<PAGE> 1
EXHIBIT 13.1
22 FINANCIAL REVIEW
INTRODUCTION
Buckeye Technologies Inc. and its subsidiaries (the Company) manufacture
value-added cellulose-based specialty products in the United States, Canada,
Germany, Ireland and Brazil, and sell these products in worldwide markets. On
October 1, 1999, the Company acquired essentially all of the assets of
Walkisoft, UPM-Kymmene's nonwovens business, with manufacturing locations in
Steinfurt, Germany and Gaston County, North Carolina.
On July 26, 2000, the Company announced its purchase of the cotton cellulose
business of Fibra, S.A., located in Americana, Brazil, for approximately $35.0
million. The Company assumed operations of the facility on August 1, 2000.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 2000 AND JUNE 30, 1999
Net sales for 2000 were $712.8 million, compared to $617.7 million for 1999,
an increase of 15.4%. The increase for the year was due to the acquisition of
Walkisoft, higher volume and favorable product mix on existing businesses,
offset by the lower unit sales prices related to the January 1, 1999 fluff
pulp contract price reduction to Procter & Gamble.
In 2000, operating income was $136.9 million, compared to $113.0 million for
1999, an increase of 21.2%. The 2000 operating income as a percentage of sales
was 19.2%, compared to 18.3% for 1999. The increase was primarily due to the
favorable product mix and lower production costs, partially offset by higher
research, selling and administrative expenses.
Net interest and amortization of debt costs for 2000 were $42.7 million,
compared to $38.9 million for 1999, an increase of $3.8 million. The increase
was primarily due to higher debt levels as a result of the Walkisoft acquisition
and the purchase of certain packaging technology from Stac-Pac Technologies Inc.
The Company's effective tax rate for 2000 was 33.7% versus 31.7% in 1999. The
increase was primarily the result of higher profits in the Company's foreign
operations.
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1999 AND JUNE 30, 1998
Net sales for 1999 were $617.7 million, compared to $630.2 million for 1998, a
decrease of 2%. The decrease was primarily due to lower sales volume.
In 1999, operating income was $113.0 million, compared to $122.4 million for
1998, a decrease of 7.7%. The 1999 operating income as a percentage of sales was
18.3% compared to 19.4% for 1998. The decrease was primarily due to lower
cellulose volume and unit sales prices, including a scheduled January 1, 1999
fluff pulp contract price reduction to Procter & Gamble. These negative factors
were substantially offset by improved airlaid sales and lower overall costs.
Net interest and amortization of debt costs for 1999 were $38.9 million,
compared to $36.3 million for 1998, an increase of $2.6 million. This increase
was due to higher average interest rates.
The Company's effective tax rate for 1999 was 31.7% versus 34.1% in 1998. During
the last two quarters of the fiscal year, the Company recognized additional
benefit from optimizing its foreign sales corporation.
22
<PAGE> 2
FINANCIAL CONDITION
CASH FLOW
Cash provided by operating activities is the major source of funds for the
Company, totaling $138.2 million in 2000, $97.8 million in 1999 and $94.0
million in 1998. The increase in cash generated during 2000 was primarily due to
higher earnings before noncash charges and changes in working capital. The
increase in cash generated during 1999 was primarily due to higher deferred
taxes partially offset by lower net income. In 1998, an increase in funding of
net operating assets offset an increase in net income, depreciation and
amortization.
Capital expenditures for property, plant and equipment were $68.6 million in
2000, $51.5 million in 1999 and $66.7 million in 1998. The Company made these
expenditures to purchase, modernize and upgrade production equipment and to
maintain and acquire facilities. Capital expenditures (including environmental
expenditures) for 2001 are expected to be approximately $165.0 million. The
increase relates primarily to the construction of a large airlaid nonwovens
machine at the Gaston County, North Carolina plant.
The Board of Directors has authorized the repurchase of 5,000,000 shares of
common stock. Repurchased shares will be held as treasury stock and will be
available for general corporate purposes, including the funding of employee
benefit and stock-related plans. During the year ended June 30, 2000, 717,900
shares were repurchased at a cost of $11.7 million. Through June 30, 2000, a
total of 4,240,000 shares have been repurchased under the current board
authority.
LEVERAGE/CAPITALIZATION
Total debt increased to $532.9 million at June 30, 2000 from $441.2 million at
June 30, 1999, an increase of $91.7 million, of which the major components are
$85.1 million of debt related to the acquisition of Walkisoft and $10.0 million
of debt related to the purchase of the Stac-Pac technology.
The total debt to capital ratio was 71.3% at June 30, 2000, compared to 71.4% at
June 30, 1999 and 74.6% at June 30, 1998. The interest coverage ratio was
4.4x in 2000, 4.0x in 1999 and 4.6x in 1998.
LIQUIDITY
The Company believes that its cash flow from operations, together with the
borrowings available under its credit facility, will be sufficient to fund
capital expenditures (including environmental expenditures), meet operating
expenses, fund authorized 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. At
June 30, 2000, the Company had unused borrowing capacity of $195.0 million on
the bank credit facility.
MARKET RISK
The Company is exposed to market risk from changes in foreign exchange, interest
rates and raw material costs. To reduce such risks, the Company selectively uses
financial instruments. All hedging transactions are authorized and executed
pursuant to clearly defined policies and procedures. Further, the Company does
not enter into financial instruments for trading purposes.
A discussion of the Company's accounting policies for risk management is
included in the Accounting Policies in the Notes to the Consolidated Financial
Statements.
<PAGE> 3
24 FINANCIAL REVIEW (CONTINUED)
INTEREST RATES
The fair value of the Company's long-term public debt is based on an average of
the bid and offer prices at year-end. The fair value of the credit facility
approximates its carrying value due to its variable interest rate. The carrying
value of other long-term debt approximates fair value based on the Company's
current incremental borrowing rates for similar types of borrowing instruments.
The carrying value and fair value of long-term debt at June 30, 2000 were $532.9
million and $520.4 million, respectively, and at June 30, 1999 were $441.2
million and $434.6 million, respectively. Market risk is estimated as the
potential change in fair value resulting from a hypothetical 10% decrease in
interest rates and amounts to $4.7 million at June 30, 2000 and $16.3 million at
June 30, 1999.
