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UNITED STATES
FORM 10-Q
(Mark One)
|
||
[X]
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended September 30, 2000 | ||
OR | ||
[ ]
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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: 0-20646
Caraustar Industries, Inc.
North Carolina | 58-1388387 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
|
3100 Joe Jerkins Blvd., Austell, Georgia | 30106 | |
(Address of principal executive offices) | (Zip Code) |
(770) 948-3101
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 shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of issuers classes of common stock, as of the latest practicable date, November 9, 2000.
Common Stock, $.10 par value | 26,204,567 | |
(Class)
|
(Outstanding) |
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000
CARAUSTAR INDUSTRIES, INC.
TABLE OF CONTENTS
Page | ||||||
PART I
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FINANCIAL INFORMATION
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|||||
Item 1.
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Condensed Consolidated Financial Statements:
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|||||
Condensed Consolidated Balance Sheets as of September 30, 2000
and
December 31, 1999. |
3 | |||||
Condensed Consolidated Statements of Income for the three-month
and nine-month periods ended September 30, 2000 and September
30, 1999.
|
4 | |||||
Condensed Consolidated Statements of Cash Flows for the
nine-month periods ended September 30, 2000 and September 30,
1999.
|
5 | |||||
Notes to Condensed Consolidated Financial Statements
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6 | |||||
Item 2.
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Managements Discussion and Analysis of Financial Condition
and Results of Operations for the three-month and nine-month
periods ended September 30, 2000 and September 30, 1999.
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11 | ||||
Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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20 | ||||
PART II
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OTHER INFORMATION
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|||||
Item 1.
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Legal Proceedings
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21 | ||||
Item 6.
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Exhibits and Reports on Form 8-K
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21 | ||||
Signatures | 22 | |||||
Exhibit Index | 23 |
2
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000
CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, | December 31, | |||||||||
2000 | 1999* | |||||||||
(Unaudited) | ||||||||||
ASSETS | ||||||||||
CURRENT ASSETS:
|
||||||||||
Cash and cash equivalents
|
$ | 855 | $ | 18,771 | ||||||
Receivables, net
|
108,798 | 108,819 | ||||||||
Inventories
|
101,996 | 89,770 | ||||||||
Refundable income taxes
|
11,614 | 1,985 | ||||||||
Other current assets
|
11,807 | 7,777 | ||||||||
Total current assets
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235,070 | 227,122 | ||||||||
PROPERTY, PLANT AND EQUIPMENT:
|
||||||||||
Land
|
12,663 | 12,312 | ||||||||
Buildings and improvements
|
125,948 | 125,126 | ||||||||
Machinery and equipment
|
600,153 | 580,892 | ||||||||
Furniture and fixtures
|
11,606 | 8,984 | ||||||||
750,370 | 727,314 | |||||||||
Less accumulated depreciation
|
(276,297 | ) | (247,458 | ) | ||||||
Property, plant and equipment, net
|
474,073 | 479,856 | ||||||||
GOODWILL, net
|
147,911 | 140,763 | ||||||||
INVESTMENT IN UNCONSOLIDATED AFFILIATES
|
72,648 | 22,111 | ||||||||
OTHER ASSETS
|
6,528 | 8,791 | ||||||||
$ | 936,230 | $ | 878,643 | |||||||
LIABILITIES AND SHAREHOLDERS EQUITY | ||||||||||
CURRENT LIABILITIES:
|
||||||||||
Current maturities of long-term debt
|
$ | 16,583 | $ | 16,615 | ||||||
Accounts payable
|
53,462 | 62,454 | ||||||||
Accrued liabilities
|
43,432 | 43,755 | ||||||||
Dividends payable
|
4,699 | 4,572 | ||||||||
Total current liabilities
|
118,176 | 127,396 | ||||||||
REVOLVING CREDIT LOANS
|
194,000 | 140,000 | ||||||||
LONG-TERM DEBT, less current maturities
|
269,730 | 269,739 | ||||||||
DEFERRED INCOME TAXES
|
58,964 | 49,153 | ||||||||
DEFERRED COMPENSATION
|
2,685 | 3,164 | ||||||||
OTHER LIABILITIES
|
7,448 | 9,786 | ||||||||
MINORITY INTEREST
|
1,108 | 946 | ||||||||
COMMITMENTS AND CONTINGENCIES
|
||||||||||
SHAREHOLDERS EQUITY:
|
||||||||||
Preferred stock, $.10 par value; 5,000,000 shares authorized;
none issued
|
0 | 0 | ||||||||
Common stock, $.10 par value; 60,000,000 shares authorized,
26,186,734 and 25,488,280 shares issued and outstanding at
September 30, 2000 and December 31, 1999, respectively
|
2,619 | 2,549 | ||||||||
Additional paid-in capital
|
160,276 | 149,509 | ||||||||
Retained earnings
|
121,982 | 126,935 | ||||||||
Accumulated other comprehensive income
|
(758 | ) | (534 | ) | ||||||
284,119 | 278,459 | |||||||||
$ | 936,230 | $ | 878,643 | |||||||
The accompanying notes are an integral part of these condensed consolidated balance sheets.
3
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000
PART I, ITEM 1.
CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended | Nine Months Ended | |||||||||||||||||
September 30, | September 30, | |||||||||||||||||
2000 | 1999 | 2000 | 1999 | |||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||||
SALES
|
$ | 249,592 | $ | 254,349 | $ | 779,073 | $ | 675,959 | ||||||||||
FREIGHT
|
12,861 | 13,057 | 38,710 | 34,646 | ||||||||||||||
Net sales
|
236,731 | 241,292 | 740,363 | 641,313 | ||||||||||||||
COST OF SALES
|
188,909 | 188,015 | 581,608 | 487,955 | ||||||||||||||
Gross profit
|
47,822 | 53,277 | 158,755 | 153,358 | ||||||||||||||
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
|
34,459 | 33,326 | 109,510 | 93,968 | ||||||||||||||
RESTRUCTURING COSTS
|
8,564 | 0 | 15,477 | 0 | ||||||||||||||
Operating income
|
4,799 | 19,951 | 33,768 | 59,390 | ||||||||||||||
OTHER (EXPENSE) INCOME:
|
||||||||||||||||||
Interest expense
|
(9,063 | ) | (7,552 | ) | (24,674 | ) | (17,802 | ) | ||||||||||
Interest income
|
59 | 100 | 316 | 465 | ||||||||||||||
Equity in income of unconsolidated affiliates
|
816 | 2,912 | 7,186 | 7,355 | ||||||||||||||
Other, net
|
(259 | ) | (132 | ) | (609 | ) | (220 | ) | ||||||||||
(8,447 | ) | (4,672 | ) | (17,781 | ) | (10,202 | ) | |||||||||||
(LOSS) INCOME BEFORE INCOME TAXES AND MINORITY INTEREST
|
(3,648 | ) | 15,279 | 15,987 | 49,188 | |||||||||||||
MINORITY INTEREST
|
(28 | ) | (95 | ) | (161 | ) | (291 | ) | ||||||||||
(BENEFIT) PROVISION FOR INCOME TAXES
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(1,115 | ) | 5,129 | 6,778 | 17,111 | |||||||||||||
NET (LOSS) INCOME
|
$ | (2,561 | ) | $ | 10,055 | $ | 9,048 | $ | 31,786 | |||||||||
BASIC
|
||||||||||||||||||
NET (LOSS) INCOME PER COMMON SHARE
|
$ | (0.10 | ) | $ | 0.40 | $ | 0.35 | $ | 1.27 | |||||||||
Weighted average number of shares outstanding
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25,932 | 25,100 | 25,780 | 24,942 | ||||||||||||||
DILUTED
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||||||||||||||||||
NET (LOSS) INCOME PER COMMON SHARE
|
$ | (0.10 | ) | $ | 0.40 | $ | 0.35 | $ | 1.27 | |||||||||
Diluted weighted average number of shares outstanding
|
25,932 | 25,212 | 25,791 | 25,069 | ||||||||||||||
The accompanying notes are an integral part of these condensed consolidated statements of income.
