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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2004
Or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ____ to ____
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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 Each Class Name of Each Exchange on which Registered
------------------- -----------------------------------------
Common Stock, par value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether 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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No ____
Indicate by check mark whether there is no disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K(ss.229.405 of this chapter) is not
contained herein, and will 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-KSB.
|X| ____
As of December 31, 2003, the aggregate market value of the registrant's voting
common equity held by non-affiliates, computed by reference to the price at
which the common equity was last sold, was approximately $310.6 million.
As of August 18, 2004, there were outstanding 36,974,347 Common Shares of the
Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Buckeye Technologies Inc.'s 2004 Annual Proxy Statement to be filed
with the commission in connection with the 2004 Annual Meeting of Stockholders
are incorporated by reference into Part III and IV.
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INDEX
BUCKEYE TECHNOLOGIES INC.
ITEM PAGE
PART I
1. Business.......................................................................... 2
2. Properties........................................................................ 7
3. Legal Proceedings................................................................. 8
4. Submission of Matters to a Vote of Security Holders............................... 8
PART II
5. Market for the Registrant's Common Stock, Related Security Holder Matters......... 10
6. Selected Financial Data........................................................... 10
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................. 12
7a. Qualitative and Quantitative Disclosures About Market Risk........................ 23
8. Financial Statements and Supplementary Data....................................... 25
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ................................................................ 25
9a. Controls and Procedures........................................................... 25
PART III
10. Directors and Executive Officers of the Registrant................................ 26
11. Executive Compensation............................................................ 26
12. Security Ownership of Certain Beneficial Owners and Management.................... 26
13. Certain Relationships and Related Transactions.................................... 26
14. Principal Accountant Fees and Services............................................ 26
PART IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................. 27
Signatures........................................................................ 29
OTHER
Index to Consolidated Financial Statements and Schedules.......................... F-1
PART I
Item 1. Business
General
Buckeye Technologies Inc. is a leading producer of value-added
cellulose-based specialty products, headquartered in Memphis, Tennessee. We
believe that we have leading positions in many of the high-end niche markets in
which we compete. We utilize our expertise in polymer chemistry, leading
research and development and advanced manufacturing facilities to develop and
produce innovative and proprietary products for our customers. We sell our
products to a wide array of technically demanding niche markets in which we
believe our proprietary products, manufacturing processes and commitment to
customer technical service give us a competitive advantage. We are the only
manufacturer in the world offering cellulose-based specialty products made from
both wood and cotton and utilizing wetlaid and airlaid technologies. As a
result, we believe we produce and market a broader range of cellulose-based
specialty products than any of our competitors. We produce uniquely tailored
products designed to meet individual customer requirements. Our focus on
specialty niche markets allows us to establish long-term supply positions with
key customers. We operate manufacturing facilities in the United States, Canada,
Germany and Brazil.
Cellulose is a natural fiber derived from trees and other plants that
is used in the manufacture of a wide array of products. The total cellulose
market generally can be divided into two categories: commodity and specialty.
Manufacturers use commodity cellulose to produce bulk paper and packaging
materials, the markets for which are very large but highly cyclical. Specialty
cellulose is used to impart unique chemical or physical characteristics to a
diverse range of highly engineered products. Specialty cellulose generally
commands higher prices, and demand for specialty cellulose is less cyclical than
commodity cellulose. We believe the more demanding performance requirements for
products requiring specialty cellulose limit the number of participants in our
niche markets. Our focus on niche specialty cellulose markets has enabled us to
maintain positive cash flows even during cyclical downturns in the commodity
cellulose markets.
Company History
We and our predecessors have participated in the specialty cellulose
market for over 75 years and have developed new uses for many cellulose based
products. We began operations as an independent company on March 16, 1993, when
we acquired the cellulose manufacturing operations of Procter & Gamble located
in Memphis, Tennessee and Perry, Florida (the Foley Plant), with Procter &
Gamble retaining a 50% limited partnership interest in the Foley Plant. We
became a public company in November of 1995 and simultaneously acquired/redeemed
Procter & Gamble's remaining interest in the Foley Plant. In May 1996, we
acquired the specialty cellulose business of Peter Temming AG located in
Glueckstadt, Germany. In September 1996, we acquired Alpha Cellulose Holdings,
Inc., a specialty cellulose producing facility located in Lumberton, North
Carolina. In May 1997, we acquired Merfin International Inc., a leading
manufacturer of airlaid nonwovens with facilities located in Canada, Ireland and
the United States. In October 1999, we acquired essentially all of the assets of
Walkisoft, UPM-Kymmene's airlaid nonwovens business. The acquisition of
Walkisoft added manufacturing facilities in Steinfurt, Germany and Gaston
County, North Carolina. In March 2000, we acquired the intellectual property
rights to the Stac-Pac(TM) folding technology. In August 2000, we acquired the
cotton cellulose business of Fibra, S.A. located in Americana, Brazil. In
calendar 2001, we started up the world's largest airlaid nonwovens machine at
our Gaston, North Carolina facility and started up a cosmetic cotton fiber line
at our Lumberton, North Carolina facility. Due to a decline in demand for cotton
content paper, in August 2003, we completed the closure of the specialty cotton
papers portion of our Lumberton, North Carolina facility. In April of 2004 we
announced the impending closure of our Cork, Ireland facility and ceased
production of nonwoven materials at this facility in July 2004. As we completed
fiscal 2004, we initiated an $18 million project to upgrade the capability of
our Americana, Brazil manufacturing facility. We expect this expansion will be
completed in the fall of 2005. See Note 3, Impairment of Long-Lived Assets, to
the Consolidated Financial Statements for further discussion of the Lumberton,
North Carolina and Cork, Ireland closures.
We are incorporated in Delaware and our executive offices are located
at 1001 Tillman Street, Memphis, Tennessee. Our telephone number is (901)
320-8100.
2
Products
Our product lines can be broadly grouped into four categories: chemical
cellulose, customized fibers, fluff pulp and nonwoven materials. We manage these
products within two reporting segments: specialty fibers and nonwoven materials.
The chemical cellulose and customized fibers are derived from wood and cotton
cellulose materials using wetlaid technologies. Fluff pulps are derived from
wood using wetlaid technology. Wetlaid technologies encompass cellulose
manufacturing processes in which fibers are deposited using water. Airlaid
nonwoven materials are derived from wood pulps, synthetic fibers and other
materials using airlaid technology. Airlaid technology utilizes air as a
depositing medium for fibers, one benefit of which is an increased ability over
wetlaid processes to mix additional feature-enhancing substances into the
material being produced. A breakdown of our major product categories, percentage
of sales, product attributes and applications is provided below.
% of Fiscal
Product Groups 2004 Sales Value Added Attributes Market for End Use Applications
-------------------------------------------------------------------------------------------------------------------------
Specialty Fibers
Chemical Cellulose 32%
Food casings Purity and strength Hot dog and sausage casings
Rayon industrial Strength and heat stability High performance tires and hose
cord reinforcement
High purity cotton High viscosity, purity and safety Personal care products, low fat dairy
ethers products, pharmaceuticals and
construction materials
Film for liquid Transparency/clarity, strength and Laptop and desktop computers and
crystal displays purity television screens
-------------------------------------------------------------------------------------------------------------------------
Customized Fibers 17%
Filters High porosity and product life Automotive, laboratory and industrial
filters
Specialty cotton Color permanence and tear Personal stationery, premium letterhead
papers resistance and currency
Cosmetic Cotton Absorbency, strength and softness Cotton balls and cotton swabs
-------------------------------------------------------------------------------------------------------------------------
Fluff Pulp 18%
Fluff pulp Absorbency and fluid transport Disposable diapers, feminine hygiene
products and adult incontinence products
-------------------------------------------------------------------------------------------------------------------------
Nonwoven Materials 33%
Airlaid nonwovens Absorbency, fluid management and Feminine hygiene products, specialty
wet strength wipes and mops, tablecloths, napkins,
placemats, incontinence products and
food pads
-------------------------------------------------------------------------------------------------------------------------
See Note 15, Segment Information, to the Consolidated Financial
Statements for additional information on products.
3
Raw Materials
Slash pine timber and cotton fibers are the principal raw materials
used in the manufacture of our specialty fibers products. These materials
represent the largest components of our variable costs of production. The region
surrounding the Foley Plant has a high concentration of slash pine timber, which
enables us to purchase adequate supplies of a species well suited to our
products at an attractive cost. In order to be better assured of a secure source
of wood at reasonable prices, we have entered into timber purchase agreements
which allow us to purchase wood at current market or fixed prices as stated in
the agreements. Additional information is included in Note 17, Commitments, to
the Consolidated Financial Statements.
We purchase cotton fiber either directly from cottonseed oil mills or
indirectly through agents or brokers. We purchase the majority of our
requirements of cotton fiber for the Memphis and Lumberton plants domestically.
The Glueckstadt plant purchases cotton fiber principally from suppliers in
Central Asia and the Middle East. The majority of the cotton fiber processed in
the Americana plant comes from within Brazil.
Fluff pulp is the principal raw material used in the manufacture of our
nonwoven materials products. More than 50% of our fluff pulp usage is supplied
internally and the remainder is purchased from several other suppliers. In
addition to fluff pulp, these products are comprised of synthetic fibers, latex
polymers, absorbent powders and carrier tissue depending on grade
specifications. These materials are also purchased from multiple sources.
The cost of slash pine timber, cotton fiber, and fluff pulp are subject
to market fluctuations caused by supply and demand factors. We do not foresee
material constraints from pricing or availability for any of our key raw
materials.
Sales and Customers
Our products are marketed and sold through a highly trained and
technically skilled in-house sales force. We maintain sales offices in the
United States and Europe. Our worldwide sales are diversified by geographic
region as well as end-product application. Our sales are distributed to
customers in approximately 60 countries around the world. Our fiscal 2004 sales
reflect this geographic diversity, with 39% of sales in North America, 40% of
sales in Europe, 11% of sales in Asia, 4% of sales in South America and 6% in
other regions. Approximately 83% of our worldwide sales, for the year ended June
30, 2004, were denominated in U.S. dollars. Our products are shipped by rail,
truck and ocean carrier. 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 niche markets that we
serve require a higher level of sales and technical service support than do
commodity cellulose sales. Our sales, product development and customer service
professionals work with customers in their plants to design products tailored
precisely to their product needs and manufacturing processes. In addition to an
in-house sales force, we also utilize outside sales agents in some parts of the
world.
Procter & Gamble is our largest customer, accounting for 16% of our
fiscal 2004 net sales. These sales are about evenly split between specialty
fibers and nonwoven materials. No other customer accounted for greater than 5%
of our fiscal 2004 net sales.
Research and Development
Our 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. We have research and
development pilot plant facilities in Memphis, and we employ scientists and
technicians who are focused on advanced products and new applications to drive
future growth. The pilot plant facilities allow us to produce and test new
products without interrupting the normal production cycles of our 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 $9.5 million, $9.3 million and $9.0
million were charged to expense as incurred for the years ended June 30, 2004,
2003 and 2002, respectively.
4
Competition
There are relatively few specialty fibers producers when compared with
the much larger commodity paper pulp markets. The technical demands and unique
requirements of the high-purity chemical cellulose or customized fiber 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
high-purity chemical cellulose and customized fiber markets are less subject to
price variation than commodity paper pulp markets. Major competitors include
Archer-Daniels-Midland, Borregaard, Rayonier, Tembec and Weyerhaeuser. A major
competitor closed its high-purity wood cellulose mill in July 2003, which we
estimate represented 18% of the high-purity wood cellulose market. This closure
has provided us with an opportunity to increase our volume in these markets.
We believe that the number of producers is unlikely to grow
significantly given the substantial investment to enter the mature specialty
fibers market and sufficient existing capacity.
Although demand for fluff pulp is generally stable, fluff pulp prices
tend to vary together with commodity paper pulp prices because fluff pulp is
often produced in mills that also produce commodity paper pulp. Our strategy is
to reduce our exposure to fluff pulp by increasing our sales of more specialized
wood cellulose into new and existing markets. We also use about 40,000 metric
tons of fluff pulp from our Foley plant annually as a key raw material in our
airlaid nonwovens operations. We currently produce less than 10% of the world's
supply of fluff pulp. Major competitors include Bowater, International Paper,
Koch Industries (formally Georgia-Pacific), Rayonier, and Weyerhaeuser,
Demand for airlaid nonwovens grew significantly in the 1990's.
Significant capacity expansion in 2001, primarily in North America, has resulted
in the market being oversupplied. Buckeye is the leading supplier of airlaid
nonwoven materials worldwide. The markets we compete in also utilize nonwovens
materials produced with technologies other than airlaid such as spunlaced. Major
nonwovens competitors include Ahlstrom, BBA Nonwovens, Concert Industries, Duni,
Georgia-Pacific, Kimberly Clark, PGI, and Rayonier.
In August 2003, Concert Industries filed for protection under Canada's
Companies' Creditors Arrangement Act and has currently been granted extensions
of protection under this act through September 30, 2004. We are unable to
predict the impact this bankruptcy filing will have on our markets. The closure
of our Cork, Ireland plant in July 2004 will improve airlaid industry capacity
utilization in Europe and should improve our competitive position there. There
will be some loss of market share in Europe due to the Cork closure, but we have
been able to successfully transition more than half of Cork's business to other
airlaid sites.
Intellectual Property
At June 30, 2004 and 2003, we had recorded intellectual property assets
totaling $29.2 million and $30.7 million, respectively. These amounts include
patents (including application and defense costs), licenses, trademarks, and
tradenames the majority of which were obtained in the acquisition of airlaid
nonwovens businesses and Stac-Pac(TM) technology. We intend to protect our
patents and file applications for any future inventions that are deemed to be
important to our business operations. The Stac-Pac(TM) packaging technology, a
proprietary system for packaging low-density nonwoven materials in compressed
cube-shaped bales, is an example of technology acquired by us to further
differentiate us from our airlaid nonwovens competitors. Stac-Pac(TM) bales
facilitate customers' high-speed production lines with a continuous flow of
material. Stac-Pac(TM) units also reduce freight costs by compressing more
material in a bale than can be shipped in a traditional roll form, which enables
us to more effectively ship the bales in trucks and containers. Additional
information is included in Note 1, Accounting Policies, to our Consolidated
Financial Statements.
Inflation
We believe that inflation has not had a material effect on our results
of operations nor on our financial condition during recent periods.
Seasonality
Our business has generally not been seasonal to a substantial extent,
but in most years somewhat lower specialty fiber volume is shipped in the July -
September quarter and somewhat lower nonwoven materials volume is shipped in the
October - December quarter.
5
Employees
As of August 18, 2004, we employed approximately 1,670 employees,
approximately 1,115 of whom are employed at our facilities in the United States.
Approximately 60% of the U.S. employees are represented by unions at three
plants in Perry, Florida; Lumberton, North Carolina; and Memphis, Tennessee. On
October 21, 2003, the union at our Foley plant ratified a new labor agreement
effective through March 31, 2008. The agreement for the Memphis Plant was signed
on April 28, 2003 and goes through March 18, 2006. During fiscal 2003, the
Lumberton hourly employees elected to be represented by a union. A two-year
labor agreement was ratified on May 1, 2004. On December 4, 2003 the union at
our Canadian facility ratified a new labor agreement effective through June 30,
2006.
Works councils provide employee representation for non-management
workers at our cotton cellulose plants in Glueckstadt, Germany and Americana,
Brazil, and our airlaid plant in Steinfurt, Germany. Our plants in Gaston, and
King, North Carolina are not unionized.
None of our 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. We
consider our relationships with our employees and their representative
organizations to be good. An extended interruption of operations at any of our
facilities could have a material adverse effect on our business.
Environmental Regulations and Liabilities
Our operations are subject to extensive general and industry-specific
federal, state, local and foreign environmental laws and regulations. We devote
significant resources to maintaining compliance with these laws and regulations.
We expect that, due to the nature of our operations, we 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, we can offer no assurance
that we will not incur material environmental compliance costs or liabilities in
the future. Our failure to comply with environmental laws or regulations could
subject us to penalties or other sanctions which could materially affect our
business, results of operations or financial condition. Additional information
is included in Note 18, Contingencies, to the Consolidated Financial Statements.
Internet Availability
Our website is www.bkitech.com. We make available, free of charge,
through our website under the heading "Investor Relations," annual reports on
Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and
any amendments to those filed or furnished, pursuant to Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934. These reports are
available as soon as reasonably practicable after we electronically file such
materials with, or furnish such materials to, the Securities and Exchange
Commission. The information on our website is not part of or incorporated by
reference in this Annual Report on Form 10-K.
Safe Harbor Provisions
This document contains both historical and forward-looking statements.
All statements other than statements of historical fact are, or may be deemed to
be, forward-looking statements within the meaning of section 27A of the
Securities Act of 1933, as amended, and section 21E of the Securities Exchange
Act of 1934, as amended. These forward-looking statements are not based on
historical facts, but rather reflect management's current expectations
concerning future results and events. These forward-looking statements generally
can be identified by the use of statements that include phrases such as
"believe," "expect," "anticipate," "intend," "plan," "foresee," "likely," "will"
or other similar words or phrases. Similarly, statements that describe
management's objectives, plans or goals are or may be forward-looking
statements. These forward-looking statements involve known and unknown risks,
uncertainties and other factors that are difficult to predict and which may
cause the actual results, performance or achievements to be different from any
future results, performance and achievements expressed or implied by these
statements. The following important factors, among others, could affect future
results, causing these results to differ materially from those expressed in our
forward-looking statements: pricing fluctuations and worldwide economic
conditions; dependence on a single customer; fluctuation in the costs of raw
materials; competition; inability to predict the scope of future environmental
compliance costs or liabilities; and the ability to obtain additional capital,
maintain adequate cash flow to service debt as well as meet operating needs. The
forward-looking statements included in this document are only made as of the
date of this document and we do not have any obligation to publicly update any
forward-looking statements to reflect subsequent events or circumstances.
6
Item 2. Properties
Corporate Headquarters. Our corporate headquarters, research and
development laboratories, and pilot plants are located in Memphis, Tennessee.
Specialty Fiber Plants
Memphis Plant. The Memphis Plant is located on approximately 75 acres
adjacent to the headquarters complex and has a capacity of approximately 100,000
annual metric tons of cotton cellulose. The facility currently operates at
approximately 80% of capacity using a reduced shift system.
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. In connection with the acquisition of the Foley Plant, we also own
13,000 acres of real property near the plant site. The Foley Plant operates near
100% capacity.
Glueckstadt Plant. The Glueckstadt Plant is located in Glueckstadt,
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. The Glueckstadt plant operates
at approximately 55% of capacity using a reduced shift system.
Lumberton Plant. The Lumberton Plant is located in Lumberton, North
Carolina on a 65-acre site and has a capacity of approximately 8,000 annual
metric tons of cosmetic cotton fiber. The Lumberton Plant is operating near 100%
of capacity.
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 is operating at its full capacity of
approximately 40,000 annual metric tons of cotton cellulose annually.
