UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal period ended December 31, 2003
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 1-13182
GRAPHIC PACKAGING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization) |
58-2205241
(I.R.S. employer identification no.) |
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814 Livingston Court Marietta, Georgia (Address of principal executive offices) |
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30067 (Zip Code) |
(770) 644-3000
Registrant's telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No ý
As of June 30, 2003, there was no established public trading market for the registrant's Common Stock, par value $0.01 per share.
As of February 29, 2004, there were 198,416,983 shares of the registrant's Common Stock, par value $0.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's definitive proxy statement which will be filed within 120 days after December 31, 2003 are incorporated by reference into Part III of this Form 10-K.
TABLE OF CONTENTS TO FORM 10-K
PART I. | |||||
ITEM 1. | BUSINESS | 3 | |||
ITEM 2. | PROPERTIES | 12 | |||
ITEM 3. | LEGAL PROCEEDINGS | 13 | |||
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | 15 | |||
PART II. |
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ITEM 5. | MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS | 18 | |||
ITEM 6. | SELECTED FINANCIAL DATA | 19 | |||
ITEM 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 20 | |||
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK | 40 | |||
ITEM 8. | FINANCIAL STATEMENTS | 42 | |||
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE | 94 | |||
ITEM 9A. | CONTROLS AND PROCEDURES | 94 | |||
PART III. |
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ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT | 94 | |||
ITEM 11. | EXECUTIVE COMPENSATION | 94 | |||
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT | 94 | |||
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS | 95 | |||
ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES | 95 | |||
PART IV. |
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ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K | 95 |
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Overview
Graphic Packaging Corporation ("GPC" and, together with its subsidiaries, the "Company") is a leading provider of paperboard packaging solutions to multinational consumer products companies. The Company focuses on the paperboard packaging market where it provides companies with packaging solutions designed to deliver marketing and performance benefits at a competitive cost. In doing this, the Company capitalizes on its low-cost paperboard mills and converting plants, its proprietary carton designs and packaging machines, and its commitment to customer service.
The Company focuses on providing a range of paperboard packaging products to major companies with well-recognized brands. Its customers have prominent market positions in the beverage, food, household products and tobacco industries. The Company offers customers its paperboard, cartons and packaging machines, either as an integrated solution or separately. The Company has long-term relationships with major companies, including Altria Group, Anheuser-Busch, General Mills, Miller Brewing Company, Coors Brewing Company, and numerous Coca-Cola and Pepsi bottling companies.
The Company's packaging products are made from a variety of grades of paperboard. The Company makes most of its packaging products from coated unbleached kraft paperboard ("CUK board") and coated recycled paperboard ("CRB") that the Company produces at its mills, and a portion from paperboard purchased from external sources.
The Company reports its results in two business segments: paperboard packaging and containerboard/other. The Company operates in four geographic areas: the United States, Central and South America, Europe and Asia-Pacific. For business segment and geographic area information for each of the last three fiscal years, see Note 22 in Notes to Consolidated Financial Statements.
GPC (formerly known as Riverwood Holding, Inc.) was incorporated on December 7, 1995 under the laws of the State of Delaware. On August 8, 2003, the corporation formerly known as Graphic Packaging International Corporation merged with and into Riverwood Acquisition Sub LLC, a wholly owned subsidiary of Riverwood Holding, Inc. ("Riverwood Holding"), with Riverwood Acquisition Sub LLC as the surviving entity (the "Merger"). At the closing of the Merger, one share of common stock of Riverwood Holding was exchanged for each share of common stock of Graphic Packaging International Corporation. After the Merger, (1) RIC Holding, Inc. merged into Graphic Packaging Holdings, Inc. which was renamed GPI Holding, Inc., (2) the corporation formerly known as Graphic Packaging Corporation merged into Riverwood International Corporation ("RIC") which was renamed Graphic Packaging International, Inc. ("Graphic Packaging International"), and (3) Riverwood Acquisition Sub LLC merged into Riverwood Holding which was renamed Graphic Packaging Corporation.
Throughout this report, references to the "Company" or to "Riverwood" are to Riverwood Holding and its subsidiaries for periods prior to the Merger. References to the "Company" are to GPC and its subsidiaries for periods after the Merger. The corporation formerly known as Graphic Packaging International Corporation and its subsidiaries for periods prior to the Merger are referred to herein as "Graphic."
The Company's website is located at http://www.graphicpkg.com . The Company makes available, free of charge through its website, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such materials are electronically filed or furnished to the Securities and Exchange Commission. The information contained or incorporated in the Company's website is not part of these documents.
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Paperboard Packaging
The Company provides paperboard packaging products to multinational consumer products companies. The Company focuses on providing companies with packaging solutions designed to deliver marketing and performance benefits at a competitive cost. The Company supplies its customers with paperboard cartons and carriers designed to protect and contain its customers' products while providing:
In doing this, the Company capitalizes on its low-cost paperboard mills and converting plants, proprietary carton designs and packaging machines, and its commitment to customer service.
The Company offers customers its paperboard, cartons and packaging machines, either as an integrated solution or separately. The Company produces paperboard at its mills, prints and cuts, or converts, the paperboard into cartons at its converting plants, and designs and manufactures specialized, proprietary packaging machines designed to package bottles and cans and, to a lesser extent, non-beverage consumer products. The Company also sells the paperboard it produces to independent converters. The Company installs its packaging machines at customer plants under long-term leases and provides value-added support, service and advanced performance monitoring of the machines.
The Company offers a variety of laminated, coated, and printed structures that are produced from its CUK and CRB boards, as well as other grades of paperboard that are purchased from third party suppliers. The Company produces cartons using diverse structural designs and combinations of paperboard, films, foils, metalization, holographics, embossing and other characteristics that are tailored to the needs of individual products. The Company provides a wide range of packaging solutions to consumer products companies in the following end-use markets:
For its beverage multiple packaging customers, the Company supplies beverage cartons in a variety of designs and formats, including 6, 12 and 24 multi-packs. Its proprietary beverage packaging machines package cans, bottles and other beverage containers into its beverage cartons at high speeds. Its packaging machines are designed to create "pull-through" demand for its CUK board. The Company seeks to increase the use by customers of its integrated packaging solutions which, the Company believes, improve its revenue opportunities, enhance customer relationships, provide customers with greater packaging line and supply chain efficiencies and overall cash benefits, and expand opportunities for the Company to provide value added support and service. The Company enters into annual or multi-year carton supply contracts with its beverage packaging customers, which generally require the customer to purchase a fixed portion of its carton requirements from the Company. Particularly in its international operations, its CUK board may be sold to and converted by joint ventures and licensees of its beverage carton machines who, in turn, sell converted beverage cartons to end-users for use on its proprietary packaging machines. The Company also sells CUK board, which the Company produces, to customers for use on third-party packaging machines.
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The Company develops packaging applications to meet the needs of its customers. Described below are a number of characteristics of its packaging products.
Strength Packaging. Through its application of materials and package designs, the Company provides sturdiness to meet a variety of packaging needs, including tear and wet strength, puncture resistance, durability and compression strength (providing stacking strength to meet store display packaging requirements). The Company achieves such sturdiness characteristics through diverse combinations of paperboard, film laminates and metallized layers tailored on a product-by-product basis.
Promotional Packaging. The Company offers diverse promotional packaging options that help differentiate its customers' products. The Company provides products designed to enhance point-of-purchase and marketing opportunities through package shapes, portability, metallization, holographics, embossing and micro-embossing, brilliant high-tech inks, specialized coatings, hot-stamp metal foil surfaces, in-pack and on-pack customized promotions, inserts, windows and die-cuts. These promotional enhancements improve brand awareness and visibility on store shelves.
Convenience Packaging. Its packaging solutions improve package usage and food preparation:
Barrier Packaging. The Company provides packages that protect against moisture, grease, oil, oxygen, sunlight, insects and other potential product-damaging factors. Its barrier technologies integrate a variety of specialized laminate and film layers, metallized package layers, package sealing, applied coatings, and other techniquesall customized to specific barrier requirements.
Converting Operations
The Company converts CUK board and CRB, as well as other grades of paperboard, into cartons at 28 carton converting plants at 27 sites that the Company operates in the United States, Canada, the United Kingdom, Spain, France and Brazil, as well as through converting plants associated with its joint ventures in Japan and Denmark and licensees in other markets outside the United States. The converting plants print, cut and glue paperboard into cartons designed to meet customer specifications. These plants utilize roll-fed web-printing presses with in-line cutters and sheet-fed printing presses to print and cut paperboard. Printed and cut cartons are in turn glued and shipped to the Company's customers.
The Company's U.S. converting plants are dedicated to converting paperboard produced by the Company, as well as paperboard supplied by outside producers, into cartons. Because these presses have high cutting and printing speeds, they result in less labor hours per ton of cartons produced.
The Company's international converting plants convert paperboard produced by the Company, as well as paperboard supplied by outside producers, into cartons. Its converting plants outside of the United States are designed to meet the smaller volume orders of these markets.
Paperboard Production
CUK Board Production. The Company is the larger of two worldwide producers of CUK board. CUK board is a specialized high-quality grade of paperboard with excellent wet and tear strength
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characteristics and printability for high resolution graphics that make it particularly suited for a variety of packaging applications. The Company produces CUK board at its West Monroe, Louisiana mill and its Macon, Georgia mill. The Company has three paperboard machines at its West Monroe mill and two paperboard machines at its Macon mill. These mills have a current total combined annual production capacity of approximately 1.2 million gross tons of CUK board.
The Company's CUK board production at its West Monroe and Macon mills was approximately 671,000 tons and 487,000 tons, respectively, for 2003. CUK board is manufactured from pine and hardwood fibers and, in some cases, recycled fibers, such as old corrugated containers ("OCC") and clippings from its converting operations. Virgin fiber is obtained in the form of wood chips or pulp wood acquired through open market purchases or its long-term purchase contract with Plum Creek Timber Company, L.P. See "Energy and Raw Materials." These chips are chemically treated to form softwood and hardwood pulp, which are then blended (together, in some cases, with recycled fibers). In the case of carrierboard (paperboard used in the beverage industry's multi-pack cartons), a chemical is added to increase moisture resistance. The pulp is then processed through the mill's paper machines, which consist of a paper-forming section, a press section (where water is removed by pressing the wet paperboard between rolls), a drying section and the coating section. Coating on CUK board, principally a mixture of pigments, binding agents and water, provides a white, smooth finish, and is applied in multiple steps to achieve desired levels of brightness, smoothness and shade on the print side of the paperboard. After the CUK board is coated, it is wound into rolls, which are then shipped to its converting plants or to outside converters.
CRB Production. The Company's CRB is a grade of recycled paperboard that offers superior quality graphics, strength and appearance characteristics when compared to other recycled grades. The Company and Graphic's CRB production at its Kalamazoo, Michigan mill was approximately 349,000 tons for full year 2003. The mill is one of the largest CRB facilities in North America. The mill's paperboard is specifically designed to maximize throughput on high-speed web-litho presses. The Company consumes approximately 80% of the Kalamazoo mill's output in its carton converting operations, and the mill is an integral part of its low cost converting strategy.
White Lined Chip Board. The Company produces white lined chip ("WLC") board at its mill in Norrköping, Sweden, and produced approximately 160,000 tons of such board during 2003. WLC board is used for a variety of folding carton applications principally throughout Europe. Its WLC board incorporates recycled fibers to meet the demands of the European marketplace.
Packaging Design and Proprietary Packaging Machinery
The Company has four research and design centers located in Golden, Colorado, Marietta, Georgia, Neenah, Wisconsin, and Mississauga, Ontario, Canada. At these centers, the Company designs, tests, and manufactures prototype packaging for consumer products packaging applications. The Company designs and tests packaging machinery at its Marietta, Georgia product development center. The Company's Golden, Colorado product development center contains full size pilot lines that can simulate the manufacturing environments of customers. The Company utilizes a network of computer equipment at its converting facilities to provide automated computer-to-plate graphic services designed to improve efficiencies and reduce errors associated with the pre-press preparation of printing plates.
The Company's engineers create and test packaging designs, processes and materials based on market and customer needs, which are generally characterized as enhanced stacking or tear strength, promotional or aesthetic appeal, consumer convenience, or barrier properties. Concepts go through a gated review process through their development to ensure that resources are being focused on those projects that are most likely to succeed commercially. The Company also works to refine and build on current proprietary materials, processes and designs. The Company also seeks to identify consumer needs and meet those needs through structural and graphic design.
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At the Company's product development center in Marietta, Georgia, the Company develops carton and packaging machinery designs from a common data base balancing carton manufacturing costs and packaging line performance. The Company manufactures and designs packaging machines for beverage multiple packaging and other consumer products packaging applications at its principal U.S. manufacturing facility in Crosby, Minnesota and at a facility near Barcelona, Spain. The Company leases substantially all of its packaging machines to customers, typically under machinery use agreements with original terms of three to six years.
The Company employs a "pull-through" marketing strategy for its beverage multiple packaging customers, the key elements of which are (1) the design and manufacture of proprietary packaging machines capable of packaging plastic and glass bottles, cans and other primary containers, (2) the installation of the machines at beverage customer locations under multi-year machinery use arrangements and (3) the development of propriety beverage cartons with high-resolution graphics for use on those machines.
The Company's packaging machines are designed to package polyethylene terephthalate, or PET bottles and glass bottles, cans and other primary beverage containers, as well as non-beverage consumer products, using cartons designed by the Company, made from its CUK board and converted into cartons by the Company, its joint venture partners or its licensees. In order to meet customer requirements, the Company has developed an extensive portfolio of packaging machines consisting of three principal machinery lines, including over eight different models of packaging machines. Its machines package cans and PET or glass bottles in a number of formats including baskets, clips, trays, wraps and fully enclosed cartons. These machines have packaging ranges from 2 to 36 cans per package and have the ability to package cans at speeds of up to 3,000 cans per minute.
The Company manufactures and leases packaging machines to its non-beverage consumer products packaging customers, internationally and in the United States, but to a lesser extent than its beverage multiple packaging customers. Its non-beverage consumer products packaging machines are designed to package cans or bottles in wraps or fully enclosed cartons. The Company also manufactures ancillary equipment, such as machines for inserting coupons in cartons or to divide or turn filled packages for conveying.
The Company has introduced innovative beverage packaging machines such as its Quikflex® family of machines that package Fridge Vendor® and Twin Stack® style cartons. The Quikflex TS®, a double-layer multiple packaging design, packages Twin-Stack® cartons providing better portability and a more visible billboard compared with conventional large-volume multipacks. Double layer packaging allows for cans to be stacked vertically in a double layer in the same paperboard carton. Its other lines of packaging machines include the Marksman®, a family of machines designed to package bottles, cans, juice boxes and dairy products in a variety of wrap configurations and the Autoflex, a machine designed to package bottles in a variety of basket style carton configurations. Its newest packaging machines incorporate an advanced performance monitoring system called RADAR. This system provides continuous monitoring and reporting to the Company in real time over the Internet of the performance of packaging machines installed at customers' sites providing technical support on-line and improved operational performance.
Marketing and Distribution
The Company markets its paperboard and paperboard-based products principally to multinational brewers, soft drink bottlers, food companies, tobacco companies and other well-recognized consumer products companies. It also sells paperboard in the open market to independent paperboard converters. The Company reviews a customer's credit history before extending credit to the customer of which the payment terms are generally 30 days domestically, but vary internationally according to local business practices.
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The Company's major customers for beverage cartons include Anheuser-Busch Companies, Inc., Miller Brewing Company, Coors Brewing Company, numerous Coca-Cola and Pepsi bottling companies, Interbrew and Asahi Breweries. It also sells beverage paperboard in the open market to independent converters, including licensees of its proprietary carton designs, for the manufacture of beverage cartons.
The Company's non-beverage consumer products packaging customers include Altria Group, General Mills, Nestle, Unilever and Mattel. It also sells its CUK board to numerous independent converters who convert the CUK board into cartons for consumer products. The Company has entered into agreements with a number of major independent converters. Under the terms of these agreements, the converters agree to purchase a significant portion of their CUK board requirements from the Company and to assist the Company in customer development efforts designed to grow the market for CUK board. The terms of these agreements include certain limitations on the Company's ability to raise the selling prices of its CUK board.
Distribution is primarily accomplished through direct sales offices in the United States, Australia, Brazil, Denmark, Germany, Hong Kong, Italy, Japan, Mexico, Singapore, Spain, Sweden and the United Kingdom and, to a lesser degree, through broker arrangements with third parties. The Company's selling activities are supported by its technical and developmental staff.
During 2003, the Company had one customer, Anheuser-Busch Companies, Inc., who represented approximately 11% of its net sales.
Joint Ventures
The Company is a party to joint ventures with Rengo Company Limited and Danapak Holding A/S, in which it owns 50% and 60%, respectively, to market machinery-based packaging systems in Japan and Scandinavia, respectively. The joint ventures cover CUK board supply, use of proprietary carton designs and marketing and distribution of packaging systems.
Competition
A relatively small number of large competitors hold a significant portion of the paperboard packaging industry. The Company's primary competitors include Caraustar Industries, Inc., Field Container Company, L.P., Gulf States Paper Corporation, International Paper Company, MeadWestvaco Corporation, Packaging Corporation of America, R.A. Jones Co, Inc., Rock-Tenn Company and Smurfit-Stone Container Corporation. There are only two major producers in the United States of CUK board, MeadWestvaco Corporation and the Company. The Company faces significant competition in its CUK board business from MeadWestvaco as well as from other manufacturers of packaging machines. Like the Company, MeadWestvaco produces and converts CUK board, designs and places packaging machines with customers and sells CUK board in the open market.
In beverage multiple packaging, cartons made from CUK board compete with plastics and corrugated packaging for packaging glass or plastic bottles, cans and other primary containers. Although plastics and corrugated packaging are priced lower than CUK board, the Company believes that cartons made from CUK board offer advantages over these materials, in areas such as distribution, high quality graphics, carton designs, package performance, package line speed, environmental friendliness and design flexibility.
In non-beverage consumer products packaging, the Company's paperboard competes principally with MeadWestvaco's CUK board, recycled clay-coated news ("CCN") and solid bleached sulphate board ("SBS") and, internationally, WLC board and folding boxboard. Paperboard grades compete based on price, strength and printability. CUK board and CRB have generally been priced in a range that is lower than SBS board. CUK board has slightly better tear strength characteristics than SBS board. There are a large number of producers in the paperboard markets, which are subject to
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significant competitive and other business pressures. Suppliers of paperboard compete primarily on the basis of price, strength and printability of their paperboard, quality and service.
Containerboard/Other
In the United States, the Company manufactures containerboardlinerboard, corrugating medium and kraft paperfor sale in the open market. Corrugating medium is combined with linerboard to make corrugated containers. Kraft paper is used primarily to make grocery bags and sacks. Its principal paper machines have the capacity to produce both linerboard and CUK board. The Company has in the past used these machines to produce linerboard. The Company has shifted significant mill capacity away from linerboard production on its CUK board machines to more profitable packaging applications and intends to stop producing linerboard. The Company continues to operate two paper machines dedicated to the production of corrugating medium and kraft paper at its West Monroe mill.
In 2003, the Company had net sales in its containerboard business of $82.7 million. In 2003, the Company shipped approximately 5,000 tons of linerboard from the Macon mill and approximately 128,000 tons of corrugating medium, 35,000 tons of kraft paper and 56,000 tons of linerboard from its West Monroe mill. In 2003, the Company also shipped approximately 26,000 tons of various other paperboard products.
The primary customers for the Company's U.S. containerboard production are independent and integrated corrugated converters. The Company sells corrugating medium and linerboard through direct sales offices and agents in the United States. Outside of the United States, linerboard is primarily distributed through independent sales representatives.
The Company's containerboard business operates within a highly fragmented industry. Most products within this industry are viewed as commodities, consequently, selling prices tend to be cyclical, being affected by economic activity and industry capacity.
Energy and Raw Materials
Pine pulpwood, hardwood, paper and recycled fibers, including OCC, used in the manufacture of paperboard, and various chemicals used in the coating of paperboard, represent the largest components of the Company's variable costs of paperboard production. The cost of these materials is subject to market fluctuations caused by factors beyond its control. OCC pricing tends to be somewhat volatile.
With the October 1996 sale of the Company's timberlands in Louisiana and Arkansas, the Company now relies on private landowners and the open market for all of its pine pulpwood, hardwood and recycled fiber requirements, except for CUK board clippings that are obtained from its converting operations. Under the terms of the sale of those timberlands, the Company entered into a 20-year supply agreement with the buyer, Plum Creek Timber Company, L.P., with a 10-year renewal option, for the purchase by the Company, at market-based prices, of a majority of the West Monroe mill's requirements for pine pulpwood and residual chips, as well as a portion of its needs for hardwood at the West Monroe mill. An assignee of Plum Creek supplies residual chips to the Company pursuant to this supply agreement. The Company purchases the remainder of the wood fiber used in CUK board production at the West Monroe mill from other private landowners in this region. The Company believes that adequate supplies of open market timber currently are available to meet its fiber needs at the West Monroe mill.
The Macon mill purchases most of its fiber requirements on the open market, and is a significant consumer of recycled fiber, primarily in the form of clippings from its domestic converting plants as well as OCC and other recycled fibers. The Company has not experienced any significant difficulties obtaining sufficient OCC or other recycled fibers for its Macon mill operations, which the Company purchases in part from brokers located in the eastern United States. The Macon mill purchases substantially all of its pine pulpwood and hardwood requirements from private landowners in central and southern Georgia. Because of the adequate supply and large concentration of private landowners
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in this area, the Company believes that adequate supplies of pine pulpwood and hardwood timber currently are available to meet its fiber needs at the Macon mill.
The Kalamazoo mill produces paperboard made primarily from OCC, old newsprint ("ONP"), and boxboard clippings. ONP and OCC recycled fibers are purchased through brokers at market prices and, less frequently, purchased directly from sources under contract. Boxboard clippings are provided by the Company's folding carton converting plants and, to a lesser extent, purchased through brokers. The market price of each of the various recycled fiber grades fluctuates with supply and demand. The Company has many sources for its fiber requirement and believes that the supply is adequate to satisfy its needs.
Energy, including natural gas, fuel, oil and electricity, represents a significant portion of the Company's manufacturing costs. The Company has entered into fixed price contracts designed to mitigate the impact of future energy cost increases through August 2004, and will continue to evaluate its hedge position. The Company believes that higher energy costs will negatively impact its results for 2004. Since negotiated contracts and the market largely determine the pricing for its products, the Company is limited in its ability to pass through to its customers any energy or other cost increases that the Company may incur in the future.
The Company purchases a variety of other raw materials for the manufacture of its paperboard and cartons, such as inks, aluminum foil, plastic filling, plastic resins, adhesives, process chemicals and coating chemicals such as kaolin and titanium dioxide. While such raw materials are readily available from many sources, and the Company is not dependent upon any one source of such raw materials, the Company has developed strategic long-standing alliances with some of its vendors, including the use of multi-year supply agreements, in order to provide a guaranteed source of raw materials that satisfies customer requirements, while obtaining the best quality, service and price.
In addition to paperboard that is supplied to its converting operations from its own mills, the Company converts a variety of other paperboard grades such as SBS, SUS and uncoated recycled board. The Company purchases a significant portion of such paperboard requirements, including additional CRB, from outside vendors, including through multi-year supply agreements.
Seasonality
The Company's net sales, income from operations and cash flows from operations are subject to moderate seasonality with demand usually increasing in the spring and summer due to the seasonality of the worldwide beverage multiple packaging markets.
Working Capital
The Company continues to focus on reducing working capital needs and increasing liquidity. The Company's working capital needs arise primarily from maintaining a sufficient amount of inventories to meet the delivery requirements of the Company's customers and its policy to extend credit to customers. The Company reviews a customer's credit history before extending credit of which the payment terms are generally 30 days domestically, but vary internationally according to local business practices.
Research, Development and Engineering
Research, development and engineering expenses were approximately $7.4 million, $5.2 million, and $5.1 million in the years ended December 31, 2003, 2002 and 2001, respectively, and primarily related to packaging machines and new products.
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The Company's research and development staff works directly with its sales and marketing personnel in meeting with customers and pursuing new business. The Company's development efforts include, but are not limited to, extending the shelf life of customers' products, reducing production costs, enhancing the heat-managing characteristics of food packaging and refining packaging appearance through new printing techniques and materials.
Patents and Trademarks
As of December 31, 2003, the Company has a large patent portfolio, presently owning, controlling or holding rights to more than 1,600 U.S. and foreign patents, with more than 600 patent applications currently pending. Its operations are not dependent to any significant extent upon any single or related group of patents. The Company does not believe that the expiration of any of its patents at the end of their normal lives would have a material adverse effect on its financial condition or results of operations. The Company may not be able to adequately protect its intellectual property and proprietary rights, which could harm its future success and competitive position. Its patent portfolio consists primarily of patents in the following categories: packaging machinery, manufacturing methods, structural carton designs, and microwave and barrier protection packaging. These patents and processes are significant to its operations and are supported by trademarks such as Z-Flute®, Fridge Vendor®, Composipac® and Micro-Rite®. The Company's operations are not dependent upon any single trademark.
Employees and Labor Relations
As of December 31, 2003, the Company had approximately 8,300 employees worldwide (excluding employees of joint ventures), of which approximately 53% were represented by labor unions and covered by collective bargaining agreements. The Company considers its employee relations to be satisfactory.
Employees covered by collective bargaining agreements are located at 15 different plants. The Company is a party to 17 different union contracts, three of which are scheduled to expire by the end of 2004. Its contract with the Paper, Allied-Industrial, Chemical & Energy Workers International UnionAFL-CIO, CLC ("PACE") that covers employees at the Macon mill, expired on December 31, 2003. However, the Company reached a new agreement in November 2003 with all three of its unions (PACE, IBEW and IAM) which will be effective January 1, 2004 through December 31, 2010. Both the PACE contract and the Graphic Communication International Union ("GCIU") contract covering employees at the Wausau and Menasha, WI converting plants are scheduled to expire on April 30, 2004 and June 30, 2004, respectively, and its contract with the International Brotherhood of Teamsters covering certain employees at the Kalamazoo, MI transportation center is scheduled to expire on July 31, 2004.
In addition to employees at the Macon mill, and the Wausau and Menasha, WI converting plants, PACE represents employees at the Charlotte, NC, Gordonsville, TN, Garden Grove, CA and Cincinnati, OH converting plants, the West Monroe mill and converting plants and the Kalamazoo, MI converting plant and mill.
At the West Monroe Mill, a six-year contract was negotiated and ratified by the union on March 20, 2003 and covers the six-year period from March 1, 2003 to February 28, 2009. A contract was also reached in 2003 for the Kalamazoo facility, which will expire in January 2008. In 2002, the Garden Grove, CA, contract was extended to April 2007. The Company's labor agreement for its Cincinnati, OH converting plant covers the five-year period from February 1, 2001 through January 31, 2006.
GCIU represents employees in the Clinton, MS converting plant in addition to employees in the Wausau and Menasha, WI converting plants. A six-year contract covering its Clinton, MS converting
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plant was negotiated and ratified by the union on April 12, 2003 and covers the six-year period from February 1, 2003 through January 31, 2009.
The Association of Western Pulp & Paper Union represents employees at the North Portland, OR converting plant. In 2002, a four-year contract was reached at the North Portland converting plant which will expire in March 2006. The International Association of Machinists and Aerospace Workers and the International Brotherhood of Electrical Workers represent certain maintenance employees at the Macon mill.
The Company's international employees are represented by unions in Brazil, France, Spain, Sweden and the United Kingdom.
Environmental Matters
Certain environmental matters in which the Company is involved are discussed in "Management's Discussion and Analysis of Financial Condition and Results of OperationsEnvironmental Matters."
Headquarters
The Company's principal executive offices are located in Marietta, Georgia where it currently leases approximately 52,000 square feet of office space.
Manufacturing Facilities
A listing of the major plants and properties owned, or leased, and operated by the Company is set forth below. The Company's buildings are adequate and suitable for the business of the Company. The Company also leases certain facilities, warehouses and office space throughout the United States and in foreign countries.
Type of Facility and Location(1)
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Floor Space in
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Principal Products Manufactured
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Paperboard Mills: | ||||
West Monroe, LA | 1,535,000 | CUK Board; linerboard; corrugating medium; kraft paper | ||
Macon, GA | 756,000 | CUK Board; linerboard | ||
Kalamazoo, MI | 1,411,000 | Coated recycled board | ||
Norrköping, Sweden | 417,000 | White lined chip board | ||
Converting Plants: |
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West Monroe, LA (2 plants) | 621,000 | Cartons | ||
Cincinnati, OH | 242,000 | Cartons | ||
Clinton, MS | 215,000 | Cartons | ||
Perry, GA(2) | 133,000 | Cartons | ||
Bow, NH | 234,000 | Cartons | ||
Centralia, IL(3) | 283,000 | Cartons | ||
Charlotte, NC | 125,000 | Cartons | ||
Fort Smith, AR | 180,000 | Cartons | ||
Garden Grove, CA(4) | 152,000 | Cartons | ||
Golden, CO | 299,000 | Cartons | ||
Gordonsville, TN | 173,000 | Cartons | ||
Kalamazoo, MI | 238,000 | Cartons | ||
Kendallville, IN | 95,000 | Cartons | ||
Lawrenceburg, TN | 326,000 | Cartons | ||
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Lumberton, NC | 252,000 | Cartons | ||
Menasha, WI | 431,000 | Cartons | ||
Mitchell, SD | 265,000 | Cartons | ||
Portland, OR | 552,000 | Cartons | ||
Richmond, VA | 130,000 | Cartons | ||
Tuscaloosa, AL | 126,000 | Cartons | ||
Wausau, WI | 481,000 | Cartons | ||
Mississauga, Ontario, Canada | 44,000 | Cartons | ||
Bristol, Avon, United Kingdom | 375,000 | Cartons | ||
Igualada, Barcelona, Spain | 131,000 | Cartons | ||
Beauvois en Cambresis, France | 70,000 | Cartons | ||
Le Pont de Claix, France | 120,000 | Cartons | ||
Jundiai, Sao Paulo, Brazil | 95,000 | Cartons | ||
Packaging Machinery/Other: |
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Crosby, MN | 188,000 | Packaging machinery engineering design and manufacturing | ||
Marietta, GA | 31,000 | Research and development and packaging machinery engineering design | ||
Igualada, Barcelona, Spain | 22,000 | Packaging machinery engineering design and manufacturing | ||
Golden, CO | 26,000 | Research and development/office | ||
Menasha, WI | 5,000 | Research and development | ||
Mississauga, Ontario, Canada | 7,000 | Research and development |
The Company is a party to a number of lawsuits arising out of the ordinary conduct of its business, the most significant of which are listed below. Although the timing and outcome of these lawsuits cannot be predicted, the Company does not believe that disposition of these lawsuits will have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows.
On April 2, 2003, two separate lawsuits were filed in the District Court, Jefferson County, Colorado, against Graphic, Graphic's directors and the Company relating to the Merger between Graphic and the Company pursuant to the merger agreement. The complaints were filed by Robert F.
13
Smith and Harold Lightweis, on behalf of themselves and all others similarly situated. Each of the two complaints alleges breach of fiduciary duties by Graphic's directors to Graphic's public shareholders in connection with the Merger and that the Company aided and abetted the alleged breach.The complaints also allege that the Coors family stockholders negotiated the merger consideration in their own interest and not in the interest of the public stockholders. The complaints seek an injunction against consummation of the Merger, rescission of the Merger if it is consummated, unspecified damages, costs and other relief permitted by law and equity. These two lawsuits have been consolidated. Messrs. Smith and Lightweis filed a motion asking to dismiss their claims as moot and for an award of attorney's fees of $300,000 plus expenses. The Company has objected to the request for fees and expenses. On July 3, 2003, a third lawsuit was filed in District Court of Jefferson County in Colorado, on behalf of a purported class of Graphic's stockholders against Graphic, Graphic's directors and the Company, alleging that Graphic's directors breached their fiduciary duties to the stockholders of Graphic in connection with the negotiation of the Merger and that Graphic and the Company aided and abetted the alleged breach. The complaint alleges that the defendants negotiated the terms of the Merger in their own interest and in the interest of certain other insiders (including the Coors family stockholders), to the detriment of the public stockholders. The complaint, which is encaptioned James A. Bederka, On behalf of Himself and All Other Similarly Situated v. Riverwood Holding, et al., seeks certain equitable relief, including an injunction against the consummation of the Merger, rescission of the Merger if it is consummated, rescission of the sale of August 15, 2000 of the convertible preferred stock which had been issued on August 15, 2000 to the Grover C. Coors Trust (the "Trust"), and injunction against the conversion of the convertible preferred stock in connection with the Merger and costs. Graphic filed motions asking to dismiss the lawsuit or to bifurcate the claim to enjoin the Merger from the claim to rescind issuance or enjoin the conversion of the preferred stock and to either stay the claim relating to the preferred stock or consolidate that claim with the lawsuit filed by Chinyun Kim disclosed below. By order dated October 7, 2003, the court dismissed Graphic from the Bederka lawsuit, leaving Graphic's directors and the Company as defendants. The court also refused to consolidate the Bederka lawsuit with the Chinyun Kim lawsuit (discussed below), but stayed all discovery in the Bederka lawsuit relating to the sale of the preferred stock. The court has allowed the parties to proceed, however, with disclosures and discovery relating to the Merger. The Company believes that these three lawsuits are without merit.
On February 19, 2002, Chinyun Kim filed a putative class action claim in District Court Jefferson County, Colorado against Graphic and certain of its shareholders and directors alleging breach of fiduciary duty in connection with the issuance on August 15, 2000 of the convertible preferred stock to the Trust. Plaintiff sought damages in the amount of over $43 million or, alternatively, to require transfer to the class of some or all of the Trust's Graphic common stock into which the convertible preferred stock was converted. The court dismissed plaintiff's claims against Graphic for breach of fiduciary duty while allowing the plaintiff to proceed against the named directors and shareholders, including certain other Coors family trusts. The Company provided a defense to this action pursuant to its indemnification obligations. The case was tried in January 2004 and the court ruled in favor of the defendants on all counts.
On April 14, 2000, Lemelson Medical, Education & Research Foundation sued Graphic and 75 other defendants in the United States District Court for the District of Arizona for unspecified damages for alleged infringement of certain patents relating to "machine vision" and "automatic identification." This is one of a series of cases brought against 430 defendants and has been stayed pending a final determination of a lawsuit for noninfringement brought by equipment manufacturers which utilize the technology. The Company believes, based upon the advice of counsel, that the Lemelson patents are invalid and therefore the litigation against the Company will not have a material adverse effect on its financial position, results of operations or cash flows.
14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2003, there were no matters submitted to a vote of security holders.
15
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of Form 10-K, the following list is included as an unnumbered item in Part I of this Report in lieu of being included in the definitive proxy statement which will be filed within 120 days after December 31, 2003.
The following is a list of names and ages of all of the executive officers of the Company, indicating all positions and offices with the Company held by each such person and each such person's term of office as officer and the period during which he has served as such.
Jeffrey H. Coors, 59, has been the Executive Chairman and a director of GPC since the closing of the Merger. Mr. Coors was Chairman of Graphic from 2000 and until the closing of the Merger, and was its Chief Executive Officer and President from Graphic's formation in 1992 and until the closing of the Merger. He was also the President since 1997 and Chairman since 1985 of Graphic. Mr. Coors served as Executive Vice President of the Adolph Coors Company from 1991 to 1992 and as its President from 1985-1989, as well as at Coors Technology Companies as its President from 1989 to 1992.
Stephen M. Humphrey, 59, has been the President and Chief Executive Officer and a director of GPC since the closing of the Merger. From March 1997 until the closing of the Merger, Mr. Humphrey was the President and Chief Executive Officer and a director of Riverwood, RIC Holding, Inc. and RIC. From 1994 through 1996, Mr. Humphrey was Chairman, President and Chief Executive Officer of National Gypsum Company, a manufacturer and supplier of building products and services. From 1981 until 1994, Mr. Humphrey was employed by Rockwell International Corporation, a manufacturer of electronic industrial, automotive products, telecommunications systems and defense electronics products and systems, where he held a number of key executive positions.
David W. Scheible, 47, has been the Company's Executive Vice President of Commercial Operations since the closing of the Merger. Mr. Scheible served as Graphic's Chief Operating Officer from June 1999 until the closing of the Merger. He was President of Graphic's Flexible Division from January to June 1999. Before joining Graphic, he was affiliated with the Avery Denison Corporation, working most recently as its Vice President and General Manager of the Specialty Tape Division from 1995 through January 1999 and Vice President and General Manager of the Automotive Division from 1993 to 1995.
John T. Baldwin, 47, has served as the Company's Senior Vice President and Chief Financial Officer since September 2003. He was Vice President and Chief Financial Officer of Worthington Industries from December 1998 to September 2003 and its Treasurer from August 1997 through December 1998. From 1994 through August 1997 Mr. Baldwin served as Assistant Treasurer of Tenneco, Inc., which manufactured and marketed automotive parts and packaging.
Daniel J. Blount, 48, has been the Company's Senior Vice President, Integration since October 2003. From August 2003 until October 2003, he was the Senior Vice President, Integration, Chief Financial Officer and Treasurer. From June 2003 until August 2003, he was Senior Vice President, Chief Financial Officer and Treasurer of Riverwood, RIC Holding, Inc. and RIC. From September 1999 until June 2003, Mr. Blount was Senior Vice President and Chief Financial Officer of Riverwood, RIC Holding, Inc. and RIC. Mr. Blount was named Vice President and Chief Financial Officer of Riverwood, RIC Holding, Inc. and RIC in September 1998. Prior to joining Riverwood, Mr. Blount spent 13 years at Montgomery Kone, Inc., an elevator, escalator and moving ramp product manufacturer, installer and service provider, most recently as Senior Vice President, Finance.
Stephen A. Hellrung, 56, has been the Company's Senior Vice President, General Counsel and Secretary since October 2003. He was Senior Vice President, General Counsel and Secretary of Lowe's Companies, Inc., a home improvement specialty retailer, from April 1999 until June 2003. Prior to
16
joining Lowe's Companies, Mr. Hellrung held similar positions with Pillsbury Company and Bausch & Lomb, Incorporated.
