SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission file number: 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 preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/. No / /.
Number of shares of $1.00 par value common stock outstanding as
of October 29, 1999: 17,516,233 shares.
CHESAPEAKE CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
INDEX
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Earnings-
Quarter and Nine Months ended September 30, 1999
and September 30, 1998 3
Consolidated Balance Sheets
at September 30, 1999 and December 31, 1998 5
Consolidated Statements of Cash Flows-
Nine Months ended September 30, 1999
and September 30, 1998 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 23
Item 3. Qualitative and Quantitative Disclosures
About Market Risk 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 6. Exhibits and Reports on Form 8-K 32
Signature 33
-2-
PART I
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In millions, except per share data)
(Unaudited)
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------------------
1999 1998 1999 1998
------ ------ ------ ------
Net sales $350.2 $260.7 $916.8 $714.5
Costs and expenses:
Cost of products sold 251.2 189.4 660.0 514.7
Depreciation, amortization
and cost of timber
harvested 23.0 14.4 65.4 45.7
Selling, general and
administrative expenses 44.0 34.3 121.5 99.5
------ ------ ------ ------
Income from operations 32.0 22.6 69.9 54.6
Gain on sales of businesses 85.9 - 85.9 -
Other income and expenses, net 1.6 3.2 7.0 10.4
Interest expense, net (11.8) (4.8) (29.2) (14.1)
------ ------ ------ ------
Income before taxes and
cumulative effect of
accounting change 107.7 21.0 133.6 50.9
Income taxes 41.9 7.8 50.9 19.1
------ ------ ------ ------
Income before cumulative
effect of accounting
change 65.8 13.2 82.7 31.8
Cumulative effect of accounting
change, net of income
taxes of $8.4 - - - 13.3
------ ------ ------ ------
Net income $ 65.8 $ 13.2 $ 82.7 $ 45.1
====== ====== ====== ======
-3-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS, Continued
(In millions, except per share data)
(Unaudited)
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------------------
1999 1998 1999 1998
------ ------ ------ ------
Basic earnings per share:
Earnings before cumulative
effect of accounting
change $3.21 $ .62 $3.92 $ 1.50
Cumulative effect of
accounting change, net
of income taxes - - - .62
------ ------ ------ ------
Basic earnings per share $3.21 $ .62 $3.92 $ 2.12
====== ====== ====== ======
Weighted average number of
common shares 20.5 21.2 21.1 21.2
====== ====== ====== ======
Diluted earnings per share
Earnings before cumulative
effect of accounting
change $3.16 $ .61 $3.87 $ 1.48
Cumulative effect of
accounting change, net
of income taxes - - - .62
------ ------ ------ ------
Diluted earnings per share $3.16 $ .61 $3.87 $ 2.10
====== ====== ====== ======
Weighted average number of
common shares and equivalents
outstanding, assuming dilution 20.8 21.6 21.3 21.5
====== ====== ====== ======
Cash dividends declared per
share of common stock $ .22 $ .20 $ .66 $ .60
====== ====== ====== ======
See accompanying notes to consolidated financial statements.
-4-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Millions of dollars)
(Unaudited)
Sept. 30, Dec. 31,
1999 1998
---------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 36.0 $ 62.4
Accounts receivable, less allowances for
doubtful accounts (1999-$4.8; 1998-$4.1) 230.2 127.6
Inventories:
Finished goods 50.8 34.5
Work in process 47.5 27.0
Materials and supplies 54.7 41.2
-------- ------
Total inventories 153.0 102.7
Deferred income taxes 12.4 12.4
Other 4.4 8.3
-------- ------
Total current assets 436.0 313.4
-------- ------
Property, plant and equipment, at cost 1,103.4 872.4
Less accumulated depreciation 409.0 385.9
-------- ------
694.4 486.5
Timber and timberlands, net - 56.7
-------- ------
Net property, plant and equipment 694.4 543.2
-------- ------
Goodwill and intangibles, net 267.7 52.7
Other assets 93.3 70.1
-------- ------
Total assets $1,491.4 $979.4
======== ======
-5-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
(Millions of dollars, except share data)
(Unaudited)
Sept. 30, Dec. 31,
1999 1998
---------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 114.5 $ 57.4
Accrued expenses 118.0 89.7
Current maturities of long-term debt 4.6 5.8
Dividends payable 3.9 4.7
Income taxes payable 55.5 -
-------- ------
Total current liabilities 296.5 157.6
-------- ------
Long-term debt 642.5 270.4
Other long-term liabilities 26.4 16.3
Postretirement benefits other than pensions 20.4 19.5
Deferred income taxes 94.1 74.3
-------- ------
Total liabilities 1,079.9 538.1
-------- ------
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 18,161,253
in 1999 and 21,439,385 shares in 1998,
respectively 18.2 21.4
Additional paid-in capital - 28.8
Unearned compensation (8.7) (8.8)
Accumulated other comprehensive income (loss) 3.6 (8.7)
Retained earnings 398.4 408.6
-------- ------
Total shareholders' equity 411.5 441.3
-------- ------
Total liabilities and shareholders'
equity $1,491.4 $979.4
======== ======
See accompanying notes to consolidated financial statements.
-6-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of dollars)
(Unaudited)
Nine Months Ended
September 30,
1999 1998
------ -------
Operating activities:
Net income $82.7 $ 45.1
Adjustments to reconcile net income to
net cash provided by operating activities:
Gain on sale of businesses (85.9) -
Cumulative effect of accounting change - (21.7)
Depreciation, cost of timber harvested and
amortization of intangibles 65.4 45.7
Deferred income taxes (5.7) 8.7
Gain on sale of property, plant and equipment (0.2) (0.9)
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable, net (39.2) (35.6)
Inventories (13.9) (4.3)
Other assets 1.6 (2.7)
Accounts payable 7.5 9.0
Accrued expenses (14.9) 5.5
Income taxes payable 47.7 .6
Other .2 1.7
------ ------
Net cash provided by operating activities 45.3 51.1
------ ------
Investing activities:
Purchases of property, plant and equipment (66.8) (55.1)
Acquisitions (374.3) (6.3)
Proceeds from sale of businesses 185.3 -
Proceeds from sale of
property, plant and equipment 1.1 3.4
Other, net (6.4) (.3)
------ ------
Net cash used in investing activities (261.1) (58.3)
------ ------
-7-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(Millions of dollars)
(Unaudited)
Nine Months Ended
September 30,
1999 1998
----- -----
Financing activities:
Net borrowings on lines of credit 317.2 4.7
Payments on long-term debt (21.7) (.5)
Proceeds from long-term debt 23.1 .5
Purchases of outstanding common stock (117.6) (6.9)
Dividends paid (14.0) (12.8)
Debt issuance costs (2.5) -
Other 1.1 4.7
------ ------
Net cash provided by (used in) financing
activities 185.6 (10.3)
------ ------
Effect of exchange rates on cash 3.8 (2.1)
Decrease in cash and cash equivalents (26.4) (19.6)
Cash and cash equivalents at beginning of
period 62.4 73.3
------ ------
Cash and cash equivalents at end of period $ 36.0 $ 53.7
====== ======
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 consolidated financial statements of Chesapeake
Corporation and subsidiaries ("Chesapeake" or the "Company")
included herein are unaudited, except for the December 31, 1998,
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
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 presented herein. These
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
1999 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 1999 presentation.
