-----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, BuCC0HxDj4/mY5sZ4Qtu9fb2bTZQLeQl2BCpOyCPc6f0HC7JQZwygFJGw0iqD2KH sdMtAIgK6WyUt0O+7TYl0g== 0000950144-99-011437.txt : 19990927 0000950144-99-011437.hdr.sgml : 19990927 ACCESSION NUMBER: 0000950144-99-011437 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990924 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BUCKEYE TECHNOLOGIES INC CENTRAL INDEX KEY: 0000899597 STANDARD INDUSTRIAL CLASSIFICATION: PULP MILLS [2611] IRS NUMBER: 621518973 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-14030 FILM NUMBER: 99717087 BUSINESS ADDRESS: STREET 1: 1001 TILLMAN ST STREET 2: PO BOX 8407 CITY: MEMPHIS STATE: TN ZIP: 38108-0407 BUSINESS PHONE: 9013208100 FORMER COMPANY: FORMER CONFORMED NAME: BUCKEYE CELLULOSE CORP DATE OF NAME CHANGE: 19930326 10-K 1 BUCKEYE TECHNOLOGIES INC 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K -------------------- ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1999 --------------------- Commission file number: 33-60032 BUCKEYE TECHNOLOGIES INC. Incorporated pursuant to the Laws of Delaware --------------------- Internal Revenue Service -- Employer Identification No. 62-1518973 1001 Tillman Street, Memphis, TN 38112 901-320-8100 --------------------- Securities registered pursuant to Section 12(b) of the Act: Title of Securities: Common Stock - $.01 par value Exchanges on which Registered: New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: 8-1/2% Senior Subordinated Notes due 2005 9-1/4% Senior Subordinated Notes due 2008 8% Senior Subordinated Notes due 2010 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of September 13, 1999, the aggregate market value of the registrant's voting shares held by non-affiliates was approximately $366,199,000. As of September 13, 1999, there were outstanding 35,342,464 Common Shares of the registrant. DOCUMENTS INCORPORATED BY REFERENCE Portions of Buckeye Technologies Inc.'s 1999 Annual Report are incorporated by reference into Part I and Part II. Portions of Buckeye Technologies Inc.'s 1999 Annual Proxy Statement are incorporated by reference into Part III. ================================================================================ 2 INDEX BUCKEYE TECHNOLOGIES INC.
ITEM PAGE PART I 1. Business............................................................................. 2 2. Properties........................................................................... 6 3. Legal Proceedings.................................................................... 6 4. Submission of Matters to a Vote of Security Holders.................................. 6 PART II 5. Market for the Registrant's Common Stock and Related Security Holder Matters......... 7 6. Selected Financial Data.............................................................. 7 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................................... 7 7a. Market Risk Disclosure............................................................... 7 8. Financial Statements and Supplementary Data.......................................... 7 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................................... 7 PART III 10. Directors and Executive Officers of the Registrant................................... 8 11. Executive Compensation............................................................... 9 12. Security Ownership of Certain Beneficial Owners and Management....................... 9 13. Certain Relationships and Related Transactions....................................... 9 PART IV 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K...................... 10 OTHER Signatures........................................................................... 13
1 3 PART I ITEM 1. BUSINESS GENERAL Buckeye Technologies Inc. (the Company or Buckeye) is a leading manufacturer and worldwide marketer of value-added cellulose-based specialty products. The Company utilizes its expertise in polymer chemistry and its state-of-the-art manufacturing facilities to develop and produce innovative proprietary products for its customers. The Company sells its products to a wide array of technically demanding niche markets in which its proprietary products and commitment to customer technical service give it a competitive advantage. Buckeye is the world's only manufacturer offering cellulose-based specialty products made from both wood and cotton and utilizing both wet-laid and air-laid technologies. As a result, the Company produces a broader range of cellulose-based specialty products than any of its competitors. The Company believes that it has leading positions in most of the high-end niche markets in which it competes. Buckeye's focus on niche specialty cellulose markets has enabled it to maintain consistently strong sales growth and stable operating margins, even during downturns in the commodity cellulose markets. COMPANY HISTORY The Company has participated in the cellulose-based specialty market for over 75 years and has developed new uses for both wood and cotton based cellulose products. During fiscal 1997, the Company made two acquisitions. The first acquisition, Alpha Cellulose Holdings Inc., in September 1996, produces specialty cellulose. The second acquisition, Merfin International Inc., utilizes specialty cellulose to produce cellulose based air-laid nonwovens for absorbent applications. Further information on these acquisitions is incorporated herein by reference to Note 2, Business Combinations, to the Consolidated Financial Statements, on page 32 of the Company's 1999 Annual Report. The Company is incorporated in Delaware and its executive offices are located at 1001 Tillman Street, Memphis, Tennessee. Its telephone number is (901) 320-8100. PRODUCTS The Company is the only manufacturer offering cellulose-based specialty products made from both wood and cotton utilizing both wet-laid and air-laid technologies. As a result, the Company produces a broader range of cellulose-based specialty products than any of its competitors. Additional information is incorporated herein by reference to the pages of the Company's 1999 Annual Report starting with the section titled "Our Ideas Really Hold Water" through the section titled "Recycling Is In Our Genes" and Note 11, Segment Information, to the Consolidated Financial Statements on pages 37 and 38 of the Company's 1999 Annual Report. 2 4 RAW MATERIALS Slash pine timber and cotton fiber are the principal raw materials used in the manufacture of the Company's specialty cellulose and absorbent cellulose products. They represent the largest components of the Company's variable costs of production. The region surrounding Buckeye's plant located in Perry, Florida (the Foley Plant) has a high concentration of slash pine timber, which enables Buckeye to purchase adequate supplies of a species well suited to its products at an attractive cost. In order to be better assured of a secure source of wood at reasonable prices, the Company has entered into various timber purchase agreements. Additional information is incorporated herein by reference to Note 13, Purchase Commitments, to the Consolidated Financial Statements, which appears on page 38 of the Company's 1999 Annual Report. The Company purchases cotton fiber either directly from cottonseed oil mills or indirectly through agents or brokers. The Memphis Plant is strategically located in the Mississippi Valley, one of the largest cotton fiber producing regions in the world. Generally, the Company purchases substantially all of its requirements of cotton fiber for the Memphis and Lumberton plants domestically. The Glueckstadt plant purchases cotton fiber principally from suppliers in the Middle East. The cost of both slash pine timber and cotton fiber is subject to market fluctuations caused by supply and demand factors beyond the Company's control. SALES AND CUSTOMERS The Company's products are marketed and sold through a highly trained and technically skilled in-house sales force. The Company maintains sales offices in Memphis, Tennessee, and Geneva, Switzerland. The Company's worldwide sales are diversified by geographic region as well as end-product application. Buckeye's sales are distributed to customers in approximately 50 countries around the world. The Company's fiscal 1999 sales reflect this geographic diversity, with 36% of sales in North America 35% in Europe, 16% in Asia, 8% in South America and 5% in other regions. Geographic segment data and product sales data is included in Note 11 to the Consolidated Financial Statements which appears on pages 37-38, Segment Information, of the Company's 1999 Annual Report, and is incorporated herein by reference. The high-end, technically demanding specialty niches that Buckeye serves require a higher level of sales and technical service support than do commodity cellulose sales. Most of the Company's technically trained sales and service engineers began their careers in the Company's manufacturing or product development operations. These professionals work with customers in their plants to design cellulose tailored precisely to their product needs and manufacturing processes. Procter & Gamble, the world's largest diaper manufacturer, is the Company's largest customer, accounting for 35% of the Company's fiscal 1999 gross sales. The Company and Procter & Gamble have entered into a long-term Pulp Supply Agreement, which requires Procter & Gamble to purchase specified tonnage of the Company's fluff pulp annually through the year 2002. Shipments of fluff pulp under the Pulp Supply Agreement are made to Procter & Gamble affiliates worldwide, as directed by Procter & Gamble. The pricing of the fluff pulp sold pursuant to the Pulp Supply Agreement in the years 1999 and 2000 will be at the higher of the contract formula price or market, and pricing in the years 2001 and 2002 will be at market. The formula price has three components: (i) a specified provision to cover the Company's manufacturing costs and profit margin (ii) a provision for escalation based on Consumer Price Index changes, and (iii) a provision to adjust for all actual changes in the price of wood, the major raw material component of the fluff pulp purchased under the contract. Buckeye's next four largest customers in the aggregate account for approximately 12% of gross sales. Over 90% of the Company's worldwide sales are denominated in U.S. dollars, and such sales are not 3 5 subject to exchange rate fluctuations. The Company's products are shipped by rail, truck and ocean carrier. RESEARCH AND DEVELOPMENT The Company's research and development activities focus on developing new products, improving existing products, and enhancing process technologies to further reduce costs and respond to environmental needs. The Company has a history of innovation in specialty cellulose products. The acquisition of Merfin added capability in the research and development of new air-laid absorbent products. Buckeye has pilot plant facilities in which to produce experimental products for qualification in customer plants. The Company completed the