Nonwovens Plants
The stated capacity of airlaid nonwovens machines is based upon an
assumed mix of products. The flexible nature of the airlaid technology allows
for a wide range of materials to be produced. Machine production capability has
typically been lower than the stated capacity, often by factors of 10-20%, when
adjusted to reflect the actual product mix. Based on current product mix,
utilization of our airlaid machines worldwide is running approximately 70%
excluding our Cork facility, which ceased operations in July 2004.
All of our airlaid nonwovens sites have proprietary Stac-Pac(TM)
folding technology operational, which allows us to efficiently produce
compressed bales that facilitate customers' high-speed production lines with a
continuous flow of materials and facilitate more efficient shipping.
Delta Plant. The Delta Plant is located in Delta, British Columbia on a
12-acre industrial park site and has a total capacity of approximately 30,000
annual metric tons of airlaid nonwovens (26,000 based on current production mix)
from two production lines.
Steinfurt Plant. The Steinfurt Plant is located in Steinfurt, Germany
on an 18-acre site and has a total capacity of approximately 30,000 annual
metric tons of airlaid nonwovens from two production lines.
Gaston Plant. The Gaston Plant is located in Gaston County near Mt.
Holly, North Carolina on an 80-acre site and has a total capacity of
approximately 60,000 annual metric tons of airlaid nonwovens (48,000 annual
metric tons based on current production mix) from two production lines.
King Plant. The King Plant is located in King, North Carolina and
converts airlaid materials and wetlaid papers into wipes, towels and tissues for
industrial and commercial uses.
Cork Plant. The Cork Plant is located near Cork, Ireland on a 16-acre
site. Production at the facility ceased in July 2004 and the equipment is being
dismantled.
7
We own our 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. We lease buildings that house the King, North
Carolina Plant, the sales offices in Europe and distribution facilities in
Savannah, Georgia. All of the facilities located in the United States are
pledged as collateral for certain debt agreements. Additionally, the Delta,
Canada Plant is pledged as collateral for the Canadian credit facility.
We believe that our specialty fibers and nonwoven materials
manufacturing facilities and administrative buildings are adequate to meet
current operating demands.
Item 3. Legal Proceedings
We are involved in certain legal actions and claims arising in the
ordinary course of business. We believe that such litigation and claims will be
resolved without material adverse effect on our financial position or results of
operation.
Item 4. Submission of Matters to a Vote of Security Holders
None
Executive Officers of the Registrant
The names, ages and positions held by our executive officers on August
18, 2004 are:
Elected to
Name Age Position Present Position
David B. Ferraro 66 Chairman of the Board, Chief Executive Officer and April 2003
Director
John B. Crowe 57 President, Chief Operating Officer and Director April 2003
Kristopher J. Matula 41 Executive Vice President and Chief Financial Officer October 2003
Charles S. Aiken 54 Sr. Vice President, Manufacturing October 2003
R. Howard Cannon 41 Sr. Vice President, Wood Cellulose and Director April 2003
Sheila Jordan Cunningham 52 Sr. Vice President, General Counsel and Secretary April 2000
William M. Handel 58 Sr. Vice President, Human Resources April 2000
Paul N. Horne 49 Sr. Vice President, Cotton Cellulose January 2001
----------------------------------
David B. Ferraro
Chairman of the Board, Chief Executive Officer and Director
Mr. Ferraro has served as Chairman of the Board and Chief Executive
Officer since April 1, 2003. From March 1993 until he was named Chairman and
CEO, he served as President and Chief Operating Officer. He has been a director
of Buckeye since March 1993. He was Manager of Strategic Planning of Procter &
Gamble from 1991 through 1992. He served as President of our predecessor,
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.
8
John B. Crowe
President, Chief Operating Officer and Director
Mr. Crowe has served as President and Chief Operating Officer since
April 1, 2003. He was elected as a director of Buckeye in August 2004. He served
as Senior Vice President, Wood Cellulose from January 2001 to April 2003. He
served as Vice President, Wood Cellulose Manufacturing from December 1997 to
January 2001. Prior to joining the Company, he was Executive Vice
President/General Manager of Alabama River Pulp and Alabama Pine Pulp
Operations, a division of Parsons and Whittemore, Inc. and was 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.
Kristopher J. Matula
Executive Vice President and Chief Financial Officer
Mr. Matula has served as Executive Vice President and Chief Financial
Officer since October 2003. He served as Senior Vice President, Nonwovens and
Corporate Strategy from April 2003 to October 2003. He served as Senior Vice
President, Nonwovens from January 2001 to April 2003. 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.
Charles S. Aiken
Senior Vice President, Manufacturing
Mr. Aiken has served as Senior Vice President, Manufacturing since
October 1, 2003. He served as Senior Vice President, Nonwovens Manufacturing
from April 2000 to October 2003. 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.
R. Howard Cannon
Senior Vice President, Wood Cellulose and Director
Mr. Cannon has served as Senior Vice President, Wood Cellulose since
April 1, 2003. Previously, he was Vice President, Nonwovens Sales from August
2000 to April 2003 and was Manager, Corporate Strategy from November 1999 to
August 2000. He has served as a director of Buckeye since 1996. Before assuming
a position with Buckeye, he was President of Dryve, Inc., a company consisting
of 33 dry cleaning operations, a position he had held since 1987. He is
co-trustee of the Cannon Family Trust. R. Howard Cannon is the son of Robert E.
Cannon.
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.
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.
9
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 4,900 shareholders on August 18,
2004, based on the number of record holders of our 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 our
common stock.
Year Ended June 30
2004 2003
High Low High Low
---------- ---------- ---------- ------------
First quarter (ended September 30)................. $9.24 $6.72 $10.30 $6.40
Second quarter (ended December 31)................. 11.05 8.55 7.46 5.10
Third quarter (ended March 31)..................... 11.40 8.00 6.22 4.21
Fourth quarter (ended June 30)..................... 12.10 9.35 7.24 4.35
We did not make any dividend payments during the year ended June 30,
2004 or 2003 and due to certain debt agreements we are currently restricted from
making dividend distributions. We have 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
2004 (a) 2003 (b) 2002 (c) 2001 (d) 2000 (e)
Operating Data:
Net sales............................ $656,913 $ 641,082 $ 635,218 $ 731,528 $755,544
Operating income (loss).............. (16,835) 6,826 28,565 111,147 136,908
Cumulative effect of changes in
accounting........................ 5,720 - (11,500) 3,249 -
Net income (loss).................... (38,190) (24,894) (26,004) 46,523 59,117
Basic earnings (loss) per share...... $ (1.03) $ (0.67) $ (0.74) $ 1.35 $ 1.68
Diluted earnings (loss) per share.... $ (1.03) $ (0.67) $ (0.74) $ 1.32 $ 1.65
Proforma amounts (f)
Net income (loss)................. $(43,910) $ (23,513) $ (13,899) $ 43,138 $ 61,507
Earnings (loss) per share
Basic.......................... $ (1.18) $ (0.64) $ (0.40) $ 1.25 $ 1.75
Diluted........................ $ (1.18) $ (0.64) $ (0.40) $ 1.22 $ 1.71
Balance sheet data:
Total assets....................... $966,075 $1,097,855 $1,134,737 $1,075,550 $ 930,721
Total long-term debt (including
current portion)............... 606,748 664,475 701,218 654,679 532,875
(a) Includes a pretax charge of $51,853 ($33,522 after tax) for
restructuring and impairment costs. (See Notes 3 and 4 to the Consolidated
Financial Statements.) Includes $4,940 ($3,112 after tax) for loss on early
extinguishment of debt. Includes $5,720 ($0.15 per share), net of tax,
cumulative effect of change in accounting relating to a change in the way
we account for planned maintenance activities at our Perry, Florida
facility. (See Note 2 to the Consolidated Financial Statements.)
(b) Includes a pretax charge of $38,139 ($24,678 after tax) for restructuring
and impairment costs. (See Notes 3 and 4 to the Consolidated Financial
Statements.)
10
(c) Includes a pretax charge of $11,589 ($7,596 after tax) for restructuring
and impairment costs. (See Notes 3 and 4 to the Consolidated Financial
Statements.) Includes $11,500 ($0.33 per share) cumulative effect of a
change in accounting relating to a goodwill impairment charge for our
converting plant at King, North Carolina under the transition rules of
Statement of Financial Accounting Standards, No. 142, Goodwill and Other
Intangible Assets. (See Note 2 to the Consolidated Financial Statements.)
(d) Includes the operations of Americana from August 1, 2000, its date of
acquisition. Includes the $3,249 ($0.09 per share), net of tax, cumulative
effect of a change in accounting relating to a change in depreciation
methods from straight-line to units-of-production for some cotton cellulose
and airlaid nonwovens equipment. (See Note 2 to the Consolidated Financial
Statements.)
(e) Includes the operations of Walkisoft from October 1, 1999, its date of
acquisition.
(f) Proforma amounts reflect net income (loss) and earnings (loss) per share as
if the changes in accounting methods were applied retroactively.
11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following Management's Discussion and Analysis of Results of
Operations and Financial Condition ("MD&A") summarizes the significant factors
affecting our results of operations, liquidity, capital resources and
contractual obligations, as well as discussing our critical accounting policies.
This discussion should be read in conjunction with the Consolidated Financial
Statements, Notes to the Consolidated Financial Statements, and other sections
of this Annual Report on Form 10-K. Our MD&A is composed of four major sections;
Executive Summary, Results of Operations, Financial Condition and Critical
Accounting Policies.
Executive Summary
Buckeye Technologies Inc. and its subsidiaries manufacture value-added
cellulose-based specialty products in the United States, Canada, Germany, and
Brazil and sell these products in approximately 60 countries worldwide. We
generate revenues, operating income and cash flows from two reporting segments;
specialty fibers and nonwoven materials. Specialty fibers are derived from wood
and cotton cellulose materials using wetlaid technologies. Our nonwoven
materials are derived from wood pulps, synthetic fibers and other materials
using an airlaid process. See "Item 1: Business" for a more detailed description
of these segments and processes.
Our strategy is to continue to strengthen our position as a leading
supplier of cellulose-based specialty products. We believe that we can continue
to expand market share, improve profitability and decrease our exposure to
cyclical downturns by pursuing the following strategic objectives: focus on
technically demanding niche markets, develop and commercialize innovative
proprietary products, strengthen long-term alliances with customers, provide our
products at an attractive value, and significantly reduce our debt. While we
operated at a loss in fiscal 2004, we made progress on strategic initiatives
which we believe will strengthen both our specialty fibers and nonwoven
materials businesses and position us for future growth.
In the specialty fibers segment, we completed the partial closure of
the Lumberton facility last summer and transferred all of our production of
specialty paper cotton cellulose to our facilities located at Memphis, Tennessee
and at Glueckstadt, Germany. Although we experienced some short term disruptions
while transitioning to Memphis and Glueckstadt, we have since mastered the new
processes and are now producing specialty cotton cellulose for these niche paper
markets at an even better quality than the products we manufactured at
Lumberton. Importantly, we now are benefiting from the economies of scale of
having increased our cotton cellulose capacity utilization percentage.
We have also taken an important step in further developing our
capability to supply a wide range of products based on cotton cellulose to
customers worldwide by initiating an $18 million project to upgrade the
capability of our Americana, Brazil manufacturing facility. Because Brazil
benefits from low manufacturing costs and a large and increasing raw material
supply, we are confident that, when this conversion is completed in the fall of
2005, it will be a significant contributor to our profitability.
We improved the product mix of our wood based specialty fibers by
transferring a portion of our wood cellulose production away from fluff pulp
into higher value chemical applications. The closure of a competitor's specialty
wood pulp production facility, in July 2003, effectively removed 18% of the
high-end specialty wood pulp capacity from the market. We capitalized on this
closure by devoting more of our Foley wood pulp mill to the production and sale
of high-end specialty fibers and less to fluff pulp. During fiscal year 2003,
fluff pulp accounted for 22% of our sales. In fiscal 2004, this percentage was
reduced to 18%. While the market for fluff pulp has recently shown improvement,
we believe that over the long run we will be better served by having more of our
production in high value specialty grades and a smaller exposure to the volatile
fluff pulp market.
In the nonwoven materials segment, we made the decision to cease
production at our single-line Cork, Ireland facility. The plant ceased
production in July of 2004. This closure will enable us to increase the capacity
utilization rate at our three larger dual-line facilities, thereby improving our
cost structure. The benefits of the Cork closure, which should improve earnings
by over $7 million annually and reduce working capital requirements by about $4
million, will be realized over the course of fiscal 2005.
In the fall of 2003, as part of our strategy to improve our debt
structure, we successfully refinanced our near term debt by issuing $200 million
in senior notes which have an interest rate of 8.5% and amending our bank credit
facility, which now consists of a $70 million revolving credit line and a $150
million term loan. The senior notes mature in 2013 and the revolving credit line
and term loan mature in 2008 and 2010, respectively. We have no significant
mandatory debt reductions before 2008.
12
While we are not faced with the requirement to retire our debt quickly,
we have continued to focus on debt reduction because we believe strengthening
our balance sheet is important to our business. During the past fiscal year, we
used cash, cash equivalents, and restricted cash on-hand as well as cash from
operations to reduce our debt from $664.5 million to $606.7 million, a reduction
of $57.8 million. At the same time, we reduced our cash, cash equivalents, and
restricted cash on-hand by $26.1 million to $27.2 million. We have reduced our
debt $94.5 million since it reached its high point at the end of calendar 2001.
We intend to make further debt reductions during fiscal 2005.
Results of Operations
Consolidated results
The following table compares consolidated net sales; operating income
(loss); and impairment and restructuring costs for the three years ended June
30, 2004.
-------------------------------------------------------------------------------------------------------------------
(millions) Year Ended June 30 $ Change Percent Change
------------------ -------- --------------
2004/ 2003/ 2004/ 2003/
2004 2003 2002 2003 2002 2003 2002
-------------------------------------------------------------------------------
Net sales $656.9 $641.1 $635.2 $15.8 $ 5.9 2% 1%
Cost of goods sold 579.5 558.2 557.9 0.3 4% 0%
21.3
-------------------------------------------------------------------------------
Gross margin 77.4 82.9 77.3 (5.5) 5.6 -7% 7%
Selling, research and
administrative expenses 42.4 37.9 37.1 4.5 0.8 12% 2%
Impairment and
restructuring costs 51.8 38.2 11.6 13.6 26.6 36% 229%
-------------------------------------------------------------------------------
Operating income (loss) $ (16.8) $ 6.8 $ 28.6 $ (23.6) $(21.8) N/A -76%
===============================================================================
Net sales growth in fiscal 2004 was due to strong performance by the
nonwoven materials segment, primarily the result of increased volume and the
strengthening of the Euro. The increase in nonwoven materials sales was only
slightly offset by a decline in net sales of specialty fibers products. Cost of
goods sold increased at a faster rate than sales due primarily to higher
manufacturing costs at some of our specialty fibers plants due to unusual events
and special situations (discussed further in "Segment Results - Specialty
Fibers" of this MD&A). The net sales increase in fiscal 2003 was attributed to
higher volume and sales prices for fluff pulp and airlaid nonwoven materials,
partially offset by a decline in cotton cellulose sales prices in fiscal 2003
from unusually high levels in fiscal 2002.
We experienced an operating loss in 2004 that was primarily the result
of $51.8 million of restructuring and impairment costs related to the closure of
our Cork, Ireland facility and other organizational restructuring. Also
contributing to the loss were increases in selling, research and administrative
expenses which were primarily the result of an increase in bad debt expense of
$3.3 million due to the bankruptcy of a large customer (discussed further in
"Segment Results - Specialty Fibers" of this MD&A). Operating income was also
negatively impacted by impairment and restructuring charges in fiscal years 2003
and 2002.
Further discussion on the revenue and operating trends and impairment
and restructuring costs are discussed in the "Segment Results" of this MD&A.
Additional information on the impairment and restructuring charges taken in each
of the three fiscal years may be found in Note 3 and Note 4 of the Consolidated
Financial Statements.
Segment results
Although nonwoven materials, processes, customers, distribution methods
and regulatory environment are very similar to specialty fibers, we believe it
is appropriate for nonwoven materials to be disclosed as a separate reporting
segment from specialty fibers. The specialty fiber segment is an aggregation of
cellulosic fibers based on both wood and cotton. We make financial decisions and
allocate resources based on the sales and operating income of each segment. We
allocate selling, research, and administration expense to each segment and we
use the resulting operating income to measure the performance of the segments.
We exclude items that are not included in measuring business performance, such
as restructuring costs, asset impairment and certain financing and investing
costs.
13
Specialty fibers
The following table compares specialty fibers net sales and operating
income for the three years ended June 30, 2004.
--------------------------------------------------------------------------------------------------------
(millions) Year Ended June 30 $ Change Percent Change
-------- --------------
2004/ 2003/ 2004/ 2003/
2004 2003 2002 2003 2002 2003 2002
------------------------------------------------------------------------------
Net sales $461.4 $466.5 $471.1 $(5.1) $(4.6) -1% -1%
Operating income 28.2 41.9 39.5 (13.7) 2.4 -33% 6%
--------------------------------------------------------------------------------------------------------
The decrease in net sales of $5.1 million during fiscal 2004 was due
primarily to lower selling prices and mix changes for our cotton-based products
and lower unit wood volume, partially offset by improvements in selling prices
and mix of wood-based products.
Sales price increases and decreases for cotton-based products are
influenced by the variability in the cost and supply of cotton fibers. As the
cost of these fibers fell during calendar 2003, we reduced our sales prices. Our
cotton sales prices did not recover until calendar year 2004. Total cotton
volume increased by 3.9% in fiscal 2004, but a change in mix reduced the average
selling price. Sales volume at our Americana, Brazil facility, increased by 23%
in fiscal 2004, which contributed to the mix change as the selling price of this
product is significantly lower due to our tolling arrangement with the customer.
We recently implemented additional price increases averaging approximately 7% on
most of our cotton-based specialty products. Although we expect this increase to
have a positive impact on revenue and operating income during fiscal 2005, it
primarily will offset higher costs.
Improvements in selling prices and mix of our wood-based products were
driven by several complementing factors. Overall strengthening of the economy
increased the demand for pulp and paper products, driving up commodity pulp
prices. While our average fluff pulp price increased by 4.2% during fiscal 2004,
we can offer no assurances that this increase in fluff pulp pricing will
continue or that it will not reverse direction during fiscal 2005. Continued
weakening of the US dollar made our products more attractive to export
customers. Additionally, market supply constraints caused by the closure of one
of the world's largest dissolving wood cellulose mills in calendar 2003
significantly tightened the market for high purity dissolving wood pulps. As a
result of the tightening of our markets, we are continuing to capitalize on
opportunities to significantly reduce our shipments of fluff pulp and increase
our shipments of high purity dissolving wood pulps.
The decrease in net sales in fiscal 2003 was due to lower selling
prices on cotton based products being only partially offset by slightly higher
unit volumes and the restart of operations at our Americana facility. As the
cost of cotton fibers increased in 2002 we increased our sales prices. As these
costs fell during fiscal 2003 we reduced our sales prices. During fiscal 2003
our selling prices decreased by approximately 13%, while in fiscal 2002 they
increased by approximately 10%. Fluff pulp prices vary with market conditions.
During fiscal 2003, our average fluff pulp price increased by 3.7% versus fiscal
2002.
