-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OVJjBaCldOvN5Xi81KdGVfrga7SgiwL3YbMhXMBj3KN7ruLrG7Fx9YuTvnzJuHCc hBWD3YIY/zx0AtRBrKWa2A== 0000892793-01-500009.txt : 20010813 0000892793-01-500009.hdr.sgml : 20010813 ACCESSION NUMBER: 0000892793-01-500009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010810 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GRAPHIC PACKAGING INTERNATIONAL CORP CENTRAL INDEX KEY: 0000892793 STANDARD INDUSTRIAL CLASSIFICATION: PAPERBOARD CONTAINERS & BOXES [2650] IRS NUMBER: 841208699 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14060 FILM NUMBER: 1704598 BUSINESS ADDRESS: STREET 1: 4455 TABLE MOUNTAIN DRIVE CITY: GOLDEN STATE: CO ZIP: 80403 BUSINESS PHONE: 3032154600 MAIL ADDRESS: STREET 1: 4455 TABLE MOUNTAIN DRIVE, CITY: GOLDEN STATE: CO ZIP: 80403 FORMER COMPANY: FORMER CONFORMED NAME: ACX TECHNOLOGIES INC DATE OF NAME CHANGE: 19940524 10-Q 1 secondquarterq.txt FORM 10-Q FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 OR [ ] 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: 0-20704 GRAPHIC PACKAGING INTERNATIONAL CORPORATION (Exact name of registrant as specified in its charter) Colorado 84-1208699 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4455 Table Mountain Drive, Golden, Colorado 80403 (Address of principal executive offices) (Zip Code) (303) 215-4600 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] There were 31,867,031 shares of common stock outstanding as of August 2, 2001. PART I. FINANCIAL INFORMATION Item 1. Financial Statements GRAPHIC PACKAGING INTERNATIONAL CORPORATION CONSOLIDATED INCOME STATEMENT (In thousands, except per share data) Three months ended Six months ended June 30, June 30, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Net sales $283,252 $273,189 $571,696 $549,509 Cost of goods sold 240,976 237,378 489,186 480,802 -------- -------- -------- -------- Gross profit 42,276 35,811 82,510 68,707 Selling, general and administrative expense 16,428 16,076 30,917 31,853 Goodwill amortization 5,143 5,088 10,312 10,272 Asset impairment and restructuring charges 1,000 --- 3,000 3,420 -------- -------- ------- -------- Operating income 19,705 14,647 38,281 23,162 Gain on sale of assets-net --- --- 3,650 5,407 Interest expense - net (13,530) (21,650) (29,655) (41,330) -------- -------- ------- -------- Income (loss) before income taxes 6,175 (7,003) 12,276 (12,761) Income tax (expense) benefit (2,446) 2,742 (4,866) 5,044 -------- -------- ------- -------- Net income (loss) 3,729 (4,261) 7,410 (7,717) Preferred stock dividends declared 2,500 --- 5,000 --- -------- -------- ------- -------- Net income (loss) attributable to common shareholders $1,229 ($4,261) $2,410 ($7,717) ======== ======== ======= ======== Net income (loss) attributable to common shareholders per basic share $0.04 ($0.15) $0.08 ($0.27) ======== ======== ======= ======== Net income (loss) attributable to common shareholders per diluted share $0.04 ($0.15) $0.08 ($0.27) ======== ======== ======= ======== Weighted average shares outstanding - basic 31,535 28,985 31,245 28,824 ======== ======== ======= ======== Weighted average shares outstanding - diluted 32,551 28,985 32,017 28,824 ======== ======== ======= ======== See Notes to Consolidated Financial Statements. GRAPHIC PACKAGING INTERNATIONAL CORPORATION CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (In thousands) Three months ended Six months ended June 30, June 30, ------------------- ------------------ 2001 2000 2001 2000 -------- ------- ------- ------- Net income (loss) $3,729 ($4,261) $7,410 ($7,717) Other comprehensive income: Foreign currency translation adjustments (56) (6) (330) (8) Cumulative effect of change in accounting principle, net of tax of $2,012 --- --- (3,217) --- Recognition of hedge results to interest expense during the period, net of tax of $371 and $579 593 --- 926 --- Change in fair value of cash flow hedges during the period, net of tax of $461 and $1,048 (737) --- (1,673) --- -------- ------- ------ ------- Other comprehensive income (loss) (200) (6) (4,294) (8) -------- ------- ------ ------- Comprehensive income (loss) $3,529 ($4,267) $3,116 ($7,725) ======== ======= ====== ======= See Notes to Consolidated Financial Statements. GRAPHIC PACKAGING INTERNATIONAL CORPORATION CONSOLIDATED BALANCE SHEET (In thousands, except share data) June 30, December 31, 2001 2000 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $3,991 $4,012 Accounts receivable, net 79,419 75,187 Inventories: Finished 61,576 61,038 In process 11,653 13,301 Raw materials 24,493 30,889 ------------ ------------ Total inventories 97,722 105,228 ------------ ------------ Other assets 33,586 31,634 Total current assets 214,718 216,061 Properties,net 462,555 480,395 Goodwill, net 569,998 580,299 Other assets 41,185 54,695 ------------ ------------ Total assets $1,288,456 $1,331,450 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current maturities of long-term debt $61,644 $58,500 Accounts payable 40,985 38,903 Other current liabilities 89,154 79,345 ------------ ------------ Total current liabilities 191,783 176,748 Long-term debt 