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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1996
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Commission file number: 33-60032
BUCKEYE CELLULOSE CORPORATION
Incorporated pursuant to the Laws of Delaware
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Internal Revenue Service -- Employer Identification No. 62-1518973
1001 Tillman Street, Memphis, TN 38112
901-320-8100
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Securities registered pursuant to Section 12(b) of the Act:
Title of Securities: Common Stock - $.01 par value
Exchanges on which Registered: New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act:
8-1/2% Senior Subordinated Notes due 2005
9-1/4% Senior Subordinated Notes due 2008
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 ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
As of September 23, 1996, the aggregate market value of the registrant's voting
shares held by non-affiliates was approximately $302,714,000.
As of September 23, 1996, there were outstanding 19,311,498 Common Shares of the
Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Buckeye Cellulose Corporation's 1996 Annual Proxy Statement
are incorporated by reference into Part III.
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INDEX
BUCKEYE CELLULOSE CORPORATION
ITEM PAGE
PART I
1. Business......................................................... 2
2. Properties....................................................... 9
3. Legal Proceedings................................................ 9
4. Submission of Matters to a Vote of Security Holders.............. 9
PART II
5. Market for the Registrant's Common Stock and Related
Security Holder Matters.................................... 10
6. Selected Financial Data.......................................... 10
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 11
8. Financial Statements and Supplementary Data...................... 14
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 34
PART III
10. Directors and Executive Officers of the Registrant............... 34
11. Executive Compensation........................................... 34
12. Security Ownership of Certain Beneficial Owners and Management... 34
13. Certain Relationships and Related Transactions................... 34
PART IV
14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.. 35
OTHER
Signatures....................................................... 38
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PART I
ITEM 1. BUSINESS
GENERAL
Buckeye Cellulose Corporation (the Company or Buckeye) is a leading
manufacturer and worldwide marketer of high-quality, value-added specialty
cellulose pulps. The Company focuses on a wide array of technically demanding
niche markets in which its proprietary products and commitment to customer
technical service give it a competitive advantage. Buckeye believes it is the
world's only manufacturer of both wood-based and cotton linter-based specialty
cellulose pulps and, as such, produces the broadest range of specialty pulps in
the industry. The Company believes that it has a leading position in most of the
high-end niche markets in which it competes. Buckeye's focus on niche specialty
pulp markets has enabled it to maintain consistently strong margins, even during
downturns in the commodity pulp markets.
The cellulose pulp market generally can be divided into two categories:
commodity pulps and specialty cellulose pulps. The Company participates
exclusively in the estimated $7 billion annual specialty cellulose pulp market,
which accounts for approximately 3% of the total cellulose pulp market.
Specialty cellulose pulps are used to impart unique chemical or physical
characteristics to a broad and diverse range of specialty end products.
Specialty cellulose pulps generally command higher prices and tend to be less
cyclical than commodity pulps. The more demanding performance requirements for
specialty cellulose pulps limit customers' ability to substitute other products.
The Company manufactures approximately 600,000 metric tons of specialty
pulp annually at its three plants in the United States and Germany. Since 1983,
Buckeye has invested over $400.0 million in two of its U.S. plants and believes
that both are state-of-the-art manufacturing facilities. The Company's plant
located near Perry, Florida (the Foley Plant) has an annual capacity of
approximately 450,000 metric tons. The Company's plant located in Memphis,
Tennessee (the Memphis Plant) has an annual capacity of approximately 100,000
metric tons. In May 1996, the Company acquired the specialty cellulose pulp
business of Peter Temming AG, a German company which has an annual capacity of
approximately 50,000 metric tons at its plant in Gluckstadt, Germany (the
Gluckstadt Plant). In September 1996 (fiscal year 1997), the Company added a
fourth plant by acquiring Alpha Cellulose Holdings, Inc., the owner of a
specialty cellulose pulp facility with an annual capacity of approximately
50,000 metric tons, located in Lumberton, North Carolina (the Alpha Plant).
COMPANY HISTORY
The Company has participated in the specialty cellulose pulp market for
nearly 75 years and has developed uses for both wood-based and cotton
linter-based pulps for many specialty pulp applications. In March 1993, an
investor group consisting of Madison Dearborn Capital Partners, (MDCP) and
members of the Company's current management organized the Company to acquire
from the Cellulose & Specialties Division (C&S Division) of The Procter & Gamble
Cellulose Company (P&GCC) substantially all of the assets of the Memphis Plant,
as well as certain other assets of the C&S Division. At the same time, MDCP and
members of current management also organized Buckeye Florida Corporation to
serve as the sole general partner of Buckeye Florida, Limited Partnership
(BFLP), which simultaneously acquired from P&GCC substantially all of the assets
of the Foley Plant. P&GCC retained an interest in the Foley Plant as the sole
limited partner of BFLP and granted Buckeye Florida Corporation an option to
purchase P&GCC's limited partnership interest in BFLP.
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In November 1995, the ownership of the Memphis Plant, the Foley Plant
and related assets was combined into a single corporate ownership structure,
Buckeye Florida Corporation became a wholly owned subsidiary of the Company, and
the Company acquired P&GCC's remaining equity interest in BFLP for approximately
$62.1 million (the Business Combination). Concurrently, the Company and MDCP
made an initial public offering of the Common Stock, and the Company refinanced
substantially all of its outstanding indebtedness (including all indebtedness to
P&GCC) through a public offering of $150.0 million aggregate principal amount of
8-1/2% Senior Subordinated Notes due 2005 and the establishment of a bank credit
facility. The Company also completed an offer to repurchase, and a related
amendment to the terms of, a majority of its outstanding 10-1/4% Senior Notes
due 2001. As a result of these transactions, P&GCC ceased to have any interest
as an equity owner or lender to BFLP, a single capital structure for the
Company's businesses was established and the Common Stock was listed for trading
on the New York Stock Exchange.
The Company is incorporated in Delaware and its executive offices are
located at 1001 Tillman Street, Memphis, Tennessee. Its telephone number is
(901) 320-8100.
PRODUCTS
The Company believes that it is the only specialty cellulose pulp
producer offering both wood-based and cotton linter-based products and,
accordingly, produces a broader range of specialty pulps than any of its
competitors. Buckeye believes that it has a leading position in most of the
high-end niche markets in which it competes. The Company's specialty pulps can
be broadly grouped into chemical cellulose pulps, absorbent pulps and customized
paper pulps.
The following table presents relative gross sales for the Company's
specialty pulps:
Fiscal Year Ended June 30
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1996 1995 1994
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Chemical cellulose pulps .......... 45% 41% 44%
Absorbent pulps ................... 37% 39% 38%
Customized paper pulps ............ 18% 20% 18%
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100% 100% 100%
Chemical Cellulose Pulps:
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Chemical cellulose pulps, frequently referred to as dissolving pulps,
are dissolved in chemical solutions which modify the molecular properties of the
cellulose before it is regenerated to form an end-use product. Chemical
cellulose pulp, a highly purified material, is the basic ingredient in the
production of food casings, rayon filament, photographic film, transparent tape,
acetate plastics, and thickeners for food, cosmetics, and pharmaceuticals.
Chemical cellulose pulps are selected for these applications for their chemical
and molecular, rather than physical, properties.
The Company is one of the world's largest manufacturers of chemical
cellulose pulp. Buckeye believes that it is well positioned to participate in
the continued steady growth of the chemical cellulose markets in which it
competes.
Absorbent Pulps:
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Absorbent pulps, frequently referred to as fluff pulp, are used in
applications such as disposable diapers, feminine hygiene products, and adult
incontinence products. Absorbent pulps are selected for these applications for
their special physical properties. The Company believes that the long,
thick-walled slash pine fiber used in the production of the Company's fluff pulp
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contributes to its excellent quality in terms of absorbency, fluid transport,
and structural integrity. The performance of Buckeye's fluff pulp allows reduced
quantities to be used in the manufacture of diapers relative to competitive
pulps.
The Company is one of the world's major producers of absorbent pulps.
While the volume of fluff pulp used in disposable diapers is negatively impacted
by a move to thinner diapers, this has been more than offset by the increased
use of disposable diapers in less developed countries, such as China and India,
as well as growth in the use of training pants and adult incontinence products.
The Company's understanding of the technology of absorbent products positions it
to participate in this growth.
Customized Paper Pulps:
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Customized paper pulps are selected for their special physical property
in filter and premium paper applications. Automotive air filters require high
porosity so that large volumes of air can flow freely through the filter while
extraneous particles are removed. Cotton linter pulps are used in currency
paper, stock certificates, and wedding invitations, because the papers need to
be long-lived, retain their original color, and resist tearing in use.
Additionally, the Company's customized paper pulps are used in other
high-performance applications, including laboratory and industrial filters,
battery separators, printed circuits, decorative laminates, maps and personal
stationery.
Buckeye believes it is the world's only manufacturer of both wood-based
and cotton linter-based customized paper pulps. The special nature of the
Company's customized paper pulps allows the Company to participate effectively
in the relatively stable markets for these highly technical applications.
Customized paper pulps for automotive air and oil filters demonstrate steady
growth because a large majority of such filters are sold in the after-market and
are therefore less influenced by variations in the market for new cars.
RAW MATERIALS
Slash pine timber and cotton linters are the principal raw materials
used in the manufacture of the Company's specialty pulps and represent the
largest components of the Company's variable costs of pulp production. The
region surrounding the Foley Plant has a high concentration of slash pine
timber, which enables Buckeye to purchase adequate supplies of a species well
suited to its products at an attractive cost. In order to be better assured of a
secure source of wood at reasonable prices, the Company entered into the
Timberlands Agreement and the Timber Purchase Agreement (collectively, the
Timber Supply Agreements) with The Procter & Gamble Company (Procter & Gamble).
Under the terms of the Timberlands Agreement, the Company agreed to purchase an
annual percentage of the slash pine timber harvest from specified timberlands
near the Foley Plant, which percentage was initially set at 85% and will
gradually reduce to 60% by the final year of the Timberlands Agreement. The
Timberlands Agreement has an initial term of ten years and is subject to two
renewals at the Company's option for five and three years, respectively, which,
if exercised, would result in the Timberlands Agreement's extension through
2010. The term of the Timber Purchase Agreement expires in 2002. As of July 8,
1994, all of Procter & Gamble's interests in the timberlands subject to the
Timber Supply Agreements, together with its rights and obligations with respect
to such Timber Supply Agreements (other than certain expressly excluded
obligations retained by Procter & Gamble), were assigned to Foley Timber and
Land Company, L.P., a third party unrelated to either Procter & Gamble or the
Company. The purchase price for the Timberlands Agreement is established
according to a market-based formula set forth in the agreement and is annually
adjusted to take into account pricing conditions in the Florida counties in
which the covered timberlands are located. In addition, the Company has a right
of first offer on a substantial portion of slash pine timber located on the
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timberlands and not initially purchased pursuant to the Timberlands Agreement.