construction of a new air-laid nonwovens pilot plant during the year ended June 30, 1999. This proprietary pilot facility will support Buckeye's development efforts with a number of leading consumer products companies and speed delivery of these breakthrough products to the marketplace. Research and development costs of $10.9 million, $10.7 million, and $8.4 million were charged to expense as incurred for the years ended June 30, 1999, 1998 and 1997, respectively. COMPETITION Buckeye's competitors include the following: Concert Industries (Canada), Duni AB (Sweden), Fort James (U.S.), Georgia-Pacific Corporation (U.S.), Havix (Japan), Honshu (Japan), Hosposables (U.S.), International Paper Company (U.S.), Personal Care Group (U.S.), Rayonier, Inc. (U.S.), Sappi Limited (South Africa), Southern Cellulose Products Inc. (U.S.), Spontex (U.K.), Tembec Inc. (Canada), Western Pulp Limited Partnership, (Canada), and Weyerhaeuser Company (U.S.). Competition is based on product performance, technical service, and, to a lesser extent, price. Southern Cellulose Products Inc. is owned by Archer Daniels Midland, a subsidiary of which supplies cotton fibers to the Company. INTELLECTUAL PROPERTY The Company currently holds six U. S. patents and three foreign patents, and has more than two dozen applications pending. In addition, the Company has access to royalty-free licenses for five U.S. patents and two foreign patents. Buckeye intends to protect its patents and file applications for any future inventions that are deemed to be important to its business operations. INFLATION The Company believes that inflation has not had a material effect on its results of operations or financial condition during recent periods. SEASONALITY The Company's business has generally not been seasonal to any significant extent. 4 6 EMPLOYEES On June 30, 1999, the Company employed approximately 1,800 individuals at its facilities in Memphis, Tennessee; Perry, Florida; Lumberton and King, North Carolina; Savannah, Georgia; Glueckstadt, Germany; Delta, Canada; Cork, Ireland; and Geneva, Switzerland. Collective bargaining agreements are in place at the Foley Plant (approximately 600 hourly employees) with the United Paper Workers International Union, AFL-CIO, Local #1192; and at the Memphis Plant (approximately 190 hourly employees) wit the Local Union 910 Pulp and Processing Workers and the Retail, Wholesale, and Department Store Union, AFL-CIO. The agreement for the Foley Plant expires April 1, 2002. The agreement for the Memphis Plant expires March 18, 2000. A Works Council provides employee representation for all non-management workers at the Glueckstadt Plant. The Lumberton, Delta, Cork, and King plants are not unionized. None of the Company's facilities have had labor disputes or work stoppages in recent history. The Foley Plant has not experienced any work stoppages due to labor disputes in over 25 years, and the Memphis Plant has not experienced any work stoppages due to labor disputes in over 45 years. The Company believes its relationship with its employees is very good. ENVIRONMENTAL REGULATIONS AND LIABILITIES The Company's operations are subject to extensive general and industry-specific federal, state, local and foreign environmental laws and regulations. The Company devotes significant resources to maintaining compliance with such requirements. The Company expects that, due to the nature of its operations, it will be subject to increasingly stringent environmental requirements (including standards applicable to waste water discharges and air emissions) and will continue to incur substantial costs to comply with such requirements. Given the uncertainties associated with predicting the scope of future requirements, there can be no assurance that the Company will not in the future incur material environmental compliance costs or liabilities. Additional information is incorporated herein by reference to Note 14, Contingencies to the Consolidated Financial Statements, on pages 38 and 39 of the Company's 1999 Annual Report. SAFE HARBOR PROVISIONS This document contains various forward-looking statements and information which is based on management's beliefs as well as assumptions made by and information currently available to management. Statements in this document which are not historical statements are forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties, including among other things, pricing fluctuations and worldwide economic conditions; the Company's dependence on its largest customer, Procter & Gamble; fluctuation in the costs of raw materials; competition; inability to predict the scope of future environmental compliance costs or liabilities; and the ability of the Company to obtain additional capital, maintain adequate cash flow to service debt as well as meet operating needs. Should one or more of these risks materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those anticipated, estimated or projected. 5 7 ITEM 2. PROPERTIES Corporate Headquarters and Sales Offices. The Company's corporate headquarters, research and development laboratories, and pilot plants are located in Memphis, Tennessee. The Company owns the corporate headquarters, the Memphis Plant, the Foley Plant, the Cork, Ireland Plant, the Lumberton Plant, the Delta, Canada Plant and the Glueckstadt, Germany Plant. The Company leases buildings that house the King, North Carolina Plant, the sales offices in Geneva, Switzerland and distribution facilities in Savannah, Georgia. Memphis Plant. The Memphis Plant is located on an approximately 75-acre site adjacent to the headquarters complex. The Memphis Plant has capacity of approximately 100,000 annual metric tons of cotton cellulose. Foley Plant. The Foley Plant is located at Perry, Florida, on a 2,900 acre site. The Company also owns 13,000 acres of real property near the plant site. The Foley Plant has capacity of approximately 460,000 annual metric tons of wood cellulose. Glueckstadt Plant. The Glueckstadt Plant is located in close proximity to the Elbe River near Hamburg, Germany. The site is adjacent to the paper plant of Steinbeis Temming Papier GmbH. Some utilities, including steam, power, water and waste treatment, are shared between the plants pursuant to various utility agreements. The Glueckstadt Plant has a capacity of approximately 50,000 annual metric tons and is the largest cotton cellulose plant in Europe. Lumberton Plant. The Lumberton Plant, which is located in Lumberton, North Carolina on an approximately 65-acre site, has a capacity of approximately 50,000 annual metric tons of cotton cellulose. Air-laid Plants. The Delta Plant has a total capacity of approximately 30,000 annual metric tons of air-laid nonwoven fabric from two production lines. The Cork Plant has a capacity of approximately 15,000 annual metric tons of air-laid nonwoven fabric from its existing single production line. The King Plant converts air-laid fabrics and wet-laid paper into wipes, towels and tissues for industrial and commercial uses. ITEM 3. LEGAL PROCEEDINGS The Company is involved in certain legal actions and claims arising in the ordinary course of business. It is the opinion of management that such litigation and claims will be resolved without material adverse effect on the Company's financial position or results of operation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 6 8 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS Information on this item is set forth under the caption "Stockholder Information" on page 44 in the Company's 1999 Annual Report and is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA Information on this item is set forth under the caption "Selected Financial Data" on page 42 in the Company's 1999 Annual Report and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information on this item is set forth under the caption "Financial Review" on pages 22-25 in the Company's 1999 Annual Report and is incorporated herein by reference. ITEM 7A. MARKET RISK DISCLOSURE Information on this item is set forth under the caption "Financial Review" on pages 23 and 24 in the Company's 1999 Annual Report and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data are set forth on pages 26-40 in the Company's 1999 Annual Report and are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company has had no changes in or disagreements with its independent auditors. 7 9 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The names, ages and positions held by the executive officers of the Company on September 15, 1999 are:
Elected to Name Age Position Present Position - ---------------------- --- ---------------------------------------------------- ---------------- Robert E. Cannon* 69 Chairman of the Board, Chief Executive Officer and March 1993 Director David B. Ferraro* 61 President, Chief Operating Officer and Director March 1993 Henry P. Doggrell** 51 Sr. Vice President, Business Development July 1997 George B. Ellis* 59 Sr. Vice President, Manufacturing-Specialty Cellulose July 1997 E. Allen Eppinger* 61 Sr. Vice President, Manufacturing-Absorbent Products July 1997 Paul N. Horne* 43 Sr. Vice President, Commercial-Specialty Cellulose July 1997 B. Jerry L. Huff* 60 Sr. Vice President, Research & Development July 1997 Kristopher J. Matula** 37 Sr. Vice President, Commercial-Absorbent Products July 1997 David H. Whitcomb* 59 Sr. Vice President, Finance & Accounting July 1997 - ----------------------------------------------------------------------------------------------------------------