Operating income for the year ended June 30, 2004 decreased by 33% from
the same period in 2003. The decrease in operating income was primarily the
result of several additional charges related to unusual events and special
situations discussed below:
- Lenzing Fibers, a specialty fibers customer which owes us
$3.7 million, filed for Chapter 11 reorganization bankruptcy during the
quarter ended December 31, 2003. Based on an evaluation of the
potential to recover this debt from our customer, we established a
reserve of $3.2 million during the quarter ended December 31, 2003.
Based on new information that became available during the quarter ended
March 31, 2004, we reevaluated our allowance for bad debt for Lenzing
Fibers and increased the allowance to 90% or $3.3 million of the
outstanding balance. The reserve represents our best estimate at this
time for the amounts we may not recover as a result of this customer's
bankruptcy. We cannot offer any assurance to the timing of our
recovery, if any, of the Lenzing receivable.
- During the first half of fiscal 2004, we conducted an
extended maintenance shutdown at our Perry, Florida wood pulp mill.
This extended shutdown was the first in five years and impacted cost of
goods sold by $9.6 million. Historically, we accrued expenses related
to extended maintenance shutdowns, but as of July 1, 2003, we changed
our method of accounting from the accrue in advance method to the
direct expense method. See Note 2 of the Consolidated Financial
Statements for further discussion.
- In addition to the increased charges for the maintenance
shutdown, we incurred high manufacturing costs and reduced production
14
at both our Perry, Florida wood pulp mill and our Memphis, Tennessee
cotton cellulose facility during the quarter ended December 31, 2003.
The poor operating results were related to maintenance work completed
in October at each location. The Perry, Florida plant had difficulty
reestablishing stable operations following the maintenance shutdown,
and the Memphis plant was impacted by the startup of new equipment and
processes associated with the production of paper grade products
previously produced at the recently closed Lumberton cotton cellulose
plant. Both plants have now returned to normal operations.
- On October 21, 2003, the union at our Perry, Florida
plant, ratified a new labor agreement effective through March 31, 2008.
The agreement included a one-time retroactive payment of approximately
$0.8 million.
Operating income during fiscal 2004 was also negatively impacted by
currency driven manufacturing cost increases at our Glueckstadt, Germany cotton
facility due to the weakening of the U.S. dollar. All of these decreases were
partially offset by a more favorable specialty wood pulp sales mix, higher
specialty wood pulp prices, and operating the Americana, Brazil facility at
capacity for the entire year ending June 30, 2004.
Operating income for fiscal 2003 improved $2.4 million over fiscal
2002. This improvement in operating income reflected modestly higher fluff pulp
pricing, a more favorable dissolving wood pulp sales mix, operating the
Americana facility for most of the year, and operating expense reductions. These
improvements were partially offset by lower margins for cotton based products,
increased energy and chemicals costs, a write down in the value of cotton raw
material, and the impact of a strengthening euro on the operating costs of our
facility in Glueckstadt, Germany.
We restarted manufacturing at our Americana facility in July 2002. This
facility manufactures chemical cellulose and distributes it to a single
customer. The Americana facility had been idled previously due to the high cost
of cotton linters. In fiscal 2003, we agreed with our customer to extend the
initial volume agreement. We anticipate that this extension agreement will
provide sufficient volume to enable the plant to continue to operate at full
capacity through calendar year 2004. We have negotiated a further extension to
provide sufficient volume through September 2005.
Nonwoven materials
The following table compares nonwoven materials net sales and operating
income (loss) for the three years ended June 30, 2004.
-------------------------------------------------------------------------------------------------
(millions) Year Ended June 30 $ Change Percent Change
----------- --------------
2004 2003 2002 2003 2002 2003 2002
---------------------------------------------------------------------
Net sales $217.6 $195.9 $184.1 $21.7 $11.8 11% 6 %
Operating income (loss) 7.6 4.0 (2.1) 3.6 6.1 90% N/A
-------------------------------------------------------------------------------------------------
Our increase in net sales in fiscal 2004 was primarily due to a 5.4%
increase in shipment volume and the strengthening of the euro versus the U.S.
dollar. These improvements were partially offset by minor price and mix changes.
Net sales in fiscal 2003 increased primarily due to increased shipments and the
strengthening of the Euro.
Our improvement in operating income in fiscal 2004 reflects the
increase in sales volume previously discussed. Additionally, improved waste,
reliability and other cost reductions along with the favorable net impact of
changes in exchange rates offset some modest selling price reductions,
unfavorable changes to product mix and increases in raw material prices. Our
Gaston, North Carolina facility improved its operating performance compared to
the prior year as we were able to increase production volume while at the same
time reducing site overhead and realizing significant improvements in waste,
run-rates and reliability. Reduced waste, other cost reductions and the
strengthening of the euro improved operating results at our Steinfurt, Germany
facility. At our Delta, British Columbia, Canada facility the weakening of the
US dollar against the Canadian dollar more than offset the increases in
production and shipment volume. Our Cork facility recorded improved earnings
performance in the fourth quarter of fiscal 2004 primarily due to a reduction in
depreciation expense after the facility's fixed assets were impaired at the end
of the third quarter. For further discussion of this closure see Note 3 and Note
4 of the Consolidated Financial Statements.
As noted in the previous paragraph, the weakening of the US dollar
against both the euro and Canadian dollar had opposite impacts on operating
results at our foreign facilities. This inconsistency is caused by the pricing
of our products in multiple currencies. The vast majority of sales for
Steinfurt, Germany are denominated in euros or other European currencies while a
portion of their raw material purchases are denominated in US dollars. As the
euro strengthened, Steinfurt's cost of goods sold increased at a slightly slower
rate than sales revenues when translated into US dollars, resulting in an
increase to Steinfurt's gross margin. At our Delta, British Columbia, Canada
facility nearly all of our sales are in US dollars while the labor and overhead
costs are denominated in Canadian dollars. In this case, as the Canadian dollar
strengthened, Delta's gross margin was compressed. During fiscal 2004, nonwoven
materials operating income improved by approximately $1.0 million as a result of
the net impact of these currency changes.
Operating income in fiscal 2003 increased compared to the prior year's
operating loss. Our improvement reflected reductions in waste and other costs.
Restructuring and impairment activities
During the three years ended June 30, 2004, we entered into various
restructuring programs, which resulted in restructuring and impairment charges.
In order to continue to provide both specialty fibers and nonwoven materials at
attractive values, we will continue to look for ways to reduce costs and
optimize our operating structure. The following table summarizes restructuring
expense by program and impairment charges for the three years ended June 30,
2004. Following the table is an explanation of the programs and the resulting
impairment charges. For further explanation of these charges, see Notes 3 and 4
of the Consolidated Financial Statements.
-----------------------------------------------------------------------------------------------------------------
Estimate to
Complete Year Ended June 30 Total
at June 30, ---------------------------- Estimated
(millions) 2004 2004 2003 2002 Charges
-----------------------------------------------------------------------------------------------------------------
Impairment charges.......................... $ 45.9 $36.5 $ 10.0
Restructuring costs
2004 Restructuring program............... $ 1.2 $ 1.8 $ - $ - $ 3.0
2003 Restructuring program - phase 2..... 0.5 3.2 - - 3.7
2003 Restructuring program - phase 1..... - 1.0 1.6 - 2.6
2002 Restructuring program............... - - - 1.6 1.6
----------------------------------------------------------------
Total restructuring costs $ 1.7 $ 6.0 $ 1.6 $1.6 $ 10.9
-----------------------------------------------------------------------------------------------------------------
2004 Restructuring program and impairments
During March of 2004, our Board of Directors approved the
discontinuation of production of nonwoven materials at our Cork, Ireland
facility. While the demand for nonwoven products is growing in the low to
mid-single digits, the growth in demand has not been sufficient to fully utilize
existing capacity. As such, industry participants have been rationalizing
production by taking down time, reducing operating shifts and closing
facilities.
Due to excess production capacity around the globe, we have operated
Cork below its productive capacity since the plant started up in 1998. Because
of its location and small size, our cost to produce at Cork is higher than it is
at our other locations. After careful consideration of all the options
available, management reached the decision to close the Cork facility and
consolidate production at our three other manufacturing facilities. Production
at Cork ceased in July of 2004. Closing our Cork facility reduced our nonwovens
capacity by about 10%.
We will continue to meet customer needs for nonwoven materials by
producing these products at our facilities in Delta, British Columbia, Canada;
Steinfurt, Germany; and Gaston County, North Carolina. We expect this
consolidation will enable us to improve our overall nonwoven materials operating
results by about $7 million annually and reduce working capital needs by $4
million. The closure of the Cork facility will result in the termination of 83
employees. We expect restructuring expenses and payments related to the closure
to be approximately $3 million of which $1.8 million has been incurred and with
the remaining $1.2 million to occur over the remainder of calendar 2004.
Our commitment to discontinue production represented an indicator of
impairment and subsequently we evaluated the value of the property, plant, and
equipment associated with the Cork facility. We determined that these long-lived
assets, with a carrying amount of $48.4 million were impaired and wrote them
down to their estimated fair value of $5.4 million, resulting in an impairment
charge of $43.0 million. During fiscal 2004, we also impaired certain equipment
and other capitalized costs of $2.9 million.
16
2003 Restructuring programs (phase 1 and phase 2) and impairments
In April 2003, we announced the discontinuation of production of cotton
linter pulp at our specialty fibers Lumberton, North Carolina facility due to
the decline in demand for cotton content paper. We completed this partial
closure in August 2003 and continue to produce cosmetic cotton products at the
Lumberton site. This decision reflects a steady decline in demand in the cotton
fiber paper industry, which has contracted by about one-third since the late
1990's. While cotton linter pulp is one of our core businesses, current demand
did not economically justify operating a facility that could only produce
products for paper applications.
To better meet our customers' needs, we consolidated our U.S. cotton
linter pulp production at our larger Memphis, Tennessee and Glueckstadt, Germany
facilities. In conjunction with the consolidation, we initiated the first phase
of a restructuring program designed to deliver cost reductions through reduced
expenses across the company, the main component of which was the partial closure
of our Lumberton, North Carolina facility. This phase of restructuring resulted
in the elimination of approximately 100 positions within the specialty fibers
segment. The resulting increase in facility utilization is enabling us to
improve our operating results by over $6 million annually. This more efficient
operating configuration began to reduce our cost of goods sold beginning in
January 2004. This closure reduced our working capital needs by approximately
$10 million.
...As part of the closure, we evaluated the ongoing value of the property,
plant and equipment associated with the Lumberton facility. We determined that
long-lived assets (property, plant and equipment) with a carrying amount of
$36.5 million were impaired and wrote them down to their estimated fair value of
$7.9 million. The resulting impairment charge of $28.6 million is reflected in
the statement of operations during fiscal 2003.
During the first quarter of fiscal 2004, we entered into a second phase
of this restructuring program. This phase of the program will enable us to
improve our operating results by approximately $6 million annually through
reduced salaries, benefits, other employee-related expenses and operating
expenses. As a result of this restructuring, 78 positions are being eliminated.
These positions include manufacturing, sales, product development and
administrative functions throughout the organization. The full benefit of this
restructuring will not be realized until the end of calendar 2005. We expect
payments related to this phase of the restructuring program to continue into
calendar 2005 and expect costs to total approximately $3.7 million.
2002 restructuring program and impairments
During fiscal 2002, we entered into a restructuring program designed to
deliver cost reductions through reduced overhead expenses. The cost recorded
comprised mainly of severance and employee benefit costs, was $1.6 million and
was recorded in fiscal 2002. As a result of the restructuring, approximately 200
positions were eliminated, which reduced our costs by over $10.0 million
annually. As part of the restructuring, we closed engineering offices located in
Finland. This cost reduction program impacted our nonwovens and specialty fibers
businesses in North America and Europe. All payments for the program were
completed as of June 30, 2004.
During fiscal 2002, we recorded impairment costs of $10.0 million.
These impairments were primarily related to obsolete airlaid nonwovens packaging
equipment that was replaced with more efficient StacPac(TM) packaging lines.
Net interest expense and amortization of debt costs
We incurred net interest expense and amortization of debt costs of
$46.4 million in fiscal 2004 compared to $46.5 million for the prior fiscal
year. The consistency is the result of several offsetting factors. Lower
interest rates and average debt levels during fiscal 2004 offset both the
negative impact of the termination of the interest rate swap and the additional
expense of holding the $150 million of senior subordinated notes due 2005 and
the $200 million of senior notes due 2013 concurrently for 30 days during the
first half of fiscal 2004. Net interest and amortization of debt costs were $1.6
million lower in fiscal 2003 compared to $48.1 million incurred in fiscal 2002.
This decrease was primarily due to lower interest rates in fiscal 2003, which
were partially offset by $1.8 million of interest capitalization in fiscal 2002.
Loss on early extinguishment of debt costs
On September 22, 2003, we placed privately $200 million in aggregate
principal amount of 8.5% senior notes due October 1, 2013. The notes are
unsecured obligations and are senior to any of our subordinated debt. The notes
are guaranteed by our direct and indirect domestic subsidiaries that are also
guarantors on our senior secured indebtedness. We used the net proceeds from
17
the private placement to redeem our $150 million senior subordinated notes due
2005. As a result of the extinguishment, $3.3 million was expensed during the
first quarter of fiscal 2004. These expenses included a $2.1 million call
premium and $1.2 million related to the write-off of deferred financing costs.
See Note 8, Debt, in the Consolidated Financial Statements for further
discussion of the debt issuance and related extinguishment.
Foreign exchange, amortization of intangibles and other
Foreign exchange, amortization of intangibles and other expense in
fiscal 2004, 2003 and 2002 were $2.0 million, $2.4 million and $3.4 million,
respectively. The decrease in fiscal 2004 was due primarily to the absence of
expenses related to the settlement of a lawsuit and the negative impact of a
natural gas forward contract recognized in fiscal 2003, partially offset by
lower foreign currency gains. The $1.0 million favorable variance in fiscal 2003
from 2002 was due primarily to an increase of $3.1 million in foreign currency
gains partially offset by the lawsuit settlement and the natural gas forward
contract.
Income taxes
Our effective tax rate for fiscal 2004 was 37.4% versus 40.8% in
fiscal 2003 and 36.7% in fiscal 2002. This decrease in fiscal 2004 and the
increase in 2003 were primarily attributable to the utilization of a foreign net
operating loss carryforward in fiscal 2003 that had previously been fully
reserved. During the fourth quarter of fiscal 2004, we recorded a net tax
benefit of $0.8 million resulting from changes in estimates used in our prior
year end tax provision compared to the actual amounts utilized in filing our
2003 tax return. For further information on income taxes see Note 11 in the
Consolidated Financial Statements.
Cumulative effect of change in accounting
Planned maintenance activities
Historically, we accrued expenses related to extended maintenance
shutdowns at our Perry, Florida facility. However, as of July 1, 2003, we
changed our method of accounting from the accrue in advance method to the direct
expense method. The effect of applying the new method for the year ended June
30, 2004 is a decrease in net loss of $0.3 million. This decrease in net loss is
composed of a profit increase of $9.1 million pre-tax ($5.7 million net-of-tax
reported as a cumulative effect of accounting change), offset by $8.5 million
($5.4 million net-of-tax) in additional cost of goods sold which was the cost of
the planned maintenance activity performed in 2004. See Note 2, Changes in
Accounting, in the Consolidated Financial Statements for further discussion of
this change in accounting.
Goodwill
Effective July 1, 2001, we adopted SFAS No. 142, which established new
accounting and reporting requirements for goodwill and other intangible assets
as described in our critical accounting policies. Based on our assessment,
effective July 1, 2001 we reduced our goodwill by $11.5 million in the
converting business, which we had purchased in the Merfin acquisition in 1997.
We recorded no tax benefit as a result of the reduction in the carrying value of
goodwill.
Financial Condition
Our financial condition improved during the current fiscal year. We are
committed to reducing our debt, strengthening our operations and continuing to
improve our profitability and cash flow.
Cash Flow
Net cash provided by operating activities
For the years ended June 30, 2004, 2003 and 2002, we provided cash from
operating activities of $65.7 million, $55.2 million and $27.9 million,
respectively. The $10.5 million increase in fiscal 2004 was primarily due to a
targeted decrease in inventories and decreased accounts receivable.
Approximately $10 million of the accounts receivable decrease was a permanent
reduction due to a change in our cash management strategy, as we began
discounting large letters of credit, enabling us to reduce our debt and interest
costs. These improvements in cash from operating activities were partially
offset by lower accounts payable and the expenditures at our Foley plant for a
planned maintenance shutdown. The $27.3 million improvement in fiscal 2003 cash
flow was due to a $16.1 million increase in operating results before the effect
of certain non-cash charges (a change in accounting and impairment of long-lived
18
assets). Additionally, reductions in inventories and the receipt of an $18.3
million federal tax refund, that reduced prepaid expenses, contributed to the
improved cash flows from operations in fiscal 2003. These improvements were
partially offset by an increase in accounts receivable due to a change in the
terms of a supply contract with a significant customer.
Net cash used in investing activities
In fiscal 2004, we used $32.2 million cash in investing activities, as
compared to $20.4 million in fiscal 2003. The increase of $11.8 million in
fiscal 2004 was primarily due to the absence of redemptions of short-term
investments which occurred in fiscal 2003 and the expenditure at our Foley plant
for a planned maintenance shutdown and capital expenditures at our Memphis
Tennessee facility to provide the capability to manufacture cotton cellulose
products previously manufactured at our Lumberton, North Carolina facility. In
fiscal 2003, we reduced the cash used in investing activities by $25.7 million.
$17.7 million of the reduction was due to the redemption of short term
investments in fiscal 2003 that had been purchased in fiscal 2002. The remaining
decrease in fiscal 2003 was due to continued efforts to reduce capital
expenditures and the lack of any major construction or projects during the year.
Overall, we used cash to make capital expenditures for property, plant
and equipment of $31.9 million in fiscal 2004, $28.4 million in fiscal 2003,
$36.0 million in fiscal 2002. In fiscal 2003 and fiscal 2002, we made these
expenditures primarily to construct, purchase, modernize and upgrade our
production equipment and facilities. A large portion of our capital expenditures
in fiscal 2004 related to the Foley plant planned maintenance shutdown and the
transfer of cotton cellulose paper products, that were previously manufactured
at our Lumberton plant, to our Memphis plant. We expect to increase capital
expenditures in fiscal 2005 by about $10 million, primarily related to the
upgrade of our Americana facility.
Net cash provided by (used in) financing activities
In fiscal 2004, we restructured our debt position by eliminating debt
that came due in calendar 2005. We redeemed our $150 million senior subordinated
notes due 2005 and made a permanent reduction on our revolving credit facility
by issuing $200 million of senior notes due 2013. In addition, we established a
$220 million senior secured credit facility of which $70 million matures in 2008
and $150 million matures in 2010. This facility amended our revolving credit
facility due in 2005. (See Note 8 to the Consolidated Financial Statements for
further information.)
In fiscal 2003, we used cash to repay $42.5 million in debt including a
$22.0 million note payment to UPM-Kymmene in connection with the purchase of
Walkisoft. In May 2002, we sold 2,150,000 shares of common stock at a price of
$10.00 per share. The net proceeds of the offering were $21.4 million. We also
used additional borrowings under our bank credit facilities along with the cash
provided by operating activities to make our 2002 $22.0 million note payment to
UPM-Kymmene.