518,706 576,600 Other long-term liabilities 61,651 62,951 ------------ ------------ Total liabilities 772,140 816,299 Shareholders' equity Preferred stock, nonvoting, 20,000,000 shares authorized: Series A, $0.01 par value, no shares issued or outstanding Series B, $0.01 par value, 1,000,000 shares issued and outstanding at stated value of $100 per share 100,000 100,000 Common stock, $0.01 par value 100,000,000 shares authorized and 31,742,441 and 30,544,449 issued and outstanding at June 30, 2001, and December 31, 2000, respectively 317 305 Paid-in capital 420,364 422,327 Retained earnings (deficit) 412 (6,998) Accumulated other comprehensive income (loss) (4,777) (483) ------------ ------------ Total shareholders' equity 516,316 515,151 ------------ ------------ Total liabilities and shareholders' equity $1,288,456 $1,331,450 ============ ============ See Notes to Consolidated Financial Statements. GRAPHIC PACKAGING INTERNATIONAL CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands) Six months ended June 30, --------------------- 2001 2000 -------- --------- Cash flows from operating activities: Net income (loss) $7,410 ($7,717) Adjustments to reconcile net income (loss)to net cash from operating activities: Asset impairment and restructuring charges 3,000 3,420 Gain on sale of assets (3,650) (5,407) Depreciation and amortization 40,242 42,758 Amortization of debt issuance costs 3,970 4,585 Change in current assets and current liabilities and other 17,936 (49,035) -------- -------- Net cash provided by (used in) operating activities 68,908 (11,396) -------- -------- Cash flows from investing activities: Sale of assets 7,050 5,596 Capital expenditures (16,374) (17,102) Collection of note receivable --- 200,000 -------- -------- Net cash provided by (used in) investing activities (9,324) 188,494 -------- -------- Cash flows from financing activities: Repayment of debt (141,450) (219,000) Proceeds from borrowings 86,700 31,500 Payment of debt issuance costs --- (3,976) Payment of preferred dividends (5,000) --- Issuance of stock and other 145 2,432 -------- -------- Net cash used in financing activities (59,605) (189,044) -------- -------- Cash and cash equivalents: Net decrease in cash and cash equivalents (21) (11,946) Balance at beginning of period 4,012 15,869 -------- -------- Balance at end of period $3,991 $3,923 ======== ======== See Notes to Consolidated Financial Statements. GRAPHIC PACKAGING INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Nature of Operations and Basis of Presentation Graphic Packaging International Corporation (the Company or GPC) is a manufacturer of packaging products used by consumer product companies as primary packaging for their end-use products. The consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures included herein are adequate to make the information presented not misleading. A description of the Company's accounting policies and other financial information is included in the audited financial statements filed with the Securities and Exchange Commission in the Company's Form 10-K for the year ended December 31, 2000. In the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary to present fairly the financial position of the Company at June 30, 2001, and the results of operations and cash flows for the periods presented. All such adjustments are of a normal recurring nature. The results of operations for the three months and six months ended June 30, 2001 are not necessarily indicative of the results that may be achieved for the full fiscal year and cannot be used to indicate financial performance for the entire year. Certain prior period information has been reclassified to conform to the current presentation. Note 2. New Accounting Standard for Goodwill Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, was issued in July 2001. This statement establishes new accounting and reporting standards that will, among other things, eliminate amortization of goodwill. Upon adoption of the new standard, goodwill will be evaluated for impairment using a fair-value based approach and, if there is impairment, the carrying amount of the goodwill will be written down to the implied fair value. This statement is effective for the Company's financial statements for the year beginning January 1, 2002. Management is reviewing the implementation guidance and evaluating the potential impact of the statement and the change in accounting method on the Company's financial position; therefore, a reliable estimate of the impact of this new accounting standard is not possible at this time. Note 3. New Accounting Standard for Derivatives and Hedging Activities In accordance with the Company's interest rate risk- management strategy, the Company has entered into contracts to hedge the interest rates on approximately $575 million of its borrowings. Swap agreements are in place on $225 million of borrowings and cap agreements are in place on $350 million of borrowings. The swap agreements lock in an average LIBOR rate of 6.5%, $150 million of the caps provide upside protection to the Company if LIBOR moves above 6.75% and $200 