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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2002
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Commission file number: 33-60032
Buckeye Technologies Inc.
Incorporated pursuant to the Laws of Delaware
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Internal Revenue Service-- Employer Identification No. 62-1518973
1001 Tillman Street, Memphis, TN 38112
901-320-8100
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Securities registered pursuant to Section 12(b) of the Act:
Title of Securities: Common Stock - $0.01 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. [x]
As of September 17, 2002, the aggregate market value of the registrant's voting
shares held by non-affiliates was approximately $222,197,465.
As of September 17, 2002 there were outstanding 36,948,900 Common Shares of the
registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Buckeye Technologies Inc.'s 2002 Annual Proxy Statement are
incorporated by reference into Part III.
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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................................................................. 8
7a. Qualitative and Quantitative Disclosures About Market Risk........................ 12
8. Financial Statements and Supplementary Data....................................... 14
9. Changes in and Disagreements with Accountants on Accounting and Financial 14
Disclosure ..................................................................
PART III
10. Directors and Executive Officers of the Registrant................................ 15
11. Executive Compensation............................................................ 17
12. Security Ownership of Certain Beneficial Owners and Management.................... 17
13. Certain Relationships and Related Transactions.................................... 17
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................. 18
Signatures........................................................................ 20
OTHER
Index to Consolidated Financial Statements and Schedules.......................... F-1
PART I
Item 1. Business
General
Headquartered in Memphis, Tennessee, 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. The Company supplies 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 utilizing wetlaid and airlaid
technology. As a result, the Company produces a broader range of products than
any of its competitors. Buckeye produces uniquely tailored products designed to
meet individual customer requirements. The Company's focus on specialty niches
allows it to establish long term supply positions with key customers. The
Company operates manufacturing operations in the United States, Canada, Germany,
Ireland and Brazil.
Company History
The Company and its predecessor have participated in the
cellulose-based specialty market for over 75 years and the Company has developed
new uses for both wood and cotton based cellulose products. In July 1997, the
Company completed the acquisition of the common shares of Merfin International
Inc. Merfin was one of the leading manufacturers of airlaid nonwovens with
facilities located in Ireland, Canada and the United States. On October 1, 1999,
the Company acquired essentially all of the assets of Walkisoft, UPM-Kymmene's
nonwovens business. The acquisition of Walkisoft added manufacturing facilities
in Steinfurt, Germany and Gaston County, North Carolina. On August 1, 2000, the
Company acquired the cotton cellulose business of Fibra, S. A. (Americana)
located in Americana, Brazil. Further information on the acquisition of
Walkisoft and Americana is included in Note 3, Business Combinations, to the
Consolidated Financial Statements.
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's products can be broadly grouped into three categories:
absorbent products, chemical cellulose and customized paper. The chemical
cellulose and customized paper are derived from wood and cotton cellulose
materials using wetlaid technologies. Fluff pulps are derived from wood using
wetlaid technology. The airlaid nonwovens materials are derived from wood pulps
using airlaid technology. A breakdown of the Company's major product categories,
percentage of sales, product attributes and applications is provided on the
following page.
2
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% of
Fiscal
Product Groups 2002 Sales Unique Product Attributes End Use Applications
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Absorbent Products 50%
Fluff Pulp Absorbency and fluid transport Disposable diapers, feminine hygiene
products and adult incontinence products
Airlaid Nonwovens Absorbency, fluid management and Feminine hygiene products, wipes, table
strength top items, food pads and household
cleaning products
Cosmetic Cotton Absorbency, strength and softness Cotton balls and cotton swabs
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Chemical Cellulose 32%
Food Casings Purity and strength Hot dog and sausage casings
Rayon Filament Strength and heat stability Coat linings, fashion wear and tire,
belt, and hose reinforcement
Ethers High viscosity, purity and Thickeners for food, personal care
solution clarity products, pharmaceuticals and
construction materials
Acetate Permanent transparency and LCD screens, high clarity plastics and
uniformity photographic film
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Customized Paper 18%
Filters High porosity and product life Automotive, laboratory and industrial
filters
Premium Papers Aesthetics, color permanence and Letterhead, currency, stock certificates
tear resistance and personal stationery
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Raw Materials
Slash pine timber, cotton fiber and fluff pulp are the principal raw
materials used in the manufacture of the Company's products. These materials
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 timber purchase agreements.
Additional information is included in Note 17, Commitments, to the Consolidated
Financial Statements.
The Company purchases cotton fiber either directly from cottonseed oil
mills or indirectly through agents or brokers. The Company purchases the
majority 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 slash pine timber, cotton fiber and fluff pulp is subject
to market fluctuations caused by supply and demand factors beyond the Company's
control.
3
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 the U.S., Europe, Asia and South America. 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 60 countries
around the world. The Company's fiscal 2002 sales reflect this geographic
diversity, with 36% of sales in North America, 37% of sales in Europe, 14% in
Asia, 7% in South America and 6% in other regions. Geographic segment data and
product sales data is included in Note 15, Segment Information, to the
Consolidated Financial Statements.
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. Our sales professionals work with customers in their
plants to design products tailored precisely to their product needs and
manufacturing processes.
The Procter & Gamble Company (Procter & Gamble) is the Company's
largest customer, accounting for 20% of the Company's fiscal 2002 gross sales.
Over 88% of the Company's worldwide sales are denominated in U.S.
dollars, and such sales are not 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. Buckeye has research
and development pilot plant facilities in Memphis, and employs scientists and
technicians who are focused on advanced products and new applications to drive
future growth. The main objective of Buckeye's aggressive research and
development efforts is to maintain close technological relationships with
customers. The pilot plant facilities allow the Company to produce and test new
products without interrupting the normal production cycles of its operating
plants, a process that ensures rapid delivery of these breakthrough products to
the market place on a more cost-effective basis.
Research and development costs of $9.0 million, $13.0 million and $13.1
million were charged to expense as incurred for the years ended June 30, 2002,
2001 and 2000, respectively.
Competition
For wood pulps, there are relatively few specialty pulp producers when
compared with the much larger commodity paper pulp market. The technical demands
and unique requirements of the specialty pulp user tend to differentiate
suppliers on the basis of their ability to meet the customer's particular set of
needs, rather than focusing only on pricing. The specialty pulp market is less
subject to the price variation experienced in the commodity paper pulp market.
Major competitors include Rayonier (U.S.), Weyerhaeuser (U.S.), International
Paper (U.S.), Sappi Limited (South Africa) and Tembec Inc. (Canada). Management
believes that the number of producers is unlikely to grow given the substantial
investment to enter a mature market with sufficient existing capacity. Product
performance, technical service and pricing are the primary competitive factors.
For cotton pulps, the primary competition is Southern Cellulose
Products Inc., owned by Archer-Daniels-Midland, Inc., a subsidiary of which also
supplies cotton raw material to the Company. Nonwovens competitors of Buckeye
include BBA Nonwovens (Europe and China.), Concert Industries Ltd. (Germany and
Canada), Duni AB (Sweden) and Georgia Pacific Corporation (U.S.).
Intellectual Property
The Company holds numerous patents throughout the world to protect its
proprietary products. Buckeye intends to protect its patents and file
applications for any future inventions that are deemed to be important to its
business operations. The Stac-Pac(TM) packaging technology, a proprietary system
for packaging low-density nonwovens materials in compressed cube-shaped bales,
is an example of technology acquired by the Company to further differentiate it
from its airlaid nonwovens competitors. Stac-Pac(TM) units reduce freight costs
by compressing more material in a bale than can be shipped in a traditional roll
form and more effectively shipping the bales in trucks and containers.
Stac-Pac(TM) bales also facilitate customers' high-speed production lines with a
continuous flow of material.
4
Inflation
The Company believes that inflation has not had a material effect on
its results of operations nor on its financial condition during recent periods.
Seasonality
The Company's business has generally not been seasonal to a substantial
extent, but in most years somewhat lower volume is shipped in the July -
September quarter.
Employees
As of June 30, 2002, the Company employed approximately 1,990
employees, 1,320 of whom are employed at the Company's facilities in the United
States. Fifty-one percent of the U.S.employees are represented by unions at two
plants in Foley, Florida and Memphis, Tennessee. The labor agreement at the
Foley Plant expired on April 1, 2002 and a new agreement is currently being
negotiated. The agreement for the Memphis Plant is scheduled to be negotiated
during fiscal 2003.
None of the Company's facilities have had labor disputes or work
stoppages in recent history. The Foley and Memphis Plants have not experienced
any work stoppages due to labor disputes in over 30 years and 50 years,
respectively.
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 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 such
requirements. Because it is difficult to predict the scope of future
requirements, there can be no assurance that the Company will not incur material
environmental compliance costs or liabilities in the future.
Additional information is included in Note 18, Contingencies, to the
Consolidated Financial Statements.
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
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 Gaston Plant, the Delta, Canada Plant, the Glueckstadt, Germany Plant, the
Steinfurt, Germany Plant and the Americana, Brazil Plant. The Company leases
buildings that house the King, North Carolina Plant, the sales offices in Europe
and Asia and distribution facilities in Savannah, Georgia.
Memphis Plant. The Memphis Plant is located on a 75-acre site adjacent to
the headquarters complex and has a 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 and has a capacity of approximately 465,000 annual metric tons of wood
cellulose. The Company also owns 13,000 acres of real property near the plant
site.
Glueckstadt Plant. The Glueckstadt Plant is located near the Elbe River
north of 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 is located in Lumberton, North
Carolina on a 65-acre site and has a capacity of approximately 50,000 annual
metric tons of cotton cellulose.
Americana Plant. The Americana Plant is located in the city of Americana in
the state of Sao Paulo, Brazil on 27 acres and is part of a multi-business
industrial site. It has a capacity of approximately 30,000 annual metric tons of
cotton cellulose.
Nonwovens Plants. The Delta Plant has a total capacity of approximately
30,000 annual metric tons of airlaid nonwovens from two production lines. The
Cork Plant has a capacity of approximately 15,000 annual metric tons of airlaid
nonwovens from its single production line. The Steinfurt Plant has a capacity of
approximately 30,000 annual metric tons of airlaid nonwovens from two production
lines. The Gaston Plant has a capacity of approximately 60,000 annual metric
tons of airlaid nonwovens from two production lines. The King Plant converts
airlaid materials and wetlaid 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
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
Buckeye Technologies Inc. is traded on the New York Stock Exchange
under the symbol BKI. There were approximately 6,500 shareholders on September
3, 2002, 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. The table below sets forth the high and low sales prices for
the Company's common stock.
Year Ended June 30
2002 2001
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High Low High Low
---- --- ---- ---
First quarter (ended September 30) 14.40 8.64 25.38 19.50
Second quarter (ended December 31) 12.14 7.77 21.94 10.00
Third quarter (ended March 31) 13.05 9.50 15.38 9.90
Fourth quarter (ended June 30) 12.15 9.40 14.40 10.31
The Company has no plans to pay dividends in the foreseeable future.
Item 6. Selected Financial Data
Selected Financial Data
(In thousands, except per share data)
Year Ended June 30
2002 (a) 2001 (b) 2000 (c) 1999 1998
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Operating Data:
Net sales $ 635,218 $731,528 $755,544 $650,295 $668,490
Operating income 28,565 111,147 136,908 113,024 122,411
Income (loss) before cumulative effect
of change in accounting (14,504) 43,274 59,117 48,018 55,260
Cumulative effect of accounting
change (d) (11,500) 3,249 - - -
Net income (loss) (26,004) 46,523 59,117 48,018 55,260
Basic earnings (loss) per share:
Income (loss) before cumulative
effect of change in accounting (.42) 1.25 1.68 1.34 1.49
Cumulative effect of accounting
change (d) (.33) 0.09 - - -
Net income (loss) (.74) 1.35 1.68 1.34 1.49
Diluted earnings (loss) per share:
Income (loss) before cumulative
effect of change in accounting (.42) 1.23 1.65 1.32 1.45
Cumulative effect of accounting
change (d) (.33) 0.09 - - -
Net income (loss) (.74) 1.32 1.65 1.32 1.45
Balance sheet data:
Total assets $1,135,373 $1,075,550 $930,721 $747,882 $751,536
Long-term debt less current portion 675,396 632,784 505,983 441,214 456,332
Other data:
EBITDA (e) $ 84,210 $ 158,959 $180,914 $151,958 $161,922
Operating cash flow 27,925 68,584 138,695 97,831 94,041
(a) Includes a pretax charge of $11,589 ($7,596 after tax) for restructuring
and impairment costs (See Note 4 to the Consolidated Financial Statements).