Our board of directors has authorized the repurchase of up to 6.0
million shares of our common stock. Under this authorization, we will hold the
repurchased shares as treasury stock and such shares will be available for
general corporate purposes, including the funding of employee benefit and
stock-related plans. In fiscal 2004, we repurchased no shares of our common
stock. Through June 30, 2004, we had repurchased a total of 5,009,300 shares
under the current board authority. At June 30, 2004, we were prohibited from
repurchasing our common stock under the terms of our senior secured credit
facility.
19
Contractual Obligations
The following table summarizes our significant contractual cash
obligations as of June 30, 2004. 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.
(In millions) Payments Due by Period
----------------------------------------------------------------------------------------------------------------
Less than Greater than
Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years
----------------------------------------------------------------------------------------------------------------
Long-term obligations (1)...... $ 911.9 $ 60.7 $ 97.1 $ 254.7 $ 499.4
Capital lease obligations (2).. 3.2 0.8 1.6 0.8 -
Operating leases (2)........... 3.0 1.4 1.2 0.4 -
Timber commitments (3)......... 87.0 13.0 26.0 27.0 21.0
Lint commitments (4)........... 15.5 15.5 - - -
Other purchase commitments (5) 17.4 13.5 3.9 - -
---------------------------------------------------------------------------
Total contractual cash
obligations................. $1,038.0 $ 104.9 $ 129.8 $ 282.9 $ 520.4
===========================================================================
(1) Amounts include related interest payments. Interest payments for variable
debt of $145.3 million are based on the effective rate as of June 30, 2004
of 3.8%. See Note 8 to the Consolidated Financial Statements for further
information on interest rates.
(2) Capital lease obligations represent principal and interest payments. See
Note 9 to the Consolidated Financial Statements for further information.
(3) See Note 17 to the Consolidated Financial Statements for further
information.
(4) Lint commitments are take-or-pay contracts made in the ordinary course of
business that usually are less than one year in length.
(5) The majority of other purchase commitments are take-or-pay contracts made
in the ordinary course of business related to utilities and raw material
purchases.
Liquidity and capitalization
We have the following major sources of financing: senior secured credit
facility, senior notes and senior subordinated notes. Our senior secured credit
facility, senior notes and senior subordinated notes contain various covenants.
We were in compliance with these covenants as of June 30, 2004 and believe we
will remain in compliance. These sources of financing are described in detail in
Note 8 to the Consolidated Financial Statements.
Our total debt decreased to $606.7 million at June 30, 2004 from $664.5
million at June 30, 2003, a decrease of $57.8 million. From June 30, 2002 to
June 30, 2003, total debt decreased by $36.7 million. Our total debt as a
percentage of our total capitalization was 72.6% at June 30, 2004 as compared to
71.6% at June 30, 2003 and 73.4% at June 30, 2002.
On June 30, 2004, we had $67.7 million borrowing capacity on our
revolving credit facility. The portion of this capacity that we could borrow
will depend on our financial results and ability to comply with certain
borrowing conditions under the revolving credit facility. As of June 30, 2004,
our liquidity, including available borrowings and cash and cash equivalents was
approximately $55 million. Management believes this is sufficient liquidity to
meet the needs of the business. We believe we will continue to have positive
cash flow and this potential limitation is not an issue.
Under our senior secured credit facility, we are required to make a
payment on our term loan for 50% of our excess cash flow (as defined under the
credit agreement), based on the 2004 fiscal year. This payment, of approximately
$15.4 million, was made during July and August of 2004.
Shelf Registration. On March 15, 2002, we filed a Form S-3 shelf
registration statement. By its terms, the shelf registration statement allows us
to issue from time to time various types of securities, including common stock,
20
preferred stock and debt securities, up to an aggregate amount of $300 million.
We 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, we sold 2,150,000 shares of common stock under this
registration statement at a price of $10.00 per share. The net proceeds of the
offering were $21.4 million. We used these proceeds for general corporate
purposes. We have no plans to issue any additional securities at this time.
While we can offer no assurances, we believe that our cash flow from
operations, together with current cash and cash equivalents, will be sufficient
to fund necessary capital expenditures, meet operating expenses and service our
debt obligations for the foreseeable future.
Critical Accounting Policies
This discussion and analysis is based upon our consolidated financial
statements. Our critical and significant accounting policies are more fully
described in Note 1, Accounting Policies, to our Consolidated Financial
Statements. Some of our accounting policies require us to make significant
estimates and assumptions about future events that affect the amounts reported
in our financial statements and the accompanying notes. Future events and their
effects cannot be determined with certainty. Therefore, the determination of
estimates underlying our financial statements requires the exercise of
management's judgment. Actual results could differ from those estimates, and any
such differences may be material to our financial statements. Our management
exercises critical judgment in the application of our accounting policies in the
following areas, which significantly affect our financial condition and results
of operation. Management has discussed the development and selection of these
critical accounting policies and estimates with the Audit Committee of our Board
of Directors and with our independent auditors.
Allowance for doubtful accounts
We provide an allowance for receivables we believe we may not collect
in full. Management evaluates the collectibility of accounts based on a
combination of factors. In circumstances where we are aware of a specific
customer's inability to meet its financial obligations (i.e., bankruptcy filings
or substantial downgrading of credit ratings), we record a specific reserve. For
all other customers, we recognize reserves for bad debts based on our historical
collection experience. If circumstances change (i.e., higher than expected
defaults or an unexpected material adverse change in a major customer's ability
to meet its financial obligations), our estimates of the recoverability of
amounts due could be reduced by a material amount. During fiscal 2004, a
significant customer filed for bankruptcy protection. As a result of this change
in circumstances, we recorded an increase in our estimate for bad debts of $3.3
million. Historically, bad debt expense for fiscal years 2004, 2003 and 2002
have been $4.0 million, $0.3 million and $1.4 million, respectively.
Deferred income taxes
Deferred income tax assets and liabilities are recognized based on the
difference between the financial statement and the tax law treatment of certain
items. Realization of certain components of deferred tax assets is dependent
upon the occurrence of future events. We record a valuation allowance to reduce
our net deferred tax assets to the amount we believe is more likely than not to
be realized. These valuation allowances can be impacted by changes in tax laws,
changes to statutory tax rates, and future taxable income levels and are based
on our judgment, estimates and assumptions regarding those events. In fiscal
2003, we utilized a $1.0 million foreign net operating loss carryforward that
had been fully reserved, in fiscal 2002, we realized a $0.6 million benefit in
Canada and in fiscal 2001, we realized a $0.5 million benefit in Germany, both
due to changes in tax laws. In the event we were to determine that we would not
be able to realize all or a portion of the net deferred tax assets in the
future, we would increase the valuation allowance through a charge to income in
the period that such determination is made. Conversely, if we were to determine
that we would be able to realize our deferred tax assets in the future, in
excess of the net carrying amounts, we would decrease the recorded valuation
allowance through an increase to income in the period that such determination is
made.
Depreciation
We provide for depreciation on our production machinery and equipment
at our cotton cellulose and airlaid nonwovens plants using the
units-of-production depreciation method. Under this method, we calculate
depreciation based on the expected total productive hours of the assets and, in
any case, subject to a minimum level of depreciation. We review our estimate of
total productive hours at least annually. If the estimated productive hours of
21
these assets change based on changes in utilization and useful life assumptions,
we adjust depreciation expense per unit of production accordingly. We use the
straight-line method for determining depreciation on our other capital assets.
During fiscal 2004, based on changes in utilization estimates, we increased
depreciation expense by $0.2 million. We had no changes in estimates or
assumptions during fiscal 2003 or 2002.
Inventory valuation
Inventories are valued at the lower of cost or market. The market price
of our inventory is subject to variation. During periods when market prices
decline below net book value, we may need to provide an allowance to reduce the
carrying value of our inventory. In addition, certain items in inventory may be
considered obsolete. We may establish an allowance to reduce the carrying value
of those items to their net realizable value. Changes in these estimates related
to the value of inventory, if any, may result in a materially adverse impact on
our reported financial position or results of operations. We recognize the
impact of any changes in estimates, assumptions and judgments in income in the
period in which it is determined.
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 held and used, recoverability is evaluated based on the undiscounted cash
flows expected to be generated by the asset. If the carrying value of the assets
are determined not be recoverable, then an impairment is recognized when the
fair value associated with the asset group is less than the carrying value. If
impairment exists, an adjustment is made to write the asset down to its fair
value. Estimated 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. During fiscal 2004, we announced the closure of the Cork,
Ireland facility. As a result of this change in circumstances, we estimated the
fair value of the long-lived assets resulting in an impairment charge of $43.0
million. Based on the estimated fair values of long-lived assets, we have
recorded impairment charges of $45.0 million, $36.5 million and $10.0 million
for years ended June 30, 2004, 2003, and 2002, respectively. If circumstances
change, our estimated fair values may be impacted and have a material effect on
our reported financial position and results of operations. See Note 4 of our
Consolidated Financial Statements for further information concerning impairment
charges.
We have made acquisitions in the past that included a significant
amount of goodwill and other intangible assets. On July 1, 2001, we adopted
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142), and, as a consequence, discontinued the
amortization of goodwill. Under the guidelines of SFAS No. 142, goodwill is
subject to an annual impairment test based on its estimated fair value. Unless
circumstances otherwise dictate, we perform our annual impairment testing in the
fourth quarter. We will continue to amortize other intangible assets that meet
certain criteria over their useful lives, and these assets will also be subject
to an impairment test based on estimated fair value. We utilize the present
value of expected net cash flows to determine the estimated fair value of our
reporting units. This present value model requires management to estimate future
net cash flows, the timing of these cash flows, and a discount rate (or weighted
average cost of capital) representing the time value of money and the inherent
risk and uncertainly of future cash flows. The discount rate, adjusted for
inflation, is based on independently calculated beta risks for a composite group
of companies, our target capital mix, and an estimated market risk premium. The
assumptions used in estimating future cash flows were consistent with the
reporting unit's internal planning. If the estimated fair value of the reporting
unit exceeds its carrying amount, goodwill of the reporting unit is not
impaired. The determination of an impairment loss is complex and requires that
we make many assumptions and estimates. If our estimates of future cash flows or
the underlying assumptions and estimates change, we may need to record
additional impairment losses in the future.
Planned maintenance activities
Through June 30, 2003, we accounted for major planned maintenance
activities at our specialty fiber plant in Perry, Florida by accruing the cost
of the maintenance activities over the period between each planned maintenance
activity (the accrue in advance method), which ranged from two to five year
intervals. All other facilities expensed maintenance costs as incurred.
We re-evaluated this critical accounting policy and, effective July 1,
2003, changed our method of accounting from the accrue in advance method to the
direct expense method. Under the new accounting method, maintenance costs are
expensed as incurred. We believe the new method is preferable in this
circumstance because the maintenance liability is not recorded until there is an
obligating event (when the maintenance event is actually being performed). The
direct expense method eliminates significant estimates and judgments inherent
22
under the accrual method, and it is the predominant method used in the industry.
We do not consider the direct expense method of accounting for planned
maintenance activities to be a critical accounting policy. See Note 2 in the
Consolidated Financial Statements for further discussion.
Item 7a. Qualitative and Quantitative Disclosures About Market Risk
We are exposed to market risk from changes in foreign exchange rates,
interest rates, raw material costs and the price of certain commodities used in
our production processes. To reduce such risks, we selectively use financial
instruments. All hedging transactions are authorized and executed pursuant to
clearly defined policies and procedures. Further, we do not enter into financial
instruments for trading purposes.
The following 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 to
assess and mitigate risks discussed below should not be considered projections
of future events or losses.
A discussion of our accounting policies for risk management is included
in Accounting Policies in the Notes to the Consolidated Financial Statements.
Interest Rates
The fair value of our 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 our current
incremental borrowing rates for similar types of borrowing instruments. The
carrying value and fair value of long-term debt at June 30, 2004 were $604.0
million and $601.3 million, respectively, and at June 30, 2003 were $661.2
million and $653.3 million, respectively. Market risk is estimated as the
potential change in fair value resulting from a hypothetical 100 basis point
decrease in interest rates and would amount to $14.7 million increase in the
fair value of long-term debt.
We had $145.3 million of variable rate long-term debt outstanding at
June 30, 2004. At this borrowing level, a hypothetical 100 basis point increase
in interest rates would have a $1.5 million unfavorable impact on our pretax
earnings and cash flows. The primary interest rate exposures on floating rate
debt are with respect to European interbank rates and U.S. prime rates.
Foreign Currency Exchange Rates
Foreign currency exposures arising from transactions include firm
commitments and anticipated transactions denominated in a currency other than an
entity's functional currency. Buckeye and our subsidiaries generally enter into
transactions denominated in their respective functional currencies. Our primary
foreign currency exposure arises from foreign-denominated revenues and costs and
their translation into U.S. dollars. The primary currencies to which we are
exposed include the European euro, Canadian dollar and the Brazilian real.
We generally view as long-term our investments in foreign subsidiaries
with a functional currency other than the U.S. dollar. As a result, we do not
generally hedge these net investments. However, we use capital structuring
techniques to manage our net investment in foreign currencies as considered
necessary. The net investment in foreign subsidiaries translated into dollars
using the year-end exchange rates is $174.9 million and $180.4 million at June
30, 2004 and 2003, respectively. The potential foreign currency translation loss
from investment in foreign subsidiaries resulting from a hypothetical 10%
adverse change in quoted foreign currency exchange rates amounts to
approximately $20.0 million at June 30, 2004. This change would be reflected in
the equity section of our consolidated balance sheet in accumulated other
comprehensive loss. The primary foreign currency exposures on our long-term
investments are with the euro, Canadian dollar and the Brazilian real.
23
Cost of Raw Materials
Amounts paid by us for wood, cotton fiber and fluff pulp represent the
largest component of our variable costs of production. The availability and cost
of these materials are subject to market fluctuations caused by factors beyond
our 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 our products, could materially and adversely affect our business,
results of operations and financial condition.
Commodities
In order to minimize market exposure, we use 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. There were no natural
gas contracts outstanding at June 30, 2004 or 2003 requiring fair value
treatment.
Exposure to commodity products also creates volatility in pricing. If
our research and development efforts do not result in the commercialization of
new, proprietary products, we will continue to have significant exposure to
fluff pulp and other commodity products, which could result in volatility in
sales prices and profits.
Industry Cyclicality
The demand and pricing of our products, particularly fluff pulp, are
influenced by the much larger market for papermaking pulps which is highly
cyclical. The markets for most cellulose based products are sensitive to both
changes in general global economic conditions and to changes in industry
capacity. Both of these factors are beyond our control. The price of these
products can fluctuate significantly when supply and demand become imbalanced
for any reason. Financial performance can be heavily influenced by these pricing
fluctuations and the general cyclicality of the industries in which we compete.
It is not certain that current prices will be maintained, that any price
increases will be achieved, or that industry capacity utilization will reach
favorable levels. The demand, cost and prices for our products may thus
fluctuate substantially in the future and downturns in market conditions could
have a material adverse effect on our business, results of operations and
financial condition.
Contingencies
Our operations are subject to extensive general and industry-specific
federal, state, local and foreign environmental laws and regulations. We devote
significant resources to maintaining compliance with such requirements. We
expect that, due to the nature of our operations, we 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 we 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 our operations, markets,
products, services and prices, and other factors. The forward-looking statements
included in this document are only made as of date of this document and we
undertake 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.
24
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
We had no changes in or disagreements with our independent auditors.
Item 9a. Controls and Procedures
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation as of June 30, 2004 of our disclosure controls and
procedures, as such term is defined under Rule 13a-15(e) or 15d-15(e)
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Based on their evaluation, our principal executive officer and our
principal financial officer concluded that our disclosure controls and
procedures were effective as of June 30, 2004.
There have been no changes (including corrective actions with regards
to significant deficiencies or material weaknesses) in our internal controls
over financial reporting or in other factors during our fourth quarter that have
materially affected or are reasonably likely to materially affect these controls
subsequent to the date of the evaluation.
25
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding members of the Board of Directors will be
presented in our definitive proxy statement for the 2004 annual meeting of
stockholders and is incorporated herein by reference. Information regarding our
executive officers is included above in Part I of the Form 10-K under the
caption "Executive Officers of the Registrant" pursuant to Instruction 3 to Item
401(b) of Regulation S-K and General Instruction G93) of Form 10-K. Our Code of
Business Conduct & Ethics is included as Exhibit 99.1 of this Form 10-K and will
be available on our website.
Item 11. Executive Compensation
Information relating to this item will be included in our 2004 Annual
Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information relating to this item will be included under the caption
"Buckeye Stock Ownership" and "Executive Compensation" in our 2004 Annual Proxy
Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information relating to this item will be included in our 2004 Annual
Proxy Statement and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
Information regarding principal accountant fees and services will be
included in our 2004 Annual Proxy Statement and is incorporated by reference
herein.
26
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements
- See Index to Consolidated Financial Statements and Schedule on
page F-1.
(2) Financial Statement Schedules
- 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.
(3) Listing of Exhibits
3.1 Second Amended and Restated Certificate of
Incorporation (4)
3.1 (a) Articles of Amendment to the Second Amended and Restated
Certificate of Incorporation of Registrant (5)
3.2 Amended and Restated By-laws of the Registrant. (8)
4.1 First Amendment to the Rights Agreement. (The Rights
Agreement was filed on Form 8-A, November 20, 1995). (2)
4.2 Indenture for 9 1/4% Senior Subordinated Notes due 2008,
dated July 2, 1996 (1)
4.3 Indenture for 8% Senior Subordinated Notes due 2010,
dated June 11, 1998(5)
4.4 Indenture for 8 1/2% Senior Notes due 2013, dated
September 22, 2003(10)
10.1 Amended and Restated 1995 Management Stock Option Plan
of the Registrant(6)
10.2 Second Amended and Restated 1995 Incentive and
Nonqualified Stock Option Plan for Management Employees
of the Registrant.(9)
10.3 Form of Management Stock Option Subscription Agreement(6)
10.4 Form of Stock Option Subscription Agreement(6)
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.(7)
10.7 Amended and Restated Credit Agreement dated November 5,
2003 among the Registrant; Fleet National Bank; Fleet
Securities Inc.; Citigroup Global Markets Inc.; UBS
Security LLC; Citibank N.A.; UBS, AG Stanford Branch;
and the other lenders party thereto. (11)
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
31.1 Certification of Chief Executive Officer, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, signed by David B. Ferraro, the Chief Executive
Officer of Buckeye Technologies Inc. on August 25, 2004.
31.2 Certification of Chief Financial Officer, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, signed by Kristopher J. Matula, the Chief Financial
Officer of Buckeye Technologies Inc. on August 25, 2004.
27
32.1* Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, signed by David B. Ferraro, the Chief
Executive Officer of Buckeye Technologies Inc. on
August 25, 2004.
32.2* Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, signed by Kristopher J. Matula, the Chief
Financial Officer of Buckeye Technologies Inc. on
August 25, 2004.