* All of the above Executive Officers have been employed by the Company since its beginning in March 1993 and had been employees of The Procter & Gamble Company, C&S Division (the C&S Division), prior to the purchase of C&S Division assets by Buckeye, except Messrs. Doggrell and Matula. ** Prior to joining Buckeye in June 1996, Mr. Doggrell was a partner in the law firm, Baker Donelson Bearman & Caldwell, from 1988 until May 30, 1996, and represented the Company as its primary legal counsel since March 1993. Prior to joining the Company in March 1994, Mr. Matula held various strategic planning and finance positions at The Procter & Gamble Company, from August 1991 until March 1994. Additional information relating to Directors and Executive Officers is incorporated herein by reference to pages 4 - 7 of the Company's 1999 Annual Proxy Statement. 8 10 ITEM 11. EXECUTIVE COMPENSATION Information relating to this item is set forth on pages 12-14 of the Company's 1999 Annual Proxy Statement and is incorporated herein by reference, but does not include the "Report of the Compensation Committee on Executive Compensation" on pages 14-15. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information relating to this item is set forth under the caption "Buckeye Stock Ownership" on pages 10-11 in the Company's 1999 Annual Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information relating to this item is set forth under the caption "Certain Transactions" on page 17 in the Company's 1999 Annual Proxy Statement and is incorporated herein by reference. 9 11 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) Financial Statements The following report of independent auditors and financial statements are incorporated by reference in Part II, Item 8: Consolidated Statements of Income -- For the years ended June 30, 1999, 1998 and 1997 Consolidated Balance Sheets -- June 30, 1999 and 1998 Consolidated Statements of Stockholders' Equity -- For the years ended June 30, 1999, 1998 and 1997 Consolidated Statements of Cash Flows -- For the years ended June 30, 1999, 1998 and 1997 Notes to Consolidated Financial Statements Report of Management Report of Independent Auditors (2) Financial Statement Schedule Schedule II - Valuation and Qualifying Accounts. See page 12 of this document. All other financial statement schedules are omitted as the information is not required or because the required information is presented in the financial statements or the notes thereto. (3) Listing of Exhibits 3.1 Second Amended and Restated Certificate of Incorporation **** 3.1 (a) Articles of Amendment to the Second Amended and Restated Certificate of Incorporation of Registrant ***** 3.2 Amended and Restated By-laws of the Registrant.* 4.1 Indenture for 8 1/2% Senior Subordinated Notes due 2005, dated November 28, 1995 * 4.2 Indenture for 9 1/4% Senior Subordinated Notes due 2008, dated July 2, 1996 ** 4.3 Indenture for 8% Senior Subordinated Notes due 2010, dated June 11, 1998 ***** 10.1 Amended and Restated 1995 Management Stock Option Plan of the Registrant ****** 10.2 Amended and Restated 1995 Incentive and Nonqualified Stock Option Plan for Management Employees of the Registrant. ***** 10.3 Form of Management Stock Option Subscription Agreement ****** 10.4 Form of Stock Option Subscription Agreement ****** 10.5 Formula Plan for Non-Employee Directors ** 10 12 10.6 Credit Agreement dated as of May 28, 1997 among the Registrant, Fleet National Bank; SunTrust Bank, Central Florida, N.A.; Toronto Dominion (Texas), Inc.; and the other lenders party thereto. *** 10.7 Amendment No. 1 to Timberlands Agreement dated January 1, 1999 by and between Buckeye Florida, Limited Partnership and Foley Timber and Land Company. Certain portions of the Agreement have been omitted pursuant to an Application for Confidential Treatment dated October 30, 1995. ******* 13.1 Buckeye Technologies Inc. 1999 Annual Report. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP. 27.1 Financial Data Schedule. (For SEC use only) (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the quarter ended June 30, 1999. * Incorporated by reference to the Registrant's Registration Statement on Form S-1, File No. 33-97836, as filed with the Securities and Exchange Commission on October 6, 1995 and as amended on October 30, 1995 and November 21, 1995. ** Incorporated by reference to the Registrant's Registration Statement on Form S-3 File No. 33-05139, as filed with the Securities and Exchange Commission on June 4, 1996 and as amended on June 11, 1996 and June 27, 1996. *** Incorporated by reference to the Registrant's Current Report on Form 10-K dated June 30, 1997. **** Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for quarterly period ended December 31, 1997. ***** Incorporated by reference to the Registrant's Registration Statement on Form S-4, file No. 333-59267, as filed with the Securities and Exchange Commission on July 16, 1998. ****** Incorporated by reference to the Registrant's Current Report on Form 10-K dated June 30, 1998. ******* Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q/A for quarterly period ended March 31, 1999. 11 13 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (In Thousands)
Column B Column C Column D Column E Additions Balance Charged Charged Balance at to to at Beginning Costs Other (a) End of and Accounts Deductions of Description Period Expenses --Describe --Describe Period YEAR ENDED JUNE 30, 1999 Deducted from asset accounts: Allowance for doubtful accounts......... $1,174 $ 9 $ -- $(141) $1,042 ====== === ==== ===== ====== YEAR ENDED JUNE 30, 1998 Deducted from asset accounts: Allowance for doubtful accounts......... $1,322 $34 $ -- $(182) $1,174 ====== === ==== ===== ====== YEAR ENDED JUNE 30, 1997 Deducted from asset accounts: (b) Allowance for doubtful accounts......... $ 980 $-- $591 $(249) $1,322 ====== === ==== ===== ======
- -------------------------------------------------------------------------------- (a) Uncollectible accounts written off, net of recoveries. Acquired allowance for doubtful accounts at the date of acquisition. 12 14 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Buckeye Technologies Inc. By: /s/ Robert E. Cannon -------------------------------------------------------------------------- Robert E. Cannon, Director, Chairman of the Board and Chief Executive Officer Date: September 17, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ Robert E. Cannon -------------------------------------------------------------------------- Robert E. Cannon, Director, Chairman of the Board and Chief Executive Officer Date: September 17, 1999 By: /s/ David B. Ferraro -------------------------------------------------------------------------- David B. Ferraro, Director, President and Chief Operating Officer Date: September 17, 1999 By: /s/ Samuel M. Mencoff -------------------------------------------------------------------------- Samuel M. Mencoff, Director Date: September 17, 1999 By: /s/ Harry J. Phillips, Sr. -------------------------------------------------------------------------- Harry J. Phillips, Sr., Director Date: September 17, 1999 By: /s/ David H. Whitcomb, Sr. -------------------------------------------------------------------------- David H. Whitcomb, Sr. Vice President, Finance and Accounting Date: September 17, 1999 13 EX-13.1 2 PORTION OF ANNUAL REPORT 1 EXHIBIT 13.1 FINANCIAL REVIEW INTRODUCTION Buckeye Technologies Inc. and its subsidiaries (the Company) manufacture value-added cellulose-based specialty products in the United States, Canada, and Europe, and sell these products in worldwide markets. In September 1996, the Company acquired Alpha Cellulose Holdings, Inc. (Alpha) with its specialty cellulose producing facility, located in Lumberton, North Carolina. In May 1997, the Company completed its tender offer for Merfin International Inc. (Merfin), with absorbent products facilities located in Delta (near Vancouver), Canada; Cork, Ireland; and King, North Carolina. On July 15, 1999, the Company announced that it had signed a letter of intent to acquire essentially all of the assets of Walkisoft, UPM-Kymmene's nonwoven business, with manufacturing locations in Steinfurt, Germany and Mt. Holly, North Carolina, for approximately $120 million. The transaction, which is expected to close during the October-December 1999 quarter, is subject to completion of due diligence, regulatory approvals and other terms of the agreement. RESULTS OF OPERATIONS COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1999 AND JUNE 30,1998 Net sales for 1999 were $617.7 million compared to $630.2 million for 1998, a decrease of 2%. The decrease was primarily due to lower sales volume. In 1999, operating income was $113. million compared to $122.4 million for 1998, a decrease of 7.7%. The 1999 operating income as a percentage of sales was 18.3%, compared to 19.4% for 1998. The decrease was primarily due to lower cellulose volume and unit sales prices, including a scheduled January 1, 1999 fluff pulp contract price reduction to Procter & Gamble. These negative factors were substantially offset by improved airlaid sales and lower overall costs. Net interest and amortization of debt costs for 1999 were $38.9 million, compared to $36.3 million for 1998, an increase of $2.6 million. This increase was due to higher average interest rates. The Company's effective tax rate for 1999 was 31.7% versus 34.1% in 1998. During the last two quarters of the fiscal year, the Company recognized additional benefit from optimizing its foreign sales corporation. The Company's net income for 1999 was $48.0 million, or $1.32 per share on a diluted basis, compared with 1998 net income of $55.3 million, or $1.45 per share on a diluted basis. COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1998 AND JUNE 30, 1997 Net sales for 1998 were $630.2 million compared to $558.9 million for 1997, an increase of 13%. The increase was primarily due to higher sales volume resulting from the acquisition of Merfin and Alpha. In 1998, operating income was $122.4 million, compared to $109.4 million for 1997, an increase of 12%. The 1998 operating income as a percentage of sales was 19.4%, virtually the same as 1997. Increased investment in product development and the start-up of a new facility were offset by lower overall raw material costs. Net interest and amortization of debt costs for 1998 were $36.3 million, compared to $27.9 million for 1997, an increase of $8.4 million. This increase was due to higher average debt balances, resulting from the acquisition of Merfin and Alpha. The Company's net income for 1998 was $55.3 million, or $1.45 per share on a diluted basis, compared with 1997 net income of $53.3 million, or $1.38 per share on a diluted basis. FINANCIAL CONDITION CASH FLOW Cash provided by operating activities is a major source of funds for the Company, totaling $97.8 million in 1999, $94.0 million in 1998, and $117.4 million in 1997. The increase in cash generated during 1999 was primarily due to higher deferred taxes partially offset by lower net income. In 1998, an increase in funding of net operating assets offset an increase in net income, depreciation 22 2 and amortization. In 1997, a decrease in inventories of $10.3 million contributed to the cash flow. Capital expenditures for property, plant and equipment were $51.5 million in 1999, $66.7 million in 1998, and $42.8 million in 1997. The Company made these expenditures to purchase, modernize and upgrade production equipment and to maintain and acquire facilities. Capital expenditures (including environmental expenditures) for 2000 are expected to be approximately $80 million. The Board of Directors has authorized the repurchase of 4.0 million shares of common stock. Repurchased shares will be held as treasury stock and will be available for general corporate purposes, including the funding of employee benefit and stock-related plans. During the year ended June 30, 1999, 1,431,900 shares were repurchased at a cost of $23.2 million. Through June 30, 1999, a total of 3,522,100, shares have been repurchased under the current board authority. LEVERAGE/CAPITALIZATION In 1997, the Company used $50 million of the proceeds from a debt offering to fund a stock repurchase of 4,519,774 shares of common stock. The favorable impact on diluted earnings per share resulting from the stock repurchase was $0.08 per share. The total debt to capital ratio was 71.4% at June 30, 1999, compared to 74.6% at June 30, 1998 and 78.9% at June 30, 1997. The interest coverage ratio was 4.0x in 1999, 4.6x in 1998, and 5.1x in 1997. LIQUIDITY The Company believes that its cash flow from