West Monroe, LA | | USW | | February 24, 2006, there were approximately 1,980 stockholders of record and 3,570 beneficial holders of GPC’s common stock. | | ITEM 6. | SELECTED FINANCIAL DATA28, 2009 |
The selected consolidated financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements of the Company and Notes thereto included elsewhere in this report.
| | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | | 2005 | | | 2004 | | | 2003 | | | 2002 | | | 2001 | | | | | | | (Amounts in millions) | | | | | | Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | | Net Sales | | $ | 2,384.0 | | | $ | 2,386.5 | | | $ | 1,683.3 | | | $ | 1,247.3 | | | $ | 1,201.6 | | Income from Operations | | | 86.9 | | | | 115.6 | | | | 106.1 | | | | 140.6 | | | | 107.3 | | Loss before Cumulative Effect of a Change in Accounting Principle (a) | | | (91.1 | ) | | | (60.9 | ) | | | (95.7 | ) | | | (49.0 | ) | | | (65.1 | ) | Net Loss (a) (b) | | | (91.1 | ) | | | (60.9 | ) | | | (95.7 | ) | | | (49.0 | ) | | | (65.6 | ) | Loss Per Share: | | | | | | | | | | | | | | | | | | | | | Basic | | $ | (0.46 | ) | | $ | (0.31 | ) | | $ | (0.65 | ) | | $ | (0.43 | ) | | $ | (0.57 | ) | Diluted | | | (0.46 | ) | | | (0.31 | ) | | | (0.65 | ) | | | (0.43 | ) | | | (0.57 | ) | Weighted average number of shares outstanding: | | | | | | | | | | | | | | | | | | | | | Basic | | | 198.6 | | | | 198.5 | | | | 148.3 | | | | 115.1 | | | | 115.1 | | Diluted | | | 198.6 | | | | 198.5 | | | | 148.3 | | | | 115.1 | | | | 115.1 | | Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | | (as of period end) | | | | | | | | | | | | | | | | | | | | | Cash and Equivalents | | $ | 12.7 | | | $ | 7.3 | | | $ | 17.5 | | | $ | 13.8 | | | $ | 7.4 | | Total Assets | | | 3,356.0 | | | | 3,465.3 | | | | 3,612.0 | | | | 2,251.2 | | | | 2,266.2 | | Total Debt | | | 1,978.3 | | | | 2,025.2 | | | | 2,154.6 | | | | 1,528.4 | | | | 1,541.2 | | Total Shareholders’ Equity | | | 268.7 | | | | 386.9 | | | | 438.4 | | | | 87.8 | | | | 196.7 | | Additional Data: | | | | | | | | | | | | | | | | | | | | | Depreciation & Amortization | | $ | 205.3 | | | $ | 228.9 | | | $ | 160.4 | | | $ | 133.8 | | | $ | 137.1 | | Capital Spending (c) | | | 95.6 | | | | 137.8 | | | | 136.6 | | | | 56.0 | | | | 57.3 | | Research, Development and Engineering Expense | | | 9.9 | | | | 9.6 | | | | 7.4 | | | | 5.2 | | | | 5.1 | |
Notes:
| | | (a) | | For the years ended December 31, 2003, 2002 and 2001, the Company recorded a Loss on Early Extinguishment of Debt of $45.3 million, $11.5 million and $8.7 million, respectively, net of applicable tax (see Note 14 in Notes to Consolidated Financial Statements). | Converting Plants: | | | | | Charlotte, NC | | USW | | August 12, 2009 | Cincinnati, OH | | USW | | January 31, 2010 | Gordonsville, TN | | USW | | October 15, 2007(2) | Kalamazoo, MI | | IBT | | July 31, 2010 | Kalamazoo, MI | | USW | | January 26, 2008 | Menasha, WI | | IBT | | June 30, 2009 | Menasha, WI | | USW | | October 31, 2008 | Portland, OR | | AWPPW | | June 30, 2007(3) | Wausau, WI | | IBT | | June 30, 2009 | Wausau, WI | | USW | | October 31, 2008 | West Monroe, LA | | USW | | August 31, 2009 | | | (b) | | For the year ended December 31, 2001, the Company recorded a charge of $0.5 million, net of tax, for the cumulative effect of a change in accounting principle for derivatives. |
Notes: | | | (1) | | The International Association of Machinists and Aerospace Workers and the International Brotherhood of Electrical Workers represent certain maintenance employees at the Macon, GA mill who are covered by the same agreement that the Company has with USW. | | (2) | | The Company and Union expect to begin negotiations for a new agreement in the summer of 2007. | | (3) | | The Company and Union expect to begin negotiations for a new agreement in the spring of 2007. |
The Company’s international employees are represented by unions in Brazil, France, Spain, Sweden and the United Kingdom. Environmental Matters The Company is subject to federal, state and local environmental regulations and employs a team of professionals in order to maintain compliance at each of its facilities. For additional information on the financial effects of such regulation and compliance, see Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Environmental Matters.” The following risks could affect (and in some cases have affected) the Company’s actual results and could cause such results to differ materially from estimates or expectations reflected in the forward-looking statements: The Company’s substantial indebtedness may adversely affect its financial health, its ability to obtain financing in the future, and its ability to react to changes in its business. As of December 31, 2006, the Company had an aggregate principal amount of approximately $1.9 billion of outstanding debt. Because of the Company’s substantial debt, the Company’s ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes may be restricted in the future. The Company is also exposed to the risk of increased interest costs because approximately $1.1 billion of its debt is at variable rates of interest. As such, a significant portion of the Company’s cash flow from operations must be dedicated to the payment of principal and interest on its indebtedness, thereby reducing the funds available for other purposes. In 2007, the Company estimates it will pay between $160 million and $170 million in interest on its outstanding debt obligations. 12
Additionally, the Company’s Senior Secured Credit Agreement contains covenants that prohibit or restrict, among other things, the disposal of assets, the incurrence of additional indebtedness (including guarantees) and payment of dividends, loans or advances and certain other types of transactions. The covenants also require compliance with certain financial ratios. The Company’s ability to comply in future periods with the financial covenants will depend on its ongoing financial and operating performance. The substantial debt and the restrictions under the Senior Secured Credit Agreement could limit the Company’s flexibility to respond to changing market conditions and competitive pressures as well as its ability to withstand competitive pressures. The material outstanding debt obligations and the Senior Secured Credit Agreement restrictions may also leave the Company more vulnerable to a downturn in general economic conditions or its business or be unable to carry out capital expenditures that are necessary or important to its growth strategy and productivity improvement programs. Significant increases in prices for raw materials, energy, transportation and other necessary supplies and services could adversely affect the Company’s financial results. Increases in the cost and availability of raw materials, including petroleum-based materials, the cost of energy, transportation and other necessary services could have an adverse effect on the Company’s financial results. The Company is also limited in its ability to pass along such cost increases to customers due to contractual provisions and competitive reasons. There is no guarantee that the Company’s efforts to reduce costs will be successful. The Company utilizes a global continuous improvement initiative that uses statistical process control to help design and manage many types of activities, including production and maintenance. The Company’s ability to implement successfully its business strategies and to realize anticipated savings is subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company’s control. These strategies include the infrastructure and reliability improvements at the Company’s West Monroe mill. If the Company cannot successfully implement the strategic cost reductions or other cost savings plans it may not be able to compete successfully against other manufacturers. In addition, any failure to generate the anticipated efficiencies and savings could adversely affect the Company’s financial results. Work stoppages and other labor relations matters may make it substantially more difficult or expensive for the Company to manufacture and distribute its products, which could result in decreased sales or increased costs, either of which would negatively impact the Company’s financial condition and results of operations. Approximately 51% of the Company’s workforce is represented by labor unions, whose goals and objectives may differ significantly from the Company’s. The Company may not be able to successfully negotiate new union contracts covering the employees at its various sites without work stoppages or labor difficulties. These events may also occur as a result of other factors. A prolonged disruption at any of the Company’s facilities due to work stoppages or labor difficulties could have a material adverse effect on its net sales, margins and cash flows. In addition, if new union contracts contain significant increases in wages or other benefits, the Company’s margins would be adversely impacted. The Company may not be able to adequately protect its intellectual property and proprietary rights, which could harm its future success and competitive position. The Company’s future success and competitive position depend in part upon its ability to obtain and maintain protection for certain proprietary carton and packaging machine technologies used in its value added products, particularly those incorporating the Fridge Vendor, IntegraPak, MicroFlex Q, Micro-Rite, Quilt Wave, Qwik Crisp and Z-Flute technologies. Failure to protect the Company’s existing intellectual property rights may result in the loss of valuable technologies or may require it to license other companies’ intellectual property rights. It is possible that any of the patents owned by the Company may be invalidated, circumvented, challenged or licensed to others or any of its pending or future patent applications may not be issued within 13
the scope of the claims sought by the Company, if at all. Further, others may develop technologies that are similar or superior to the Company’s technologies, duplicate its technologies or design around its patents, and steps taken by the Company to protect its technologies may not prevent misappropriation of such technologies. The Company is subject to environmental, health and safety laws and regulations, and costs to comply with such laws and regulations, or any liability or obligation imposed under such laws or regulations, could negatively impact its financial condition and results of operations. The Company is subject to a broad range of foreign, federal, state and local environmental, health and safety laws and regulations, including those governing discharges to air, soil and water, the management, treatment and disposal of hazardous substances, the investigation and remediation of contamination resulting from releases of hazardous substances, and the health and safety of employees. Environmental liabilities and obligations may result in significant costs, which could negatively impact the Company’s financial condition and results of operations. The Company’s operations outside the U.S. are subject to the risks of doing business in foreign countries. The Company has a mill and several converting plants in 6 foreign countries and sells its products worldwide. For 2006, before intercompany eliminations, net sales from operations outside of the U.S. represented approximately 21% of the Company’s net sales. The Company’s revenues from export sales fluctuate with changes in foreign currency exchange rates. At December 31, 2006, approximately 8% of its total assets were denominated in currencies other than the U.S. dollar. The Company has significant operations in countries that use the Swedish krona, the British pound sterling, the Australian dollar, the Japanese yen or the euro as their functional currencies. The Company cannot predict major currency fluctuations. The Company pursues a currency hedging program in order to limit the impact of foreign currency exchange fluctuations on financial results. The Company is also subject to the following significant risks associated with operating in foreign countries: | | | | • | compliance with and enforcement of environmental, health and safety and labor laws and other regulations of the foreign countries in which the Company operates; | | | • | export compliance; | | | • | imposition or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries; and | | | • | imposition or increase of investment and other restrictions by foreign governments. |
If any of the above events were to occur, the Company’s financial position, results of operations or cash flows could be adversely impacted, possibly materially. | | ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None. 14
Headquarters The Company leases its principal executive offices in Marietta, GA. Manufacturing Facilities A listing of the principal properties owned or leased and operated by the Company is set forth below. The Company’s buildings are adequate and suitable for the business of the Company. The Company also leases certain smaller facilities, warehouses and office space throughout the U.S. and in foreign countries from time to time. | | | Type of Facility and Location | | Related Segment(s) or Use of Facility | | | Paperboard Mills: | | | Kalamazoo, MI | | Paperboard Packaging | Macon, GA | | Paperboard Packaging; Containerboard/Other | Norrköping, Sweden | | Paperboard Packaging | West Monroe, LA | | Paperboard Packaging; Containerboard/Other | | | | Converting Plants: | | | Bristol, Avon, United Kingdom | | Paperboard Packaging | Centralia, IL | | Paperboard Packaging | Charlotte, NC | | Paperboard Packaging | Cincinnati, OH | | Paperboard Packaging | Fort Smith, AR | | Paperboard Packaging | Golden, CO | | Paperboard Packaging | Gordonsville, TN(a) | | Paperboard Packaging | Igualada, Barcelona, Spain | | Paperboard Packaging | Jundiai, Sao Paulo, Brazil | | Paperboard Packaging | Kalamazoo, MI | | Paperboard Packaging | Kendallville, IN | | Paperboard Packaging | Lawrenceburg, TN | | Paperboard Packaging | Le Pont de Claix, France | | Paperboard Packaging | Lumberton, NC | | Paperboard Packaging | Masnieres, France | | Paperboard Packaging | Menasha, WI | | Paperboard Packaging | Mississauga, Ontario, Canada | | Paperboard Packaging | Mitchell, SD | | Paperboard Packaging | Perry, GA(b) | | Paperboard Packaging | Portland, OR | | Paperboard Packaging | Richmond, VA | | Paperboard Packaging | Tuscaloosa, AL | | Paperboard Packaging | Wausau, WI | | Paperboard Packaging | West Monroe, LA | | Paperboard Packaging | | | | Other: | | | Crosby, MN | | Packaging machinery engineering design and manufacturing | Golden, CO | | Research and development/office | Igualada, Barcelona, Spain | | Packaging machinery engineering design and manufacturing | Marietta, GA | | Research and development and packaging machinery engineering design | Menasha, WI | | Research and development | Mississauga, Ontario, Canada | | Research and development | West Monroe, LA | | Research and development | | | (c) | | Includes capitalized interest and amounts invested in packaging machinery. |
Notes: | | | (a) | | Two facilities, one leased. | | (b) | | The facility is leased from the Middle Georgia Regional Development Authority in consideration of the issuance of industrial development bonds by such entity. |
15
The Company is a party to a number of lawsuits arising in the ordinary conduct of its business. Although the timing and outcome of these lawsuits cannot be predicted with certainty, the Company does not believe that disposition of these lawsuits will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. See also Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Environmental Matters.” | | ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
During the fourth quarter of 2006, there were no matters submitted to a vote of security holders. EXECUTIVE OFFICERS OF THE REGISTRANT Pursuant to General Instruction G (3) ofForm 10-K, the following list is included as an unnumbered item in Part I of this Report in lieu of being included in the definitive proxy statement that will be filed within 120 days after December 31, 2006. Jeffrey H. Coors,62, was named Vice Chairman of the Company in August 2006. Mr. Coors continues to serve as a member of the Board of Directors of GPC and served as Executive Chairman since the closing of the Merger in August 2003 until August 2006. Mr. Coors was Chairman of the former Graphic Packaging International Corporation from 2000 until the closing of the Merger, and was its Chief Executive Officer and President from its formation in 1992 until the closing of the Merger in August 2003. Mr. Coors served as Executive Vice President of the Adolph Coors Company from 1991 to 1992 and as its President from 1985 to 1989, as well as at Coors Technology Companies as its President from 1989 to 1992. Stephen M. Humphrey,62, was named Vice Chairman of the Company in January 2007. Prior to that time he had served as a Director, President and Chief Executive Officer of the Company from March 1997 until December 2006. From 1994 through 1996, Mr. Humphrey was Chairman, President and Chief Executive Officer of National Gypsum Company, a manufacturer and supplier of building products and services. From 1981 until 1994, Mr. Humphrey was employed by Rockwell International Corporation, a manufacturer of electronic industrial, automotive products, telecommunications systems and defense electronics products and systems, where he held a number of key executive positions. David W. Scheible,50, was appointed as a Director, President and Chief Executive Officer of the Company in January 2007. Prior to that time he had served as the Chief Operating Officer since October 2004. Mr. Scheible served as the Company’s Executive Vice President of Commercial Operations from the closing of the Merger in August 2003 until October 2004. Mr. Scheible served as Chief Operating Officer of Graphic Packaging International Corporation from June 1999 until the closing of the Merger. He also served as President of Graphic Packaging International Corporation’s Flexible Division from January to June 1999. Previously, Mr. Scheible was affiliated with the Avery Denison Corporation, working most recently as its Vice President and General Manager of the Specialty Tape Division from 1995 through January 1999 and Vice President and General Manager of the Automotive Division from 1993 to 1995. Daniel J. Blount,51, has been the Company’s Senior Vice President and Chief Financial Officer since September 2005. From October 2003 until September 2005, he was the Senior Vice President, Integration. From the closing of the Merger in August 2003 until October 2003, he was the Senior Vice President, Integration, Chief Financial Officer and Treasurer. From June 2003 until August 2003, he was Senior Vice President, Chief Financial Officer and Treasurer. From September 1999 until June 2003, Mr. Blount was Senior Vice President and Chief Financial Officer. Mr. Blount was named Vice President and Chief Financial Officer of Riverwood Holding in September 1998. Prior to joining the Company, Mr. Blount spent 13 years at Montgomery Kone, Inc., an elevator, escalator and moving ramp product manufacturer, installer and service provider, serving last as Senior Vice President, Finance. 16
Michael P. Doss,40, has been the Senior Vice President, Consumer Products Packaging of the Company since September 2006. From the closing of the Merger in August 2003 through September 2006, Mr. Doss served as the Company’s Vice President of Operations, Universal Packaging Division. Since joining Graphic Packaging International Corporation in 1990, he has held positions of increasing management responsibility, including Plant Manager at the Gordonsville, TN and Wausau, WI facilities. Mr. Doss was Director of Web Systems for the Universal Packaging Division before his promotion to Vice President of Operations. Stephen A. Hellrung,59, has been the Company’s Senior Vice President, General Counsel and Secretary since October 2003. He was Senior Vice President, General Counsel and Secretary of Lowe’s Companies, Inc., a home improvement specialty retailer, from April 1999 until June 2003. Prior to joining Lowe’s Companies, Mr. Hellrung held similar positions with The Pillsbury Company and Bausch & Lomb, Incorporated. Wayne E. Juby,59, has been the Company’s Senior Vice President, Human Resources since April 2001. Mr. Juby joined the Company in November 2000 and was Director, Corporate Training, until April 2001. Prior to joining the Company, Mr. Juby was Vice President, Human Resources, of National Gypsum Company, from 1994 until 1996. Robert M. Simko,47, has been the Company’s Senior Vice President, Paperboard since December 2005. From October 2002 until December 2005, Mr. Simko served as Vice President, Supply Chain Operations. Mr. Simko joined the Company in February 1999 as the Vice President and Resident Manager, Georgia Paperboard Operations after serving as the Director of Operations for Sealright Co., Inc. for approximately three years and holding several key manufacturing positions with the Films Division at Mobil Chemical Co. Michael R. Schmal,53, has been the Company’s Senior Vice President, Beverage since the closing of the Merger in August 2003 and was the Vice President and General Manager, Brewery Group of the Company from October 1996 until August 2003. Prior to that time, Mr. Schmal held various positions at the Company since 1981. 17
PART II | | ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES | ITEM 7. |
GPC’s common stock (together with the associated stock purchase rights) is traded on the New York Stock Exchange under the symbol “GPK.” The historical range of the high and low sales price per share for each quarter of 2006 and 2005 are as follows: | | | | | | | | | | | | | | | | | | | 2006 | | | 2005 | | | | | | | | High | | | Low | | | High | | | Low | | | | | First Quarter | | $ | 3.00 | | | $ | 1.94 | | | $ | 7.42 | | | $ | 4.26 | | Second Quarter | | | 4.09 | | | | 2.09 | | | | 4.63 | | | | 2.98 | | Third Quarter | | | 4.09 | | | | 3.20 | | | | 3.97 | | | | 2.72 | | Fourth Quarter | | | 4.57 | | | | 3.45 | | | | 3.04 | | | | 2.09 | | | |
No cash dividends have been paid during the last three years to the Company’s common stockholders. The Company’s intent is not to pay dividends at this time. Additionally, the Company’s credit facilities and the indentures governing its debt securities place substantial limitations on the Company’s ability to pay cash dividends on its common stock (see “Covenant Restrictions” in Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 5 in the Notes to Consolidated Financial Statements included herein under Item 8., “Financial Statements and Supplementary Data”). On February 26, 2007, there were approximately 2,015 stockholders of record and approximately 4,500 beneficial holders of GPC’s common stock. Total Return to Stockholders The following graph compares the total returns (assuming reinvestment of dividends) of the Company’s common stock, the Standard & Poor’s 500 Stock Index and the Dow Jones U.S. Container & Packaging Index. The graph assumes $100 invested on August 11, 2003 (the first day of public trading in the Company’s common stock) in the Company’s common stock and each of the indices. The stock price performance on the following graph is not necessarily indicative of future stock price performance. | | | | | | | | | | | | | | | | | | | | | | | 08/11/03 | | | 12/31/03 | | | 12/31/04 | | | 12/31/05 | | | 12/31/06 | | | | Graphic Packaging Corporation | | $ | 100.00 | | | $ | 99.02 | | | $ | 175.61 | | | $ | 55.61 | | | $ | 105.61 | | S&P 500 Index | | | 100.00 | | | | 114.21 | | | | 126.63 | | | | 132.85 | | | | 153.83 | | DJ U.S. Container & Packaging Index | | | 100.00 | | | | 118.85 | | | | 140.22 | | | | 137.50 | | | | 151.67 | | | |
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| | ITEM 6. | SELECTED FINANCIAL DATA |
The selected consolidated financial data set forth below should be read in conjunction with Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements of the Company and in the Notes to Consolidated Financial Statements included herein under Item 8., “Financial Statements and Supplementary Data”. | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | In millions, except per share amounts | | 2006 | | | 2005 | | | 2004 | | | 2003 | | | 2002 | | | | | | Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | | | | Net Sales | | $ | 2,413.0 | | | $ | 2,384.0 | | | $ | 2,386.5 | | | $ | 1,683.3 | | | $ | 1,247.3 | | | | Income from Operations | | | 90.3 | | | | 86.9 | | | | 115.6 | | | | 106.1 | | | | 140.6 | | | | Net Loss(a) | | | (100.5 | ) | | | (91.1 | ) | | | (60.9 | ) | | | (95.7 | ) | | | (49.0 | ) | | | Loss Per Share: | | | | | | | | | | | | | | | | | | | | | | | Basic | | | (0.50 | ) | | | (0.46 | ) | | | (0.31 | ) | | | (0.65 | ) | | | (0.43 | ) | | | Diluted | | | (0.50 | ) | | | (0.46 | ) | | | (0.31 | ) | | | (0.65 | ) | | | (0.43 | ) | | | Weighted average number of shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | Basic | | | 201.1 | | | | 200.0 | | | | 198.9 | | | | 148.3 | | | | 115.1 | | | | Diluted | | | 201.1 | | | | 200.0 | | | | 198.9 | | | | 148.3 | | | | 115.1 | | | | Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | | | | (as of period end) | | | | | | | | | | | | | | | | | | | | | | | Cash and Equivalents | | $ | 7.3 | | | $ | 12.7 | | | $ | 7.3 | | | $ | 17.5 | | | $ | 13.8 | | | | Total Assets | | | 3,233.6 | | | | 3,356.0 | | | | 3,465.3 | | | | 3,612.0 | | | | 2,251.2 | | | | Total Debt | | | 1,922.7 | | | | 1,978.3 | | | | 2,025.2 | | | | 2,154.6 | | | | 1,528.4 | | | | Total Shareholders’ Equity | | | 181.7 | | | | 268.7 | | | | 386.9 | | | | 438.4 | | | | 87.8 | | | | Additional Data: | | | | | | | | | | | | | | | | | | | | | | | Depreciation & Amortization | | $ | 196.0 | | | $ | 205.3 | | | $ | 228.9 | | | $ | 160.4 | | | $ | 133.8 | | | | Capital Spending(b) | | | 94.5 | | | | 110.8 | | | | 149.1 | | | | 136.6 | | | | 56.0 | | | | Research, Development and Engineering Expense | | | 11.4 | | | | 9.9 | | | | 9.6 | | | | 7.4 | | | | 5.2 | | | | | |
Notes: | | | (a) | | For the years ended December 31, 2003 and 2002, the Company recorded a Loss on Early Extinguishment of Debt of $45.3 million and $11.5 million, respectively, net of applicable tax. | | (b) | | Includes capitalized interest and amounts invested in packaging machinery. |
19
| | ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
INTRODUCTION This management’s discussion and analysis of financial conditions and results of operation is intended to provide investors with an understanding of the Company’s past performance, its financial condition and its prospects. The following will be discussed and analyzed: Overview of Business Overview of 20052006 Results Results of Operations Financial Condition, Liquidity and Capital Resources Critical Accounting Policies New Accounting Standards Business Outlook OVERVIEW OF BUSINESS The Company’s objective is to strengthen its position as a leading provider of paperboard packaging solutions. To achieve this objective, the Company offers customers its paperboard, cartons and packaging machines, either as an integrated solution or separately. The Company is also implementing strategies (i) to expand market share in its current markets and to identify and penetrate new markets; (ii) to capitalize on the Company’s customer relationships, business competencies, and mills and converting assets; (iii) to develop and market innovative products and applications; (iv) and to continue to reduce costs by focusing on operational improvements. The Company’s ability to fully implement its strategies and achieve its objectives maybeobjective may be influenced by a variety of factors, many of which are beyond its control, including (i)such as inflation of raw material and other costs, which the Company cannot always pass through to its customers, and (ii) the effect of overcapacity in the worldwide paperboard packaging industry. Significant Factors That Impact The Company’s Business Impact of Inflation. The Company’s cost of sales consists primarily of energy (including natural gas, fuel oil and electricity), pine pulpwood, hardwood, chemicals, recycled fibers, purchased paperboard, paper, aluminum foil, ink, plastic films and resins, depreciation expense and labor. The Company continues to be negatively impacted by inflationary pressures which increased year over year costs by $71.4 million, $96.3 million compared to the prior year and $50.0 million in 2006, 2005, and 2004, respectively. The 2006 costs are primarily related to chemical-based inputs ($25.910.5 million); fiber, outside board purchases and corrugated shipping containers ($21.74.6 million); energy ($17.437.9 million); labor and related benefits ($15.811.3 million); freight ($12.24.4 million); and other ($3.32.7 million). The Company has entered into contracts designed to manage risks associated with future variability in cash flows caused by changes in the price of natural gas. The Company has hedged approximately 50% and price risk related to future energy cost increases for a significant portion5% of its expected natural gas requirements, primarily at its U.S. mills through December 2006. The Company plans to continue its hedging programusage for natural gas.the years 2007 and 2008, respectively. The Company believes that inflationary pressures, including higher costs for fiber, wood and chemical-based inputs will continue to negatively impact its results for 2006.2007. Since negotiated sales contracts and the market largely determine the pricing for its products, the Company is at times limited in its ability to raise prices and pass through to its customers any inflationary or other cost increases that the Company may incur, thereby further exacerbating the inflationary problems. Substantial Debt Obligations. The Company has approximately $1,978$1,922.7 million of outstanding debt obligations as of December 31, 2005.2006. This debt can have significant consequences for the Company, as it requires a significant portion of cash flow from operations to be used for the payment of principal and interest, exposes the Company to the risk of increased interest rates and restricts the Company’s ability to obtain additional financing. Covenants in the Company’s Senior Secured Credit Agreement also prohibit or restrict, among other 20
things, the disposal of assets, the incurrence of additional indebtedness (including guarantees) and
18
payment of dividends, loans or advances and certain other types of transactions. These restrictions could limit the Company’s flexibility to respond to changing market conditions and competitive pressures. The covenants also require compliance with certain financial ratios. The Company’s ability to comply in future periods with the financial covenants will depend on its ongoing financial and operating performance, which in turn will be subject to many other factors, many of which are beyond the Company’s control. See “Financial Condition, Liquidity and Capital Resources — Liquidity and Capital Resources” and “— Covenant Restrictions” for additional information regarding the Company’s debt obligations. Commitment to Cost Reduction. In light of increasing margin pressure throughout the paperboard packaging industry, the Company has programs in place that are designed to reduce costs, improve productivity and increase profitability. The Company utilizes a global continuous improvement initiative that uses statistical process control to help design and manage many types of activities, including production and maintenance. This includes a Six Sigma process focused on reducing variable and fixed manufacturing and administrative costs. In addition, the Company finalized its initiative designed to enhance the competitiveness of its beverage multiple packaging converting operations and has begun to recognize improved converting performance. The Company has made expenditures of approximately $73 million on this initiative through December 31, 2005 and added new manufacturing technology, new presses and optimized current press capacity, and also consolidated certain beverage carton converting operations. As part of the Company’s manufacturing rationalization initiatives, the Company announced in January 2004 plans to close its Garden Grove, CA converting plant, and in May 2004 announced plans to close its Bow, NH and Clinton, MS converting plants. In addition, the Company announced it is expanding certain of its existing sites, including Fort Smith, AR and Lumberton, NC, and as a result expects to make expenditures of approximately $28 million over the 2004 toDuring 2006, period. The Company has spent approximately $26 million of the projected expenditures through December 31, 2005. During 2005, the Company achieved approximately $50$47.0 million in cost savings through its continuous improvement programs and manufacturing initiatives. In December 2005, the Company completed a reduction in work force affecting 62 corporateCompetition and divisional support staff. The Company recorded a one-time charge of approximately $5 million for severance and related costs in the fourth quarter of 2005. The Company took this action to reduce on-going operating expenses in future periods.
Market Factors. BecauseAs some products can be packaged in different types of materials, the Company’s sales are affected by competition from other manufacturers’ coated unbleached kraft paperboard, or CUK board, and other substrates such as— solid bleached sulfate, or SBS, recycled clay coated news, or CCN, and, WLC, substituteinternationally, white lined chipboard, or WLC. Substitute products includingalso include shrink film and corrugated containers, as well as by general market conditions.containers. In addition, the Company’s sales historically are driven by consumer buying habits in the markets its customers serve. New product introductions and promotional activity by the Company’s customers and the Company’s introduction of new packaging products also impacted its sales. The Company’s containerboard business is subject to conditions in the cyclical worldwide commodity paperboard markets, thatwhich have a significant impact on containerboard sales. In addition, the Company’s net sales, income from operations and cash flows from operations are subject to moderate seasonality, with demand usually increasing in the spring and summer due to the seasonality of the worldwide beverage multiple packaging markets. The Company works to maintain market share through efficiency, product innovation and long-term board and machinery and supply contractsstrategic sourcing to its customers; however, pricing and other competitive pressures may occasionally result in the loss of a customer relationship. Packaging machinery placements during 2005 decreased approximately 27% compared to 2004 due primarily to timing differences and to the additional placements in 2004 as a result of the success of the new Fridge Vendor® Package. The Company expects packaging machinery placements for 2006 to be higher when compared to 2005.
OVERVIEW OF 20052006 RESULTS | | | | • | Net Sales in 2005 decreased2006 increased by $2.5$29.0 million, or 0.1%1.2%, to $2,413.0 million from $2,384.0 million from $2,386.5 million in 20042005 due primarily to improved pricing for North American food and consumer product cartons, containerboard and open market roll stock, product mix in the North American beverage carton market and an increase in international beverage market sales as a result of higher unit volumes. These increases were offset by lower volumes in both the open market roll stock and mix, somewhat offset by increased pricing.North American food and consumer product carton markets. |
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| | | | • | Income from Operations in 2005 decreased2006 increased by $28.7$3.4 million, or 24.8%3.9%, to $90.3 million from $86.9 million from $115.6 million in 20042005 due primarily to inflationary pressures.the improved pricing, worldwide cost reductions and manufacturing improvements, as well as lower Corporate expenses. These increases were partially offset by higher inflation and manufacturing costs, specifically at the Company’s West Monroe mill. | | | • | Cost savings of approximately $50$47 million helped offset inflation of approximately $96$71 million. | | | • | Debt was reduceddecreased by $46.9 million.$55.6 million during 2006. |
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RESULTS OF OPERATIONS Segment Information The Company reports its results in two business segments: paperboard packaging and containerboard/other. Business segment information is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended
| | Year Ended
| | Year Ended
| | | Year Ended December 31, | | | Dec. 31,
| | Dec. 31,
| | Dec. 31,
| | | | | 2005 | | 2004 | | 2003 | | | In millions | | | 2006 | | 2005 | | 2004 | | | | | (Amounts in millions) | | | | NET SALES: | | | | | | | | | | | | | | | | | | | | | | | | | | | Paperboard Packaging | | $ | 2,297.8 | | | $ | 2,291.2 | | | $ | 1,600.6 | | | $ | 2,318.4 | | | $ | 2,297.8 | | | $ | 2,291.2 | | | | Containerboard/Other | | | 86.2 | | | | 95.3 | | | | 82.7 | | | | 94.6 | | | | 86.2 | | | | 95.3 | | | | | | | | | | | | | | | | Total | | | $ | 2,413.0 | | | $ | 2,384.0 | | | $ | 2,386.5 | | | | | | $ | 2,384.0 | | | $ | 2,386.5 | | | $ | 1,683.3 | | | | | | | | | | | | INCOME (LOSS) FROM OPERATIONS: | | | | | | | | | | | | | | | | | | | | | | | | | | | Paperboard Packaging | | $ | 161.7 | | | $ | 211.3 | | | $ | 169.8 | | | $ | 143.4 | | | $ | 161.7 | | | $ | 211.3 | | | | Containerboard/Other | | | (16.1 | ) | | | (21.6 | ) | | | (27.3 | ) | | | (17.9 | ) | | | (16.1 | ) | | | (21.6 | ) | | | Corporate | | | (58.7 | ) | | | (74.1 | ) | | | (36.4 | ) | | | (35.2 | ) | | | (58.7 | ) | | | (74.1 | ) | | | | | | | | | | | | | | $ | 86.9 | | | $ | 115.6 | | | $ | 106.1 | | | Total | | | $ | 90.3 | | | $ | 86.9 | | | $ | 115.6 | | | | | | | | | | | | | | | |
2006 COMPARED WITH 2005 Net Sales The components of the change in Net Sales are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended
| | | | | | | | | | | | | | | Year Ended
| | | | December 31,
| | | Variances | | | December 31,
| | In millions | | 2005 | | | Price | | | Volume/Mix | | | Exchange | | | Total | | | 2006 | | | | | Net Sales | | $ | 2,384.0 | | | | 34.4 | | | | (5.0 | ) | | | (0.4 | ) | | | 29.0 | | | $ | 2,413.0 | |
Paperboard Packaging The Company’s Net Sales from paperboard packaging in 2006 increased by $20.6 million, or 0.9%, to $2,318.4 million from $2,297.8 million in 2005 due primarily to improved pricing and product mix in the North American food and consumer product carton markets. Also contributing to the increase was favorable product mix in the North American beverage market. These increases were partially offset by unfavorable mix in Europe and lower volumes in the North American food and consumer product carton markets. Additionally, improved pricing in open market roll stock and Asia were completely offset by lower volumes. Containerboard/Other The Company’s Net Sales from containerboard/other in 2006 increased by $8.4 million, or 9.7%, to $94.6 million from $86.2 million in 2005 due primarily to improved pricing in the containerboard medium and liner markets as well as increased volumes of liner and rollstock. These increases were partially offset by unfavorable product mix for liner and medium. Income (Loss) from Operations The components of the change in Income (Loss) from Operations are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended
| | | | | | | | | | | | | | | | | | | | | Year Ended
| | | | December 31,
| | | Variances | | | December 31,
| | In millions | | 2005 | | | Price | | | Volume/Mix | | | Inflation | | | Exchange | | | Other(a) | | | Total | | | 2006 | | | | | Income (Loss) from Operations | | $ | 86.9 | | | | 34.4 | | | | (5.2 | ) | | | (71.4 | ) | | | 5.2 | | | | 40.4 | | | | 3.4 | | | $ | 90.3 | |
Note: | | | (a) | | Includes the benefits from the Company’s cost reduction initiatives. |
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Paperboard Packaging The Company’s Income from Operations from paperboard packaging in 2006 decreased by $18.3 million, or 11.3%, to $143.4 million from $161.7 million in 2005 due primarily to inflationary pressures primarily on energy, chemical-based inputs, freight, labor and related benefits and higher manufacturing costs, primarily at the Company’s West Monroe, LA mill. These costs include an initiative to upgrade the mill’s preventive maintenance program, the conversion of the mill’s primary boiler to allow for the burning of bark which will in turn lower energy costs, the mill’s bi-annual maintenance cold outage and an unexpected failure in a major turbine generator earlier in the year. The cold outage was expanded to include an overhaul of the clarifier, a key piece of the mill’s effluent system. These decreases were partially offset by worldwide cost reductions resulting from the Company’s cost reduction initiatives, the improved pricing in the North American food and consumer product carton markets and improved manufacturing performance at the Company’s other mills and converting operations. Containerboard/Other The Company’s Loss from Operations from containerboard/other was $17.9 million in 2006 compared to a loss of $16.1 million in 2005. This change of $1.8 million was due primarily to inflationary pressures partially offset by the improved pricing in the containerboard medium markets. Corporate The Company’s Loss from Operations from corporate was $35.2 million in 2006 compared to a loss of $58.7 million in 2005. This $23.5 million improvement was due primarily to lower merger related expenses, primarily related to the conversion to the SAP system in 2005, lower consulting fees and expenses related to Sarbanes-Oxley compliance efforts and gains on foreign currency transactions. Offsetting these improvements was the 2005 benefit recorded of $4.5 million relating to the settlement of a lawsuit. INTEREST INCOME, INTEREST EXPENSE, INCOME TAX EXPENSE, AND EQUITY IN NET EARNINGS OF AFFILIATES Interest Income Interest Income was $0.6 million in both 2006 and 2005. Interest Expense Interest Expense increased by $15.7 million to $172.2 million in 2006 from $156.5 million in 2005, due to higher interest rates on the unhedged portion of the Company’s floating rate debt. Income Tax Expense During 2006, the Company recognized Income Tax Expense of $20.2 million on Loss before Income Taxes and Equity in Net Earnings of Affiliates of $81.3 million. During 2005, the Company recognized Income Tax Expense of $23.3 million on Loss before Income Taxes and Equity in Net Earnings of Affiliates of $69.0 million. Income Tax Expense for 2006 and 2005 primarily relates to the noncash expense associated with the amortization of goodwill for tax purposes, benefits related to losses in certain foreign countries and tax withholding in foreign jurisdictions. Equity in Net Earnings of Affiliates Equity in Net Earnings of Affiliates was $1.0 million in 2006 and $1.2 million in 2005 and is related to the Company’s equity investment in the joint venture Rengo Riverwood Packaging, Ltd. (“Rengo”). 23
2005 COMPARED WITH 2004 Net Sales The components of the change in Net Sales are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended
| | | | | | | | | | Year Ended
| | | Dec. 31,
| | Variances | | Dec. 31,
| | | 2004 | | Price | | Volume/Mix | | Exchange | | Total | | 2005 | | | (Amounts in millions) | | Net Sales | | $ | 2,386.5 | | | | 10.7 | | | | (15.5 | ) | | | 2.3 | | | | (2.5 | ) | | $ | 2,384.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended
| | | | | | | | | | | | | | | Year Ended
| | | | December 31,
| | | Variances | | | December 31,
| | In millions | | 2004 | | | Price | | | Volume/Mix | | | Exchange | | | Total | | | 2005 | | | | | Net Sales | | $ | 2,386.5 | | | | 10.7 | | | | (15.5 | ) | | | 2.3 | | | | (2.5 | ) | | $ | 2,384.0 | |
Paperboard Packaging The Company’s Net Sales from paperboard packaging in 2005 increased by $6.6 million, or 0.3%, to $2,297.8 million from $2,291.2 million in 2004 due primarily to a 5.9% increase in North American food and consumer product carton sales as a result of higher unit volumes and increased pricing. These increases were somewhat offset by lower volumes in North American open market rollstock sales and lower volumes in the international food and consumer product markets as well as lower pricing in North American beverage carton markets as a result of increased market competitiveness. Containerboard/Other The Company’s Net Sales from containerboard/other in 2005 decreased by $9.1 million, or 9.5%, to $86.2 million from $95.3 million in 2004 due primarily to lower linerboard sales as a result of producing coated board in place of containerboard tons. This additional coated board was utilized in the production of food and consumer product cartons. This decrease was somewhat offset by improved pricing in the containerboard medium and linerboard markets.