Note 2. Adoption of Accounting Pronouncements
The Financial Accounting Standards Board has issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 requires companies to record derivatives on the balance
sheet as assets or liabilities, measured at fair market value.
Statement of Financial Accounting Standards No. 137, which was
issued in July 1999, defers the Company's required adoption of
SFAS 133 until fiscal 2001. This standard is not expected to
have a material impact on the Company's financial statements.
Note 3. Comprehensive Income
Comprehensive income for the quarters and the nine months
ended September 30, 1999 and 1998 was $83.5 million and $95.0
million and $12.5 million and $43.6 million, respectively. The
difference between net income and comprehensive income is due to
foreign currency translation.
-9-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited),continued
Note 4. Acquisitions and Dispositions
Effective October 3, 1999, Wisconsin Tissue Mills Inc.
("WT"), a wholly owned subsidiary of Chesapeake, completed the
formation of a joint venture with Georgia-Pacific Corporation ("G-
P") through which the companies combined their commercial tissue
businesses. WT contributed substantially all of its assets and
liabilities of the Company's tissue business to the joint
venture, known as Georgia-Pacific Tissue, LLC (the "JV") and
received a 5% equity interest in the JV and a tax-deferred cash
distribution of approximately $755 million (the "Special
Distribution"). G-P contributed certain of its commercial tissue
assets and related liabilities to the JV in return for a 95%
equity interest. The respective net values of WT's and G-P's
contributed businesses were based on a multiple of each
businesses' 1998 earnings before interest, income taxes,
depreciation and amortization ("EBITDA"), which valuation
principle was negotiated on an arms' length basis. In connection
with the receipt of the Special Distribution, WT entered into an
Indemnity Agreement pursuant to which it agreed to indemnify
G-P, under certain circumstances, against certain payments G-P
may make under a guaranty of the JV's debt that was incurred to
finance the Special Distribution (the "JV Debt").
The WT assets contributed to the JV include production
facilities located in Bellemont and Flagstaff, Arizona; Alsip,
Illinois; Greenwich, New York; Menasha and Neenah, Wisconsin; and
Toluca, Mexico. The JV has assumed substantially all of WT's
liabilities that relate primarily to its contributed business,
including any liabilities associated with certain alleged
violations of antitrust laws (see Note 6), but specifically
excluding most tax liabilities related to the contributed assets
for periods prior to formation of the JV and certain liabilities
associated with the discharge of PCBs and other hazardous
materials in the Fox River and Green Bay System (see Note 8).
At any time on or after the third anniversary of the
October 4, 1999, closing date, WT will have up to 3 "put"
rights to sell to G-P, or cause the JV to redeem, all or any
portion of WT's equity interest in the JV. At any time after
the tenth anniversary of the closing date, G-P will have the
right to "call" all, but not less than all, of WT's equity
interest in the JV. The purchase and sale price of WT's equity
interest for both the put and call will be based on the JV's
EBITDA for the immediately preceding 4 fiscal quarters and the
same multiple used to value WT's and G-P's initial
contributions to the JV.
-10-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 4. Acquisitions and Dispositions, continued
Certain events, including exercise of the put or call,
reduction of the principal amount of the JV Debt or the JV's
sale of some or all of assets contributed to it by WT, may
trigger recognition of all or a portion of WT's deferred tax
liability related to the transaction. Under certain
circumstances (primarily related to a sale by the JV of WT
contributed assets outside of the ordinary course of business
prior to the tenth anniversary of the closing date, or a
failure by the JV to maintain the principal amount of the JV
Debt and any refinancings thereof outstanding for 30 years
after the closing date, or G-P's exercise of the call or some
other buy out of WT's equity interest in the JV), the JV will
distribute to WT an amount equal to the amount of WT's federal
and state income tax liability that is triggered, excluding the
first $22 million triggered solely by sales of contributed
assets. In certain other circumstances (primarily related to a
determination that the transaction was not eligible for tax
deferral or in the event of an involuntary dissolution of the
JV), G-P will pay to WT an amount equal to one-half of the net
income tax benefit to G-P resulting therefrom.
G-P will control and manage the JV, subject to obtaining
WT's consent in connection with certain actions. Chesapeake
and WT, on the one hand, and G-P, on the other hand, made
customary representations, warranties and covenants to the JV
in connection with their contributions of assets and
liabilities, and agreed to indemnify the JV (subject to certain
deductibles and caps on the amount of such indemnification, and
limitations on the periods during which claims may be asserted)
in connection with a breach of such representations, warranties
and covenants. The JV has agreed to indemnify Chesapeake, G-P
and their respective affiliates against, among other things,
the liabilities assumed by the JV in connection with the
transaction.
On September 10, 1999, the Company completed the sale of
approximately 278,000 acres of timberland in Virginia, Maryland
and Delaware, and on July 30, 1999, the Company completed the
sale of its building products business (two sawmills, a lumber
processing plant and a wood-chip mill) for combined cash proceeds
of approximately $185 million. The third quarter results of
operations includes a non-recurring after-tax gain on sales of
these businesses of $51.7, net of a revision of $11.7 million
after-tax cost associated with the disposal of the kraft products
business segment.
-11-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 4. Acquisitions and Dispositions, continued
On March 18, 1999, Chesapeake completed its acquisition of
substantially all of the outstanding capital shares of Field
Group plc ("Field Group"), a European specialty packaging company
headquartered in the United Kingdom. The acquisition was
effected through a tender offer by Chesapeake UK Acquisitions
plc, a wholly-owned subsidiary of Chesapeake, for all of the
outstanding capital shares of Field Group at a purchase price of
(pound) 3.60 per share. As of April 30, 1999, Chesapeake
acquired compulsorily all remaining outstanding shares of Field
Group. The final purchase price of approximately US $373.4
million was funded through a combination of approximately $316.2
million in borrowings under a new credit facility (the "Credit
Facility"), $22.2 million in unsecured
loan notes ("Loan Notes") issued to certain Field Group
shareholders, and $35.0 million in cash.
The Credit Facility consisted of a $200 million 364-day
revolving credit facility and a $250 million five-year revolving
credit facility. Borrowings under the Credit Facility bear
interest and incur facility fees at a variable rate per annum,
which are initially equal to an all-in cost of LIBOR plus 1.0%.
The Credit Facility contains customary representations,
warranties and covenants, including covenants that require
Chesapeake to maintain certain financial ratios. Subsequent to
September 30, 1999, the Company repaid the outstanding balances
of the Credit Facility with a portion of the Special Distribution
received from the JV combined with the net proceeds from the sale
of the building products business and timberland and cancelled
the $200 million 364-day revolving credit facility. The Loan
Notes bear interest at a variable rate per annum equal to the
LIBOR rate for six-month sterling deposits, and are redeemable in
whole or in part at the option of the holder on each biannual
interest payment date commencing March 31, 2000. If not earlier
redeemed, the Loan Notes mature on September 30, 2006.