The Company had $28.4 million of variable rate long-term debt outstanding at
June 30, 2000. At this borrowing level, a hypothetical 10% increase in interest
rates would have a $0.2 million unfavorable impact on the Company's pretax
earnings and cash flows. The primary interest rate exposures on floating rate
debt are with respect to U.S. prime rates and European interbank rates.
FOREIGN CURRENCY EXCHANGE RATES
Foreign currency exposures arising from transactions include firm commitments
and anticipated transactions denominated in a currency other than an entity's
functional currency. The Company and its subsidiaries generally enter into
transactions denominated in their respective functional currencies. Therefore
foreign currency exposures arising from transactions are not material to the
Company. The Company's primary foreign currency exposure arises from
foreign-denominated revenues and profits and their translation into U.S.
dollars. The primary currencies to which the Company is exposed include the
Canadian dollar and the euro.
The Company generally views as long-term its investments in foreign subsidiaries
with a functional currency other than the U.S. dollar. As a result, the Company
does not generally hedge these net investments. However, the Company uses
capital structuring techniques to manage its net investment in foreign
currencies as considered necessary. The net investment in foreign subsidiaries
translated into U.S. dollars using the year-end exchange rates is $176.2 million
and $158.2 million at June 30, 2000 and 1999, respectively. The potential loss
in value of the Company's net investment in foreign subsidiaries resulting from
a hypothetical 10% adverse change in quoted foreign currency exchange rates at
June 30, 2000 amounts to $16.0 million and $14.4 million at June 30, 1999. This
change would be reflected in the equity section of the Company's balance sheet.
COST OF RAW MATERIALS
Amounts paid by the Company for wood and cotton fiber represent the largest
component of the Company's variable costs of production. The cost of these
materials is subject to market fluctuations caused by factors beyond the
Company's control, including weather conditions. Significant increases in the
cost of wood or cotton fiber, to the extent not reflected in prices for the
Company's products, could materially and adversely affect the Company's
business, results of operations and financial condition.
FORWARD-LOOKING INFORMATION
The above risk management discussion and the estimated amounts generated from
the sensitivity analyses are forward-looking statements of market risk, assuming
that certain adverse market conditions occur. Actual results in the future may
differ materially from those projected results due to actual developments in the
global financial markets. The analysis methods used by the Company to assess and
mitigate risks discussed above should not be considered projections of future
events or losses.
<PAGE> 4
CONTINGENCIES
The Company's 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. The Company expects that, due to the nature of its operations, it
will be subject to increasingly stringent environmental requirements (including
standards applicable to wastewater discharges and air emissions) and will
continue to incur substantial costs to comply with such requirements. 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. For additional information on
environmental matters, see Note 14 to the Consolidated Financial Statements.
See Note 10 to the Consolidated Financial Statements for information related to
the Pulp Supply Agreement with the Procter & Gamble Company.
SUBSEQUENT EVENT
On July 26, 2000, the Company announced its purchase of the cotton cellulose
business of Fibra, S.A. (Fibra), located in Americana, Brazil, for approximately
$35.0 million. The Company assumed operation of the facility on August 1, 2000.
Fibra and the Company concurrently entered into a contract under which this
plant will continue to supply cotton cellulose for Fibra's staple rayon
operations in Brazil. The acquisition has been funded using borrowings from the
Company's bank credit facility.
FORWARD-LOOKING STATEMENTS
Except for the historical information contained herein, the matters discussed in
this annual report are forward-looking statements that involve risks and
uncertainties, including, but not limited to, economic, competitive,
governmental and technological factors affecting the Company's operations,
markets, products, services and prices and other factors. The Company undertakes
no obligation to publicly release the result of any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
<PAGE> 5
26 CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended June 30
(In thousands, except per share data) 2000 1999 1998
-----------------------------------------
<S> <C> <C> <C>
NET SALES $ 712,757 $ 617,707 $ 630,210
Cost of goods sold 521,124 459,115 461,757
-----------------------------------------
Gross margin 191,633 158,592 168,453
Selling, research and administrative expenses 54,725 45,568 46,042
-----------------------------------------
OPERATING INCOME 136,908 113,024 122,411
Other income (expense):
Interest income 741 390 539
Interest expense and amortization of debt costs (43,485) (39,263) (36,808)
Other (5,047) (3,821) (2,285)
-----------------------------------------
(47,791) (42,694) (38,554)
-----------------------------------------
Income before income taxes 89,117 70,330 83,857
Income taxes 30,000 22,312 28,597
-----------------------------------------
NET INCOME $ 59,117 $ 48,018 $ 55,260
=========================================
BASIC EARNINGS PER SHARE $ 1.68 $ 1.34 $ 1.49
=========================================
DILUTED EARNINGS PER SHARE $ 1.65 $ 1.32 $ 1.45
=========================================
Weighted average shares for basic earnings per share 35,091 35,756 37,109
Effect of dilutive stock options 838 745 1,125
-----------------------------------------
Adjusted weighted average shares for diluted earnings per share 35,929 36,501 38,234
=========================================
</TABLE>
See accompanying notes.
<PAGE> 6
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30
(In thousands, except share data) 2000 1999
-------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 12,257 $ 403
Accounts receivable - trade, net of allowance for doubtful accounts of
$1,219 and $1,042 at June 30, 2000 and 1999, respectively 108,652 79,349
Accounts receivable - other 3,247 2,299
Inventories 107,238 104,584
Deferred income taxes 5,911 2,412
Prepaid expenses and other 7,645 8,046
-------------------------
TOTAL CURRENT ASSETS 244,950 197,093
Property, plant and equipment, net 520,402 412,231
Goodwill, net 122,399 127,409
Intellectual property and other, net 42,970 11,149
-------------------------
TOTAL ASSETS $ 930,721 $ 747,882
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 36,397 $ 22,848
Accrued expenses 71,549 45,127
Current portion of long-term debt 26,892 --
-------------------------
TOTAL CURRENT LIABILITIES 134,838 67,975
Long-term debt 505,983 441,214
Accrued postretirement benefits 17,531 16,270
Deferred income taxes 56,691 43,480
Other liabilities 1,699 1,524
Commitments and contingencies (Notes 6, 10, 13 and 14)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 10,000,000 shares authorized;
none issued or outstanding -- --
Common stock, $.01 par value; 100,000,000 shares authorized;
43,142,770 shares issued and 34,750,614 and 35,379,736 shares outstanding
at June 30, 2000 and 1999, respectively 431 431
Additional paid-in capital 65,306 65,477
Deferred stock compensation (626) (1,468)
Accumulated other comprehensive income (34,376) (21,642)
Retained earnings 298,114 238,997
Treasury shares, 8,392,156 and 7,763,034 shares at June 30, 2000 and
1999, respectively (114,870) (104,376)
-------------------------
TOTAL STOCKHOLDERS' EQUITY 213,979 177,419
=========================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 930,721 $ 747,882
=========================
</TABLE>
See accompanying notes.
