-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M+BeqIVfmL3aVasM85apN/sm+JXzqtIhcdCs0L+kXg8kAvmryfW4JkowZy9MwONQ Ykj8hV1TrfBMtWWneIB/rQ== /in/edgar/work/0000019731-00-000016/0000019731-00-000016.txt : 20001121 0000019731-00-000016.hdr.sgml : 20001121 ACCESSION NUMBER: 0000019731-00-000016 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000702 FILED AS OF DATE: 20001120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHESAPEAKE CORP /VA/ CENTRAL INDEX KEY: 0000019731 STANDARD INDUSTRIAL CLASSIFICATION: [2631 ] IRS NUMBER: 540166880 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 001-03203 FILM NUMBER: 773506 BUSINESS ADDRESS: STREET 1: 1021 E CARY ST STREET 2: PO BOX 2350 CITY: RICHMOND STATE: VA ZIP: 23219 BUSINESS PHONE: 8046971000 MAIL ADDRESS: STREET 1: P O BOX 2350 STREET 2: 1021 EAST CARY STREET CITY: RICHMOND STATE: VA ZIP: 23218 FORMER COMPANY: FORMER CONFORMED NAME: CHESAPEAKE CORP OF VIRGINIA DATE OF NAME CHANGE: 19840509 10-Q/A 1 0001.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 2, 2000 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________. Commission file number: 1-3203 _______________________ CHESAPEAKE CORPORATION (Exact name of registrant as specified in its charter) Virginia 54-0166880 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1021 East Cary Street Richmond, Virginia 23218-2350 (Address of principal executive offices) Zip Code Registrant's telephone number, including area code: 804-697-1000 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 / /. Number of shares of $1.00 par value common stock outstanding as of July 15, 2000: 15,319,897 shares. SIGNIFICANT FINANCIAL AND ACCOUNTING DEVELOPMENTS On October 19, 2000, Chesapeake Corporation ("Chesapeake" or the "Company") issued a press release in which it reported significantly reduced operating profit at its U.S point-of- purchase display business ("Display") for the third quarter ended October 1, 2000. The Company promptly initiated a detailed review of Display's operating performance and accounting practices by its internal staff and independent accountants. As a result of the review, the Company has restated its previously issued unaudited consolidated financial statements and related disclosures for the quarters ended April 2, 2000, and July 2, 2000. The purpose of this 10-Q/A is to restate the Company's second quarter 2000 financial statements to reflect adjustments related to: allowance for doubtful accounts; inventory obsolescence; lower-than-expected full-year sales volume; and the revaluation of inventory standards. The principal effects of these adjustments on the accompanying financial statements are set forth in Note 1 of the Notes to Consolidated Financial Statements. For purposes of this Form 10-Q/A, and in accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended, each item of the 2000 second quarter Form 10-Q as originally filed on August 2, 2000, that was affected by the restatement has been amended and restated in its entirety. No attempt has been made in this Form 10-Q/A to modify or update other disclosures as presented in the original Form 10-Q, except as required to reflect the effects of the restatement. -2- CHESAPEAKE CORPORATION FORM 10-Q/A FOR THE QUARTERLY PERIOD ENDED JULY 2, 2000 AS RESTATED INDEX PAGE NUMBER ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Earnings- Quarter and Six Months Ended July 2, 2000 and June 30, 1999 4 Consolidated Balance Sheets at July 2, 2000 and December 31, 1999 6 Consolidated Statements of Cash Flows- Six Months Ended July 2, 2000 and June 30, 1999 8 Notes to Consolidated Financial Statements 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 24 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 31 Signature 32 -3- PART I CHESAPEAKE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (In millions, except per share data) (Unaudited) Quarter Ended Six Months Ended -------------------------------- July 2, June 30, July 2, June 30, 2000 1999 2000 1999 (As (As restated) restated) ------ ------ ------ ------ Net sales $255.9 $327.5 $495.0 $566.6 Costs and expenses: Cost of products sold 202.1 258.4 399.0 444.4 Selling, general and administrative expenses 45.2 46.5 88.0 84.2 ------ ------ ------ ------ Income from operations 8.6 22.6 8.0 38.0 Other income and expenses, net 2.8 1.6 2.9 5.3 Interest expense, net (9.2) (11.4) (14.8) (17.4) ------ ------ ------ ------ Income (loss) before taxes and extraordinary item 2.2 12.8 (3.9) 25.9 Income tax expense (benefit) 0.7 4.4 (3.1) 9.0 ------ ------ ------ ------ Income (loss) before extraordinary item 1.5 8.4 (0.8) 16.9 Extraordinary item, net of income taxes of $0.9 - - (1.5) - ------ ------ ------ ------ Net income (loss) $ 1.5 $ 8.4 $ (2.3)$ 16.9 ====== ====== ====== ====== -4- CHESAPEAKE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS, Continued (In millions, except per share data) (Unaudited) Quarter Ended Six Months Ended -------------------------------- July 2, June 30, July 2, June 30, 2000 1999 2000 1999 (As (As restated) restated) ------ ------ ------ ------ Basic earnings (loss) per share: Earnings (loss) before extraordinary item $ 0.10 $ 0.39 $ (0.05)$ 0.79 Extraordinary item, net of income taxes - - (0.09) - ------ ------ ------ ------ Basic earnings (loss) per share $ 0.10 $ 0.39 $ (0.14)$ 0.79 ====== ====== ====== ====== Weighted average number of common shares 15.7 21.3 16.5 21.3 ====== ====== ====== ====== Diluted earnings (loss) per share: Earnings (loss) before extraordinary item $ 0.09 $ 0.39 $ (0.05)$ 0.78 Extraordinary item, net of income taxes - - (0.09) - ------ ------ ------ ------ Diluted earnings (loss) per share $ 0.09 $ 0.39 $ (0.14)$ 0.78 ====== ====== ====== ====== Weighted average number of common shares and equivalents outstanding, assuming dilution 16.1 21.6 16.5 21.6 ====== ====== ====== ====== Cash dividends declared per share of common stock $ 0.22 $ 0.22 $ 0.44 $ 0.44 ====== ====== ====== ====== See accompanying notes to consolidated financial statements. -5- CHESAPEAKE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Millions of dollars) (Unaudited) July 2, Dec. 31, 2000 1999 (As restated) ---------- -------- ASSETS Current assets: Cash and cash equivalents $ 16.6 $ 306.6 Accounts receivable (less allowance of $4.6 and $4.1) 180.3 170.5 Inventories: Finished goods 48.0 41.8 Work in process 27.5 28.2 Materials and supplies 45.9 36.7 ---------------- Total inventories 121.4 106.7 Deferred income taxes 22.4 22.4 Other 11.7 4.7 ---------------- Total current assets 352.4 610.9 ---------------- Property, plant and equipment, at cost 606.3 520.4 Less accumulated depreciation 156.6 164.7 ---------------- 449.7 355.7 ---------------- Goodwill, net 536.7 296.4 Investment in affiliates 70.8 1.5 Other assets 86.3 108.7 ---------------- Total assets $1,495.9$1,373.2 ================ -6- CHESAPEAKE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS, Continued (Millions of dollars, except share data) (Unaudited) July 