million of the caps provide upside protection to the Company if LIBOR moves above 8.13%. The hedging instruments expire in 2002. The fair value of these hedge agreements at June 30, 2001 was a liability of $6.4 million, which has been recorded in the accompanying balance sheet. The Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133) on January 1, 2001. In accordance with the transition provisions of FAS 133, as of January 1, 2001 the Company recorded a net-of-tax cumulative loss adjustment to other comprehensive income totaling $3.2 million which relates to the fair value of previously designated cash flow hedging relationships. Based upon current interest rates, approximately $6 million of the interest rate hedging pre-tax loss currently in other comprehensive income is expected to flow through interest expense during the next twelve months. All derivatives are recognized on the balance sheet at their fair value. On the date that the Company enters into a derivative contract, it designates the derivative as (1) a hedge of (a) the fair value of a recognized asset or liability or (b) an unrecognized firm commitment (a fair value hedge); (2) a hedge of (a) a forecasted transaction or (b) the variability of cash flows that are to be received or paid in connection with a recognized asset or liability (a cash flow hedge); or (3) a foreign-currency fair-value or cash flow hedge (a foreign currency hedge). The Company does not enter into derivative contracts for trading or non-hedging purposes. Currently, all of the Company's derivatives are designated as cash flow hedges and are recognized on the balance sheet at their fair value. Changes in the fair value of the Company's cash flow hedges, to the extent that the hedges are highly effective, are recorded in other comprehensive income, until earnings are affected by the variability of cash flows of the hedged transaction through interest expense. Any hedge ineffectiveness (which represents the amount by which the changes in the fair value of the derivative exceed the variability in the cash flows being hedged) is recorded in current period earnings. Hedge ineffectiveness during the six months ended June 30, 2001 was immaterial. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk- management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair value, cash flow, or foreign currency hedges to (1) specific assets and liabilities on the balance sheet or (2) specific firm commitments or forecasted transactions. The Company also formally assesses (both at the hedge's inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. When it is determined that a derivative is not (or has ceased to be) highly effective as a hedge, the Company discontinues hedge accounting prospectively, as discussed below. The Company discontinues hedge accounting prospectively when (1) it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item (including hedged items such as firm commitments or forecasted transactions); (2) the derivative expires or is sold, terminated, or exercised; (3) it is no longer probable that the forecasted transaction will occur; (4) a hedged firm commitment no longer meets the definition of a firm commitment; or (5) management determines that designating the derivative as a hedging instrument is no longer appropriate. When hedge accounting is discontinued due to the Company's determination that the derivative no longer qualifies as an effective fair value hedge, the Company will continue to carry the derivative on the balance sheet at its fair value but cease to adjust the hedged asset or liability for changes in fair value. When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, the Company will continue to carry the derivative on the balance sheet at its fair value, removing from the balance sheet any asset or liability that was recorded to recognize the firm commitment and recording it as a gain or loss in current period earnings. When the Company discontinues hedge accounting because it is no longer probable that the forecasted transaction will occur in the originally expected period, the gain or loss on the derivative remains in accumulated other comprehensive income and is reclassified into earnings when the forecasted transaction affects earnings. However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter, the gains and losses that were accumulated in other comprehensive income will be recognized immediately in earnings. In all situations in which hedge accounting is discontinued and the derivative remains outstanding the Company will carry the derivative at its fair value on the balance sheet, recognizing changes in the fair value in current period earnings. Note 4. Asset Impairment and Restructuring Charges The Company recorded a restructuring charge of $1.0 million in the second quarter of 2001 in continuance of the plan announced in the fourth quarter of 2000 that will eliminate approximately 200 non-production positions across the Company, including the closure of the Company's folding carton plant in Portland, Oregon. $3.0 million was recorded in the fourth quarter of 2000 and $1.0 million was