|
SECURITIES AND EXCHANGE COMMISSION |
|
|
Washington, D. C. 20549 |
|
|
------------------- |
|
|
|
|
|
|
|
|
GEORGIA |
93-0432081 |
|
(State of Incorporation) |
(IRS Employer Id. Number) |
|
133 PEACHTREE STREET, N.E., ATLANTA, GEORGIA 30303 |
|
|
(Address of Principal Executive Offices) |
|
|
|
|
|
(Telephone Number of Registrant) |
|
|
|
|
|
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 and Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No |
|
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). |
|
As of the close of business on May 2, 2003, Georgia-Pacific Corporation had 250,285,945 shares of Georgia-Pacific Common Stock outstanding. |
|
PART I - FINANCIAL INFORMATION |
|||
|
Item 1. |
Financial Statements |
||
|
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) |
|||
|
First Quarter |
|||
|
(In millions, except per share amounts) |
2003 |
2002 |
|
|
------------------------------------------------------------------------------------------------------------------------------------------------------- |
|||
|
Net sales |
$ 4,567 |
$ 5,796 |
|
|
-------------------------------------------------------------------------------------------------------------------------------------------------------- |
|||
|
Costs and expenses |
|
|
|
|
-------------------------------------------------------------------------------------------------------------------------------------------------------- |
|||
|
Total costs and expenses |
4,680 |
5,705 |
|
|
-------------------------------------------------------------------------------------------------------------------------------------------------------- |
|||
|
(Loss) income before income taxes and accounting change |
(113) |
91 |
|
|
-------------------------------------------------------------------------------------------------------------------------------------------------------- |
|||
|
(Loss) income before accounting change |
(56) |
61 |
|
|
-------------------------------------------------------------------------------------------------------------------------------------------------------- |
|||
|
Net loss |
$ (28) |
$ (484) |
|
|
======================================================================================= |
|||
|
Basic per share: (Loss) income before accounting change Cumulative effect of accounting change, net of taxes |
$ (0.22) |
$ 0.27 |
|
|
-------------------------------------------------------------------------------------------------------------------------------------------------------- |
|||
|
Net loss |
$ (0.11) |
$ (2.11) |
|
|
======================================================================================= |
|||
|
Diluted per share: (Loss) income before accounting change Cumulative effect of accounting change, net of taxes |
$ (0.22) |
$ 0.26 |
|
|
-------------------------------------------------------------------------------------------------------------------------------------------------------- |
|||
|
Net loss |
$ (0.11) |
$ (2.10) |
|
|
======================================================================================= |
|||
|
Shares (denominator): |
|
|
|
|
------------------------------------------------------------------------------------------------------------------------------------------------------- |
|||
|
Total assuming conversion |
250.1 |
230.4 |
|
|
======================================================================================= |
|||
|
The accompanying notes are an integral part of these consolidated financial statements. |
|||
|
2 |
|||
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Georgia-Pacific Corporation and Subsidiaries
|
First Quarter |
||
|
(In millions, except per share amount) |
2003 |
2002 |
|
------------------------------------------------------------------------------------------------------------------------------------------------------- |
||
|
Cash flows from operating activities Net loss Adjustments to reconcile net loss to cash (used for) provided by operations: Cumulative effect of accounting change, net of taxes Other loss, net Depreciation, amortization and accretion Deferred income taxes Increase in receivables Increase in inventories Increase in accounts payable Change in other working capital Change in taxes payable/receivable Change in other assets and other long-term liabilities Other |
|
|
|
------------------------------------------------------------------------------------------------------------------------------------------------------- |
||
|
Cash (used for) provided by operations |
(25) |
208 |
|
------------------------------------------------------------------------------------------------------------------------------------------------------- |
||
|
Cash flows from investing activities Property, plant and equipment investments Net proceeds from sales of assets Other |
|
|
|
------------------------------------------------------------------------------------------------------------------------------------------------------- |
||
|
Cash used for investing activities |
(131) |
(113) |
|
------------------------------------------------------------------------------------------------------------------------------------------------------- |
||
|
Cash flows from financing activities Repayments of long-term debt Additions to long-term debt Fees paid to issue debt Net decrease in bank overdrafts Net decrease in short-term debt Proceeds from option plan exercises Cash dividends paid ($0.125 per share) |
|
|
|
------------------------------------------------------------------------------------------------------------------------------------------------------- |
||
|
Cash provided by (used for) financing activities |
178 |
(83) |
|
------------------------------------------------------------------------------------------------------------------------------------------------------- |
||
|
Increase in cash |
22 |
12 |
|
--------------------------------------------------------------------------------------------------------------------------------------------------- |
||
|
Balance at end of period |
$ 57 |
$ 43 |
|
==================================================================================== |
||
|
The accompanying notes are an integral part of these consolidated financial statements. |
||
|
3 |
||
CONSOLIDATED BALANCE SHEETS (Unaudited)
Georgia-Pacific Corporation and Subsidiaries
|
(In millions, except shares and per share amounts) |
March 29, |
December 28, |
|
------------------------------------------------------------------------------------------------------------------------------------------------------- |
||
|
ASSETS |
|
|
|
------------------------------------------------------------------------------------------------------------------------------------------------------- |