2, Dec. 31, 2000 1999 (As restated) ---------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 128.8 $ 92.5 Accrued expenses 113.7 111.6 Current maturities of long-term debt 2.1 91.3 Dividends payable 3.4 3.9 Income taxes payable 14.5 20.6 ---------------- Total current liabilities 262.5 319.9 ---------------- Long-term debt 505.0 224.4 Other long-term liabilities 46.5 44.4 Postretirement benefits other than pensions 17.0 16.5 Deferred income taxes 222.5 216.3 ---------------- Total liabilities 1,053.5 821.5 ---------------- Stockholders' equity: Preferred stock, $100 par value, issuable in series; authorized, 500,000 shares; issued, none - - Common stock, $1 par value; authorized, 60,000,000 shares; outstanding 15,589,139 in 2000 and 17,509,064 shares in 1999, respectively 15.6 17.5 Additional paid-in capital - - Unearned compensation (3.9) (4.8) Accumulated other comprehensive loss (52.4) (7.2) Retained earnings 483.1 546.2 ---------------- Total stockholders' equity 442.4 551.7 ---------------- Total liabilities and stockholders' equity $1,495.9$1,373.2 ================ See accompanying notes to consolidated financial statements. -7- CHESAPEAKE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Millions of dollars) (Unaudited) Six Months Ended July 2, June 30, 2000 1999 (As restated) ------ ------- Operating activities: Net (loss) income $ (2.3) $ 16.9 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Extraordinary item 2.4 - Depreciation, cost of timber harvested and amortization of intangibles 35.7 42.4 Deferred income taxes (2.0) 1.0 Loss (gain) on sale of property, plant and equipment 0.2 (0.2) Changes in operating assets and liabilities, net of acquisitions: Accounts receivable, net 14.7 (10.5) Inventories (18.1) (10.6) Other assets (7.1) 2.4 Accounts payable 18.5 (11.9) Accrued expenses (13.3) (5.6) Income taxes payable (9.4) 2.9 Other (0.7) (3.9) ------ ------ Net cash provided by operating activities 18.6 22.9 ------ ------ Investing activities: Purchases of property, plant and equipment (34.2) (41.8) Acquisitions (354.4) (374.2) Proceeds from sale of property, plant and equipment - 1.1 Other, net 0.1 (2.8) ------ ------ Net cash used in investing activities (388.5) (417.7) ------ ------ -8- CHESAPEAKE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued (Millions of dollars) (Unaudited) Six Months Ended July 2, June 30, 2000 1999 (As restated) ----- ----- Financing activities: Net borrowing on lines of credit 76.3 36.6 Payments on long-term debt (15.8) (21.8) Proceeds from long-term debt 87.5 360.7 Debt issue costs (3.7) (2.7) Purchases of outstanding common stock (58.1) (13.8) Dividends paid (7.3) (9.4) Other 1.0 1.0 ------ ------ Net cash provided by financing activities 79.9 350.6 ------ ------ Decrease in cash and cash equivalents (290.0) (44.2) Cash and cash equivalents at beginning of period 306.6 62.4 ------ ------ Cash and cash equivalents at end of period $ 16.6 $ 18.2 ====== ====== See accompanying notes to consolidated financial statements. -9- CHESAPEAKE CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Unaudited) Note 1. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements of Chesapeake Corporation and subsidiaries (the "Company") included herein are unaudited, except for the December 31, 1999, consolidated balance sheet, and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the consolidated financial statements reflect all adjustments, all of a normal recurring nature, necessary to present fairly the Company's consolidated financial position and results of operations for the interim periods presented herein. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto incorporated by reference in the Company's latest Annual Report on Form 10-K. The results of operations for the 2000 interim period should not be regarded as necessarily indicative of the results that may be expected for the entire year. Effective January 1, 2000, the Company changed its fiscal year end for financial statement purposes from a calendar year to a 52/53 week fiscal year. Beginning with fiscal year 2000, the Company's fiscal year will end on the Sunday closest to December 31. Additionally, the Company now reports its quarterly periods on a 13-week basis ending on a Sunday. The effect of this change was not material to the Company's financial condition or results of operations. Certain prior-year data have been reclassified to conform to the 2000 presentation. Revenue Recognition The Company recognizes revenue in the packaging businesses upon passage of title to the customer, which is generally at the time of product shipment. The Company recognizes sales of land when all conditions have occurred, as set forth in Statement of Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate." Restatement In November 2000, following a detailed review by its internal staff and independent accountants, the Company has restated the previously reported results of Display, which is included in its Merchandising and Specialty Packaging segment. The restatements had the effect of reducing net income by -10- CHESAPEAKE CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Unaudited),continued Note 1. Summary of Significant Accounting Policies, continued Restatement, continued $4.7 million in the first quarter of 2000 and reducing net income by $0.3 million in the second quarter of 2000. The adjustments in the second quarter of 2000 related to: revaluation of inventory standards; inventory obsolescence; allowance for doubtful accounts; and lower-than-expected full-year sales volume, which reduced operating income by $0.5 million in the second quarter of 2000. Accordingly, the financial statements for the periods presented in this Form 10-Q/A have been restated as follows: Quarter Ended Six Months Ended -------------------------------- July 2, July 2, July 2, July 2, 2000 2000 2000 2000 As As As As Reported Restated Reported Restated ------ ------ ------ ------ Statement of operations impact: Net sales $255.3 $255.9 $495.4 $495.0 Cost of products sold 201.3 202.1 392.6 399.0 Selling, general and administrative expenses 44.9 45.2 87.2 88.0 ------ ------ ------ ------ Income from operations 9.1 8.6 15.6 8.0 Other income, net 2.8 2.8 2.9 2.9 Interest expense, net (9.2) (9.2) (14.8) (14.8) ------ ------ ------ ------ Income (loss) before taxes and extraordinary item 2.7 2.2 3.7 (3.9) Income tax expense(benefit) 0.9 0.7 (0.5) (3.1) ------ ------ ------ ------ Income (loss) before extraordinary item 1.8 1.5 4.2 (0.8) Extraordinary item, net of income taxes of $0.9 - - (1.5) (1.5) ------ ------ ------ ------ Net income (loss) $ 1.8 $ 1.5 $ 2.7 $ (2.3) ====== ====== ====== ====== Earnings (loss) per share before extraordinary item: Basic $ 0.11 $ 0.10 $ 0.25 $ (0.05) Diluted $ 0.11 $ 0.09 $ 0.25 $ (0.05) -11- CHESAPEAKE CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Unaudited),continued Quarter Ended Six Months Ended -------------------------------- July 2, July 2, July 2, July 2, 2000 2000 2000 2000 As As As As ReportedRestated Reported Restated ------ ------ ------ ------ Earnings (loss) per share: Basic $ 0.11 $ 0.10 $ 0.16 $ (0.14) Diluted $ 0.11 $ 0.09 $ 0.16 $ (0.14) July 2, July 2, 2000 2000 As Reported As Restated ----------------------- Balance sheet impact: Accounts receivable, net $182.8 $180.3 Inventories 126.5 121.4 Income taxes payable 17.1 14.5 Retained earnings 488.1 483.1 Note 2. Adoption of Accounting Pronouncements In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 44, "Accounting of Certain Transactions involving Stock Compensation," an interpretation of APB Opinion No. 25 ("FIN 44"). FIN 44 clarifies the application of APB Opinion No. 25 as to (a) the definition of employee for purposes of applying APB Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 did not have a material impact on the Company's financial results. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. The adoption of SAB 101 is required in -12- CHESAPEAKE CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Unaudited),continued Note 2. Adoption of Accounting Pronouncements, continued the fourth quarter of 2000 and is not expected to have a material impact on the Company's financial statements. The FASB has issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires companies to record derivative instruments on the balance sheet as assets or liabilities, measured at fair market value. Statement of Financial Accounting Standards No. 137, which was issued in July 1999, defers the Company's required adoption of SFAS 133 until fiscal year 2001. The adoption of SFAS 133 is not expected to have a material impact on the Company's financial statements. Note 3. Comprehensive Income Comprehensive income (loss) for the quarters and the six months ended July 2, 2000 (as restated), and June 30, 1999, was $(28.2) million and $(47.5) million and $(42.5) million and $11.5 million, respectively. The difference between net income (loss) and comprehensive income (loss) is due to foreign currency translation. Note 4. Acquisitions and Dispositions On February 24, 2000, the Company completed its acquisition of substantially all of the outstanding capital shares of Boxmore International PLC ("Boxmore"), a European specialty packaging company headquartered in Belfast, Northern Ireland. The acquisition was effected through a tender offer by Chesapeake UK Acquisitions II PLC ("Chesapeake UK II"), a wholly-owned subsidiary of Chesapeake, for all of the outstanding capital shares of Boxmore at a purchase price of (pound)2.65 per share. The tender offer represented a value of approximately US $319 million for Boxmore's outstanding share capital. Including assumed debt of approximately $64 million, the tender offer reflected a total enterprise value for Boxmore of approximately US $383 million. The purchase price for Boxmore's capital shares was paid in cash of approximately $234 million, and approximately $85 million in unsecured loan notes ("Loan Notes") issued by Chesapeake UK II and guaranteed by First Union National Bank, London Branch ("First Union, London"). The Loan Notes bear interest at a variable rate per annum equal to the LIBOR rate for six month sterling deposits less one-half of one percent, are redeemable in whole or part at the option of the holders on each biannual interest payment date commencing February 28, 2001, and, if not earlier redeemed, -13- CHESAPEAKE CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Unaudited),continued Note 4. Acquisitions and Dispositions, continued mature on February 28, 2005. Under the terms of its current credit facility, Chesapeake is required to pay First Union, London a 1.25 percent loan guarantee fee on the outstanding loan note balance. During the first quarter of 2000, the Company also completed the acquisitions of Green Printing Company, Inc. a specialty packaging producer and printer in Lexington, North Carolina, and a corrugated container facility in Warren County, North Carolina, and finalized the formation of a joint venture with Georgia- Pacific Corporation, in which the two companies combined their litho-laminated graphic packaging businesses. On March 18, 1999, Chesapeake completed its acquisition of 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. As of April 30, 1999, Chesapeake acquired compulsorily all remaining outstanding shares of Field Group. The final purchase price of approximately US $373.3 million was funded through a combination of approximately $316.1 million in borrowings under a credit facility, $22.2 million in unsecured loan notes issued to certain Field Group shareholders, and $35.0 million in cash. On May 5, 1999, the Company acquired Berry's (Holding) Limited of Ireland ("Berry's") through Field Group. Berry's is one of Ireland's largest suppliers of printed pharmaceutical leaflets and self-adhesive labels and has annual net sales of approximately $9.2 million. Each of the acquisitions has been accounted for using the purchase method and is included in the results of operations since the purchase date. The purchase price allocation for the Boxmore acquisition is based on preliminary estimates of fair value for property, plant and equipment; however, the amounts are not expected to vary materially from this estimate. As of the acquisition date of Boxmore, the Company initiated plans to eliminate duplicate functions and processes and restructure capacity at certain acquired facilities. As of July 2, 2000, approximately $8 million was recorded in the opening balance sheet for the closure of one of the facilities; and, of this amount, $5 million related to severance and $3 million related to closure costs. The remaining estimated accrual for severance, -14- CHESAPEAKE CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Unaudited),continued Note 4. Acquisitions and Dispositions, continued relocation and restructuring costs associated with these plans is expected to be in the range of $6 million to $15 million. These plans are expected to be completed by the end of the year. The purchase price amounts for the acquisitions which occurred during the six months ending July 2, 2000, and June 30, 1999, have been allocated to the acquired net assets as summarized below (in millions): July 2, June 30, 2000 1999 ------ ------ Fair value of assets acquired $500.4 $553.4 Liabilities assumed or created (141.4) (167.5) Cash acquired (4.6) (11.7) ------ ------ Cash paid for acquisitions, net $354.4 $374.2 ====== ====== Pro forma financial information reflecting the combined results of the Company, Boxmore and Field Group as if these acquisitions occurred on January 1, 1999, is as follows (in millions, except per share amounts): Quarter Ended Six Months Ended July 2, June 30, July 2, June 30, 2000 1999 2000 1999 (As (as restated restated) -------- --------- --------- -------- Net sales $255.9 $376.9 $529.4 $737.9 Income (loss) before extraordinary item $1.5 $9.3 $(1.3) $11.1 Net income (loss) $1.5 $9.3 $(2.8) $11.1 Earnings (loss) per share before extraordinary item: Basic $0.10 $0.44 $(0.08) $0.52 Diluted $0.09 $0.43 $(0.08) $0.51 Earnings (loss) per share: Basic $0.10 $0.44 $(0.17) $0.52 Diluted $0.09 $0.43 $(0.17) $0.51 -15- CHESAPEAKE CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Unaudited),continued Note 5. Restructuring/Special Charges In the fourth quarter of 1999, the Company recognized a pretax restructuring/special charge of $38 million related to employment reduction, the closure of one facility, impairment of assets in the Company's French operations and defense fees incurred to respond to an unsolicited proposal by Shorewood Packaging Corporation ("Shorewood") to acquire Chesapeake. The cash portion of the restructuring/special charges was $23 million. Announced workforce reductions included approximately 300 employees in the Merchandising and Specialty Packaging segment, 170 employees in the European Specialty Packaging segment and 10 corporate employees. Payments for employment reduction included approximately 80 employees in the Merchandising and Specialty Packaging segment, 50 employees in the European Specialty Packaging Segment and 10 corporate employees. The Company anticipates completing the above restructuring activities as planned by the end of 2000. An analysis of the restructuring reserve as of July 2, 2000 is as follows (in millions): Employment Facility Defense Reduction Closure Fees Total --------- -------- -------- ------- Restructuring charge $12.6 $1.2 $9.2 $23.0 Cash payments in 1999 (1.1) - (2.5) (3.6) ----- ----- ----- ----- Balance, December 31, 1999 11.5 1.2 6.7 19.4 Cash payments in 2000 (6.4) (0.5) (4.3) (11.2) Foreign currency translation (0.1) - - (0.1) ----- ----- ----- ----- Balance, July 2, 2000 $ 5.0 $0.7 $2.4 $ 8.1 ===== ===== ===== ===== Ongoing annual operating savings of approximately $11 million upon full implementation of the program are expected in the form of reduced salaries and benefits expenses(approximately $7.5 million), manufacturing costs (approximately $1.0 million) and depreciation expense (approximately $2.5 million). The Company estimates that actions implemented under the plan resulted in pre-tax savings of approximately $1.3 million and $2.6 million for the quarter and six months ended July 2, 2000, respectively. -16- CHESAPEAKE CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Unaudited),continued Note 6. Income Taxes Excluding the non-recurring impact of the Shorewood transaction costs, the Company's effective income tax rate was 33% for the six months ended July 2, 2000 and 35% for the six months ended June 30, 1999. The decrease in the Company's effective income tax rate is primarily due to the acquisition of businesses in countries which have a lower effective tax rate. Note 7. Debt On June 15, 2000, Chesapeake terminated its six month $250 million senior credit facility and entered into a five year $450 million senior credit facility. Interest accrues on the outstanding balance of the loan based upon Chesapeake's choice of the following rates: (i) an alternative base rate, which is equal to the higher of the administrative agent's base rate or the federal funds rate plus 1/2 of 1%, plus a margin determined by reference to the Company's leverage ratios; (ii) LIBOR plus a margin; or (iii) a fixed interest rate per annum. The Company is required to pay a 1.25 percent loan guarantee fee on the outstanding loan note balance issued in connection with the Boxmore acquisition. In addition, the Company is required to pay a fee based on the total facility commitment and the Company's leverage ratio. The facility has customary covenants, including debt and acquisition limits, interest coverage and a minimum net worth requirement. Chesapeake's foreign subsidiary obligations under this facility are collateralized by a pledge of the stock of its principal foreign subsidiaries. Note 8. Commitments and Contingencies Environmental Matters Chesapeake has a strong commitment to protecting the environment. The Company has an environmental audit program to monitor compliance with environmental laws and regulations. The costs of compliance with existing environmental regulations are not expected to have a material adverse effect on the Company's financial condition or results of operations. 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 -17- CHESAPEAKE CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Unaudited),continued Note 8. Commitments and Contingencies, continued as potentially responsible parties or "PRPs") associated with a release or threat of a release of hazardous substances into the environment. Financial responsibility for the clean-up or other remediation of contaminated property or for natural resource damages can extend to previously owned or used properties, waterways, and properties owned by third parties, as well as to properties currently owned and used by a company even if contamination is attributable entirely to prior owners. As discussed below, the U.S. Environmental Protection Agency ("EPA") has given notice of its intent to list the lower Fox River in Wisconsin on the National Priorities List under CERCLA and has identified Wisconsin Tissue Mills Inc., now WTM I Company ("WT"), as a PRP. Except for the Fox River matter, the Company has not been identified as a PRP at any CERCLA-related sites. However, there can be no assurance that the Company will not be named as a PRP at any other sites in the future, or that the costs associated with additional sites would not be material to the Company's financial condition or results of operations. In June 1994, the United States Department of Interior, Fish and Wildlife Service ("FWS"), a federal natural resources trustee, notified WT that it had identified WT and four other companies located along the lower Fox River in northeast Wisconsin as PRPs for purposes of natural resources liability under CERCLA arising from alleged releases of polychlorinated- biphenyls ("PCBs") in the Fox River and Green Bay System. Two other companies subsequently received similar notices from the FWS. The FWS and other governmental and tribal entities, including the State of Wisconsin, allege that natural resources, including endangered species, fish, birds, tribal lands, or lands held by the United States in trust for various Indian tribes, have been exposed to PCBs that were released from facilities located along the lower Fox River. The FWS is proceeding with a natural resource damage assessment with respect to the alleged discharges. On January 31, 1997, the FWS notified WT of its intent to file suit, subject to final approval by the Department of Justice, against WT to recover alleged natural resource damages. WT and other PRPs have engaged in discussions with the parties asserting trusteeship of the natural resources concerning the damage assessment and the basis for resolution of the natural resource damage claims. WT and other PRPs are also engaged in