Under the terms of the Timber Purchase Agreement, Buckeye agreed to purchase
from Procter & Gamble its rights to harvest certain third party timber reserves
at a purchase price determined according to a formula provided in the Timber
Purchase Agreement. In fiscal 1996, timber acquired pursuant to the Timber
Supply Agreements accounted for approximately 24% of the Company's total wood
purchases.
The Company purchases cotton linters either directly from cotton seed
oil mills which remove these short, fuzzy linters before processing the seed
into vegetable oil and animal feed or indirectly through agents or brokers. The
Memphis Plant is strategically located in the Mississippi Valley, one of the
largest cotton linter producing regions in the world. Generally, the Company
purchases substantially all of its requirements of cotton linters for the
Memphis Plant domestically, and it is expected that substantially all of the
cotton linters requirements for the Alpha Plant also will be purchased
domestically. The Gluckstadt Plant purchases cotton linters principally from
suppliers in the Middle East.
The cost of both slash pine timber and cotton linters is subject to
market fluctuations caused by supply and demand factors beyond the Company's
control.
SALES AND CUSTOMERS
The Company's products are marketed and sold through a highly trained
and technically skilled in-house sales force. The Company maintains sales
offices in Memphis, Tennessee and Geneva, Switzerland. The Company's worldwide
sales are diversified by geographic region as well as end-product application.
Buckeye's sales of specialty pulps are distributed to customers worldwide. The
Company's fiscal 1996 sales reflect this geographic diversity, with 29% of sales
in the United States, 34% in Europe, 23% in Asia and 14% in other regions.
The high-end, technically demanding specialty pulp niches that Buckeye
serves require a higher level of sales and technical service support than do
commodity pulp sales. The Company's technically trained sales and service
engineers have worked for the Company for an average of over 20 years and
typically began their careers in the Company's manufacturing or product
development operations. These professionals work with customers in their plants
to design pulps tailored precisely to their product needs and manufacturing
processes.
Procter & Gamble, the world's largest diaper manufacturer, is the
Company's largest customer, accounting for 36% of the Company's fiscal 1996 net
sales. The Company and Procter & Gamble have entered into a long-term Pulp
Supply Agreement, which requires Procter & Gamble to purchase a specified
tonnage of the Company's fluff pulp through the year 2002. Shipments of fluff
pulp under the Pulp Supply Agreement are made to Procter & Gamble affiliates
worldwide, as directed by Procter & Gamble. The price of the fluff pulp sold
pursuant to the Pulp Supply Agreement is based in the first six years of the
Pulp Supply Agreement's term on a formula specified in the Pulp Supply
Agreement. Pricing in the years 1999 and 2000 will be at the higher of the
contract formula price or market and pricing in the years 2001 and 2002 will be
at market. The formula price has three components: (i) a periodic margin
adjustment, (ii) a general escalation component based on Consumer Price Index
changes, and (iii) a provision to adjust for all actual changes in the price of
timber, the major raw material component of the pulp purchased under the
contract. Buckeye's other large customers include Akzo Nobel N.V. (rayon
filament and cellulose ethers), A. Ahlstrom Corporation (automotive filter
paper), Hercules Incorporated (cellulose ethers), and Eastman Chemical Company
(cellulose acetate).
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Substantially all of the Company's worldwide sales are denominated in
U.S. dollars, and such sales are not subject to exchange rate fluctuations.
Because the cost of shipping is borne by the customer, Buckeye's margin on a
sale to any given customer is similar regardless of a customer's location. The
Company's products are shipped by rail, truck and ocean carrier.
RESEARCH AND DEVELOPMENT
The Company's research and development activities focus on developing
new specialty cellulose pulps, improving existing products, and enhancing
process technologies to further reduce costs and respond to environmental needs.
Buckeye has pilot plant facilities in which to produce experimental pulps for
qualification in customers' plants. The Company has a history of innovation in
specialty cellulose pulps. The Company's latest product developments include:
- a higher porosity automotive air filter pulp providing a 50%
increase in air permeability;
- a higher purity pulp for food casings;
- a highly uniform acetate wood pulp; a higher viscosity ether
pulp yielding superior thickening performance; and a process
technology coupled with customized refining providing improved
cotton linter paper pulps.
COMPETITION
Buckeye's competitors include the following specialty pulp producers:
Alfa Cellulose de Mexico S.A. (Mexico), Borregaard Industries, Ltd. (Norway),
Georgia-Pacific Corporation (U.S.), International Paper Company (U.S.),
Louisiana-Pacific Corporation (U.S.), Rayonier, Inc. (U.S.), Sappi Limited
(South Africa), Southern Cellulose Products Inc. (U.S.), Tembec Inc. (Canada),
Western Pulp Limited Partnership (Canada), and Weyerhaeuser Company (U.S.).
Competition in specialty cellulose pulp markets is based on product performance,
technical service, and, to a lesser extent, price. Southern Cellulose Products
Inc. is owned by Archer Daniels Midland, a subsidiary of which supplies cotton
linters to the Company.
The Company produces a broader range of specialty pulps than any of its
competitors and believes it is the only specialty cellulose pulp producer
offering both wood-based and cotton linter-based products. Buckeye is the
world's largest cotton linter pulp producer. The Company believes that the
number of specialty pulp producers is unlikely to increase significantly in the
foreseeable future given the substantial investment and technological expertise
required to enter this market.
INTELLECTUAL PROPERTY
The Company currently holds four U.S. patents, three foreign patents
and has one new application filed. In addition, it has access to royalty-free
licenses for five U.S. patents and two foreign patents. Buckeye intends to
maintain its patents and file applications for any future inventions which are
deemed to be important to its business operations. The Company has four
trademarks, including the name Buckeye(R).
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INFLATION
The Company believes that inflation has not had a material effect on
its results of operations or financial condition during recent periods.
SEASONALITY
The Company's business has generally not been seasonal to any
significant extent.
EMPLOYEES
On June 30, 1996, the Company employed approximately 1,400 individuals
at its facilities in Memphis, Tennessee; Perry, Florida; Savannah, Georgia;
Gluckstadt, Germany and Geneva, Switzerland. Collective bargaining agreements
are in place at the Foley Plant with the United Paper Workers International
Union, AFL-CIO, Local #1192; and at the Memphis Plant with the Pulp and
Processing Workers of the Retail, Wholesale, and Department Store Union,
AFL-CIO, Local #910. The agreement for the Foley Plant covers the period April
1, 1995 to April 1, 1998. The agreement for the Memphis Plant covers the period
March 18, 1994 to March 18, 1997. Approximately 54% of the Company's employees
are members of these two unions. A Works Council provides employee
representation for all non-management workers at the Gluckstadt Plant.
The Foley Plant has not experienced any work stoppages due to labor
disputes in over 25 years, and the Memphis Plant has not experienced any work
stoppages due to labor disputes in over 45 years. The Company believes its
relationship with its employees is very good.
ENVIRONMENTAL REGULATIONS AND LIABILITIES
The Company's facilities and operations are subject to extensive
general and industry-specific federal, state, local and foreign environmental
laws and regulations. The Company devotes significant resources to maintaining
compliance with such requirements and believes that its facilities and
operations are in substantial compliance with all such requirements. The Company
expects that, due to the nature of its operations, it will be subject to
increasingly stringent environmental requirements (including anticipated
standards applicable to waste water discharges and air emissions) and will
continue to incur substantial costs to comply with such requirements. Based upon
its understanding of current and anticipated requirements, the Company believes
that continued compliance with environmental requirements will not have a
material adverse effect on its business, results of operations or financial
condition and will not adversely affect the Company's competitive position.
However, given the uncertainties associated with predicting the scope of future
requirements, there can be no assurance that the Company will not in the future
incur material environmental compliance costs or liabilities.
The Foley Plant discharges treated waste water into the Fenholloway
River. The Fenholloway River is currently classified under Florida Statutes as a
Class 5 (industrial) stream. Under the federal Clean Water Act, the State of
Florida is required to perform an analysis every three years of the feasibility
of reclassifying the river to Class 3 (fishable/swimmable) status. Such an
analysis recommending reclassification was completed in early 1994 and approved
by the Florida Department of Environmental Protection ("DEP") at an
administrative hearing in December 1994. At this administrative hearing, the
Company and the State of Florida reached agreement on a plan to attain Class 3
objectives, which relies primarily on the laying of an extensive pipeline by the
Company to relocate the Foley Plant's waste water discharge point. The plan also
includes process changes in the Foley Plant designed to reduce the coloration of
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its waste water discharge, provide oxygen enrichment of the effluent prior to
discharge and restore certain wetlands areas. The reclassification will not
become effective until December 1997 (with a final compliance deadline of
December 1999) to allow the Company to obtain all the necessary permits for
implementation of the approved plan and complete construction of the pipeline
and the treatment upgrades. The Company estimates that implementation of the
approved plan will result in approximately $39 million of capital expenditures,
the majority of which will likely be expended during fiscal 1998 and fiscal
1999.
In 1993, the U.S. Environmental Protection Agency (EPA) issued a set of
proposed regulations for the pulp and paper industry addressing the emission of
"hazardous air pollutants" under the Clean Air Act and waste water discharges
under the Clean Water Act, commonly known as the "cluster rules". The Company is
examining and evaluating the potential impact of the cluster rules, as proposed,
on its operations and capital expenditures over the next several years. The
Company believes that the proposed cluster rules will likely be amended
significantly prior to their promulgation, which is anticipated to occur in
1997, with compliance to be phased in between 1999 and 2002. Although the
Company anticipates that significant capital expenditures for environmental
control equipment and related costs will be required to comply with the cluster
rules when promulgated (which the Company currently projects will be
approximately $14 million through fiscal 2000), such expenditures are not likely
to have a material adverse effect on the Company's business or financial
condition.
The Foley Plant is on the EPA CERCLIS (as defined) list of potential
hazardous substance release sites prepared pursuant to CERCLA (as defined). The
EPA conducted a site investigation in early 1995. Although the Company considers
it unlikely that the Foley Plant will be listed on the CERCLA National
Priorities List and hence require remedial action, the possibility of such
listing cannot be ruled out. If the site were to be placed on the National
Priorities List, the costs associated with conducting a CERCLA remedial action
could be material.
As of June 30, 1996, the Company had established reserves of $4.2
million to address certain environmental matters. Because an environmental
reserve is not established until a liability is determined to be probable and
reasonably estimable, not all potential future environmental liabilities are
covered by the Company's reserves. Accordingly, there can be no assurance that
the Company's environmental reserves will be sufficient to meet the Company's
obligations, and additional charges to earnings are possible.
FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE
This document contains various forward-looking statements and
information which is based on management's beliefs as well as assumptions made
by and information currently available to management. Statements in this
document which are not historical statements are forward-looking statements.
Such forward-looking statements are subject to certain risks and uncertainties,
including among other things, pricing fluctuations and industry cyclicality; the
Company's dependence on its largest customer, Procter & Gamble; fluctuation in
the costs of raw materials; competition; inability to predict scope of future
environmental compliance costs or liabilities; and ability of the Company to
obtain additional capital, maintain adequate cash flow to service debt as well
as meet operating needs. Should one or more of these risks materialize, or
should underlying assumptions prove incorrect, actual results may differ
materially from those anticipated, estimated or projected.