4
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000
CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended | |||||||||||
September 30, | |||||||||||
2000 | 1999 | ||||||||||
(Unaudited) | |||||||||||
Cash provided by (used in)
|
|||||||||||
Operating activities:
|
|||||||||||
Net income
|
$ | 9,048 | $ | 31,786 | |||||||
Depreciation and amortization
|
45,170 | 37,283 | |||||||||
Restructuring costs
|
12,588 | 0 | |||||||||
Other noncash adjustments
|
1,434 | (2,250 | ) | ||||||||
Changes in current assets and liabilities
|
(34,913 | ) | (7,517 | ) | |||||||
Net cash provided by operating activities
|
33,327 | 59,302 | |||||||||
Investing activities:
|
|||||||||||
Purchases of property, plant and equipment
|
(47,110 | ) | (25,923 | ) | |||||||
Acquisitions of businesses, net of cash acquired
|
(4,007 | ) | (177,881 | ) | |||||||
Investment in unconsolidated affiliates
|
(50,809 | ) | 0 | ||||||||
Other
|
10,818 | 2,160 | |||||||||
Net cash used in investing activities
|
(91,108 | ) | (201,644 | ) | |||||||
Financing activities:
|
|||||||||||
Proceeds from revolving credit loans
|
144,000 | 153,000 | |||||||||
Repayments of revolving credit loans
|
(90,000 | ) | (150,000 | ) | |||||||
Proceeds from note issuance
|
0 | 196,733 | |||||||||
Repayments of long-term debt
|
(115 | ) | (33,672 | ) | |||||||
Dividends paid
|
(13,831 | ) | (13,424 | ) | |||||||
Proceeds from issuances of stock
|
460 | 1,024 | |||||||||
Other
|
(649 | ) | (616 | ) | |||||||
Net cash provided by financing activities
|
39,865 | 153,045 | |||||||||
Net (decrease) increase in cash and cash equivalents
|
(17,916 | ) | 10,703 | ||||||||
Cash and cash equivalents at beginning of period
|
18,771 | 2,610 | |||||||||
Cash and cash equivalents at end of period
|
$ | 855 | $ | 13,313 | |||||||
Supplemental Disclosures:
|
|||||||||||
Cash payments for interest
|
$ | 17,229 | $ | 12,261 | |||||||
Cash payments for income taxes
|
$ | 8,939 | $ | 14,373 | |||||||
Stock issued for acquisitions
|
$ | 10,547 | $ | 17,963 | |||||||
The accompanying notes are an integral part of these condensed consolidated statements of cash flows.
5
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000
CARAUSTAR INDUSTRIES, INC.
Note 1. | Basis of Presentation |
The financial information included herein is unaudited; however, such information reflects all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods. The results of operations for the nine months ended September 30, 2000 are not necessarily indicative of the results to be expected for the full year.
Note 2. | Acquisitions |
Each of the following acquisitions is being accounted for under the purchase method of accounting, applying the provisions of Accounting Principles Board Opinion No. 16. As a result, the Company records the assets and liabilities of the acquired companies at their estimated fair value with the excess of the purchase price over these amounts being recorded as goodwill. Actual allocations of goodwill and other identifiable assets will be based on further studies and may change during the allocation period, generally one year following the date of acquisition. The pro forma impact of the following acquisitions are not material to the interim operating results for the period ending September 30, 2000.
In February 2000, the Company acquired all of the outstanding stock of MilPak, Inc. in exchange for 248,132 shares of the Companys common stock valued at $4.7 million and $4.7 million in cash. MilPak operates a facility located in Pine Brook, New Jersey that provides blister packaging, cartoning and labeling, and other contract packaging services. Goodwill of approximately $6.0 million was recorded in connection with the acquisition and is being amortized over 40 years.
In September 2000, the Company acquired all of the outstanding stock of Arrow Paper Products in exchange for 342,743 shares of the Companys common stock valued at $5.1 million. Arrow is located in Saginaw, Michigan and operates two tube and core converting facilities that serve customers in the automotive, film, housewares and other specialty tube and core markets. Goodwill of approximately $3.6 million was recorded in connection with the acquisition and is being amortized over 40 years.
Note 3. | Comprehensive Income |
Total comprehensive income (loss), consisting of net income (loss) plus other nonowner changes in equity, for the three months ended September 30, 2000 and 1999 was ($2,587,000) and $10,190,000, respectively. For the nine months ended September 30, 2000 and 1999, total comprehensive income was $8,824,000 and $31,771,000, respectively.
Note 4. | New Accounting Pronouncements |
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It also requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at
6
fair value. In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities Deferral of the Effective Date of FASB Statement 133. This statement defers the effective date of SFAS No. 133 until the fiscal year ending December 31, 2001. In June 2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities (an amendment of FASB No. 133). This statement amends the accounting and reporting standards of SFAS No. 133 for certain derivative instruments and hedging activities. Management does not expect these pronouncements to have a significant impact on the Companys financial statements and will adopt the provisions of the pronouncements effective January 1, 2001. |
Note 5. | Segment Information |
The Company operates principally in three business segments organized by products. The paperboard segment consists of facilities that manufacture 100 percent recycled uncoated and clay-coated paperboard and facilities that collect recycled paper and broker recycled paper and other paper rolls. The tube, core and composite container segment is principally made up of facilities that produce spiral and convolute-wound tubes, cores and cans. The carton and custom packaging segment consists of facilities that produce printed and unprinted folding and set-up cartons and facilities that provide contract manufacturing and contract packaging services. Intersegment sales are recorded at prices which approximate market prices. Operating income includes all costs and expenses directly related to the segment involved. Corporate expenses include corporate, general, administrative and unallocated information systems expenses.
The following table presents certain business segment information for the periods indicated (in thousands): |
Three Months | Nine Months | |||||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||||
2000 | 1999 | 2000 | 1999 | |||||||||||||||
Net sales (external customers):
|
||||||||||||||||||
Paperboard
|
$ | 96,714 | $ | 105,045 | $ | 313,997 | $ | 272,772 | ||||||||||
Tube, core and composite container
|
67,583 | 64,150 | 201,230 | 190,925 | ||||||||||||||
Carton and custom packaging
|
72,434 | 72,097 | 225,136 | 177,616 | ||||||||||||||
Total
|
$ | 236,731 | $ | 241,292 | $ | 740,363 | $ | 641,313 | ||||||||||
Net sales (intersegment):
|
||||||||||||||||||
Paperboard
|
$ | 39,716 | $ | 32,654 | $ | 106,836 | $ | 88,896 | ||||||||||
Tube, core and composite container
|
994 | 814 | 3,372 | 2,106 | ||||||||||||||
Carton and custom packaging
|
243 | 161 | 793 | 318 | ||||||||||||||
Total
|
$ | 40,953 | $ | 33,629 | $ | 111,001 | $ | 91,320 | ||||||||||
Operating income:
|
||||||||||||||||||
Paperboard(A)
|
$ | 1,320 | $ | 13,714 | $ | 20,403 | $ | 43,216 | ||||||||||
Tube, core and composite container
|
4,576 | 5,373 | 14,784 | 15,592 | ||||||||||||||
Carton and custom packaging
|
2,634 | 4,158 | 8,607 | 9,383 | ||||||||||||||
Total
|
$ | 8,530 | $ | 23,245 | $ | 43,794 | $ | 68,191 |
7
Three Months | Nine Months | ||||||||||||||||
Ended September 30, | Ended September 30, | ||||||||||||||||
2000 | 1999 | 2000 | 1999 | ||||||||||||||
Corporate expense
|
$ | (3,731 | ) | $ | (3,294 | ) | $ | (10,026 | ) | $ | (8,801 | ) | |||||
Operating income
|
4,799 | 19,951 | 33,768 | 59,390 | |||||||||||||
Interest expense
|
(9,063 | ) | (7,552 | ) | (24,674 | ) | (17,802 | ) | |||||||||
Interest income
|
59 | 100 | 316 | 465 | |||||||||||||
Equity in income of unconsolidated affiliates
|
816 | 2,912 | 7,186 | 7,355 | |||||||||||||
Other (net)
|
(259 | ) | (132 | ) | (609 | ) | (220 | ) | |||||||||
Income (loss) before income taxes and minority interest
|
$ | (3,648 | ) | $ | 15,279 | $ | 15,987 | $ | 49,188 | ||||||||
(A) | During the first quarter of 2000, the Company recorded a charge to operations of approximately $6.9 million in restructuring costs related to the closing of the Baltimore, Maryland paperboard mill. During the third quarter of 2000, the Company also recorded a charge to operations of approximately $8.6 million in restructuring costs related to the closing of the Camden, New Jersey paperboard mill. Both of these restructuring costs were related to the paperboard segment and are reflected in the segments operating income (See Note 6). |
Note 6. | Restructuring Costs |
In February 2000, the Company initiated a plan to close its paperboard mill located in Baltimore, Maryland and recorded a charge to operations of approximately $6.9 million. The plan to close the mill was adopted in conjunction with the Companys ongoing efforts to increase manufacturing efficiency and reduce costs in its mill system. The $6.9 million charge included a $5.7 million noncash asset impairment charge to write-down machinery and equipment to net realizable value. The charge also included a $604 thousand accrual for severance and termination benefits for 21 salaried and 83 hourly employees terminated in connection with this plan and a $613 thousand accrual for post-closing security, utilities and other exit costs. As of September 30, 2000, one employee remained to assist in marketing the land and building. The Company will complete the exit plan upon the sale of the property, which is anticipated to occur prior to December 31, 2001. The remaining severance and termination benefits will be paid by December 31, 2000.