discussions with the State of Wisconsin with respect to resolving possible state claims -18- CHESAPEAKE CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Unaudited),continued Note 8. Commitments and Contingencies, continued concerning remediation, restoration and natural resource damages related to the alleged discharge of PCBs into the Fox River and Green Bay System. On June 18, 1997, the EPA announced that it was initiating the process of listing the lower Fox River on the CERCLA National Priorities List of hazardous waste sites. The EPA identified several PRPs, including WT. On February 26, 1999, the Wisconsin Department of Natural Resources ("DNR") released for public comment a draft remedial investigation/feasibility study ("RI/FS") for the lower Fox River site. In the draft RI/FS, the DNR reviewed and summarized several categories of possible remedial alternatives for the site, estimated to cost in the range of $143 million to $721 million, but did not identify a preferred remedy. (As required by applicable regulations, the draft RI/FS also includes a "no action" alternative that does not entail remediation costs, but WT does not believe that the "no action" alternative will be selected). There can be no assurance that many of the cost estimates in the draft RI/FS will not differ significantly from actual costs. WT submitted timely comments on the draft RI/FS both individually and in conjunction with other PRPs. After finalizing the RI/FS, the DNR and the EPA are expected to announce a preferred remedial alternative in a Proposed Remedial Action Plan. The Proposed Remedial Action Plan will be subject to a public comment period, and enforcement of any definitive Remedial Action Plan may be subject to judicial review. The largest components of the costs of the more expensive clean-up alternatives presented in the draft RI/FS are attributable to large-scale sediment removal, treatment and disposal. Based on current information and advice from its environmental consultants, WT believes that an aggressive effort to remove substantial amounts of PCB-contaminated sediments (most of which are buried under cleaner material or are otherwise unlikely to move), as contemplated by certain alternatives presented in the draft RI/FS, would be environmentally detrimental and therefore inappropriate. Instead, WT believes that less intrusive alternatives are more environmentally appropriate, cost effective and responsible methods of managing risks attributable to sediment contamination. The ultimate cost to WT associated with this matter cannot be predicted with certainty at this time, due to uncertainties with respect to: which, if any, of the remedial alternatives presented in the draft RI/FS will be implemented, and uncertainties associated with the actual costs of each of the potential alternatives; the outcome of the federal and state natural resource damage assessments; WT's share of any multi- -19- CHESAPEAKE CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Unaudited),continued Note 8. Commitments and Contingencies, continued party clean-up/restoration expenses; the timing of any clean- up/restoration; the evolving nature of clean-up/restoration technologies and governmental regulations; controlling legal precedent; the extent to which contribution will be available from other parties; and the scope of potential recoveries from insurance carriers and prior owners of WT. While such costs cannot be predicted with certainty at this time, WT believes that the ultimate clean-up/restoration costs associated with the lower Fox River site may exceed $100 million for all PRPs in the aggregate. Under CERCLA, each PRP generally will be jointly and severally liable for the full amount of the clean-up costs, subject to a right of contribution from the other PRPs. In practice, PRPs generally negotiate among themselves to determine their respective contributions to any multi-party cleanup/ restoration, based upon factors including their respective contributions to the alleged contamination and their ability to pay. Based on presently available information, WT believes that several of the named PRPs will be able to pay substantial shares toward remediation and restoration, and that there are additional parties, some of which have substantial resources, that may also be jointly and severally liable. WT also believes that it is entitled to substantial indemnification from a prior owner of WT, pursuant to a stock purchase agreement between the parties, with respect to liabilities related to this matter. WT believes that the prior owner intends to, and has the financial ability to, honor its indemnification obligation under the stock purchase agreement. Pursuant to the Joint Venture Agreement for the Georgia- Pacific Tissue joint venture (the "Tissue JV"), WT has retained liability for, and the third party indemnity rights associated with, the discharge of PCBs and other hazardous materials in the Fox River and Green Bay System. Based on presently available information, WT believes that if any remediation/restoration is done in an environmentally appropriate, cost effective and responsible manner, the matter is unlikely to have a material adverse effect on the Company's financial condition or results of operations. However, because of the uncertainties described above, there can be no assurance that WT's ultimate liability with respect to the lower Fox River site will not have a material adverse effect on the Company's financial condition or results of operations. On April 19, 1999, the EPA and the Virginia Department of Environmental Quality ("DEQ") each issued Notices of Violation ("NOVs") under the Clean Air Act Amendments of 1990 ("CAA") against St. Laurent Paper Products Corp. ("St. Laurent") (and, in the case of EPA's NOV, Chesapeake) relating to St. Laurent's -20- CHESAPEAKE CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Unaudited),continued Note 8. Commitments and Contingencies, continued kraft products mill located in West Point, Virginia (the "West Point Mill") formerly owned and operated by Chesapeake Paper Products, L.L.C. Chesapeake Paper Products, L.L.C. was sold by Chesapeake to St. Laurent Paperboard (U.S.) Inc. ("St. Laurent (U.S.)") in May 1997, pursuant to a Purchase Agreement dated as of April 30, 1997, by and among Chesapeake Corporation, St. Laurent Paperboard Inc. and St. Laurent (U.S.) (the "Purchase Agreement"). In general, the NOVs allege that from 1984 to the present, the West Point Mill installed certain equipment and modified certain production processes without obtaining required permits. Under applicable law, the EPA and DEQ may commence a court action with respect to the matters alleged in the NOVs seeking injunctive relief to compel compliance with the CAA, and a court may impose civil penalties of up to $25,000 per day of violation ($27,500 per day for violations after January 30, 1997) for violations of the CAA (provided that a court, in determining