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UNITED STATES |
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SECURITIES AND EXCHANGE COMMISSION |
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Washington, D. C. 20549 |
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GEORGIA |
93-0432081 |
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(State of Incorporation) |
(IRS Employer Id. Number) |
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133 PEACHTREE STREET, N.E., ATLANTA, GEORGIA 30303 |
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(Address of Principal Executive Offices) |
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(Telephone Number of Registrant) |
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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 |
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Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). |
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As of the close of business on October 31, 2003, Georgia-Pacific Corporation had 254,131,254 shares of Georgia-Pacific Common Stock outstanding. |
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PART I - FINANCIAL INFORMATION |
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Item 1. |
Financial Statements |
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CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) |
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Third Quarter |
First Nine Months |
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(In millions, except per share amounts) |
2003 |
2002 |
2003 |
2002 |
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Net sales |
$ 5,278 |
$ 6,152 |
$ 14,893 |
$ 18,170 |
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Costs and expenses: |
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Total costs and expenses |
4,990 |
6,055 |
14,628 |
18,054 |
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Income before income taxes and accounting changes |
288 |
97 |
265 |
116 |
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Income before accounting changes |
189 |
66 |
195 |
44 |
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Net income (loss) |
$ 189 |
$ 66 |
$ 223 |
$ (501) |
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Basic per share: Income before accounting changes Cumulative effect of accounting changes, net of taxes |
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Net income (loss) |
$ 0.76 |
$ 0.27 |
$ 0.89 |
$ (2.15) |
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Diluted per share: Income before accounting changes Cumulative effect of accounting changes, net of taxes |
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Net income (loss) |
$ 0.75 |
$ 0.27 |
$ 0.89 |
$ (2.14) |
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Shares (denominator): |
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Total assuming conversion |
251.7 |
240.8 |
250.6 |
234.1 |
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The accompanying notes are an integral part of these consolidated financial statements. |
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2 |
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CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) |
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First Nine Months |
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(In millions, except per share amount) |
2003 |
2002 |
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Cash flows from operating activities Net income (loss) Adjustments to reconcile net income (loss) to cash provided by operations: Cumulative effect of accounting changes, net of taxes Other (income) losses, net Depreciation, amortization and accretion Deferred income taxes Increase in receivables Decrease (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 |
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Cash provided by operations |
1,191 |
760 |
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Cash flows from investing activities Property, plant and equipment investments Net proceeds from sales of assets Other |
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Cash used for investing activities |
(479) |
(434) |
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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 increase (decrease) in short-term debt Proceeds from option plan exercises Employee stock purchase plan Cash dividends paid ($0.375 per share) |
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Cash used for financing activities |
(640) |
(312) |
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Increase in cash and equivalents |
72 |
14 |
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Balance at end of period |
$ 107 |
$ 45 |
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The accompanying notes are an integral part of these consolidated financial statements. |
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3 |
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CONSOLIDATED BALANCE SHEETS (Unaudited) |
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(In millions, except shares and per share amounts) |
September 27, |
December 28, |
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ASSETS |
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Total current assets |
4,858 |
4,726 |
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Property, plant and equipment |
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Property, plant and equipment, net |
9,066 |
9,322 |
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Goodwill, net |
7,615 |
7,663 |
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Intangible assets, net |
662 |
676 |
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Other assets |
2,287 |
2,242 |
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Total assets |
$ 24,488 |
$ 24,629 |
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4 |
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CONSOLIDATED BALANCE SHEETS (Unaudited) (Continued) |
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(In millions, except shares and per share amounts) |
September 27, |
December 28, |
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LIABILITIES AND SHAREHOLDERS' EQUITY |