99.1 Code of Business Conduct and Ethics
(1) 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.
(2) Incorporated by reference to the Registrant's Annual Report on Form
10-K dated June 30, 1997 (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 December 31, 1997.
(5) 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.
(6) Incorporated by reference to the Registrant's Annual Report on Form
10-K dated June 30, 1998.
(7) Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q/A for quarterly period ended March 31, 1999.
(8) Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended June 30, 2000.
(9) Incorporated by reference to the Registrant's Annual Report on Form
10-K dated June 30, 2001.
(10) Incorporated by reference to the Registrant's Registration Statement
Form S-4, file no. 333-110091, as filed with the Securities and
Exchange Commission on October 30, 2003.
(11) Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for quarterly period ended September 30, 2003.
* This certification accompanies the Periodic Report pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and shall be deemed
"filed" by the Registrant for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended.
(b) Reports on Form 8-K
During the quarter ended June 30, 2004, the following reports were
filed on Form 8-K or 8-K/A
- Report dated April 1, 2004, announcing the closure of the Cork, Ireland
manufacturing facility.
- Report dated April 2, 2004, announcing the scheduling of the conference
call regarding operating results for the quarter ended March 31, 2004.
- Reported dated April 21, 2004, announcing January - March 2004 operating
results.
- Report dated April 23, 2004, announcing the plan to upgrade capability
of Americana, Brazil cotton cellulose plant.
(c) See exhibits listed under Item 15(a).
(d) Not applicable - see Item 15(a)
28
SIGNATURES
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/ DAVID B. FERRARO
--------------------------------------------------------------------------------
David B. Ferraro, Director, Chairman of the Board and Chief Executive Officer
Date: August 25, 2004
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/ DAVID B. FERRARO
--------------------------------------------------------------------------------
David B. Ferraro, Director, Chairman of the Board and Chief Executive Officer
Date: August 25, 2004
By: /S/ SAMUEL M. MENCOFF
--------------------------------------------------------------------------------
Samuel M. Mencoff, Director
Date: August 25, 2004
By: /S/ HENRY F. FRIGON
--------------------------------------------------------------------------------
Henry F. Frigon, Director
Date: August 25, 2004
By: /S/ RED DAVANEY
--------------------------------------------------------------------------------
Red Cavaney, Director
Date: August 25, 2004
By: /S/ KRISTOPHER J. MATULA
--------------------------------------------------------------------------------
Kristopher J. Matula, Executive Vice President and Chief Financial Officer
Date: August 25, 2004
29
BUCKEYE TECHNOLOGIES INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
PAGE
Report of Management................................................................ F-2
Report of Independent Registered Public Accounting Firm............................. F-3
Financial Statements as of June 30, 2004, June 30, 2003 and for the Three Years
Ended June 30, 2004:
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:
Report of Independent Registered Public Accounting Firm, on Financial Statement Schedule F-34
Schedule II - Valuation and Qualifying Accounts..............................
F-35
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
independent 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 independent 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
control 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 annually.
Buckeye was built on a foundation of integrity and honesty. We take
responsibility for the quality and accuracy of our financial reporting.
/S/ DAVID B. FERRARO /S/ JOHN B. CROWE /S/ KRISTOPHER J. MATULA
David B. Ferraro John B. Crowe Kristopher J. Matula
Chairman of the Board and President and Executive Vice President and
Chief Executive Officer Chief Operating Officer Chief Financial Officer
F-2
Report of Independent Registered Public Accounting Firm
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, 2004 and 2003 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 2004. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (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. as of June 30, 2004 and 2003, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended June 30, 2004, in conformity with U. S. generally accepted accounting
principles.
As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for planned maintenance activities in
2004 and the Company adopted Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets, in 2002.
/s/ Ernst & Young LLP
Memphis, Tennessee
July 30, 2004
F-3
Consolidated Statements of Operations
(In thousands, except per share data)
Year Ended June 30
2004 2003 2002
----------------------------------------------
Net sales................................................. $656,913 $ 641,082 $ 635,218
Cost of goods sold........................................ 579,472 558,221 557,963
----------------------------------------------
Gross margin.............................................. 77,441 82,861 77,255
Selling, research and administrative expenses............. 42,423 37,896 37,101
Impairment of long-lived assets........................... 45,908 36,503 9,984
Restructuring costs....................................... 5,945 1,636 1,605
----------------------------------------------
Operating income (loss) (16,835) 6,826 28,565
Other income (expense):
Interest income...................................... 923 1,062 535
Interest expense and amortization of debt costs...... (47,284) (47,526) (48,586)
Loss on early extinguishment of debt................. (4,940) - -
Foreign exchange, amortization of intangibles and
other.............................................. (1,971) (2,378) (3,438)
----------------------------------------------
Loss before income taxes and cumulative effect of
change in accounting............................... (70,107) (42,016) (22,924)
Income tax benefit........................................ (26,197) (17,122) ( 8,420)
----------------------------------------------
Loss before cumulative effect of change in
accounting..................................... (43,910) (24,894) (14,504)
Cumulative effect of change in accounting (net of
tax of $3,359, $0 and $0, respectively)........ 5,720 - (11,500)
----------------------------------------------
Net loss............................................. $(38,190) $ (24,894) $ (26,004)
==============================================
Basic and diluted loss per share before cumulative
effect of change in accounting................. $ (1.18) $ (0.67) $ (0.42)
Cumulative effect of change in accounting............ $ 0.15 $ - $ (0.33)
Basic and diluted loss per share..................... $ (1.03) $ (0.67) $ (0.74)
Proforma amounts, assuming change in accounting
method for planned maintenance activities is applied
retroactively:
Net loss..................................... $(43,910) $ (23,513) $ (25,399)
Basic and diluted loss per share............. $ (1.18) $ (0.64) $ (0.73)
Weighted average shares for basic and diluted earnings
per share....................................... 37,075 36,965 34,906
==============================================
See accompanying notes.
F-4
Consolidated Balance Sheets
(In thousands, except share data)
June 30
2004 2003
----------------------------------------
Assets
Current assets:
Cash and cash equivalents................................ $ 27,235 $ 49,977
Cash, restricted......................................... - 3,375
Accounts receivable - trade, net of allowance for doubtful accounts
of $4,240 in 2004 and $721 in 2003..................... 110,209 123,303
Accounts receivable - other.............................. 2,158 2,980
Inventories.............................................. 107,439 136,705
Deferred income taxes.................................... 3,655 5,843
Prepaid expenses and other............................... 6,552 7,694
----------------------------------------
Total current assets.......................................... 257,248 329,877
Property, plant and equipment, net............................ 537,632 594,138
Goodwill, net................................................. 130,172 129,631
Intellectual property and other, net.......................... 41,023 44,239
----------------------------------------
Total assets.................................................. $ 966,075 $ 1,097,885
========================================
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable................................... $ 27,130 $ 37,007
Accrued expenses......................................... 45,337 48,360
Current portion of capital lease obligation............ 632 583
Current portion of long-term debt........................ 16,972 41,718
----------------------------------------
Total current liabilities..................................... 90,071 127,668
Long-term debt................................................ 587,076 619,474
Accrued postretirement benefits............................... 18,931 18,882
Deferred income taxes......................................... 37,956 66,728
Capital lease obligation...................................... 2,068 2,700
Other liabilities............................................. 628 549
Commitments and contingencies (Notes 8, 9, 12, 17, and 18)....
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 37,074,529 and 36,973,478
shares outstanding at June 30, 2004 and 2003, respectively 431 431
Additional paid-in capital.................................... 53,824 55,517
Deferred stock compensation................................... (230) (282)
Accumulated other comprehensive loss.......................... (569) (3,410)
Retained earnings............................................. 255,549 293,739
Treasury shares, 5,839,262 and 6,169,292 shares at
June 30, 2004 and 2003, respectively..................... (79,660) (84,111)
----------------------------------------
Total stockholders' equity.................................... 229,345 261,884
----------------------------------------
Total liabilities and stockholders' equity.................... $ 966,075 $1,097,885
========================================
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 loss earnings shares Total
-------------------------------------------------------------------------------------
Balance at June 30, 2001 $431 $ 65,125 $(202) $ (58,289) $ 344,637 $ (121,680) $230,022
==== ======== ====== ========== ========= =========== =========
Comprehensive income (loss):
Net loss...................... - - - - (26,004) - (26,004)
Other comprehensive income:
Foreign currency translation
adjustment............... - - - 21,908 - - 21,908
--------
Comprehensive 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
==== ======== ====== ========== ========== ========= ========
Comprehensive income (loss):
Net loss....................... - - - - (24,894) - (24,894)
Other comprehensive income:
Foreign currency translation
adjustment............... - - - 32,971 - - 32,971
-------
Comprehensive income................ 8,077
Issuance of 24,578 shares of common
stock........................... - - - - - 147 147
---- -------- ------ ---------- ---------- -------- --------
Balance at June 30, 2003 $431 $ 55,517 $(282) $(3,410) $ 293,739 $ (84,111) $261,884
==== ======== ====== ========== =========== ========= ========
Comprehensive income (loss):
Net loss....................... - - - - $ (38,190) - $(38,190)
Other comprehensive income:
Foreign currency translation
adjustment............... - - - 2,841 - - 2,841
-------
Comprehensive loss ................. (35,349)
Issuance of 326,219 shares of common
stock........................... - (1,782) - - - 4,416 2,634
Tax benefit on option exercise...... - 105 - - - - 105
Termination of restricted stock..... - - - - - (5) (5)
Deferred stock compensation......... - (16) 16 - - - -
Amortization of deferred stock
compensation.................... - - 36 - - - 36
Directors stock compensation
(4,469 shares).................. - - - - - 40 40
---- --------- ------ --------- ---------- -------- --------
Balance at June 30, 2004 $431 $ 53,824 $(230) $(569) $ 255,549 $ (79,660) $229,345
==== ========= ====== ========= ========== ======== ========
See accompanying notes.
F-6
Consolidated Statements of Cash Flows
(In thousands)
Year Ended June 30
2004 2003 2002
------------------------------------------------------
Operating activities
Net loss............................................. $(38,190) $(24,894) $ (26,004)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Cumulative effect of change in accounting....... (5,720) - 11,500
Impairment of long-lived assets................. 45,908 36,503 9,984
Depreciation and depletion...................... 45,675 46,500 45,096
Amortization.................................... 4,227 5,588 5,525
Loss on early extinguishment of debt............ 4,940 - -
Deferred income taxes........................... (27,340) (13,489) 9,142
Provision for bad debts......................... 4,010 296 1,355
Other........................................... 867 289 346
Changes in operating assets and liabilities:
Accounts receivable......................... 11,716 (25,267) 10,688
Inventories................................. 29,838 14,284 (3,411)
Prepaid expenses and other assets........... (1,302) 13,827 (10,807)
Accounts payable and other current liabilities (8,973) 1,569 (25,489)
------------------------------------------------------
Net cash provided by operating activities............ 65,656 55,206 27,925
Investing activities
Purchases of property, plant and equipment........... (31,871) (28,424) (35,972)
Redemptions (purchases) of short term investments.... - 8,863 (8,863)
Other................................................ (374) (872) (1,292)
------------------------------------------------------
Net cash used in investing activities................ (32,245) (20,433) (46,127)
Financing activities
Net proceeds from sale of equity interests........... 2,667 - 26,233
Net borrowings (payments) under revolving line of
credit............................................ (224,026) (19,923) 54,040
Issuance of long-term debt........................... 350,000 - -
Payments for debt issuance costs..................... (9,070) (671) (2,157)
Payments related to early extinguishment of debt..... (2,115) - -
Proceeds from termination of swap 4,000 - -
Principal payments on long-term debt and other....... (178,333) (22,539) (18,459)
------------------------------------------------------
Net cash provided by (used in) financing activities.. (56,877) (43,133) 59,657
Effect of foreign currency rate fluctuations on cash 724 2,331 1,619
------------------------------------------------------
Increase (decrease) in cash and cash equivalents..... (22,742) (6,029) 43,074
Cash and cash equivalents at beginning of year....... 49,977 56,006 12,932
------------------------------------------------------
Cash and cash equivalents at end of year............. $27,235 $ 49,977 $ 56,006
======================================================
See accompanying notes.
F-7
Notes to Consolidated Financial Statements
(In thousands, except share data)
1. Accounting Policies
Business Description and Basis of Presentation
Our financial statements are consolidated financial statements of
Buckeye Technologies Inc. and our subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
We manufacture and distribute 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
We consider cash equivalents to be temporary cash investments with
maturity of three months or less when purchased.
Inventories
Inventories are stated at the lower of cost (determined on average cost
or first-in, first-out methods) or market.
Allowance for Doubtful Accounts
We provide an allowance for receivables we believe we may not collect
in full. Management evaluates the collectibility of accounts based on a
combination of factors. In circumstances where we are aware of a specific
customer's inability to meet its financial obligations (i.e., bankruptcy
filings or substantial downgrading of credit ratings), we record a specific
reserve. For all other customers, we recognize reserves for bad debts
based on our historical collection experience. If circumstances change
(i.e., higher than expected defaults or an unexpected material adverse change
in a major customer's ability to meet its financial obligations), our
estimates of the recoverability of amounts due could be reduced by a material
amount.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Cost includes the
interest cost associated with significant capital additions. Interest
capitalized for the years ended June 30, 2004, 2003 and 2002 was $67, $70 and
$1,772, 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.
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 3 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, 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. Unless circumstances otherwise dictate, we perform our
F-8
annual impairment testing in the fourth quarter. Accumulated amortization was
$19,231 and $19,108 at June 30, 2004 and 2003, respectively. No impairment was
recorded during the year ending June 30, 2004. The change in accumulated
amortization resulted from changes in foreign currency exchange rates during the
period. A corresponding amount is recorded as a translation adjustment in
stockholders' equity.
Intellectual Property and Other
At June 30, 2004 and 2003, we had intellectual property totaling
$29,195 and $30,690, respectively, which includes patents (including application
and defense costs), licenses, trademarks, and tradenames the majority of which
were obtained in the acquisition of airlaid nonwovens businesses and
Stac-Pac(TM) technology. Intellectual property is amortized by the straight-line
method over 5 to 20 years and is net of accumulated amortization of $10,112 and
$7,852 at June 30, 2004 and 2003, respectively. Intellectual property
amortization expense of $2,244, $2,329 and $2,136 was recorded during the years
June 30, 2004, 2003 and 2002, respectively. Estimated amortization expense for
the five succeeding fiscal years follows: $2,168 in 2005, $2,130 in 2006, $2,135
in 2007, $2,019 in 2008 and $2,000 in 2009.
Deferred debt costs of $10,898 and $6,399 at June 30, 2004 and 2003,
respectively are amortized by the effective interest method over the life of the
related debt and are net of accumulated amortization of $5,755 and $9,601 at
June 30, 2004 and 2003, respectively.
Income Taxes
We provide 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. It is not practicable to
compute the potential deferred tax liability associated with theses
undistributed foreign earnings.
Risk Management
We periodically use derivatives and other financial instruments to
hedge exposures to natural gas, interest rates and currency risks. For hedges
which meet the SFAS 133, Accounting for Derivative Instruments and Hedging
Activities, criteria, we formally designate and document 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. At June 30, 2004, we had no derivatives.
Credit Risk
We have established credit limits for each customer. We generally
require 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 our
commitment to a plan of action based on the then known facts.
Revenue Recognition
We recognize revenue when the following criteria are met: persuasive
evidence of an agreement exists, delivery has occurred, our price to the buyer
is fixed and determinable, and collectibility is reasonably assured. Delivery is
not considered to have occurred until the customer takes title and assumes the
risks and rewards of ownership. The timing of revenue recognition is largely
dependent on shipping terms. Discounts and allowances are comprised of trade
allowances, cash discounts and sales returns.
F-9
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.
Foreign Currency Translation
Management has determined that the local currency of our 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 (expense)" in the results of operations.
Transaction gains and (losses) of $224, $1,095 and $(1,974) were recorded during
the years ended June 30, 2004, 2003 and 2002, 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, inventory reserves, income tax
liabilities, and contingent liabilities.
During 2002, we changed our estimate of 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 $53 and $1,981 for fiscal years
2003 and 2002, respectively. Effective July 1, 2003, we changed our method of
accounting from the accrue in advance method to the direct expense method
eliminating the requirement to estimate the timing and cost of future shutdowns.
See Note 2 for further discussion of this change in accounting.
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 2004, 2003 and 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
anti-dilutive.
F-10
Stock-Based Compensation
At June 30, 2004, we had stock-based compensation plans which we
account for under the recognition and measurement principles of APB Opinion No.
25, Accounting for Stock Issued to Employees, and related interpretations. The
following table illustrates the effect on net loss and earnings per share if we
had applied the fair value recognition provisions of SFAS 123, Accounting for
Stock-Based Compensation, to our stock-based awards.
Year Ended June 30
2004 2003 2002
----------------------------------------------------------
Net loss as reported........................ $(38,190) $ (24,894) $(26,004)
Deduct: Total stock-based compensation
expense determined under fair value
based method, net of related tax
effect.......................... (1,511) (3,089) (2,788)
----------------------------------------------------------
Pro forma net loss.......................... $(39,701) $(27,983) $(28,792)
==========================================================
Basic and diluted loss per share:
As reported............................ $ (1.03) $ (0.67) $ (0.74)
Pro forma.............................. $ (1.07) $ (0.76) $ (0.82)
Reclassifications
Certain prior year amounts have been reclassified to conform to current
year classifications.
2. Changes in Accounting
Planned maintenance activities
Through June 30, 2003, we accounted for major planned maintenance
activities at our specialty fiber plant in Perry, Florida by accruing the cost
of the maintenance activities over the period between each planned maintenance
activity (the accrue in advance method), which ranged from two to five year
intervals. All other facilities expensed maintenance costs as incurred.
During fiscal 2004, we re-evaluated this critical accounting policy
and, effective July 1, 2003, changed our method of accounting from the accrue
in advance method to the direct expense method. Under the new accounting
method, maintenance costs are expensed as incurred. We believe the new method
is preferable in this circumstance because the maintenance liability is not
recorded until there is an obligating event (when the maintenance event is
actually being performed). The direct expense method eliminates significant
estimates and judgments inherent under the accrual method, and it is the
predominant method used in the industry.
The effect of applying the new method for the year ended June 30, 2004
is a decrease in net loss of $349 or $0.01 per share. This decrease in net loss
is composed of a profit increase of $9,079 pre-tax ($5,720 net-of-tax reported
as a cumulative effect of accounting change), offset by $8,525 ($5,371
net-of-tax) in additional cost of goods sold which was the cost of the planned
maintenance activity performed in 2004.
F-11
The following table reflects the restated net income as if the change
in accounting for planned maintenance activities were handled retroactively.