On May 5, 1999, the Company acquired Berry's (Holding)
Limited of Ireland ("Berry's") through Field Group. Berry's is
one of Ireland's largest suppliers of printed pharmaceutical
leaflets and self-adhesive labels and has annual net sales of
approximately $9.2 million.
The acquisitions of Field Group and Berry's have been accounted
for using the purchase method. The results of operations of
Field Group and Berry's have been included in the consolidated
-12-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 4. Acquisitions and Dispositions, continued
statement of earnings since March 18, 1999 and May 5, 1999,
respectively. The purchase price amounts for these acquisitions
have been allocated to the acquired net assets as summarized
below (in millions):
Fair value of assets acquired $553.5
Liabilities assumed or created (167.5)
Cash acquired (11.7)
------
Cash paid for acquisitions, net $374.3
======
Pro forma financial information reflecting the combined
results of the Company and Field Group as if the acquisition
occurred on January 1, 1998, is as follows (in millions, except
per share amounts):
Acquisition of Field Group: Quarter Ended Nine Months Ended
September 30, September 30,
---------------- -----------------
1999 1998 1999 1998
------ ------ ------ ------
Net sales $350.2 $370.8 $996.2 $1,028.7
Income before cumulative
effect of accounting change $65.8 $15.7 $77.8 $35.8
Net income $65.8 $15.7 $77.8 $49.1
Earnings per share before
cumulative effect of
accounting change:
Basic $3.21 $0.74 $3.69 $1.69
Diluted $3.16 $0.73 $3.65 $1.66
Net income per share:
Basic $3.21 $0.74 $3.69 $2.31
Diluted $3.16 $0.73 $3.65 $2.28
Supplemental pro forma financial information reflecting the
acquisition of Field Group, the contribution of the Company's
Tissue business to the JV and the sales of timberland and the
Company's building products business, as if each transaction
-13-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 4. Acquisitions and Dispositions, continued
occurred on January 1, 1999, is as follows (in millions, except
per share amounts):
Quarter Nine months
Acquisition of Field Group Ended Ended
and divestitures*: Sept. 30, Sept. 30,
1999 1999
--------- ----------
Net sales $233.1 $651.9
Net income $6.0 $4.2
Net income per share:
Basic $.28 $.20
Diluted $.28 $.20
* Results do not include an assumption for the use of
approximately $410 million excess cash generated from the
divestitures nor the after-tax gain on sales of businesses of
$51.7 million
On November 20, 1998, Chesapeake Corporation acquired all of
the outstanding capital stock of Capitol Packaging Corporation, a
specialty packaging company located in Denver, Colorado. On
February 2, 1998, Chesapeake Packaging Company purchased
substantially all of the assets, and assumed certain liabilities,
of Rock City Box Company, Inc., located in Utica, New York. This
operation manufactures corrugated containers, trays, and pallets,
as well as wood and foam packaging products.
Note 5. Restructuring
In the fourth quarter of 1998, the Company formulated a
restructuring program which included early retirement and
voluntary severance programs (70 positions) in the Tissue
segment, and a severance program (60 positions) and 2 facility
closures in the Merchandising and Specialty Packaging segment.
At September 30, 1999, the facility closures were in process and
payments totaling $6.8 million have been made primarily for the
early retirement and severance programs for all planned positions
and $1.1 million of exit costs have been incurred. The $11.8
million restructuring accrual at December 31, 1998, has been
reduced to approximately $3.9 million, which is expected to be
fully utilized in accordance with the Company's plans by December
31, 1999.
Note 6. Litigation
WT has been identified by the federal government and the
State of Wisconsin as a potentially responsible party with
-14-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 6. Litigation, continued
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.
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 and state
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. As of October 3,
1999, the JV formed by WT and G-P assumed all liabilities
associated with this litigation (see Note 4).
The Company is a party to various other legal actions that
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
Excluding the impact of the net gain on sales of businesses,
the Company's effective income tax rate was 35% for the nine
months ended September 30, 1999, and 37.5% for the nine months
ended September 30, 1998. The decrease in the Company's
effective income tax rate is primarily due to the acquisition of
businesses in countries which have a lower effective income tax
rate.
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
-15-
CHESAPEAKE CORPORATION AND ITS SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 8. Environmental Matters, continued
regulations, although compliance with existing environmental
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, liquidity or results of operations.
In June 1994, the United States Department of Interior, 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 notices 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, 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
-16-
CHESAPEAKE CORPORATION AND ITS SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 8. Environmental Matters, continued
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 trusteeship of the natural
resources concerning the damage assessment and the basis for
resolution of the 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, liquidity 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.
On February 26, 1999, the Wisconsin Department of Natural
Resources ("DNR") released for public comment a draft remedial
investigation/feasibility study ("RI/FS") for the lower Fox River
site. In the draft RI/FS, the DNR reviewed and summarized
several categories of possible remedial alternatives for the
site, estimated to cost in the range of $143 million to $721
million, but did not identify a preferred remedy. (As required
by applicable regulations, the draft RI/FS also includes a "no
action" alternative that does not entail remediation costs, but
the Company does not believe that the "no action" alternative
will be selected). There can be no assurance that many of the
cost estimates in the draft RI/FS will not differ significantly
from actual costs. The Company submitted timely comments on the
draft RI/FS both individually and in conjunction with other PRPs.
After finalizing the RI/FS, the DNR and the EPA are expected to
announce a preferred remedial alternative in a Proposed Remedial
Action Plan. The Proposed Remedial Action Plan will be subject to
a public comment period, and enforcement of any definitive
Remedial Action Plan may be subject to judicial review.
The largest components of the costs of the more expensive
clean-up alternatives presented in the draft RI/FS are
-17-
CHESAPEAKE CORPORATION AND ITS SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 8. Environmental Matters, continued
attributable to large-scale sediment removal, treatment and
disposal. Based on current information and advice from its
environmental consultants, WT believes that an aggressive effort
to remove substantial amounts of PCB-contaminated sediments (most
of which are buried under cleaner material or are otherwise
unlikely to move), as contemplated by certain alternatives
presented in the draft RI/FS, would be environmentally
detrimental and therefore inappropriate. Instead, WT believes
that less intrusive alternatives are more environmentally
appropriate, cost effective and responsible methods of managing
risks attributable to sediment contamination.
