SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 2, 2000
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
The registrant's former fiscal year ended on
December 31 of each year.
(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 / /.
The number of shares outstanding of each of the issuer's classes
of common stock as of April 30, 2000: 16,062,533 shares.
SIGNIFICANT FINANCIAL AND ACCOUNTING DEVELOPMENTS
On October 19, 2000, Chesapeake Corporation ("Chesapeake" or the
"Company") issued a press release in which it reported
significantly reduced operating profit at its U.S point-of-
purchase display business ("Display") for the third quarter ended
October 1, 2000. The Company promptly initiated a detailed
review of Display's operating performance and accounting
practices by its internal staff and independent accountants. As
a result of the review, the Company has restated its previously
issued unaudited interim consolidated financial statements and
related disclosures for the quarters ended April 2, 2000, and
July 2, 2000.
The purpose of this 10-Q/A is to restate the Company's first
quarter 2000 financial statements to reflect adjustments related
to: allowance for doubtful accounts; inventory obsolescence; and
the revaluation of inventory standards. The principal effects of
these adjustments on the accompanying financial statements are
set forth in Note 1 of the Notes to Consolidated Financial
Statements.
For purposes of this Form 10-Q/A, and in accordance with
Rule 12b-15 under the Securities Exchange Act of 1934, as
amended, each item of the 2000 first quarter Form 10-Q as
originally filed on May 15, 2000, that was affected by the
restatement has been amended and restated in its entirety. No
attempt has been made in this Form 10-Q/A to modify or update
other disclosures as presented in the original Form 10-Q, except
as required to reflect the effects of the restatement.
-2-
CHESAPEAKE CORPORATION
FORM 10-Q/A
FOR THE QUARTERLY PERIOD ENDED APRIL 2, 2000
AS RESTATED
INDEX
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Earnings-
Quarters ended April 2, 2000
and March 31, 1999 4
Consolidated Balance Sheets
at April 2, 2000 and December 31, 1999 5
Consolidated Statements of Cash Flows-
Quarters ended April 2, 2000
and March 31, 1999 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 27
Signature 28
-3-
PART I
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In millions, except per share data)
(Unaudited)
Quarters Ended
April 2, March 31,
2000 1999
(As restated)
------ ------
Net sales $239.1 $239.1
Costs and expenses:
Cost of products sold 196.9 186.0
Selling, general and
administrative expenses 42.8 37.7
------ ------
(Loss) income from operations (0.6) 15.4
Other income and expenses, net 0.1 3.7
Interest expense, net (5.6) (6.0)
------ ------
(Loss) income before taxes and
extraordinary item (6.1) 13.1
Income tax (benefit) expense (3.8) 4.6
------ ------
(Loss) income before extraordinary item (2.3) 8.5
Extraordinary item, net of income taxes
of $0.9 1.5 -
------ ------
Net (loss) income $ (3.8) $ 8.5
====== ======
Basic (loss)earnings per share:
(Loss) earnings before extraordinary item $(0.13) $ 0.40
Extraordinary item, net of income taxes (0.09) -
------ ------
Basic (loss) earnings per share $(0.22) $ 0.40
====== ======
Weighted average number of common shares 17.3 21.4
====== ======
Diluted (loss) earnings per share:
(Loss) earnings before extraordinary item $(0.13) $ 0.39
Extraordinary item, net of income taxes (0.09) -
------ ------
Diluted (loss) earnings per share $(0.22) $ 0.39
====== ======
Weighted average number of common shares and
equivalents outstanding, assuming dilution 17.3 21.7
====== ======
Cash dividends declared per share of
common stock $ 0.22 $ 0.22
====== ======
See accompanying notes to consolidated financial statements.