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Income (Loss) from Operations The components of the change in Income (Loss) from Operations are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended
| | | | | | | | | | | | | | Year Ended
| | | Dec. 31,
| | Variances | | Dec. 31,
| | | 2004 | | Price | | Volume/Mix | | Inflation | | Exchange | | Other(a) | | Total | | 2005 | | | (Amounts in millions) | | Income (Loss) from Operations | | $ | 115.6 | | | | 10.7 | | | | 2.4 | | | | (96.3 | ) | | | (2.8 | ) | | | 57.3 | | | | (28.7 | ) | | $ | 86.9 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended
| | | | | | | | | | | | | | | | | | | | | Year Ended
| | | | December 31,
| | | Variances | | | December 31,
| | In millions | | 2004 | | | Price | | | Volume/Mix | | | Inflation | | | Exchange | | | Other(a) | | | Total | | | 2005 | | | | | Income (Loss) from Operations | | $ | 115.6 | | | | 10.7 | | | | 2.4 | | | | (96.3 | ) | | | (2.8 | ) | | | 57.3 | | | | (28.7 | ) | | $ | 86.9 | |
Note: | | | (a) | | Includes the benefits from the Company’s cost reduction initiatives. |
Paperboard Packaging The Company’s Income from Operations from paperboard packaging in 2005 decreased by $49.6 million, or 23.5%, to $161.7 million from $211.3 million in 2004 due primarily to inflationary pressures primarily on chemical-based inputs, fiber, outside board purchases and corrugated shipping containers, energy, labor and related benefits and freight; and the lower pricing in North American beverage carton markets as a result of increased market competitiveness. These decreases were somewhat offset by worldwide cost reductions resulting from the Company’s cost reduction initiatives, improved volume and pricing in the North American food and consumer product carton markets and lower depreciation expense. Containerboard/Other The Company’s Loss from Operations from containerboard/other was $16.1 million in 2005 compared to a loss of $21.6 million in 2004. This $5.5 million improvement was due primarily to improved pricing in the containerboard medium and linerboard markets. Corporate The Company’s Loss from Operations from corporate was $58.7 million in 2005 compared to a loss of $74.1 million in 2004. This $15.4 million improvement was due primarily to lower amortization expense of 24
Merger related intangibles of $15.3 million and a $4.5 million benefit relating to the settlement of a lawsuit, somewhat offset by higher consulting fees in 2005. INTEREST INCOME, INTEREST EXPENSE, INCOME TAX EXPENSE AND EQUITY IN NET EARNINGS OF AFFILIATES Interest Income Interest Income was $0.6 million in 2005 and 2004. Interest Expense Interest Expense increased by $6.9 million to $156.5 million in 2005 from $149.6 million in 2004, due to higher interest rates on the unhedged portion of the Company’s floating rate debt. The increase was somewhat offset by lower average debt balances in 2005 and a 25 basis pointspoint reduction in interest charged during 2005 on the Term Loan Facility as a result of the first amendment to the Company’s Senior Secured Credit Agreement (as defined herein). Income Tax Expense During 2005, the Company recognized an Income Tax Expense of $23.3 million on Loss before Income Taxes and Equity in Net Earnings of Affiliates of $69.0 million. During 2004, the Company recognized an Income Tax Expense of $28.9 million on Loss before Income Taxes and Equity in Net Earnings of Affiliates of $33.4 million. Income Tax Expense for 2005 and 2004 was primarily due to the noncash expense associated
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with the amortization of goodwill for tax purposes, valuation allowance adjustments and tax withholding in foreign jurisdictions. Equity in Net Earnings of Affiliates Equity in Net Earnings of Affiliates was $1.2 million in 2005 and $1.4 million in 2004 and related to the Company’s equity investment in the joint venture Rengo Riverwood Packaging, Ltd. (“Rengo”).Rengo. 2004 COMPARED WITH 2003
Net Sales
The components of the change in Net Sales are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended
| | | | | | | | | | | | Year Ended
| | | Dec. 31,
| | Variances | | Dec. 31,
| | | 2003 | | Price | | Volume/Mix | | Exchange | | Merger | | Total | | 2004 | | | (Amounts in millions) | | Net Sales | | $ | 1,683.3 | | | | (5.4 | ) | | | (21.4 | ) | | | 39.8 | | | | 690.2 | | | | 703.2 | | | $ | 2,386.5 | |
Paperboard Packaging Segment
The Company’s Net Sales from paperboard packaging in 2004 increased by $690.6 million, or 43.1%, to $2,291.2 million from $1,600.6 million in 2003 due primarily to the inclusion of an additional 221 days in 2004 of Graphic’s paperboard packaging business, which resulted in increased Net Sales of $690.2 million. Net sales were positively impacted by foreign currency exchange rates of $39.8 million. These increases were somewhat offset by lower pricing in the Company’s North American markets, primarily as a result of increased market competitiveness.
Containerboard/Other
The Company’s Net Sales from containerboard/other in 2004 increased by $12.6 million, or 15.2%, to $95.3 million from $82.7 million in 2003 due primarily to improved pricing in the containerboard medium and linerboard markets.
Income (Loss) from Operations
The components of the change in Income (Loss) from Operations are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended
| | | | | | | | | | | | | | Year Ended
| | | Dec. 31,
| | Variances | | Dec. 31,
| | | 2003 | | Price | | Volume/Mix | | Inflation | | Exchange | | Other(a) | | Total | | 2004 | | | (Amounts in millions) | | Income (Loss) from Operations | | $ | 106.1 | | | | (5.4 | ) | | | (10.9 | ) | | | (44.1 | ) | | | 6.2 | | | | 63.7 | | | | 9.5 | | | $ | 115.6 | |
Note:
| | | (a) | | Includes the benefits from the Company’s cost reduction initiatives and the inclusion of an additional 221 days in 2004 of Graphic’s paperboard packaging business. |
Paperboard Packaging Segment
The Company’s Income from Operations from paperboard packaging in 2004 increased by $41.5 million, or 24.4%, to $211.3 million from $169.8 million in 2003 due primarily to the addition of Graphic’s paperboard packaging business and worldwide cost reductions resulting from the Company’s cost reduction initiatives. The increase was somewhat offset by inflationary pressures primarily on fiber, outside board purchases and corrugated shipping containers, energy, labor and related benefits, freight and chemical-based inputs as well as lower pricing in North American markets as a result of increased market competitiveness.
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Containerboard/Other
The Company’s Loss from Operations from containerboard/other was $21.6 million in 2004 compared to a loss of $27.3 million in 2003. This $5.7 million improvement was due primarily to improved pricing in the containerboard medium and linerboard markets.
Corporate
The Company’s Loss from Operations from corporate was $74.1 million in 2004 compared to a loss of $36.4 million in 2003, due primarily to the inclusion of an additional 221 days in 2004 of Graphic’s corporate operations as well as higher amortization expense of $17.7 million due to the effects of purchase accounting in connection with the Merger, and inflation including higher medical and health benefits and higher expenses associated with Sarbanes-Oxley compliance efforts.
LOSS ON EARLY EXTINGUISHMENT OF DEBT, INTEREST INCOME, INTEREST EXPENSE, INCOME TAX EXPENSE, AND EQUITY IN NET EARNINGS OF AFFILIATES
Loss on Early Extinguishment of Debt
In 2003 and in connection with the Merger and the related financing transactions, the Company recorded a non-cash charge to earnings of approximately $16.7 million, related to the write-off of remaining debt issuance costs on its prior senior secured credit facilities, RIC’s 105/8% senior notes due 2007 (“Senior Notes due 2007”) and RIC’s 107/8% senior subordinated notes due 2008 (“Senior Subordinated Notes due 2008” and, together with the Senior Notes due 2007, the “Prior RIC Notes”), and also recorded a charge of approximately $28.6 million, related to the call premium paid upon redemption of the Prior RIC Notes.
Interest Income
Interest Income decreased by $0.4 million to $0.6 million in 2004 from $1.0 million in 2003 due primarily to interest received in 2003 on monies held in tax escrow.
Interest Expense
Interest Expense increased by $5.1 million to $149.6 million in 2004 from $144.5 million in 2003, due primarily to higher debt balances following the Merger. Interest Expense was also affected by higher interest rates on the unhedged portion of the Company’s floating rate debt. The increase was somewhat offset by lower interest rates on the new Senior and Senior Subordinated notes and by lower interest rates resulting from the first amendment of the Senior Secured Credit Agreement (as defined herein).
Income Tax Expense
During 2004, the Company recognized an Income Tax Expense of $28.9 million on Loss before Income Taxes and Equity in Net Earnings of Affiliates of $33.4 million. During 2003, the Company recognized an Income Tax Expense of $14.3 million on Loss before Income Taxes and Equity in Net Earnings of Affiliates of $82.7 million. Income Tax Expense for 2004 resulted from the noncash expense associated with the amortization of goodwill for tax purposes, income earned in foreign countries, valuation allowance adjustments and tax contingencies. Income Tax Expense for 2003 resulted from the noncash expense associated with the amortization of goodwill for tax purposes and income earned in foreign countries somewhat offset by the benefit from valuation allowance adjustments.
Equity in Net Earnings of Affiliates
Equity in Net Earnings of Affiliates was $1.4 million in 2004 and $1.3 million in 2003 and related to the Company’s non-consolidated joint venture, Rengo.
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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES The Company broadly defines liquidity as its ability to generate sufficient funds from both internal and external sources to meet its obligations and commitments. In addition, liquidity includes the ability to obtain appropriate debt and equity financing and to convert into cash those assets that are no longer required to meet existing strategic and financial objectives. Therefore, liquidity cannot be considered separately from capital resources that consist of current or potentially available funds for use in achieving long-range business objectives and meeting debt service commitments. Cash Flows Cash and Equivalents increaseddecreased by $5.4 million in 2005.2006. Cash provided by operating activities in 20052006 totaled $169.5$136.6 million, compared to $263.8$169.1 million in 2004.2005. This decreasereduction was principally due to higher net loss, lower operating income as well as $19.6 milliondepreciation and amortization and a reduction of cash contributions made to fund the Company’s pension plans and unfavorable changes in operating assets and liabilities. Depreciation and amortization during 2006 totaled $196.0 million. Cash used in investing activities in 20052006 totaled $114.6$85.7 million, compared to $141.5$114.2 million in 2004.2005. This decreaseyear over year change was principally due to lower capital investmentpurchases of $42.2property, plant and equipment of $16.3 million (see “— Capital“Capital Investment”) which was somewhat offset by lowerand proceeds fromreceived for the salesales of assets. Cash used in financing activities in 20052006 totaled $49.1$56.6 million, compared to $133.0$49.1 million in 2004.2005. This decreasechange was principally due to lowerhigher debt payments and higher net borrowings under the Company’s revolving credit facilities. Depreciation and amortization during 2005 totaled $205.3 million.repayments in 2006. Liquidity and Capital Resources The Company’s liquidity needs arise primarily from debt service on its substantial indebtedness and from the funding of its capital expenditures, ongoing operating costs and working capital. 25
At December 31, 2005 and 2004, Long-Term Debt consisted of the following:
| | | | | | | | | | | | | | | | | | | December 31,
| | December 31,
| | | At December 31, | | | | 2005 | | 2004 | | | In millions | | | 2006 | | 2005 | | | | (Amounts in millions) | | | | | Senior Notes with interest payable semi-annually at 8.5%, payable in 2011 | | $ | 425.0 | | | $ | 425.0 | | | $ | 425.0 | | | $ | 425.0 | | Senior Subordinated Notes with interest payable semi-annually at 9.5%, payable in 2013 | | | 425.0 | | | | 425.0 | | | | 425.0 | | | | 425.0 | | Senior Secured Term Loan Facility with interest payable at various dates at floating rates (6.60%at December 31, 2005 and 4.52% at December 31, 2004) payable through 2010 | | | 1,109.0 | | | | 1,158.0 | | | Senior Secured Revolving Facility with interest payable at various dates at floating rates (9.25%at December 31, 2005) payable in 2009 | | | 6.0 | | | | — | | | Senior Secured Term Loan Facility with interest payable at various dates at floating rates (7.47% at December 31, 2006 and 6.60% at December 31, 2005) payable through 2010 | | | | 1,055.0 | | | | 1,109.0 | | Senior Secured Revolving Facility with interest payable at various dates at floating rates (10.25% at December 31, 2006 and 9.25% at December 31, 2005) payable in 2009 | | | | 3.6 | | | | 6.0 | | Other | | | 3.5 | | | | 3.8 | | | | 2.4 | | | | 3.5 | | | | | | | | | | | | | | | 1,968.5 | | | | 2,011.8 | | | | 1,911.0 | | | | 1,968.5 | | Less, current portion | | | 1.2 | | | | 0.8 | | | | 0.3 | | | | 1.2 | | | | | | | | | | | | Total | | $ | 1,967.3 | | | $ | 2,011.0 | | | $ | 1,910.7 | | | $ | 1,967.3 | | | | | | | | | | | |
The Senior Notes are rated B- by Standard & Poor’s and B2 by Moody’s Investor Services. During 2005, cash paid for interest was approximately $152 million.
24
At December 31, 2005,2006, the Company and its U.S. and international subsidiaries had the following commitments, amounts outstanding and amounts available under revolving credit facilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | Total Amount of
| | Total Amount
| | Total Amount
| | | Total
| | Total
| | Total
| | | | Commitments | | Outstanding | | Available(a) | | | In millions | | | Commitments | | Outstanding | | Available(a) | | | | (Amounts in millions) | | | | | Revolving Credit Facility | | $ | 325.0 | | | $ | 6.0 | | | $ | 306.6 | | | $ | 325.0 | | | $ | 3.6 | | | $ | 307.0 | | International Facilities | | | 17.4 | | | | 8.9 | | | | 8.5 | | | | 18.0 | | | | 8.5 | | | | 9.5 | | | | | | | | | | | | | | Total | | $ | 342.4 | | | $ | 14.9 | | | $ | 315.1 | | | $ | 343.0 | | | $ | 12.1 | | | $ | 316.5 | | | | | | | | | | | | | |
Note: | | | (a) | (a) | In accordance with its debt agreements, the Company’s availability under its Revolving Credit Facility has been reduced by the amount of standby letters of credit issued of $12.4$14.4 million as of December 31, 2005.2006. These letters of credit are used as security against its self-insurance obligations and workers’ compensation obligations. These letters of credit expire at various dates through 20062007 unless extended. |
Principal and interest payments under the Term Loan Facility and the Revolving Credit Facility, together with principal and interest payments on the Senior Notes and the Senior Subordinated Notes, represent significant liquidity requirements for the Company. Based upon current levels of operations, anticipated cost-savings and expectations as to future growth, the Company believes that cash generated from operations, together with amounts available under its Revolving Credit Facility and other available financing sources, will be adequate to permit the Company to meet its debt service obligations, necessary capital expenditure program requirements, ongoing operating costs and working capital needs, although no assurance can be given in this regard. The Company’s future financial and operating performance, ability to service or refinance its debt and ability to comply with the covenants and restrictions contained in its debt agreements (see “— Covenant“Covenant Restrictions”) will be subject to future economic conditions and to financial, business and other factors, many of which are beyond the Company’s control and will be substantially dependent on the selling prices and demand for the Company’s products, raw material and energy costs, and the Company’s ability to successfully implement its overall business and profitability strategies. The Company expects that its working capital and business needs will require it to continue to have access to the Revolving Credit Facility or a similar revolving credit facility after the maturity date in 2009, and that the Company accordingly will have to extend, renew, replace or otherwise refinance such facility at or prior to such date. No assurance can be given that it will be able to do so. The Company has in the past refinanced and in the future may seek to refinance its debt prior to the respective maturities of such debt. 26
The Company uses interest rate swaps to manage interest rate risks caused by interest rate changes on its variable rate Term Loan Facility. The differential to be paid or received under these agreements is recognized as an adjustment to interest expense related to the debt. At December 31, 2005,2006, the Company had interest rate swap agreements with a notional amount of $660$550 million, which expire on various dates from 20062007 to 2008 under which the Company will pay fixed rates of 2.69%3.27% to 4.53%5.46% and receive three-month LIBOR.LIBOR rates. Effective as of December 31, 2005,2006, the Company had approximately $1.2$1.3 billion of net operating loss carryforwards (“NOLs”) for U.S. federal income tax purposes. These NOLs generally may be used by the Company to offset taxable income earned in subsequent taxable years. However, the Company’s ability to use these NOLs to offset its future taxable income may be subject to significant limitation as a result of certain shifts in ownership due to direct or indirect transfers of the Company’s common stock by one or more 5 percent stockholders, or issuances or redemptions of the Company’s common stock, which, when taken together with previous changes in ownership of the Company’s common stock, constitute an ownership change under the Internal Revenue Code. Imposition of any such limitation on the use of NOLs could have an adverse effect on the Company’s future after tax free cash flow.
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Covenant Restrictions In October 2005, the Company, entered into the Second Amendment (the “Second Amendment”) to the Senior Secured Credit Agreement. As a result, the Company incurred fees and transaction costs of approximately $4 million. The Second Amendment relaxed the maximum Consolidated Debt to Credit Agreement EBITDA Leverage Ratio covenant and the minimum Credit Agreement EBITDA to Consolidated Interest Expense Ratio covenant beginning with the covenant requirements for September 30, 2005. The Senior Secured Credit Agreement, as amended, which governs the Term Loan Facility and the Revolving Credit Facility, imposes restrictions on the Company’s ability to make capital expenditures and both the Senior Secured Credit Agreement and the indentures governing the Senior Notes and Senior Subordinated Notes (the “Notes”) limit the Company’s ability to incur additional indebtedness. Such restrictions, together with the highly leveraged nature of the Company, could limit the Company’s ability to respond to market conditions, meet its capital spending program, provide for unexpected capital investments or take advantage of business opportunities. The covenants contained in the Senior Secured Credit Agreement, as amended, among other things, restrict the ability of the Company to dispose of assets, incur additional indebtedness, incur guarantee obligations, prepay other indebtedness, make dividend and other restricted payments, create liens, make equity or debt investments, make acquisitions, modify terms of indentures under which the Notes are issued, engage in mergers or consolidations, change the business conducted by the Company and its subsidiaries, make capital expenditures and engage in certain transactions with affiliates. 27
On October 17, 2005, the Company, entered into the Second Amendment (the “Second Amendment”) toThe financial covenants contained in the Senior Secured Credit Agreement. As a result,Agreement, as amended, among other things, specify the Company incurred fees and transaction costs of approximately $4 million.
The Second Amendment relaxed the maximum Consolidated Debt to Credit Agreement EBITDA Leverage Ratio covenant and the minimum Credit Agreement EBITDA to Consolidated Interest Expense Ratio covenant as shown below beginning with the covenantfollowing requirements for September 30, 2005.each of the following test periods:
| | | | | | | | | | | | | | | | | | | Maximum Consolidated Debt to
| | | Minimum Credit Agreement
| | | | Credit Agreement EBITDA
| | | EBITDA to Consolidated
| | Four Fiscal Quarters Ending | | Leverage Ratio(a) | | | Interest Expense Ratio | | Four Fiscal Quarters Ending
| | Previous | | | As Amended | | | Previous | | | As Amended(a) | | | 2005 | | | | | | | | | | | | | | | | | September 30, 2005 | | | 6.15 to 1.00 | | | | 6.75 to 1.00 | | | | 2.25 to 1.00 | | | | 1.75 to 1.00 | | December 31, 2005 | | | 5.75 to 1.00 | | | | 6.75 to 1.00 | | | | 2.35 to 1.00 | | | | 1.75 to 1.00 | | 2006 | | | | | | | | | | | | | | | | | MarchDecember 31, 2006 | | | 5.75 to 1.00 | | | | 6.75 to 1.00 | | | | 2.35 to 1.00 | | | | 1.75 to 1.00 | | June 30, 2006 | | | 5.75 to 1.00 | | | | 6.75 to 1.00 | | | | 2.35 to 1.00 | | | | 1.75 to 1.00 | | September 30, 2006 | | | 5.75 to 1.00 | | | | 6.75 to 1.00 | | | | 2.35 to 1.00 | | | | 1.75 to 1.00 | | December 31, 2006 | | | 5.25 to 1.00 | | | | 6.75 to 1.00 | | | | 2.50 to 1.00 | | | | 1.75 to 1.00 | | 2007 | | | | | | | | | | | | | | | | | March 31, 2007 | | | 5.25 to 1.00 | | | | 6.50 to 1.00 | | | | 2.50 to 1.00 | | | | 1.75 to 1.00 | | June 30, 2007 | | | 5.25 to 1.00 | | | | 6.50 to 1.00 | | | | 2.50 to 1.00 | | | | 1.75 to 1.00 | | September 30, 2007 | | | 5.25 to 1.00 | | | | 6.50 to 1.00 | | | | 2.50 to 1.00 | | | | 1.75 to 1.00 | | December 31, 2007 | | | 4.75 to 1.00 | | | | 6.00 to 1.00 | | | | 2.75 to 1.00 | | | | 1.85 to 1.00 | | 2008 | | | | | | | | 2008 | | | | | | | | | March 31, 2008 | | | 4.75 to 1.00 | | | | 6.00 to 1.00 | | | | 2.75 to 1.00 | | | | 1.85 to 1.00 | | June 30, 2008 | | | 4.75 to 1.00 | | | | 6.00 to 1.00 | | | | 2.75 to 1.00 | | | | 1.85 to 1.00 | | September 30, 2008 | | | 4.75 to 1.00 | | | | 6.00 to 1.00 | | | | 2.75 to 1.00 | | | | 1.85 to 1.00 | | December 31, 2008 | | | 4.50 to 1.00 | | | | 5.50 to 1.00 | | | | 2.90 to 1.00 | | | | 2.00 to 1.00 | | 2009 | | | | | | | | 2009 | | | | | | | | | March 31, 2009 and thereafter | | | 4.50 to 1.00 | | | | 4.50 to 1.00 | | | | 2.90 to 1.00 | | | | 2.90 to 1.00 | |
Note: | | | (a) | | Credit Agreement EBITDA is calculated in accordance with the definitions contained in the Company’s Senior Secured Credit Agreement, as amended. Credit Agreement EBITDA is defined as consolidated net income before consolidated interest expense, non-cash expenses and charges, total income tax expense, depreciation expense, expense associated with amortization of intangibles and other assets, non-cash provisions for reserves for discontinued operations, extraordinary, unusual or non-recurring gains or losses or charges or credits, gain or loss associated with sale or write-down of assets not in the ordinary course of business, and any income or loss accounted for by the equity method of accounting. |
At December 31, 2005,2006, the Company was in compliance with the financial covenants in the Secured Credit Agreement, as amended, and the ratios were as follows: Consolidated Debt to Credit Agreement EBITDA Leverage Ratio — 6.155.91 to 1.00 Credit Agreement EBITDA to Consolidated Interest Expense Ratio — 2.182.00 to 1.00
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Credit Agreement EBITDA as used herein is a financial measure that is used in the Senior Secured Credit Agreement.covenant calculations above reflects a change in the calculation made to track the definition in the Company’s Credit Agreement EBITDA is not a defined term under accounting principles generally acceptedmore closely. Previously, the Company had subtracted cash contributions to its pension plans from Credit Agreement EBITDA. Beginning in the United States and shouldthird quarter of 2006, the Company did not be considered as an alternative to incomesubtract such contributions from operations or net income as a measureits calculation of operating results or cash flows as a measure of liquidity. Credit Agreement EBITDA differs fromEBITDA. This change in the term “EBITDA” (earnings before interest expense, income tax expense, and depreciation and amortization) as it is commonly used. In addition to adjusting net income to exclude interest expense, income tax expense, and depreciation and amortization,calculation method did not affect the Company’s compliance with its covenants under the Credit Agreement, EBITDA also adjusts net income by excluding certain other items and expenses, as specified below.the Company would have been in compliance even if the prior calculation method had been used. The Company’s definition of Credit Agreement EBITDA may differ from that of other similarly titled measures at other companies. The Company’s management believes that presentation of Credit Agreement EBITDA provides useful information to investors because borrowings under the Senior Secured Credit Agreement are a key source of the Company’s liquidity, and the Company’s ability to borrow under the Senior Secured Credit Agreement is dependent on, among other things, its compliance with the financial ratio covenants. Failure to comply with these financial ratio covenants would result in a violation of the Senior Secured Credit Agreement and, absent a waiver or amendment from the lenders under such agreement, permit the acceleration of all outstanding borrowings under the Senior Secured Credit Agreement. 28
The calculations of the components of the Company’s financial covenant ratios are listed below: | | | | | | | | | | | Year Ended
| | | Year Ended
| | | | December 31, 2005 | | | In millions | | | December 31, 2006 | | | | (Amounts in millions) | | | | | Net Loss | | $ | (91.1 | ) | | $ | (100.5 | ) | Income Tax Expense | | | 23.3 | | | | 20.2 | | Interest Expense, Net | | | 155.9 | | | | 171.6 | | Depreciation and Amortization | | | 205.3 | | | | 196.0 | | Equity in Net Earnings of Affiliates | | | (1.2 | ) | | Dividends Received, Net of Earnings of Equity Affiliates | | | | 1.3 | | Pension, Postemployment and Postretirement Benefits Expense, Net of Contributions | | | 9.5 | | | | 32.2 | | Merger Related Expenses | | | 17.1 | | | | 0.7 | | Write-Down of Assets | | | 1.6 | | | | 3.9 | | Dividends from Equity Investments | | | 1.0 | | | | | | | | | | | Credit Agreement EBITDA (a) | | $ | 321.4 | | | $ | 325.4 | | | | | | | | | |
| | | | | | | | | | | Year Ended
| | | Year Ended
| | | | December 31, 2005 | | | In millions | | | December 31, 2006 | | | | (Amounts in millions) | | | | | Interest Expense, Net | | $ | 155.9 | | | $ | 171.6 | | Amortization of Deferred Debt Issuance Costs | | | (8.3 | ) | | | (8.8 | ) | Credit Agreement Interest Expense Adjustments (b)(a) | | | 0.1 | | | | 0.1 | | | | | | | Consolidated Interest Expense (c) | | $ | 147.7 | | | | | | | | Consolidated Interest Expense(b) | | | $ | 162.9 | | | | | | | |
| | | | | | | | | | | As of
| | | As of
| | | | December 31, 2005 | | | In millions | | | December 31, 2006 | | | | (Amounts in millions) | | | | | Short-Term Debt | | $ | 11.0 | | | $ | 12.0 | | Long-Term Debt | | | 1,967.3 | | | | 1,910.7 | | | | | | | | | | Total Debt | | $ | 1,978.3 | | | $ | 1,922.7 | | | | | | | | | |
Notes: | | | (a) | | Credit Agreement EBITDA is calculated in accordance with the definitions contained in the Company’s Senior Secured Credit Agreement. Credit Agreement EBITDA is defined as consolidated net income |
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| | | | | before consolidated interest expense, non-cash expenses and charges, total income tax expense, depreciation expense, expense associated with amortization of intangibles and other assets, non-cash provisions for reserves for discontinued operations, extraordinary, unusual or non-recurring gains or losses or charges or credits, gain or loss associated with sale or write-down of assets not in the ordinary course of business, and any income or loss accounted for by the equity method of accounting. | | (b) | (a) | Credit agreement interest expense adjustments include the discount from the financing of receivables. | | (c) | (b) | Consolidated Interest Expense is calculated in accordance with the definitions contained in the Company’s Senior Secured Credit Agreement. Consolidated Interest Expense is defined as consolidated interest expense minus consolidated interest income plus any discount from the financing of receivables. |
In addition to the changes to the financial covenants described above, the Second Amendment modifies the pricing for the Senior Secured Term Loan Facility by increasing the applicable margin by 0.25% if, and for so long as, the Company’s indebtedness under the Senior Secured Credit Agreement is rated less than B+ by Standard & Poor’s Ratings Group (a division of The McGraw Hill Companies Inc.) or less than B1 by Moody’s Investors Service, Inc. The Senior Notes are rated B− by Standard & Poor’s and B2 by Moody’s Investor Services. The Senior Subordinated Notes are rated B− by Standard & Poor’s and B3 by Moody’s Investor Services. The Company’s indebtedness under the Senior Secured Credit Agreement, as amended, is rated B+ by Standard & Poor’s and Ba2 by Moody’s Investor Services. As of December 31, 2006, both Standard & Poor’s and Moody’s Investor Services’ ratings on the Company remain on negative outlook. During 2006, cash paid for interest was approximately $162 million. If the negative impact of inflationary pressures on key inputs continues, or depressed selling prices, lower sales volumes, increased operating costs or other factors have a negative impact on the Company’s ability to increase its profitability, the Company may not be able to maintain its compliance with the financial covenants in its Senior Secured Credit Agreement, as amended. The Company’s ability to comply in future periods with the financial covenants in the Senior Secured Credit Agreement will depend on its ongoing financial and operating performance, which in turn will be subject to economic conditions and to financial, business and 29
other factors, many of which are beyond the Company’s control and will be substantially dependent on the selling prices for the Company’s products, raw material and energy costs, and the Company’s ability to successfully implement its overall business strategies, and meet its profitability objective. If a violation of any of the covenants occurred, the Company would attempt to obtain a waiver or an amendment from its lenders, although no assurance can be given that the Company would be successful in this regard. The Senior Secured Credit Agreement and the indentures governing the Senior Subordinated Notes and the Senior Notes have covenants as well as certain cross-default or cross-acceleration provisions; failure to comply with these covenants in any agreement could result in a violation of such agreement which could, in turn, lead to violations of other agreements pursuant to such cross-default or cross-acceleration provisions. If an event of default occurs, the lenders are entitled to declare all amounts owed to be due and payable immediately. The Senior Secured Credit Agreement is collateralized by substantially all of the Company’s domestic assets. Capital Investment The Company’s capital investment in 20052006 was $95.6$94.5 million, compared to $137.8$110.8 million in 2004.2005. This $16.3 million decrease was due primarily to the higher capital investment in 2005 related to the Company’s manufacturing rationalization initiatives and compliance with environmental laws and regulations. During 2005,2006, the Company invested $46.9had capital spending of $54.9 million for improving process capabilities, $15.8$23.6 million for the expansion of its Fort Smith, AR and Lumberton, NC converting plants, $19.0capital spares, $15.6 million for manufacturing packaging machinery $8.2and $0.4 million for compliance with environmental laws and regulations and $5.7 million for its beverage multiple packaging converting operations initiative.regulations. Environmental Matters The Company is subject to a broad range of foreign, federal, state and local environmental, health and safety laws and regulations that change from time to time, including those governing discharges to air, soil and water, the management, treatment and disposal of hazardous substances, solid waste and hazardous wastes, the investigation and remediation of contamination resulting from historical site operations and releases of hazardous substances, and the health and safety of employees. Compliance initiatives could result in significant costs, which could negatively impact the Company’s financial position, results of operations or cash flows. Any failure to comply with such laws and regulations or any permits and authorizations required thereunder could subject the Company to fines, corrective action or other sanctions. In addition, some of the Company’s current and former facilities are the subject of environmental investigations and remediations resulting from historical operations and the release of hazardous substances or
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other constituents. Some current and former facilities have a history of industrial usage for which investigation and remediation obligations may be imposed in the future or for which indemnification claims may be asserted against the Company. Also, potential future closures or sales of facilities may necessitate further investigation and may result in future remediation at those facilities. During the first quarter of 2006, the Company self-reported certain violations of its Title V permit under the federal Clean Air Act for its West Monroe, Louisiana mill to the Louisiana Department of Environmental Quality (the “LADEQ”). The violations relate to the collection, treatment and reporting of hazardous air pollutants. The Company recorded $0.6 million of expense in the first quarter of 2006 for compliance costs to correct the technical issues causing the Title V permit violations. The Company received a consolidated Compliance Order and notice of potential penalty dated July 5, 2006 from the LADEQ indicating that the Company may be required to pay civil penalties for violations that occurred from 2001 through 2005. Although the Company believes that it is reasonably possible that the LADEQ will assess some penalty, at this time the amount of such penalty is not estimable. The Company has established reserves for those facilities or issues where liability is probable and the costs are reasonably estimable. The Company believes that the amounts accrued for all of its loss contingencies, and the reasonably possible loss beyond the amounts accrued, are not material to the Company’s financial position, results of operations or cash flows. The Company cannot estimate with certainty future compliance, investigation or remediation costs, all of which the Company currently considers to be remote. Costs relating to historical usage or indemnification claims that the Company considers to be reasonably possible are not quantifiable at this time. The Company will continue to monitor environmental issues at each of its facilities 30
and will revise its accruals, estimates and disclosures relating to past, present and future operations as additional information is obtained. Contractual Obligations and Commitments AtA summary of our contractual obligations and commitments as of December 31, 2005, total commitments of the Company under long-term, non-cancelable contracts were2006 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Payment Due by Year | | | | 2006 | | | 2007 | | | 2008 | | | 2009 | | | 2010 | | | After 2010 | | | Total | | | | (Amounts in millions) | | | Long-Term Debt | | $ | 1.2 | | | $ | 11.7 | | | $ | 12.5 | | | $ | 17.4 | | | $ | 1,074.9 | | | $ | 850.8 | | | $ | 1,968.5 | | Operating Leases | | | 12.5 | | | | 7.5 | | | | 5.4 | | | | 4.6 | | | | 3.8 | | | | 12.6 | | | | 46.4 | | Other Commitments (a) | | | 157.2 | | | | 148.3 | | | | 141.4 | | | | 139.4 | | | | 130.5 | | | | 157.3 | | | | 874.1 | | Purchase Obligations (b) | | | 52.4 | | | | 42.7 | | | | 41.5 | | | | 41.0 | | | | 40.5 | | | | 226.0 | | | | 444.1 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total Contractual Obligations (c) | | $ | 223.3 | | | $ | 210.2 | | | $ | 200.8 | | | $ | 202.4 | | | $ | 1,249.7 | | | $ | 1,246.7 | | | $ | 3,333.1 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Payment Due by Year | | In millions | | 2007 | | | 2008 | | | 2009 | | | 2010 | | | 2011 | | | After 2011 | | | Total | | | | | Long-Term Debt | | $ | 0.3 | | | $ | 12.3 | | | $ | 14.5 | | | $ | 1,033.1 | | | $ | 425.0 | | | $ | 425.8 | | | $ | 1,911.0 | | Operating Leases | | | 11.8 | | | | 10.3 | | | | 8.9 | | | | 6.0 | | | | 4.1 | | | | 9.6 | | | | 50.7 | | Other Commitments(a) | | | 164.9 | | | | 155.7 | | | | 145.2 | | | | 131.9 | | | | 65.1 | | | | 62.1 | | | | 724.9 | | Purchase Obligations(b) | | | 51.8 | | | | 47.7 | | | | 50.4 | | | | 49.3 | | | | 49.3 | | | | 334.6 | | | | 583.1 | | Pension and Postretirement Funding | | | 32.7 | | | | 2.7 | | | | 3.0 | | | | 3.2 | | | | 3.5 | | | | 18.3 | | | | 63.4 | | | | Total Contractual Obligations(c) | | $ | 261.5 | | | $ | 228.7 | | | $ | 222.0 | | | $ | 1,223.5 | | | $ | 547.0 | | | $ | 850.4 | | | $ | 3,333.1 | | | |
Notes: Notes:
| | | (a) | | Other commitments primarily includesinclude scheduled interest payments on the Company’s long-term debt. | | (b) | | Purchase obligations primarily consist of commitments related to pine pulpwood, hardwood, wood chips, wood processing and handling, chemical-based inputs, natural gas and electricity. | | (c) | | Some of the figures included in this table are based on management’s estimates and assumptions about these obligations. Because these estimates and assumptions are necessarily subjective, the obligations the Company will actually pay in the future periods may vary from those reflected in the table. |
International Operations For 2005,2006, before intercompany eliminations, net sales from operations outside of the United StatesU.S. represented approximately 21% of the Company’s net sales. The Company’s revenues from export sales fluctuate with changes in foreign currency exchange rates. At December 31, 2005,2006, approximately 6%8% of its total assets were denominated in currencies other than the U.S. dollar. The Company has significant operations in countries that use the Swedish krona, the British pound sterling, the Australian dollar, the Japanese yen the Brazilian real or the euro as their functional currencies. The effect of a generally strongerweaker U.S. dollar against the euro and other Europeanthese currencies and the Japanese yen, produced a net currency translation adjustment lossgain of $17.2$14.7 million, which was recorded as an adjustment to shareholders’ equityShareholders’ Equity for the year ended December 31, 2005.2006. The magnitude and direction of this adjustment in the future depends on the relationship of the U.S. dollar to other currencies. The Company cannot predict major currency fluctuations. The Company pursues a currency hedging program in order to limit the impact of foreign currency exchange fluctuations on financial results. See “Financial Instruments” below.