7
(b) Includes the operations of Americana from August 1, 2000, its date of
acquisition. See Note 3 to the Consolidated Financial Statements.
(c) Includes the operations of Walkisoft from October 1, 1999, its date of
acquisition. See Note 3 to the Consolidated Financial Statements.
(d) The 2002 cumulative effect of change in accounting relates to a goodwill
impairment charge for the Company's converting plant at King, North
Carolina under the transition rules of FAS 142 (See Note 2 to the
Consolidated Financial Statements). The 2001 cumulative effect of change in
accounting relates to a change in depreciation methods from straight-line
to units-of-production for certain cotton cellulose and airlaid nonwovens
equipment (See Note 2 to the Consolidated Financial Statements).
(e) EBITDA represents earnings before interest, taxes, depreciation, depletion,
amortization and non-recurring items. This data should not be considered in
isolation and is not intended to be a substitute for income statement or
cash flow statement data as a measure of the Company's profitability (see
Consolidated Financial Statements).
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
Buckeye Technologies Inc. and its subsidiaries (the Company)
manufacture value-added cellulose-based specialty products in the United States,
Canada, Germany, Ireland and Brazil, and sell these products in worldwide
markets. On October 1, 1999, the Company acquired essentially all of the assets
of Walkisoft, UPM-Kymmene's nonwovens business, with manufacturing locations in
Steinfurt, Germany and Gaston, North Carolina. On August 1, 2000, the Company
acquired the cotton cellulose business of Fibra, S.A. (Americana) located in
Americana, Brazil.
Critical Accounting Policies
The Company's financial statements are based on the application of
accounting policies, which require management to make estimates and assumptions.
We believe the following are some of the more critical judgment areas in the
application of our accounting policies that currently affect our financial
condition and results of operations.
Inventories
Inventories are stated at the lower of cost or market. In assessing the
ultimate realization of inventories, we are required to make judgments as to
future demand requirements and estimated market values and compare that with the
current cost of inventory. If actual market conditions are less favorable than
those projected, inventory write-downs may be required.
Depreciation
The Company provides for depreciation on its production machinery and
equipment at the cotton cellulose and airlaid nonwovens plants using the
units-of-production depreciation method. The depreciation is based on the
expected productive hours of the assets and is subject to a minimum level of
depreciation. If the estimated productive hours of these assets change in the
future, the Company may be required to adjust depreciation expense per unit of
production, accordingly. Other capital assets use the straight-line method for
determining depreciation.
Goodwill and Other Acquired Intangible Assets
The Company has made acquisitions in the past that included a
significant amount of goodwill and other intangible assets. On July 1, 2001, the
Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" and discontinued the amortization of goodwill.
Under the guidelines of SFAS 142, goodwill is subject to an annual impairment
test based on its estimated fair value. Other intangible assets that meet
certain criteria will continue to be amortized over their useful lives and will
also be subject to an impairment test based on estimated fair value. Estimated
fair value is typically based on operating earnings adjusted by a discount
factor in valuing future cash flows. There are many assumptions and estimates
underlying the determination of an impairment loss. If the estimates of future
cash flows or their related assumptions change, additional impairment losses
could be recorded in the future.
8
Planned Maintenance Shutdowns
The Company accrues the cost of periodic planned maintenance shutdowns,
over the period between shutdowns, based on its estimates of incremental
spending and fixed overhead cost. If the estimates of costs or the period
between shutdowns are different than those projected, an adjustment to the
accrual may be required.
Results of Operations
Comparison of Fiscal Years Ended June 30, 2002 and June 30, 2001
Net sales for 2002 were $635.2 million compared to $731.5 million for
2001, a decrease of 13.2%. The decrease in net sales was primarily due to lower
sales prices of fluff pulp and airlaid nonwovens and lower shipment volumes of
cotton cellulose. Fluff pulp prices steadily declined throughout 2002 but now
appear to have stabilized. These decreases were partially offset by higher sales
prices of cotton cellulose.
In 2002, operating income was $28.6 million compared to $111.1 million
for 2001, a decrease of 74.2%. The 2002 operating income as a percentage of
sales was 4.5% compared to 15.2% for 2001. Operating income decreased mainly due
to the sales issues previously noted, increased cost of cotton raw materials and
the restructuring and impairment costs discussed below. The decrease was
partially offset by reducing sales, research and administrative expense by $9.2
million or 19.9% versus the prior year. The reduction in research expenses was
the result of focusing efforts on key projects. The Company's results have been
adversely affected by the weak global economy and a strong U.S. dollar.
During the year ended June 30, 2002, the Company entered into a
restructuring program. The program is designed to deliver cost reductions
through reduced overhead expenses. The cost recorded during the year ended June
30, 2002, comprised mainly of severance and other employee benefit costs, is
$1.6 million.
Involuntary termination benefits of $1.0 million have been paid and
$0.6 million has been accrued as of June 30, 2002. Payments related to the
restructuring program are expected to continue into the second quarter of fiscal
year 2003. As a result of the restructuring, approximately 185 positions have
been eliminated, resulting in cost reductions of about $10.0 million annually.
An additional 15 positions will be eliminated by the end of the first quarter of
fiscal 2003. All costs of the program are reported in the statements of
operations under restructuring and impairment costs. The nonwovens and cotton
businesses in North America and Europe are impacted by this cost reduction
program. As part of this restructuring, the Company has closed engineering
offices located in Finland.
During the quarter ended June 30, 2002, the Company recorded impairment
costs of $10.0 million in the statements of operations under restructuring and
impairment costs. These impairment costs are primarily related to the write-off
of obsolete airlaid nonwovens packaging equipment that has been replaced with
more efficient StacPac(TM) lines. This equipment is expected to be disposed of
during fiscal year 2003.
Net interest and amortization of debt costs for 2002 were $48.6 million
compared to $44.8 million for 2001, an increase of $3.8 million. The increase
was primarily due to higher debt levels. The increase was partially offset by
capitalization of interest of $1.8 million on large construction projects during
2002 and the interest rate swap agreement that the Company entered into during
May 2001, which exchanged fixed rate interest payments for floating rate
interest payments.
Effective July 1, 2001, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets, which establishes new accounting and reporting
requirements for goodwill and other intangible assets as described in our
critical accounting policies. Based on the assessment, effective July 1, 2001,
the Company has reduced its goodwill by $11.5 million in the converting
business, which was purchased as part of the Merfin acquisition in 1997. There
was no tax benefit recorded as a result of the reduction in the carrying value
of the goodwill.
The Company's effective tax rate for 2002 was 36.7% versus 32.7% in
2001. The change was primarily due to recognizing the benefit of research and
development tax credits.
Comparison of Fiscal Years Ended June 30, 2001 and June 30, 2000
Net sales for 2001 were $731.5 million compared to $755.5 million for
2000, a decrease of 3.2%. The decrease for the year was due mainly to lower
shipment volumes and declining sales prices on fluff pulp. The decrease in both
shipment volume and sales price reflects the impact of the contractual changes
9
in the Fluff Pulp Supply Agreement with The Procter & Gamble Company. The
formula-priced agreement converted to a market price basis on January 1, 2001
and volumes specified in the agreement decrease from calendar year 2000 levels
by 33% in calendar year 2001. This decline was offset somewhat by the increase
in sales due to the full year inclusion of the operations of Walkisoft.
In 2001, operating income was $111.1 million compared to $136.9 million
for 2000, a decrease of 18.8%. The 2001 operating income as a percentage of
sales was 15.2% compared to 18.1% for 2000. The decrease was primarily due to
lower shipment volumes and prices plus increased costs for cotton fibers, energy
and caustic. The lower sales and higher manufacturing costs were partially
offset by a reduction of $8.4 million in sales, research and administrative
expenses for the year. A substantial part of the reduction in sales, research
and administrative expenses was due to decreases in incentive compensation
expense.
Net interest and amortization of debt costs for 2001 were $44.8 million
compared to $42.7 million for 2000, an increase of $2.1 million. The increase
was primarily due to higher debt levels to finance the Americana acquisition,
capital projects and higher inventory levels. The increase was partially offset
by the capitalization of interest of $4.8 million on large construction projects
during 2001 and the interest rate swap agreement that the Company entered into
during May 2001, which exchanged fixed rate interest payments for floating rate
interest payments.
The Company's effective tax rate for 2001 was 32.7% versus 33.7 % in
2000. The decrease was primarily due to lower tax rates in Germany as a result
of recently enacted tax legislation.
Effective July 1, 2000, depreciation on the Company's production
machinery and equipment at cotton cellulose and airlaid nonwovens plants was
converted from the straight-line method to the units-of-production method, which
is based upon the expected productive hours of the assets. This method more
appropriately matches production costs over the lives of the production
machinery and equipment of the cotton cellulose and airlaid plants with the
revenues of those plants and results in a more accurate allocation of the cost
of the physical assets to the periods over their useful lives. The cumulative
effect of applying the new method for years prior to 2001 is an increase to
income of $3.2 million net-of-tax ($4.5 million pretax) reported as a cumulative
effect of accounting change in the consolidated statement of income for the year
ended June 30, 2001. In addition, the net income of the Company, excluding the
cumulative effect of accounting change, for the year ended June 30, 2001 is $0.4
million or $.01 per share more than it would have been if the Company had
continued to follow the straight-line method of depreciation. See Note 2 to the
Consolidated Financial Statements for pro forma information.
Financial Condition
Cash Flow
Cash provided by operating activities for the years ended June 30,
2002, 2001 and 2000 were $27.9 million $68.6 million and $138.7 million,
respectively. The decrease of $40.7 million, for the year ended June 30, 2002,
million was due primarily to lower earnings, lower current liabilities and tax
refunds not yet received partially offset by a smaller decrease in accounts
receivable. Additional borrowings from the credit facilities, along with the
cash provided from operations, were used to fund capital expenditures and to
make the $22.0 million note payment to UPM-Kymmene for the purchase of
Walkisoft. Cash used in investing activities for the years ended June 30, 2002
was $46.1 million compared to $191.3 million for the same period in the prior
fiscal year. The decrease is due mainly to the completion of the large airlaid
nonwovens machine at the Gaston plant. Additionally, the prior year activities
included the $36.6 million acquisition of Americana.
EBITDA is presented as an additional means of evaluating the Company's
financial condition because the Company incurs significant noncash charges,
including depreciation and amortization, related to the material capital assets
utilized in its operations. EBITDA is a central measure used in the Company's
compliance with debt covenants to its credit facility. This measure should not
be considered as a superior alternative to net income, operating income, cash
flow from operations, or any other operating or liquidity performance measure as
defined by accounting principles generally accepted in the United States.
EBITDA, as adjusted (earnings before goodwill accounting change, interest,
taxes, depreciation and amortization, and nonrecurring charges) for the years
ended June 30, 2002, 2001, and 2000 was $84.2 million, $159.0 million, and
$180.9 million, respectively. The decrease in EBITDA in 2002 reflects the
decrease in cash flows from operating activities.
10
Capital expenditures for property, plant and equipment were $36.0
million in 2002, $153.0 million in 2001, and $68.6 million in 2000. The Company
made these expenditures to construct, purchase, modernize, and upgrade
production equipment and facilities. The majority of the expenditures in 2001
relates to the construction of the large airlaid nonwovens machine at the Gaston
plant. Capital expenditures (including environmental expenditures) for 2003 are
expected to be approximately $40.0 million.