-4-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
(Unaudited)
April 2, Dec. 31,
2000 1999
(As restated)
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 16.3 $ 306.6
Accounts receivable (less allowance
of $5.2 and $4.1) 192.0 170.5
Inventories:
Finished goods 48.1 41.8
Work in process 22.7 28.2
Materials and supplies 40.3 36.7
------- ------
Total inventories 111.1 106.7
Deferred income taxes 22.4 22.4
Other 6.1 4.7
------- ------
Total current assets 347.9 610.9
------- ------
Property, plant and equipment, at cost 596.8 520.4
Less accumulated depreciation 143.3 164.7
------- ------
453.5 355.7
------- ------
Goodwill, net 541.4 296.4
Investment in affiliates 70.5 1.5
Other assets 85.0 108.7
-------- --------
Total assets $1,498.3 $1,373.2
======== ========
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CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
(In millions, except share data)
(Unaudited)
April 2, Dec. 31,
2000 1999
(As restated)
---------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 120.8$ 92.5
Accrued expenses 123.5 111.6
Current maturities of long-term debt 92.2 91.3
Dividends payable 3.9 3.9
Income taxes payable 17.1 20.6
----------------
Total current liabilities 357.5 319.9
----------------
Long-term debt 347.8 224.4
Other long-term liabilities 47.0 44.4
Postretirement benefits other than pensions 16.7 16.5
Deferred income taxes 225.3 216.3
----------------
Total liabilities 994.3 821.5
Stockholders' 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 16,555,943
in 2000 and 17,509,064 shares in 1999,
respectively 16.6 17.5
Additional paid-in capital - -
Unearned compensation (3.9) (4.8)
Accumulated other comprehensive loss (22.7) (7.2)
Retained earnings 514.0 546.2
----------------
Total stockholders' equity 504.0 551.7
----------------
Total liabilities and stockholders'
equity $1,498.3$1,373.2
================
See accompanying notes to consolidated financial statements.
-6-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Quarters Ended
April 2, March 31,
2000 1999
(As restated)
------ -------
Operating activities:
Net (loss) income $ (3.8) $ 8.5
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Extraordinary item 2.4 -
Depreciation, cost of timber harvested
and amortization of intangibles 16.7 18.0
Deferred income taxes (0.5) 0.8
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable, net 6.5 (4.8)
Inventories (5.5) (4.4)
Other assets (1.1) 2.6
Accounts payable 6.0 (0.7)
Accrued expenses 8.4 (1.9)
Income taxes payable (6.5) 1.6
Other (1.3) -
------ ------
Net cash provided by operating activities 21.3 19.7
------ ------
Investing activities:
Purchases of property, plant and equipment (14.6) (19.7)
Acquisitions (338.0) (328.9)
Other, net 0.3 (4.2)
------ ------
Net cash used in investing activities (352.3) (352.8)
------ ------
-7-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(In millions)
(Unaudited)
Quarters Ended
April 2, March 31,
2000 1999
(As restated)
------ -------
Financing activities:
Net (repayment) borrowing on lines of credit (10.6) 0.8
Payments on long-term debt (1.6) (0.7)
Proceeds from long-term debt 84.3 303.5
Debt issuance costs (2.5) -
Purchases of outstanding common stock (25.2) -
Dividends paid (3.8) (4.7)
Other 0.1 -
------ ------
Net cash provided by financing
activities 40.7 298.9
------ ------
Decrease in cash and cash equivalents (290.3) (34.2)
Cash and cash equivalents at beginning of period 306.6 62.4
------ ------
Cash and cash equivalents at end of period $ 16.3 $ 28.2
====== ======
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
Basis of presentation
The consolidated financial statements of Chesapeake
Corporation and subsidiaries ("Chesapeake" or the "Company")
included herein are unaudited, except for the December 31, 1999,
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
2000 interim period should not be regarded as necessarily
indicative of the results that may be expected for the entire
year.
Effective January 1, 2000, the Company changed its fiscal
year end for financial statement purposes from a calendar year to
a 52/53 week fiscal year. Beginning with fiscal year 2000, the
Company's fiscal year will end on the Sunday closest to December
31. Additionally, the Company now reports its quarterly periods
on a 13-week basis ending on a Sunday. The effect of this change
was not material to the Company's financial condition or results
of operations.
Certain prior-year data have been reclassified to conform to
the 2000 presentation.
Revenue recognition
The Company recognizes revenue in the packaging businesses
upon passage of title to the customer, which is generally at the
time of product shipment. The Company recognizes sales of land
when all conditions, as set forth in Statement of Financial
Accounting Standards No. 66, "Accounting for Sales of Real
Estate," have occurred.