the amount of any penalty to be assessed, shall take into consideration, among other things, the size of the business, the economic impact of the penalty on the business, the business' compliance history and good faith efforts to comply, the economic benefit to the business of noncompliance and the seriousness of the violation). The Purchase Agreement provides that Chesapeake may be required to indemnify St. Laurent against certain violations of applicable environmental laws (including the CAA) that were identified as of the May 1997 closing date (and other such violations that existed prior to such date as to which Chesapeake had "knowledge," as defined in the Purchase Agreement). Chesapeake's indemnification obligation to St. Laurent with respect to such matters is subject to certain limitations, including a cap of $50 million and, in certain circumstances, a $2.0 million deductible. The Company and St. Laurent have jointly responded to and are defending against the matters alleged in the NOVs, and have presented an initial settlement offer, consisting primarily of engineering measures, to the EPA and DEQ. Based upon a review of the NOVs and an analysis of the applicable law and facts, the Company believes that both it and St. Laurent have substantial defenses against the alleged violations and intend to vigorously defend against the alleged violations. The Company and St. Laurent are negotiating with EPA, the United States Department of Justice and DEQ to address the matters that are the subject of the NOVs. The ultimate cost, if any, to the Company relating to matters alleged in the NOVs cannot be determined with certainty at this time, due to the absence of a determination whether any violations of the CAA occurred and, if any violations are ultimately found to have occurred, a -21- CHESAPEAKE CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Unaudited),continued Note 8. Commitments and Contingencies, continued 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 and, if so, to what extent. Litigation The Company is a party to various other legal actions, which are ordinary and incidental to its business. While the outcome of legal actions cannot be predicted with certainty, the Company believes the outcome of any of these proceedings, or all of them combined, will not have a material adverse effect on its consolidated financial position or results of operations. Note 9. Segment Disclosure Second Quarter Year-to-Date -------------- ------------- (In millions) (In millions) 2000 1999 2000 1999 (As (As restated) restated) Net sales: ---- ---- ---- ---- European Specialty Packaging $122.6 $ 89.6 $243.4 $105.0 Merchandising and Specialty Packaging 101.2 114.3 207.3 227.4 Plastic Packaging 27.3 - 37.2 - Tissue - 108.2 - 207.0 Forest Products/Land Development 4.8 15.4 7.1 27.2 ------ ------ ------ ------ $255.9 $327.5 $495.0 $566.6 ====== ====== ====== ====== Earnings (losses) before interest and taxes (EBIT): European Specialty Packaging $10.9 $ 5.8 $ 19.8 $ 6.4 Merchandising and Specialty Packaging (0.4) 1.9 (5.8) 3.9 Plastic Packaging 2.5 - 3.5 - Tissue - 17.8 - 33.3 Forest Products/Land Development 3.4 3.4 5.4 8.1 Corporate/other (5.0) (4.7) (12.0) (8.4) ------ ------ ------ ------ $11.4 $24.2 $ 10.9 $43.3 ====== ====== ====== ====== -22- CHESAPEAKE CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Unaudited),continued Note 9. Segment Disclosure, continued July 2, June 30, 2000 1999 (As restated) -------- -------- (In millions) Identifiable assets: European Specialty Packaging $ 739.4 $534.0 Plastic Packaging 244.4 - Merchandising and Specialty Packaging 403.8 338.4 Tissue - 458.1 Forest Products/Land Development 34.2 119.8 Corporate/other 74.1 51.7 -------- -------- $1,495.9 $1,502.0 ======== ======== Chesapeake currently conducts its business in four segments. The Company's European Specialty Packaging segment, which is comprised of the Field Group operations and the paper-based specialty packaging operations of Boxmore, produces folding cartons, labels, and leaflets, primarily for consumer products and pharmaceutical/healthcare companies. The results of the operations of Field Group and Boxmore are included in the consolidated segment results since their respective acquisition dates of March 18, 1999, and February 24, 2000 (see Note 4). The Merchandising and Specialty Packaging segment produces and sells point-of-sale displays, merchandising services, graphic packaging and corrugated shipping containers (see Note 1 regarding restatement). The Plastic Packaging segment is comprised of the plastic-based specialty packaging operations of Boxmore, which produce plastic containers for food/drink and agricultural/industrial markets. The Forest Products/Land Development segment manages the Company's real estate holdings. The Company's Tissue segment was composed of the commercial and industrial tissue operations of WT and Wisconsin Tissue de Mexico, which were contributed to a joint venture with Georgia- Pacific Corporation effective October 3, 1999. There were no intersegment sales for the six months ended July 2, 2000, and June 30, 1999. -23- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Restatement In November 2000, following a detailed review by its internal staff and independent accountants, the Company has restated the previously reported results of Display, which is included in its Merchandising and Specialty Packaging segment. The restatements had the effect of reducing the previously reported net income for the first quarter of 2000 by approximately $4.7 million, or $0.27 per share, and reducing previously reported earnings for the second quarter of 2000 by approximately $0.3 million, or $0.02 per share. As a result, the Company has restated its previously issued consolidated financial statements to reflect adjustments related to: allowance for doubtful accounts; inventory obsolescence; lower-than-expected full-year sales volume; and the revaluation of inventory standards. The review described above indicated no adjustments were necessary to the 1999 audited results as reported. The Company has retained both Goldman, Sachs & Co. and McKinsey & Company to assist in exploring strategic alternatives for Display. Overview Net sales were $255.9 million for the quarter ended July 2, 2000, compared to net sales of $327.5 million for the second quarter of 1999, or a decrease of $71.6 million. Net sales for the six months ended July 2, 2000, were $495.0 million compared to net sales for the six months ended June 30, 1999 of $566.6 million. The decreases in net sales for the quarter and first half of 2000 primarily reflect sales from the recently acquired European operations offset by the absence of sales from Chesapeake's former Tissue segment and lower Display sales. Net income for the quarter ended July 2, 2000, was $1.5 million, or $0.09 per diluted share, compared with 1999 second quarter net income of $8.4 million, or $.39 per diluted share. Net loss for the