Year Ended June 30
2004 2003 2002
---------------------------------------------
Net loss as reported................................... $(38,190) $(24,894) $(26,004)
Deduct: Cumulative effect of change in accounting for
planned maintenance costs, net of tax............. 5,720 - -
Add: Major planned maintenance costs accrued and
deducted from net income, net of tax.............. - 1,381 605
---------------------------------------------
Proforma net loss...................................... $(43,910) $(23,513) $(25,399)
=============================================
Basic and diluted loss per share:
As reported................................... $ (1.03) $ (0.67) $ (0.74)
Pro forma.................................... $ (1.18) $ (0.64) $ (0.73)
Goodwill
In June 2001, the FASB issued SFAS 141, Business Combinations (SFAS
141) and No. 142, Goodwill and Other Intangible Assets (SFAS 142). We adopted
SFAS 142 on July 1, 2001 and discontinued the amortization of goodwill. Under
the guidelines of SFAS 142, we completed our impairment assessments of the
carrying value of goodwill. In the assessment of the carrying value of goodwill,
management 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, we reduced our
goodwill by $11,500 in our 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 did not support its previous carrying value of 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. Impairment of Long-Lived Assets
During March of 2004, our Board of Directors approved the
discontinuation of production of nonwoven materials at our Cork, Ireland
facility. While the demand for nonwoven products is growing in the low to
mid-single digits, the growth in demand has not been sufficient to fully utilize
existing capacity. As such, industry participants have been rationalizing
production by taking down time, reducing operating shifts and closing
facilities.
Due to excess production capacity around the globe, we have operated
Cork below its productive capacity since the plant started up in 1998. Because
of its location and small size, our cost to produce at Cork is higher than it is
at our other locations. After careful consideration of all the options
available, management reached the decision to close the Cork facility and
consolidate production at our three other nonwoven materials manufacturing
facilities. Production at Cork ceased during July of 2004. Closing our Cork
facility reduced our nonwovens capacity by about 10%.
In accordance with SFAS No. 144, Accounting for Impairment or Disposal
of Long-Lived Assets (SFAS No. 144), we believe the commitment to discontinue
production represented an indicator of impairment and subsequently we evaluated
the value of the property, plant, and equipment associated with the Cork
facility. Under this guidance, we determined that these long-lived assets, with
a carrying amount of $48,359 (net of $6,914 of foreign currency translation
adjustment), were impaired and wrote them down to their estimated fair value of
$5,409, resulting in an impairment charge of $42,950. Fair value was based on
the estimated salvage value of the Cork facility as we do not believe the
facility can be utilized for its intended purpose and we will eventually abandon
the property. The salvage value incorporated assumptions that marketplace
participants would likely use in estimating the fair value of the Cork facility.
Subsequent to the July closure of the facility, we began to actively market the
building and equipment with carrying values of $4,028 and $1,349, respectively.
F-12
We anticipate the sale of the building and equipment will be completed during
fiscal 2005.
During fiscal 2004, we also impaired certain equipment and other
capitalized costs at specialty fibers facilities in the United States. These
assets consisted of equipment that was replaced with more cost effective
technology, engineering costs and capitalized interest for a long delayed
project, and assets related to idled equipment. In evaluating these assets with
a total carrying amount of $3,209, it was determined that the carrying value was
not recoverable and the estimated fair value was $251. Management recognized an
impairment charge of $2,958.
In April 2003, we announced the discontinuation of production of cotton
linter pulp at our specialty fibers Lumberton, North Carolina facility due to
the decline in demand for cotton content paper over the last five years. We will
continue to produce cosmetic cotton products at the Lumberton site. Accordingly,
management evaluated the ongoing value of the property, plant and equipment
associated with the Lumberton facility. Using the guidance issued under SFAS
144, management determined that long-lived assets (property, plant and
equipment) with a carrying amount of $36,462 were impaired and wrote them down
to their estimated fair value of $7,866. The resulting impairment charge of
$28,596 is reflected in the statement of operations during 2003. Fair value was
based on the present value method of estimating future cash flows and
incorporated assumptions that marketplace participants would likely use in
estimating fair value for the Lumberton facility, using a discount rate
incorporating time value of money, expectations about timing and amount of
future cash flows, and an appropriate risk premium.
During fiscal 2003, we decided to abandon certain waste removal
equipment at airlaid nonwovens facilities, which had a carrying value of $2,859.
Management has determined that the estimated fair value of the abandoned
equipment, which did not operate as intended, was $104. The resulting impairment
charge of $2,755 is reflected in the statement of operations during 2003. We
also decided to impair an idled airlaid nonwovens machine after determining the
additional capacity will not be needed in the foreseeable future. Therefore, we
fully impaired the asset with a carrying value of $4,767.
Additionally, during fiscal 2003 we impaired certain engineering costs
incurred for use at the Florida specialty fibers plant. The carrying value of
these engineering costs was $385. Since we abandoned the portion of a project
that relied on these drawings, the asset had no remaining value and was fully
impaired.
During the year ended June 30, 2002, we recorded impairment costs of
$9,984. These impairments are primarily related to obsolete airlaid nonwovens
packaging equipment that was replaced with more efficient StacPac(TM)
packaging lines.
4. Restructuring Costs
During fiscal 2002, we entered into a restructuring program designed to
deliver cost reductions through reduced overhead expenses. The cost recorded
during fiscal 2002, comprised mainly of severance and employee benefit costs,
was $1,605. As a result of the restructuring, approximately 200 positions were
eliminated and we closed engineering offices located in Finland. All payments
for the program were completed as of June 30, 2004.
During fiscal 2003 we initiated the first phase of a restructuring
program designed to deliver cost reductions through reduced expenses across our
company. The main component of this phase was the partial closure of our
Lumberton, North Carolina facility resulting in the consolidation of our U.S.
cotton linter pulp production at our Memphis, Tennessee facility and included
the elimination of approximately 100 positions within the specialty fibers
segment. We estimate the remaining expenses for this phase of the restructuring
program to be approximately $46, which we expect to be recognized and paid in
calendar year 2004.
During the first quarter of fiscal 2004, we entered into a second phase
of our restructuring program. This program was a continuation of the program
initiated in the fourth quarter of fiscal 2003 and will enable us to improve our
operating results through reduced salaries, benefits, other employee-related
expenses and operating expenses. As a result of this restructuring, 78 positions
will be eliminated. These positions include manufacturing, sales, product
development and administrative functions throughout the organization. We expect
payments related to this phase of the restructuring program to continue into
calendar 2005 and expect costs to total approximately $3,660.
On April 1, 2004 we announced the cessation of production of nonwoven
materials at our Cork, Ireland facility. We will continue to meet customer needs
for nonwoven materials by producing these products at our facilities in Delta,
British Columbia, Canada; Steinfurt, Germany; and Gaston County, North Carolina.
We expect this consolidation will enable us to improve our overall nonwoven
materials operating results by about $7,000 annually and reduce working capital
F-13
needs by $4,000. The closure of the Cork facility will result in the termination
of 83 employees. We expect total restructuring expenses and payments related to
the closure to be approximately $3,000 and completed by the end of calendar
2004.
Restructuring expenses are included in "Restructuring costs" in our
condensed consolidated statements of operations. Accrual balances are included
in "Accrued expenses" in the balance sheet. The following table summarizes the
expenses and accrual balances by reporting segments for the year ended June 30,
2004.
Year Ended
June 30, 2004
-------------------------------------
Accrual Accrual
Balance Impact Balance as
as of of of Program Total
June 30, Additional Foreign June 30, Charges Estimated
2003 Charges Currency Payments 2004 to Date Charges
2002 Restructuring Program
------------------------------------------------------------------------------------------------------ ------------------------
Specialty fibers $ - $ - $ - $ - $ - $ 608 $ 608
Nonwoven materials 17 - - (17) - 997 997
---------------------------------------------------------------- ------------------------
Total 2002 Program 17 - - (17) - 1,605 1,605
2003 Restructuring Program-Phase 1
------------------------------------------------------------------------------------------------------ ------------------------
Severance and employee benefits
Specialty fibers 1,437 195 - (1,632) - 1,656 1,656
Nonwoven materials 87 - - (87) - 87 87
Other miscellaneous expenses
Specialty fibers - 784 - (784) - 790 836
Nonwoven materials 83 - - (83) - 83 83
---------------------------------------------------------------- ------------------------
Total 2003 Program-Phase 1 1,607 979 - (2,586) - 2,616 2,662
2003 Restructuring Program-Phase 2
------------------------------------------------------------------------------------------------------ ------------------------
Severance and employee benefits
Specialty fibers - 1,606 55 (1,398) 263 1,606 2,101
Nonwoven materials - 39 - (39) - 39 39
Corporate - 1,514 - (1,393) 121 1,514 1,520
---------------------------------------------------------------- ------------------------
Total 2003 Program-Phase 2 - 3,159 55 (2,830) 384 3,159 3,660
2004 Restructuring Program
------------------------------------------------------------------------------------------------------ ------------------------
Nonwoven materials
Severance and employee
benefits - 1,767 10 (27) 1,750 1,767 2,663
Other miscellaneous expenses - 40 - (40) - 40 337
---------------------------------------------------------------- ------------------------
Total 2004 Program - 1,807 10 (67) 1,750 1,807 3,000
---------------------------------------------------------------- ------------------------
Total All Programs $ 1,624 $ 5,945 $ 65 $ (5,500) $ 2,134 $9,187 $10,927
================================================================ ========================
5. Inventories
Components of inventories
June 30
2004 2003
------------------------------------
Raw materials..................... $28,073 $36,827
Finished goods.................... 57,118 75,394
Storeroom and other supplies...... 22,248 24,484
------------------------------------
$107,439 $136,705
====================================
F-14
6. Property, plant and equipment
Components of property, plant and equipment
June 30
2004 2003
--------------------------------
Land and land improvements........... $17,243 $17,025
Buildings............................ 132,504 144,444
Machinery and equipment.............. 713,937 727,620
Construction in progress............. 19,929 20,644
--------------------------------
883,613 909,733
Accumulated depreciation............. (345,981) (315,595)
--------------------------------
$537,632 $594,138
================================
7. Accrued expenses
Components of accrued expenses
June 30
2004 2003
--------------------------------
Retirement plans....................... $ 5,825 $ 6,848
Vacation pay........................... 4,546 4,757
Maintenance shutdown................... - 9,881
Customer incentive programs............ 5,641 5,194
Interest............................... 11,130 7,416
Other.................................. 18,195 14,264
--------------------------------
$ 45,337 $ 48,360
================================
8. Debt
Components of long-term debt
June 30
2004 2003
--------------------------------
Senior Notes due:
2013................................. $200,000 $ -
Senior Subordinated Notes due:
2005.................................. - 149,816
2008.................................. 99,737 99,688
2010.................................. 153,061 155,470
Credit Facilities........................ 144,250 227,315
Notes payable............................ - 21,903
Other.................................... 7,000 7,000
--------------------------------
604,048 661,192
Less current portion .................... 16,972 41,718
--------------------------------
$587,076 $ 619,474
================================
Senior notes - On September 22, 2003, we placed privately $200,000 in
aggregate principal amount of 8.5% senior notes due October 1, 2013. The notes
are unsecured obligations and are senior to any of our subordinated debt. The
notes are guaranteed by our direct and indirect domestic subsidiaries that are
also guarantors on our senior secured indebtedness. The senior notes are
redeemable at our option, in whole or part, at any time on or after October 1,
2008, at redemption prices varying from 104.25% of principal amount to 100% of
principal amount on or after October 1, 2011, together with accrued and unpaid
interest to the date of redemption. We used the net proceeds from the private
placement to redeem our $150,000 senior subordinated notes due 2005, make a
permanent reduction of $40,000 to our revolving credit facility and pay the
related transaction costs. Total costs for the issuance of these notes was
$5,274 and will be amortized over the life of the senior notes using the
effective interest method. On September 22, 2003, we called the senior
subordinated notes due in 2005. These notes were redeemed on October 22, 2003.
On December 18, 2003, we completed our offer to exchange the privately placed
unregistered senior notes for debt securities of like principal amount of senior
notes that have been registered under the Securities Act of 1933, as amended.
F-15
During the first quarter of fiscal 2004, $3,300 was expensed related to
the early extinguishment of the $150,000 senior subordinated notes due 2005.
These expenses included a $2,115 call premium and $1,185 related to the
write-off of deferred financing costs.
Senior subordinated notes - During July 1996, we completed a public
offering of $100,000 principal amount of 9.25% unsecured Senior Subordinated
Notes due September 15, 2008. These notes are redeemable at our option, in whole
or in part, at any time after September 15, 2002, at redemption prices varying
from 103.8% of principal amount to 100% of principal amount on or after
September 15, 2004, together with accrued and unpaid interest to the date of
redemption.
During June 1998, we completed a private placement of $150,000
principal amount of 8% unsecured Senior Subordinated Notes due October 15, 2010.
In fiscal 1999, we exchanged these outstanding notes for public notes with the
same terms. These notes are redeemable at our option, in whole or in part, at
any time on or after October 15, 2003, at redemption prices varying from 104% of
principal amount to 100% of principal amount on or after October 15, 2006,
together with accrued and unpaid interest to the date of redemption.
Under the indentures governing our senior subordinated notes, as well
as the indenture that governs the senior notes, our ability to incur additional
debt is limited. Under these indentures, additional debt must be incurred as
so-called "ratio debt" or, alternatively, must be permitted in form and amount
as "Permitted Indebtedness." In order to incur ratio debt, a specified
consolidated fixed charge coverage ratio (as defined in the indentures) must
equal or exceed 2:1 (measured on a rolling four-quarter basis). At March 31,
2002, our fixed charge coverage ratio fell below 2:1. This development did not
breach any covenant or constitute an event of default under any of our debt
agreements. However, until such time as the ratio again equals or exceeds 2:1,
we can only incur debt that is Permitted Indebtedness.
On October 16, 2003, we successfully completed a solicitation of
consents from holders of our notes due in 2008 (2008 notes) to amend this
indenture to conform certain provisions of the 2008 notes to the provisions in
our notes due in 2010 and to current market practice. This amendment allowed us
to refinance our revolving credit facility (discussed later in this note), while
we are still limited to Permitted Indebtedness as defined in the indentures.
Under each of these indentures, the fixed charge coverage ratio test is
measured on a rolling four-quarter basis. While we can offer no assurance in
this regard, we believe that our operating results will improve over the next
several quarters and that such improved results together with recent reductions
in our outstanding debt, will enable us to exceed the required 2:1 ratio
necessary to incur ratio debt under indentures governing the senior notes and
the senior subordinated notes.
Interest rate swap - In May 2001, we entered into an interest rate swap
on $100,000 of 8% fixed rate notes maturing in October 2010. The swap converted
interest payments from a fixed rate to a floating rate of LIBOR plus 1.97%. This
arrangement qualified as a fair value hedge under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. As such, the net effect from the
interest rate swap was recorded as part of interest expense. On October 15,
2003, the swap counter party exercised its right to change the termination date
of the swap from October 15, 2010 to October 15, 2003. By exercising this right,
the swap counter party paid us $4,000 as an early termination fee, which is
being amortized as a reduction to interest expense through October 15, 2010. At
June 30, 2004 the unamortized portion of the termination fee was recorded as an
increase in debt of $3,595. During the year ended June 30, 2004 and 2003, the
swap reduced our interest expense by $1,848 and $4,462, respectively and will
continue to reduce interest expense through the amortization period of the
termination fee. Based upon interest rates for similar transactions, the fair
value of the interest rate swap agreement was recorded as an asset and a
corresponding increase in debt of $6,067 at June 30, 2003.
Revolving credit facility - We amended our revolving credit facility on
July 28, 2003 to modify the financial covenants from June 30, 2003 through March
31, 2005. Additionally, this amendment authorized the issuance of $200,000 of
senior notes (to refinance our $150,000 of senior subordinated notes due in
2005) and required a permanent reduction in the credit facility of $40,000.
On November 5, 2003, we established a $220,000 senior secured credit
facility, comprised of a $70,000 revolving credit facility (the revolver)
maturing on September 15, 2008 and a $150,000 term loan (the term loan) with
serial maturities of $375 quarterly through September 2008, $71,250 maturing
March 31, 2009 and final maturity on October 15, 2010. We had $142,250
outstanding on this facility at an average variable interest rate of 3.8% as of
June 30, 2004. This facility amends and restates our existing $215,000 revolving
credit facility. We used the proceeds of the new credit facility to pay the
F-16
outstanding balance on the former revolving credit facility plus transaction
fees and expenses. The interest rate applicable to borrowings under the revolver
is the agent's prime rate plus 1.50% to 1.75% or a LIBOR-based rate ranging from
LIBOR plus 2.50% to LIBOR plus 3.25%. The interest rate applicable to the term
loan is the agent's prime rate plus 1.50% or a LIBOR-based rate plus 2.50%. The
credit facility is secured by substantially all of our assets located in the
United States.
The credit facility contains covenants customary for financing of this
type. The financial covenants include: maximum ratio of consolidated net senior
secured debt to consolidated EBITDA, minimum ratio of consolidated EBITDA to
consolidated interest expense and minimum ratio of consolidated EBITDA minus
capital expenditures and taxes to consolidated fixed charges; as well as
limitations on capital expenditures. At June 30, 2004, we were in compliance
with these financial covenants.
As of June 30, 2004, we had $67,692 borrowing capacity on our revolving
credit facility. The portion of this capacity that we could borrow will depend
on our financial results and ability to comply with certain borrowing conditions
under the revolving credit facility. The commitment fee on the unused portion of
the revolving credit facility is 0.40% - 0.50% per annum. As of June 30, 2004,
we had approximately $55 million of liquidity including available borrowings and
cash and cash equivalents. Total costs for the issuance of the new facility were
approximately $3,300 and are being amortized using the effective interest method
over the life of the facility. During fiscal 2004, $1,640 was expensed as early
extinguishment of debt related to the write-off of deferred financing costs for
the former revolving credit facility.
Other credit facilities - On December 5, 2003, we paid off the
remaining balance on our receivables-based credit facility. We used cash on hand
and the restricted cash held as collateral for the facility to make the final
payment.
On September 30, 2003, we renewed our Canadian credit facility. The
renewal extended the maturity to November 30, 2004 and required a 20% reduction
of the principal to Canadian $16,000 (U.S. $11,899 equivalent based on exchange
rates in effect at June 30, 2004). As of June 30, 2004, we had $0 outstanding on
this facility. Our Canadian credit facility is secured by all our Canadian
assets. The commitment fee on the unused portion of this credit facility is
0.40% per annum. Availability on this facility is incorporated in, the
availability of our revolving credit facility and subject to the same borrowing
conditions previously discussed. All other terms and conditions remained the
same. In addition, we have a credit facility in Germany providing for
availability of $8,752. Letters of credit issued through this credit facility of
$2,138 were outstanding at June 30, 2004. The amount available for borrowing
under this facility was $6,614 at June 30, 2004.
Aggregate maturities of long-term debt are as follows: 2005-$16,972,
2006-$6,500, 2007-$1,500, 2008-$1,500, 2009-$171,625 and thereafter $405,951.
The 2005 maturities consist of the term loan serial maturities of $1,500 and a
required excess cash flow payment on the term loan of $15,472 that must be paid
during the first quarter of fiscal 2005. The calculation is based on the
revolving credit facilities definition of consolidated excess cash flow. Terms
of long-term debt agreements require compliance with certain covenants including
interest coverage ratios, and limitations on restricted payments and levels of
indebtedness. At June 30, 2004, 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 for the years ended June 30, 2004, 2003, and 2002
was $47,783, $49,225 and $49,046, respectively.