<PAGE> 7
28 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Additional Deferred other
Common paid-in stock comprehensive Retained Treasury
(In thousands, except share data) stock capital compensation income earnings shares Total
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 1, 1997 $ 431 $ 65,928 $(2,200) $ (4,673) $135,719 $ (67,015) $ 128,190
Comprehensive income:
Net income -- -- -- -- 55,260 -- 55,260
Other comprehensive income:
Foreign currency translation
adjustment -- -- -- (12,387) -- -- (12,387)
---------
Comprehensive income 42,873
Purchase of 911,200 shares -- -- -- -- -- (18,445) (18,445)
Issuance of 215,550 shares of
common stock -- (1,209) -- -- -- 3,395 2,186
Compensation charge for
stock options -- 70 -- -- -- -- 70
Deferred stock compensation -- 1,010 (1,010) -- -- -- --
Amortization of deferred
stock compensation -- -- 805 -- -- -- 805
------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1998 431 65,799 (2,405) (17,060) 190,979 (82,065) 155,679
Comprehensive income:
Net income -- -- -- -- 48,018 -- 48,018
Other comprehensive income:
Foreign currency translation
adjustment -- -- -- (4,582) -- -- (4,582)
---------
Comprehensive income 43,436
Purchase of 1,431,900 shares -- -- -- -- -- (23,151) (23,151)
Issuance of 58,090 shares of
common stock -- (157) -- -- -- 840 683
Termination of stock options -- (165) 165 -- -- -- --
Amortization of deferred stock
compensation -- -- 772 -- -- -- 772
------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1999 431 65,477 (1,468) (21,642) 238,997 (104,376) 177,419
Comprehensive income:
Net income -- -- -- -- 59,117 -- 59,117
Other comprehensive income:
Foreign currency translation
adjustment -- -- -- (12,734) -- -- (12,734)
---------
Comprehensive income 46,383
Purchase of 717,900 shares -- -- -- -- -- (11,715) (11,715)
Compensation charge for
stock options -- 107 -- -- -- -- 107
Issuance of 88,778 shares of
common stock -- (180) -- -- -- 1,221 1,041
Termination of stock options -- (98) 98 -- -- -- --
Amortization of deferred
stock compensation -- -- 744 -- -- -- 744
------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2000 $ 431 $ 65,306 $ (626) $(34,376) $298,114 $(114,870) $ 213,979
==========================================================================================
</TABLE>
See accompanying notes.
<PAGE> 8
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30
(In thousands) 2000 1999 1998
---------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 59,117 $ 48,018 $ 55,260
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 42,305 37,673 36,562
Amortization 6,141 5,186 7,460
Deferred income taxes 9,857 10,990 3,768
Other 5,661 4,233 2,500
Changes in operating assets and liabilities:
Accounts receivable (21,962) 7,036 (8,609)
Inventories 1,561 (5,117) 5,103
Prepaid expenses and other assets 859 (2,493) (3,459)
Accounts payable and other current liabilities 34,833 (7,695) (4,544)
---------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 138,372 97,831 94,041
INVESTING ACTIVITIES
Acquisitions of businesses (29,501) -- (3,869)
Purchases of property, plant and equipment (68,561) (51,549) (66,720)
Other (13,734) 2,523 (58)
---------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (111,796) (49,026) (70,647)
FINANCING ACTIVITIES
Proceeds from sale of equity interests 702 450 1,757
Purchase of treasury shares (11,715) (23,151) (18,445)
Net payments under revolving line of credit (2,804) (15,192) (125,557)
Proceeds from long-term debt -- -- 160,480
Payments for debt issuance costs -- -- (4,000)
Principal payments on long-term debt and other (163) (11,934) (41,163)
---------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (13,980) (49,827) (26,928)
EFFECT OF FOREIGN CURRENCY RATE FLUCTUATIONS (742) (47) (158)
---------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,854 (1,069) (3,692)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 403 1,472 5,164
---------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 12,257 $ 403 $ 1,472
=============================================
</TABLE>
See accompanying notes
<PAGE> 9
30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
1. ACCOUNTING POLICIES
BUSINESS DESCRIPTION AND BASIS OF PRESENTATION
The financial statements are consolidated financial statements of Buckeye
Technologies Inc. and its subsidiaries (the Company). All significant
intercompany accounts and transactions have been eliminated in consolidation.
The Company manufactures and distributes value-added cellulose-based specialty
products used in numerous applications including disposable diapers, personal
hygiene products, engine air and oil filters, food casings, rayon filament,
acetate plastics, 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.
INVENTORIES
Inventories are stated at the lower of cost (determined on average cost or
first-in, first-out methods) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. The cost of major renewals and
improvements is 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 16 years. The Company accrues the cost of
periodic planned maintenance shutdowns, based on its best estimate of
incremental spending and the fixed overhead cost, over the period between
shutdowns.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews the appropriateness of the carrying value of its long-lived
assets, including goodwill, whenever events or changes in circumstances
indicate that the historical cost carrying value of an asset may no longer be
appropriate. The Company assesses recoverability of the carrying value of the
asset by estimating the future net cash flows expected to result from the asset
including eventual disposition. If the future net cash flows are less than the
carrying value of the asset, an impairment loss is recorded equal to the
difference between the asset's carrying value and fair value.
INTANGIBLE ASSETS
Goodwill is amortized by the straight-line method over 30 to 40 years. Goodwill
is net of accumulated amortization of $14,004 and $10,416 at June 30, 2000
and 1999, respectively. Deferred debt costs are amortized by the interest method
over the life of the related debt and are net of accumulated amortization of
$4,594 and $3,283 at June 30, 2000 and 1999, respectively. Intellectual
property, primarily resulting from current year acquisitions, is amortized by
the straight-line method over 5 to 20 years and is net of accumulated
amortization of $1,273 and $127 at June 30, 2000 and 1999, respectively.
