SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission file number: 1-3203
_______________________
CHESAPEAKE CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-0166880
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1021 East Cary Street
Richmond, Virginia 23218-2350
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: 804-697-1000
Not Applicable
(Former name, former address, and former fiscal year,
if changed since last report)
_______________________
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/. No / /.
The number of shares outstanding of each of the issuer's classes
of common stock as of April 30, 1999: 21,516,057 shares.
CHESAPEAKE CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
INDEX
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Earnings-
Three months ended March 31, 1999
and March 31, 1998 3
Consolidated Balance Sheets
at March 31, 1999 and December 31, 1998 4
Consolidated Statements of Cash Flows-
Three months ended March 31, 1999
and March 31, 1998 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of
Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 24
Signature 25
-2-
PART I
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In millions, except per share data)
(Unaudited)
Three Months Ended
March 31,
------------------
1999 1998
------ ------
Net sales $239.1 $216.8
Costs and expenses:
Cost of products sold 170.9 154.6
Depreciation and cost of timber harvested 17.1 13.2
Selling, general and administrative expenses 34.9 34.4
------ ------
Income from operations 16.2 14.6
Other income and expenses, net 2.9 2.7
Interest expense, net (6.0) (4.6)
------ ------
Income before taxes and cumulative
effect of accounting change 13.1 12.7
Income tax expense 4.6 4.7
------ ------
Income before cumulative effect
of accounting change 8.5 8.0
Cumulative effect of accounting change,
net of income taxes of $8.4 - 13.3
------ ------
Net income $ 8.5 $ 21.3
====== ======
Basic earnings per share:
Earnings before cumulative effect
of accounting change $ 0.40 $ 0.38
Cumulative effect of accounting
change, net of income taxes - 0.62
------ ------
Basic earnings per share $ 0.40 $ 1.00
====== ======
Weighted average number of common shares 21.4 21.2
====== ======
Diluted earnings per share:
Earnings before cumulative effect
of accounting change $ 0.39 $ 0.37
Cumulative effect of accounting
change, net of income taxes - 0.62
------ ------
Diluted earnings per share $ 0.39 $ 0.99
====== ======
Weighted average number of common shares and
equivalents outstanding, assuming dilution 21.7 21.5
====== ======
Cash dividends declared per share of
common stock $ 0.22 $ 0.20
====== ======
See accompanying notes to consolidated financial statements.
-3-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
March 31, Dec. 31,
1999 1998
------------------
ASSETS
Current assets:
Cash and cash equivalents $ 28.2 $ 62.4
Accounts receivable, less allowances for
doubtful accounts (1999-$4.0; 1998-$4.1) 189.0 127.6
Inventories:
Finished goods 56.8 34.5
Work in process 43.8 27.0
Materials and supplies 47.5 41.2
-------- ------
Total inventories 148.1 102.7
Deferred income taxes 12.4 12.4
Other 5.9 8.3
-------- ------
Total current assets 383.6 313.4
-------- ------
Property, plant and equipment, at cost 1,069.9 872.4
Less accumulated depreciation 379.7 385.9
-------- ------
690.2 486.5
Timber and timberlands, net 56.0 56.7
-------- ------
Net property, plant and equipment 746.2 543.2
-------- ------
Goodwill, net 217.5 50.3
Other assets 83.1 72.5
-------- ------
Total assets $1,430.4 $979.4
======== ======
-4-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
(In millions, except share data)
(Unaudited)
March 31, Dec. 31,
1999 1998
---------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 105.4 $ 57.4
Accrued expenses 122.9 89.7
Current maturities of long-term debt 5.7 5.8
Dividends payable 4.7 4.7
Income taxes payable 5.1 -
-------- ------
Total current liabilities 243.8 157.6
-------- ------
Long-term debt 626.5 270.4
Other long-term liabilities 16.7 16.3
Postretirement benefits other than pensions 20.0 19.5
Deferred income taxes 75.1 74.3
-------- ------
Total liabilities 982.1 538.1
-------- ------
Stockholders' equity:
Preferred stock, $100 par value, issuable
in series; authorized, 500,000 shares;
issued, none
Common stock, $1 par value; authorized,
60,000,000 shares; outstanding 21,473,622
in 1999 and 21,439,385 shares in 1998,
respectively 21.5 21.4
Additional paid-in capital 22.7 20.0
Accumulated other comprehensive loss (8.3) (8.7)
Retained earnings 412.4 408.6
-------- ------
Total stockholders' equity 448.3 441.3
-------- ------
Total liabilities and stockholders'
equity $1,430.4 $979.4
======== ======
See accompanying notes to consolidated financial statements.