The Board of Directors has authorized the repurchase of 6.0 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, 2002 no
shares were repurchased. Through June 30, 2002, a total of 5,009,300 shares have
been repurchased under the current Board authority. At June 30, 2002, the amount
available for the acquisition of treasury stock was zero under the most
restrictive of the Company's debt agreements.
Contractual Obligations
The following table summarizes the Company's significant contractual
cash obligations as of June 30, 2002. Certain of these contractual obligations
are reflected in our balance sheet, while others are disclosed as future
obligations under accounting principles generally accepted in the United States.
Less than Greater than
Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years
- ----------------------- ----- ------ --------- --------- -------
Long-term obligations (1) $ 697,396 $22,000 $ 272,101 $ 149,751 $ 253,544
Capital lease obligations (2) 4,871 834 1,668 1,551 818
Operating leases (2) 3,796 1,513 2,038 245 -
Timber commitments (3) 124,000 15,000 28,000 28,000 53,000
-------------- -------------- ------------- -------------- -------------
Total contractual cash
obligations $ 830,063 $39,347 $ 303,807 $ 179,547 $ 307,362
============== ============== ============= ============== =============
(1) See Note 8 to the Consolidated Financial Statements.
(2) See Note 9 to the Consolidated Financial Statements.
(3) See Note 17 to the Consolidated Financial Statements.
Leverage/Capitalization
Total debt increased to $697.4 million at June 30, 2002 from $654.7
million at June 30, 2001, an increase of $42.7 million. The Company has capital
leases of $3.8 million at June 30, 2002. There were no capital leases at June
30, 2001. The majority of the increase in debt was due to the funding of capital
expenditures.
The total debt to capital ratio was 73% at June 30, 2002, compared to
74.0% at June 30, 2001 and 71.3% at June 30, 2000. The interest coverage ratio
was 1.8x in 2002, 3.7x in 2001 and 4.4x in 2000.
Liquidity
The Company has the following major sources of financing: revolving
credit facility, receivables based credit facility and senior subordinated
notes. The Company's revolving credit facility and senior subordinated notes
contain various covenants. At June 30, 2002, the Company was in compliance with
such covenants and believes it will be in compliance through fiscal 2003.
Revolving Credit Facility. The Company amended its Revolving Credit
Facility on March 18, 2002 to modify the financial convenants for the period
March 31, 2002 through June 30, 2003. The interest rate applicable to borrowings
under the revolving credit facility is the agent's prime rate plus 1.75% to
2.25% or a LIBOR based rate ranging from LIBOR plus 2.75% to LIBOR plus 3.75%.
This facility is secured by substantially all of the Company's assets located in
the United States. On March 28, 2002, the Company borrowed the remaining
availability on its $215 million Revolving Credit Facility and invested the
excess cash in a AAA rated money market fund.
11
Receivables Based Credit Facility. At June 30, 2002, $18.9 million was
outstanding on the Company's $30.0 million receivables based credit facility.
The interest rate applicable to borrowings under this facility is one-week LIBOR
plus 0.75%, and the facility is secured by certain insured receivables. The
Company has classified the outstanding amount of the receivables based credit
facility as long-term debt as it has amended the maturity date to December 2003.
Senior Subordinated Notes. At March 31, 2002, the Company's fixed
charge coverage ratio (as defined in the subordinated note indentures) fell
below 2:1. Falling below the 2:1 ratio does not breach any covenant and is not
an event of default under any of the Company's debt agreements. As specified in
those indentures, the Company's debt is now limited to a "Permitted
Indebtedness" limitation (also defined in the indentures), until the ratio again
equals or exceeds 2:1. Under the "Permitted Indebtedness" limitation, the
Company is limited to but is able to maintain its current borrowings under the
revolving credit facility and to continue to borrow under its receivables based
credit facility. In addition, the Company has a $25.0 million basket (as defined
in the 1995 Indenture) that can be used for any new indebtedness. None of this
basket had been used at June 30, 2002. In the event that any principal is repaid
on the receivables based credit facility, any new borrowing under the
receivables based credit facility will be counted against the $25 million
basket.
While there can be no assurances, the Company believes that operating
results will improve and the Company will exceed the 2:1 ratio, which is
measured on a rolling four-quarter basis by the quarter ending March 31, 2003.
On March 15, 2002, the Company filed a Form S-3 shelf registration
statement. The shelf registration statement allows the Company to issue various
types of securities, including common stock, preferred stock and debt
securities, from time to time, up to an aggregate of $300 million. The Company
filed the registration statement to gain additional flexibility in accessing
capital markets for general corporate purposes. This S-3 registration statement
became effective on April 18, 2002.
On May 16, 2002, the Company sold 2,150,000 shares of its common stock
under its universal shelf registration at a price of $10.00 per share. The net
proceeds of $21.4 million were used for general corporate purposes. The Company
currently has no plans to issue additional securities.
While there can be no assurances, the Company believes that its cash
flow from operations along with current cash and cash equivalents and short-term
investments will be sufficient to fund capital expenditures, meet operating
expenses and service all debt requirements for the foreseeable future.
Item 7a. Qualitative and Quantitative Disclosures About Market Risk
The Company is exposed to market risk from changes in foreign exchange,
interest rates, raw material costs and the price of certain commodities used in
its production processes. 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 public debt is based on an
average of the bid and offer prices at year-end. The fair value of the credit
facility approximates its carrying value due to its variable interest rate. The
carrying value of other long-term debt approximates fair value based on the
Company's current incremental borrowing rates for similar types of borrowing
instruments. The carrying value and fair value of long-term debt at June 30,
2002 were $698.2 million and $656.9 million, respectively, and at June 30, 2001
were $654.7 million and $645.8 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 $2.2 million at June 30, 2002 and $3.1 million
at June 30, 2001.
The Company had $246.7 million of variable rate long-term debt
outstanding at June 30, 2002. At this borrowing level, a hypothetical 10%
increase in interest rates would have a $1.4 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.
12
At June 30, 2002, the Company had one interest rate swap agreement with
a total notional value of $100.0 million, terminating on October 15, 2010. The
Company entered into the interest rate swap agreement on May 7, 2001. The
agreement involves the exchange of fixed-rate interest payments at 8% for
floating-rate interest payments at three-month LIBOR plus 1.97% over the life of
the agreement without the exchange of any underlying principal amounts. The net
amounts paid or received under this interest rate swap agreement are recognized
as an adjustment to interest expense.
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 costs and their translation into U.S. dollars.
The primary currencies to which the Company is exposed include the European
euro, Canadian dollar and the Brazilian real.
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 $158.1 million and
$149.4 million at June 30, 2002 and 2001, 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
amounts to $14.4 million at June 30, 2002 and $13.6 million at June 30, 2001.
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, cotton fiber and fluff pulp
represent the largest component of the Company's variable costs of production.
The availability and cost of these materials are subject to market fluctuations
caused by factors beyond the Company's control, including weather conditions.
Significant decreases in availability or 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.
Commodities
In order to minimize market exposure, the Company uses forward
contracts to reduce price fluctuations in a desired percentage of forecasted
purchases of natural gas over a period of generally less than one year. At June
30, 2002, the Company had a natural gas contract outstanding with a fair value
of $0.4 million which is included in other assets. The fair value is based upon
exchange quoted market prices of comparable instruments. While this contract
does not qualify for hedge accounting, neither the effect on the results of
operations nor the year-end position was material to the Company's overall
results.
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.
13
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 18 to the Consolidated
Financial Statements.
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.
Item 8. Financial Statements and Supplementary Data
See Index to Financial Statements on page F-1
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.
14
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 16, 2002 are:
Elected to
Name Age Position Present Position
- ------------------------ ----- ------------------------------------------------------- ----------------
Robert E. Cannon 72 Chairman of the Board, Chief Executive Officer and March 1993
Director
David B. Ferraro 64 President, Chief Operating Officer and Director March 1993
Gayle L. Powelson 43 Sr. Vice President, Chief Financial Officer October 2000
Charles S. Aiken 52 Sr. Vice President, Nonwovens Manufacturing April 2000
John B. Crowe 55 Sr. Vice President, Wood Cellulose January 2001
Sheila Jordan Cunningham 50 Sr. Vice President, General Counsel and Secretary April 2000
George B. Ellis 62 Sr. Vice President, Cotton Cellulose January 2001
William M. Handel 56 Sr. Vice President, Human Resources April 2000
Paul N. Horne 46 Sr. Vice President, Cotton Cellulose January 2001
Kristopher J. Matula 40 Sr. Vice President, Nonwovens January 2001
- ----------------------------------
Robert E. Cannon
Chairman of the Board, Chief Executive Officer and Director
Mr. Cannon has served as Chairman of the Board and Chief Executive
Officer since March 1993, the same year in which he became a director. Before
assuming his current position, he served as Dean of the College of Management,
Policy and International Affairs at the Georgia Institute of Technology from
1991 through 1992, and Senior Vice President of Procter & Gamble from 1989 to
1991. He was Group Vice President - Industrial Products of Procter & Gamble,
which included the operations of Buckeye Cellulose Corporation, then a
subsidiary of Procter & Gamble, from 1981 to 1989. He was President of the
subsidiary from 1971 to 1981.
David B. Ferraro
President, Chief Operating Officer and Director
Mr. Ferraro has served as President and Chief Operating Officer since
March 1993, the same year in which he first became a director. He was Manager of
Strategic Planning of The Procter & Gamble Company from 1991 through 1992. He
served as President of Buckeye Cellulose Corporation, then a subsidiary of
Procter & Gamble, from 1989 through 1991, as its Executive Vice President and
Manager of Commercial Operations from 1987 through 1989, and as its Comptroller
from 1973 through 1986.
15
Gayle L. Powelson
Senior Vice President, Chief Financial Officer
Ms. Powelson has served as Senior Vice President, Chief Financial
Officer since October 2000. She served as Senior Vice President, Finance and
Accounting, from April 2000 to October 2000, Vice President Finance and
Accounting from April 1999 to April 2000 and as International Operations
Controller from February 1998 to April 1999. Prior to joining the Company she
served as Vice President and Controller of TruGreen-ChemLawn, L.P. and as Chief
Financial Officer and Vice President of ACI America Holdings Inc., a subsidiary
of BTR Nylex Ltd.
Charles S. Aiken
Senior Vice President, Nonwovens Manufacturing
Mr. Aiken has served as Senior Vice President, Nonwovens Manufacturing
since April 2000. He served as Vice President, Business Systems from April 1998
to April 2000 and as Vice President, Foley Plant from June 1995 to April 1998.
He was an employee of Procter & Gamble from 1977 to March 1993.
John B. Crowe
Senior Vice President, Wood Cellulose
Mr. Crowe has served as Senior Vice President, Wood Cellulose since
January 2001. He has served as Vice President, Wood Cellulose Manufacturing
from December 1997 to January 2001. Prior to joining the Company, he served as
Executive Vice President/General Manager of Alabama River Pulp and Alabama Pine
Pulp Operations, a division of Parsons and Whittemore, Inc. and as Vice
President and Site Manager of Flint River Operations, a subsidiary of
Weyerhauser Company. From 1979 to 1992, he was an employee of Procter & Gamble.
Sheila Jordan Cunningham
Senior Vice President, General Counsel and Secretary
Ms. Cunningham has served as Senior Vice President, General Counsel and
Secretary since April 2000. She served as Vice President, General Counsel and
Secretary from April 1998 to April 2000. She served as Assistant General Counsel
from March 1997 and as Secretary from July 1997 to April 1998. Prior to joining
the Company, she was a partner in the law firm of Baker, Donelson, Bearman &
Caldwell from 1988 to March 1997.