The ultimate cost to WT associated with this matter cannot
be predicted with certainty at this time, due to uncertainties
with respect to: which, if any, of the remedial alternatives
presented in the draft RI/FS will be implemented, and
uncertainties associated with the actual costs of each of the
potential alternatives; the outcome of the federal and state
natural resource damage assessments; WT's share of any multi-
party clean-up/restoration expenses; the timing of any clean-
up/restoration; the evolving nature of clean-up/restoration
technologies and governmental regulations; 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. While such costs
cannot be predicted with certainty at this time, the Company
believes that the ultimate clean-up/restoration costs associated
with the lower Fox River site may exceed $100 million for all
PRPs in the aggregate. Under CERCLA, each PRP generally will be
jointly and severally liable for the full amount of the clean-up
costs, subject to a right of contribution from the other PRPs.
In practice, PRPs generally negotiate among themselves to
determine their respective contributions to any multi-party
cleanup/restoration, based upon factors including their
respective contributions to the alleged contamination and their
ability to pay. Based on presently available information, the
Company believes that several of the named PRPs will be able to
pay substantial shares toward remediation and restoration, and
that there are additional parties, some of which have substantial
resources, that may also be jointly and severally liable.
The Company also believes that it is entitled to substantial
indemnification from a prior owner of WT, pursuant
-18-
CHESAPEAKE CORPORATION AND ITS SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 8. Environmental Matters, continued
to a stock purchase agreement between the parties, with respect
to liabilities related to this 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.
Pursuant to the Joint Venture Agreement with G-P, the
Company has retained liability for, and the third party indemnity
rights associated with, the discharge of PCBs and other hazardous
materials in the Fox River and Green Bay System. Based on
presently available information, the Company believes that if any
remediation/restoration is done in an environmentally
appropriate, cost effective and responsible manner, the matter is
unlikely to have a material adverse effect on the Company's
financial position, liquidity or results of operations. However,
because of the uncertainties described above, there can be no
assurance that WT's ultimate liability with respect to the lower
Fox River site will not have a material adverse effect on the
Company's financial position, liquidity or results of operations.
In March 1998, WT's Chicago, IL tissue mill received a
Notice of Violation ("NOV") from EPA alleging violation of the
Illinois State Implementation Plan as adopted pursuant to the
Clean Air Act ("CAA"). The alleged violation involves the
emission of volatile organic material. As of October 3, 1999,
the JV formed by WT and G-P assumed all liabilities and related
indemnification rights associated with these allegations.
On April 19, 1999, the EPA and the Virginia Department of
Environmental Quality ("DEQ") each issued NOVs under the CAA
against St. Laurent Paper Products Corp. ("St. Laurent") (and, in
the case of EPA's NOV, Chesapeake Corporation) relating to St.
Laurent's kraft products mill located in West Point, Virginia
(the "Mill"). St. Laurent is the successor to Chesapeake Paper
Products, L.L.C. which, as owner of the Mill, was sold by
Chesapeake Corporation to St. Laurent Paperboard (U.S.) Inc.
("St. Laurent (U.S.)") in May 1997, pursuant to a Purchase
Agreement dated as of April 30, 1997, by and among Chesapeake
Corporation, St. Laurent Paperboard Inc. and St. Laurent (U.S.)
(the "Purchase Agreement"). In general, the NOVs
allege that from 1984 to the present the Mill installed certain
equipment and modified certain production processes without
obtaining required permits. Under applicable law, the EPA and
DEQ may commence a court action with respect to the matters
-19-
CHESAPEAKE CORPORATION AND ITS SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 8. Environmental Matters, continued
alleged in the NOVs seeking injunctive relief to compel
compliance with the CAA, and a court may impose civil penalties
of up to $25,000 per day of violation ($27,500 per day for
violations after January 30, 1997) for violations of the CAA
(provided that a court, in determining the amount of any penalty
to be assessed, shall take into consideration, among other
things, the size of the business, the economic impact of the
penalty on the business, the business' compliance history and
good faith efforts to comply, the economic benefit to the
business of noncompliance and the seriousness of the violation).
The Purchase Agreement provides that Chesapeake Corporation will
indemnify St. Laurent against any violations of applicable
environmental laws (including the CAA) that existed at the Mill
as of the date of the Purchase Agreement and as of the May 1997
closing date (and any other such violations that existed prior to
such dates as to which Chesapeake had "knowledge," as defined in
the Purchase Agreement). Chesapeake's indemnification obligation
to St. Laurent with respect to such matters is capped at $50
million and, in certain circumstances, is subject to a $2.0
million deductible. The Company is cooperating with St. Laurent
to analyze, respond to, and defend against the matters alleged in
the NOVs. Based upon an initial review of the NOVs, the Company
believes that both it and St. Laurent have substantial defenses
against the alleged violations. The Company and St. Laurent
intend to work with EPA and DEQ to address the matters that are
the subject of the NOVs and, if necessary, to defend vigorously
against the allegations. The ultimate cost, if any, to the
Company relating to matters alleged in the NOVs cannot be
determined with certainty at this time due to the absence of a
determination that any violations of the CAA occurred and, if any
violations are ultimately found to have occurred, a determination
of (i) any required remediation costs and penalties and (ii)
whether St. Laurent would be entitled to indemnification from the
Company under the Purchase Agreement.
-20-
CHESAPEAKE CORPORATION AND ITS SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 9. Segment Disclosure
Third Quarter Year-to-Date
------------- ------------
1999 1998 1999 1998
Net sales: ---- ---- ---- ----
Merchandising and Specialty
Packaging $124.4 $133.5 $351.8 $349.2
European Specialty Packaging 102.1 - 207.1 -
Tissue 112.6 116.1 319.6 331.3
Forest Products/Land Development 11.1 11.1 38.3 34.0
------ ------ ------ ------
$350.2 $260.7 $916.8 $714.5
====== ====== ====== ======
Earnings before interest and
taxes (EBIT):
Merchandising and Specialty
Packaging $ 4.4 $ 5.4 $ 8.3 $ 7.9
European Specialty Packaging 9.6 - 16.0 -
Tissue 17.8 19.3 51.1 53.1
Forest Products/Land Development 5.1 4.5 13.2 13.4
Corporate (3.3) (3.4) (11.7) (9.4)
------ ------ ------ ------
33.6 25.8 76.9 65.0
Gain on sale of businesses 85.9 - 85.9 -
------ ------ ------ ------
$119.5 $ 25.8 $162.8 $ 65.0
====== ====== ====== ======
Sept.30, Sept.30,
1999 1998
Identifiable assets: -------- -------
Merchandising and Specialty Packaging $ 355.9 $331.1
European Specialty Packaging 568.1 -
Tissue 465.7 450.0
Forest Products/Land Development 34.8 122.5
Corporate 66.9 68.3
-------- ------
$1,491.4 $971.9
======== ======
Chesapeake conducts its business in four segments. The
Company's Merchandising and Specialty Packaging segment produces
and sells point-of-sale displays, graphic packaging and
corrugated shipping containers. The European Specialty
-21-
CHESAPEAKE CORPORATION AND ITS SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 9. Segment Disclosure, continued
Packaging segment, which is comprised of the Field Group
operations, produces folding cartons for food/consumer and
pharmaceutical/healthcare companies. The results of
operations of Field Group are included in the consolidated
segment results since March 18, 1999, the acquisition date
(see Note 4). The Company's Tissue segment is composed of
commercial and industrial tissue operations of Wisconsin Tissue
and Wisconsin Tissue de Mexico, which were contributed to a joint
venture with G-P effective October 3, 1999 (see Note 4). The
Forest Products/Land Development segment manages the Company's
timberlands and real estate holdings (see Note 4). There were no
intersegment sales for the nine months ended September 30, 1999,
and September 30, 1998.