INCOME TAXES
The Company has provided for income taxes under the liability method.
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. No
provision is made for U.S. income taxes applicable to undistributed earnings of
foreign subsidiaries that are indefinitely reinvested in foreign operations.
RISK MANAGEMENT
The Company selectively uses interest rate swap contracts and foreign currency
forward and option contracts to offset the effects of interest and exchange
rate risk. The differentials to be received or paid under interest rate
contracts are recognized in income over the life of the contracts as
adjustments to interest expense. Gains or losses on termination of interest
rate contracts are recognized as other income or expense when terminated in
conjunction
<PAGE> 10
with the retirement of associated debt. The foreign currency forward and option
contracts that are designated as effective hedges are deferred and included in
income as part of the underlying transactions.
CREDIT RISK
The Company has established credit limits for each customer. The Company
requires the customer to provide a letter of credit for export sales in
high-risk countries. Credit limits are monitored routinely.
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 are composed of sales reduced by sales allowances and distribution costs.
FOREIGN CURRENCY TRANSLATION
Company management has determined that the local currency of its German,
Canadian and Irish subsidiaries is the functional currency, and accordingly
Deutsche mark, Canadian dollar and Irish punt 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.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States 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
Basic earnings per share has been computed based on the average number of
common shares outstanding. Diluted earnings per share reflects the increase in
average common shares outstanding that would result from the assumed exercise
of outstanding stock options calculated using the treasury stock method.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB No. 25) and related interpretations as permitted
by Financial Accounting Standards Board Statement No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123).
COMPREHENSIVE INCOME
Comprehensive income for the Company consists of net income and foreign
currency translation adjustments and is presented in the Consolidated
Statements of Stockholders' Equity.
RECENTLY ISSUED ACCOUNTING STANDARDS
During 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133).
This statement requires companies to record derivative instruments on the
balance sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of a derivative would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. SFAS No. 133, as amended, is effective for the Company's fiscal
year 2001.
<PAGE> 11
32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Because of the Company's minimal historical use of derivatives, management
anticipates that the adoption of SFAS No. 133 will not have a significant
effect on earnings or the financial position of the Company.
2. BUSINESS COMBINATION
On October 1, 1999, the Company acquired essentially all of the assets of
Walkisoft, UPM-Kymmene's nonwovens business, for $29,501 in cash and $83,963
($88,000 in notes payable, net of $4,037 discount) in debt payable to
UPM-Kymmene. The acquisition of Walkisoft adds manufacturing facilities in
Steinfurt, Germany and Gaston County, North Carolina, as well as engineering,
research and development operations in Finland. 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.
<TABLE>
<S> <C>
PURCHASE PRICE ALLOCATION
Working capital, net of cash $ 9,266
Property, plant and equipment 92,223
Intangible assets 11,975
--------
$113,464
========
</TABLE>
The consolidated operating results of Walkisoft have been included in the
consolidated statements of income from the date of acquisition. The following
unaudited pro forma results of operations assume that the acquisition occurred
at the beginning of the periods presented.
PRO FORMA RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended June 30
2000 1999
---------------------------
<S> <C> <C>
Net sales $ 730,248 $ 676,714
Net income 58,113 40,311
---------------------------
Basic earnings per share $ 1.66 $ 1.13
Diluted earnings per share $ 1.62 $ 1.10
---------------------------
</TABLE>
The pro forma financial information is presented for information purposes only
and is not necessarily indicative of the operating results that would have
occurred had the business combination been consummated as of the above dates,
nor is it necessarily indicative of future operating results.
3. INVENTORIES
Components of inventories
<TABLE>
<CAPTION>
June 30
2000 1999
---------------------------
<S> <C> <C>
Raw materials $ 26,527 $ 28,619
Finished goods 59,255 56,927
Storeroom and other supplies 21,456 19,038
---------------------------
$ 107,238 $ 104,584
===========================
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Components of property, plant and equipment
<TABLE>
<CAPTION>
June 30
2000 1999
---------------------------
<S> <C> <C>
Land and land improvements $ 13,915 $ 9,478
Buildings 95,423 79,575
Machinery and equipment 555,218 465,310
Construction in progress 53,090 15,392
---------------------------
717,646 569,755
Accumulated depreciation (197,244) (157,524)
---------------------------
$ 520,402 $ 412,231
===========================
</TABLE>
5. ACCRUED EXPENSES
Components of accrued expenses
<TABLE>
<CAPTION>
June 30
2000 1999
---------------------------
<S> <C> <C>
Retirement plans $ 15,687 $ 12,461
Vacation pay 4,792 4,347
Maintenance accrual 8,711 4,822
Sales program accrual 5,435 4,991
Interest 9,533 6,013
Property taxes 2,923 2,737
Employee compensation 7,965 3,101
Other 16,503 6,655
---------------------------
$ 71,549 $ 45,127
===========================
</TABLE>
<PAGE> 12
6. DEBT
Components of long-term debt
<TABLE>
<CAPTION>
June 30
2000 1999
---------------------------
<S> <C> <C>
Senior Subordinated Notes due:
2005 $ 149,637 $ 149,587
2008 99,567 99,533
2010 149,242 149,197
Credit Facility 28,384 31,847
Notes payable 85,134 --
Other 20,911 11,050
---------------------------
532,875 441,214
Less current portion 26,892 --
---------------------------
$ 505,983 $ 441,214
===========================
</TABLE>
The Company completed a public offering of $150,000 principal amount of 8 1/2%
unsecured Senior Subordinated Notes due December 15, 2005 (the 2005 Notes)
during November 1995. The 2005 Notes are redeemable at the option of the
Company, in whole or in part, at any time on or after December 15, 2000, at
redemption prices varying from 104.25% of principal amount to 100.00% of
principal amount on or after December 15, 2003, in each case together with
accrued and unpaid interest to the date of redemption.