operations, together with the borrowings available under its credit facility, will be sufficient to fund capital expenditures (including environmental expenditures), meet operating expenses, fund authorized common stock repurchases, and service all debt requirements for the foreseeable future. Consistent with the Company's stated policy, there are no plans to pay dividends in the foreseeable future. At June 30, 1999, the Company had unused borrowing capacity of $192.4 million on the bank credit facility. The announced Walkisoft acquisition for approximately $120 million includes $15 million in working capital. When completed, this acquisition will be funded over the next four years by paying UPM-Kymmene $32 million at closing and $22 million on each of the first four anniversaries of closing. Interest of 5% annually will be paid on the unpaid balance. MARKET RISK The Company is exposed to market risk from changes in foreign exchange, interest rates and raw material costs. To reduce such risks, the Company selectively uses financial instruments. All hedging transactions are authorized and executed pursuant to clearly defined policies and procedures. Further, the Company does not enter into financial instruments for trading purposes. A discussion of the Company's accounting policies for risk management is included in the Accounting Policies in the Notes to the Consolidated Financial Statements. INTEREST RATES The fair value of the Company's long-term debt is based on an average of the bid and offer prices at year-end. The carrying value and fair value of long-term debt at June 30, 1999 were $441.2 million and $434.6 million, respectively, and at June 30, 1998 were $456.8 million and $467.3 million, respectively. Market risk is estimated as the potential change in fair value resulting from a hypothetical 10% decrease in interest rates and amounts to $16.3 million at June 30, 1999. The Company had $31.8 million of variable rate long-term debt outstanding at June 30, 1999. At this borrowing level, a hypothetical 10% adverse change in interest rates would have a $0.2 million unfavorable impact on the Company's pretax earnings and cash flows. The primary interest rate exposures on floating rate debt are with respect to U.S. prime rates and European interbank rates. 23 3 FINANCIAL REVIEW (CONTINUED) FOREIGN CURRENCY EXCHANGE RATES Foreign currency exposures arising from transactions include firm commitments and anticipated transactions denominated in a currency other than an entity's functional currency. The Company and its subsidiaries generally enter into transactions denominated in their respective functional currencies. Therefore, foreign currency exposures arising from transactions are not material to the Company. The Company's primary foreign currency exposure arises from foreign-denominated revenues and profits and their translation into U.S. dollars. The primary currencies to which the Company is exposed include the Canadian dollar, the German mark and the Irish punt. The Company generally views as long-term its investments in foreign subsidiaries with a functional currency other than the U.S. dollar. As a result, the Company does not generally hedge these net investments. However, the Company uses capital structuring techniques to manage its net investment in foreign currencies as considered necessary. The net investment in foreign subsidiaries translated into dollars using the year-end exchange rates is $209.3 million and $204.7 million at June 30, 1999 and 1998, respectively. The potential loss in value of the Company's net investment in foreign subsidiaries resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates at June 30, 1999 amounts to $19.0 million. This change would be reflected in the equity section of the Company's balance sheet. COST OF RAW MATERIALS Amounts paid by the Company for wood and cotton fiber represent the largest component of the Company's variable costs of production. The cost of these materials is subject to market fluctuations caused by factors beyond the Company's control, including weather conditions. Significant increases in the cost of wood or cotton fiber, to the extent not reflected in prices for the Company's products, could materially and adversely affect the Company's business, results of operations and financial condition. FORWARD-LOOKING INFORMATION The above risk management discussion and the estimated amounts generated from the sensitivity analyses are forward-looking statements of market risk, assuming that certain adverse market conditions occur. Actual results in the future may differ materially from those projected results due to actual developments in the global financial markets. The analysis methods used by the Company to assess and mitigate risks discussed above should not be considered projections of future events or losses. CONTINGENCIES The Company's operations are subject to extensive general and industry-specific federal, state, local and foreign environmental laws and regulations. The Company devotes significant resources to maintaining compliance with such requirements. The Company expects that, due to the nature of its operations, it will be subject to increasingly stringent environmental requirements (including standards applicable to wastewater discharges and air emissions) and will continue to incur substantial costs to comply with such requirements. Given the uncertainties associated with predicting the scope of future requirements, there can be no assurance that the Company will not in the future incur material environmental compliance costs or liabilities. For additional information on environmental matters, see Note 14 to the Consolidated Financial Statements. See Note 10 to the Consolidated Financial Statements for information related to the Pulp Supply Agreement with the Procter & Gamble Company. YEAR 2000 COMPLIANCE The Company is dependent upon computerized information systems for all phases of its operations including production, distribution and accounting. The Company's 24 4 suppliers, distributors and customers are also dependent upon computerized information systems and may have year 2000 problems, which could adversely affect the Company. During the last four years, the Company has replaced substantially all of its mission-critical information technology (IT) systems, giving the Company the benefit of new technology and functionality while becoming year 2000 compliant. The Company developed a plan and timetable to determine the impact of the year 2000 on its operations and to achieve year 2000 compliance. The Company separated its compliance analysis into four categories. These categories were mission-critical IT systems, other IT systems, non-IT systems and major customers' and suppliers' IT systems. The Company also identified five major steps, within each of these areas, that needed to be completed in order to become year 2000 compliant. These steps were: (1)identify compliance owners, (2)inventory all systems to determine compliance or non-compliance, (3)establish a plan to implement any required changes, (4)test the implementation plan, and (5)execute the plan, establish contingencies, and verify that compliance has been achieved. The Company has completed the total plan and has achieved compliance and established contingencies for all systems. Management believes that its year 2000 readiness program has encompassed all reasonable actions and contingency plans to avoid business interruptions resulting from year 2000 problems. The Company has no information that indicates that a significant vendor may be unable to sell to the Company; that a significant customer may be unable to purchase from the Company; or that a significant service provider may be unable to provide services to the Company. Notwithstanding the above, the effect, if any, on the Company's future results of operations, due to the Company's major customers or suppliers not being year 2000 ready, cannot be reasonably estimated. FORWARD-LOOKING STATEMENTS Except for the historical information contained herein, the matters discussed in this annual report are forward- looking statements that involve risks and uncertainties, including, but not limited to, economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices, and other factors. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements to reflect events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events. 25 5 CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended June 30 1999 1998 1997 --------- --------- --------- NET SALES $ 617,707 $ 630,210 $ 558,933 Cost of goods sold 459,115 461,757 411,751 --------- --------- --------- Gross margin 158,592 168,453 147,182 Selling, research and administrative expenses 45,568 46,042 37,790 --------- --------- --------- OPERATING INCOME 113,024 122,411 109,392 Other income (expense): Interest income 390 539 765 Interest expense and amortization of debt costs (39,263) (36,808) (28,691) Other (3,821) (2,285) (1,213) --------- --------- --------- (42,694) (38,554) (29,139) --------- --------- --------- Income before income taxes 70,330 83,857 80,253 Income taxes 22,312 28,597 26,979 --------- --------- --------- NET INCOME $ 48,018 $ 55,260 $ 53,274 ========= ========= ========= BASIC EARNINGS PER SHARE $ 1.34 $ 1.49 $ 1.40 ========= ========= ========= DILUTED EARNINGS PER SHARE $ 1.32 $ 1.45 $ 1.38 ========= ========= ========= Weighted average shares for basic earnings per share 35,756 37,109 38,127 Effect of dilutive stock options 745 1,125 594 --------- --------- --------- Adjusted weighted average shares for diluted earnings per share 36,501 38,234 38,721 ========= ========= =========
See accompanying notes. 26 6 CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
June 30 1999 1998 --------- --------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 403 $ 1,472 Short-term investments -- 2,900 Accounts receivable - trade, net of allowance for doubtful accounts of $1,042 and $1,174 at June 30, 1999 and 1998, respectively 79,349 85,354 Accounts receivable - other 2,299 3,367 Inventories 104,584 100,372 Deferred income taxes 2,412 4,531 Prepaid expenses and other 8,046 5,510 --------- --------- TOTAL CURRENT ASSETS 197,093 203,506 Property, plant and equipment, net 412,231 401,947 Goodwill, net 127,409 132,488 Deferred debt costs and other, net 11,149 13,595 --------- --------- TOTAL ASSETS $ 747,882 $ 751,536 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Trade accounts payable $ 22,848 $ 25,142 Accrued expenses 45,127 49,547 Notes payable -- 829 Current portion of long-term debt -- 511 --------- --------- TOTAL CURRENT LIABILITIES 67,975 76,029 Long-term debt 441,214 456,332 Accrued postretirement benefits 16,270 15,159 Deferred income taxes 43,480 34,609 Other liabilities 1,524 13,728 Commitments and contingencies (Notes 6, 10, 13, and 14) STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value; 10,000,000 shares authorized; none issued or outstanding -- -- Common stock, $.01 par value; 100,000,000 shares authorized; 43,142,770 shares issued and 35,379,736 and 36,753,546 shares outstanding at June 30, 1999 and 1998, respectively 431 431 Additional paid-in capital 65,477 65,799 Deferred stock compensation (1,468) (2,405) Accumulated other comprehensive income (21,642) (17,060) Retained earnings 238,997 190,979 Treasury shares, 7,763,034 and 6,389,224 shares at June 30, 1999 and 1998, respectively (104,376) (82,065) --------- --------- TOTAL STOCKHOLDERS' EQUITY 177,419 155,679 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 747,882 $ 751,536 ========= =========