Wayne E. Juby, 56, has been the Company's Senior Vice President, Human Resources since the closing of the Merger. Mr. Juby was the Senior Vice President, Human Resources of Riverwood, RIC Holding, Inc. and RIC, from April 2001 until the closing of the Merger. Mr. Juby joined Riverwood in November 2000. From November 2000 until April 2001, Mr. Juby was Director, Corporate Training, of Riverwood. From 1997 until November 2000, Mr. Juby was in retirement. From 1994 until 1996, Mr. Juby was Vice President, Human Resources, of National Gypsum Company.
Steven D. Saucier, 50, has been the Company's Senior Vice President, Paperboard Operations since the closing of the Merger. Mr. Saucier was the Senior Vice President, Paperboard Operations of Riverwood. Mr. Saucier joined Riverwood in November 1998. From July 1998 until October 1998, Mr. Saucier was Senior Vice President, Manufacturing, of JPS Packaging, a manufacturer of flexible packaging. From April 1996 until July 1998, Mr. Saucier was Senior Vice President, Supply Chain, of Sealright Co., Inc., a manufacturer of rigid and flexible packaging, and from September 1975 until April 1996, Mr. Saucier was employed by Mobil Corporation, where his last position was General Manager, Manufacturing with Mobil Films division.
Michael R. Schmal, 51, has been the Company's Senior Vice President, Beverage since the closing of the Merger and was the Vice President and General Manager, Brewery Group of Riverwood from October 1, 1996 until the closing of the Merger. Prior to that time, Mr. Schmal held various positions at Riverwood since 1981.
Robert W. Spiller, 45, has been the Company's Senior Vice President, Performance Packaging Division since the closing of the Merger and was the Senior Vice President, Consumer Products Packaging for Riverwood, a position he held since he joined Riverwood in September 2002 until the closing of the Merger. From 1997 until June 2002, Mr. Spiller was President and CEO of Sonopress USA, a manufacturing packaging and service subsidiary of Bertelsmann AG. From 1985 until 1997, Mr. Spiller was with Avery Dennison Corporation, a manufacturer of office products, pressure sensitive adhesive label materials and labeling systems, in a number of key management positions.
Donald W. Sturdivant, 43, has been the Company's Senior Vice President, Universal Packaging Division since the closing of the Merger. He joined Graphic in August 1999 as President of the Performance Packaging Division. Prior to joining Graphic, Mr. Sturdivant was with Fort James Corporation since October 1991, first as General Manager, and then, beginning in June 1995, as Vice President and General Manager. In February 1999, he was promoted to President of the Packaging Business and served in that position until Graphic's acquisition of the folding carton business of Fort James Corporation in August 1999.
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
GPC's common stock is traded on the New York Stock Exchange under the symbol "GPK." The common stock began trading on the New York Stock Exchange on August 11, 2003. The historical range of the high and low sales price per share for the third and fourth quarters of 2003 are as follows:
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2003
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High
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Low
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Third Quarter (commencing August 11, 2003) | $ | 5.06 | $ | 3.87 | ||
Fourth Quarter | $ | 5.05 | $ | 3.50 |
No cash dividends have been paid during the last two years to its common stockholders. The Company's intent is to not pay a common dividend at this time. Rather, its intent is to deploy any earnings back into the Company. Additionally, its credit facilities and the indentures governing its debt securities place substantial limitations on the Company's ability to pay cash dividends on its common stock (see Note 9 in Notes to the Consolidated Financial Statements).
On February 29, 2004, there were approximately 3,040 shareholders of record of GPC's common stock.
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ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company and Notes thereto included elsewhere in the Form 10-K.
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Year Ended December 31,
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2003
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2002
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2001
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2000
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1999
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(In millions of dollars)
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Statement of Operations Data: | |||||||||||||||||
Net Sales | $ | 1,683.3 | $ | 1,247.3 | $ | 1,201.6 | $ | 1,192.4 | $ | 1,174.7 | |||||||
Income from Operations(a) | 106.1 | 140.6 | 107.3 | 213.6 | 115.6 | ||||||||||||
(Loss) Income before Cumulative Effect of a Change in Accounting Principle(a)(b) | (82.9 | ) | (11.2 | ) | (65.1 | ) | 31.3 | (59.5 | ) | ||||||||
Net (Loss) Income(a)(b)(c) | (82.9 | ) | (11.2 | ) | (65.6 | ) | 31.3 | (59.5 | ) | ||||||||
(Loss) Income Per Share: |
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Basic | $ | (0.56 | ) | $ | (0.10 | ) | $ | (0.57 | ) | $ | 0.27 | $ | (0.52 | ) | |||
Diluted | (0.56 | ) | (0.10 | ) | (0.57 | ) | 0.27 | (0.52 | ) | ||||||||
Weighted average number of shares outstanding: |
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Basic | 148.3 | 115.1 | 115.1 | 115.0 | 114.9 | ||||||||||||
Diluted | 148.3 | 115.1 | 115.1 | 116.9 | 114.9 | ||||||||||||
Balance Sheet Data: (as of period end) |
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Cash and Equivalents | $ | 17.5 | $ | 13.8 | $ | 7.4 | $ | 18.4 | $ | 14.1 | |||||||
Total Assets | 3,200.3 | 1,957.7 | 2,001.1 | 2,094.4 | 2,343.8 | ||||||||||||
Total Debt | 2,154.6 | 1,528.4 | 1,541.2 | 1,532.8 | 1,748.2 | ||||||||||||
Total Shareholders' Equity | 489.0 | 125.6 | 196.7 | 277.0 | 260.3 | ||||||||||||
Additional Data: |
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Depreciation & Amortization | $ | 160.4 | $ | 133.8 | $ | 137.1 | $ | 143.5 | $ | 142.6 | |||||||
Additions to Property, Plant and Equipment(d) | 136.6 | 56.0 | 57.3 | 62.1 | 66.0 | ||||||||||||
Research, Development and Engineering
Expense |
7.4 | 5.2 | 5.1 | 4.6 | 4.1 |
Notes:
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company is a leading provider of paperboard packaging solutions to multinational consumer products companies. The Company has vertically integrated operations enabling it to offer customers paperboard, cartons and packaging machines, either as an integrated solution or separately.
The Company's objective is to expand its position as a leading provider of paperboard packaging solutions. To achieve this objective, the Company is implementing strategies to expand market share in its current markets and to identify and penetrate new markets; to capitalize on the Company's and Graphic's complementary customer relationships, business competencies, and mills and converting assets; to develop and market innovative products and applications; to continue to reduce costs by focusing on operational improvements and identified operating synergies from the Merger; and to use anticipated future cash flows to reduce debt.
The Merger
The Merger was accounted for as a purchase by the Company. Under the purchase method of accounting, the assets and liabilities of Graphic were recorded, as of the date of the closing of the Merger, at their respective fair values and added to those of the Company.
The Company is ahead of schedule in merger integration and realizing the initial estimate of approximately $52 million of synergies by the third year after the closing of the Merger primarily due to savings realized in corporate and supply chain operations. As of December 31, 2003, the Company has achieved synergies at an annualized rate in excess of $24 million. In January 2004, the Company announced plans to close its Garden Grove, CA converting plant, and it estimates realizing an additional $4 million in synergies as a result of the closing. The Company cannot make assurances as to the amount or timing of future synergies, if any, that may be realized. Potential difficulties in realizing such synergies include, among other things, the integration of personnel, the combination of different corporate cultures and the integration of facilities.
For additional discussion of the Merger and the impact of the Merger on the Company's financial condition and results of operations, see Note 1 and Note 2 in Notes to Consolidated Financial Statements.
Segment Information
The Company reports its results in two business segments: paperboard packaging and containerboard/other. Business segment information is as follows:
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Year Ended
Dec. 31, 2003 |
Year Ended
Dec. 31, 2002 |
Year Ended
Dec. 31, 2001 |
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(In millions of dollars)
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NET SALES: | ||||||||||
Paperboard Packaging | $ | 1,600.6 | $ | 1,165.7 | $ | 1,107.9 | ||||
Containerboard/Other | 82.7 | 81.6 | 93.7 | |||||||
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$ | 1,683.3 | $ | 1,247.3 | $ | 1,201.6 | |||||
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INCOME (LOSS) FROM OPERATIONS: |
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Paperboard Packaging | $ | 169.8 | $ | 186.1 | $ | 148.0 | ||||
Containerboard/Other | (27.3 | ) | (24.0 | ) | (15.2 | ) | ||||
Corporate | (36.4 | ) | (21.5 | ) | (25.5 | ) | ||||
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$ | 106.1 | $ | 140.6 | $ | 107.3 | |||||
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20
Significant Factors That Impact The Company's Business
The Company's net sales, income from operations, cash flows from operations and financial condition are influenced by a variety of factors, many of which are beyond its control.
Sales. The Company sells its packaging products primarily to major consumer product companies in traditionally non-cyclical industries, such as beverage, food and other consumer products, and has long-term relationships with major companies, including Altria Group, Anheuser-Busch, General Mills, Miller Brewing Company, Coors Brewing Company, and numerous Coca-Cola and Pepsi bottling companies. The Company's products are used primarily in the following end-use markets:
The Company historically experienced stable pricing for its integrated beverage multiple packaging products and moderate cyclical pricing for its other product offerings. Because some products can be packaged in different types of materials, the Company's sales are affected by competition from other manufacturers' coated unbleached kraft paperboard, or CUK board, and other substratessolid bleached sulfate, or SBS, recycled clay coated news, or CCN, and, internationally, white lined chipboard, or WLCas well as by general market conditions. Graphic's sales historically were driven primarily by consumer buying habits in the markets its customers serve. Recent economic conditions in the United States have had a significant impact on consumer buying even in traditionally noncyclical industries. New product introductions and promotional activity by Graphic's customers and Graphic's introduction of new packaging products also impacted its sales. The Company's containerboard business is subject to conditions in the cyclical worldwide commodity paperboard markets which have a substantial impact on containerboard sales.
The Company works to maintain market share through efficiency, product innovation and strategic sourcing to its customers; however, pricing and other competitive pressures may occasionally result in the loss of a customer relationship. In the fourth quarter of 2002, the Company was notified by Coca-Cola Enterprises ("CCE") that CCE would not renew its supply contract with the Company. Under this contract, which expired on March 31, 2003, the Company supplied to CCE beverage cartons made from its CUK board, packaging machines and related services. The Company's supply contracts with its independent Coca-Cola bottling company customers were not subject to CCE's non-renewal notification. CCE's action negatively impacted the Company's volumes in 2003 by approximately 16,000 tons. In February 2004, the Company dismissed a lawsuit that was filed against MeadWestvaco Corporation alleging infringement of US Patent 6,578,736 covering the Company's Fridge Vendor® carton and also announced the Company will resume supplying Fridge Vendor® cartons to CCE in various locations that were being supplied by MeadWestvaco.
Packaging machinery placements during 2003 were relatively consistent compared to 2002. The Company expects packaging machinery placements for 2004 to be approximately 25% higher compared to 2003. The Company has been and will continue to be selective in future packaging machinery placements to ensure appropriate returns.
Cost of Sales. The Company's cost of sales consist primarily of energy, pine pulpwood, hardwood, chemicals, recycled fibers, purchased paperboard, paper, aluminum foil, ink, plastic films and resins, depreciation expense and labor. Energy, including natural gas, fuel oil and electricity, represents a significant portion of the Company's manufacturing costs. During full year 2003, the Company and
21
Graphic experienced a significant increase in their energy costs compared to 2002, principally at their mills, equal to approximately $11 million on a pro forma basis which represents an approximate 10% increase. The Company has entered into contracts designed to mitigate the impact of future cost increases for a portion of its natural gas requirements, at its U.S. mills through August 2004. The Company will continue to evaluate its position regarding natural gas purchase commitments. The Company believes that higher energy costs will negatively impact its results for 2004.
Commitment to Cost Reduction. In light of increasing margin pressure throughout the paperboard packaging industry, the Company has programs in place that are designed to reduce costs. The Company is pursuing a number of long-term initiatives designed to improve productivity and profitability. The Company is continuing to implement a global continuous improvement initiative which uses statistical process control to help design and manage many types of activities, including production and maintenance. This includes a Six Sigma process focused on reducing variable and fixed manufacturing and administrative costs. During full year 2003, the Company and Graphic achieved $31 million in annual cost savings through its continuous improvement initiative.
The Company is implementing an initiative designed to enhance the competitiveness of its beverage multiple packaging converting operations. This initiative is expected to add new manufacturing technology, add press capacity and consolidate certain beverage carton converting operations. The Company expects to make capital investments of approximately $75 million through 2005 and to realize cost savings relative to 2002 from this initiative of approximately $39 million annually by 2005. The Company has spent approximately $27 million of that amount for such capital investment through December 31, 2003. The Company cannot make assurances as to the amount or timing of cost savings that may be realized.
The Company continues to evaluate its current operations and assets with a view to rationalizing its operations and improving profitability. The Company is continuing to focus on reducing working capital and increasing liquidity.
Critical Accounting Policies
The preparation of consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions.
The Company believes the following accounting policies are the most critical since these policies require significant judgment or involve complex estimations that are important to the portrayal of the Company's financial conditions and operating results:
22
Payments from packaging machinery use agreements are recognized on a straight-line basis over the term of the agreements. Service revenue on packaging machinery is recorded at the time of service.
Discounts and allowances are comprised of trade allowances, cash discounts, and sales returns. Cash discounts and sales returns are estimated using historical experience. Trade allowances are based on the estimated obligations and historical experience. Rebates are determined based on the quantity purchased and are recorded at the time of sale.
23
any, is based on the fair value of the asset, which is generally determined by the discounting of future estimated cash flows, or in the case of real estate, determining market value. The Company evaluates the recovery of its long-lived assets by analyzing operating results and considering significant events or changes in the business environment that may have triggered impairment.
For a discussion of recent accounting pronouncements impacting the Company, see Note 24 in Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
The Merger was accounted for as a purchase by the Company. Thus, the Company's results of operations for the year ended December 31, 2003 include the results of Graphic beginning August 9, 2003 through December 31, 2003. The results of operations for 2002 and 2001 represent the results of the Company only. Accordingly, amounts for 2003 are not comparable to those for 2002 and 2001.
24
2003 COMPARED WITH 2002
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Year Ended
December 31, 2003 |
Increase (Decrease)
From Prior Period |
Year Ended
December 31, 2002 |
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(Amounts in Millions)
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Net Sales | $ | 1,683.3 | 35.0 | % | $ | 1,247.3 | |||
Cost of Sales | 1,398.5 | 42.0 | 984.8 | ||||||
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Gross Profit | 284.8 | 8.5 | 262.5 | ||||||
Selling, General and Administrative | 153.1 | 30.5 | 117.3 | ||||||
Research, Development and Engineering | 7.4 | 42.3 | 5.2 | ||||||
Other Expense (Income), Net | 18.2 | NM | (0.6 | ) | |||||
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Income from Operations | $ | 106.1 | (24.5 | )% | $ | 140.6 | |||
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NM=Not Meaningful |
Net Sales
The Company's Net Sales in 2003 increased by $436.0 million, or 35.0%, to $1,683.3 million from $1,247.3 million in 2002 due primarily to the addition of Graphic's paperboard packaging business which increased Net Sales by $409.9 million. Foreign currency exchange rates positively impacted Net Sales by $44.3 million. Higher volumes in international beverage markets also contributed to the increase in Net Sales. These increases were somewhat offset by lower volumes and pricing in the Company's North American markets and lower volumes in international consumer products markets, both primarily as a result of increased market competitiveness.
Gross Profit
The Company's Gross Profit in 2003 increased by $22.3 million, or 8.5%, to $284.8 million from $262.5 million in 2002. The Company's gross profit margin decreased to 16.9% in 2003 from 21.0% in 2002. The decrease in gross profit margin was due primarily to lower volumes and pricing in North American markets as a result of increased market competitiveness, lower margin product mix in North American markets including the addition of Graphic's paperboard packaging business, higher energy and fiber costs, higher non-cash pension costs, and the increase of approximately $7.0 million in Cost of Sales relating to the increase in Graphic's inventory to fair value as a result of purchase accounting revaluation. These decreases were somewhat offset by higher Net Sales as a result of the factors discussed above and worldwide cost reductions as a result of savings gained from the Company's cost reduction initiatives.
Selling, General and Administrative
Selling, General and Administrative expenses increased by $35.8 million, or 30.5%, to $153.1 million in 2003 from $117.3 million in 2002, due primarily to the addition of Graphic's Selling, General and Administrative expenses of $18.9 million and expenses related to the Merger of $9.1 million. As a percentage of Net Sales, Selling, General and Administrative expenses were 9.1% in 2003 and 9.4% in 2002.
Research, Development and Engineering
Research, Development and Engineering expenses increased by $2.2 million, or 42.3%, to $7.4 million in 2003 from $5.2 million in 2002, due primarily to higher research and development investment related to the Company's products and packaging machinery, and the addition of Graphic's Research, Development and Engineering expenses of $1.2 million.
25
Other Expense (Income), Net
Other Expense (Income), Net was $18.2 million in 2003 as compared to $(0.6) million in 2002. This change was principally due to higher amortization expense of $7.8 million due to the effects of purchase accounting in connection with the Merger, non-cash charges of approximately $8.4 million recorded in 2003 associated with the retirement of certain equipment, and the charge of approximately $1.9 million recorded in 2003 to write off deferred costs associated with the withdrawal of the proposed initial public offering of the Company's common stock, somewhat offset by a non-cash pension adjustment recorded in 2002.
Income from Operations
Primarily as a result of the factors discussed above, the Company's Income from Operations in 2003 decreased by $34.5 million, or 24.5%, to $106.1 million from $140.6 million in 2002, while its operating margin decreased to 6.3% in 2003 from 11.3% in 2002.
Fluctuations in U.S. Currency Exchange Rates
The weakening of the U.S. dollar currency exchange rates as compared to the euro and other European currencies, and the Japanese yen had a modest impact on Net Sales, Gross Profit, Income from Operations, and operating expenses during 2003.
LOSS ON EARLY EXTINGUISHMENT OF DEBT, INTEREST INCOME, INTEREST EXPENSE, INCOME TAX (EXPENSE) BENEFIT, AND EQUITY IN NET EARNINGS OF AFFILIATES
Loss on Early Extinguishment of Debt
In connection with the Merger, the Company entered into the Related Financing Transactions (as defined herein). In 2003, the Company recorded a non-cash charge to earnings of approximately $16.7 million, related to the write-off of remaining debt issuance costs on its prior senior secured credit facilities and the Prior RIC Notes (as defined herein), and also recorded a charge of approximately $28.6 million, related to the call premium paid upon redemption of the Prior RIC Notes.
On April 23, 2002, the Company borrowed $250 million pursuant to its prior senior secured credit agreement. The proceeds were applied to redeem in full $250 million aggregate principal amount of 10 1 / 4 % senior notes due 2006 ("1996 Senior Notes"). In addition, the Company borrowed $12 million under its prior revolving credit facility to pay fees, costs and expenses related to the refinancing transaction. In the second quarter of 2002, the Company recorded a non-cash charge to earnings of approximately $3.0 million, related to the write-off of the remaining debt issuance costs on the 1996 Senior Notes and a charge of approximately $8.6 million, related to the call premium paid upon redemption of the 1996 Senior Notes.
Interest Income
Interest Income decreased by $0.4 million to $1.0 million in 2003 from $1.4 million in 2002 due primarily to lower average interest rates and interest received in 2002 on monies held in escrow.
Interest Expense
Interest Expense decreased by $2.9 million to $144.5 million in 2003 from $147.4 million in 2002 due primarily to lower average interest rates as a result of market interest rates, the second quarter 2002 refinancing and the Related Financing Transactions, somewhat offset by interest on increased indebtedness following the Merger.
26
Income Tax (Expense) Benefit
During 2003, the Company recognized an Income Tax (Expense) of $(1.5) million on Loss before Income Taxes and Equity in Net Earnings of Affiliates of $(82.7) million. During 2002, the Company recognized an Income Tax Benefit of $4.7 million on Loss before Income Taxes and Equity in Net Earnings of Affiliates of $(16.9) million. The Income Tax (Expense) in 2003 was due primarily to international operating income somewhat offset by the reduction of a valuation allowance related to the Company's Australian operations. The Income Tax Benefit in 2002 was primarily due to reductions of valuation allowances related to the Company's U.K. and German operations, somewhat offset by the Income Tax (Expense) on the international operating income (see Note 18 in Notes to Consolidated Financial Statements).
Equity in Net Earnings of Affiliates
Equity in Net Earnings of Affiliates increased by $0.3 million to $1.3 million in 2003 from $1.0 million in 2002 as a result of improved operations of the Company's non-consolidated joint venture, Rengo Riverwood Packaging, Ltd. ("Rengo").
2002 COMPARED WITH 2001
|
Year Ended
December 31, 2002 |
Increase (Decrease)
From Prior Period |
Year Ended
December 31, 2001 |
|||||
---|---|---|---|---|---|---|---|---|
|
(Amounts in Millions)
|
|||||||
Net Sales | $ | 1,247.3 | 3.8 | % | $ | 1,201.6 | ||
Cost of Sales | 984.8 | 3.2 | 953.9 | |||||
|
|
|
||||||
Gross Profit | 262.5 | 6.0 | 247.7 | |||||
Selling, General and Administrative | 117.3 | 0.7 | 116.5 | |||||
Research, Development and Engineering | 5.2 | 2.0 | 5.1 | |||||
Other (Income) Expense, Net | (0.6 | ) | NM | 18.8 | ||||
|
|
|
||||||
Income from Operations | $ | 140.6 | 31.0 | % | $ | 107.3 | ||
|
|
|
||||||
NM= Not Meaningful |
Net Sales
The Company's Net Sales in 2002 increased by $45.7 million, or 3.8%, to $1,247.3 million from $1,201.6 million in 2001 due primarily to higher sales volume in North American beverage carton markets resulting, in large part, from increased volumes under a multi-year agreement with a beer producer customer and, to a lesser extent, higher sales volumes in worldwide consumer products markets resulting principally from the Company's increased efforts designed to generate growth in the consumer packaged goods sector and success in expanding the application of the Company's products into frozen food packaging, and higher sales volumes in international beverage from market share gains.
Gross Profit
The Company's Gross Profit for 2002 increased by $14.8 million, or 6.0%, to $262.5 million from $247.7 million in 2001. The Company's gross profit margin increased to 21.0% in 2002 from 20.6% in 2001. The increase in Gross Profit was due primarily to worldwide cost reductions as a result of savings gained from the Company's TQS initiative, higher Net Sales as a result of the factors discussed above and lower depreciation expense.
27
Selling, General and Administrative
Selling, General and Administrative expenses increased by $0.8 million, or 0.7%, to $117.3 million in 2002 from $116.5 million in 2001, due primarily to higher incentive expenses and non-cash pension costs as a result of the decline in market values of the Company's pension assets due to unfavorable market conditions, somewhat offset by lower warehousing and rent expenses. As a percentage of Net Sales, Selling, General and Administrative expenses decreased to 9.4% in 2002 from 9.7% in 2001.
Research, Development and Engineering
Research, Development and Engineering expenses increased by $0.1 million, or 2.0%, to $5.2 million in 2002 from $5.1 million in 2001.
Other Expense (Income), Net
Other Expense (Income), Net was $(0.6) million in 2002 as compared to $18.8 million in 2001. This change was primarily due to the cessation of goodwill amortization in 2002 and a non-cash pension adjustment recorded in 2002 as well as certain charges recorded in 2001 relating to non-cash long-lived manufacturing asset retirement charges of approximately $3.9 million and a litigation charge of approximately $2.2 million to settle miscellaneous tort and workers compensation cases.
Income from Operations
Primarily as a result of the factors discussed above, the Company's Income from Operations in 2002 increased by $33.3 million, or 31.0%, to $140.6 million from $107.3 million in 2001, while its operating margin increased to 11.3% in 2002 from 8.9% in 2001.
Fluctuations in U.S. Currency Exchange Rates
The weakening of the U.S. dollar currency exchange rates as compared to the euro and other European currencies had a modest impact on Net Sales, Gross Profit, Income from Operations, and operating expenses during 2002. However, the impact was somewhat offset by the strengthening of the U.S. dollar against the Japanese yen.
LOSS ON EARLY EXTINGUISHMENT OF DEBT, INTEREST INCOME, INTEREST EXPENSE, INCOME TAX (EXPENSE) BENEFIT, EQUITY IN NET EARNINGS OF AFFILIATES, AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE.
Loss on Early Extinguishment of Debt
On April 23, 2002, the Company borrowed $250 million pursuant to its prior senior secured credit agreement. The proceeds were applied to redeem in full $250 million aggregate principal amount of 10 1 / 4 % senior notes due 2006 ("1996 Senior Notes"). In addition, the Company borrowed $12 million under its prior revolving credit facility to pay fees, costs and expenses related to the refinancing transaction. In the second quarter of 2002, the Company recorded a non-cash charge to earnings of approximately $3.0 million, related to the write-off of the remaining debt issuance costs on the 1996 Senior Notes and a charge of approximately $8.6 million, related to the call premium paid upon redemption of the 1996 Senior Notes.
On August 10, 2001, the Company entered into its prior senior secured credit agreement. The proceeds of the initial borrowings under the facilities of approximately $386 million, including $51 million in revolving credit borrowings, were applied to repay in full the outstanding borrowings under a prior term loan facility and a prior revolving facility and to pay approximately $12 million of the $14 million of fees and expenses incurred in connection with the amendment and restatement of a prior credit agreement. During the third quarter of 2001, the Company recorded a non-cash charge to earnings of approximately $6.0 million related to the write-off of the applicable remaining deferred debt issuance costs on a prior term loan facility and a prior revolving facility.
28
On June 21, 2001, the Company completed an offering of $250 million principal amount of 10 5 / 8 % senior notes due 2007. The net proceeds of this offering were applied to prepay a portion of a prior term loan facility resulting in a non-cash charge to earnings of approximately $2.8 million related to the write-off of the applicable portion of deferred debt issuance costs on the prior term loans.
Interest Income
Interest Income increased by $0.5 million to $1.4 million in 2002 from $0.9 million in 2001 due primarily to interest earned on the temporary investment of the proceeds associated with the prior term loan facility pursuant to a 30-day call notice period required under the indenture governing the 1996 Senior Notes.
Interest Expense
Interest Expense decreased by $11.5 million to $147.4 million in 2002 from $158.9 million in 2001 due primarily to lower average interest rates as a result of market interest rates as well as the second quarter 2002 refinancing, somewhat offset by the additional interest expense incurred on the 1996 Senior Notes during the 30-day call notice period required under such indenture.
Income Tax (Expense) Benefit
During 2002, the Company recognized an Income Tax Benefit of $4.7 million on a Loss before Income Taxes and Equity in Net Earnings of Affiliates of $(16.9) million. During 2001, the Company recognized an Income Tax (Expense) of $(6.6) million on a Loss before Income Taxes and Equity in Net Earnings of Affiliates of $(59.4) million. The Income Tax Benefit in 2002 was primarily due to reductions of valuation allowances related to the Company's U.K. and German operations, somewhat offset by the Income Tax (Expense) on the international operating income (see Note 18 in Notes to Consolidated Financial Statements). The Income Tax (Expense) in 2001 was due primarily to international operating income.
Equity in Net Earnings of Affiliates
Equity in Net Earnings of Affiliates was $1.0 million in 2002 and $0.9 million in 2001 and related to the Company's non-consolidated joint venture, Rengo.
Cumulative Effect of a Change in Accounting Principle
On January 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137, Accounting for Derivative Instruments and Hedging ActivitiesDeferral of the Effective Date of FASB Statement No. 133, and SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities ("SFAS No. 133"), which requires all derivative instruments to be measured at fair value and recognized on the balance sheet as either assets or liabilities. In addition, all derivative instruments used in hedging relationships must be designated, reassessed and documented pursuant to the provisions of SFAS No. 133. Upon adoption of SFAS No. 133, the Company recognized a one-time after-tax transition adjustment to decrease earnings by approximately $0.5 million.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company broadly defines liquidity as its ability to generate sufficient funds from both internal and external sources to meet its obligations and commitments. In addition, liquidity includes the ability to obtain appropriate debt and equity financing and to convert into cash those assets that are no longer required to meet existing strategic and financial objectives. Therefore, liquidity cannot be considered separately from capital resources that consist of current or potentially available funds for use in achieving long-range business objectives and meeting debt service commitments.
29
Cash Flows
Cash and Equivalents increased by approximately $3.7 million in 2003. Cash provided by operating activities in 2003 totaled $156.8 million, compared to $87.5 million in 2002. This improvement was principally due to favorable changes in operating assets and liabilities, primarily receivables and accounts payable, as the Company continues to focus on reducing its working capital levels. Cash used in investing activities in 2003 totaled $220.9 million, compared to $58.7 million in 2002. This change was principally due to approximately $93.9 million in expenses and fees related to the Merger and an increase in purchases of property, plant and equipment of approximately $80.6 million offset somewhat by $6.1 million of cash acquired in the Merger. Cash provided by financing activities in 2003 totaled $67.3 million, compared to a use of cash of $23.6 million in 2002. This change was principally due to higher net borrowings under the Company's revolving credit facilities as well as the net effect in connection with the Related Financing Transactions. Depreciation and amortization during 2003 totaled approximately $160.4 million and is expected to be approximately $210 million to $220 million in 2004.
Liquidity and Capital Resources
The Company's liquidity needs arise primarily from debt service on its substantial indebtedness and from the funding of its capital expenditures, ongoing operating costs and working capital.
The following financing transactions (the "Related Financing Transactions") were entered into in connection with the Merger:
30
As of December 31, 2003, the Company had outstanding $2.1 billion of long-term debt, consisting primarily of $850 million aggregate principal amount of Senior Notes and Senior Subordinated Notes, $1,266 million of term loans under the Term Loan Facility, $20 million of revolving credit borrowings under the Revolving Credit Facility, and other debt issues and facilities.
Principal and interest payments under the Term Loan Facility and the Revolving Credit Facility, together with principal and interest payments on the Senior Notes and the Senior Subordinated Notes, represent significant liquidity requirements for the Company. The Tranche A term loans mature in 2009 and amortize in semi-annual installments over their term on the following amortization schedule: $3.75 million on December 31, 2003 and June 30, 2004, $7.5 million on December 31, 2004 and June 30, 2005, $11.25 million on December 31, 2005 and June 30, 2006, $15.0 million on December 31, 2006 and June 30, 2007, and $18.75 million on December 31, 2007, June 30, 2008, December 31, 2008 and at maturity. The Tranche B term loans mature in 2010 and amortize in semi-annual installments of $5.625 million payable on December 31 and June 30 of each year commencing on December 31, 2003 through December 31, 2009, with a final bullet payment of approximately $1.05 billion at maturity. The Revolving Credit Facility matures in 2009.
The loans under the Senior Secured Credit Agreement bear interest at fluctuating rates based upon the interest rate option elected by the Company. The loans under the Term Loan Facility bore interest as of December 31, 2003 at an average rate per annum of 3.9%. The Senior Notes and the Senior Subordinated Notes bear interest at rates of 8.5% and 9.5%, respectively. The loans under the Revolving Credit Facility bore interest as of December 31, 2003 at an average rate per annum of 4.2%.
Interest expense in 2004 is expected to be approximately $145 million, including approximately $8 million of non-cash amortization of deferred debt issuance costs. During 2003, cash paid for interest was approximately $156 million.
At December 31, 2003, the Company and its U.S. and international subsidiaries had the following commitments, amounts outstanding and amounts available under revolving credit facilities:
|
Total Amount of
Commitments |
Total Amount
Outstanding |
Total Amount
Available(A) |
||||||
---|---|---|---|---|---|---|---|---|---|
|
(In millions of dollars)
|
||||||||
Revolving Credit Facility | $ | 325.0 | $ | 20.0 | $ | 291.4 | |||
International Facilities | 24.6 | 12.1 | 12.5 | ||||||
|
|
|
|||||||
$ | 349.6 | $ | 32.1 | $ | 303.9 | ||||
|
|
|
Note:
Based upon current levels of operations, anticipated cost-savings and expectations as to future growth, the Company believes that cash generated from operations, together with amounts available under its Revolving Credit Facility and other available financing sources, will be adequate to permit the Company to meet its debt service obligations, capital expenditure program requirements, ongoing operating costs and working capital needs, although no assurance can be given in this regard. The Company's future financial and operating performance, ability to service or refinance its debt and ability to comply with the covenants and restrictions contained in its debt agreements (see "Covenant Restrictions"), will be subject to future economic conditions and to financial, business and other factors, many of which are beyond the Company's control and will be substantially dependent on the selling prices and demand for the Company's products, raw material and energy costs, and the Company's ability to successfully implement its overall business and profitability strategies.
31
The Company expects that its working capital and business needs will require it to continue to have access to the Revolving Credit Facility or a similar revolving credit facility after the maturity date, and that the Company accordingly will have to extend, renew, replace or otherwise refinance such facility at or prior to such date. No assurance can be given that it will be able to do so. The Company has in the past refinanced and in the future may seek to refinance its debt prior to the respective maturities of such debt.
The Company uses interest rate swaps to manage interest rate risks on future income caused by interest rate changes on its variable rate Term Loan Facility. The differential to be paid or received under these agreements is recognized as an adjustment to interest expense related to the debt. At December 31, 2003 the Company had interest rate swap agreements with a notional amount of $910 million, which expire on various dates through the years 2004 to 2007 under which the Company will pay fixed rates of 1.89% to 3.27% and receive three-month LIBOR.
As of December 31, 2003, the Company had approximately $1,360.5 million of net operating loss carryforwards ("NOLs"). These NOLs generally may be used by the Company to offset taxable income earned in subsequent taxable years. However, the Company's ability to use these NOLs to offset its future taxable income may be subject to significant limitation as a result of certain shifts in ownership due to direct or indirect transfers of the Company's common stock by one or more 5-percent stockholders, or issuances or redemptions of the Company's common stock, which, when taken together with previous changes in ownership of the Company's common stock, constitute an ownership change under the Internal Revenue Code. Imposition of any such limitation on the use of NOLs could have an adverse effect on the Company's future after tax free cash flow.
Covenant Restrictions
The Senior Secured Credit Agreement, which governs the Term Loan Facility and the Revolving Credit Facility, imposes restrictions on the Company's ability to make capital expenditures and both the Senior Secured Credit Agreement and the indentures governing the notes limit the Company's ability to incur additional indebtedness. Such restrictions, together with the highly leveraged nature of the Company, could limit the Company's ability to respond to market conditions, meet its capital spending program, provide for unanticipated capital investments or take advantage of business opportunities. The covenants contained in the Senior Secured Credit Agreement, among other things, restrict the ability of the Company to dispose of assets, incur additional indebtedness, incur guarantee obligations, prepay other indebtedness, make dividends and other restricted payments, create liens, make equity or debt investments, make acquisitions, modify terms of indentures under which the notes are issued, engage in mergers or consolidations, change the business conducted by the Company and its subsidiaries, make capital expenditures and engage in certain transactions with affiliates.
The financial covenants in the Senior Secured Credit Agreement specify, among other things, the following requirements for each four quarter period ended during the following test periods:
Test Period
|
Consolidated Debt to
Credit Agreement EBITDA Leverage Ratio(A) |
Credit Agreement
EBITDA to Consolidated Interest Expense Ratio(A) |
||
---|---|---|---|---|
October 1, 2003December 30, 2004 | 6.40 to 1.00 | 2.00 to 1.00 | ||
December 31, 2004December 30, 2005 | 6.15 to 1.00 | 2.25 to 1.00 | ||
December 31, 2005December 30, 2006 | 5.75 to 1.00 | 2.35 to 1.00 | ||
December 31, 2006December 30, 2007 | 5.25 to 1.00 | 2.50 to 1.00 | ||
December 31, 2007December 30, 2008 | 4.75 to 1.00 | 2.75 to 1.00 | ||
December 31, 2008June 30, 2010 | 4.50 to 1.00 | 2.90 to 1.00 |
Note:
32
At December 31, 2003, the Company was in compliance with the financial covenants in the Senior Secured Credit Agreement. The Company's ability to comply in future periods with the financial covenants in the Senior Secured Credit Agreement will depend on its ongoing financial and operating performance, which in turn will be subject to economic conditions and to financial, business and other factors, many of which are beyond the Company's control and will be substantially dependent on the selling prices for the Company's products, raw material and energy costs, and the Company's ability to successfully implement its overall business and profitability strategies. If a violation of any of the covenants occurred, the Company would attempt to get a waiver or an amendment from its lenders, although no assurance can be given that the Company would be successful in this regard. The Senior Secured Credit Agreement and the indentures governing the Senior Subordinated Notes and the Senior Notes have covenants as well as certain cross-default or cross-acceleration provisions; failure to comply with these covenants in any agreement could result in a violation of such agreement which could, in turn, lead to violations of other agreements pursuant to such cross-default or cross-acceleration provisions.
The Senior Secured Credit Agreement is collateralized by substantially all of the Company's domestic assets.
Credit Agreement EBITDA
The table below sets forth EBITDA as defined in the Company's Senior Secured Credit Agreement, which is referred to in this report as "Credit Agreement EBITDA." Credit Agreement EBITDA as presented below is a financial measure that is used in the Senior Secured Credit Agreement. Credit Agreement EBITDA is not a defined term under accounting principles generally accepted in the United States and should not be considered as an alternative to income from operations or net income as a measure of operating results or cash flows as a measure of liquidity. Credit Agreement EBITDA differs from the term "EBITDA" (earnings before interest expense, income tax expense, and depreciation and amortization) as it is commonly used. In addition to adjusting net income to exclude interest expense, income tax expense, and depreciation and amortization, Credit Agreement EBITDA also adjusts net income by excluding certain other items and expenses, as specified below. The Company's definition of Credit Agreement EBITDA may differ from that of other similarly titled measures at other companies. The Senior Secured Credit Agreement requires the Company to comply with a specified consolidated debt to Credit Agreement EBITDA leverage ratio and a specified Credit Agreement EBITDA to consolidated interest expense ratio for specified periods, as described in the preceding section, "Covenant Restrictions."
