10-Q 1 c64285e10-q.txt QUARTERLY REPORT 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------ FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------ For the Quarter Ended June 30, 2001 Commission File Number 33-60714 IVEX PACKAGING CORPORATION (Exact name of registrant as specified in its charter) Delaware 76-0171625 (State or other jurisdiction (I.R.S. Employer of incorporation) Identification No.) 100 Tri-State Drive Lincolnshire, Illinois 60069 (Address of Principal Executive Office) (Zip Code) Registrant's Telephone number, including area code: (847) 945-9100 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- At August 10, 2001, there were 20,440,481 shares of common stock, par value $0.01 per share, outstanding. ================================================================================ 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS IVEX PACKAGING CORPORATION CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

The accompanying notes are an integral part of this statement. 2 3 IVEX PACKAGING CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

The accompanying notes are an integral part of this statement. 3 4 IVEX PACKAGING CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

The accompanying notes are an integral part of this statement. 4 5 IVEX PACKAGING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)

The accompanying notes are an integral part of this statement. 5 6 IVEX PACKAGING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1 - ACCOUNTING AND REPORTING POLICIES In the opinion of management, the information in the accompanying unaudited financial statements reflects all adjustments necessary for a fair statement of results for the interim periods. These interim financial statements should be read in conjunction with the financial statements and the notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2000 (the "Form 10-K") of Ivex Packaging Corporation ("Ivex" or the "Company"). IPC, Inc. ("IPC") is the only direct subsidiary of Ivex and is wholly owned. The Company's accounting and reporting policies are summarized in Note 2 to the consolidated financial statements of the Ivex Form 10-K. Accounts Receivable Accounts receivable at June 30, 2001 and December 31, 2000 consist of the following:

Inventories Inventories at June 30, 2001 and December 31, 2000 consist of the following:

Inventories are stated at the lower of cost or market using the first-in, first-out method to determine the cost of raw materials and finished goods. Such cost includes raw materials, direct labor and manufacturing overhead. Earnings Per Share Basic earnings per share excludes dilution and is computed by dividing income by the weighted average number of common shares outstanding during each period. Diluted earnings per share reflects the potential dilution that could occur if common stock options are exercised and is computed by dividing income by the number of common shares outstanding, including common stock equivalent shares, issued upon exercise of outstanding stock options, to the extent that they would have a dilutive effect on the per share amounts. Dilution of the Company's weighted average shares outstanding results from common stock issued upon exercise of outstanding stock options. Equity Investments The Company has investments in a number of affiliates. Affiliated companies in which Ivex does not have a controlling interest, or for which control is expected to be temporary, are accounted for using the equity method. The Company's share of earnings of these affiliates is included in income as earned. 6 7 The Company owns a 50% equity interest in Thermoflex Corporation, a medical and electronics packaging joint venture with operations in Puerto Rico. Since 1997, the Company has invested approximately $2,600 in this joint venture in the form of common stock and inventory and equipment transfers. Thermoflex Corporation has not been profitable and is expected to continue to incur losses in the future. The Company and its joint venture partner are evaluating Thermoflex's strategic alternatives. Consequently, during 2001, the Company recorded an asset impairment equal to its remaining investment. NOTE 2 - OTHER COMPREHENSIVE INCOME (LOSS) Comprehensive income is defined as the sum of net income and all other non-owner changes in equity. The components of other comprehensive income (loss) were as follows:

As of January 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No.133, "Accounting for Derivatives and Similar Financial Instruments and Hedging Activities." It requires all derivative instruments to be recorded in the financial position at fair value. The change in fair value of a derivative is required to be recorded each period in current earnings or other comprehensive income, depending on whether the derivative is designated as part of a hedge transaction and if so, the type of hedge transaction. The effect of adopting SFAS 133 at January 1, 2001 was immaterial. The Company uses interest rate swaps and collars to modify its exposure to interest rate movements and to reduce borrowing costs. The Company has designated these instruments as cash flow hedges and considers such instruments effective at offsetting the Company's risk to variable interest rates on debt. The Company's exposure to interest rate risk consists of floating rate debt instruments that are benchmarked to LIBOR. As of June 30, 2001, the Company had $260,000 notional value of interest rate derivatives outstanding. The Company has interest rate swap agreements with a group of banks having notional amounts totaling $100,000 through November 5, 2002. These agreements effectively fix the Company's LIBOR base rate for $100,000 of the Company's indebtedness at a rate of 6.12% during this period. The Company has no cost interest rate collar agreements with a group of banks having notional amounts totaling $100,000 through November 5, 2002. These collar agreements effectively fix the LIBOR base rate for $100,000 of the Company's indebtedness at a maximum of 7.00% and allow for the Company to pay the market LIBOR from a floor of 5.55% to the maximum rate. If LIBOR falls below 5.55%, the Company is required to pay the floor rate of 5.55%. The Company also has no cost interest rate collar agreements with a group of banks having notional amounts totaling $60,000 of the Company's indebtedness through November 5, 2001 at a maximum of 5.31% and allow for the Company to pay the market LIBOR from a floor of 4.47% to the maximum rate. If LIBOR falls below 4.47%, the Company is required to pay the floor rate of 4.47%. Income or expense related to settlements under these agreements is recorded as adjustments to interest expense in the Company's financial statements. The fair market value of the Company's derivative instruments outlined above approximates a loss of $4,527 as of June 30, 2001 and is based upon the amount at which it could be settled with a third party, although the Company has no current intention to trade any of these instruments and plans to hold them as hedges for the Senior Credit Facility. The fair market value of the Company's derivative instruments, net of tax, was recorded in other comprehensive income/loss during the first six months of 2001. On July 23, 2001, the Company entered into interest rate swap agreements with a bank having notional amounts totaling $40,000 through July 25, 2002. This agreement effectively fixes the Company's LIBOR base rate for $40,000 of the Company's indebtedness at a rate of 3.925% during this period. Also on July 23, 2001, the Company entered into interest rate swap agreements with a bank having notional amounts totaling $20,000 through July 25, 2002. This 7 8 agreement effectively fixes the Company's LIBOR base rate for $20,000 of the Company's indebtedness at a rate of 3.9075% during this period. These derivatives will be accounted for as hedges and income or expense related to settlements under these agreements is recorded as adjustments to interest expense in the Company's financial statements During the third quarter of 2000, the Company sold certain interest rate swaps with an aggregate notional amount of $60,000. The interest rate swaps were accounted for as cash flow hedges and effectively fixed the Company's LIBOR base rate at 5.33% on $60,000 of indebtedness through January 22, 2002. The sale resulted in a gain of $985 that is being amortized over the instrument period. NOTE 3 - LONG TERM DEBT At June 30, 2001 and December 31, 2000, the long-term debt of the Company was as follows:

8 9 NOTE 4 - REPORTING SEGMENTS In connection with the sale of the Company's Specialty Coating business during 2000, Ivex realigned its operating segments based on management decisions as to resource allocation. The Consumer Packaging group now includes the medical and electronics product group, leaving the Company's Protective Packaging product group as a separate operating segment. All historical information has been restated to reflect the realignment. The reconciliation of the operating segment information to the Company's consolidated financial statements is as follows:

9 10 NOTE 5 - RESTRUCTURING CHARGE The reserves for restructuring charges are as follows:

The Company maintains restructuring reserves for future lease commitments at the closed Hollister, California manufacturing facility, severance cost associated with the management reorganization of the medical and electronics group and severance, contractual obligations and exit costs associated with terminating certain European operations. NOTE 6 - COMMITMENTS AND CONTINGENCIES The Company is party to litigation matters and claims, including environmental, which are normal in the course of its operations. Insurance coverage is maintained and estimated costs are recorded for items that are reasonably estimable. It is management's opinion that none of these matters will have a materially adverse effect on the Company's financial position. The Company has accrued approximately $1,107 and $1,335 relating to environmental matters at June 30, 2001 and December 31, 2000, respectively. The Company's environmental liabilities are not discounted and do not take into consideration any possible recoveries of future insurance proceeds. Because of the uncertainties associated with environmental assessment and remediation activities, future expenses to remediate the currently identified sites could be higher than the accrued liability. While the amount of ultimate costs associated with known environmental matters cannot be determined at this time, management believes, that absent any unforeseen future developments, these environmental matters will not have a material adverse effect on the Company. Although, no assurance can be given that additional issues relating to presently known sites or to other sites will not require additional investigation or expenditures. NOTE 7 - ACQUISITIONS AND DIVESTITURES On January 19, 2001, Ivex acquired all of the stock of Chester Plastics Limited ("Chester") for cash payments of approximately $4,800, including the repayment of certain indebtedness and expenses associated with the acquisition. Chester manufactures plastic food packaging products from facilities located in Chester, Nova Scotia and Calgary, Alberta. Chester generated revenues of approximately $8,000 in 2000. The acquisition of Chester was financed through revolving credit borrowings under the Company's Senior Credit Facility (the "Senior Credit Facility") and was accounted for using the purchase method of accounting. On May 26, 2000, the Company sold its Specialty Coating business to Chargeurs, SA ("Chargeurs") of Paris, France for approximately $113,000 in cash, resulting in a pre-tax gain of $42,150. The Specialty Coating business was part of the Company's former Technical Packaging operating segment and included the Newton, Massachusetts, Troy, Ohio and Bellwood, Illinois operations. The Specialty Coating business generated revenues of approximately $90,000 in 1999 and $45,000 through the date of sale in 2000. The Company is subject to certain indemnities and obligations under the terms of the sales contract. During 2001, certain indemnities and closing balance sheet obligations were resolved, and accordingly, the gain accounting was adjusted. 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The following discussion addresses the consolidated financial statements of the Company. The Company owns 100% of the common stock of IPC. The Company is a holding company with no operations of its own and IPC has no contractual obligations to distribute funds to the Company. References to the Company or Ivex herein reflect the consolidated results of Ivex Packaging Corporation. RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND 2000 Net Sales The Company's net sales decreased by 9.7% during the second quarter of 2001 over the Company's net sales during the corresponding period in 2000. The decrease primarily resulted from the sale of the Specialty Coating business in May 2000 partially offset by the acquisition of Chester (the net effect of these two transactions aggregated approximately $13,172 net sales decrease during 2001 compared to 2000). The decrease was also the result of decreased sales of electronics packaging due primarily to continued poor industry trends. See additional discussion in "Operating Segments". Gross Profit The Company's gross profit decreased 3.9% during the second quarter of 2001 compared to the corresponding period in the prior year primarily as a result of the sale of the Specialty Coating business (Specialty Coating gross profit was $2,518 during the second quarter of 2000), partially offset by reduced labor and overhead expenses. Gross profit margin increased to 21.2% during the second quarter of 2001 compared to 19.9% during the second quarter of 2000 primarily as a result of the current period's favorable product mix resulting from the sale of the Specialty Coating business and reduced labor and overhead expenses. Average plastic resin costs started to decrease slightly during the second quarter of 2001 compared with the second quarter of 2000. Operating Expenses Selling and administrative expenses decreased 3.5% during the second quarter of 2001 primarily as a result of the sale of the Specialty Coating business (Specialty Coating selling and administrative expenses were $1,697 during the second quarter of 2000), partially offset by increased incentive compensation. As a percentage of net sales, selling and administrative expenses increased to 11.0% during the second quarter of 2001 compared to 10.3% during the same period in the prior year. The increase as a percentage of net sales was primarily the