||
|
Total current assets |
5,087 |
4,706 |
|
------------------------------------------------------------------------------------------------------------------------------------------------------- |
||
|
Property, plant and equipment |
|
|
|
------------------------------------------------------------------------------------------------------------------------------------------------------- |
||
|
Property, plant and equipment, net |
9,185 |
9,322 |
|
------------------------------------------------------------------------------------------------------------------------------------------------------- |
||
|
Goodwill, net |
7,662 |
7,663 |
|
------------------------------------------------------------------------------------------------------------------------------------------------------- |
||
|
Intangible assets, net |
670 |
676 |
|
------------------------------------------------------------------------------------------------------------------------------------------------------- |
||
|
Other assets |
2,253 |
2,262 |
|
------------------------------------------------------------------------------------------------------------------------------------------------------- |
||
|
Total assets |
$ 24,857 |
$ 24,629 |
|
======================================================================================= |
||
|
4 |
||
CONSOLIDATED BALANCE SHEETS (Unaudited) (Continued)
Georgia-Pacific Corporation and Subsidiaries
|
(In millions, except shares and per share amounts) |
March 29, |
December 28, |
|
------------------------------------------------------------------------------------------------------------------------------------------------------- |
||
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
------------------------------------------------------------------------------------------------------------------------------------------------------- |
||
|
Total current liabilities |
4,069 |
4,045 |
|
------------------------------------------------------------------------------------------------------------------------------------------------------- |
||
|
Long-term debt, excluding current portion |
10,566 |
10,185 |
|
------------------------------------------------------------------------------------------------------------------------------------------------------- |
||
|
Other long-term liabilities |
4,245 |
4,397 |
|
------------------------------------------------------------------------------------------------------------------------------------------------------- |
||
|
Deferred income tax liabilities |
1,412 |
1,442 |
|
------------------------------------------------------------------------------------------------------------------------------------------------------- |
||
|
Commitments and contingencies (Note 11) |
||
|
Shareholders' equity |
- 200 3,414 1,409 (2) (456) |
- 200 3,413 1,468 (2) (519) |
|
------------------------------------------------------------------------------------------------------------------------------------------------------- |
||
|
Total shareholders' equity |
4,565 |
4,560 |
|
------------------------------------------------------------------------------------------------------------------------------------------------------- |
||
|
Total liabilities and shareholders' equity |
$ 24,857 |
$ 24,629 |
|
======================================================================================= |
||
|
The accompanying notes are an integral part of these consolidated financial statements. |
||
|
5 |
||
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
Georgia-Pacific Corporation and Subsidiaries
|
First quarter |
||
|
(In millions) |
2003 |
2002 |
|
------------------------------------------------------------------------------------------------------------------------------------------------------- |
||
|
Net loss |
$ (28) |
$ (484) (72) |
|
------------------------------------------------------------------------------------------------------------------------------------------------------- |
||
|
Comprehensive income (loss) |
$ 35 |
$ (554) |
|
====================================================================================== |
||
|
The accompanying notes are an integral part of these consolidated financial statements. |
||
|
6 |
||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
GEORGIA-PACIFIC CORPORATION
March 29, 2003
|
1. |
PRINCIPLES OF PRESENTATION AND ACCOUNTING POLICIES. These consolidated financial statements include the accounts of Georgia-Pacific Corporation and subsidiaries. We prepared the consolidated financial statements following the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP (accounting principles generally accepted in the United States of America) can be condensed or omitted. All significant intercompany balances and transactions were eliminated in consolidation. We made certain reclassifications to the 2002 consolidated financial statements to conform to the 2003 presentation. During the first quarter of 2003, we realigned our reportable segments for financial reporting purposes to align reporting with the company's current operating structure. |
|
We are responsible for the unaudited financial statements included in this document. The financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our financial position, results of operations and cash flows. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our annual report on Form 10-K for the fiscal year ended December 28, 2002. |
|
|
We classify certain shipping and handling costs as selling and distribution expenses. Shipping and handling costs included in selling and distribution expenses were $95 million and $94 million for the first quarter of 2003 and 2002, respectively. |
|
|
Stock-Based Compensation |
|
|
We have elected to continue to account for our stock-based compensation plans under APB Opinion No. 25, Accounting for Stock Issued to Employees, and disclose pro forma effects of the plans on net income and earnings per share as provided by Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"). Accordingly, because the fair market value on the date of grant was equal to the exercise price, we did not recognize any compensation cost. Had compensation cost for these plans been determined based on the fair value at the grant dates during the first quarters of 2003 and 2002 under the plan consistent with the method of SFAS No. 123, the pro forma net loss and loss per share would have been as follows: |
|
|
7 |
|
|
|
(In millions, except per share amounts) |
First Quarter |
||
|
2003 |
2002 |
|||
|
------------------------------------------------------------------------------------------------------------------------------------ |
||||