Borrowings under the Senior Secured Credit Agreement are a key source of the Company's liquidity. The Company's ability to borrow under the Senior Secured Credit Agreement is dependent on, among other things, its compliance with the financial ratio covenants referred to in the preceding paragraph. Failure to comply with these financial ratio covenants would result in a violation of the Senior Secured Credit Agreement and, absent a waiver or amendment from the lenders under such agreement, permit the acceleration of all outstanding borrowings under the Senior Secured Credit Agreement.
33
The calculation of Credit Agreement EBITDA for the periods indicated is set forth below. Credit Agreement EBITDA for the year ended December 31, 2003 is calculated on a pro forma basis giving effect to the Merger in accordance with the Senior Secured Credit Agreement. Credit Agreement EBITDA for the year ended December 31, 2002 is also calculated on a pro forma basis giving effect to the Merger as if the Senior Secured Credit Agreement was in effect with respect to such period. See Note 2 in Notes to Consolidated Financial Statements for selected unaudited pro forma combined financial information giving effect to the Merger.
|
Year Ended
Dec. 31, 2003 |
Year Ended
Dec. 31, 2002 |
|||||
---|---|---|---|---|---|---|---|
|
(Amounts in Millions)
|
||||||
Unaudited Pro Forma combined Loss attributable to common stockholders before cumulative effect of change in accounting principle | $ | (74.4 | ) | $ | (2.4 | ) | |
Income Tax Expense (Benefit) | 2.5 | (3.8 | ) | ||||
Interest Expense, Net | 148.1 | 157.2 | |||||
Depreciation and Amortization | 214.9 | 220.9 | |||||
Equity in Net Earnings of Affiliates | (1.3 | ) | (1.0 | ) | |||
Other Non-Cash Charges(A) | 31.8 | 10.8 | |||||
Merger Related Expenses | 13.1 | | |||||
Dividends from Equity Investments | 0.7 | 0.6 | |||||
Loss on Early Extinguishment of Debt | 46.6 | 27.3 | |||||
|
|
||||||
Credit Agreement EBITDA(B) | $ | 382.0 | $ | 409.6 | |||
|
|
Notes:
Capital Expenditures
The Company's capital spending for the year ended 2003 was approximately $136.6 million, up 143.9% from $56.0 million in 2002. During 2003, the Company had capital spending of approximately $71.7 million for improving process capabilities, approximately $26.6 million for its beverage multiple packaging converting operations initiative, approximately $19.6 million due to the addition of Graphic's capital spending, approximately $15.1 million for manufacturing packaging machinery and approximately $3.6 million for compliance with cluster rules. Total capital spending for 2004 is expected to be approximately $150 million and is expected to relate principally to improving the Company's process capabilities (approximately $126 million), the production of packaging machinery (approximately $18 million) and environmental cluster rules compliance (approximately $6 million). Through 2005, the Company anticipates that it will spend approximately $22 million at its U.S. mills to comply with the cluster rules. The Company is accelerating certain capital driven cost reduction projects that it anticipates will deliver benefits in 2004 and 2005.
34
Related Party TransactionsCoors Brewing Company
Coors Brewing Company, a subsidiary of Adolph Coors Company, accounted for approximately $39 million of the Company's Net Sales since the date of the Merger through December 31, 2003. The Company continues to sell packaging products to Coors Brewing Company. The loss of Coors Brewing Company as a customer in the foreseeable future could have a material effect on the Company's results of operations. The supply agreement, effective April 1, 2003, with Coors Brewing Company will not expire until December 31, 2006. Total sales under the previous supply agreement in 2002 were approximately $111 million, accounting for approximately 10% of Graphic's 2002 Net Sales.
Seasonality
The Company's net sales, income from operations and cash flows from operations are subject to moderate seasonality with demand usually increasing in the spring and summer due to the seasonality of the worldwide beverage multiple packaging markets.
Environmental Matters
The Company is subject to a broad range of foreign, federal, state and local environmental, health and safety laws and regulations, including those governing discharges to air, soil and water, the management, treatment and disposal of hazardous substances, the investigation and remediation of contamination resulting from releases of hazardous substances, and the health and safety of employees. The Company's environmental liabilities and obligations may result in significant costs, which could negatively impact its financial condition and results of operations. Capital expenditures may be necessary for the combined company to comply with such laws and regulations, including the U.S. Environmental Protection Agency's regulations mandating stringent controls on air and water discharges from pulp and paper mills, or the cluster rules. The Company expects to spend approximately $22 million over the next two years to comply with the cluster rules. These costs have not been accrued, but rather are a part of the Company's capital expenditure plan. Most of these costs are anticipated to be incurred in the first two quarters of 2005. Any failure to comply with environmental, health and safety laws or any permits and authorizations required thereunder could subject the Company to fines or sanctions. In addition, some of the Company's current and former facilities, and facilities at which it disposed of hazardous substances, are the subject of environmental investigations and remediations resulting from releases of hazardous substances or other constituents. Some current and former facilities have a history of industrial usage for which investigation and remediation obligations could be imposed in the future or for which indemnification claims could be asserted against the Company. The Company cannot predict with certainty future investigation or remediation costs or future costs relating to indemnification claims. Also, potential future closures of facilities may necessitate further investigation and remediation at those facilities.
The federal Clean Air Act imposes stringent limits on air emissions, establishes a federal permit program (Title V) and provides for enforcement sanctions. Where necessary, the Company's plants have received or submitted an application to the appropriate permitting authority for a Title V permit. The Company upgrades and replaces equipment in order to comply with air quality standards.
The federal Clean Water Act establishes a system of minimum national effluent standards for each industry, water quality standards for the nation's waterways and a permit program that provides discharge limitations and provides for enforcement sanctions. It also regulates releases and spills of oil and hazardous materials and wastewater and stormwater discharges. Many of the Company's operations discharge to publicly owned treatment works and are subject to pretreatment requirements and limitations.
The federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") establishes liability for waste generators, current and former site owners and operators
35
and others in connection with releases of hazardous substances. In several instances, the Company has been identified as a Potentially Responsible Party ("PRP") under CERCLA and similar state laws with respect to remediation of sites at which hazardous substances have been released. These actions are not material. The Company is involved in investigation and remediation projects for certain properties that it currently or formerly owned or operated. The Company has also received demands arising out of alleged contamination of various properties currently or formerly operated by it, and at certain waste disposal sites. The Company's costs in many instances cannot be reliably estimated until the remediation process is substantially underway or liability has been addressed.
The Company could incur significant costs in connection with investigation and remediation activities and other environmental matters. Some current and former facilities have a history of industrial usage for which investigation and remediation obligations could be imposed in the future or for which indemnification claims could be asserted against the Company.
The presence of soil and groundwater contamination has been investigated at portions of the Company's Portland, Oregon plant. The site is listed on Oregon's inventory of contaminated sites. The Company periodically monitors groundwater conditions at the site. While the Company does not currently have any remediation obligations at the site, such obligations could arise in the future.
The Kalamazoo, Michigan mill and carton plant have long histories of industrial usage. Portions of the property on which the mill is located have been found to contain some contamination. Remediation obligations could arise in the future at these facilities.
Commitments
At December 31, 2003, total commitments of the Company under long-term, non-cancelable contracts were as follows:
|
Payment Due by Period
|
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Less than
1 year |
1-3 years
|
4-5 years
|
After 5 years
|
Total
|
||||||||||
|
(In millions of dollars)
|
||||||||||||||
Long-Term Debt | $ | 23.3 | $ | 68.4 | $ | 95.1 | $ | 1,952.7 | $ | 2,139.5 | |||||
Operating Leases | 7.6 | 7.0 | 3.4 | 1.5 | 19.5 | ||||||||||
Unconditional Purchase Obligations(A) | 27.3 | 22.7 | 19.5 | 72.3 | 141.8 | ||||||||||
|
|
|
|
|
|||||||||||
Total Contractual Obligations | $ | 58.2 | $ | 98.1 | $ | 118.0 | $ | 2,026.5 | $ | 2,300.8 | |||||
|
|
|
|
|
Note:
International Operations
For 2003, before intercompany eliminations, net sales from operations outside of the United States represented approximately 28% of the Company's net sales. At December 31, 2003, approximately 8% of its total assets were denominated in currencies other than the U.S. dollar. The Company has significant operations in countries that use the Swedish krona, the British pound sterling, the Japanese yen, or the euro as their functional currencies. The effect of a generally weaker U.S. dollar against the euro and other European currencies, and the Japanese yen, produced a net currency translation adjustment gain of approximately $20.1 million, which was recorded as an adjustment to shareholders' equity for the year ended December 31, 2003. The magnitude and direction of this adjustment in the future depends on the relationship of the U.S. dollar to other currencies. The Company cannot predict major currency fluctuations. Its revenues from export sales fluctuate with changes in foreign currency
36
exchange rates. The Company pursues a currency hedging program in order to limit the impact of foreign currency exchange fluctuations on financial results. See "Financial Instruments" below.
Financial Instruments
The functional currency for most of the Company's international subsidiaries is the local currency for the country in which the subsidiaries own their primary assets. The translation of the applicable currencies into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period. Any related translation adjustments are recorded directly to shareholders' equity. Gains and losses on foreign currency transactions are included in Other Expense (Income), Net for the period in which the exchange rate changes.
The Company pursues a currency hedging program which utilizes derivatives to limit the impact of foreign currency exchange fluctuations on its consolidated financial results. Under this program, the Company has entered into forward exchange and option contracts in the normal course of business to hedge certain foreign currency denominated transactions. Realized and unrealized gains and losses on these forward contracts are included in the measurement of the basis of the related foreign currency transaction when recorded. The premium on an option contract is reflected in Other Expense (Income), Net during the period in which the contract expires. These instruments involve, to varying degrees, elements of market and credit risk in excess of the amounts recognized in the Consolidated Balance Sheets. The Company does not hold or issue financial instruments for trading purposes. See "Quantitative and Qualitative Disclosure About Market Risk."
Impact of Inflation
In the U.S., the inflation rate was approximately 2.3% for 2003. In Europe, where the Company has manufacturing facilities, the inflation rate for 2003 was approximately 1.9%. The impact of inflation on the Company's financial position and results of operations has been minimal during 2003, 2002 and 2001.
Information Concerning Forward-Looking Statements
Certain of the statements contained in this report (other than the financial statements and other statements of historical fact) are forward-looking statements, including, without limitation, (i) the statements in "Merger" regarding the Company's expectations that it will achieve specified synergies; (ii) the statements in "Significant Factors That Impact Its Business" concerning (a) the Company's expectations regarding packaging machinery placements and (b) the improvements which the Company's long-term initiatives, including, without limitation, its TQS and beverage carton converting operations initiatives, are designed to achieve; (iii) the statements in "Financial Condition, Liquidity and Capital Resources" concerning (a) the Company's expectation that depreciation and amortization for 2004 will be approximately $210 million to $220 million, (b) the Company's expectation that 2004 interest expense will be approximately $145 million, including approximately $8 million of non-cash amortization of deferred debt issuance costs, (c) the Company's belief that cash generated from operations, together with amounts available under available financing sources, will be adequate to permit the Company to meet its debt service obligations, capital expenditure program requirements, ongoing operating costs and working capital needs, (d) the Company's expectation that capital expenditures will be approximately $150 million in 2004, and (e) the Company's expectations with respect to capital spending that may be required to comply with the cluster rules and that, based on current knowledge, environmental costs are not expected to have a material impact on the results of operations, cash flows or financial condition of the Company (see Note 14 in Notes to Consolidated Financial Statements), and (iv) other statements as to management's or the Company's expectations and beliefs presented in this report.
37
Forward-looking statements are made based upon management's current expectations and beliefs concerning future developments and their potential effects upon the Company. There can be no assurance that future developments will be in accordance with management's expectations or that the effect of future developments on the Company will be those anticipated by management. The following important factors, and those important factors described elsewhere in this report, could affect (and in some cases have affected) the Company's actual results and could cause such results to differ materially from estimates or expectations reflected in such forward-looking statements:
38
While the Company periodically reassesses material trends and uncertainties affecting the Company's results of operations and financial condition in connection with its preparation of management's discussion and analysis of results of operations and financial condition contained in its quarterly and annual reports, the Company does not intend to review or revise any particular forward-looking statement referenced in this report in light of future events.
39
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rates
The Company is exposed to changes in interest rates, primarily as a result of its short-term and long-term debt with both fixed and floating interest rates. The Company uses interest rate swap agreements effectively to fix the LIBOR rate on $910.0 million of variable rate borrowings. The table below sets forth interest rate sensitivity information related to the Company's debt.
Long-Term DebtPrincipal Amount by Maturity-Average Interest Rate
|
2004
|
2005
|
2006
|
2007
|
2008
|
Thereafter
|
Total
|
Fair Value
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(In millions of dollars)
|
||||||||||||||||
Total Debt | |||||||||||||||||
Fixed Rate | | | | | 1.0 | 850.0 | 851.0 | 936.0 | |||||||||
Average Interest Rate | N/A | N/A | N/A | N/A | 6.25 | % | 9.00 | % | |||||||||
Variable Rate | 23.3 | 30.2 | 38.2 | 45.3 | 48.8 | 1,102.7 | 1,288.5 | 1,302.2 | |||||||||
Average Interest Rate, spread range is 2.75% - 3.00% | LIBOR+ spread | LIBOR+ spread | LIBOR+ spread | LIBOR+ spread | LIBOR+ spread | LIBOR+ spread |
Total Interest Rate Swaps-Notional Amount by Expiration-Average Swap Rate
|
2004
|
2005
|
2006
|
2007
|
2008
|
Thereafter
|
Total
|
Fair Value
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Interest rate Swaps (Pay Fixed/Receive Variable) | ||||||||||||||||||
Notional | 250.0 | 330.0 | 220.0 | 110.0 | | | 910.0 | (8.2 | ) | |||||||||
Average Pay Rate | 2.521 | % | 2.173 | % | 2.849 | % | 3.270 | % | | |||||||||
Average Receive Rate | 3-Month LIBOR | 3-Month LIBOR | 3-Month LIBOR | 3-Month LIBOR | |
Foreign Exchange Rates
The Company enters into forward exchange contracts to effectively hedge substantially all accounts receivable and certain accounts payable resulting from transactions denominated in foreign currencies. The purpose of these forward exchange contracts is to protect the Company from the risk that the eventual functional currency cash flows resulting from the collection of the hedged accounts receivable or payment of the hedged accounts payable will be adversely affected by changes in exchange rates. The Company also enters into foreign currency options and forward exchange contracts to hedge certain anticipated foreign currency transactions. The purpose of these contracts is to protect the Company from the risk that the eventual functional currency cash flows resulting from anticipated foreign currency transactions will be adversely affected by changes in exchange rates.
40
Foreign Exchange Rates SensitivityContractual Amount by Expected MaturityAverage Contractual Exchange Rate
|
December 31, 2003
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Contract Amount
|
Fair Value
|
||||||||
|
(In millions of dollars)
|
|||||||||
FORWARD EXCHANGE AGREEMENTS: | ||||||||||
Functional Currency: | ||||||||||
Yen | ||||||||||
Receive $US/Pay Yen | $ | 13.2 | $ | | ||||||
Weighted average contractual exchange rate | 107.09 | |||||||||
Pay $US/Receive Yen |
|
$ |
9.0 |
|
$ |
|
|
|||
Weighted average contractual exchange rate | 107.75 | |||||||||
Euro |
|
|
|
|
|
|
|
|||
Receive $US/Pay Euro | $ | 21.7 | $ | (0.3 | ) | |||||
Weighted average contractual exchange rate | 1.24 | |||||||||
Pay $US/Receive Euro |
|
$ |
6.7 |
|
$ |
0.3 |
|
|||
Weighted average contractual exchange rate | 1.19 | |||||||||
British Pound |
|
|
|
|
|
|
|
|||
Receive $US/Pay GBP | $ | 3.3 | $ | | ||||||
Weighted average contractual exchange rate | 1.76 | |||||||||
Pay $US/Receive GBP |
|
$ |
2.0 |
|
$ |
0.1 |
|
|||
Weighted average contractual exchange rate | 1.71 | |||||||||
Australian Dollar |
|
|
|
|
|
|
|
|||
Receive $US/Pay AUD | $ | 4.7 | $ | (0.1 | ) | |||||
Weighted average contractual exchange rate | 0.74 | |||||||||
Pay $US/Receive AUD |
|
$ |
0.8 |
|
$ |
|
|
|||
Weighted average contractual exchange rate | 0.72 | |||||||||
Other(A) |
|
|
|
|
|
|
|
|||
Net Receive various/Pay various | $ | 4.9 | $ | | ||||||
Weighted average contractual exchange rate | Various |
Note:
Natural Gas Contracts
The Company enters into fixed price natural gas contracts designed to effectively hedge prices for a substantial portion of its natural gas requirements at its U.S. mills. The purpose of the fixed price natural gas contracts is to eliminate or reduce price risk with a focus on making cash flows more predictable. The Company has entered into contracts for a portion of its natural gas requirements for its U.S. mills through August 2004. These contracts are not accounted for as derivative instruments under SFAS No. 133, as they qualify for the normal purchase exemption.
41
|
Page
|
|
---|---|---|
GRAPHIC PACKAGING CORPORATION | ||
Consolidated Balance Sheets as of December 31, 2003 and 2002 | 43 | |
Consolidated Statements of Operations for each of the three years in the period ended December 31, 2003 | 44 | |
Consolidated Statements of Comprehensive Loss for each of the three years in the period ended December 31, 2003 | 45 | |
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2003 | 46 | |
Consolidated Statements of Shareholders' Equity for each of the three years in the period ended December 31, 2003 | 47 | |
Notes to Consolidated Financial Statements | 48 | |
Report of Independent Auditors | 92 | |
Independent Auditors' Report | 93 |
42
GRAPHIC PACKAGING CORPORATION
CONSOLIDATED BALANCE SHEETS
(Amounts in Millions, Except Per Share Amounts)
|
December 31,
2003 |
December 31,
2002 |
||||||
---|---|---|---|---|---|---|---|---|
ASSETS | ||||||||
Current Assets: |
|
|
|
|
|
|
|
|
Cash and Equivalents | $ | 17.5 | $ | 13.8 | ||||
Receivables, Net of Allowances (Note 4) | 198.5 | 137.3 | ||||||
Inventories | 306.9 | 174.4 | ||||||
Prepaid Expenses | 15.1 | 9.1 | ||||||
|
|
|||||||
Total Current Assets | 538.0 | 334.6 | ||||||
Property, Plant and Equipment, at Cost | ||||||||
Land and Improvements | 61.5 | 38.8 | ||||||
Buildings | 222.2 | 113.2 | ||||||
Machinery and Equipment | 2,347.6 | 1,858.0 | ||||||
|
|
|||||||
2,631.3 | 2,010.0 | |||||||
Less: Accumulated Depreciation | (908.4 | ) | (777.1 | ) | ||||
|
|
|||||||
Property, Plant and Equipment, Net | 1,722.9 | 1,232.9 | ||||||
Deferred Tax Assets | 12.3 | 11.1 | ||||||
Investment in Net Assets of Equity Affiliates | 6.5 | 4.8 | ||||||
Goodwill | 624.3 | 268.3 | ||||||
Intangible Assets, Net of Accumulated Amortization of $38.0 and $24.0 at December 31, 2003 and 2002, respectively | 192.3 | 42.8 | ||||||
Other Assets | 104.0 | 63.2 | ||||||
|
|
|||||||
Total Assets | $ | 3,200.3 | $ | 1,957.7 | ||||
|
|
|||||||
LIABILITIES |
|
|||||||
Current Liabilities: |
|
|
|
|
|
|
|
|
Short-Term Debt | $ | 38.4 | $ | 98.7 | ||||
Accounts Payable | 176.6 | 80.9 | ||||||
Compensation and Employee Benefits | 67.3 | 31.8 | ||||||
Income Taxes | 4.0 | 0.7 | ||||||
Interest Payable | 30.5 | 35.7 | ||||||
Other Accrued Liabilities | 68.3 | 31.5 | ||||||
|
|
|||||||
Total Current Liabilities | 385.1 | 279.3 | ||||||
Long Term Debt, Less Current Portion | 2,116.2 | 1,429.7 | ||||||
Deferred Tax Liabilities | 13.4 | 13.5 | ||||||
Other Noncurrent Liabilities | 196.6 | 102.6 | ||||||
|
|
|||||||
Total Liabilities | 2,711.3 | 1,825.1 | ||||||
|
|
|||||||
Contingencies and Commitments (Note 14) | ||||||||
Class A Redeemable Common Stock $120/share redemption value; 0 and 57,930 shares issued and outstanding at Dec. 31, 2003 and 2002, respectively | | 7.0 | ||||||
|
|
|||||||
SHAREHOLDERS' EQUITY |
|
|||||||
Preferred Stock par value $.01 per Share; 50,000,000 shares authorized; no shares issued or outstanding |
|
|
|
|
|
|
|
|
Common Stock par value $.01 per Share; | ||||||||
Common Stock, 500,000,000 shares authorized; 198,378,110 shares issued and outstanding at Dec. 31, 2003 | 2.0 | | ||||||
Class A Common Stock, 9,000,000 shares authorized; 7,057,930 designated, 7,000,000 non- redeemable shares issued and outstanding at Dec. 31, 2002 | | 0.1 | ||||||
Class B Common Stock, 3,000,000 shares authorized; 500,000 shares of non-redeemable shares issued and outstanding at Dec. 31, 2002 | | | ||||||
Capital in Excess of Par Value | 1,168.5 | 748.7 | ||||||
Accumulated Deficit | (598.0 | ) | (515.1 | ) | ||||
Minimum Pension Liability Adjustment | (60.2 | ) | (71.3 | ) | ||||
Accumulated Derivative Instruments Loss | (12.7 | ) | (6.1 | ) | ||||
Cumulative Currency Translation Adjustment | (10.6 | ) | (30.7 | ) | ||||
|
|
|||||||
Total Shareholders' Equity | 489.0 | 125.6 | ||||||
|
|
|||||||
Total Liabilities and Shareholders' Equity | $ | 3,200.3 | $ | 1,957.7 | ||||
|
|
The accompanying notes are an integral part of the consolidated financial statements.
43
GRAPHIC PACKAGING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Millions, Except Per Share Amounts)
|
Year Ended
December 31, 2003 |
Year Ended
December 31, 2002 |
Year Ended
December 31, 2001 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
Net Sales | $ | 1,683.3 | $ | 1,247.3 | $ | 1,201.6 | ||||
Cost of Sales | 1,398.5 | 984.8 | 953.9 | |||||||
Selling, General and Administrative | 153.1 | 117.3 | 116.5 | |||||||
Research, Development and Engineering | 7.4 | 5.2 | 5.1 | |||||||
Other Expense (Income), Net | 18.2 | (0.6 | ) | 18.8 | ||||||
|
|
|
||||||||
Income from Operations | 106.1 | 140.6 | 107.3 | |||||||
Loss on Early Extinguishment of Debt | (45.3 | ) | (11.5 | ) | (8.7 | ) | ||||
Interest Income | 1.0 | 1.4 | 0.9 | |||||||
Interest Expense | (144.5 | ) | (147.4 | ) | (158.9 | ) | ||||
|
|
|
||||||||
Loss before Income Taxes and Equity in Net Earnings of Affiliates | (82.7 | ) | (16.9 | ) | (59.4 | ) | ||||
Income Tax (Expense) Benefit | (1.5 | ) | 4.7 | (6.6 | ) | |||||
|
|
|
||||||||
Loss before Equity in Net Earnings of Affiliates | (84.2 | ) | (12.2 | ) | (66.0 | ) | ||||
Equity in Net Earnings of Affiliates | 1.3 | 1.0 | 0.9 | |||||||
|
|
|
||||||||
Loss before Cumulative Effect of a Change in Accounting Principle | (82.9 | ) | (11.2 | ) | (65.1 | ) | ||||
Cumulative Effect of a Change In Accounting Principle Net of Tax of $0 | | | (0.5 | ) | ||||||
|
|
|
||||||||
Net Loss | $ | (82.9 | ) | $ | (11.2 | ) | $ | (65.6 | ) | |
|
|
|
||||||||
Loss Per ShareBasic |
|
$ |
(0.56 |
) |
$ |
(0.10 |
) |
$ |
(0.57 |
) |
Loss Per ShareDiluted | $ | (0.56 | ) | $ | (0.10 | ) | $ | (0.57 | ) | |
Weighted Average Number of Shares OutstandingBasic |
|
|
148.3 |
|
|
115.1 |
|
|
115.1 |
|
Weighted Average Number of Shares OutstandingDiluted | 148.3 | 115.1 | 115.1 |
The accompanying notes are an integral part of the consolidated financial statements.
44
GRAPHIC PACKAGING CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Amounts in Millions)
|
Year Ended
December 31, 2003 |
Year Ended
December 31, 2002 |
Year Ended
December 31, 2001 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Net Loss | $ | (82.9 | ) | $ | (11.2 | ) | $ | (65.6 | ) | ||
Other Comprehensive (Loss) Income: | |||||||||||
Derivative Instruments Loss, Net of Tax of $0 | (6.6 | ) | (1.5 | ) | (4.6 | ) | |||||
Minimum Pension Liability Adjustment, Net of Tax of $0 | 11.1 | (71.3 | ) | | |||||||
Foreign Currency Translation Adjustments, Net of Tax of $0 | 20.1 | 13.0 | (10.1 | ) | |||||||
|
|
|
|||||||||
Comprehensive Loss | $ | (58.3 | ) | $ | (71.0 | ) | $ | (80.3 | ) | ||
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
45
GRAPHIC PACKAGING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Millions)
|
Year Ended
December 31, 2003 |
Year Ended
December 31, 2002 |
Year Ended
December 31, 2001 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
Net Loss | $ | (82.9 | ) | $ | (11.2 | ) | $ | (65.6 | ) | ||
Noncash Items Included in Net Loss: | |||||||||||
Depreciation and Amortization | 160.4 | 133.8 | 137.1 | ||||||||
Cumulative Effect of a Change in Accounting Principle | | | 0.5 | ||||||||
Loss on Early Extinguishment of Debt | 16.7 | 3.0 | 8.7 | ||||||||
Deferred Income Taxes | (2.8 | ) | (10.7 | ) | (0.7 | ) | |||||
Pension, Postemployment and Postretirement Benefits
Expense, Net of Contributions |
18.6 | 8.4 | 4.9 | ||||||||
Equity in Net Earnings of Affiliates, Net of Dividends | (0.8 | ) | (0.4 | ) | (0.3 | ) | |||||
Amortization of Deferred Debt Issuance Costs | 7.6 | 6.9 | 7.6 | ||||||||
Loss on Retirement of Assets | 8.4 | 1.5 | 5.7 | ||||||||
Other, Net | 7.8 | | | ||||||||
Changes in Operating Assets & Liabilities: | |||||||||||
Receivables | 26.5 | (9.6 | ) | 17.3 | |||||||
Inventories | (14.6 | ) | (10.3 | ) | (13.8 | ) | |||||
Prepaid Expenses | 1.4 | (7.1 | ) | 2.8 | |||||||
Accounts Payable | 30.3 | (11.9 | ) | (4.7 | ) | ||||||
Compensation and Employee Benefits | 5.6 | (1.9 | ) | (11.4 | ) | ||||||
Income Taxes | (2.0 | ) | (1.5 | ) | 0.6 | ||||||
Other Accrued Liabilities | (22.4 | ) | (0.6 | ) | (1.5 | ) | |||||
Other Noncurrent Liabilities | (1.0 | ) | (0.9 | ) | 0.5 | ||||||
|
|
|
|||||||||
Net Cash Provided by Operating Activities | 156.8 | 87.5 | 87.7 | ||||||||
|
|
|
|||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
Purchases of Property, Plant and Equipment | (136.6 | ) | (56.0 | ) | (57.3 | ) | |||||
Acquisition Fees | (93.9 | ) | | | |||||||
Cash Acquired in Merger | 6.1 | | | ||||||||
Payment for Settlement of Tax Matters Relating to the Merger | | | (29.5 | ) | |||||||
Decrease (Increase) in Other Assets | 3.5 | (2.7 | ) | (3.2 | ) | ||||||
|
|
|
|||||||||
Net Cash Used in Investing Activities | (220.9 | ) | (58.7 | ) | (90.0 | ) | |||||
|
|
|
|||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
Borrowing under Revolving Credit Facilities | 474.8 | 279.9 | 523.9 | ||||||||
Payments on Revolving Credit Facilities | (456.6 | ) | (288.3 | ) | (617.6 | ) | |||||
Proceeds from Issuance of Debt | 2,125.0 | 250.0 | 592.5 | ||||||||
Increase in Debt Issuance Costs | (57.4 | ) | (3.8 | ) | (19.0 | ) | |||||
Premium Paid on Early Extinguishment of Debt | (28.6 | ) | (8.5 | ) | | ||||||
Payment on Debt | (1,989.1 | ) | (252.5 | ) | (488.9 | ) | |||||
Issuance of Common Stock | 0.2 | | | ||||||||
Repurchases of Redeemable Common Stock | (1.0 | ) | (0.4 | ) | (0.4 | ) | |||||
Issuance of Redeemable Common Stock | | | 0.3 | ||||||||
|
|
|
|||||||||
Net Cash Provided by (Used in) Financing Activities | 67.3 | (23.6 | ) | (9.2 | ) | ||||||
|
|
|
|||||||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH | 0.5 | 1.2 | 0.5 | ||||||||
|
|
|
|||||||||
Net Increase (Decrease) in Cash and Equivalents | 3.7 | 6.4 | (11.0 | ) | |||||||
Cash and Equivalents at Beginning of Period | 13.8 | 7.4 | 18.4 | ||||||||
|
|
|
|||||||||
CASH AND EQUIVALENTS AT END OF PERIOD | $ | 17.5 | $ | 13.8 | $ | 7.4 | |||||
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
46
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in Millions)
|
|
|
Class A
Non-Redeemable Common Stock |
Class B
Non-Redeemable Common Stock |
|
|
|
|
|
|
|||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Common Stock
|
|
|
Minimum
Pension Liability Adjustment |
Cumulative
Currency Translation Adjustment |
Accumulated
Derivative Instruments Loss |
|
||||||||||||||||||||||||||||
|
Capital in
Excess of Par Value |
Accumulated
Deficit |
Total
Shareholders' Equity |
||||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
|||||||||||||||||||||||||||||
Balances at December 31, 2000 | | $ | | 7,000,000 | $ | 0.1 | 500,000 | $ | | 748.8 | $ | (438.3 | ) | $ | | $ | (33.6 | ) | $ | | 277.0 | ||||||||||||||
Net Loss | | | | | | | | (65.6 | ) | | | | (65.6 | ) | |||||||||||||||||||||
Accumulated Derivative Instruments Loss | | | | | | | | | | | (4.6 | ) | (4.6 | ) | |||||||||||||||||||||
Currency Translation Adjustment | | | | | | | | | | (10.1 | ) | | (10.1 | ) | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
Balances at December 31, 2001 | | | 7,000,000 | 0.1 | 500,000 | | 748.8 | (503.9 | ) | | (43.7 | ) | (4.6 | ) | 196.7 | ||||||||||||||||||||
Net Loss | | | | | | | | (11.2 | ) | | | | (11.2 | ) | |||||||||||||||||||||
Accumulated Derivative Instruments Loss | | | | | | | | | | | (1.5 | ) | (1.5 | ) | |||||||||||||||||||||
Minimum Pension Liability Adjustment | | | | | | | | | (71.3 | ) | | | (71.3 | ) | |||||||||||||||||||||
Currency Translation Adjustment | | | | | | | | | | 13.0 | | 13.0 | |||||||||||||||||||||||
Repurchases of Redeemable Common Stock | | | | | | | (0.1 | ) | | | | | (0.1 | ) | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
Balances at December 31, 2002 | | | 7,000,000 | 0.1 | 500,000 | | 748.7 | (515.1 | ) | (71.3 | ) | (30.7 | ) | (6.1 | ) | 125.6 | |||||||||||||||||||
Net Loss | | | | | | | | (82.9 | ) | | | | (82.9 | ) | |||||||||||||||||||||
15.21-to-One Stock Split | 99,470,000 | 1.0 | 7,105,000 | 0.1 | (1.1 | ) | | | | | | ||||||||||||||||||||||||
Non-Redeemable Class A and Class B Common Stock Exchange | 114,075,000 | 1.2 | (106,470,000 | ) | (1.1 | ) | (7,605,000 | ) | (0.1 | ) | | | | | | ||||||||||||||||||||
Redeemable Class A Common Stock Exchange | 748,027 | 0.0 | | | | | 5.9 | | | | | 5.9 | |||||||||||||||||||||||
Common Stock issued in Merger | 83,441,490 | 0.8 | | | | | 414.7 | | | | | 415.5 | |||||||||||||||||||||||
Accumulated Derivative Instruments Loss | | | | | | | | | | | (6.6 | ) | (6.6 | ) | |||||||||||||||||||||
Minimum Pension Liability Adjustment | | | | | | | | | 11.1 | | | 11.1 | |||||||||||||||||||||||
Currency Translation Adjustment | | | | | | | | | | 20.1 | | 20.1 | |||||||||||||||||||||||
Issuance of Common Stock | 100,000 | | | | | | 0.2 | | | | | 0.2 | |||||||||||||||||||||||
Net Issuance of Restricted Stock | 13,593 | | | | | | 0.1 | | | | | 0.1 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
Balances at December 31, 2003 | 198,378,110 | $ | 2.0 | | $ | | | $ | | $ | 1,168.5 | $ | (598.0 | ) | $ | (60.2 | ) | $ | (10.6 | ) | $ | (12.7 | ) | $ | 489.0 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
47
GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1ORGANIZATION AND BASIS OF PRESENTATION
On August 8, 2003, the corporation formerly known as Graphic Packaging International Corporation merged with and into Riverwood Acquisition Sub LLC, a wholly owned subsidiary of Riverwood Holding, Inc. ("Riverwood Holding"), with Riverwood Acquisition Sub LLC as the surviving entity (the "Merger"). At the closing of the Merger, one share of common stock of Riverwood Holding was exchanged for each share of common stock of Graphic Packaging International Corporation. After the Merger, (1) RIC Holding, Inc. merged into Graphic Packaging Holdings, Inc. which was renamed GPI Holding, Inc., (2) the corporation formerly known as Graphic Packaging Corporation merged into Riverwood International Corporation ("RIC") which was renamed Graphic Packaging International, Inc. ("Graphic Packaging International"), and (3) Riverwood Acquisition Sub LLC merged into Riverwood Holding which was renamed Graphic Packaging Corporation.
References to the "Company" are to Riverwood Holding and its subsidiaries for periods prior to the Merger and to Graphic Packaging Corporation and its subsidiaries for periods after the Merger. Graphic Packaging International Corporation and its subsidiaries for periods prior to the Merger are referred to herein as "Graphic."
For accounting purposes, the Merger was accounted for as a purchase by the Company. Under the purchase method of accounting, the assets and liabilities of Graphic were recorded, as of the date of the closing of the Merger, at their respective fair values and added to those of the Company. The difference between the purchase price and the fair market values of the assets acquired and liabilities assumed of Graphic was recorded as goodwill. The historical financial statements of Riverwood Holding became the historical financial statements of Graphic Packaging Corporation. The accompanying consolidated statement of operations for the year ended December 31, 2003 includes approximately five months of Graphic's results of operations and twelve months of the Company's results of operations. Note 2 provides summary unaudited pro forma information and information pertaining to the Merger.
Graphic Packaging Corporation and GPI Holding, Inc., its wholly-owned subsidiary, conduct no significant business and have no independent assets or operations other than their ownership of Graphic Packaging International. Graphic Packaging Corporation and GPI Holding, Inc. fully and unconditionally guarantee substantially all of the debt of Graphic Packaging International.
NOTE 2MERGER
The Merger was consummated primarily to create a premier value added paperboard packaging company. Prior to consummation of the Merger, Riverwood Holding had two classes of common stock. There were 9.0 million shares of Class A common stock, par value $0.01, authorized with 7.0 million and 7.1 million shares outstanding at August 8, 2003 and December 31, 2002, respectively. There were 3.0 million shares of Class B common stock, par value $0.01, authorized with 0.5 million shares outstanding at August 8, 2003 and December 31, 2002. In connection with the Merger, the Company's Board of Directors approved a 15.21-to-one stock split. At the time, the Class A and Class B common stock were reclassified as one class of common stock, par value $0.01. Immediately after the stock split, there were 500.0 million shares of common stock authorized with 114.8 million shares outstanding. The aggregate par value of the issued common stock was increased by $1.1 million as a result of keeping the par value price $0.01. Accordingly, Capital in Excess of Par Value was decreased $1.1 million. In connection with the Merger, the shareholders of Graphic Packaging International Corporation received one share of the Company's common stock and associated shareholder rights for each share of Graphic
48
Packaging International Corporation common stock and associated shareholder rights they owned prior to the Merger. Accordingly, Capital in Excess of Par Value increased $419.5 million.
The Company determined that the relative outstanding share ownership and the designation of certain senior management positions require the Company to be the acquiring entity for accounting purposes, resulting in the historical financial statements of Riverwood Holding becoming the historical financial statements of Graphic Packaging Corporation. The assets and liabilities of the acquired business are included in the consolidated balance sheet at December 31, 2003. Graphic's results of operations have been included in the consolidated statement of operations beginning August 9, 2003 through December 31, 2003. The purchase price for the acquisition, including transaction costs, has been allocated to the assets acquired and liabilities assumed based on the estimated fair market values at the date of the Merger. Goodwill is allocated entirely to the paperboard packaging segment and is not deductible for tax purposes. The purchase price allocation for the Merger is preliminary and further adjustments are likely to be made as valuations for property, plant, equipment, and intangible assets are finalized. The stock-for-stock exchange resulted in the issuance of approximately 83.4 million shares of common stock to fund the purchase price of $470.2 million. The preliminary purchase price allocation is as follows:
Selected Unaudited Pro Forma Combined Financial Information
The following unaudited pro forma combined financial information is presented to show the estimated effect of the Merger and the Related Financing Transactions (as defined herein) and represent the Company's pro forma combined financial information for the year ended December 31, 2003 and 2002, respectively, as if the Merger and Related Financing Transactions had occurred on January 1, 2003 and January 1, 2002, respectively. The unaudited pro forma combined financial information includes adjustments directly attributable to the Merger and the Related Financing Transactions that are expected to have a continuing impact on the Company. The pro forma adjustments are based upon available information and certain assumptions that management believes are reasonable.