Restatement
In November 2000, following a detailed review by its
internal staff and independent accountants, the Company has
restated the previously reported results of Display, which is
included in its Merchandising and Specialty Packaging
-9-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements(Unaudited),continued
Note 1. Summary of Significant Accounting Policies, continued
Restatement, continued
segment. The restatement had the effect of reducing net income by
$4.7 million in the first quarter of 2000 and reducing net income
by $0.3 million in the second quarter of 2000. The adjustments
in the first quarter of 2000 related to: revaluation of inventory
standards; inventory obsolescence and allowance for doubtful
accounts, which reduced operating income by $7.1 million.
Accordingly, the financial statements for the period presented in
this Form 10-Q/A have been restated as follows:
Quarter Ended
April 2, 2000
As As
Reported Restated
-------- ---------
Statement of operations impact:
Net sales $240.1 $239.1
Cost of products sold 191.3 196.9
Selling, general and administrative expenses 42.3 42.8
------ ------
Income (loss) from operations 6.5 (0.6)
Other income, net 0.1 0.1
Interest expense, net (5.6) (5.6)
------ ------
Income (loss) before income taxes and
extraordinary item 1.0 (6.1)
Income tax benefit (1.4) (3.8)
Income (loss) before
extraordinary item 2.4 (2.3)
Extraordinary item, net of income
taxes of $0.9 (1.5) (1.5)
------ ------
Net income (loss) $ 0.9 $ (3.8)
====== ======
Earnings (loss) per share before
extraordinary item:
Basic $0.14 $(0.13)
Diluted $0.14 $(0.13)
Earnings (loss) per share:
Basic $0.05 $(0.22)
Diluted $0.05 $(0.22)
-10-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements(Unaudited),continued
Note 1. Summary of Significant Accounting Policies, continued
Restatement, continued
April 2, 2000
As As
Reported Restated
-------- ---------
Balance sheet impact:
Accounts receivable, net $193.5 $192.0
Inventories 116.7 111.1
Income taxes payable 19.5 17.1
Retained earnings 518.7 514.0
Note 2. Adoption of Accounting Pronouncements
In March 2000, the Financial Accounting Standards Board
("FASB") issued FASB Interpretation No. 44, "Accounting of
Certain Transactions involving Stock Compensation," an
interpretation of APB Opinion No. 25 ("FIN 44"). FIN 44 clarifies
the application of APB Opinion No. 25 as to (a) the definition of
employee for purposes of applying APB Opinion No. 25, (b) the
criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or
award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions cover specific
events that occur after either December 15, 1998, or January 12,
2000. The Company has not determined what effect, if any, FIN 44
will have on its financial statements.
In December 1999, the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101"), which provides
guidance on the recognition, presentation and disclosure of
revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue
and provides guidance for disclosures related to revenue
recognition policies. The adoption of SAB 101 is required in the
second quarter of 2000 and is not expected to have a material
impact on the Company's financial statements.
The FASB has issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133"). SFAS 133 requires companies to
record derivative instruments 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
-11-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited), continued
Note 2. Adoption of Accounting Pronouncements, continued
1999, defers the Company's required adoption of SFAS 133 until
fiscal year 2001. The adoption of SFAS 133 is not expected to
have a material impact on the Company's financial statements.
Note 3. Comprehensive Income
Comprehensive income (loss) for the quarters ended April 2,
2000 (as restated), and March 31, 1999, was $(19.3) million and
$8.9 million, respectively. The difference between net income
(loss) and comprehensive income (loss) is due to foreign currency
translation.
Note 4. Acquisitions and Dispositions
On February 24, 2000, the Company completed its acquisition
of substantially all of the outstanding capital shares of Boxmore
International PLC ("Boxmore"), a European specialty packaging
company headquartered in Belfast, Northern Ireland. The
acquisition was effected through a tender offer by Chesapeake UK
Acquisitions II plc ("Chesapeake UK II"), a wholly-owned
subsidiary of Chesapeake, for all of the outstanding capital
shares of Boxmore at a purchase price of (pound)2.65 per share.