|
Net loss as reported |
$ (28) |
$ (484) |
||
|
------------------------------------------------------------------------------------------------------------------------------------ |
||||
|
Pro forma net loss |
(32) |
(491) |
||
|
============================================================================ |
||||
|
Stock-based employee compensation cost, net of taxes, included in |
|
|
||
|
============================================================================ |
||||
|
Basic net loss per share: |
|
(2.14) |
||
|
============================================================================ |
||||
|
Diluted net loss per share: |
(0.13) |
(2.13) |
||
|
============================================================================ |
||||
|
|
Accounting Changes |
|
On December 29, 2002, we adopted the provisions of SFAS No. 143, Accounting for Asset Retirement Obligations ("SFAS No. 143"). Under the provisions of SFAS No. 143, entities are required to record the estimated fair value of an asset retirement obligation in the period in which it was incurred (see Note 9). |
|
|
Effective December 30, 2001, we adopted SFAS No. 141, Business Combinations ("SFAS No. 141"), and SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"). SFAS No 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 142 requires that entities assess the fair value of the net assets underlying all acquisition-related goodwill on a reporting unit basis (see Note 8). |
|
|
2. |
PROVISION FOR INCOME TAXES. The loss before income taxes and accounting change was $113 million and we reported an income tax benefit of $57 million for the first quarter of 2003, compared with income before income taxes and accounting change of $91 million and an income tax provision of $30 million for the first quarter of 2002. The effective tax rate in 2003 was different from the statutory rate primarily because of lower international income tax rates, utilization of state tax credits and the reversal of approximately $10 million of income tax contingency reserves no longer required in Europe. The effective tax rate in 2002 was different from the statutory rate primarily because of lower international income tax rates and state tax credits. |
|
3. |
EARNINGS PER SHARE. Basic (loss) earnings per share is computed based on net income and the weighted average number of common shares outstanding. Diluted earnings per share reflect the assumed issuance of common shares under long-term incentive stock option and stock purchase plans and pursuant to the terms of the 7.5% Premium Equity Participating Security Units ("PEPS Units") that were redeemed during the third quarter of 2002. The computation of diluted earnings per share does not assume conversion or exercise of securities that would have an antidilutive effect on earnings per share. |
|
4. |
SUPPLEMENTAL DISCLOSURES -- CONSOLIDATED STATEMENTS OF CASH FLOWS. The cash impact of interest and income taxes is reflected in the table below. The effect of foreign currency exchange rate changes on cash was not material in either period. |
|
8 |
|
|
First quarter |
|||
|
(In millions) |
2003 |
2002 |
|
|
-------------------------------------------------------------------------------------------------------------------------------------- |
|||
|
Total interest costs |
$ 209 |
$ 235 |
|
|
--------------------------------------------------------------------------------------------------------------------------------------- |
|||
|
Interest expense |
$ 207 |
$ 233 |
|
|
============================================================================= |
|||
|
Interest paid |
$ 114 |
$ 154 |
|
|
============================================================================= |
|||
|
Income tax paid, net |
$ 28 |
$ 14 |
|
|
============================================================================= |
|||
|
5. |
ACQUISITIONS AND DIVESTITURES. Effective November 2, 2002, we sold a 60% controlling interest in Unisource Worldwide, Inc. ("Unisource"), our paper distribution business, to an affiliate of Bain Capital Partners, LLC, and retained the remaining 40% equity interest in Unisource. In connection with this disposal, we recorded a pretax loss of $298 million ($30 million after taxes) in the fourth quarter of 2002 in the paper distribution segment. In addition, we entered into a financing lease arrangement with a third party regarding certain warehouse facilities used by Unisource. As part of these transactions, we: |
|
|
a) |
received $471 million in cash during fiscal 2002 in connection with the disposition and repaid debt; |
|
|
b) |
received $169 million in cash as a result of the financing lease arrangement accounted for by us as a capital lease; |
|
|
c) |
received two payment-in-kind notes from Unisource for $70 million and $100 million, which accrue interest at an annual interest rate of 7% and 8%, respectively, and mature in November 2012; and |
|
|
d) |
entered into a sublease with Unisource for certain warehouses retained by us. |
|
|
In addition, in the second quarter of 2003, we received more than $193 million of cash refund from the related income tax benefit of the Unisource sale. |
||
|
As part of this transaction, we have entered into a loan agreement with Unisource pursuant to which we agreed to provide, subject to certain conditions, a $100 million subordinated secured loan to Unisource. This subordinated loan, if drawn, will mature in May 2008 and bears interest at a fluctuating rate based on LIBOR. In addition, we have also agreed to provide certain employee benefits and other administrative services to Unisource pursuant to an agreement with a two-year term. We also agreed to provide certain insurance coverage (including related letters of credit) to Unisource, generally for a period of five years, including workers' compensation, general liability, automobile liability and property insurance. |
||
|
Beginning in November 2002, we have accounted for our 40% investment in Unisource using the equity method and have reported its results in the bleached pulp and paper segment. |
||
|
During the first quarter of 2002, we sold various assets, including a gypsum wallboard paper mill, for a total of $13 million in cash and recognized a pretax gain of $4 million which was reflected in "Other losses, net" in the accompanying consolidated statements of operations. |
||
|
9 |
||
|
6. |