The following is a summary of restructuring activity from plan adoption to September 30, 2000 (unaudited):
Severance and | |||||||||||||||||
Other | |||||||||||||||||
Asset | Termination | Other Exit | |||||||||||||||
Impairment | Benefits | Costs | Total | ||||||||||||||
First quarter 2000 provision
|
$ | 5,696,000 | $ | 604,000 | $ | 613,000 | $ | 6,913,000 | |||||||||
Noncash
|
5,696,000 | 0 | 0 | 5,696,000 | |||||||||||||
Cash
|
0 | 604,000 | 613,000 | 1,217,000 | |||||||||||||
First quarter 2000 cash activity
|
0 | (275,000 | ) | (204,000 | ) | (479,000 | ) | ||||||||||
Balance as of March 31, 2000
|
$ | 0 | $ | 329,000 | $ | 409,000 | $ | 738,000 | |||||||||
Second quarter 2000 cash activity
|
0 | (183,000 | ) | (309,000 | ) | (492,000 | ) | ||||||||||
Balance as of June 30, 2000
|
$ | 0 | $ | 146,000 | $ | 100,000 | $ | 246,000 | |||||||||
Third quarter 2000 cash activity
|
0 | (141,000 | ) | (63,000 | ) | (204,000 | ) | ||||||||||
Balance as of September 30, 2000
|
$ | 0 | $ | 5,000 | $ | 37,000 | $ | 42,000 | |||||||||
8
In September 2000, the Company initiated a plan to close its paperboard mill located in Camden, New Jersey and recorded a pretax charge to operations of approximately $8.6 million. The mill experienced a slowdown in wallboard shipments during the third quarter of 2000, and the shut down was precipitated by the refusal of the Companys largest gypsum facing paper customer to continue purchasing facing paper under a long term supply agreement. The $8.6 million charge included a $6.9 million noncash asset impairment write-down of fixed assets to estimated net realizable value and a $558 thousand accrual for severance and termination benefits for 19 salaried and 46 hourly employees terminated in connection with this plan, as well as a $1.1 million accrual for post-closing utility, security, leases, and other exit costs. As of September 30, 2000, seven employees remained to collect receivables, process payables and provide human resources services to terminated employees. The remaining severance and termination benefits will be paid by December 31, 2001. This mill contributed net sales and operating income of $11.6 million and $1.2 million, respectively, for the nine months ended September 30, 2000 and $13.7 million and $0.9 million, respectively, for the nine months ended September 30, 1999. The Company is marketing the land and building and will complete the exit plan upon the sale of the property, which is anticipated to occur prior to December 31, 2001.
The following is a summary of restructuring activity from plan adoption to September 30, 2000 (unaudited):
Severance and | |||||||||||||||||
Other | |||||||||||||||||
Asset | Termination | Other Exit | |||||||||||||||
Impairment | Benefits | Costs | Total | ||||||||||||||
Third quarter 2000 provision
|
$ | 6,890,000 | $ | 558,000 | $ | 1,116,000 | $ | 8,564,000 | |||||||||
Noncash
|
6,890,000 | 0 | 0 | 6,890,000 | |||||||||||||
Cash
|
0 | 558,000 | 1,116,000 | 1,674,000 | |||||||||||||
Third quarter 2000 cash activity
|
0 | (378,000 | ) | (99,000 | ) | (477,000 | ) | ||||||||||
Balance as of September 30, 2000
|
$ | 0 | $ | 180,000 | $ | 1,017,000 | $ | 1,197,000 | |||||||||
Note 7. | Commitments and Contingencies |
The Company is currently in litigation with its largest gypsum facing paper customer, Georgia-Pacific Corporation (G-P), over G-Ps refusal to continue purchasing certain requirements of gypsum facing paper pursuant to the terms of a long-term supply contract between the Company and G-P. The contract was executed in April 1996 and terminates on August 20, 2005, unless extended. The Company believes that the express language of the contract requires G-P to purchase all paper products used in wallboard manufacturing at the G-P wallboard plants designated in the contract, and the parties generally have performed their respective obligations under the contract in accordance with this requirement since inception. In the third quarter of 2000, G-P asserted the position that the contract does not include certain grades of facing paper and that G-P would manufacture these grades for itself. Since then, G-P has substantially curtailed its purchases of gypsum facing paper from the Company.
On August 16, 2000, the Company filed suit against G-P in the General Court of Justice, Superior Court Division, of Mecklenburg County, North Carolina (Case No. 00-CVS-12302), asserting a claim for breach of contract based on G-Ps refusal to continue making purchases under the contract. The complaint seeks damages in excess of $100 million, and was amended in October 2000 to request an injunction requiring G-P to specifically perform its obligations under the contract.
On September 1, 2000, G-P filed a separate action in the Superior Court of Fulton County, Georgia (Case No. 2000CV-27684), seeking a declaratory judgment in support of its interpretation of the contract that its actions are not in breach of the contract.
9
The Company, as defendant in the Georgia case, has filed an answer and motion seeking dismissal or stay of the Georgia case pending resolution of the North Carolina case, and G-P has done likewise with respect to the North Carolina case, but the respective courts have yet to rule on these motions.
The Company and G-P also have engaged in settlement discussions from time to time during the dispute, but have failed to reach any agreement to date.
The Company intends to vigorously prosecute the North Carolina action and defend the Georgia case in order to vindicate its interpretation of the contract, but can give no assurance as to the timing or outcome of the litigation. Based on the nature of litigation generally and the course of developments in the North Carolina and Georgia actions to date, the Company does not believe that any resolution of the pending dispute will be forthcoming in the near future. Accordingly, the Company believes that its operating results and financial condition will continue to be materially and adversely affected by the loss of contract volume from G-P.
The Company is involved in certain other litigation arising in the ordinary course of business. In the opinion of management, the ultimate resolution of these matters (other than the litigation described above with G-P) will not have a material adverse effect on the Companys financial condition or results of operations.
The Company has guaranteed one-half of the debt of its two 50-percent-owned joint ventures with Temple-Inland Forest Products Corporation (Temple-Inland). At September 30, 2000, the Companys portion of this guaranteed debt totaled approximately $43.1 million. These joint ventures are being accounted for under the equity method of accounting.
Note 8. | Subsequent Events |
In October 2000, the Company completed the acquisition of 100 percent of the membership interests in Crane Carton Company, LLC in exchange for 1,659,790 shares of the Companys common stock valued at $18.9 million plus $6.4 million of assumed debt. Crane operates a single folding carton manufacturing facility located in suburban Chicago, Illinois.