See accompanying notes. 27 7 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
Accumulated Additional Deferred other Common paid-in stock comprehensive Retained Treasury stock capital compensation income earnings shares Total ---------------------------------------------------------------------------------------- BALANCE AT JULY 1, 1996 $ 428 $ 61,071 $(2,373) $ (683) $ 82,445 $ -- $ 140,888 Comprehensive income: Net income -- -- -- -- 53,274 -- 53,274 Other comprehensive income: Foreign currency translation adjustment -- -- -- (3,990) -- -- (3,990) Comprehensive income 49,284 Purchase of 5,698,774 shares -- -- -- -- -- (67,063) (67,063) Issuance of 333,524 shares of common stock 3 4,248 -- -- -- 48 4,299 Deferred stock compensation -- 609 (609) -- -- -- -- Amortization of deferred stock compensation -- -- 782 -- -- -- 782 ------- -------- ------- -------- --------- --------- --------- BALANCE AT JUNE 30, 1997 431 65,928 (2,200) (4,673) 135,719 (67,015) 128,190 Comprehensive income: Net income -- -- -- -- 55,260 -- 55,260 Other comprehensive income: Foreign currency translation adjustment -- -- -- (12,387) -- -- (12,387) Comprehensive income 42,873 Purchase of 911,200 shares -- -- -- -- -- (18,445) (18,445) Issuance of 215,550 shares of common stock -- (1,209) -- -- -- 3,395 2,186 Compensation charge for stock options -- 70 -- -- -- -- 70 Deferred stock compensation -- 1,010 (1,010) -- -- -- -- Amortization of deferred stock compensation -- -- 805 -- -- -- 805 ------- -------- ------- -------- --------- --------- --------- BALANCE AT JUNE 30, 1998 431 65,799 (2,405) (17,060) 190,979 (82,065) 155,679 Comprehensive income: Net income -- -- -- -- 48,018 -- 48,018 Other comprehensive income: Foreign currency translation adjustment -- -- -- (4,582) -- -- (4,582) Comprehensive income 43,436 Purchase of 1,431,900 shares -- -- -- -- -- (23,151) (23,151) Issuance of 58,090 shares of common stock -- (157) -- -- -- 840 683 Termination of stock options -- (165) 165 -- -- -- -- Amortization of deferred stock compensation -- -- 772 -- -- -- 772 ------- -------- ------- -------- --------- --------- --------- BALANCE AT JUNE 30, 1999 $ 431 $ 65,477 $(1,468) $(21,642) $ 238,997 $(104,376) $ 177,419 ======= ======== ======= ======== ========= ========= =========
See accompanying notes 28 8 CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Year Ended June 30 1999 1998 1997 -------- --------- --------- OPERATING ACTIVITIES Net income $ 48,018 $ 55,260 $ 53,274 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 37,673 36,562 30,287 Amortization 5,186 7,460 5,800 Deferred income taxes 10,990 3,768 8,769 Other 4,233 2,500 4,198 Changes in operating assets and liabilities: Accounts receivable 7,036 (8,609) (4) Inventories (5,117) 5,103 10,347 Prepaid expenses and other assets (2,493) (3,459) 3,998 Accounts payable and other current liabilities (7,695) (4,544) 736 -------- --------- --------- Net cash provided by operating activities 97,831 94,041 117,405 Investing activities Acquisitions of businesses -- (3,869) (172,670) Purchases of property, plant and equipment (51,549) (66,720) (42,757) Other 2,523 (58) (440) -------- --------- --------- Net cash used in investing activities (49,026) (70,647) (215,867) Financing activities Proceeds from sale of equity interests 450 1,757 48 Purchase of treasury shares (23,151) (18,445) (67,063) Net borrowings (payments) under revolving line of credit (15,192) (125,557) 110,612 Proceeds from long-term debt -- 160,480 99,449 Payments for debt issuance costs -- (4,000) (4,677) Principal payments on long-term debt and other (11,934) (41,163) (34,992) -------- --------- --------- Net cash provided by (used in) financing activities (49,827) (26,928) 103,377 Effect of foreign currency rate fluctuations (47) (158) 249 -------- --------- --------- Increase (decrease) in cash and cash equivalents (1,069) (3,692) 5,164 Cash and cash equivalents at beginning of year 1,472 5,164 -- -------- --------- --------- Cash and cash equivalents at end of year $ 403 $ 1,472 $ 5,164 ======== ========= =========
See accompanying notes. 29 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE DATA) 1. ACCOUNTING POLICIES BUSINESS DESCRIPTION AND BASIS OF PRESENTATION The financial statements are consolidated financial statements of Buckeye Technologies Inc. and its subsidiaries (the Company). All significant intercompany accounts and transactions have been eliminated in consolidation. The Company manufactures and distributes value-added cellulose-based specialty products used in numerous applications including disposable diapers, personal hygiene products, engine air and oil filters, food casings, rayon filament, acetate fibers and plastics, thickeners and papers. CASH AND CASH EQUIVALENTS The Company considers cash equivalents to be temporary cash investments with a maturity of three months or less when purchased. INVENTORIES Inventories are stated at the lower of cost (determined on average cost or first-in, first-out methods) or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost. The cost of major renewals and improvements is capitalized. Depreciation is computed by the straight-line method over the following estimated useful lives: buildings - 30 to 40 years; machinery and equipment - 5 to 16 years. IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews the appropriateness of the carrying value of its long-lived assets, including goodwill, whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of the asset by estimating the future net cash flows expected to result from the asset including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset's carrying value and fair value. INTANGIBLE ASSETS Goodwill is amortized by the straight-line method over 30 to 40 years. Approximately 95% of the Company's goodwill is attributable to the Company's 1997 acquisitions (see Note 2). Goodwill is net of accumulated amortization of $10,416 and $6,758 at June 30, 1999 and 1998, respectively. Deferred debt costs are amortized by the interest method over the life of the related debt and are net of accumulated amortization of $3,283 and $2,038 at June 30, 1999 and 1998, respectively. INCOME TAXES The Company has provided for income taxes under the liability method. Accordingly, deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. No provision is made for U.S. income taxes applicable to undistributed earnings of foreign subsidiaries that are indefinitely reinvested in foreign operations. RISK MANAGEMENT The Company selectively uses interest rate swap contracts and foreign currency forward and option contracts to offset the effects of interest and exchange rate risk. The differentials to be received or paid under interest rate contracts are recognized in income over the life of the contracts as adjustments to interest expense. Gains or losses on termination of interest rate contracts are recognized as other income or expense when terminated in conjunction with the retirement of associated debt. The foreign currency forward and option contracts that are designated as effective hedges are deferred and included in income as part of the underlying transactions. CREDIT RISK The Company generally obtains credit insurance or requires the customer to provide a letter of credit for export sales. Credit limits have been established for each domestic customer and those foreign customers where credit insurance is not available. Credit limits are monitored routinely. 30 10 ENVIRONMENTAL COSTS Liabilities are recorded when environmental assessments are probable and the cost can be reasonably estimated. Generally, the timing of these accruals coincides with the earlier of completion of a feasibility study or the Company's commitment to a plan of action based on the then known facts. REVENUE RECOGNITION Revenues are recognized when title to the goods passes to the customer. Net sales are composed of sales reduced by sales allowances and distribution costs. FOREIGN CURRENCY TRANSLATION Company management has determined that the local currency of its German, Canadian and Irish subsidiaries is the functional currency, and accordingly Deutsche mark, Canadian dollar and Irish punt denominated balance sheet accounts are translated into United States dollars at the rate of exchange in effect at fiscal year end. Income and expense activity for the period is translated at the weighted average exchange rate during the period. Translation adjustments are included as a separate component of stockholders' equity. USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from the estimates and assumptions used. EARNINGS PER SHARE Basic earnings per share has been computed based on the average number of common shares outstanding. Diluted earnings per share reflects the increase in average common shares outstanding that would result from the assumed exercise of outstanding stock options calculated using the treasury stock method. STOCK-BASED COMPENSATION The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25) and related interpretations as permitted by Statement of Financial Accounting Standards No.123, Accounting for Stock-Based Compensation (SFAS No.123). COMPREHENSIVE INCOME In fiscal 1999, the Company adopted Statement of Financial Accounting Standards No.130, Reporting Comprehensive Income (SFAS No.130). This statement establishes rules for the reporting of comprehensive income and its components. Comprehensive income for the Company consists of net income and foreign currency translation adjustments and is presented in the Consolidated Statements of Stockholders' Equity. The adoption of SFAS No.130 by the Company had no impact on total stockholders' equity. Prior year financial statements have been reclassified to conform with the SFAS No.130 requirements. RECENTLY ISSUED ACCOUNTING STANDARDS During 1998, the Financial Accounting Standards Board issued Statement No.133, Accounting for Derivative Instruments and Hedging Activities (SFAS No.133). This statement requires companies to record derivative instruments on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of a derivative would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. SFAS No.133 is effective for the Company's fiscal year 2001. Because of the Company's minimal historical use of derivatives, management anticipates that the adoption of SFAS No.133 will not have a significant effect on earnings or the financial position of the Company. 31 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. BUSINESS COMBINATIONS On September 1, 1996, the Company acquired all of the issued and outstanding stock of Alpha Cellulose Holdings, Inc. (Alpha) for $25,921 in cash, 328,324 shares of Company common stock valued at $4,244 and the assumption of long-term debt of $34,276. Alpha is located in Lumberton, North Carolina and its primary business is the manufacture of specialty cellulose. On May 28, 1997, the Company's wholly-owned subsidiary, Buckeye Acquisition Inc. (BAI), acquired 97.5% of the common shares of Merfin International Inc. (Merfin) for $146,749 in cash. On July 30,1997, BAI acquired the remaining outstanding common shares of Merfin for $3,869 in cash. The total purchase price includes $150,618 in cash and the assumption of debt of $49,208. Merfin was one of the leading manufacturers of airlaid nonwovens, which are used as ultrathin absorbent cores in feminine hygiene and adult incontinence products, with facilities located in Canada, Ireland and the United States. The acquisitions were accounted for using the purchase method of accounting. The allocation of the purchase price for both acquisitions is based on the respective fair value of assets and liabilities at the date of acquisition. The excess of the purchase price over the fair value of the net assets for both acquisitions has been recorded as goodwill, and is being amortized by the straight-line method over 30 to 40 years. PURCHASE PRICE ALLOCATION