recorded in the first quarter of 2001 related to this restructuring plan. The 2001 charges relate to severance packages that were communicated to employees in the first half of 2001. No additional charges related to this restructuring plan are expected. On May 12, 2000, the Company announced the planned closure of the Perrysburg, Ohio folding carton plant. The shutdown and related restructuring plan for the Perrysburg facility included asset impairments totaling $6.5 million and restructuring reserves of $1.35 million, which were recorded in the second quarter 2000. The costs to shut down the Perrysburg facility, which was part of the acquisition of the Fort James packaging business, were accounted for as a cost of the acquisition, with a resultant adjustment to goodwill. The Company completed the closure of the plant and the transition of the plant's business to other Company facilities by the end of 2000. On July 11, 2001, the Perrysburg plant building and land were sold for cash proceeds of approximately $1.9 million. The Company recorded a restructuring charge of $3.4 million in the first quarter of 2000 for anticipated severance costs as a result of the announced closure of the Saratoga Springs, New York plant. The Company has completed the closure of the Saratoga Springs plant and the transition of the plant's business to other Company facilities. Approximately $0.5 million of the restructuring charges were not necessary to meet severance obligations for the plant's former employees and were reversed in the first quarter of 2001. The Company recorded an asset impairment charge of $1.5 million in the quarter ended March 31, 2001 related to its Saratoga Springs building. On June 29, 2001, the Saratoga Springs building and land were sold for cash proceeds of approximately $3.4 million, with no gain or loss being recognized. The following table summarizes accruals related to all of the Company's restructuring activities during the first half of 2001: (in millions) Balance, December 31, 2000 $5.0 Transfer of enhanced benefit to pension liability (1.5) Additional restructuring charges 1.0 Reversal of Saratoga Springs severance accrual (0.5) Cash paid (1.6) ---- Balance, March 31, 2001 2.4 Transfer of enhanced benefit to pension liability (0.5) Additional restructuring charges 1.0 Cash paid (1.0) ----- Balance, June 30, 2001 $1.9 ===== Note 5. Asset Sales 2001 As discussed in Note 4, the Company has closed several noncore or underperforming facilities over the past two years. The Company sold its Saratoga Springs, New York building and land in June 2001 and its Perrysburg, Ohio building and land in July 2001 for cash proceeds of $3.4 million and $1.9 million, respectively. No gain or loss was recognized on the sales. The Company has recently announced that it has engaged advisors to assess the strategic options with respect to its extruded coated paper business in Portland, Oregon. 2000 The Company sold patents and various long-lived assets of its former developmental businesses during the first half of 2000 for consideration of approximately $6.2 million. A pre-tax gain of $5.4 million was recognized related to these asset sales. In the first half of 2001, a pre-tax gain of $3.6 million was recognized upon receipt of additional consideration for assets of the Company's former developmental businesses. Note 6. Segment Information The Company's reportable segments are based on its method of internal reporting, which is based on product category. The Company has one reportable segment in 2001 and 2000 - Packaging. In addition, the Company's holdings and operations outside the United States are nominal in 2001 and 2000. Therefore, no additional segment information is provided herein. Note 7. Subsequent Event Pursuant to terms in its senior credit agreement, the Company expects to complete a $50 million private placement of subordinated unsecured debt in August 2001 substantially according to the following terms: the notes will accrue interest at 10% per annum, payable quarterly, beginning September 15, 2001; and the notes mature August 15, 2008, but are redeemable, subject to the terms of the senior credit agreement, at a premium of 3% in the first year, 1.5% in the second year and at par thereafter. Proceeds will be used to repay the remaining $27.9 million balance (as of July 31, 2001) on the one-year term note due August 15, 2001 and the balance applied against the five-year senior credit facilities. If the Company does not issue the subordinated debt, it will utilize available borrowing capacity under its revolving credit facility to repay the remaining $27.9 million of the one-year note and would pay an additional spread of 75 basis points in interest and a fee of $750,000 to the senior lenders. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General Business Overview Graphic Packaging International Corporation (the Company or GPC) is a manufacturer of packaging products used by consumer product companies as primary packaging for their end-use products. The Company's strategy is to maximize its competitive position and growth opportunities in its sole business, folding cartons. Segment Information The Company's reportable segments are based on its method of internal reporting, which is based on product category. The Company has one reportable segment in 2001 and 2000 - Packaging, and the Company's holdings and operations outside the United States are nominal in 2001 and 2000. Results from Operations Net sales increased 3.7% to $283 million for the three months ended June 30, 2001, compared to $273 million in the second quarter of 2000. For the six months ended June 30, 2001, net sales increased 4% to $572 million, compared to $550 million in the first half of 2000. If net sales generated by the Malvern, Pennsylvania plant, which was sold in October 2000, are subtracted from the 2000 comparable sales numbers, the quarterly increase would be 7.3% and the year-to-date increase would be 7.8%. GPC's sales increases, although strengthened by new customers, are directly related to the success of its customers' products. The Company's sales to established customers have been enhanced by special product promotions and other value-added products during 2001. Gross profit margins for the second quarter and the six months ended June 30, 2001 were 14.9% and 14.4%, respectively, increasing from 13.1% and 12.5% in the comparable periods in 2000. The Company's goal has been to optimize its capacity and personnel in order to meet increased customer demand in the most cost-effective manner. Improvements in profit margin reflect the Company's increased sales and success at decreasing variable production costs, such as overtime, rework and scrap. Also, margins have improved due to decreased fixed manufacturing costs that were achieved through plant closures, specifically the Saratoga Springs and Perrysburg facilities, and consolidation of administrative functions company-wide. Selling, general and administrative expense as a percentage of net sales continues to be just under 6% when comparing quarter- to-quarter and year-to-year. This has been the Company's target rate as it works to keep overhead costs at an optimal level. The Company's improvements in managing its production and overhead costs have resulted in improved operating income margin. Operating income margin in the three months ended June 30, 2001 was 7%, compared to 5.4% in the second quarter of 2000. Operating income margin for the six months ended June 30, 2001 was 6.7%, compared to 4.2% in the first half of 2000. Net interest expense for the second quarter of 2001 totaled $13.5 million, an $8.2 million decrease from the $21.7 million of interest expense recorded in the second quarter of 2000. Likewise, net interest expense for the first half of 2001 decreased $11.7 million when compared to the $41.3 million of net interest expense recorded in the comparable 2000 period. Lower amounts of outstanding debt, lower LIBOR rates, and lower interest rate spreads over LIBOR as a result of the Company's improved financial condition have contributed to these decreases. The consolidated effective tax rate for the second quarter and the first half of 2001 was approximately 40%. The Company expects to maintain an effective tax rate of approximately 40% for the remainder of 2001. Asset Impairment and Restructuring Charges The Company recorded a restructuring charge of $1.0 million in the second quarter of 2001 in continuance of the plan announced in the fourth quarter of 2000 that will eliminate approximately 200 non-production positions across the Company, including the closure of the Company's folding carton plant in Portland, Oregon. $3.0 million was recorded in the fourth quarter of 2000 and $1.0 million was recorded in the first quarter of 2001 related to this restructuring plan. The 2001 charges relate to severance packages that were communicated to employees in the first half of 2001. No additional charges related to this restructuring plan are expected. On May 12, 2000, the Company announced the planned closure of the Perrysburg, Ohio folding carton plant. The shutdown and related restructuring plan for the Perrysburg facility included asset impairments totaling $6.5 million and restructuring reserves of $1.35 million, which were recorded in the second quarter 2000. The costs to shut down the Perrysburg facility, which was part of the acquisition of the Fort James packaging business, were accounted for as a cost of the acquisition, with a resultant adjustment to goodwill. The Company completed the closure of the plant and the transition of the plant's business to other Company facilities by the end of 2000. On July 11, 2001, the Perrysburg plant building and land were sold for cash proceeds of approximately $1.9 million. The Company recorded a restructuring charge of $3.4 million in the first quarter of 2000 for anticipated severance costs as a result of the announced closure of the Saratoga Springs, New York plant. The Company has completed the closure of the Saratoga Springs plant and the transition of the plant's business to other Company facilities. Approximately $0.5 million of the restructuring charges were not necessary to meet severance obligations for the plant's