-22-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Net sales for the quarter ended September 30, 1999, were
$350.2 million, an increase of 34 percent compared with net sales
of $260.7 million for the third quarter of 1998. Net sales of
$916.8 million for the nine months ended September 30, 1999,
compared to net sales of $714.5 million for the comparable 1998
period. Net sales for the 1999 periods increased primarily due
to the acquisition of Field Group, offset in part by lower tissue
selling prices and jumbo roll volumes and lower average packaging
selling prices.
Net income for the quarter ended September 30, 1999, was
$65.8 million, or $3.16 per diluted share, compared with 1998
third quarter net income of $13.2 million, or $.61 per diluted
share. The third quarter 1999 results included a non-recurring
gain of $51.7 million after tax, or $2.48 per diluted share, on
the sale of the Company's building products business and
approximately 278,000 acres of timberland, net of a revision of
$11.7 million after tax in estimated costs associated with the
disposal in 1997 of the kraft products business segment.
Excluding the non-recurring net gain, net income for the third
quarter was $14.1 million, or $.68 per diluted share, an increase
of 11 compared with the third quarter of 1998.
Net income for the nine months ended September 30, 1999, was
$82.7 million, or $3.87 per diluted share, compared with the nine
months ended September 30, 1998, net income, before the
cumulative effect of an accounting change, of $31.8 million, or
$1.48 per diluted share. Excluding the non-recurring net gain,
net income for the nine months ended September 30, 1999, was
$31.0 million, or $1.45 per diluted share, a decrease of 2
percent over the comparable period of 1998. The decrease in net
income was primarily the result of higher raw material costs in
the Merchandising and Specialty Packaging segment, lower jumbo
roll sales and lower converted selling prices in the tissue
segment, partially offset by the impact of the Field Group
acquisition.
Net income for the nine months ended September 30, 1998,
including the cumulative effect of an accounting change of $13.3
million, net of taxes, was $45.1 million, or $2.10 per diluted
share. The change in accounting consisted of the capitalization
of certain timber reforestation costs that were previously
expensed in order to achieve better matching of those costs with
the revenues realized from the eventual harvesting of the
timber.
-23-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Other income and expenses, net decreased $1.6 million and
$3.4 million for the quarter and nine months ended September 30,
1999, respectively, compared to the same periods in 1998,
primarily as a result of reduced bulk land sales and a gain on
the sale of a corporate aircraft of $1.5 million ($.04 per
diluted share after taxes) in the first quarter of 1998.
Net interest expense increased for the third quarter of 1999
by $7.0 million compared to the third quarter of 1998 and by
$15.1 million for the nine months ended September 30, 1999
compared to the same 1998 period, due primarily to increased debt
levels related to the Field Group acquisition.
Restructuring
In the fourth quarter of 1998, the Company formulated a
restructuring program which included early retirement and
voluntary severance programs (70 positions) in the Tissue
segment, and a severance program (60 positions) and 2 facility
closures in the Merchandising and Specialty Packaging segment.
At September 30, 1999, the facility closures were in process and
payments totaling $6.8 million have been made primarily for the
early retirement and severance programs for all planned positions
and $1.1 million of exit costs have been incurred. The $11.8
million restructuring accrual at December 31, 1998, has been
reduced to approximately $3.9 million, which is expected to be
fully utilized in accordance with the Company's plans by December
31, 1999.
Segment Information
Merchandising and Specialty Packaging
Increase/(Decrease)
(dollars in millions) 1999 1998 $ %
- ----------------------------------------------------------------
Third quarter:
Net sales $124.4 $133.5 $(9.1) (6.8%)
EBIT 4.4 5.4 (1.0) (18.5%)
Operating margin 3.5% 4.1% (14.6%)
Nine months:
Net sales $351.8 349.2 2.6 0.7%
EBIT 8.3 7.9 0.4 5.1%
Operating margin 2.4% 2.3% 4.3%
================================================================
-24-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Net sales for the 1999 third quarter decreased compared to
the prior year quarter, primarily due to lower point-of-purchase
display volume and lower average selling prices. The sales
increase for the first nine months of 1999 reflected corrugated
container plant acquisitions. The decrease in EBIT and operating
margin quarter over quarter was primarily due to lower sales and
lower margins in the corrugated container and graphic packaging
businesses, which were caused by higher raw material costs. The
increase in EBIT and operating margin for the first nine months
of 1999 compared to the prior year-to-date reflected sales volume
growth and operating cost reductions, partially offset by lower
corrugated container and graphic packaging margins caused by
higher raw material costs.
European Specialty Packaging
The European Specialty Packaging segment consists of the
results of Field Group, which has been consolidated since the
date of acquisition, March 18, 1999. Sales and EBIT for this
segment were $102.1 million and $9.6 million, respectively, for
the third quarter of 1999 and $207.1 million and $16.0 million,
respectively for year-to-date. On a pro forma basis Field
Group's third quarter sales were down approximately 7.3% year
over year due to lower volume and selling prices, particularly in
Field Group's Asian markets. Field's operating margin in the
third quarter of 9.4% was equal to the pro forma operating margin
for the third quarter of 1998.
Tissue
Increase/(Decrease)
(dollars in millions) 1999 1998 $ %
- ----------------------------------------------------------------
Third quarter:
Net sales $112.6 $116.1 $(3.5) (3.0%)
EBIT 17.8 19.3 (1.5) (7.8%)
Operating margin 15.8% 16.6% (4.8%)
Nine months:
Net sales 319.6 331.3 (11.7) (3.5%)
EBIT 51.1 53.1 (2.0) (3.8%)
Operating margin 16.0% 16.0% -
================================================================
The decrease in sales for the quarter and nine months ended
September 30, 1999, compared to the prior year periods, reflected
a one percent decline in average tissue selling prices and lower
parent roll volume, offset slightly by higher
-25-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
converted tissue volume. The EBIT impact of lower sales was
somewhat offset by productivity improvements. See Note 4
regarding the contribution of the Tissue business to a joint
venture with Georgia-Pacific Corporation.
Forest Products/Land Development
Increase/(Decrease)
(dollars in millions) 1999 1998 $ %
- ----------------------------------------------------------------
Third quarter:
Net sales $11.1 $11.1 $ - -
EBIT 5.1 4.5 0.6 13.3%
Operating margin 45.9% 40.5% 13.3%
Nine months:
Net sales 38.3 34.0 4.3 12.6%
EBIT 13.2 13.4 (0.2) (1.5%)
Operating margin 34.5% 39.4% (12.4%)
================================================================
Net sales for the 1999 quarter and nine month periods
compared to prior year periods reflect the impact of higher land
development sales offset by the impact of the sale of the
building products business and timberland in the third quarter of
1999 (see Note 4). EBIT and operating margin decreases were due
to lower average lumber prices and lower margins on land
development sales and the impact of the sale of the building
products business.