We had no off-balance sheet financing except for operating leases as
disclosed in Note 9.
9. Leases
In October 2001, we 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, 2004, the Company's future minimum lease
payments, including interest, for these assets were as follows: 2005--$834;
2006--$834; 2007--$717; 2008--$449; 2009--$369. Amortization of assets recorded
under capital lease agreements is included in depreciation expense.
We lease office and warehouse facilities and equipment under various
operating leases. Operating lease expense was $3,960, $4,463 and $4,554 during
the years ended June 30, 2004, 2003 and 2002, respectively. The commitments
under the operating leases at June 30, 2004 were as follows: 2005--$1,444;
2006--$676; 2007--$543; 2008--$280; 2009--$129 and thereafter--$11.
F-17
10. Stockholders' Equity
During the quarter ended June 30, 2002, we sold 2,150,000 shares of our
common stock, held as treasury shares, from our 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.
Our 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, 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
--------------------------------------------
Granted at market........................... 40,000 6.64 3.13
Terminated.................................. (49,000) 12.53
--------------------------------------------
Outstanding at June 30, 2003................ 4,833,950 13.60
--------------------------------------------
Granted at market........................... 845,000 10.72 6.24
Granted below market........................ 36,000 7.60 7.19
Exercised................................... (318,200) 8.04
Terminated.................................. (350,000) 14.64
--------------------------------------------
Outstanding at June 30, 2004................ 5,046,750 13.35
--------------------------------------------
Average
Exercise
Options Exercisable at June 30: Options Price
---------------------------------
2002.................. 2,916,950 14.03
2003.................. 3,744,617 13.91
2004 ................ 3,638,484 14.13
There were 308,400, 839,400 and 830,400 shares reserved for grants of
options at June 30, 2004, 2003, 2002, respectively. The following summary
provides information about stock options outstanding and exercisable at June 30,
2004:
Outstanding Exercisable
-------------------------------------------------- ------------------------
Average Average Average
Exercise Remaining Life Exercise
Exercise Price Options Price (Years) Options Price
--------------------------------------------------------------------------------------------------------------
$ 6.50-$12.00.............. 2,693,750 $ 10.19 6.9 1,417,484 $ 9.72
$12.50-$18.00.............. 2,170,792 16.55 3.9 2,069,792 16.58
$18.50-$24.00.............. 182,208 22.05 4.9 151,208 21.86
--------------------------------------------------------------------------------------------------------------
Total 5,046,750 $ 13.35 5.5 3,638,484 $ 14.13
--------------------------------------------------------------------------------------------------------------
We have 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
granted in 2004 and 2002 of eight years; volatility of the expected market price
of common stock of .49 for 2004 and 2003, and .43 for 2002; a risk free interest
rate range of 2.9% to 4.1% for 2004, 3.9% for 2003 and 4.5% to 5.1% for 2002 and
no dividends. The expected life of the stock options granted in 2003 was five
years, since this grant was only made to non-employee directors. 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 2004. Since compensation expense from stock
options is recognized over the future years' vesting period, and additional
F-18
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 treasury shares to fund this plan. At June 30, 2004,
89,632 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 3,801,640, 4,833,950 and 4,842,950 for
the years ended June 30, 2004, 2003 and 2002, 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, 2004,
no shares were repurchased. A total of 5,009,300 shares have been repurchased
through June 30, 2004.
11. Income Taxes
The components of income (loss) before income taxes and cumulative effect of
change in accounting were taxed under the following jurisdictions:
Year Ended June 30
2004 2003 2002
---------------------------------------------------
Domestic.................................... $ (76,210) $ (54,343) $ (20,692)
Foreign..................................... 6,103 12,327 (2,232)
---------------------------------------------------
Loss before income taxes and cumulative
effect of change in accounting............. $ (70,107) $ (42,016) $(22,924)
===================================================
Income tax expense (benefit) before cumulative effect of change in accounting:
Year Ended June 30
2004 2003 2002
---------------------------------------------------
Current tax (benefit) expense:
Federal................................ $(2,676) $ (6,630) $ (16,564)
Foreign................................ 4,695 2,958 470
State and other........................ (876) 39 (1,468)
---------------------------------------------------
Current tax expense 1,143 (3,633) (17,562)
Deferred tax (benefit) expense:
Federal................................ (24,861) (14,592) 6,281
Foreign................................ (1,057) 1,972 2,649
State and other........................ (1,422) (869) 212
---------------------------------------------------
Deferred tax (benefit) expense (27,340) (13,489) 9,142
---------------------------------------------------
Income tax benefit $ (26,197) $ (17,122) $ (8,420)
===================================================
The difference between reported income tax expense (benefit) and a tax
determined by applying the applicable U.S. federal statutory income tax rate to
income (loss) before income taxes and the cumulative effect of the change in
accounting is reconciled as follows:
Year Ended June 30
2004 2003 2002
---------------------------------------------------
Expected tax benefit $ (24,537) $ (14,706) $ (8,026)
State taxes................................. (736) (4) (816)
Foreign sales corporation/
extraterritorial income................. (1,155) (1,171) (685)
Effect of foreign operations................ 531 (1,046) 2,517
Effect of rate change in Canada............. - - (585)
Nondeductible items......................... 98 54 90
Other....................................... (398) (249) (915)
---------------------------------------------------
Income tax benefit $ (26,197) $ (17,122) $ (8,420)
===================================================
F-19
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets (liabilities) are as follows:
June 30
2004 2003
----------------------------------
Deferred tax liabilities:
Property, plant and
equipment............. $ (78,611) $ (87,075)
Inventory............... (1,421) (1,863)
Other................... (15,081) (14,899)
----------------------------------
Total deferred tax liabilities (95,113) (103,837)
Deferred tax assets:
Postretirement benefits. 7,368 7,164
Inventory costs......... 1,451 1,617
Net operating losses.... 34,208 14,997
Nondeductible reserves.. 2,510 5,704
Credit carryforwards.... 10,244 8,783
Other................... 7,898 7,126
----------------------------------
Total deferred tax assets 63,679 45,391
Valuation allowances....... (2,867) (2,439)
----------------------------------
Deferred tax assets, net of
valuation allowances 60,812 42,952
----------------------------------
Net deferred tax liability $ (34,301) $ (60,885)
==================================
The valuation allowances at June 30, 2004 and 2003 relate specifically
to net operating losses in certain state operations. Based on the future
reversal of deferred tax liabilities and the actions management has taken and
will continue to take to improve financial performance, management believes it
is more likely than not that the net deferred tax assets recorded at June 30,
2004 will be fully utilized after consideration of the valuation allowance
recorded.
We paid income taxes of $3,828 during the year ended June 30, 2004 and
received a net refund of $18,594 and $6,737 during the years ended June 30, 2003
and 2002, respectively.
At June 30, 2004, we have foreign net operating loss carryforwards of
approximately $64,411, which have no expiration date and federal and state net
operating loss carryforwards of approximately $82,751 and $100,172, respectively
which expire between 2017 and 2024. Additionally, we have a minimum tax
carryforward of $6,648 at June 30, 2004 which has an indefinite life.
12. Derivatives
We are exposed to certain market risks as a part of its ongoing
business operations and use 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, we record 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.
We do 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. We formally
document all relations between hedging instruments and the hedged items, as well
as its risk-management objectives and strategy for undertaking various hedge
transactions. We 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.
We periodically use 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 our exposure through our use of derivatives.
F-20
In May 2001, we entered into an interest rate swap on $100,000 of 8%
fixed rate notes maturing in October 2010. The swap converted interest payments
from a fixed rate to a floating rate of LIBOR plus 1.97%. The arrangement was
considered a hedge of a specific borrowing, and differences paid and received
under the arrangement were recognized as adjustments to interest expense. This
agreement, which was accounted for as a fair value hedge, decreased interest
expense by $1,848 and $4,462 for the years ended June 30, 2004 and 2003,
respectively. On October 15, 2003, the swap counter party exercised its right to
change the termination date of the swap from October 15, 2010 to October 15,
2003. By exercising this right, the swap counter party paid us $4,000 as an
early termination fee, which is being amortized as a reduction to interest
expense through October 15, 2010. At June 30, 2004 the unamortized portion of
the termination fee was recorded as an increase in debt of $3,595. Based upon
interest rates for similar transactions, the fair value of the interest rate
swap agreement was recorded as an asset and a corresponding increase in debt of
$6,067 at June 30, 2003.
In order to minimize market exposure, we use 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. There were no natural
gas contracts outstanding at June 30, 2004 or June 30, 2003 requiring fair value
treatment.
We may be exposed to losses in the event of nonperformance of
counterparties but do not anticipate such nonperformance.
13. Employee Benefit Plans
We have defined contribution retirement plans covering U.S. employees.
We contribute 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 contingent upon our results of
operations. Contribution expense for the retirement plans for the years ended
June 30, 2004, 2003 and 2002 was $5,744, $5,824 and $5,656, respectively.
We also provide 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. Our current policy is to fund the cost of these benefits as
payments to participants as required. We have established cost maximums to more
effectively control future medical costs. Effective July 1, 2002, we amended our
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
2004 2003 2002
-----------------------------------------------------
Service cost for benefits earned............ $ 753 $ 660 $ 725
Interest cost on benefit obligation......... 1,252 1,132 1,250
Amortization of unrecognized prior service cost (1,125) (1,125) (600)
(Gain)/loss................................. 335 96 -
-----------------------------------------------------
Total cost.................................. $ 1,215 $ 763 $ 1,375
=====================================================
F-21
The following table provides a reconciliation of the changes in the
plans' benefit obligations over the two-year period ending June 30, 2004, and a
statement of the plans' funded status as of June 30, 2004 and 2003:
June 30
2004 2003
-----------------------------------
Change in benefit obligation:
Obligation at beginning of year.......................... $20,361 $ 15,845
Service cost............................................. 753 660
Interest cost............................................ 1,252 1,132
Participant contributions................................ 235 179
Actuarial loss........................................... 1,231 3,736
Benefits paid............................................ (1,291) (1,191)
-----------------------------------
Underfunded status at end of year........................ 22,541 20,361
Unrecognized prior service cost.......................... 3,641 4,766
Unrecognized loss........................................ (7,407) (6,510)
Other.................................................... 1,184 911
-----------------------------------
Net amount recognized in the consolidated balance sheet....... $19,959 $ 19,528
===================================
The amount recognized in the consolidated balance sheets as of June
30, 2004 and 2003 includes $1,028and $646, respectively which is classified in
accrued expenses as the amount of benefits expected to be paid in fiscal year
2005 and 2004, respectively. Expected annual benefit payments net of retiree
contributions are as follows: 2005 - $1,028; 2006 - $1,219; 2007 - $1,328;
2008 - $1,433; 2009 and $1,525; 2010 through 2014 - $8,953. The measurement
date used to perform the benefit obligation analysis was May 1, 2004.
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 11.0% for 2005 and is assumed to decrease gradually to 5.0% in 2011 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 6.50% at June 30, 2004 and 6.25% at June
30, 2003.
In accordance with Financial Staff Position No. FAS 1601-1 (FSP 106-1),
the impact, if any, of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) has not been recognized in the consolidated
Financial Statements as of June 30, 2004. Authoritative guidance on the
accounting for the federal subsidy in the Act is pending on guidance that, when
issued, could require us to change previously reported information.
14. Significant Customer
Net sales to The Procter & Gamble Company and its affiliates for the
years ended June 30, 2004, 2003 and 2002 were 16%, 20% and 20%, respectively, of
total net sales.
F-22
15. Segment Information
Although nonwoven materials, processes, customers, distribution methods
and regulatory environment are very similar to specialty fibers, management
believes it is appropriate for nonwoven materials to be disclosed as a separate
reporting segment from specialty fibers. The specialty fiber segment is an
aggregation of cellulosic fibers based on both wood and cotton. Management makes
financial decisions and allocates resources based on the sales and operating
income of each segment. We allocate selling, research, and administration
expenses to each segment and management uses the resulting operating income to
measure the performance of the segments. The financial information attributed to
these segments is included in the following table:
Specialty Nonwoven
Fibers Materials Corporate Total
------------------------------------------------------------------------------------------------------------
Net sales 2004 $461,360 $217,641 $(22,088) $656,913
2003 466,524 195,860 (21,302) 641,082
2002 471,057 184,134 (19,973) 635,218
------------------------------------------------------------------------------------------------------------
Operating income (loss) 2004 28,198 7,580 (52,613) (16,835)
2003 41,935 3,978 (39,087) 6,826
2002 39,518 (2,130) (8,823) 28,565
------------------------------------------------------------------------------------------------------------
Depreciation and amortization 2004 27,662 17,150 3,321 48,133
of intangibles 2003 29,344 16,096 3,589 49,029
2002 29,462 14,735 3,212 47,409
------------------------------------------------------------------------------------------------------------
Total assets 2004 464,294 297,864 203,917 966,075
2003 516,118 360,574 233,963 1,110,655
2002 515,041 354,645 265,051 1,134,737
------------------------------------------------------------------------------------------------------------
Capital expenditures 2004 28,909 2,662 300 31,871
2003 24,670 3,194 560 28,424
2002 19,677 14,986 1,309 35,972
------------------------------------------------------------------------------------------------------------
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The corporate segment
includes operating elements such as segment eliminations and charges related to
restructuring and asset impairment. Corporate net sales represents the
elimination of intersegment sales included in the specialty fibers reporting
segment. We account for intersegment sales as if the sales were to third
parties, that is, at current market prices. Certain partially impaired assets
are included in the total assets for the reporting segments, but the associated
asset impairment charges are included in the corporate category. These asset
impairment charges and the segments they relate to are discussed further in Note
4, Restructuring and Impairment Costs, to these Consolidated Financial
Statements. Corporate assets primarily include cash, goodwill and intellectual
property.
Operating income in 2004 for specialty fibers, includes $9,582 of
expense related to an extended maintenance shutdown at our Perry, Florida
facility. This shutdown was the first in five years. Historically, we accrued
expenses related to extended maintenance shutdowns; however, as of July 1, 2003,
we changed our method of accounting from the accrue in advance method to the
direct expense method. Fiscal years 2003 and 2002 include $1,381 and $605 of
extended maintenance shutdown expense that was accrued in advance. See Note 2 of
the Consolidated Financial Statements for further discussion.
Our identifiable product lines are chemical cellulose, customized
fibers, fluff pulp and nonwoven materials. Chemical cellulose is used to impart
purity, strength and viscosity in the manufacture of diverse products such as
food casings, rayon filament, acetate fibers, thickeners for consumer products,
cosmetics and pharmaceuticals. Customized fibers are used to provide porosity,
color permanence, strength and tear resistance in filters, premium letterhead,
currency paper and personal stationery as well as absorbency and softness in
cotton balls and cotton swabs. Fluff pulp and nonwoven materials are used to
increase absorbency and fluid transport in products such as disposable diapers,
feminine hygiene products and adult incontinence products. Additionally,
nonwoven materials are used to enhance fluid management and strength in wipes,
tabletop items, food pads, household wipes and mops.
F-23
The following provides relative net sales to unaffiliated customers by
product line:
Year Ended June 30
2004 2003 2002
---------------------------------------
Chemical cellulose......... 32% 30% 32%
Customized fibers.......... 17% 17% 18%
Fluff pulp................. 18% 22% 21%
Nonwoven materials......... 33% 31% 29%
---------------------------------------
100% 100% 100%
=======================================
We are domiciled in the United States and have manufacturing operations
in the United States, Canada, Germany 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
2004 2003 2002
------------------------------------------
Net sales:
United States........ $436,722 $442,643 $452,521
Germany.............. 129,426 116,828 108,454
Other................ 90,765 81,611 74,243
------------------------------------------
Total net sales............ $656,913 $641,082 $635,218
==========================================
Long-lived assets:
United States....... $485,935 $465,967 $505,814
Canada.............. 118,639 123,349 114,885
Germany............. 76,102 76,754 76,606
Other............... 23,664 87,645 82,316
------------------------------------------
Total long-lived assets.... $704,340 $753,715 $779,621
==========================================
For the year ended June 30, 2004, our net sales by destination were
concentrated in the following geographic markets: North America - 39%, Europe -
40%, Asia - 11%, South America - 4% and Other - 6%.
16. Research and Development Expenses
Research and development costs of $9,457, $9,291and $9,041 were charged
to expense as incurred for the years ended June 30, 2004, 2003 and 2002,
respectively.
17. Commitments
Under two separate agreements expiring at various dates through
December 31, 2010, we are 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, 2004, estimated annual purchase
obligations were as follows: 2005--$13,000; 2006--$13,000; 2007--$13,000;
2008--$13,000; 2009--$14,000 and thereafter--$21,000. Purchases under these
agreements for the years ended June 30, 2004, 2003 and 2002 were $9,166, $13,450
and $12,612, respectively.
18. Contingencies
Our operations are subject to extensive general and industry-specific
federal, state, local and foreign environmental laws and regulations. We devote
significant resources to maintaining compliance with these laws and regulations.
We expect that, due to the nature of our operations, we 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 we will not incur material environmental compliance costs or liabilities in
the future.
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, we 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
F-24
requires us, 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. We have already made significant expenditures to make the in-plant
process changes required by the Fenholloway Agreement, and estimate, based on
1997 projections, we may 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. We 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 we are required by the "cluster rules" or other regulations 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 has proposed 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 2006 and thereafter. These possible expenditures could
have a material adverse effect on our business, results of operations or
financial condition.
We are 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
our financial position or results of operations.
19. Fair Values of Financial Instruments
For certain of our financial instruments, including cash and cash
equivalents, short-term investments, accounts receivable and accounts payable,
the carrying amounts approximate fair value due to their short maturities. The
fair value of our 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 our current
incremental borrowing rates for similar types of borrowing instruments. The
carrying value and fair value of long-term debt at June 30, 2004 were $604,048
and $601,345, respectively and at June 30, 2003 were $661,192 and $653,285,
respectively.
F-25
20. Quarterly Results of Operations (Unaudited)
Restated (5)
-------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
-------------------------------------------------------------------------------
Year ended June 30, 2004
Net sales.................... $155,831 $160,279 $172,761 $168,042
Gross margin................. 21,591 8,131 21,730 25,989
Operating income (loss)...... 10,961 (8,450) (31,749) 12,403
Income (loss) before cumulative
effect of change in accounting (2,664) (15,151) (27,505) 1,410
Cumulative effect of change in
accounting for planned
maintenance costs 5,720 - - -
Net income (loss)............ 3,056 (15,151) (27,505) 1,410
Earnings (loss) per share before
cumulative effect of change in
accounting
Basic and diluted........ (0.07) (0.41) (0.74) 0.04
Earnings (loss) per share
Basic and diluted........ 0.08 (0.41) (0.74) 0.04
Year ended June 30, 2003
Net sales.................... $156,425 $153,146 $163,497 $168,014
Gross margin................. 20,381 21,795 20,273 20,412
Operating income (loss)...... (778) 347 (31,642) (9,943)
Net income (loss)............ (519) 540 (19,754) (5,161)
Earnings (loss) per share
Basic and diluted........ (0.01) 0.01 (0.53) (0.14)
(1) 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.