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ITEM 2. PROPERTIES
Corporate Headquarters And Sales Offices. The Company's corporate
headquarters, research and development laboratories, and pilot plants are
located in Memphis, Tennessee. The Company owns the corporate headquarters, the
Memphis Plant, the Foley Plant and the Gluckstadt Plant and leases sales offices
in Geneva, Switzerland and distribution facilities in Savannah, Georgia.
Memphis Plant. The Memphis Plant is located on a 60-acre site adjacent
to the headquarters complex. The Company believes that the Memphis Plant
utilizes a state-of-the-art continuous pulping process. During fiscal 1996, its
capacity was expanded to approximately 100,000 annual metric tons. The Memphis
Plant is ISO 9002 certified.
Foley Plant. The Foley Plant is located at Perry, Florida, on a 2,900
acre site. The Company also owns 13,000 acres of real property near the plant
site. The Foley Plant is a state-of-the-art facility with two separate
production lines and has been continuously modernized and expanded to a current
capacity of approximately 450,000 annual metric tons. The Foley Plant has
operated at full capacity for over 30 years. In 1994, the Foley Plant was
selected by Plant Engineering magazine and the American Institute of Plant
Engineers as the sole winner of the annual North American Maintenance Excellence
Award. The Foley Plant is ISO 9002 certified.
Gluckstadt Plant. The Gluckstadt Plant is located in close proximity to
the Elbe River near Hamburg. The site is adjacent to the paper plant of
Steinbeis Temming Papier GmbH. Some utilities, including steam, power, water and
waste treatment, are shared between the plants pursuant to various utility
agreements. The Gluckstadt Plant is the largest cotton linter specialty pulp
plant in Europe. The Gluckstadt Plant is ISO 9002 certified.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various claims, complaints and other legal
actions that have arisen in the normal course of business from time to time.
Other than the lawsuits relating to the Foley Plant discussed in the Notes to
the Consolidated Financial Statements under Note 13-Contingencies, the Company
is not currently involved in any legal proceedings, which, in the aggregate,
could be expected to have a material adverse effect on its business, results of
operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Except for certain matters submitted to the Company's shareholders
related to the Business Combination and the adoption of certain stock option
plans prior to the Company's initial public offering in November 1995, no
matters were submitted to a vote of security holders during the period from July
1, 1995 through June 30, 1996, through solicitation of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange
under the symbol "BKI" since the Company's initial public offering in November
1995. The following table sets forth, for the periods indicated, the high and
low sale prices for the common stock on such market.
Year Ended June 30, 1996: High Low
-------- -------
Second quarter (since November 22, 1995)..... $22-1/2 $19
Third quarter................................ 24 21-1/4
Fourth quarter............................... 29-1/8 21-7/8
At September 23, 1996, the Company had approximately 4,200 shareholders
of its common stock and 19,311,498 shares outstanding. The Company has no plans
to pay dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share data)
Company: Predecessor:(a)
-------------------------------------- ------------------
March 16, July 1,
1993 1992 Year
through through Ended
Year Ended June 30 June 30, March 15, June 30,
1996 1995 1994 1993 1993 1992
-------- -------- -------- --------- --------- ---------
OPERATING DATA: (b)
Net sales .......... $470,979 $408,587 $371,526 $113,074 $233,460 $357,493
Operating income ... 108,567 79,172 55,689 21,031 21,366 36,696
Income before
extraordinary loss. 47,010 21,712 12,968 4,704 21,366 36,696
Net income .......... 43,061 21,712 12,968 4,704 21,366 36,696
Earnings per share:(c)
Income before
extraordinary loss. 2.23
Net income ......... 2.04
BALANCE SHEET DATA:
Total assets ....... $452,799 $379,056 $374,204 $403,542 $446,732 $445,454
Long-term debt less
current portion .. 217,873 166,202 203,482 278,713
OTHER DATA:
EBITDA (d) ........ $134,670 $104,088 $ 81,879 $ 28,185 $ 40,628 $ 62,491
- - ----------
(a) The Predecessor was historically operated as part of the C&S Division
of Procter & Gamble. The Predecessor was allocated certain expenses
for services provided by the C&S Division and Procter & Gamble,
including sales, general management, and financial services. Costs and
expenses were allocated using formulas, primarily based on estimates
of efforts expended and sales. Since debt obligations of Procter &
Gamble were not specifically identifiable with individual operating
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units, interest charges are not reflected in the financial data of the
Predecessor. Since Procter & Gamble had no tax sharing agreement for
allocating income taxes to operating units, income tax expense or
benefit is not reflected in the financial data of the Predecessor. On
March 16, 1993, the Company acquired from P&GCC all of the assets of
the Predecessor.
(b) In fiscal 1996, an extraordinary loss of $3,949, net of tax benefit,
was recognized on the early retirement of a portion of the Senior
Notes. Minority interest charge representing P&GCC's limited
partnership interest in BFLP ceased on November 28, 1995.
(c) Historical net income per share has not been presented as it is not
considered relevant for periods prior to June 30, 1996.
(d) EBITDA represents earnings before secondary offering costs, interest,
taxes, minority interest, extraordinary loss, depreciation, depletion,
amortization and other non-cash charges. This data should not be
considered in isolation and is not intended to be a substitute for
income statement or cash flow statement data as a measure of the
Company's profitability (see Consolidated Financial Statements).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
Buckeye Cellulose Corporation (the Company) manufactures specialty
cellulose pulps in the United States and Europe, and sells these products in
worldwide markets. The Company began operations under current management on
March 16, 1993 by acquiring the Memphis, Tennessee based production, research
and administrative facilities of Procter & Gamble Cellulose Company (P&GCC). At
the same time, current management formed a partnership to acquire the Perry,
Florida based production facilities of P&GCC, in which P&GCC retained a
financial minority interest. In November 1995, the Company (1) acquired the
remaining partnership interest of P&GCC and combined the Memphis, Tennessee and
Perry, Florida businesses under a common ownership; (2) completed an initial
primary and secondary public offering of common stock; and (3) refinanced
substantially all of its outstanding indebtedness. In May 1996, the Company
acquired the specialty cellulose pulp facilities of Peter Temming AG, located in
Gluckstadt, Germany, thereby increasing annual production capacity by 8%. The
results of this acquisition are included in the Company's operations for the
period May 1, 1996 through June 30, 1996.
RESULTS OF OPERATIONS
Comparison of Fiscal Years Ended June 30, 1996 and June 30, 1995
----------------------------------------------------------------
Net sales for 1996 were $471.0 million compared to $408.6 million for
1995, an increase of $62.4 million or 15.3%. The increase was primarily due to
higher average unit sales prices which, excluding the effect of product mix
changes due to the acquisition, were 19.3% above 1995. The increase in net sales
was partially offset by a 4.2% decrease in unit sales volume in 1996 as the
result of softer market demand for pulp, in comparison to strong market demand
in 1995.
In 1996, operating income rose to 23.1% of sales, an improvement of 3.7
percentage points from 1995. The impact of higher sales discussed previously was
partially offset by higher raw material costs for wood, cotton linters and
process chemicals. Selling, research and administrative expenses were $2.8
million higher in 1996 than in 1995, but decreased as a percentage of sales from
5.9% to 5.7%. The increase in selling, research and administrative expenses was
primarily due to increased employment and transition expenses related to the
acquisition of the specialty pulp business of Peter Temming AG.
11
<PAGE>
Net interest and amortization of debt costs for 1996 were $17.0 million
compared to $21.2 million for 1995, a decrease of $4.2 million or 19.6%,
primarily due to lower average debt balances during the period preceding the
November 1995 business combination, and lower interest rates following the
business combination as the result of the refinancing of indebtedness.
Minority interest for 1996 was $16.6 million for the five month period
July-November 1995, compared to $23.2 million for the full twelve months of
1995, a decrease of $6.6 million or 28.4%. The decrease is the result of the
purchase of P&GCC's remaining partnership interest as part of the November 1995
combination of related businesses.
Non-recurring charges associated with the November 1995 and July 1996
secondary stock offerings totaled $1.9 million and reduced net income by $.09
per share in fiscal year 1996. There were no non-recurring charges in fiscal
year 1995.
The effective income tax rate decreased to 35.2% in 1996 from 36.5% in
the prior year, primarily as the result of establishing a foreign sales
corporation in November 1995.
The Company incurred an extraordinary loss of $3.9 million, net of
taxes, in 1996. This loss resulted from the retirement of $57.8 million in
principal amount of the Company's 10 1/4% Senior Notes due 2001.
The Company's income before extraordinary loss for 1996 was $47.0
million, or $2.23 per share, more than double 1995 net income of $21.7 million.
Net income for 1996 was $43.1 million, or $2.04 per share, which is nearly
double 1995 net income of $21.7 million.
Comparison of Fiscal Years Ended June 30, 1995 and June 30, 1994
----------------------------------------------------------------
Net sales for 1995 were $408.6 million compared to $371.5 million for
1994, an increase of $37.1 million or 10%. The increase was primarily due to a
12% average increase in unit selling prices and by a move to a higher
value-added product mix. The sales price increase reflected strong domestic and
international market demand for pulp, which resulted in sales price increases on
the Company's specialty pulps beginning in January 1995. This increase in unit
sales prices was partially offset by a 2% reduction in unit sales volume.
In 1995, operating income rose to 19.4% of sales, an improvement of 4.4
percentage points from 1994. The impact of higher sales discussed previously was
partially offset by higher raw material costs for cotton linters, wood, and
process chemicals. Selling, research and administrative expenses decreased as a
percentage of sales by 0.6 percentage points.
Net interest and amortization of debt costs for 1995 was $21.2 million
compared to $26.5 million in 1994, a decrease of $5.3 million or 20%. The
decrease was due to substantially lower debt levels as cash from operations was
used to retire $51.4 million in long-term debt during fiscal 1995.
Minority interest for 1995 was $23.2 million compared to $8.3 million
for 1994, an increase of $14.9 million. The increase reflected the higher net
income of Buckeye Florida, Limited Partnership, in which P&GCC held a 50%
limited partnership interest during the period.
The effective income tax rate was 36.5% for 1995 compared to 35.9% for
1994.
The Company's net income for 1995 was $21.7 million compared to $13.0
million for 1994, an increase of $8.7 million or 67%.
12
<PAGE>
FINANCIAL CONDITION
Cash Flow
---------
Cash provided by operating activities is the major source of funds for
the Company, totaling $60.1 million in 1996, $77.8 million in 1995, and $86.4
million in 1994. Net income increased in each of these years, contributing to
increased cash flow. However, in 1996 an increase of $22.7 million in accounts
receivable and $27.6 million in inventories offset the increase in net income.
The accounts receivable increase was due to higher sales prices, the
Temming acquisition, and higher shipment volume in April-June 1996 compared to
April-June 1995. The inventory increase was the result of higher quantities and
prices for raw materials and higher quantities of finished goods.