-5-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Three Months Ended
March 31,
------------------
1999 1998
------ -------
Operating activities
Net income $ 8.5 $ 21.3
Adjustments to reconcile net income to
net cash provided by operating activities:
Cumulative effect of accounting change - (21.7)
Depreciation, cost of timber harvested
and amortization of intangibles 18.0 15.2
Deferred income taxes 0.8 8.4
Gain on sale of property, plant and equipment - (1.5)
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable, net (4.8) (4.1)
Inventories (4.4) (3.2)
Other assets 2.6 0.5
Accounts payable (0.7) 1.3
Accrued expenses (1.9) (4.5)
Income taxes payable 1.6 4.7
------ ------
Net cash provided by operating activities 19.7 16.4
------ ------
Investing activities
Purchases of property, plant and equipment (19.7) (15.8)
Acquisitions (328.9) (6.0)
Proceeds from sale of property, plant and
equipment - 3.2
Other, net (4.2) 2.2
------ ------
Net cash used in investing activities (352.8) (16.4)
------ ------
-6-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(In millions)
(Unaudited)
Three Months Ended
March 31,
-------------------
1999 1998
------ -------
Financing activities
Net borrowing on lines of credit 0.8 2.5
Payments on long-term debt (0.7) (1.0)
Proceeds from long-term debt 303.5 -
Purchases of outstanding common stock - (4.7)
Dividends paid (4.7) (4.2)
Other - 0.4
------ ------
Net cash provided by (used in) financing
activities 298.9 (7.0)
------ ------
Decrease in cash and cash equivalents (34.2) (7.0)
Cash and cash equivalents at beginning of period 62.4 73.3
------ ------
Cash and cash equivalents at end of period $ 28.2 $ 66.3
====== ======
See accompanying notes to consolidated financial statements.
-7-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited)
Note 1. Summary of Significant Accounting Policies
The consolidated financial statements of Chesapeake
Corporation and subsidiaries (the "Company" or "Chesapeake")
included herein are unaudited, except for the December 31, 1998
consolidated balance sheet, and have been prepared by the Company
pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, the
consolidated financial statements reflect all adjustments, all of
a normal recurring nature, necessary to present fairly the
Company's consolidated financial position and results of
operations and cash flows for the interim periods presented
herein.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates in reporting the amounts of certain revenues and
expenses during the reporting period of the financial statements
and certain assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
These consolidated financial statements should be read in
conjunction with the consolidated financial statements and the
notes thereto included or incorporated by reference in the
Company's latest Annual Report on Form 10-K. The results of
operations for the 1999 interim period should not be regarded as
necessarily indicative of the results that may be expected for
the entire year.
Certain prior-year data have been reclassified to conform to
the 1999 presentation.
Note 2. Prospective Accounting Pronouncements
The Financial Accounting Standards Board has issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133, which is effective for fiscal years beginning after
June 15, 1999, requires companies to record derivatives on the
balance sheet as assets or liabilities, measured at fair market
value. This standard is not expected to have a material impact
on the Company's financial statements.
Note 3. Comprehensive Income
Comprehensive income for the three months ended March 31,
1999 and 1998 was $8.9 million and $20.9 million, respectively.
The difference between net income and comprehensive income is due
to foreign currency translation.
-8-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements(Unaudited),continued
Note 4. Acquisitions and Dispositions
On March 18, 1999, the Company completed its acquisition of
substantially all of the outstanding capital shares of Field
Group plc ("Field Group"), a European specialty packaging company
headquartered in the United Kingdom. The acquisition was
effected through a tender offer by Chesapeake UK Acquisitions
plc, a wholly-owned subsidiary of Chesapeake, for all of the
outstanding capital shares of Field Group at a purchase price of
(pound)3.60 per share. The tender offer, which was recommended
by Field Group's board of directors, represented a value of
approximately US $355 million for Field Group's outstanding share
capital. Including assumed debt of approximately $50 million,
the tender offer reflected a total enterprise value for Field
Group of approximately US $405 million.
The purchase price for Field Group's outstanding share
capital of approximately $355 million was funded primarily
through borrowings under a new credit facility (the "Credit
Facility"). The Credit Facility consists of a $200 million 364-
day revolving credit facility (which, at Chesapeake's option, may
be converted into a two-year term loan) and a $250 million five-
year revolving credit facility. Borrowings under the Credit
Facility bear interest and incur facility fees at a variable rate
per annum, which are initially equal to an all-in cost of LIBOR
plus 1.0%. The Credit Facility contains customary
representations, warranties and covenants, including covenants
that require Chesapeake to maintain certain financial ratios. In
addition, the Credit Facility includes a provision that requires
Chesapeake to apply no less than 50% of the net proceeds of any
sale of its timberlands to permanently extinguish borrowings
under the 364-day revolving credit facility.
The acquisition has been accounted for using the purchase
method. The results of operations of Field Group are included in
the consolidated statement of earnings since March 18, 1999. The
amounts included in the consolidated balance sheet at March 31,
1999 for Field Group are based on a preliminary purchase price
allocation that will be finalized in 1999. The purchase price
has been allocated to the acquired net assets as summarized below
(in millions):
Fair value of assets acquired $485.5
Liabilities assumed or created (144.5)
Cash acquired (12.1)
------
Cash paid for acquisition, net $328.9
======
Pro forma financial information reflecting the combined
results of the Company and Field Group will be filed on Form 8-K
by June 1, 1999.