10
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000
CARAUSTAR INDUSTRIES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
The following is managements discussion and analysis of certain significant factors which have affected the Companys financial condition and operating results during the periods included in the accompanying condensed consolidated financial statements.
General
The Company is a major manufacturer of recycled paperboard and converted paperboard products, operating principally in three business segments. The paperboard segment consists of facilities that manufacture 100 percent recycled uncoated and clay-coated paperboard and facilities that collect recycled paper and broker recycled paper and other paper rolls. The tube, core and composite container segment is principally made up of facilities that produce spiral and convolute-wound tubes, cores and cans. The carton and custom packaging segment consists of facilities that produce printed and unprinted folding and set-up cartons and facilities that provide contract manufacturing and contract packaging services.
The Company is vertically integrated to the extent that a large portion of its paperboard production is consumed internally by its converting segments (approximately 38 percent in the first nine months of 2000). As part of its strategy to optimize capacity utilization, the Company regularly purchases paperboard from other manufacturers in an effort to minimize the potential impact of demand declines on the Companys own mill system. Additionally, each of the Companys mills can produce recycled paperboard for more than one end-use product market, which allows it to shift production between mills in response to customer or market demands. The Company is also the only major manufacturer to serve all four recycled boxboard end-use markets: tube and core, folding carton, gypsum wallboard facing paper and other specialty.
Recovered fiber, which is derived from recycled paper stock, is the Companys only significant raw material. Historically, the cost of recovered fiber has fluctuated significantly due to market and industry conditions. Recovered fiber cost per ton averaged $78 during 1999. Fiber costs rose steadily throughout 1999 and the first half of this year before beginning to decrease, averaging $108 during the first nine months of 2000. Although the Company raises its selling prices in response to increases in raw material costs, it often is unable to maintain its operating margins in the face of dramatic cost increases, and it experiences short-term margin shrinkage during all periods of price increases due to customary time lags in the implementation of price increases. There can be no assurance that the Company will be able to recoup any future increases in the cost of recovered fiber by raising the prices of its products. There also can be no assurance that, even if the Company is able to recoup such cost increases, its operating margins and results of operations will not be materially and adversely affected by time delays in the implementation of price increases.
11
Three Months Ended September 30, 2000 and 1999
The following tables set forth certain operating data regarding the Companys volume and gross paper margins for the periods indicated. The volume information shown below includes shipments of unconverted paperboard and converted paperboard products. Tonnage volumes from the Companys business segments are combined and presented along end-use market lines. Net sales and operating income are reported by segment in Note 5 to the consolidated financial statements as part of Part 1, Item 1 of this report.
Three Months | ||||||||||||||||||||
Ended | ||||||||||||||||||||
September 30, | ||||||||||||||||||||
% | ||||||||||||||||||||
2000 | 1999 | Change | Change | |||||||||||||||||
Production source of paperboard tons sold (in thousands):
|
||||||||||||||||||||
From paperboard mill production
|
242.0 | 293.2 | (51.2 | ) | 17.5 | % | ||||||||||||||
Outside purchases
|
28.9 | 24.7 | 4.2 | 17.0 | % | |||||||||||||||
Total paperboard tonnage
|
270.9 | 317.9 | (47.0 | ) | 14.8 | % | ||||||||||||||
Tons sold by market (in thousands):
|
||||||||||||||||||||
Tube, core and can volume
|
||||||||||||||||||||
Paperboard (internal)
|
52.6 | 52.1 | 0.5 | 1.0 | % | |||||||||||||||
Outside purchases
|
6.3 | 5.3 | 1.0 | 18.9 | % | |||||||||||||||
Tube, core and can converted products
|
58.9 | 57.4 | 1.5 | 2.6 | % | |||||||||||||||
Unconverted paperboard
|
11.1 | 9.7 | 1.4 | 14.4 | % | |||||||||||||||
Tube, core and can volume
|
70.0 | 67.1 | 2.9 | 4.3 | % | |||||||||||||||
Folding carton volume
|
||||||||||||||||||||
Paperboard (internal)
|
15.6 | 20.1 | (4.5 | ) | 22.4 | % | ||||||||||||||
Outside purchases
|
20.4 | 16.2 | 4.2 | 25.9 | % | |||||||||||||||
Folding carton converted products
|
36.0 | 36.3 | (0.3 | ) | 0.8 | % | ||||||||||||||
Unconverted paperboard
|
67.5 | 84.0 | (16.5 | ) | 19.6 | % | ||||||||||||||
Folding carton volume
|
103.5 | 120.3 | (16.8 | ) | 14.0 | % | ||||||||||||||
Gypsum facing paper volume
|
||||||||||||||||||||
Unconverted paperboard
|
44.3 | 73.0 | (28.7 | ) | 39.3 | % | ||||||||||||||
Outside purchases (for resale)
|
0.0 | 0.6 | (0.6 | ) | 100 | % | ||||||||||||||
Gypsum facing volume
|
44.3 | 73.6 | (29.3 | ) | 39.8 | % | ||||||||||||||
Other specialty volume
|
||||||||||||||||||||
Paperboard (internal)
|
22.9 | 24.2 | (1.3 | ) | 5.4 | % | ||||||||||||||
Outside purchases
|
2.2 | 2.6 | (0.4 | ) | 15.4 | % | ||||||||||||||
Other specialty converted products
|
25.1 | 26.8 | (1.7 | ) | 6.3 | % | ||||||||||||||
Unconverted paperboard
|
28.0 | 30.1 | (2.1 | ) | 7.0 | % | ||||||||||||||
Other specialty volume
|
53.1 | 56.9 | (3.8 | ) | 6.7 | % | ||||||||||||||
Total paperboard tonnage
|
270.9 | 317.9 | (47.0 | ) | 14.8 | % | ||||||||||||||
Gross paper margins ($/ton):
|
||||||||||||||||||||
Paperboard mill:
|
||||||||||||||||||||
Average same-mill net selling price
|
$ | 448 | $ | 412 | $ | 36 | 8.7 | % | ||||||||||||
Average same-mill recovered fiber cost
|
99 | 97 | 2 | 2.1 | % | |||||||||||||||
Paperboard mill gross paper margin
|
$ | 349 | $ | 315 | $ | 34 | 10.8 | % | ||||||||||||
Tube and core:
|
||||||||||||||||||||
Average net selling price
|
$ | 797 | $ | 724 | $ | 73 | 10.1 | % | ||||||||||||
Average paperboard cost
|
455 | 388 | 67 | 17.3 | % | |||||||||||||||
Tube and core gross paper margin
|
$ | 342 | $ | 336 | $ | 6 | 1.8 | % | ||||||||||||
12
Consolidated net sales for the quarter ended September 30, 2000 decreased 1.9 percent to $236.7 million from $241.3 million in the same quarter of 1999. Acquisitions accounted for $8.2 million of net sales during the third quarter of 2000. Excluding acquisitions, net sales decreased 5.3 percent. This decrease was primarily due to lower volume in the paperboard segment and lower sales in the carton and custom packaging segment, partially offset by higher selling prices in the paperboard and the tube, core and composite container segments.
Total paperboard tonnage for the quarter decreased 14.8 percent to 270.9 thousand tons from 317.9 thousand tons. This decrease was the result of lower shipments of unconverted paperboard to external customers, primarily to customers in the gypsum facings and folding carton end-use markets. Outside purchases increased 17.0 percent to 28.9 thousand tons compared to prior year. Tons sold from paperboard mill production decreased 17.5 percent for the quarter to 242.0 thousand tons compared with 293.2 thousand tons in the third quarter of last year. Total tonnage converted was essentially unchanged at 120.0 thousand tons in the third quarter of 2000 compared to 1999, but decreased 2.1 percent excluding acquisitions.
Gross margin for the third quarter of 2000 decreased to 20.2 percent of net sales from 22.1 percent in 1999. This margin decrease was due primarily to lower volume and a revaluation of recovered fiber inventory to reflect the rapid decline in recovered fiber prices in the paperboard segment, and higher fuel and energy costs for all business segments, partially offset by higher margins in the paperboard and the tube, core and composite container segments.