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Financial Instruments The functional currency of the Company’s international subsidiaries is the local currency for the country in which the subsidiaries own their primary assets. The translation of the applicable currencies into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period. Any related translation adjustments are recorded directly to shareholders’ equity. Gains and losses on foreign currency transactions are included in Other Expense, Net for the period in which the exchange rate changes. The Company pursues a currency hedging program which utilizes derivatives to limit the impact of foreign currency exchange fluctuations on its consolidated financial results. Under this program, the Company has entered into forward exchange contracts in the normal course of business to hedge certain foreign currency denominated transactions. Realized and unrealized gains and losses on these forward contracts are included in the measurement of the basis of the related foreign currency transaction when recorded. The Company also pursues a hedging program which utilizes derivatives designed to manage risks associated with future variability in cash flows and price risk related to future energy cost increases. Under this program the 31
Company has entered into natural gas swap contracts to hedge a significant portion of its natural gas requirements through December 2006.2008. Realized gains and losses on these contracts are included in the financial results concurrently with the recognition of the commodity purchased. The Company uses interest rate swaps to manage interest rate risks on future income caused by interest rate changes on its variable rate Term Loan facility.Facility. These instruments involve, to varying degrees, elements of market and credit risk in excess of the amounts recognized in the Consolidated Balance Sheets. The Company does not hold or issue financial instruments for trading purposes. See Item 7A., “Quantitative and Qualitative Disclosure About Market Risk.” CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Actual results could differ from these estimates, and changes in these estimates are recorded when known. The critical accounting policies used by management in the preparation of the Company’s consolidated financial statements are those that are important both to the presentation of the Company’s financial condition and results of operations and require significant judgments by management with regard to estimates used. The critical judgments by management relate to pension benefits, retained insurable risks, future cash flows associated with impairment testing for goodwill and long-lived assets, and deferred taxes. • Pension Benefits The Company sponsors defined benefit pension plans (the “Plans”) for eligible employees in North America and certain international locations. The funding policy for the qualified defined benefit plans in North America is to, at a minimum, contribute assets as required by the Internal Revenue Code Section 412. Nonqualified U.S. plans providing benefits in excess of limitations imposed by the U.S. income tax code are not funded. U.S. pension expense for defined benefits pension plans was $26.0 million in 2006 compared with $22.0 million in 2005 compared with $18.7 million in 2004.2005. Pension expense is calculated based upon a number of actuarial assumptions applied to each of the defined benefit plans. The expected long-term rate of return on pension fund assets used to calculate pension expense was 8.25% in both 20052006 and 2004.2005. The expected long-term rate of return on pension assets was determined based on several factors, including input from our pension investment consultants and projected long-term returns of broad equity and bond indices. The Company also considered the plan’s historical10-year compounded annual return of 8.80%8.73%, which has been in excess of these broad equity and bond benchmark indices. The Company will continue to evaluate its long-term rate of return assumptions at least annually and will adjust them as necessary. The Company determined pension expense using both the fair value of assets and a calculated value that averages gains and losses over a period of years. Investment gains or losses represent the difference between
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the expected and actual return on assets. As of December 31, 2005,2006, the cumulative unrecognized investmentnet actuarial loss was $96.6$65.0 million. These unrecognized net losses may increase future pension expense if not offset by (i) actual investment returns that exceed the assumed investment returns, or (ii) other factors, including reduced pension liabilities arising from higher discount rates used to calculate pension obligations, or (iii) other actuarial gains, including whether such accumulated actuarial losses at each measurement date exceed the “corridor” determined under SFASStatement of Financial Accounting Standards (“SFAS”) No. 87, “Employers’ Accounting for Pensions.” The discount rate used to determine the present value of future pension obligations at December 31, 20052006 was based on a yield curve constructed from a portfolio of high quality corporate debt securities with maturities ranging from 1 year to 30 years. Each year’s expected future benefit payments were discounted to their present value at the appropriate yield curve rate thereby generating the overall discount rate for U.S. pension obligations. The discount rate for U.S. plans decreasedincreased from 6.00% in 2004 to 5.75% in 2005.2005 to a plan specific rate ranging from 5.95% to 6.05% in 2006. Fornon-U.S. plans, the discount rate is determined using long-term local corporate bonds. 32
U.S. pension expense is estimated to be approximately $24$18 million in 2006.2007. The estimate is based on an expected long-term rate of return of 8.25%, a discount rate of 5.75%ranging from 5.95% to 6.05% and other assumptions. Pension expense beyond 20062007 will depend on future investment performance, the Company’s contribution to the plans, changes in discount rates and other factors related to covered employees in the plans. If the discount rate assumptions for these plans were reduced by 0.25 percent, pension expense would increase by approximately $2$1 million and the December 31, 2005 minimum2006 pension liabilityfunding obligation would increase by about $18$19 million. The fair value of assets in the U.S. plans was $441.9 million at December 31, 2006 and $391.8 million at December 31, 2005 and $376.6 million at December 31, 2004.2005. Lower discount rates have caused the projected benefit obligations to exceed thatthe fair value of plan assets by approximately $183.2$152.7 million and $138.1$183.2 million as of December 31, 20052006 and 2004,2005, respectively. Primarily due to the lower discount rates, the accumulated benefit obligation (“ABO”) exceeded plan assets by $159.2$134.0 million at the end of 2005.2006. At the end of 2004,2005, the ABO exceeded the fair value of plan assets by $111.2$159.2 million. • Retained Insurable Risks The Company is self-insured for certain losses relating to workers’ compensation claims and employee medical and dental benefits. Provisions for expected losses are recorded based on the Company’s estimates, on an undiscounted basis, of the aggregate liabilities for known claims and estimated claims incurred but not reported. The Company has purchased stop-loss coverage or insurance with deductibles in order to limit its exposure to significant claims. The Company also has an extensive safety program in place to minimize its exposure to workers’ compensation claims. Self-insured losses are accrued based upon estimates of the aggregate uninsured claims incurred using certain actuarial assumptions and loss development factors followed in the insurance industry and historical experience. • Goodwill The Company tests the carrying amount of its goodwill using the discounted cash flow method of valuation on an annual basis and whenever events or circumstances indicate that impairment may have occurred. The review for impairment is based on a discounted cash flow approach, which requires the Company to estimate future net cash flows, the timing of these cash flows and a discount rate (based upon a weighted average cost of capital). The Company’s cash flows are generated by its operations and are used to fund working capital needs, debt service and capital spending. The Company discounted these cash flows using a weighted average cost of capital of 9 percent. Changes in borrowing rates, which are impacted by market rate fluctuations, would impact discounted cash flow calculations. Other factors, such as significant operating losses or acquisitions of new operations, would also impact discounted cash flow calculations. If the discount rate used in the discounted cash flow calculations were to be increased 100 basis points, the fair value would continue to exceed the carrying amount in the Company’s goodwill valuation analysis. The Company has completed its annual goodwill impairment testing and has determined that none of its goodwill is impaired.
31
• Recovery of Long-Lived Assets The Company reviews long-lived assets (including property, plant and equipment and intangible assets) for impairment whenever events or changes in circumstances indicate that the carrying amount of such long-lived assets may not be fully recoverable by undiscounted cash flows. Measurement of the impairment loss, if any, is based on the fair value of the asset, which is generally determined by the discounting of future estimated cash flows, or in the case of real estate, determining market value. The Company evaluates the recovery of its long-lived assets by analyzing operating results and considering significant events or changes in the business environment that may have triggered impairment. See Note 15 in the Notes to Consolidated Financial Statements included herein under Item 8., “Financial Statements and Supplementary Data”. 33
• Deferred Income Taxes and Potential Assessments As of December 31, 2005, the Company has recorded deferred tax assets totaling $616.0 million primarily related to income tax loss carryforwards and income tax credit carryforwards and has established valuation allowances against these deferred tax assets of $252.1 million, thereby resulting in net deferred tax assets of $363.9 million. The remaining deferred tax assets may be utilized against future deferred tax liabilities excluding those liabilities resulting from indefinite lived intangible assets. As of December 31, 2004, the net deferred tax assets were $364.8 million. The Company’s income tax losses are in U.S. andnon-U.S. taxing jurisdictions. In determining the valuation allowances to establish against these deferred tax assets, the Company considers many factors, including the specific taxing jurisdiction, the carryforward period, forecasted earnings for the entities in each jurisdiction and tax strategies. A valuation allowance is recognized if, based on the weight of available evidence, the Company concludes that it is more likely than not that some portion or all of the deferred tax asset will not be realized. As of December 31, 2005,2006, the Company, in accordance with Accounting Principles Board (“APB”) Opinion 23,“Accounting for Income Taxes, Special AreasAreas”has determined that $71.5$67.2 million of undistributed foreign earnings are not intended to be reinvested indefinitely by itsnon-U.S. subsidiaries. Deferred income tax was recorded as a reduction to the Company’s net operating losses on these undistributed earnings as well as the financial statement carrying value in excess of tax basis in the amount of $35.8$30.2 million. As of December 31, 20042005, the Company had determined that $71.8$71.5 million of undistributed foreign earnings were not intended to be reinvested indefinitely. Deferred income tax was recorded as a reduction to the Company’s net operating losses on these undistributed earnings as well as the financial statement carrying value in excess of tax basis in the amount of $48.8$35.8 million. Prior to 2004, the Company’s intent was to permanently reinvest its foreign earnings and it was not practical to determine the amount of unrecognized deferred U.S. income tax liability on these unremitted earnings. The Company periodically determines whether thenon-U.S. subsidiaries subsidiaries will invest their undistributed earnings indefinitely and reassesses this determination as appropriate.
The Company records current liabilities for potential assessments. The accruals relate to uncertain tax positions in a variety of taxing jurisdictions and are based on what management believes will be the ultimate resolution of these positions. These liabilities may be affected by changing interpretations of laws, rulings by tax authorities, or the expiration of the statute of limitations. NEW ACCOUNTING STANDARDS For a discussion of recent accounting pronouncements impacting the Company, see Note 32 in the Notes to Consolidated Financial Statements.Statements included herein under Item 8., “Financial Statements and Supplementary Data”. BUSINESS OUTLOOK The Company expects inflationary pressures for production inputs, including higher costs for fiber, wood and chemical-based inputs, to continue to impact results in 2006. Specifically, the higher cost of natural gas is expected to negatively influence results, particularly in the first quarter 2006. Because higher priced inputs first began to impact the Company at the end of 2004,2007. These increases should be somewhat offset by lower energy costs. Additionally, the Company expects prior period comparisonsthat its first quarter 2007 results of operations will continue to be more favorable than in 2005.negatively impacted by the infrastructure and reliability improvements at its West Monroe mill. To help offset inflation in 2006,2007, the Company expects to realize approximately $50 million in year over year operating cost savings from its continuous improvement programs and manufacturing rationalization. In
32
addition, contractual price escalators and price increases announced in October 20052006 for coated board and containerboard will carry through to 2006. Finally, the Company expects to gain further price increases on cartons.cartons should favorably impact 2007. Total capital investment for 20062007 is expected to be between approximately $80$100 million and $90$120 million and is expected to relate principally to improving the Company’s process capabilities (approximately $62$66 million), the production of packaging machinery (approximately $17$15 million), capital spares (approximately $15 million) and environmental laws and regulations (approximately $6$14 million). Depreciation and amortization is expected to be between approximately $190 million and $200 million forThe Company also expects the full year 2006.following in 2007:
| | | | • | Depreciation and amortization between $185 million and $195 million. | | | • | Interest expense of $170 million to $180 million, including $9 million of non-cash interest expense associated with amortization of debt issuance costs. | | | • | Debt reduction of $60 million to $70 million. | | | • | Pension plan contributions of $25 million to $30 million. |
34
| | ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
The Company does not trade or use derivative instruments with the objective of earning financial gains on interest or currency rates, nor does it use leveraged instruments or instruments where there are no underlying exposures identified. Interest Rates The Company is exposed to changes in interest rates, primarily as a result of its short-term and long-term debt, which bear both fixed and floating interest rates. The Company uses interest rate swap agreements effectively to fix the LIBOR rate on $660.0$550.0 million of variable rate borrowings. The table below sets forth interest rate sensitivity information related to the Company’s debt. Long-Term Debt Principal Amount by Maturity-Average Interest Rate | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Expected Maturity Date | | | Expected Maturity Date | | | | | | | | | | | | | | | | | | Fair
| | | | | | | | | | | | | | | | | Fair
| | | | 2006 | | 2007 | | 2008 | | 2009 | | 2010 | | Thereafter | | Total | | Value | | | In millions | | | 2007 | | 2008 | | 2009 | | 2010 | | 2011 | | Thereafter | | Total | | Value | | | | (Amounts in millions) | | | | | Total Debt | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fixed Rate | | | 0.2 | | | | 0.2 | | | | 1.2 | | | | — | | | | — | | | | 850.8 | | | | 852.4 | | | | 834.2 | | | | 0.2 | | | | 1.2 | | | | — | | | | — | | | | 425.0 | | | | 425.8 | | | | 852.2 | | | | 895.6 | | Average Interest Rate | | | 6.13 | % | | | 6.13 | % | | | 6.23 | % | | | N/A | | | | N/A | | | | 9.00 | % | | | | | | | | | | | 6.13 | % | | | 6.25 | % | | | N/A | | | | N/A | | | | 8.5 | % | | | 9.5 | % | | | | | | | | | Variable Rate | | | 1.0 | | | | 11.5 | | | | 11.3 | | | | 17.4 | | | | 1,074.9 | | | | — | | | | 1,116.1 | | | | 1,135.4 | | | | 0.1 | | | | 11.1 | | | | 14.5 | | | | 1,033.1 | | | | — | | | | — | | | | 1,058.8 | | | | 1,064.9 | | Average Interest Rate, spread range is 2.50% — 3.00% | | | LIBOR+ spread | | | | LIBOR+ spread | | | | LIBOR+ spread | | | | LIBOR+ spread | | | | LIBOR+ spread | | | | LIBOR+ spread | | | | | | | | | | | | LIBOR+ spread | | | | LIBOR+ spread | | | | LIBOR+ spread | | | | LIBOR+ spread | | | | LIBOR+ spread | | | | LIBOR+ spread | | | | | | | | | | | | | | | |
Total Interest Rate Swaps-Notional Amount by Expiration-Average Swap Rate | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Expected Maturity Date | | | Expected Maturity Date | | | | | | | | | | | | | | | | | | Fair
| | | | | | | | | | | | | Fair
| | | | 2006 | | 2007 | | 2008 | | 2009 | | 2010 | | Thereafter | | Total | | Value | | | In millions | | | 2007 | | 2008 | | 2009 | | Thereafter | | Total | | Value | | | | (Amounts in millions) | | | | | Interest rate Swaps (Pay Fixed/Receive Variable) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Notional | | | 330.0 | | | | 110.0 | | | | 220.0 | | | | — | | | | — | | | | — | | | | 660.0 | | | | 5.2 | | | | 110.0 | | | | 330.0 | | | | 110.0 | | | | — | | | | 550.0 | | | | 1.6 | | Average Pay Rate | | | 3.348 | % | | | 3.270 | % | | | 4.532 | % | | | — | | | | — | | | | | | | | | | | | | | | | 3.270 | % | | | 4.842 | % | | | 5.027 | % | | | — | | | | | | | | | | | | | | 3-Month | | | | 3-Month | | | | 3-Month | | | | | | | | | | | | | | Average Receive Rate | | | 3-Month | | | | 3-Month | | | | 3-Month | | | | — | | | | — | | | | | | | | | | | | | | | | LIBOR | | | | LIBOR | | | | LIBOR | | | | — | | | | | | | | | | | | | LIBOR | | | | LIBOR | | | | LIBOR | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign Exchange Rates The Company enters into forward exchange contracts to effectively hedge substantially all accounts receivable resulting from transactions denominated in foreign currencies. The purpose of these forward exchange contracts is to protect the Company from the risk that the eventual functional currency cash flows resulting from the collection of the hedgedthese accounts receivable will be adversely affected by changes in exchange rates.
33
Foreign Exchange Rates Sensitivity-Contractual Amount by Expected
Maturity-Average Contractual Exchange Rate
| | | | | | | | | | | December 31, 2005 | | | | Contract
| | | Fair
| | | | Amount | | | Value | | | | (Amounts in millions) | | | FORWARD EXCHANGE AGREEMENTS: | | | | | | | | | Functional Currency: | | | | | | | | | Receive $US/Pay Yen | | $ | 1.3 | | | $ | — | | Weighted average contractual exchange rate | | | 117.01 | | | | | | Receive $US/Pay Euro | | $ | 1.4 | | | $ | — | | Weighted average contractual exchange rate | | | 1.19 | | | | | | Pay $US/Receive Euro | | $ | 0.5 | | | $ | — | | Weighted average contractual exchange rate | | | 1.20 | | | | | | Receive $US/Pay GBP | | $ | 0.6 | | | $ | — | | Weighted average contractual exchange rate | | | 1.73 | | | | | | Pay $US/Receive GBP | | $ | 0.4 | | | $ | — | | Weighted average contractual exchange rate | | | 1.74 | | | | | | Receive $US/Pay AUD | | $ | 3.6 | | | $ | — | | Weighted average contractual exchange rate | | | 0.73 | | | | | | Pay $US/Receive AUD | | $ | 3.0 | | | $ | — | | Weighted average contractual exchange rate | | | 0.73 | | | | | |
At December 31, 2006, multiple foreign currency forward exchange contracts existed, with maturities ranging up to three months. Those forward currency exchange contracts outstanding at December 31, 2006, when aggregated and measured in U.S. dollars at December 31, 2006 exchange rates, had net notional amounts totaling $6.6 million. The Company continuously monitors these forward exchange contracts and adjusts accordingly to minimize the exposure. The Company also enters into forward exchange contracts to hedge certain other anticipated foreign currency transactions. The purpose of these contracts is to protect the Company from the risk that the eventual functional currency cash flows resulting from anticipated foreign currency transactions will be adversely affected by changes in exchange rates. 35
Foreign Exchange Rates Sensitivity-Contractual Amount by Expected Maturity-Average Contractual Exchange Rate | | | | | | | | | | | | | | | | | | | | December 31, 2005 | | | December 31, 2006 | | | Contract
| | Fair
| | | Contract
| | Fair
| | | | | Amount | | Value | | | In millions | | | Amount | | Value | | | | | (Amounts in millions) | | | | FORWARD EXCHANGE AGREEMENTS: | | | | | | | | | | | | | | | | | | | Receive $US/Pay Yen | | $ | 34.5 | | | $ | 1.7 | | | $ | 31.9 | | | $ | 1.5 | | | | Weighted average contractual exchange rate | | | 110.00 | | | | | | | | 111.27 | | | | | | | | Receive $US/Pay Euro | | $ | 35.2 | | | $ | 0.6 | | | $ | 43.3 | | | $ | (1.0 | ) | | | Weighted average contractual exchange rate | | | 1.22 | | | | | | | | 1.29 | | | | | | | | Receive $US/Pay GBP | | $ | 13.1 | | | $ | 0.3 | | | $ | 13.8 | | | $ | (0.6 | ) | | | Weighted average contractual exchange rate | | | 1.77 | | | | | | | | 1.88 | | | | | | | | Receive SEK/Pay Euro | | $ | 29.8 | | | $ | (0.3 | ) | | $ | 36.2 | | | $ | 0.7 | | | | Weighted average contractual exchange rate | | | 9.28 | | | | | | | | 9.20 | | | | | | | | Receive SEK/Pay GBP | | $ | 13.0 | | | $ | (0.1 | ) | | $ | 15.0 | | | $ | 0.2 | | | | Weighted average contractual exchange rate | | | 13.37 | | | | | | | | 13.44 | | | | | | | | | | | | | |
34
Natural Gas Contracts The Company entered into natural gas swap contracts to hedge prices for a significant portion of its natural gas requirements through December 20062008 with a weighted average contractual rate of $11.24$8.57 per MMBTU. The carrying amount and fair value of the natural gas swap contracts was a liability of $1.2$7.8 million as of December 31, 2005 and2006, which was recorded as $7.6 million in Other Accrued Liabilities and $0.2 million in Other Noncurrent Liabilities in the Consolidated Balance Sheet. Such contracts are designated as cash flow hedges and are accounted for by deferring the quarterly change in fair value of the outstanding contracts in Accumulated Derivative Instruments Gain (Loss).Shareholders’ Equity. On the date a contract matures, the resulting gain or loss is reclassified into Cost of Sales concurrently with the recognition of the commodity purchased. The ineffective portion of the swap contracts change in fair value, if any, would be recognized immediately in earnings. During 2006 and 2005, there was awere minimal amountamounts of ineffective portion related to changes in fair value of natural gas swap contracts. Additionally, there were no amounts excluded from the measure of effectiveness. During 2004, there was no material ineffective portionportions related to changes in fair value of natural gas swap contracts. Additionally, there were no amounts excluded from the measure of effectiveness.
3536
| | ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
INDEX TO FINANCIAL STATEMENTS | | | | | | | Page | | | GRAPHIC PACKAGING CORPORATION | | | | | | | | 3738 | | | | | 38 | | | | | 39 | | | | | 40 | | | | | 41 | | | | | 42 | | | | | 7774 | | | |
36
GRAPHIC PACKAGING CORPORATION
| | | | | | | | | | | December 31,
| | | December 31,
| | | | 2005 | | | 2004 | | | | (Amounts in millions, except share amounts) | | | ASSETS | Current Assets: | | | | | | | | | Cash and Equivalents | | $ | 12.7 | | | $ | 7.3 | | Receivables, Net | | | 216.3 | | | | 214.9 | | Inventories | | | 298.5 | | | | 301.2 | | Deferred Tax Assets | | | 13.1 | | | | — | | Other Current Assets | | | 13.0 | | | | 14.9 | | | | | | | | | | | Total Current Assets | | | 553.6 | | | | 538.3 | | Property, Plant and Equipment, Net | | | 1,551.5 | | | | 1,649.0 | | Goodwill | | | 642.6 | | | | 643.4 | | Intangible Assets, Net | | | 157.3 | | | | 166.6 | | Deferred Tax Assets | | | 350.8 | | | | 364.8 | | Other Assets | | | 100.2 | | | | 103.2 | | | | | | | | | | | Total Assets | | $ | 3,356.0 | | | $ | 3,465.3 | | | | | | | | | | | | LIABILITIES | Current Liabilities: | | | | | | | | | Short Term Debt | | $ | 11.0 | | | $ | 14.2 | | Accounts Payable | | | 209.6 | | | | 200.0 | | Compensation and Employee Benefits | | | 84.4 | | | | 91.9 | | Interest Payable | | | 42.6 | | | | 43.7 | | Other Accrued Liabilities | | | 73.0 | | | | 66.2 | | | | | | | | | | | Total Current Liabilities | | | 420.6 | | | | 416.0 | | Long Term Debt | | | 1,967.3 | | | | 2,011.0 | | Deferred Tax Liabilities | | | 461.5 | | | | 440.0 | | Other Noncurrent Liabilities | | | 237.9 | | | | 211.4 | | | | | | | | | | | Total Liabilities | | | 3,087.3 | | | | 3,078.4 | | | | | | | | | | | | SHAREHOLDERS’ EQUITY | Preferred Stock, par value $.01 per share; 50,000,000 shares authorized; no shares issued or outstanding | | | — | | | | — | | Common Stock, par value $.01 per share; | | | | | | | | | Common Stock, 500,000,000 shares authorized; 198,663,007 and 198,586,108 shares issued and outstanding at December 31, 2005 and 2004, respectively | | | 2.0 | | | | 2.0 | | Capital in Excess of Par Value | | | 1,169.6 | | | | 1,169.2 | | Unearned Compensation | | | (0.1 | ) | | | (0.4 | ) | Accumulated Deficit | | | (800.6 | ) | | | (709.5 | ) | Minimum Pension Liability Adjustment | | | (90.0 | ) | | | (65.2 | ) | Accumulated Derivative Instruments Gain (Loss) | | | 5.2 | | | | (9.0 | ) | Cumulative Currency Translation Adjustment | | | (17.4 | ) | | | (0.2 | ) | | | | | | | | | | Total Shareholders’ Equity | | | 268.7 | | | | 386.9 | | | | | | | | | | | Total Liabilities and Shareholders’ Equity | | $ | 3,356.0 | | | $ | 3,465.3 | | | | | | | | | | |
The accompanying notes are an integral part of the consolidated financial statements.