-9-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements(Unaudited),continued
Note 4. Acquisitions and Dispositions, continued
On November 20, 1998, Chesapeake Corporation acquired all of
the outstanding capital stock of Capitol Packaging Corporation, a
specialty packaging company located in Denver, Co. On February
2, 1998, Chesapeake Packaging Co. purchased substantially all of
the assets, and assumed certain liabilities, of Rock City Box
Co., Inc., located in Utica, NY. This operation manufactures
corrugated containers, trays, and pallets, as well as wood and
foam packaging products.
Note 5. Restructuring
In the fourth quarter of 1998, the Company formulated a
restructuring program which included early retirement and
voluntary severance programs (70 positions) in the Tissue
segment, and a severance program (60 positions) and 2 facility
closures in the Merchandising and Specialty Packaging segment.
At March 31, 1999, payments totaling $1.7 million have been made
for the early retirement and severance programs for approximately
60 persons, reducing the $11.8 million restructuring accrual to
$10.1 million.
Note 6. Commitments
At March 31, 1999, commitments, primarily for capital
expenditures, approximated $18.7 million. These commitments
include anticipated expenditures of $0.1 million in 1999 for
environmental protection related to the Company's tissue mills.
The remaining commitments of $18.6 million are related to various
capital projects, none of which is individually material.
Additional non-determinable environmental protection
expenditures could be required in the future if facilities are
expanded or if more stringent standards become applicable. See
Note 9.
Note 7. Litigation
Wisconsin Tissue ("WT"), a wholly-owned subsidiary of the
Company, has been identified by the federal government and the
State of Wisconsin as a potentially responsible party with
respect to possible natural resource damages and Superfund
liability in the Fox River and Green Bay System. See Note 9 for
further information regarding this matter.
On May 13, 1997, the Attorney General of Florida filed a
civil complaint against WT alleging violations of antitrust laws.
The complaint also names nine other commercial and industrial
tissue manufacturers and seeks compensatory monetary damages,
civil penalties, and injunctive relief. Other private and state
civil antitrust class actions have also been filed against WT (or
against the Company, identifying WT as a "division" of the
-10-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited), continued
Note 7. Litigation, continued
Company) and against the other defendants. WT and the Company
believe that WT has valid defenses to the plaintiffs' claims and
are defending the actions vigorously.
The Company is a party to various other legal actions that
are ordinary and incidental to its business. While the outcome
of legal actions cannot be predicted with certainty, the Company
believes the outcome of any of these proceedings, or all of them
combined, will not have a materially adverse effect on its
consolidated financial position, results of operations, or cash
flows.
Note 8. Income Taxes
The Company's effective income tax rate was 35.5% and 37.5%
in the first quarter of 1999 and 1998, respectively. The
decrease in the Company's effective income tax rate is primarily
due to the impact of a heavier mix of business in countries which
have a lower effective tax rate.
Note 9. Environmental Matters
Chesapeake has a strong commitment to protecting the
environment. The Company has an environmental audit program to
monitor compliance with environmental laws and regulations. The
Company is committed to abiding by the environmental, health and
safety principles of the American Forest & Paper Association.
Each expansion project has been planned to comply with applicable
environmental regulations and to enhance environmental protection
at existing facilities. The Company faces increasing capital
expenditures and operating costs to comply with expanding and
more stringent environmental regulations, although compliance
with existing environmental regulations is not expected to have a
materially adverse effect on the Company's earnings, financial
position, or competitive position.
The Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") and similar state "Superfund" laws
impose liability, without regard to fault or to the legality of
the original action, on certain classes of persons (referred to
as potentially responsible parties or "PRPs") associated with a
release or threat of a release of hazardous substances into the
environment. Financial responsibility for the clean-up or other
remediation of contaminated property or for natural resource
damages can extend to previously owned or used properties,
waterways, and properties owned by third parties, as well as to
properties currently owned and used by a company even if
contamination is attributable entirely to prior owners. As
discussed below, the U.S. Environmental Protection Agency ("EPA")
has given notice of its intent to list the lower Fox River in
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CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited), continued
Note 9. Environmental Matters, continued
Wisconsin on the National Priorities List under CERCLA and has
identified WT as a PRP.
Except for the Fox River matter, the Company has not been
identified as a PRP at any CERCLA-related sites. However, there
can be no assurance that the Company will not be named as a PRP
at any other sites in the future, or that the costs associated
with additional sites would not be material to the Company's
financial position, liquidity or results of operation.
In June 1994, the United States Department of Interior,
Fish and Wildlife Service ("FWS"), a federal natural resources
trustee, notified WT that it had identified WT and four other
companies located along the lower Fox River in northeast
Wisconsin as PRPs for purposes of natural resources liability
under CERCLA arising from alleged releases of polychlorinated
biphenyls ("PCBs") in the Fox River and Green Bay System. Two
other companies subsequently received similar notices from the
FWS. The FWS and other governmental and tribal entities,
including the State of Wisconsin, allege that natural resources,
including endangered species, fish, birds, tribal lands, or
lands held by the United States in trust for various Indian
tribes, have been exposed to PCBs that were released from
facilities located along the lower Fox River. The FWS is
proceeding with a natural resource damage assessment with
respect to the alleged discharges. On January 31, 1997, the FWS
notified WT of its intent to file suit, subject to final
approval by the Department of Justice, against WT to recover
alleged natural resource damages. WT and other PRPs are engaged
in discussions with the parties asserting trusteeship of the
natural resources concerning the damage assessment and the basis
for resolution of the natural resource damage claims.