49
The following financing transactions (the "Related Financing Transactions") were entered into in connection with the Merger:
The pro forma financial information was prepared using the purchase method of accounting, with the Company treated as the acquirer for accounting purposes. Under purchase accounting, the total cost of the Merger is allocated to the tangible and intangible assets acquired and liabilities assumed based upon their respective fair values at the effective date of the Merger. A preliminary allocation of the cost of the Merger has been made based upon currently available information and management's estimates. The actual allocation and its effect on results of operations may differ significantly from the pro forma amounts included herein.
The pro forma information is based on the Company's actual financial results for the periods indicated and the historical results of Graphic from the beginning of the period presented through the date of the Merger. The pro forma information has been prepared in accordance with accounting principles generally accepted in the United States of America and is provided for comparison and analysis purposes only. The unaudited pro forma combined financial information does not purport to
50
represent the combined company's results of operations or financial condition had the Merger and Related Financing Transactions actually occurred as of such dates or of the results that the combined company would have achieved after the Merger. The unaudited pro forma combined financial information is as follows:
Combined Company
Unaudited Condensed Pro Forma Combined Statement of Operations
For the Year Ended December 31, 2003
(Amounts in Millions, Except Per Share Amounts)
|
Company
|
Graphic
|
Pro Forma
Adjustments |
Condensed Pro Forma Combined
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net Sales | $ | 1,683.3 | $ | 650.8 | $ | (38.0 | ) A | $ | 2,296.1 | |||||
Cost of Sales | 1,398.5 | 581.7 |
(45.0
(1.3 |
)
A
) B |
1,933.9 | |||||||||
Selling, General and Administrative, Research, Development and Engineering | 178.7 | 44.0 | 18.0 | B | 240.7 | |||||||||
|
|
|
|
|||||||||||
Income from Operations | 106.1 | 25.1 | (9.7 | ) | 121.5 | |||||||||
Interest Expense, Net | (143.5 | ) | (23.0 | ) | 18.4 | C | (148.1 | ) | ||||||
Loss on Early Extinguishment of Debt | (45.3 | ) | (1.3 | ) | | (46.6 | ) | |||||||
|
|
|
|
|||||||||||
(Loss) Income before Income Taxes and Equity in Net Earnings of Affiliates | (82.7 | ) | 0.8 | 8.7 | (73.2 | ) | ||||||||
Income Tax (Expense) Benefit | (1.5 | ) | (1.0 | ) | | (2.5 | ) | |||||||
|
|
|
|
|||||||||||
(Loss) Income before Equity in Net Earnings of Affiliates | (84.2 | ) | (0.2 | ) | 8.7 | (75.7 | ) | |||||||
Equity in Net Earnings of Affiliates | 1.3 | | | 1.3 | ||||||||||
|
|
|
|
|||||||||||
Net (Loss) Income | (82.9 | ) | (0.2 | ) | 8.7 | (74.4 | ) | |||||||
Preferred Stock Dividends Declared | | 6.1 | (6.1 | ) D | | |||||||||
|
|
|
|
|||||||||||
Net (Loss) Income Attributable to Common Stockholders | $ | (82.9 | ) | $ | (6.3 | ) | $ | 14.8 | $ | (74.4 | ) | |||
|
|
|
|
|||||||||||
Loss Per ShareBasic |
|
$ |
(0.56 |
) |
|
|
|
|
|
|
$ |
(0.38 |
) |
|
Loss Per ShareDiluted | $ | (0.56 | ) | $ | (0.38 | ) | ||||||||
Weighted Average Number of Shares Outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic | 148.3 | 198.3 | ||||||||||||
Diluted | 148.3 | 198.3 |
51
Combined Company
Unaudited Condensed Pro Forma Combined Statement of Operations
For the Year Ended December 31, 2002
(Amounts in Millions, Except Per Share Amounts)
|
Company
|
Graphic
|
Pro Forma
Adjustments |
Condensed Pro Forma Combined
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net Sales | $ | 1,247.3 | $ | 1,057.8 | $ | (52.8 | ) A | $ | 2,252.3 | |||||
Cost of Sales | 984.8 | 930.6 |
(52.8
(2.2 |
)
A
) B |
1,860.4 | |||||||||
Selling, General and Administrative, Research, Development and Engineering | 121.9 | 64.6 | 28.1 | B | 214.6 | |||||||||
|
|
|
|
|||||||||||
Income from Operations | 140.6 | 62.6 | (25.9 | ) | 177.3 | |||||||||
Interest Expense, Net | (146.0 | ) | (44.6 | ) | 33.4 | C | (157.2 | ) | ||||||
Loss on Early Extinguishment of Debt | (11.5 | ) | (15.8 | ) | | (27.3 | ) | |||||||
|
|
|
|
|||||||||||
(Loss) Income before Income Taxes, Equity in Net Earnings of Affiliates and Cumulative Effect of a Change in Accounting Principle | (16.9 | ) | 2.2 | 7.5 | (7.2 | ) | ||||||||
Income Tax Benefit (Expense) | 4.7 | (0.9 | ) | | 3.8 | |||||||||
|
|
|
|
|||||||||||
(Loss) Income before Equity in Net Earnings of Affiliates and Cumulative Effect of a Change in Accounting Principle | (12.2 | ) | 1.3 | 7.5 | (3.4 | ) | ||||||||
Equity in Net Earnings of Affiliates | 1.0 | | | 1.0 | ||||||||||
|
|
|
|
|||||||||||
(Loss) Income before Cumulative Effect of a Change in Accounting Principle | (11.2 | ) | 1.3 | 7.5 | (2.4 | ) | ||||||||
Preferred Stock Dividends Declared | | 10.0 | (10.0 | ) D | | |||||||||
|
|
|
|
|||||||||||
(Loss) Income Attributable to Common Stockholders before Cumulative Effect of a Change in Accounting Principle | $ | (11.2 | ) | $ | (8.7 | ) | $ | 17.5 | $ | (2.4 | ) | |||
|
|
|
|
|||||||||||
Loss Per Share before Cumulative Effect of a Change in Accounting PrincipleBasic |
|
$ |
(0.10 |
) |
|
|
|
|
|
|
$ |
(0.01 |
) |
|
Loss Per Share before Cumulative Effect of a Change in Accounting PrincipleDiluted |
|
$ |
(0.10 |
) |
|
|
|
|
|
|
$ |
(0.01 |
) |
|
Weighted Average Number of Shares Outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic | 115.1 | 198.5 | ||||||||||||
Diluted | 115.1 | 198.5 |
Adjustments in the unaudited condensed pro forma combined financial statements are as follows:
52
$52.8 million for the period ended August 8, 2003, and the year ended December 31, 2002, respectively, related to this activity. Cost of sales also includes an adjustment of approximately $7.0 million for the year ended December 31, 2003 to eliminate the effect of the increase in fair value of inventory which was recorded as an addition to cost of sales as a non-recurring item in 2003.
|
Year Ended
Dec. 31, 2003 |
Year Ended
Dec. 31, 2002 |
|||||
---|---|---|---|---|---|---|---|
Cost of Sales | $ | (1.3 | ) | $ | (2.2 | ) | |
Selling, General and Administrative, Research, Development and Engineering | 18.0 | 28.1 | |||||
|
|
||||||
Total Additional Amortization and Depreciation of Intangible Assets and Property, Plant and Equipment | $ | 16.7 | $ | 25.9 | |||
|
|
NOTE 3SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies of the Company.
(A) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include all of the accounts of Graphic Packaging Corporation and its majority-owned and controlled subsidiaries. The accompanying consolidated financial statements include the worldwide operations of the Paperboard Packaging
53
segment which includes the paperboard, packaging, and packaging machinery businesses and the Containerboard/Other segment. All significant transactions and balances between the consolidated operations have been eliminated.
(B) CASH AND EQUIVALENTS
Cash and equivalents include time deposits, certificates of deposit and other marketable securities with original maturities of three months or less.
(C) INVENTORIES
Inventories are stated at the lower of cost or market with cost determined principally by the first-in, first-out ("FIFO") basis (see Note 5). Average cost basis is used to determine the cost of supplies inventories. Inventories are stated net of an allowance for slow-moving and obsolete inventory, which is based on estimates. If the condition of the inventories or the state of the Company's business were to deteriorate, additional allowances may be required which would reduce income. Raw materials and consumables used in the production process such as wood chips and chemicals are valued at purchase cost on a FIFO basis upon receipt. Work in progress and finished goods inventories are valued at the cost of raw material consumed plus direct manufacturing costs (such as labor, utilities and supplies) as incurred and a proportion of manufacturing overhead.
(D) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Betterments, renewals and extraordinary repairs that extend the life of the asset are capitalized; other repairs and maintenance charges are expensed as incurred. The Company's cost and related accumulated depreciation applicable to assets retired or sold are removed from the accounts and the gain or loss on disposition is recognized in income.
Costs directly associated with the development and testing of computer information systems for internal use are deferred and included in property, plant and equipment. Such costs are amortized on a straight-line basis over the expected useful life of 5 years. Costs indirectly associated with such projects and ongoing maintenance costs are expensed as incurred. A total of $6.8 million and $1.0 million in costs relating to software development were capitalized in 2003 and 2002, respectively, and were included in property, plant and equipment at December 31, 2003 and December 31, 2002.
Interest is capitalized on major projects. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset's estimated useful life. Capitalized interest was approximately $1.6 million, $1.3 million and $2.1 million in the years ended December 31, 2003, 2002 and 2001, respectively.
54
(E) DEPRECIATION AND AMORTIZATION
Depreciation and amortization are principally computed using the straight-line method based on the following estimated useful lives of the related assets:
Buildings | 40 years | |
Land improvements | 15 years | |
Machinery and equipment | 3 to 40 years | |
Furniture and fixtures | 10 years | |
Automobiles and light trucks | 3 to 5 years |
For certain major capital additions, the Company computes depreciation on the units-of-production method until the asset's designed level of production is achieved and sustained.
The Company assesses its long-lived assets, including goodwill and certain identifiable intangibles, for impairment whenever events or circumstances indicate that the carrying value of an asset may not be recoverable. To analyze recoverability, the Company projects future cash flows, undiscounted and before interest, over the remaining life of such assets. If these projected cash flows are less than the carrying amount, an impairment would be recognized, resulting in a write-down of assets with a corresponding charge to earnings. The impairment loss is measured based upon the difference between the carrying amount and the fair value of the assets. The Company assesses the appropriateness of the useful life of its long-lived assets periodically.
Intangible assets with a determinable life are amortized on a straight-line basis over that period. The related amortization expense is included in Other Expense (Income), Net.
In June 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142"), which was effective January 1, 2002. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS No. 142 also requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The adoption of SFAS No. 142 resulted in the discontinuation of amortization of goodwill recorded at December 31, 2001 of approximately $8 million annually. Intangible assets with a determinable life will continue to be amortized over the appropriate periods. The Company adopted SFAS No. 142 on January 1, 2002. The following table shows Net Loss for the
55
years ended December 31, 2003 and 2002 and Adjusted Net Loss for the year ended December 31, 2001 exclusive of goodwill amortization:
|
Year Ended
Dec. 31, 2003 |
Year Ended
Dec. 31, 2002 |
Year Ended
Dec. 31, 2001 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
Net Loss | $ | (82.9 | ) | $ | (11.2 | ) | $ | (65.6 | ) | |
Plus: Amortization of Goodwill | | | 7.7 | |||||||
|
|
|
||||||||
Adjusted Net Loss | $ | (82.9 | ) | $ | (11.2 | ) | $ | (57.9 | ) | |
|
|
|
||||||||
Loss Per Basic ShareAs Reported |
|
$ |
(0.56 |
) |
$ |
(0.10 |
) |
$ |
(0.57 |
) |
Loss Per Basic ShareAs Adjusted | $ | (0.56 | ) | $ | (0.10 | ) | $ | (0.50 | ) | |
Loss Per Diluted ShareAs Reported |
|
$ |
(0.56 |
) |
$ |
(0.10 |
) |
$ |
(0.57 |
) |
Loss Per Diluted ShareAs Adjusted | $ | (0.56 | ) | $ | (0.10 | ) | $ | (0.50 | ) |
The following table shows Loss before Cumulative Effect of a Change in Accounting Principle for the years ended December 31, 2003 and 2002 and Adjusted Loss before Cumulative Effect of a Change in Accounting Principle for the year ended December 31, 2001 exclusive of goodwill amortization:
|
Year Ended
Dec. 31, 2003 |
Year Ended
Dec. 31, 2002 |
Year Ended
Dec. 31, 2001 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
Loss before Cumulative Effect of a Change in Accounting Principle | $ | (82.9 | ) | $ | (11.2 | ) | $ | (65.1 | ) | |
Plus: Amortization of Goodwill | | | 7.7 | |||||||
|
|
|
||||||||
Adjusted Loss before Cumulative Effect of a Change in Accounting Principle | $ | (82.9 | ) | $ | (11.2 | ) | $ | (57.4 | ) | |
|
|
|
||||||||
Loss Per Basic ShareAs Reported |
|
$ |
(0.56 |
) |
$ |
(0.10 |
) |
$ |
(0.57 |
) |
Loss Per Basic ShareAs Adjusted | $ | (0.56 | ) | $ | (0.10 | ) | $ | (0.50 | ) | |
Loss Per Diluted ShareAs Reported |
|
$ |
(0.56 |
) |
$ |
(0.10 |
) |
$ |
(0.57 |
) |
Loss Per Diluted ShareAs Adjusted | $ | (0.56 | ) | $ | (0.10 | ) | $ | (0.50 | ) |
56
The following table displays the intangible assets that continue to be subject to amortization and aggregate amortization expense as well as intangible assets not subject to amortization as of December 31, 2003 and December 31, 2002:
|
As of December 31, 2003
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Gross Carrying
Amount |
Accumulated
Amortization |
Net Carrying
Amount |
|||||||
Amortized Intangible Assets | ||||||||||
Customer Relationships | $ | 109.9 | $ | 2.0 | $ | 107.9 | ||||
Non-Compete Agreements | 23.3 | 7.3 | 16.0 | |||||||
Patents | 24.9 | 11.0 | 13.9 | |||||||
Licenses | 3.6 | 1.4 | 2.2 | |||||||
Trademarks | 68.6 | 16.3 | 52.3 | |||||||
|
|
|
||||||||
$ | 230.3 | $ | 38.0 | $ | 192.3 | |||||
|
|
|
||||||||
Unamortized Intangible Assets | ||||||||||
Goodwill | $ | 624.3 | $ | 624.3 |
|
As of December 31, 2002
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Gross Carrying
Amount |
Accumulated
Amortization |
Net Carrying
Amount |
|||||||
Amortized Intangible Assets | ||||||||||
Patents | $ | 23.6 | $ | 9.4 | $ | 14.2 | ||||
Licenses | 3.6 | 1.2 | 2.4 | |||||||
Trademarks | 39.6 | 13.4 | 26.2 | |||||||
|
|
|
||||||||
$ | 66.8 | $ | 24.0 | $ | 42.8 | |||||
|
|
|
||||||||
Unamortized Intangible Assets | ||||||||||
Goodwill | $ | 268.3 | $ | 268.3 |
The Company recorded amortization expense of $14.0 million and $3.7 million for the years ended December 31, 2003 and 2002, respectively, relating to intangible assets subject to amortization, and is expected to be approximately $26 million for 2004 and approximately $12 million for each of the following four fiscal years.
Goodwill increased by $356.0 million in 2003 as a result of the Merger (See Note 2Merger).
(F) INTERNATIONAL CURRENCY
The functional currency for most of the international subsidiaries is the local currency for the country in which the subsidiaries own their primary assets. The translation of the applicable currencies into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period. Any related translation adjustments are recorded directly to Shareholders' Equity. Gains and losses on foreign currency transactions are included in Other Expense (Income), Net for the period in which the exchange rate changes.
57
The Company pursues a currency hedging program which utilizes derivatives to limit the impact of foreign currency exchange fluctuations on its consolidated financial results. Under this program, the Company has entered into forward exchange and option contracts in the normal course of business to hedge certain foreign currency denominated transactions. Realized and unrealized gains and losses on these forward contracts are included in the measurement of the basis of the related foreign currency transaction when recorded. The premium on an option contract is reflected in Other Expense (Income), Net during the period in which the contract expires.
(G) INCOME TAXES
The Company accounts for income taxes under the asset and liability method whereby the effect of changes in corporate tax rates on deferred income taxes is recognized currently as an adjustment to income tax expense. The asset and liability method also requires that deferred tax assets or liabilities be recorded based on the difference between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. A valuation allowance is established for deferred tax assets when it is more likely than not that the benefits of such assets will not be realized.
(H) REVENUE RECOGNITION
The Company generates revenue from the sales of manufactured products, the leasing of packaging machinery, and the servicing of packaging machinery. The Company recognizes sales revenue when the following criteria are met: persuasive evidence of an agreement exists, delivery has occurred or services have been rendered, the Company's 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. Revenue is recorded at the time of shipment for terms designated as free on board, or f.o.b., shipping point. For sales transactions designated f.o.b. destination, revenue is recorded when the product is delivered to the customer's delivery site. The Company recognizes revenues on its annual and multi-year carton supply contracts as the shipment occurs in accordance with the shipping terms discussed above.
Payments from packaging machinery use agreements are recognized on a straight-line basis over the term of the agreements. Service revenue on packaging machinery is recorded at the time of service. Discounts and allowances are comprised of trade allowances, cash discounts and sales returns. Cash discounts and sales returns are estimated using historical experience. Trade allowances are based on the estimated obligations and historical experience. Rebates are determined based on the quantity purchased and are recorded at the time of sale.
(I) SHIPPING AND HANDLING COSTS
The Company includes shipping and handling costs in Cost of Sales.
(J) INSURANCE RESERVES
It is the Company's policy to self-insure or fund a portion of certain expected losses related to group health benefits and workers' compensation claims. Provisions for expected losses are recorded based on the Company's estimates, on an undiscounted basis, of the aggregate liabilities for known claims and estimated claims incurred but not reported.
58
(K) ENVIRONMENTAL REMEDIATION RESERVES
The Company records accruals for environmental obligations based on estimates developed in consultation with environmental consultants and legal counsel. Accruals for environmental liabilities are established in accordance with the American Institute of Certified Public Accountants Statement of Position 96-1, "Environmental Remediation Liabilities." The Company records a liability at the time it is probable and can be reasonably estimated. Such liabilities are not reduced for potential recoveries from insurance carriers. Costs of future expenditures are not discounted to their present value.
(L) STOCK-BASED COMPENSATION
As permitted by Statement of Financial Accounting Standards ("SFAS") No. 123 "Accounting for Stock-Based Compensation", the Company continues to apply intrinsic value accounting for its stock option plans under Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees". Compensation cost for stock options, if any, is measured as the excess of the market price of the Company's common stock at the date of grant over the exercise price to be paid by the grantee to acquire the stock. The Company has adopted disclosure-only provisions of SFAS No. 123 and SFAS No. 148, "Accounting for Stock-Based CompensationTransition and Disclosurean Amendment of FASB Statement No. 123". If the Company had elected to recognize compensation expense based upon the fair value at the grant dates for awards under these plans, the Company's Net Loss would have been as follows:
|
Year Ended
Dec. 31, 2003 |
Year Ended
Dec. 31, 2002 |
Year Ended
Dec. 31, 2001 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Net Loss, As Reported | $ | (82.9 | ) | $ | (11.2 | ) | $ | (65.6 | ) | ||
Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects | 0.9 | 0.4 | 1.5 | ||||||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | (0.3 | ) | (0.7 | ) | (1.9 | ) | |||||
|
|
|
|||||||||
Adjusted Net Loss | $ | (82.3 | ) | $ | (11.5 | ) | $ | (66.0 | ) | ||
|
|
|
|||||||||
Loss Per Basic ShareAs Reported |
|
$ |
(0.56 |
) |
$ |
(0.10 |
) |
$ |
(0.57 |
) |
|
Loss Per Basic ShareAs Adjusted | $ | (0.56 | ) | $ | (0.10 | ) | $ | (0.57 | ) | ||
Loss Per Diluted ShareAs Reported |
|
$ |
(0.56 |
) |
$ |
(0.10 |
) |
$ |
(0.57 |
) |
|
Loss Per Diluted ShareAs Adjusted | $ | (0.56 | ) | $ | (0.10 | ) | $ | (0.57 | ) |
The Company recognized compensation expense on stock options for which the exercise price was less than the fair value at the date of grant in the amount of $2.3 million, $1.9 million and $1.5 million for the years ended December 31, 2003, 2002 and 2001, respectively.
(M) RECLASSIFICATION
The Company has reclassified the presentation of certain prior period information to conform to the current presentation format.
59
(N) USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on historical experience and various other factors that are believed to be reasonable. Actual results could differ from these estimates under different assumptions or conditions.
NOTE 4RECEIVABLES
The components of receivables at December 31 were as follows:
|
2003
|
2002
|
||||
---|---|---|---|---|---|---|
|
(In millions of dollars)
|
|||||
Trade | $ | 193.2 | $ | 127.4 | ||
Less, allowance | 4.4 | 1.9 | ||||
|
|
|||||
188.8 | 125.5 | |||||
Other | 9.7 | 11.8 | ||||
|
|
|||||
$ | 198.5 | $ | 137.3 | |||
|
|
NOTE 5INVENTORIES
The major classes of inventories at December 31 were as follows:
|
2003
|
2002
|
||||
---|---|---|---|---|---|---|
|
(In millions of dollars)
|
|||||
Finished goods | $ | 172.8 | $ | 78.5 | ||
Work-in progress | 22.6 | 15.2 | ||||
Raw materials | 66.0 | 42.8 | ||||
Supplies | 45.5 | 37.9 | ||||
|
|
|||||
$ | 306.9 | $ | 174.4 | |||
|
|
Raw materials and consumables used in the production process such as wood chips and chemicals are valued at purchase cost on a first-in, first-out ("FIFO") basis upon receipt. Work in process and finished goods inventories are valued at the cost of raw material consumed plus direct manufacturing costs (such as labor, utilities and supplies) as incurred and a proportion of manufacturing overhead.
60
NOTE 6OTHER ASSETS
Other Assets included at December 31, consisted of the following:
|
2003
|
2002
|
||||
---|---|---|---|---|---|---|
|
(In millions of dollars)
|
|||||
Deferred debt issuance costs, net | $ | 54.1 | $ | 26.7 | ||
Pension intangible asset | 12.7 | 2.5 | ||||
Capitalized spare parts | 29.5 | 24.4 | ||||
Deferred design costs | 1.2 | 1.4 | ||||
Other | 6.5 | 8.2 | ||||
|
|
|||||
$ | 104.0 | $ | 63.2 | |||
|
|
NOTE 7SHORT-TERM DEBT
Short-Term Debt at December 31, consisted of the following:
|
2003
|
2002
|
||||
---|---|---|---|---|---|---|
|
(In millions of dollars)
|
|||||
Short-term borrowings | $ | 15.1 | $ | 20.3 | ||
Current portion of long-term debt | 23.3 | 78.4 | ||||
|
|
|||||
$ | 38.4 | $ | 98.7 | |||
|
|
Short-term borrowings are principally at the Company's international subsidiaries. The weighted average interest rate on Short-term borrowings as of December 31, 2003 and 2002 was 2.1% and 2.0%, respectively.
NOTE 8COMPENSATION AND EMPLOYEE BENEFITS
Accruals for future compensated employee absences, principally vacation, were $24.3 million and $12.9 million at December 31, 2003 and 2002, respectively, and were included in Compensation and Employee Benefits on the Consolidated Balance Sheets.
NOTE 9LONG-TERM DEBT
In connection with the Merger, substantially all of the Company's and Graphics's then outstanding indebtedness was redeemed, repurchased or otherwise repaid and replaced with borrowings under the Senior Secured Credit Agreement and indebtedness under the Senior Notes and the Senior Subordinated Notes. For a description of the Related Financing Transactions, see Note 2Merger.
The Senior Secured Credit Agreement, which governs the Term Loan Facility and the Revolving Credit Facility, imposes restrictions on the Company's ability to make capital expenditures and both the Senior Secured Credit Agreement and the indentures governing the notes limit the Company's ability to incur additional indebtedness. Such restrictions, together with the highly leveraged nature of the Company, could limit the Company's ability to respond to market conditions, meet its capital spending program, provide for unanticipated capital investments or take advantage of business opportunities. The covenants contained in the Senior Secured Credit Agreement, among other things, restrict the ability of the Company to dispose of assets, incur additional indebtedness, incur guarantee obligations, prepay
61
other indebtedness, make dividends and other restricted payments, create liens, make equity or debt investments, make acquisitions, modify terms of indentures under which the notes are issued, engage in mergers or consolidations, change the business conducted by the Company and its subsidiaries, make capital expenditures and engage in certain transactions with affiliates.
The financial covenants in the Senior Secured Credit Agreement specify, among other things, the following requirements for each four quarter period ended during the following test periods:
Test Period
|
Consolidated Debt to
Credit Agreement EBITDA Leverage Ratio(A) |
Credit Agreement
EBITDA to Consolidated Interest Expense Ratio(A) |
||
---|---|---|---|---|
October 1, 2003December 30, 2004 | 6.40 to 1.00 | 2.00 to 1.00 | ||
December 31, 2004December 30, 2005 | 6.15 to 1.00 | 2.25 to 1.00 | ||
December 31, 2005December 30, 2006 | 5.75 to 1.00 | 2.35 to 1.00 | ||
December 31, 2006December 30, 2007 | 5.25 to 1.00 | 2.50 to 1.00 | ||
December 31, 2007December 30, 2008 | 4.75 to 1.00 | 2.75 to 1.00 | ||
December 31, 2008June 30, 2010 | 4.50 to 1.00 | 2.90 to 1.00 |
Note:
At December 31, 2003, the Company was in compliance with the financial covenants in the Senior Secured Credit Agreement. The Company's ability to comply in future periods with the financial covenants in the Senior Secured Credit Agreement will depend on its ongoing financial and operating performance, which in turn will be subject to economic conditions and to financial, business and other factors, many of which are beyond the Company's control and will be substantially dependent on the selling prices for the Company's products, raw material and energy costs, and the Company's ability to successfully implement its overall business and profitability strategies. If a violation of any of the covenants occurred, the Company would attempt to get a waiver or an amendment from its lenders, although no assurance can be given that the Company would be successful in this regard. The Senior Secured Credit Agreement and the indentures governing the Senior Subordinated Notes and the Senior Notes have covenants as well as certain cross-default or cross-acceleration provisions; failure to comply with these covenants in any agreement could result in a violation of such agreement which could, in turn, lead to violations of other agreements pursuant to such cross-default or cross-acceleration provisions.
The Senior Secured Credit Agreement is collateralized by substantially all of the Company's domestic assets.
62
At December 31, 2003, the Company and its U.S. and international subsidiaries had the following amounts of commitments, amounts outstanding and amounts available under revolving credit facilities:
|
Total Amount of
Commitments |
Total Amount
Outstanding |
Total Amount
Available (A) |
||||||
---|---|---|---|---|---|---|---|---|---|
|
(In millions of dollars)
|
||||||||
Revolving Credit Facility | $ | 325.0 | $ | 20.0 | $ | 291.4 | |||
International Facilities | 24.6 | 12.1 | 12.5 | ||||||
|
|
|
|||||||
$ | 349.6 | $ | 32.1 | $ | 303.9 | ||||
|
|
|
Note:
63
Long-Term Debt at December 31 consisted of the following:
|
2003
|
2002
|
||||
---|---|---|---|---|---|---|
|
(In millions of dollars)
|
|||||
Senior Notes with interest payable semi-annually at 8.5%, payable in 2011 | $ | 425.0 | $ | | ||
Senior Subordinated Notes with interest payable semi-annually at 9.5%, payable in 2013 | 425.0 | | ||||
Senior Secured Term Loan Facility with interest payable at various dates less than one year at floating rates (3.92% to 3.93% at December 31, 2003), payable through 2010 | 1,265.6 | | ||||
Senior Secured Revolving Facility with interest payable at various dates less than one year at floating rates (4.16% at December 31, 2003) payable in 2009 | 20.0 | | ||||
Senior Notes with interest payable semi-annually at 10.625%, payable in 2007 | | 256.0 | ||||
Senior Subordinated Notes with interest payable semi-annually at 10.875%, payable in 2008 | | 400.0 | ||||
Senior Secured Term Loan Facility with interest payable at various dates less than one year at floating rates (3.90% to 4.26% at December 31, 2002), payable through 2007 | | 248.8 | ||||
Senior Secured Term Loan Facility with interest payable at various dates less than one year at floating rates (4.15% to 4.59% at December 31, 2002), payable through 2006 | | 335.0 | ||||
Senior Notes with interest payable semi-annually at 10.625%, payable in 2007 | | 250.0 | ||||
Senior Secured Revolving Facility with interest payable at various dates less than one year at floating rates (4.19% to 6.00% at December 31, 2002) payable in 2006 | | 14.9 | ||||
Other | 3.9 | 3.4 | ||||
|
|
|||||
2,139.5 | 1,508.1 | |||||
Less, current portion | 23.3 | 78.4 | ||||
|
|
|||||
$ | 2,116.2 | $ | 1,429.7 | |||
|
|
64
Long-term debt maturities and expirations of funded long-term working capital commitments at December 31, 2003, were as follows:
(In millions of dollars)
|
|
||
---|---|---|---|
2004 | $ | 23.3 | |
2005 | 30.2 | ||
2006 | 38.2 | ||
2007 | 45.3 | ||
2008 | 49.8 | ||
After 2008 | 1,952.7 | ||
|
|||
$ | 2,139.5 | ||
|
NOTE 10REDEEMABLE COMMON STOCK
During the nine months ended December 31, 1996, Riverwood Holding completed an offering of Riverwood Holding Common Stock to certain members of management and key employees of the Company. As of December 31, 1996, the Company had issued 111,900 shares of Riverwood Holding Class A Common Stock to Management Investors at fair value for gross cash proceeds of $11.2 million. During 2000, the Company issued 5,000 shares of additional Redeemable Common Stock to Management Investors at fair value for gross cash proceeds of $0.6 million. The common stock held by Management Investors is mandatorily redeemable at fair market value as determined by the Executive Committee of the Board of Directors and in certain circumstances the Management Investors can require the Company to repurchase the Riverwood Holding Class A Common Stock. These shares are classified as Redeemable Common Stock on the Consolidated Balance Sheet and are carried at their redemption value of $120 per share at December 31, 2002. During 2002, the Company repurchased 3,500 shares of Redeemable Common Stock at a weighted average price of $120.00 per share. During 2002, Riverwood Holding issued 250 shares of additional Redeemable Common Stock to Management Investors for gross cash proceeds of approximately $25,000.
In connection with the prior issuance of Redeemable Common Stock to Management Investors, the Company guaranteed loans, with full recourse, from a bank to certain Management Investors with remaining amounts totaling approximately $0.3 million and $0.4 million at December 31, 2003 and 2002, respectively. As guarantor of the loans, the Company fully and unconditionally guarantees to the Lender the prompt and complete payment of all principal and interest on the Loans and all other amounts owed under the letter agreements when due and payable (whether at the stated maturity, by acceleration or otherwise) in the amounts and with respect to each of the borrowers listed in the agreement. The Company has the right of subrogation should a borrower default.
At the consummation of the Merger, all redeemable common stock was eliminated (See Note 2Merger).
NOTE 11NONREDEEMABLE COMMON STOCK
On March 27, 1996, Riverwood Holding completed an offering of 7,000,000 shares of Class A Common Stock with a par value of $0.01 per share to certain institutional investors for $700 million.
65
Total Class A Common Stock authorized for issuance at December 31, 2002 was 9,000,000 shares, of which amount 7,057,930 shares were outstanding, including 57,930 shares issued to Management Investors as Redeemable Common Stock (see Note 10). Also on March 27, 1996, Riverwood Holding completed an offering of 500,000 shares of Class B Common Stock with a par value of $0.01 per share to an institutional investor for $50 million. Total Class B Common Stock, which is non-voting, authorized for issuance at December 31, 2002 was 3,000,000 shares, of which 500,000 shares were outstanding.
In connection with the Merger, the Company's Board of Directors approved a 15.21-to-one stock split. At the time, the Class A and Class B common stock were reclassified as one class of common stock, par value $0.01. Immediately after the stock split, there were 500.0 million shares of common stock authorized with 114.8 million shares outstanding (See Note 2Merger).
NOTE 12STOCK INCENTIVE PLANS
The Company has developed five Stock Incentive Plans ("SIP") designed to provide certain key executives and management options to purchase shares of Common Stock. These plans are the 1996 Stock Incentive Plan ("1996 SIP"), the 2002 Stock Incentive Plan ("2002 SIP"), the 1999 Long Term Incentive Plan ("LTIP"), the 2003 Stock Incentive Plan ("2003 SIP"), the 1999 Supplemental Long-Term Incentive Plan ("SLTP") and the Equity Incentive Plan ("EIP"). The following table summarizes information pertaining to options outstanding and exercisable at December 31, 2003:
Plan
|
Grant
Date |
Number Authorized/
Outstanding(10) |
Granted
Weighted Average Exercise Price |
Vesting
Reference |
Number
Exercisable(11) |
Exercisable
Weighted Average Exercise Price |
||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
2003 SIP | Aug-Nov 2003 | 2,098,178 | 6.16 | (1 | ) | | | |||||
2002 SIP | Jan-Sep 2002 | 6,623,408 | 7.88 | (2 | ) | 1,451,764 | 7.88 | |||||
1996 SIP | November 2000 | 24,336 | 7.56 | (3 | ) | 24,336 | 7.56 | |||||
SLTP | November 2000 | 25,356 | 7.56 | (4 | ) | 25,356 | 7.56 | |||||
SLTP | May-Dec 1999 | 946,964 | 6.57 | (5 | ) | 909,593 | 6.57 | |||||
EIP | Feb 1999-Dec 2002 | 3,277,851 | 7.24 | (6 | ) | 3,154,017 | 7.44 | |||||
1996 SIP | June-Dec 1999 | 288,382 | 6.57 | (7 | ) | 276,214 | 6.57 | |||||
1996 SIP | March 1997 | 3,245,025 | 4.93 | (8 | ) | 3,245,025 | 4.93 | |||||
1996 SIP | June 1996 | 580,415 | 6.57 | (9 | ) | 580,415 | 6.57 | |||||
|
|
|
|
|||||||||
Total | 17,109,915 | 6.85 | 9,666,720 | 6.51 | ||||||||
|
|
|
|
Notes:
66
not vest as described above, they will vest assuming the employee is still employed at the Company, nine years and six months following the date of grant.
67
A summary of option activity during the three years ended December 31, 2003 is as follows:
|
Shares
|
Exercise Price
|
|||||
---|---|---|---|---|---|---|---|
OutstandingDecember 31, 2000 | 8,596,844 | $ | 5.94 | ||||
Exercised | (107,519 | ) | (7.89 | ) | |||
Canceled | (193,639 | ) | (6.82 | ) | |||
|
|
||||||
OustandingDecember 31, 2001 | 8,295,686 | $ | 5.90 | ||||
Granted | 10,147,397 | 7.89 | |||||
Exercised | (3,803 | ) | (6.57 | ) | |||
Canceled | (1,572,638 | ) | (7.18 | ) | |||
|
|
||||||
OutstandingDecember 31, 2002 | 16,866,642 | $ | 6.98 | ||||
Granted | 2,098,178 | 6.16 | |||||
Exercised | (100,000 | ) | (1.56 | ) | |||
Canceled | (7,231,741 | ) | (5.54 | ) | |||
Assumed From Merger | 5,476,836 | 5.90 | |||||
|
|
||||||
OutstandingDecember 31, 2003 | 17,109,915 | $ | 7.17 | ||||
|
|
The weighted average contractual life of the outstanding options at December 31, 2003, is 7 years. The Company applies APB Opinion No. 25, " Accounting for Stock Issued to Employees ," and related interpretations in accounting for the stock options. Accordingly, the Company recognizes compensation expense for stock options when the exercise price is less than the related fair value at the date of grant or when the performance criteria is met. The weighted average fair value of the stock options was estimated to be $1.99 per option on the date of grant for stock options granted in 2003 and $1.87 per option on the date of grant for stock options granted in 2002. The Company used the Black-Scholes option-pricing model to value the Stock Options with the following assumptions: dividend yield of zero, expected volatility ranging from 0% to 74%, risk-free interest rates ranging from 4.23% to 6.75%, a zero forfeiture rate and an expected life of 3 to 10 years.
As of December 31, 2003, 15,210 incentive stock units, issued under the 1999 SLTP, were outstanding. These units vest when there is a change in control of the Company based on the change in control stock price. In the event there is not a change in control, the units vest nine years and six months from the date of grant of June 30, 1999.
On January 1, 2002, 246,402 restricted stock units ("RSUs") were issued to key employees of the company under the 2002 Stock Incentive Plan. 193,167 of these RSUs were canceled in 2003. The RSUs vest on the second anniversary date of grant provided that the recipients are still employed by the company. During 2003, 2,595,077 RSUs were issued to key employees under the 2003 Stock Incentive Plan. The RSUs vest on the third anniversary date of grant provided that the recipients are still employed by the company. During 2003, 13,798 RSUs were issued to members of the Board. The RSUs vest on the second anniversary date of grant. The aggregate market value of the restricted stock at the date of issuance was approximately $14.0 million and is being recorded as deferred compensation over the appropriate vesting period. Total RSUs outstanding at December 31, 2003 were 3,344,080 of which none were vested.