Capital expenditures for property, plant and equipment were $34.8
million in 1996, $24.9 million in 1995, and $15.7 million in 1994. The Company
used all of the expenditures to purchase, modernize, and upgrade production
equipment and to maintain its facilities. Capital expenditures (including
environmental expenditures) for 1997 are expected to be approximately $50
million.
During 1996, $62.1 million was used to purchase the remaining minority
interest of P&GCC as part of the November 1995 business combination and $27.1
million was used for the Temming acquisition.
Leverage/Capitalization
-----------------------
Total debt increased to $219.5 million at June 30, 1996 from $174.7
million at June 30, 1995, reflecting (1) the Company's refinancing of
substantially all its debt in connection with the November 1995 business
combination; (2) the purchase of P&GCC's remaining minority interest in the
Perry, Florida business; and (3) the acquisition of the specialty pulp business
of Temming. In 1995, strong operating cash flow enabled the Company to reduce
total debt to $174.7 million from $217.6 million in 1994.
The total debt to capital ratio was 60.9% at June 30, 1996, compared
to 67.4% in 1995, and 77.6% in 1994. The interest coverage ratio increased to
7.9x in 1996 from 4.9x in 1995 and 3.1x in 1994.
At June 30, 1996, the Company had a $135 million bank credit facility
in place with $70.7 million of unused borrowing capacity. On August 30, 1996,
the bank credit facility was increased to $155 million.
Subsequent Events
-----------------
On July 2, 1996 (fiscal year 1997), the Company completed a stock
repurchase of 2,259,887 shares of common stock for $50 million, reducing the
total number of shares outstanding to 19,147,336. On the same date, the Company
completed a public offering for $100 million in 9 1/4% Senior Subordinated
Notes. The Company used $50 million of the proceeds from the debt offering to
fund the stock repurchase. On September 1, 1996, the remaining proceeds of the
debt offering and borrowings from the existing bank credit facility were used to
fund the purchase of Alpha Cellulose Holdings, Inc. and its related pulp
production facility located in Lumberton, North Carolina for a purchase price of
approximately $63 million plus assumed liabilities.
On August 9, 1996 the Company announced that its Board of Directors
authorized the repurchase of up to one million shares of its common stock from
time to time on the open market or in privately negotiated purchases.
13
<PAGE>
Liquidity
---------
The Company believes that its cash flow from operations, together with
the borrowings available under the existing bank credit facility will be
sufficient to fund capital expenditures (including environmental expenditures),
meet operating expenses, fund any common stock repurchases, and service all debt
requirements for the foreseeable future. Consistent with the Company's stated
policy, there are no plans to pay dividends in the foreseeable future.
ENVIRONMENTAL MATTERS
The Company has reached an agreement (the Fenholloway Agreement) with
the Florida Department of Environmental Protection based upon the results of the
recently completed Fenholloway River reclassification analysis. In order to
comply with the Fenholloway Agreement, the Company expects to invest
approximately $39 million through fiscal 1999 to modify its facilities. In
addition to capital spending pursuant to the Fenholloway Agreement, the Company
projects that it will spend approximately $14 million in environmental capital
expenditure costs through fiscal 2000, primarily to comply with the anticipated
federal cluster rule regulations applicable to the Company, at such time as they
are promulgated.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following report of independent auditors and financial statements
are included in Item 8:
Buckeye Cellulose Corporation:
- Report of Management
- Report of Independent Auditors
- Consolidated Balance Sheets -- June 30, 1996 and 1995
- Consolidated Statements of Income -- For the years ended June 30, 1996,
June 30, 1995 and June 30, 1994
- Consolidated Statements of Changes in Stockholders' Equity -- For the
years ended June 30, 1996, June 30, 1995 and June 30, 1994
- Consolidated Statements of Cash Flows -- For the years ended June 30,
1996, June 30, 1995 and June 30, 1994
- Notes to Consolidated Financial Statements
14
<PAGE>
REPORT OF MANAGEMENT
-------------------------------------------------------------------------
The preparation and integrity of the financial statements of
Buckeye Cellulose Corporation are the responsibility of its
management. These statements, which include amounts based on
management's best estimates and judgments, have been prepared in
conformity with generally accepted accounting principles and in the
opinion of management fairly present the Company's financial position,
results of operations and cash flows.
The Company maintains accounting and internal control
systems which it believes are adequate to provide reasonable assurance
that assets are safeguarded against loss from unauthorized use or
disposition and that the financial records are reliable for preparing
financial statements. The selection and training of qualified
personnel, plus the establishment and communication of accounting and
administrative policies and procedures, are important elements of
these control systems.
The report of Ernst & Young LLP on their audits of the
accompanying financial statements follows. This report states that the
audits were made in accordance with generally accepted auditing
standards. These standards include a study and evaluation of internal
controls for the purpose of establishing a basis for reliance thereon
relative to the scope of their audits of the financial statements.
The Board of Directors, through its Audit Committee
consisting solely of outside directors, meets periodically with
management and the independent auditors to discuss audit and financial
reporting matters. To assure independence, Ernst & Young LLP has
direct access to the Audit Committee.
Robert E. Cannon David B. Ferraro
Chairman of the Board President and
and Chief Executive Officer Chief Operating Officer
15
<PAGE>
REPORT OF INDEPENDENT AUDITORS
-------------------------------------------------------------------------
To the Board of Directors and Stockholders of Buckeye
Cellulose Corporation
We have audited the accompanying consolidated balance sheets
of Buckeye Cellulose Corporation as of June 30, 1996 and 1995 and the
related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended June 30,
1996. Our audits also included the financial statement schedule listed
in the Index at Item 14(a). These financial statements and schedule
are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule
based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Buckeye Cellulose Corporation at June 30, 1996 and 1995,
and the consolidated results of its operations and its cash flows for
each of the three years in the period ended June 30, 1996 in
conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Memphis, Tennessee
August 8, 1996, except for Note 16, as to
which the date is September 1, 1996
16
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
Year Ended June 30
----------------------------------
1996 1995 1994
--------- --------- ----------
Net sales ................................ $ 470,979 $ 408,587 $ 371,526
Cost of goods sold ....................... 335,377 305,150 291,833
--------- --------- ---------
Gross margin ............................. 135,602 103,437 79,693
Selling, research and
administrative expenses ............. 27,035 24,265 24,004
--------- --------- ---------
Operating income ......................... 108,567 79,172 55,689
Other income (expense):
Interest income .......................... 1,060 1,138 314
Interest expense and amortization
of debt costs ....................... (18,061) (22,290) (26,859)
Other .................................... (451) (615) (632)
Minority interest ........................ (16,628) (23,223) (8,291)
Secondary offering costs.................. (1,945) -- --
--------- --------- ---------
(36,025) (44,990) (35,468)
--------- --------- ---------
Income before income taxes and
extraordinary loss .................. 72,542 34,182 20,221
Income taxes ............................. 25,532 12,470 7,253
--------- --------- ---------
Income before extraordinary loss ......... 47,010 21,712 12,968
Extraordinary loss, net of tax benefit.... (3,949) -- --
--------- --------- ----------
Net income ............................... $ 43,061 $ 21,712 $ 12,968
========= ========= =========
Earnings per share:
Income before extraordinary loss........ $ 2.23
Extraordinary loss, net of tax benefit.. (0.19)
---------
Net income per share...................... $2.04
==========
Weighted average shares outstanding....... 21,111,793
==========
See accompanying notes.
17
<PAGE>
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30
-----------------------
1996 1995
-------- ---------
ASSETS
Current assets:
Cash and cash equivalents ...................... $ - $ 11,789
Short-term investments ......................... 2,900 9,706
Accounts receivable--trade, net of
allowance for doubtful accounts of
$980 and $1,152 at June 30, 1996 and
1995, respectively .......................... 65,423 43,519
Accounts receivable--other ..................... 1,382 548
Inventories .................................... 101,028 61,947
Deferred income taxes .......................... 3,225 541
Prepaid expenses and other ..................... 5,414 2,530
-------- --------
Total current assets ........................ 179,372 130,580
Property, plant and equipment:
Land and land improvements ..................... 5,415 3,980
Buildings ...................................... 42,301 36,842
Machinery and equipment ........................ 252,824 232,653
Construction in progress ....................... 14,341 8,696
-------- --------
314,881 282,171
Less allowances for depreciation ............... 57,283 54,072
-------- --------
Net property, plant and equipment .......... 257,598 228,099
Goodwill ......................................... 6,624 16,998
Deferred debt costs and other .................... 9,205 3,379
-------- --------
Total assets ............................... $452,799 $379,056
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable ...................... $ 23,226 $ 14,908
Accrued expenses ............................ 36,414 27,937
Income taxes payable ........................ -- 1,230
Notes payable ............................... 1,620 8,500
Other liabilities ........................... 147 898
-------- --------
Total current liabilities ........... 61,407 53,473
Long-term debt ................................... 217,873 166,202
Accrued postretirement benefits .................. 13,487 12,400
Deferred income taxes ............................ 14,976 5,848
Other liabilities ................................ 4,168 4,408
Minority interest ................................ -- 52,104
Commitments and contingencies .................... -- --
Stockholders' Equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized;none issued or outstanding....... -- --
Common stock, $.01 par value; 60,000,000 shares
authorized; 21,407,223 and 19,681,458 shares
issued and outstanding at June 30, 1996 and
1995, respectively ......................... 214 197
Additional paid-in capital .................... 61,285 45,040
Deferred stock compensation ................... (2,373) --
Cumulative translation adjustment ............. (683) --
Retained earnings ............................. 82,445 39,384
-------- --------
Total stockholders' equity ................. 140,888 84,621
-------- --------
Total liabilities and stockholders' equity.. $452,799 $379,056
======== ========
See accompanying notes.
18
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Additional Deferred Cumulative
Common paid-in stock translation Retained
stock capital compensation adjustment earnings Total
-------- ---------- ------------ ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1993 ................... $155 $38,401 $ -- $ -- $ 4,704 $ 43,260
Issuance of 3,871,797 shares of
common stock ....................... 39 5,561 -- -- -- 5,600
Capital contribution .................. -- 1,000 -- -- -- 1,000
Net income ............................ -- -- -- -- 12,968 12,968
---- ------- ------- ----- ------- --------
Balance at June 30, 1994 .................. 194 44,962 -- -- 17,672 62,828
Issuance of 267,226 shares of
common stock ....................... 3 78 -- -- -- 81
Net income ............................ -- -- -- -- 21,712 21,712
---- ------- ------- ----- ------- --------
Balance at June 30, 1995 .................. 197 45,040 -- -- 39,384 84,621
Issuance of 1,725,765 shares of
common stock ....................... 17 13,132 -- -- -- 13,149
Compensation charge for stock
options ............................ -- 635 -- -- -- 635
Deferred stock compensation ........... -- 2,478 (2,478) -- -- --
Amortization of deferred stock
compensation ....................... -- -- 105 -- -- 105
Translation adjustment ................ -- -- -- (683) -- (683)
Net income ............................ -- -- -- -- 43,061 43,061
---- ------- ------- ----- ------- --------
Balance at June 30, 1996 .................. $214 $61,285 $(2,373) $(683) $82,445 $140,888
==== ======= ======= ===== ======= ========
</TABLE>
See accompanying notes.