Liquidity and Financial Position
Net cash provided by operating activities decreased in the
nine months ended September 30, 1999, compared to the nine months
ended September 30, 1998, primarily due to increases in working
capital. The working capital increases were partially offset by
improvements in EBITDA, a measure of internal cash flow combining
EBIT before the non-recurring gain on sale of businesses plus
depreciation, amortization and cost of timber harvested. EBITDA
of $142.3 million for the nine months ended September 30, 1999,
was 28% higher than EBITDA of $110.7 million for the nine months
ended September 30, 1998. The ratio of current assets to current
liabilities of 1.5 at September 30, 1999, decreased from 2.2 at
September 30, 1998. The changes in EBITDA and the current ratio
are primarily due to the purchase of Field Group.
-26-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Net cash used in investing activities for the first nine
months of 1999 was $261.1 million compared to $58.3 million in
the first nine months of 1998, which primarily reflects the cash
utilized to acquire Field Group offset in part by the proceeds
from the sales of the building products business and timberland.
Capital spending increased, due primarily to the continued
implementation of improved information systems throughout the
Company.
Cash provided by financing activities in 1999 was $185.6
million compared to a $10.3 million use of cash in 1998, due to
the funding of the Field Group acquisition through borrowings on
lines of credit, which was offset in part (primarily in the third
quarter) with debt repayments funded by the proceeds from the
sales of the building products business and timberland and open
market repurchases of the Company's common stock. With this
increase in debt, Chesapeake's net debt-to-capital ratio was 55
percent as of September 30, 1999, compared to 29 percent as of
September 30, 1998.
Effective October 3, 1999, Wisconsin Tissue Mills Inc., a
wholly owned subsidiary of Chesapeake, completed the formation of
a joint venture with Georgia-Pacific Corporation through which
the companies combined their commercial tissue businesses. WT
contributed substantially all of its assets and liabilities to
the joint venture, known as Georgia-Pacific Tissue, LLC, and
received a 5% equity interest in the JV and a tax-deferred cash
distribution of approximately $755 million (see Note 4).
The Company expects to use the cash received from the joint
venture combined with the net proceeds from the sale of the
building products business and timberland to continue to
repurchase outstanding common stock, continue the growth of its
specialty packaging businesses through strategic acquisitions and
alliances, and reduce debt.
In January 1999, the Company entered into a new $450 million
bank credit facility which included a 364-day $200 million
revolving line of credit and a five-year $250 million revolving
line of credit. This credit facility was used primarily to fund
the acquisition of Field Group. Subsequent to September 30, 1999,
the Company repaid the outstanding balances of the Credit
Facility with a portion of the Special Distribution received from
the JV combined with the net proceeds from the sale of the
building products business and timberland and cancelled the $200
million 364-day revolving credit facility.
-27-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
During the third quarter of 1999, the Company purchased 3.1
million shares of Chesapeake common stock in open market
transactions at an average price of $33.37 per share. Through
the first nine months of 1999, the Company has purchased 3.5
million shares of its common stock.
Management believes that its existing cash position and
other available sources of liquidity are sufficient to meet
current and anticipated liquidity requirements for the
foreseeable future.
Outlook
The following statements reflect management's outlook for
the Company as of October 21, 1999. These statements do not
reflect the potential impact of any mergers, acquisitions,
divestitures after October 31, 1999, or other structural changes
in the Company's business, and are subject to certain risks and
uncertainties, including those listed under the caption "Forward-
Looking Statements" on page 31 of this report. However, the
outlook includes the expected 1999 impact of the Field Group
acquisition, the sale of the building products business and
approximately 278,000 acres of timberland, and the formation of
the tissue joint venture with Georgia-Pacific.
- -The Company expects revenue for 1999 to be in the $1.1 billion
to $1.2 billion range.
- -The Company's effective income tax rate in 1999, exclusive of
the rate on the non-recurring gain is expected to be 35 percent.
- -Capital spending, excluding acquisitions, for 1999 is expected
to be approximately $75 million, compared to $73 million in 1998,
due primarily to expected capital spending by Field Group.
- -Depreciation, depletion, and amortization is expected to be
approximately $85 million in 1999, up from $62 million in 1998,
due primarily to the acquisition of Field Group.
- -Earnings per share expectations for 1999 are expected to be in
the range of $1.85 to $2.00 per diluted share.
Year 2000
In 1997, Chesapeake established a plan intended to address
the impact of the Year 2000 problem on its internal systems and
-28-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
facilities, as well as its key suppliers and customers. The
project consists of the following four phases:
- -Phase 1 - inventory and analysis of key business systems and
infrastructure for Year 2000 problems. Phase 1 was completed in
July 1997.
- -Phase 2 - remediation of non-compliant systems. As discussed
below, the remediation of systems which are mission critical and
which affect production was completed in July 1999; the
remediation of non-critical ancillary systems was completed in
the third quarter of 1999.
- -Phase 3 - testing of mission critical systems. This phase has
been completed.
- -Phase 4 - development of contingency plans. This phase has been
completed.
The Company's Year 2000 team consists of location and
business unit Year 2000 coordinators and project managers who,
for the purpose of this project, report and are accountable to
the Company's Chief Financial Officer.
State of Readiness
Most of the Company's mission critical business systems
utilize packaged applications, which are purchased from third
party software vendors. As part of its overall business
strategy, the Company has installed new integrated Enterprise
Resource Planning ("ERP") software that is expected to provide
enhanced reporting and operational benefits. The installation of
Year 2000 compliant ERP software is also the principal element
of the Company's Year 2000 remediation plan. The Company's
Tissue segment implemented Year 2000 compliant ERP software in
April 1999. Chesapeake's other business segments and corporate
headquarters have completed the installation of Year 2000
compliant ERP software. The Company has performed integrated
validation and testing of all mission critical systems.
In addition to the installation of Year 2000 compliant ERP
software, the Company's remediation efforts included the
upgrading or replacement of proprietary computer software
systems (primarily in the Tissue segment), and the upgrading or
replacement of computer hardware, machinery, and equipment;
process control systems; security systems; and telecommunications
equipment. The Company has completed the process of upgrading or
replacing these systems and equipment, as necessary for Year 2000
compliance.
-29-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Cost to Address Year 2000 Readiness
The cost of installing the new ERP software, no material portion
of which relates specifically to achieving Year 2000 compliance,
was approximately $23 million (approximately $6 million was
divested with the tissue, building products and timberland
transactions). Approximately $17 million was capitalized, with
approximately $8.6 million capitalized during the Company's
fiscal year ending December 31, 1998. To date, the Company has
incurred approximately $22 million of the expected ERP
implementation cost. Other specifically identifiable costs
related to Year 2000 compliance were approximately $3.5 million.