The tender offer represented a value of approximately US $315
million for Boxmore's outstanding share capital. Including
assumed debt of approximately $64 million, the tender offer
reflected a total enterprise value for Boxmore of approximately
US $379 million. The purchase price for Boxmore's capital shares
was paid in cash of $229.9 million, and $85.2 million in
unsecured loan notes ("Loan Notes") issued by Chesapeake UK II
and guaranteed by First Union National Bank, London Branch,
("First Union, London"). The Loan Notes bear interest at a
variable rate per annum equal to the LIBOR rate for six month
sterling deposits less one-half of one percent, are redeemable in
whole or part at the option of the holders on each biannual
interest payment date commencing February 28, 2001, and, if not
earlier redeemed, mature on February 28, 2005. Under the terms of
its current credit facility, Chesapeake is required to pay First
Union, London a two percent loan guarantee fee on the outstanding
loan note balance.
During the first quarter of 2000, the Company also completed
the acquisitions of Green Printing Company, Inc. a specialty
packaging producer and printer in Lexington, North Carolina, and
a corrugated container facility in Warren County, North Carolina,
and finalized the formation of a joint venture with Georgia-
Pacific Corporation, in which the two companies combined their
litho-laminated graphic packaging businesses.
On March 18, 1999, Chesapeake completed its acquisition of
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CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited), continued
Note 4. Acquisitions and Dispositions, continued
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. The final purchase price of approximately
US $373 million was funded through a combination of approximately
$316 million in borrowings under a credit facility, $22 million
in unsecured loan notes issued to certain Field Group
shareholders, and $35 million in cash.
Each of the acquisitions has been accounted for using the
purchase method and is included in the results of operations
since the purchase date. The purchase price allocation for the
Boxmore acquisition is based on preliminary estimates of fair
value for property, plant and equipment; however, the amounts
should not vary materially from this estimate. As of the
acquisition date of Boxmore, the Company began to develop plans
to eliminate duplicate functions and processes and restructure
capacity at certain acquired facilities. The estimated accrual
for severance, relocation and restructuring costs associated with
these facilities is in the range of $14 million to $24 million,
which will be recorded in the opening balance sheet. These plans
are expected to be completed by the end of the year.
The purchase price amounts for the acquisitions which
occurred during the quarters ending April 2, 2000, and March 31,
1999, have been allocated to the acquired net assets as
summarized below (in millions):
April 2, March 31,
2000 1999
------ ------
Fair value of assets acquired $475.6 $485.5
Liabilities assumed or created (132.2) (144.5)
Cash acquired (5.4) (12.1)
------ ------
Cash paid for acquisitions, net $338.0 $328.9
====== ======
-13-
CHESAPEAKE CORPORATION AND ITS SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited), continued
Note 4. Acquisitions and Dispositions, continued
Pro forma financial information reflecting the combined
results of the Company, as if the Boxmore and Field Group
acquisitions occurred on January 1, 1999, is as follows (in
millions, except per share amounts):
Quarter Ended
April 2, March 31,
------------------
2000 1999
As restated
------ ------
Net sales $273.7 $361.0
(Loss) income before
extraordinary item (2.8) 1.8
Net (loss) income (4.3) 1.8
Earnings (loss) per share before
extraordinary item:
Basic $(0.16) $0.08
Diluted $(0.16) $0.08
Earnings (loss) per share:
Basic $(0.25) $0.08
Diluted $(0.25) $0.08
Note 5. Restructuring/Special Charges
In the fourth quarter of 1999, the Company recognized a
restructuring/special charge of $38 million related to employment
reduction, the closure of one facility, impairment of assets in
the Company's French operations and defense fees incurred to
respond to an unsolicited proposal by Shorewood Packaging
Corporation ("Shorewood") to acquire Chesapeake. The cash portion
of the restructuring/special charges was $23 million. Announced
workforce reductions included approximately 300 employees in the
Merchandising and Specialty Packaging segment, 170 employees in
the European Specialty Packaging segment and 10 corporate
employees. Payments for employment reduction included
approximately 80 employees in the Merchandising and Specialty
Packaging segment, 50 employees in the European Specialty
Packaging Segment and 10 corporate employees. The Company
anticipates completing the above restructuring activities as
planned by the end of the year.