37
GRAPHIC PACKAGING CORPORATION | | | | | | | | | | | | | | | Year Ended
| | | Year Ended
| | | Year Ended
| | | | December 31,
| | | December 31,
| | | December 31,
| | | | 2005 | | | 2004 | | | 2003 | | | | (Amounts in millions, except per share amounts) | | | Net Sales | | $ | 2,384.0 | | | $ | 2,386.5 | | | $ | 1,683.3 | | Cost of Sales | | | 2,071.3 | | | | 2,026.7 | | | | 1,398.5 | | Selling, General and Administrative | | | 206.1 | | | | 202.3 | | | | 153.1 | | Research, Development and Engineering | | | 9.9 | | | | 9.6 | | | | 7.4 | | Other Expense, Net | | | 9.8 | | | | 32.3 | | | | 18.2 | | | | | | | | | | | | | | | Income from Operations | | | 86.9 | | | | 115.6 | | | | 106.1 | | Loss on Early Extinguishment of Debt | | | — | | | | — | | | | (45.3 | ) | Interest Income | | | 0.6 | | | | 0.6 | | | | 1.0 | | Interest Expense | | | (156.5 | ) | | | (149.6 | ) | | | (144.5 | ) | | | | | | | | | | | | | | Loss before Income Taxes and Equity in Net Earnings of Affiliates | | | (69.0 | ) | | | (33.4 | ) | | | (82.7 | ) | Income Tax Expense | | | (23.3 | ) | | | (28.9 | ) | | | (14.3 | ) | | | | | | | | | | | | | | Loss before Equity in Net Earnings of Affiliates | | | (92.3 | ) | | | (62.3 | ) | | | (97.0 | ) | Equity in Net Earnings of Affiliates | | | 1.2 | | | | 1.4 | | | | 1.3 | | | | | | | | | | | | | | | Net Loss | | $ | (91.1 | ) | | $ | (60.9 | ) | | $ | (95.7 | ) | | | | | | | | | | | | | | Loss Per Share — Basic | | $ | (0.46 | ) | | $ | (0.31 | ) | | $ | (0.65 | ) | Loss Per Share — Diluted | | $ | (0.46 | ) | | $ | (0.31 | ) | | $ | (0.65 | ) | Weighted Average Number of Shares Outstanding — Basic | | | 198.6 | | | | 198.5 | | | | 148.3 | | Weighted Average Number of Shares Outstanding — Diluted | | | 198.6 | | | | 198.5 | | | | 148.3 | |
| | | | | | | | | | | | | December 31, | In millions, except share amounts | | 2006 | | | 2005 | | | | | | ASSETS | | | | | | | | | | | | Current Assets: | | | | | | | | | | | Cash and Equivalents | | $ | 7.3 | | | $ | 12.7 | | | | Receivables, Net | | | 230.9 | | | | 216.3 | | | | Inventories | | | 301.3 | | | | 302.8 | | | | Deferred Tax Assets | | | 11.7 | | | | 13.1 | | | | Other Current Assets | | | 13.1 | | | | 13.0 | | | | | | Total Current Assets | | | 564.3 | | | | 557.9 | | | | | | | | | | | | | | | Property, Plant and Equipment, Net | | | 1,488.7 | | | | 1,576.0 | | | | Goodwill | | | 642.3 | | | | 642.6 | | | | Intangible Assets, Net | | | 148.5 | | | | 157.3 | | | | Deferred Tax Assets | | | 345.0 | | | | 350.8 | | | | Other Assets | | | 44.8 | | | | 71.4 | | | | | | Total Assets | | $ | 3,233.6 | | | $ | 3,356.0 | | | | | | | LIABILITIES | | | | | | | | | | | | Current Liabilities: | | | | | | | | | | | Short-Term Debt | | $ | 12.0 | | | $ | 11.0 | | | | Accounts Payable | | | 214.4 | | | | 209.6 | | | | Compensation and Employee Benefits | | | 63.1 | | | | 58.4 | | | | Interest Payable | | | 48.2 | | | | 42.6 | | | | Other Accrued Liabilities | | | 82.6 | | | | 73.0 | | | | | | Total Current Liabilities | | | 420.3 | | | | 394.6 | | | | | | | | | | | | | | | Long-Term Debt | | | 1,910.7 | | | | 1,967.3 | | | | Deferred Tax Liabilities | | | 475.2 | | | | 461.5 | | | | Accrued Pension and Postretirement Benefits | | | 206.7 | | | | 214.6 | | | | Other Noncurrent Liabilities | | | 39.0 | | | | 49.3 | | | | | | Total Liabilities | | | 3,051.9 | | | | 3,087.3 | | | | | | | | | SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | | Preferred Stock, par value $.01 per share; 50,000,000 shares authorized; no shares issued or outstanding | | | — | | | | — | | | | Common Stock, par value $.01 per share; Common Stock, 500,000,000 shares authorized; 200,584,591 and 198,663,007 shares issued and outstanding at December 31, 2006 and 2005, respectively | | | 2.0 | | | | 2.0 | | | | Capital in Excess of Par Value | | | 1,186.8 | | | | 1,169.6 | | | | Unearned Compensation on Restricted Stock | | | — | | | | (0.1 | ) | | | Accumulated Deficit | | | (901.1 | ) | | | (800.6 | ) | | | Accumulated Other Comprehensive Loss | | | (106.0 | ) | | | (102.2 | ) | | | | | Total Shareholders’ Equity | | | 181.7 | | | | 268.7 | | | | | | Total Liabilities and Shareholders’ Equity | | $ | 3,233.6 | | | $ | 3,356.0 | | | | | |
The accompanying notes are an integral part of the consolidated financial statements. 38
GRAPHIC PACKAGING CORPORATION | | | | | | | | | | | | | | | Year Ended
| | | Year Ended
| | | Year Ended
| | | | December 31,
| | | December 31,
| | | December 31,
| | | | 2005 | | | 2004 | | | 2003 | | | | (Amounts in millions) | | | Net Loss | | $ | (91.1 | ) | | $ | (60.9 | ) | | $ | (95.7 | ) | Other Comprehensive (Loss) Income: | | | | | | | | | | | | | Derivative Instruments Income (Loss), Net of Tax of $0 | | | 14.2 | | | | 3.7 | | | | (6.6 | ) | Minimum Pension Liability Adjustment, Net of Tax of $0 | | | (24.8 | ) | | | (5.0 | ) | | | 11.1 | | Currency Translation Adjustments, Net of Tax of $0 | | | (17.2 | ) | | | 10.4 | | | | 20.1 | | | | | | | | | | | | | | | Comprehensive Loss | | $ | (118.9 | ) | | $ | (51.8 | ) | | $ | (71.1 | ) | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | Year Ended December 31, | In millions, except per share amounts | | 2006 | | | 2005 | | | 2004 | | | | | | Net Sales | | $ | 2,413.0 | | | $ | 2,384.0 | | | $ | 2,386.5 | | | | Cost of Sales | | | 2,109.8 | | | | 2,071.3 | | | | 2,026.7 | | | | Selling, General and Administrative | | | 201.2 | | | | 206.1 | | | | 202.3 | | | | Research, Development and Engineering | | | 11.4 | | | | 9.9 | | | | 9.6 | | | | Other Expense, Net | | | 0.3 | | | | 9.8 | | | | 32.3 | | | | | | Income from Operations | | | 90.3 | | | | 86.9 | | | | 115.6 | | | | | | | | | | | | | | | | | | | Interest Income | | | 0.6 | | | | 0.6 | | | | 0.6 | | | | Interest Expense | | | (172.2 | ) | | | (156.5 | ) | | | (149.6 | ) | | | | | Loss before Income Taxes and Equity in Net Earnings of Affiliates | | | (81.3 | ) | | | (69.0 | ) | | | (33.4 | ) | | | | | | | | | | | | | | | | | | Income Tax Expense | | | (20.2 | ) | | | (23.3 | ) | | | (28.9 | ) | | | | | Loss before Equity in Net Earnings of Affiliates | | | (101.5 | ) | | | (92.3 | ) | | | (62.3 | ) | | | | | | | | | | | | | | | | | | Equity in Net Earnings of Affiliates | | | 1.0 | | | | 1.2 | | | | 1.4 | | | | | | Net Loss | | $ | (100.5 | ) | | $ | (91.1 | ) | | $ | (60.9 | ) | | | | | | | | | | | | | | | | | | | | Loss Per Share — Basic | | $ | (0.50 | ) | | $ | (0.46 | ) | | $ | (0.31 | ) | | | Loss Per Share — Diluted | | $ | (0.50 | ) | | $ | (0.46 | ) | | $ | (0.31 | ) | | | Weighted Average Number of Shares Outstanding — Basic | | | 201.1 | | | | 200.0 | | | | 198.9 | | | | Weighted Average Number of Shares Outstanding — Diluted | | | 201.1 | | | | 200.0 | | | | 198.9 | | | |
The accompanying notes are an integral part of the consolidated financial statements. 39
GRAPHIC PACKAGING CORPORATION | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended
| | Year Ended
| | Year Ended
| | | Year Ended December 31, | | | | | December 31,
| | December 31,
| | December 31,
| | | | | | 2005 | | 2004 | | 2003 | | | In millions | | | 2006 | | 2005 | | 2004 | | | | | (Amounts in millions) | | | | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | | | | Net Loss | | $ | (91.1 | ) | | $ | (60.9 | ) | | $ | (95.7 | ) | | $ | (100.5 | ) | | $ | (91.1 | ) | | $ | (60.9 | ) | | | Noncash Items Included in Net Loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | Depreciation and Amortization | | | 205.3 | | | | 228.9 | | | | 160.4 | | | | 196.0 | | | | 205.3 | | | | 228.9 | | | | Loss on Early Extinguishment of Debt | | | — | | | | — | | | | 16.7 | | | Deferred Income Taxes | | | 24.5 | | | | 23.6 | | | | 11.8 | | | | 19.5 | | | | 24.5 | | | | 23.6 | | | | Pension, Postemployment and Postretirement Benefits Expense, Net of Contributions | | | 9.5 | | | | 24.8 | | | | 18.6 | | | | 3.6 | | | | 9.5 | | | | 24.8 | | | | Amortization of Deferred Debt Issuance Costs | | | 8.3 | | | | 8.7 | | | | 7.6 | | | | 8.8 | | | | 8.3 | | | | 8.7 | | | | Loss on Retirement of Assets | | | 3.7 | | | | 10.8 | | | | 8.4 | | | Asset Retirements (Gain) Loss | | | | (3.2 | ) | | | 3.7 | | | | 10.8 | | | | Impairment Charge | | | | 3.9 | | | | — | | | | — | | | | Other, Net | | | 3.3 | | | | (3.4 | ) | | | 7.0 | | | | 5.9 | | | | 3.3 | | | | (3.4 | ) | | | Changes in Operating Assets & Liabilities | | | 6.0 | | | | 31.3 | | | | 22.0 | | | Changes in Operating Assets & Liabilities (See Note 4) | | | | 2.6 | | | | 5.6 | | | | 33.1 | | | | | | | | | | | | | | | | Net Cash Provided by Operating Activities | | | 169.5 | | | | 263.8 | | | | 156.8 | | | | 136.6 | | | | 169.1 | | | | 265.6 | | | | | | | | | | | | | CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | | | | Capital Spending | | | (95.6 | ) | | | (137.8 | ) | | | (136.6 | ) | | | (94.5 | ) | | | (110.8 | ) | | | (149.1 | ) | | | Acquisition Fees | | | — | | | | — | | | | (93.9 | ) | | Cash Acquired in Merger | | | — | | | | — | | | | 6.1 | | | Proceeds from Sales of Assets, Net of Selling Costs | | | 1.1 | | | | 11.8 | | | | — | | | | 5.5 | | | | 1.1 | | | | 11.8 | | | | Change in Other Assets | | | (20.1 | ) | | | (15.5 | ) | | | 3.5 | | | Other, Net | | | | 3.3 | | | | (4.5 | ) | | | (6.0 | ) | | | | | | | | | | | | | | | Net Cash Used in Investing Activities | | | (114.6 | ) | | | (141.5 | ) | | | (220.9 | ) | | | (85.7 | ) | | | (114.2 | ) | | | (143.3 | ) | | | | | | | | | | | | CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | | | | Borrowing under Revolving Credit Facilities | | | 531.8 | | | | 516.7 | | | | 474.8 | | | | 674.8 | | | | 531.8 | | | | 516.7 | | | | Payments on Revolving Credit Facilities | | | (527.2 | ) | | | (541.0 | ) | | | (456.6 | ) | | | (676.5 | ) | | | (527.2 | ) | | | (541.0 | ) | | | Proceeds from Issuance of Debt | | | — | | | | — | | | | 2,125.0 | | | Increase in Debt Issuance Costs | | | (4.2 | ) | | | (0.9 | ) | | | (57.4 | ) | | | — | | | | (4.2 | ) | | | (0.9 | ) | | | Premium Paid on Early Extinguishment of Debt | | | — | | | | — | | | | (28.6 | ) | | Payment on Debt | | | (50.0 | ) | | | (108.2 | ) | | | (1,989.1 | ) | | | (54.2 | ) | | | (50.0 | ) | | | (108.2 | ) | | | Other | | | 0.5 | | | | 0.4 | | | | (0.8 | ) | | Other, Net | | | | (0.7 | ) | | | 0.5 | | | | 0.4 | | | | | | | | | | | | | Net Cash (Used in) Provided by Financing Activities | | | (49.1 | ) | | | (133.0 | ) | | | 67.3 | | | | | | Net Cash Used in Financing Activities | | | | (56.6 | ) | | | (49.1 | ) | | | (133.0 | ) | | | | | | | | | | | | EFFECT OF EXCHANGE RATE CHANGES ON CASH | | | (0.4 | ) | | | 0.5 | | | | 0.5 | | | | 0.3 | | | | (0.4 | ) | | | 0.5 | | | | | | | | | | | | | Net Increase (Decrease) in Cash and Equivalents | | | 5.4 | | | | (10.2 | ) | | | 3.7 | | | | | | Net (Decrease) Increase in Cash and Equivalents | | | | (5.4 | ) | | | 5.4 | | | | (10.2 | ) | | | Cash and Equivalents at Beginning of Period | | | 7.3 | | | | 17.5 | | | | 13.8 | | | | 12.7 | | | | 7.3 | | | | 17.5 | | | | | | | | | | | | | | | | CASH AND EQUIVALENTS AT END OF PERIOD | | $ | 12.7 | | | $ | 7.3 | | | $ | 17.5 | | | $ | 7.3 | | | $ | 12.7 | | | $ | 7.3 | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of the consolidated financial statements. 40
GRAPHIC PACKAGING CORPORATION | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Class A
| | Class B
| | | | | | | | Minimum
| | Cumulative
| | Accumulated
| | | | | | | | | | | | | | | Accumulated
| | | | | | | | | | Non-Redeemable
| | Non-Redeemable
| | Capital in
| | | | | | Pension
| | Currency
| | Derivative
| | Total
| | | | | | | Capital in
| | | | | | Other
| | | | | | Common Stock | | Common Stock | | Common Stock | | Excess of
| | Unearned
| | Accumulated
| | Liability
| | Translation
| | Instruments
| | Shareholders’
| | | Common Stock | | Excess of
| | Unearned
| | Accumulated
| | Comprehensive
| | Comprehensive
| | In millions, except share amounts | | | Shares | | Amount | | Par Value | | Compensation | | Deficit | | Income (Loss) | | Income (Loss) | | | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Par Value | | Compensation | | Deficit | | Adjustment | | Adjustment | | Gain (Loss) | | Equity | | | | | | (Amounts in millions, except share amounts) | | Balances at December 31, 2003 | | | | 198,378,110 | | | $ | 2.0 | | | $ | 1,168.5 | | | $ | — | | | $ | (648.6 | ) | | $ | (83.5 | ) | | | | | | | Balances at December 31, 2002 | | | — | | | | — | | | | 7,000,000 | | | $ | 0.1 | | | | 500,000 | | | $ | — | | | $ | 748.7 | | | $ | — | | | $ | (552.9 | ) | | $ | (71.3 | ) | | $ | (30.7 | ) | | $ | (6.1 | ) | | $ | 87.8 | | | Net Loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (95.7 | ) | | | — | | | | — | | | | — | | | | (95.7 | ) | | | — | | | | — | | | | — | | | | — | | | | (60.9 | ) | | | — | | | $ | (60.9 | ) | 15.21-to-One Stock Split | | | — | | | | — | | | | 99,470,000 | | | | 1.0 | | | | 7,105,000 | | | | 0.1 | | | | (1.1 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | Non-Redeemable Class A and Class B | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Common Stock Exchange | | | 114,075,000 | | | | 1.2 | | | | (106,470,000 | ) | | | (1.1 | ) | | | (7,605,000 | ) | | | (0.1 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | Redeemable Class A Common Stock Exchange | | | 748,027 | | | | 0.0 | | | | — | | | | — | | | | — | | | | — | | | | 5.9 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 5.9 | | | Common Stock issued in Merger | | | 83,441,490 | | | | 0.8 | | | | — | | | | — | | | | — | | | | — | | | | 414.7 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 415.5 | | | Other Comprehensive Income (Loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated Derivative Instruments Gain | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3.7 | | | | 3.7 | | Minimum Pension Liability Adjustment | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (5.0 | ) | | | (5.0 | ) | Currency Translation Adjustment | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 10.4 | | | | 10.4 | | | | | | | Total Comprehensive Income (Loss) | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | (51.8 | ) | Issuance of Common Stock | | | | 149,828 | | | | — | | | | 0.4 | | | | — | | | | — | | | | — | | | | | | Net Issuance of Restricted Stock, less Amortization | | | | 58,170 | | | | — | | | | 0.3 | | | | (0.4 | ) | | | — | | | | — | | | | | | | | | | | | Balances at December 31, 2004 | | | | 198,586,108 | | | | 2.0 | | | | 1,169.2 | | | | (0.4 | ) | | | (709.5 | ) | | | (74.4 | ) | | | | | | | | Net Loss | | | | — | | | | — | | | | — | | | | — | | | | (91.1 | ) | | | — | | | $ | (91.1 | ) | Other Comprehensive Income (Loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated Derivative Instruments Gain | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 14.2 | | | | 14.2 | | Minimum Pension Liability Adjustment | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (24.8 | ) | | | (24.8 | ) | Currency Translation Adjustment | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (17.2 | ) | | | (17.2 | ) | | | | | | Total Comprehensive Income (Loss) | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | (118.9 | ) | Issuance of Common Stock | | | | 21,189 | | | | — | | | | 0.2 | | | | — | | | | — | | | | — | | | | | | Net Issuance of Restricted Stock, less Amortization | | | | 55,710 | | | | — | | | | 0.2 | | | | 0.3 | | | | — | | | | — | | | | | | | | | | | | Balances at December 31, 2005 | | | | 198,663,007 | | | | 2.0 | | | | 1,169.6 | | | | (0.1 | ) | | | (800.6 | ) | | | (102.2 | ) | | | | | | | | Net Loss | | | | — | | | | — | | | | — | | | | — | | | | (100.5 | ) | | | — | | | $ | (100.5 | ) | Other Comprehensive Income (Loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated Derivative Instruments Loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (6.6 | ) | | | (6.6 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (10.6 | ) | | | (10.6 | ) | Minimum Pension Liability Adjustment | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 11.1 | | | | — | | | | — | | | | 11.1 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 23.3 | | | | 23.3 | | Currency Translation Adjustment | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 20.1 | | | | — | | | | 20.1 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 14.7 | | | | 14.7 | | | | | | | Total Comprehensive Income (Loss) | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | (73.1 | ) | Adjustment to Initially Apply SFAS No. 158 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (31.2 | ) | | | | | Issuance of Common Stock | | | 100,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 0.2 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 0.2 | | | | 2,226,584 | | | | — | | | | 7.7 | | | | — | | | | — | | | | — | | | | | | Net Issuance of Restricted Stock | | | 13,593 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 0.1 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 0.1 | | | Stock-based Compensation | | | | (305,000 | ) | | | — | | | | 9.5 | | | | 0.1 | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balances at December 31, 2003 | | | 198,378,110 | | | | 2.0 | | | | — | | | | — | | | | — | | | | — | | | | 1,168.5 | | | | — | | | | (648.6 | ) | | | (60.2 | ) | | | (10.6 | ) | | | (12.7 | ) | | | 438.4 | | | Net Loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (60.9 | ) | | | — | | | | — | | | | — | | | | (60.9 | ) | | Accumulated Derivative Instruments Loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3.7 | | | | 3.7 | | | Minimum Pension Liability Adjustment | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (5.0 | ) | | | — | | | | — | | | | (5.0 | ) | | Currency Translation Adjustment | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 10.4 | | | | — | | | | 10.4 | | | Issuance of Common Stock | | | 149,828 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 0.4 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 0.4 | | | Net Issuance of Restricted Stock | | | 58,170 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 0.3 | | | | (0.4 | ) | | | — | | | | — | | | | — | | | | — | | | | (0.1 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balances at December 31, 2004 | | | 198,586,108 | | | | 2.0 | | | | — | | | | — | | | | — | | | | — | | | | 1,169.2 | | | | (0.4 | ) | | | (709.5 | ) | | | (65.2 | ) | | | (0.2 | ) | | | (9.0 | ) | | | 386.9 | | | Net Loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (91.1 | ) | | | — | | | | — | | | | — | | | | (91.1 | ) | | Accumulated Derivative Instruments Loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 14.2 | | | | 14.2 | | | Minimum Pension Liability Adjustment | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (24.8 | ) | | | — | | | | — | | | | (24.8 | ) | | Currency Translation Adjustment | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (17.2 | ) | | | — | | | | (17.2 | ) | | Issuance of Common Stock | | | 21,189 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 0.2 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 0.2 | | | Restricted Stock Amortized to Expense | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 0.5 | | | | — | | | | — | | | | — | | | | — | | | | 0.5 | | | Net Issuance of Restricted Stock | | | 55,710 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 0.2 | | | | (0.2 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | Balances at December 31, 2006 | | | | 200,584,591 | | | $ | 2.0 | | | $ | 1,186.8 | | | $ | — | | | $ | (901.1 | ) | | $ | (106.0 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balances at December 31, 2005 | | | 198,663,007 | | | $ | 2.0 | | | | — | | | $ | — | | | | — | | | $ | — | | | $ | 1,169.6 | | | $ | (0.1 | ) | | $ | (800.6 | ) | | $ | (90.0 | ) | | $ | (17.4 | ) | | $ | 5.2 | | | $ | 268.7 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of the consolidated financial statements. 41
GRAPHIC PACKAGING CORPORATION
| | NOTE 1 — | ORGANIZATION AND BASIS OF PRESENTATION |
NOTE 1 — ORGANIZATION Graphic Packaging Corporation (“GPC” and, together with its subsidiaries, the “Company”) is a leading provider of paperboard packaging solutions for a wide variety of products to multinational and other consumer products companies. The Company strives to provide its customers with packaging solutions designed to deliver marketing and performance benefits at a competitive cost by capitalizing on its low-cost paperboard mills and converting plants, its proprietary carton designs and packaging machines, and its commitment to customer service. GPC (formerly known as Riverwood Holding, Inc.) was incorporated on December 7, 1995 under the laws of the State of Delaware. On August 8, 2003, the corporation formerly known as Graphic Packaging International Corporation merged with and into Riverwood Acquisition Sub LLC, a wholly ownedwholly-owned subsidiary of Riverwood Holding, Inc. (“Riverwood Holding”), with Riverwood Acquisition Sub LLC as the surviving entity (the(collectively referred to as the “Merger”). At the closing of the Merger, one share of common stock of Riverwood Holding was exchanged for each share of common stock of Graphic Packaging International Corporation. Riverwood Acquisition Sub LLC then merged into Riverwood Holding, which was renamed Graphic Packaging Corporation. After the Merger, (1) RIC Holding, Inc. merged into Graphic Packaging Holdings, Inc., which was renamed GPI Holding, Inc. and (2) the corporation formerly known as Graphic Packaging Corporation merged into Riverwood International Corporation (“RIC”) which was renamed Graphic Packaging International, Inc. (“Graphic Packaging International”). Graphic Packaging International Corporation and its subsidiaries for periods prior to the Merger are referred to herein as “Graphic.” For accounting purposes, the Merger was accounted for as a purchase by the Company. Under the purchase method of accounting, the assets and liabilities of Graphic were recorded, as of the date of the closing of the Merger, at their respective fair values and added to those of the Company. The difference between the purchase price and the fair market values of the assets acquired and liabilities assumed of Graphic was recorded as goodwill. The historical financial statements of Riverwood Holding became the historical financial statements of Graphic Packaging Corporation. Note 2 provides summary unaudited pro forma information and other information pertaining to the Merger.
Graphic Packaging Corporation and GPI Holding, Inc., its wholly-owned subsidiary, conductGPC conducts no significant business and havehas no independent assets or operations other than theirits ownership of Graphic Packaging International. Graphic Packaging Corporation and GPI Holding,International, Inc. GPC fully and unconditionally guaranteeguarantees substantially all of the debt of Graphic Packaging International.
The Merger was entered into to createInternational, Inc. Effective July 31, 2006, GPI Holding, Inc., formerly a value-added paperboard packaging company. Prior towholly-owned subsidiary of GPC and the Merger, Riverwood Holding had two classesholder of common stock. There were 9.0 million shares of Class A common stock, par value $0.01, authorized with 7.0 million shares outstanding at August 8, 2003. There were 3.0 million shares of Class B common stock, par value $0.01, authorized with 0.5 million shares outstanding at August 8, 2003. In connection with the Merger, the Company’s Board of Directors approved a15.21-to-one stock split. At the time, the Class A and Class B common stock were reclassified as one class of common stock, par value $0.01. Immediately after the stock split, there were 500.0 million shares of common stock authorized with 114.8 million shares outstanding. The aggregate par value100% of the issued common stock was increased by $1.1 million as a result of keeping the par value price $0.01. Accordingly, Capital in Excess of Par Value was decreased $1.1 million. In connection with the Merger, the shareholders of Graphic Packaging International, Corporation received one share of the Company’s common stock and associated shareholder rights for each share of Graphic Packaging International Corporation common stock and associated shareholder rights they owned prior to the Merger. Accordingly, Capital in Excess of Par Value increased $419.5 million.
The Company determined that the relative outstanding share ownership and the designation of certain senior management positions required the Company to be the acquiring entity for accounting purposes, resulting in the historical financial statements of Riverwood Holding becoming the historical financial statements of Graphic Packaging Corporation. The assets and liabilities of the acquired business are included in the consolidated balance sheets at December 31, 2005 and 2004. Results of Graphic have been included in the consolidated statement of operations beginning August 9, 2003 through December 31, 2003. The purchase price for the acquisition, including transaction costs, has been allocated to the assets acquired and liabilities assumed based on the estimated fair market values at the date of the Merger. Goodwill is allocated entirely to
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GRAPHIC PACKAGING CORPORATION Inc., was merged into GPC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 2 — (Continued)ACCOUNTING POLICIES
the paperboard packaging segment and is not deductible for tax purposes. Thestock-for-stock exchange resulted in the issuance of 83.4 million shares of common stock to fund the purchase price of $469.8 million. During 2004, the Company recorded $19.4 million of additional Goodwill as a result of finalizing the purchase price allocation. The final purchase price allocation is as follows:
| | | | | | | (Amounts in millions) | | | Current assets | | $ | 209.6 | | Property, plant & equipment | | | 480.3 | | Goodwill | | | 375.4 | | Intangible assets | | | 162.0 | | Other assets | | | 20.0 | | | | | | | Total assets acquired | | $ | 1,247.3 | | | | | | | Accounts payable and accrued expenses | | $ | 150.5 | | Total debt | | | 496.6 | | Pension and other post-retirement liabilities, assumed merger related liabilities, and other | | | 130.4 | | | | | | | Total liabilities assumed | | $ | 777.5 | | | | | | | See also Note 17 — RESTRUCTURING CHARGES | | | | |
Selected Unaudited Pro Forma Combined Financial Information
The following unaudited pro forma combined financial information is presented to show the estimated effect of the Merger and the related financing transactions and represents the Company’s pro forma combined financial information for the years ended December 31, 2003 as if the Merger and related financing transactions had occurred on January 1, 2003. The unaudited pro forma combined financial information includes adjustments directly attributable to the Merger and the related financing transactions that are expected to have a continuing impact on the Company. The pro forma adjustments are based upon available information and certain assumptions that management believes are reasonable.
The pro forma financial information was prepared using the purchase method of accounting, with the Company treated as the acquirer for accounting purposes. Under purchase accounting, the total cost of the Merger is allocated to the tangible and intangible assets acquired and liabilities assumed based upon their respective fair values at the effective date of the Merger. The allocation of the cost of the Merger has been made based upon currently available information and management’s estimates.
The pro forma financial information is based on the Company’s actual financial results for the period indicated and the historical results of Graphic from the beginning of the period presented through the date of the Merger. The pro forma financial information has been prepared in accordance with accounting principles generally accepted in the United States of America and is provided for comparison and analysis purposes only. The unaudited pro forma combined financial information does not purport to represent the combined company’s results of operations or financial condition had the Merger and related financing transactions
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
actually occurred as of such dates or of the results that the combined company would have achieved after the Merger. The unaudited pro forma combined financial information is as follows:
Combined Company
Unaudited Condensed Pro Forma Combined Statement of Operations
For the Year Ended December 31, 2003
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Condensed
| | | | | | | | | | Pro Forma
| | | Pro Forma
| | | | Company | | | Graphic | | | Adjustments | | | Combined | | | | (Amounts in millions, except per share amounts) | | | Net Sales | | $ | 1,683.3 | | | $ | 650.8 | | | $ | (38.0 | )A | | $ | 2,296.1 | | Cost of Sales | | | 1,398.5 | | | | 581.7 | | | | (45.0 | )A | | | 1,933.9 | | | | | | | | | | | | | (1.3 | )B | | | | | Selling, General and Administrative, Research,Development and Engineering | | | 178.7 | | | | 44.0 | | | | 18.0 | B | | | 240.7 | | | | | | | | | | | | | | | | | | | Income from Operations | | | 106.1 | | | | 25.1 | | | | (9.7 | ) | | | 121.5 | | Interest Expense, Net | | | (143.5 | ) | | | (23.0 | ) | | | 18.4 | C | | | (148.1 | ) | Loss on Early Extinguishment of Debt | | | (45.3 | ) | | | (1.3 | ) | | | — | | | | (46.6 | ) | | | | | | | | | | | | | | | | | | (Loss) Income before Income Taxes and Equity in Net Earnings of Affiliates | | | (82.7 | ) | | | 0.8 | | | | 8.7 | | | | (73.2 | ) | Income Tax Expense | | | (14.3 | ) | | | (1.0 | ) | | | — | | | | (15.3 | ) | | | | | | | | | | | | | | | | | | Loss before Equity in Net Earnings of Affiliates | | | (97.0 | ) | | | (0.2 | ) | | | 8.7 | | | | (88.5 | ) | Equity in Net Earnings of Affiliates | | | 1.3 | | | | — | | | | — | | | | 1.3 | | | | | | | | | | | | | | | | | | | Net Loss | | | (95.7 | ) | | | (0.2 | ) | | | 8.7 | | | | (87.2 | ) | Preferred Stock Dividends Declared | | | — | | | | 6.1 | | | | (6.1 | )D | | | — | | | | | | | | | | | | | | | | | | | Net Loss Attributable to Common Stockholders | | $ | (95.7 | ) | | $ | (6.3 | ) | | $ | 14.8 | | | $ | (87.2 | ) | | | | | | | | | | | | | | | | | | Loss Per Share — Basic | | $ | (0.65 | ) | | | | | | | | | | $ | (0.44 | ) | Loss Per Share — Diluted | | $ | (0.65 | ) | | | | | | | | | | $ | (0.44 | ) | Weighted Average Number of Shares Outstanding: | | | | | | | | | | | | | | | | | Basic | | | 148.3 | | | | | | | | | | | | 198.3 | | Diluted | | | 148.3 | | | | | | | | | | | | 198.3 | |
Adjustments in the unaudited condensed pro forma combined financial statements are as follows:
A RIC sold coated unbleached kraft paperboard (“CUK”) folding boxboard to Graphic for use in certain cartons manufactured by Graphic. This pro forma adjustment eliminates the intercompany sales and cost of sales $38.0 million for the period ended August 8, 2003, related to this activity. Cost of Sales also includes an adjustment of approximately $7 million related to a one-time non-recurring item which was the result of the Merger. The approximately $7 million adjustment is to eliminate the purchase accounting requirement tostep-up the fair value of the acquired inventory.
B The amortization of the identifiable intangible assets (customer contracts, patents and proprietary technology) is reflected as a pro forma adjustment to the unaudited condensed pro forma combined statement of operations. The Company is amortizing the estimated fair value of the identifiable intangibles of approximately $162.0 million on a straight-line basis over an average estimated useful life of eighteen years, except for non-compete agreements which have an estimated useful life of approximately one year. Depreciation expense would have decreased by $1.3 million for the year ended
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2003 as a result of the Company revising the depreciable asset lives and the fair value of the property purchased in the Merger. The net effect of this increased amortization and decreased depreciation of $16.7 million for the year ended December 31, 2003, is reflected in the unaudited condensed pro forma combined statement of operations as follows:
| | | | | | | Year Ended
| | | | December 31,
| | | | 2003 | | | Cost of Sales | | $ | (1.3 | ) | Selling, General and Administrative, Research, Development and Engineering | | | 18.0 | | | | | | | Total Net Additional Amortization and Depreciation of Intangible Assets and Property, Plant and Equipment | | $ | 16.7 | | | | | | |
The asset lives were revised as a result of the valuation provided by a third party engaged by the Company to estimate the fair value and remaining useful lives of certain tangible and intangible assets of Graphic.
C In connection with the Merger, substantially all of RIC’s and Graphic’s then outstanding indebtedness was redeemed, repurchased or otherwise repaid and replaced with borrowings under the Senior Secured Credit Agreement and indebtedness under the Senior Notes and Senior Subordinated Notes. The condensed pro forma combined interest expense reflects an average variable interest rate of 3.9% for the combined company’s new bank debt and a blended fixed rate of 9.0% on the combined company’s Senior Notes and Senior Subordinated Notes.
D To reflect the new equity structure of the Company, including conversion of $100 million of Graphic’s convertible preferred stock into common stock (accordingly there is no preferred stock dividend declared).
| | NOTE 3 — | ACCOUNTING POLICIES |
(A) BASIS OF PRESENTATION The Company’s Consolidated Financial Statements include all subsidiaries in which the Company has the ability to exercise direct or indirect control over operating and financial policies. The accompanying consolidated financial statements include the worldwide operations of the Paperboard Packaging segment which includes the paperboard, packaging, and packaging machinery businesses and the Containerboard/Other segment. Intercompany transactions and balances are eliminated in consolidation. The Company has reclassified the presentation of certain prior period information to conform to the current presentation format. The Company holds a 50% ownership interest in a joint venture with Rengo Company Limited (in Japan) which is accounted for using the equity method. (B) USE OF ESTIMATES The preparation of financial statements in conformity with U.S.accounting principles generally accepted accounting principlesin the United States (“U.S.”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting periods. Actual results could differ from these estimates, and changes in these estimates are recorded when known. Estimates are used in accounting for, among other things, pension benefits, retained insurable risks, excessslow-moving and obsolete inventory, allowance for doubtful accounts, useful lives for depreciation and amortization, future cash flows associated with impairment testing of goodwill and long-term assets, deferred tax assets and potential income tax assessments, and contingencies.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(C) CASH AND EQUIVALENTS Cash and equivalents include time deposits, certificates of deposit and other marketable securities with original maturities of three months or less. 42
GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (D) INVENTORIES Inventories are stated at the lower of cost or market with cost determined principally by thefirst-in,first-out (“FIFO”) basis. Average cost basis is used to determine the cost of supplies inventories. Raw materials and consumables used in the production process such as wood chips and chemicals are valued at purchase cost on a FIFO basis upon receipt. Work in progress and finished goods inventories are valued at the cost of raw material consumed plus direct manufacturing costs (such as labor, utilities and supplies) as incurred and a proportionan applicable portion of manufacturing overhead. Inventories are stated net of an allowance for slow-moving and obsolete inventory, which is based on estimates. During the fourth quarter of 2003, the Company changed its method of determining the cost of inventories from the LIFO method to the FIFO method. Prior to 2003, the majority of the Company’s operations used the LIFO method of valuing inventory. The Company has concluded that the FIFO method will result in a better measurement of current inventory costs with revenues because the Company’s operations have realized and expect to continue to realize cost reductions in its manufacturing operations.
(E) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. Betterments, renewals and extraordinary repairs that extend the life of the asset are capitalized; other repairs and maintenance charges are expensed as incurred. The Company’s cost and related accumulated depreciation applicable to assets retired or sold are removed from the accounts and the gain or loss on disposition is recognizedincluded in income.income from operations. Costs directly associated with the development and testing of internally used computer information systems for internal use are deferredcapitalized and included in property, plant and equipment. Such costs are amortizeddepreciated on a straight-line basis over the expected useful life of 5 years.years as part of property, plant and equipment. Costs indirectly associated with such projects and ongoing maintenance costs are expensed as incurred. A total of $5.8$1.3 million and $7.3$5.8 million in costs relating to software development were capitalized in 2006 and 2005, and 2004, respectively, and were included in property, plant and equipment at December 31, 2005 and 2004.respectively. Interest is capitalized on major projects. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset’s estimated useful life. Capitalized interest was approximately$0.6 million, $2.5 million $3.8 million and $1.6$3.8 million in the years ended December 31, 2006, 2005 2004 and 2003,2004, respectively. (F) DEPRECIATION AND AMORTIZATION, AND IMPAIRMENT Depreciation is principally computed using the straight-line method based on the following estimated useful lives of the related assets: | | | | | | | Buildings | | | 40 years | | Land improvements | | | 15 years | | Machinery and equipment | | | 3 to 40 years | | Furniture and fixtures | | | 10 years | | Automobiles and light trucks | | | 3 to 5 years | | | |
For certain major capital additions, the Company computes depreciation on theunits-of-production method until the asset’s designed level of production is achieved and sustained.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company assesses its long-lived assets, including goodwill and certain identifiable intangibles, for impairment whenever events or circumstances indicate that the carrying value of an asset may not be recoverable. To analyze recoverability, the Company projects future cash flows, undiscounted and before interest, over the remaining life of such assets. If these projected cash flows are less than the carrying amount, an impairment would be recognized, resulting in a write-down of assets with a corresponding charge to earnings. The impairment loss is measured based upon the difference between the carrying amount and the fair value of the assets. The Company assesses the appropriateness of the useful life of its long-lived assets periodically. Intangible assets with a determinable life are amortized on a straight-line basis over that period. The related amortization expense is included in Other Expense, Net. 43
GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The following table displays the intangible assets that continue to be subject to amortization and aggregate amortization expense as well as intangible assets not subject to amortization as of December 31, 20052006 and 2004:2005: | | | | | | | | | | | | | | | As of December 31, 2005 | | | | Gross Carrying
| | | Accumulated
| | | Net Carrying
| | | | Amount | | | Amortization | | | Amount | | | | (Amounts in millions) | | | Amortizable Intangible Assets: | | | | | | | | | | | | | Customer Relationships | | $ | 109.9 | | | $ | 12.5 | | | $ | 97.4 | | Non-Compete Agreements | | | 23.3 | | | | 23.2 | | | | 0.1 | | Patents, Trademarks and Licenses | | | 101.0 | | | | 41.2 | | | | 59.8 | | | | | | | | | | | | | | | | | $ | 234.2 | | | $ | 76.9 | | | $ | 157.3 | | | | | | | | | | | | | | | Unamortizable Intangible Assets: | | | | | | | | | | | | | Goodwill | | $ | 642.6 | | | | — | | | $ | 642.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2004 | | | December 31, 2006 | | December 31, 2005 | | | | Gross Carrying
| | Accumulated
| | Net Carrying
| | | Gross
| | | | | | Gross
| | | | | | | | | Carrying
| | Accumulated
| | Net Carrying
| | Carrying
| | Accumulated
| | Net Carrying
| | In millions | | | Amount | | Amortization | | Amount | | Amount | | Amortization | | Amount | | | | Amount | | Amortization | | Amount | | | | | Amortizable Intangible Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Customer Relationships | | $ | 109.9 | | | $ | 7.3 | | | $ | 102.6 | | | $ | 109.9 | | | $ | 17.8 | | | $ | 92.1 | | | $ | 109.9 | | | $ | 12.5 | | | $ | 97.4 | | Non-Compete Agreements | | | 23.3 | | | | 22.9 | | | | 0.4 | | | | 23.3 | | | | 23.3 | | | | — | | | | 23.3 | | | | 23.2 | | | | 0.1 | | Patents, Trademarks and Licenses | | | 98.5 | | | | 34.9 | | | | 63.6 | | | | 104.0 | | | | 47.6 | | | | 56.4 | | | | 101.0 | | | | 41.2 | | | | 59.8 | | | | | | | | | | | | | $ | 231.7 | | | $ | 65.1 | | | $ | 166.6 | | | | | | | | | | | | $ | 237.2 | | | $ | 88.7 | | | $ | 148.5 | | | $ | 234.2 | | | $ | 76.9 | | | $ | 157.3 | | | | | | | | Unamortizable Intangible Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Goodwill | | $ | 643.4 | | | | — | | | $ | 643.4 | | | $ | 642.3 | | | $ | — | | | $ | 642.3 | | | $ | 642.6 | | | $ | — | | | $ | 642.6 | | | | | | | |
The Company recorded amortization expense of $11.8 million, $27.0$11.8 million and $14.0$27.0 million for the years ended December 31, 2006, 2005 2004 and 2003,2004, respectively, relating to intangible assets subject to amortization. The Company expects amortization expense to be approximately $12 million per year for 20062007 through 2010.2011. (G) INTERNATIONAL CURRENCY The functional currency of the international subsidiaries is the local currency for the country in which the subsidiaries own their primary assets. The translation of the applicable currencies into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period. Any related
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GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
translation adjustments are recorded directly to Shareholders’ Equity. Gains and losses on foreign currency transactions are included in Other Expense, Net for the period in which the exchange rate changes. The Company pursues a currency hedging program which utilizes derivatives to limit the impact of foreign currency exchange fluctuations on its consolidated financial results. Under this program, the Company has entered into forward exchange contracts in the normal course of business to hedge certain foreign currency denominated transactions. Realized and unrealized gains and losses on these forward contracts are included in the measurement of the basis of the related foreign currency transaction when recorded. (H) INCOME TAXES The Company accounts for income taxes under the asset and liability method, which requires that deferred tax assets or liabilities be recorded based on the difference between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. These assets and liabilities are measured using the enacted tax rates and laws that are currently in effect. Subsequent changes in the tax laws will require adjustment to the assets and liabilities. A valuation allowance is established for deferred tax assets when it is more likely than not that the benefits of such assets will not be realized. (I) REVENUE RECOGNITION The Company receives revenue from the sales of manufactured products, the leasing of packaging machinery and the servicing of packaging machinery. The Company recognizes sales revenue when all of the 44
GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) following criteria are met: persuasive evidence of an agreement exists, delivery has occurred or services have been rendered, the Company’s price to the buyer is fixed and determinable and collectibility is reasonably assured. Delivery is not considered to have occurred until the customer takes title and assumes the risks and rewards of ownership. The timing of revenue recognition is largely dependent on shipping terms. Revenue is recorded at the time of shipment for terms designated as free on board (“f.o.b.”) shipping point. For sales transactions designated f.o.b. destination, revenue is recorded when title to the product is deliveredpasses upon delivery to the customer’s delivery site.customer. The Company recognizes revenues on its annual and multi-year carton supply contracts as the shipment occurs in accordance with the shipping terms discussed above. Payments from packaging machinery use agreements are recognized on a straight-line basis over the term of the agreements. Service revenue on packaging machinery is recorded at the time of service. Discounts and allowances are comprised of trade allowances and rebates, cash discounts and sales returns. Cash discounts and sales returns are estimated using historical experience. Trade allowances are based on the estimated obligations and historical experience. Customer rebates are determined based on the quantity purchased and are recorded at the time of sale. (J) RETAINED INSURABLE RISK It is the Company’s policy to self-insure or fund a portion of certain expected losses related to group health benefits and workers’ compensation claims. Provisions for expected losses are recorded based on the Company’s estimates, on an undiscounted basis, of the aggregate liabilities for known claims and estimated claims incurred but not reported. (K) ENVIRONMENTAL REMEDIATION RESERVES The Company records accruals for environmental obligations based on estimates developed in consultation with environmental consultants and legal counsel. Accruals for environmental liabilities are established in accordance with the American Institute of Certified Public Accountants Statement of Position96-1, “Environmental “Environmental Remediation Liabilities.Liabilities.” The Company records a liability at the time it is probable and can be
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GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
reasonably estimated. Such liabilities are not reduced for potential recoveries from insurance carriers. Costs of future expenditures are not discounted to their present value. (L) STOCK-BASED COMPENSATION As permitted byEffective January 1, 2006, the Company adopted the fair value recognition provisions of the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123 “Accounting123(R),“Share-Based Payment” (“SFAS No. 123R”), using the modified-prospective transition method. The modified-prospective transition method applies to new awards granted, unvested awards as of the date of adoption, and to awards modified, repurchased, or cancelled after the date of adoption. Stock-based compensation expense for Stock-Based Compensation,”all share-based payment awards granted after January 1, 2006 is based on the Company continuesgrant-date fair value estimated in accordance with the provisions of SFAS No. 123R.