The Company completed a public offering of $100,000 principal amount of 9 1/4%
unsecured Senior Subordinated Notes due September 15, 2008 (the 2008 Notes)
during July 1996. The 2008 Notes are redeemable at the option of the Company,
in whole or in part, at any time on or after September 15, 2001, at redemption
prices varying from 104.625% of principal amount to 100.00% of principal amount
on or after September 15, 2004, in each case together with accrued and unpaid
interest to the date of redemption.
The Company completed a private placement of $150,000 principal amount of 8%
unsecured Senior Subordinated Notes due October 15, 2010 during June 1998. In
fiscal 1999, the Company exchanged these outstanding notes for public notes
(the 2010 Notes) with the same terms. The 2010 Notes are redeemable at the
option of the Company, in whole or in part, at any time on or after October 15,
2003, at redemption prices varying from 104.00% of principal amount to 100.00%
of principal amount on or after October 15, 2006, in each case together with
accrued and unpaid interest to the date of redemption.
The Company has an unsecured credit facility (the Credit Facility), providing
for borrowings up to $225,000. The Credit Facility matures May 28, 2002, and on
May 28, 2001, borrowing availability reduces to $150,000. The interest rates
applicable to borrowings under the Credit Facility are the agent's prime rate
or a LIBOR-based rate ranging from LIBOR plus 0.450% to 1.125%. Borrowings at
June 30, 2000 were at an average rate of 6.75%. Letters of credit issued
through the Credit Facility of $1,659 are outstanding at June 30, 2000. The
amount available for borrowing under the Credit Facility is $194,957 at June 30,
2000.
The Senior Subordinated Notes are subordinate to the Credit Facility.
In connection with the purchase of the nonwoven assets of UPM-Kymmene as of
October 1, 1999, the Company entered into four separate promissory notes with
the seller. The notes are secured by the stock of certain subsidiaries formed to
operate Walkisoft. The principal amount of each note is $22,000 and each bears
interest at a rate of 5%. The total principal amount outstanding at June 30,
2000 is $88,000 less the unamortized discount of $2,866, which is based on an
imputed interest rate of 7.1%. One note in the principal amount of $22,000 plus
accrued interest on all outstanding notes is due on each of the first four
anniversaries of the closing date.
On March 1, 2000, the Company purchased certain technology from Stac-Pac
Technologies Inc. In connection
<PAGE> 13
34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
with the purchase, the Company entered into two separate unsecured promissory
notes with Stac-Pac Technologies Inc. The principal amount of each note is
$5,000 and each bears interest at a rate of 7%. The principal amount of the
first note plus accrued interest on both notes is due on March 1, 2001, and the
principal amount of the second note plus accrued interest is due on March 1,
2002.
The Company has an unsecured term facility, which provides for borrowing up to
$15,000 and matures on May 28, 2002. The outstanding balance under this
facility was $10,911 at June 30, 2000, at an interest rate of 7.1%.
Aggregate maturities of long-term debt are as follows: 2001-$26,892;
2002-$65,774; 2003-$21,093; 2004-$20,670; 2005-$149,637 and thereafter $248,809.
Terms of long-term debt agreements require compliance with certain covenants
including minimum net worth, interest coverage ratios and limitations on
restricted payments and levels of indebtedness. At June 30, 2000, the amount
available for the payment of dividends and/or the acquisition of treasury stock
was $48,062 under the most restrictive of these agreements.
The Company has a revolving credit line of approximately $5,900 with a
financial institution at a rate of interest of 4.65% at June 30, 2000. There
was no outstanding balance under this revolving line of credit at June 30,
2000. Letters of credit issued through the revolving line of credit of $2,108
are outstanding at June 30, 2000. The revolving line of credit expires
April 30, 2001.
Total interest paid by the Company for the years ended June 30, 2000, 1999 and
1998 was $37,819, $36,883 and $37,143, respectively.
7. STOCKHOLDERS' EQUITY
The Board of Directors has authorized the repurchase of 5,000,000 shares of
common stock. Repurchased shares will be held as treasury stock and will be
available for general corporate purposes, including the funding of employee
benefit and stock-related plans. During the year ended June 30, 2000, 717,900
shares were repurchased, and a total of 4,240,000 shares have been repurchased
through June 30, 2000.
The Company's stock option plans provide for the granting of either incentive
or nonqualified stock options to employees and nonemployee directors. 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 10 years from date of
grant.
OPTION PLAN ACTIVITY
<TABLE>
<CAPTION>
Average Average
Exercise Fair
Options Price Value
--------------------------------------------
<S> <C> <C> <C>
Outstanding at
July 1, 1997 2,284,800 $ 8.83
Granted at market 1,598,792 18.25 $ 8.77
Granted below market 100,000 7.60 13.16
Granted above market 11,208 19.63 8.17
Exercised (199,600) 8.80
Terminated (159,600) 10.78
--------------------------------------------
Outstanding at
June 30, 1998 3,635,600 12.88
Granted at market 240,000 13.88 7.16
Exercised (49,700) 9.07
Terminated (40,000) 13.74
--------------------------------------------
Outstanding at
June 30, 1999 3,785,900 12.99
Granted at market 885,000 16.19 8.86
Exercised (76,150) 9.22
Terminated (84,800) 16.93
--------------------------------------------
Outstanding at
June 30, 2000 4,509,950 13.61
--------------------------------------------
Options Exercisable
at June 30:
1998 884,600 9.16
--------------------------------------------
1999 1,647,235 11.34
--------------------------------------------
2000 2,404,551 12.17
--------------------------------------------
</TABLE>
<PAGE> 14
There were 1,659,400, 859,600 and 1,059,600 shares reserved for grants of
options at June 30, 2000, 1999 and 1998, respectively. The following summary
provides information about stock options outstanding and exercisable at June
30, 2000:
<TABLE>
<CAPTION>
Outstanding Exercisable
----------------------------------------------------------------------------
Average Average Average
Exercise Remaining Exercise
Exercise Price Options Price Life (Years) Options Price
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 7.50-$10.50 1,680,950 $ 8.24 5.7 1,316,550 $ 8.29
$12.50-$18.00 2,617,792 16.42 7.8 1,016,793 16.51
$18.50-$23.00 211,208 21.45 8.2 71,208 21.88
-----------------------------------------------------------------------------------------------------
Total 4,509,950 $ 13.61 7.0 2,404,551 $12.17
=====================================================================================================
</TABLE>
As allowed under the Financial Accounting Standards Board Statement No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123), the Company applies the
provisions of Accounting Principles Board Opinion No. 25 and related
interpretations. The following pro forma information has been prepared as if
the Company had accounted for its employee stock options using the fair value
based method of accounting established by SFAS No. 123:
<TABLE>
<CAPTION>
Year Ended June 30
2000 1999 1998
-------------------------------------
<S> <C> <C> <C>
Net income:
As reported $59,117 $48,018 $55,260
Pro forma 54,658 43,874 51,482
Basic earnings
per share:
As reported $ 1.68 $ 1.34 $ 1.49
Pro forma 1.56 1.23 1.39
Diluted earnings
per share:
As reported $ 1.65 $ 1.32 $ 1.45
Pro forma 1.52 1.21 1.37
-------------------------------------
</TABLE>
The Company has estimated the fair value of each option grant using the
Black-Scholes option pricing model. The fair value was estimated with the
following weighted average assumptions: expected life of the stock options of
eight years; volatility of the expected market price of common stock of .37 for
2000 and 1999, and .29 for 1998; a risk-free interest rate range of 6.0% to
6.2% for 2000, 4.8% to 5.2% for 1999 and 5.5% to 6.2% for 1998; and no
dividends. Option pricing models, such as the Black-Scholes model, require the
input of highly subjective assumptions, including the expected stock price
volatility that are subject to change from time to time. Pro forma amounts
reflect total compensation expense from the awards made in 1996 through 2000.