-14-
CHESAPEAKE CORPORATION AND ITS SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 5. Restructuring/Special Charges,continued
An analysis of the restructuring reserve as of April 2, 2000
is as follows (in millions):
Employment Facility Defense
Reduction Closure Fees Total
Restructuring charge $12.6 $1.2 $9.2 $23.0
Cash payments in 1999 (1.1) - (2.5) (3.6)
----- ----- ----- -----
Balance, December
31, 1999 11.5 1.2 6.7 19.4
Cash payments in 2000 (2.2) (0.2) (4.1) (6.5)
Foreign currency
translation 0.4 - - 0.4
----- ----- ----- -----
Balance, April 2,
2000 $9.7 $1.0 $2.6 $13.3
===== ===== ===== =====
Ongoing annual operating savings of approximately $11
million upon full implementation of the program are expected in
the form of reduced salaries and benefits expenses (approximately
$7.5 million), manufacturing costs (approximately $1.0 million)
and depreciation expense (approximately $2.5 million). The
Company estimates that actions implemented under the plan
resulted in savings of approximately $1.3 million in the quarter
ended April 2, 2000.
Note 6. Income Taxes
Excluding the nonrecurring impact of the Shorewood
transaction costs, the Company's effective income tax rate was
33% and 35.5% in the first quarter of 2000 and 1999,
respectively. The decrease in the Company's effective income tax
rate is primarily due to the acquisition of businesses in
countries that have lower effective income tax rates.
Note 7. Commitments and Contingencies
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
costs of compliance with existing environmental regulations are
not expected to have a material adverse effect on the Company's
financial condition or results of operations.
-15-
CHESAPEAKE CORPORATION AND ITS SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 7. Commitments and Contingencies, continued
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 Wisconsin Tissue Mills, Inc., now WTM I Company ("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 condition 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 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 have 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
-16-
CHESAPEAKE CORPORATION AND ITS SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 7. Commitments and Contingencies, continued
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.
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
WT 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. WT 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
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
-17-
CHESAPEAKE CORPORATION AND ITS SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 7. Commitments and Contingencies, continued
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, WT 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, WT 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.
WT also believes that it is entitled to substantial
indemnification from a prior owner of WT, pursuant to a stock
purchase agreement between the parties, with respect to
liabilities related to this matter. WT 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 for the Tissue JV,
WT 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, WT 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 condition 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 condition or results of operations.
On April 19, 1999, the EPA and the Virginia Department of
Environmental Quality ("DEQ") each issued Notices of Violation
("NOVs") under the Clean Air Act Amendments of 1990 ("CAA")
against St. Laurent Paper Products Corp. ("St. Laurent") (and,
in the case of EPA's NOV, Chesapeake) relating to St. Laurent's
-18-
CHESAPEAKE CORPORATION AND ITS SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 7. Commitments and Contingencies, continued
kraft products mill located in West Point, Virginia (the "West
Point Mill") formerly owned and operated by Chesapeake Paper
Products, L.L.C. Chesapeake Paper Products, L.L.C. was sold by
Chesapeake 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 West Point 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 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 will indemnify St. Laurent against any
violations of applicable environmental laws (including the CAA)
that existed at the West Point 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 subject to certain
limitations, including a cap of $50 million and, in certain
circumstances, a $2.0 million deductible. The Company and St.
Laurent have jointly responded to and are defending against the
matters alleged in the NOVs, and have presented an initial
settlement offer, consisting primarily of engineering measures,
to the EPA and DEQ. Based upon a review of the NOVs and an
analysis of the applicable law and facts, the Company believes
that both it and St. Laurent have substantial defenses against
the alleged violations and intend to vigorously defend against
the alleged violations. The Company and St. Laurent are
negotiating with EPA, the United States Department of Justice and
DEQ to address the matters that are the subject of the NOVs. 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 whether 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.
-19-
CHESAPEAKE CORPORATION AND ITS SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 7. Commitments and Contingencies, continued
Litigation
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 material adverse effect on its
consolidated financial position or results of operations.