68
NOTE 13OTHER NONCURRENT LIABILITIES
Other Noncurrent Liabilities included at December 31, consisted of the following:
|
2003
|
2002
|
||||
---|---|---|---|---|---|---|
|
(In millions of dollars)
|
|||||
Accrued Retirement and Post Employment Benefits | $ | 167.7 | $ | 85.0 | ||
Deferred Revenues | 9.8 | 7.3 | ||||
Other | 19.1 | 10.3 | ||||
|
|
|||||
$ | 196.6 | $ | 102.6 | |||
|
|
NOTE 14CONTINGENCIES AND COMMITMENTS
At December 31, 2003, total commitments of the Company under long-term, non-cancelable contracts were as follows:
|
Payment Due by Period
|
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Less than
1 year |
1-3 years
|
4-5 years
|
After 5 years
|
Total
|
||||||||||
|
(In millions of dollars)
|
||||||||||||||
Long-Term Debt | $ | 23.3 | $ | 68.4 | $ | 95.1 | $ | 1,952.7 | $ | 2,139.5 | |||||
Operating Leases | 7.6 | 7.0 | 3.4 | 1.5 | 19.5 | ||||||||||
Unconditional Purchase Obligations(A) | 27.3 | 22.7 | 19.5 | 72.3 | 141.8 | ||||||||||
|
|
|
|
|
|||||||||||
Total Contractual Obligations | $ | 58.2 | $ | 98.1 | $ | 118.0 | $ | 2,026.5 | $ | 2,300.8 | |||||
|
|
|
|
|
Note:
Total rental expense was approximately $11.8 million, $8.0 million, and $10.4 million for the years ended December 31, 2003, 2002 and 2001, respectively.
The Company is subject to a broad range of foreign, federal, state and local environmental, health and safety laws and regulations, including those governing discharges to air, soil and water, the management, treatment and disposal of hazardous substances, the investigation and remediation of contamination resulting from releases of hazardous substances, and the health and safety of employees. The Company's environmental liabilities and obligations may result in significant costs, which could negatively impact its financial condition and results of operations. Capital expenditures may be necessary for the combined company to comply with such laws and regulations, including the U.S. Environmental Protection Agency's regulations mandating stringent controls on air and water discharges from pulp and paper mills, or the cluster rules. Any failure to comply with environmental, health and safety laws or any permits and authorizations required thereunder could subject the Company to fines or sanctions. In addition, some of the Company's current and former facilities, and facilities at which it disposed of hazardous substances, are the subject of environmental investigations and remediations resulting from releases of hazardous substances or other constituents. Some current and former facilities have a history of industrial usage for which investigation and remediation obligations could be imposed in the future or for which indemnification claims could be asserted
69
against the Company. The Company cannot predict with certainty future investigation or remediation costs or future costs relating to indemnification claims. Also, potential future closures of facilities may necessitate further investigation and remediation at those facilities.
The federal Clean Air Act imposes stringent limits on air emissions, establishes a federal permit program (Title V) and provides for enforcement sanctions. Where necessary, the Company's plants have received or submitted an application to the appropriate permitting authority for a Title V permit. The Company upgrades and replaces equipment in order to comply with air quality standards.
The federal Clean Water Act establishes a system of minimum national effluent standards for each industry, water quality standards for the nation's waterways and a permit program that provides discharge limitations and provides for enforcement sanctions. It also regulates releases and spills of oil and hazardous materials and wastewater and stormwater discharges. Many of the Company's operations discharge to publicly owned treatment works and are subject to pretreatment requirements and limitations.
The federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") establishes liability for waste generators, current and former site owners and operators and others in connection with releases of hazardous substances. In several instances, the Company has been identified as a Potentially Responsible Party ("PRP") under CERCLA and similar state laws with respect to remediation of sites at which hazardous substances have been released. These actions are not material. The Company is involved in investigation and remediation projects for certain properties that it currently or formerly owned or operated. The Company has also received demands arising out of alleged contamination of various properties currently or formerly operated by it, and at certain waste disposal sites. The Company's costs in many instances cannot be reliably estimated until the remediation process is substantially underway or liability has been addressed.
The Company could incur significant costs in connection with investigation and remediation activities and other environmental matters. Some current and former facilities have a history of industrial usage for which investigation and remediation obligations could be imposed in the future or for which indemnification claims could be asserted against the Company.
The presence of soil and groundwater contamination has been investigated at portions of the Company's Portland, Oregon plant. The site is listed on Oregon's inventory of contaminated sites. The Company periodically monitors groundwater conditions at the site. While the Company does not currently have any remediation obligations at the site, such obligations could arise in the future.
The Kalamazoo, Michigan mill and carton plant have long histories of industrial usage. Portions of the property on which the mill is located have been found to contain some contamination. Remediation obligations could arise in the future at these facilities.
The Company is a party to a number of lawsuits arising out of the ordinary conduct of its business, the most significant of which are listed below. Although the timing and outcome of these lawsuits cannot be predicted, the Company does not believe that disposition of these lawsuits will have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows.
On April 2, 2003, two separate lawsuits were filed in the District Court, Jefferson County, Colorado, against Graphic, Graphic's directors and the Company relating to the Merger between
70
Graphic and the Company pursuant to the merger agreement. The complaints were filed by Robert F. Smith and Harold Lightweis, on behalf of themselves and all others similarly situated. Each of the two complaints alleges breach of fiduciary duties by Graphic's directors to Graphic's public shareholders in connection with the Merger and that the Company aided and abetted the alleged breach.The complaints also allege that the Coors family stockholders negotiated the merger consideration in their own interest and not in the interest of the public stockholders. The complaints seek an injunction against consummation of the Merger, rescission of the Merger if it is consummated, unspecified damages, costs and other relief permitted by law and equity. These two lawsuits have been consolidated. Messrs. Smith and Lightweis filed a motion asking to dismiss their claims as moot and for an award of attorney's fees of $300,000 plus expenses. The Company has objected to the request for fees and expenses. On July 3, 2003, a third lawsuit was filed in District Court of Jefferson County in Colorado, on behalf of a purported class of Graphic's stockholders against Graphic, Graphic's directors and the Company, alleging that Graphic's directors breached their fiduciary duties to the stockholders of Graphic in connection with the negotiation of the Merger and that Graphic and the Company aided and abetted the alleged breach. The complaint alleges that the defendants negotiated the terms of the Merger in their own interest and in the interest of certain other insiders (including the Coors family stockholders), to the detriment of the public stockholders. The complaint, which is encaptioned James A. Bederka, On behalf of Himself and All Other Similarly Situated v. Riverwood Holding, et al., seeks certain equitable relief, including an injunction against the consummation of the Merger, rescission of the Merger if it is consummated, rescission of the sale of August 15, 2000 of the convertible preferred stock which had been issued on August 15, 2000 to the Grover C. Coors Trust (the "Trust"), and injunction against the conversion of the convertible preferred stock in connection with the Merger and costs. Graphic filed motions asking to dismiss the lawsuit or to bifurcate the claim to enjoin the Merger from the claim to rescind issuance or enjoin the conversion of the preferred stock and to either stay the claim relating to the preferred stock or consolidate that claim with the lawsuit filed by Chinyun Kim disclosed below. By order dated October 7, 2003, the court dismissed Graphic from the Bederka lawsuit, leaving Graphic's directors and the Company as defendants. The court also refused to consolidate the Bederka lawsuit with the Chinyun Kim lawsuit (discussed below), but stayed all discovery in the Bederka lawsuit relating to the sale of the preferred stock. The court has allowed the parties to proceed, however, with disclosures and discovery relating to the Merger. The Company believes that these three lawsuits are without merit.
On February 19, 2002, Chinyun Kim filed a putative class action claim in District Court Jefferson County, Colorado against Graphic and certain of its shareholders and directors alleging breach of fiduciary duty in connection with the issuance on August 15, 2000 of the convertible preferred stock to the Trust. Plaintiff sought damages in the amount of over $43 million or, alternatively, to require transfer to the class of some or all of the Trust's Graphic common stock into which the convertible preferred stock was converted. The court dismissed plaintiff's claims against Graphic for breach of fiduciary duty while allowing the plaintiff to proceed against the named directors and shareholders, including certain other Coors family trusts. The Company provided a defense to this action pursuant to its indemnification obligations. The case was tried in January 2004 and the court ruled in favor of the defendants on all counts.
On April 14, 2000, Lemelson Medical, Education & Research Foundation sued Graphic and 75 other defendants in the United States District Court for the District of Arizona for unspecified damages for alleged infringement of certain patents relating to "machine vision" and "automatic
71
identification." This is one of a series of cases brought against 430 defendants and has been stayed pending a final determination of a lawsuit for noninfringement brought by equipment manufacturers which utilize the technology. The Company believes, based upon the advice of counsel, that the Lemelson patents are invalid and therefore the litigation against the Company will not have a material adverse effect on its financial position, results of operations or cash flows.
NOTE 15PENSIONS
U.S. PENSION PLANS
The Company maintains defined benefit pension plans for its U.S. employees. Benefits are based on years of service and average base compensation levels over a period of years. The Company's funding policies with respect to its U.S. pension plans are to contribute funds to trusts as necessary to at least meet the minimum funding requirements of the U.S. Internal Revenue Code. Plan assets are invested primarily in equities and fixed income securities.
(A) PENSION EXPENSE
The pension expense related to the U.S. plans consisted of the following:
|
Year Ended
December 31, 2003 |
Year Ended
December 31, 2002 |
Year Ended
December 31, 2001 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(In millions of dollars)
|
|||||||||||
Components of net periodic pension cost: | ||||||||||||
Service cost | $ | 9.3 | $ | 5.2 | $ | 5.1 | ||||||
Interest cost | 21.4 | 16.5 | 16.1 | |||||||||
Expected return on plan assets | (31.2 | ) | (18.8 | ) | (21.0 | ) | ||||||
Amortizations: | ||||||||||||
Prior service cost | 1.6 | 1.0 | 1.0 | |||||||||
Actuarial gain | 14.6 | | | |||||||||
|
|
|
||||||||||
Net periodic pension cost | $ | 15.7 | $ | 3.9 | $ | 1.2 | ||||||
|
|
|
Certain assumptions used in determining the pension expense were as follows:
|
Year Ended
December 31, 2003 |
Year Ended
December 31, 2002 |
Year Ended
December 31, 2001 |
|||||
---|---|---|---|---|---|---|---|---|
Weighted Average Assumptions: | ||||||||
Discount rate | 6.50 | % | 7.50 | % | 7.50 | % | ||
Rate of increase in future compensation levels | 4.42 | % | 4.50 | % | 4.50 | % | ||
Expected long-term rate of return on plan assets | 8.41 | % | 8.50 | % | 8.50 | % |
72
(B) FUNDED STATUS
The following table sets forth the funded status of the U.S. pension plans as of December 31:
|
2003
|
2002
|
||||||
---|---|---|---|---|---|---|---|---|
|
(In millions of dollars)
|
|||||||
Change in benefit obligation: | ||||||||
Benefit obligation at beginning of year | $ | 262.0 | $ | 228.2 | ||||
Increase due to Merger(a) | 167.4 | | ||||||
Service cost | 9.3 | 5.2 | ||||||
Interest cost | 21.4 | 16.5 | ||||||
Actuarial loss | 7.9 | 25.9 | ||||||
Assumption change | 5.9 | | ||||||
Amendments | 11.8 | | ||||||
Benefits paid | (16.2 | ) | (13.8 | ) | ||||
|
|
|||||||
Benefit obligation at end of year | $ | 469.5 | $ | 262.0 | ||||
|
|
|||||||
Change in plan assets: | ||||||||
Fair value of plan assets at beginning of year | $ | 202.8 | $ | 227.6 | ||||
Increase due to Merger(a) | 117.1 | | ||||||
Actual return on plan assets | 54.6 | (11.0 | ) | |||||
Employer contributions | 2.6 | | ||||||
Benefits paid | (16.2 | ) | (13.8 | ) | ||||
|
|
|||||||
Fair value of plan assets at end of year | $ | 360.9 | $ | 202.8 | ||||
|
|
|||||||
Plan assets less than projected benefit obligation | $ | (108.6 | ) | $ | (59.2 | ) | ||
Unrecognized net actuarial loss | 40.6 | 64.9 | ||||||
Unrecognized prior service cost | 11.4 | 1.2 | ||||||
|
|
|||||||
Net amount recognized | $ | (56.6 | ) | $ | 6.9 | |||
|
|
|||||||
Amounts recognized in the Consolidated Balance Sheets consist of: | ||||||||
Pension intangible asset | $ | 12.7 | $ | 2.5 | ||||
Accrued pension liability | (105.3 | ) | (50.6 | ) | ||||
Accumulated Other Comprehensive Income(b) | 36.0 | 55.0 | ||||||
|
|
|||||||
Net amount recognized | $ | (56.6 | ) | $ | 6.9 | |||
|
|
|||||||
Weighted Average Assumptions: | ||||||||
Discount rate | 6.25 | % | 6.50 | % | ||||
Rates of increase in future compensation levels | 4.22 | % | 4.50 | % |
Note:
73
The accumulated benefit obligation for all defined benefit plans was $449.0 million and $251.9 million at December 31, 2003 and 2002, respectively.
For plans with accumulated benefit obligations in excess of plan assets, at December 31, the projected benefit obligation, accumulated benefit obligation and fair value of the plan assets were:
|
2003
|
2002
|
||||
---|---|---|---|---|---|---|
|
(in millions of dollars)
|
|||||
Projected benefit obligation | $ | 463.3 | $ | 260.7 | ||
Accumulated benefit obligation | 447.4 | 250.6 | ||||
Fair value of plan assets | 360.9 | 202.8 |
The Company's approach to developing its expected return on pension plan assets combines an analysis of historical performance, investment performance by asset class, the Company's investment guidelines and current economic fundamentals. Our pension plan investment guidelines are established based upon an evaluation of market conditions and tolerance for risk.
The Company's retirement plan asset allocation at December 31, 2003 and 2002, target allocation for 2004 and expected long-term rate of return by asset category are as follows:
|
Target
Allocation |
Percentage of
Plan Assets at December 31, |
|||||
---|---|---|---|---|---|---|---|
|
2004
|
2003
|
2002
|
||||
Asset Category: | |||||||
Equity Securities | 60.0 | % | 64.9 | % | 54.8 | % | |
Debt Securities | 40.0 | % | 35.1 | % | 45.2 | % | |
Other | 0.0 | % | 0.0 | % | 0.0 | % | |
|
|
|
|||||
Total | 100.0 | % | 100.0 | % | 100.0 | % | |
|
|
|
Active management of assets is used in asset classes and strategies where there is a potential to add value over a benchmark. Investment risk is measured and monitored on an on-going basis through annual long-term risk return expectations. Investment risk is measured and monitored on an on-going basis through annual liability measurements, periodic asset/liability studies, and quarterly investment portfolio reviews.
At December 31, 2003 and 2002, equity securities did not include any Company stock.
Due to certain minimum regulatory requirements, the Company may be required to make contributions to its Plans. The contributions are contingent upon final pension funding proposals separately approved by both houses of the U.S. Congress. If these legislative actions are passed in their current form, the Company estimates that the contributions required may be approximately $2.5 million; however, if these legislative actions are not passed, the Company estimates that the contributions required may be approximately $10 million.
74
INTERNATIONAL PENSION PLANS
(A) PENSION EXPENSE
The international defined benefit pension plans are both noncontributory and contributory and are funded in accordance with applicable local laws. Assets of the funded plans are invested primarily in equities and fixed income securities. The pension or termination benefits are based primarily on years of service and the employees' compensation.
The pension expense related to the international plans consisted of the following:
|
Year Ended
December 31, 2003 |
Year Ended
December 31, 2002 |
Year Ended
December 31, 2001 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(In millions of dollars)
|
|||||||||||
Components of net periodic pension cost: | ||||||||||||
Service cost | $ | 0.1 | $ | 0.1 | $ | 0.4 | ||||||
Interest cost | 5.3 | 4.9 | 5.2 | |||||||||
Expected return on plan assets | (4.7 | ) | (4.8 | ) | (5.5 | ) | ||||||
Amortizations: | ||||||||||||
Actuarial loss | 0.5 | | 2.1 | |||||||||
|
|
|
||||||||||
Net periodic pension cost | $ | 1.2 | $ | 0.2 | $ | 2.2 | ||||||
|
|
|
||||||||||
Assumptions: | ||||||||||||
Discount rate | 5.50 | % | 5.50 | % | 5.75 | % | ||||||
Rates of increase in future compensation levels | 0.00 | % | 6.00 | % | 4.00 | % | ||||||
Expected long-term rate of return on plan assets | 6.00 | % | 5.75 | % | 6.00 | % |
Approximately 315 employees participate in a multi-employer pension plan that provides defined benefits to employees under certain union-employer organization agreements. Pension expense for this plan was $5.0 million, $3.9 million and $3.5 million for the years ended December 31, 2003, 2002 and 2001, respectively.
Effective March 31, 2001, the Company's Defined Benefit Pension Plan in the U.K. (the "U.K. Plan") was curtailed. No curtailment gain was recorded as the unrecognized net loss of the U.K. Plan at March 31, 2001 exceeded any gain calculated as a result of the curtailment. Effective March 31, 2001, the Company began a defined contribution savings plan in the U.K. to replace the curtailed U.K. Plan.
75
(B) FUNDED STATUS
The following table sets forth the funded status of the international pension plans as of December 31:
|
2003
|
2002
|
||||||
---|---|---|---|---|---|---|---|---|
|
(In millions of dollars)
|
|||||||
Change in benefit obligation: | ||||||||
Benefit obligation at beginning of year | $ | 97.0 | $ | 85.4 | ||||
Service cost | 0.1 | 0.1 | ||||||
Interest cost | 5.3 | 4.9 | ||||||
Actuarial loss | 6.7 | 1.4 | ||||||
Foreign Exchange Translation | 11.1 | 9.3 | ||||||
Benefits paid | (4.3 | ) | (4.1 | ) | ||||
|
|
|||||||
Benefit obligation at end of year | $ | 115.9 | $ | 97.0 | ||||
|
|
|||||||
Change in plan assets: | ||||||||
Fair value of plan assets at beginning of year | $ | 82.1 | $ | 78.7 | ||||
Actual return on plan assets | 6.3 | (0.6 | ) | |||||
Foreign Exchange Translation | 8.9 | 8.1 | ||||||
Benefits paid | (4.3 | ) | (4.1 | ) | ||||
|
|
|||||||
Fair value of plan assets at end of year | $ | 93.0 | $ | 82.1 | ||||
|
|
|||||||
Plan assets less than projected benefit obligation | $ | (22.9 | ) | $ | (14.9 | ) | ||
Unrecognized net actuarial loss | 23.1 | 16.3 | ||||||
|
|
|||||||
Net amount recognized | $ | 0.2 | $ | 1.4 | ||||
|
|
|||||||
Amounts recognized in the Consolidated Balance Sheets consist of: | ||||||||
Accrued pension liability | $ | (24.0 | ) | $ | (14.9 | ) | ||
Accumulated Other Comprehensive Income(a) | 24.2 | 16.3 | ||||||
|
|
|||||||
Net amount recognized | $ | 0.2 | $ | 1.4 | ||||
|
|
|||||||
Weighted Average Assumptions: | ||||||||
Discount rate | 5.50 | % | 5.50 | % | ||||
Rates of increase in future compensation levels | 0.00 | % | 0.00 | % |
Note:
As of December 31, 2003 and 2002, accrued retirement contributions for the international pension plans included in Compensation and Employee Benefits on the Consolidated Balance Sheets were $1.6 million and $1.3 million, respectively.
76
DEFINED CONTRIBUTION PLANS
The Company provides defined contribution plans for eligible U.S. employees. The Company's contributions to the plans are based upon employee contributions and the Company's annual operating results. Contributions to these plans for the years ended December 31, 2003, 2002 and 2001 were $4.3 million, $2.9 million and $2.5 million, respectively.
Accrued plan contributions included in Compensation and Employee Benefits on the Consolidated Balance Sheets were $0.9 million and $0.8 million at December 31, 2003 and 2002, respectively.
NOTE 16OTHER POSTRETIREMENT BENEFITS
The Company sponsors postretirement health care plans that provide medical and life insurance coverage to eligible salaried and hourly retired U.S. employees and their dependents. No postretirement medical benefits are offered to salaried employees who began employment after December 31, 1993.
The other postretirement benefits expense consisted of the following:
|
Year Ended
December 31, 2003 |
Year Ended
December 31, 2002 |
Year Ended
December 31, 2001 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
(In millions of dollars)
|
||||||||||
Service cost | $ | 0.7 | $ | 0.4 | $ | 0.3 | |||||
Interest cost | 2.5 | 1.9 | 1.7 | ||||||||
Amortizations: | |||||||||||
Prior service cost | (0.2 | ) | (0.2 | ) | (0.2 | ) | |||||
Actuarial loss | 0.7 | 0.3 | 0.1 | ||||||||
|
|
|
|||||||||
Net periodic postretirement benefits cost | $ | 3.7 | $ | 2.4 | $ | 1.9 | |||||
|
|
|
|||||||||
Weighted Average Assumptions: | |||||||||||
Discount rate | 6.5 | % | 7.5 | % | 7.5 | % | |||||
Initial health care cost trend rate | 9.1 | % | 7.0 | % | 7.5 | % | |||||
Ultimate health care cost trend rate(a) | 5.0 | % | 5.0 | % | 5.0 | % | |||||
Ultimate year(a) | 2007 | 2006 | 2006 |
Note:
77
The accrued postretirement benefit obligation at December 31 was as follows:
|
2003
|
2002
|
||||||
---|---|---|---|---|---|---|---|---|
|
(In millions of dollars)
|
|||||||
Change in benefit obligation: | ||||||||
Benefit obligation at beginning of year | $ | 28.6 | $ | 22.9 | ||||
Increase due to Merger(a) | 21.4 | | ||||||
Service cost | 0.7 | 0.4 | ||||||
Interest cost | 2.5 | 1.9 | ||||||
Actuarial loss | 3.7 | 3.8 | ||||||
Assumptions | 1.1 | 2.5 | ||||||
Amendments | 0.1 | | ||||||
Benefits paid | (3.1 | ) | (2.9 | ) | ||||
|
|
|||||||
Benefit obligation at end of year | $ | 55.0 | $ | 28.6 | ||||
|
|
|||||||
Fair value of plan assets at end of year | | | ||||||
|
|
|||||||
Accumulated postretirement benefit obligation in excess of plan assets | $ | (55.0 | ) | $ | (28.6 | ) | ||
Unrecognized net actuarial loss | 12.3 | 8.6 | ||||||
Unrecognized prior service credit | (1.2 | ) | (1.5 | ) | ||||
|
|
|||||||
Total accrued postretirement benefit obligation | $ | (43.9 | ) | $ | (21.5 | ) | ||
|
|
|||||||
Weighted Average Assumptions: | ||||||||
Discount rate | 6.00 | % | 6.50 | % | ||||
Initial health care cost trend rate | 9.25 | % | 9.00 | % | ||||
Ultimate health care cost trend rate(b) | 5.00 | % | 5.00 | % | ||||
Ultimate year(b) | 2012 | 2007 | ||||||
|
|
1 Percentage Point Increase |
|
1 Percentage Point Decrease |
|
|||
Health care trend rate sensitivity: | ||||||||
Effect on total of interest and service cost components | $ | 0.3 | $ | (0.2 | ) | |||
Effect on year-end postretirement benefit obligation | $ | 2.9 | $ | (2.6 | ) |
Note:
The Company estimates its postretirement benefit payments to be approximately $4.0 million in 2004.
In December 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("the Act"). The Act expands Medicare primarily by adding a prescription drug benefit for Medicare-eligible individuals beginning in 2006. Pursuant to guidance provided in FASB Staff Position SFAS No. 106-1 (" Accounting for Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 "), the Company has chosen to defer recognition of the Act, and, accordingly, postretirement benefit obligations and net periodic postretirement benefit cost do not reflect any potential impact of the legislation. The authoritative guidance on the accounting for the federal subsidy is pending and that guidance, when issued, could require the Company to change previously reported information.
78
NOTE 17FOREIGN CURRENCY MOVEMENT EFFECT
Net international currency transaction (losses) gains included in determining Income from Operations for the years ended December 31, 2003, 2002 and 2001 were $(1.3) million, $1.8 million and $(1.4) million, respectively.
NOTE 18INCOME TAXES
The U.S. and international components of Loss before Income Taxes and Equity in Net Earnings of Affiliates consisted of the following:
|
Year Ended
Dec. 31, 2003 |
Year Ended
Dec. 31, 2002 |
Year Ended
Dec. 31, 2001 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(In millions of dollars)
|
|||||||||
U.S. | $ | (93.2 | ) | $ | (33.4 | ) | $ | (73.9 | ) | |
International | 10.5 | 16.5 | 14.5 | |||||||
|
|
|
||||||||
Loss before Income Taxes and Equity in Net Earnings of Affiliates | $ | (82.7 | ) | $ | (16.9 | ) | $ | (59.4 | ) | |
|
|
|
The provisions for Income Tax (Expense) Benefit on Loss before Income Taxes and Equity in Net Earnings of Affiliates consisted of the following:
|
Year Ended
Dec. 31, 2003 |
Year Ended
Dec. 31, 2002 |
Year Ended
Dec. 31, 2001 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
(In millions of dollars)
|
||||||||||
Current: | |||||||||||
U.S. Federal | $ | | $ | 0.7 | $ | | |||||
U.S. State and Local | | 0.8 | (1.6 | ) | |||||||
International | (1.5 | ) | 3.2 | (5.0 | ) | ||||||
|
|
|
|||||||||
Total Current | $ | (1.5 | ) | $ | 4.7 | $ | (6.6 | ) | |||
|
|
|
|||||||||
Income Tax (Expense) Benefit | $ | (1.5 | ) | $ | 4.7 | $ | (6.6 | ) | |||
|
|
|
A reconciliation of Income Tax (Expense) Benefit on Loss before Cumulative Effect of a Change in Accounting Principle including Equity in Net Earnings of Affiliates at the federal statutory rate of 35% compared with the Company's actual Income Tax (Expense) Benefit is as follows:
|
Year Ended
Dec. 31, 2003 |
Year Ended
Dec. 31, 2002 |
Year Ended
Dec. 31, 2001 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(In millions of dollars)
|
|||||||||
Benefit Income tax at U.S. statutory rate | $ | 28.9 | $ | 1.9 | $ | 17.7 | ||||
U.S. federal taxes benefitAMT | | 0.7 | | |||||||
U.S. state and local tax (expense) benefit | 3.3 | 0.8 | (1.6 | ) | ||||||
Limitation on use of net operating losses | (38.4 | ) | (9.6 | ) | (23.2 | ) | ||||
International tax rate differences | 0.4 | 2.0 | 1.1 | |||||||
Valuation Allowance Adjustment | 3.9 | 9.3 | | |||||||
Foreign witholding tax | (0.4 | ) | (0.4 | ) | (0.6 | ) | ||||
Other | 0.8 | | | |||||||
|
|
|
||||||||
Income Tax (Expense) Benefit | $ | (1.5 | ) | $ | 4.7 | $ | (6.6 | ) | ||
|
|
|
79
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, were as follows:
|
2003
|
2002
|
||||||
---|---|---|---|---|---|---|---|---|
|
(In millions of dollars)
|
|||||||
Property, plant and equipment | $ | (419.0 | ) | $ | (308.9 | ) | ||
Other | | | ||||||
|
|
|||||||
Deferred tax liabilities | $ | (419.0 | ) | $ | (308.9 | ) | ||
|
|
|||||||
Net operating loss carryforwards | $ | 576.6 | $ | 522.6 | ||||
Other(A) | 180.3 | 4.2 | ||||||
|
|
|||||||
Deferred tax assets | 756.9 | 526.8 | ||||||
|
|
|||||||
Valuation allowance | (339.0 | ) | (220.1 | ) | ||||
|
|
|||||||
Net deferred tax liability | $ | (1.1 | ) | $ | (2.2 | ) | ||
|
|
Note:
The Company's deferred tax assets and deferred tax liabilities recorded in the Company's Consolidated Balance Sheet as of December 31, consisted of the following:
|
2003
|
2002
|
|||||
---|---|---|---|---|---|---|---|
|
(In millions of dollars)
|
||||||
Jurisdictions with ST deferred tax assets | $ | | $ | 0.2 | |||
Jurisdictions with LT deferred tax assets | 12.3 | 11.1 | |||||
Jurisdictions with deferred tax liabilities | (13.4 | ) | (13.5 | ) | |||
|
|
||||||
$ | (1.1 | ) | $ | (2.2 | ) | ||
|
|
The Company has reviewed the net deferred tax assets as of both December 31, 2003 and 2002, respectively, and determined that it is more likely than not that some or all of the net deferred tax assets will not be realized. The need for a valuation allowance is made on a country-by-country basis and the amount of the valuation allowance has increased as of December 31, 2003, over 2002 primarily due to operating activities in various countries in 2003. As of December 31, 2003 the Company has concluded that due to years of sustained profitability and forecasted future profitability, realization is more likely than not on the deferred tax assets related to certain of the Company's international operations and as a result, the valuation allowance of $3.9 million for these international operations was released in 2003. The net result of the release of the valuation allowances against the increase in the valuation allowance resulting from 2003 operations and the addition of deferred tax assets and liabilities from Graphic is a net increase in the valuation allowance of approximately $118.9 million. The valuation allowance of $339.0 million and $220.1 million at December 31, 2003 and 2002, respectively, is maintained on the remaining net deferred tax assets for which the Company has not determined that realization is more likely than not.
The U.S. federal net operating loss carryforward amount totals $1,360.5 million, and expires in 2011, 2012, 2018, 2019, 2021, 2022 and 2023 in the amounts of $91.1 million, $421.5 million,
80
$295.0 million, $196.8 million, $144.2 million, $72.1 million and $139.8 million, respectively. International net operating loss carryforward amounts total $58.9 million of which $1.9 million expire through 2010 and $57.0 million have no expiration date.
Undistributed earnings intended to be reinvested indefinitely by the international subsidiaries totaled approximately $101.4 million at December 31, 2003. No U.S. deferred income tax has been recorded on these undistributed earnings. Deferred taxes have been provided for the Company's foreign corporate joint venture.
NOTE 19LOSS ON EARLY EXTINGUISHMENT OF DEBT
In connection with the Merger, the Company entered into the Related Financing Transactions. In 2003, the Company recorded a non-cash charge to earnings of approximately $16.7 million, related to the write-off of remaining debt issuance costs on its prior senior secured credit facilities and the Prior RIC Notes and also recorded a charge of approximately $28.6 million, related to the call premium paid upon redemption of the Prior RIC Notes.
On April 23, 2002, the Company borrowed $250 million pursuant to an amendment to its prior senior secured credit agreement. The proceeds were applied to redeem in full $250 million aggregate principal amount of 10 1 / 4 % senior notes due 2006 ("the 1996 Senior Notes"). In addition, the Company borrowed $12 million under its prior revolving credit facility to pay fees, costs and expenses related to the refinancing transaction. In the second quarter of 2002, the Company recorded a non-cash charge to earnings of approximately $3.0 million related to the write-off of the remaining deferred debt issuance costs on the 1996 Senior Notes and a charge of approximately $8.6 million, related to the call premium paid upon redemption of the 1996 Senior Notes.
On August 10, 2001, the Company entered into its prior senior secured credit agreement. The proceeds of the initial borrowings under the facilities of approximately $386 million, including $51 million in revolving credit borrowings, were applied to repay in full the outstanding borrowings under a prior term loan facility and a prior revolving facility and to pay approximately $12 million of the $14 million of fees and expenses incurred in connection with the amendment and restatement of a prior credit agreement. During the third quarter of 2001, the Company recorded a non-cash charge to earnings of approximately $6.0 million related to the write-off of the applicable remaining deferred debt issuance costs on a prior term loan facility and a prior revolving facility.
On June 21, 2001, the Company completed an offering of $250 million principal amount of 10 5 / 8 % senior notes due 2007. The net proceeds of this offering were applied to prepay a portion of a term loan facility resulting in a non-cash charge to earnings of approximately $2.8 million related to the write-off of the applicable portion of deferred debt issuance costs on the prior term loans.
NOTE 20FINANCIAL INSTRUMENTS, DERIVATIVES AND HEDGING ACTIVITIES
The Company is exposed to fluctuations in interest rates on its variable debt, fluctuations in foreign currency transaction cash flows and variability in cash flows attributable to certain commodity purchases. The Company actively monitors these fluctuations and periodically uses derivatives and other financial instruments to hedge exposures to interest, commodity and currency risks. The Company's use of derivative instruments may result in short-term gains or losses and may increase volatility in its earnings. In addition, these instruments involve, to varying degrees, elements of market
81
and credit risk in excess of the amounts recognized in the Consolidated Balance Sheets. The Company does not trade or use derivative instruments with the objective of earning financial gains on interest or currency rates, nor does it use leveraged instruments or instruments where there are no underlying exposures identified.
On January 1, 2001, the Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137, Accounting for Derivative Instruments and Hedging ActivitiesDeferral of the Effective Date of FASB Statement No. 133, and SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities ("SFAS No. 133"), which requires all derivative instruments to be measured at fair value and recognized on the balance sheet as either assets or liabilities. In addition, all derivative instruments used in hedging relationships must be designated, reassessed and documented pursuant to the provisions of SFAS No. 133. Upon adoption of SFAS No. 133, the Company recognized a one-time after-tax transition adjustment to decrease earnings by approximately $0.5 million and decrease other comprehensive income by approximately $1.1 million. These amounts have been presented as a cumulative effect of a change in accounting principle in the accompanying Consolidated Statement of Operations for the year ended December 31, 2001.
Interest Rate Risk
The Company uses interest rate swaps to manage interest rate risks on future income caused by interest rate changes on its variable rate Term Loan facility. The differential to be paid or received under these agreements is recognized as an adjustment to interest expense related to the debt. At December 31, 2003 the Company had interest rate swap agreements with a notional amount of $910 million, which expire on various dates through the years 2004 to 2007 under which the Company will pay fixes rates of 1.89% to 3.27% and receive three-month LIBOR.
During the third quarter of 2003, the Company de-designated its interest rate swap agreements due to the early payment of the underlying debt as a result of the Merger. As a result, the Company recognized a mark-to-market loss of approximately $3.6 million in the accompanying Consolidated Statement of Operations in Interest Expense for the year ended December 31, 2003. The Company subsequently re-designated these interest rate swap agreements to hedge its new debt issuance.
During the year ended December 31, 2003, there was approximately $1.0 million determined to be the ineffective portion related to changes in the fair value of the interest rate swap agreements. Additionally, there were no amounts excluded from the measure of effectiveness.
Commodity Risk
To manage risks associated with future variability in cash flows and price risk attributable to certain commodity purchases, the Company entered into fixed price natural gas contracts designed to effectively hedge prices for a portion of its natural gas requirements at its U.S. mills through August 2004. These contracts are not accounted for as derivative instruments under SFAS No. 133, as they qualify for the normal purchase exemption.
Foreign Currency Risk
The Company enters into option and forward exchange contracts to manage risks associated with future variability in cash flows resulting from anticipated foreign currency transactions adversely
82
affected by changes in exchange rates. Gains/losses, if any, related to these contracts are recognized in income when the anticipated transaction affects income. The premium on an option contract is reflected in Other Expense (Income), Net in the period in which the contract expires. At December 31, 2003 no option contracts existed. At December 31, 2002 option contracts with notional amounts of approximately $120.1 million were in effect.
During the year ended December 31, 2003, the Company entered into forward exchange contracts to manage risks associated with future variability in cash flows resulting from anticipated foreign currency transactions affected by changes in exchange rates. At December 31, 2003, various forward exchange contracts existed that expire on various dates through the year 2004. When measured in U.S. dollars at year end exchange rates, the notional amount of the purchased forward exchange contracts totaled approximately $141.7 million. Gains/losses, if any, related to these contracts are recognized in income when the anticipated transaction affects income.
No amounts were reclassified to earnings during 2003 in connection with forecasted transactions that were no longer considered probable of occurring and there was no material ineffective portion related to changes in the fair value of foreign currency forward and option contracts. Additionally, there were no amounts excluded from the measure of effectiveness.
Derivatives not Designated as Hedges
The Company enters into forward exchange contracts to effectively hedge substantially all accounts receivable and certain accounts payable resulting from transactions denominated in foreign currencies in order to manage risks associated with foreign currency transactions adversely affected by changes in exchange rates. At December 31, 2003 and 2002, the Company had various foreign currency forward exchange contracts, with maturities ranging up to six months. When aggregated and measured in U.S. dollars at year-end exchange rates, the net notional amount of these forward currency exchange contracts totaled approximately $29.3 million and $20.6 million at December 31, 2003 and 2002, respectively. Generally, unrealized gains and losses resulting from these contracts are recognized in operations and approximately offset corresponding unrealized gains and losses recognized on the hedged accounts receivable or payable. These contracts are presently being and will continue to be marked to market through the income statement.
Accumulated Derivative Instruments Loss
The balance of $12.7 million recorded in Accumulated Derivative Instruments Loss at December 31, 2003 is expected to be reclassified into future earnings, contemporaneously with and offsetting changes in the related hedged exposure. The actual amount that will be reclassified to future earnings over the next twelve months may vary from this amount as a result of changes in market conditions.
The following is a reconciliation of current period changes in the fair value of the interest rate swap agreements and foreign currency forward and option contracts which have been recorded as Accumulated Derivative Instruments Loss in the accompanying Consolidated Balance Sheets at
83
December 31, 2003 and December 31, 2002 and as Derivative Instruments Loss in the accompanying Consolidated Statement of Comprehensive Loss for the year ended December 31, 2003.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each category of financial instrument for which it is practicable to estimate that value:
The carrying amounts and estimated fair value of the Company's financial instruments as of December 31, 2003 were as follows:
|
2003
|
2002
|
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Carrying
Amounts |
Fair
Value |
Carrying
Amounts |
Fair
Value |
|||||||||
|
(In millions of dollars)
|
||||||||||||
Non-trade receivables | $ | 9.7 | $ | 9.7 | $ | 11.8 | $ | 11.8 | |||||
Short-term borrowings | $ | 15.1 | $ | 15.1 | $ | 20.3 | $ | 20.3 | |||||
Long-term debt | $ | 2,139.5 | $ | 2,238.2 | $ | 1,502.1 | $ | 1,520.9 | |||||
Currency forward exchange contracts | $ | (6.9 | ) | $ | (6.9 | ) | $ | (0.4 | ) | $ | (0.4 | ) | |
Currency option contracts | $ | | $ | | $ | 0.5 | $ | 0.5 | |||||
Interest rate swap contracts | $ | (8.2 | ) | $ | (8.2 | ) | $ | (5.1 | ) | $ | (5.1 | ) |
84
NOTE 21SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and cash paid, net of refunds, for income and franchise taxes was as follows:
|
Year Ended
Dec. 31, 2003 |
Year Ended
Dec. 31, 2002 |
Year Ended
Dec. 31, 2001 |
||||||
---|---|---|---|---|---|---|---|---|---|
|
(In millions of dollars)
|
||||||||
Interest | $ | 156.2 | $ | 147.7 | $ | 145.8 | |||
|
|
|
|||||||
Income and Franchise Taxes | $ | 3.9 | $ | 4.9 | $ | 32.5 | |||
|
|
|
NOTE 22BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION
The Company reports its results in two business segments: paperboard packaging and containerboard/other. These segments are evaluated by the chief operating decision maker based primarily on income from operations. The Company's reportable segments are based upon strategic business units that offer different products. The paperboard packaging business segment includes the production and sale of paperboard for its beverage multiple packaging and consumer products packaging businesses from its West Monroe, Louisiana, Macon, Georgia, Kalamazoo, Michigan and Norrköping, Sweden mills; carton converting facilities in the United States, Europe and Brazil; and the design, manufacture and installation of packaging machinery related to the assembly of cartons. The containerboard/other business segment primarily includes the production and sale of linerboard, corrugating medium and kraft paper from paperboard mills in the United States.