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Total current liabilities |
4,880 |
4,045 |
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Long-term debt, excluding current portion |
9,186 |
10,185 |
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Other long-term liabilities |
4,165 |
4,397 |
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Deferred income tax liabilities |
1,416 |
1,442 |
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Commitments and contingencies (Note 13) |
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Shareholders' equity |
- 203 3,478 1,597 (54) (383) |
- 200 3,413 1,468 (2) (519) |
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Total shareholders' equity |
4,841 |
4,560 |
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Total liabilities and shareholders' equity |
$ 24,488 |
$ 24,629 |
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The accompanying notes are an integral part of these consolidated financial statements. |
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5 |
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) |
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Third Quarter |
First Nine Months |
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(In millions) |
2003 |
2002 |
2003 |
2002 |
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Net income (loss) |
$ 189 - |
$ 66 |
$ 223 |
$ (501) |
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Comprehensive income (loss) |
$ 193 |
$ 43 |
$ 359 |
$ (454) |
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The accompanying notes are an integral part of these consolidated financial statements. |
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6 |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) |
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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 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 our current operating structure. |
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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. The results of operations of the three and nine month periods ended September 27, 2003 are not necessarily indicative of the results to be expected for the full fiscal year. These consolidated financial statements and other information included in this quarterly report on Form 10-Q should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended December 28, 2002. |
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We classify certain shipping and handling costs as selling and distribution expenses. Shipping and handling costs included in selling and distribution expenses were $104 million and $300 million for the third quarter and first nine months of 2003, respectively, and $146 million and $431 million for the third quarter and first nine months of 2002, respectively. |
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Other (income) losses, net |
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The following amounts are included in Other (income) losses, net: |
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Third Quarter |
First Nine Months |
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(In millions) |
2003 |
2002 |
2003 |
2002 |
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Asset impairments: |
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Other (income) losses, net |
$ (81) |
$ 13 |
$ (18) |
$ 231 |
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Stock-Based Compensation |
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We account for our stock-based compensation plans under APB Opinion No. 25, Accounting for Stock Issued to Employees, and disclose the 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- |
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7 |
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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 for stock options. In May 2003, certain stock options were exchanged for restricted shares of common stock. Had compensation cost for the options not exchanged been determined based on the fair value at the grant dates during the third quarters and first nine months of 2003 and 2002 under the plan consistent with the method of SFAS No. 123, the pro forma net income (loss) and net income (loss) per share would have been as follows: |
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Third Quarter |
First Nine Months |
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(In millions, except per share amounts) |
2003 |
2002 |
2003 |
2002 |
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Net income (loss) as reported |
$ 189 |
$ 66 |
$ 223 |
$ (501) |
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Pro forma net income (loss) |
187 |
61 |
213 |
(521) |
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Stock based employee compensation cost, net of taxes, |
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Basic net income (loss) per share: |
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Diluted net income (loss) per share: |
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On May 6, 2003, our shareholders approved a resolution requesting our Board of Directors to establish a policy of expensing the costs of all future stock options. On November 7, 2003, our Board of Directors approved the adoption of SFAS No. 123, commencing with the fourth quarter of 2003, effective at the beginning of 2003. We will utilize the prospective method in accordance with SFAS No. 148, Accounting for Stock-Based Compensation -- Transition and Disclosure, and apply the expense recognition provisions of SFAS No. 123 to stock options awarded in 2003 and thereafter. The amount of additional compensation expense to be recognized in each quarter of 2003 relating to the 2003 stock option awards is insignificant. |
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Accounting Changes |
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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. |
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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. |