The Company expects to fund any remaining costs associated with
its Year 2000 compliance program with cash generated from operations.
Management does not believe that any of Chesapeake's material
information technology projects have been deferred due to the Company's
Year 2000 compliance efforts.
Because of the interdependence of information systems today,
Year 2000 compliant companies may be affected by the Year 2000
readiness of their material suppliers, customers, and other third
parties. As part of Chesapeake's evaluation of the Year 2000
readiness of its suppliers, customers, and other third parties,
the Company has contacted substantially all of its critical
suppliers to request written assurance that they have
Year 2000 readiness programs in place as well as an affirmation
that they will be compliant when necessary. To date, no such
parties have informed the Company that they do not expect to be
Year 2000 compliant in a timeframe that would expose Chesapeake
to material business risks. Further analysis and follow-up is
being conducted as necessary. The Company can provide no
assurance that the failure of any such party would not have a
material adverse effect on the Company's results of operations,
financial position or cash flows. However, in an effort to
minimize such risks, in most cases (with utilities and banking
institutions as notable exceptions), the Company utilizes
multiple suppliers of goods and services and is prepared to
substitute suppliers if one or more have Year 2000 related
difficulties.
Business Continuity and Contingency Planning
The ultimate effects on the Company or its suppliers or
customers of not being fully Year 2000 compliant cannot be
reasonably estimated. While Chesapeake believes its efforts are
-30-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
adequate to address its Year 2000 concerns, the Company could
experience a material adverse effect on its results of
operations, financial position, or cash flows if its Year 2000
compliance schedule is not met, if the remaining costs to
remediate the Company's Year 2000 issues materially exceed
current estimates, or if material suppliers, customers, or other
businesses encounter serious problems in their Year 2000
remediation efforts. Therefore, the Company has developed plans
to address such contingencies, with a focus on mission critical
applications and material suppliers. Such contingency plans
include the development of back-up procedures, the purchase of
additional inventory, and the utilization of alternate suppliers.
Accounting Pronouncements
See Note 2 to Consolidated Financial Statements.
Forward-Looking Statements
Forward-looking statements in the foregoing Management's
Discussion and Analysis of Financial Condition and Results of
Operations include statements that are identified by the use of
words or phrases including, but not limited to, the following:
"will likely result", "expected to", "will continue", "is
anticipated", "estimated", "project", "believe" and words or
phrases of similar import. Changes in the following important
factors, among others, could cause Chesapeake's actual results to
differ materially from those expressed in any such forward-
looking statements: competitive products and pricing; production
costs, particularly for raw materials such as waste paper, folding
carton and corrugated box and display materials; fluctuations in demand;
governmental policies and regulations affecting the environment;
interest rates; currency translation movements; Year 2000
compliance issues; and other risks that are detailed from time to
time in reports filed by the Company with the Securities and
Exchange Commission.
Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET
RISK
None.
-31-
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 8-K
(a)Exhibits:
2.1 Joint Venture Agreement among Georgia-Pacific
Corporation, Chesapeake Corporation,
Wisconsin Tissue Mills Inc. and Georgia-
Pacific Tissue Company, LLC, dated as of
October 4, 1999.
2.2 Operating Agreement of Georgia-Pacific Tissue,
LLC, dated as of October 4, 1999, among
Wisconsin Tissue Mills Inc. and Georgia-
Pacific Corporation.
2.3 Indemnity Agreement, dated as of October 4,
1999, between Wisconsin Tissue Mills
Inc. and Georgia-Pacific Corporation.
10.1 Employment Continuity Agreement with William A. Raaths
27.1 Financial Data Schedule - 1999
27.2 Restated Financial Data Schedule - 1998
(b) Reports on Form 8-K:
(i) Current Report, dated October 3, 1999, filed October 15, 1999,
reporting, under Items 2 and 7, information related to the
contribution of the Company's tissue operations to a joint
venture formed by WT and G-P.
-32-
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: November 8, 1999 BY: /s/ William T. Tolley
---------------------
William T. Tolley
Senior Vice President -
Finance & Chief
Financial Officer
-33-
EXHIBIT INDEX
EXHIBIT
- -------
2.1 Joint Venture Agreement among Georgia-Pacific Corporation,
Chesapeake Corporation, Wisconsin Tissue Mills Inc. and
Georgia-Pacific Tissue, LLC, dated as of October 4,
1999. (incorporated by reference to the Company's
Current Report on Form 8-K dated October 3, 1999)
2.2 Operating Agreement of Georgia-Pacific Tissue, LLC, dated as
of October 4, 1999, among Wisconsin Tissue Mills Inc.
and Georgia-Pacific Corporation. (incorporated by
reference to the Company's Current Report on Form 8-K
dated October 3, 1999)
2.3 Indemnity Agreement, dated as of October 4, 1999, between
Wisconsin Tissue Mills Inc. and Georgia-Pacific
Corporation. (incorporated by reference to the Company's
Current Report on Form 8-K dated October 3, 1999)
10.1 Employment Continuity Agreement with William A. Raaths*
27.1 Financial Data Schedule - 1999*
27.2 Restated Financial Data Schedule - 1998*
- -------
* Filed herewith
-34-
EX 10.1
EMPLOYMENT CONTINUITY AGREEMENT
THIS AGREEMENT, dated as of August 4, 1999, is between
CHESAPEAKE CORPORATION, a Virginia corporation (the "Company")
and William A. Raaths (the "Employee").
WHEREAS, Employee serves as the President of Wisconsin
Tissue Mills Inc. (Wisconsin Tissue), a wholly owned subsidiary
of the Company; and
WHEREAS, the Company and Georgia-Pacific Corporation have
announced their intention to create a joint venture to be engaged
in the global manufacture or sale of "away from home" tissue
products and related commercial products; and
WHEREAS, Wisconsin Tissue intends to contribute its assets
as a capital contribution in connection with the formation of the
Joint Venture; and
WHEREAS, the Company recognizes that the Employee has made
substantial contributions to Wisconsin Tissue; and
WHEREAS, the Company desires that the Employee continue
employment with Wisconsin Tissue until the creation of the Joint
Venture; and
WHEREAS, the Company desires to alleviate or reduce the
uncertainties that the Employee may feel as a result of the
Employee's assignment, directly or indirectly, to a new endeavor
such as the Joint Venture;
NOW THEREFORE, in consideration of the premises and mutual
covenants and agreements set forth herein, the Company and the
Employee covenant and agree as follows:
1. Term. The "Term" of this Agreement is the period
beginning on the date first written above and ending on the day
before the second anniversary of the effective date of the
creation of the Joint Venture. Notwithstanding any other
provision of this Agreement, this Agreement shall terminate if
the creation of the Joint Venture is not effective before March
31, 2000.