former employees and were reversed in the first quarter of 2001. The Company recorded an asset impairment charge of $1.5 million in the quarter ended March 31, 2001 related to its Saratoga Springs building. On June 29, 2001, the Saratoga Springs building and land were sold for cash proceeds of approximately $3.4 million, with no gain or loss being recognized. The following table summarizes accruals related to all the Company's restructuring activities during the first half of 2001: (in millions) Balance, December 31, 2000 $5.0 Transfer of enhanced benefit to pension liability (1.5) Additional restructuring charges 1.0 Reversal of Saratoga Springs severance accrual (0.5) Cash paid (1.6) ---- Balance, March 31, 2001 2.4 Transfer of enhanced benefit to pension liability (0.5) Additional restructuring charges 1.0 Cash paid (1.0) ----- Balance, June 30, 2001 $1.9 ===== Asset Sales 2001 As discussed in Note 4, the Company has closed several noncore or underperforming facilities over the past two years. The Company sold its Saratoga Springs, New York building and land in June 2001 and its Perrysburg, Ohio building and land in July 2001 for cash proceeds of $3.4 million and $1.9 million, respectively. No gain or loss was recognized on the sales. The Company has recently announced that it has engaged advisors to assess the strategic options with respect to its extruded coated paper business in Portland, Oregon. 2000 The Company sold patents and various long-lived assets of its former developmental businesses during the first half of 2000 for consideration of approximately $6.2 million. A pre-tax gain of $5.4 million was recognized related to these asset sales. In the first half of 2001, a pre-tax gain of $3.6 million was recognized upon receipt of additional consideration for assets of the Company's former developmental businesses. Financial Resources and Liquidity The Company's liquidity is generated from both internal and external sources and is used to fund short-term working capital needs, capital expenditures, preferred stock dividends and acquisitions. Capital Structure The Company has a revolving credit and term loan agreement (the Credit Agreement) with a group of lenders, with Bank of America, N.A. as agent. Currently, the Credit Agreement is comprised of three senior credit facilities including a $400 million one-year facility, a $325 million five-year term loan facility and a $400 million five-year revolving credit facility (collectively, the Senior Credit Facilities). The Company reduced amounts outstanding under its Senior Credit Facilities in the first half of 2001 by $54.8 million, with $47.2 million repaid in the second quarter, largely through cash generated by operations. Borrowings under the revolving credit facility on August 1, 2001 were approximately $268 million, leaving $132 million available for future borrowing needs. As of June 30, 2001 the Company's borrowings under the Senior Credit Facilities were as follows (in thousands): One-year term facility due August 15, 2001 $ 31,644 Five-year term facility due August 2, 2004 283,106 Five-year revolving credit facility due August 2, 2004 265,600 -------- Total 580,350 Less: Current maturities 61,644 -------- Long-term maturities $518,706 ======== Amounts borrowed under the Senior Credit Facilities bear interest under various pricing alternatives plus a spread depending on the Company's leverage ratio. The various pricing alternatives include (i) LIBOR, or (ii) the higher of the Federal Funds Rate plus 0.5%, or the prime rate. In addition, the Company pays a commitment fee that varies based upon the Company's leverage ratio and the unused portion of the revolving credit facility. Mandatory prepayments under the Senior Credit Facilities are required from the proceeds of any significant asset sale or from the issuance of any debt or equity securities. In addition, the five-year term loan is due in quarterly installments. Total annual principal payments for 2001 through 2003, respectively, are $25 million, $35 million and $40 million, with the balance of the borrowings due in 2004. Pursuant to terms in its senior credit agreement, the Company expects to complete a $50 million private placement of subordinated unsecured debt in August 2001 substantially according to the following terms: the notes will accrue interest at 10% per annum, payable quarterly, beginning September 15, 2001; and the notes mature August 15, 2008, but are redeemable, subject to the terms of the senior credit agreement, at a premium of 3% in the first year, 1.5% in the second year and at par thereafter. Proceeds will be used to repay the remaining $27.9 million balance (as of July 31, 2001) on the one-year term note due August 15, 2001 and the balance applied against the five-year senior credit facilities. If the Company does not issue the subordinated debt, it will utilize available borrowing capacity under its revolving credit facility to repay the remaining $27.9 million of the one-year note and would pay an additional spread of 75 basis points in interest and a fee of $750,000 to the senior lenders. The Senior Credit Facilities