19
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended June 30
---------------------------------
1996 1995 1994
--------- -------- ---------
OPERATING ACTIVITIES
Net income ................................. $ 43,061 $ 21,712 $ 12,968
Adjustments to reconcile net income to net
cash provided by operating activities:
Extraordinary loss, net of tax benefit .. 3,949 -- --
Minority interest ....................... 16,628 23,223 8,291
Depreciation ............................ 25,212 23,784 24,613
Amortization ............................ 1,481 2,113 2,009
Deferred income taxes ................... 8,797 4,179 2,743
Other ................................... 1,523 1,915 2,583
Changes in operating assets and
liabilities:
Accounts receivable ................... (22,700) (4,709) 4,702
Inventories ........................... (27,609) 3,099 17,683
Prepaid expenses and other assets ..... (3,325) (1,124) 1,463
Accounts payable and other current
liabilities ....................... 13,043 3,595 9,333
--------- -------- --------
Net cash provided by operating activities ... 60,060 77,787 86,388
INVESTING ACTIVITIES
Acquisition of Temming Business ............. (27,114) -- --
Purchase of minority interest in BFLP ....... (62,078) -- --
Purchases of property, plant and equipment .. (34,807) (24,922) (15,725)
Purchases of short-term investments ......... (2,920) (13,616) (14,743)
Proceeds from sales of short-term investments 9,726 14,685 3,968
Other ....................................... (954) (1,074) 704
--------- -------- --------
Net cash used in investing activities ....... (118,147) (24,927) (25,796)
FINANCING ACTIVITIES
Proceeds from sales of equity interests ..... 13,149 81 6,600
Proceeds from revolving line of credit and
long-term debt ......................... 237,553 8,500 6,000
Payments for debt issuance costs ............ (5,506) -- --
Distribution to minority interest ........... (1,590) (4,598) (2,895)
Principal payments on revolving line of
credit, long-term debt and other ....... (197,181) (52,155) (74,383)
--------- -------- --------
Net cash provided by (used in)
financing activities ................... 46,425 (48,172) (64,678)
Effect of foreign currency rate fluctuations
on cash ................................ (127) -- --
--------- -------- --------
Increase (decrease) in cash and cash
equivalent ............................. (11,789) 4,688 (4,086)
Cash and cash equivalents at beginning of
year ................................... 11,789 7,101 11,187
--------- -------- --------
Cash and cash equivalents at end of year .... $ -- $ 11,789 $ 7,101
========= ======== ========
See accompanying notes.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
Business Description and Basis of Presentation
----------------------------------------------
The financial statements as of and for the year ended June 30, 1996 are
consolidated financial statements of Buckeye Cellulose Corporation and its
subsidiaries (the Company). The financial statements as of and for the year
ended June 30, 1995 and 1994 are combined consolidated financial statements of
Buckeye Cellulose Corporation (BCC) and Buckeye Florida Corporation (BFC). All
significant intercompany accounts and transactions have been eliminated in
consolidation and combination.
Under an agreement dated March 16, 1993, Madison Dearborn Capital
Partners (MDCP) and members of the Company's current management organized BCC
and BFC to acquire the assets comprising the cotton linter and wood pulp
businesses, and certain assets of the headquarters of the Cellulose &
Specialties Division of The Procter & Gamble Cellulose Company (P&GCC). BFC
served as the sole general partner of and held a 50% interest in Buckeye
Florida, Limited Partnership (BFLP), which operated the wood pulp business
located in Perry, Florida (the Foley Plant). P&GCC retained a limited
partnership interest in the wood pulp business and granted BFC an option to
purchase P&GCC's limited partnership interest (the P&G Call Option). On November
28, 1995, shareholders of BFC exchanged all of their outstanding common stock
for common stock of BCC and BFC became a wholly-owned subsidiary of the Company.
Concurrently, through the exercise of the P&G Call Option, the Company and its
subsidiaries redeemed and/or acquired the limited partnership interest in BFLP
for $62,078,000 in cash.
The Company manufactures and distributes a broad variety of wood and
cotton linter-based specialty pulps used in numerous applications including
disposable diapers, engine air and oil filters, food casings, rayon textile
filament, tapes, thickeners, and papers.
Cash and Cash Equivalents
-------------------------
The Company considers cash equivalents to be temporary cash investments
with a maturity of three months or less when purchased.
Short-term Investments
----------------------
Short-term investments consist primarily of government backed
securities and commercial paper of an investment grade. Included in short-term
investments is a $2,900,000 certificate of deposit which the Company has pledged
as collateral to secure loans obtained by certain officers of the Company.
Inventories
-----------
Pulpwood, raw cotton lint inventories, the lint component of finished
linter pulp, chemicals and storeroom supplies are stated at lower of cost
(determined on the average cost method) or market. The remaining components of
finished pulp, including other raw materials, labor and overhead are stated at
lower of cost (determined on a first-in, first-out basis) or market.
21
<PAGE>
Property, Plant and Equipment
-----------------------------
Property, plant and equipment is stated at cost. The cost of
maintenance, repairs, and minor renewals and improvements are expensed as
incurred. The cost of major renewals and improvements are capitalized.
Depreciation is computed by the straight-line method over the following
estimated useful lives: buildings - 30 to 40 years; machinery and equipment - 5
to 13 years.
Intangible Assets
-----------------
Goodwill is amortized by the straight-line method over thirty years.
Deferred debt costs are amortized by the interest method over the life of the
related debt. Goodwill is net of accumulated amortization of $1,854,000 and
$1,430,000 and deferred debt costs are net of accumulated amortization of
$531,000 and $1,191,000 at June 30, 1996 and 1995, respectively. Non-compete
agreements are amortized over the agreement term using the straight-line method.
Non-compete agreements are net of accumulated amortization of $123,000 at June
30, 1996 and are included in deferred debt costs and other on the consolidated
balance sheet.
Income Taxes
------------
The Company has provided for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109. Accounting for Income
Taxes. Accordingly, deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Credit Risk
-----------
The Company generally obtains credit insurance or requires the customer
to provide a letter of credit for export sales. Credit limits have been
established for each domestic customer and those foreign customers where credit
insurance is not available. Credit limits are monitored routinely. It is not the
Company's policy to require collateral or other security for domestic or foreign
sales.
Environmental Costs
-------------------
Liabilities are recorded when environmental assessments are probable,
and the cost can be reasonably estimated. Generally, the timing of these
accruals coincides with the earlier of completion of a feasibility study or the
Company's commitment to a plan of action based on the then known facts.
Revenue Recognition
-------------------
Revenues are recognized when title to the goods passes to the customer.
Net sales is comprised of sales reduced by sales allowances and distribution
costs.
Foreign Currency Translation
----------------------------
Company management has determined that the local currency of its German
subsidiary is the functional currency, and accordingly Deutsche mark denominated
balance sheet accounts are translated into United States dollars at the rate of
exchange in effect at fiscal year end. Income and expense activity for the
period is translated at the weighted average exchange rate during the period.
Translation adjustments are included as a separate component of stockholders'
equity.
22
<PAGE>
Use of Estimates
----------------
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
the estimates and assumptions used.
Earnings Per Share
------------------
Earnings per share have been computed based on the weighted average
number of common shares and common stock equivalent shares outstanding during
the period. Common stock equivalents represent the dilutive effect of the
assumed exercise of outstanding stock options. Fully diluted earnings per share
are not materially different from primary earnings per share, and accordingly
are not presented.
Historical Earnings Per Share
-----------------------------
Earnings per share have not been presented for years prior to June 30,
1996, as they are not considered relevant.
Recently Issued Accounting Standards
------------------------------------
During 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123) effective for fiscal years beginning after December 15,
1995. SFAS 123 provides companies with the option of recognizing expense for
stock-based awards based on their fair value on the date of grant or providing
pro forma disclosures of net income and earnings per share, had the new fair
value method been used. The Company anticipates that it will elect the pro forma
disclosure option.
During 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (SFAS 121)
effective for fiscal years beginning after December 15, 1995. SFAS 121 addresses
the accounting for the impairment of long-lived assets, such as property, plant
and equipment, identifiable intangibles including patents and trademarks, and
goodwill related to those assets. It specifies when assets should be reviewed
for impairment, methods to determine if an asset is impaired, methods to measure
an impairment loss, and necessary disclosures in the financial statements. SFAS
121 also requires that long-lived assets and identifiable intangibles (except
for assets of a discontinued operation) held for disposal be accounted for at
the lower of cost or fair value less cost to sell. The Company does not
anticipate that the implementation of SFAS 121 will have a material impact on
the financial position or results of operations of the Company.
Reclassifications
-----------------
Certain amounts in the 1994 and 1995 financial statements have been
reclassified to conform with the 1996 financial statement presentation.
23
<PAGE>
2. BUSINESS COMBINATIONS
The acquisition of the P&GCC limited partnership interest has been
recorded using the purchase method of accounting. The allocation of the purchase
price is based on the respective fair value of assets and liabilities and
resulted in an increase to property, plant and equipment of $4,098,000 and a
reduction in goodwill of $9,951,000. The operations of BFLP are consolidated in
the accompanying financial statements and the limited partnership interest is
recorded as a minority interest prior to the date of acquisition/redemption.
Effective May 1, 1996, Buckeye Cellulose GmbH, a wholly owned
subsidiary of the Company, purchased the property, plant, equipment and
inventories of the specialty pulp business of Peter Temming AG (the Temming
Business) in Gluckstadt, Germany for $27,114,000 in cash plus assumed
liabilities of $2,994,000. The acquisition was accounted for using the purchase
method of accounting. The allocation of the purchase price is based on the
respective fair value of assets and liabilities at the date of acquisition.
Temming purchase price allocation (in thousands):
Inventory................................... $11,721
Property, plant and equipment............... 16,870
Non-compete agreement....................... 1,517
-------
$30,108
=======
The operating results of the Temming Business have been included in the
consolidated statement of income from the date of acquisition. At June 30, 1996,
the net assets of Buckeye Cellulose GmbH were $29,870,000.
The following unaudited pro forma results of operations assume the
acquisition/redemption of P&GCC's limited partnership interest in BFLP, the
related refinancing transactions, and the acquisition of the Temming Business
occurred as of the beginning of the periods presented.
Pro forma results of operations:
Year Ended June 30
------------------------
1996 1995
-------- --------
(In thousands, except per
share data)
Net sales ........................... $521,681 $464,224
Income before extraordinary loss .... 54,824 34,807
Net income .......................... 50,875 30,858
Earnings per common share:
Income before extraordinary loss.. 2.60
Net income ....................... 2.41
The pro forma information is presented for information purposes only
and is not necessarily indicative of the operating results that would have
occurred had the business combinations been consummated as of the above dates,
nor is it necessarily indicative of future operating results.