Note 8. Segment Disclosure
First Quarter
-------------
(In millions)
2000 1999
(As restated)
Net sales: ---- ----
European Specialty Packaging $ 120.8 $ 15.4
Merchandising and Specialty Packaging 106.1 113.1
Plastic Packaging 9.9 -
Tissue - 98.8
Forest Products/Land Development 2.3 11.8
-------- --------
$ 239.1 $ 239.1
======== ========
Earnings (losses) before interest and taxes
(EBIT):
European Specialty Packaging $ 8.9 $ 0.6
Merchandising and Specialty Packaging (5.4) 2.0
Plastic Packaging 1.0 -
Tissue - 15.5
Forest Products/Land Development 2.0 4.7
Corporate/other (7.0) (3.7)
-------- --------
$ (0.5) $ 19.1
======== ========
Identifiable assets:
European Specialty Packaging $ 791.8 $ 485.5
Merchandising and Specialty Packaging 396.7 330.7
Plastic Packaging 200.7 -
Forest Products/Land Development 34.5 122.1
Tissue - 451.7
Corporate/other 74.6 40.4
-------- --------
$1,498.3 $1,430.4
========== ========
-20-
CHESAPEAKE CORPORATION AND ITS SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 8. Segment Disclosure, continued
Chesapeake currently conducts its business in four segments.
The Company's European Specialty Packaging segment, which is
comprised of the Field Group operations and the paper-based
specialty packaging operations of Boxmore, produces folding
cartons, labels, and leaflets, primarily for consumer product and
pharmaceutical/healthcare companies. The results of operations of
Field Group and Boxmore are included in the consolidated segment
results since their respective acquisition dates of March 18,
1999, and February 24, 2000 (see Note 4). The Merchandising and
Specialty Packaging segment produces and sells point-of-sale
displays, merchandising services, graphic packaging and
corrugated shipping containers (see Note 1 regarding
restatement). The Plastic Packaging segment is comprised of the
plastic-based specialty packaging operations of Boxmore, which
produces plastic containers for the food/drink and
agricultural/industrial markets. The Forest Products/Land
Development segment manages the Company's real estate holdings.
The Company's Tissue segment was composed of the commercial and
industrial tissue operations of WT and Wisconsin Tissue de
Mexico, which were contributed to a joint venture with Georgia-
Pacific Corporation effective October 3, 1999. There were no
intersegment sales for the quarter ended April 2, 2000 and March
31, 1999.
-21-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Restatement
In November 2000, following a detailed review by its
internal staff and independent accountants, the Company has
restated the previously reported results of Display, which is
included in its Merchandising and Specialty Packaging segment.
The restatements had the effect of reducing the previously
reported net income for the first quarter of 2000 by
approximately $4.7 million, or $0.27 per share, and reducing
previously reported earnings for the second quarter of 2000 by
approximately $0.3 million, or $0.02 per share. As a result, the
Company has restated its previously issued consolidated financial
statements to reflect adjustments related to: allowance for
doubtful accounts; inventory obsolescence; lower-than-expected
full-year sales volume; and the revaluation of inventory
standards.
The review described above indicated no adjustments were
necessary to the 1999 audited results as reported.
The Company has retained both Goldman, Sachs & Co. and
McKinsey & Company to assist in exploring strategic alternatives
for Display.
Overview
While net sales of $239.1 million for the quarter ended
April 2, 2000, were flat compared to the first quarter of 1999,
there was a significant shift in sales from the former Tissue
segment to the Company's recently acquired European operations
(European Specialty Packaging and Plastic Packaging segments).
Comparing the first quarter of 2000 with the first quarter of
1999, sales related to the European Specialty Packaging and
Plastic Packaging segments represented 55% and 6% of total sales,
respectively, and sales for the Tissue segment represented 0% and
41% of total sales, respectively.
Net loss for the quarter ended April 2, 2000, was $(3.8)
million, or $(0.22) per diluted share, compared with 1999 first
quarter net income of $8.5 million, or $.39 per diluted share.
Included in the first quarter of 2000's net income is an
extraordinary charge for the early extinguishment of debt of $1.5
million or $.09 per diluted share. The decrease in quarterly
operating results is primarily due to reduced profitability of
Display due to changes in product mix and the change in
Chesapeake's business portfolio which resulted from acquisition
and divestiture activities.