Alpha Merfin --------- --------- Working capital, net of cash $ 13,950 $ 2,709 Property, plant and equipment 27,538 87,009 Other assets 390 -- Non-compete agreement 4,000 -- Goodwill 25,021 112,681 Other liabilities (6,458) (2,573) --------- --------- $ 64,441 $ 199,826 ========= =========
The consolidated operating results of Alpha and Merfin have been included in the consolidated statements of income from the respective dates of acquisition. The following unaudited pro forma results of operations assume that the acquisitions of Alpha and Merfin occurred at the beginning of the period presented. Pro forma results of operations
Year Ended June 30 1997 --------- Net sales $ 618,686 Net income 41,255 --------- Basic earnings per share $ 1.08 Diluted earnings per share $ 1.06 ---------
The pro forma financial information is presented for information purposes only and is not necessarily indicative of the operating results that would have occurred had the business combinations been consummated as of the above date, nor is it necessarily indicative of future operating results. 3. INVENTORIES Components of inventories
June 30 1999 1998 -------- -------- Raw materials $ 28,619 $ 26,421 Finished goods 56,927 55,939 Storeroom and other supplies 19,038 18,012 --------- --------- $ 104,584 $ 100,372 ========= =========
4. PROPERTY, PLANT AND EQUIPMENT Components of property, plant and equipment
June 30 1999 1998 -------- --------- Land and land improvements $ 9,478 $ 10,120 Buildings 79,575 76,815 Machinery and equipment 465,310 410,770 Construction in progress 15,392 25,803 --------- --------- 569,755 523,508 Accumulated depreciation (157,524) (121,561) --------- --------- $ 412,231 $ 401,947 ========= =========
32 12 5. ACCRUED EXPENSES Components of accrued expenses
June 30 1999 1998 --------- --------- Retirement plans $ 12,461 $ 11,873 Vacation pay 4,347 4,262 Maintenance accrual 4,822 9,861 Sales program accrual 4,991 6,229 Interest 6,013 4,301 Property taxes 2,737 2,492 Employee compensation 3,101 3,650 Other 6,655 6,879 --------- --------- $ 45,127 $ 49,547 ========= =========
6. DEBT Components of long-term debt
June 30 1999 1998 --------- --------- Senior Subordinated Notes due: 2005 $ 149,587 $ 149,542 2008 99,533 99,502 2010 149,197 149,155 Credit Facility 31,847 46,919 Other 11,050 11,725 --------- --------- 441,214 456,843 Less current portion -- 511 --------- --------- $ 441,214 $ 456,332 ========= =========
The Company completed a public offering of $150,000 principal amount of 8 1/2% unsecured Senior Subordinated Notes due December 15, 2005 (the 2005 Notes) during November 1995. The 2005 Notes are redeemable at the option of the Company, in whole or in part, at any time on or after December 15, 2000, at redemption prices varying from 104.25% of principal amount to 100.00% of principal amount on or after December 15, 2003, in each case together with accrued and unpaid interest to the date of redemption. The Company completed a public offering of $100,000 principal amount of 9 1/4% unsecured Senior Subordinated Notes due September 15, 2008 (the 2008 Notes) during July 1996. The 2008 Notes are redeemable at the option of the Company, in whole or in part, at any time on or after September 15, 2001, at redemption prices varying from 104.625% of principal amount to 100.00% of principal amount on or after September 15, 2004, in each case together with accrued and unpaid interest to the date of redemption. The Company completed a private placement of $150,000 principal amount of 8% unsecured Senior Subordinated Notes due October 15, 2010 during June 1998. In fiscal 1999, the Company exchanged these outstanding notes for public notes (the 2010 Notes) with the same terms. The 2010 Notes are redeemable at the option of the Company, in whole or in part, at any time on or after October 15, 2003, at redemption prices varying from 104.00% of principal amount to 100.00% of principal amount on or after October 15, 2006, in each case together with accrued and unpaid interest to the date of redemption. The Senior Subordinated Notes are subordinate to the Credit Facility. The Company has an unsecured credit facility (the Credit Facility), providing for borrowings up to $225,000. The Credit Facility matures May 28, 2002, and on May 28, 2001, borrowing availability reduces to $150,000. The interest rates applicable to borrowings under the Credit Facility are the agent's prime rate or a LIBOR based rate ranging from LIBOR plus 0.450% to 1.125%. Borrowings at June 30,1999 were at an average rate of 4.83%. Letters of credit issued through the Credit Facility of $773 are outstanding at June 30, 1999. The amount available for borrowing under the Credit Facility is $192,380 at June 30,1999. The Company has a term facility, which provides for borrowing up to $15,000 and matures on May 28, 2002. The outstanding balance under this facility was $10,834 at June 30,1999, at an interest rate of 7.1%. Aggregate maturities of long-term debt are as follows: 2002 - $42,897 and 2005 and thereafter - $398,317. 33 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Terms of long-term debt agreements require compliance with certain covenants including minimum net worth, interest coverage ratios and limitations on restricted payments and levels of indebtedness. At June 30, 1999, the amount available for the payment of dividends and/or the acquisition of treasury stock was $29,516 under the most restrictive of these agreements. The Company has a revolving credit line of approximately $7,100 with a financial institution at a rate of interest of 4.8% at June 30, 1999. There was no outstanding balance under this revolving line of credit at June 30, 1999. Letters of credit issued through the revolving line of credit of $1,302 are outstanding at June 30, 1999. The revolving line of credit expires April 30, 2000. Total interest paid by the Company for the years ended June 30, 1999, 1998 and 1997 was $36,883, $37,143 and $24,311, respectively. 7. STOCKHOLDERS' EQUITY The Board of Directors has authorized the repurchase of 4,000,000 shares of common stock. Repurchased shares will be held as treasury stock and will be available for general corporate purposes, including the funding of employee benefit and stock-related plans. During the year ended June 30, 1999, 1,431,900 shares were repurchased, and a total of 3,522,100 shares have been repurchased through June 30, 1999. The Company's stock option plans provide for the granting of either incentive or nonqualified stock options to employees and nonemployee directors. Options are subject to terms and conditions determined by the Compensation Committee of the Board of Directors, and generally are exercisable in increments of 20% per year beginning one year from date of grant and expire ten years from date of grant. OPTION PLAN ACTIVITY
Average Average Exercise Fair Options Price Value --------- ---------- --------- Outstanding at June 30, 1996 2,140,000 $ 8.78 Granted at market 50,000 13.19 $ 6.18 Granted below market 100,000 7.60 9.15 Exercised (5,200) 9.25 --------- ---------- --------- Outstanding at June 30, 1997 2,284,800 8.83 Granted at market 1,598,792 18.25 8.77 Granted below market 100,000 7.60 13.16 Granted above market 11,208 19.63 8.17 Exercised (199,600) 8.80 Terminated (159,600) 10.78 --------- ---------- --------- Outstanding at June 30, 1998 3,635,600 12.88 Granted at market 240,000 13.88 7.16 Exercised (49,700) 9.07 Terminated (40,000) 13.74 --------- ---------- --------- Outstanding at June 30, 1999 3,785,900 12.99 Options exercisable at June 30: 1997 524,034 9.15 --------- ---------- --------- 1998 884,600 9.16 --------- ---------- --------- 1999 1,647,235 11.34 ========= ========== =========
There were 859,600, 1,059,600 and 2,610,000 shares reserved for grants of options at June 30,1999, 1998 and 1997, respectively. The following summary provides information about stock options outstanding and exercisable at June 30, 1999:
Outstanding Exercisable ----------- ----------- Average Average Average Exercise Remaining Exercise Exercise Price Options Price Life (Years) Options Price - ------------- --------- --------- ----------- --------- --------- $ 7.50-$10.50 1,759,900 $ 8.26 6.7 1,047,900 $ 8.35 $12.50-$18.00 1,854,792 16.64 7.4 561,731 16.21 $19.50-$23.00 171,208 22.06 8.6 37,604 21.84 --------- --------- ----------- --------- --------- Total 3,785,900 $ 12.99 7.1 1,647,235 $ 11.34 --------- --------- ----------- --------- ---------
34 14 As allowed under the Financial Accounting Standards Board Statement No.123, Accounting for Stock-Based Compensation (SFAS No.123), the Company applies the provisions of Accounting Principles Board Opinion No.25 and related interpretations. The following pro forma information has been prepared as if the Company had accounted for its employee stock options using the fair value based method of accounting established by SFAS No.123:
Year Ended June 30 1999 1998 1997 ---------- ---------- ---------- Net income: As reported $ 48,018 $ 55,260 $ 53,274 Pro forma 43,874 51,482 51,866 Basic earnings per share: As reported $ 1.34 $ 1.49 $ 1.40 Pro forma 1.23 1.39 1.36 Diluted earnings per share: As reported $ 1.32 $ 1.45 $ 1.38 Pro forma 1.21 1.37 1.34 ---------- ---------- ----------