WT and other PRPs are also engaged in discussions with the
State of Wisconsin with respect to resolving possible state
claims concerning remediation, restoration and natural resource
damages related to the alleged discharge of PCBs into the Fox
River and Green Bay System. Under an interim agreement with the
State of Wisconsin, the PRPs are providing funds for an interim
phase of resource damage assessment and restoration work. WT's
obligation under the agreement is not material to the Company's
financial position, liquidity or results of operations.
On June 18, 1997, the EPA announced that it was initiating
the process of listing the lower Fox River on the CERCLA National
Priorities List of hazardous waste sites. The EPA identified
several PRPs, including WT. By early 1998, the EPA and the
Wisconsin Department of Natural Resources ("DNR") had initiated a
remedial investigation/ feasibility study ("RI/FS") of the lower
Fox River site.
-12-
CHESAPEAKE CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 9. Environmental Matters, continued
On February 26, 1999, DNR released for public comment a
RI/FS for the lower Fox River site. In the draft RI/FS, the DNR
reviewed and summarized several categories of possible remedial
alternatives for the site, estimated to cost in the range of $143
million to $721 million, but did not identify a preferred remedy.
(As required by applicable regulations, the draft RI/FS also
includes a "no action" alternative that does not entail
remediation costs, but the Company does not believe that the "no
action" alternative will be selected). There can be no assurance
that many of the cost estimates in the draft RI/FS will not
differ significantly from actual costs. Public comments on the
draft RI/FS were due by April 12, 1999. The Company submitted
timely comments on the draft RI/FS both individually and in
conjunction with other PRPs. After consideration of public
comment, the draft RI/FS may be revised to add to, delete or
amend the alternatives for managing contaminated sediments.
Later this year, after finalizing the RI/FS, the DNR and the EPA
are expected to announce a preferred remedial alternative in a
Proposed Remedial Action Plan. The Proposed Remedial Action Plan
will be subject to a public comment period, and enforcement of
any definitive Remedial Action Plan may be subject to judicial
review.
The largest components of the costs of the more expensive
clean-up alternatives presented in the draft RI/FS are
attributable to large-scale sediment removal, treatment and
disposal. Based on current information and advice from its
environmental consultants, WT believes that an aggressive effort
to remove substantial amounts of PCB-contaminated sediments (most
of which are buried under cleaner material or are otherwise
unlikely to move), as contemplated by certain alternatives
presented in the draft RI/FS, would be environmentally
detrimental and therefore inappropriate. Instead, WT believes
that less intrusive alternatives are more environmentally
appropriate, cost effective and responsible methods of managing
risks attributable to sediment contamination.
The ultimate cost to WT associated with this matter cannot
be predicted with certainty at this time, due to uncertainties
with respect to: which, if any, of the remedial alternatives
presented in the draft RI/FS will be implemented, and
uncertainties associated with the actual costs of each of the
potential alternatives; the outcome of the federal and state
natural resource damage assessments; WT's share of any multi-
party clean-up/restoration expenses; the timing of any clean-
up/restoration; the evolving nature of clean-up/restoration
technologies and governmental regulations; controlling legal
precedent; the extent to which contribution will be available
from other parties; and the scope of potential recoveries from
insurance carriers and prior owners of WT. While such costs
cannot be predicted with certainty at this time, the Company
-13-
CHESAPEAKE CORPORATION AND ITS SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 9. Environmental Matters, continued
believes that the ultimate clean-up/restoration costs associated
with the lower Fox River site may exceed $100 million for all
PRPs in the aggregate. Under CERCLA, each PRP generally will be
jointly and severally liable for the full amount of the clean-up
costs, subject to a right of contribution from the other PRPs.
In practice, PRPs generally negotiate among themselves to
determine their respective contributions to any multi-party
cleanup/restoration, based upon factors including their
respective contributions to the alleged contamination and their
ability to pay. Based on presently available information, the
Company believes that several of the named PRPs will be able to
pay substantial shares toward remediation and restoration, and
that there are additional parties, some of which have substantial
resources, that may also be jointly and severally liable.
The Company also believes that it is entitled to substantial
indemnification from a prior owner of WT, pursuant to a stock
purchase agreement between the parties, with respect to
liabilities related to this matter. The Company believes that
the prior owner intends to, and has the financial ability to,
honor its indemnification obligation under the stock purchase
agreement.
Based on presently available information, the Company
believes that if any remediation/restoration is done in an
environmentally appropriate, cost effective and responsible
manner, the matter is unlikely to have a material adverse effect
on the Company's financial position, liquidity or results of
operations. However, because of the uncertainties described
above, there can be no assurance that WT's ultimate liability
with respect to the lower Fox River site will not have a material
adverse effect on the Company's financial position, liquidity or
results of operations.