Since compensation expense from stock options is recognized over the future
years' vesting period, and additional awards generally are made every one to
two years, pro forma amounts may not be representative of future years'
amounts.
In August 1997, the Board of Directors authorized a restricted stock plan and
set aside 800,000 of the Company's treasury shares to fund this plan. At June
30, 2000, 36,169 restricted shares had been awarded.
Stock options that could potentially dilute basic earnings per share in the
future, which were not included in the fully diluted computation because they
would have been antidilutive, were 1,486,322, 1,575,003 and 63,589 for the
years ended June 30, 2000, 1999 and 1998, respectively.
<PAGE> 15
36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
Provision for income taxes
<TABLE>
<CAPTION>
Year ended June 30
2000 1999 1998
------------------------------
<S> <C> <C> <C>
Current:
Federal $16,487 $11,120 $23,740
Foreign 3,167 170 241
State and other 489 32 848
------------------------------
20,143 11,322 24,829
Deferred:
Federal 4,148 7,944 4,250
Foreign 5,564 2,452 (561)
State and other 145 594 79
------------------------------
9,857 10,990 3,768
------------------------------
$30,000 $22,312 $28,597
==============================
</TABLE>
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 due to
the following:
Rate analysis
<TABLE>
<CAPTION>
Year Ended June 30
2000 1999 1998
-------------------------------
<S> <C> <C> <C>
Expected tax expense $31,191 $24,616 $29,350
State taxes 411 469 644
Foreign sales
corporation (4,969) (4,444) (3,244)
Effect of foreign
operations 2,892 1,680 1,988
Nondeductible items 644 529 547
Other (169) (538) (688)
-------------------------------
$30,000 $22,312 $28,597
===============================
</TABLE>
Significant components of the Company's deferred tax assets (liabilities) are as
follows:
Deferred tax assets (liabilities)
<TABLE>
<CAPTION>
June 30
2000 1999
----------------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation $(72,123) $(55,735)
Other (4,063) (3,377)
----------------------
(76,186) (59,112)
Deferred tax assets:
Postretirement benefits 6,535 5,852
Inventory costs 2,037 1,165
Net operating loss 5,969 4,373
Nondeductible reserves 5,213 2,953
AMT carryforward -- 1,434
Other 5,652 2,267
----------------------
25,406 18,044
----------------------
$(50,780) $(41,068)
======================
</TABLE>
The Company paid income taxes of $14,304, $10,937 and $26,455 during the years
ended June 30, 2000, 1999 and 1998, respectively.
For the year ended June 30, 2000, income before income taxes consisted of
$71,826 of domestic income and $17,291 of foreign income. For the year ended
June 30, 1999, income before income taxes consisted of $66,920 of domestic
income and $3,410 of foreign income. At June 30, 2000, the Company has foreign
net operating loss carryforwards of approximately $33,142, which have no
expiration date.
9. EMPLOYEE BENEFIT PLANS
The Company has defined contribution retirement plans covering U.S. employees.
The Company contributes 1% of the employee's gross compensation plus 1/2% for
each year of service up to a maximum of 11% of the employee's gross
compensation. The plan also provides for additional contributions by the Company
contingent upon the Company's results of operations. Contribution expense for
the retirement plans for the years ended June 30, 2000, 1999 and 1998 was
$8,551, $9,111 and $8,096, respectively.
<PAGE> 16
The Company also provides medical, dental and life insurance postretirement
plans covering certain 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 their previous employer and are not covered by
these plans. The Company's current policy is to fund the cost of these benefits
as payments to participants are required.
The components of net periodic benefit costs are as follows:
Effect on operations
<TABLE>
<CAPTION>
Year Ended June 30
2000 1999 1998
----------------------------
<S> <C> <C> <C>
Service cost for
benefits earned $ 849 $ 841 $ 779
Interest cost on
benefit obligation 979 869 795
Amortization of net loss
from earlier periods -- 1 7
Amortization of
unrecognized prior
service cost (600) (600) (650)
----------------------------
Total cost $1,228 $1,111 $ 931
============================
</TABLE>
The following table provides a reconciliation of the changes in the plans'
benefit obligations over the two-year period ending June 30, 2000, and a
statement of the plans' funded status as of June 30, 2000 and 1999:
<TABLE>
<CAPTION>
June 30
2000 1999
---------------------
<S> <C> <C>
Change in benefit obligation:
Obligation at beginning of year $13,186 $ 11,136
Service cost 849 841
Interest cost 979 869
Amendment -- 448
Participant contributions 38 6
Actuarial loss (gain) 437 (104)
Benefits paid (22) (10)
---------------------
Underfunded status at
end of year 15,467 13,186
Unrecognized prior service cost 2,957 3,557
Unrecognized loss (1,469) (1,034)
Other 576 561
---------------------
Net amount recognized in the
consolidated balance sheet $17,531 $ 16,270
=====================
</TABLE>
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
7.5% for 2001 and is assumed to decrease gradually to 5.0% in 2006 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.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% at June 30, 2000 and 7% at June
30, 1999.