ASSET IMPAIRMENT AND RESTRUCTURING. On April 4, 2003, we announced that we would close tissue-manufacturing and converting operations at our Old Town, Maine mill. The mill's pulp and dryer operations are continuing to operate. The determination to close the tissue operations was based on excess capacity of tissue production, the mill's geographic location and high energy and fiber costs. In connection with this closure, we determined that the value of related tissue assets and certain pulp assets at this location was impaired. Accordingly, in the first quarter of 2003, we recorded a pre tax impairment charge to earnings in the North America consumer products segment and bleached pulp and paper segment of $25 million and $49 million, respectively. Following the impairment charge, the carrying value of fixed assets was approximately $75 million. Any severance or business exit costs associated with the closed operations will be charged to earnings when the related liabilit y is incurred. The fair value of the impaired assets was determined using the present value of expected future cash flows. This impairment charge was recorded in "Other losses, net" in the accompanying consolidated statements of operations. |
||||
|
On May 2, 2003, the Governor of Maine announced an economic support plan that will enable us to restart one of our closed tissue machines along with eight converting lines and retain related manufacturing and support personnel. In accordance with generally accepted accounting principles, none of the impairment charge recorded in the first quarter of 2003 will be reversed. |
|||||
|
In connection with the acquisition of Fort James, we recorded liabilities totaling approximately $78 million for employee termination costs relating to approximately 960 hourly and salaried employees. In addition, we determined that we would strategically reposition our communication papers business to focus on faster-growing paper segments by retiring four high-cost paper machines and associated pulping facilities at our Camas, Washington mill and recorded liabilities of approximately $26 million to exit these activities. In addition, we recorded liabilities of $35 million primarily for lease and contract termination costs at administrative facilities that have been or will be closed in California, Connecticut, Illinois, Virginia and Wisconsin. During 2002 and 2001, approximately 779 employees were terminated and approximately $69 million of the reserve was used to pay termination benefits. During the first quarter of 2003, approximately 150 employees were terminated and appr oximately $4 million of the reserve was used to pay termination benefits. The remaining employee terminations and Camas closing activities (primarily demolition activities) are expected to be completed in early 2004 due to timing of receipt of the requisite permits. The leases and contracts at the administrative facilities expire through 2012. The following table provides a rollforward of these reserves from December 28, 2002 through March 29, 2003: |
|||||
|
Type of Cost |
Liability |
Use |
Liability |
||
|
-------------------------------------------------------------------------------------------------------------------- |
|||||
|
Employee termination |
$ 9 |
$ (4) |
$ 5 |
||
|
------------------------------------------------------------------------------------------------------------------- |
|||||
|
Total |
$ 51 |
$ (7) |
$ 44 |
||
|
=================================================================== |
|||||
|
10 |
|||||
|
7. |
INVENTORY VALUATION. Inventories include costs of materials, labor, and plant overhead. We use the dollar value method for computing LIFO inventories. The major components of inventories were as follows: |
||
|
(In millions) |
March 29, |
December 28, |
|
|
-------------------------------------------------------------------------------------------------------------------------------------- |
|||
|
Raw materials |
$ 591 |
$ 590 |
|
|
-------------------------------------------------------------------------------------------------------------------------------------- |
|||
|
Total inventories |
$ 2,242 |
$ 2,136 |
|
|
============================================================================= |
|||
|
8. |
GOODWILL AND INTANGIBLE ASSETS. Effective December 30, 2001, we adopted SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 eliminates the pooling of interests method of accounting for business combinations initiated after June 30, 2001. SFAS No. 142 requires that entities assess the fair value of the net assets underlying all acquisition-related goodwill on a reporting unit basis effective beginning in 2002. When the fair value is less than the related carrying value, entities are required to reduce the amount of goodwill. Our reporting units are: structural panels, lumber, industrial wood products, gypsum, chemical, building products distribution, packaging, pulp, paper, North American retail towel and tissue, North American commercial towel and tissue, Dixie, and international consumer products. |
|
The adoption of SFAS No. 142 required us to perform an initial impairment assessment on all goodwill as of the beginning of 2002 for each of our reporting units. In this assessment, we compared the fair value of the reporting unit to its carrying value. The fair values of the reporting units were calculated based on the present value of expected future cash flows. The assumptions used in these discounted cash flow analyses were consistent with the reporting unit's internal planning. The cumulative effect of the adoption of this accounting principle was an after-tax charge to earnings of $545 million ($2.36 diluted loss per share) effective at the beginning of fiscal year 2002. The $545 million goodwill impairment related only to our former Unisource paper distribution reporting unit. The principal facts and circumstances leading to the impairment of the paper distribution reporting unit's goodwill included a diminution of synergies originally expected to be received from the white paper mills sold to Domtar, Inc. in 2001, and changes in the marketplace for coated and uncoated free sheet paper subsequent to the acquisition of Unisource. |
|
|
In addition, during the first three months of 2003, we reduced goodwill for certain tax contingencies recorded in connection with the Fort James acquisition that are no longer required. This reclassification was offset by the foreign currency translation adjustment in our international consumer products segment. |
|
|
11 |
|
|
The changes in the carrying amount of goodwill for the first three months of 2003 are as follows: |
|
In millions |
North America Consumer Products |
International Consumer Products |
Packaging |
Bleached Pulp and Paper |
|
--------------------------------------------------------------------------------------------------------------------------------------------------------- |
||||
|
Balance as of December 28, 2002 |
$ 5,938 - |
$ 785 17 |
$ 631 - - |
$ 275 - - |
|