The EPA has stated its intent to develop additional draft
rules under the Clean Water Act and the Clean Air Act which would
impose new air and water quality standards for pulp and paper
mills (the "Cluster Rules"). The eventual capital cost impact on
the Company of compliance with the additional Cluster Rules is
not presently determinable and will depend on a number of
factors, including the scope of the standards imposed and time
permitted for compliance; the Company's strategic decisions
related to compliance, including potential changes in product mix
and markets; and developments in compliance technology.
In March 1998, WT's Chicago, IL tissue mill received a
Notice of Violation ("NOV") from EPA alleging violation of the
Illinois State Implementation Plan as adopted pursuant to the
Clean Air Act ("CAA"). The alleged violation involves the
emission of volatile organic material. WT is in the process of
negotiating a possible resolution of the alleged violation with
-14-
CHESAPEAKE CORPORATION AND ITS SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 9. Environmental Matters, continued
EPA. The ultimate cost to WT, if any, associated with the
alleged violation cannot be determined with certainty at this
time due to the absence of a determination that there has been a
violation, and, if a violation is found to have occurred, a
determination of the appropriate capture and control techniques
or other corrective action and the cost thereof, and the amount
of any penalties imposed by EPA. WT believes that it is entitled
to significant indemnification for costs or expenses incurred
with regard to this matter from the prior owner of the Chicago
mill and that the prior owner has the financial ability to honor
its indemnification obligation.
On April 19, 1999, the EPA and the Virginia Department of
Environmental Quality ("DEQ") each issued NOVs under the CAA
against St. Laurent Paper Products Corp. ("St. Laurent") (and, in
the case of EPA's NOV, Chesapeake Corporation) relating to St.
Laurent's kraft products mill located in West Point, Virginia
(the "Mill"). St. Laurent is the successor to Chesapeake Paper
Products, L.L.C. which, as owner of the Mill, was sold by
Chesapeake Corporation to St. Laurent Paperboard (U.S.) Inc.
("St. Laurent (U.S.)") in May 1997 pursuant to a Purchase
Agreement dated as of April 30, 1997 by and among Chesapeake
Corporation, St. Laurent Paperboard Inc. and St. Laurent (U.S.)
(the "Purchase Agreement"). In general, the NOVs allege that
from 1984 to the present the Mill installed certain equipment and
modified certain production processes without obtaining required
permits. Under applicable law, the EPA and DEQ may commence a
court action with respect to the matters alleged in the NOVs
seeking injunctive relief to compel compliance with the CAA, and
a court may impose civil penalties of up to $25,000 per day of
violation ($27,500 per day for violations after January 30, 1997)
for violations of the CAA (provided that a court, in determining
the amount of any penalty to be assessed, shall take into
consideration, among other things, the size of the business, the
economic impact of the penalty on the business, the business'
compliance history and good faith efforts to comply, the economic
benefit to the business of noncompliance and the seriousness of
the violation). The Purchase Agreement provides that Chesapeake
Corporation will indemnify St. Laurent against any violations of
applicable environmental laws (including the CAA) that existed at
the Mill as of the date of the Purchase Agreement and as of the
May 1997 closing date (and any other such violations that existed
prior to such dates as to which Chesapeake had "knowledge," as
defined in the Purchase Agreement). Chesapeake's indemnification
obligation to St. Laurent with respect to such matters is capped
at $50 million and, in certain circumstances, is subject to a
$2.0 million deductible. The Company is cooperating with St.
Laurent to analyze, respond to, and defend against the matters
alleged in the NOVs. Based upon an initial review of the NOVs,
the Company believes that both it and St. Laurent have
substantial defenses against the alleged violations. The Company
-15-
CHESAPEAKE CORPORATION AND ITS SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 9. Environmental Matters, continued
and St. Laurent intend to work with EPA and DEQ to address the
matters that are the subject of the NOVs and, if necessary, to
defend vigorously against the allegations. The ultimate cost, if
any, to the Company relating to matters alleged in the NOVs
cannot be determined with certainty at this time due to the
absence of a determination that any violations of the CAA
occurred and, if any violations are ultimately found to have
occurred, a determination of (i) any required remediation costs
and penalties and (ii) whether St. Laurent would be entitled to
indemnification from the Company under the Purchase Agreement.
Note 10. Subsequent Event
In April 1999, the Company announced that it had signed
letters of intent to sell 278,000 acres of timberlands in
Virginia, Maryland and Delaware and its building products
business (two sawmills, a lumber processing plant and a wood-chip
mill) for combined proceeds of $186 million. These sales are
anticipated to close in the third quarter of 1999.