In September 2000, the Company initiated a plan to close its paperboard mill located in Camden, New Jersey and recorded a pretax charge to operations of approximately $8.6 million. The mill experienced a slowdown in wallboard shipments during the third quarter of 2000, and the shut down was precipitated by the refusal of the Companys largest gypsum facing paper customer, Georgia-Pacific Corporation, to continue purchasing facing paper under a long term supply agreement. The $8.6 million charge included a $6.9 million noncash asset impairment write-down of fixed assets to estimated net realizable value and a $558 thousand accrual for severance and termination benefits for 19 salaried and 46 hourly employees terminated in connection with this plan, as well as a $1.1 million accrual for post-closing utility, security, leases, and other exit costs. In the third quarter of 2000, the Company paid $378 thousand in severance and termination benefits and $99 thousand in other exit costs. As of September 30, 2000, seven employees remained to collect receivables, process payables and provide human resources services to terminated employees. The remaining severance and termination benefits will be paid by December 31, 2001. This mill contributed net sales and operating income of $11.6 million and $1.2 million, respectively, for the nine months ended September 30, 2000 and $13.7 million and $0.9 million, respectively, for the nine months ended September 30, 1999. The Company is marketing the land and building and will complete the exit plan upon the sale of the property, which it anticipates will occur prior to December 31, 2001.
Operating income for the third quarter of 2000 was $4.8 million, a decrease of $15.2 million, or 75.9 percent, from the third quarter of 1999. Operating income for comparable facilities and excluding restructuring costs decreased $7.9 million, or 39.5 percent, from the prior year. This decrease was the result of lower operating income from all business segments, with the paperboard and carton and custom packaging segments showing the most significant decreases. Selling, general and administrative expenses increased $1.1 million in the third quarter of 2000 versus 1999 due primarily to acquisitions.
Interest expense increased 20.0 percent to $9.1 million for the third quarter of 2000 from $7.6 million in 1999. This increase was primarily due to higher average borrowings and higher interest rates on the revolving credit facility.
Equity income from unconsolidated affiliates for the third quarter of 2000 was $816 thousand, down $2.1 million, or 72.0 percent, from 1999 primarily due to lower operating results from the Companys gypsum wallboard joint venture with Temple-Inland, combined with start-up costs at Premier Boxboard Limited LLC, the Companys containerboard mill joint venture with Temple-Inland.
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As discussed above, results for the third quarter of 2000 included a nonrecurring restructuring charge recorded in conjunction with the closing of the Companys Camden, New Jersey paperboard mill of $8.6 million ($5.3 million, net of tax benefit, or $0.21 per common share on a diluted basis). Excluding this charge, net income was $2.8 million, or $0.11 per common share. Including the restructuring charge, the net loss was $2.6 million in the third quarter of 2000 compared with net income of $10.1 million last year. Including the restructuring charge, diluted net loss per common share was $0.10 in the third quarter of 2000 compared with diluted net income per common share of $0.40 in 1999.
Nine Months Ended September 30, 2000 and 1999
The following tables set forth certain operating data regarding the Companys volume and gross paper margins for the periods indicated. The volume information shown below includes shipments of unconverted paperboard and converted paperboard products. Tonnage volumes from the Companys business segments are combined and presented along end-use market lines.
Nine Months | |||||||||||||||||||
Ended | |||||||||||||||||||
September 30, | |||||||||||||||||||
% | |||||||||||||||||||
2000 | 1999 | Change | Change | ||||||||||||||||
Production source of paperboard tons sold (in thousands):
|
|||||||||||||||||||
From paperboard mill production
|
776.9 | 791.8 | (14.9 | ) | 1.9 | % | |||||||||||||
Outside purchases
|
89.8 | 62.6 | 27.2 | 43.5 | % | ||||||||||||||
Total paperboard tonnage
|
866.7 | 854.4 | 12.3 | 1.4 | % | ||||||||||||||
Tons sold by market (in thousands):
|
|||||||||||||||||||
Tube, core and can volume
|
|||||||||||||||||||
Paperboard (internal)
|
155.8 | 153.9 | 1.9 | 1.2 | % | ||||||||||||||
Outside purchases
|
18.8 | 14.3 | 4.5 | 31.5 | % | ||||||||||||||
Tube, core and can converted products
|
174.6 | 168.2 | 6.4 | 3.8 | % | ||||||||||||||
Unconverted paperboard
|
29.4 | 32.1 | (2.7 | ) | 8.4 | % | |||||||||||||
Tube, core and can volume
|
204.0 | 200.3 | 3.7 | 1.8 | % | ||||||||||||||
Folding carton volume
|
|||||||||||||||||||
Paperboard (internal)
|
51.4 | 49.4 | 2.0 | 4.0 | % | ||||||||||||||
Outside purchases
|
64.4 | 38.8 | 25.6 | 66.0 | % | ||||||||||||||
Folding carton converted products
|
115.8 | 88.2 | 27.6 | 31.3 | % | ||||||||||||||
Unconverted paperboard
|
209.2 | 213.0 | (3.8 | ) | 1.8 | % | |||||||||||||
Folding carton volume
|
325.0 | 301.2 | 23.8 | 7.9 | % | ||||||||||||||
Gypsum facing paper volume
|
|||||||||||||||||||
Unconverted paperboard
|
155.9 | 194.8 | (38.9 | ) | 20.0 | % | |||||||||||||
Outside purchases (for resale)
|
0.5 | 3.5 | (3.0 | ) | 85.7 | % | |||||||||||||
Gypsum facing volume
|
156.4 | 198.3 | (41.9 | ) | 21.1 | % | |||||||||||||
Other specialty volume
|
|||||||||||||||||||
Paperboard (internal)
|
90.6 | 67.0 | 23.6 | 35.2 | % | ||||||||||||||
Outside purchases
|
6.1 | 6.0 | 1.0 | 1.7 | % | ||||||||||||||
Other specialty converted products
|
96.7 | 73.0 | 23.7 | 32.5 | % | ||||||||||||||
Unconverted paperboard
|
84.6 | 81.6 | 3.0 | 3.7 | % | ||||||||||||||
Other specialty volume
|
181.3 | 154.6 | 26.7 | 17.3 | % | ||||||||||||||
Total paperboard tonnage
|
866.7 | 854.4 | 12.3 | 1.4 | % | ||||||||||||||
14
Nine Months | |||||||||||||||||||
Ended | |||||||||||||||||||
September 30, | |||||||||||||||||||
% | |||||||||||||||||||
2000 | 1999 | Change | Change | ||||||||||||||||
Gross paper margins ($/ton):
|
|||||||||||||||||||
Paperboard mill:
|
|||||||||||||||||||
Average same-mill net selling price
|
$ | 443 | $ | 404 | $ | 39 | 9.7 | % | |||||||||||
Average same-mill recovered fiber cost
|
108 | 78 | 30 | 38.5 | % | ||||||||||||||
Paperboard mill gross paper margin
|
$ | 335 | $ | 326 | $ | 9 | 2.8 | % | |||||||||||
Tube and core:
|
|||||||||||||||||||
Average net selling price
|
$ | 781 | $ | 719 | $ | 62 | 8.6 | % | |||||||||||
Average paperboard cost
|
437 | 383 | 54 | 14.1 | % | ||||||||||||||
Tube and core gross paper margin
|
$ | 344 | $ | 336 | $ | 8 | 2.4 | % | |||||||||||
Consolidated net sales for the nine months ended September 30, 2000 increased 15.4 percent to $740.4 million from $641.3 million in 1999. Acquisitions accounted for $90.1 million of net sales during the first nine months of 2000. Excluding acquisitions, net sales increased 1.4 percent. This increase was due primarily to higher sales from the tube, core and composite container and the carton and custom packaging segments, partially offset by lower sales from the paperboard segment.