Prior to apply intrinsic value accountingJanuary 1, 2006, the Company’s stock options were accounted for its stock option plans under Accounting Principles Boardthe recognition and measurement provisions of APB Opinion No. 25, (“APB 25”), “Accounting“Accounting for Stock Issued to Employees.” Compensation cost for stock options, if any, is measuredEmployees” and related interpretations, as the excess of the market price of the Company’s common stock at the date of grant over the exercise price to be paidpermitted by the grantee to acquire the stock. The Company has adopted disclosure-only provisions of SFAS No. 123 and SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an Amendment of FASB Statement No. 123.” 123,“Accounting for Stock-Based Compensation” (“SFAS No. 123”). 45
GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) If the Company had elected to recognize compensation expense based upon the fair valuefor awards under these plans at the grant dates for awards under these plans,using the fair value recognition provisions of SFAS No. 123, the Company’s Net Loss would have been as follows: | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | | 2005 | | 2004 | | 2003 | | | In millions, except share amounts | | | 2005 | | 2004 | | | | | (Amounts in millions, except per share amounts) | | | | Net Loss, As Reported | | $ | (91.1 | ) | | $ | (60.9 | ) | | $ | (95.7 | ) | | $ | (91.1 | ) | | $ | (60.9 | ) | | | Add: Stock-Based Employee Compensation Expense Included in Reported Net Loss | | | — | | | | (0.7 | ) | | | 0.9 | | | | — | | | | (0.7 | ) | | | Deduct: Total Stock-Based Employee Compensation Expense Determined Under Fair Value Based Method for All Awards | | | (5.5 | ) | | | (8.5 | ) | | | (0.3 | ) | | | (5.5 | ) | | | (8.5 | ) | | | | | | | | | | | | | | | Adjusted Net Loss | | $ | (96.6 | ) | | $ | (70.1 | ) | | $ | (95.1 | ) | | $ | (96.6 | ) | | $ | (70.1 | ) | | | | | | | | | | | | | | | | | | Loss Per Basic Share-As Reported | | $ | (0.46 | ) | | $ | (0.31 | ) | | $ | (0.65 | ) | | $ | (0.46 | ) | | $ | (0.31 | ) | | | Loss Per Basic Share-As Adjusted | | $ | (0.49 | ) | | $ | (0.35 | ) | | $ | (0.64 | ) | | | (0.48 | ) | | | (0.35 | ) | | | Loss Per Diluted Share-As Reported | | $ | (0.46 | ) | | $ | (0.31 | ) | | $ | (0.65 | ) | | | (0.46 | ) | | | (0.31 | ) | | | Loss Per Diluted Share-As Adjusted | | $ | (0.49 | ) | | $ | (0.35 | ) | | $ | (0.64 | ) | | | (0.48 | ) | | | (0.35 | ) | | |
On December 8, 2005, the Compensation and Benefits Committee of the Board of Directors of the Company approved the acceleration of the vesting of all of the unvested stock options granted to employees of the Company so that such options vested immediately. The action affected 1,835,268 stock options, 1,762,768 of which havehad exercise prices in excess of the current market price of the Company’s common stock. The action is expected to reducereduced the Company’s future compensation expense by $3.2 million. The $3.2 million related to this calculation is included in the $5.5 million deduction for 2005 in the table above. The adoption of SFAS No. 123R on January 1, 2006 did not have a material impact on its financial position, results of operations or cash flows. (M) RESEARCH AND DEVELOPMENT Research and development costs, which relate primarily to the development and design of new packaging machines and products are expensed as incurred. Expenses for the years ended December 31, 2006, 2005 and 2004 and 2003 were $11.4 million, $9.9 million $9.6 million and $7.4$9.6 million, respectively. (N) SHIPPING AND HANDLING COSTS The Company includes shipping and handling costs in Cost of Sales.
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GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(O) RECENT ACCOUNTING PRONOUNCEMENTS In November 2004, the Financial Accounting Standards Board (“FASB”)FASB issued SFAS No. 151, “Inventory“Inventory Costs, an Amendment of ARB No. 43, Chapter 4 “(“4” (“SFAS No. 151”), which is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. SFAS No. 151 addresses financial accounting and reporting for inventory costs. The Company does not believe the adoption of SFAS No. 151 willdid not have a material impact on itsthe Company’s financial position, and results of operations.operations or cash flows. In December 2004, the FASB issued SFAS No. 153, “Exchanges“Exchanges of Nonmonetary Assets, an Amendment of APB Opinion No. 29” (“SFAS No. 153”), which is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets. The adoption of SFAS No. 153 did not have a material impact on the Company’s financial position, and results of operations.operations or cash flows. 46
GRAPHIC PACKAGING CORPORATION
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS No. 123R”) which is effective for new awards and awards modified or settled occurring in fiscal years beginning after December 15, 2004. SFAS No. 123R amends and clarifies the accounting for stock compensation plans under SFAS No. 123, “Accounting for Stock-Based Compensation.” The Company previously reported that it will adopt SFAS No. 123R for the quarter ending September 30, 2005. On April 14, 2005, however, the Securities and Exchange Commission (“SEC”) deferred the required adoption date of SFAS No. 123R to the beginning of the first quarter of 2006, at which time the Company will adopt SFAS No. 123R. As previously mentioned, the Company accelerated the vesting of options and does not believe that such adoption of SFAS No. 123R will have a material impact on its financial position and results of operations.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Financial Accounting Standards Board Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN No. 47”), was issued in March 2005 and is effective no later than the end of fiscal years ending after December 15, 2005. FIN No. 47 clarifies the term conditional asset retirement obligation as used in FASB Statement No. 143, “Accounting for Asset Retirement Obligations.” The adoption of FIN No. 47 did not have a material impact on the Company’s financial position and results of operations.
In May 2005, the FASB issued SFAS No. 154, “Accounting“Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and Statement No. 3” (“SFAS No. 154”). Previously, APB Opinion No. 20 “Accounting“Accounting Changes” and SFAS No. 3 “Reporting“Reporting Accounting Changes in Interim Financial Statements” required the inclusion of the cumulative effect of changes in accounting principle in net income of the period of the change. SFAS No. 154, which is effective January 1, 2006, requires companies to recognize a change in accounting principle, including a change required in a new accounting pronouncement when the pronouncement does not include specific transition provisions, retrospectively to prior periods’ financial statements. The Company will assess the impact of a change in accounting principle in accordance with SFAS No. 154 when such a change arises after the effective date of January 1, 2006. | | NOTE 4 — | SUPPLEMENTAL BALANCE SHEET DATA |
The components of receivables at December 31 were as follows:
| | | | | | | | | | | 2005 | | | 2004 | | | | (Amounts in millions) | | | Trade | | $ | 200.4 | | | $ | 207.7 | | Less, allowance | | | 2.8 | | | | 3.7 | | | | | | | | | | | | | | 197.6 | | | | 204.0 | | Other | | | 18.7 | | | | 10.9 | | | | | | | | | | | | | $ | 216.3 | | | $ | 214.9 | | | | | | | | | | |
50
GRAPHIC PACKAGING CORPORATION arises.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSIn July 2006, the FASB issued FASB Interpretation No. 48,“Accounting for Uncertainty in Income Taxes — (Continued)
an interpretation of FASB Statement 109” (“FIN No. 48”). FIN No. 48 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken on an income tax return. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The major classesCompany is evaluating its uncertain tax positions and does not expect the interpretation will have a material impact on its financial position, results of inventories at December 31 were as follows: | | | | | | | | | | | 2005 | | | 2004 | | | | (Amounts in millions) | | | Finished goods | | $ | 164.2 | | | $ | 166.9 | | Work in progress | | | 22.7 | | | | 14.9 | | Raw materials | | | 67.3 | | | | 76.2 | | Supplies | | | 44.3 | | | | 43.2 | | | | | | | | | | | | | $ | 298.5 | | | $ | 301.2 | | | | | | | | | | |
operations or cash flows. In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements,” which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The componentsCompany is currently evaluating the impact of Property, PlantSFAS No. 157, but does not expect the adoption of SFAS No. 157 to have a material impact on its financial position, results of operations or cash flows. In September 2006, the FASB issued SFAS No. 158,“Employer’s Accounting for Defined Benefit Pension and Equipment atOther Postretirement Plans (an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS No. 158”). Among other items, SFAS No. 158 requires recognition of the overfunded or underfunded status of an entity’s defined benefit postretirement plan as an asset or liability in the financial statements, requires the measurement of defined benefit postretirement plan assets and obligations as of the end of the employer’s fiscal year, and requires recognition of the funded status of defined benefit postretirement plans in other comprehensive income. SFAS No. 158 is effective for fiscal years ending after December 15, 2006. Based on the Company’s unfunded obligation as of December 31, were as follows: | | | | | | | | | | | 2005 | | | 2004 | | | Property, Plant and Equipment, at Cost | | | | | | | | | Land and Improvements | | $ | 57.1 | | | $ | 60.3 | | Buildings | | | 227.2 | | | | 226.4 | | Machinery and Equipment | | | 2,496.0 | | | | 2,441.0 | | | | | | | | | | | | | | 2,780.3 | | | | 2,727.7 | | Less: Accumulated Depreciation | | | 1,228.8 | | | | 1,078.7 | | | | | | | | | | | Property, Plant and Equipment, Net | | $ | 1,551.5 | | | $ | 1,649.0 | | | | | | | | | | |
2006, the adoption of SFAS No. 158, decreased Total Assets by $7.8 million, increased Total Liabilities by $23.4 million and reduced Shareholders’ Equity by $31.2 million. The adoption of SFAS No. 158 did not affect the Company’s results of operations. For a further discussion regarding SFAS No. 158 see Note 9. Other Assets included atIn September 2006, the FASB issued FASB Staff Position AUG AIR-1,“Accounting for Planned Major Maintenance Activities” (“FSP AUG AIR-1”) which is effective for fiscal years beginning after December 31, consisted15, 2006. This position statement eliminates theaccrue-in-advance method of accounting for planned major maintenance activities. The Company does not expect the adoption of FSP AUG AIR-1 to have a material impact on its financial position, results of operations or cash flows.
In September 2006, the Securities and Exchange Commission released Staff Accounting Bulletin No. 108,“Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB No. 108”), which provides interpretive guidance on how the effects of the following: | | | | | | | | | | | 2005 | | | 2004 | | | | (Amounts in millions) | | | Deferred debt issuance costs, net | | $ | 43.8 | | | $ | 47.8 | | Capitalized spare parts | | | 28.7 | | | | 26.7 | | Pension intangible asset | | | 8.2 | | | | 10.7 | | Assets held for sale | | | 3.9 | | | | 1.5 | | Other | | | 15.6 | | | | 16.5 | | | | | | | | | | | | | $ | 100.2 | | | $ | 103.2 | | | | | | | | | | |
Other Noncurrent Liabilities included at December 31, consistedcarryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both a balance sheet and income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB No. 108 is effective for annual financial statements covering the following:
| | | | | | | | | | | 2005 | | | 2004 | | | | (Amounts in millions) | | | Accrued Retirement and Post Employment Benefits | | $ | 189.7 | | | $ | 168.1 | | Deferred Revenue | | | 19.2 | | | | 18.7 | | Other | | | 29.0 | | | | 24.6 | | | | | | | | | | | | | $ | 237.9 | | | $ | 211.4 | | | | | | | | | | |
first fiscal year ending after November 15, 2006. The adoption of SAB No. 108 did not have an effect on the Company’s financial position, results of operations or cash flows.
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GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) | | NOTE 53 — | SUPPLEMENTAL CASH FLOW INFORMATIONBALANCE SHEET DATA |
The components of changes in operating assets and liabilities for the year ended December 31 were as follows:Receivables, Net:
| | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | (Amounts in millions) | | | Receivables | | $ | (9.1 | ) | | $ | (9.5 | ) | | $ | 26.5 | | Inventories | | | (7.2 | ) | | | 5.6 | | | | (14.6 | ) | Prepaid Expenses | | | 6.9 | | | | 4.3 | | | | 1.4 | | Accounts Payable | | | 12.8 | | | | 18.2 | | | | 30.3 | | Compensation and Employee Benefits | | | (11.2 | ) | | | 3.2 | | | | 5.6 | | Income Taxes | | | (0.2 | ) | | | (2.0 | ) | | | (3.8 | ) | Other Accrued Liabilities | | | 13.1 | | | | 1.5 | | | | (22.4 | ) | Other Noncurrent Liabilities | | | 0.9 | | | | 10.0 | | | | (1.0 | ) | | | | | | | | | | | | | | | | $ | 6.0 | | | $ | 31.3 | | | $ | 22.0 | | | | | | | | | | | | | | |
| | | | | | | | | In millions | | 2006 | | | 2005 | | | | | Trade | | $ | 214.6 | | | $ | 200.4 | | Less, Allowance | | | 2.4 | | | | 2.8 | | | | | | | 212.2 | | | | 197.6 | | Other | | | 18.7 | | | | 18.7 | | | | Total | | $ | 230.9 | | | $ | 216.3 | | | |
Cash paid for interest and cash paid, net of refunds, for income taxes was as follows:Inventories by Major Class:
| | | | | | | | | | | | | | | Year Ended
| | | Year Ended
| | | Year Ended
| | | | Dec. 31, 2005 | | | Dec. 31, 2004 | | | Dec. 31, 2003 | | | | (In millions of dollars) | | | Interest | | $ | 151.8 | | | $ | 131.6 | | | $ | 156.2 | | Income Taxes | | $ | 1.0 | | | $ | 3.5 | | | $ | 3.9 | |
Short-Term Debt at December 31, consisted of the following:
| | | | | | | | | | | 2005 | | | 2004 | | | | (Amounts in millions) | | | Short-term borrowings | | $ | 9.8 | | | $ | 13.4 | | Current portion of long-term debt | | | 1.2 | | | | 0.8 | | | | | | | | | | | | | $ | 11.0 | | | $ | 14.2 | | | | | | | | | | |
| | | | | | | | | In millions | | 2006 | | | 2005 | | | | | Finished Goods | | $ | 159.4 | | | $ | 169.5 | | Work in Progress | | | 22.1 | | | | 22.7 | | Raw Materials | | | 71.9 | | | | 68.7 | | Supplies | | | 56.8 | | | | 51.0 | | | | | | | 310.2 | | | | 311.9 | | Less, Allowance | | | 8.9 | | | | 9.1 | | | | Total | | $ | 301.3 | | | $ | 302.8 | | | |
Short-term borrowings are principally at the Company’s international subsidiaries. The weighted average interest rate on short-term borrowings as of December 31, 2005Property, Plant and 2004 was 2.2% and 2.1%, respectively.Equipment, Net:
| | | | | | | | | In millions | | 2006 | | | 2005 | | | | | Property, Plant and Equipment, at Cost | | | | | | | | | Land and Improvements | | $ | 59.6 | | | $ | 57.1 | | Buildings | | | 237.6 | | | | 227.2 | | Machinery and Equipment | | | 2,581.6 | | | | 2,520.5 | | | | | | | 2,878.8 | | | | 2,804.8 | | Less: Accumulated Depreciation | | | 1,390.1 | | | | 1,228.8 | | | | Total | | $ | 1,488.7 | | | $ | 1,576.0 | | | |
Other Assets: | | | | | | | | | In millions | | 2006 | | | 2005 | | | | | Deferred Debt Issuance Costs, Net of Amortization of $23.2 and $14.4 for 2006 and 2005, respectively | | $ | 35.0 | | | $ | 43.8 | | Pension Intangible Asset | | | — | | | | 8.2 | | Assets Held for Sale | | | 1.2 | | | | 3.9 | | Other | | | 8.6 | | | | 15.5 | | | | Total | | $ | 44.8 | | | $ | 71.4 | | | |
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GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) NOTE 4 — SUPPLEMENTAL CASH FLOW INFORMATION Cash Flow Effects of (Increases) Decreases in Operating Assets and Liabilities: | | | | | | | | | | | | | | | In millions | | 2006 | | | 2005 | | | 2004 | | | | | | Receivables | | $ | (1.0 | ) | | $ | (9.5 | ) | | $ | (7.7 | ) | | | Inventories | | | 5.5 | | | | (7.2 | ) | | | 5.6 | | | | Prepaid Expenses | | | (4.7 | ) | | | 6.9 | | | | 4.3 | | | | Accounts Payable | | | 0.8 | | | | 12.8 | | | | 18.2 | | | | Compensation and Employee Benefits | | | 1.4 | | | | (11.2 | ) | | | 3.2 | | | | Income Taxes | | | 1.1 | | | | (0.2 | ) | | | (2.0 | ) | | | Other Accrued Liabilities | | | 3.9 | | | | 13.1 | | | | 1.5 | | | | Other Noncurrent Liabilities | | | (4.4 | ) | | | 0.9 | | | | 10.0 | | | | | | Total | | $ | 2.6 | | | $ | 5.6 | | | $ | 33.1 | | | | | |
Cash paid for interest and cash paid, net of refunds, for income taxes was as follows: | | | | | | | | | | | | | | | In millions | | 2006 | | | 2005 | | | 2004 | | | | | | Interest | | $ | 161.9 | | | $ | 149.3 | | | $ | 134.9 | | | | Income Taxes | | | 1.1 | | | | 1.0 | | | | 3.5 | | | | | |
| | NOTE 7 — 5 | LONG-TERM — DEBT |
Long-TermShort-Term Debt at December 31 consistedis composed of the following:
| | | | | | | | | | | 2005 | | | 2004 | | | | (Amounts in millions) | | | Senior Notes with interest payable semi-annually at 8.5%, payable in 2011 | | $ | 425.0 | | | $ | 425.0 | | Senior Subordinated Notes with interest payable semi-annually at 9.5%, payable in 2013 | | | 425.0 | | | | 425.0 | | Senior Secured Term Loan Facility with interest payable at various dates at floating rates (6.60%at December 31, 2005 and 4.52% at December 31, 2004) payable through 2010 | | | 1,109.0 | | | | 1,158.0 | | Senior Secured Revolving Facility with interest payable at various dates at floating rates (9.25%at December 31, 2005) payable in 2009 | | | 6.0 | | | | — | | Other | | | 3.5 | | | | 3.8 | | | | | | | | | | | | | | 1,968.5 | | | | 2,011.8 | | Less, current portion | | | 1.2 | | | | 0.8 | | | | | | | | | | | Total | | $ | 1,967.3 | | | $ | 2,011.0 | | | | | | | | | | |
| | | | | | | | | | | In millions | | 2006 | | | 2005 | | | | | | Short-Term Borrowings | | $ | 11.7 | | | $ | 9.8 | | | | Current Portion of Long-Term Debt | | | 0.3 | | | | 1.2 | | | | | | Total | | $ | 12.0 | | | $ | 11.0 | | | | | |
Long-term debt maturities and expirationsShort-term borrowings are principally at the Company’s international subsidiaries. The weighted average interest rate on short-term borrowings as of funded long-term working capital commitments at December 31, 2006 and 2005 werewas 3.4% and 2.2%, respectively.
Long-Term Debt is composed of the following: | | | | | | | | | In millions | | 2006 | | | 2005 | | | | | Senior Notes with interest payable semi-annually at 8.5%, payable in 2011 | | $ | 425.0 | | | $ | 425.0 | | Senior Subordinated Notes with interest payable semi-annually at 9.5%, payable in 2013 | | | 425.0 | | | | 425.0 | | Senior Secured Term Loan Facility with interest payable at various dates at floating rates (7.47%at December 31, 2006 and 6.60% at December 31, 2005) payable through 2010 | | | 1,055.0 | | | | 1,109.0 | | Senior Secured Revolving Facility with interest payable at various dates at floating rates (10.25%at December 31, 2006 and 9.25%at December 31, 2005) payable in 2009 | | | 3.6 | | | | 6.0 | | Other | | | 2.4 | | | | 3.5 | | | | | | | 1,911.0 | | | | 1,968.5 | | Less, current portion | | | 0.3 | | | | 1.2 | | | | Total | | $ | 1,910.7 | | | $ | 1,967.3 | | | |
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GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Long-Term Debt maturities are as follows: | | | | | | In millions | | | | | | | | | | | | | | (Amounts in millions) | | | | 2006 | | $ | 1.2 | | | 2007 | | | 11.7 | | | $ | 0.3 | | 2008 | | | 12.5 | | | | 12.3 | | 2009 | | | 17.4 | | | | 14.5 | | 2010 | | | 1,074.9 | | | | 1,033.1 | | After 2010 | | | 850.8 | | | 2011 | | | | 425.0 | | After 2011 | | | | 425.8 | | | | | | | | | $ | 1,968.5 | | | Total | | | $ | 1,911.0 | | | | | | | | | |
At December 31, 2005, theThe Company and its U.S. and international subsidiaries had the following commitments, amounts outstanding and amounts available under revolving credit facilities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | Total Amount of
| | Total Amount
| | Total Amount
| | | Total
| | Total
| | Total
| | | | Commitments | | Outstanding | | Available(a) | | | In millions | | | Commitments | | Outstanding | | Available(a) | | | | (Amounts in millions) | | | | | Revolving Credit Facility | | $ | 325.0 | | | $ | 6.0 | | | $ | 306.6 | | | $ | 325.0 | | | $ | 3.6 | | | $ | 307.0 | | International Facilities | | | 17.4 | | | | 8.9 | | | | 8.5 | | | | 18.0 | | | | 8.5 | | | | 9.5 | | | | | | | | | | | | | | Total | | $ | 342.4 | | | $ | 14.9 | | | $ | 315.1 | | | $ | 343.0 | | | $ | 12.1 | | | $ | 316.5 | | | | | | | | | | | | | |
Note: | | | (a) | | In accordance with its debt agreements, the Company’s availability under its Revolving Credit Facility has been reduced by the amount of standby letters of credit issued of approximately $12.4$14.4 million as of December 31, 2005.2006. These letters of credit are used as security against its self-insurance obligations and workers’ compensation obligations. These letters of credit expire at various dates through 20062007 unless extended. |
53
GRAPHIC PACKAGING CORPORATION In October 2005, the Company entered into the Second Amendment (the “Second Amendment”) to the Senior Secured Credit Agreement. As a result, the Company incurred fees and transaction costs of approximately $4 million. The Second Amendment relaxed the maximum Consolidated Debt to Credit Agreement EBITDA Leverage Ratio covenant and the minimum Credit Agreement EBITDA to Consolidated Interest Expense Ratio covenant beginning with the covenant requirements for September 30, 2005.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Senior Secured Credit Agreement, as amended, which governs the Term Loan Facility and the Revolving Credit Facility, imposes restrictions on the Company’s ability to make capital expenditures and both the Senior Secured Credit Agreement and the indentures governing the Senior Notes and Senior Subordinated Notes (the “Notes”) limit the Company’s ability to incur additional indebtedness. Such restrictions, together with the highly leveraged nature of the Company, could limit the Company’s ability to respond to market conditions, meet its capital spending program, provide for unexpected capital investments or take advantage of business opportunities. The covenants contained in the Senior Secured Credit Agreement, as amended, among other things, restrict the ability of the Company to dispose of assets, incur additional indebtedness, incur guarantee obligations, prepay other indebtedness, make dividend and other restricted payments, create liens, make equity or debt investments, make acquisitions, modify terms of indentures under which the Notes are issued, engage in mergers or consolidations, change the business conducted by the Company and its subsidiaries, make capital expenditures and engage in certain transactions with affiliates. On October 17, 2005, the Company, entered into the Second Amendment (the “Second Amendment”) to the Senior Secured Credit Agreement. As a result, the Company incurred fees and transaction costs of approximately $4 million.
The Second Amendment relaxed the maximum Consolidated Debt to Credit Agreement EBITDA Leverage Ratio covenant and the minimum Credit Agreement EBITDA to Consolidated Interest Expense Ratio covenant as shown below beginning with the covenant requirements for September 30, 2005.
| | | | | | | | | | | | | | | | | | | | | | Minimum Credit Agreement
| | | | Maximum Consolidated Debt to
| | | EBITDA to Consolidated Interest
| | | | Credit Agreement EBITDA Leverage Ratio(a) | | | Expense Ratio(a) | | Four Fiscal Quarters Ending
| | Previous | | | As Amended | | | Previous | | | As Amended | | | 2005 | | | | | | | | | | | | | | | | | September 30, 2005 | | | 6.15 to 1.00 | | | | 6.75 to 1.00 | | | | 2.25 to 1.00 | | | | 1.75 to 1.00 | | December 31, 2005 | | | 5.75 to 1.00 | | | | 6.75 to 1.00 | | | | 2.35 to 1.00 | | | | 1.75 to 1.00 | | 2006 | | | | | | | | | | | | | | | | | March 31, 2006 | | | 5.75 to 1.00 | | | | 6.75 to 1.00 | | | | 2.35 to 1.00 | | | | 1.75 to 1.00 | | June 30, 2006 | | | 5.75 to 1.00 | | | | 6.75 to 1.00 | | | | 2.35 to 1.00 | | | | 1.75 to 1.00 | | September 30, 2006 | | | 5.75 to 1.00 | | | | 6.75 to 1.00 | | | | 2.35 to 1.00 | | | | 1.75 to 1.00 | | December 31, 2006 | | | 5.25 to 1.00 | | | | 6.75 to 1.00 | | | | 2.50 to 1.00 | | | | 1.75 to 1.00 | | 2007 | | | | | | | | | | | | | | | | | March 31, 2007 | | | 5.25 to 1.00 | | | | 6.50 to 1.00 | | | | 2.50 to 1.00 | | | | 1.75 to 1.00 | | June 30, 2007 | | | 5.25 to 1.00 | | | | 6.50 to 1.00 | | | | 2.50 to 1.00 | | | | 1.75 to 1.00 | | September 30, 2007 | | | 5.25 to 1.00 | | | | 6.50 to 1.00 | | | | 2.50 to 1.00 | | | | 1.75 to 1.00 | | December 31, 2007 | | | 4.75 to 1.00 | | | | 6.00 to 1.00 | | | | 2.75 to 1.00 | | | | 1.85 to 1.00 | | 2008 | | | | | | | | | | | | | | | | | March 31, 2008 | | | 4.75 to 1.00 | | | | 6.00 to 1.00 | | | | 2.75 to 1.00 | | | | 1.85 to 1.00 | | June 30, 2008 | | | 4.75 to 1.00 | | | | 6.00 to 1.00 | | | | 2.75 to 1.00 | | | | 1.85 to 1.00 | | September 30, 2008 | | | 4.75 to 1.00 | | | | 6.00 to 1.00 | | | | 2.75 to 1.00 | | | | 1.85 to 1.00 | | December 31, 2008 | | | 4.50 to 1.00 | | | | 5.50 to 1.00 | | | | 2.90 to 1.00 | | | | 2.00 to 1.00 | | 2009 | | | | | | | | | | | | | | | | | March 31, 2009 and thereafter | | | 4.50 to 1.00 | | | | 4.50 to 1.00 | | | | 2.90 to 1.00 | | | | 2.90 to 1.00 | |
| | | (a) | | Credit Agreement EBITDA is calculated in accordance with the definitions contained in the Company’s Senior Secured Credit Agreement. Credit Agreement EBITDA is defined as consolidated net income |
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GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The financial covenants contained in the Senior Secured Credit Agreement, as amended, among other things, specify the following requirements for each of the following test periods: | | | | | | | | | | | Maximum Consolidated
| | | Minimum Credit Agreement
| | | | Debt to Credit Agreement
| | | EBITDA To Consolidated
| | Four Fiscal Quarters Ending | | EBITDA Leverage Ratio(a) | | | Interest Expense Ratio(a) | | | | | 2006 | | | | | | | | | | | December 31, 2006 | | | 6.75 to 1.00 | | | | 1.75 to 1.00 | | | | | | | | | | | 2007 | | | | | | | | | | | March 31, 2007 | | | 6.50 to 1.00 | | | | 1.75 to 1.00 | | June 30, 2007 | | | 6.50 to 1.00 | | | | 1.75 to 1.00 | | September 30, 2007 | | | 6.50 to 1.00 | | | | 1.75 to 1.00 | | December 31, 2007 | | | 6.00 to 1.00 | | | | 1.85 to 1.00 | | | | | | | | | | | 2008 | | | | | | | | | | | March 31, 2008 | | | 6.00 to 1.00 | | | | 1.85 to 1.00 | | June 30, 2008 | | | 6.00 to 1.00 | | | | 1.85 to 1.00 | | September 30, 2008 | | | 6.00 to 1.00 | | | | 1.85 to 1.00 | | December 31, 2008 | | | 5.50 to 1.00 | | | | 2.00 to 1.00 | | | | | | | | | | | 2009 | | | | | | | | | | | March 31, 2009 and thereafter | | | 4.50 to 1.00 | | | | 2.90 to 1.00 | | | |
Note: | | | | (a) | Credit Agreement EBITDA is calculated in accordance with the definitions contained in the Company’s Senior Secured Credit Agreement, as amended. Credit Agreement EBITDA is defined as consolidated net income before consolidated interest expense, non-cashon-cash expenses and charges, total income tax expense, depreciation expense, expense associated with amortization of intangibles and other assets, non-cash provisions for reserves for discontinued operations, extraordinary, unusual or non-recurring gains or losses or charges or credits, gain or loss associated with sale or write-down of assets not in the ordinary course of business, and any income or loss accounted for by the equity method of accounting. |
At December 31, 2005,2006, the Company was in compliance with the financial covenants in the Secured Credit Agreement, as amended, and the ratios were as follows: Consolidated Debt to Credit Agreement EBITDA Leverage Ratio — 6.155.91 to 1.00 Credit Agreement EBITDA to Consolidated Interest Expense Ratio – 2.18— 2.00 to 1.00 In additionCredit Agreement EBITDA used in the covenant calculations above reflects a change in the calculation made to track the changesdefinition in the Company’s Credit Agreement more closely. Previously, the Company had subtracted cash contributions to its pension plans from Credit Agreement EBITDA. Beginning in the third quarter of 2006, the Company did not subtract such contributions from its calculation of Credit Agreement EBITDA. This change in the calculation method did not affect the Company’s compliance with its covenants under the Credit Agreement, as the Company would have been in compliance even if the prior calculation method had been used. The Company’s definition of Credit Agreement EBITDA may differ from that of other similarly titled measures at other companies.
The Company’s management believes that presentation of Credit Agreement EBITDA provides useful information to investors because borrowings under the Senior Secured Credit Agreement are a key source of the Company’s liquidity, and the Company’s ability to borrow under the Senior Secured Credit Agreement is dependent on, among other things, its compliance with the financial ratio covenants. Failure to comply with these financial ratio covenants described above,would result in a violation of the Second Amendment modifiesSenior Secured Credit Agreement and, absent 51
GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) a waiver or amendment from the lenders under such agreement, permit the acceleration of all outstanding borrowings under the Senior Secured Credit Agreement. The calculations of the components of the Company’s financial covenant ratios are listed below: | | | | | | | | Twelve Months Ended
| | In millions | | December 31, 2006 | | | | | Net Loss | | $ | (100 | .5 | ) | Income Tax Expense | | | 20 | .2 | | Interest Expense, Net | | | 171 | .6 | | Depreciation and Amortization | | | 196 | .0 | | Dividends Received, Net of Earnings of Equity Affiliates | | | 1 | .3 | | Pension, Postemployment and Postretirement Benefits Expense | | | 32 | .2 | | Merger Related Expenses | | | 0 | .7 | | Write-Down of Assets | | | 3 | .9 | | | | Credit Agreement EBITDA | | $ | 325 | .4 | | | |
| | | | | | | Twelve Months Ended
| | In millions | | December 31, 2006 | | | | | Interest Expense, Net | | $ | 171.6 | | Amortization of Deferred Debt Issuance Costs | | | (8.8 | ) | Credit Agreement Interest Expense Adjustments(a) | | | 0.1 | | | | Consolidated Interest Expense(b) | | $ | 162.9 | | | |
| | | | | | | As of
| In millions | | December 31, 2006 | | | Short Term Debt | | $ | 12 | .0 | Long Term Debt | | | 1,910 | .7 | | | Total Debt | | $ | 1,922 | .7 | | |
Notes: | | | | (a) | Credit agreement interest expense adjustments include the discount from the financing of receivables. | | | (b) | Consolidated Interest Expense is calculated in accordance with the definitions contained in the Company’s Senior Secured Credit Agreement. Consolidated Interest Expense is defined as consolidated interest expense (b) minus consolidated interest income plus any discount from the financing of receivables. |
The Senior Secured Credit Agreement, as amended, requires adjustment to the pricing for the Senior Secured Term Loan Facility by increasing the applicable margin by 0.25% if, and for so long as, the Company’s indebtedness under the Senior Secured Credit Agreement, as amended, is rated less than B+ by Standard & Poor’s Ratings Group (a division of The McGraw Hill Companies, Inc.) or less than B1 by Moody’s Investors Service, Inc. The Senior Notes are rated B- by Standard & Poor’s and B2 by Moody’s Investor Services. The Senior Subordinated Notes are rated B- by Standard & Poor’s and B3 by Moody’s Investor Services. The Company’s indebtedness under the Senior Secured Credit Agreement, as amended, is rated B+ by Standard & Poor’s and Ba2 by Moody’s Investor Services. As of December 31, 2006, both Standard & Poor’s and Moody’s Investor Services’ ratings on the Company remain on negative outlook. If the negative impact of inflationary pressures on key inputs continues, or depressed selling prices, lower sales volumes, increased operating costs or other factors have a negative impact on the Company’s ability to 52
GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) increase its profitability, the Company may not be able to maintain its compliance with the financial covenants in its Senior Secured Credit Agreement, as amended. The Company’s ability to comply in future periods with the financial covenants in the Senior Secured Credit Agreement, as amended, will depend on its ongoing financial and operating performance, which in turn will be subject to economic conditions and to financial, business and other factors, many of which are beyond the Company’s control and will be substantially dependent on the selling prices for the Company’s products, raw material and energy costs, and the Company’s ability to successfully implement its overall business strategies, and meet its profitability objective. If a violation of any of the covenants occurred, the Company would attempt to obtain a waiver or an amendment from its lenders, although no assurance can be given that the Company would be successful in this regard. The Senior Secured Credit Agreement and the indentures governing the Senior Subordinated Notes and the Senior Notes have covenants as well as certain cross-default or cross-acceleration provisions; failure to comply with these covenants in any agreement could result in a violation of such agreement which could, in turn, lead to violations of other agreements pursuant to such cross-default or cross-acceleration provisions. If an event of default occurs, the lenders are entitled to declare all amounts owed to be due and payable immediately. The Senior Secured Credit Agreement, as amended, is collateralized by substantially all of the Company’s domestic assets. | | NOTE 8 — | STOCK INCENTIVE PLANS |
NOTE 6 — STOCK INCENTIVE PLANS The Company has eight equity compensation plans, seven of which were adopted by the Company or Graphic prior to the Merger and are no longer used to make new option grants or equity awards.plans. The Company’s only active plan as of December 31, 20052006 is the Graphic Packaging Corporation 2004 Stock and Incentive Compensation Plan (“2004 Plan”), pursuant to which the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units and other types of stock-based awards to employees and directors of the Company. The other plans are the 2003 Riverwood Holding, Inc. Long-Term Incentive Plan (“2003 LTIP”), the 2003 Riverwood Holding, Inc. Directors Stock Incentive Plan (“2003 Directors’Directors Plan”), the Riverwood Holding, Inc. 2002 Stock Incentive Plan (“2002 SIP”), the Riverwood Holding, Inc. Supplemental Long-Term Incentive Plan (“1999 LTIP”), the Riverwood Holding, Inc. Stock Incentive Plan (“1996 SIP”), the Graphic Packaging Equity Incentive Plan (“EIP”), and the Graphic Packaging Equity Compensation Plan for Non-Employee Directors (“Graphic NEDP”). Stock options and other awards granted under all of the Company’s plans generally vest and expire in accordance with terms established at the time of grant.
55
GRAPHIC PACKAGING CORPORATION grant (except as noted below with respect to accelerated vesting). Compensation costs are recognized on a straight-line basis over the requisite service period of the award.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Effective January 1, 2006, the Company adopted the fair value recognition provisions of the SFAS No. 123R, using the modified-prospective transition method. The modified-prospective transition method applies to new awards granted, unvested awards as of the date of adoption, and to awards modified, repurchased, or cancelled after the date of adoption. Stock-based compensation expense for all share-based payment awards granted after January 1, 2006 is based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R. For a further discussion regarding SFAS 123R see Note 2.