The Company's customers are not concentrated in any specific geographic region, but are concentrated in certain industries. Customers of the Paperboard Packaging business segment include the beverage and consumer products packaging industries. Customers of the Containerboard/Other business segment include integrated and non-integrated containerboard converters. During 2003, the Company had one customer who accounted for approximately 11% of the Company's net sales. During 2002, the Company had one customer who accounted for approximately 16% of the Company's net sales and another customer who accounted for approximately 12% of the Company's net sales. During 2001, the Company had one customer who accounted for approximately 13% of the Company's net sales and another customer who accounted for approximately 11% of the Company's net sales. There were no significant accounts receivable from a single customer at December 31, 2003 or 2002. The Company reviews a customer's credit history before extending credit of which the payment terms are generally 30 days domestically, but vary internationally according to local business practices. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information.
85
Business segment information is as follows:
|
Year Ended December 31, 2003
|
Year Ended December 31, 2002
|
Year Ended December 31, 2001
|
|||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(In millions of dollars)
|
|||||||||
NET SALES: | ||||||||||
Paperboard Packaging | $ | 1,600.6 | $ | 1,165.7 | $ | 1,107.9 | ||||
Containerboard/Other | 82.7 | 81.6 | 93.7 | |||||||
|
|
|
||||||||
$ | 1,683.3 | $ | 1,247.3 | $ | 1,201.6 | |||||
|
|
|
||||||||
INCOME (LOSS) FROM OPERATIONS: | ||||||||||
Paperboard Packaging | $ | 169.8 | $ | 186.1 | $ | 148.0 | ||||
Containerboard/Other | (27.3 | ) | (24.0 | ) | (15.2 | ) | ||||
Corporate(A) | (36.4 | ) | (21.5 | ) | (25.5 | ) | ||||
|
|
|
||||||||
$ | 106.1 | $ | 140.6 | $ | 107.3 | |||||
|
|
|
||||||||
CAPITAL EXPENDITURES: | ||||||||||
Paperboard Packaging | $ | 123.5 | $ | 50.7 | $ | 51.5 | ||||
Containerboard/Other | 2.3 | 2.8 | 2.6 | |||||||
Corporate | 10.8 | 2.5 | 3.2 | |||||||
|
|
|
||||||||
$ | 136.6 | $ | 56.0 | $ | 57.3 | |||||
|
|
|
||||||||
DEPRECIATION AND AMORTIZATION: | ||||||||||
Paperboard Packaging | $ | 124.6 | $ | 112.1 | $ | 115.7 | ||||
Containerboard/Other | 13.5 | 12.7 | 13.8 | |||||||
Corporate | 22.3 | 9.0 | 7.6 | |||||||
|
|
|
||||||||
$ | 160.4 | $ | 133.8 | $ | 137.1 | |||||
|
|
|
|
2003
|
2002
|
||||
---|---|---|---|---|---|---|
|
(In millions of dollars)
|
|||||
IDENTIFIABLE ASSETS AT DECEMBER 31: | ||||||
Paperboard Packaging(B) | $ | 2,933.5 | $ | 1,720.1 | ||
Containerboard/Other(B) | 152.3 | 156.9 | ||||
Corporate(C) | 114.5 | 80.7 | ||||
|
|
|||||
$ | 3,200.3 | $ | 1,957.7 | |||
|
|
86
Business geographic area information is as follows:
|
Year Ended
December 31, 2003 |
Year Ended
December 31, 2002 |
Year Ended
December 31, 2001 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(In millions of dollars)
|
|||||||||
NET SALES: | ||||||||||
United States | $ | 1,350.2 | $ | 1,011.2 | $ | 986.5 | ||||
Central/South America | 16.6 | 13.4 | 17.4 | |||||||
Europe | 340.9 | 230.8 | 203.4 | |||||||
Asia Pacific | 118.8 | 92.8 | 93.5 | |||||||
Eliminations(D) | (143.2 | ) | (100.9 | ) | (99.2 | ) | ||||
|
|
|
||||||||
$ | 1,683.3 | $ | 1,247.3 | $ | 1,201.6 | |||||
|
|
|
||||||||
INCOME (LOSS) FROM OPERATIONS: | ||||||||||
United States | $ | 73.4 | $ | 118.1 | $ | 82.3 | ||||
Central/South America | (3.4 | ) | (5.2 | ) | (4.0 | ) | ||||
Europe | 25.2 | 19.9 | 12.5 | |||||||
Asia Pacific | 14.9 | 10.8 | 13.1 | |||||||
Eliminations(D) | (4.0 | ) | (3.0 | ) | 3.4 | |||||
|
|
|
||||||||
$ | 106.1 | $ | 140.6 | $ | 107.3 | |||||
|
|
|
|
2003
|
2002
|
||||
---|---|---|---|---|---|---|
|
(In millions of dollars)
|
|||||
IDENTIFIABLE ASSETS AT DECEMBER 31: | ||||||
United States | $ | 2,835.2 | $ | 1,629.4 | ||
Central/South America | 17.7 | 22.5 | ||||
Europe | 183.3 | 180.9 | ||||
Asia Pacific | 49.4 | 44.0 | ||||
Corporate(C) | 114.5 | 80.7 | ||||
Eliminations(D) | 0.2 | 0.2 | ||||
|
|
|||||
$ | 3,200.3 | $ | 1,957.7 | |||
|
|
Notes:
87
NOTE 23RELATED PARTY TRANSACTIONS
On November 18, 1999, the Company loaned $5.0 million to a principal employee in a non-interest bearing note due March 26, 2002. On December 19, 2001, the Company extended the maturity of the loan through March 26, 2007. At December 31, 2003 and 2002, this receivable was included in Other Assets on the Consolidated Balance Sheets.
The Company received certain management services provided by Clayton, Dubilier and Rice, Inc. ("CD&R"), an affiliate of an equity investor in the Company. Charges for such services, including reimbursement of expenses, totaled approximately $0.4 million, $0.5 million and $0.5 million for the years ended December 31, 2003, 2002 and 2001, respectively, and were included in Selling, General and Administrative in the Consolidated Statements of Operations. In connection with the Merger, the Company paid a transaction fee of $10 million to CD&R for assistance in connection with negotiation of all aspects of the Merger, including the contribution analysis, financial and business due diligence, structure of the proposed refinancing and arranging for proposals by and handling negotiations with financing sources to provide funds for the refinancing.
Coors Brewing Company, a subsidiary of Adolph Coors Company, accounted for approximately $39 million of the Company's Net Sales since the date of the Merger through December 31, 2003. The Company continues to sell packaging products to Coors Brewing Company. The loss of Coors Brewing Company as a customer in the foreseeable future could have a material effect on the Company's results of operations. The supply agreement, effective April 1, 2003, with Coors Brewing Company will not expire until December 31, 2006. Total sales under the supply agreement in 2002 were approximately $111 million, accounting for approximately 10% of Graphic's 2002 Net Sales.
NOTE 24RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, " Accounting for Asset Retirement Obligations " ("SFAS No. 143"), which was effective January 1, 2003. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company adopted SFAS No. 143 effective January 1, 2003 and the adoption did not have a significant impact on its financial position and results of operations.
In April 2002, the FASB issued SFAS No. 145, " Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002" ("SFAS No. 145"). This statement rescinds SFAS No. 4, " Reporting Gains and Losses from Extinguishment of Debt " ("SFAS No. 4") and an amendment of the Statement, SFAS No. 64, " Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. " This Statement also rescinds SFAS No. 44, " Accounting for Intangible Assets of Motor Carriers. " This statement amends SFAS No. 13, " Accounting for Leases ", to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The Company adopted SFAS No. 145 effective January 1, 2003 and the adoption resulted in a reclassification of expenses from Extraordinary Loss on Early Extinguishment of Debt to Loss on Early Extinguishment of Debt included in (Loss) before Income Taxes and Equity in
88
Net Earnings of Affiliates of approximately $11.5 million, $8.7 million and $2.1 million for the years ended December 31, 2002, 2001 and 2000, respectively, associated with the rescission of SFAS No. 4.
In July 2002, the FASB issued SFAS No. 146, " Accounting for Costs Associated with Exit or Disposal Activities " ("SFAS No.146"), which was effective December 31, 2002. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, " Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). " This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, and concludes that an entity's commitment to an exit plan does not by itself create a present obligation that meets the definition of a liability. This Statement also establishes that fair value is the objective of initial measurement of the liability. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company adopted SFAS No. 146 effective January 1, 2003 and the adoption did not have a significant impact on its financial position and results of operations.
In December 2002, the FASB issued SFAS No. 148, " Accounting for Stock-Based CompensationTransition and Disclosure, Amendment of SFAS No. 123 " ("SFAS No. 148"). This Statement provides additional transition guidance for those entities that elect to voluntarily adopt the provisions of SFAS No. 123, " Accounting for Stock-Based Compensation ." Furthermore, SFAS No. 148 mandates new disclosures in both interim and year-end financial statements within the Company's Significant Accounting Policies footnote. The Company has elected not to adopt the recognition provisions of SFAS No. 123, as amended by SFAS No. 148 (See Note 3).
In April 2003, the FASB issued SFAS No. 149 " Amendment of Statement 133 on Derivative Instruments and Hedging Activities, " ("SFAS No. 149"). This statement will be applied prospectively and is effective for contracts entered into or modified after June 30, 2003. The statement is applicable to existing contracts and new contracts entered into after June 30, 2003. The Company adopted SFAS No. 149 and the adoption did not have a significant impact on its financial position and results of operations.
In May 2003, the FASB issued SFAS No. 150 " Accounting for Certain Financial Instruments with Characteristics of Liabilities and Equity, " ("SFAS No. 150"). This statement establishes standards for classification of certain financial instruments that have characteristics of both liabilities and equity in the statement of financial position. This Statement is effective for all contracts created or modified after the date the Statement was issued and otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted SFAS No. 150 effective July 1, 2003 and the adoption did not have an impact on its financial position and results of operations.
In December 2003, the FASB issued SFAS No. 132 (Revised 2003), " Employers' Disclosures about Pensions and Other Postretirement Benefits-an amendment of FASB Statements No. 87, 88 and 106 " ("SFAS No. 132"). This statement revises the disclosures required for pension plans and other
89
postretirement benefit plans. The Company adopted this revised statement effective December 31, 2003 (See Note 15Pensions).
The Emerging Issues Task Force ("EITF") issued EITF No. 00-21 , "Revenue Arrangements with Multiple Deliverables " ("EITF No.00-21"), which is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. EITF No. 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. The Company adopted EITF No. 00-21 effective July 1, 2003 and the adoption did not have a significant impact on its financial position and results of operations.
Financial Accounting Standards Board Interpretation ("FIN") No. 46, " Consolidation of Variable Interest Entities " ("FIN No. 46"), was issued in January 2003. FIN No. 46 defines a variable interest entity as a legal entity in which, among other things, the equity investments at risk are not sufficient to finance the operating and closing activities of the entity without additional subordinated financial support from the entity's investors. The Company is not a partner to any material variable interest entity.
NOTE 25RESTATEMENT AND CHANGE IN ACCOUNTING
During the fourth quarter of 2002, the Company changed its method of determining the cost of inventories from the LIFO method to the FIFO method. Prior to 2002, the majority of the Company's operations used the LIFO method of valuing inventory. The Company has concluded that the FIFO method will result in a better measurement of current inventory costs with revenues because the Company's operations have realized and expect to continue to realize cost reductions in its manufacturing operations. The Company applied this change by retroactively restating its financial statements as required by Accounting Principles Board Opinion No. 20, " Accounting Changes ," which resulted in an increase to the accumulated deficit as of January 1, 2001 of approximately $22.4 million.
|
2001
As Previously Reported |
LIFO
Adjustments |
As Restated
|
|||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(In millions of dollars)
|
|||||||||
December 31: | ||||||||||
Inventories | $ | 180.9 | $ | (19.5 | ) | $ | 161.4 | |||
Total Shareholders' Equity | 216.2 | (19.5 | ) | 196.7 | ||||||
Cost of Sales | 966.2 | (12.3 | ) | 953.9 | ||||||
Income from Operations | 95.0 | 12.3 | 107.3 | |||||||
Net Loss | (77.9 | ) | 12.3 | (65.6 | ) |
90
NOTE 26QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Results of operations for the four quarters of 2003 and 2002 are shown below.
(Quarter)
|
Net
Sales |
Gross
Profit |
Income
From Operations |
Net
(Loss) Income |
Net
(Loss) Income per Basic Share |
Net
(Loss) Income per Diluted Share |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(In millions of dollars, except per share amounts)
|
|||||||||||||||||||
2003 | ||||||||||||||||||||
First | $ | 298.0 | $ | 58.1 | $ | 24.9 | $ | (9.8 | ) | $ | (0.09 | ) | $ | (0.09 | ) | |||||
Second | 338.6 | 62.3 | 29.2 | (6.4 | ) | (0.06 | ) | (0.06 | ) | |||||||||||
Third(A) | 478.1 | 81.4 | 33.1 | (52.7 | ) | (0.32 | ) | (0.32 | ) | |||||||||||
Fourth | 568.6 | 83.0 | 18.9 | (14.0 | ) | (0.07 | ) | (0.07 | ) | |||||||||||
|
|
|
|
|||||||||||||||||
Year | $ | 1,683.3 | $ | 284.8 | $ | 106.1 | $ | (82.9 | ) | $ | (0.56 | ) | $ | (0.56 | ) | |||||
|
|
|
|
|
|
|||||||||||||||
2002 | ||||||||||||||||||||
First | $ | 291.2 | $ | 57.3 | $ | 30.9 | $ | (7.7 | ) | $ | (0.07 | ) | $ | (0.07 | ) | |||||
Second(B) | 334.4 | 74.6 | 40.2 | (9.7 | ) | (0.08 | ) | (0.08 | ) | |||||||||||
Third | 326.1 | 72.3 | 41.1 | 4.7 | 0.04 | 0.04 | ||||||||||||||
Fourth | 295.6 | 58.3 | 28.4 | 1.5 | 0.01 | 0.01 | ||||||||||||||
|
|
|
|
|||||||||||||||||
Year | $ | 1,247.3 | $ | 262.5 | $ | 140.6 | $ | (11.2 | ) | $ | (0.10 | ) | $ | (0.10 | ) | |||||
|
|
|
|
|
|
Notes:
91
Report of Independent Auditors
To the Stockholders and Directors of Graphic Packaging Corporation:
In our opinion, the consolidated financial statements listed in the index appearing under Item 15 (a)(1) present fairly, in all material respects, the financial position of Graphic Packaging Corporation and subsidiaries at December 31, 2003 and 2002, and the results of their operations, comprehensive loss, cash flows, and shareholders' equity for the two years then ended in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15 (a)(2) presents fairly, in all material respects, the information set forth therein as of and for the years ended December 31, 2003 and 2002, when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Notes 3 and 25 to the financial statements, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" and changed its method of accounting for the cost of inventories, respectively, in 2002. As discussed in Note 24 to the financial statements, the Company adopted SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002" effective January 1, 2003.
We also audited the adjustments in Note 25 that were applied to restate the 2001 consolidated financial statements to give retroactive effect to the change in the method of accounting for the cost of inventories from the last-in, first-out ("LIFO") method to the first-in, first-out ("FIFO") method. In our opinion, such adjustments are appropriate and have been properly applied.
/S/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Atlanta, Georgia
March 15, 2004
92
To the Stockholders and Directors of Graphic Packaging Corporation:
We have audited the consolidated statements of operations, comprehensive loss, shareholders' equity, and cash flows of Graphic Packaging Corporation and subsidiaries (the "Company") (formerly Riverwood Holding, Inc.) for the year ended December 31, 2001 (none of which are presented herein). Our audit also included the financial statement schedule listed in the Index at Item 15 as it relates to information as of December 31, 2001 and for the year then ended. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the results of operations and the cash flows of Graphic Packaging Corporation and subsidiaries for the year ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule as it relates to information as of December 31, 2001 and for the year then ended, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 20 to the consolidated financial statements, effective January 1, 2001, the Company changed its method of accounting for derivative instruments and hedging activities.
As discussed in a note to the 2001 consolidated financial statements, the 2001 consolidated financial statements have previously been restated.
/S/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Atlanta, Georgia
February 15, 2002
(April 10, 2003 as to the effect of the restatement referred to in the fifth paragraph above)
93
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On June 9, 2002, the Company dismissed Deloitte & Touche LLP as the Company's auditors, and appointed PricewaterhouseCoopers LLP to serve as the Company's independent auditors. On June 11, 2002, the Company filed a Form 8-K disclosing the information required by Item 304 of Regulation S-K with respect to the foregoing.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's management has carried out an evaluation, with the participation of its chief executive officer and chief financial officer, of the effectiveness of the Company's disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon management's evaluation, the Company's chief executive officer and chief financial officer have concluded that the Company's disclosure controls and procedures were effective as of December 31, 2003. There was no change in the Company's internal control over financial reporting that occurred during the Company's last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to Instruction G(3) to Form 10-K, the information relating to Directors of the Registrant required by Item 10 is incorporated by reference from the Registrant's definitive proxy statement which is to be filed pursuant to Regulation 14A within 120 days after the end of the Registrant's fiscal year ended December 31, 2003.
For information pertaining to Executive Officers of the Registrant, as permitted by instruction 3 of Paragraph (b) of Item 401 of Regulation S-K, refer to the "Executive Officers of the Registrant" section of Part I of this document.
Pursuant to Instruction G(3) to Form 10-K, the information relating to compliance with Section 16(a) required by Item 10 is incorporated by reference from the Registrant's definitive proxy statement which is to be filed pursuant to Regulation 14A within 120 days after the end of the Registrant's fiscal year ended December 31, 2003.
ITEM 11. EXECUTIVE COMPENSATION
Pursuant to Instruction G(3) to Form 10-K, the information required by Item 11 is incorporated by reference from the Registrant's definitive proxy statement which is to be filed pursuant to Regulation 14A within 120 days after the end of the Registrant's fiscal year ended December 31, 2003.
The Company's directors have entered into indemnification agreements with the Company, a form of which is filed as an exhibit to this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to Instruction G(3) to Form 10-K, the information required by Item 12 is incorporated by reference from the Registrant's definitive proxy statement which is to be filed pursuant to Regulation 14A within 120 days after the end of the Registrant's fiscal year ended December 31, 2003.
94
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to Instruction G(3) to Form 10-K, the information required by Item 13 is incorporated by reference from the Registrant's definitive proxy statement which is to be filed pursuant to Regulation 14A within 120 days after the end of the Registrant's fiscal year ended December 31, 2003.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Pursuant to Instruction G(3) to Form 10-K, the information required by Item 14 is incorporated by reference from the Registrant's definitive proxy statement which is to be filed pursuant to Regulation 14A within 120 days after the end of the Registrant's fiscal year ended December 31, 2003.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Consolidated Statements of Operations for each of the three years in the period ended December 31, 2003
Consolidated Statements of Comprehensive Loss for each of the three years in the period ended December 31, 2003
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2003
Consolidated Statements of Shareholders' Equity for each of the three years in the period ended December 31, 2003
Notes to Consolidated Financial Statements
Report of Independent Auditors
Independent Auditors' Report
All other schedules are omitted as the information required is either included elsewhere in the consolidated financial statements herein or is not applicable.
Reports on Form 8-K filed with the SEC on:
October 22, 2003 relating to the merger between Riverwood Holding and the corporation formerly known as Graphic Packaging International Corporation (amending the current report on Form 8-K filed on August 18, 2003).
December 12, 2003 providing notice to the Registrant's officers and directors with respect to a blackout period under the Graphic Savings and Investment Plan.
Reports on Form 8-K furnished to the SEC on:
November 12, 2003 reporting the Registrant's third quarter 2003 results.
95
Exhibit Number
|
Description
|
|
---|---|---|
2.1 | Agreement and Plan of Merger, dated as of March 25, 2003, among Registrant, Riverwood Acquisition Sub LLC and Graphic Packaging International Corporation. Filed as Exhibit 2.1 to Registrant's Current Report on Form 8-K filed on March 27, 2003 (Commission File No. 001-11113), and incorporated herein by reference. | |
2.2 |
|
Amendment No. 1 to Agreement and Plan of Merger, dated as of July 11, 2003, among Registrant, Riverwood Acquisition Sub LLC and Graphic Packaging International Corporation. Filed as Exhibit 2.2 to Registrant's Amendment No. 3 to Registration Statement on Form S-4 filed on July 17, 2003 (Registration No. 333-104928), and incorporated herein by reference. |
3.1 |
|
Restated Certificate of Incorporation of Graphic Packaging Corporation. Filed as Exhibit 3.1 to Registrant's Current Report on Form 8-K filed on August 13, 2003 (Commission File No. 001-13182), and incorporated herein by reference. |
3.2 |
|
Amended and Restated Bylaws of Graphic Packaging Corporation. Filed as Exhibit 3.2 to Registrant's Current Report on Form 8-K filed on August 13, 2003 (Commission File No. 001-13182), and incorporated herein by reference. |
3.3 |
|
Graphic Packaging Corporation Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock. Filed as Exhibit 3.3 to Registrant's Current Report on Form 8-K filed on August 13, 2003 (Commission File No. 001-13182), and incorporated herein by reference. |
4.1 |
|
Form of Certificate for the Common Stock, par value $0.01 per share. Filed as Exhibit 4.1 to Registrant's Amendment No. 2 to Registration Statement on Form S-4 filed on June 13, 2003 (Registration No. 333-104928), and incorporated herein by reference. |
4.2 |
|
Rights Agreement, dated August 7, 2003, between Registrant and Wells Fargo Bank Minnesota, N.A. Filed as Exhibit 4.1 to Registrant's Current Report on Form 8-K filed on August 13, 2003 (Commission File No. 001-13182), and incorporated herein by reference. |
4.3 |
|
Credit Agreement, dated as of August 8, 2003, among Graphic Packaging International, Inc., the several lenders from time to time parties thereto, JPMorgan Chase Bank, as administrative agent, Deutsche Bank Securities Inc., as syndication agent, and Goldman Sachs Credit Partners L.P. and Morgan Stanley Senior Funding, Inc., as documentation agents. Filed as Exhibit 4.2 to Registrant's Current Report on Form 8-K filed on August 13, 2003 (Commission File No. 001-13182), and incorporated herein by reference. |
4.4 |
|
Guarantee and Collateral Agreement, dated as of August 8, 2003, made by Registrant, Riverwood Acquisition Sub LLC, GPI Holding, Inc., Graphic Packaging International, Inc., and certain of its subsidiaries in favor of JPMorgan Chase Bank as administrative agent. Filed as Exhibit 4.3 to Registrant's Current Report on Form 8-K filed on August 13, 2003 (Commission File No. 001-13182), and incorporated herein by reference. |
4.5 |
|
Indenture, dated August 8, 2003, among Graphic Packaging International, Inc., as issuer, Registrant and GPI Holding, Inc., as Note Guarantors, and Wells Fargo Bank Minnesota, National Association, as Trustee, relating to the 8.50% Senior Notes due 2011 of Graphic Packaging International, Inc. Filed as Exhibit 4.4 to Registrant's Current Report on Form 8-K filed on August 13, 2003 (Commission File No. 001-13182), and incorporated herein by reference. |
96
4.6 |
|
Indenture, dated August 8, 2003, among Graphic Packaging International, Inc., as issuer, Registrant and GPI Holding, Inc., as Note Guarantors, and Wells Fargo Bank Minnesota, National Association, as Trustee, relating to the 9.50% Senior Subordinated Notes due 2013 of Graphic Packaging International, Inc. Filed as Exhibit 4.5 to Registrant's Current Report on Form 8-K filed on August 13, 2003 (Commission File No. 001-13182), and incorporated herein by reference. |
4.7 |
|
Form of 8.50% Senior Notes due 2011 of Graphic Packaging International, Inc. (included in Exhibit 4.5). Filed as Exhibit 4.7 to Registrant's Quarterly Report on Form 10-Q filed on November 14, 2003 (Commission File No. 001-13182), and incorporated herein by reference. |
4.8 |
|
Form of 9.50% Senior Subordinated Notes due 2013 of Graphic Packaging International, Inc. (included in Exhibit 4.6). Filed as Exhibit 4.8 to Registrant's Quarterly Report on Form 10-Q filed on November 14, 2003 (Commission File No. 001-13182), and incorporated herein by reference. |
10.1 |
|
Amended and Restated Registration Rights Agreement, dated as of March 25, 2003, among Registrant, the Family Stockholders named therein, Clayton Dubilier & Rice Fund V Limited Partnership, EXOR Group S.A., and the Other Riverwood Stockholders named therein. Filed as Exhibit 10.1 to Registrant's Registration Statement on Form S-4 filed on May 2, 2003 (Registration No. 333-104928), and incorporated herein by reference. |
10.2 |
|
Stockholders Agreement, dated as of March 25, 2003, by and among Registrant, the Family Stockholders named therein, Clayton Dubilier & Rice Fund V Limited Partnership and EXOR Group S.A. Filed as Exhibit 10.2 to Registrant's Registration Statement on Form S-4 filed on May 2, 2003 (Registration No. 333-104928), and incorporated herein by reference. |
10.3 |
|
Amendment No. 1 to Stockholders Agreement, dated as of April 29, 2003, by and among Registrant, the Family Stockholders named therein, Clayton Dubilier & Rice Fund V Limited Partnership and EXOR Group S.A. Filed as Exhibit 10.3 to Registrant's Registration Statement on Form S-4 filed on May 2, 2003 (Registration No. 333- 104928), and incorporated herein by reference. |
10.4 |
|
Amendment No. 2 to Stockholders Agreement, dated as of June 12, 2003, by and among Registrant, the Family Stockholders named therein, Clayton Dubilier & Rice Fund V Limited Partnership and EXOR Group S.A. Filed as Exhibit 10.4 to Registrant's Amendment No. 1 to Registration Statement on Form S-4 filed on June 13, 2003 (Registration No. 333-104928), and incorporated herein by reference. |
10.5 |
|
Transfer Restrictions and Observation Rights Agreement, dated as of March 25, 2003, among Registrant and the Other Riverwood Stockholders named therein. Filed as Exhibit 10.4 to Registrant's Registration Statement on Form S-4 filed on May 2, 2003 (Registration No. 333-104928), and incorporated herein by reference. |
10.6 |
|
Third Amended and Restated Graphic Packaging International Corporation Executive Employment Agreement, dated as of March 25, 2003, among Graphic Packaging International Corporation the Affiliated Companies named therein, and Jeffrey H. Coors. Filed as Exhibit 10.24 to Registrant's Registration Statement on Form S-4 filed on May 2, 2003 (Registration No. 333-104928), and incorporated herein by reference. |
97
10.7 |
|
Third Amended and Restated Graphic Packaging International Corporation Executive Employment Agreement, dated as of March 25, 2003, among Graphic Packaging International Corporation, the Affiliated Companies named therein, and David W. Scheible. Filed as Exhibit 10.25 to Riverwood Holding Inc.'s Registration Statement on Form S-4 filed on May 2, 2003 (Registration No. 333-104928), and incorporated herein by reference. |
10.8 |
|
First Amended and Restated Employment Agreement, dated as of August 8, 2003, among Riverwood International Corporation, Registrant and Daniel J. Blount. Filed as Exhibit 10.8 to Registrant's Quarterly Report on Form 10-Q filed on November 14, 2003 (Commission File No. 001-13182), and incorporated herein by reference. |
10.9 |
|
Third Amended and Restated Graphic Packaging International Corporation Executive Employment Agreement, dated as of March 25, 2003, among Graphic Packaging International Corporation, the Affiliated Companies named therein, and Donald W. Sturdivant. Filed as Exhibit 10.31 to Registrant's Amendment No. 1 to Registration Statement on Form S-4 filed on June 13, 2003 (Registration No. 333-104928), and incorporated herein by reference. |
10.10 |
|
Employment Agreement, dated as of August 8, 2003, among Riverwood International Corporation, Registrant and Michael R. Schmal. Filed as Exhibit 10.10 to Registrant's Quarterly Report on Form 10-Q filed on November 14, 2003 (Commission File No. 001-13182), and incorporated herein by reference. |
10.11 |
|
Amendment No. 1 to Riverwood Holding, Inc. Stock Incentive Plan, Riverwood Holding, Inc. Supplemental Long-Term Incentive Plan and Riverwood Holding, Inc. 2002 Stock Incentive Plan. Filed as Exhibit 10.11 to Registrant's Quarterly Report on Form 10-Q filed on November 14, 2003 (Commission File No. 001-13182), and incorporated herein by reference. |
10.12 |
|
Form of Restricted Unit Agreement, dated as of August 8, 2003, entered into by and between Registrant and each of Jeffrey H. Coors, David W. Scheible, and Donald W. Sturdivant. Filed as Exhibit 10.12 to Registrant's Quarterly Report on Form 10-Q filed on November 14, 2003 (Commission File No. 001-13182), and incorporated herein by reference. |
10.13 |
|
Form of Management Stock Option Agreement entered into by and between Registrant and each of Wayne E. Juby, Steven D. Saucier, Michael R. Schmal, Daniel J. Blount, John T. Baldwin and Stephen A. Hellrung. Filed as Exhibit 10.13 to Registrant's Quarterly Report on Form 10-Q filed on November 14, 2003 (Commission File No. 001-13182), and incorporated herein by reference. |
10.14 |
|
Form of Restricted Unit Agreement entered into by and between Registrant and each of Wayne E. Juby, Steven D. Saucier, Michael R. Schmal, Daniel J. Blount, John T. Baldwin and Stephen A. Hellrung. Filed as Exhibit 10.14 to Registrant's Quarterly Report on Form 10-Q filed on November 14, 2003 (Commission File No. 001-13182), and incorporated herein by reference. |
10.15 |
|
Form of Option Cancellation Acknowledgement of Wayne E. Juby, Steven D. Saucier and Michael R. Schmal. Filed as Exhibit 10.15 to Registrant's Quarterly Report on Form 10-Q filed on November 14, 2003 (Commission File No. 001-13182), and incorporated herein by reference. |
10.16 |
|
Form of Amendment to Employment Agreement, dated as of August 7, 2003, entered into by and between Riverwood International Corporation, Registrant and each of Wayne E. Juby and Steven D. Saucier. Filed as Exhibit 10.16 to Registrant's Quarterly Report on Form 10-Q filed on November 14, 2003 (Commission File No. 001-13182), and incorporated herein by reference. |
98
10.17 |
|
Management Stock Option Agreement, dated as of August 8, 2003 entered into by and between Registrant and Stephen M. Humphrey. Filed as Exhibit 10.17 to Registrant's Quarterly Report on Form 10-Q filed on November 14, 2003 (Commission File No. 001-13182), and incorporated herein by reference. |
10.18 |
|
Restricted Unit Agreement, dated as of August 8, 2003, entered into by and between Registrant and Stephen M. Humphrey. Filed as Exhibit 10.18 to Registrant's Quarterly Report on Form 10-Q filed on November 14, 2003 (Commission File No. 001-13182), and incorporated herein by reference. |
10.19 |
|
Employment Agreement, dated as of September 8, 2003, among Registrant, Graphic Packaging International, Inc. and John T Baldwin. Filed as Exhibit 10.19 to Registrant's Quarterly Report on Form 10-Q filed on November 14, 2003 (Commission File No. 001-13182), and incorporated herein by reference. |
10.20 |
|
Form of Officers' Salary Continuation Agreement, as amended. Filed as Exhibit 10.10 to Graphic Packaging International Corporation's Annual Report on Form 10-K filed on March 20, 1995 (Commission File No. 0- 20704), and incorporated herein by reference. |
10.21 |
|
Employment Agreement, dated as of October 6, 2003, entered into by and between Registrant, Graphic Packaging International, Inc. and Stephen A. Hellrung. Filed as Exhibit 10.21 to Registrant's Quarterly Report on Form 10-Q filed on November 14, 2003 (Commission File No. 001-13182), and incorporated herein by reference. |
10.22 |
|
Graphic Packaging Equity Incentive Plan, as amended. Filed as Exhibit 10.9 to Graphic Packaging International Corporation's Annual Report on Form 10-K filed on March 23, 2001 (Commission File No. 001-14060), and incorporated herein by reference. |
10.23 |
|
Graphic Packaging Equity Compensation Plan for Non-Employee Directors, as amended and restated. Filed as Exhibit 10.10 to Graphic Packaging International Corporation's Annual Report on Form 10-K filed on March 23, 2001 (Commission File No. 001-14060), and incorporated herein by reference. |
10.24 |
|
ACX Technologies, Inc. Phantom Equity Plan. Filed as Exhibit 10.11 to Graphic Packaging InternationalCorporation's Current Report on Form 8-K filed on November 19, 1992 (Commission File No. 0-20704), and incorporated herein by reference. |
10.25 |
|
Graphic Packaging Excess Benefit Plan, as restated. Filed as Exhibit 10.12 to Graphic Packaging International Corporation's Annual Report on Form 10-K filed on March 23, 2001 (Commission File No. 001-14060), and incorporated herein by reference. |
10.26 |
|
Graphic Packaging Supplemental Retirement Plan, as restated. Filed as Exhibit 10.13 to Graphic Packaging International Corporation's Annual Report on Form 10-K filed on March 23, 2001 (Commission File No. 001-14060), and incorporated herein by reference. |
10.27 |
|
ACX Technologies, Inc. Deferred Compensation Plan, as amended. Filed as Exhibit 10.15 to Graphic Packaging International Corporation's Annual Report on Form 10-K filed on March 7, 1996 (Commission File No. 0-20704), and incorporated herein by reference. |
10.28 |
|
First Amendment to the Graphic Packaging Deferred Compensation Plan. Filed as Exhibit 10.16 to Graphic Packaging International Corporation's Annual Report on Form 10-K filed on March 23, 2001 (Commission File No. 001-14060), and incorporated herein by reference. |
99
10.29 |
|
Graphic Packaging Executive Incentive Plan, as amended and restated. Filed as Exhibit 10.17 to Graphic Packaging International Corporation's Quarterly Report on Form 10-Q filed on October 31, 2002 (Commission File No. 001-14060), and incorporated herein by reference. |
10.30 |
|
Form of Indemnification Agreement, dated as of September 10, 2003, entered into by and between Registrant, GPI Holding, Inc., Graphic Packaging International, Inc. and each of Jeffrey H. Coors, Stephen M. Humphrey, Kevin J. Conway, G. Andrea Botta, John D. Beckett, Harold R. Logan, Jr., John R. Miller, Robert W. Tieken, Martin D. Walker, B. Charles Ames (as emeritus director), and William K. Coors (as emeritus director). |
10.31 |
|
Indemnification Agreement, dated as of September 10, 2003, entered into by and between Registrant, GPI Holding, Inc., Graphic Packaging International, Inc. and Lawrence C. Tucker. |
14.1 |
|
Code of Business Conduct and Ethics. |
21.1 |
|
List of Subsidiaries. |
23.1 |
|
Consent of PricewaterhouseCoopers LLP. |
23.2 |
|
Consent of Deloitte & Touche LLP. |
31.1 |
|
Certification required by Rule 13a-14(a). |
31.2 |
|
Certification required by Rule 13a-14(a). |
32.1 |
|
Certification required by Section 1350 of Chapter 63 of Title 18 of the United States Code. |
32.2 |
|
Certification required by Section 1350 of Chapter 63 of Title 18 of the United States Code. |
100
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.
GRAPHIC PACKAGING CORPORATION
(Registrant) |
||||
/s/ STEPHEN M. HUMPHREY Stephen M. Humphrey |
|
President and Chief Executive Officer and Director (Principal Executive Officer) |
|
March 16, 2004 |
/s/ JOHN T. BALDWIN John T. Baldwin |
|
Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
|
March 16, 2004 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Each of the directors of the Registrant whose signature appears below hereby appoints John T. Baldwin and Stephen A. Hellrung, and each of them severally, as his attorney-in-fact to sign in his name and behalf, in any and all capacities stated below, and to file with the Securities and Exchange Commission any and all amendments to this report on Form 10-K, making such changes in this report on Form 10-K as appropriate, and generally to do all such things in their behalf in their capacities as directors and/or officers to enable the Registrant to comply with the provisions of the Securities Exchange Act of 1934, and all requirements of the Securities and Exchange Commission.