result of the increased selling and administrative expenses (excluding the effect of the sale of the Specialty Coating business) and slightly decreased selling prices in certain businesses. Amortization of intangibles during the second quarter of 2001 decreased slightly compared to the second quarter of 2000 primarily as a result of the sale of the Specialty Coating business. During 2000, Ivex recorded a restructuring charge of $4,000 (the "2000 Restructuring Charge") related to facility exit costs and a management restructuring of the European converting operations and the additional charges incurred for the consolidation of the Sparks, Nevada facility. During 2000, the Company recorded expense of $2,600 related to facility exit costs associated with closing certain European operations. The Company also recorded expense of $756 related to severance and other employee costs resulting from the restructuring of its European operations, which the Company expects to complete during 2001. Additionally, the Company recognized an asset impairment of $194 in connection with the consolidation of the Sparks, Nevada facility. The remaining balance of the 2000 Restructuring Charge consisted of severance and other employee costs associated with completing the consolidation of the Sparks, Nevada facility. The closure of the Sparks, Nevada facility was part of a reorganization of the medical and electronics 11 12 product group. Income from Operations Income from operations and operating margin were $16,462 and 9.6%, respectively, during the second quarter of 2001 compared to income from operations and operating margin of $13,150 and 7.0%, respectively, during the second quarter of 2000. The increase in operating income was primarily the result of the 2000 Restructuring Charge partially offset by the sale of the Specialty Coating business. Excluding the effect of the 2000 Restructuring Charge and the sale of the Specialty Coating business, income from operations and operating margin were $16,356 and 9.4%, respectively for the second quarter of 2000. Interest Expense Interest expense during the second quarter of 2001 was $6,708 compared to $8,698 during the same period in 2000. The decrease is primarily due to the debt repayment associated with the sale of the Specialty Coating business and decreased interest rates on borrowings (approximately 0.48% on the Company's Senior Credit Facility). Other Income (Expense) Income from equity investments primarily results from the Company's equity interest in the net operating results of Packaging Holdings, L.L.C. The increase during the second quarter of 2001 compared with the second quarter of 2000 is primarily the result of the significant charges recorded during the second quarter of 2000. During the quarter ended June 30, 2000, Packaging Holdings, L.L.C. recorded a provision for one large customer account and for severance costs resulting from an operational management restructuring (the "Packaging Holdings Charges"). The Company's share of the Packaging Holdings Charges was $2,123. The Company owns a 50% equity interest in Thermoflex Corporation, a medical and electronics packaging joint venture with operations in Puerto Rico. Since 1997, the Company has invested approximately $2,600 in this joint venture in the form of common stock and inventory and equipment transfers. Thermoflex Corporation has not been profitable and is expected to continue to incur losses in the future. The Company and its joint venture partner are evaluating Thermoflex's strategic alternatives. Consequently, during 2001, the Company recorded an asset impairment equal to its remaining investment. On May 26, 2000, the Company sold its Specialty Coating business to Chargeurs of Paris, France for approximately $113,000 in cash, resulting in a pre-tax gain of $42,150. During 2001, certain indemnities and closing balance sheet obligations were resolved, and accordingly, the gain accounting was adjusted. Income Taxes The Company's effective tax rate for the second quarter of 2001 approximated 35% compared with 46% for the second quarter of 2000. The decrease in effective tax rate primarily reflects a higher effective rate on the gain on the sale of the Specialty Coating business during 2000, partially due to the non-deductibility for income tax purposes of certain goodwill disposed of as part of the sale of the Specialty Coating business, and a lower effective rate on the tax benefit associated with the 2000 Restructuring Charge. 12 13 Net Income and Earnings per Share Net income decreased to $6,632 during the second quarter of 2001 compared to net income of $24,313 in the prior year. The decrease is primarily the result of the gain on sale of the Specialty Coating business recorded during the second quarter of 2000. Diluted earnings per share decreased to $0.32 during the second quarter of 2001 compared to earnings per share of $1.20 during the second quarter of 2000. Excluding the after-tax effect of the gain on the sale of the Specialty Coating business ($1.13 per share), the 2000 Restructuring Charge ($0.14 per share) and the Packaging Holdings Charges ($0.06 per share), earnings per share were $0.27 during the second quarter of 2000. The increase in adjusted earnings per share compared to the first six months of 2000 is primarily due to the reduced interest expense. OPERATING SEGMENTS Net Sales The following table sets forth information with respect to net sales of the Company's operating segments for the periods presented:

Consumer Packaging net sales decreased by 1.4% during the second quarter of 2001 compared to the corresponding period in 2000. The decrease primarily resulted from decreased sales of electronics packaging products (approximately $4,400), selling price reductions in certain markets including markets for extruded plastic sheet and film and decreased sales of converted products in Continental Europe as this business is transferred to a minority owned joint venture. The decrease was partially offset by increased sales of converted products primarily associated with the Company's Canadian converting operations (approximately $3,500, which includes the first quarter 2001 acquisition of Chester). Protective Packaging net sales decreased by 35.5% during the second quarter of 2001 from the corresponding period in 2000, primarily due to the sale of the Specialty Coating business (net sales for Specialty Coating were $15,668 in the second quarter of 2000). The remaining decrease primarily resulted from lower selling price for the Company's manufactured paper. Adjusted EBITDA Adjusted EBITDA includes income from operations adjusted to exclude depreciation and amortization expenses, and restructuring charges. The Company believes that Adjusted EBITDA provides additional information for determining its ability to meet future debt service requirements. However, Adjusted EBITDA is not a defined term under GAAP and is not indicative of operating income or cash flow from operations as determined under GAAP. 13 14 The following table sets forth information with respect to Adjusted EBITDA of the Company's product groups for the periods presented:

The Company's Adjusted EBITDA decreased 7.1% from $28,131 to $26,141 and EBITDA margin increased from 14.9% to 15.3% during the second quarter of 2001 compared to the same period in 2000. Consumer Packaging EBITDA was comparable for the quarter as decreased earnings associated with reduced volume of electronics packaging products was offset by improved gross margin on converted products for food applications. The decrease in Protective Packaging EBITDA of 29.9%, or $1,793 is primarily due to the sale of the Specialty Coating business (Specialty Coating EBITDA was $1,288 during the second quarter of 2000). RESULTS OF OPERATIONS - FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000 Net Sales The Company's net sales decreased by 10.9% during the first six months of 2001 over the Company's net sales during the corresponding period in 2000. The decrease primarily resulted from the sale of the Specialty Coating business in May 2000 (approximately $40,485 net sales decrease during 2001 compared to 2000). See additional discussion in "Operating Segments". Gross Profit The Company's gross profit decreased 10.2% during the first six months of 2001 compared to the corresponding period in the prior year primarily as a result of the sale of the Specialty Coating business (Specialty Coating gross profit was $7,964 during the first six months of 2000). Gross profit margin increased slightly to 20.4% during the first six months of 2001 compared to 20.2% during the first six months of 2000. Operating Expenses Selling and administrative expenses decreased 10.1% during the first six months of 2001 primarily as a result of the sale of the Specialty Coating business (Specialty Coating selling and administrative expenses were $4,509 during the first six months of 2000). As a percentage of net sales, selling and administrative expenses increased to 11.0% during the first six months of 2001 compared to 10.9% during the same period in the prior year. Amortization of intangibles during the first six months of 2001 decreased slightly compared to the first six months of 2000 primarily as a result of the sale of the Specialty Coating business. During 2000, Ivex recorded the 2000 Restructuring Charge of $4,000. During 2000, the Company recorded expense of $2,600 related to facility exit costs associated with closing certain European operations. The Company also recorded expense of $756 related to severance and other employee costs resulting from the restructuring of its European operations, which the Company expects to complete during 2001. Additionally, the Company recognized an asset impairment of $194 in connection with the consolidation of the Sparks, Nevada facility. The remaining balance of the 2000 Restructuring Charge consisted of 14 15 severance and other employee costs associated with completing the consolidation of the Sparks, Nevada facility. The closure of the Sparks, Nevada facility was part of a reorganization of the medical and electronics product group. Income from Operations Income from operations and operating margin were $29,371 and 8.9%, respectively, during the first six months of 2001 compared to income from operations and operating margin of $28,871 and 7.8%, respectively, during the first six months of 2000. The increase in operating income was primarily the result of the 2000 Restructuring Charge partially offset by the sale of the Specialty Coating business. Excluding the effect of the 2000 Restructuring Charge and the sale of the Specialty Coating business, income from operations and operating margin were $29,518 and 8.9%, respectively for the second quarter of 2000. Interest Expense Interest expense during the first six months of 2001 was $13,203 compared to $17,771 during the same period in 2000. The decrease is primarily due to the debt repayment associated with the sale of the Specialty Coating business and decreased interest rates on borrowings (approximately 0.36% on the Company's Senior Credit Facility). Other Income (Expense) Income from equity investments primarily results from the Company's equity interest in the net operating results of Packaging Holdings, L.L.C. The increase during the first six months of 2001 compared with the first six months of 2000 is primarily the result of the significant charges recorded during the second quarter of 2000. During the quarter ended June 30, 2000, Packaging Holdings, L.L.C. recorded the Packaging Holdings Charges. The Company's share of the Packaging Holdings Charges was $2,123. The Company owns a 50% equity interest in Thermoflex Corporation, a medical and electronics packaging joint venture with operations in Puerto Rico. Since 1997, the Company has invested approximately $2,600 in this joint venture in the form of common stock and inventory and equipment transfers. Thermoflex Corporation has not been profitable and is expected to continue to incur losses in the future. The Company and its joint venture partner are evaluating Thermoflex's strategic alternatives. Consequently, during 2001, the Company recorded an asset impairment equal to its remaining investment. On May 26, 2000, the Company sold its Specialty Coating business to Chargeurs of Paris, France for approximately $113,000 in cash, resulting in a pre-tax gain of $42,150. During 2001, certain indemnities and closing balance sheet obligations were resolved, and accordingly, the gain accounting was adjusted. Income Taxes The Company's effective tax rate for the first six months of 2001 approximated 35% compared with 45% for the first six months of 2000. The decrease in effective tax rate primarily reflects a higher effective rate on the gain on the sale of the Specialty Coating business during 2000, partially due to the non-deductibility for income tax purposes of certain goodwill disposed of as part of the sale of the Specialty Coating business, and a lower effective rate on the tax benefit associated with the 2000 Restructuring Charge. 15 16 Net Income and Earnings per Share Net income decreased to $10,826 during the first six months of 2001 compared to net income of $28,550 in the prior year. The decrease is primarily the result of the gain on sale of the Specialty Coating business recorded during the first six months of 2000. Diluted earnings per share decreased to $0.53 during the first six months of 2001 compared to earnings per share of $1.40 during the first six months of 2000. Excluding the after-tax effect of the gain on the sale of the Specialty Coating business ($1.13 per share), the 2000 Restructuring Charge ($0.14 per share) and the Packaging Holdings Charges ($0.06 per share), earnings per share were $0.48 during the first six months of 2000. The increase in adjusted earnings per share compared to the first six months of 2000 is primarily due to the reduced interest expense. OPERATING SEGMENTS Net Sales The following table sets forth information with respect to net sales of the Company's operating segments for the periods presented:

Consumer Packaging net sales increased by 0.6% during the first six months of 2001 compared to the corresponding period in 2000. The increase resulted from increased sales of converted products primarily associated with the Company's Canadian converting operations (approximately $5,600, which includes the first quarter 2001 acquisition of Chester) and increased selling price in certain markets including markets for extruded plastic sheet. The increase was partially offset by decreased unit sales of extruded plastic sheet (unit volume decrease in the extruded plastic sheet markets represented approximately $1,700), decreased sales of medical and electronics packaging products during the first six months of 2001 compared to the prior year (approximately $6,200), and decreased sales of converted products in Continental Europe as this business is transferred to a minority owned joint venture (approximately $2,000). Protective Packaging net sales decreased by 41.4% during the first six months of 2001 from the corresponding period in 2000, primarily due to the sale of the Specialty Coating business (net sales for Specialty Coating were $40,485 in the first six months of 2000). The remaining decrease primarily resulted from lower selling price for the Company's manufactured paper. Adjusted EBITDA Adjusted EBITDA includes income from operations adjusted to exclude depreciation and amortization expenses, and restructuring charges. The Company believes that Adjusted EBITDA provides additional information for determining its ability to meet future debt service requirements. However, Adjusted EBITDA is not a defined term under GAAP and is not indicative of operating income or cash flow from operations as determined under GAAP. 16 17 The following table sets forth information with respect to Adjusted EBITDA of the Company's product groups for the periods presented:

The Company's Adjusted EBITDA decreased 11.2% from $54,610 to $48,502 and EBITDA margin was consistent at 14.7% during the first six months of 2001 and 2000. Consumer Packaging EBITDA decreased 1.2%, or $536 during the first six months of 2001 primarily due to decreased unit sales volume of extruded sheet. The decrease in Protective Packaging EBITDA of 36.2%, or $5,328 is primarily due to the sale of the Specialty Coating business (Specialty Coating EBITDA was $4,679 during the first six months of 2000). LIQUIDITY AND CAPITAL RESOURCES At June 30, 2001, the Company had cash and cash equivalents of $3,984 and availability of $36,529 under the revolving credit portion of its Senior Credit Facility. The Company's working capital at June 30, 2001 was $94,343. The increase in working capital from the prior period end primarily relates to the timing of payments to vendors, payments made under annual incentive programs to employees and annual rebate programs to certain customers. The Company's primary short-term and long-term operating cash requirements are for debt service, working capital, acquisitions and capital expenditures. The Company expects to rely on cash generated from operations supplemented by revolving credit facility borrowings under the Senior Credit Facility to fund the Company's principal short-term and long-term cash requirements. The Senior Credit Facility is comprised of a $150,000 Term A Loan, a $150,000 Term B Loan and a $265,000 revolving credit facility (up to $65,000 of which may be in the form of letters of credit). The Term A Loan is required to be repaid in quarterly payments totaling $18,380 in 2001, $21,881 in 2002 and $18,380 in 2003, and the Term B Loan is required to be repaid in quarterly payments totaling $1,052 per annum through September 30, 2003 and four installments of $24,681 on December 31, 2003, March 31, 2004, June 30, 2004 and September 30, 2004. The interest rate of the Senior Credit Facility can be, at the election of IPC, based upon LIBOR or the Adjusted Base Rate, as defined therein, and is subject to certain performance pricing adjustments. The Term A Loan and loans under the revolving credit facility bear interest at rates up to LIBOR plus 1.625% or the Adjusted Base Rate plus 0.625%. As of June 30, 2001, such rate was LIBOR plus 1.50%. The Term B Loan bears interest at rates up to LIBOR plus 2.0% or the Adjusted Base Rate plus 1.0%. As of June 30, 2001, such rate for the Term B Loan was LIBOR plus 2.0%. Borrowings are secured by substantially all the assets of the Company and its subsidiaries. The revolving credit facility and Term A Loan will terminate on September 30, 2003 and the Term B Loan will terminate on September 30, 2004. Under the Senior Credit Facility, IPC is required to maintain certain financial ratios and levels of net worth and future indebtedness and dividends are restricted, among other things. The Company believes it is currently in compliance with the terms and conditions of the Senior Credit Facility in all material respects. 17 18 IPC's industrial revenue bonds require monthly interest payments and are due in varying amounts and dates through 2009. Certain letters of credit under the Senior Credit Facility provide credit enhancement for IPC's industrial revenue bonds. In order to reduce the impact of changes in interest rates on its variable rate debt, the Company entered into interest rate derivative instruments discussed in "Quantitative and Qualitative Disclosures About Market Risk". The Company made capital expenditures of $11,435 and $21,212 in the six months ended June 30, 2001 and 2000, respectively. At June 30, 2001, the Company has capital projects ongoing in all major business groups. Capital spending for 2001 is expected to approximate $25,000. During the first six months of 2001, the Company made payments related to its restructuring reserves totaling $1,294. The remaining balance sheet reserve at June 30, 2001 related to restructuring charges was $4,151 representing $1,311 of future lease commitment at the Hollister facility, net of estimated sublease proceeds, $20 of severance cost associated with the management reorganization of the medical and electronics group and $2,820 of severance, contractual obligations and exit costs associated with terminating certain European operations. On January 19, 2001, Ivex acquired all of the stock of Chester for cash payments of approximately $4,800, including payment of existing debt and expenses associated with the acquisition. The acquisition of Chester was financed through revolving credit borrowings under the Senior Credit Facility. RECENT ACCOUNTING PRONOUNCEMENTS On June 30, 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets" to establish accounting and reporting standards for business combinations, goodwill and intangible assets. Under SFAS No. 142, effective January 1, 2002, amortization of goodwill recorded on the Company's books will cease effective January 1, 2002 (goodwill amortization for the first six months of 2001 was $1,280). After January 1, 2002, goodwill will be subject to an annual assessment for impairment, using a fair value based test. An impairment loss would be reported as a reduction to goodwill and a charge to operating expense, except at the transition date. The Company is in the process of evaluating the impact of SFAS No. 141 and SFAS No. 142 on its financial statements. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Foreign Exchange The Company periodically uses primarily foreign exchange forward contracts to hedge its exposure from adverse changes in foreign exchange rates. A 10% unfavorable movement in the foreign exchange rates would not expose the Company to material losses in earnings or cash flows. Interest Rates The Company uses interest rate swaps and collars to modify its exposure to interest rate movements and to reduce borrowing costs. The Company's net exposure interest rate risk consists of floating rate debt instruments that are benchmarked to LIBOR. During the third quarter of 2000, the Company sold certain interest rate swaps with an aggregate notional amount of $60,000. The interest rate swaps were accounted for as hedges and effectively fixed the Company's LIBOR base rate at 5.33% on $60,000 of indebtedness through January 22, 2002. The sale resulted in a gain of $985 that is being amortized over the instrument period. As of June 30, 2001, the Company had $260,000 notional value of interest rate derivatives outstanding (described below). A 10% unfavorable movement in LIBOR rates would not expose the Company to material losses of earnings or cash flows. 