six months ended July 2, 2000, was $(2.3) million, or $(.14) per diluted share, compared with 1999 first -24- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview, continued half net income of $16.9 million, or $.78 per diluted share. Included in the first half of 2000's net income is an extraordinary charge for the early extinguishment of debt of $1.5 million, or $.09 per diluted share. The decrease in quarterly operating results is primarily due to reduced profitability of Display due to changes in product mix and volume decreases and the change in Chesapeake's business portfolio which resulted from acquisition and divestiture activities. Other income and expenses, net, increased $1.2 million for the quarter ended July 2, 2000, compared to the same period ended June 30, 1999, due to increased land sales. Other income and expenses, net, decreased $2.4 million for the six months ended July 2, 2000, compared to the same period in 1999. During the first quarter of 2000, the Company announced the expiration of its offer to acquire Shorewood Packaging Corporation ("Shorewood") after International Paper Company entered into a definitive agreement to acquire Shorewood. The first half of 2000 other income and expenses, net, includes nonrecurring expenses associated with the Shorewood tender offer of $10.3 million, which were largely offset by a $7.7 million gain on Chesapeake's sale of 4.1 million shares of Shorewood common stock. Tax expense (benefit) for the six months ended July 2, 2000, includes the tax effect of the transaction costs associated with the Shorewood tender offer and the reversal of an estimated tax provision on the 1999 accrual of Shorewood defense costs that totaled $2.6 million. Excluding these nonrecurring items, the Company's effective tax rate for the second quarter and six months ended July 2, 2000, was 33% (See Note 6 to the consolidated financial statements). Lower debt levels and increased cash balances, partially offset by higher interest rates, decreased net interest expense by $2.2 million and $2.6 million for the quarter and six months ended July 2, 2000, respectively, compared to the same periods ended June 30, 1999. -25- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued Segment Information European Specialty Packaging Increase/(Decrease) (Dollars in millions) 2000 1999 $ % - ---------------------------------------------------------------- Second quarter: Net sales $122.6 $ 89.6 $33.0 36.8% EBIT 10.9 5.8 5.1 87.9% Operating margin 8.9% 6.5% - 36.9% Six months: Net sales 243.4 105.0 138.4 131.8% EBIT 19.8 6.4 13.4 209.4% Operating margin 8.1% 6.1% - 32.8% ================================================================ The European Specialty Packaging segment consists of the results of Field Group and the paper-based specialty packaging operations of Boxmore. These operations have been consolidated since their respective acquisition dates. Net sales for the second quarter of 2000 increased 36.8% over the second quarter of 1999 due to growth in Field Group sales, and the addition of the paperboard packaging business of Boxmore. EBIT for this segment in the second quarter and six months ended July 2, 2000, increased over the corresponding 1999 periods largely due to the addition of the Boxmore business and productivity improvements in the Field Group. Included in the operating results of this segment for the 2000 second quarter were reductions in sales and EBIT of $7 million and $0.5 million, respectively, due to unfavorable foreign currency exchange rates used to translate local currency results to U.S. dollars. On a proforma basis, net sales and EBIT were $262.6 million and $20.9 million, respectively for the first half of 2000 compared to $253.1 million and $15.7 million, respectively for the first half of 1999. The increase in pro forma sales was due to an increase in business volume partially offset by the impact of unfavorable foreign exchange rates. The increase in pro forma EBIT was largely due to volume growth and productivity improvements in the Field Group. -26- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued Segment Information, continued Merchandising and Specialty Packaging Increase/(Decrease) (Dollars in millions) 2000 1999 $ % (As restated) - ---------------------------------------------------------------- Second Quarter: Net sales $101.2 $114.3 (13.1) (11.5)% EBIT (0.4) 1.9 (2.3) (121.1)% Operating margin (0.4)% 1.7% - (123.5)% Six months: Net sales 207.3 227.4 (20.1) (8.8)% EBIT (5.8) 3.9 (9.7) (248.7)% Operating margin (2.8)% 1.7% - (264.7)% ================================================================ Net sales for the second quarter of 2000 decreased 11.5 percent compared to the same period in the prior year, primarily due to lower sales volumes, which were impacted by delays in new product rollouts and a general slowdown in promotional activities within the Display business customer base, comprised largely of consumer products companies. Also reducing this segment's sales was the deconsolidation of Color-Box sales after the formation of the litho-laminated joint venture with Georgia-Pacific Corporation in February 2000, offset, in part, by sales generated by the acquisitions of Consumer Promotions International in October 1999 and Green Printing in February 2000. The decrease in EBIT and operating margin quarter over quarter reflected lower profitability in the Display business and start-up costs at the Company's Warren County, North Carolina, corrugated container facility, largely offset by improved profitability in the remainder of the corrugated container business. First half 2000 net sales and EBIT were down compared to the first half of 1999 due to lower U.S. display business volume. Plastic Packaging The Plastic Packaging segment is comprised of the plastic- based specialty packaging operations of Boxmore. Net sales and EBIT for the segment were $27.3 million and $2.5 million for the quarter ended July 2, 2000, and $37.2 million and $3.5 million for the six months ended July 2, 2000, respectively. On a proforma basis, net sales and EBIT were up approximately 21% and -27- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued Segment Information, continued 19%, respectively, for the second quarter and 21% and 23% for the six months ended July 2, 2000. This improvement was generated from volume increases and improved production efficiencies, partially offset by the impact of unfavorable foreign currency exchange rates used to translate local currency results to U.S. dollars. Tissue The Tissue segment was eliminated from separate reporting after the formation of the Georgia-Pacific Tissue joint venture (the "Tissue JV") on October 4, 1999. The results of Chesapeake's 5% equity interest in the Tissue JV have been included in the Corporate/other segment. Forest Products/Land Development Increase/(Decrease) (Dollars in millions) 2000 1999 $ % - ---------------------------------------------------------------- Second