10. SIGNIFICANT CUSTOMER
Gross sales to Procter & Gamble Company and its affiliates (P&G) for the years
ended June 30, 2000, 1999 and 1998 were 31%, 35% and 31%, respectively, of total
gross sales.
The Company and P&G are parties to the Pulp Supply Agreement (the "Supply
Agreement"), which provides that P&G will purchase, under a take-or-pay
agreement, a specified tonnage of fluff pulp annually at the higher of the
formula price or market price in calendar years 1999 and 2000, and at market
price in calendar years 2001 and 2002. Currently, the formula price paid by P&G
under the Supply Agreement exceeds the market price for fluff pulp. The
specified tonnage decreases in calendar 2001 and further decreases in calendar
2002. The impact of the scheduled contract changes at January 1, 2001 may result
in an adverse effect on the Company's business, results of operations, and
financial condition if present market conditions deteriorate.
11. SEGMENT INFORMATION
The Company operates in one segment consisting of the manufacturing and
marketing of value-added cellulose-based specialty products. All of the
Company's products involve similar production processes, are sold to similar
classes of customers and markets, are distributed using the same methods, and
operate in similar regulatory environments.
<PAGE> 17
38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's identifiable products are chemical cellulose, customized paper
cellulose and absorbent products. Chemical cellulose is used to impart purity,
strength and viscosity in the manufacture of diversified products such as food
casings, rayon filament and acetate plastics, as well as thickeners for food,
cosmetics and pharmaceuticals. Customized paper cellulose is used to provide
porosity, color permanence and tear resistance in automotive air and oil
filters, premium letterhead, currency paper and personal stationery. Absorbent
products are used to increase absorbency and fluid transport in products such as
disposable diapers, feminine hygiene products, adult incontinence products and
household wipes and mops.
The following provides relative gross sales to unaffiliated customers by
product:
<TABLE>
<CAPTION>
Year Ended June 30
2000 1999 1998
----------------------
<S> <C> <C> <C>
Chemical cellulose 31% 35% 39%
Customized paper
cellulose 18% 22% 22%
Absorbent products 51% 43% 39%
----------------------
100% 100% 100%
======================
</TABLE>
The Company has manufacturing operations in the United States, Canada, Germany
and Ireland. The following provides a summary of net sales to unaffiliated
customers, based on point of origin, and long-lived assets by geographic areas:
<TABLE>
<CAPTION>
Year Ended June 30
2000 1999 1998
----------------------------------
<S> <C> <C> <C>
Net sales:
United States $532,116 $504,219 $539,132
Germany 91,355 41,894 44,792
Other 89,286 71,594 46,286
----------------------------------
Total net sales $712,757 $617,707 $630,210
==================================
Long-lived assets:
United States $433,967 $354,835 $343,475
Canada 121,665 121,532 124,473
Germany 67,791 13,235 14,617
Other 52,539 51,664 53,932
----------------------------------
Total long-lived assets $675,962 $541,266 $536,497
==================================
</TABLE>
For the year ended June 30, 2000, the Company's gross sales by destination were
concentrated in the following geographic markets: Europe - 37%, North America -
36%, Asia - 15%, South America - 7% and Other - 5%.
12. RESEARCH AND DEVELOPMENT EXPENSES
Research and development costs of $13,059, $10,924 and $10,732 were charged to
expense as incurred for the years ended June 30, 2000, 1999 and 1998,
respectively.
13. COMMITMENTS
At June 30, 2000, under two separate agreements expiring by December 31, 2010,
the Company is required to purchase, at market prices, certain timber from
specified tracts of land that is available for harvest. At June 30, 2000,
estimated annual purchase obligations were as follows: 2001 - $21,000;
2002 - $22,000; 2003 - $22,000; 2004 - $21,000; 2005 - $22,000 and thereafter -
$129,000. Purchases under these agreements for the years ended June 30,
2000, 1999 and 1998 were $25,541, $21,629 and $16,522, respectively.
The Company has committed to the construction of a large airlaid nonwovens
machine at the Gaston County, North Carolina plant. The total cost of this
project will approach $100,000.
14. CONTINGENCIES
The Company's 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 these laws
and regulations. The Company expects that, due to the nature of its operations,
it will be subject to increasingly stringent environmental requirements
(including standards applicable to wastewater discharges and air emissions) and
will continue to incur substantial costs to comply with these requirements.
Because it is difficult to predict 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.
<PAGE> 18
The Foley Plant discharges treated wastewater into the Fenholloway River. Under
the terms of an agreement with the Florida Department of Environmental
Protection ("FDEP"), approved by the U.S. Environmental Protection Agency
("EPA") in 1995, the Company agreed to a comprehensive plan to attain Class III
("fishable/swimmable") status for the Fenholloway River under applicable Florida
law (the "Fenholloway Agreement"). The Fenholloway Agreement requires the
Company, among other things, to (i) make process changes within the Foley Plant
to reduce the coloration of its wastewater discharge, (ii) restore certain
wetlands areas, (iii) relocate the wastewater discharge point into the
Fenholloway River to a point closer to the mouth of the river, and (iv) provide
oxygen enrichment to the treated wastewater prior to discharge at the new
location. The Company has already made significant expenditures to make certain
in-plant process changes required by the Fenholloway Agreement, and the Company
estimates, based on 1997 projections, it will incur additional capital
expenditures of approximately $40 million through fiscal 2005 to comply with the
remaining obligations under the Fenholloway Agreement. The EPA has objected to
several provisions of the renewal permit for the Foley effluent discharge. The
Company and the FDEP, which is the delegated permitting authority, requested a
public hearing on the objections.
The EPA requested additional environmental studies to identify possible
alternatives to the relocation of the discharge point to determine if more cost
effective technologies are available to address both Class III water quality
standards for the Fenholloway River and anticipated EPA "cluster rules"
applicable to wastewater discharges from dissolving kraft pulp mills, like the
Foley Plant. The Company completed the process changes within the Foley Plant as
required by the Fenholloway Agreement. The other requirements of the Fenholloway
Agreement have been deferred until the EPA objections to the renewal permit are
satisfactorily resolved. Consequently, a portion of the estimated $40 million in
capital expenditures may be delayed beyond fiscal 2005, and the total capital
expenditures for the Foley Plant may increase if prices increase or the Company
is required by the "cluster rules" to implement other technologies.