The Company has estimated the fair value of each option grant using the Black-Scholes option pricing model. The fair value was estimated with the following weighted average assumptions: expected life of the stock options of eight years; volatility of the expected market price of common stock of .37 for 1999, .29 for 1998 and .27 for 1997; a risk-free interest rate range of 4.8% to 5.2% for 1999, 5.5% to 6.2% for 1998, and 6% for 1997; and no dividends. Option pricing models, such as the Black-Scholes model, require the input of highly subjective assumptions, including the expected stock price volatility, that are subject to change from time to time. Pro forma amounts reflect total compensation expense from the awards made in 1996 through 1999. Since compensation expense from stock options is recognized over the future years' vesting period, and additional awards generally are made every one to two years, pro forma amounts may not be representative of future years' amounts. In August 1997, the Board of Directors authorized a restricted stock plan and set aside 800,000 of the Company's treasury shares to fund this plan. At June 30, 1999, 23,541 restricted shares had been awarded. Stock options that could potentially dilute basic earnings per share in the future, which were not included in the fully diluted computation because they would have been antidilutive, were 1,575,003, 63,589 and 43,562 for the years ended June 30, 1999,1998 and 1997, respectively. 8. INCOME TAXES Provision for income taxes
Year Ended June 30 1999 1998 1997 --------- ---------- ---------- Current: Federal $ 11,120 $ 23,740 $ 17,472 State and other 202 1,089 738 --------- --------- --------- 11,322 24,829 18,210 Deferred: Federal 7,944 4,250 8,242 State and other 3,046 (482) 527 --------- --------- --------- 10,990 3,768 8,769 --------- --------- --------- $ 22,312 $ 28,597 $ 26,979 ========= ========= =========
The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate of 35% to income before income taxes due to the following: RATE ANALYSIS
Year Ended June 30 1999 1998 1997 --------- --------- --------- Expected tax expense $ 24,616 $ 29,350 $ 28,089 State taxes 469 644 850 Foreign sales corporation (4,444) (3,244) (3,030) Effect of foreign operations 1,680 1,988 765 Nondeductible items 529 547 339 Other (538) (688) (34) --------- --------- --------- $ 22,312 $ 28,597 $ 26,979 ========= ========= =========
35 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Significant components of the Company's deferred tax assets (liabilities) are as follows: DEFERRED TAX ASSETS (LIABILITIES)
June 30 1999 1998 ---- ---- Deferred tax liabilities: Depreciation $(55,735) $(45,836) Other (3,377) (2,699) -------- -------- (59,112) (48,535) Deferred tax assets: Postretirement benefits 5,852 5,438 Inventory costs 1,165 1,217 Net operating loss 4,373 5,133 Nondeductible reserves 2,953 4,909 AMT carryforward 1,434 -- Other 2,267 1,760 -------- -------- 18,044 18,457 -------- -------- $(41,068) $(30,078) ======== ========
The Company paid income taxes of $10,937, $26,455 and $16,965 during the years ended June 30, 1999, 1998 and 1997, respectively. For the year ended June 30,1999, income before income taxes consisted of $66,920 of domestic income and $3,410 of foreign income. For the year ended June 30, 1998, income before income taxes consisted of $90,243 of domestic income and $6,386 of foreign losses. At June 30,1999, the Company has foreign net operating loss carryforwards of approximately $23,197, which have no expiration date. 9. EMPLOYEE BENEFIT PLANS During fiscal 1999, the Company adopted Statement of Financial Accounting Standards No. 132, Employers' Disclosures about Pensions and Other Postretirement benefits (SFAS No. 132). The provisions of SFAS No. 132 revise disclosure requirements related to pension and other postretirement benefit plans. These provisions do not change the methods of measurement or recognition of assets, liabilities and benefit costs of these plans. The Company has defined contribution retirement plans covering U.S. employees. The Company contributes 1% of the employee's gross compensation plus 1/2% for each year of service up to a maximum of 11% of the employee's gross compensation. The plans also provide for additional contributions by the Company contingent upon the Company's results of operations. Contribution expense for the retirement plans for the years ended June 30, 1999, 1998 and 1997 was $9,111, $8,096 and $7,528, respectively. The Company also provides medical, dental and life insurance postretirement plans covering certain U.S. employees who meet specified age and service requirements. Certain employees who met specified age and service requirements on March 15, 1993 are covered by their previous employer and are not covered by these plans. The Company's current policy is to fund the cost of these benefits as payments to participants are required. The components of net periodic benefit costs are as follows: EFFECT ON OPERATIONS
Year Ended June 30 1999 1998 1997 ------- ----- ----- Service cost for benefits earned $ 841 $ 779 $ 677 Interest cost on benefit obligation 869 795 671 Amortization of net loss from earlier periods 1 7 23 Amortization of unrecognized prior service cost (600) (650) (650) ------- ----- ----- Total cost $ 1,111 $ 931 $ 721 ======= ===== =====
36 16 The following table provides a reconciliation of the changes in the plans' benefit obligations over the two-year period ending June 30,1999, and a statement of the plans' funded status as of June 30,1999 and 1998:
June 30 1999 1998 -------- -------- Change in benefit obligation: Obligation at beginning of year $ 11,136 $ 9,489 Service cost 841 779 Interest cost 869 795 Amendment 448 -- Participant contributions 6 -- Actuarial loss (gain) (104) 79 Benefits paid (10) (6) -------- -------- Underfunded status at end of year $ 13,186 $ 11,136 Unrecognized prior service cost 3,557 4,605 Unrecognized loss (1,034) (1,138) Other 561 556 -------- -------- Net amount recognized in the consolidated balance sheet $ 16,270 $ 15,159 ======== ========
The weighted average annual assumed rate of increase in the per capita cost of covered benefits (i.e. health care cost trend rate) for the medical plans is 8.0% for 2000, and is assumed to decrease gradually to 5.0% in 2006, and remain level thereafter. Due to the benefit cost limitations in the plan, the health care cost trend rate assumption does not have a significant effect on the amounts reported. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7% at June 30, 1999 and 1998. 10. SIGNIFICANT CUSTOMER Gross sales to Procter & Gamble Company and its affiliates (P&G) for the years ended June 30, 1999, 1998 and 1997 were 35%, 31% and 32%, respectively, of total gross sales. The Company and P&G are parties to the Pulp Supply Agreement (the "Supply Agreement"), which provides that P&G will purchase, under a take-or-pay arrangement, a specified tonnage (currently, most of the Company's output) of fluff pulp annually at the higher of the formula price or market price in calendar years 1999 and 2000, and at market price in calendar years 2001 and 2002. Currently, the formula price paid by P&G under the Supply Agreement significantly exceeds the market price for fluff pulp. In the event that P&G does not perform under the Supply Agreement or renew it upon terms favorable to the Company, and the market price for fluff pulp does not increase significantly from present levels, the Company's business, results of operations and financial condition could be materially and adversely affected. 11. SEGMENT INFORMATION During June 1997, the Financial Accounting Standards Board issued Statement No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS No. 131). This statement replaces the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS No. 131 also establishes standards for related disclosures about products, geographic areas and major customers. The Company operates in one segment consisting of the manufacturing and marketing of value-added cellulose-based specialty products. All of the Company's products involve similar production processes, are sold to similar classes of customers and markets, are distributed using the same methods, and operate in similar regulatory environments. The Company's identifiable products are chemical cellulose, customized paper cellulose and absorbent products. Chemical cellulose is used to impart purity, strength and viscosity in the manufacture of diversified products such as food casings, rayon filament, acetate fibers and plastics, as well as thickeners for food, cosmetics and pharmaceuticals. Customized paper cellulose is used to provide porosity, color permanence and tear resistance in automotive air and oil filters, premium letterhead, currency paper and personal stationery. Absorbent 37 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) products are used to increase absorbency and fluid transport in products such as disposable diapers, feminine hygiene products and adult incontinence products. The following provides relative gross sales to unaffiliated customers by product:
Year Ended June 30 1999 1998 1997 ---- ---- ---- Chemical cellulose 35% 39% 40% Customized paper cellulose 22% 22% 26% Absorbent products 43% 39% 34% ---- ---- ---- 100% 100% 100% ==== ==== ====
The Company has manufacturing operations in the United States, Canada, Germany and Ireland. The following provides a summary of net sales to unaffiliated customers, based on point of origin, and long-lived assets by geographic areas:
Year Ended June 30 1999 1998 1997 -------- -------- -------- Net sales: United States $504,219 $539,132 $501,124 Other 113,488 91,078 57,809 -------- -------- -------- Total net sales $617,707 $630,210 $558,933 ======== ======== ======== Long-lived assets: United States $354,835 $343,475 $325,488 Canada 121,532 124,473 123,049 Other 64,899 68,549 76,555 -------- -------- -------- Total long-lived assets $541,266 $536,497 $525,092 ======== ======== ========