Note 11. Segment Disclosure
First Quarter
-------------
(In millions)
1999 1998
Net Sales: ---- ----
Tissue $ 98.8 $101.7
Merchandising and Specialty Packaging 113.1 104.3
European Specialty Packaging 15.4 -
Forest Products/Land Development 11.8 10.8
-------- ------
$ 239.1 $216.8
======== ======
Earnings before interest and taxes
(EBIT):
Tissue $ 15.5 $ 15.4
Merchandising and Specialty Packaging 2.0 0.8
European Specialty Packaging .6 -
Forest Products/Land Development 4.7 3.3
Corporate (3.7) (2.2)
-------- ------
$ 19.1 $ 17.3
======== ======
Identifiable assets:
Tissue $ 451.7 $456.3
Merchandising and Specialty Packaging 330.7 284.7
European Specialty Packaging 485.5 -
Forest Products/Land Development 122.1 122.3
Corporate 40.4 74.4
-------- ------
$1,430.4 $937.7
======== ======
-16-
CHESAPEAKE CORPORATION AND ITS SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited),continued
Note 11. Segment Disclosure, continued
Chesapeake conducts its business in four segments. The
Company's Tissue segment is composed of commercial and industrial
tissue operations of Wisconsin Tissue and Wisconsin Tissue de
Mexico. The Company's Merchandising and Specialty Packaging
segment produces and sells point-of-sale displays, graphic
packaging and corrugated shipping containers. The European
Specialty Packaging segment is composed of the Field Group
operations (See Note 4) which produces folding cartons for food
and consumer and pharmaceutical and healthcare companies. The
results of operations of Field Group are included in the
consolidated segment results since March 18, 1999, the
acquisition date. The Forest Products/Land Development segment
manages the Company's timberlands and real estate holdings.
There were no intersegment sales for the three months ended March
31, 1999 and March 31, 1998.
-17-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
First Quarter 1999 vs. First Quarter 1998
Overview
Net sales for the three months ended March 31, 1999, were
$239.1 million, compared with first quarter net sales of $216.8
million in 1998. This increase was primarily the result of
growth in sales volume in all segments and the Field Group
acquisition.
Net income for the three months ended March 31, 1999, was
$8.5 million, or $.39 per diluted share, compared with the 1998
first quarter reported net income before the cumulative effect of
an accounting change of $8.0 million, or $.37 per diluted share.
The increase in net income was primarily the result of
higher sales volume and increased land sales, offset by increased
interest costs on outstanding debt. The additional borrowings in
the 1999 quarter, primarily generated by the Field Group
acquisition, caused the $1.4 million increase in interest
expense.
First quarter 1998 net income, including the cumulative
effect of an accounting change of $13.3 million, net of taxes,
was $21.3 million, or $.99 per diluted share. The change in
accounting consisted of the capitalization of certain timber
reforestation costs that were previously expensed in order to
achieve better matching of those costs with the revenues realized
from the eventual harvesting of the timber.
Other income and expenses, net increased to $2.9 million for
the first quarter of 1999 compared to $2.7 million for the first
quarter of 1998 due to higher land sales offset by a gain on the
sale of a corporate aircraft of $1.5 million ($.04 per diluted
share after tax) in the first quarter of 1998.
Segment Information
Net sales for the Tissue segment of $98.8 million for the
first quarter of 1999 were down 3% from the first quarter of
1998. The sales decrease resulted from lower average selling
prices and lower parent roll volume offset slightly by higher
converted tissue volume. Tissue segment earnings before interest
and taxes ("EBIT") for the first quarter of 1999 of $15.5 million
were slightly higher than the first quarter of 1998. Favorable
raw materials yield and improved converting operating
efficiencies combined to offset the EBIT impact of lower sales.
Preliminary work related to the previously announced new tissue
mill and converting facility in Halifax Count, North Carolina
continues, with construction planned to begin in the third
quarter of this year.
-18-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Net sales for the Merchandising and Specialty Packaging
segment for the first quarter of 1999 of $113.1 million were up
8% compared to net sales for the segment during the first quarter
of 1998 due primarily to higher sales volume. For the first
quarter of 1999, segment EBIT was $2.0 million, a $1.2 million
improvement over the $0.8 million income for the first quarter of
1998. The increase was primarily due to sales volume growth,
ongoing cost reductions, and improved operating efficiencies,
partially offset by modestly lower corrugated container margins.
Net sales for the Forest Products/Land Development segment
for the first quarter of 1999 were $11.8 million, up 9% from net
sales of $10.8 million in the first quarter of 1998, due,
primarily to higher land sales and higher lumber sales volume,
offset in part by lower lumber pricing. Segment EBIT for the
first quarter of 1999 was $4.7 million, up 42% compared to $3.3
million for the first quarter last year resulting from improved
sawmill productivity and higher land sales. See Note 10
regarding the planned sale of 278,000 acres of timberlands and
the segment's building products business.
Liquidity and Financial Position
Net cash provided by operating activities improved primarily
due to improved earnings before depreciation, cost of timber
harvested and amortization. EBITDA, a measure of internal cash
flow combining EBIT plus non-cash charges for depreciation, cost
of timber harvested and amortization, was $37.1 million for the
first quarter of 1999, 14% higher than EBITDA of $32.5 million
for the first quarter of 1998. The ratio of current assets to
current liabilities of 1.6 at the end of the first quarter of
1999, decreased from 2.2 at the end of the first quarter of 1998
primarily as a result of consolidating the Field Group assets.