Total paperboard tonnage for the first nine months of 2000 increased 1.4 percent to 866.7 thousand tons from 854.4 thousand tons in 1999. Excluding acquisitions, total paperboard tonnage decreased 5.5 percent to 807.5 thousand tons from the prior year. This decrease was due to lower shipments of unconverted paperboard to the gypsum facings and folding carton end-use markets, partially offset by higher outside purchases. Excluding acquisitions, outside purchases increased 17.7 percent to 73.6 thousand tons. Tons sold from paperboard mill production decreased 1.9 percent for the first nine months of 2000 to 776.9 thousand tons and decreased 7.7 percent excluding acquisitions. Total tonnage converted increased 17.7 percent for the first nine months of 2000 to 387.1 thousand tons and increased 4.4 percent excluding acquisitions. Excluding acquisitions, volumes in the folding carton and other specialty end-use markets decreased 7.9 percent and increased 9.7 percent, respectively.
Gross margin for the first nine months of 2000 decreased to 21.4 percent of net sales from 23.9 percent in 1999. This margin decrease was due primarily to the acquisition of operations with lower margins, as a percent of sales, than the Companys other operations, combined with lower margins in the paperboard segment.
In February 2000, the Company initiated a plan to close its paperboard mill located in Baltimore, Maryland and recorded a charge to operations of approximately $6.9 million. The plan to close the mill was adopted in conjunction with the Companys ongoing efforts to increase manufacturing efficiency and reduce costs in its mill system. The $6.9 million charge included a $5.7 million noncash asset impairment charge to write-down machinery and equipment to net realizable value. The charge also included a $604 thousand accrual for severance and termination benefits for 21 salaried and 83 hourly employees terminated in connection with this plan and a $613 thousand accrual for post-closing security, utilities and other exit costs. In the first, second and third quarters of 2000, the Company paid $275 thousand, $183 thousand and $141 thousand, respectively, in severance and termination benefits and paid $204 thousand, $309 thousand and $63 thousand, respectively, in other exit costs. As of September 30, 2000, one employee remained to assist in marketing the land and building. The Company will complete the exit plan upon the sale of the property, which it anticipates will occur prior to December 31, 2001. The remaining severance and termination benefits will be paid by December 31, 2000. The Company does not expect the mill closure to have a material impact on future operations.
Operating income for the first nine months of 2000 was $33.8 million, a decrease of $25.6 million, or 43.1 percent from the year-earlier period. Operating income at comparable facilities and excluding restructuring costs declined $9.8 million, or 16.6 percent. This decline was due to lower operating income in all business
15
segments, with the paperboard and carton and custom packaging segments showing the most significant decreases from prior year. Selling, general and administrative expenses increased $15.5 million in the first nine months of 2000 versus 1999 due primarily to acquisitions and higher information technology costs.
Interest expense increased 38.6 percent to $24.7 million for the first nine months of 2000 from $17.8 million in 1999. This increase was primarily due to the June 1, 1999 public debt securities offering, higher average borrowings and higher interest rates on the revolving credit facility.
Equity income from unconsolidated affiliates for the first nine months of the year was $7.2 million, down 2.3 percent from 1999 due to start-up costs at Premier Boxboard Limited LLC, the Companys containerboard mill joint venture with Temple-Inland, partially offset by improved results in the first half of 2000 for the Companys gypsum wallboard joint venture with Temple-Inland.
As discussed above, results for the first nine months of 2000 included nonrecurring restructuring charges, recorded in conjunction with the closings of the Companys Baltimore, Maryland and Camden, New Jersey paperboard mills, of $15.5 million ($9.7 million, net of tax benefit, or $0.38 per common share on a diluted basis). Excluding these charges, net income was $18.7 million, or $0.73 per common share. Including the restructuring charges, net income decreased 71.5 percent to $9.0 million for the first nine months of 2000 from $31.8 million last year. Diluted net income per common share, including the restructuring charges, decreased 72.4 percent to $0.35 for the nine months ended September 30, 2000 from $1.27 in the same period of 1999.
Liquidity and Capital Resources
On September 30, 2000, the Company had loans of $194.0 million outstanding under its revolving credit facility versus $150.0 million on September 30, 1999 and $140.0 million on December 31, 1999. Loans under the revolving credit facility bear interest, payable monthly, at the Eurodollar rate plus a margin based upon the Companys investment grade rating, as defined in the revolving credit agreement. For the nine months ended September 30, 2000 and 1999 and for the year ended December 31, 1999, the weighted average borrowings outstanding under the revolving credit facility during such periods bore interest at 6.28 percent, 5.36 percent and 5.44 percent, respectively. Other long-term debt consisted of the following (in thousands):
September 30, | December 31, | |||||||||||
2000 | 1999 | 1999 | ||||||||||
7.375 percent 10-year notes
|
$ | 198,766 | $ | 198,667 | $ | 198,691 | ||||||
7.74 percent senior notes
|
82,750 | 82,750 | 82,750 | |||||||||
Other notes payable
|
4,797 | 4,871 | 4,913 | |||||||||
286,313 | 286,288 | 286,354 | ||||||||||
Less current maturities
|
16,583 | 90 | 16,615 | |||||||||
$ | 269,730 | $ | 286,198 | $ | 269,739 | |||||||
In 1998, the Company registered with the Securities and Exchange Commission a total of $300 million in public debt securities for issuance in one or more series and with such specific terms as to be determined from time to time. On June 1, 1999, the Company issued $200 million in aggregate principal amount of its 7.375 percent notes due June 1, 2009. The 7.375 percent notes were issued at a discount to yield an effective interest rate of 7.473 percent, are unsecured obligations of the Company and pay interest semiannually.
The Company has a $400 million, five-year bank revolving credit facility which may be increased up to $500 million and its maturity extended by up to three additional years beyond the second quarter of 2002, subject to certain conditions and approvals. The Company can use the facility to fund ongoing working capital needs and for general corporate purposes, including acquisitions. Interest under the facility is computed using the Companys choice of: (a) the Eurodollar rate plus a margin; or (b) the higher of (i) the Federal Funds Rate plus a margin or (ii) the banks prime lending rate. The Company can also choose the basis for determining
16
the margin above the Eurodollar rate as either: (a) its consolidated leverage ratio; or (b) its investment grade rating. The revolving credit agreement contains certain restrictive covenants regarding, among other matters, the incurrence of additional indebtedness and the maintenance of certain leverage and interest coverage ratios, as defined in the agreement. During the third quarter of 2000 the Company completed an amendment to the credit agreement renegotiating certain debt covenant provisions. This amendment will require the Company to compute the interest margin using its consolidated leverage ratio beginning in the fourth quarter of 2000.
Cash generated from operations was $33.3 million for the nine months ended September 30, 2000 compared with $59.3 million for the same period last year. The decrease in the first nine months of 2000 compared to the same period last year was due primarily to lower net income and unfavorable changes in working capital.
Capital expenditures, excluding acquisitions of businesses, were $47.1 million in the first nine months of 2000 versus $25.9 million for the same period last year. Significant projects contributing to the increase in 2000 over 1999 included a major upgrade to the stock preparation system at the Sprague mill, the purchase of two die-cutters and a state-of-the-art, high-speed printing press for the carton and custom packaging segment and a capacity expansion at a specialty converted products facility. Aggregate capital expenditures of approximately $57.9 million are anticipated for 2000.
In February 2000, the Company acquired all of the outstanding stock of MilPak, Inc. in exchange for 248,132 shares of the Companys common stock valued at $4.7 million and $4.7 million in cash. MilPak operates a facility located in Pine Brook, New Jersey that provides blister packaging, cartoning and labeling, and other contract packaging services.
In September 2000, the Company acquired all of the outstanding stock of Arrow Paper Products in exchange for 342,743 shares of the Companys common stock valued at $5.1 million. Arrow is located in Saginaw, Michigan and operates two tube and core converting facilities that serve customers in the automotive, film, housewares and other specialty tube and core markets.
In October 2000, the Company completed the acquisition of 100 percent of the membership interests in Crane Carton Company, LLC in exchange for 1,659,790 shares of the Companys common stock valued at $18.9 million plus $6.4 million of assumed debt. Crane operates a single folding carton manufacturing facility located in suburban Chicago, Illinois.