24
<PAGE>
3. INVENTORIES
Components of inventories (in thousands):
June 30
-----------------------
1996 1995
---------- ---------
Raw materials..................... $ 20,340 $ 9,317
Finished goods.................... 65,276 36,887
Storeroom and other supplies...... 15,412 15,743
-------- -------
$101,028 $61,947
======== =======
4. ACCRUED EXPENSES
Components of accrued expenses (in thousands):
June 30
------------------------
1996 1995
---------- ----------
Retirement plans.................. $11,212 $12,731
Vacation pay...................... 3,287 3,003
Maintenance accrual............... 9,482 3,527
Sales program accrual............. 3,268 3,154
Other............................. 9,165 5,522
------- -------
$36,414 $27,937
======= =======
5. DEBT
Long-term debt (in thousands):
June 30
----------------------
1996 1995
-------- --------
8 1/2% Senior Subordinated Notes due
December 15, 2005 ....................... $149,460 $ --
10 1/4% Senior Notes due May 15, 2001 ......... 6,913 64,720
10% Class A Senior Secured Notes due
March 16, 2000 .......................... -- 26,000
12% Subordinated Secured Notes due
March 16, 2003 .......................... -- 75,000
Credit Facility ............................... 61,500 --
Other ......................................... -- 482
-------- --------
$217,873 $166,202
======== ========
The Company completed a public offering of $150,000,000 principal
amount of 8 1/2% Senior Subordinated Notes due December 15, 2005 (the
Subordinated Notes) during November 1995, which were sold for 99.626% of their
principal amount. The Subordinated Notes are unsecured senior subordinated
obligations and are subordinated in right of payment to the prior payment in
full of all senior indebtedness, including the indebtedness under the Credit
Facility and the outstanding 10 1/4% Senior Notes due May 15, 2001 (the Senior
Notes). A portion of the proceeds from the Subordinated Notes were used to
retire $45,594,000 of the Senior Notes, resulting in an extraordinary loss of
$3,228,000, net of tax benefit.
25
<PAGE>
The Subordinated Notes are redeemable at the option of the Company, in
whole or in part, at any time on or after December 15, 2000, at the redemption
prices (expressed as percentages of principal amount) set forth below, if
redeemed during the 12-month period beginning December 15 of the years indicated
below, in each case together with accrued and unpaid interest to the date of
redemption.
Subordinated Notes redemption:
Price
-----
2000......................................... 104.25%
2001......................................... 102.83
2002......................................... 101.41
2003 and thereafter.......................... 100.00
The Company also entered into a new credit facility (the Credit
Facility) concurrent with the issuance of the Subordinated Notes, providing for
borrowings up to $135,000,000 less the outstanding principal amount of Senior
Notes in excess of $5,000,000. The Credit Facility matures November 27, 2000,
and beginning January 1, 1998, availability reduces by $3,750,000 per quarter.
The interest rate applicable to borrowings under the Credit Facility is the
agent's prime rate or a LIBOR based rate ranging from LIBOR plus 0.5% to 1.0%.
Borrowings at June 30, 1996 were at an average rate of 6.02%. Letters of credit
issued through the Credit Facility of $932,000 are outstanding at June 30, 1996.
The amount available for borrowing under the Credit Facility is $70,655,000 at
June 30, 1996.
The Senior Notes are unsecured obligations and are equal (pari passu)
in the right of payment with all existing and future indebtedness of the Company
which is not subordinated indebtedness. During the year ended June 30, 1996, the
Company purchased and retired $57,807,000 of its Senior Notes.
The Senior Notes are redeemable at the option of the Company, in whole
or in part, at any time on or after May 15, 1998, at the redemption prices
(expressed as percentages of principal amount) set forth below, if redeemed
during the 12-month period beginning May 15 of the years indicated below, in
each case together with accrued and unpaid interest to the date of redemption.
Senior Notes redemption:
Price
-----
1998......................................... 103.875%
1999......................................... 101.937
2000 and thereafter.......................... 100.000
Under the terms of the long-term debt agreements, the Company is
required to comply with certain covenants including minimum net worth, interest
coverage ratios, and limitations on restricted payments and levels of
indebtedness. At June 30, 1996, the amount of retained earnings available for
the payment of dividends was approximately $32,643,000 under the most
restrictive of these agreements. The Company Stock Repurchase (see Note 16)
reduced the amount available for the payment of dividends by $25,000,000.
The Company has a revolving credit line of approximately $8,900,000
with a financial institution at a rate of interest equal to the bank's prime
discount rate (7.5% at June 30, 1996). The outstanding balance under this
revolving line of credit was $1,620,000 at June 30, 1996 and is classified as
notes payable in the consolidated balance sheet. Letters of credit issued
through the revolving line of credit of $2,271,000 are outstanding at June 30,
1996. The revolving line of credit expires April 30, 1997.
26
<PAGE>
Total interest paid by the Company for the years ended June 30, 1996,
1995, and 1994 was $17,460,000, $21,755,000, and $25,866,000, respectively.
6. STOCKHOLDERS' EQUITY
Immediately prior to the Company's initial public offering of its
Common Stock, the previously outstanding Class A Common and Class B Common of
BCC and BFC were converted into shares of Common Stock of the Company. The
aggregate number of shares of Common Stock issued to the holders of Class A
Common and Class B Common, respectively, was determined based on the accreted
liquidation preference of the Class A Common at the time of conversion and the
total equity valuation of the Company. The Company also effected an approximate
9.2:1.0 stock split. Share and per share amounts presented have been restated to
reflect the conversion and stock split, with an offsetting adjustment to
additional paid-in capital.
In November 1995, 8,222,500 shares of Common Stock were sold through an
initial public offering of the Company's Common Stock. Of the 8,222,500 shares,
7,475,000 were shares sold by a selling stockholder and the remaining 747,500
shares were issued and sold by the Company. Net proceeds to the Company were
$12,819,000, net of underwriting discounts and expenses associated with the
offering. The proceeds were used to retire $12,213,000 (principal amount) of
Senior Notes in January 1996, resulting in an extraordinary loss of 721,000, net
of tax benefit. If the retirement of Senior Notes, using the net proceeds to the
Company of the offering, were assumed to have taken place at the beginning of
the current fiscal year, net income per share would have been reduced by $.01
per share.
The Company's Stock Option Plans (the Option Plans) provide for the
granting of either qualified or nonqualified stock options. Options are subject
to terms and conditions determined by the Compensation Committee of the Board of
Directors, and generally are exercisable in increments of 20% per year beginning
one year from date of grant and expire ten years from date of grant.
Option Plan activity:
Year Ended June 30
----------------------------
1996 1995
----------- -----------
Outstanding at beginning of year ......... 978,265 1,245,491
Granted .................................. 1,070,000 --
Exercised ................................ 978,265 267,226
--------- ---------
Outstanding at end of year ............... 1,070,000 978,265
========= =========
Exercisable at end of year ............... -- 283,940
========= =========
Shares reserved for future grants ........ 1,380,000 --
========= =========
Options outstanding as of June 30, 1996 were at exercise prices
ranging from $15.19 to $25.50 per share. Options exercised were at share prices
ranging from $0.18 to $1.22 in both 1996 and 1995.
In connection with the grant of certain stock options to employees in
1996, the Company recorded deferred stock compensation of $2,478,000 for the
difference between the fair value at the date of grant and the option price.
Such amount is presented as a reduction of stockholders' equity and is amortized
over the vesting period of the related stock options.
27
<PAGE>
7. INCOME TAXES
Provision for income taxes (in thousands):
Year Ended June 30
--------------------------------
1996 1995 1994
------- ------- ------
Current:
Federal.............. $15,701 $7,256 $4,366
State and other...... 1,034 1,035 144
------- ------- -------
16,735 8,291 4,510
Deferred:
Federal.............. 8,414 3,652 2,499
State................ 383 527 244
------- ------- -------
8,797 4,179 2,743
------- ------- -------
$25,532 $12,470 $7,253
======= ======= =======
Significant components of the Company's deferred tax assets
(liabilities) are as follows (in thousands):
Deferred tax assets (liabilities):
June 30
------------------------
1996 1995
--------- ---------
Deferred tax liabilities:
Depreciation ........................ $(24,807) $(5,934)
Investment in partnership ........... -- (7,454)
Other ............................... (2,210) (456)
-------- --------
(27,017) (13,844)
Deferred tax assets:
Postretirement benefits ............. 4,786 1,399
Inventory costs ..................... 843 359
State tax credit .................... 507 452
Alternative minimum tax credit ...... 1,902 4,984
Net operating loss .................. 1,598 --
Nondeductible reserves .............. 5,196 332
Other ............................... 434 1,011
-------- --------
15,266 8,537
-------- --------
$(11,751) $(5,307)
======== ========
The provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate of 35% to income before income
taxes and extraordinary loss due to the following (in thousands):
Rate analysis:
Year Ended June 30
-----------------------------------
1996 1995 1994
-------- -------- --------
Expected tax expense .............. $25,390 $11,964 $7,077
State taxes ....................... 857 693 426
Foreign sales corporation ......... (2,112) -- --
Nondeductible items ............... 681 -- --
Other ............................. 716 (187) (250)
------- ------- -------
$25,532 $12,470 $7,253
======= ======= =======
28
<PAGE>
The Company paid income taxes of $16,832,000, $6,884,000, and
$7,040,000 during the years ended June 30, 1996, 1995 and 1994, respectively.
The Company's state tax credit carryforward expires at varying dates
through 2011, and its alternative minimum tax credit carryforward has no
expiration date. The Company has a foreign net operating loss carryforward of
approximately $3,200,000 which has no expiration date.
The Company's extraordinary loss of $3,949,000 is net of an income tax
benefit of $2,383,000.
8. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution retirement plan covering U.S.
employees. The Company contributes 1% of the employee's base compensation plus
1/2% for each year of service up to a maximum of 11% of the employee's base
compensation. The plan also provides for additional contributions by the Company
contingent upon the Company's results of operations. Contribution expense for
the retirement plan for the years ended June 30, 1996, 1995 and 1994 was
$7,424,000, $7,125,000, and $6,336,000, respectively.
In conjunction with the acquisition of the Temming Business, the
Company assumed a pension obligation for a defined benefit pension plan which is
available to employees of Buckeye Cellulose GmbH who have reached the age of 20.
Benefits under the plan are primarily based on years of service, employees'
compensation prior to retirement, and expected increases in benefit payments
pursuant to German law. The Company has elected not to fund the pension
liability as of June 30, 1996 as allowed by German law. The liability at June
30, 1996 was $551,000.
Also, the Company provides medical, dental, and life insurance
postretirement plans covering U.S. employees who meet specified age and service
requirements. Certain employees who met specified age and service requirements
on March 15, 1993 are covered by the Procter & Gamble plans and are not covered
by these plans. The Company has accounted for its obligation related to these
plans in accordance with Statement of Financial Accounting Standards No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions.
The Company's current policy is to fund the cost of these benefits as
payments to participants are required.