--------------------------------------------------------------------------------------------------------------------------------------------------------- |
||||
|
Balance as of March 29, 2003 |
$ 5,938 |
$ 785 |
$ 631 |
$ 275 |
|
======================================================================================== |
||||
|
In millions |
Building Products Manufacturing |
Building Products Distribution |
All Other |
Consolidated |
|
--------------------------------------------------------------------------------------------------------------------------------------------------------- |
||||
|
Balance as of December 28, 2002 |
$ 34 (1) |
$ -- - - |
$ -- - - |
$ 7,663 |
|
--------------------------------------------------------------------------------------------------------------------------------------------------------- |
||||
|
Balance as of March 29, 2003 |
$ 33 |
$ - |
$ - |
$ 7,662 |
|
======================================================================================== |
||||
|
|
Intangible Assets |
|||||||||
|
The following table sets forth information for intangible assets subject to amortization: |
||||||||||
|
As of March 29, 2003 |
As of December 28, 2002 |
|||||||||
|
|
Gross Carrying |
Accumulated |
Gross Carrying |
Accumulated |
||||||
|
---------------------------------------------------------------------------------------------------------------------------------- |
||||||||||
|
Trademarks |
$ 616 |
$ 30 |
$ 616 |
$ 28 |
||||||
|
---------------------------------------------------------------------------------------------------------------------------------- |
||||||||||
|
Total |
$ 762 |
$ 92 |
$ 762 |
$ 86 |
||||||
|
========================================================================== |
||||||||||
|
Aggregate Amortization Expense: |
|
|||||||||
|
Estimated Amortization Expense: |
|
|||||||||
|
12 |
||||||||||
|
9. |
ASSET RETIREMENT OBLIGATIONS. Effective December 29, 2002, we changed our method of accounting for asset retirement obligations in accordance with SFAS No. 143, Accounting for Asset Retirement Obligations. Under SFAS No. 143, we recognize asset retirement obligations in the period in which they are incurred if a reasonable estimate of the fair value can be made. When the liability is initially recorded, we capitalize the cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, we will recognize a gain or loss for any difference between the settlement amount and the liability recorded. |
|||
|
The cumulative effect of the change on prior years resulted in an after-tax credit to income of $28 million (net of income taxes of $19 million), or $0.11 diluted earnings per share, for the quarter ended March 29, 2003. The effect of the change on the quarter ended March 29, 2003 was to decrease income before the cumulative effect of the accounting change by approximately $1 million related to depreciation and accretion expense recorded during the period. The pro forma effects of the application of SFAS No. 143 as if the statement had been adopted on December 30, 2001 (instead of December 29, 2002) are presented below (pro forma amounts assuming the accounting change is applied retroactively net of tax): |
||||
|
(in millions, except per share amounts) |
First Quarter 2003 |
First Quarter 2002 |
||
|
-------------------------------------------------------------------------------------------------------------------------------------- |
||||
|
(Loss) income before accounting change, as reported |
$ (56) - - |
$ 61 |
||
|
-------------------------------------------------------------------------------------------------------------------------------------- |
||||
|
Pro forma (loss) income before accounting change |
$ (56) |
$ 61 |
||
|
============================================================================= |
||||
|
Pro forma basic (loss) income before accounting change, |
|
|
||
|
============================================================================= |
||||
|
Our asset retirement obligations consist primarily of landfill capping and closure and post-closure costs and quarry reclamation costs. We are legally required to perform capping and closure and post-closure care on the landfills and reclamation on the quarries. In accordance with SFAS No. 143, for each landfill and quarry we recognized the fair value of a liability for an asset retirement obligation and capitalized that cost as part of the cost basis of the related asset. The related assets are being depreciated on a straight-line basis over 25-years. We have additional asset retirement obligations with indeterminate settlement dates; the fair value of these asset retirement obligations cannot be estimated due to the lack of sufficient information to estimate a range of potential settlement dates for the obligation. An asset retirement obligation related to these assets will be recognized when we know such information. |
||||
|
The following table describes changes to our asset retirement obligation liability: |
||||
|
(in millions) |
First Quarter 2003 |
|||
|
----------------------------------------------------------------------------------------------------------------------------------- |
||||
|
Asset retirement obligation at the beginning of the year |
$ 69 |
|||
|
----------------------------------------------------------------------------------------------------------------------------------- |
||||
|
Asset retirement obligation at the end of the quarter |
$ 50 |
|||
|
=========================================================================== |
||||
|
13 |
||||
|
The pro forma asset retirement obligation liability balances as if SFAS No. 143 had been adopted on December 30, 2001 (instead of December 29, 2002) were as follows: |
|||
|
(in millions) |
March 29, |
December 28, |
|
|
----------------------------------------------------------------------------------------------------------------------------------- |
|||
|
Pro forma amounts of liability for asset retirement obligations |
|
|
|
|
10. |
DEBT. Our total debt increased by $358 million to $11,874 million at March 29, 2003 from $11,516 million at December 28, 2002. The increase was primarily due to increased working capital requirements. At March 29, 2003, the weighted average interest rate on our total debt, including outstanding interest rate exchange agreements was 6.59%. |
||
|