Stock Options ThePrior to January 1, 2006, the Company appliesapplied APB Opinion No. 25 “Accounting for Stock Issued to Employees,” and related interpretations in accounting for stock options issued under its plans. Accordingly, the Company recognizesrecognized compensation expense for stock options when the exercise price iswas less than the related fair value at the date of grant or when the performance criteria iswas met.
The Company did not grant any options in 2005 and accelerated the vesting of all options in December2006 or 2005. The weighted average fair value of stock options is estimated to be $2.73 per option as of the date of grant for stock options granted in 2004. The Company used the Black-Scholes Merton option pricing model to value stock options with the following 53
GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) assumptions: dividend yield of zero, expected volatility ranging from 0% to 74%, risk-free interest rates ranging from 4.23% to 6.75%, a zero forfeiture rate and an expected life of 3 to 10 years. The weighted average contractual life of the options outstanding at December 31, 2005 is 5.4 years. The following table summarizes information pertaining to stock options outstanding and exercisable at December 31, 2005.2006 and the option exercise price range per plan. No options have been granted under the 2004 Plan or the 2003 Director’sDirectors Plan, so these plans have been omitted from the table. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted
| | | | | | | | | Weighted
| | | | | | | | Weighted Average
| | | | | | Avg.
| | | | | | | | | Average
| | | | | | Exercise
| | Remaining
| | | | Shares Subject
| | Exercise
| | Shares Subject to
| | Weighted Avg.
| | | Shares Subject
| | Exercise
| | Shares Subject to
| | Weighted Average
| | Price
| | Contractual Life
| | Plan | | to Options | | Price | | Exercisable Options | | Exercise Price | | | to Options | | Price | | Exercisable Options | | Exercise Price | | Range | | in Years | | | | | | | 2003 LTIP | | | 1,694,605 | | | $ | 5.70 | | | | 1,694,605 | | | $ | 5.70 | | | | 1,222,866 | | | $ | 6.18 | | | | 1,222,866 | | | $ | 6.18 | | | | $4.45 | to $6.57 | | | 6.7 | | 2002 SIP | | | 6,503,948 | | | | 7.88 | | | | 6,503,948 | | | | 7.88 | | | | 6,503,948 | | | | 7.88 | | | | 6,503,948 | | | | 7.88 | | | | 7.88 | | | | 5.0 | | 1999 LTIP | | | 848,599 | | | | 6.57 | | | | 848,599 | | | | 6.57 | | | | 774,952 | | | | 6.57 | | | | 774,952 | | | | 6.57 | | | | 6.57 | | | | 2.4 | | 1996 SIP | | | 3,898,448 | | | | 5.20 | | | | 3,898,448 | | | | 5.20 | | | | 3,544,558 | | | | 5.27 | | | | 3,544,558 | | | | 5.27 | | | | 3.28 | to 6.57 | | | 1.5 | | EIP | | | 2,983,462 | | | | 7.44 | | | | 2,983,462 | | | | 7.44 | | | | 2,830,950 | | | | 7.48 | | | | 2,830,950 | | | | 7.48 | | | | 1.56 | to 13.74 | | | 6.1 | | Graphic NEDP | | | 15,277 | | | | 7.37 | | | | 15,277 | | | | 7.37 | | | | 9,213 | | | | 4.39 | | | | 9,213 | | | | 4.39 | | | | 2.88 | to 12.47 | | | 2.4 | | | | | | | | | | | | Total | | | 15,944,339 | | | $ | 6.84 | | | | 15,944,339 | | | $ | 6.84 | | | | 14,886,487 | | | $ | 6.97 | | | | 14,886,487 | | | $ | 6.97 | | | | — | | | | 4.4 | | | | | | | | | | | |
As of December 31, 20042006 and 2003,2005, there were exercisable options in the amount of 11,247,76914,886,487 and 9,666,720,15,944,339, respectively. A summary of option activity during the three years ended December 31, 20052006 is as follows: | | | | | | | | | | | | | | | | | | | Shares | | Exercise Price | | | | | Weighted Average
| | | | Options | | Exercise Price | | Outstanding — December 31, 2002 | | | 16,866,642 | | | $ | 6.98 | | | Granted | | | 2,098,178 | | | $ | 6.16 | | | Exercised | | | (100,000 | ) | | $ | 1.56 | | | Canceled | | | (7,231,741 | ) | | $ | 5.54 | | | Assumed From Merger | | | 5,476,836 | | | $ | 5.90 | | | | | | | | | | | Outstanding — December 31, 2003 | | | 17,109,915 | | | $ | 7.17 | | | | 17,109,915 | | | $ | 7.17 | | Granted | | | 62,500 | | | $ | 4.60 | | | | 62,500 | | | | 4.60 | | Exercised | | | (149,828 | ) | | $ | 2.63 | | | | (149,828 | ) | | | 2.63 | | Canceled | | | (364,691 | ) | | $ | 6.56 | | | | (364,691 | ) | | | 6.56 | | | | | | | | | | Outstanding — December 31, 2004 | | | 16,657,896 | | | $ | 6.81 | | | | 16,657,896 | | | | 6.81 | | Canceled | | | (713,557 | ) | | $ | 6.17 | | | | (713,557 | ) | | | 6.17 | | | | | | | | | | Outstanding — December 31, 2005 | | | 15,944,339 | | | $ | 6.84 | | | | 15,944,339 | | | | 6.84 | | Exercised | | | | (237,000 | ) | | | 3.13 | | Canceled | | | | (820,852 | ) | | | 5.54 | | | | | | | | | | Outstanding — December 31, 2006 | | | | 14,886,487 | | | $ | 6.97 | | | | | | | |
Stock Awards, Restricted Stock and Restricted Stock Units The Company’s 2004 Plan and the 2003 LTIP permit the grant of stock awards, restricted stock and restricted stock units (“RSUs”). All restricted stock and RSUs vest and become unrestricted in one to five years from date of grant. Upon vesting, RSUs granted in 2005 and 2006 are payable 50% in cash and 50% in shares of common stock. All other RSUs are payable in shares of common stock.
5654
GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Restricted Stock Units and Other Stock-Based Awards
The 2004 Plan and 2003 LTIP provide forData concerning stock awards, restricted stock awards (shares or stock units (“RSUs”)). All restricted stock awards vest and become unrestricted in one to five years from date of grant. Upon vesting, RSUs granted in 2005 are 50% payable in cash and 50% in shares of common stock. All other RSUs are payable in shares of common stock.the years ended December 31:
Data concerning restricted stock awards follows:
| | | | | | | | | | | | | | Shares in thousands | | | 2006 | | 2005 | | 2004 | | | | | | | | | | | | | | | | | | | 2005 | | 2004 | | 2003 | | RSUs — Employees | | | | 2,239 | | | | 506 | | | | 38 | | Weighted-average price per share | | | $ | 2.83 | | | $ | 4.84 | | | $ | 4.70 | | Stock Awards — Board of Directors | | | | 71 | | | | — | | | | — | | Weighted-average price per share | | | $ | 3.39 | | | | — | | | | — | | Restricted Stock — Board of Directors | | | | — | | | | 67 | | | | 60 | | Weighted-average price per share | | | | — | | | $ | 3.59 | | | $ | 5.72 | | | | (Shares in thousands) | | | | RSUs — employees | | | 506 | | | | 38 | | | | 3,226 | | | Weighted-average price per share | | $ | 4.84 | | | $ | 4.70 | | | $ | 4.05 | | | Restricted shares — Board of Directors | | | 67 | | | | 60 | | | | 16 | | | Weighted-average price per share | | $ | 3.59 | | | $ | 5.72 | | | $ | 4.70 | | |
The value of restricted stock unitsthe RSUs is based on the market value of the Company’s common stock aton the date of grant. The shares payable in cash are subject to variable accounting and marked to market accordingly. Both componentsThe RSUs payable in cash are recorded as liabilities, whereas the RSUs payable in shares are recorded in Shareholders’ Equity. At December 31, 2006, the Company had 2,375,379 RSUs outstanding. The unrecognized expense at December 31, 2006 is approximately $4 million and is expected to be recognized over a liability.weighted average period of 2.0 years. The value of restricted stock and stock awards is based on the market value of the Company’s common stock at the date of grant and recorded at the date of the award as unearned compensation on restricted stock in a separate component of stockholders’ equity.Shareholders’ Equity. During 2006, 2005 and 2004, and 2003,$6.5 million, $4.0 million $4.1 million and $1.4$4.1 million, respectively was charged to compensation expense. During 20052006 and 2004,2005, the Company also issued 23,07127,890 and 8,03023,071 shares of phantom stock, respectively, representing compensation deferred compensation by one of its directors. These shares of phantom stock vest on the first anniversary of the date of grant and are payable upon termination of service.service as a director. The Company also has an obligation to issue 195,288192,565 shares in payment of employee deferred compensation. | | NOTE 9 — | LEASES AND PURCHASE OBLIGATIONS |
NOTE 7 �� LEASES AND PURCHASE OBLIGATIONS The Company leases certain warehouse facilities, office space, data processing equipment and plant equipment under long-term, non-cancelable contracts that expire at various dates. At December 31, 2005,2006, total minimum rental payments under these leases were as follows: | | | | | | In millions | | | At December 31, | | | | | | | | | | | (Amounts in Millions) | | | | Year ended December 31, | | | | | | 2006 | | $ | 12.5 | | | 2007 | | | 7.5 | | | $ | 11.8 | | 2008 | | | 5.4 | | | | 10.3 | | 2009 | | | 4.6 | | | | 8.9 | | 2010 | | | 3.8 | | | | 6.0 | | 2011 | | | | 4.1 | | Thereafter | | | 12.6 | | | | 9.6 | | | | | | | | | $ | 46.4 | | | Total | | | $ | 50.7 | | | | | | | | | |
Total rental expense was approximately$14.2 million, $14.1 million $13.6 million and $11.8$13.6 million for the years ended December 31, 2006, 2005 2004 and 2003,2004, respectively. The Company has entered into other long-term contracts principally for the purchase of fiber, chip processing and electricity. The minimum purchase commitments extend beyond 2010.2011. Commitments under these contracts are $51.8 million in 2007, $47.7 million in 2008, $50.4 million in 2009, $49.3 million in 2010 and $49.3 million in 2011. Total commitments beyond the year 2011 are $334.6 million.
5755
GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) approximately $52.4 million in 2006, $42.7 million in 2007, $41.5 million in 2008, $41.0 million in 2009 and $40.5 million in 2010. Total commitments beyond the year 2010 are $226.0 million.
NOTE 8 — ENVIRONMENTAL AND LEGAL MATTERS | | NOTE 10 — | ENVIRONMENTAL AND LEGAL MATTERS |
Environmental Matters The Company is subject to a broad range of foreign, federal, state and local environmental, health and safety laws and regulations, that change from time to time, including those governing discharges to air, soil and water, the management, treatment and disposal of hazardous substances, solid waste and hazardous wastes, the investigation and remediation of contamination resulting from historical site operations and releases of hazardous substances, and the health and safety of employees. Compliance initiatives could result in significant costs, which could negatively impact the Company’s financial position, results of operations or cash flows. Any failure to comply with such laws and regulations or any permits and authorizations required thereunder could subject the Company to fines, corrective action or other sanctions. In addition, some of the Company’s current and former facilities are the subject of environmental investigations and remediations resulting from historical operations and the release of hazardous substances or other constituents. Some current and former facilities have a history of industrial usage for which investigation and remediation obligations may be imposed in the future or for which indemnification claims may be asserted against the Company. Also, potential future closures or sales of facilities may necessitate further investigation and may result in future remediation at those facilities. During the first quarter of 2006, the Company self-reported certain violations of its Title V permit under the federal Clean Air Act for its West Monroe, Louisiana mill to the Louisiana Department of Environmental Quality (the “LADEQ”). The violations relate to the collection, treatment and reporting of hazardous air pollutants. The Company recorded $0.6 million of expense in the first quarter of 2006 for compliance costs to correct the technical issues causing the Title V permit violations. The Company received a consolidated Compliance Order and notice of potential penalty dated July 5, 2006 from the LADEQ indicating that the Company may be required to pay civil penalties for violations that occurred from 2001 through 2005. Although the Company believes that it is reasonably possible that the LADEQ will assess some penalty, at this time the amount of such penalty is not estimable. The Company has established reserves for those facilities or issues where liability is probable and the costs are reasonably estimable. TheExcept for the Title V permit issue described above, for which it is too early in the investigation and regulatory process to make a determination, the Company believes that the amounts accrued for all of its loss contingencies, and the reasonably possible loss beyond the amounts accrued, are not material to the Company’s financial position, results of operations or cash flows. TheExcept for the compliance costs described above relating to the West Monroe, Louisiana mill, the Company cannot estimate with certainty other future corrective compliance, investigation or remediation costs, all of which the Company currently considers to be remote. Costs relating to historical usage or indemnification claims that the Company considers to be reasonably possible are not quantifiable at this time. The Company will continue to monitor environmental issues at each of its facilities and will revise its accruals, estimates and disclosures relating to past, present and future operations as additional information is obtained. Legal Matters The Company is a party to a number of lawsuits arising in the ordinary conduct of its business. Although the timing and outcome of these lawsuits cannot be predicted with certainty, the Company does not believe that disposition of these lawsuits will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. NOTE 9 — POSTRETIREMENT AND OTHER BENEFITS As discussed in Note 2, the Company adopted the balance sheet recognition requirements of SFAS No. 158 at December 31, 2006. 56
GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) OVERVIEW OF U.S. PENSION PLANS The Company maintains defined benefit pension plans for its U.S. employees. Benefits are based on years of service and average base compensation levels over a period of years. The Company’s funding policies with respect to its U.S. pension plans are to contribute funds to trusts as necessary to at least meet the minimum funding requirements of the U.S. Internal Revenue Code. Plan assets are invested in equities and fixed income securities.
58
GRAPHIC PACKAGING CORPORATION The Company also sponsors three postretirement health care plans that provide medical and life insurance coverage to eligible salaried and hourly retired U.S. employees and their dependents. One of the salaried plans closed to new employees who began employment after December 31, 1993 and the other salaried plan closed to new employees who began after June 15, 1999.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(A) PENSION EXPENSEPension and Postretirement Expense
The pension expenseand postretirement expenses related to the U.S. plans consisted of the following: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended
| | Year Ended
| | Year Ended
| | | Pension Benefits | | Postretirement Benefits | | | December 31,
| | December 31,
| | December 31,
| | | Year Ended December 31, | In millions | | | 2006 | | 2005 | | 2004 | | 2006 | | 2005 | | 2004 | | | | | 2005 | | 2004 | | 2003 | | | | | | | (Amounts in millions) | | | | | Components of Net Periodic Pension Cost: | | | | | | | | | | | | | | Components of Net Periodic Cost: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Service Cost | | $ | 14.5 | | | $ | 14.1 | | | $ | 9.3 | | | $ | 16.4 | | | $ | 14.5 | | | $ | 14.1 | | | $ | 1.0 | | | $ | 0.9 | | | $ | 0.9 | | | | Interest Cost | | | 30.8 | | | | 28.9 | | | | 21.4 | | | | 33.2 | | | | 30.8 | | | | 28.9 | | | | 2.5 | | | | 2.3 | | | | 2.8 | | | | Expected Return on Plan Assets | | | (30.8 | ) | | | (29.3 | ) | | | (31.2 | ) | | | (32.0 | ) | | | (30.8 | ) | | | (29.3 | ) | | | — | | | | — | | | | — | | | | Amortizations: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Prior Service Cost | | | 2.6 | | | | 2.6 | | | | 1.6 | | | | 2.4 | | | | 2.6 | | | | 2.6 | | | | 0.1 | | | | 0.1 | | | | (0.2 | ) | | | Actuarial Loss | | | 3.3 | | | | 2.4 | | | | 14.6 | | | Actuarial Loss (Gain) | | | | 6.0 | | | | 3.3 | | | | 2.4 | | | | — | | | | (0.2 | ) | | | 0.4 | | | | Special One Time Benefit | | | 1.2 | | | | — | | | | — | | | | — | | | | 1.2 | | | | — | | | | — | | | | — | | | | — | | | | Curtailment Loss | | | 0.4 | | | | — | | | | — | | | | — | | | | 0.4 | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | Net Periodic Pension Cost | | $ | 22.0 | | | $ | 18.7 | | | $ | 15.7 | | | | | | | | | | | | Net Periodic Cost | | | $ | 26.0 | | | $ | 22.0 | | | $ | 18.7 | | | $ | 3.6 | | | $ | 3.1 | | | $ | 3.9 | | | | | | | | | |
AIn 2005, a special one time benefit expense of $1.2 million was recorded for those plan participants at one of the Company’s facilities who elected to take early retirement with unreduced benefits. In addition, a curtailment charge of $0.4 million, for the write-off of prior service costs, was recorded relating to the closure of the Clinton facility.
Certain assumptions used in determining the pension and postretirement expense were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended
| | Year Ended
| | Year Ended
| | | Pension Benefits | | Postretirement Benefits | | | December 31,
| | December 31,
| | December 31,
| | | Year Ended December 31, | | | 2005 | | 2004 | | 2003 | | | 2006 | | 2005 | | 2004 | | 2006 | | 2005 | | 2004 | | | | | | | Weighted Average Assumptions: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Discount Rate | | | 6.00 | % | | | 6.25 | % | | | 6.50 | % | | | 5.75 | % | | | 6.00 | % | | | 6.25 | % | | | 5.65 | % | | | 5.80 | % | | | 6.00 | % | | | Rate of Increase in Future Compensation Levels | | | 4.50 | % | | | 4.50 | % | | | 4.42 | % | | | 4.50 | % | | | 4.50 | % | | | 4.50 | % | | | — | | | | — | | | | — | | | | Expected Long-Term Rate of Return on Plan Assets | | | 8.25 | % | | | 8.25 | % | | | 8.41 | % | | | 8.25 | % | | | 8.25 | % | | | 8.25 | % | | | — | | | | — | | | | — | | | | Initial Health Care Cost Trend Rate | | | | — | | | | — | | | | — | | | | 9.00 | % | | | 8.50 | % | | | 9.00 | % | | | Ultimate Health Care Cost Trend Rate(a) | | | | — | | | | — | | | | — | | | | 5.00 | % | | | 5.00 | % | | | 5.00 | % | | | Ultimate Year(a) | | | | — | | | | — | | | | — | | | | 2014 | | | | 2012 | | | | 2012 | | | | | | | | | |
| | | (a) | | One of the salaried plan’s costs was capped beginning in 1999. |
5957
GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (B) FUNDED STATUSFunded Status
The following table sets forth the funded status of the U.S. pension and postretirement plans as of December 31: | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2005 | | 2004 | | | | | Postretirement
| | | (Amounts in millions) | | | Pension Benefits | | Benefits | In millions | | | 2006 | | 2005 | | 2006 | | 2005 | | | | Change in Benefit Obligation: | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefit Obligation at Beginning of Year | | $ | 514.7 | | | $ | 469.5 | | | $ | 575.0 | | | $ | 514.7 | | | $ | 44.5 | | | $ | 50.2 | | | | Service Cost | | | 14.5 | | | | 14.1 | | | | 16.4 | | | | 14.5 | | | | 1.0 | | | | 0.9 | | | | Interest Cost | | | 30.8 | | | | 28.9 | | | | 33.2 | | | | 30.8 | | | | 2.5 | | | | 2.3 | | | | Actuarial Loss | | | 36.9 | | | | 18.9 | | | Actuarial (Gain) / Loss | | | | (9.3 | ) | | | 36.9 | | | | (0.3 | ) | | | (6.9 | ) | | | Special One Time Benefit | | | 1.2 | | | | — | | | | — | | | | 1.2 | | | | — | | | | — | | | | Amendments | | | (1.1 | ) | | | 3.3 | | | | 3.3 | | | | (1.1 | ) | | | — | | | | 1.4 | | | | Benefits Paid | | | (22.0 | ) | | | (20.0 | ) | | | (24.0 | ) | | | (22.0 | ) | | | (2.8 | ) | | | (3.4 | ) | | | Change in Claim Reserve | | | | — | | | | — | | | | 0.2 | | | | — | | | | Retiree Drug Subsidy Paid | | | | — | | | | — | | | | 0.1 | | | | — | | | | | | | | | | | | | | Benefit Obligation at End of Year | | $ | 575.0 | | | $ | 514.7 | | | $ | 594.6 | | | $ | 575.0 | | | $ | 45.2 | | | $ | 44.5 | | | | | | | | | | | | | | | | | Change in Plan Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | Fair Value of Plan Assets at Beginning of Year | | $ | 376.6 | | | $ | 360.9 | | | $ | 391.8 | | | $ | 376.6 | | | $ | — | | | $ | — | | | | Actual Return on Plan Assets | | | 19.5 | | | | 35.4 | | | | 48.2 | | | | 19.5 | | | | — | | | | — | | | | Employer Contributions | | | 17.7 | | | | 0.3 | | | | 25.9 | | | | 17.7 | | | | 2.8 | | | | 3.4 | | | | Benefits Paid | | | (22.0 | ) | | | (20.0 | ) | | | (24.0 | ) | | | (22.0 | ) | | | (2.8 | ) | | | (3.4 | ) | | | | | | | | | | | | | Fair Value of Plan Assets at End of Year | | $ | 391.8 | | | $ | 376.6 | | | $ | 441.9 | | | $ | 391.8 | | | $ | — | | | $ | — | | | | | | | | | | | | | | | | | Plan Assets Less than Projected Benefit Obligation | | $ | (183.2 | ) | | $ | (138.1 | ) | | $ | (152.7 | ) | | $ | (183.2 | ) | | $ | (45.2 | ) | | $ | (44.5 | ) | | | Unrecognized Net Actuarial Loss | | | 96.6 | | | | 51.1 | | | Unrecognized Net Actuarial Loss (Gain) | | | | N/A | (a) | | | 96.6 | | | | N/A | (a) | | | (1.3 | ) | | | Unrecognized Prior Service Cost | | | 7.4 | | | | 12.1 | | | | N/A | (a) | | | 7.4 | | | | N/A | (a) | | | 0.3 | | | | | | | | | | | | | | Net Amount Recognized | | $ | (79.2 | ) | | $ | (74.9 | ) | | $ | (79.3 | ) | | $ | (79.2 | ) | | $ | (46.3 | ) | | $ | (45.5 | ) | | | | | | | | | | | | | | | | Amounts Recognized in the Consolidated Balance Sheets Consist of: | | | | | | | | | | | | | | | | | | | | | | | | | | | Pension Intangible Asset | | $ | 8.2 | | | $ | 10.7 | | | $ | — | | | $ | 8.2 | | | $ | — | | | $ | — | | | | Accrued Pension Liability | | | (160.8 | ) | | | (128.0 | ) | | Accumulated Other Comprehensive Income(a) | | | 73.4 | | | | 42.4 | | | Accrued Pension and Postretirement Benefits Liability — Current | | | | (0.3 | ) | | | N/A | (a) | | | (2.6 | ) | | | N/A | (a) | | | Accrued Pension and Postretirement Benefits Liability — Noncurrent | | | | (152.4 | ) | | | N/A | (a) | | | (42.6 | ) | | | N/A | (a) | | | Accrued Benefit Liability | | | | N/A | (a) | | | (160.8 | ) | | | N/A | (a) | | | (45.5 | ) | | | Accumulated Other Comprehensive Income | | | | N/A | (a) | | | 73.4 | | | | N/A | (a) | | | — | | | | Net Actuarial Loss (Gain) | | | | 65.0 | | | | N/A | (a) | | | (1.3 | ) | | | N/A | (a) | | | Prior Service Cost | | | | 8.4 | | | | N/A | (a) | | | 0.2 | | | | N/A | (a) | | | | | | | | | | | | | Net Amount Recognized | | $ | (79.2 | ) | | $ | (74.9 | ) | | $ | (79.3 | ) | | $ | (79.2 | ) | | $ | (46.3 | ) | | $ | (45.5 | ) | | | | | | | | | | | | | | | | Weighted Average Assumptions: | | | | | | | | | | | | | | | | | | | | | | | | | | | Discount Rate | | | 5.75 | % | | | 6.00 | % | | | 5.95% to 6.05%(b | ) | | | 5.75 | % | | | 5.80% to 6.05%(c | ) | | | 5.65 | % | | | Rates of Increase in Future Compensation Levels | | | 4.50 | % | | | 4.50 | % | | | 4.00 | % | | | 4.50 | % | | | — | | | | — | | | | Initial Health Care Cost Trend Rate | | | | — | | | | — | | | | 9.00 | % | | | 9.00 | % | | | Ultimate Health Care Cost Trend Rate(d) | | | | — | | | | — | | | | 5.00 | % | | | 5.00 | % | | | Ultimate Year(d) | | | | — | | | | — | | | | 2015 | | | | 2014 | | | | | | | | | |
| | | (a) | | During 2005 and 2004, the Company recorded a charge to Other Comprehensive Loss of $31.0 million and $6.4 million in its Consolidated Statements of Comprehensive LossNot applicable due to market conditions.a change in Accounting Standard. | | (b) | | Discount rates assumed for each plan ranged from 5.95% to 6.05%. | | (c) | | Discount rates assumed for each plan ranged from 5.80% to 6.05%. | | (d) | | One of the salaried plans assumes no future increases in employer subsidies. |
The accumulated benefit obligation for all defined benefit plans was $551.0 million and $487.8 million at December 31, 2005 and 2004, respectively.
6058
GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Information for Pension Plans The accumulated benefit obligation for all defined benefit plans was $575.9 million and $551.0 million at December 31, 2006 and 2005, respectively. For plans with accumulated benefit obligations in excess of plan assets, at December 31, the projected benefit obligation, accumulated benefit obligation and fair value of the plan assets were: | | | | | | | | | | | | | | | | | | | 2005 | | 2004 | | | | | (Amounts in millions) | | | In millions | | | 2006 | | 2005 | | | | | Projected Benefit Obligation | | $ | 575.0 | | | $ | 514.7 | | | $ | 594.6 | | | $ | 575.0 | | Accumulated Benefit Obligation | | $ | 551.0 | | | $ | 487.8 | | | | 575.9 | | | | 551.0 | | Fair Value of Plan Assets | | $ | 391.8 | | | $ | 376.6 | | | | 441.9 | | | | 391.8 | | | | | | | |
The Company’s approach to developing its expected long-term rate of return on pension plan assets combines an analysis of historical investment performance by asset class, the Company’s investment guidelines and current and expected economic fundamentals. The Company’s retirement plan asset allocation at December 31, 20052006 and 20042005 and target allocation for 20062007 by asset category are as follows: | | | | | | | | | | | | | | | | | | | Percentage of
| | | | | | | Plan Assets at
| | | | | | | | | | | | | | | | | | December 31, | | | | | | Percentage of
| | | | | | | | | Target
| | Plan Assets at
| | | Target
| | | | | | | | Allocation
| | December 31, | | | Allocation
| | | | | | | | 2006 | | 2005 | | 2004 | | | 2007 | | 2006 | | 2005 | | | | | Asset Category: | | | | | | | | | | | | | | | | | | | | | | | | | Equity Securities | | | 60.0 | % | | | 62.7 | % | | | 63.8 | % | | | 60.0 | % | | | 62.0 | % | | | 62.7% | | Debt Securities | | | 40.0 | % | | | 37.1 | % | | | 36.1 | % | | | 40.0 | | | | 37.9 | | | | 37.1 | | Cash | | | — | | | | 0.2 | % | | | 0.1 | % | | | — | | | | 0.1 | | | | 0.2 | | | | | | | | | | | | | | Total | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0% | | | | | | | | | | | | | |
Active management of assets is used in asset classes and strategies where there is a potential to add value over a passive benchmark. Investment risk is measured and monitored on an on-going basis through annual liability measurements, periodic asset/liability studies, and quarterly investment portfolio reviews. At December 31, 20052006 and 2004,2005, pension investments did not include any direct investments in the Company’s stock or the Company’s debt. During 20052006 and 2004,2005, the Company made $17.7$25.9 million and $0.3$17.7 million, respectively of contributions to its U.S. pension plans. For 2006,2007, the Company expects to make contributions of approximately $27$28 million. Information for Postretirement Benefits During 2006 and 2005, the Company made postretirement benefit payments of $2.7 million and $2.6 million, respectively. 59
GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Assumed health care cost trend rates affect the amounts reported for postretirement health care benefit plans. A one-percentage-point change in assumed health care trend rates would have the following effects on 2006 data: | | | | | | | | | | | One Percentage Point | | In millions | | Increase | | | Decrease | | | | Health Care Trend Rate Sensitivity: | | | | | | | | | Effect on Total Interest and Service Cost Components | | $ | 0.3 | | | $ | (0.3 | ) | Effect on Year-End Postretirement Benefit Obligation | | | 3.5 | | | | (3.1 | ) | | |
Estimated Future Benefit Payments The following represents the Company’s estimated future pension and postretirement benefit payments through the year 2015:2016: | | | | | | | | | | | | | Year | | (Amounts in Millions) | | | | | | | Postretirement
| | 2006 | | $ | 24.2 | | | In millions | | | Pension Plans | | Benefits | | | | | | 2007 | | $ | 25.8 | | | $ | 26.4 | | | $ | 2.7 | | 2008 | | $ | 27.5 | | | | 28.0 | | | | 2.7 | | 2009 | | $ | 29.6 | | | | 30.0 | | | | 3.0 | | 2010 | | $ | 31.9 | | | | 32.1 | | | | 3.2 | | 2011 — 2015 | | $ | 193.1 | | | 2011 | | | | 34.2 | | | | 3.5 | | 2012 — 2016 | | | | 207.5 | | | | 18.3 | | | | | | | |
INTERNATIONAL PENSION PLANSInformation for Postemployment Benefits
The Company maintains postemployment benefits for U.S. employees. Certain benefits are based on years of service. The Company recorded an entry to Accumulated Other Comprehensive Income for the net actuarial loss of $6.1 million. (A)Net Periodic Benefit Costs
During 2007, amounts expected to be recognized in Net Periodic Benefit Costs are as follows: | | | | | | | | | | | | | | | | | | Postretirement
| | | Postemployment
| | In millions | | Pension Plans | | | Benefits | | | Benefits | | | | Recognition of Prior Service Cost | | $ | 2.8 | | | $ | 0.1 | | | $ | — | | Recognition of Actuarial Loss (Gain) | | | 2.3 | | | | (0.1 | ) | | | 0.6 | | | |
DEFINED CONTRIBUTION PLANS The Company provides defined contribution plans for eligible U.S. employees. The Company’s contributions to the plans are based upon employee contributions and the Company’s annual operating results. Contributions to these plans for the years ended December 31, 2006, 2005 and 2004 were $7.8 million, $8.2 million and $7.3 million, respectively. 60
GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) INTERNATIONAL PENSION EXPENSEPLANS Pension Expense The Company maintains international defined benefit pension plans that are both noncontributory and contributory and are funded in accordance with applicable local laws. The pension or termination benefits are based primarily on years of service and the employees’ compensation. The U.K. defined benefit plan was frozen effective March 31, 2001 and replaced with a defined contribution plan. The Company’s contribution to the plan is based on employee contributions. The pension expense related to the international plans consisted of the following: | | | | | | | | | | | | | | | | | Year Ended December 31, | In millions | | 2006 | | | 2005 | | | 2004 | | | | | | Components of Net Periodic Pension Cost: | | | | | | | | | | | | | | | Service Cost | | $ | 0.6 | | | $ | 0.5 | | | $ | 0.6 | | | | Interest Cost | | | 6.4 | | | | 6.3 | | | | 6.4 | | | | Expected Return on Plan Assets | | | (8.4 | ) | | | (7.1 | ) | | | (5.9 | ) | | | Amortizations: | | | | | | | | | | | | | | | Actuarial Loss | | | 0.3 | | | | 0.6 | | | | 0.8 | | | | | | Net Periodic Pension (Income) Cost | | $ | (1.1 | ) | | $ | 0.3 | | | $ | 1.9 | | | | | | Weighed Average Assumptions: | | | | | | | | | | | | | | | Discount Rate | | | 4.80% | | | | 5.25% | | | | 5.50% | | | | Rates of Increase in Future Compensation Levels | | | 0.00% | | | | 0.00% | | | | 0.00% | | | | Expected Long-Term Rate of Return on Plan Assets | | | 7.00% | | | | 7.00% | | | | 6.25% | | | | | |
Approximately 350 employees participate in a multi-employer pension plan that provides defined benefits to employees under certain union-employer organization agreements. Pension expense for this plan was $5.5 million, $5.4 million and $5.6 million for the years ended December 31, 2006, 2005 and 2004, respectively. 61
GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The pension expense related to the international plans consisted of the following:
| | | | | | | | | | | | | | | Year Ended
| | | Year Ended
| | | Year Ended
| | | | December 31,
| | | December 31,
| | | December 31,
| | | | 2005 | | | 2004 | | | 2003 | | | | (Amounts in millions) | | | Components of Net Periodic Pension Cost: | | | | | | | | | | | | | Service Cost | | $ | 0.5 | | | $ | 0.6 | | | $ | 0.1 | | Interest Cost | | | 6.3 | | | | 6.4 | | | | 5.3 | | Expected Return on Plan Assets | | | (7.1 | ) | | | (5.9 | ) | | | (4.7 | ) | Amortizations: | | | | | | | | | | | | | Actuarial Loss | | | 0.6 | | | | 0.8 | | | | 0.5 | | | | | | | | | | | | | | | Net Periodic Pension Cost | | $ | 0.3 | | | $ | 1.9 | | | $ | 1.2 | | | | | | | | | | | | | | | Assumptions: | | | | | | | | | | | | | Discount Rate | | | 5.25 | % | | | 5.50 | % | | | 5.50 | % | Rates of Increase in Future Compensation Levels | | | 0.00 | % | | | 0.00 | % | | | 0.00 | % | Expected Long-Term Rate of Return on Plan Assets | | | 7.00 | % | | | 6.25 | % | | | 6.00 | % |
Approximately 340 employees participate in a multi-employer pension plan that provides defined benefits to employees under certain union-employer organization agreements. Pension expense for this plan was $5.4 million, $5.6 million and $5.0 million for the years ended December 31, 2005, 2004 and 2003, respectively.
62
GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(B) FUNDED STATUSFunded Status
The following table sets forth the funded status of the international pension plans as of December 31: | | | | | | | | | | | | | | | | | | | | | 2005 | | 2004 | | | In millions | | | 2006 | | 2005 | | | | | (Amounts in millions) | | | | Change in Benefit Obligation: | | | | | | | | | | | | | | | | | | | Benefit Obligation at Beginning of Year | | $ | 129.1 | | | $ | 115.9 | | | $ | 126.5 | | | $ | 129.1 | | | | Service Cost | | | 0.5 | | | | 0.6 | | | | 0.6 | | | | 0.5 | | | | Interest Cost | | | 6.3 | | | | 6.4 | | | | 6.4 | | | | 6.3 | | | | Actuarial Loss | | | 10.1 | | | | 3.1 | | | | 2.7 | | | | 10.1 | | | | Foreign Exchange Translation | | | (13.7 | ) | | | 8.8 | | | | 17.8 | | | | (13.7 | ) | | | Expenses Paid | | | (0.5 | ) | | | (0.6 | ) | | | (0.3 | ) | | | (0.5 | ) | | | Benefits Paid | | | (5.3 | ) | | | (5.1 | ) | | | (5.5 | ) | | | (5.3 | ) | | | | | | | | | | | | | Benefit Obligation at End of Year | | $ | 126.5 | | | $ | 129.1 | | | $ | 148.2 | | | $ | 126.5 | | | | | | | | | | | | | | Change in Plan Assets: | | | | | | | | | | | | | | | | | | | Fair Value of Plan Assets at Beginning of Year | | $ | 109.3 | | | $ | 93.0 | | | $ | 114.0 | | | $ | 109.3 | | | | Actual Return on Plan Assets | | | 20.7 | | | | 10.3 | | | | 10.3 | | | | 20.7 | | | | Foreign Exchange Translation | | | (12.1 | ) | | | 7.3 | | | | 16.2 | | | | (12.1 | ) | | | Expenses Paid | | | (0.5 | ) | | | (0.6 | ) | | | (0.3 | ) | | | (0.5 | ) | | | Employer Contribution | | | 1.9 | | | | 4.4 | | | | 1.8 | | | | 1.9 | | | | Benefits Paid | | | (5.3 | ) | | | (5.1 | ) | | | (5.5 | ) | | | (5.3 | ) | | | | | | | | | | | | | Fair Value of Plan Assets at End of Year | | $ | 114.0 | | | $ | 109.3 | | | $ | 136.5 | | | $ | 114.0 | | | | | | | | | | | | | | Plan Assets Less Than Projected Benefit Obligation | | $ | (12.5 | ) | | $ | (19.8 | ) | | $ | (11.7 | ) | | $ | (12.5 | ) | | | Unrecognized Net Actuarial Loss | | | 16.6 | | | | 22.7 | | | | N/A | (a) | | | 16.6 | | | | | | | | | | | | | | Net Amount Recognized | | $ | 4.1 | | | $ | 2.9 | | | $ | 7.8 | | | $ | 4.1 | | | | | | | | | | | | | | Amounts Recognized in the Consolidated Balance Sheets Consist of: | | | | | | | | | | | | | | | | | | | Accrued Pension Liability | | $ | (12.5 | ) | | $ | (19.8 | ) | | Accumulated Other Comprehensive Income(a) | | | 16.6 | | | | 22.7 | | | Accrued Pension Liability — Noncurrent | | | $ | (11.7 | ) | | $ | (12.5 | ) | | | Accumulated Other Comprehensive Income | | | | N/A | (a) | | | 16.6 | | | | Net Actuarial Loss | | | | 19.5 | | | | N/A | (a) | | | | | | | | | | | | | Net Amount Recognized | | $ | 4.1 | | | $ | 2.9 | | | $ | 7.8 | | | $ | 4.1 | | | | | | | | | | | | | | Weighted Average Assumptions: | | | | | | | | | | | | | | | | | | | Discount Rate | | | 4.80 | % | | | 5.25 | % | | | 5.10% | | | | 4.80% | | | | Rates of Increase in Future Compensation Levels | | | 0.00 | % | | | 0.00 | % | | | 0.00% | | | | 0.00% | | | | | | | | | |
Note: | | | (a) | | During 2005 and 2004, the Company recorded a credit to Other Comprehensive Loss of approximately $6.1 million and $1.5 million in its Consolidated Statements of Comprehensive Loss due to market conditions. |
(a) Not applicable due to a change in Accounting Standard. The accumulated benefit obligation for the Company’s international defined benefit plan was $122.4$148.2 million and $129.1$126.5 million at December 31, 2006 and 2005, and 2004, respectively.