Accrued postretirement benefits (in thousands):
June 30
---------------------
1996 1995
-------- --------
Accumulated postretirement benefits:
Eligible active plan participants ..... $ 146 $ 115
Retirees .............................. 84 56
Other active plan participants ........ 8,022 6,476
------- -------
8,252 6,647
Unrecognized gain from plan amendments ..... 5,906 6,556
Unrecognized net loss ...................... (1,222) (803)
------- -------
$12,936 $12,400
======= =======
29
<PAGE>
Postretirement benefits (in thousands):
Year Ended June 30
------------------------------------
1996 1995 1994
--------- --------- --------
Service cost................ $ 598 $ 539 $ 720
Interest cost............... 578 487 891
Amortization................ (640) (650) --
------- ------- ------
$ 536 $ 376 $1,611
======= ======= ======
The Company amended its postretirement plans effective July 1, 1994.
The amendments changed the plans' eligibility requirements and benefit
schedules, created required retiree contributions, and implemented limits on the
Company's postretirement benefit costs. The effect of the amendments was to
reduce the accumulated postretirement benefit obligation by approximately
$7,206,000 at July 1, 1994. The reduction in the accumulated postretirement
benefit obligation is being recognized as a reduction to net periodic
postretirement benefit cost over approximately eleven years, the average
remaining service of active participants not yet eligible for benefits.
The weighted average annual assumed rate of increase in the per capita
cost of covered benefits (i.e. health care cost trend rate) for the medical
plans is 10.0% for 1997 and is assumed to decrease gradually to 5.5% in 2004 and
remain level thereafter. Due to the benefit cost limitations in the plan, the
health care cost trend rate assumption does not have a significant effect on the
amounts reported. For example, increasing the assumed health care cost trend
rate by one percentage point would increase the accumulated postretirement
benefit obligation as of June 30, 1996 by $79,000 and the aggregate of the
service and interest cost components of net periodic postretirement benefit cost
for the year ended June 30, 1996 by $5,000.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% and 8% at June 30, 1996 and 1995,
respectively.
9. SIGNIFICANT CUSTOMER
The Company has entered into an agreement whereby Procter & Gamble will
purchase a specified tonnage of fluff pulp from the Company each year. The
agreement expires on December 31, 2002. Shipments of fluff pulp under the
agreement are made to Procter & Gamble affiliates worldwide, as directed by
Procter & Gamble. Net sales to Procter & Gamble for the years ended June 30,
1996, 1995 and 1994 were $171,819,000, $157,901,000, and $148,196,000,
respectively.
10. EXPORT SALES
Gross export sales by U.S. operations as a percent of total gross
sales are as follows:
U.S. Export Sales:
Year Ended June 30
---------------------------------
1996 1995 1994
-------- -------- --------
Europe....................... 32% 30% 35%
Asia......................... 23 26 22
Other........................ 14 14 13
-- -- --
69% 70% 70%
== == ==
30
<PAGE>
11. RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses of $3,471,000, $3,044,000, and
$2,960,000 were charged to expense as incurred for the years ended June 30,
1996, 1995, and 1994, respectively.
12. PURCHASE COMMITMENTS
At June 30, 1996, under four separate agreements expiring at various
dates through December 31, 2002, the Company is required to purchase certain
timber from specified tracts of land that is available for harvest. At the
option of the Company, certain of these timber purchase commitments may be
extended through December 31, 2010. The contract price under the terms of these
agreements is either at the then current market price or at fixed prices as
stated in the contract. The fixed and determinable purchase obligations related
to these contracts, based on contract prices as of June 30, 1996, are as follows
(in thousands):
Timber purchase commitments:
Amounts
---------
1997................................... $19,519
1998................................... 17,854
1999................................... 16,491
2000................................... 15,322
2001................................... 12,699
Thereafter............................. 15,617
-------
$97,502
=======
Purchases under these agreements for the years ended June 30, 1996,
1995 and 1994 were $25,443,000, $21,819,000, and $18,644,000, respectively.
13. CONTINGENCIES
Procter & Gamble has been named as a defendant in 21 lawsuits involving
approximately 188 individual plaintiffs claiming unspecified compensatory and
punitive damages, costs and legal fees for alleged diminished property value and
fear of illness asserting that the Foley Plant discharged toxic pollutants into
the nearby Fenholloway River and into treatment ponds from which the pollutants
allegedly entered and contaminated the underground water. In November 1995, by
order of the federal court, all but four individual cases were dismissed for
lack of federal jurisdiction. This dismissal is not a decision on the merits of
the individual cases, and the claims may be refiled in state court within
applicable statutes of limitations. The Company assumed the obligation for any
costs related to this matter on the date of the acquisition of the Foley Plant.
The Company intends to vigorously defend these suits and contends that the
discharge from the Foley Plant is in compliance with federal and state permits.
Additionally, the Company is subject to various state and federal
environmental laws and regulations. The Company has reached an agreement (the
Fenholloway Agreement) with the Florida Department of Environmental Regulation
based upon the results of an environmental study of the Company's operations.
Compliance with the Fenholloway Agreement will require the Company to invest
approximately $39,000,000 through 1999 to modify its facilities. In addition to
the cost of compliance with the Fenholloway Agreement, the cost of future
compliance with other environmental regulations will depend on environmental
regulations which are subject to change and the subsequent definition of the
necessary technology to meet the changing regulations. Therefore, it is
31
<PAGE>
difficult to determine the total amount of expenditures that may be required in
the future. However, the Company estimates that capital spending for
environmental compliance based on certain regulations expected to be promulgated
in addition to compliance with the Fenholloway Agreement could be approximately
$14,000,000 through the year 2000.
As of June 30, 1996, the Company has established reserves of $4,200,000
for certain environmental matters. Based on current information and
requirements, the Company believes that such reserves are adequate. Because an
environmental reserve is not established until a liability is determined to be
probable and reasonably estimable, not all potential future environmental
liabilities are covered by the Company's reserves. Accordingly, there can be no
assurance that the Company's environmental reserves will be sufficient to meet
the Company's obligations, and additional earnings charges are possible.
The Foley Plant is on the EPA CERCLIS list of potential hazardous
substance release sites prepared pursuant to CERCLA. The EPA conducted a site
investigation in early 1995. Although the Company considers it unlikely that the
Foley Plant will be listed on the CERCLA National Priorities List and hence
require remedial action, the possibility of such listing cannot be ruled out. If
the site were to be placed on the National Priorities List, the costs associated
with conducting a CERCLA remedial action could be material.
The Company is involved in certain legal actions and claims arising in
the ordinary course of business. It is the opinion of management that such
litigation and claims will be resolved without material adverse effect on the
Company's financial position or results of operation.
14. FAIR VALUES OF FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments, including cash and
cash equivalents, short-term investments, accounts receivable, accounts payable,
other accrued liabilities and notes payable, the carrying amounts approximate
fair value due to their short maturities. The fair value of the Company's
long-term debt is based on an average of the bid and offer prices at year-end.
The carrying value and fair value of long-term debt at June 30, 1996 were
$217,873,000 and $209,924,000, respectively, and at June 30, 1995 were
$166,202,000 and $176,076,000, respectively.
32
<PAGE>
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- ------- ------- -------
Year Ended June 30, 1996:
Net sales ......................... $ 108,566 $ 117,013 $113,246 $132,154
Gross margin ...................... 33,495 33,801 34,380 33,927
Operating income .................. 27,303 27,872 28,004 25,388
Income before extraordinary loss .. 7,737 9,902 15,513 13,858
Net income ........................ 7,737 6,674 14,792 13,858
Earnings per share:
Income before extraordinary loss 0.37 0.47 0.72 0.65
Extraordinary loss ............. (0.15) (0.03) --
Net income ..................... 0.37 0.32 0.69 0.65
Year Ended June 30, 1995:
Net sales ......................... $ 93,934 $ 103,153 $104,231 $107,269
Gross margin ...................... 20,697 24,560 25,814 32,366
Operating income .................. 14,974 19,104 20,547 24,547
Net income ........................ 3,967 4,905 5,592 7,248
16. SUBSEQUENT EVENTS
On July 2, 1996, BKI Investment Corp., a newly formed, wholly-owned
subsidiary of the Company, purchased 2,259,887 shares of Common Stock from MDCP
for $22.125 per share (the Company Stock Repurchase) for an aggregate purchase
price of $50,000,000. Additionally, on July 2, 1996, MDCP sold to certain
individuals employed by the Company and their related trusts, in an exempt
transaction under the Securities Act of 1933, as amended, an aggregate of
1,385,269 shares of Common Stock for $22.125 per share (the Individuals' Stock
Purchase). The purchase price for the Company Stock Repurchase and the
Individuals' Stock Purchase reflected the prevailing market price when the
parties decided to pursue definitive agreements and sought board approval.
Concurrently with the completion of the Company Stock Repurchase and
the Individuals' Stock Purchase, MDCP sold 2,887,935 shares of Common Stock in a
public offering and the Company issued and sold $100,000,000 principal amount of
9 1/4% Senior Subordinated Notes due 2008. Upon completion of the equity
offering, the Company Stock Repurchase and the Individuals' Stock Purchase, the
Company had 19,147,336 shares of Common Stock outstanding, and MDCP's ownership
percentage was less than five percent. The proceeds of the 9 1/4% Senior
Subordinated Notes were used to fund the Company Stock Repurchase and together
with borrowings under the Credit Facility, to acquire the stock of Alpha
Cellulose Holdings, Inc. (Alpha) on September 1, 1996, for an aggregate purchase
price of approximately $63,000,000 in cash plus assumed liabilities. Alpha is a
specialty pulp manufacturer in Lumberton, North Carolina with net sales in the
year ended December 31, 1995 of approximately $50,000,000.
In August 1996, the Company's Board of Directors authorized the
repurchase of up to one million shares of its common stock from time to time on
the open market or in privately negotiated purchases.
33
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company has had no changes in or disagreements with its independent
auditors to report under this item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to Directors and Executive Officers is set forth on
pages 4 through 5 in the Company's 1996 Annual Proxy Statement and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to Executive Compensation is set forth under the
caption "Executive Compensation" on pages 7 through 8 and under the caption
"Report of the Compensation Committee" on page 6 in the Company's 1996 Annual
Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to Security Ownership of Certain Beneficial Owners
and Management is set forth under the caption "Security Ownership of Certain
Beneficial Owners" on pages 2 through 3 in the Company's Annual Proxy Statement
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to Certain Relationships and Related Transactions is
set forth under the caption "Certain Relationships and Related Transactions" in
the Company's 1996 Annual Proxy Statement on page 10 and is incorporated herein
by reference.
34
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
- See Item 8 of Part II herein.
(2) Financial Statement Schedule
- Schedule II - Valuation and Qualifying Accounts. See page 39 of
this document.
- All other financial statement schedules are omitted as the
information is not required or because the required information is
presented in the financial statements or the notes thereto.