quarter: Net sales $ 4.8 $15.4 $(10.6) (68.8)% EBIT 3.4 3.4 - - Operating margin 70.8% 22.1% - 220.4 % Six months: Net sales 7.1 27.2 (20.1) (73.9)% EBIT 5.4 8.1 (2.7) (33.3)% Operating margin 76.1% 29.8% - 155.4 % ================================================================ The fluctuation in earnings reflects the impact of the sale of a substantial portion of the Company's timberland and its Building Products business in the third quarter of 1999. Liquidity and Financial Position Net cash provided by operating activities decreased 18.8%, to $18.6 million for the six months ended July 2, 2000, compared to $22.9 million for the six months ended June 30, 1999, primarily due to a decrease in EBITDA offset, in part, by decreases in working capital. EBITDA, a measure of internal cash flow, which combines earnings before nonrecurring charges, interest, income taxes and non-cash charges for depreciation, cost of timber harvested, and amortization, was $49.2 million -28- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued Liquidity and Financial Position, continued for the first six months of 2000, compared to EBITDA of $85.7 million for the first six months of 1999. This decrease in EBITDA was due primarily to the shift in the seasonal operating profit pattern of the Company's business portfolio and lower profitability in Display. Net cash used in investing activities for the first six months of 2000 was $388.5 million, compared to $417.7 million in the first six months of 1999, which primarily reflects the cash utilized for acquisitions in each period. Net cash provided by financing activities in the first six months of 2000 was $79.9 million, compared to $350.6 million in the first six months of 1999. The decrease in net cash provided by financing activities was primarily due to higher borrowings under the Company's lines of credit to finance acquisitions in the first half of 1999 than in the first half of 2000. Chesapeake's net debt-to-capital ratio was 42 percent as of July 2, 2000, compared to 56 percent as of June 30, 1999. The decrease in the net debt-to-capital ratio was the result of applying cash received from the formation of the Tissue JV to repay debt, partially offset by the use of cash to partially fund acquisitions and share repurchases. During the second quarter of 2000, the Company purchased approximately 1 million shares of its common stock in open market transactions at an average price of approximately $31 per share. During the first half of 2000, the Company purchased approximately 2 million shares of its common stock, or about 11 percent of the outstanding shares at December 31, 1999, at an average price of approximately $29 per share. At the end of the second quarter of 2000, the Company was authorized to purchase an additional 500,000 shares in open market or privately negotiated transactions. On February 23, 2000, Chesapeake terminated a commitment to enter into a long-term $1.075 billion senior credit facility (which it had obtained in connection with the anticipated acquisition of Boxmore and its efforts to acquire Shorewood), and entered into a six-month $250 million senior credit facility to satisfy short-term liquidity requirements. On June 15, 2000, Chesapeake terminated its six month $250 million senior credit facility and entered into a five year $450 million senior credit facility. Interest accrues on the outstanding balance of the loan based upon Chesapeake's choice of the following rates: (i) an alternative base rate, which is equal to the higher of the administrative agent's base rate or the federal funds rate plus -29- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued Liquidity and Financial Position, continued 1/2 of 1%, plus a margin determined by reference to the Company's leverage ratios; (ii) LIBOR plus a margin; or (iii) a fixed interest rate per annum. The Company is required to pay a 1.25 percent loan guarantee fee on the outstanding loan note balance issued in connection with the Boxmore acquisition. In addition, the Company is required to pay a fee based on the total facility commitment and the Company's leverage ratio. The facility has customary covenants, including debt and acquisition limits, interest coverage and a minimum net worth requirement. Chesapeake's foreign subsidiary obligations under this facility are collateralized by a pledge of the stock of its principal foreign subsidiaries. The Company believes that its financial resources are adequate to support anticipated long-term and short-term capital needs and commitments. Accounting Pronouncements See Note 2 to the 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, folding carton and corrugated box and display materials; fluctuations in demand; governmental policies and regulations affecting the environment; interest rates; currency translation movements; and other risks that are detailed from time to time in reports filed by the Company with the Securities and Exchange Commission. -30- Item 6. Exhibits and Reports on Form 8-K (a)Exhibits: 4.1 - Credit Agreement, dated as of June 15, 2000, among Chesapeake Corporation, Chesapeake UK Acquisitions II PLC, Chesapeake UK Acquisitions PLC, Chesapeake U.K. Holdings Limited, Boxmore International PLC, Field Group PLC and Chesapeake Europe, SAS, as the Borrowers, Various Financial Institutions and Other Persons From Time to Time Parties Thereto, as the Lenders, First Union National Bank, as the Administrative Agent, Bank of America, N.A., as the Syndication Agent, and Wachovia Bank, N.A., as the Documentation Agent (filed as Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 2, 2000) 27.1 - Restated Financial Data Schedule - 2000 (b)Reports on Form 8-K: None. -31- SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CHESAPEAKE CORPORATION (Registrant) Date: November 20, 2000 BY: /s/ William T. Tolley William T. Tolley Senior Vice President - Finance & Chief Financial Officer -32- EXHIBIT INDEX EXHIBIT - ------- 4.1 Credit Agreement, dated as of June 15, 2000, among Chesapeake Corporation, Chesapeake UK Acquisitions II PLC, Chesapeake UK Acquisitions PLC, Chesapeake U.K. Holdings Limited, Boxmore International PLC, Field Group PLC and Chesapeake Europe, SAS, as the Borrowers, Various Financial Institutions and Other Persons From Time to Time Parties Thereto, as the Lenders, First Union National Bank, as the Administrative Agent, Bank of America, N.A., as the Syndication Agent, and Wachovia Bank, N.A., as the Documentation Agent. 27.1 Restated Financial Data Schedule - 2000 * * Filed herewith -33- EX-27 2 0002.txt
5 1 6-MOS DEC-31-2000 JUL-2-2000 16,600,000 0 180,300,000 4,600,000 121,400,000 352,400,000 606,300,000 156,600,000 1,495,900,000 262,500,000 505,000,000 0 0 15,600,000 426,800,000 1,495,900,000 495,000,000 495,000,000 399,000,000 487,000,000 2,900,000 900,000 14,800,000 (3,900,000) (3,100,000) (800,000) 0 1,500,000 0 (2,300,000) (0.14) (0.14)
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