are collateralized by first priority liens on all material assets of the Company and all of its domestic subsidiaries. The Credit Agreement currently limits the Company's ability to pay dividends other than permitted dividends on its Series B preferred stock, and imposes limitations on the incurrence of additional debt, capital expenditures, acquisitions and the sale of assets. The Company is in compliance with all covenants. Although there can be no assurance that all of these covenants will continue to be met, management believes that the Company will remain in compliance with the covenants based upon the Company's expected performance and debt repayment forecasts. In the event of a default under the Credit Agreement, the lenders would have the right to call the Senior Credit Facilities immediately due and refrain from making further advances to the Company. If the Company is unable to pay the accelerated payments, the lenders could elect to proceed against the collateral in order to satisfy the Company's obligations. The Company maintains an interest rate risk-management strategy that uses derivative instruments to minimize significant, unanticipated earnings fluctuations that may arise from volatility in interest rates. The Company's specific goals are to (1) manage interest rate sensitivity by modifying the re- pricing or maturity characteristics of some of its debt and (2) lower (where possible) the cost of its borrowed funds. In accordance with the Company's interest rate risk-management strategy, the Company has entered into contracts to hedge the interest rates on approximately $575 million of its borrowings. Swap agreements are in place on $225 million of borrowings and cap agreements are in place on $350 million of borrowings. The swap agreements lock in an average LIBOR rate of 6.5%, $150 million of the caps provide upside protection to the Company if LIBOR moves above 6.75% and $200 million of the caps provide upside protection to the Company if LIBOR moves above 8.13%. The hedging instruments expire in 2002. The Company's capital structure also includes $100 million of Series B preferred stock, issued on August 15, 2000. The Series B preferred stock is convertible into shares of the Company's common stock at $2.0625 per share and is entitled to receive a dividend payable quarterly at an annual rate of 10%. The Company may redeem the Series B preferred stock beginning on August 15, 2005 at 105% of par reducing by 1% per year until August 15, 2010 at which time the Company can elect to redeem the shares at par. The Series B preferred stock has a liquidation preference over the Company's common stock and is entitled to one vote for every two shares held on an as-converted basis. Working Capital The Company currently expects that cash flows from operations, the possible sale of certain assets, borrowings under its current credit facilities, and the proposed subordinated debt issuance will be adequate to meet the Company's needs for working capital, temporary financing for capital expenditures and debt repayments. The Company's working capital position as of June 30, 2001 was $22.9 million. During the first half of 2001, net cash from operations was used to fund capital requirements. During the first half of 2000, capital requirements were met largely through investing activities. The Company expects its capital expenditures for 2001 to be approximately $35 million, primarily related to a new enterprise resource planning system and upgrades to equipment. The impact of inflation on the Company's financial position and results of operations has been minimal and is not expected to adversely affect future results. Item 3. Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk As of August 1, 2001, the Company's capital structure includes approximately $580 million of debt that bears interest based upon an underlying rate that fluctuates with short-term interest rates, specifically LIBOR. The Company has entered into interest rate swap agreements that lock LIBOR at 5.94% on $100 million of borrowings and 6.98% on $125 million of its borrowings. In addition, the Company has interest rate contracts that cap the LIBOR interest rate at 8.13% on $200 million of borrowings and 6.75% for $150 million of borrowings. With the Company's interest rate protection contracts, a 1% rise in interest rates would impact annual pre-tax results by approximately $3.6 million. Factors That May Affect Future Results Some statements in this release are forward looking and so involve uncertainties that may cause actual results to be materially different from those stated or implied. Specifically, a) revenue for 2001 might be reduced because customers experience lower demand, find alternative suppliers, or otherwise reduce their demand for our products, or because the Company, as a result of plant closures, is unable to efficiently move business or to qualify that business at other plants; b) margins might be reduced due to market conditions for products sold and due to increases in operating and materials costs, including energy- related costs, recycled fiber and paperboard; c) the