For the year ended June 30,1999, the Company's gross sales by destination were concentrated in the following geographic markets: North America - 36%, Europe - 35%, Asia -16%, South America - 8% and Other - 5%. 12. RESEARCH AND DEVELOPMENT EXPENSES Research and development costs of $10,924, $10,732 and $8,423 were charged to expense as incurred for the years ended June 30, 1999, 1998 and 1997, respectively. 13. PURCHASE COMMITMENTS At June 30,1999, under three separate agreements expiring at various dates through December 31, 2010, the Company is required to purchase certain timber from specified tracts of land that is available for harvest. The contract price under the terms of these agreements is either at the then current market price or at fixed prices as stated in the contract. At June 30,1999, estimated annual purchase obligations were as follows: 2000 - $25,000; 2001- $22,000; 2002 - $24,000; 2003 - $23,000; 2004 - $23,000; and thereafter - $179,000. Purchases under these agreements for the years ended June 30, 1999, 1998 and 1997 were $21,629, $16,522 and $23,441, respectively. 14. CONTINGENCIES The Company's operations are subject to extensive general and industry-specific federal, state, local and foreign environmental laws and regulations. The Company devotes significant resources to maintaining compliance with these laws and regulations. The Company expects that, due to the nature of its operations, it will be subject to increasingly stringent environmental requirements (including standards applicable to wastewater discharges and air emissions) and will continue to incur substantial costs to comply with these requirements. Because it is difficult to predict the scope of future requirements, there can be no assurance that the Company will not in the future incur material environmental compliance costs or liabilities. The Foley Plant discharges treated wastewater into the Fenholloway River. Under the terms of an agreement with the Florida Department of Environmental Protection ("FDEP"), approved by the U.S. Environmental Protection Agency ("EPA") in 1995, the Company agreed to a comprehensive plan to attain Class III ("fishable/swimmable") status for the Fenholloway River under applicable Florida law (the "Fenholloway Agreement"). The Fenholloway Agreement requires the Company, among other things, to (i) make process changes within the Foley Plant to reduce the coloration of its wastewater discharge, (ii) restore certain wetlands areas, (iii) relocate the 38 18 wastewater discharge point into the Fenholloway River to a point closer to the mouth of the river, and (iv) provide oxygen enrichment to the treated wastewater prior to discharge at the new location. The Company has already made significant expenditures to make certain in-plant process changes required by the Fenholloway Agreement, and the Company estimates based on 1997 projections, it will incur additional capital expenditures of approximately $40 million through fiscal 2005 to comply with the remaining obligations under the Fenholloway Agreement. The EPA has objected to several provisions of the renewal permit for the Foley effluent discharge and the Company and the FDEP, which is the delegated permitting authority, requested a public hearing on the objections. The EPA requested additional environmental studies to identify possible alternatives to the relocation of the discharge point to determine if more cost effective technologies are available to address both Class III water quality standards for the Fenholloway River and anticipated EPA "cluster rules" applicable to wastewater discharges from dissolving kraft pulp mills, like the Foley Plant. The Company completed the process changes within the Foley Plant as required by the Fenholloway Agreement. The other requirements of the Fenholloway Agreement have been deferred until the EPA objections to the renewal permit are satisfactorily resolved. Consequently, a portion of the estimated $40 million in capital expenditures may be delayed beyond fiscal 2005, and the total capital expenditures for the Foley Plant may increase if prices increase or the Company is required by the "cluster rules" to implement other technologies. While the EPA has not yet proposed wastewater standards under the "cluster rules" applicable to dissolving kraft pulp mills like the Foley Plant, the EPA has issued air emission standards applicable to the Foley Plant. The Company is reviewing these air emission standards and presently does not believe that such expenditures required by them are likely to have a materially adverse effect on the Company's business, results of operations or financial condition. The Foley Plant is on the EPA list of potential hazardous substance release sites prepared under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). The EPA conducted a site investigation in early 1995. It is possible that the Foley Plant will be listed on the CERCLA National Priorities List and therefore require remedial action, although the Company considers this possibility unlikely. If the site were to be placed on the National Priorities List, the costs associated with conducting a CERCLA remedial action could be material. The Company is involved in certain legal actions and claims arising in the ordinary course of business. It is the opinion of management that such litigation and claims will be resolved without a materially adverse effect on the Company's financial position or results of operation. 15. FAIR VALUES OF FINANCIAL INSTRUMENTS For certain of the Company's financial instruments, including cash and cash equivalents, short-term investments, accounts receivable, accounts payable and notes payable, the carrying amounts approximate fair value due to their short maturities. The fair value of the Company's long-term debt is based on an average of the bid and offer prices at year-end. The carrying value and fair value of long-term debt at June 30,1999 were $441,214 and $434,647, respectively, and at June 30, 1998 were $456,843 and $467,270, respectively. 39 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Year ended June 30,1999 Net sales $156,177 $147,274 $155,880 $158,376 Gross margin 42,354 38,005 38,883 39,350 Operating income 30,526 27,600 27,803 27,095 Net income 13,383 10,874 11,488 12,273 Earnings per share: Basic 0.37 0.30 0.32 0.35 Diluted 0.36 0.30 0.32 0.34 -------- --------- -------- -------- Year ended June 30,1998 Net sales $153,313 $153,610 $162,474 $160,813 Gross margin 42,141 40,356 42,597 43,359 Operating income 30,769 30,220 30,263 31,159 Net income 13,161 13,338 14,204 14,557 Earnings per share: Basic 0.35 0.36 0.38 0.40 Diluted 0.34 0.35 0.37 0.38 -------- --------- -------- --------
The Company's effective tax rate for the fourth quarter of fiscal 1999 was 24.0% compared to 34.0% for the nine months ended March 31,1999. The decrease was primarily the result of the recognition of additional benefit from the Company's optimization of its foreign sales corporation. 17. SUBSEQUENT EVENT On July 15, 1999, the Company announced that it had signed a letter of intent to acquire essentially all the assets of Walkisoft, UPM-Kymmene's nonwoven business, with manufacturing locations in Steinfurt, Germany and Mt. Holly, North Carolina, for approximately $120,000. The acquisition includes $15,000 in working capital and will be funded over the next four years by paying UPM-Kymmene $32,000 at closing and $22,000 on each of the first four anniversaries of closing. The transaction, which is expected to close during the October-December 1999 quarter, is subject to completion of due diligence, regulatory approvals and other terms of the agreement. 40 20 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of Buckeye Technologies Inc. We have audited the accompanying consolidated balance sheets of Buckeye Technologies Inc. as of June 30, 1999 and 1998 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Buckeye Technologies Inc. at June 30, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 1999 in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP --------------------- Memphis, Tennessee July 30, 1999 41 21 SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended June 30 1999 1998 1997(a) 1996(b) 1995 -------- -------- -------- -------- -------- Operating data: Net sales $617,707 $630,210 $558,933 $470,979 $408,587 Operating income 113,024 122,411 109,392 108,567 79,172 Income before extraordinary loss 48,018 55,260 53,274 47,010 21,712 Net income 48,018 55,260 53,274 43,061 21,712 Basic earnings per share:(c) Income before extraordinary loss 1.34 1.49 1.40 1.11 Net income 1.34 1.49 1.40 1.02 Diluted earnings per share:(c) Income before extraordinary loss 1.32 1.45 1.38 1.10 Net income 1.32 1.45 1.38 1.01 Balance sheet data: Total assets $747,882 $751,536 $737,464 $452,799 $379,056 Long-term debt less current portion 441,214 456,332 474,631 217,873 166,202 Other data:(d) Company EBITDA $152,009 $162,397 $143,024 $134,670 $104,088 -------- -------- -------- -------- --------
(a) Includes the operations of Alpha from September 1, 1996 and Merfin from May 28, 1997, their respective dates of acquisition. (b) An extraordinary loss of $3,949, net of tax benefit, was recognized on the early retirement of debt. A minority interest charge ceased on November 28, 1995. This data includes the operations of the Temming Business from May 1, 1996, the date of acquisition. (c) Historical net income per share has not been presented for 1995 as it is not considered relevant. (d) Company EBITDA represents earnings before interest, taxes, depreciation, amortization, depletion, minority interest, extraordinary loss, secondary offering costs and other non-cash charges. This data should not be considered in isolation and is not intended to be a substitute for income statement or cash flow statement data as a measure of the Company's profitability (see Consolidated Financial Statements). 42 22 STOCKHOLDER INFORMATION COMMON STOCK PRICE RANGE
Year Ended June 30 1999 1998 High Low High Low --------- -------- ------------ ----------- First quarter (ended September 30) $ 25 3/8 $ 14 $ 21 3/8 $ 16 9/16 Second quarter (ended December 31) 21 1/8 11 3/4 23 3/8 19 1/8 Third quarter (ended March 31) 15 7/16 12 1/8 23 3/16 19 5/16 Fourth quarter (ended June 30) 17 12 3/4 24 11/16 20 15/16 --------- -------- ------------ -----------
The Company has no plans to pay dividends in the foreseeable future. STOCK LISTING AND SHAREHOLDERS Buckeye Technologies Inc. is traded on the New York Stock Exchange under the symbol BKI. There were approximately 6,000 stockholders on September 1, 1999, based on the number of record holders of the Company's common stock and an estimate of the number of individual participants represented by security position listings. 44 EX-21.1 3 SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21.1 SUBSIDIARIES OF THE REGISTRANT
SUBSIDIARY JURISDICTION OF INCORPORATION - ---------- ----------------------------- Buckeye Florida Corporation Delaware Buckeye Foley Corporation Delaware Buckeye Florida, Limited Partnership Delaware Buckeye S. A. Switzerland Buckeye (Barbados) Ltd. Barbados Buckeye Technologies Gmbh Germany BKI Holding Corporation Delaware BKI Finance Corporation Tennessee BKI Asset Management Corporation Delaware Buckeye Lumberton Inc. North Carolina Buckeye Canada Inc. Canada Buckeye Technologies Ireland Ltd. Ireland Merfin Systems Inc. Delaware
EX-23 4 CONSENT OF ERNST & YOUNG LLP 1 Exhibit 23.1 Consent of Independent Auditors We consent to the incorporation by reference in this Annual Report (Form 10-K) of Buckeye Technologies Inc. of our report dated July 30, 1999, included in the 1999 Annual Report to Shareholders of Buckeye Technologies Inc. Our audits also included the financial statement schedule of Buckeye Technologies Inc. listed in Item 14(a)(2). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Form S-8, Numbers 33-80865, 33-80867, 33-33621, 33-61373, and 33-61371) pertaining to the Buckeye Retirement Plus Savings Plan, the Buckeye Retirement Plan, the Alpha Cellulose Cash Option Thrift Plan, the Restricted Stock Plan, and the Merfin Systems 401(K) Profit Sharing Plan, of our reports dated July 30, 1999, with respect to the consolidated financial statements and schedule of Buckeye Technologies Inc. include or incorporated by reference in this Annual Report (Form 10-K) for the year ended June 30, 1999. Memphis, Tennessee September 20, 1999 EX-27 5 FDS
5 1,000 12-MOS JUN-30-1999 JUL-01-1998 JUN-30-1999 0 0 82,690 1,042 104,584 197,093 569,755 157,524 747,882 67,975 441,214 0 0 431 176,988 747,882 617,707 617,707 459,115 504,683 3,821 0 38,873 70,330 22,312 48,018 0 0 0 48,018 1.34 1.32
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