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In January 2003, the FASB released Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). Fin 46 requires that all primary beneficiaries of Variable Interest Entities (VIE) consolidate that entity. FIN 46 is effective immediately for VIEs created after January 31, 2003 and to VIEs to which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to VIEs in which an enterprise holds a variable interest it acquired before February 1, 2003. In October 2003, the FASB delayed the implementation of FIN 46 until after December 15, 2003, for all entities acquired before February 1, 2003. |
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8 |
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The only non-consolidated entity that we have identified as a potential VIE is the GA-MET joint venture partnership. We have a 50% interest in this partnership that owns and operates our main office building in Atlanta, GA. We currently account for our investment in this partnership under the equity method. We are in the process of performing tests to determine if the GA-MET joint venture is a VIE and will finalize our analysis in the fourth quarter of 2003. At September 27, 2003, the GA-MET partnership had assets of $92 million and debt of $129 million. |
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2. |
PROVISION FOR INCOME TAXES. 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 first quarter 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 the second quarter write-off of nondeductible goodwill, offset somewhat by lower international income tax rates and state tax credits. |
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3. |
EARNINGS PER SHARE. Basic earnings (loss) per share was computed based on net income (loss) 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, restricted stock 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. |
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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. |
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First nine months |
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(In millions) |
2003 |
2002 |
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Total interest costs |
$ 622 |
$ 659 |
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Interest expense |
$ 617 |
$ 653 |
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Interest paid |
$ 525 |
$ 608 |
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Income tax (refunds received) paid, net |
$ (236) |
$ 104 |
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Redemption of senior deferrable notes and issuance of |
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5. |
ACQUISITIONS AND DIVESTITURES. During the second quarter of 2003, we sold certain packaging assets and recorded a pre-tax gain of $18 million in the packaging segment. This gain was reflected in "Other (income) losses, net" in the accompanying statements of operations. |
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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: |
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9 |
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a) |
received $471 million in cash during fiscal 2002 in connection with the disposition and repaid debt; |
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b) |
received $169 million in cash as a result of the financing lease arrangement accounted for by us as a capital lease; |
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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 |
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d) |
entered into a sublease with Unisource for certain warehouses retained by us. |
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In addition, in the second quarter of 2003, we received a cash refund of more than $193 million from the related income tax benefit of the Unisource sale. |
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As part of this transaction, we 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. No amounts were outstanding under this loan at September 27, 2003. 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. |
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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. |
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During the first nine months of 2002, we disposed of and sold various assets for a total of $24 million in cash and recognized a pretax loss of $22 million that was reflected in "Other (income) losses, net" in the accompanying consolidated statements of operations. |
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In September 2003, we announced that we are exploring strategic alternatives for our building products distribution business, including its possible sale. |
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6. |
ASSET IMPAIRMENT AND RESTRUCTURING. On October 15, 2003, we announced that we would idle chemical production operations at our White City, Ore., facility. The determination to close the chemical operations was based on continued decline in demand for urea formaldehyde resins. In connection with this announcement, we determined that the value of related chemical producing assets at this location was impaired. Accordingly, in the third quarter of 2003, we recorded a pre tax impairment charge to earnings in the building products segment of $12 million. Following the impairment charge, the carrying value of the related assets was approximately $5 million. In addition, we recorded a pre tax charge of approximately $2 million for employee termination costs in the third quarter of 2003. Any further severance or business exit costs associated with the idled operations will be charged to earnings when the related liability is incurred. The fair value of the impaired assets was determined by an independent appraisal. The impairment charge was recorded in "Other (income) losses, net" in the accompanying consolidated statements of operations. |
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10 |