(3) Listing of Exhibits
3.1 Amended and Restated Certificate of Incorporation of the
Registrant, as amended through November 20, 1995 *
3.2 Amended and Restated By-laws of the Registrant *
10.1 Asset Purchase Agreement dated March 16, 1993 by and between
the Registrant and The Procter & Gamble Cellulose Company. **
10.2 Management Stock Subscription Agreement and the Addendum
thereto dated March 22, 1994 by and between the Registrant and
Robert E. Cannon. ***
10.3 Management Stock Subscription Agreement and the Addendum
thereto dated March 22, 1994 by and between the Registrant and
David B. Ferraro. ***
10.4 Management Stock Subscription Agreement and the Addendum
thereto dated March 22, 1994 by and between the Registrant and
Herman P. van Eck. ***
10.5 Management Stock Subscription Agreement and the Addendum
thereto dated March 22, 1994 by and between the Registrant and
George B. Ellis. ***
10.6 1994 Incentive Stock Option Plan for Management Employees of
The Buckeye Cellulose Corporation dated March 22,1994.***
10.7 Incentive Stock Option Subscription Agreement dated March 22,
1994 by and between the Registrant and Robert E. Cannon. ***
10.8 Incentive Stock Option Subscription Agreement dated March 22,
1994 by and between the Registrant and David B. Ferraro. ***
10.9 Incentive Stock Option Subscription Agreement dated March 22,
1994 by and between the Registrant and Herman P. van Eck. ***
10.10 Incentive Stock Option Subscription Agreement dated March 22,
1994 by and between the Registrant and George B. Ellis. ***
10.11 Stockholder Agreement dated March 22, 1994 by and between the
Registrant, Madison Dearborn Capital Partners L.P. and each of
the named "Executives". ***
10.12 Registration Agreement and the Addendum thereto, dated March
22, 1994 by and between the Registrant, Madison Dearborn
Capital Partners L.P. and the named "Executives". ***
35
<PAGE>
10.13 Pulp Supply Agreement dated as of March 16, 1993 by and
between Buckeye Florida, Limited Partnership and The Procter &
Gamble Company. Certain portions of the Agreement have been
omitted and filed separately with the Commission pursuant to
an Application for Confidential Treatment dated October 30,
1995, as supplemented on November 14, 1995 and November 21,
1995. *
10.14 Timberlands Agreement dated as of March 16, 1993 by and
between Buckeye Florida, Limited Partnership and The Procter &
Gamble Company. Certain portions of the Agreement have been
omitted and filed separately with the Commission pursuant to
an Application for Confidential Treatment dated October 30,
1995, as supplemented on November 14, 1995 and November 21,
1995. *
10.15 Timber Purchase Agreement dated as of March 16, 1993 by and
between Buckeye Florida, Limited Partnership and The Procter &
Gamble Company. Certain portions of the Agreement have been
omitted and filed separately with the Commission pursuant to
an Application for Confidential Treatment dated October 30,
1995, as supplemented on November 14, 1995 and November 21,
1995. *
10.16 1994 Incentive Stock Option Plan for Management Employees of
Buckeye Florida Corporation. *
10.17 Amended and Restated Registration Agreement by and among the
Registrant, Madison Dearborn Capital Partners, L.P. and the
named "Executives". *
10.18 Umbrella Agreement dated January 18, 1996 by and among Peter
Temming AG--Specialty Pulp Business, Peter Temming AG,
Steinbeis Temming Papier GmbH and Steinbeis Temming Papier
GmbH & Co. ****
10.19 Asset Purchase Agreement dated as of March 16, 1993 between
Buckeye Florida, Limited Partnership and The Procter & Gamble
Cellulose Company. The Registrant agrees to furnish
supplementally to the Commission a copy of any omitted
schedule or exhibit to the Agreement upon request by the
Commission. *
10.20 Agreement of Limited Partnership of Buckeye Florida, Limited
Partnership dated as of March 16, 1993 between Buckeye
Acquisition Corporation and The Procter & Gamble Cellulose
Company. *
10.21 1996 Management Stock Option Plan of the Registrant. *
10.22 1995 Incentive and Nonqualified Stock Option Plan for
Management Employees of the Registrant. *
10.23 Formof Management Stock Option Subscription Agreement. *
10.24 Form of Stock Option Subscription Agreement. *
10.25 Indenture dated as of May 27, 1993 between the Registrant and
Bankers Trust Company. **
10.26 First Supplemental Indenture, dated as of November 21, 1995
between the Registrant and Bankers Trust Company to Indenture
dated as of May 27, 1993. *****
10.27 Indenture dated as of November 28, 1995 between the Registrant
and Union Planters National Bank. *****
10.28 Credit Agreement dated as of November 28, 1995 among the
Registrant, certain subsidiaries of the Registrant, Fleet Bank
of Massachusetts, N.A., SunTrust Bank, Central Florida, N.A.
and the other lenders party thereto. *****
36
<PAGE>
10.29 Stock Purchase Agreement dated April 26, 1996 among the
Registrant, Stonebridge Partners Equity Fund, L.P., Alpha
Cellulose Associates I, L.P., Alpha Cellulose Associates II,
L.P., Stonebridge Partners Management, L.P., as nominee for
P&C Venture Corp. and Dawkes Corporation, John P. Flanagan,
Michael M. Brown, Janice S. Valenta, John F. Manning, Ken L.
Wilcox, Albert A. Bounds, Jr., Ralph Bolin, Charles P.
Oxendine and James R. Israelson. *****
10.30 The Formula Plan for Non-Employee Directors. *****
10.31 Amendment No. 1 to Credit Agreement dated as of April 25, 1996
among the Registrant, certain subsidiaries of the Registrant,
Fleet Bank of Massachusetts, N.A., SunTrust Bank, Central
Florida, N.A. and the other lenders party thereto. *****
10.32 Company Stock Repurchase Agreement dated as of June 3, 1996
between BKI Investment Corp. and Madison Dearborn Capital
Partners, L.P. *****
10.33 Amendment No. 2 to Credit Agreement dated as of June 6, 1996,
among the Registrant, certain subsidiaries of the Registrant,
Fleet Bank of Massachusetts, N.A., SunTrust Bank, Central
Florida N.A. and the other lenders party thereto. *****
10.34 Amendment No. 3 to Credit Agreement dated as of June 24, 1996,
among the Registrant, certain subsidiaries of the Registrant,
Fleet Bank of Massachusetts, N.A., SunTrust Bank, Central
Florida N.A. and the other lenders party thereto. *****
21.1 Subsidiaries of the Registrant. *****
23.0 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
During the quarter ended June 30, 1996, the following current reports
were filed on Form 8-K
- Report dated May 2, 1996, pursuant to Item 2 and Item 7 of that form.
No financial statements were filed as part of that report.
- Report dated May 10, 1996, pursuant to Item 7 of that form. Financial
statements filed were:
- Audited Financial Statements of Peter Temming
Aktiengesellschaft--Specialty Pulp Business for the year ended
December 31, 1995
- Pro Forma Financial Information
- - ---------
* Incorporated by reference to the Registrant's Registration Statement
on Form S-1, File No. 33-97836, as filed with the Securities and
Exchange Commission on October 6, 1995 and as amended on October 30,
1995 and November 21, 1995.
** Incorporated by reference to the Registrant's Registration Statement
on Form S-1, File No. 33-60032, as filed with the Securities and
Exchange Commission on March 25, 1993 and as amended on April 7, 1993,
May 4, 1993 and May 17, 1993.
*** Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended June 30, 1994.
**** Incorporated by reference to the Registrant's Current Report on Form
8-K dated May 2, 1996.
*****Incorporated by reference to the Registrant's Registration Statement
on Form S-3, File No. 333-05139, as filed with the Securities and
Exchange Commission on June 4, 1996 and as amended on June 11, 1996
and June 27, 1996.
37
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) 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.
Buckeye Cellulose Corporation
By: /s/ ROBERT E. CANNON Date: September 25, 1996
----------------------
Robert E. Cannon
Director, Chairman of the Board, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ ROBERT E. CANNON Date: September 25, 1996
----------------------
Robert E. Cannon
Director, Chairman of the Board, Chief Executive Officer
By: /s/ DAVID B. FERRARO Date: September 25, 1996
----------------------
David B. Ferraro
Director, President, Chief Operating Officer
By: /s/ SAMUEL M. MENCOFF Date: September 25, 1996
----------------------
Samuel M. Mencoff
Director
By: /s/ HARRY J. PHILLIPS, SR. Date: September 25, 1996
----------------------
Harry J. Phillips, Sr.
Director
By: /s/ DAVID H. WHITCOMB Date: September 25, 1996
----------------------
David H. Whitcomb
Vice President, Comptroller
38
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Column B Column C Column D Column E
--------- -------------------- --------- --------
Additions
--------------------
Balance Charged Charged Balance
at to to at
Beginning Costs Other (a) End
of and Accounts- Deductions of
Description Period Expenses Describe -Describe Period
- - --------------------------------------------------------------------------------
YEAR ENDED JUNE 30, 1996:
Deducted from asset
accounts:
Allowance for doubtful
accounts................... $1,152 $-- $-- $172 $980
====== ===== ====== ======= ======
YEAR ENDED JUNE 30, 1995
Deducted from asset
accounts:
Allowance for doubtful
accounts .................. $2,494 $500 $-- $(1,842) $1,152
====== ====== ====== ======= ======
YEAR ENDED JUNE 30, 1994
Deducted from asset
accounts:
Allowance for doubtful
accounts .................. $1,291 $1,237 $-- $(34) $2,494
====== ====== ====== ======= ======
- - -----------------------------------
(a) Uncollectible accounts written off, net of recoveries.
39
Exhibit 23.0
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8, Numbers 33-80865 and 33-80867) pertaining to the Buckeye Retirement
Plus Savings Plan and the Buckeye Retirement Plan of our report dated August 8,
1996, except for Note 16, as to which the date is September 1, 1996, with
respect to the consolidated financial statements and schedule of Buckeye
Cellulose Corporation included in the Annual Report (Form 10-K) for the year
ended June 30, 1996.
ERNST & YOUNG LLP
Memphis, Tennessee
September 25, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 0
<SECURITIES> 2,900
<RECEIVABLES> 66,403
<ALLOWANCES> 980
<INVENTORY> 101,028
<CURRENT-ASSETS> 179,372
<PP&E> 314,881
<DEPRECIATION> 57,283
<TOTAL-ASSETS> 452,799
<CURRENT-LIABILITIES> 61,407
<BONDS> 217,873
0
0
<COMMON> 214
<OTHER-SE> 140,674
<TOTAL-LIABILITY-AND-EQUITY> 452,799
<SALES> 470,979
<TOTAL-REVENUES> 470,979
<CGS> 335,377
<TOTAL-COSTS> 335,377
<OTHER-EXPENSES> 17,964
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,061
<INCOME-PRETAX> 72,542
<INCOME-TAX> 25,532
<INCOME-CONTINUING> 47,010
<DISCONTINUED> 0
<EXTRAORDINARY> 3,949
<CHANGES> 0
<NET-INCOME> 43,061
<EPS-PRIMARY> 2.04
<EPS-DILUTED> 2.04
</TABLE>