63
GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s approach to developing its expected long-term rate of return on pension plan assets combines an analysis of historical investment performance by asset class, the Company’s investment guidelines and current and expected economic fundamentals. 62
GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The Company’s retirement plan asset allocation at December 31, 20052006 and 20042005 and target allocation for 20062007 by asset category are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Percentage of
| | | | | Percentage of
| | | Target
| | Plan Assets at
| | | Target
| | Plan Assets at
| | | Allocation | | December 31, | | | Allocation
| | December 31, | In millions | | | 2007 | | 2006 | | 2005 | | | 2006 | | 2005 | | 2004 | | | | Asset Category: | | | | | | | | | | | | | | | | | | | | | | | | | Equity Securities | | | 70.0 | % | | | 71.0 | % | | | 69.8 | % | | | 70.0 | % | | | 69.0 | % | | | 71 | .0% | Debt Securities | | | 30.0 | % | | | 27.4 | % | | | 28.7 | % | | | 30.0 | | | | 30.0 | | | | 27 | .4 | Cash | | | — | | | | 1.6 | % | | | 1.5 | % | | | — | | | | 1.0 | | | | 1 | .6 | | | | | | | | | | | | | Total | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100 | .0% | | | | | | | | | | | | |
Active management of assets is used in asset classes and strategies where there is a potential to add value over a passive benchmark. Investment risk is measured and monitored on an on-going basis through annual liability measurements, periodic asset/liability studies, and quarterly investment portfolio reviews. During 20052006 and 2004,2005, the Company made $1.9$1.8 million and $4.4$1.9 million, respectively of contributions to its international pension plan. For 2006,2007, the Company expects to make contributions of approximately $2 million. Estimated Future Benefit Payments The following represents the Company’s estimated future benefit payments through the year 2015:2016: | | | | | | | | | Year | | (Amounts in Millions) | | | In millions | | | | | | | | 2006 | | $ | 4.7 | | | | | 2007 | | $ | 4.5 | | | $ | 5.5 | | 2008 | | $ | 4.7 | | | | 5.6 | | 2009 | | $ | 4.8 | | | | 5.7 | | 2010 | | $ | 4.8 | | | | 5.7 | | 2011 — 2015 | | $ | 26.3 | | | 2011 | | | | 5.8 | | 2012 — 2016 | | | | 32.9 | | | | | | | |
During 2007, $0.3 million of the net actuarial loss is expected to be recognized in Net Periodic Benefit Costs. 63
DEFINED CONTRIBUTION PLANSGRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) ADOPTION OF SFAS NO. 158 The Company provides defined contribution plans for eligible U.S. employees. The Company’s contributionstable below summarizes the minimum pension liability adjustment (“AMPLA”) and the incremental effect of applying SFAS No. 158 to the plans are based upon employee contributionsCompany’s Pension Plans and Postretirement and Postemployment Benefits by line item on the Company’s annual operating results. Contributions to these plans for the years endedConsolidated Balance Sheet as of December 31, 2005, 2004 and 2003 were $8.2 million, $7.3 million and $4.3 million, respectively.2006: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pre-SFAS
| | | SFAS No. 158
| | | | | | | Pre-SFAS
| | | | | | No. 158
| | | Adoption
| | | After Application
| | In millions | | No. 158 | | | AMPLA | | | with AMPLA | | | Adjustments | | | of SFAS No. 158 | | | | | Deferred Income Tax Assets(a) | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | Intangible Asset | | | 8.2 | | | | (0.4 | ) | | | 7.8 | | | | (7.8 | ) | | | — | | | | | | | | | | | | | | | | | | | | | | | Pension Liability | | | (169.7 | ) | | | 23.7 | | | | (146.0 | ) | | | (18.4 | ) | | | (164.4 | ) | Postretirement Liability | | | (46.3 | ) | | | — | | | | (46.3 | ) | | | 1.1 | | | | (45.2 | ) | Postemployment Liability | | | (1.4 | ) | | | — | | | | (1.4 | ) | | | (6.1 | ) | | | (7.5 | ) | | | Total Liabilities | | $ | (217.4 | ) | | $ | 23.7 | | | $ | (193.7 | ) | | $ | (23.4 | ) | | $ | (217.1 | ) | | | Accumulated Other Comprehensive Income, Pension — Net of Tax(a) | | $ | 90.0 | | | $ | (23.3 | ) | | $ | 66.7 | | | $ | 26.2 | | | $ | 92.9 | | Accumulated Other Comprehensive Income, Postretirement — Net of Tax(a) | | | — | | | | — | | | | — | | | | (1.1 | ) | | | (1.1 | ) | Accumulated Other Comprehensive Income, Postemployment — Net of Tax(a) | | | — | | | | — | | | | — | | | | 6.1 | | | | 6.1 | | | | Total Shareholders’ Equity | | $ | 90.0 | | | $ | (23.3 | ) | | $ | 66.7 | | | $ | 31.2 | | | $ | 97.9 | | | |
Note: | | | NOTE 12 — | OTHER POSTRETIREMENT BENEFITS(a) | Deferred Income Tax Assets are fully offset by a Valuation Allowance. |
NOTE 10 — INCOME TAXES The Company sponsors postretirement health care plans that provide medicalU.S. and life insurance coverage to eligible salariedinternational components of Loss before Income Taxes and hourly retired U.S. employees and their dependents. No postretirement medical benefits are offered toEquity in Net Earnings of Affiliates consisted of the Company’s salaried employees who began employment after December 31, 1993 or to Graphic employees hired after June 15, 1999.following: | | | | | | | | | | | | | | | | | Year Ended December 31, | | | | In millions | | 2006 | | | 2005 | | | 2004 | | | | | | U.S. | | $ | (66.3 | ) | | $ | (60.7 | ) | | $ | (35.4 | ) | | | International | | | (15.0 | ) | | | (8.3 | ) | | | 2.0 | | | | | | Loss before Income Taxes and Equity in Net Earnings of Affiliates | | $ | (81.3 | ) | | $ | (69.0 | ) | | $ | (33.4 | ) | | | | |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The other postretirement benefits expense consisted of the following:
| | | | | | | | | | | | | | | Year Ended
| | | Year Ended
| | | Year Ended
| | | | December 31,
| | | December 31,
| | | December 31,
| | | | 2005 | | | 2004 | | | 2003 | | | | (Amounts in millions) | | | Service Cost | | $ | 0.9 | | | $ | 0.9 | | | $ | 0.7 | | Interest Cost | | | 2.3 | | | | 2.8 | | | | 2.5 | | Amortizations: | | | | | | | | | | | | | Prior Service Cost | | | 0.1 | | | | (0.2 | ) | | | (0.2 | ) | Actuarial (Gain) loss | | | (0.2 | ) | | | 0.4 | | | | 0.7 | | | | | | | | | | | | | | | Net Periodic Postretirement Benefits Cost | | $ | 3.1 | | | $ | 3.9 | | | $ | 3.7 | | | | | | | | | | | | | | | Weighted Average Assumptions: | | | | | | | | | | | | | Discount Rate | | | 5.8% | | | | 6.0% | | | | 6.5% | | Initial Health Care Cost Trend Rate | | | 8.5% | | | | 9.0% | | | | 9.1% | | Ultimate Health Care Cost Trend Rate(a) | | | 5.0% | | | | 5.0% | | | | 5.0% | | Ultimate Year(a) | | | 2012 | | | | 2012 | | | | 2007 | |
| | | (a) | | The Company’s salaried plan’s cost was capped beginning in 1999. |
The accrued postretirement benefit obligation at December 31 was as follows:
| | | | | | | | | | | 2005 | | | 2004 | | | | (Amounts in millions) | | | Change in Benefit Obligation: | | | | | | | | | Benefit Obligation at Beginning of Year | | $ | 50.2 | | | $ | 55.0 | | Service Cost | | | 0.9 | | | | 0.9 | | Interest Cost | | | 2.3 | | | | 2.8 | | Actuarial Gain | | | (6.9 | ) | | | (1.9 | ) | Amendments | | | 1.4 | | | | — | | Benefits Paid | | | (3.4 | ) | | | (2.8 | ) | Impact of Medicare Rx | | | — | | | | (3.8 | ) | | | | | | | | | | Benefit Obligation at End of Year | | $ | 44.5 | | | $ | 50.2 | | | | | | | | | | | Fair Value of Plan Assets at End of Year | | | — | | | | — | | | | | | | | | | | Accumulated Postretirement Benefit Obligation in Excess of Plan Assets | | $ | (44.5 | ) | | $ | (50.2 | ) | Unrecognized Net Actuarial (Gain)/Loss | | | (1.3 | ) | | | 6.3 | | Unrecognized Prior Service Cost/(Credit) | | | 0.3 | | | | (1.1 | ) | | | | | | | | | | Total Accrued Postretirement Benefit Obligation, net | | $ | (45.5 | ) | | $ | (45.0 | ) | | | | | | | | | | Weighted Average Assumptions: | | | | | | | | | Discount Rate | | | 5.65% | | | | 5.75% | | Initial Health Care Cost Trend Rate | | | 9.00% | | | | 8.50% | | Ultimate Health Care Cost Trend Rate(a) | | | 5.00% | | | | 5.00% | | Ultimate Year(a) | | | 2014 | | | | 2012 | |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | 2005 | | | | 1 Percentage
| | | 1 Percentage
| | | | Point Increase | | | Point Decrease | | | Health Care Trend Rate Sensitivity: | | | | | | | | | Effect on Total of Interest and Service Cost Components | | $ | 0.2 | | | $ | (0.2 | ) | Effect on Year-End Postretirement Benefit Obligation | | $ | 2.4 | | | $ | (2.1 | ) |
| | | (a) | | The Company’s salaried plan assumes no future increases in employer subsidies. |
In December 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”). The Act expands Medicare primarily by adding a prescription drug benefit for Medicare-eligible individuals beginning in 2006. The Act has not and is not expected to have a material impact on the Company’s financial position and results of operations.
The Company made benefit payments of $2.6 million during 2005. The Company estimates its postretirement benefit payments through 2015 to be:
| | | | | Year | | (Amounts in Millions) | | | 2006 | | $ | 2.9 | | 2007 | | $ | 2.9 | | 2008 | | $ | 2.9 | | 2009 | | $ | 3.0 | | 2010 | | $ | 3.1 | | 2011 — 2015 | | $ | 17.0 | |
The U.S. and international components of Loss before Income Taxes and Equity in Net Earnings of Affiliates consisted of the following:
| | | | | | | | | | | | | | | Year Ended
| | | Year Ended
| | | Year Ended
| | | | Dec. 31, 2005 | | | Dec. 31, 2004 | | | Dec. 31, 2003 | | | | (Amounts in millions) | | | U.S. | | $ | (60.7 | ) | | $ | (35.4 | ) | | $ | (93.2 | ) | International | | | (8.3 | ) | | | 2.0 | | | | 10.5 | | | | | | | | | | | | | | | Loss before Income Taxes and Equity in Net Earnings of Affiliates | | $ | (69.0 | ) | | $ | (33.4 | ) | | $ | (82.7 | ) | | | | | | | | | | | | | |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The provisions for Income Tax (Expense) Benefit on Loss before Income Taxes and Equity in Net Earnings of Affiliates consisted of the following: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended
| | Year Ended
| | Year Ended
| | | Year Ended December 31, | | | | | Dec. 31, 2005 | | Dec. 31, 2004 | | Dec. 31, 2003 | | | In millions | | | 2006 | | 2005 | | 2004 | | | | | (Amounts in millions) | | | | Current | | | | | | | | | | | | | | | | | | | | | | | | | | | U.S. Federal | | $ | 0.2 | | | $ | — | | | $ | — | | | $ | — | | | $ | 0.2 | | | $ | — | | | | U.S. State and Local | | | — | | | | (0.5 | ) | | | — | | | | — | | | | — | | | | (0.5 | ) | | | International | | | 1.0 | | | | (4.8 | ) | | | (2.5 | ) | | | (0.7 | ) | | | 1.0 | | | | (4.8 | ) | | | | | | | | | | | | | | | Total Current | | | 1.2 | | | | (5.3 | ) | | | (2.5 | ) | | | (0.7 | ) | | | 1.2 | | | | (5.3 | ) | | | | | | Deferred | | | | | | | | | | | | | | | | | | | | | | | | | | | U.S. | | | (19.5 | ) | | | (19.1 | ) | | | (12.8 | ) | | | (19.8 | ) | | | (19.5 | ) | | | (19.1 | ) | | | International | | | (5.0 | ) | | | (4.5 | ) | | | 1.0 | | | | 0.3 | | | | (5.0 | ) | | | (4.5 | ) | | | | | | | | | | | | | | | Total Deferred | | | | (19.5 | ) | | | (24.5 | ) | | | (23.6 | ) | | | | | | | | | | | | Income Tax Expense | | $ | (23.3 | ) | | $ | (28.9 | ) | | $ | (14.3 | ) | | $ | (20.2 | ) | | $ | (23.3 | ) | | $ | (28.9 | ) | | | | | | | | | | | | | | |
A reconciliation of Income Tax Expense on Loss before Income Taxes and Equity in Net Earnings of Affiliates at the federal statutory rate of 35% compared with the Company’s actual Income Tax Expense is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended
| | | | | | Year Ended
| | | | | | Year Ended
| | | | | | | Dec. 31, 2005 | | | | | | Dec. 31, 2004 | | | | | | Dec. 31, 2003 | | | | | | | (Amounts in
| | | | | | (Amounts in
| | | | | | (Amounts in
| | | | | | | millions) | | | Percent | | | millions) | | | Percent | | | millions) | | | Percent | | | Benefit income tax at U.S. statutory rate | | $ | 24.2 | | | | 35.0 | % | | $ | 11.7 | | | | 35.0 | % | | $ | 28.9 | | | | 35.0 | % | U.S. state and local tax benefit | | | 1.3 | | | | 1.9 | | | | 1.2 | | | | 3.6 | | | | 3.3 | | | | 4.0 | | Valuation allowance on current year benefit | | | (25.4 | ) | | | (36.8 | ) | | | (16.6 | ) | | | (49.7 | ) | | | (38.4 | ) | | | (46.4 | ) | International tax rate differences | | | (0.2 | ) | | | (0.3 | ) | | | 0.1 | | | | 0.3 | | | | 0.4 | | | | 0.5 | | Valuation allowance adjustment | | | (6.1 | ) | | | (8.8 | ) | | | (3.2 | ) | | | (9.6 | ) | | | 3.9 | | | | 4.7 | | Amortization of goodwill | | | (19.5 | ) | | | (28.3 | ) | | | (19.1 | ) | | | (57.2 | ) | | | (12.8 | ) | | | (15.5 | ) | Foreign withholding tax | | | (0.1 | ) | | | (0.1 | ) | | | (0.4 | ) | | | (1.2 | ) | | | (0.4 | ) | | | (.5 | ) | Adjustment to tax contingencies | | | 2.5 | | | | 3.6 | | | | (2.5 | ) | | | (7.5 | ) | | | — | | | | — | | Other | | | — | | | | — | | | | (0.1 | ) | | | (0.3 | ) | | | 0.8 | | | | 0.9 | | | | | | | | | | | | | | | | | | | | | | | | | | | Income Tax Expense | | $ | (23.3 | ) | | | (33.8 | %) | | $ | (28.9 | ) | | | (86.6 | %) | | $ | (14.3 | ) | | | (17.3 | %) | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | | In millions | | 2006 | | | Percent | | | 2005 | | | Percent | | | 2004 | | | Percent | | | | | | Income Tax Benefit at U.S. Statutory Rate | | $ | 28.4 | | | | 35.0 | % | | $ | 24.2 | | | | 35.0 | % | | $ | 11.7 | | | | 35.0 | % | | | U.S. State and Local Tax Benefit | | | 2.3 | | | | 2.8 | | | | 1.3 | | | | 1.9 | | | | 1.2 | | | | 3.6 | | | | Valuation Allowance on Current Year Benefit | | | (25.5 | ) | | | (31.4 | ) | | | (25.4 | ) | | | (36.8 | ) | | | (16.6 | ) | | | (49.7 | ) | | | International Tax Rate Differences | | | (1.7 | ) | | | (2.1 | ) | | | (0.2 | ) | | | (0.3 | ) | | | 0.1 | | | | 0.3 | | | | Valuation Allowance Adjustment | | | (3.9 | ) | | | (4.8 | ) | | | (6.1 | ) | | | (8.8 | ) | | | (3.2 | ) | | | (9.6 | ) | | | Amortization of Goodwill | | | (19.6 | ) | | | (24.1 | ) | | | (19.5 | ) | | | (28.3 | ) | | | (19.1 | ) | | | (57.2 | ) | | | Foreign Withholding Tax | | | (0.2 | ) | | | (0.2 | ) | | | (0.1 | ) | | | (0.1 | ) | | | (0.4 | ) | | | (1.2 | ) | | | Adjustment to Tax Contingencies | | | 0.1 | | | | 0.1 | | | | 2.5 | | | | 3.6 | | | | (2.5 | ) | | | (7.5 | ) | | | Other | | | (0.1 | ) | | | (0.1 | ) | | | — | | | | — | | | | (0.1 | ) | | | (0.3 | ) | | | | | Income Tax Expense | | $ | (20.2 | ) | | | (24.8 | )% | | $ | (23.3 | ) | | | (33.8 | )% | | $ | (28.9 | ) | | | (86.6 | )% | | | | |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The tax effects of differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31 were as follows: | | | | | | | | | | | 2005 | | | 2004 | | | | (Amounts in millions) | | | Short-term deferred tax assets | | | | | | | | | Compensation based accruals | | $ | 17.0 | | | $ | — | | Other | | | 4.6 | | | | — | | Valuation allowance | | | (8.5 | ) | | | — | | | | | | | | | | | Net short-term deferred tax assets | | $ | 13.1 | | | $ | — | | | | | | | | | | | Long-term deferred tax assets | | | | | | | | | Net operating loss carryforwards | | | 451.3 | | | | 516.8 | | Pension accrual | | | 62.5 | | | | — | | Tax credits | | | 24.9 | | | | — | | Other | | | 55.7 | | | | 69.7 | | Valuation allowance | | | (243.6 | ) | | | (221.7 | ) | | | | | | | | | | Net long-term deferred tax assets | | $ | 350.8 | | | $ | 364.8 | | | | | | | | | | | Long-term deferred tax liabilities | | | | | | | | | Property, plant and equipment | | $ | (325.4 | ) | | $ | (370.3 | ) | Goodwill | | | (89.3 | ) | | | (69.7 | ) | Other intangibles | | | (41.3 | ) | | | — | | Other | | | (5.5 | ) | | | — | | | | | | | | | | | Total long-term deferred tax liabilities | | $ | (461.5 | ) | | $ | (440.0 | ) | | | | | | | | | | Net deferred tax liability | | $ | (97.6 | ) | | $ | (75.2 | ) | | | | | | | | | |
| | | | | | | | | | | In millions | | 2006 | | | 2005 | | | | | | Short-Term Deferred Tax Assets | | | | | | | | | | | Compensation Based Accruals | | $ | 17.6 | | | $ | 17.0 | | | | Other | | | 4.0 | | | | 4.6 | | | | Valuation Allowance | | | (9.9 | ) | | | (8.5 | ) | | | | | Net Short-Term Deferred Tax Assets | | $ | 11.7 | | | $ | 13.1 | | | | | | Long-Term Deferred Tax Assets | | | | | | | | | | | Net Operating Loss Carryforwards | | | 541.2 | | | | 494.2 | | | | Pension Accrual | | | 62.3 | | | | 62.5 | | | | Tax Credits | | | 13.6 | | | | 13.3 | | | | Other | | | 60.5 | | | | 55.7 | | | | Valuation Allowance | | | (332.6 | ) | | | (274.9 | ) | | | | | Net Long-Term Deferred Tax Assets | | $ | 345.0 | | | $ | 350.8 | | | | | | Long-Term Deferred Tax Liabilities | | | | | | | | | | | Property, Plant and Equipment | | $ | (324.7 | ) | | $ | (325.4 | ) | | | Goodwill | | | (108.8 | ) | | | (89.2 | ) | | | Other Intangibles | | | (37.1 | ) | | | (41.3 | ) | | | Other | | | (4.6 | ) | | | (5.6 | ) | | | | | Total Long-Term Deferred Tax Liabilities | | $ | (475.2 | ) | | $ | (461.5 | ) | | | | | Net Deferred Tax Liability | | $ | (118.5 | ) | | $ | (97.6 | ) | | | | |
The Company has reviewed the net deferred tax assets as of both December 31, 20052006 and 2004,2005, respectively, and determined that it is more likely than not that some or all of the net deferred tax assets will not be realized. The valuation allowance of $342.5 million and $283.4 million at December 31, 2006 and 2005, respectively, is maintained on the remaining net deferred tax assets for which the Company has not determined that realization is more likely than not. Of the total valuation allowance, $32.9 million relates to foreign jurisdictions and the remaining $309.6 million relates to the U.S. The need for a valuation allowance is made on acountry-by-country basis and the amount of the valuation allowance has increased as of December 31, 2005,2006, over 20042005 primarily due to operating activities in various countries in 20052006 and changes in deferred tax balances. As of December 31, 20052006, the Company has concluded that due to difficulty in maintaining profitability and the lack of sufficient future taxable income of the appropriate character, realization is less than more likely than not on the deferred tax assets related primarily to the Company’s Brazil, Germany, France, Hong Kong, Sweden, Mexico and the United Kingdom operations and as a result, a valuation allowance of $6.1$3.9 million for these operations was accrued in 2005. The2006. An additional valuation allowance of $252.1 million and $221.7 million at December 31, 2005 and 2004, respectively, is maintained onwas also accrued during 2006 for the remaining net deferred tax assets for which the Company has not determined that realization is more likely than not.U.S.
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GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The U.S. federal net operating loss carryforward amount totals $1,218.6 million and expirescarryforwards expire as follows: | | | | | | | | | Year | | Amounts in Millions | | | In millions | | | | | | | | | | 2012 | | $ | 378.5 | | | $ | 385.2 | | 2018 | | | 295.0 | | | | 295.0 | | 2019 | | | 196.8 | | | | 196.8 | | 2021 | | | 144.2 | | | | 144.2 | | 2022 | | | 72.1 | | | | 72.1 | | 2023 | | | 122.0 | | | | 122.0 | | 2025 | | | 10.0 | | | | 24.2 | | 2026 | | | | 104.1 | | | | | | | | Total | | | $ | 1,343.6 | | | | | | | |
U.S. state net operating loss carryforward amounts total $809.5 million and expire in various years. International net operating loss carryforward amounts total $60.5$80.7 million of which $1.0 million expire through 2020 and $59.5 millionsubstantially all have no expiration date. As of December 31, 2005,2006, the Company, in accordance with APB Opinion 23, Accounting for Income Taxes, Special Areas, has determined that $71.5$67.2 million of undistributed foreign earnings are not intended to be reinvested indefinitely by itsnon-U.S. subsidiaries. Deferred income tax was recorded as a reduction to the Company’s net operating losses on these undistributed earnings as well as the financial statement carrying value in excess of tax basis in the amount of $35.8$30.2 million. As of December 31, 2004,2005, the Company had determined that $71.8$71.5 million of undistributed foreign earnings were not intended to be reinvested indefinitely. Deferred income tax was recorded as a reduction to the Company’s net operating losses on these undistributed earnings as well as the financial statement carrying value in excess of tax basis in the amount of $48.8$35.8 million. Prior to 2004, the Company’s intent was to permanently reinvest its foreign earnings. It is not practicable to determine the amount of unrecognized deferred U.S. income tax liability on these unremitted earnings. The Company periodically determines whether thenon-U.S. subsidiaries subsidiaries will invest their undistributed earnings indefinitely and reassesses this determination as appropriate. The Company has determined that it is not beneficial to utilize the temporary incentive related to the repatriation of earnings accumulated outside the U.S. as provided in the American Jobs Creation Act of 2004. | | NOTE 1411 — | LOSS ON EARLY EXTINGUISHMENT OF DEBT |
In 2003 and in connection with the Merger, the Company recorded a non-cash charge to earnings of $16.7 million, related to the write-off of remaining debt issuance costs on its prior senior secured credit facilities and the Prior RIC Notes and also recorded a charge of $28.6 million, related to the call premium paid upon redemption of the Prior RIC Notes.
| | NOTE 15 — | FINANCIAL INSTRUMENTS, DERIVATIVES AND HEDGING ACTIVITIES |
The Company is exposed to fluctuations in interest rates on its variable debt, fluctuations in foreign currency transaction cash flows and variability in cash flows attributable to certain commodity purchases. The Company actively monitors these fluctuations and periodically uses derivatives and other financial instruments to hedge exposures to interest, currency and commodity risks. The Company’s use of derivative instruments may result in short-term gains or losses and may increase volatility in its earnings. In addition, these instruments involve, to varying degrees, elements of market and credit risk in excess of the amounts recognized in the Consolidated Balance Sheets. The Company does not trade or use derivative instruments with the objective of earning financial gains on interest or currency rates, nor does it use leveraged instruments or instruments where there are no underlying exposures identified.
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GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Interest Rate Risk The Company uses interest rate swaps to manage interest rate risks on future income caused by interest rate changes on its variable rate Term Loan facility. The differential to be paid or received under these agreements is recognized as an adjustment to interest expense related to the debt. At December 31, 2005,2006, the 67
GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Company had interest rate swap agreements with a notional amount of $660$550 million, which expire on various dates from 20062007 to 20082009 under which the Company will pay fixed rates of 2.69%3.27% to 4.53%5.46% and receive the three-month LIBOR.LIBOR rates. During 2006 and 2005, there was no ineffective portion related to changes in the fair value of the interest rate swap agreements. Additionally, there were no amounts excluded from the measure of effectiveness. During 2004, there was approximately $2.5 million determined to be the ineffective portionportions related to changes in the fair value of the interest rate swap agreements. Additionally, there were no amounts excluded from the measure of effectiveness.
Commodity Risk To manage risks associated with future variability in cash flows and price risk attributable to certain commodity purchases, the Company entered into natural gas swap contracts to hedge prices for a significant portion of its natural gas requirements through December 20062008 with a weighted average contractual rate of $11.24$8.57 per MMBTU. Such contracts are designated as cash flow hedges. When a contract matures, the resulting gain or loss is reclassified into Cost of Sales concurrently with the recognition of the commodity purchased. The ineffective portion of the swap contracts change in fair value, if any, would be recognized immediately in earnings. During 2006 and 2005, there was awere minimal amountamounts of ineffective portion related to changes in fair value of natural gas swap contracts. Additionally, there were no amounts excluded from the measure of effectiveness. During 2004, there was no material ineffective portionportions related to changes in fair value of natural gas swap contracts. Additionally, there were no amounts excluded from the measure of effectiveness. Foreign Currency Risk The Company enters into forward exchange contracts to manage risks associated with future variability in cash flows resulting from anticipated foreign currency transactions that may be adversely affected by changes in exchange rates. Gains/losses, if any, related to these contracts are recognized in income when the anticipated transaction affects income. At December 31, 20052006 and 2004,2005, multiple forward exchange contracts existed that expire on various dates throughout 2006.2007. Those purchased forward exchange contracts outstanding at December 31, 2006, when measured in U.S. dollars at December 31, 2006 exchange rates, had notional amounts totaling $140.2 million. Those purchased forward exchange contracts outstanding at December 31, 2005, when measured in U.S. dollars at December 31, 2005 exchange rates, had notional amounts totaling $125.6 million. Those purchased forward exchange contracts outstanding at December 31, 2004, when measured in U.S. dollars at December 31, 2004 exchange rates, had notional amounts totaling $154.8 million. No amounts were reclassified to earnings during 20052006 or 20042005 in connection with forecasted transactions that were no longer considered probable of occurring and there was no amount of ineffective portion related to changes in the fair value of foreign currency forward contracts. Additionally, there were no amounts excluded from the measure of effectiveness. Derivatives not Designated as Hedges The Company enters into forward exchange contracts to effectively hedge a portionsubstantially all of accounts receivable resulting from transactions denominated in foreign currencies in order to manage risks associated with foreign currency transactions adversely affected by changes in exchange rates. At December 31, 20052006 and 2004,2005, multiple foreign currency forward exchange contracts existed, with maturities ranging up to three months. Those forward currency exchange contracts outstanding at December 31, 2006, when aggregated and six
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
months, respectively.measured in U.S. dollars at December 31, 2006 exchange rates, had net notional amounts totaling $6.6 million. Those forward currency exchange contracts outstanding at December 31, 2005, when aggregated and measured in U.S. dollars at December 31, 2005 exchange rates, had net notional amounts totaling $3.0 million. Those forward currency exchange contracts outstanding at December 31, 2004, when aggregated and measured in U.S. dollars at December 31, 2004 exchange rates, had net notional amounts totaling $12.8 million. Generally, unrealized gains and losses resulting from these contracts are recognized in operations and approximately offset corresponding unrealized gains and losses recognized on the hedgedthese accounts receivable. These contracts are presently being and will continue to be marked to market through the income statement.
68
GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Foreign Currency Movement Effect Net international currency exchange (gains) losses included in determining Income from Operations for the years ended December 31, 2006, 2005 and 2004 and 2003 were $(1.6) million, $6.3 million $4.6 million and $1.3$4.6 million, respectively. Accumulated Derivative Instruments (Loss) Gain (Loss) The following is a reconciliation of changes in the fair value of the interest rate swap agreements, natural gas swaps and foreign currency forward contracts which have been recorded as Accumulated Derivative Instruments (Loss) Gain (Loss) in the accompanying Consolidated Balance Sheets at December 31, 2005 and 2004, and as Derivative Instruments Income (Loss) in the accompanying Consolidated StatementsStatement of Comprehensive LossShareholders’ Equity for years ended December 31, 2006, 2005 2004 and 2003.2004. | | | | | | | | | | | | | | | | | | | | | | | | | | | 2005 | | 2004 | | 2003 | | | In millions | | | 2006 | | 2005 | | 2004 | | | (Amounts in millions) | | | | Balance at January 1 | | $ | (9.0 | ) | | $ | (12.7 | ) | | $ | (6.1 | ) | | $ | 5 | .2 | | $ | (9 | .0) | | $ | (12 | .7) | Reclassification to earnings | | | (11.4 | ) | | | (6.7 | ) | | | (5.0 | ) | | | 19 | .3 | | | (11 | .4) | | | (6 | .7) | Current period change in fair value | | | 25.6 | | | | 10.4 | | | | (1.6 | ) | | | (29 | .9) | | | 25 | .6 | | | 10 | .4 | | | | | | | | | | | | | Balance at December 31 | | $ | 5.2 | | | $ | (9.0 | ) | | $ | (12.7 | ) | | $ | (5 | .4) | | $ | 5 | .2 | | $ | (9 | .0) | | | | | | | | | | | | |
The balance recordedAt December 31, 2006, the Company expects to reclassify $6.1 million of losses in 2007 from Accumulated Derivative Instruments (Loss) Gain (Loss) at December 31, 2005 is expected to be reclassified into future earnings, contemporaneously with and offsetting changes in the related hedged exposure. The actual amount that will be reclassified to future earnings over the next twelve months may vary from this amount as a result of changes in market conditions.
Fair Value of Financial Instruments The following methodsfair values of the Company’s financial assets at December 31, 2006 and assumptions were used to estimate2005, equal the fair value of each category of financial instrumentcarrying values reported on the Consolidated Balance Sheets except for which it is practicable to estimate that value: | | | | • | Other Receivables and Short-Term Borrowings |
The carrying amount of these instruments approximates fair value due to their short-term nature.
Long-Term Debt. The fair value of long-term debtthe Company’s Long-Term Debt was $1,960.5 million and $1,969.6 million as compared to the carrying amounts of $1,911.0 million and $1,968.5 million as of December 31, 2006 and 2005, respectively. The fair value of Long-Term Debt is based on quoted market prices. | | | NOTE 12 — | • | Forward Exchange ContractsACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |
The fair valuechanges in the components of forward exchange contracts is based on quoted market prices by counter parties.Accumulated Other Comprehensive Income (Loss) are as follows: | | | | • | Interest Rate Swap Contracts |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Years Ended December 31, | | | 2006 | | | 2005 | | | 2004 | | | Pretax
| | | Tax
| | | Net
| | | Pretax
| | | Tax
| | | Net
| | | Pretax
| | | Tax
| | | Net
| | | | In millions | | Amount | | | Effect | | | Amount | | | Amount | | | Effect | | | Amount | | | Amount | | | Effect | | | Amount | | | | | | Accumulated Derivative Instruments (Loss) Gain | | $ | (10.6 | ) | | $ | — | | | $ | (10.6 | ) | | $ | 14.2 | | | $ | — | | | $ | 14.2 | | | $ | 3.7 | | | $ | — | | | $ | 3.7 | | | | Minimum Pension Liability Adjustment | | | 23.3 | | | | — | | | | 23.3 | | | | (24.8 | ) | | | — | | | | (24.8 | ) | | | (5.0 | ) | | | — | | | | (5.0 | ) | | | Currency Translation Adjustment | | | 14.7 | | | | — | | | | 14.7 | | | | (17.2 | ) | | | — | | | | (17.2 | ) | | | 10.4 | | | | — | | | | 10.4 | | | | Adjustment to initially apply SFAS No. 158 — Pension | | | (26.2 | ) | | | ��� | | | | (26.2 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | Adjustment to initially apply SFAS No. 158 — Postretirement | | | 1.1 | | | | — | | | | 1.1 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | Adjustment to initially apply SFAS No. 158 — Postemployment | | | (6.1 | ) | | | — | | | | (6.1 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | Accumulated Other Comprehensive (Loss) Income | | $ | (3.8 | ) | | $ | — | | | $ | (3.8 | ) | | $ | (27.8 | ) | | $ | — | | | $ | (27.8 | ) | | $ | 9.1 | | | $ | — | | | $ | 9.1 | | | | | |
7169
GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The fair valuebalances of interest rate swap contracts is based on quoted market prices by counter parties. | | | | • | Natural Gas Swap Contracts |
The fair valueAccumulated Other Comprehensive Loss, net of natural gas swap contracts is based on quoted market prices by counter parties.