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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. In the second quarter of 2003, we recorded a pre-tax charge of $7 million and $4 million in the North America consumer products segment for related severance and business exit costs, respectively. Following the impairment charge, the carrying value of fixed assets was approximately $75 million. In the third quarter of 2003, we recorded a pre tax credit of $2 million for business exit cost accruals that were no longer needed at the Old Town mill. Any further severance or business exit costs associated with the closed operations will be charged to earnings when the related liability is incurred. The fair value of the impaired assets was determined using the present value of expected future cash flows. The impairment charge was recorded in "Other losses, net" in the accompanying consolidated statements of operations. |
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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 at our Old Town Mill. In accordance with generally accepted accounting principles, none of the impairment charge recorded in the first quarter of 2003 has been reversed. |
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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, Wisconsin and Europe. 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 nine months of 2003, approximately 161 employees were termina ted and approximately $5 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 by the third quarter of 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 September 27, 2003: |
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Type of Cost |
Liability |
Use |
Liability |
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Employee termination |
$ 9 |
$ (5) |
$ 4 |
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Total |
$ 57 |
$ (21) |
$ 36 |
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11 |
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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: |
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(In millions) |
September 27, |
December 28, |
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Raw materials |
$ 595 |
$ 590 |
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Total inventories |
$ 2,126 |
$ 2,136 |
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8. |
GOODWILL AND INTANGIBLE ASSETS. Effective December 30, 2001, we adopted SFAS No. 141 and SFAS No. 142. 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 tissue, towel and napkin; Dixie, and international consumer products. |
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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 ($2.33 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. |
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On August 13, 2002, we entered into a letter of intent to sell a 60% controlling interest in our Unisource paper distribution business to Bain Capital Partners, LLC. Based on the terms of this letter of intent, we concluded that the fair value of this business was further diminished. Accordingly, in the second quarter of 2002, we recorded an after-tax charge of $170 million, which is comprised of an additional goodwill impairment charge of $106 million and a pretax long-lived asset impairment charge of $102 million ($64 million after tax) in the paper distribution segment. |
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During the first nine months of 2003, we reduced goodwill by $92 million for certain deferred taxes and tax contingencies recorded in connection with the Fort James acquisition that were no longer required. |
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12 |
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The changes in the carrying amount of goodwill for the first nine months of 2003 are as follows: |
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(In millions) |
North America Consumer Products |
International Consumer Products |
Packaging |
Bleached Pulp and Paper |
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Balance as of December 28, 2002 |
$ 5,938 - |
$ 785 - - 38 |
$ 631 6 - - |
$ 275 - - - - |
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Balance as of September 27, 2003 |
$ 5,863 |
$ 806 |
$ 637 |
$ 275 |
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(In millions) |
Building Products Manufacturing |
Building Products Distribution |
All Other |
Consolidated |
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Balance as of December 28, 2002 |
$ 34 - - - |
$ -- - - - - |
$ -- - - - - |
$ 7,663 |
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Balance as of September 27, 2003 |
$ 34 |
$ - |
$ - |
$ 7,615 |
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In order to align our goodwill impairment analysis with our strategic forecasting and to provide adequate time to complete the analysis each year, beginning in 2003 we changed the period in which we perform our annual goodwill impairment test from the fourth fiscal quarter to the third fiscal quarter of each year. |
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13 |
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Intangible Assets |
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The following table sets forth information for intangible assets subject to amortization: |
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As of September 27, 2003 |
As of December 28, 2002 |
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Gross Carrying |
Accumulated |
Gross Carrying |
Accumulated |
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Trademarks |
$ 619 |
$ 37 |
$ 618 |
$ 28 |
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Total |
$ 747 |
$ 85 |
$ 740 |
$ 64 |
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Aggregate Amortization Expense: |
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9. |
ASSET RETIREMENT OBLIGATIONS. Effective December 29, 2002, we changed our method of accounting for asset retirement obligations in accordance with SFAS No. 143. 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. |
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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 first nine months of 2003. The effect of the change on the first nine months of 2003 was to decrease income before the cumulative effect of the accounting changes by approximately $3 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): |
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14 |
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(in millions, except per share amounts) |
Third Quarter |
First Nine Months |
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2003 |