As of March 29, 2003, we had $700 million outstanding under our accounts receivable secured borrowing program which expires in December 2003. On March 31, 2003, we increased our borrowings under our accounts receivable secured borrowing program by $200 million and used the funds to pay down debt. G-P Receivables, Inc. ("G-P Receivables") is a wholly-owned subsidiary and is the special purpose entity into which the receivables of participating domestic subsidiaries are sold. G-P Receivables, in turn, sells the receivables to the various banks and entities that purchase the receivables. The receivables outstanding under these programs and the corresponding debt are included as both "Receivables" and "Secured borrowings and other short-term notes," respectively, in the accompanying balance sheets. This program is accounted for as a secured borrowing. As collections reduce previously pledged interests, new receivables may be pledged. G-P Receivables is a separate corporate entity and its assets will be available first and foremost to satisfy the claims of its creditors. |
|||
|
On January 30, 2003, we completed a $1.5 billion senior notes offering, consisting of $800 million of 9.375% notes due in 2013 and $700 million of 8.875% notes due in 2010, all of which were guaranteed by Fort James Corporation. In the second quarter of 2003, we intend to cause Fort James Operating Company, a subsidiary of Fort James Corporation, to guarantee these notes as well. The 9.375% notes due in 2013 are callable at our option beginning in 2008. Proceeds from the offering were used to completely repay the Senior Capital Markets Bridge Facility, and approximately $1 billion of bank debt outstanding under the revolving credit facility. We paid approximately $32 million in fees associated with the transaction. The fees are being amortized over the term of the senior notes. |
|||
|
The $1.5 billion senior notes offering completed on January 30, 2003 requires a fixed charges coverage ratio of 2.00 to 1.00 (as defined in the agreement) and various non-financial covenants. We were in compliance with these debt covenants as of March 29, 2003. |
|||
|
On January 21, 2003, Moody's Investors Service announced that it had downgraded our senior implied and issuer debt ratings from Ba1 to Ba2 and our senior unsecured notes from Ba1 to Ba3. On January 29, 2003, Fitch Ratings announced that it had lowered our senior unsecured long-term debt ratings from BB+ to BB and withdrew our commercial paper rating. |
|||
|
At March 29, 2003, the Multi-Year Revolving Credit Facility totaled $3,250 million with a maturity date of November 28, 2005. Pursuant to an amendment to the Multi-Year Revolving Credit Facility, dated as of March 28, 2003 (the "Amendment Effective Date"), amounts available thereunder are (a) now comprised of (i) $2,750 million in revolving loans and (ii) $500 million in term loans, established on April 1, 2003 and due November 2005, and (b) will be reduced to $3,000 million on December 31, 2004, with a $2,500 million revolver and the $500 million term loan. |
|||
|
14 |
|||
|
Borrowings under the Multi-Year Revolving Credit Facility bear interest at market rates. These interest rates may be adjusted according to a rate grid based on our debt ratings. Fees include a facility fee of 0.4% per annum on the aggregate commitments of the lenders as well as up-front fees. As of March 29, 2003, we paid $3 million in commitment fees and $3 million in amendment fees. Fees and margins may also be adjusted according to a pricing grid based on our debt ratings. At March 29, 2003, $1,982 million was borrowed under the Multi-Year Revolving Credit Facility, at a weighted-average interest rate of 3.8%. Amounts outstanding under the Multi-Year Revolving Credit Facility are included in "Long-term debt, excluding current portion" on the accompanying consolidated balance sheets. |
||
|
On April 23, 2003, we received income tax refunds of approximately $354 million, including the tax refund related to the Unisource sale, and used these funds to pay down debt. |
||
|
The amounts outstanding under our credit agreement include the following: |
||
|
In millions |
March 29, 2003 |
|
|
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
||
|
Commitments: Multi-Year Revolving Credit Facility |
|
|
|
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
||
|
Amounts Outstanding: Letter of Credit Agreements* Multi-Year Revolving Credit Facility due November 2005, average rate of 3.8% |
|
|
|
------------------------------------------------------------------------------------------------------------------------------------------------------ |
||
|
Total credit balance |
(2,519) |
|
|
------------------------------------------------------------------------------------------------------------------------------------------------------ |
||
|
Total credit available ** |
$ 731 |
|
|
====================================================================================== |
||
|
* |
The Letter of Credit Agreements only include Standby Letter of Credits from Bank of America. |
|
|
** |
On March 31, 2003, the amount of total credit available increased by $200 million resulting from the pay down of the facility from the proceeds of the increase in the accounts receivable secured borrowing program. On April 23, 2003, the amount of total credit available increased by $354 million resulting from the pay down of the facility from the proceeds of the income tax refunds. However, we were limited to $893 million of incremental debt available pursuant to certain restrictive debt covenants and our outstanding debt balance at March 29, 2003. |
|
|
The unsecured financing facilities require a maximum leverage ratio (as defined in the financing facilities agreements) of 70.00% on March 29, 2003; 67.50% on June 28, 2003, September 27, 2003 and January 3, 2004; and 65.00% on April 3, 2004 and thereafter. The restrictive covenants also require a minimum interest coverage ratio (as defined in the financing facilities agreements), of 2.25 to 1.00 on March 29, 2003, June 28, 2003, September 27, 2003 and January 3, 2004; 2.50 to 1.00 on April 3, 2004; 2.75 to 1.00 on July 3, 2004; and 3.00 to 1.00 on October 2, 2004 and thereafter. In addition, the restrictive covenants require a minimum net worth that changes quarterly and a maximum debt level of $12,594 (as defined in the financing facilities agreements) for so long as our leverage ratio exceeds 65.00%. We were in compliance with these debt covenants as of March 29, 2003, with a leverage ratio of 66.70%, an interest coverage ratio of 2.53 to 1.00, a debt balance (as defined in the financing facilities agreements) of $11,701 million and an adjusted net worth surplus of $377 million. All of these amounts were calculated in accordance with the financing facilities agreements. |
||
|
Our borrowing arrangements contain a number of financial and non-financial covenants, which restrict our activities. The more significant financial covenants are discussed above. In addition, certain agreements contain cross-default provisions. We were in compliance with the covenants of these agreements. |