George B. Ellis
Senior Vice President, Cotton Cellulose
Mr. Ellis has served as Senior Vice President, Cotton Cellulose since
January 2001. Mr. Ellis served as Senior Vice President, Manufacturing-Specialty
Cellulose from July 1997 to January 2001 and as Vice President, Manufacturing
from March 1993 to July 1997. He was an employee of Procter & Gamble from 1960
to March 1993.
William M. Handel
Senior Vice President, Human Resources
Mr. Handel has served as Senior Vice President, Human Resources since
April 2000. He served as Vice President, Human Resources from November 1995 to
April 2000 and as Human Resources Manager from March 1993 to November 1995. He
was an employee of Procter & Gamble from 1974 to March 1993.
Paul N. Horne
Senior Vice President, Cotton Cellulose
Mr. Horne has served as Senior Vice President, Cotton Cellulose since
January 2001. He served as Senior Vice President, Commercial - Specialty
Cellulose from July 1997 to January 2001 and as Vice President, North and South
American Sales from October 1995 to July 1997. He was an employee of Procter &
Gamble from 1982 to March 1993.
Kristopher J. Matula
Senior Vice President, Nonwovens
Mr. Matula has served as Senior Vice President, Nonwovens since January
2001. He served as Senior Vice President, Commercial - Absorbent Products from
July 1997 to January 2001 and as Vice President, Corporate Strategy from April
1996 to July 1997. Prior to joining Buckeye in 1994, he held various positions
with Procter & Gamble and General Electric.
Additional information relating to Directors and Executive Officers is
incorporated herein by reference to the Company's 2002 Annual Proxy Statement.
16
Item 11. Executive Compensation
Information relating to this item is set forth in the Company's 2002
Annual Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information relating to this item is set forth under the caption
"Buckeye Stock Ownership" and "Executive Compensation" in the Company's 2002
Annual Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
None
17
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements and Financial Statement Schedules
o See Index to Consolidated Financial Statements and
Schedule on page F-1. 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.
(2) Listing of Exhibits
3.1 Second Amended and Restated Certificate of Incorporation (5)
3.1 (a) Articles of Amendment to the Second Amended and Restated
Certificate of Incorporation of Registrant (6)
3.2 Amended and Restated By-laws of the Registrant. (10)
4.1 Indenture for 8 1/2% Senior Subordinated Notes due 2005,
dated November 28, 1995(1) 4.2 Indenture for 9 1/4% Senior
Subordinated Notes due 2008, dated July 2, 1996 (2) 4.3
Indenture for 8% Senior Subordinated Notes due 2010, dated
June 11, 1998(6)
10.1 Amended and Restated 1995 Management Stock Option Plan of the
Registrant(7)
10.2 Second Amended and Restated 1995 Incentive and Nonqualified
Stock Option Plan for Management Employees of the
Registrant.(11)
10.3 Form of Management Stock Option Subscription Agreement(7)
10.4 Form of Stock Option Subscription Agreement(7)
10.5 Amended and Restated Formula Plan for Non-Employee
Directors(3)
10.6 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.(8)
10.7 Asset Purchase Agreement, dated October 1, 1999, between
Buckeye Technologies Inc., BKI Holdings Corporation, Buckeye
Mt. Holly LLC, Buckeye Finland Oy, BKI International Inc.
and UPM-Kymmene Corporation, Walkisoft Finland Oy, Walkisoft
USA, Inc., Walkisoft Denmark A/S(9)
10.8 German Purchase Agreement between Buckeye Technologies Inc.,
Buckeye Steinfurt GmbH, Buckeye Holdings GmbH, Walkisoft GmbH
and UPM-Kymmene Ojy(9)
10.9 Credit Agreement dated April 16, 2001 among the Registrant,
Fleet National Bank; Toronto Dominion (Texas), Inc.; Bank of
America, N. A.; First Union National Bank; and the other
lenders party thereto (Credit Agreement). (4)
10.10 Amendment No. 1 to the Credit Agreement dated September 7,
2001.(11)
10.11 Amendment of German Purchase Agreement Between Buckeye
Technologies Inc., Buckeye Steinfurt GmbH, Buckeye Holdings
GmbH AND Walkisoft GmbH, UPM-Kymmene Ojy dated
September 20, 2001.(11)
10.12 Amendment No. 2 to the Credit Agreement dated October 16,
2001.(12)
10.13 Credit and Security Agreement dated December 5, 2001 by and
among Wachovia Bank, N.A. and Buckeye Receivables (Credit and
Security Agreement).(13)
10.14 Amendment No. 3 to the Credit Agreement dated March 18,
2002.(14)
10.15 Consent Under Credit Agreement dated August 20, 2002.
10.16 Amendment to the Credit and Security Agreement dated
September 3, 2002.
12.1 Computation of Interest Coverage Ratio.
18
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
signed by Robert E. Cannon, the Chief Executive Officer
of Buckeye Technologies Inc. on September 20, 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
signed by Gayle L. Powelson, the Chief Financial Officer
of Buckeye Technologies Inc. on September 20, 2002.
- ----------------------
(1) 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.
(2) 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.
(3) Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for quarterly period ended December 31, 2000.
(4) Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for quarterly period ended March 31, 2001.
(5) Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for quarterly period ended December 31, 1997.
(6) 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.
(7) Incorporated by reference to the Registrant's Annual Report on
Form 10-K dated June 30, 1998.
(8) Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q/A for quarterly period ended March 31, 1999.
(9) Incorporated by reference to the Registrant's Current Report on
Form 8-K dated October 13, 1999.
(10) Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the year ended June 30, 2000.
(11) Incorporated by reference to the Registrant's Annual Report on
Form 10-K dated June 30, 2001.
(12) Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for quarterly period ended September 30, 2001.
(13) Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for quarterly period ended December 31, 2001.
(14) Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 2002.
(b) Reports on Form 8-K
During the quarter ended June 30, 2002, the following reports were
filed on Form 8-K or 8-K/A
- Report dated April 2, 2002, announcing the conference call regarding
operating results for the quarter ended March 31, 2002.
- Report dated April 5, 2002, amending the scheduling of the conference
call regarding operating results for the quarter ended March 31, 2002.
- Report dated May 16, 2002, announcing the sale of 2.1 million shares
of common stock.
19
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 20, 2002
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 20, 2002
By: /S/ DAVID B. FERRARO
- -------------------------------
David B. Ferraro, Director, President and Chief Operating Officer
Date: September 20, 2002
By: /S/ SAMUEL M. MENCOFF
- --------------------------------
Samuel M. Mencoff, Director
Date: September 20, 2002
By: /S/ HENRY F. FRIGON
- --------------------------------
Henry F. Frigon, Director
Date: September 20, 2002
By: /S/ RED CAVANEY
- --------------------------------
Red Cavaney, Director
Date: September 20, 2002
By: /S/ GAYLE L. POWELSON
- --------------------------------
Gayle L. Powelson, Senior Vice President, Chief Financial Officer
Date: September 20, 2002
20
Certification of Chief Executive Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Robert E. Cannon, certify that:
1. I have reviewed this annual report on Form 10-K of Buckeye
Technologies Inc. ("Buckeye");
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in
all material respects the financial condition, results of operations
and cash flows of Buckeye as of, and for, the periods presented in this
annual report.
Date: September 20, 2002 /s/ ROBERT E. CANNON
-------------------------
Chairman of the Board
and Chief Executive Officer
Certification of Chief Financial Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Gayle L. Powelson, certify that:
1. I have reviewed this annual report on Form 10-K of Buckeye
Technologies Inc. ("Buckeye");
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in
all material respects the financial condition, results of operations
and cash flows of Buckeye as of, and for, the periods presented in this
annual report.
Date September 20, 2002 /s/ GAYLE L. POWELSON
------------------------
Senior Vice President and
Chief Financial Officer
21
BUCKEYE TECHNOLOGIES INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
PAGE
Report of Management................................................................ F-2
Report of Independent Auditors...................................................... F-3
Financial Statements as of June 30, 2002, June 30, 2001 and for the three years
ended June 30, 2002:
Consolidated Statements of Operations............................................... F-4
Consolidated Balance Sheets......................................................... F-5
Consolidated Statements of Stockholders' Equity..................................... F-6
Consolidated Statements of Cash Flows............................................... F-7
Notes to Consolidated Financial Statements.......................................... F-8
Schedule:
Schedule II - Valuation and Qualifying Accounts.............................. F-25
F-1
Report of Management
The management of Buckeye Technologies Inc. is committed to providing
financial reports that are complete, accurate, and easily understood.
The consolidated financial statements and financial information included
in this report have been prepared in accordance with accounting principles
generally accepted in the United States and in the opinion of management fairly
and completely present the Company's financial results. Our auditor, Ernst
& Young LLP, has examined our financial statements and expressed an unqualified
opinion.
Ensuring the accuracy of financial statements starts at the top of the
Company. Our Board of Directors provides oversight as the representative of the
stockholders. Our Audit Committee, consisting entirely of independent Directors,
meets regularly with management and the auditors to review our financial
reports.
The Company's senior management, our Corporate Leadership Team, is
actively involved in all aspects of the business. This group understands key
strategies and monitors financial results. We maintain a system of internal
controls which provides reasonable assurance that transactions are accurately
recorded and assets are safeguarded. All of the Company's officers and financial
executives adhere to the Company's Code of Ethics and provide written
confirmation of their compliance.
Buckeye was built on a foundation of integrity and honesty. We take
responsibility for the quality and accuracy of our financial reporting.
/S/ ROBERT E. CANNON /S/ DAVID B. FERRARO /S/ GAYLE L. POWELSON
Robert E. Cannon David B. Ferraro Gayle L. Powelson
Chairman of the Board and President and Senior Vice President and
Chief Executive Officer Chief Operating Officer Chief Financial Officer
F-2
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, 2002 and 2001 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 2002. Our audits also included the
financial statement schedule listed in the index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Buckeye
Technologies Inc. at June 30, 2002 and 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 2002 in conformity with accounting principles generally accepted in the
United States. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, in
2001, the Company changed its method of depreciation for certain equipment, and
in 2002, the Company adopted Statement of Financial Accounting Standards No.
142.
/S/ ERNST & YOUNG LLP
Memphis, Tennessee
August 1, 2002
except for the ninth paragraph of Note 8 and the
second paragraph of Note 21, as to which the
date is September 3, 2002 and the first paragraph
of Note 21, as to which the date is August 20, 2002.
F-3
Consolidated Statements of Operations
(In thousands, except per share data)
Year Ended June 30
2002 2001 2000
--------------- --------------- --------------
Net sales $ 635,218 $ 731,528 $ 755,544
Cost of goods sold 557,963 574,055
------- -------
563,911
Gross margin 77,255 157,473
191,633
Selling, research and administrative expenses 37,101 46,326
54,725
Restructuring and impairment costs 11,589 -
-------- ------- -------
Operating income 28,565 111,147
136,908
Other income (expense):
Interest income 535 1,097 741
Interest expense and amortization of debt costs (48,586) (45,853) (43,485)
Foreign exchange, amortization of intangibles and
other ( 3,438) ( 2,062) ( 5,047)
--------- --------- ---------
(51,489) (46,818) (47,791)
-------- --------- ---------
Income (loss) before income taxes and cumulative effect of
change in accounting (22,924) 64,329 89,117
Income tax expense (benefit) ( 8,420) 21,055 30,000
--------- --------- --------
Income (loss) before cumulative effect of change in
accounting (14,504) 43,274 59,117
Cumulative effect of change in accounting
(net of tax of $0 and $1,286, respectively) (11,500) 3,249 -
--------- --------- --------
Net income (loss) $ (26,004) $ 46,523 $ 59,117
======== ======== ========
Earnings (loss) per share before cumulative effect of
change in accounting
Basic earnings (loss) per share $ (0.42) $ 1.25 $ 1.68
Diluted earnings (loss) per share $ (0.42) $ 1.23 $ 1.65
Cumulative effect of change in accounting
Basic earnings (loss) per share $ (0.33) $ 0.09 $ -
Diluted earnings (loss) per share $ (0.33) $ 0.09 $ -
Earnings (loss) per share
Basic earnings (loss) per share $ (0.74) $ 1.35 $ 1.68
Diluted earnings (loss) per share $ (0.74) $ 1.32 $ 1.65
Weighted average shares for basic earnings per share 34,906 34,534 35,091
Effect of dilutive stock options - 786 838
-------- ------- -------
Adjusted weighted average shares for diluted earnings
per share 34,906 35,320 35,929
======== ======= ======
See accompanying notes.