(2) During the third quarter of fiscal 2004, we incurred impairment charges of
$43,891 related to the announced closure of our Cork, Ireland facility. See Note
3 for further information.
(3) During the fourth quarter of 2004, we recorded a net tax benefit of $773
resulting from changes in estimates used in our prior year end tax provision to
the actual amounts utilized in filing our 2003 tax return.
(4) During the third quarter of fiscal 2003, we incurred impairment charges of
$29,742 related to the partial closure of our Lumberton, North Carolina
facility. See Note 3 for further information.
F-26
(5) Amounts for the first and second quarters for the year ended June 30, 2004
differ from amounts previously reported in Form 10-Q's. The differences relate
to the adoption of a new accounting method for planned maintenance activities
during the third quarter retroactive to July 1, 2003. The change in accounting
is described further in Note 2. Following is a reconciliation of the line items
impacted by the change.
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------------------------------------------
Year ended June 30, 2004
Gross margin as previously reported in Form 10-Q..... $21,961 $ 16,286 $21,730 $25,989
Increase in cost of goods sold....................... 370 8,155 - -
----------------------------------------------------
Gross margin......................................... 21,591 8,131 21,730 25,989
====================================================
Operating income (loss) as previously reported in
Form 10-Q......................................... 11,331 (295) (31,749) 12,403
Increase in cost of goods sold....................... 370 8,155 - -
----------------------------------------------------
Operating income (loss).............................. 10,961 (8,450) (31,749) 12,403
====================================================
Income (loss) before cumulative effect of change in
accounting as previously reporting in Form 10-Q.... (2,431) (10,013) (27,505) 1,410
Increase in cost of goods sold net of tax............ 233 5,138 - -
----------------------------------------------------
Income (loss) before cumulative effect of change in
accounting......................................... (2,664) (15,151) (27,505) 1,410
====================================================
Net income (loss) as previously reported in Form 10-Q (2,431) (10,013) (27,505) 1,410
Increase in cost of goods sold net of tax............ 233 5,138 - -
Cumulative effect of change in accounting (net of tax
of $3,359)......................................... 5,720 - - -
----------------------------------------------------
Net income (loss).................................... $ 3,056 $(15,151) $(27,505) $1,410
====================================================
Earnings (loss) per share as previously reported
Basic and diluted............................... $ (0.07) $ (0.27) $ (0.74) $ 0.04
Revised earnings (loss) per share before cumulative effect of
change in accounting
Basic and diluted............................... $ (0.07) $ (0.41) $ (0.74) $ 0.04
Revised earnings (loss) per share
Basic and diluted............................... $ 0.08 $ (0.41) $ (0.74) $ 0.04
21. Condensed Consolidating Financial Statements
The guarantor subsidiaries presented below represent our subsidiaries
that are subject to the terms and conditions outlined in the indenture governing
the senior notes and that guarantee the notes, jointly and severally, on a
senior unsecured basis. The non-guarantor subsidiaries presented below represent
the foreign subsidiaries and the receivables subsidiary which do not guarantee
the senior notes. Each subsidiary guarantor is 100% owned directly or indirectly
by Buckeye Technologies Inc. and all guarantees are full and unconditional.
Supplemental financial information for Buckeye Technologies Inc. and
our guarantor subsidiaries and non-guarantor subsidiaries for the senior notes
is presented in the following tables.
F-27
STATEMENTS OF OPERATIONS
Year ending June 30, 2004
Guarantors
-------------------------------
Buckeye Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
-------------------------------------------------------------------------------
Net sales................................... $ 88,914 $370,399 $224,150 $(26,550) $656,913
Cost of goods sold.......................... 71,623 330,153 203,521 (25,825) 579,472
-------------------------------------------------------------------------------
Gross margin................................ 17,291 40,246 20,629 (725) 77,441
Selling, research and administrative expenses 14,307 18,828 9,288 - 42,423
Restructuring and impairment costs.......... 1,596 4,533 45,724 - 51,853
-------------------------------------------------------------------------------
Operating income (loss)..................... 1,388 16,885 (34,383) (725) (16,835)
Other income (expense):
Net interest expense and
amortization of debt.................. (45,554) (294) (513) - (46,361)
Other income/(expense), including equity
income in affiliates................. (49,884) (1,965) 198 44,740 (6,911)
Intercompany interest income/(expense).. 32,135 (23,646) (8,489) - -
Intercompany miscellaneous income/
expense.............................. (446) (950) 1,396 - -
-------------------------------------------------------------------------------
Income/(loss) before income taxes and
cumulative effect of change in accounting (62,361) (9,970) (41,791) 44,015 (70,107)
Income tax expense (benefit)................ (24,171) (4,179) (14,907) 17,060 (26,197)
-------------------------------------------------------------------------------
Income/(loss) before cumulative effect
of change in accounting.................. (38,190) (5,791) (26,884) 26,955 (43,910)
Cumulative effect of change in accounting
(net of tax)............................. - 5,720 - - 5,720
-------------------------------------------------------------------------------
Net income (loss)........................... $(38,190) $ (71) $(26,884) $ 26,955 $(38,190)
===============================================================================
STATEMENTS OF OPERATIONS
Year ending June 30, 2003
Guarantors
-------------------------------
Buckeye Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
-------------------------------------------------------------------------------
Net sales................................... $ 81,433 $382,630 $202,046 $(25,027) $641,082
Cost of goods sold.......................... 62,923 340,278 179,079 (24,059) 558,221
-------------------------------------------------------------------------------
Gross margin................................ 18,510 42,352 22,967 (968) 82,861
Selling, research and administrative expenses 9,420 20,773 7,703 - 37,896
Restructuring and impairment costs.......... 5,189 31,889 1,061 - 38,139
-------------------------------------------------------------------------------
Operating income (loss)..................... 3,901 (10,310) 14,203 (968) 6,826
Other income (expense):
Net interest expense and
amortization of debt.................. (43,165) (337) (2,962) - (46,464)
Other income/(expense), including equity
income in affiliates................. (34,782) (2,209) 979 33,634 (2,378)
Intercompany interest income/(expense).. 28,621 (19,810) (8,811) - -
Intercompany miscellaneous
income/(expense)...................... (1,430) (3,531) 4,961 - -
-------------------------------------------------------------------------------
Income/(loss) before income taxes........... (46,855) (36,197) 8,370 32,666 (42,016)
Income tax expense/(benefit)................ (21,961) (15,332) 4,860 15,311 (17,122)
-------------------------------------------------------------------------------
Net income (loss)........................... $(24,894) $ (20,865) $ 3,510 $ 17,355 $(24,894)
===============================================================================
F-28
STATEMENTS OF OPERATIONS
Year ending June 30, 2002
Guarantors
-------------------------------
Buckeye Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
-------------------------------------------------------------------------------
Net sales................................... $ 91,296 $382,663 $184,007 $(22,748) $635,218
Cost of goods sold.......................... 71,887 351,260 160,350 (25,534) 557,963
-------------------------------------------------------------------------------
Gross margin................................ 19,409 31,403 23,657 2,786 77,255
Selling, research and administrative expenses 3,306 25,967 7,828 - 37,101
Restructuring and impairment costs.......... 3,713 3,644 4,232 - 11,589
-------------------------------------------------------------------------------
Operating income............................ 12,390 1,792 11,597 2,786 28,565
Other income (expense):
Net interest expense and
amortization of debt.................. (43,747) 1,122 (5,426) - (48,051)
Other income/(expense), including equity
income in affiliates................. (37,571) (2,631) 1,189 35,575 (3,438)
Intercompany interest income/(expense) 32,558 (25,288) (7,270) - -
Intercompany miscellaneous
income/(expense)...................... (954) (2,654) 3,608 - -
-------------------------------------------------------------------------------
Income/(loss) before income taxes and
cumulative effect of change in accounting. (37,324) (27,659) 3,698 38,361 (22,924)
Income tax expense/(benefit)................ (11,320) (12,047) 3,312 11,635 (8,420)
-------------------------------------------------------------------------------
Income/(loss) before cumulative effect
of change in accounting................... (26,004) (15,612) 386 26,726 (14,504)
Cumulative effect of change in
accounting (net of tax)................... - (11,500) - - (11,500)
-------------------------------------------------------------------------------
Net income (loss)........................... $(26,004) $ (27,112) $ 386 $26,726 $(26,004)
===============================================================================
F-29
BALANCE SHEETS
As of June 30, 2004
Guarantors
-------------------------------
Buckeye Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
-------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents................. $14,746 $ 103 $12,386 $ - $ 27,235
Accounts receivable, net.................. 15,502 58,631 38,234 - 112,367
Inventories............................... 21,770 51,722 34,503 (556) 107,439
Other current assets...................... 9,408 5,008 (4,209) - 10,207
Intercompany accounts receivable.......... - 22,604 6,109 (28,713) -
-------------------------------------------------------------------------------
Total current assets 61,426 138,068 87,023 (29,269) 257,248
Property, plant and equipment, net.......... 54,042 347,782 135,808 - 537,632
Goodwill and intangibles, net............... 21,012 55,241 83,114 - 159,367
Intercompany notes receivable............... 369,279 - - (369,279) -
Other assets, including investment in
subsidiaries............................. 290,493 330,210 114,164 (723,039) 11,828
-------------------------------------------------------------------------------
Total assets $796,252 $871,301 $420,109 $(1,121,587) $966,075
===============================================================================
Liabilities and stockholders' equity
Current liabilities
Trade accounts payable.................... $ 5,860 $16,118 $ 5,152 $ - $27,130
Other current liabilities................. 34,493 17,390 11,058 - 62,941
Intercompany accounts payable............. 17,063 - 11,650 (28,713) -
-------------------------------------------------------------------------------
Total current liabilities 57,416 33,508 27,860 (28,713) 90,071
Long-term debt.............................. 585,076 2,000 - - 587,076
Deferred income taxes....................... (40,480) 61,732 16,704 - 37,956
Other long-term liabilities................. 5,385 14,657 1,585 - 21,627
Intercompany notes payable.................. - 236,883 132,396 (369,279) -
Stockholders'/invested equity............... 188,855 522,521 241,564 (723,595) 229,345
-------------------------------------------------------------------------------
Total liabilities and stockholders' equity $796,252 $871,301 $420,109 $(1,121,587) $966,075
===============================================================================
F-30
BALANCE SHEETS
As of June 30, 2003
Guarantors
-------------------------------
Buckeye Non-
Technologies US Guarantor Consolidating
Inc. Subsidiaries Subsidiaries Adjustments Consolidated
-------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents................. $26,075 $ 4,349 $19,553 $ - $ 49,977
Restricted cash and short-term investments - - 3,375 - 3,375
Accounts receivable, net.................. 6,672 42,657 76,954 - 126,283
Inventories............................... 28,711 61,532 46,291 171 136,705
Other current assets...................... 9,046 7,063 (2,572) - 13,537
Intercompany accounts receivable.......... 9,553 - - (9,553) -
-------------------------------------------------------------------------------
Total current assets 80,057 115,601 143,601 (9,382) 329,877
Property, plant and equipment, net.......... 51,753 354,057 188,328 - 594,138
Goodwill and intangibles, net............... 3,698 56,575 100,036 - 160,309
Intercompany notes receivable............... 379,941 - - (379,941) -
Other assets, including investment in
subsidiaries............................. 337,654 279,717 107,625 (711,435) 13,561
-------------------------------------------------------------------------------
Total assets $853,103 $805,950 $539,590 $(1,100,758) $1,097,885
===============================================================================
Liabilities and stockholders' equity
Current liabilities
Trade accounts payable.................... $ 6,153 $20,659 $10,195 $ - $ 37,007
Other current liabilities................. 12,553 25,978 52,129 1 90,661
Intercompany accounts payable - 1,710 7,843 (9,553) -
-------------------------------------------------------------------------------
Total current liabilities 18,706 48,347 70,167 (9,552) 127,668
Long-term debt.............................. 617,474 2,000 - - 619,474
Deferred income taxes....................... (6,847) 55,821 17,754 - 66,728
Other long-term liabilities................. 5,543 15,387 1,201 - 22,131
Intercompany notes payable.................. - 211,392 168,549 (379,941) -
Stockholders'/invested equity............... 218,227 473,003 281,919 (711,265) 261,884
-------------------------------------------------------------------------------
Total liabilities and stockholders' equity $853,103 $805,950 $539,590 $(1,100,758) $1,097,885
===============================================================================
F-31
STATEMENTS OF CASH FLOWS
Year ending June 30, 2004
Guarantors
-------------------------------
Buckeye Non-
Technologies US Guarantor
Inc. Subsidiaries Subsidiaries Consolidated
---------------------------------------------------------------
Net cash provided by (used in) operations $ 3,925 $(5,806) $67,537 $65,656
Investing activities:
Purchases of property, plant and equipment (6,524) (22,971) (2,376) (31,871)
Other....................................... - (377) 3 (374)
---------------------------------------------------------------
Net cash used in investing activities (6,524) (23,348) (2,373) (32,245)
Financing activities
Net payments under revolving line of credit (209,124) - (14,902) (224,026)
Payments for debt issuance and
extinguishment.......................... (9,070) - - (9,070)
Net issuance of (payments on) long-term
debt and other.......................... 209,464 24,908 (58,153) 176,219
---------------------------------------------------------------
Net cash provided by (used in)
financing activities (8,730) 24,908 (73,055) (56,877)
Effect of foreign currency rate fluctuations
on cash................................ - - 724 724
---------------------------------------------------------------
Decrease in cash and cash equivalents (11,329) (4,246) (7,167) (22,742)
Cash and cash equivalents at beginning
of period 26,075 4,349 19,553 49,977
---------------------------------------------------------------
Cash and cash equivalents at end of period $14,746 $ 103 $12,386 $27,235
===============================================================
STATEMENTS OF CASH FLOWS
Year ending June 30, 2003
Guarantors
-------------------------------
Buckeye Non-
Technologies US Guarantor
Inc. Subsidiaries Subsidiaries Consolidated
---------------------------------------------------------------
Net cash provided by (used in) operations $ (1,681) $ 37,614 $19,273 $55,206
Investing activities:
Purchases of property, plant and equipment.. (3,037) (21,840) (3,547) (28,424)
Redemptions of short term investments....... 8,863 - - 8,863
Other....................................... - (926) 54 (872)
---------------------------------------------------------------
Net cash provided by (used in) investing
activities 5,826 (22,766) (3,493) (20,433)
Financing activities
Net borrowings (payments) under revolving
lines of credit......................... (6,000) - (13,923) (19,923)
Payments for debt issuance costs............ (256) - (415) (671)
Net issuance of (payments on) long-term
debt and other.......................... (8,257) (11,857) (2,425) (22,539)
---------------------------------------------------------------
Net cash provided by (used in) financing
activities (14,513) (11,857) (16,763) (43,133)
Effect of foreign currency rate fluctuations
on cash................................ - - 2,331 2,331
---------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents............................ (10,368) 2,991 1,348 (6,029)
Cash and cash equivalents at beginning
of period.............................. 36,443 1,358 18,205 56,006
---------------------------------------------------------------
Cash and cash equivalents at end of period $26,075 $4,349 $19,553 $49,977
===============================================================
F-32
STATEMENTS OF CASH FLOWS
Year ending June 30, 2002
Guarantors
-------------------------------
Buckeye Non-
Technologies US Guarantor
Inc. Subsidiaries Subsidiaries Consolidated
---------------------------------------------------------------
Net cash provided by (used in) operations $19,141 $41,463 $(32,679) $27,925
Investing activities:
Purchases of property, plant and equipment.. (4,410) (28,370) (3,192) (35,972)
Purchases of short term investments......... (8,863) - - (8,863)
Other....................................... - (1,292) - (1,292)
---------------------------------------------------------------
Net cash provided by (used in) investing
activities (13,273) (29,662) (3,192) (46,127)
Financing activities:
Net proceeds from sale of equity interests 23,203 - 3,030 26,233
Net borrowings under revolving
lines of credit........................... 31,301 - 22,739 54,040
Payments for debt issuance costs............ (1,443) - (714) (2,157)
Principal payments on long-term
debt and other.......................... (23,025) (10,631) 15,197 (18,459)
---------------------------------------------------------------
Net cash provided by (used in) financing
activities 30,036 (10,631) 40,252 59,657
Effect of foreign currency rate fluctuations
on cash................................ - - 1,619 1,619
---------------------------------------------------------------
Increase in cash and cash equivalents 35,904 1,170 6,000 43,074
Cash and cash equivalents at beginning
of period 539 188 12,205 12,932
---------------------------------------------------------------
Cash and cash equivalents at end of period $36,443 $ 1,358 $ 18,205 $56,006
===============================================================
F-33
Report of Independent Registered Public Accounting Firm on Financial Statement
Schedule
To the Board of Directors and Stockholders of Buckeye Technologies Inc.
We have audited the consolidated financial statements of Buckeye Technologies
Inc. as of June 30, 2004 and 2003, and for each of the three years in the period
ended June 30, 2004, and have issued our report thereon dated July 30, 2004
(included elsewhere in this Annual Report on Form 10-K). Our audits also
included the financial statement schedule listed in Item 15(a) in this Annual
Report on Form 10-K. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Memphis, Tennessee
July 30, 2004
F-34
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Column B Column C Column D Column E
-----------------------------------------------------------------
Balance Balance
at Additions at
Beginning Charged End
of to of
Description Period Expenses Deductions Period
----------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts
Year ended June 30, 2004 $ 721 $ 4,010 $ (491) (a) $ 4,240
======= ====== ========= ======
Year ended June 30, 2003 $ 1,947 $ 296 $ (1,522) (a) $ 721
====== ======= ======== ======
Year ended June 30, 2002 $ 984 $ 1,355 $ (392) (a) $ 1,947
======= ====== ======== ======
Reserve for maintenance shutdowns
Year ended June 30, 2004 $ 9,881 $ - $ 9,881 (b) $ -
===== ====== ======== ======
Year ended June 30, 2003 $ 7,699 $ 4,234 $ (2,052) (b) $ 9,881
===== ====== ======== ======
Year ended June 30, 2002 $ 8,008 $ 2,782 $ (3,091) (b) $ 7,699
===== ====== ======== ======
Accrual for restructuring
Year ended June 30, 2004 $ 1,624 $ 5,945 $ (5,435) (c) $ 2,134
===== ====== ======= ======
Year ended June 30, 2003 $ 601 $ 1,636 $ (613) (c) $ 1,624
===== ====== ======= ======
Year ended June 30, 2002 $ 0 $ 1,605 $(1,004) (c) $ 601
===== ====== ======== ======
(a) Uncollectible accounts written off, net of recoveries and translation
adjustments. (b) Payments made during plant shutdowns were $9,881 in 2004, $732
in 2003 and $1,910 in 2002. During 2002,
the estimate was changed based on a change in the estimated timing of
shutdown. Adjustments of $53 and $1,981 were made in 2003 and 2002,
respectively. Effective July 1, 2003, we changed our method of accounting
for planned maintenance activities from the accrue in advance method to
the direct expense method. For further discussion of this change, see
Note 2 of the Consolidated Financial Statements.
(c) Severance payments, lease cancellations, relocation expenses, and
miscellaneous other expenses.
F-35