Signatures
|
Title
|
Date
|
||
---|---|---|---|---|
|
|
|
|
|
/s/
JEFFREY H. COORS
Jeffrey H. Coors |
Chairman of the Board and Director | March 16, 2004 | ||
/s/ KEVIN J. CONWAY Kevin J. Conway |
|
Director |
|
March 16, 2004 |
/s/ G. ANDREA BOTTA G. Andrea Botta |
|
Director |
|
March 16, 2004 |
/s/ JOHN D. BECKETT John D. Beckett |
|
Director |
|
March 16, 2004 |
/s/ HAROLD R. LOGAN, JR. Harold R. Logan, Jr. |
|
Director |
|
March 16, 2004 |
/s/ JOHN. R. MILLER John. R. Miller |
|
Director |
|
March 16, 2004 |
/s/ MARTIN D. WALKER Martin D. Walker |
|
Director |
|
March 16, 2004 |
/s/ ROBERT W. TIEKEN Robert W. Tieken |
|
Director |
|
March 16, 2004 |
101
GRAPHIC PACKAGING CORPORATION
SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS
(Amounts In Millions)
(Classification)
|
Balance
Beginning of Period |
Increase
Due to Merger |
(Credits) Charges
to Costs and Expenses |
Deductions
(a) |
Balance
at End of Period |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Year ended December 31, 2003: | |||||||||||||||||
Allowances Reducing the Assets in the Balance Sheet: | |||||||||||||||||
Doubtful accounts receivable | $ | 1.9 | $ | 2.4 | $ | 0.8 | $ | (0.7 | ) | $ | 4.4 | ||||||
Deferred tax assets | 220.1 | 101.0 | 34.5 | (16.6 | ) | 339.0 | |||||||||||
|
|
|
|
|
|||||||||||||
Total | $ | 222.0 | $ | 103.4 | $ | 35.3 | $ | (17.3 | ) | $ | 343.4 | ||||||
|
|
|
|
|
|||||||||||||
Year ended December 31, 2002: | |||||||||||||||||
Allowances Reducing the Assets in the Balance Sheet: | |||||||||||||||||
Doubtful accounts receivable | $ | 3.3 | $ | | $ | 2.2 | $ | (3.6 | ) | $ | 1.9 | ||||||
Deferred tax assets | 219.7 | | 0.4 | | 220.1 | ||||||||||||
|
|
|
|
|
|||||||||||||
Total | $ | 223.0 | $ | | $ | 2.6 | $ | (3.6 | ) | $ | 222.0 | ||||||
|
|
|
|
|
|||||||||||||
Year ended December 31, 2001: | |||||||||||||||||
Allowances Reducing the Assets in the Balance Sheet: | |||||||||||||||||
Doubtful accounts receivable | $ | 2.8 | $ | | $ | 2.3 | $ | (1.8 | ) | $ | 3.3 | ||||||
Deferred tax assets | 174.8 | | 44.9 | | 219.7 | ||||||||||||
|
|
|
|
|
|||||||||||||
Total | $ | 177.6 | $ | | $ | 47.2 | $ | (1.8 | ) | $ | 223.0 | ||||||
|
|
|
|
|
Note:
102
[FORM AGREEMENT]
INDEMNIFICATION AGREEMENT
This Indemnification Agreement (" Agreement ") is made as of this 10th day of September, 2003, by and among Graphic Packaging Corporation, a Delaware corporation (formerly known as Riverwood Holding, Inc., and the successor by merger to Graphic Packaging International Corporation) (the " Company "); GPI Holding, Inc., a Colorado corporation (formerly known as Graphic Packaging Holdings, Inc., and the successor by merger to RIC Holding, Inc.) (" GPI Holding "); Graphic Packaging International, Inc., a Delaware corporation (formerly known as Riverwood International Corporation, and the successor by merger to the company formerly known as Graphic Packaging Corporation) (" GPI ," and together with the Company and GPI Holding, the " Indemnitors "), and (the " Indemnitee ").
WHEREAS, the Indemnitors and the Indemnitee recognize the significant cost of directors and officers liability insurance and the general reductions in the coverage of such insurance;
WHEREAS, the Indemnitors and the Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting officers and directors to expensive litigation risks at the same time as the coverage of directors and officers liability insurance has been limited; and
WHEREAS, the Indemnitors desire to attract and retain the services of highly qualified individuals, such as the Indemnitee, to serve as officers and directors of the Indemnitors and their respective subsidiaries, and to indemnify their and their respective subsidiaries' officers and directors so as to provide them with the maximum protection permitted by law.
NOW, THEREFORE, in consideration for the Indemnitee's services as an officer or director of one or more of the Indemnitors or one or more of their respective subsidiaries, or both, the Indemnitors and the Indemnitee hereby agree as follows (all obligations of the Indemnitors hereunder being joint and several obligations):
1. Indemnification.
a. Third Party Proceedings. Subject to Section 1(b), the Indemnitors shall indemnify the Indemnitee to the fullest extent permitted by law if the Indemnitee is or was a party or is threatened to be made a party to, or is or was a witness or other participant in, any threatened, pending or completed investigation, action, suit, proceeding or any alternative dispute resolution (" ADR ") mechanism, whether civil, criminal, administrative or investigative, by reason of the fact that the Indemnitee is or was a director (including, without limitation, a member of any committee of the Board of Directors), officer, employee or agent, or serves or served in any similar position, of any of the Indemnitors or any of their respective subsidiaries, or any predecessor thereof, or by reason of the fact that the Indemnitee is or was serving at the request of any of the Indemnitors or any of their respective subsidiaries as a director (including, without limitation, as a member of any committee of the Board of Directors), officer, employee or agent, or serves or served in any similar position, of another corporation, limited liability company, partnership, joint venture, trust or other entity or enterprise, or any predecessor thereof, including service with respect to an employee benefit plan, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement incurred by the Indemnitee in connection with such investigation, action, suit, proceeding or ADR mechanism.
b. Review of Indemnification Obligations. Notwithstanding the foregoing, in the event any Independent Legal Counsel (as herein defined) shall have determined, in a written opinion, that there is no reasonable basis for the position that the Indemnitee is entitled to be indemnified hereunder under applicable law, (i) the Indemnitors shall have no further obligation under Section 1(a) to make any payments to the Indemnitee not made prior to such determination by such Independent Legal Counsel and (ii) the Indemnitors shall be entitled to be reimbursed by the
Indemnitee (who hereby agrees to reimburse the Indemnitors) for all expenses (including attorneys' fees), judgments, fines and penalties theretofore paid by the Indemnitors to the Indemnitee to which the Indemnitee is not entitled hereunder under applicable law; provided, however, that if the Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that the Indemnitee is entitled to be indemnified hereunder under applicable law, any determination made by any Independent Legal Counsel that there is no reasonable basis for the position that the Indemnitee is entitled to be indemnified hereunder under applicable law shall not be binding, the Indemnitors shall continue to be obligated under Section 1(a) to make payments to the Indemnitee, and the Indemnitee shall not be required to reimburse the Indemnitors for any expenses (including attorneys' fees), judgments, fines and penalties theretofore paid in indemnifying the Indemnitee, until a final judicial determination is made that the Indemnitee is not entitled to be indemnified hereunder under applicable law (as to which all rights of appeal therefrom have been exhausted or lapsed). The Indemnitee's obligation to reimburse the Indemnitors for any expenses (including attorneys' fees), judgments, fines and penalties shall be unsecured, and no interest shall be charged thereon.
c. The Indemnitee's Rights on Unfavorable Determination; Binding Effect. If any Independent Legal Counsel determines that there is no reasonable basis for the position that the Indemnitee is entitled to be indemnified hereunder in whole or in part under applicable law, the Indemnitee shall have the right to commence legal proceedings in a court of competent jurisdiction to secure a determination that the Indemnitee is entitled to be indemnified hereunder under applicable law and, subject to the provisions of Section 15, each of the Indemnitors hereby consents to service of process and to appear in any such proceeding. Absent such legal proceedings, any determination by any Independent Legal Counsel shall be conclusive and binding on the Indemnitors and the Indemnitee.
d. Selection of Independent Legal Counsel; Change of Control. If there has not been a Change in Control (as herein defined), any Independent Legal Counsel shall be selected by the Board of Directors of the Company, and if there has been such a Change in Control, any Independent Legal Counsel with respect to all matters thereafter arising concerning the rights of the Indemnitee to indemnification of expenses (including attorneys' fees), judgments, fines and penalties under this Agreement or any other agreement or under the Certificate of Incorporation or By-Laws of any of the Indemnitors or any of their respective subsidiaries as now or hereafter in effect, or under any other applicable law, if desired by the Indemnitee, shall be Independent Legal Counsel selected by the Indemnitee and approved by the Company on behalf of all of the Indemnitors (which approval shall not be unreasonably withheld). Such counsel, among other things, shall render its written opinion to the Indemnitors and the Indemnitee as to whether and to what extent the Indemnitee would be entitled to be indemnified hereunder under applicable law, and the Indemnitors agree to abide by such opinion. The Indemnitors agree to pay the fees and expenses of the Independent Legal Counsel referred to above and to indemnify fully such counsel against any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. Notwithstanding any other provision of this Agreement, the Indemnitors shall not be required to pay expenses (including attorneys' fees), judgments, fines and penalties of more than one Independent Legal Counsel in connection with all matters concerning a single Indemnitee, and such Independent Legal Counsel shall be the Independent Legal Counsel for any or all other Indemnitees under indemnification agreements similar to this Agreement, unless (i) the employment of separate counsel by two or more of such Indemnitees has been previously authorized by the Company on behalf of all of the Indemnitors in writing or (ii) the Indemnitee shall have provided to the Indemnitors a written statement that the Indemnitee has reasonably concluded that there may be a conflict of interest between the Indemnitee and any of such other Indemnitees with respect to the matters arising under this Agreement.
2
e. Mandatory Payment of Expenses. To the extent that the Indemnitee has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 1(a), or in defense of any claim, issue or matter therein, the Indemnitee shall be indemnified against expenses (including attorneys' fees) incurred by the Indemnitee in connection therewith.
f. For purposes of this Agreement, the following terms shall have the following meanings:
" Independent Legal Counsel " shall mean an attorney or firm of attorneys competent to render an opinion under the applicable law, selected in accordance with the provisions of Section 1(d), who shall not have otherwise performed any services for any of the Indemnitors, any of their respective subsidiaries or the Indemnitee within the last three years (other than with respect to matters concerning the rights of the Indemnitee under this Agreement, or of other Indemnitees under indemnity agreements similar to this Agreement).
" Change in Control " shall mean, and shall be deemed to have occurred if, on or after the date of this Agreement, ( i ) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than ( A ) a trustee or other fiduciary holding securities under an employee benefit plan of one or more of the Indemnitors acting in such capacity, ( B ) a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, ( C ) a person or group party to the Stockholders Agreement, dated as of March 25, 2003, as amended, by and among Riverwood Holding, Inc., the persons listed thereto, Clayton, Dubilier & Rice Fund V Limited Partnership and EXOR Group S.A. (" Exor ") or ( D ) any Affiliate (as defined in such Stockholders Agreement) of Exor or Clayton, Dubilier & Rice, Inc. (" CD&R ") or any investment fund managed by CD&R, becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing more than 50% of the total voting power represented by the Company's then outstanding Voting Securities (as herein defined), ( ii ) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors of the Company or nomination for election by the Company's stockholders was approved by a vote of at least two thirds ( 2 / 3 ) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, ( iii ) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation other than a merger or consolidation that would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 80% of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, ( iv ) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by any of the Indemnitors of (in one transaction or a series of related transactions) all or substantially all of such Indemnitor's assets, or ( v ) any of the Indemnitors shall file or have filed against it, and such filing shall not be dismissed, any bankruptcy, insolvency or dissolution proceedings, or a trustee, administrator or creditors committee shall be appointed to manage or supervise the affairs of any of the Indemnitors.
" Voting Securities " shall mean any securities of the Company that vote generally in the election of directors.
2. Agreement to Serve.
In consideration of the protection afforded by this Agreement, if the Indemnitee is a director of any of the Indemnitors or any of their respective subsidiaries, he agrees to serve in such capacity for at
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least 90 days after the effective date of this Agreement and not to resign voluntarily during such period without the written consent of a majority of the Board of Directors of the Company. If the Indemnitee is an officer of any of the Indemnitors or any of their respective subsidiaries not serving under an employment contract, he agrees to serve in such capacity for at least 90 days after the effective date of this Agreement and not to resign voluntarily during such period without the written consent of a majority of the Board of Directors of the Company. Following the applicable period set forth above, the Indemnitee agrees to continue to serve in such capacity at the will of such Indemnitor or such subsidiary, as the case may be (or under separate agreement, if such agreement exists), so long as he is duly appointed or elected and qualified in accordance with the applicable provisions of the By-Laws of such Indemnitor or such subsidiary or until such time as he tenders his resignation in writing. Notwithstanding the foregoing provisions of this Section 2, the Indemnitee shall be entitled to resign with immediate effect if the Company shall not maintain a policy or policies of directors and officers liability insurance with reputable and creditworthy insurance companies providing the officers and directors of each such Indemnitor and each such subsidiary with coverage for losses from alleged wrongful acts and omissions and having an aggregate limit of liability of at least $25 million. Nothing contained in this Agreement is intended to create in the Indemnitee any right to continued employment or appointment.
3. Expenses; Indemnification Procedure.
a. Advancement of Expenses. The Indemnitors shall advance all expenses (including attorneys' fees) incurred by the Indemnitee in connection with the investigation, defense, settlement or appeal of any investigation, action, suit, proceeding or ADR mechanism referenced in Section 1(a) hereof (but not amounts actually paid in settlement of any such action, suit or proceeding). The Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be finally determined that the Indemnitee is not entitled to be indemnified by the Indemnitors as authorized hereby. The advances to be made hereunder shall be paid by the Indemnitors to the Indemnitee within 30 days following delivery of a written request therefor by the Indemnitee to the Company on behalf of all of the Indemnitors, which request shall be accompanied by invoices or statements or such other evidence of such expenses as the Indemnitors may reasonably request.
b. Notice/Cooperation by the Indemnitee. The Indemnitee shall, as a condition precedent to his right to be indemnified under this Agreement, give the Indemnitors notice in writing as soon as practicable of any claim made against the Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Indemnitors shall be directed to the President and Chief Executive Officer of the Company (or, if the Indemnitee shall be the President and Chief Executive Officer of the Company, to the chief legal officer of the Company) at the address of the Company shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to the Indemnitee). Notice shall be deemed received in accordance with the provisions of Section 15. In addition, the Indemnitee shall give the Indemnitors such information and cooperation with respect to such claim as they may reasonably require and as shall be within the Indemnitee's power to provide.
c. Procedure. Any indemnification and advances provided for in Section 1 and this Section 3 shall be made no later than 30 days after receipt of the written request of the Indemnitee. In the event that any action is instituted by the Indemnitee under this Agreement or liability insurance policies maintained by any of the Indemnitors or any of their respective subsidiaries to enforce or interpret any of the terms hereof or thereof, the Indemnitee may, but need not, at any time thereafter bring an action against the Indemnitors to recover the unpaid amount of the claim and, subject to Section 15 of this Agreement, the Indemnitee shall also be entitled to be paid for the expenses (including attorneys' fees) of bringing such action. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses (including attorneys' fees) incurred
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in connection with any action, suit or proceeding in advance of its final disposition) that the Indemnitee has not met the standards of conduct which make it permissible under applicable law for the Indemnitors to indemnify the Indemnitee for the amount claimed, but the burden of proving such defense shall be on the Indemnitors. However, the Indemnitee shall be entitled to receive interim payments of expenses (including attorneys' fees) pursuant to Section 3(a) unless and until such defense may be finally adjudicated by court order or judgment from which no further right of appeal exists.
d. No Presumptions; Burden of Proof. For purposes of this Agreement, the termination of any investigation, action, suit, proceeding or ADR mechanism by judgment, order, finding, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere , or its equivalent, shall not create a presumption that the Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by this Agreement or applicable law. In addition, neither the failure of any Independent Legal Counsel to have made a determination as to whether the Indemnitee has met any particular standard of conduct or had any particular belief, nor an actual determination by any Independent Legal Counsel that the Indemnitee has not met such standard of conduct or did not have such belief, prior to the commencement of legal proceedings by the Indemnitee to secure a judicial determination that the Indemnitee should be indemnified under this Agreement under applicable law, shall be a defense to the Indemnitee's claim or create a presumption that the Indemnitee has not met any particular standard of conduct or did not have any particular belief. In connection with any determination by any Independent Legal Counsel or otherwise as to whether the Indemnitee is entitled to be indemnified hereunder under applicable law, the burden of proof shall be on the Indemnitors to establish that the Indemnitee is not so entitled.
e. Notice to Insurers. If, at the time of the receipt of a notice of a claim pursuant to Section 3(b), the relevant Indemnitor or relevant subsidiary of any Indemnitor has directors and officers liability insurance in effect, the Company shall give or shall cause such Indemnitor or such subsidiary to give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Indemnitors shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies.
f. Selection of Counsel; Defense of Claim. In the event the Indemnitors shall be obligated under Section 3(a) to pay the expenses (including attorneys' fees) of any proceeding against the Indemnitee, the Indemnitors, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by the Indemnitee, upon the delivery to the Indemnitee of written notice of its election to do so. After delivery of such notice, approval of such counsel by the Indemnitee and the retention of such counsel by the Indemnitors, the Indemnitors will not be liable to the Indemnitee under this Agreement for any fees of other counsel subsequently incurred by the Indemnitee with respect to the same proceeding, provided that ( i ) the Indemnitee shall have the right to employ separate counsel in any such proceeding at the Indemnitee's expense; and ( ii ) if ( A ) the employment of separate counsel by the Indemnitee has been previously authorized by the Indemnitors, ( B ) the Indemnitee shall have reasonably concluded that there may be a conflict of interest between any of the Indemnitors or any of their respective subsidiaries and the Indemnitee in the conduct of any such defense, ( C ) the named parties in any such proceeding include both one or more of the Indemnitors or any of their respective subsidiaries and the Indemnitee or ( D ) the Indemnitors shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of the Indemnitee's counsel shall be at the expense of the Indemnitors. The Indemnitors will not, without the prior written consent of the Indemnitee,
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which may be provided or withheld in the sole discretion of the Indemnitee, effect any settlement of any threatened or pending action, suit or proceeding to which the Indemnitee is or could have been a party unless such settlement solely involves the payment of money and includes an unconditional release of the Indemnitee from all liability on any claims that are the subject matter of such action, suit or proceeding.
4. Additional Indemnification Rights; Nonexclusivity.
a. Scope. Notwithstanding any other provision of this Agreement, the Indemnitors hereby agree to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, by the Indemnitors' respective Certificates of Incorporation, by the Indemnitors' respective By-Laws or by statute. In the event of any change, after the date of this Agreement, in any applicable law, statute, or rule which expands the right of an Indemnitor to indemnify a member of its board of directors or an officer, such changes shall be, ipso facto, within the purview of the Indemnitee's rights and such Indemnitor's obligations, under this Agreement. In the event of any change in any applicable law, statute or rule which narrows the right of an Indemnitor to indemnify a member of its board of directors or an officer, such changes, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder.
b. Nonexclusivity. The indemnification provided by this Agreement shall not be deemed exclusive of any rights to which the Indemnitee may be entitled under the Indemnitors' respective Certificates of Incorporation, their respective By-Laws, any agreement, any vote of stockholders or disinterested Directors, the General Corporation Law of the State of Delaware or other applicable corporations law, any employment, consulting or other indemnification agreement to which the Indemnitee may be a party or a beneficiary, or otherwise, both as to action in the Indemnitee's official capacity and as to action in another capacity while holding such office. The indemnification provided under this Agreement shall continue as to the Indemnitee for any action taken or not taken while serving in an indemnified capacity even though he may have ceased to serve in such capacity at the time of any action, suit or other covered proceeding.
5. Partial Indemnification.
If the Indemnitee is entitled under any provision of this Agreement to indemnification by the Indemnitors for some or a portion of the expenses, judgments, fines or penalties actually or reasonably incurred by him in the investigation, defense, appeal or settlement of any investigation, action, suit, proceeding or ADR mechanism, but not, however, for the total amount thereof, the Indemnitors shall nevertheless indemnify the Indemnitee for the portion of such expenses, judgments, fines or penalties to which the Indemnitee is entitled.
6. Mutual Acknowledgement.
Both the Indemnitors and the Indemnitee acknowledge that in certain instances, United States of America federal securities law or applicable public policy may prohibit the Indemnitors from indemnifying their respective directors and officers or the directors and officers of their respective subsidiaries under this Agreement or otherwise. The Indemnitee understands and acknowledges that the Indemnitors have undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Indemnitors' rights under public policy to indemnify the Indemnitee.
7. Directors and Officers Liability Insurance.
Each of the Indemnitors hereby covenants and agrees that, so long as the Indemnitee shall serve as a director (including, without limitation, as a member of any committee of the Board of Directors) or officer of such Indemnitor or any subsidiary thereof, or shall serve at the request of such Indemnitor
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as a director (including, without limitation, as a member of any committee of the Board of Directors) or officer of another corporation, limited liability company, partnership, joint venture, trust or other entity or enterprise, including service with respect to an employee benefit plan, and thereafter so long as the Indemnitee shall be subject to any possible, threatened, pending or completed claim or proceeding arising out of, relating to, based upon, in connection with or due to the fact that the Indemnitee was a director (including, without limitation, a member of any committee of the Board of Directors) or officer of such Indemnitor or any subsidiary thereof, or any predecessor thereof, or is or was serving at the request of such Indemnitor as a director (including, without limitation, as a member of any committee of the Board of Directors) or officer of another corporation, limited liability company, partnership, joint venture, trust or other entity or enterprise, or any predecessor thereof, including service with respect to an employee benefit plan, such Indemnitor (or a parent corporation thereof) shall maintain in full force and effect directors and officers liability insurance issued by reputable and creditworthy insurance companies, covering the Indemnitee's service as a director or officer. In all such policies of directors and officers liability insurance, the Indemnitee shall be designated as an insured (either by name or by description) in such a manner as to provide the Indemnitee the same rights and benefits as are accorded to the most favorably insured of such Indemnitor's or subsidiary's then current directors.
8. Severability.
Nothing in this Agreement is intended to require or shall be construed as requiring the Indemnitors to do or fail to do any act in violation of applicable law. An Indemnitor's inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 8. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Indemnitors shall nevertheless indemnify the Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms.
9. Limitation of Liability as a Director.
If the Indemnitee is a director of any of the Indemnitors or any of their respective subsidiaries, the Indemnitee shall not be personally liable to any of the Indemnitors or their respective stockholders for monetary damages for breach of fiduciary duty as a director of such Indemnitor or such subsidiary; provided, however, that the foregoing shall not eliminate or limit the liability of the Indemnitee (i) for any breach of the Indemnitee's duty of loyalty to such Indemnitor or such subsidiary or the stockholders thereof; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law; (iii) under Section 174 of the General Corporation Law of the State of Delaware or any similar provision of other applicable corporations law; or (iv) for any transaction from which the Indemnitee derived an improper personal benefit. If the General Corporation Law of the State of Delaware or such other applicable corporations law shall be amended to permit further elimination or limitation of the personal liability of directors, then the liability of the Indemnitee shall, automatically, without any further action, be eliminated or limited to the fullest extent permitted by the General Corporation Law of the State of Delaware or such other applicable corporations law as so amended.
10. Exceptions.
Any other provision herein to the contrary notwithstanding, the Indemnitors shall not be obligated pursuant to the terms of this Agreement:
a. Claims Initiated by the Indemnitee. To indemnify or advance expenses (including attorneys' fees) to the Indemnitee with respect to proceedings or claims initiated or brought voluntarily by the Indemnitee and not by way of defense, counterclaim or crossclaim, except with
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respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under Section 145 of the General Corporation Law of the State of Delaware or other similar provision of any other applicable corporations law, but such indemnification or advancement of expenses (including attorneys' fees) may be provided by the Indemnitors in specific cases if the Board of Directors of the Company has approved the initiation or bringing of such suit;
b. Lack of Good Faith. To indemnify the Indemnitee for any expenses (including attorneys' fees) incurred by the Indemnitee with respect to any proceeding instituted by the Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such proceeding was not made in good faith or was frivolous;
c. Insured Claims. To indemnify the Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) which have been paid directly to the Indemnitee by an insurance carrier under a policy of directors and officers liability insurance maintained by any of the Indemnitors or any of their respective subsidiaries; or
d. Claims Under Section 16(b). To indemnify the Indemnitee for expenses (including attorneys' fees) and the payment of profits arising from the purchase and sale by the Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute.
11. Construction of Certain Phrases.
For purposes of this Agreement, references to any of the "Indemnitors" and any of the "subsidiaries" thereof shall include, in addition to the resulting corporation, limited liability company, partnership, joint venture, trust or other entity or enterprise, any constituent corporation, limited liability company, partnership, joint venture, trust or other entity or enterprise (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors (including, without limitation, the members of any committee of the Board of Directors), officers and employees or agents, or those serving in similar positions, so that if the Indemnitee is or was a director (including, without limitation, a member of any committee of the Board of Directors), officer, employee or agent, or serves or served in any similar position, of such constituent corporation, limited liability company, partnership, joint venture, trust or other entity or enterprise, or is or was serving at the request of such constituent corporation, limited liability company, partnership, joint venture, trust or other entity or enterprise as a director (including, without limitation, as a member of any committee of the Board of Directors), officer, employee or agent, or serves or served in any similar position, of another corporation, limited liability company, partnership, joint venture, trust or other entity or enterprise, including service with respect to an employee benefit plan, the Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation, limited liability company, partnership, joint venture, trust or other entity or enterprise as the Indemnitee would have with respect to such constituent corporation, limited liability company, partnership, joint venture, trust or other entity or enterprise if its separate existence had continued; and references to "fines" shall include any excise taxes assessed on the Indemnitee with respect to an employee benefit plan.
12. Counterparts.
This Agreement may be executed in one or more counterparts, each of which shall constitute an original.
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13. Successors and Assigns.
This Agreement shall be binding upon the Indemnitors and their respective successors and assigns and shall inure to the benefit of the Indemnitee and the Indemnitee's estate, heirs, legal representatives and assigns.
14. Attorneys' Fees.
In the event that any action is instituted by the Indemnitee under this Agreement to enforce or interpret any of the terms hereof (including but not limited to any legal proceedings in a court of competent jurisdiction to secure a determination that the Indemnitee is entitled to be indemnified hereunder under applicable law, as provided pursuant to Section 1(c)), the Indemnitee shall be entitled to be paid all court costs and expenses, including reasonable attorneys' fees incurred by the Indemnitee with respect to such action, unless as a part of such action, the court of competent jurisdiction determines that each of the material assertions made by the Indemnitee as a basis for such action was not made in good faith or was frivolous. In the event of an action instituted by or in the name of the Indemnitors under this Agreement or to enforce or interpret any of the terms of this Agreement, the Indemnitee shall be entitled to be paid all court costs and expenses, including attorneys' fees, incurred by the Indemnitee in defense of such action (including with respect to the Indemnitee's counterclaims and cross-claims made in such action), unless as a part of such action the court determines that each of the Indemnitee's material defenses to such action, counterclaims and cross-claims was made in bad faith or was frivolous.
15. Notice.
All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) on the date of delivery if delivered personally, or by telecopy or telefacsimile, upon confirmation of receipt, (ii) on the first business day following the date of dispatch if delivered by a recognized next-day courier service or (iii) on the third business day following the date of mailing if delivered by domestic registered or certified mail, properly addressed, or five business days if sent by airmail from a country outside of North America. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice.
16. Consent to Jurisdiction.
The Indemnitors and the Indemnitee each hereby irrevocably consents to the jurisdiction of the courts of the State of Delaware for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be brought only in the state courts of the State of Delaware.
17. Choice of Law.
This Agreement shall be governed by and its provisions construed in accordance with the laws of the State of Delaware, as applied to contracts between Delaware residents entered into and to be performed entirely within Delaware, without regard to the conflict of law principles thereof.
18. Period of Limitations.
No legal action shall be brought and no cause of action shall be asserted by or in the right of the Indemnitors against the Indemnitee, the Indemnitee's estate, spouse, heirs, executors or personal or legal representatives after the expiration of two years from the date of accrual of such cause of action, and any claim or cause of action of the Indemnitors shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such two-year period; provided, however, that if any shorter period of limitations is otherwise applicable to any such cause of action, such shorter period shall govern.
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19. Subrogation.
In the event of payment under this Agreement, the Indemnitors shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Indemnitors effectively to bring suit to enforce such rights.
20. Amendment and Termination.
No amendment, modification, termination or cancellation of this Agreement shall be effective unless it is in writing signed by all the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.
21. Integration and Entire Agreement.
This Agreement sets forth the entire understanding between the parties hereto and supersedes and merges all previous written and oral negotiations, commitments, understandings and agreements relating to the subject matter hereof between the parties hereto, provided that the provisions hereof shall not supersede the provisions of the Indemnitors' respective Certificates of Incorporation or By-Laws, any agreement, any vote of stockholders or disinterested Directors, the General Corporation Law of the State of Delaware or other applicable corporations law, or any employment, consulting or indemnification agreement to which the Indemnitee may be a party or a beneficiary, to the extent any such provisions shall be more favorable to the Indemnitee than the provisions hereof.
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IN WITNESS WHEREOF, the parties hereto have executed this Indemnification Agreement as of the date first above written.
GRAPHIC PACKAGING CORPORATION | |||
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Signature of Authorized Signatory |
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Stephen A. Hellrung Senior Vice President, General Counsel And Secretary |
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Address: |
814 Livingston Court Marietta, Georgia 30067 |
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GPI HOLDING, INC. |
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Signature of Authorized Signatory |
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Stephen A. Hellrung Senior Vice President, General Counsel And Secretary |
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Address: |
814 Livingston Court Marietta, Georgia 30067 |
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GRAPHIC PACKAGING INTERNATIONAL, INC. |
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Signature of Authorized Signatory |
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Stephen A. Hellrung Senior Vice President, General Counsel And Secretary |
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Address: |
814 Livingston Court Marietta, Georgia 30067 |
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AGREED TO AND ACCEPTED: |
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INDEMNITEE: |
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Signature |
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Exhibit 10.31
This Indemnification Agreement (" Agreement ") is made as of this 10th day of September, 2003, by and among Graphic Packaging Corporation, a Delaware corporation (formerly known as Riverwood Holding, Inc., and the successor by merger to Graphic Packaging International Corporation) (the " Company "); GPI Holding, Inc., a Colorado corporation (formerly known as Graphic Packaging Holdings, Inc., and the successor by merger to RIC Holding, Inc.) (" GPI Holding "); Graphic Packaging International, Inc., a Delaware corporation (formerly known as Riverwood International Corporation, and the successor by merger to the company formerly known as Graphic Packaging Corporation) (" GPI ," and together with the Company and GPI Holding, the " Indemnitors "), and Lawrence C. Tucker (the " Indemnitee ").
WHEREAS, the Indemnitors and the Indemnitee recognize the significant cost of directors and officers liability insurance and the general reductions in the coverage of such insurance;
WHEREAS, the Indemnitors and the Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting officers and directors to expensive litigation risks at the same time as the coverage of directors and officers liability insurance has been limited; and
WHEREAS, the Indemnitors desire to attract and retain the services of highly qualified individuals, such as the Indemnitee, to serve as officers, directors and observer of the Board of Directors of the Indemnitors and their respective subsidiaries, and to indemnify their and their respective subsidiaries' officers, directors and observer of the Board of Directors so as to provide them with the maximum protection permitted by law.
NOW, THEREFORE, in consideration for the Indemnitee's services as an officer, director or observer of the Board of Directors of one or more of the Indemnitors or one or more of their respective subsidiaries, or both, the Indemnitors and the Indemnitee hereby agree as follows (all obligations of the Indemnitors hereunder being joint and several obligations):
1. Indemnification.
a. Third Party Proceedings. Subject to Section 1(b), the Indemnitors shall indemnify the Indemnitee to the fullest extent permitted by law if the Indemnitee is or was a party or is threatened to be made a party to, or is or was a witness or other participant in, any threatened, pending or completed investigation, action, suit, proceeding or any alternative dispute resolution (" ADR ") mechanism, whether civil, criminal, administrative or investigative, by reason of the fact that the Indemnitee is or was a director (including, without limitation, a member of any committee of the Board of Directors), observer of the Board of Directors, officer, employee or agent, or serves or served in any similar position, of any of the Indemnitors or any of their respective subsidiaries, or any predecessor thereof, or by reason of the fact that the Indemnitee is or was serving at the request of any of the Indemnitors or any of their respective subsidiaries as a director (including, without limitation, as a member of any committee of the Board of Directors), observer of the Board of Directors, officer, employee or agent, or serves or served in any similar position, of another corporation, limited liability company, partnership, joint venture, trust or other entity or enterprise, or any predecessor thereof, including service with respect to an employee benefit plan, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement incurred by the Indemnitee in connection with such investigation, action, suit, proceeding or ADR mechanism.
b. Review of Indemnification Obligations. Notwithstanding the foregoing, in the event any Independent Legal Counsel (as herein defined) shall have determined, in a written opinion, that there is no reasonable basis for the position that were the Indemnitee a director such Indemnitee would be entitled to be indemnified hereunder under applicable law, ( i ) the Indemnitors shall have no further obligation under Section 1(a) to make any payments to the Indemnitee not made prior
to such determination by such Independent Legal Counsel and ( ii ) the Indemnitors shall be entitled to be reimbursed by the Indemnitee (who hereby agrees to reimburse the Indemnitors) for all expenses (including attorneys' fees), judgments, fines and penalties theretofore paid by the Indemnitors to the Indemnitee to which the Indemnitee is not entitled hereunder under applicable law; provided, however, that if the Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that the Indemnitee is entitled to be indemnified hereunder under applicable law, any determination made by any Independent Legal Counsel that there is no reasonable basis for the position that the Indemnitee is entitled to be indemnified hereunder under applicable law (because were it a director it would not be entitled to indemnification under applicable law) shall not be binding, the Indemnitors shall continue to be obligated under Section 1(a) to make payments to the Indemnitee, and the Indemnitee shall not be required to reimburse the Indemnitors for any expenses (including attorneys' fees), judgments, fines and penalties theretofore paid in indemnifying the Indemnitee, until a final judicial determination is made that the Indemnitee is not entitled to be indemnified hereunder under applicable law (because were it a director it would not be entitled to be indemnified under applicable law) (as to which all rights of appeal therefrom have been exhausted or lapsed). The Indemnitee's obligation to reimburse the Indemnitors for any expenses (including attorneys' fees), judgments, fines and penalties shall be unsecured, and no interest shall be charged thereon.
c. The Indemnitee's Rights on Unfavorable Determination; Binding Effect. If any Independent Legal Counsel determines that there is no reasonable basis for the position that the Indemnitee is entitled to be indemnified hereunder in whole or in part under applicable law, the Indemnitee shall have the right to commence legal proceedings in a court of competent jurisdiction to secure a determination that the Indemnitee is entitled to be indemnified hereunder under applicable law and, subject to the provisions of Section 15, each of the Indemnitors hereby consents to service of process and to appear in any such proceeding. Absent such legal proceedings, any determination by any Independent Legal Counsel shall be conclusive and binding on the Indemnitors and the Indemnitee.
d. Selection of Independent Legal Counsel; Change of Control. If there has not been a Change in Control (as herein defined), any Independent Legal Counsel shall be selected by the Board of Directors of the Company, and if there has been such a Change in Control, any Independent Legal Counsel with respect to all matters thereafter arising concerning the rights of the Indemnitee to indemnification of expenses (including attorneys' fees), judgments, fines and penalties under this Agreement or any other agreement or under the Certificate of Incorporation or By-Laws of any of the Indemnitors or any of their respective subsidiaries as now or hereafter in effect, or under any other applicable law, if desired by the Indemnitee, shall be Independent Legal Counsel selected by the Indemnitee and approved by the Company on behalf of all of the Indemnitors (which approval shall not be unreasonably withheld). Such counsel, among other things, shall render its written opinion to the Indemnitors and the Indemnitee as to whether and to what extent the Indemnitee would be entitled to be indemnified hereunder under applicable law, and the Indemnitors agree to abide by such opinion. The Indemnitors agree to pay the fees and expenses of the Independent Legal Counsel referred to above and to indemnify fully such counsel against any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. Notwithstanding any other provision of this Agreement, the Indemnitors shall not be required to pay expenses (including attorneys' fees), judgments, fines and penalties of more than one Independent Legal Counsel in connection with all matters concerning a single Indemnitee, and such Independent Legal Counsel shall be the Independent Legal Counsel for any or all other Indemnitees under indemnification agreements similar to this Agreement, unless ( i ) the employment of separate counsel by two or more of such Indemnitees has been previously authorized by the Company on behalf of all of the
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Indemnitors in writing or ( ii ) the Indemnitee shall have provided to the Indemnitors a written statement that the Indemnitee has reasonably concluded that there may be a conflict of interest between the Indemnitee and any of such other Indemnitees with respect to the matters arising under this Agreement.
e. Mandatory Payment of Expenses. To the extent that the Indemnitee has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 1(a), or in defense of any claim, issue or matter therein, the Indemnitee shall be indemnified against expenses (including attorneys' fees) incurred by the Indemnitee in connection therewith.
f. For purposes of this Agreement, the following terms shall have the following meanings:
" Independent Legal Counsel " shall mean an attorney or firm of attorneys competent to render an opinion under the applicable law, selected in accordance with the provisions of Section 1(d), who shall not have otherwise performed any services for any of the Indemnitors, any of their respective subsidiaries or the Indemnitee within the last three years (other than with respect to matters concerning the rights of the Indemnitee under this Agreement, or of other Indemnitees under indemnity agreements similar to this Agreement).
" Change in Control " shall mean, and shall be deemed to have occurred if, on or after the date of this Agreement, ( i ) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than ( A ) a trustee or other fiduciary holding securities under an employee benefit plan of one or more of the Indemnitors acting in such capacity, ( B ) a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, ( C ) a person or group party to the Stockholders Agreement, dated as of March 25, 2003, as amended, by and among Riverwood Holding, Inc., the persons listed thereto, Clayton, Dubilier & Rice Fund V Limited Partnership and EXOR Group S.A. (" Exor ") or ( D ) any Affiliate (as defined in such Stockholders Agreement) of Exor or Clayton, Dubilier & Rice, Inc. (" CD&R ") or any investment fund managed by CD&R, becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing more than 50% of the total voting power represented by the Company's then outstanding Voting Securities (as herein defined), ( ii ) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors of the Company or nomination for election by the Company's stockholders was approved by a vote of at least two thirds ( 2 / 3 ) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, ( iii ) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation other than a merger or consolidation that would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 80% of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, ( iv ) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by any of the Indemnitors of (in one transaction or a series of related transactions) all or substantially all of such Indemnitor's assets, or ( v ) any of the Indemnitors shall file or have filed against it, and such filing shall not be dismissed, any bankruptcy, insolvency or dissolution proceedings, or a trustee, administrator or creditors committee shall be appointed to manage or supervise the affairs of any of the Indemnitors.
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" Voting Securities " shall mean any securities of the Company that vote generally in the election of directors.