While the EPA has not yet proposed wastewater standards under the "cluster
rules" applicable to dissolving kraft pulp mills like the Foley Plant, the EPA
has issued air emission standards applicable to the Foley Plant. The Company is
reviewing these air emission standards and presently does not believe that such
expenditures required by them are likely to have a material adverse effect on
the Company's business, results of operations or financial condition.
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 a materially adverse effect on
the Company's financial position or results of operations.
15. FAIR VALUES OF FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments, including cash and cash
equivalents, accounts receivable and accounts payable, the carrying amounts
approximate fair value due to their short maturities. The fair value of the
Company's long-term public debt is based on an average of the bid and offer
prices at year-end. The fair value of the credit facility approximates its
carrying value due to its variable interest rate. The carrying value of other
long-term debt approximates fair value based on the Company's current
incremental borrowing rates for similar types of borrowing instruments. The
carrying value and fair value of long-term debt at June 30, 2000 were $532,875
and $520,374, respectively and at June 30, 1999 were $441,214 and $434,647,
respectively.
<PAGE> 19
40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-----------------------------------------------
<S> <C> <C> <C> <C>
Year ended June 30, 2000
Net sales $153,400 $183,702 $188,388 $187,267
Gross margin 42,220 47,636 49,636 52,141
Operating income 29,990 34,066 35,315 37,537
Net income 13,355 14,238 14,894 16,630
Earnings per share:
Basic 0.38 0.40 0.43 0.48
Diluted 0.37 0.40 0.42 0.46
-----------------------------------------------
Year ended June 30, 1999
Net sales $156,177 $147,274 $155,880 $158,376
Gross margin 42,354 38,005 38,883 39,350
Operating income 30,526 27,600 27,803 27,095
Net income 13,383 10,874 11,488 12,273
Earnings per share:
Basic 0.37 0.30 0.32 0.35
Diluted 0.36 0.30 0.32 0.34
-----------------------------------------------
</TABLE>
The Company's effective tax rate for the fourth quarter of fiscal 2000 was 35.3%
compared to 33.0% for the nine months ended March 31, 2000. The increase was
primarily the result of increased profits in the Company's foreign operations,
which are taxed at higher rates.
The Company's effective tax rate for the fourth quarter of fiscal 1999 was 24.0%
compared to 34.0% for the nine months ended March 31, 1999. The decrease was
primarily the result of the recognition of additional benefit from the Company's
optimization of its foreign sales corporation.
17. SUBSEQUENT EVENT
On July 26, 2000, the Company announced its purchase of the cotton cellulose
business of Fibra, S.A. (Fibra), located in Americana, Brazil, for approximately
$35,000. The Company will assume operation of the facility on August 1, 2000.
Fibra and the Company concurrently entered into a contract under which this
plant will continue to supply cotton cellulose for Fibra's staple rayon
operations in Brazil. The acquisition has been funded using borrowings from the
Company's bank credit facility.
<PAGE> 20
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Buckeye Technologies Inc.
We have audited the accompanying consolidated balance sheets of Buckeye
Technologies Inc. as of June 30, 2000 and 1999 and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended June 30, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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
Technologies Inc. at June 30, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 2000, in conformity with accounting principles generally accepted in
the United States.
/s/ Ernst & Young LLP
---------------------
Memphis, Tennessee
July 31, 2000
<PAGE> 21
42 SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended June 30
(In thousands, except per share data) 2000(a) 1999 1998 1997(b) 1996(c)
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating data:
Net sales $712,757 $617,707 $630,210 $558,933 $470,979
Operating income 136,908 113,024 122,411 109,392 108,567
Income before extraordinary loss 59,117 48,018 55,260 53,274 47,010
Net income 59,117 48,018 55,260 53,274 43,061
Basic earnings per share:
Income before extraordinary loss 1.68 1.34 1.49 1.40 1.11
Net income 1.68 1.34 1.49 1.40 1.02
Diluted earnings per share:
Income before extraordinary loss 1.65 1.32 1.45 1.38 1.10
Net income 1.65 1.32 1.45 1.38 1.01
Balance sheet data:
Total assets $930,721 $747,882 $751,536 $737,464 $452,799
Long-term debt less current portion 505,983 441,214 456,332 474,631 217,873
Other data:(d)
Company EBITDA $180,323 $152,009 $162,397 $143,024 $134,670
------------------------------------------------------------
</TABLE>
(a) Includes the operations of Walkisoft from October 1, 1999, its date of
acquisition.
(b) Includes the operations of Alpha Cellulose Holdings, Inc. from September 1,
1996 and Merfin International Inc. from May 28, 1997, their respective dates
of acquisition.
(c) An extraordinary loss of $3,949, net of tax benefit, was recognized on the
early retirement of debt. A minority interest charge ceased on
November 28, 1995. This data includes the operations of the specialty
cellulose business of Peter Temming A.G. from May 1, 1996, the date of
acquisition.
(d) Company EBITDA represents earnings before interest, taxes, depreciation,
amortization, depletion, minority interest, extraordinary loss, secondary
offering costs and other noncash 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).
<PAGE> 22
44 STOCKHOLDER INFORMATION
COMMON STOCK PRICE RANGE
<TABLE>
<CAPTION>
Year Ended June 30
2000 1999
High Low High Low
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<S> <C> <C> <C> <C>
First quarter (ended September 30) $17 7/8 $14 3/8 $25 3/8 $14
Second quarter (ended December 31) 16 15/16 14 7/16 21 1/8 11 3/4
Third quarter (ended March 31) 20 14 1/4 15 7/16 12 1/8
Fourth quarter (ended June 30) 23 1/2 17 5/8 17 12 3/4
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</TABLE>
The Company has no plans to pay dividends in the foreseeable future.
STOCK LISTING AND SHAREHOLDERS
Buckeye Technologies Inc. is traded on the New York Stock Exchange under the
symbol BKI. There were approximately 6,000 shareholders on September 1, 2000,
based on the number of record holders of the Company's common stock and an
estimate of the number of individual participants represented by security
position listings.