Cash dividends of $13.8 million were paid in the first nine months of 2000 versus $13.4 million in the same period last year. The Companys debt agreements contain no specific limitations on the payment of dividends.
The Company did not purchase any shares of its common stock during the first nine months of 2000 pursuant to its common stock purchase plan. The Company has cumulatively purchased 3,169,000 shares since January 1996. The Companys board of directors has authorized purchases of up to 831,000 additional shares, and the Company intends to continue such purchases, subject to market conditions and availability, but there can be no assurance as to the completion, timing or prices of such future purchases.
During the second quarter of 1999, the Company formed a joint venture with Temple-Inland to own and operate Temples Newport, Indiana containerboard mill. The joint venture, Premier Boxboard Limited LLC (PBL), undertook a 14-month, $75 million project to modify the mill to enable it to produce a new, lightweight gypsum facing paper along with other containerboard grades. The mill began operations as modified during the third quarter of 2000. Under the joint venture agreement, the Company contributed $50 million to the joint venture during the second quarter of 2000 and Temple contributed the net assets of the mill. The Company and Temple each have a 50 percent interest in the joint venture.
The Company anticipates that it will be able to meet its funding needs for the possible acquisition of additional facilities, working capital, capital expenditures and additional stock purchases through internally generated cash and borrowings under its revolving credit facility and the issuance of debt securities in the public markets.
17
Georgia-Pacific Litigation
As previously reported, the Company is currently in litigation with its largest gypsum facing paper customer, Georgia-Pacific Corporation (G-P), over G-Ps refusal to continue purchasing certain requirements of gypsum facing paper pursuant to the terms of a long-term supply contract between the Company and G-P. The contract was executed in April 1996 and terminates on August 20, 2005, unless extended. The Company believes that the express language of the contract requires G-P to purchase all paper products used in wallboard manufacturing at the G-P wallboard plants designated in the contract, and the parties generally have performed their respective obligations under the contract in accordance with this requirement since inception. In the third quarter of 2000, G-P asserted the position that the contract does not include certain grades of facing paper and that G-P would manufacture these grades for itself. By the end of the third quarter, G-Ps purchases fell by more than 80% from the 7,000 tons per month that prevailed in the first half of 2000. Shipments to G-P are expected to fall below 500 tons per month in the fourth quarter. As a result of this loss in volume the Company, as previously reported, closed its Camden paperboard mill and lost volume amounting to approximately 40% of the capacity of its Buffalo paperboard mill.
On August 16, 2000, the Company filed suit against G-P in the General Court of Justice, Superior Court Division, of Mecklenburg County, North Carolina (Case No. 00-CVS-12302), asserting a claim for breach of contract based on G-Ps refusal to continue making purchases under the contract. The compliant seeks damages in excess of $100 million, and was amended in October 2000 to request an injunction requiring G-P to specifically perform its obligations under the contract.
On September 1, 2000, G-P filed a separate action in the Superior Court of Fulton County, Georgia (Case No. 2000CV-27684), seeking a declaratory judgment in support of its interpretation of the contract that its actions are not in breach of the contract.
The Company, as defendant in the Georgia case, has filed an answer and motion seeking dismissal or stay of the Georgia case pending resolution of the North Carolina case, and G-P has done likewise with respect to the North Carolina case, but the respective courts have yet to rule on these motions.
The Company and G-P has engaged in settlement discussions from time to time during the dispute, but have failed to reach any agreement to date.
The Company intends to vigorously prosecute the North Carolina action and defend the Georgia case in order to vindicate its interpretation of the contract, but can give no assurance as to the timing or outcome of the litigation. Based on the nature of litigation generally and the course of developments in the North Carolina and Georgia actions to date, the Company does not believe that any resolution of the pending dispute will be forthcoming in the near future. Accordingly, the Company believes that its operating results and financial condition will continue to be materially and adversely affected by the loss of contract volume from G-P.
Forward-Looking Information
This Report on Form 10-Q, including Managements Discussion and Analysis of Financial Condition and Results of Operations, and Legal Proceedings may contain various forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, that are based on managements belief and assumptions, as well as information currently available to management. When used in this document, the words anticipate, estimate, expect, and similar expressions may identify forward-looking statements. Although the Company believes that the expectations reflected in any such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Any such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, the Companys actual financial results, performance or condition may vary materially from those anticipated, estimated or expected. Among the key factors that may have a direct bearing on the Companys actual financial results, performance or condition are
18
fluctuations in raw material prices and the economy in general, the outcome of the Companys pending dispute and litigation with Georgia-Pacific Corporation and the Companys ability to minimize the impact of, or recover from Georgia-Pacific, losses resulting from this dispute, the degree and nature of competition, demand for the Companys products, changes in government regulations, the Companys ability to complete acquisitions and integrate the operations of acquired businesses, and other matters discussed in this report and the Companys other filings with the Securities and Exchange Commission.
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FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000
CARAUSTAR INDUSTRIES, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of certain market risks related to the Company, see Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk, in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 1999. There have been no significant developments with respect to the Companys exposure to interest rate market risk.
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FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is currently in litigation with its largest gypsum facing paper customer, Georgia-Pacific Corporation (G-P), over G-Ps refusal to continue purchasing certain requirements of gypsum facing paper pursuant to the terms of a long-term supply contract between the Company and G-P. The contract was executed in April 1996 and terminates on August 20, 2005, unless extended. The Company believes that the express language of the contract requires G-P to purchase all paper products used in wallboard manufacturing at the G-P wallboard plants designated in the contract, and the parties generally have performed their respective obligations under the contract in accordance with this requirement since inception. In the third quarter of 2000, G-P asserted the position that the contract does not include certain grades of facing paper and that G-P would manufacture these grades for itself. Since then, G-P has substantially curtailed its purchases of gypsum facing paper from the Company.
On August 16, 2000, the Company filed suit against G-P in the General Court of Justice Superior Court Division, of Mecklenburg County, North Carolina (Case No. 00-CVS-12302), asserting a claim for breach of contract based on G-Ps refusal to continue making purchases under the contract. The complaint seeks damages in excess of $100 million, and was amended in October 2000 to request an injunction requiring G-P to specifically perform its obligations under the contract.
On September 1, 2000, G-P filed a separate action in the Superior Court of Fulton County, Georgia (Case No. 2000CV-27684), seeking a declaratory judgment in support of its interpretation of the contract that its actions are not in breach of the contract.
The Company, as defendant in the Georgia case, has filed an answer and motion seeking dismissal or stay of the Georgia case pending resolution of the North Carolina case, and G-P has done likewise with respect to the North Carolina case, but the respective courts have yet to rule on these motions.
The Company and G-P also have engaged in settlement discussions from time to time during the dispute, but have failed to reach any agreement to date.
The Company intends to vigorously prosecute the North Carolina action and defend the Georgia case in order to vindicate its interpretation of the contract, but can give no assurance as to the timing or outcome of the litigation. Based on the nature of litigation generally and the course of developments in the North Carolina and Georgia actions to date, the Company does not believe that any resolution of the pending dispute will be forthcoming in the near future. Accordingly, the Company believes that its operating results and financial condition will continue to be materially and adversely affected by the loss of contract volume from G-P.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The Exhibits to this Report on Form 10-Q are listed in the accompanying Exhibit Index.
(b) Reports on Form 8-K
The Company filed two current reports on Form 8-K during the quarter ended September 30, 2000. The first report, filed on September 12, 2000, incorporated by reference the contents of a Company press release regarding the Companys contract dispute with Georgia-Pacific Corporation.
The second report, filed on September 12, 2000, incorporated the contents of a Company press release regarding the possible effect of certain developments on the Companys third quarter operating results.
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FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000
SIGNATURES
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.