2002 |
2003 |
2002 |
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Income before accounting changes, as reported |
$ 189 |
$ 66 |
$ 195 |
$ 44 |
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Pro forma income before accounting changes |
$ 189 |
$ 66 |
$ 195 |
$ 45 |
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Pro forma basic income before accounting |
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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. |
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The following table describes changes to our asset retirement obligation liability: |
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(In millions) |
First Nine Months 2003 |
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Asset retirement obligation at the beginning of the year |
$ 69 |
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Asset retirement obligation at the end of the third quarter |
$ 52 |
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The actual and 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: |
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(In millions) |
September 27, |
December 28, |
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Liability for asset retirement |
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15 |
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10. |
DEBT. Our total debt decreased by $413 million to $11,103 million at September 27, 2003 from $11,516 million at December 28, 2002. At September 27, 2003, the weighted average interest rate on our total debt, including outstanding interest rate exchange agreements, was 6.78%. |
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As of September 27, 2003, we had $900 million outstanding under our accounts receivable secured borrowing program, which expires in December 2003. 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 an interest in the receivables to the various banks and entities. This program is accounted for as a secured borrowing. 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. 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. |
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On June 3, 2003, we completed a $500 million senior notes offering, consisting of $350 million of 7.375% notes due in 2008 and $150 million of 8% notes due in 2014, all of which were guaranteed by Fort James Corporation and Fort James Operating Company, a subsidiary of Fort James Corporation. The 8% senior notes due 2014 will be callable at our option beginning in 2009. Net proceeds from the offering were used to pay down a portion of our Multi-Year Revolving Credit Facility. On October 3, 2003, we completed an offer to exchange these notes. We have paid approximately $8 million in fees and expenses associated with these transactions. The fees are being amortized over the term of the senior notes. |
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On January 30, 2003, we completed a $1.5 billion of 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 fourth quarter of 2003, we intend to cause Fort James Operating Company to guarantee these notes as well. The 9.375% notes due in 2013 are callable at our option beginning in 2008. Net proceeds from the offering were used to completely repay the Senior Capital Markets Bridge Facility, and to pay down approximately $1 billion outstanding under our Multi-Year Revolving Credit Facility. On September 9, 2003, we completed an offer to exchange these notes. We have paid approximately $34 million in fees and expenses associated with these transactions. The fees are being amortized over the term of these senior notes. |
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On September 1, 2003 and August 1, 2003, a $10 million variable rate industrial revenue bond and a $1 million, 6.88% industrial revenue bond matured, respectively. Also, on August 22, 2003, a $300 million variable rate note matured. |
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On September 30, 2003, Moody's Investors Service announced that it had assigned our revolving credit facility debt a rating of SGL-3, which indicates adequate liquidity. 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. On September 27, 2002, Standard & Poor's changed our long-term corporate credit rating to "BB-plus" from "BBB-minus" and our short-term rating to "B" from "A-3." |
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The indentures associated with the $500 million and $1.5 billion senior notes offerings completed on June 3, 2003 and January 30, 2003, respectively, allow Georgia-Pacific and the guarantors of the senior notes to incur any debt so long as we meet a fixed charges coverage ratio of 2.00 to 1.00 (as defined in the indentures). In addition, we can incur other items of permitted debt (as defined in the indentures) without being in compliance with the fixed charge coverage ratio. The senior notes indentures allow us to make restricted payments if certain conditions are met. We can, however, make permitted payments without complying with such conditions. These offerings also contain various non-financial covenants. We were in compliance with these debt covenants as of September 27, 2003. |
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16 |
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We elected to reduce the commitments under the Multi-Year Revolving Credit Facility effective June 6, 2003. Amounts available thereunder are now comprised of (i) $2,500 million in revolving loans and (ii) $500 million in term loans due November 2005. |
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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 September 27, 2003, we paid $8 million in commitment fees and $4 million in amendment fees. Fees and margins may also be adjusted according to a pricing grid based on our debt ratings. At September 27, 2003, $791 million was borrowed under the Multi-Year Revolving Credit Facility, at a weighted-average interest rate of 3.3%. Amounts outstanding under the Multi-Year Revolving Credit Facility are included in "Long-term debt, excluding current portion" on the accompanying consolidated balance sheets. |
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The amounts outstanding under our Multi-Year Revolving Credit Facility include the following: |