-22-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, continued
Other income and expenses, net, decreased to $0.1 million
for the quarter ended April 2, 2000, compared to $3.7 million
for the quarter ended March 31, 1999. During the first quarter
of 2000, the Company announced the expiration of its offer to
acquire Shorewood Packaging Corporation ("Shorewood") after
International Paper Company entered into a definitive agreement
to acquire Shorewood. The first quarter of 2000 other income
and expenses, net, includes nonrecurring expenses associated
with the Shorewood tender offer of $10.3 million, which were
largely offset by a $7.7 million gain on Chesapeake's sale of
4.1 million shares of Shorewood common stock.
The first quarter of 2000 tax benefit includes the tax
effect of the transaction costs associated with the Shorewood
tender offer and the reversal of an estimated tax provision on
the 1999 accrual of Shorewood defense costs that totaled $2.6
million. Excluding these nonrecurring items, the Company's
effective tax rate for the first quarter of 2000 was 33% (See
Note 6 to the consolidated financial statements).
Lower debt levels and increased cash balances, partially
offset by higher interest rates, during the first quarter of 2000
decreased net interest expense by $0.4 million compared to the
first quarter of 1999.
Segment Information
European Specialty Packaging
Increase/(Decrease)
(Dollars in millions) 2000 1999 $ %
----------------------------------------------------------------
Net sales $120.8 $15.4 * *
EBIT 8.9 0.6 * *
Operating margin 7.4% 3.9% 89.7%
================================================================
* Not meaningful
The European Specialty Packaging segment consists of the
results of Field Group and the paper-based specialty packaging
operations of Boxmore. These operations have been consolidated
since their respective acquisition dates. Sales and EBIT for
this segment were $120.8 million and $8.9 million, respectively,
for the first quarter of 2000. Net sales and earnings were not
material for this segment in the first quarter of 1999, as they
reflected only the results of Field Group following its
acquisition in March 1999. Operating margin improved by over 3
percentage points on a pro forma basis quarter over quarter due
primarily to improved volume and selling prices, particularly in
the luxury packaging markets and Field Group's Asian markets.
-23-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, continued
Merchandising and Specialty Packaging
Increase/(Decrease)
(Dollars in millions) 2000 1999 $ %
(As restated)
----------------------------------------------------------------
Net sales $106.1 $113.1 $(7.0) (6.2)%
EBIT (5.4) 2.0 (7.4) (370.0)
Operating margin (5.1)% 1.8% - (383.3)
================================================================
Net sales for the 2000 first quarter decreased 6.2 percent
compared to the prior year quarter, primarily due to the
deconsolidation of the Company's litho-laminated operations,
which were contributed to a joint venture with Georgia-Pacific
Corporation on February 18, 2000. The decrease in EBIT and
operating margin quarter over quarter was primarily due to lower-
margin sales mix at Display, start-up costs at the Company's
Warren County, North Carolina, corrugated container facility
acquired in February 2000, and the seasonality of operating
results at Consumer Promotions International, a manufacturer of
permanent point-of-sale displays, which was acquired in October
1999.
Plastic Packaging
The Plastic Packaging segment is comprised of the plastic-
based specialty packaging operations of Boxmore. Net sales and
EBIT for the segment were $9.9 million and $1.0 million,
respectively, since the acquisition of Boxmore on February 24,
2000.
Tissue
The tissue segment was eliminated from separate reporting
with the formation of the Georgia-Pacific Tissue joint venture
(the "Tissue JV") on October 4, 1999. The results of
Chesapeake's 5% equity interest in the Tissue JV have been
included in the Corporate/other segment.
-24-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS,
continued
Forest Products/Land Development
Increase/(Decrease)
(Dollars in millions) 2000 1999 $ %
----------------------------------------------------------------
Net sales $2.3 $11.8 $(9.5) 80.5%
EBIT 2.0 4.7 (2.7) 57.4
Operating margin 87.0% 39.9% - 118.0
================================================================
The decreases in quarter-over-quarter net sales and EBIT
reflect the impact of the sale of a substantial portion of the
Company's timberland and its Building Products business in the
third quarter of 1999.