Net cash used in investing activities for the first quarter
of 1999 was $352.8 million compared to $16.4 million in the first
quarter of 1998, which primarily reflects the cash paid for the
Field Group acquisition. Capital spending increased due to the
continued implementation of improved information systems
throughout the Company. See Note 6 for capital spending
commitments.
Cash provided by financing activities in 1999 was $298.9
million compared to a $7.0 million use of cash in 1998, due to
the funding of the Field Group purchase. In January 1999, the
Company entered into a new $450 million bank credit facility
which included a 364-day $200 million revolving line of credit,
which is convertible at the Company's option to a two-year term
loan, and a five-year $250 million revolving line of credit. This
credit facility was used primarily to fund the acquisition of
Field Group. With this increase in debt, Chesapeake's net debt-
to-capital ratio was 53 percent at March 31, 1999, compared to 28
-19-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
percent at the end of the first quarter of 1998. In April 1999,
the Company announced it had signed letters of intent to sell
278,000 acres of timberlands and its building products business
(two sawmills, a lumber processing plant and a wood-chip mill)
for combined proceeds of $186 million. These sales are
anticipated to close in the third quarter of 1999. The Company
expects to use the proceeds to reduce revolving debt and to
continue its stock repurchase program.
Management believes that its existing cash position and
other available sources of liquidity are sufficient to meet
current and anticipated requirements for the foreseeable future.
Outlook
The following statements reflect management's outlook for
the Company as of April 15, 1999. These statements do not
reflect the potential impact of any mergers, acquisitions,
divestitures, or other structural changes in the Company's
business, and are subject to certain risks and uncertainties,
including those listed under the caption "Forward-Looking
Statements" on page 23 of this report. The outlook includes the
expected 1999 impact of the Field Group acquisition.
- - The Company expects revenue for 1999 to be in the $1.2 billion
to $1.3 billion range, up primarily as a result of the
acquisition of the Field Group.
- - Full-year earnings improvements in all business segments are
expected in 1999 compared to 1998.
- - The Company's effective income tax rate in 1999 is expected to
be 35.5 percent, down slightly from the previous outlook, due to
a lower effective tax rate in Europe.
- - Capital spending, excluding acquisitions, for 1999 is expected
to be approximately $100 million, compared to $73 million in
1998, due primarily to expected capital spending by the Field
Group.
- - Depreciation, depletion, and amortization is expected to be
approximately $82 million in 1999, up from $62 million in 1998,
due primarily to the acquisition of the Field Group.
- - Earnings per share expectations for 1999 are expected to be in
the range of $2.25 to $2.50 per diluted share.
Year 2000
In 1997, Chesapeake established a plan intended to address
the impact of the Year 2000 problem on its internal systems and
facilities, as well as its key suppliers and customers. The
project consists of the following four phases:
- - Phase 1 - inventory and analysis of key business systems and
infrastructure for Year 2000 problems. Phase 1 was completed in
July 1997.
-20-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
- - Phase 2 - remediation of non-compliant systems. As discussed
below, this phase is underway and should be completed by mid-
1999.
- - Phase 3 - testing of mission critical systems. This phase has
begun and is scheduled to be completed by mid-1999.
- - Phase 4 - development of contingency plans. This phase has also
begun. As discussed below, the Company expects that its
contingency plans will be fully developed by mid-1999.
The Company's Year 2000 team consists of location and
business unit Year 2000 coordinators and project managers who,
for the purpose of this project, report and are accountable to
the Company's Chief Financial Officer.
State of Readiness
Most of the Company's mission critical business systems
utilize packaged applications, which are purchased from third
party software vendors. As part of its overall business
strategy, the Company is installing new integrated Enterprise
Resource Planning ("ERP") software that is expected to provide
enhanced reporting and operational benefits. The installation of
Year 2000 compliant ERP software is also the principal element
of the Company's Year 2000 remediation plan. The Company's
Tissue segment implemented Year 2000 compliant ERP software in
April 1999. Chesapeake's other business segments and corporate
headquarters are in the process of installing Year 2000
compliant ERP software. Those installations are approximately
80% complete as of April 1999, and are scheduled to be completed
at all locations by mid-1999.
In addition to the installation of Year 2000 compliant ERP
software, the Company's remediation efforts include the upgrading
or replacement of proprietary computer software systems
(primarily in the Tissue segment), and the upgrading or
replacement of computer hardware, machinery, and equipment;
process control systems; security systems; and telecommunications
equipment. The Company, including the Field Group, is in the
process of upgrading or replacing these systems and equipment, as
necessary for Year 2000 compliance, and expects the process to be
completed by mid-1999.