F-4
Consolidated Balance Sheets
(In thousands, except share data)
June 30
2002 2001
-----------------------------
Assets
Current assets:
Cash and cash equivalents $ 56,006 $ 12,932
Cash, restricted 3,375 -
Short-term investments 8,863 -
Accounts receivable - trade, net of allowance for doubtful accounts
of $1,391 and $984 at June 30, 2002 and 2001, respectively 94,534 99,832
Accounts receivable - other 3,618 4,757
Inventories 145,103 136,780
Deferred income taxes 7,421 4,613
Prepaid expenses and other 22,232 10,247
------- -------
Total current assets 341,152 269,161
Property, plant and equipment, net 627,752 629,551
Goodwill, net 120,399 131,688
Intellectual property and other, net 46,070 45,150
------- -------
Total assets $1,135,373 $1,075,550
=========== ===========
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable $ 33,789 $ 52,645
Accrued expenses 47,832 51,457
Current portion of capital lease obligation 793 -
Current portion of long-term debt 22,000 21,895
------- -------
Total current liabilities 104,414 125,997
Long-term debt 675,396 632,784
Accrued postretirement benefits 19,163 18,923
Deferred income taxes 79,295 64,353
Capital lease obligation 3,029 -
Other liabilities 416 3,471
Commitments and contingencies (Notes 7, 11, 14, and 15)
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 36,948,900 and 34,195,440 shares outstanding at
June 30, 2002 and 2001, respectively 431 431
Additional paid-in capital 55,517 65,125
Deferred stock compensation (282) (202)
Accumulated other comprehensive income (36,381) (58,289)
Retained earnings 318,633 344,637
Treasury shares, 6,193,870 and 8,947,330 shares at
June 30, 2002 and 2001, respectively ( 84,258) (121,680)
--------- ---------
Total stockholders' equity 253,660 230,022
--------- ---------
Total liabilities and stockholders' equity $1,135,373 $1,075,550
========= =========
See accompanying notes.
F-5
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 June 30, 1999 $ 431 $65,477 $ (1,468) $ (21,642) $ 238,997 (104,376) $177,419
Comprehensive income:
Net income - - - - 59,117 - 59,117
Other comprehensive income:
Foreign currency translation
adjustment - - - (12,734) - - (12,734)
-------
Comprehensive income 46,383
Purchase of 717,900 shares - - - - - (11,715) (11,715)
Compensation charge for stock options - 107 - - - - 107
Issuance of 88,778 shares of common stock - (180) - - - 1,221 1,041
Termination of stock options - (98) 98 - - - -
Amortization of deferred stock compensation - 744 - - - - 744
---- ------ ------- -------- ------- ------ -------
Balance at June 30, 2000 431 65,306 (626) (34,376) 298,114 (114,870) 213,979
Comprehensive income:
Net income - - - - 46,523 - 46,523
Other comprehensive income:
Foreign currency translation
adjustment - - - (23,913) - - (23,913)
------
Comprehensive income 22,610
Purchase of 769,300 shares - - - - - (9,827) (9,827)
Issuance of 214,126 shares of common stock - (199) - - - 3,017 2,818
Termination of stock options - 18 (18) - - - -
Amortization of deferred stock compensation - - 442 - - - 442
----- ------- ------ ------- ------- ------- ------
Balance at June 30, 2001 431 65,125 (202) (58,289) 344,637 (121,680) 230,022
Comprehensive income (loss):
Net income (loss) - - - - (26,004) - (26,004)
Other comprehensive income:
Foreign currency translation
adjustment - - - 21,908 - - 21,908
------
Comprehensive income (loss) (4,096)
Issuance of 2,756,859 shares of common stock - (11,054) - - - 37,482 26,428
Tax benefit on option exercise - 1,356 - - - - 1,356
Termination of restricted stock - - - - - (60) (60)
Deferred stock compensation - 90 (90) - - - -
Amortization of deferred stock compensation - - 10 - - - (10)
----- -------- ------ ------- ------- ------- -------
Balance at June 30, 2002 $ 431 $55,517 $ (282) $(36,381) $ 318,633 $(84,258) $253,660
===== ======= ======= ======== ========= ======== =======
See accompanying notes.
F-6
Consolidated Statements of Cash Flows
(In thousands)
Year Ended June 30
2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Operating activities
Net income (loss) $(26,004) $ 46,523 $ 59,117
Adjustments to reconcile net income to net cash provided by
operating activities:
Cumulative effect of change in accounting 11,500 (3,249) -
Impairment charge on idle equipment 9,984 - -
Depreciation 44,977 43,619 42,305
Amortization 5,525 9,028 6,141
Deferred income taxes 9,142 9,575 9,857
Other 1,820 4,550 5,661
Changes in operating assets and liabilities:
Accounts receivable 10,230 2,921 (21,962)
Inventories (3,411) (32,692) 1,561
Prepaid expenses and other assets (10,807) (8,358) 859
Accounts payable and other current liabilities (25,031) (3,333) 35,156
------- ------ -------
Net cash provided by operating activities 27,925 68,584 138,695
Investing activities
Acquisitions of businesses - (36,588) (29,501)
Purchases of property, plant and equipment (35,972) (153,033) (68,561)
Purchase short term investments (8,863)
Other (1,292) (1,637) (13,734)
------ -------- --------
Net cash used in investing activities (46,127) (191,258) (111,796)
Financing activities
Net proceeds from sale of equity interests 26,233 2,604 702
Purchase of treasury shares - (9,827) (11,715)
Net borrowings (payments) under revolving line of credit 54,040 160,819 (2,804)
Payments for debt issuance costs (2,157) (1,354) -
Principal payments on long-term debt and other (18,459) (35,521) (163)
------ ------- -------
Net cash provided by (used in) financing activities 59,657 116,721 (13,980)
Effect of foreign currency rate fluctuations 1,619 (2,060) (742)
------ ------- -------
Increase (decrease) in cash and cash equivalents 43,074 (8,013) 12,177
Cash and cash equivalents at beginning of year 12,932 20,945 8,768
------ ------- -------
Cash and cash equivalents at end of year $56,006 $ 12,932 $ 20,945
====== ======= =======
See accompanying notes.
F-7
Notes to Consolidated Financial Statements
(In thousands, except share data)
1. Accounting Policies
Business Description and Basis of Presentation
The financial statements are consolidated financial statements of
Buckeye Technologies Inc. and its subsidiaries (the Company). All significant
intercompany accounts and transactions have been eliminated in consolidation.
The Company manufactures and distributes value-added cellulose-based
specialty products used in numerous applications including disposable diapers,
personal hygiene products, engine air and oil filters, food casings, rayon
filament, acetate plastics, thickeners, and papers.
Cash and Cash Equivalents
The Company considers cash equivalents to be temporary cash investments
with maturity of three months or less when purchased.
Short-term Investments
The Company's short-term investments, consisting primarily of
high-grade debt securities, are recorded at fair value and are classified as
available-for-sale. Maturities of these investments are one year or less.
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 recorded at cost. Cost includes the
interest cost associated with significant capital additions. Interest
capitalized for the years ended June 30, 2002, 2001 and 2000 was $1,772, $4,824
and $447 respectively. Depreciation on production machinery and equipment at the
cotton cellulose and airlaid nonwovens plants is determined by the
units-of-production method which is based on the expected productive hours of
the assets, subject to a minimum level of depreciation. Other capital assets use
the straight-line method for determining depreciation. Depreciation under the
straight-line method is computed over the following estimated useful lives:
buildings--30 to 40 years; machinery and equipment--3 to 16 years. Depreciation
and amortization expense includes the amortization of assets under capital
lease.
The Company accrues the cost of periodic planned maintenance shutdowns,
based on its best estimate of incremental spending and the fixed overhead cost,
over the period between shutdowns.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment when circumstances
indicate the carrying value of an asset may not be recoverable. For assets that
are to be held and used, an impairment is recognized when the estimated
undiscounted cash flows associated with the asset or group of assets is less
than their carrying value. If impairment exists, an adjustment is made to write
the asset down to its fair value, and a loss is recorded as the difference
between the carrying value and fair value. Fair values are determined based on
quoted market values, discounted cash flows or internal and external appraisals,
as applicable. Assets to be disposed of are carried at the lower of carrying
value or estimated net realizable value. See Note 4 for information concerning
impairment charges.
Goodwill is recognized for the excess of the purchase price over the
fair value of tangible and identifiable intangible net assets of businesses
acquired. Prior to the adoption of Statement of Financial Accounting Standards
No. ("SFAS") 142, "Goodwill and Other Intangible Assets" in June 2001, goodwill
was amortized over the estimated period of benefit on a straight-line basis over
periods ranging from 30 to 40 years, and was reviewed for impairment under the
policy for other long-lived assets. Since adoption of SFAS 142 in July 2001,
amortization of goodwill was discontinued and goodwill is reviewed at least
annually for impairment. Accumulated amortization was $17,950 and $17,793 at
June 30, 2002 and 2001, respectively.
F-8
Intellectual Property and Other
At June 30, 2002 and 2001, the Company had intellectual property
totaling $37,442 and $36,688, respectively, which includes patents (including
application and defense costs), licenses, trademarks, and tradenames the
majority of which were obtained in the acquisition of airlaid businesses.
Intellectual property is amortized by the straight-line method over 5 to 20
years and is net of accumulated amortization of $5,562 and $3,432 at June 30,
2002 and 2001, respectively. Intellectual property amortization expense of
$2,199, $2,175 and $1,155 was recorded during the years June 30, 2002, 2001 and
2000, respectively. Estimated amortization expense for the five succeeding
fiscal years follows: $2,175 in 2003, $2,210 in 2004, $2,215 in 2005, $2,175 in
2006 and $2,070 in 2007.
Deferred debt costs of $15,313 and $13,160 at June 30, 2002 and 2001,
respectively are amortized by the interest method over the life of the related
debt and are net of accumulated amortization of $7,088 and $5,095 at June 30,
2002 and 2001, 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
Effective at the beginning of fiscal 2001, the Company adopted
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS No. 133), as amended by SFAS Nos. 137
and 138. These statements require that every derivative instrument be recorded
in the balance sheet as either an asset or liability measured by its fair value.
These statements also establish new accounting rules for hedge transactions,
which depend on the nature and effectiveness of the hedge relationship.
The Company periodically uses derivatives and other financial
instruments to hedge exposures to natural gas, interest rates and currency
risks. For hedges which meet the SFAS No. 133 criteria, the Company formally
designates and documents the instrument as a hedge of a specific underlying
exposure, as well as the risk management objective and strategy for undertaking
each hedge transaction. Because of the high degree of effectiveness between the
hedging instrument and the underlying exposure being hedged, fluctuations in the
value of the derivative instruments are generally offset by changes in the value
or cash flows of the underlying exposures being hedged. Derivatives are recorded
in the consolidated balance sheet at fair value.
Credit Risk
The Company has established credit limits for each customer. The
Company generally requires the customer to provide a letter of credit for export
sales in high-risk countries. Credit limits are monitored routinely.
Environmental Costs
Liabilities are recorded when environmental assessments are probable
and the cost can be reasonably estimated. Generally, the timing of these
accruals coincides with the earlier of completion of a feasibility study or the
Company's commitment to a plan of action based on the then known facts.
Revenue Recognition
Revenues are recognized when title to the goods passes to the customer.
Net sales are composed of sales reduced by sales allowances.