Liquidity and Financial Position
Net cash provided by operating activities increased 8%, to
$21.3 million from $19.7 million in the quarter ended April 2,
2000, compared to the quarter ended March 31, 1999, primarily due
to decreases in working capital offset in part by a decrease in
EBITDA. EBITDA, a measure of internal cash flow, which combines
earnings before interest, income taxes and non-cash charges for
depreciation, cost of timber harvested, and amortization, was
$18.8 million for the first quarter of 2000, compared to EBITDA
of $37.1 million for the first quarter of 1999. This decrease in
EBITDA was due primarily to reduced profitability of Display due
to changes in product mix and volume decreases and to a shift in
the seasonal operating profit pattern of the Company's business
portfolio.
Net cash used in investing activities for the first quarter
of 2000 was $352.3 million compared to $352.8 million in the
first quarter of 1999, which primarily reflects the cash utilized
for acquisitions in each period.
Net cash provided by financing activities in the first
quarter of 2000 was $40.7 million compared to $298.9 million in
the first quarter of 1999. This decrease in net cash provided by
financing activities quarter-over-quarter is primarily due to the
use of borrowings under the Company's lines of credit to finance
the 1999 acquisition of Field Group. Chesapeake's net debt-to-
capital ratio was 37 percent as of April 2, 2000, compared to 54
percent as of March 31, 1999. The decrease in the net debt-to-
capital ratio was the result of applying cash received from the
formation of the Tissue JV to debt, partially offset by the use
of cash to partially fund the Company's acquisitions in the
fourth quarter of 1999 and the first quarter of 2000.
-25-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, continued
During the first quarter of 2000, the Company purchased
approximately 950,000 shares of its common stock in open market
transactions at an average price of $26.40 per share. As of April
30, 2000, the Company is authorized to purchased an additional
1.0 million shares in open market and negotiated transactions.
On February 23, 2000, Chesapeake terminated a commitment to
enter into a long-term $1.075 billion senior credit facility
(which it had obtained in connection with the anticipated
acquisition of Boxmore and its efforts to acquire Shorewood), and
entered into a six-month $250 million senior credit facility to
satisfy short-term liquidity requirements. Pricing on the six-
month facility is initially at 200 points over LIBOR, with a
nominal facility fee to be paid on the unused amount. In
addition, the Company is required to pay a two percent loan
guarantee fee on the outstanding loan note balance issued in
connection with the Boxmore acquisition. The facility has
customary covenants, including debt and capital spending limits,
a minimum net worth requirement, and a $20 million annual
limitation on dividend payments. Chesapeake's obligations under
this facility are secured by a pledge of the stock of its
principal UK subsidiaries. The Company expects to enter into a
replacement long-term credit facility prior to the expiration of
the six-month senior credit facility. The Company believes that
its financial resources are adequate to support anticipated long-
term and short-term capital needs and commitments.
Year 2000
With the passage of the critical January 1, 2000, date,
Chesapeake and, to management's knowledge, its suppliers and its
customers, have not experienced any significant business
disruptions as a result of the Year 2000 date change. The Company
will continue to monitor its systems and communicate with its
suppliers for ongoing Year 2000 compliance until it is reasonably
assured that no significant business interruptions are likely to
occur. Based on the actions taken as outlined above and the
experience to date, the Company does not believe that its
operations will be materially impacted by the Year 2000 issue.
Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements.
-26-
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.
PART II
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits:
10.1 - Service Agreement with Mark Ennis, dated as
of March 8, 2000 (filed as Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended April 2, 2000)
10.2 - Executive Employment Agreement with John F.
Gillespie, dated as of March 1, 2000(filed as
Exhibit 10.2 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended April 2, 2000)
27.1 - Financial Data Schedule - 2000 restated
(b) Reports on Form 8-K:
None
-27-
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 20, 2000 BY: /s/ William T. Tolley
William T. Tolley
Senior Vice President -
Finance & Chief
Financial Officer
-28-
EXHIBIT INDEX
EXHIBIT
-------
10.1 Service Agreement with Mark Ennis, dated as of March 8,
2000
10.2 Executive Employment Agreement with John F. Gillespie,
dated as of March 1, 2000
27.1 Financial Data Schedule - 2000 restated*
* Filed herewith electronically
-29-