||
|
15 |
||
|
|
Our continued compliance with these restrictive covenants is dependent on substantially achieving the 2003 forecast, which is dependent on a number of factors, many of which are outside of our control. We believe the forecast is reasonable and we will remain in compliance with these covenants. Should events occur that result in noncompliance, we believe there are remedies available acceptable to our lenders and us. |
|
At March 29, 2003, we had interest rate exchange agreements that effectively converted $300 million of floating rate obligations with a weighted average interest rate of 1.3% to fixed rate obligations with an average effective interest rate of approximately 5.9%. During the first three months of 2003, interest rate exchange agreements increased interest expense by $3 million. The agreements had a weighted-average maturity of approximately five months at March 29, 2003. |
|
|
At March 29, 2003, we also had interest rate exchange agreements (a collar) that effectively capped $47 million of floating rate obligations to a maximum interest rate of 7.5% and established a minimum interest rate on these obligations of 5.5%. Our interest expense is unaffected by this agreement when the market interest rate falls within this range. During the first three months of 2003, these agreements decreased interest expense by $.5 million. The agreements had a weighted-average maturity of approximately three years at March 29, 2003. |
|
|
The estimated fair value of our interest rate exchange agreements at March 29, 2003 was a $5 million liability. The liability balance represents the estimated amount we could have paid upon termination of the agreements. The fair value at March 29, 2003 was estimated by calculating the present value of anticipated cash flows. The discount rate used was an estimated borrowing rate for similar debt instruments with like maturities. |
|
|
As of March 29, 2003, we had $1.5 billion of debt and equity securities available for issuance under a shelf registration statement filed with the Securities and Exchange Commission in 2000. |
|
|
11. |
COMMITMENTS AND CONTINGENCIES. We are involved in various legal proceedings incidental to our business and are subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which we operate. As is the case with other companies in similar industries, Georgia-Pacific faces exposure from actual or potential claims and legal proceedings involving environmental matters. Liability insurance in effect during the last several years provides only very limited coverage for environmental matters. |
|
ENVIRONMENTAL MATTERS |
|
|
We are involved in environmental remediation activities at approximately 174 sites, both owned by us and owned by others, where we have been notified that we are or may be a potentially responsible party ("PRP") under the United States Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") or similar state "superfund" laws. Of the known sites in which we are involved, we estimate that approximately 37% are being investigated, approximately 21% are being remediated and approximately 42% are being monitored (an activity that occurs after either site investigation or remediation has been completed). The ultimate costs to us for the investigation, remediation and monitoring of many of these sites cannot be predicted with certainty, due to the often unknown nature and magnitude of the pollution or the necessary cleanup, the varying costs of alternative cleanup methods, the amount of time necessary to accomplish the cleanups, the evolving nature of cleanup t echnologies and governmental regulations, and the inability to determine our share of multiparty cleanups or the extent to which contribution will be available from other parties, all of which factors are taken into account to the extent possible in estimating our liabilities. We have established reserves for environmental remediation costs for these sites that we believe are probable and reasonably able to be estimated. To the extent that we are aware of unasserted claims, consider them probable, and can estimate their potential costs, we include appropriate amounts in the reserves. |
|
|
16 |
|
|
Based on analyses of currently available information and previous experience with respect to the cleanup of hazardous substances, we believe it is reasonably possible that costs associated with these sites may exceed current reserves by amounts that may prove insignificant or that could range, in the aggregate, up to approximately $128 million. This estimate of the range of reasonably possible additional costs is less certain than the estimates upon which reserves are based, and in order to establish the upper limit of this range, assumptions least favorable to us among the range of reasonably possible outcomes were used. In estimating both our current reserve for environmental remediation and the possible range of additional costs, we have not assumed we will bear the entire cost of remediation of every site to the exclusion of other known PRPs who may be jointly and severally liable. The ability of other PRPs to participate has been taken into account, based generally on the ir financial condition and probable contribution on a per-site basis. |
||||||
|
Presented below is the activity in our environmental liability account for the last three fiscal years and first three months of 2003 and 2002. |
||||||
|
|
|
|
||||
|
|
2003 |
2002 |
2002 |
2001 |
2000 |
|
|
------------------------------------------------------------------------------------------------------------------------------------- |
||||||
|
Beginning balance |
$ 306 - - - - (1) (3) |
$ 318 - - - - (4) |
$ 318 - - - - (26) |
$ 121 - 207 - (27) |
$ 57 49 - - (16) |
|
|
------------------------------------------------------------------------------------------------------------------------------------- |
||||||
|
Ending balance |
$ 302 |
$ 315 |
$ 306 |
$ 318 |
$ 121 |
|
|
============================================================================ |
||||||
|
KALAMAZOO RIVER SUPERFUND SITE |
||||||
|
We are currently implementing an Administrative Order by Consent ("AOC") entered into with the Michigan Department of Natural Resources and the United States Environmental Protection Agency ("United States EPA") regarding an investigation of the Kalamazoo River Superfund Site. The Kalamazoo River Superfund Site is comprised of 35 miles of the Kalamazoo River, three miles of Portage Creek and a number of operable units in the form of landfills, waste disposal areas and impoundments. We became a PRP for the site in December 1990 by signing the AOC. There are two other named PRPs at this time. The contaminant of concern is polychlorinated biphenyls ("PCBs") in the river sediments and residuals in the landfills and waste disposal areas. |