Cost to Address Year 2000 Readiness
The cost of installing the new ERP software, no material
portion of which relates specifically to achieving Year 2000
compliance, is expected to be approximately $20 million. Of this
amount, approximately $16 million is expected to be capitalized,
with approximately $8.6 million capitalized during the Company's
fiscal year ending December 31, 1998. To date, the Company has
incurred approximately $13.9 million of the expected ERP
implementation cost. Other specifically identifiable costs
-21-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
related to Year 2000 compliance are in the range of $2-3 million,
approximately $2.5 million of which has been incurred to date.
The Field Group has incurred costs of $0.4 million out of
anticipated total costs of $0.5 million. The Company expects to
fund the costs associated with its Year 2000 compliance program
with cash generated from operations. Management does not believe
that any of Chesapeake's material information technology projects
have been deferred due to the Company's Year 2000 compliance
efforts.
Because of the interdependence of information systems today,
Year 2000 compliant companies may be affected by the Year 2000
readiness of their material suppliers, customers, and other third
parties. As part of Chesapeake's evaluation of the Year 2000
readiness of its suppliers, customers, and other third parties,
the Company has contacted substantially all of its critical
suppliers to request written assurance that they have
Year 2000 readiness programs in place as well as an affirmation
that they will be compliant when necessary. Responses to these
inquiries continue to be gathered and reviewed. To date, no such
parties have informed the Company that they do not expect to be
Year 2000 compliant in a timeframe that would expose Chesapeake
to material business risks. Further analysis and follow-up is
being conducted as necessary. Although management has not yet
determined the risk associated with the failure of any such party
to become Year 2000 compliant, the Company can provide no
assurance that such failure would not have a material adverse
effect on the Company's results of operations and financial
condition. However, in an effort to minimize such risks, in most
cases (with utilities and banking institutions as notable
exceptions), the Company utilizes multiple suppliers of goods
and services and is prepared to substitute suppliers if one or
more have Year 2000 related difficulties.
Business Continuity and Contingency Planning
The ultimate effects on the Company or its suppliers or
customers of not being fully Year 2000 compliant cannot be
reasonably estimated. While Chesapeake believes its efforts are
adequate to address its Year 2000 concerns, the Company could
experience a material adverse effect on its results of
operations, financial position, or cash flows if its Year 2000
compliance schedule is not met, if the costs to remediate the
Company's Year 2000 issues materially exceed current estimates,
or if material suppliers, customers, or other businesses
encounter serious problems in their Year 2000 remediation
efforts. Therefore, the Company is in the process of developing
plans to address such contingencies, with a focus on mission
critical applications and material suppliers. Such contingency
plans may include the development of back-up procedures, the
purchase of additional inventory, and the utilization of
alternate suppliers. The Company expects to complete its
contingency plans during the third quarter of 1999.
-22-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Accounting Pronouncements
See Note 2 to Consolidated Financial Statements.
Forward-Looking Statements
Forward-looking statements in the foregoing Management's
Discussion and Analysis of Financial Condition and Results of
Operations include statements that are identified by the use of
words or phrases including, but not limited to, the following:
"will likely result", "expected to", "will continue", "is
anticipated", "estimated", "project", "believe" and words or
phrases of similar import. Changes in the following important
factors, among others, could cause Chesapeake's actual results to
differ materially from those expressed in any such forward-
looking statements: competitive products and pricing; production
costs, particularly for raw materials such as waste paper and
corrugated box and display materials; fluctuations in demand;
governmental policies and regulations affecting the environment;
interest rates; currency translation movements; Year 2000
compliance issues; and other risks that are detailed from time to
time in reports filed by the Company with the Securities and
Exchange Commission.
Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET
RISK
None.
-23-
PART II
Item 1. Legal Proceedings
Reference is made to Note 7 of the Notes to
Consolidated Financial Statements included herein.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders on April 28,
1999, the following business was transacted:
(1) All nominees for election to the Board of Directors were
elected.
Number Number
of of shares
Shares Authority
For Withheld
------ ---------
John W. Rosenblum 17,714,766 1,199,810
Richard G. Tilghman 18,598,729 315,847
Hugh V. White, Jr. 18,624,751 289,825
(2) Amendments to the Chesapeake Corporation 1997 Incentive Plan
were approved. There were 15,101,457 votes for the proposal and
3,626,060 against with 187,056 abstentions.
(3) The appointment of Pricewaterhouse Coopers LLP as
independent accountants for the fiscal year ending December 31,
1999, was ratified. There were 18,811,808 votes for the proposal
and 52,079 against with 50,689 abstentions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27.1 - Financial Data Schedule - 1999
Exhibit 27.2 - Restated Financial Data Schedule -
1998
(b) Reports on Form 8-K:
(i) Current Report dated March 18, 1999,
reporting, under Items 2 and 7, the
acquisition of Field Group plc.
-24-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
CHESAPEAKE CORPORATION
(Registrant)
Date: May 14, 1999 BY: /s/ William T. Tolley
-----------------------
William T. Tolley
Senior Vice President -
Finance & Chief
Financial Officer
-25-
EXHIBIT INDEX
EXHIBIT METHOD OF FILING
- ------- --------------------
27.1 Financial Data Schedule - 1999 *
27.2 Restated Financial Data Schedule - 1998 *
* Filed herewith electronically
-26-