18 19 The Company has interest rate swap agreements with a group of banks having notional amounts totaling $100,000 through November 5, 2002. These agreements effectively fix the Company's LIBOR base rate for $100,000 of the Company's indebtedness at a rate of 6.12% during this period. The Company has no cost interest rate collar agreements with a group of banks having notional amounts totaling $100,000 through November 5, 2002. These collar agreements effectively fix the LIBOR base rate for $100,000 of the Company's indebtedness at a maximum of 7.00% and allow for the Company to pay the market LIBOR from a floor of 5.55% to the maximum rate. If LIBOR falls below 5.55%, the Company is required to pay the floor rate of 5.55%. The Company also has no cost interest rate collar agreements with a group of banks having notional amounts totaling $60,000 of the Company's indebtedness through November 5, 2001 at a maximum of 5.31% and allow for the Company to pay the market LIBOR from a floor of 4.47% to the maximum rate. If LIBOR falls below 4.47%, the Company is required to pay the floor rate of 4.47%. Income or expense related to settlements under these agreements is recorded as adjustments to interest expense in the Company's financial statements. The fair market value of the Company's derivative instruments outlined above approximates a loss of $4,527 as of June 30, 2001 and is based upon the amount at which it could be settled with a third party, although the Company has no current intention to trade any of these instruments and plans to hold them as hedges for the Senior Credit Facility. On July 23, 2001, the Company entered into interest rate swap agreements with a bank having notional amounts totaling $40,000 through July 25, 2002. This agreement effectively fixes the Company's LIBOR base rate for $40,000 of the Company's indebtedness at a rate of 3.925% during this period. Also on July 23, 2001, the Company entered into interest rate swap agreements with a bank having notional amounts totaling $20,000 through July 25, 2002. This agreement effectively fixes the Company's LIBOR base rate for $20,000 of the Company's indebtedness at a rate of 3.9075% during this period. These derivatives will be accounted for as hedges and income or expense related to settlements under these agreements is recorded as adjustments to interest expense in the Company's financial statements SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - For the Three Months Ended June 30, 2001, - For the Six Months Ended June 30, 2001, - Liquidity and Capital Resources, and - Quantitative and Qualitative Disclosures About Market Risk" constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Among the factors that could cause results to differ materially from current expectations are: (i) changes in consumer demand and prices resulting in a negative impact on revenues and margins; (ii) raw material substitutions and increases in the costs of raw materials, utilities, labor and other supplies; (iii) increased competition in the Company's product lines; (iv) changes in capital availability or costs; (v) workforce factors such as strikes or labor interruptions; (vi) the ability of the Company and its subsidiaries to develop new products, identify and execute capital programs and efficiently integrate acquired businesses; (vii) the cost of compliance with applicable governmental regulations and changes in such regulations, including environmental regulations; (viii) the general political, economic and competitive conditions in markets and countries where the Company and its subsidiaries operate, including currency fluctuations and other risks associated with operating in foreign countries; and (ix) the timing and occurrence (or non-occurrence) of transactions and events which may be subject to circumstances beyond the control of the Company and its subsidiaries. 19 20 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. From time to time Ivex and its subsidiaries are involved in various litigation matters arising in the ordinary course of business. Ivex believes that none of the matters which arose during the quarter, either individually or in the aggregate, is material to Ivex or IPC. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On May 9, 2001, the Corporation held its 2001 annual meeting of stockholders, at which the stockholders elected two Class I directors for a three-year term, approved the adoption of the Amendment and Restatement of the Corporation's 1997 Long Term Stock Incentive Plan and ratified the appointment of PricewaterhouseCoopers LLP as the Corporation's independent accountants for 2001. The following Class II and Class III directors, whose terms expire at the annual meeting in 2002 and 2003, respectively, continued in office following the 2001 annual meeting: Class II: R. James Comeaux and William J. White Class III: George V. Bayly and Anthony P. Scotto A total of 19,347,768 shares of common stock were voted in person or by proxy at the annual meeting, representing approximately 95.2% of the voting power of the Corporation entitled to vote at such meeting. Each share of common stock was entitled to one vote on each matter before the meeting. The votes cast on the matters before the meeting, including the broker non-votes, where applicable, were as follows: Nominees for Election Number of Votes to Board of Directors: In Favor Withheld Frank V. Tannura 18,453,272 894,496 Glenn R. August 18,453,272 894,496 Approval of Amendment and For 13,048,337 Restatement of 1997 Long Term Against 6,268,962 Stock Incentive Plan Abstentions 30,469 Ratification of For 19,343,418 PricewaterhouseCoopers LLP Against 2,237 as independent accountants Abstentions 2,113 ITEM 5. OTHER INFORMATION. On July 6, 2001, the Company and Mr. Gordon B. Bonfield entered into a Separation and Release Agreement pursuant to which Mr. Bonfield resigned as an officer of the Company. 20 21 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. None (b) Reports on Form 8-K. None SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. IVEX PACKAGING CORPORATION By: /s/ Frank V. Tannura ------------------------------ Frank V. Tannura Executive Vice President and Principal Financial Officer August 10, 2001 21

IVEX PACKAGING CORP /DE/ 10-Q