CARAUSTAR INDUSTRIES, INC. |
By: | /s/ H. LEE THRASH, III |
|
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H. Lee Thrash, III | |
Vice President and Chief Financial Officer | |
(Principal Financial and Accounting Officer) |
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FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000
Exhibit | ||||
No. | Description | |||
3.01 | Amended and Restated Articles of Incorporation of the Company (Incorporated by reference Exhibit 3.01 to Annual Report for 1992 on Form 10-K [SEC File No. 0-20646]) | |||
3.02 | Second Amended and Restated Bylaws of the Company (Incorporated by reference Exhibit 3.02 to Registration Statement on Form S-4 [SEC File No. 333-29937]) | |||
4.01 | Specimen Common Stock Certificate (Incorporated by reference Exhibit 4.01 to Registration Statement on Form S-1 [SEC File No. 33-50582]) | |||
4.02 | Articles 3 and 4 of the Companys Amended and Restated Articles of Incorporation (included in Exhibit 3.01) | |||
4.03 | Article II of the Companys Second Amended and Restated Bylaws (included in Exhibit 3.02) | |||
4.04 | Amended and Restated Rights Agreement, dated as of May 24, 1999, between Caraustar Industries, Inc. and The Bank of New York as Rights Agent (Incorporated by reference Exhibit 10.1 to current report on Form 8-K dated June 1, 1999 [SEC File No. 020646]) | |||
4.05 | Indenture, dated as of June 1, 1999, between Caraustar Industries, Inc. and The Bank of New York, as Trustee (Incorporated by reference Exhibit 4.05 to report on Form 10-Q for the quarter ended June 30, 1999 [SEC File No. 0-20646]) | |||
4.06 | First Supplemental Indenture, dated as of June 1, 1999, between Caraustar Industries, Inc. and The Bank of New York, as Trustee (Incorporated by reference Exhibit 4.06 to report on Form 10-Q for the quarter ended June 30, 1999 [SEC File No. 0-20646]) | |||
10.01 | Note Agreement, dated as of October 1, 1992, between the Company and the Prudential Insurance Company of America, regarding the Companys 7.89% Senior Subordinated Notes (Incorporated by reference Exhibit 10.02 to Annual Report for 1992 on Form 10-K [SEC File No. 0-20646]) | |||
10.02 | Amendment Agreement, dated as of June 2, 1995, between the Company and the Prudential Insurance Company of America regarding the Companys 7.89% Senior Subordinated Notes (Incorporated by reference Exhibit 10.03 to report on Form 10-Q for the quarter ended September 30, 1995 [SEC File No. 0-20646]) | |||
10.03 | Amendment Agreement, dated as of July 23, 1997, between the Company and the Prudential Insurance Company of America regarding the Companys 7.89% Senior Subordinated Notes (Incorporated by reference Exhibit 10.03 to report on Form 10-Q for the quarter ended June 30, 1997 [SEC File No. 0-20646]) | |||
10.04 | Amendment Agreement, dated as of August 12, 1998, between the Company and the Prudential Insurance Company of America regarding the Companys 7.89% Senior Subordinated Notes (Incorporated by reference Exhibit 10.04 to report on Form 10-Q for the quarter ended September 30, 1998 [SEC File No. 0-20646]) | |||
10.05 | Employment Agreement, dated December 31, 1990, between the Company and Thomas V. Brown (Incorporated by reference Exhibit 10.06 to Registration Statement on Form S-1 [SEC File No. 33-50582]) | |||
10.06 | | Paperboard Agreement, dated as of April 10, 1996, between the Company and Georgia-Pacific Corporation. |
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Exhibit | ||||
No. | Description | |||
10.07 | Deferred Compensation Plan, together with copies of existing individual deferred compensation agreements (Incorporated by reference Exhibit 10.08 to Registration Statement on Form S-1 [SEC File No. 33-50582]) | |||
10.08 | 1987 Executive Stock Option Plan (Incorporated by reference Exhibit 10.09 to Registration Statement on Form S-1 [SEC File No. 33-50582]) | |||
10.09 | 1993 Key Employees Share Ownership Plan (Incorporated by reference Exhibit 10.10 to Registration Statement on Form S-1 [SEC File No. 33-50582]) | |||
10.10 | Energy Purchase Agreement, dated December 18, 1989, between Camden Paperboard Corporation and Camden Cogen, L.P. (Incorporated by reference Exhibit 10.11 to Registration Statement on Form S-1 [SEC File No. 33-50582]) | |||
10.11 | Incentive Bonus Plan of the Company (Incorporated by reference Exhibit 10.10 to Annual Report for 1993 on Form 10-K [SEC File No. 0-20646]) | |||
10.12 | 1996 Director Equity Plan of the Company (Incorporated by reference Exhibit 10.12 to report on Form 10-Q for the quarter ended March 31, 1996 [SEC File No. 0-20646]) | |||
10.13 | Amendment No. 1 to the Companys 1996 Director Equity Plan, dated July 16, 1998 (Incorporated by reference Exhibit 10.2 to Current Report on Form 8-K dated June 1, 1999 [SEC File No. 0-20646]) | |||
10.14 | 1998 Key Employee Incentive Compensation Plan, as amended (Incorporated by reference Exhibit 10.14 to report on Form 10-Q for the quarter ended March 31, 2000 [SEC File No. 0-20646]) | |||
10.15 | Credit Agreement, dated as of July 23, 1997, by and among the Company, as Borrower, the banks listed therein, Bankers Trust Company, as Administrative Agent, NationsBank, N.A., as Syndication Agent, SunTrust Bank, Atlanta, as Documentation Agent, First Union National Bank, as Managing Agent and each of Credit Lyonnais, The Bank of New York, The Bank of Nova Scotia, The Bank of Tokyo Mitsubishi, Ltd., and Wachovia Bank, as Co-Agents (Incorporated by reference Exhibit 10.13 to report on Form 10-Q for the Quarter Ended June 30, 1997 [SEC File No. 0-20646]) | |||
10.16 | Amendment No. 1 to Credit Agreement, dated as of October 8, 1997, by and among the Company, as Borrower, the banks listed therein, Bankers Trust Company, as Administrative Agent, NationsBank, N.A., as Syndication Agent, SunTrust Bank, Atlanta, as Documentation Agent, First Union National Bank, as Managing Agent and each of Credit Lyonnais, The Bank of New York, The Bank of Nova Scotia, The Bank of Tokyo Mitsubishi, Ltd., and Wachovia Bank, as Co-Agents (Incorporated by reference Exhibit 10.15 to report on Form 10-Q for the quarter ended September 30, 1998 [SEC File No. 0-20646]) | |||
10.17 | Amendment No. 2 to Credit Agreement, dated as of October 30, 1998, by and among the Company, as Borrower, the banks listed therein, Bankers Trust Company, as Administrative Agent, NationsBank, N.A., as Syndication Agent, SunTrust Bank, Atlanta, as Documentation Agent, First Union National Bank, as Managing Agent and each of Credit Lyonnais, The Bank of New York, The Bank of Nova Scotia, The Bank of Tokyo Mitsubishi, Ltd., and Wachovia Bank, as Co-Agents (Incorporated by reference Exhibit 10.16 to report on Form 10-Q for the quarter ended September 30, 1998 [SEC File No. 0-20646]) | |||
10.18 | | Amendment No. 4 to Credit Agreement, dated as of September 29, 2000, by and among the Company, as Borrower, the banks Listed therein, Bankers Trust Company, as Administrative Agent, Bank of America, N.A., as Syndication Agent, SunTrust Bank, Atlanta, as Documentation Agent, First Union National Bank, as Managing Agent and each of Credit Lyonnais, The Bank of New York, The Bank of Nova Scotia, The Bank of Tokyo Mitsubishi, Ltd., and Wachovia Bank, as Co-Agents |
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Exhibit | ||||
No. | Description | |||
10.19 | Asset Purchase Agreement between Caraustar Industries, Inc., Sprague Paperboard, Inc. and International Paper Company, dated as of March 4, 1999 (Incorporated by reference Exhibit 10.17 to report on Form 10-Q for the quarter ended March 31, 1999 [SEC File No. 0-20646]) | |||
11.01 | Computation of Earnings Per Share | |||
27.01 | Financial Data Schedule (For SEC purposes only) |
Filed herewith |
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