2. Agreement to Serve.
In consideration of the protection afforded by this Agreement, if the Indemnitee is a director of any of the Indemnitors or any of their respective subsidiaries, he agrees to serve in such capacity for at least 90 days after the effective date of this Agreement and not to resign voluntarily during such period without the written consent of a majority of the Board of Directors of the Company. If the Indemnitee is an officer of any of the Indemnitors or any of their respective subsidiaries not serving under an employment contract, he agrees to serve in such capacity for at least 90 days after the effective date of this Agreement and not to resign voluntarily during such period without the written consent of a majority of the Board of Directors of the Company. Following the applicable period set forth above, the Indemnitee agrees to continue to serve in such capacity at the will of such Indemnitor or such subsidiary, as the case may be (or under separate agreement, if such agreement exists), so long as he is duly appointed or elected and qualified in accordance with the applicable provisions of the By-Laws of such Indemnitor or such subsidiary or until such time as he tenders his resignation in writing. Notwithstanding the foregoing provisions of this Section 2, the Indemnitee shall be entitled to resign with immediate effect if the Company shall not maintain a policy or policies of directors and officers liability insurance with reputable and creditworthy insurance companies providing the officers and directors and any observers of the Board of Directors of each such Indemnitor and each such subsidiary with coverage for losses from alleged wrongful acts and omissions and having an aggregate limit of liability of at least $25 million. Nothing contained in this Agreement is intended to create in the Indemnitee any right to continued employment or appointment.
3. Expenses; Indemnification Procedure.
a. Advancement of Expenses. The Indemnitors shall advance all expenses (including attorneys' fees) incurred by the Indemnitee in connection with the investigation, defense, settlement or appeal of any investigation, action, suit, proceeding or ADR mechanism referenced in Section 1(a) hereof (but not amounts actually paid in settlement of any such action, suit or proceeding). The Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be finally determined that the Indemnitee is not entitled to be indemnified by the Indemnitors as authorized hereby. The advances to be made hereunder shall be paid by the Indemnitors to the Indemnitee within 30 days following delivery of a written request therefor by the Indemnitee to the Company on behalf of all of the Indemnitors, which request shall be accompanied by invoices or statements or such other evidence of such expenses as the Indemnitors may reasonably request.
b. Notice/Cooperation by the Indemnitee. The Indemnitee shall, as a condition precedent to his right to be indemnified under this Agreement, give the Indemnitors notice in writing as soon as practicable of any claim made against the Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Indemnitors shall be directed to the President and Chief Executive Officer of the Company (or, if the Indemnitee shall be the President and Chief Executive Officer of the Company, to the chief legal officer of the Company) at the address of the Company shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to the Indemnitee). Notice shall be deemed received in accordance with the provisions of Section 15. In addition, the Indemnitee shall give the Indemnitors such information and cooperation with respect to such claim as they may reasonably require and as shall be within the Indemnitee's power to provide.
c. Procedure. Any indemnification and advances provided for in Section 1 and this Section 3 shall be made no later than 30 days after receipt of the written request of the Indemnitee. In the event that any action is instituted by the Indemnitee under this Agreement or liability insurance
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policies maintained by any of the Indemnitors or any of their respective subsidiaries to enforce or interpret any of the terms hereof or thereof, the Indemnitee may, but need not, at any time thereafter bring an action against the Indemnitors to recover the unpaid amount of the claim and, subject to Section 15 of this Agreement, the Indemnitee shall also be entitled to be paid for the expenses (including attorneys' fees) of bringing such action. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses (including attorneys' fees) incurred in connection with any action, suit or proceeding in advance of its final disposition) that the Indemnitee has not met the standards of conduct which make it permissible under applicable law for the Indemnitors to indemnify the Indemnitee for the amount claimed, but the burden of proving such defense shall be on the Indemnitors. However, the Indemnitee shall be entitled to receive interim payments of expenses (including attorneys' fees) pursuant to Section 3(a) unless and until such defense may be finally adjudicated by court order or judgment from which no further right of appeal exists.
d. No Presumptions; Burden of Proof. For purposes of this Agreement, the termination of any investigation, action, suit, proceeding or ADR mechanism by judgment, order, finding, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere , or its equivalent, shall not create a presumption that the Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by this Agreement or applicable law. In addition, neither the failure of any Independent Legal Counsel to have made a determination as to whether the Indemnitee has met any particular standard of conduct or had any particular belief, nor an actual determination by any Independent Legal Counsel that the Indemnitee has not met such standard of conduct or did not have such belief, prior to the commencement of legal proceedings by the Indemnitee to secure a judicial determination that the Indemnitee should be indemnified under this Agreement under applicable law, shall be a defense to the Indemnitee's claim or create a presumption that the Indemnitee has not met any particular standard of conduct or did not have any particular belief. In connection with any determination by any Independent Legal Counsel or otherwise as to whether the Indemnitee is entitled to be indemnified hereunder under applicable law, the burden of proof shall be on the Indemnitors to establish that the Indemnitee is not so entitled.
e. Notice to Insurers. If, at the time of the receipt of a notice of a claim pursuant to Section 3(b), the relevant Indemnitor or relevant subsidiary of any Indemnitor has directors and officers liability insurance in effect, the Company shall give or shall cause such Indemnitor or such subsidiary to give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Indemnitors shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies.
f. Selection of Counsel; Defense of Claim. In the event the Indemnitors shall be obligated under Section 3(a) to pay the expenses (including attorneys' fees) of any proceeding against the Indemnitee, the Indemnitors, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by the Indemnitee, upon the delivery to the Indemnitee of written notice of its election to do so. After delivery of such notice, approval of such counsel by the Indemnitee and the retention of such counsel by the Indemnitors, the Indemnitors will not be liable to the Indemnitee under this Agreement for any fees of other counsel subsequently incurred by the Indemnitee with respect to the same proceeding, provided that ( i ) the Indemnitee shall have the right to employ separate counsel in any such proceeding at the Indemnitee's expense; and ( ii ) if ( A ) the employment of separate counsel by the Indemnitee has been previously authorized by the Indemnitors, ( B ) the Indemnitee shall have reasonably concluded that there may be a
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conflict of interest between any of the Indemnitors or any of their respective subsidiaries and the Indemnitee in the conduct of any such defense, ( C ) the named parties in any such proceeding include both one or more of the Indemnitors or any of their respective subsidiaries and the Indemnitee or ( D ) the Indemnitors shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of the Indemnitee's counsel shall be at the expense of the Indemnitors. The Indemnitors will not, without the prior written consent of the Indemnitee, which may be provided or withheld in the sole discretion of the Indemnitee, effect any settlement of any threatened or pending action, suit or proceeding to which the Indemnitee is or could have been a party unless such settlement solely involves the payment of money and includes an unconditional release of the Indemnitee from all liability on any claims that are the subject matter of such action, suit or proceeding.
4. Additional Indemnification Rights; Nonexclusivity.
a. Scope. Notwithstanding any other provision of this Agreement, the Indemnitors hereby agree to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, by the Indemnitors' respective Certificates of Incorporation, by the Indemnitors' respective By-Laws or by statute. In the event of any change, after the date of this Agreement, in any applicable law, statute, or rule which expands the right of an Indemnitor to indemnify a member of its board of directors, an observer of the Board of Directors or an officer, such changes shall be, ipso facto, within the purview of the Indemnitee's rights and such Indemnitor's obligations, under this Agreement. In the event of any change in any applicable law, statute or rule which narrows the right of an Indemnitor to indemnify a member of its board of directors, an observer of the Board of Directors, or an officer, such changes, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder.
b. Nonexclusivity. The indemnification provided by this Agreement shall not be deemed exclusive of any rights to which the Indemnitee may be entitled under the Indemnitors' respective Certificates of Incorporation, their respective By-Laws, any agreement, any vote of stockholders or disinterested Directors, the General Corporation Law of the State of Delaware or other applicable corporations law, any employment, consulting or other indemnification agreement to which the Indemnitee may be a party or a beneficiary, or otherwise, both as to action in the Indemnitee's official capacity and as to action in another capacity while holding such office. The indemnification provided under this Agreement shall continue as to the Indemnitee for any action taken or not taken while serving in an indemnified capacity even though he may have ceased to serve in such capacity at the time of any action, suit or other covered proceeding.
5. Partial Indemnification.
If the Indemnitee is entitled under any provision of this Agreement to indemnification by the Indemnitors for some or a portion of the expenses, judgments, fines or penalties actually or reasonably incurred by him in the investigation, defense, appeal or settlement of any investigation, action, suit, proceeding or ADR mechanism, but not, however, for the total amount thereof, the Indemnitors shall nevertheless indemnify the Indemnitee for the portion of such expenses, judgments, fines or penalties to which the Indemnitee is entitled.
6. Mutual Acknowledgement.
Both the Indemnitors and the Indemnitee acknowledge that in certain instances, United States of America federal securities law or applicable public policy may prohibit the Indemnitors from indemnifying their respective directors, officers, and observers of the Board of Directors or the directors, observers of the Board of Directors, or officers of their respective subsidiaries under this
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Agreement or otherwise. The Indemnitee understands and acknowledges that the Indemnitors have undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Indemnitors' rights under public policy to indemnify the Indemnitee.
7. Directors and Officers Liability Insurance.
Each of the Indemnitors hereby covenants and agrees that, so long as the Indemnitee shall serve as a director (including, without limitation, as a member of any committee of the Board of Directors), observer of the Board of Directors or officer of such Indemnitor or any subsidiary thereof, or shall serve at the request of such Indemnitor as a director (including, without limitation, as a member of any committee of the Board of Directors), observer of the Board of Directors or officer of another corporation, limited liability company, partnership, joint venture, trust or other entity or enterprise, including service with respect to an employee benefit plan, and thereafter so long as the Indemnitee shall be subject to any possible, threatened, pending or completed claim or proceeding arising out of, relating to, based upon, in connection with or due to the fact that the Indemnitee was a director (including, without limitation, a member of any committee of the Board of Directors), observer of the Board of Directors or officer of such Indemnitor or any subsidiary thereof, or any predecessor thereof, or is or was serving at the request of such Indemnitor as a director (including, without limitation, as a member of any committee of the Board of Directors), observer of the Board of Directors or officer of another corporation, limited liability company, partnership, joint venture, trust or other entity or enterprise, or any predecessor thereof, including service with respect to an employee benefit plan, such Indemnitor (or a parent corporation thereof) shall maintain in full force and effect directors and officers liability insurance issued by reputable and creditworthy insurance companies, covering the Indemnitee's service as a director, observer of the Board of Directors or officer. In all such policies of directors and officers liability insurance, the Indemnitee shall be designated as an insured (either by name or by description) in such a manner as to provide the Indemnitee the same rights and benefits as are accorded to the most favorably insured of such Indemnitor's or subsidiary's then current directors.
8. Severability.
Nothing in this Agreement is intended to require or shall be construed as requiring the Indemnitors to do or fail to do any act in violation of applicable law. An Indemnitor's inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 8. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Indemnitors shall nevertheless indemnify the Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms.
9. Limitation of Liability as a Director.
If the Indemnitee is a director or an observer of the Board of Directors of any of the Indemnitors or any of their respective subsidiaries, the Indemnitee shall not be personally liable to any of the Indemnitors or their respective stockholders for monetary damages for breach of fiduciary duty as a director or observer of the Board of Directors of such Indemnitor or such subsidiary; provided, however, that the foregoing shall not eliminate or limit the liability of the Indemnitee ( i ) for any breach of the Indemnitee's duty of loyalty to such Indemnitor or such subsidiary or the stockholders thereof; ( ii ) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law; ( iii ) under Section 174 of the General Corporation Law of the State of Delaware or any similar provision of other applicable corporations law; or ( iv ) for any transaction from which the Indemnitee derived an improper personal benefit. If the General Corporation Law of the State of Delaware or such other applicable corporations law shall be amended to permit further elimination or limitation of the personal liability of directors, then the liability of the Indemnitee shall, automatically,
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without any further action, be eliminated or limited to the fullest extent permitted by the General Corporation Law of the State of Delaware or such other applicable corporations law as so amended.
10. Exceptions.
Any other provision herein to the contrary notwithstanding, the Indemnitors shall not be obligated pursuant to the terms of this Agreement:
a. Claims Initiated by the Indemnitee. To indemnify or advance expenses (including attorneys' fees) to the Indemnitee with respect to proceedings or claims initiated or brought voluntarily by the Indemnitee and not by way of defense, counterclaim or crossclaim, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under Section 145 of the General Corporation Law of the State of Delaware or other similar provision of any other applicable corporations law, but such indemnification or advancement of expenses (including attorneys' fees) may be provided by the Indemnitors in specific cases if the Board of Directors of the Company has approved the initiation or bringing of such suit;
b. Lack of Good Faith. To indemnify the Indemnitee for any expenses (including attorneys' fees) incurred by the Indemnitee with respect to any proceeding instituted by the Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such proceeding was not made in good faith or was frivolous;
c. Insured Claims. To indemnify the Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) which have been paid directly to the Indemnitee by an insurance carrier under a policy of directors and officers liability insurance maintained by any of the Indemnitors or any of their respective subsidiaries; or
d. Claims Under Section 16(b). To indemnify the Indemnitee for expenses (including attorneys' fees) and the payment of profits arising from the purchase and sale by the Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute.
11. Construction of Certain Phrases.
For purposes of this Agreement, references to any of the "Indemnitors" and any of the "subsidiaries" thereof shall include, in addition to the resulting corporation, limited liability company, partnership, joint venture, trust or other entity or enterprise, any constituent corporation, limited liability company, partnership, joint venture, trust or other entity or enterprise (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors (including, without limitation, the members of any committee of the Board of Directors), officers, observers of the Board of Directors, and employees or agents, or those serving in similar positions, so that if the Indemnitee is or was a director (including, without limitation, a member of any committee of the Board of Directors), observer of the Board of Directors, officer, employee or agent, or serves or served in any similar position, of such constituent corporation, limited liability company, partnership, joint venture, trust or other entity or enterprise, or is or was serving at the request of such constituent corporation, limited liability company, partnership, joint venture, trust or other entity or enterprise as a director (including, without limitation, as a member of any committee of the Board of Directors), observers of the Board of Directors, officer, employee or agent, or serves or served in any similar position, of another corporation, limited liability company, partnership, joint venture, trust or other entity or enterprise, including service with respect to an employee benefit plan, the Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation,
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limited liability company, partnership, joint venture, trust or other entity or enterprise as the Indemnitee would have with respect to such constituent corporation, limited liability company, partnership, joint venture, trust or other entity or enterprise if its separate existence had continued; and references to "fines" shall include any excise taxes assessed on the Indemnitee with respect to an employee benefit plan.
12. Counterparts.
This Agreement may be executed in one or more counterparts, each of which shall constitute an original.
13. Successors and Assigns.
This Agreement shall be binding upon the Indemnitors and their respective successors and assigns and shall inure to the benefit of the Indemnitee and the Indemnitee's estate, heirs, legal representatives and assigns.
14. Attorneys' Fees.
In the event that any action is instituted by the Indemnitee under this Agreement to enforce or interpret any of the terms hereof (including but not limited to any legal proceedings in a court of competent jurisdiction to secure a determination that the Indemnitee is entitled to be indemnified hereunder under applicable law, as provided pursuant to Section 1(c)), the Indemnitee shall be entitled to be paid all court costs and expenses, including reasonable attorneys' fees incurred by the Indemnitee with respect to such action, unless as a part of such action, the court of competent jurisdiction determines that each of the material assertions made by the Indemnitee as a basis for such action was not made in good faith or was frivolous. In the event of an action instituted by or in the name of the Indemnitors under this Agreement or to enforce or interpret any of the terms of this Agreement, the Indemnitee shall be entitled to be paid all court costs and expenses, including attorneys' fees, incurred by the Indemnitee in defense of such action (including with respect to the Indemnitee's counterclaims and cross-claims made in such action), unless as a part of such action the court determines that each of the Indemnitee's material defenses to such action, counterclaims and cross-claims was made in bad faith or was frivolous.
15. Notice.
All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given ( i ) on the date of delivery if delivered personally, or by telecopy or telefacsimile, upon confirmation of receipt, ( ii ) on the first business day following the date of dispatch if delivered by a recognized next-day courier service or ( iii ) on the third business day following the date of mailing if delivered by domestic registered or certified mail, properly addressed, or five business days if sent by airmail from a country outside of North America. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice.
16. Consent to Jurisdiction.
The Indemnitors and the Indemnitee each hereby irrevocably consents to the jurisdiction of the courts of the State of Delaware for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be brought only in the state courts of the State of Delaware.
17. Choice of Law.
This Agreement shall be governed by and its provisions construed in accordance with the laws of the State of Delaware, as applied to contracts between Delaware residents entered into and to be performed entirely within Delaware, without regard to the conflict of law principles thereof.
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18. Period of Limitations.
No legal action shall be brought and no cause of action shall be asserted by or in the right of the Indemnitors against the Indemnitee, the Indemnitee's estate, spouse, heirs, executors or personal or legal representatives after the expiration of two years from the date of accrual of such cause of action, and any claim or cause of action of the Indemnitors shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such two-year period; provided, however, that if any shorter period of limitations is otherwise applicable to any such cause of action, such shorter period shall govern.
19. Subrogation.
In the event of payment under this Agreement, the Indemnitors shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Indemnitors effectively to bring suit to enforce such rights.
20. Amendment and Termination.
No amendment, modification, termination or cancellation of this Agreement shall be effective unless it is in writing signed by all the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.
21. Integration and Entire Agreement.
This Agreement sets forth the entire understanding between the parties hereto and supersedes and merges all previous written and oral negotiations, commitments, understandings and agreements relating to the subject matter hereof between the parties hereto, provided that the provisions hereof shall not supersede the provisions of the Indemnitors' respective Certificates of Incorporation or By-Laws, any agreement, any vote of stockholders or disinterested Directors, the General Corporation Law of the State of Delaware or other applicable corporations law, or any employment, consulting or indemnification agreement to which the Indemnitee may be a party or a beneficiary, to the extent any such provisions shall be more favorable to the Indemnitee than the provisions hereof.
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IN WITNESS WHEREOF, the parties hereto have executed this Indemnification Agreement as of the date first above written.
GRAPHIC PACKAGING CORPORATION | |||
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/s/ STEPHEN A. HELLRUNG Signature of Authorized Signatory |
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Stephen A. Hellrung Senior Vice President, General Counsel And Secretary |
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Address: |
814 Livingston Court Marietta, Georgia 30067 |
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GPI HOLDING, INC. |
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/s/ STEPHEN A. HELLRUNG Signature of Authorized Signatory |
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Stephen A. Hellrung Senior Vice President, General Counsel And Secretary |
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Address: |
814 Livingston Court Marietta, Georgia 30067 |
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GRAPHIC PACKAGING INTERNATIONAL, INC. |
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/s/ STEPHEN A. HELLRUNG Signature of Authorized Signatory |
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Stephen A. Hellrung Senior Vice President, General Counsel And Secretary |
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Address: |
814 Livingston Court Marietta, Georgia 30067 |
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AGREED TO AND ACCEPTED: |
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INDEMNITEE: |
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/s/ LAWRENCE C. TUCKER Signature |
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Lawrence C. Tucker Observer |
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Address: |
Brown Brothers Harriman & Co. 140 Broadway, 16 th Floor New York, NY 10005 |
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Exhibit 14.1
CODE OF BUSINESS CONDUCT AND ETHICS
Graphic Packaging Corporation and Subsidiaries
Graphic Packaging Corporation has a solid reputation for honesty, social responsibility and ethical dealings. Every employee, including every officer and director, shares an obligation to protect and strengthen our good reputation in our relationships with customers, employees, suppliers, competitors, investors, and governmental agencies.
Consistent with this objective, each employee should:
Unfortunately, matters of honesty and fairness are not always apparent or easy to determine in every situation. Accordingly, our Board of Directors has approved a revised Code of Business Conduct and Ethics to provide guidance to our employees in conducting business in accordance with the highest ethical standards. After reading the Code, if you have any questions or doubts about a matter, feel free to discuss it with your manager or supervisor. Full, early and ongoing disclosure can prevent potential problems.
Consistent with our new Code of Business Conduct and Ethics, we respect the rights of all employees to engage in and carry on all activities outside their employment with us that are legal, do not interfere with the performance of assigned duties, do not involve misuse of our influence or assets, and do not involve risk to our good reputation.
These standards and procedures for ethical business behavior have always been an integral part of our business and we reaffirm our commitment to the highest principles of business conduct.
Stephen
M. Humphrey
President and
Chief Executive Officer
INTRODUCTION | 1 | ||
A. |
COMPLIANCE WITH LAWS AND REGULATIONS |
|
1 |
B. |
CONFLICTS OF INTEREST |
|
2 |
C. |
CUSTOMERS AND SUPPLIERS; FAIR DEALING |
|
3 |
D. |
CORPORATE OPPORTUNITY |
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4 |
E. |
CONFIDENTIAL INFORMATION |
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4 |
F. |
INSIDER TRADING |
|
4 |
G. |
PERSONAL INVESTMENTS |
|
5 |
H. |
POLITICAL CONTRIBUTIONS |
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5 |
I. |
GOVERNMENTAL OFFICIALS AND AGENCIES |
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5 |
J. |
BOOKS AND RECORDS |
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6 |
K. |
EMPLOYEE RELATIONS |
|
7 |
L. |
PROTECTION AND PROPER USE OF ASSETS |
|
7 |
M. |
ACCOUNTING COMPLAINTS |
|
7 |
N. |
PUBLIC COMPANY REPORTING |
|
7 |
O. |
AMENDMENT, MODIFICATION AND WAIVER |
|
8 |
P. |
COMPLIANCE WITH THIS CODE |
|
8 |
Q. |
PROCEDURES FOR INQUIRIES |
|
9 |
Graphic Packaging Corporation and Subsidiaries
Code of Business Conduct and Ethics
INTRODUCTION
The Graphic Packaging Code of Business Conduct and Ethics (the "Code") is a practical guide to the business and personal behavior of our employees while conducting our affairs.
This Code applies to every employee, officer and director (collectively, "employees") of Graphic Packaging Corporation or our subsidiaries worldwide. Please take time to read, review and understand these standards, since you will be subject to them. If objections, possible conflicts, or disagreements with this Code arise, or if you become aware of possible violations of this Code, it is important that we resolve them promptly.
A. COMPLIANCE WITH LAWS AND REGULATIONS
We value our corporate reputation for complying with all applicable federal, state and local laws, rules and regulations in that apply to our business as around the world. Every employee must share this responsibility. Legal compliance includes, without limitation, the following prohibitions and requirements:
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We will cooperate with law enforcement authorities in the prosecution of anyone (employee or non-employee) involved in theft, fraud or any other illegal activity.
This Code does not summarize all governmental laws, rules and regulations applicable to us and our employees. Please consult with our Law Department if you have any questions.
B. CONFLICTS OF INTEREST
All employees should avoid any conflict, or the appearance of any conflict, between his or her personal interests and our interests. This includes conflicts with the employee's immediate family. A conflict of interest can arise when an employee takes actions or has an interest that may make it difficult to perform his or her work objectively and effectively. Conflicts of interests also arise when employees or their family members receive improper personal benefits as a result of the employee's position with us, whether received from us or a third party. Loans to, or guarantees of obligations of, employees and their respective immediate family members may create conflicts of interest. Federal law prohibits extensions of credit in the form of a personal loan to our directors and executive officers.
Conflicts of interest may not always be clear-cut, so if you have a question, please consult with your supervisor or our Law Department.
The following paragraphs further define our policy concerning conflicts of interest:
Generally, permissible entertainment includes the actual cost of meals, beverages, greens fees, and theater or arena tickets where the entertainment is occasional and related to a legitimate business purpose. Permissible business entertainment does not include the use of condominiums, hunting lodges, or similar personal accommodations or trips, unless an employee obtains prior approval from an appropriate senior officer.
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Employees are required to disclose fully any benefit, interest or activity that is or may be in violation of the Code. Whenever any question arises as to the application of the Code, an employee should immediately notify his or her immediate supervisor. To the extent possible, such disclosure should be made before a potential conflict arises.
The employee's immediate supervisor shall report the matter to his or her Senior Vice President, who will consult with our General Counsel to determine the course of action, if any, to be taken.
Any employee who knows or has reasonable cause to suspect another employee of any conflicts of interest, or other violations of this Code must inform his or her supervisor or our General Counsel and/or to report his suspicions by calling our AlertLine at 1-800 563-0190. Failure to do so will be considered a violation of the Code by that employee and will be subject to appropriate disciplinary action, up to and including termination. All employees must fully cooperate with all investigations regarding suspected violations of this Code.
C. CUSTOMERS AND SUPPLIERS; FAIR DEALING
We will discharge our obligations to our customers and suppliers in a manner that reflects a strong sensitivity and concern for social responsibility and ethical dealings, and will maintain our solid reputation for honesty and fairness in all transactions. Every employee shares an obligation to protect and strengthen our good reputation in all our relationships with our customers and suppliers. Each employee shall endeavor to deal fairly with our customers and suppliers, as well as our competitors and employees. Employees may not take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts of any other unfair dealing practice.
In furtherance of this policy:
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D. CORPORATE OPPORTUNITY
Employees are prohibited from taking for themselves opportunities that properly belong to us or are discovered through the use of our property, information or position; using our property, information or position for personal gain; or competing with us. Employees owe a duty to us to advance our legitimate interests when the opportunity to do so arises. Employees are also required to make full disclosure of any situation or transactions which would compromise, or appear to compromise the Employee's independence, or the interest of the Company.
E. CONFIDENTIAL INFORMATION
We have always worked diligently to communicate accurately and on a timely basis with our shareholders, investment professionals, and other members of the public. Federal law generally requires us to make available a timely flow of information to all members of the public, with equal access, which is consistent with our goal of maintaining the trust and confidence of the investing public.
Employees must maintain the confidentiality of confidential information entrusted to them by us or our suppliers or customers, except when disclosure is authorized in advance by our Law Department, or required by laws, regulations or legal proceedings. Whenever possible, employees should consult the Law Department if they believe they have a legal obligation to disclose confidential information. Confidential information includes all non-public information that might be of use to our competitors, or harmful to us or our customers if disclosed.
Our financial information is always considered confidential, unless it has been published in reports to our shareholders or otherwise publicly disseminated. This and any other confidential information must be treated with proper security at all times. No one may disclose such confidential information without the prior approval of our Chief Financial Officer or our General Counsel.
All terminated employees must immediately return all written material (including computerized data) prepared by, or for us, to their immediate supervisor.
F. INSIDER TRADING
In the course of operating our business, employees frequently have access to financial information, operating results, and plans that have not been made public. This is especially true of employees working at our headquarters, where such information is collected, assembled and analyzed. This information may be "material," and federal securities laws prohibit persons possessing "material" non-public information from trading in our securities or providing that information to others.
Information is "material" if there is a substantial likelihood that a reasonable investor would consider it important in determining whether to buy or sell our securities. Non-public information concerning periodic financial results is nearly always "material." Employees possessing material inside information shall not trade in our securities until the information has been publicly distributed, and then only in accordance with the following rules:
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For more information see the Policy Statement on Trading Securities of Graphic Packaging Corporation , available on our website, or from the Law Department upon request.
G. PERSONAL INVESTMENTS
Just as our reputation rests in part on intelligent management of our business, all employees are expected to manage their personal finances in an intelligent and prudent way. Financial activities that would reflect adversely on us should be avoided. Employees may make personal investments in corporate stock, bonds, real estate, partnerships, money market instruments, or other securities, including our common stock (See Section F ). Employees may not invest in securities, enterprises or other activities of customers and suppliers that are not available to the public without the prior written approval of our President and Chief Executive Officer.
H. POLITICAL CONTRIBUTIONS
No employee shall, during normal business hours or on our premises, solicit contributions for any political party, organization or committee, or any candidate for public office, whether on our behalf or individually, except in connection with a solicitation on behalf of any political action committee established by us, or that is approved by our President and Chief Executive Officer. No employee shall use coercion of any kind in connection with any permissible solicitation. No employee shall use our funds or property in support of any political party, organization or committee, or any candidate for public office unless this is permitted by law and approved by our President and Chief Executive Officer.
I. PAYMENTS TO GOVERNMENTAL OFFICIALS
The U.S. Foreign Corrupt Practices Act prohibits giving anything of value, directly or indirectly, to foreign government officials or foreign political candidates in order to obtain or retain business. Payments to government officials of any country is strictly prohibited. In addition, there are legal limitations on business gratuities that may be accepted by U.S. government personnel. The promise,
5
offer or delivery to an official or employee of the U.S. government of a gift, favor or other gratuity in violation of these regulations would not only violate our policy, but could also be a criminal offense. State and local governments, as well as foreign governments, may have similar rules. Governmental officials include elected or appointed officials of any foreign or domestic federal, state, county, municipal or other political subdivision, agencies thereof, and their families and employees. Our Law Department can provide guidance to you in this area.
It is our policy that:
J. BOOKS AND RECORDS
All of our books, records, accounts and financial statements must be maintained in reasonable detail, must appropriately reflect our transactions and must conform both to applicable legal requirements and to our system of internal controls. Unrecorded or "off the books" funds or assets may not be maintained unless permitted by applicable law or regulation.
The integrity of our accounting is based on the validity, accuracy, and completeness of supporting documents and original entries in our books and records.
Records should always be retained or destroyed according to our record retention policies. In accordance with these policies, in the event of litigation or governmental investigation, consult our Law Department.
In furtherance of these policies:
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K. EMPLOYEE RELATIONS
We adhere to the employment policies and practices of non-discrimination as it relates to sex, race, color, religion, natural origin, age, or handicap. All employees are expected to conduct themselves in such a manner as to maintain a working environment free of discrimination of any kind, including sexual or racial harassment.
All of us, particularly management, must respect and preserve the individual rights and dignity of every employee.
L. PROTECTION AND PROPER USE OF ASSETS
All employees should protect our assets and ensure their efficient use. Theft, carelessness and waste have a direct impact on our profitability. Our assets should be used for legitimate business purposes only.
M. ACCOUNTING COMPLAINTS
Our policy is to comply with all applicable financial reporting and accounting regulations. If any employee has concerns or complaints regarding questionable accounting or auditing matters, then he or she should submit those concerns or complaints (anonymously, confidentially or otherwise) to our General Counsel or report such concerns or complaints by calling our AlertLine at 1-800-563-0190.
N. PUBLIC COMPANY REPORTING
As a public company, it is critically important that the reports and documents we file with the SEC and other public communications be complete, accurate, timely and understandable in all material respects. Depending on their position, an employee may be called upon to provide necessary information to assure that our filings and other public communications meet these standards. We expect employees to take this responsibility very seriously and to provide prompt accurate answers to inquiries related to our public disclosure requirements.
In addition, our principal executive officer, principal financial officer, principal accounting officer, or controller, or persons performing similar functions must follow the following guidelines to promote the foregoing:
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O. AMENDMENT, MODIFICATION AND WAIVER
This Code may be amended or modified only by the Board of Directors. Waivers of or changes in this Code for our executive officers or directors may only be granted by the Board or the Nominating and Corporate Governance Committee, subject to the requirements of the Exchange Act and the applicable rules of the New York Stock Exchange, and must be promptly disclosed to our stockholders.
P. COMPLIANCE WITH THIS CODE
Any employee having information or knowledge of any actual or contemplated violation of this Code shall promptly inform his or her supervisor, report the matter to our General Counsel or call our AlertLine at 1-800-563-0190 to report the matter. With respect to actual or contemplated violations of this Code involving an executive officer, including our principal executive officer, principal financial officer, principal accounting officer or controller, such matters should be reported to our General Counsel, or by calling our AlertLine at 1-800-563-0190.
The Internal Audit function, as part of our regular procedures, shall assess compliance with this Code. Any matters discovered by Internal Audit that appear to violate this Code shall be investigated, and serious violations will be reported to the Audit Committee of the Board, our Chief Executive Officer and our General Counsel.
Our independent auditors shall report in writing to our Internal Audit Department and our General Counsel any matter discovered during their examination of our financial statements that appear to violate this Code.
All management employees (and those non-management employees designated by senior management), shall be required at least annually to affirm to the best of their knowledge, that they have complied with this Code, have no knowledge of any violation of this Code not previously reported and have not been requested to engage in any activity in violation of this Code. Employees may also be required to submit detailed information on any business interest in which they or their immediate family are involved.
An employee's failure to comply with this Code will result in disciplinary action that, depending on the seriousness of the matter, may include reprimand, probation, suspension, demotion or dismissal. Disciplinary measures will apply to supervisors and senior executives who condone questionable, improper, or illegal conduct, who fail to take appropriate corrective action when such matters are brought to their attention, or who allow unethical or illegal conduct to occur because of their inattention to their supervisory responsibilities.
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We will not permit retaliation of any kind against employees for good faith reports or complaints of either violations of this Code or other illegal conduct.
Q. PROCEDURES FOR INQUIRIES
This Code provides a framework to guide employees in their day-to-day conduct. However, it is not possible to cover the infinite variety of situations to which the above policies apply. If you encounter a situation that requires policy interpretation, do not proceed until you clarify your responsibilities under this Code. Any questions regarding the Code or the interpretation of laws or regulations as they apply to our operations should be referred to the Law Department. While we wish to preserve the privacy of our employees and their rights to conduct their personal affairs without interference, full and timely resolution of situations can usually avoid problems. Employees are encouraged to talk to supervisors, managers or other appropriate personnel about illegal or unethical behavior and the best course of action in a particular situation.
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Subsidiary Name
|
Jurisdiction of Incorporation
|
|
---|---|---|
ACX (UK) Ltd. | England | |
ACX Group Ltd. | Wales | |
Danapak Riverwood Multipack A/S | Denmark | |
Fiskeby Board A/S | Denmark | |
Fiskeby Board AB | Sweden | |
Fiskeby Board Ltd. | UK | |
Fiskeby Board SARL | France | |
Fiskeby Holding AB | Sweden | |
Golden Equities, Inc. | Colorado | |
Golden Properties Limited | Colorado | |
Golden Technologies Company, Inc. | Colorado | |
GPI Holding, Inc. | Colorado | |
Graphic Packaging Corporation | Nova Scotia, Canada | |
Graphic Packaging International, Inc. | Delaware | |
Graphic Packaging International Holding Company | Delaware | |
IL Returpapper AB | Sweden | |
Industrikompetens i Ostergotland AB | Sweden | |
Kalamazoo Valley Group Partnership | Michigan(1) | |
Lauener Engineering Limited/ | Delaware/Switzerland(2) | |
Lauener Engineering AG | ||
New Materials Limited | UK | |
NMC Group Ltd. | England | |
Recywrap Recycling GmbH | Germany | |
Rengo Riverwood Packaging, Ltd. | Japan | |
Riverwood Argentina S/A | Argentina | |
Riverwood do Brasil Ltda. | Brazil | |
Riverwood Espana, S.A. | Spain | |
Riverwood International S.p.A. | Italy | |
Riverwood International (Cyprus) Limited | Cyprus | |
Riverwood International (Europe) S.A. | Belgium | |
Riverwood International Asia Pacific Limited | Hong Kong | |
Riverwood International Asia Pte Ltd. | Singapore | |
Riverwood International Australia Pty. Ltd. | Australia | |
Riverwood International Enterprises, Inc. | Delaware | |
Riverwood International France S.A. | France | |
Riverwood International G.m.b.H. | Germany | |
Riverwood International Japan, Ltd. | Japan | |
Riverwood International Limited | UK | |
Riverwood International Machinery, Inc. | Delaware | |
Riverwood International Mexicana, S. de R.L. de C.V. | Mexico | |
Riverwood International Pension Trustee Company Ltd. | UK | |
Riverwood International Corp. Philanthropic Fund | Delaware | |
Riverwood International, S.A. | France | |
Slevin South Company | Arkansas | |
Svensk Kartongatervinning AB | Sweden |
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-108256) of Graphic Packaging Corporation of our report dated March 15, 2004 relating to the financial statements and financial statement schedule, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Atlanta,
Georgia
March 15, 2004
Exhibit 23.2
We consent to the incorporation by reference in the Registration Statement of Graphic Packaging Corporation (the "Company") (formerly Riverwood Holding, Inc.) on No. 333-108256 on Form S-8 of our report dated February 15, 2002, April 10, 2003 as to the effect of the restatement referred to in the fifth paragraph of such report (which report expresses an unqualified opinion and includes explanatory paragraphs relating to (i) the change in the method of accounting for derivative instruments and hedging activities and (ii) the restatement of the 2001 consolidated financial statements), relating to the consolidated financial statements of the Company for the year ended December 31, 2001 appearing in the Annual Report on Form 10-K of Graphic Packaging Corporation for the year ended December 31, 2003.
/s/ DELOITTE & TOUCHE LLP
Atlanta,
Georgia
March 15, 2004
Exhibit 31.1
I, Stephen M. Humphrey, certify that:
1. I have reviewed this annual report on Form 10-K of Graphic Packaging Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: March 16, 2004 | ||
|
|
/s/ STEPHEN M. HUMPHREY Stephen M. Humphrey President and Chief Executive Officer |
Exhibit 31.2
I, John T. Baldwin, certify that:
1. I have reviewed this annual report on Form 10-K of Graphic Packaging Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: March 16, 2004 | ||
|
|
/s/ JOHN T. BALDWIN John T. Baldwin Senior Vice President and Chief Financial Officer |
Exhibit 32.1
CERTIFICATION
Pursuant to 18 United States Code Section 1350,
As adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
The undersigned hereby certifies that, to the best of my knowledge, the Annual Report on Form 10-K for the period ended December 31, 2003 of Graphic Packaging Corporation (the "Company") filed with the Securities and Exchange Commission on the date hereof fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ STEPHEN M. HUMPHREY
Name: Stephen M. Humphrey Title: President and Chief Executive Officer Date: March 16, 2004 |
Exhibit 32.2
CERTIFICATION
Pursuant to 18 United States Code Section 1350,
As adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
The undersigned hereby certifies that, to the best of my knowledge, the Annual Report on Form 10-K for the period ended December 31, 2003 of Graphic Packaging Corporation (the "Company") filed with the Securities and Exchange Commission on the date hereof fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ JOHN T. BALDWIN
Name: John. T. Baldwin Title: Senior Vice President and Chief Financial Officer Date: March 16, 2004 |