||||||
|
A draft Remedial Investigation/Feasibility Study ("RI/FS") for the Kalamazoo River was submitted to the State of Michigan on October 30, 2000 by us and other PRPs. The draft RI/FS evaluated five remedial options ranging from no action to total dredging of the river and off-site disposal of the dredged materials. In February 2001, the PRPs, at the request of the State of Michigan, also evaluated 9 additional potential remedies. The cost for these remedial options ranges from $0 to $2.5 billion. The draft RI/FS recommends a remedy involving stabilization of over twenty miles of riverbank and long-term monitoring of the riverbed. The total cost for this remedy is approximately $73 million. It is unknown over what timeframe these costs will be paid out. The United States EPA has taken over management of the RI/FS and is evaluating the proposed remedy. We cannot predict what impact or change will result from the United States EPA's assuming management of the site. |
||||||
|
17 |
||||||
|
We are paying 50% of the costs for the river portion of the RI/FS investigation based on an interim allocation. This 50% interim allocation includes the share assumed by Fort James prior to its acquisition by us. Several other companies have been identified by government agencies as PRPs, and all but one is believed to be financially viable. We are currently engaged in cost recovery litigation against two other parties, and have identified several more parties that it believes have some share of liability for the river. |
|||||
|
As part of implementing the AOC, we have investigated the closure of two disposal areas which are contaminated with PCBs. The cost to remediate one of the disposal areas, the King Highway Landfill, was approximately $9 million. The remediation of that area is essentially complete and we are waiting for final approval of the closure from the State of Michigan. A 30-year post-closure care period will begin upon receipt of closure approval. Expenditures accrued for post-closure care will be made over the following 30 years. We are solely responsible for closure and post closure care of the King Highway Landfill. |
|||||
|
It is anticipated that the cost for closure of the second disposal area, the Willow Boulevard/A Site landfill, will be approximately $8 million. We are still negotiating the final closure agreement with the State of Michigan. It is anticipated these costs will be paid out over the next five years, and for post-closure care for 30 years following certification of the closure. We are solely responsible for closure and post-closure care of the Willow Boulevard portion of the landfill, and are sharing investigation costs for the A Site portion of the landfill with Millennium Holdings on an equal basis. A final determination as to how closure and post-closure costs for the A Site will be allocated between us and Millennium Holdings has not been made, however, our share should not exceed 50%. |
|||||
|
We have spent approximately $31.2 million on the Kalamazoo River Superfund Site through March 29, 2003 broken down as follows: |
|||||
|
Site |
(in millions) |
||||
|
River |
$ 17.5 |
||||
|
King Highway |
9.0 |
||||
|
A Site |
1.7 |
||||
|
Willow Blvd. |
3.0 |
||||
|
$ 31.2 |
|||||
|
All of these amounts were charged to earnings. |
|||||
|
The reserve for the Kalamazoo River Superfund Site is based on the assumption that the bank stabilization remedy will be selected as the final remedy by the United States EPA and the State of Michigan, and that the costs of the remedy will be shared by several other PRPs. Based on analyses of currently available information and previous experience with respect to the cleanup of hazardous substances, we believe that the reserves are adequate; however, it is reasonably possible that costs associated with the Kalamazoo River Superfund Site may exceed current reserves by amounts that may prove insignificant or that could range, in the aggregate, up to approximately $70 million. |
|||||
|
FOX RIVER SUPERFUND SITE |
|||||
|
The Fox River site in Wisconsin is comprised of 39 miles of the Fox River and Green Bay. The site was nominated by the United States EPA (but never finally designated) as a Superfund Site due to contamination of the river by PCBs through wastewater discharged from the recycling of carbonless copy paper from 1953-1971. We became a PRP through our acquisition of Fort James. |
|||||
|
18 |
|||||
|
In October 2001, the Wisconsin Department of Natural Resources ("WDNR") and the United States EPA released for public comment a draft RI/FS and proposed remedial action plan ("PRAP") for the Fox River and Green Bay. The draft sets forth a proposed remedy with an estimated total cost of $308 million. We provided comments on this plan to the relevant agencies in January 2002. Those comments questioned the WDNR's assumed costs for dredging, as information from other remediation dredging projects indicated costs per cubic yard of material dredged were significantly higher than those used by WDNR. We, along with other PRPs, also questioned the need to dredge the amount of sediment called for by the proposed remedy. We believe that other alternatives involving substantially less dredging would meet the risk reduction goals of WDNR. The final cleanup alternative to be selected and implemented, the costs of the alternative, and our share of these costs, are unknown at this time. |
|
|
Six other companies have been identified by the governments as PRPs, most of which are believed to be financially viable. Under an interim allocation, we are paying 30 percent of costs incurred by the PRPs in analyzing and responding to the various agency reports, including the RI/FS and PRAP. We believe our ultimate liability will be less than 30 percent. It is unknown over what timeframe these costs will be paid out. |
|
|
Our reserves for the Fox River site are based on the assumptions that the volume of sediment to be dredged will be less than the amount discussed in the PRAP, that the cost per cubic yard of sediment removed will be several times higher, as well as our estimate of our ultimate share of this liability. Given currently available information and our previous experience with respect to the clean up of hazardous substances, we believe our current reserves for this site are adequate. The WDNR is expected to issue a Record of Decision ("ROD") in 2003 for the portion of the Fox River Site into which the Fort James mill discharged wastewater. Depending on the conclusions of this ROD about the volume of sediment to be dredged a |