future benefits of restructuring, cost reduction and optimization are uncertain because of possible delays and increases in costs; d) capital expenditures might be higher than planned due to unexpected requirements or opportunities; e) debt may not be reduced due to lower than expected free cash flow; f) the Company may be exposed to higher than predicted interest rates on the unhedged portion of its debt and on any new debt it might incur; g) if the Company is unable to meet the financial terms or covenants of its senior debt, including the refinancing of a portion of its senior debt with subordinated debt, it could be subject to higher interest rates, one time fees and/or default; and h) the Company might not meet its estimates for 2001 as a result of the transfer of production within the system, market conditions for pricing products, higher production costs, higher than predicted interest rates, and other business factors. These statements should be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 2000. The accompanying financial statements have not been examined by independent accountants in accordance with generally accepted auditing standards, but in the opinion of management, such financial statements include all adjustments necessary to summarize fairly the Company's financial position and results of operations. Except for certain reclassifications made to consistently report the information contained in the financial statements, all adjustments made to the interim financial statements presented are of a normal recurring nature. The results of operations for the first half of 2001 may not be indicative of results that may be expected for the year ending December 31, 2001. PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of the Shareholders At the May 15, 2001 annual meeting of the Company's shareholders, the following matters were submitted for a vote of the shareholders. The report of the Inspectors of Election is below. There were 55,495,592 shares of common stock (including voting rights of preferred stock) entitled to vote at the meeting and a total of 49,123,608 shares (88.5%) were represented at the meeting. (1) Election of three directors for a three-year term. FOR WITHHOLD ---------- --------- Jeffrey H. Coors 46,169,299 2,954,309 Harold R. Logan, Jr. 46,525,720 2,597,888 James K. Peterson 46,445,386 2,678,222 (2) Approval of amendments to the Company's Executive Incentive Plan to modify the financial goals to include the ratio of debt to EBITDA (earnings before interest and taxes, plus depreciation and amortization). In addition, the Compensation Committee of the Board of Directors is authorized to establish long term goals and payouts. FOR AGAINST ABSTAIN BROKER NON-VOTE ---------- --------- --------- --------------- 43,444,976 621,470 1,488,784 3,568,378 (3) Approval of an amendment to the Company's Equity Compensation Plan for Non-Employee Directors to increase the number of shares of common stock authorized for issuance to 500,000 shares. FOR AGAINST ABSTAIN BROKER NON-VOTE ---------- --------- --------- --------------- 43,329,144 754,384 1,471,702 3,568,378 (4) Approval of an amendment to the Company's Equity Incentive Plan to make shares available for award each calendar year beginning with 2002 equal to two percent of the number of shares outstanding on the preceding December 31. FOR AGAINST ABSTAIN BROKER NON-VOTE ---------- --------- --------- --------------- 39,817,800 4,255,256 1,482,174 3,568,378 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit Number Document Description 10.0 Description of Arrangement with Luis E. Leon dated May, 2001. (b) Reports on Form 8-K No reports were filed on Form 8-K during the second quarter of 2001. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 10, 2001 By /s/ Luis E. Leon -------------------------------- Luis E. Leon (Chief Financial Officer) Date: August 10, 2001 By /s/ John S. Norman -------------------------------- John S. Norman (Corporate Controller) EX-10.0 3 luisleonarrangement.txt DESCRIPTION OF ARRANGEMENT Exhibit 10.0 Description of Arrangement In May 2001, Luis Leon accepted an offer to become the Chief Financial Officer of the Company, effective July 2, 2001. The terms of Mr. Leon's employment include: 1) an annual salary of $325,000; 2) eligibility for the Executive Incentive Plan, with a guaranteed minimum bonus in 2001 of $162,500, which is normally paid out in March of the following year if employment is not terminated for cause; 3) inclusion in the Company's Long Term Incentive Plan, with a cash component of $300,000 and a stock option level of 200,000 options in accordance with the plan document; 4) eligibility for the Company's Change of Control agreement; 5) relocation reimbursement; 6) annual car and perquisite allowances commencing as of January 1, 2001 and totaling $43,500; and 6) participation in other applicable employee benefit plans. Consistent with Company employment policies, Mr. Leon's employment was contingent upon drug screening, background investigation, and the signing of a confidentiality agreement. -----END PRIVACY-ENHANCED MESSAGE-----