Shipping and Handling Costs
Amounts related to shipping and handling and billed to a customer in a
sale transaction have been classified as revenue. Costs incurred for shipping
and handling have been classified as costs of goods sold.
F-9
Foreign Currency Translation
Company management has determined that the local currency of its
German, Irish, Canadian, and Brazilian subsidiaries is the functional currency,
and accordingly European euro, Canadian dollar, and Brazilian real 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.
Transaction gains and losses that arise from exchange rate fluctuations
on transactions denominated in a currency other than the local functional
currency are included in "Other income" in the results of operations.
Transaction gains and (losses) of $(1,974), $2,133 and $716 were recorded during
the years ended June 30, 2002, 2001 and 2000, respectively.
Use of Estimates
The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from the estimates and assumptions used.
Changes in estimates are recognized in accordance with the accounting
rules for the estimate, which is typically in the period when new information
becomes available to management. Areas where the nature of the estimate makes it
reasonably possible that actual results could materially differ from amounts
estimated include: impairment assessments on long-lived assets (including
goodwill), allowance for doubtful accounts, income tax liabilities, accruals for
planned maintenance shutdowns, and contingent liabilities.
During 2002 and 2001, the Company changed its estimate of its accrual
for planned maintenance shutdowns based on a change in the estimated timing of
the shutdown. The effect of the change was to decrease cost of goods sold $1,181
and $2,207 for the years ended June 30, 2002 and 2001, respectively.
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. Diluted
loss per share amounts for 2002 have been calculated using the same denominator
as used in the basic loss per share calculation as the inclusion of dilutive
securities in the denominator would have been an anti-dilutive effect.
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).
Recently Issued Accounting Standards
In October 2001, the Financial Accounting Standards Board issued
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS No. 144). The Statement supersedes Statement No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of (SFAS No. 121). The Statement provides more guidance on estimating cash flows
when performing a recoverability test, requires that a long-lived asset (group)
to be disposed of other than by sale (e.g. abandoned) be classified as "held and
used" until it is disposed of, and establishes more restrictive criteria to
classify an asset (group) as "held for sale." The Statement also supersedes the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30, Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions (APB 30), for the disposal of a segment of a business
and would extend the reporting of a discontinued operation to a "component of an
entity." SFAS No. 144 is effective for the Company's fiscal year 2003.
F-10
Effective July 1, 2001 the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets, which establishes new accounting and reporting
requirements for goodwill and other intangible assets as described in our
critical accounting policies. Based on the assessment, effective July 1, 2001,
the Company has reduced its goodwill by $11,500 in the converting business,
which was purchased as part of the Merfin acquisition in 1997. There was no tax
benefit recorded as a result of the reduction in the carrying value of the
goodwill.
Reclassifications
Certain prior year amounts have been reclassified to conform to current
year classifications. In 2002, the Company began classifying bank overdrafts as
accounts payable. Total bank overdrafts at June 30, 2002 and June 30, 2001 were
$4,315 and $6,020, respectively.
2. Changes in Accounting
Depreciation
Through June 30, 2000, property, plant and equipment had been
depreciated on the straight-line method over the estimated useful lives of the
assets, which range from 5 to 40 years. Effective July 1, 2000, depreciation on
the Company's production machinery and equipment at cotton cellulose and airlaid
nonwovens plants was computed using the units-of-production method, which is
based upon the expected productive hours of the assets, subject to a minimum
level of depreciation. The Company believes the units-of-production method is
preferable to the method previously used because the new method recognizes that
depreciation of this machinery and equipment is related substantially to
physical wear due to usage rather than the passage of time. This method,
therefore, more appropriately matches production costs over the lives of the
production machinery and equipment of the cotton cellulose and airlaid nonwovens
plants with the revenues of those plants and results in a more accurate
allocation of the cost of the physical assets to the periods over their useful
lives. The cumulative effect of applying the new method for years prior to 2001
is an increase to income of $3,249 net-of-tax ($4,535 pretax) reported as a
cumulative effect of accounting change in the consolidated statement of income
for the year ended June 30, 2001. In addition, the net income of the Company,
excluding the cumulative effect of accounting change, for the year ended June
30, 2001 is $440 or $.01 per share more than it would have been if the Company
had continued to follow the straight-line method of depreciation of the
production machinery and equipment of the cotton cellulose and airlaid nonwovens
plants.
The pro-forma amounts below reflect the retroactive application of
units-of-production depreciation on machinery and equipment of the cotton
cellulose and airlaid nonwoven plants and the corresponding elimination of the
cumulative effect of the accounting change.
Year ended June 30
2001 2000
---- ----
As reported:
Net income $ 46,523 $ 59,117
Basic earnings per share 1.35 1.68
Diluted earnings per share 1.32 1.65
Pro forma:
Net income $ 43,274 $ 58,927
Basic earnings per share 1.25 1.68
Diluted earnings per share 1.23 1.64
F-11
Goodwill
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, Business Combinations
(SFAS No. 141) and No. 142, Goodwill and Other Intangible Assets (SFAS
No. 142). The Company adopted SFAS 142 on July 1, 2001 and discontinued the
amortization of goodwill. The following schedule adjusts reported net income
(loss) and related earnings (loss) per share to exclude amortization expense
related to goodwill, including any related tax effects, for all periods
presented:
Years Ended June 30
2002 2001 2000
---------------------------------------------------
Adjusted income (loss) before cumulative
effect of change in accounting for
goodwill............................... $ (14,504) $46,523 $59,117
Net income (loss):
Originally reported net income (loss).. (26,004) 46,523 59,117
Add back: Goodwill Amortization
(net of taxes)..................... - 3,881 3,596
---------------------------------------------------
Adjusted net income (loss)............ $ (26,004) $50,404 $62,713
===================================================
Adjusted earnings (loss) per share:
Basic................................. $ (0.74) $ 1.46 $ 1.79
Diluted............................... $ (0.74) $ 1.43 $ 1.75
Under the guidelines of SFAS 142, the Company has completed its
impairment assessments of the carrying value of goodwill. In the assessment of
the carrying value of goodwill, the Company developed its best estimate of
operating cash flows over the period approximating the remaining life of the
business' long-lived assets.
Based on this assessment, effective July 1, 2001, the Company has
reduced its goodwill by $11,500 in its converting business, which was purchased
as part of the Merfin acquisition in 1997. There was no tax benefit recorded as
a result of the reduction in the carrying value of the goodwill. The low growth
rate in the converting business does not support its goodwill on a discounted
basis. Under SFAS 142, the impairment adjustment recognized at adoption of the
new rules was reflected as a cumulative effect of accounting change in the 2002
consolidated statement of operations. Impairment adjustments recognized after
adoption, if any, are required to be recognized as operating expenses.
3. Business Combinations
On October 1, 1999, the Company acquired essentially all of the assets
of Walkisoft, UPM-Kymmene's nonwovens business, for $29,501 in cash and $83,963
($88,000 in notes payable, net of $4,037 discount) in debt payable to
UPM-Kymmene. The acquisition of Walkisoft added manufacturing facilities in
Steinfurt, Germany and Gaston, North Carolina. On August 1, 2000, the Company
acquired the cotton cellulose business of Fibra, S.A. (Americana), located in
Americana, Brazil for $36,588, including acquisition costs. The Americana
acquisition was funded using borrowings from the Company's bank credit facility.
In May 2001, production at Americana was suspended and capital improvements are
planned to allow sales to market customers. Both acquisitions were accounted
for using the purchase method of accounting. The allocation of the purchase
price is based on the respective fair value of assets and liabilities at the
date of acquisition.
Purchase Price Allocation
Walkisoft Americana
--------- ---------
Working capital, net of cash $ 9,266 $ 67
Property, plant and equipment 92,223 9,332
Intangible assets 11,975 21,500
Other assets - 5,689
------ -------
$113,464 $ 36,588
========= =========
F-12
The consolidated operating results of Walkisoft and Americana have been
included in the consolidated statements of operations from their respective
dates of acquisition. The following pro forma results of operations assume that
the acquisitions occurred at the beginning of the year of acquisition and at the
beginning of the year proceeding the year of acquisition. The information for
the year ended June 30, 2001 is after the cumulative effect of the change in
accounting.
Pro forma results of operations Year Ended June 30
2001 2000
------------------------------------
Net sales $ 732,158 $ 781,585
Net income 46,481 57,708
Basic earnings per share 1.35 1.64
Diluted earnings per share 1.32 1.61
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.
4. Restructuring and Impairment Costs
During the year ended June 30, 2002, the Company entered into a
restructuring program. The program is designed to deliver cost reductions
through reduced overhead expenses. The cost recorded during the year ended June
30, 2002, comprised mainly of severance and other employee benefit costs, is
$1,605.
Involuntary termination benefits of $1,004 have been paid and $601 have
been accrued as of June 30, 2002. Payments related to the restructuring program
are expected to continue into the second quarter of fiscal year 2003. As a
result of the restructuring, approximately 185 positions have been eliminated.
An additional 15 positions will be eliminated by the end of the first quarter of
fiscal 2003. All costs of the program are reported in the statements of
operations under restructuring and impairment costs. The nonwovens and cotton
businesses in North America and Europe are impacted by this cost reduction
program. As part of this restructuring, the Company has closed engineering
offices located in Finland.
During the quarter ended June 30, 2002, the Company recorded impairment
costs of $9,984 in the statements of operations under restructuring and
impairment costs. These impairment costs are primarily related to the write-off
of obsolete airlaid nonwovens packaging equipment that has been replaced with
more efficient StacPac(TM) lines. This equipment is expected to be disposed of
during fiscal year 2003.
5. Inventories
Components of inventories
June 30
2002 2001
------------------------------------
Raw materials $ 36,902 $ 39,008
Finished goods 84,906 76,032
Storeroom and other supplies 23,295 21,740
------------------------------------
$145,103 $136,780
====================================
F-13
6. Property, plant and equipment
Components of property, plant and equipment
June 30
2002 2001
-----------------------------
Land and land improvements $ 15,618 $ 14,362
Buildings 140,476 97,788
Machinery and equipment 718,356 610,372
Construction in progress 31,095 138,458
-----------------------------
905,545 860,980
Accumulated depreciation (277,793) (231,429)
-----------------------------
$627,752 $629,551
=============================
7. Accrued expenses
Components of accrued expenses
June 30
2002 2001
----------------------------
Retirement plans $ 5,899 $ 6,369
Vacation pay 4,392 4,947
Maintenance accrual 7,699 8,008
Sales program accrual 3,184 3,486
Interest 8,324 8,283
Property taxes 3,259 2,938
Salaries and incentive pay 1,766 4,170
Other 3,309 13,256
----------------------------
$47,832 $51,457
============================
8. Debt
Components of long-term debt
June 30
2002 2001
----------------------------
Senior Subordinated Notes due:
2005 $149,751 $149,692
2008 99,644 99,603
2010 151,900 146,505
Credit Facilities 245,698 187,439
Notes payable 43,403 64,432
Other 7,000 7,008
----------------------------
697,396 654,679
Less current portion 22,000 21,895
----------------------------
$675,396 $632,784
============================
The Company completed a public offering of $150,000 principal amount of
8.5% 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
9.25% 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.
F-14
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. These notes have been
hedged by an interest rate swap (see Note 12).
The Company has a secured credit facility (the Credit Facility)
providing for borrowings up to $215,000 of which $213,500 is outstanding at June
30, 2002. The Credit Facility matures on March 31, 2005. The Company amended its
Credit Facility on March 18, 2002 to modify the financial covenants for the
period March 31, 2002 through June 30, 2003. The interest rate applicable to
borrowings under the Credit Facility is the agent's prime rate plus 1.75% to
2.25% or a LIBOR based rate ranging from LIBOR plus 2.75% to LIBOR plus 3.75%.
The Credit Facility is secured by substantially all of the Company's assets
located in the United States. The Senior Subordinated Notes are subordinate to
the Credit Facility.