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September 27, 2003 |
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Commitments: Revolving Loans Term Loans |
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Credit facilities available |
3,000 |
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Amounts Outstanding: Letter of Credit Agreements* Revolving Loans due November 2005, average rate of 3.29% Term Loans due November 2005, average rate of 3.37% |
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Total credit balance |
(1,388) |
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Total credit available |
$ 1,612 |
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* |
The Letter of Credit Agreements only include Standby Letters of Credit from Bank of America. |
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The Multi-Year Revolving Credit Facility requires a maximum leverage ratio (as defined in the Multi-Year Revolving Credit Facility agreement) of 67.50% on 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 Multi-Year Revolving Credit Facility agreement), of 2.25 to 1.00 on 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 (as defined in the Multi-Year Revolving Credit Facility agreement) that changes quarterly and a maximum debt level of $12,594 for so long as our leverage ratio exceeds 65.00%. We were in compliance with these debt covenants as of September 27, 2003, with a leverage ratio of 64.12%, an interest coverage ratio of 2.46 to 1.00, a debt balance (as defined in the Multi-Yea r Revolving Credit Facility agreement) of $10,933 million and an adjusted net worth as defined below: |
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17 |
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September 27, |
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Adjusted Net Worth: Net Worth Goodwill impairments Minimum Pension Liability |
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Adjusted Net Worth |
6,117 |
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Required Net Worth: 80% of Net Worth as of the Credit Agreement closing date 50% of Net Income from fourth quarter 2000 to third quarter 2003* Proceeds of new capital stock or other equity interests from fourth quarter 2000 to second quarter 2003 The Timber Company Net Worth |
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Required Net Worth |
5,593 |
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Adjusted Net Worth surplus |
$ 524 |
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* |
Does not include quarters with net losses. |
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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. |
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Our continued compliance with these restrictive covenants is dependent on substantially achieving the current 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 that are acceptable to our lenders and us. |
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Interest rate exchange agreements with a notional amount of $300 million matured on August 22, 2003. For the first nine months of 2003, interest rate exchange agreements increased interest expense by $9 million. |
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At September 27, 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 nine months of 2003, these agreements decreased interest expense by approximately $2 million. The agreements had a weighted-average maturity of approximately two years at September 27, 2003. |
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As of September 27, 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. |
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18 |
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11. |
RETIREE MEDICAL BENEFITS COST SHARING. In April 2003, we changed the way that we share retiree medical costs for all of our active salaried employees and the majority of our retired salaried employees. This cost sharing change shifts all of the remaining retiree medical costs to the impacted plan participants over the next three to five years. Accordingly, at the end of the five-year period, we will no longer incur retiree medical costs for these impacted plan participants. This change results in a reduction to the retiree medical liability. The net effect of this reduction, approximately $107 million, is being amortized over 15 years, which represents the average expected remaining lives of remaining plan participants. |
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12. |
OPTION EXCHANGE PROGRAM. On May 6, 2003, our shareholders approved a plan to offer eligible employees the opportunity to exchange certain outstanding stock options for restricted shares of our common stock and exchange certain outstanding stock appreciation rights ("SARs") for replacement SARs. On June 5, 2003, we completed this exchange program whereby eligible employees exchanged approximately 9,084,000 stock options with exercise prices ranging from $18.64 per share to $41.59 per share for 3,363,000 restricted shares of common stock valued at $17.77 per share. In addition, eligible employees exchanged approximately 3,286,000 SARs with exercise prices ranging from $24.44 per share to $29.47 per share for 2,640,000 replacement SARs with an exercise price of $17.77 per share. These restricted shares and replacement SARs vest in three annual installments, 25% each on June 5, 2004 and 2005, and 50% on June 5, 2006. Total compensation expense to be recognized over the three- year vesting period related to the restricted stock is approximately $59.8 million. The replacement SARs receive variable accounting treatment. During the third quarter and first nine months of 2003, we recognized compensation expense of $8.4 million and $10.3 million, respectively, related to the restricted stock and replacement SARs issued under this exchange program. |
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13. |
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. |
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ENVIRONMENTAL MATTERS |
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We are involved in environmental remediation activities at approximately 171 sites, both owned by us and owned by other |