2. Benefits. The Employee shall be entitled to receive the
severance and welfare benefits and the pension supplement
described in this paragraph if, during the Term, (i) the Employee
ceases to be employed by Wisconsin Tissue because the Employee's
service has been terminated by Wisconsin Tissue without Cause
(for purposes of this Agreement, the transfer of the Employee's
employment from Wisconsin Tissue to an affiliate of Wisconsin
Tissue or to the Joint Venture shall not be deemed to be a
termination of the Employee's employment), (ii) the Employee
ceases to be employed by the Joint Venture because the Employee's
service has been terminated by the Joint Venture without Cause or
(iii) the Employee ceases to be employed by Wisconsin Tissue or
the Joint Venture because the Employee resigned with Good Reason.
(a) The severance benefit payable under this
paragraph is an amount equal to three (3) years
of the Employee's annual compensation determined
as the Employee's annual base salary (as in
effect on the date he ceases to be employed by
Wisconsin Tissue or the Joint Venture) plus his
target annual incentive award calculated as 50%
of his annual base salary as in effect on his
termination date, reduced by the amount of any
severance benefit payable to the Employee by the
Joint Venture or payable to the Employee under
the Chesapeake Corporation Salaried Employees'
Benefits Continuation Plan. The severance benefit
payable under this paragraph, less applicable
income and employment taxes and other authorized
deductions, shall be paid in a single sum as soon
as practicable following the Employee's cessation
of employment with Wisconsin Tissue or the Joint
Venture.
(b) The welfare benefits provided under this
paragraph are continued coverage of the Employee
and the Employee's eligible dependents under all
life, medical and dental benefit plans and
programs in which the Employee participates
immediately prior to the Employee's date of
termination on such terms as are then in effect.
In the event that the continued coverage of the
Employee or the Employee's eligible dependents
in any such plan or program is barred by its
terms, the Company shall arrange to provide the
Employee and the Employee's eligible dependents
with benefits substantially similar to those to
which they are entitled to receive under such
plans or programs including, by way of example
and not of limitation, the reimbursement of the
Employee of the cost or premium for continued
coverage available pursuant to Section 4980B of
the Internal Revenue Code of 1986, as amended
("COBRA"). The continued coverage provided
under this paragraph shall continue until the
earlier of (i) the end of the Severance Period
or (ii) the date that the Employee is eligible
for similar coverage under another employer's
plan. For purposes of this Agreement, the term
"Severance Period" means the period beginning on
the date that the Employee ceases to be employed
by Wisconsin Tissue or the Joint Venture and
ending on the date that is three (3) years
thereafter.
(c) The pension supplement payable under this
paragraph is an amount equal to the benefit that
the Employee would have accrued under the
Chesapeake Corporation Executive Supplemental
Retirement Plan (the "ESRP") had the Employee
been an employee of the Company during the
Severance Period (i.e., recognizing as service
with the Company the months of the Severance
Period and the Employee's attained age as of the
end of the Severance Period). The pension
supplement payable under this paragraph shall be
reduced, but not below zero, by any benefit that
the Employee accrues during the Severance Period
under any employee pension benefit plan provided
by the Wisconsin Tissue or the Joint Venture. The
present value of the pension supplement payable
under this paragraph, less applicable income and
employment taxes and other authorized deductions,
shall be paid in a single sum to the Employee as
soon as practicable following the cessation of
Employee's employment with Wisconsin Tissue or
the Joint venture. The present value of the
pension supplement payable under this paragraph
and any offset or reductions for benefits
provided by Wisconsin Tissue or the Joint Venture
shall be made on an actuarially equivalent basis
using the ESRP's actuarial assumptions and
methods.
Except as provided under this paragraph, no severance, welfare or
other benefits are payable to the Employee under this Agreement
as a result of the cessation of his service to Wisconsin Tissue
or the Joint Venture.
3. Cause. For purposes of this Agreement, the term "Cause"
means the Employee's (i) conviction by a court of competent
jurisdiction for, or pleading no contest to, a felony; (ii)
breach of any material obligation to Wisconsin Tissue or the
Joint Venture or (iii) willful neglect of duties to Wisconsin
Tissue or the Joint Venture which is not corrected within thirty
days after written notice to the Employee or willful and material
misconduct in the performance of such duties.
4. Good Reason. For purposes of this Agreement, the term
"Good Reason" means (i) a material reduction in the Employee's
duties or responsibilities; (ii) the failure, by Wisconsin Tissue
or the Joint Venture, to permit the Employee to exercise such
responsibilities as are consistent with the Employee's position;
(iii) a requirement that the Employee relocate more than fifty
miles from the Employee's current place of employment (except a
requirement that the Employee relocate to the Atlanta, Georgia
metropolitan area); (iv) a material reduction in the Employee's
base salary or the payment to the Employee by the Joint Venture
of a base salary that is materially less than the base salary
payable to the Employee by Wisconsin Tissue as in effect
immediately before the Employee is employed by the Joint Venture
or (v) the failure, by the Joint Venture, to make a payment when
due to the Employee.
5. Confidentiality. During the period of his employment
with Wisconsin Tissue, the Company or both, the Employee has had
access to certain confidential, non-public information concerning
the Company (the "Information"). The Employee agrees to maintain
the Information as confidential and not disclose it to third
parties or use it in his employment with any direct or indirect
competitor of the Company. The Employee agrees that if this
confidentiality obligation is breached, the Company shall, in
addition to other available remedies, be entitled to injunctive
relief.
6. Covenant Not to Compete. The Employee agrees that he
will not take certain actions that would be damaging to the
competitive position of Wisconsin Tissue or the Joint Venture.
By making this commitment the Employee agrees that, if the
Employee's employment with Wisconsin Tissue or the Joint Venture
is terminated during the term of this Agreement, the Employee,
during the twelve months following the Employee's cessation of
employment, will not (a) accept any employment with, ownership
interest in, or engagement as a consultant, contractor or service
provider to any business engaged in the commercial and industrial
tissues segment of the paper industry or (b) on behalf of any
such business solicit any business that was a customer of
Wisconsin Tissue or the Joint Venture during the preceding twelve
months. The Employee understands and agrees that each provision
of this Agreement is a separate and independent clause, and if
any clause should be found unenforceable, that will not affect
the enforceability of the other clauses. In the event that any
of the provisions of this Agreement should ever be deemed to
exceed the time, geographic area or activity limitations
permitted by applicable law, the Company and the Employee agree
that such provisions must be and are reformed to the maximum
time, geographic area and activity limitations permitted by
applicable law, and expressly authorize a court having
jurisdiction to reform the provisions to the maximum time,
geographic area and activity limitations permitted by applicable
law.
7. Successors. This Agreement shall inure to the benefit
of and be binding on 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 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.
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. The Company may assign its rights
under paragraphs 5 and 6 of this Agreement.
8. Modification, etc. 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 a duly authorized officer 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. For purposes of this Agreement any reference to
Wisconsin Tissue or the Joint Venture include their respective
affiliates and successors. 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.
9. Enforceability. 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.
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.
William A. Raaths CHESAPEAKE CORPORATION
__________________________
By: Thomas A. Smith
__________________________
Thomas A. Smith
Title Vice President - Human
Resources
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