Borrowings under the Credit Facility at June 30, 2002 were at an
average rate of 5.79%. Letters of credit issued through the Credit Facility of
$1,179 are outstanding at June 30, 2002. On March 28, 2002, the Company borrowed
the remaining availability on its Credit Facility and invested the excess cash
in AAA rated money market funds and AAA rated short term securities.
The Company has a secured credit facility in Canada providing for
borrowings of approximately $13,276. This facility matures on September 30, 2003
and is secured by substantially all of the Company's assets in Canada. The
interest rate applicable to borrowings under the facility is a Bankers
Acceptance based rate ranging from BA plus 0.75% to BA plus 1.75%. At June 30,
2002, there was no available borrowing under this facility. In addition, the
Company has a credit facility in Germany providing for borrowings of
approximately $6,150. Letters of credit issued through this credit facility of
$2,269 are outstanding at June 30, 2002. The amount available for borrowing
under the German credit facility is approximately $3,880 at June 30, 2002.
In connection with the purchase of the nonwovens assets of UPM-Kymmene
as of October 1, 1999, the Company entered into four separate promissory notes
with the seller. The principal amount of each note is $22,000 and each bears
interest at a rate of 5%. The total principal amount outstanding at June 30,
2002 is $44,000 less the unamortized discount of $597 which is based on an
imputed interest rate of 7.1%. One note in the principal amount of $22,000 plus
accrued interest on all outstanding notes is due on each of the next two
anniversaries of the closing date. The notes are secured by the stock of the
German subsidiary formed to operate Walkisoft.
On March 1, 2000, the Company purchased certain technology from
Stac-Pac Technologies Inc. In connection with the purchase, the Company entered
into two separate unsecured promissory notes with Stac-Pac Technologies Inc. The
principal amount of each note is $5,000 and each bears interest at a rate of 7%.
The principal amount of the first note plus accrued interest has been paid. In
accordance with the purchase agreement, the Company is entitled to withhold the
final installment of the purchase price until final resolution of a patent
opposition legal proceeding. Therefore, the principal amount of the second note
has been classified as long-term debt.
On December 5, 2001, the Company entered into a receivables based
credit facility with a commercial bank providing for borrowings up to $30,000,
of which $18,922 was outstanding at June 30, 2002. In accordance with the terms
of the agreement, $3,375 of the loan proceeds are held as restricted cash. The
credit facility was amended on September 3, 2002. It matures on December 4, 2003
and the interest rate applicable to borrowings under the credit facility is
one-week LIBOR plus 0.75%. The credit facility is secured by certain insured
receivables of the Company. At June 30, 2002, the Company had unused borrowing
availability of $11,078 on its receivables based credit facility.
Senior Subordinated Notes. At March 31, 2002, the Company's fixed
charge coverage ratio (as defined) in the subordinated note indentures) fell
below 2:1. As specified in those indentures, the Company's debt is now limited
to "Permitted Indebtedness" (also defined in the indentures), until the ratio
again equals or exceeds 2:1. Under the "Permitted Indebtedness" limitation, the
Company is limited to its current borrowings under the revolving credit facility
and may continue to borrow under its receivables based credit facility up to the
$30,000 limit. In addition, the Company has a $25,000 basket (as defined in the
1995 Indenture) that can be used for any new indebtedness. In the event that any
principal is repaid on the receivables based credit facility, any new borrowing
under the receivables based credit facility will be counted against the $25,000
basket.
F-15
Aggregate maturities of long-term debt are as follows: 2003-$22,000,
2004-$58,601, 2005-$213,500, 2006-$149,751; and thereafter $253,544. 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, 2002, the amount available for
the payment of dividends and/or the acquisition of treasury stock was zero under
the most restrictive of these agreements.
Total interest paid by the Company for the years ended June 30, 2002,
2001, and 2000 was $49,046, $48,859, and $37,819, respectively.
The Company has no off-balance sheet financing except for operating
leases as disclosed in Note 9.
9. Leases
In October 2001, the Company entered into capital lease agreements for
certain airlaid nonwovens plant equipment. The total cost of the assets covered
by these agreements was $4,284. At June 30, 2002, the Company's future minimum
lease payments for these assets were as follows: 2003 through 2006--$834;
2007--$717 and thereafter--$818.
The Company leases office and warehouse facilities and other equipment
under various operating leases. Operating Lease expense was $4,554, $3,676 and
$3,127 during the years ended June 30, 2002, 2001 and 2000, respectively. The
following shows the Company's commitments under its operating leases at June 30,
2002: 2003--$1,513; 2004--$1,083; 2005--$955; 2006--$245 and none
thereafter.
10. Stockholders' Equity
During the quarter ended June 30, 2002, the Company sold 2,150,000
shares of its common stock, held as treasury shares, from its universal shelf
registration initially filed with the Securities and Exchange Commission (SEC)
on March 15, 2002 and declared effective by the SEC on April 18, 2002. These
direct sales were at a price of $10.00 per share and the net proceeds were
approximately $21,364.
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, 1999 3,785,900 $ 12.99
Granted at market 885,000 16.19 $ 8.86
Exercised (76,150) 9.22
Terminated (84,800) 16.93
------------------------------------------
Outstanding at June 30, 2000 4,509,950 13.61
Granted at market 150,000 19.02 9.90
Exercised (205,000) 12.70
Terminated (40,000) 16.46
------------------------------------------
Outstanding at June 30, 2001 4,414,950 13.81
------------------------------------------
Granted at market 1,152,000 11.17 6.28
Granted below market 80,000 7.60 7.46
Exercised (591,000) 8.24
Terminated (213,000) 16.32
------------------------------------------
Outstanding at June 30, 2002 4,842,950 13.65
------------------------------------------
Options Exercisable at June 30:
2000 2,404,551 $ 12.17
2001 3,095,450 12.60
2002 2,916,950 14.03
F-16
There were 830,400, 1,849,400 and 1,659,400 shares reserved for grants
of options at June 30, 2002, 2001, and 2000 respectively. The following summary
provides information about stock options outstanding and exercisable at June 30,
2002:
Outstanding Exercisable
-------------------------------------------------------------------------------
Average Average Average
Exercise Remaining Life Exercise
Exercise Price Options Price (Years) Options Price
- ---------------------------------------------------------------------------------------------------------------
$ 7.50-$12.00 2,255,950 $ 9.81 7.0 1,012,950 $ 8.47
$12.50-$24.00 2,349,792 16.49 6.0 1,772,792 16.62
$18.50-$23.00 237,208 22.00 6.7 131,208 21.82
- ---------------------------------------------------------------------------------------------------------------
Total 4,842,950 $13.65 6.5 2,916,950 $ 14.03
- ---------------------------------------------------------------------------------------------------------------
As allowed under the Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation (SFAS 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 123:
Year Ended June 30
2002 2001 2000
------------------------------------
Net income (loss):
As reported $(26,004) $46,523 $59,117
Pro forma (28,792) 42,792 54,658
Basic earnings (loss) per share:
As reported $ (0.74) $ 1.35 $ 1.68
Pro forma (0.82) 1.24 1.56
Diluted earnings (loss) per share:
As reported $ (0.74) $ 1.32 $ 1.65
Pro forma (0.82) 1.21 1.52
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 .43 for
2002 and .41 for 2001 and .37 for 2000; a risk free interest rate range of 4.5%
to 5.1% for 2002, 5.1% to 5.9% for 2001 and 6.0% to 6.2% for 2000 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 2002.
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, 2002, 57,755 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 2,953,559, 1,522,000 and 1,486,322 for
the years ended June 30, 2002, 2001 and 2000, respectively.
The Board of Directors has authorized the repurchase of 6,000,000
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, 2002,
no shares were repurchased. A total of 5,009,300 shares have been repurchased
through June 30, 2002.
F-17
11. Income Taxes
Provision (benefit) for income taxes
Year ended June 30
2002 2001 2000
----------------------------------------------------
Current:
Federal $ (16,564) $ 5,664 $ 16,487
Foreign 470 6,005 3,167
State and other (1,468) (189) 489
----------------------------------------------------
(17,562) 11,480 20,143
Deferred:
Federal 6,281 9,312 4,148
Foreign 2,649 (100) 5,564
State and other 212 363 145
-----------------------------------------------------
9,142 9,575 9,857
-----------------------------------------------------
$ (8,420) $ 21,055 $ 30,000
=====================================================
The provision (benefit) for income taxes differs from the amount
computed by applying the statutory federal income tax rate of 35% to income
(loss) before income taxes and the cumulative effect of the change in
accounting, due to the following:
Rate analysis
Year Ended June 30
2002 2001 2000
-------------------------------------
Expected tax expense (benefit) $ (8,026) $ 22,515 $ 31,191
State taxes (816) 111 411
Foreign sales corporation (685) (2,986) (4,969)
Effect of foreign operations 2,517 1,280 2,892
Effect of rate change in
Germany - (450) -
Effect of rate change in
Canada (585) - -
Nondeductible items 90 638 644
Other (915) (53) (169)
--------------------------------------
$ (8,420) $ 21,055 $ 30,000
======================================
Significant components of the Company's deferred tax assets (liabilities) are as
follows:
Deferred tax assets (liabilities)
June 30
2002 2001
-----------------------------
Deferred tax liabilities:
Depreciation $ (87,159) $ (77,818)
Inventory (690) (2,411)
Other (2,576) (1,505)
-----------------------------
(90,425) (81,734)
Deferred tax assets:
Postretirement benefits 7,505 7,021
Inventory costs 128 -
Net operating losses 8,764 9,262
Nondeductible reserves 4,291 4,195
Other 4,145 4,363
-----------------------------
24,833 24,841
Valuation allowances (6,282) (2,847)
-----------------------------
18,551 21,994
-----------------------------
$ (71,874) $ (59,740)
=============================
F-18
The valuation allowances at June 30, 2002 and June 30, 2001 relate
specifically to net operating losses in the Company's foreign operations.
The Company paid income taxes of $3,520, $10,640 and $14,304 during the
years ended June 30, 2002, 2001 and 2000, respectively.
For the year ended June 30, 2002, loss before income taxes and the
cumulative effect of the change in accounting consisted of $20,699 of domestic
loss and $2,232 of foreign loss. For the year ended June 30, 2001, income before
income taxes and the cumulative effect of change in accounting consisted of
$49,193 of domestic income and $15,136 of foreign income. At June 30, 2002, the
Company has foreign net operating loss carryforwards of approximately $44,194,
which have no expiration date and U.S. net operating loss carryforwards of
approximately $57,278 which expire between 2017 and 2022.
12. Derivatives
The Company is exposed to certain market risks as a part of its ongoing
business operations and uses derivative financial instruments, where
appropriate, to manage these risks. Derivatives are financial instruments whose
value is derived from one or more underlying financial instruments. Examples of
underlying instruments are currencies, commodities and interest rates.
With the adoption of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," in 2001, the Company records the fair value
of all outstanding derivatives in other assets or other liabilities. Gains and
losses related to non-designated instruments or the ineffective portion of any
hedge are recorded in various costs and expenses, depending on the nature of the
derivative.
The Company does not utilize derivatives for speculative purposes.
Derivatives are transaction specific so that a specific debt instrument,
contract or invoice determines the amount, maturity and other specifics of the
hedge. The Company formally documents all relations between hedging instruments
and the hedged items, as well as its risk-management objectives and strategy for
undertaking various hedge transactions. The Company formally assesses, both at
the hedge's inception and on an ongoing basis, whether the derivatives that are
used in hedging transactions are highly effective in offsetting changes in the
hedged items.
The Company periodically uses derivative instruments to reduce
financial risk in three areas: interest rates, foreign currency and commodities.
The notional amounts of derivatives do not represent actual amounts exchanged by
the parties and, thus, are not a measure of the Company's exposure through its
use of derivatives.
At June 30, 2002, the Company has one interest rate swap agreement
outstanding that effectively converts $100,000 of a fixed rate obligation with
an interest rate of 8% to a floating rate obligation with a rate of LIBOR plus
1.97%. The arrangement is considered a hedge of a specific borrowing, and
differences paid and received under the arrangement are recognized as
adjustments to interest expense. This agreement, which is accounted for as a
fair value hedge, decreased interest expense by $3,451 and $264 for the years
ended June 30, 2002 and 2001, respectively. The agreement terminates on October
15, 2010. The fair market value of this agreement at June 30, 2002 and 2001 was
$2,555 and $(2,787), respectively, and is included in other assets at June 30,
2002 and other liabilities at June 30, 2001. The fair value is based upon the
estimated cost to terminate the agreement, taking into account current interest
rates and creditworthiness of counterparties.
In order to minimize market exposure, the Company uses forward
contracts to reduce price fluctuations in a desired percentage of forecasted
purchases of natural gas over a period of generally less than one year. At June
30, 2002, the Company had a natural gas contract outstanding with a fair value
of $424 which is included in other assets. The fair value is based upon exchange
quoted market prices of comparable instruments. While this contract does not
qualify for hedge accounting, neither its effect on the results of operations
nor the year-end position was material to the Company's overall results.
The Company may be exposed to losses in the event of nonperformance of
counterparties but does not anticipate such nonperformance.
F-19
13. Employee Benefit Plans
The Company has defined contribution retirement plans covering U.S.
employees. The Company contributes 1% of the employee's gross compensation plus
1/2% for each year of service up to a maximum of 11% of the employee's gross
compensation. The plan also provides for additional contributions by the Company
contingent upon the Company's results of operations. Contribution expense for
the retirement plans for the years ended June 30, 2002, 2001, and 2000 was
$5,656, $6,204 and $8,551, 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 Company has
established cost maximums to more effectively control future medical costs.
Effective July 1, 2002 the Company amended its postretirement medical plan to
among other things reduce the level of cost maximums per eligible employee.
The components of net periodic benefit costs are as follows:
Effect on operations
Year Ended June 30
2002 2001 2000
--------------------------------------
Service cost for benefits earned $ 725 $ 805 $ 849
Interest cost on benefit obligation 1,250 1,169 979
Amortization of unrecognized prior service cost (600) (600) (600)
--------------------------------------
Total cost $1,375 $ 1,374 $1,228
======================================
The following table provides a reconciliation of the changes in the
plans' benefit obligations over the two-year period ending June 30, 2002, and a
statement of the plans' funded status as of June 30, 2002 and 2001:
June 30
2002 2001
--------------------------------
Change in benefit obligation:
Obligation at beginning of year $ 15,585 $ 15,467
Service cost 725 805
Interest cost 1,250 1,169
Participant contributions 113 57
Actuarial loss (gain) 3,280 (1,879)
Benefits paid (973) (34)
Amendments (4,135) -
--------------------------------
Underfunded status at end of year 15,845 15,585
Unrecognized prior service cost 5,891 2,357
Unrecognized (loss) gain (2,870) 410
Other 755 571
--------------------------------
Net amount recognized in the consolidated balance sheet $ 19,621 $ 18,923
================================
The amount recognized in the consolidated balance sheet as of June 30,
2002 includes $458 which is classified in accrued expenses as the amount of
benefits expected to be paid in fiscal year 2003.
The weighted average annual assumed rate of increase in the per capita
cost of covered benefits (i.e. health care cost trend rate) for the medical
plans is 10.0% for 2002 and is assumed to decrease gradually to 5.0% in 2010 and
remain level thereafter. Due to the benefit cost limitations in the plan, the
health care cost trend rate assumption does not have a significant effect on the
amounts reported.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% at June 30, 2002 and 7.75% at June
30, 2001.
F-20
14. Significant Customer
Gross sales to The Procter & Gamble Company and its affiliates (P&G)
for the years ended June 30, 2002, 2001 and 2000 were 20%, 26% and 31%,
respectively, of total gross sales.
15. Segment Information
The Company operates in one segment consisting of the manufacturing and
marketing of value-added cellulose-based specialty products. All of the
Company's products involve similar production processes, are sold to similar
classes of customers and markets, are distributed using the same methods, and
operate in similar regulatory environments.
The Company's identifiable products are chemical cellulose, customized
paper and absorbent products. Chemical cellulose is used to impart purity,
strength and viscosity in the manufacture of diverse products such as food
casings, rayon filament, acetate plastics, thickeners for food, cosmetics,
pharmaceuticals and construction materials. Customized paper is used to provide
porosity, color permanence and tear resistance in automotive, laboratory and
industrial oil filters, premium letterhead, currency paper and personal
stationery. Absorbent products are used to increase absorbency and fluid
transport in products such as disposable diapers, feminine hygiene products and
adult incontinence products; and absorbency, fluid management and strength in
wipes, tabletop items, food pads and household wipes and mops.
The following provides relative gross sales to unaffiliated customers
by product:
Year Ended June 30
2002 2001 2000
----------------------------------------------------
Absorbent products 50% 53% 51%
Chemical cellulose 32% 30% 31%
Customized paper 18% 17% 18%
----------------------------------------------------
100% 100% 100%
====================================================
The Company has manufacturing operations in the United States, Canada,
Germany, Ireland and Brazil. 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
2002 2001 1999
-----------------------------------------------------
Net sales:
United States $ 452,521 $ 510,557 $ 563,829
Germany 108,454 119,193 95,665
Other 74,243 101,778 96,050
-----------------------------------------------------
Total net sales $ 635,218 $ 731,528 $ 755,544
=====================================================
Long-lived assets:
United States $ 505,814 $ 525,850 $ 433,967
Canada 114,885 118,837 121,665
Germany 76,606 68,787 67,791
Other 82,316 80,508 52,539
-----------------------------------------------------
Total long-lived assets $ 779,621 $ 793,982 $ 675,962
=====================================================
For the year ended June 30, 2002, the Company's gross sales by
destination were concentrated in the following geographic markets: North America
- - 36%, Europe - 37%, Asia - 14%, South America - 7% and Other - 6%.
16. Research and Development Expenses
Research and development costs of $9,041, $12,958 and $13,059 were
charged to expense as incurred for the years ended June 30, 2002, 2001 and 2000,
respectively.
F-21
17. Commitments
Under two 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, 2002, estimated annual
purchase obligations were as follows: 2003--$15,000; 2004--$14,000;
2005--$14,000; 2006--$14,000 and thereafter--$67,000. Purchases under
these agreements for the years ended June 30, 2002, 2001 and 2000 were $22,365,
$21,962 and $25,541, respectively.
18. 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 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 the
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 over several years to comply with the
remaining obligations under the Fenholloway Agreement.
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, the capital expenditures may be delayed,
and the total capital expenditures for the Foley Plant may increase if costs
increase or the Company is required by the "cluster rules" to implement other
technologies.
While the EPA has not yet finalized the 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. In
addition, the EPA is proposing boiler air emission standards that could be
applicable to the Foley Plant. It is not possible to accurately estimate the
cost of future compliance, but substantial capital expenditures could be
required in fiscal year 2005 and thereafter. These possible expenditures could
have a material adverse effect on our business, results of operations or
financial condition.
The Company is involved in certain legal actions and claims arising in
the ordinary course of business. It is the opinion of management that such
litigation and claims will be resolved without a materially adverse effect on
the Company's financial position or results of operations.
F-22
19. 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 public debt is based
on an average of the bid and offer prices at short maturities. The fair value of
the credit facilities approximates its carrying value due to its variable
interest rate. The carrying value of other long-term debt approximates fair
value based on the Company's current incremental borrowing rates for similar
types of borrowing instruments. The carrying value and fair value of long-term
debt at June 30, 2002 were $698,189 and $656,948, respectively and at June 30,
2001 were $654,679 and $645,842, respectively.
20. Quarterly Results of Operations (Unaudited)
First Quarter Second Quarter Third Quarter Fourth Quarter (2)
------------- --------------- ------------- ------------------
Year ended June 30, 2002
Net sales $ 155,157 $ 155,708 $ 164,225 $160,128
Gross margin 20,045 18,936 17,946 20,328
Operating income 11,424 10,456 7,430 (745)
Income (loss) before cumulative
effect of change in accounting 12 (848) (4,169) (9,499)
Net income (loss) (1) (11,488) (848) (4,169) (9,499)
Earnings (loss) per share before
cumulative effect of change in
accounting:
Basic (3) 0.00 (0.02) (0.12) (0.27)
Diluted (3) 0.00 (0.02) (0.12) (0.27)
Earnings (loss) per share
Basic (0.33) (0.02) (0.12) (0.27)
Diluted (0.33) (0.02) (0.12) (0.27)
Year ended June 30, 2001
Net sales $ 188,604 $ 186,001 $ 181,933 $174,990
Gross margin 48,298 43,372 37,674 28,129
Operating income 34,890 30,945 27,342 17,970
Income before cumulative effect
of change in accounting 15,536 13,318 9,290 5,130
Net income 18,785 13,318 9,290 5,130
Earnings per share before
cumulative effect of change in
accounting:
Basic 0.45 0.38 0.27 0.15
Diluted 0.43 0.38 0.27 0.15
Earnings per share
Basic (3) 0.54 0.38 0.27 0.15
Diluted 0.52 0.38 0.27 0.15
(1) Net income for the quarter ended September 30, 2001 has been
restated from the amount previously reported in the Company's 10-Q. The effect
of the restatement was to recognize in the quarter ended September
30, 2001 the cumulative effect of the change in accounting related to the
adoption of SFAS No. 142, Goodwill and Other Intangible Assets. (See Note 1).
(2) Fourth quarter of 2002 includes a pretax $11,589 charge ($7,596
after tax) for restructuring and impairment costs which are further described in
Note 4.
(3) The sums of the quarterly earnings per share do not equal annual
amounts due to differences in the weighted-average number of shares outstanding
during the respective periods.
F-23
21. Subsequent Events
On August 20, 2002, the Company's bank group waived the requirement
that the Company sell additional equity. The banks also agreed to Buckeye's
immediate prepayment of the $22,000 note due on October 1, 2002 to UPM-Kymmene.
On September 3, 2002, the Company amended its $30,000 receivables based
credit facility. The amendment extends the maturity of the facility to December
4, 2003 and reduces the interest rate to one-week LIBOR plus 0.75%.
F-24
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Column B Column C Column D Column E
--------------- -------------- ------------------ ---------------
Balance Additions Balance
at at
Beginning Charged End
of to of
Description Period Expenses Deductions Period
- ---------------------------------------------------- --------------- -------------- ------------------ ---------------
Reserve deducted from related asset accounts:
Allowance for doubtful accounts
Year ended June 30, 2002 $ 984 $ 799 $ (392) (a) $1,391
====== ====== ======= =====
Year ended June 30, 2001 $1,219 $1,032 $ (1,267) (a) $984
====== ====== ======= ====
Year ended June 30, 2000 $1,042 $177 $ -- $1,219
====== ==== ======= =====
Reserve for maintenance shutdowns
Year ended June 30, 2002 $8,008 $2,782 $ (3,091) (b) $7,699
====== ====== ======== ======
Year ended June 30, 2001 $8,624 $4,874 $ (5,490) (b) $8,008
====== ====== ======== ======
Year ended June 30, 2000 $4,822 $6,095 $ (2,293) (b) $8,624
====== ====== ======== ======
Provision for Restructuring
Year ended June 30, 2002 $ 0 $1,605 $ (1,004) (c) $ 601
==== ====== ======== =====
(a) Uncollectible accounts written off, net of recoveries
(b) Payments made during plant shutdowns were $1,910 in 2002, $3,283 in 2001
and $2,293 in 2000. During 2002 and 2001 the estimate was changed based
on a change in the estimated timing of shutdown. Adjustments of $1,181
and $2,207 were made in 2002 and 2001, respectively.
(c) Severance payments
F-25