The carrying amounts and estimated fair value of the Company’s financial instruments as of December 31 wereapplicable taxes are as follows:
| | | | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | | Carrying
| | | Fair
| | | Carrying
| | | Fair
| | | | Amounts | | | Value | | | Amounts | | | Value | | | | (Amounts in millions) | | | Other receivables | | $ | 18.7 | | | $ | 18.7 | | | $ | 10.9 | | | $ | 10.9 | | Short-term borrowings | | | 9.8 | | | | 9.8 | | | | 13.4 | | | | 13.4 | | Long-term debt | | | 1,968.5 | | | | 1,969.6 | | | | 2,011.8 | | | | 2,130.5 | | Currency forward exchange contracts | | | 2.2 | | | | 2.2 | | | | (8.0 | ) | | | (8.0 | ) | Interest rate swap contracts | | | 5.2 | | | | 5.2 | | | | 2.7 | | | | 2.7 | | Natural gas swap contracts | | | (1.2 | ) | | | (1.2 | ) | | | (1.6 | ) | | | (1.6 | ) |
| | | | | | | | | | | | | December 31, | In millions | | 2006 | | | 2005 | | | | | | Accumulated Derivative Instruments (Loss) Gain | | $ | (5.4 | ) | | $ | 5.2 | | | | Minimum Pension Liability Adjustment | | | — | | | | (90.0 | ) | | | Currency Translation Adjustment | | | (2.7 | ) | | | (17.4 | ) | | | Pension Benefit Plan | | | (92.9 | ) | | | — | | | | Postretirement Benefit Plan | | | 1.1 | | | | — | | | | Postemployment Benefit Plan | | | (6.1 | ) | | | — | | | | | | Accumulated Other Comprehensive Loss | | $ | (106.0 | ) | | $ | (102.2 | ) | | | | |
| | NOTE 1613 — | BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION |
The Company reports its results in two business segments: paperboard packaging and containerboard/other. These segments are evaluated by the chief operating decision maker based primarily on income from operations. The Company’s reportable segments are based upon strategic business units that offer different products. The paperboard packaging business segment includes the production and sale of paperboard for its beverage multiple packaging and consumer products packaging businesses from its West Monroe, Louisiana, Macon, Georgia, Kalamazoo, Michigan and Norrköping, Sweden mills; carton converting facilities in the United States,U.S., Europe, Brazil and Canada; and the design, manufacture and installation of packaging machinery related to the assembly of cartons. The containerboard/other business segment primarily includes the production and sale of linerboard, corrugating medium and kraft paper from paperboard mills in the United States.U.S. The Company’s customers are not concentrated in any specific geographic region, but are concentrated in certain industries. Customers of the Paperboard Packaging business segment include the beverage and consumer products packaging industries. Customers of the Containerboard/Other business segment include integrated and non-integrated containerboard converters. During 2005 or 2004, theThe Company did not have any one customer who accounted for 10% or more of the Company’s net sales. During 2003, the Company had one customer who accounted for approximately 11% of the Company’s net sales.sales during 2006, 2005 or 2004.
7270
GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Business segment information is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended
| | Year Ended
| | Year Ended
| | | Year Ended December 31, | | | December 31,
| | December 31,
| | December 31,
| | | | | 2005 | | 2004 | | 2003 | | | In millions | | | 2006 | | 2005 | | 2004 | | | | | (Amounts in millions) | | | | NET SALES: | | | | | | | | | | | | | | | | | | | | | | | | | | | Paperboard Packaging | | $ | 2,297.8 | | | $ | 2,291.2 | | | $ | 1,600.6 | | | $ | 2,318.4 | | | $ | 2,297.8 | | | $ | 2,291.2 | | | | Containerboard/Other | | | 86.2 | | | | 95.3 | | | | 82.7 | | | | 94.6 | | | | 86.2 | | | | 95.3 | | | | | | | | | | | | | | | $ | 2,384.0 | | | $ | 2,386.5 | | | $ | 1,683.3 | | | Total | | | $ | 2,413.0 | | | $ | 2,384.0 | | | $ | 2,386.5 | | | | | | | | | | | | | | | | INCOME (LOSS) FROM OPERATIONS: | | | | | | | | | | | | | | | | | | | | | | | | | | | Paperboard Packaging | | $ | 161.7 | | | $ | 211.3 | | | $ | 169.8 | | | $ | 143.4 | | | $ | 161.7 | | | $ | 211.3 | | | | Containerboard/Other | | | (16.1 | ) | | | (21.6 | ) | | | (27.3 | ) | | | (17.9 | ) | | | (16.1 | ) | | | (21.6 | ) | | | Corporate(a) | | | (58.7 | ) | | | (74.1 | ) | | | (36.4 | ) | | Corporate(a) | | | | (35.2 | ) | | | (58.7 | ) | | | (74.1 | ) | | | | | | | | | | | | | | | Total | | | $ | 90.3 | | | $ | 86.9 | | | $ | 115.6 | | | | | | $ | 86.9 | | | $ | 115.6 | | | $ | 106.1 | | | | | | | | | | | | CAPITAL EXPENDITURES: | | | | | | | | | | | | | | | | | | | | | | | | | | | Paperboard Packaging | | $ | 84.0 | | | $ | 125.1 | | | $ | 123.5 | | | $ | 89.6 | | | $ | 98.5 | | | $ | 135.9 | | | | Containerboard/Other | | | 1.6 | | | | 2.0 | | | | 2.3 | | | | 2.6 | | | | 2.3 | | | | 2.5 | | | | Corporate | | | 10.0 | | | | 10.7 | | | | 10.8 | | | | 2.3 | | | | 10.0 | | | | 10.7 | | | | | | | | | | | | | | | $ | 95.6 | | | $ | 137.8 | | | $ | 136.6 | | | Total | | | $ | 94.5 | | | $ | 110.8 | | | $ | 149.1 | | | | | | | | | | | | | | | | DEPRECIATION AND AMORTIZATION: | | | | | | | | | | | | | | | | | | | | | | | | | | | Paperboard Packaging | | $ | 172.3 | | | $ | 176.0 | | | $ | 124.6 | | | $ | 162.5 | | | $ | 172.3 | | | $ | 176.0 | | | | Containerboard/Other | | | 11.0 | | | | 15.1 | | | | 13.5 | | | | 11.3 | | | | 11.0 | | | | 15.1 | | | | Corporate | | | 22.0 | | | | 37.8 | | | | 22.3 | | | | 22.2 | | | | 22.0 | | | | 37.8 | | | | | | | | | | | | | | | $ | 205.3 | | | $ | 228.9 | | | $ | 160.4 | | | Total | | | $ | 196.0 | | | $ | 205.3 | | | $ | 228.9 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | 2005 | | 2004 | | | In millions | | | 2006 | | 2005 | | | | | (Amounts in millions) | | | | ASSETS AT DECEMBER 31: | | | | | | | | | | | | | | | | | | | Paperboard Packaging(b) | | $ | 2,762.1 | | | $ | 2,852.1 | | | Containerboard/Other(b) | | | 116.9 | | | | 153.4 | | | Corporate(c) | | | 477.0 | | | | 459.8 | | | Paperboard Packaging(b) | | | $ | 2,708.7 | | | $ | 2,762.1 | | | | Containerboard/Other(b) | | | | 102.9 | | | | 116.9 | | | | Corporate(c) | | | | 422.0 | | | | 477.0 | | | | | | | | | | | | | $ | 3,356.0 | | | $ | 3,465.3 | | | Total | | | $ | 3,233.6 | | | $ | 3,356.0 | | | | | | | | | | | | | |
7371
GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Business geographic area information is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended
| | Year Ended
| | Year Ended
| | | Year Ended December 31, | | | December 31, 2005 | | December 31, 2004 | | December 31, 2003 | | | In millions | | | 2006 | | 2005 | | 2004 | | | | | (Amounts in millions) | | | | NET SALES: | | | | | | | | | | | | | | | | | | | | | | | | | | | United States/North America | | $ | 2,034.2 | | | $ | 2,021.6 | | | $ | 1,350.2 | | | U.S./North America | | | $ | 2,060.9 | | | $ | 2,034.2 | | | $ | 2,021.6 | | | | Central/South America | | | 17.8 | | | | 17.9 | | | | 16.6 | | | | 21.9 | | | | 17.8 | | | | 17.9 | | | | Europe | | | 343.3 | | | | 366.2 | | | | 340.9 | | | | 360.1 | | | | 343.3 | | | | 366.2 | | | | Asia Pacific | | | 128.4 | | | | 133.3 | | | | 118.8 | | | | 123.6 | | | | 128.4 | | | | 133.3 | | | | Eliminations(d) | | | (139.7 | ) | | | (152.5 | ) | | | (143.2 | ) | | Eliminations(d) | | | | (153.5 | ) | | | (139.7 | ) | | | (152.5 | ) | | | | | | | | | | | | | | | Total | | | $ | 2,413.0 | | | $ | 2,384.0 | | | $ | 2,386.5 | | | | | | $ | 2,384.0 | | | $ | 2,386.5 | | | $ | 1,683.3 | | | | | | | | | | | | INCOME (LOSS) FROM OPERATIONS: | | | | | | | | | | | | | | | | | | | | | | | | | | | United States/North America | | $ | 73.1 | | | $ | 86.4 | | | $ | 73.4 | | | U.S./North America | | | $ | 84.0 | | | $ | 73.1 | | | $ | 86.4 | | | | Central/South America | | | (3.2 | ) | | | (5.0 | ) | | | (3.4 | ) | | | (7.2 | ) | | | (3.2 | ) | | | (5.0 | ) | | | Europe | | | 6.9 | | | | 22.3 | | | | 25.2 | | | | (0.1 | ) | | | 6.9 | | | | 22.3 | | | | Asia Pacific | | | 12.9 | | | | 14.9 | | | | 14.9 | | | | 12.9 | | | | 12.9 | | | | 14.9 | | | | Eliminations(d) | | | (2.8 | ) | | | (3.0 | ) | | | (4.0 | ) | | Eliminations(d) | | | | 0.7 | | | | (2.8 | ) | | | (3.0 | ) | | | | | | | | | | | | | | $ | 86.9 | | | $ | 115.6 | | | $ | 106.1 | | | Total | | | $ | 90.3 | | | $ | 86.9 | | | $ | 115.6 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | 2005 | | 2004 | | | In millions | | | 2006 | | 2005 | | | | | (Amounts in millions) | | | | ASSETS AT DECEMBER 31: | | | | | | | | | | | | | | | | | | | United States/North America | | $ | 2,667.0 | | | $ | 2,751.2 | | | U.S./North America | | | $ | 2,560.0 | | | $ | 2,667.0 | | | | Central/South America | | | 14.3 | | | | 15.4 | | | | 11.5 | | | | 14.3 | | | | Europe | | | 167.4 | | | | 195.8 | | | | 201.6 | | | | 167.4 | | | | Asia Pacific | | | 30.3 | | | | 43.1 | | | | 38.5 | | | | 30.3 | | | | Corporate(c) | | | 477.0 | | | | 459.8 | | | Corporate(c) | | | | 422.0 | | | | 477.0 | | | | | | | | | | | | | $ | 3,356.0 | | | $ | 3,465.3 | | | Total | | | $ | 3,233.6 | | | $ | 3,356.0 | | | | | | | | | | | | | |
Notes: | | | (a) | | Primarily consists of unallocated general corporate expenses. | | (b) | (b) | Certain mill assets are allocated based on production. | | (c) | (c) | Corporate assets are principally cash and equivalents, other current assets, deferred tax assets, deferred loan costs and a portion of property, plant and equipment. | | (d) | (d) | Represents primarily the elimination of intergeographic sales and profits from transactions between the Company’s U.S., Europe, Asia Pacific and Central/South America operations. |
| | NOTE 17 — | RESTRUCTURING CHARGES |
NOTE 14 — RESTRUCTURING CHARGES The Company adopted a plan inIn the first quarter of 2004, the Company adopted a plan and recorded a charge of $7.2 million to restructure some of its operations in its paperboard packaging segment by closing facilities, relocating equipment and severing employees in an effort to better position the Company to operate in the
74
GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
current business environment. The initial restructuring activities described herein affect only the paperboard packaging segment. Components of the restructuring charges for 2004 are as follows: | | | | | | | Year Ended
| | | | Dec. 31, 2004 | | | | (Amounts in millions) | | | Restructuring Charges: | | | | | Equipment Removal Costs | | $ | 1.4 | | Facility Restoration and Carrying Costs | | | 0.7 | | Severance of Employees and Other Employee Termination-Related Charges | | | 4.2 | | | | | | | Total Restructuring Charges | | $ | 6.3 | | | | | | |
The initial purchase price allocation of $7.2 million recorded at March 31, 2004charge was reduced by $0.9 million in the second quarter of 2004 primarily for facility restoration and carrying costs as a building was sold sooner than anticipated and by $1.0 million in the fourth quarter of 2005 for a change in estimate for certain severance and other employee related termination costs. Through December 31, 2005 the Company has made payments for severance and other employee termination-related charges in the amount of $2.6 million and for equipment removal and facilities restoration in the amount of $1.5 million, both of which reduced the initial reserve detailed above. The remaining reserve is for carrying costs until the building is sold and additional severance to be paid. As of December 31, 2005, the Company had $1.2 million accrued for restructuring, as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Adjustments
| | | | | | | | | | | | | Balance at
| | | (Statement of
| | | Purchase
| | | | | | Balance at
| | | | December 31,
| | | Operations Impact) | | | Price
| | | Cash
| | | December 31,
| | | | 2004 | | | Expense | | | Reversal | | | Allocation | | | Payments | | | 2005 | | | | (Amounts in millions) | | | Equipment Removal Costs | | $ | 0.8 | | | $ | — | | | $ | — | | | $ | — | | | $ | (0.8 | ) | | $ | — | | Facility Restoration and Carrying Costs | | | 0.6 | | | | — | | | | — | | | | — | | | | — | | | | 0.6 | | Severance of Employees and Other Employee Termination-Related Charges | | | 3.1 | | | | — | | | | (1.0 | ) | | | — | | | | (1.5 | ) | | | 0.6 | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 4.5 | | | $ | — | | | $ | (1.0 | ) | | $ | — | | | $ | (2.3 | ) | | $ | 1.2 | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2004, the Company had $4.5 million accrued for restructuring, as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Adjustments
| | | | | | | | | | | | | Balance at
| | | (Statement of
| | | Purchase
| | | | | | Balance at
| | | | January 1,
| | | Operations Impact) | | | Price
| | | Cash
| | | December 31,
| | | | 2004 | | | Expense | | | Reversal | | | Allocation | | | Payments | | | 2004 | | | | (Amounts in millions) | | | Equipment Removal Costs | | $ | — | | | $ | — | | | $ | — | | | $ | 1.4 | | | $ | (0.6 | ) | | $ | 0.8 | | Facility Restoration and Carrying Costs | | | — | | | | — | | | | — | | | | 0.7 | | | | (0.1 | ) | | | 0.6 | | Severance of Employees and Other Employee Termination-Related Charges | | �� | — | | | | — | | | | — | | | | 4.2 | | | | (1.1 | ) | | | 3.1 | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | — | | | $ | — | | | $ | — | | | $ | 6.3 | | | $ | (1.8 | ) | | $ | 4.5 | | | | | | | | | | | | | | | | | | | | | | | | | | |
7572
GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) $1.0 million in the fourth quarter of 2005 for a change in estimate for certain severance and other employee related termination costs. | | NOTE 18 — | RELATED PARTY TRANSACTIONS |
Through December 31, 2006, the Company has made payments for severance and other employee termination-related charges in the amount of $3.2 million and for equipment removal and facilities restoration in the amount of $2.1 million, both of which reduced the initial reserve. The table below reflects the 2004, 2005 and 2006 activity for the restructuring: | | | | | | | | | | | | | | | | | | | | | Equipment
| | | Facility Restoration
| | | Severance/
| | | | | | | In millions | | Removal Costs | | | and Carrying Costs | | | Termination Benefits | | | Total | | | | | | Provision in 2004 | | $ | 1.4 | | | $ | 1.6 | | | $ | 4.2 | | | $ | 7.2 | | | | Payments in 2004 | | | (0.6 | ) | | | (0.1 | ) | | | (1.1 | ) | | | (1.8 | ) | | | Change in Estimate | | | — | | | | (0.9 | ) | | | — | | | | (0.9 | ) | | | | | Balance at December 31, 2004 | | | 0.8 | | | | 0.6 | | | | 3.1 | | | | 4.5 | | | | Payments in 2005 | | | (0.8 | ) | | | — | | | | (1.5 | ) | | | (2.3 | ) | | | Change in Estimate | | | — | | | | — | | | | (1.0 | ) | | | (1.0 | ) | | | | | Balance at December 31, 2005 | | | — | | | | 0.6 | | | | 0.6 | | | | 1.2 | | | | Payments in 2006 | | | — | | | | (0.6 | ) | | | (0.6 | ) | | | (1.2 | ) | | | | | Balance at December 31, 2006 | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | |
NOTE 15 — BRAZIL IMPAIRMENT During the third quarter of 2006, the Company recognized an impairment charge of $3.9 million relating to its Sao Paulo, Brazil operations. In accordance with the FASB SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company reviews long-lived assets for impairment when events or changes in circumstances indicate the carrying value of these assets may exceed their current fair values. The continued and projected operating losses and negative cash flows led to the testing for impairment of long-lived assets. The fair value of the impaired assets was determined using the expected present value method and third party appraisals. The impairment charge is reflected as a component of Cost of Sales on the Consolidated Statement of Operations and as a component of Income from Operations in the Company’s Paperboard Packaging Segment. NOTE 16 — RELATED PARTY TRANSACTIONS On November 18, 1999, the Company loaned $5.0 million to a principal employee inStephen M. Humphery pursuant to a non-interest bearing note due March 26, 2002. On December 19, 2001, the Company extended the maturity of the loan through March 26, 2007. At December 31, 20052006 and 2004,2005, this receivable was included in Other Current Assets and Other Assets on the Consolidated Balance Sheets. The Company received certain management services provided by Clayton, Dubilier and Rice, Inc. (“CD&R”), an affiliate of an equity investor in the Company. Charges for such services, including reimbursement of expenses, totaled nil for the years ended December 31, 2005 and 2004 and $0.4 million for the year ended December 31, 2003, and were included in Selling, General and Administrative in the Consolidated Statements of Operations. In connection with the Merger, the Company paid a transaction fee of $10 million to CD&R for assistance in connection with negotiation of all aspects of the Merger, including the contribution analysis, financial and business due diligence, structure of the proposed refinancing and arranging for proposals by and handling negotiations with financing sources to provide funds for the refinancing.Sheets, respectively.
Coors Brewing Company, a subsidiary of Molson Coors Brewing Company (formerly known as the Adolph Coors Company), accounted for approximately $74 million, $84 million $110 million and $39$110 million of the Company’s Net Sales for the year ended December 31, 2006, 2005 2004 and since the date of the Merger through December 31, 2003,2004, respectively. The Company continues to sell packaging products to Coors Brewing Company. The loss of Coors Brewing Company as a customer in the foreseeable future could have a material effect on the Company’s results of operations. The supply agreement, as amended, effective April 1, 2003, with Coors Brewing Company will not expire until December 31, 2006. The Company’s Executive Chairman,2007. Mr. Jeffrey H. Coors, a member of the Company’s Board of Directors, was an Executive Vice President of the Adolph Coors Company from 1991 to 1992 and its President from 1985 to 1989. 73
GRAPHIC PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Together with family members and related trusts, Mr. Coors owns a significant interest in Molson Coors Brewing Company. | | NOTE 19 — | QUARTERLY FINANCIAL INFORMATION (UNAUDITED) |
One of the Company’s subsidiaries, Golden Equities, Inc., is the general partner of Golden Properties, Ltd., a limited partnership in which Coors Brewing Company is the limited partner. Before the Merger, Golden Equities was a subsidiary of Graphic Packaging International Corporation. The partnership owns, develops, operates and sells certain real estate previously owned directly by Coors Brewing Company or Adolph Coors Company. Transactions between the Company and Golden Properties, Ltd. are eliminated in the consolidated financial statements. NOTE 17 — QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Results of operations for the four quarters of 20052006 and 20042005 are shown below. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net
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| | Net
| | Income
| | Income
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| | Net
| | Income
| | Income
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| | Gross
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| | (Quarter) | | Sales | | Profit | | Operations | | Income | | Share | | Share | | | In millions, except per share amounts | | | Sales | | Profit | | Operations | | Income | | Share | | Share | | | | | | | | 2006 | | | | | | | | | | | | | | | | | | | | | | | | | | First | | | $ | 580.4 | | | $ | 67.2 | | | $ | 14.3 | | | $ | (31.5) | | | $ | (0.16 | ) | | $ | (0.16 | ) | Second | | | | 625.5 | | | | 74.7 | | | | 21.5 | | | | (26.0) | | | | (0.13 | ) | | | (0.13 | ) | Third | | | | 617.7 | | | | 97.7 | | | | 44.0 | | | | (4.0) | | | | (0.02 | ) | | | (0.02 | ) | Fourth | | | | 589.4 | | | | 63.6 | | | | 10.5 | | | | (39.0) | | | | (0.19 | ) | | | (0.19 | ) | | | | | | | | | | | | | | | | Year | | | $ | 2,413.0 | | | $ | 303.2 | | | $ | 90.3 | | | $ | (100.5) | | | $ | (0.50 | ) | | $ | (0.50 | ) | | | (Amounts in millions, except per share amounts) | | | | 2005 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | First | | $ | 583.0 | | | $ | 67.2 | | | $ | 12.3 | | | $ | (29.6 | ) | | $ | (0.15 | ) | | $ | (0.15 | ) | | $ | 583.0 | | | $ | 67.2 | | | $ | 12.3 | | | $ | (29.6) | | | $ | (0.15 | ) | | $ | (0.15 | ) | Second | | | 623.0 | | | | 85.8 | | | | 23.6 | | | | (19.6 | ) | | | (0.10 | ) | | | (0.10 | ) | | | 623.0 | | | | 85.8 | | | | 23.6 | | | | (19.6) | | | | (0.10 | ) | | | (0.10 | ) | Third | | | 605.4 | | | | 98.6 | | | | 44.1 | | | | 0.6 | | | | — | | | | — | | | | 605.4 | | | | 98.6 | | | | 44.1 | | | | 0.6 | | | | — | | | | — | | Fourth | | | 572.6 | | | | 61.1 | | | | 6.9 | | | | (42.5 | ) | | | (0.21 | ) | | | (0.21 | ) | | | 572.6 | | | | 61.1 | | | | 6.9 | | | | (42.5) | | | | (0.21 | ) | | | (0.21 | ) | | | | | | | | | | | | | | | | | | | | Year | | $ | 2,384.0 | | | $ | 312.7 | | | $ | 86.9 | | | $ | (91.1 | ) | | $ | (0.46 | ) | | $ | (0.46 | ) | | | | | | | | | | | | | | | | | 2004 | | | | | | | | | | | | | | | | | | | | | | | | | | First | | $ | 575.9 | | | $ | 89.0 | | | $ | 26.7 | | | $ | (17.2 | ) | | $ | (0.09 | ) | | $ | (0.09 | ) | | Second | | | 606.3 | | | | 98.1 | | | | 36.7 | | | | (4.6 | ) | | | (0.02 | ) | | | (0.02 | ) | | Third | | | 617.2 | | | | 104.2 | | | | 47.0 | | | | 0.7 | | | | — | | | | — | | | Fourth | | | 587.1 | | | | 68.5 | | | | 5.2 | | | | (39.8 | ) | | | (0.20 | ) | | | (0.20 | ) | | | | | | | | | | | | | | Year | | $ | 2,386.5 | | | $ | 359.8 | | | $ | 115.6 | | | $ | (60.9 | ) | | $ | (0.31 | ) | | $ | (0.31 | ) | | $ | 2,384.0 | | | $ | 312.7 | | | $ | 86.9 | | | $ | (91.1) | | | $ | (0.46 | ) | | $ | (0.46 | ) | | | | | | | | | | | | | | | | | | |
7674
Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of Graphic Packaging Corporation: We have completed integrated audits of Graphic Packaging Corporation’s December 31, 20052006 and December 31, 20042005 consolidated financial statements and of its internal control over financial reporting as of December 31, 2005, and an audit of its December 31, 2003 consolidated financial statements2006, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below. Consolidated financial statements In our opinion, the accompanying consolidated balance sheets and the related consolidated financial statements present fairly, in all material respects, the financial position of Graphic Packaging Corporation and its subsidiaries at December 31, 20052006 and December 31, 2004,2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20052006 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Notes 2 and 9, respectively, to the consolidated financial statements, Graphic Packaging Corporation and subsidiaries changed its method of accounting for stock based compensation plans as of January 1, 2006 and its method of accounting for defined benefit pension and other postretirement plans as of December 31, 2006. Internal control over financial reporting Also, in our opinion, management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that the Company maintained effective internal control over financial reporting as of December 31, 20052006 based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005,2006, based on criteria established inInternal Control — Integrated FrameworkFramework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
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A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in 75
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ PRICEWATERHOUSECOOPERS LLP PricewaterhouseCoopers LLP Atlanta, Georgia March 3, 20062, 2007
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| | Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None. | | Item 9A. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures The Company’s management has established disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within time periods specified in the Securities and Exchange Commission rules and forms. Such disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management to allow timely decisions regarding required disclosure. Based on management’s evaluation as of the end of the period covered by this Annual Report onForm 10-K, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined inRules 13a-15(e) and15d-15(e) promulgated under the Exchange Act) were effective as of the end of the period covered by this Annual Report onForm 10-K. Management’s Report on Internal Control Over Financial Reporting The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as such term is defined in Exchange ActRule 13a-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only with proper authorizations; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The Company’s management, under the supervision of and with the participation of the Chief Executive Officer and the Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 20052006 based on criteria for effective control over financial reporting described inInternal Control — Integrated Frameworkissued by the COSO. Based on this assessment, the Company’s management concluded that its internal control over financial reporting was effective as of December 31, 2005.2006. Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 20052006 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
7977
Changes in Internal Control Over Financial Reporting During the fiscal quarter ended December 31, 2005, there were changesThere was no change in the Company’s internal control over financial reporting that haveoccurred during the quarter ended December 31, 2006 that has materially affected, or areis likely to materially affect, the Company’s internal control over financial reporting. These changes include oversight and management review of all tax activities by the newly hired tax director, enhanced documentation to support valuation allowances and loss contingencies, and completion of the reconciliation of tax accounts. The Company made such changes in its internal control over financial reporting which have remediated the material weakness in accounting for income taxes.
| | ITEM 9B. | OTHER INFORMATION |
None. PART III | | ITEM 10. | DIRECTORS, AND EXECUTIVE OFFICERS OF THE REGISTRANTAND CORPORATE GOVERNANCE |
Pursuant to Instruction G(3) toForm 10-K, the information relating to Directors of the Registrant, compliance with Section 16(a) of the Exchange Act and compliance with the Company’s Code of Ethics required by Item 10 is incorporated by reference to the Registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 16, 2006,15, 2007, which is to be filed pursuant to Regulation 14A within 120 days after the end of the Registrant’s fiscal year ended December 31, 2005.2006. | | ITEM 11. | EXECUTIVE COMPENSATION |
Pursuant to Instruction G(3)G (3) toForm 10-K, the information required by Item 11 is incorporated by reference to the Registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 16, 2006,15, 2007, which is to be filed pursuant to Regulation 14A within 120 days after the end of the Registrant’s fiscal year ended December 31, 2005.2006. | | ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Pursuant to Instruction G(3)G (3) toForm 10-K, the information required by Item 12 is incorporated by reference to the Registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 16, 2006,15, 2007, which is to be filed pursuant to Regulation 14A within 120 days after the end of the Registrant’s fiscal year ended December 31, 2005.2006. | | ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Pursuant to Instruction G(3)G (3) toForm 10-K, the information required by Item 13 is incorporated by reference to the Registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 16, 2006,15, 2007, which is to be filed pursuant to Regulation 14A within 120 days after the end of the Registrant’s fiscal year ended December 31, 2005.2006. | | ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
Pursuant to Instruction G(3)G (3) toForm 10-K, the information required by Item 14 is incorporated by reference to the Registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 16, 2006,15, 2007, which is to be filed pursuant to Regulation 14A within 120 days after the end of the Registrant’s fiscal year ended December 31, 2005.2006.
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PART IV | | ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
a.) Financial statements, financial statement schedule and exhibits filed as part of this report: 1. Consolidated Balance Sheets as of December 31, 20052006 and 20042005 Consolidated Statements of Operations for each of the three years in the period ended December 31, 2005 Consolidated Statements of Comprehensive Loss for each of the three years in the period ended December 31, 20052006
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 20052006 Consolidated Statements of Shareholders’ Equity for each of the three years in the period ended December 31, 20052006 Notes to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm 2. Schedule II — Valuation and Qualifying Accounts. All other schedules are omitted as the information required is either included elsewhere in the consolidated financial statements herein or is not applicable. 3. Exhibits to Annual Report onForm 10-K for Year Ended December 31, 2005.2006. | | | | | | | | | Exhibit
| Exhibit
| | | Exhibit
| | | Number | Number | | Description | Number | | Description | | | 2 | .1 | | Agreement and Plan of Merger, dated as of March 25, 2003, among Registrant, Riverwood Acquisition Sub LLC and Graphic Packaging International Corporation. Filed as Exhibit 2.1 to Registrant’s Current Report onForm 8- K filed on March 27, 2003 (Commission File No.001-11113), and incorporated herein by reference. | | 2 | .2 | | Amendment No. 1 to Agreement and Plan of Merger, dated as of July 11, 2003, among Registrant, Riverwood Acquisition Sub LLC and Graphic Packaging International Corporation. Filed as part of Annex A to Registrant’s Amendment No. 3 to Registration Statement onForm S-4 filed on July 17, 2003 (RegistrationNo. 333-104928), and incorporated herein by reference. | 2 | .1 | | Agreement and Plan of Merger, dated as of March 25, 2003, among Registrant, Riverwood Acquisition Sub LLC and Graphic Packaging International Corporation. Filed as Exhibit 2.1 to Registrant’s Current Report onForm 8-K filed on March 27, 2003 (Commission FileNo. 001-11113), and incorporated herein by reference. | | 3 | .1 | | Restated Certificate of Incorporation of Graphic Packaging Corporation. Filed as Exhibit 3.1 to Registrant’s Current Report onForm 8-K filed on August 13, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | 2 | .2 | | Amendment No. 1 to Agreement and Plan of Merger, dated as of July 11, 2003, among Registrant, Riverwood Acquisition Sub LLC and Graphic Packaging International Corporation. Filed as part of Annex A to Registrant’s Amendment No. 3 to Registration Statement onForm S-4 filed on July 17, 2003 (RegistrationNo. 333-104928), and incorporated herein by reference. | | 3 | .2 | | Bylaws of Graphic Packaging Corporation, as amended and restated on November 19, 2003. Filed as Exhibit 3.2 to Registrant’s Quarterly Report onForm 10-Q filed on November 4, 2004 and incorporated herein by reference. | 3 | .1 | | Restated Certificate of Incorporation of Graphic Packaging Corporation. Filed as Exhibit 3.1 to Registrant’s Current Report onForm 8-K filed on August 13, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 3 | .3 | | Graphic Packaging Corporation Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock. Filed as Exhibit 3.3 to Registrant’s Current Report onForm 8-K filed on August 13, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | 3 | .2 | | Bylaws of Graphic Packaging Corporation, as amended and restated as of September 20, 2006. Filed as Exhibit 3.1 to Registrant’s Current Report onForm 8-K filed on September 25, 2006 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 4 | .1 | | Form of Certificate for the Common Stock, par value $0.01 per share. Filed as Exhibit 4.1 to Registrant’s Amendment No. 2 to Registration Statement onForm S-4 filed on June 13, 2003 (RegistrationNo. 333-104928), and incorporated herein by reference. | 3 | .3 | | Graphic Packaging Corporation Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock. Filed as Exhibit 3.3 to Registrant’s Current Report onForm 8-K filed on August 13, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 4 | .2 | | Rights Agreement, dated as of August 7, 2003, between Registrant and Wells Fargo Bank Minnesota, National Association. Filed as Exhibit 4.1 to Registrant’s Current Report onForm 8-K filed on August 13, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | 4 | .1 | | Form of Certificate for the Common Stock, par value $0.01 per share. Filed as Exhibit 4.1 to Registrant’s Amendment No. 1 to Registration Statement onForm S-4 filed on June 13, 2003 (RegistrationNo. 333-104928), and incorporated herein by reference. | | | 4 | .2 | | Rights Agreement, dated as of August 7, 2003, between Registrant and Wells Fargo Bank Minnesota, National Association. Filed as Exhibit 4.1 to Registrant’s Current Report onForm 8-K filed on August 13, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | | 4 | .3 | | Credit Agreement, dated as of August 8, 2003, among Graphic Packaging International, Inc., the several lenders from time to time parties thereto, JPMorgan Chase Bank, as administrative agent, Deutsche Bank Securities Inc., as syndication agent, and Goldman Sachs Credit Partners L.P. and Morgan Stanley Senior Funding, Inc., as documentation agents. Filed as Exhibit 4.2 to Registrant’s Current Report onForm 8-K filed on August 13, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. |
79
| | | | | Exhibit
| | | Number | | Description | | | | 4 | .4 | | Guarantee and Collateral Agreement, dated as of August 8, 2003, made by Registrant, Riverwood Acquisition Sub LLC, GPI Holding, Inc., Graphic Packaging International, Inc., and certain of its subsidiaries in favor of JPMorgan Chase Bank as administrative agent. Filed as Exhibit 4.3 to Registrant’s Current Report onForm 8-K filed on August 13, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 4 | .5 | | Indenture, dated as of August 8, 2003, among Graphic Packaging International, Inc., as Issuer, Registrant and GPI Holding, Inc., as Note Guarantors, and Wells Fargo Bank Minnesota, National Association, as Trustee, relating to the 8.50% Senior Notes due 2011 of Graphic Packaging International, Inc. Filed as Exhibit 4.4 to Registrant’s Current Report onForm 8-K filed on August 13, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 4 | .6 | | Indenture, dated as of August 8, 2003, among Graphic Packaging International, Inc., as Issuer, Registrant and GPI Holding, Inc., as Note Guarantors, and Wells Fargo Bank Minnesota, National Association, as Trustee, relating to the 9.50% Senior Subordinated Notes due 2013 of Graphic Packaging International, Inc. Filed as Exhibit 4.5 to Registrant’s Current Report onForm 8-K filed on August 13, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 4 | .7 | | Form of 8.50% Senior Notes due 2011 of Graphic Packaging International, Inc. (included in Exhibit 4.5). Filed as Exhibit A to the Indenture, dated as of August 8, 2003, among Graphic Packaging International, Inc., as Issuer, Registrant and GPI Holding, Inc., as Note Guarantors, and Wells Fargo Bank Minnesota, National Association, as Trustee, relating to the 8.50% Senior Notes due 2011 of Graphic Packaging International, Inc. filed as Exhibit 4.4 to Registrant’s Current Report onForm 8-K filed on August 13, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 4 | .8 | | Form of 9.50% Senior Subordinated Notes due 2013 of Graphic Packaging International, Inc. (included in Exhibit 4.6). Filed as Exhibit A to the Indenture, dated as of August 8, 2003, among Graphic Packaging International, Inc., as Issuer, Registrant and GPI Holding, Inc., as Note Guarantors, and Wells Fargo Bank Minnesota, National Association, as Trustee, relating to the 9.50% Senior Subordinated Notes due 2013 of Graphic Packaging International, Inc. filed as Exhibit 4.5 to Registrant’s Current Report onForm 8-K filed on August 13, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 4 | .9 | | First Amendment, dated as of October 1, 2004, to the Credit Agreement dated as of August 8, 2003 among Graphic Packaging International, Inc., the Several Lenders Parties thereto, JPMorgan Chase Bank, as administrative agent, and J.P. Morgan Securities Inc., as lead arranger and sole bookrunner. Filed as Exhibit 99.1 to Registrant’s Current Report onForm 8-K filed on October 7, 2004 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 4 | .10 | | Second Amendment, dated as of October 17, 2005, to the Credit Agreement dated as of August 8, 2003 among Graphic Packaging International, Inc., the Lenders, JPMorgan Chase Bank, as administrative agent, and J.P. Morgan Securities Inc., as lead arranger and sole bookrunner. Filed as Exhibit 10.1 to Registrant’s Current Report onForm 8-K filed on October 20, 2005 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 10 | .1 | | Amended and Restated Registration Rights Agreement, dated as of March 25, 2003, among Registrant, the Family Stockholders named therein, Clayton Dubilier & Rice Fund V Limited Partnership, EXOR Group S.A., and the Other Riverwood Stockholders named therein. Filed as Exhibit 10.1 to Registrant’s Registration Statement onForm S-4 filed on May 2, 2003 (RegistrationNo. 333-104928), and incorporated herein by reference. | | 10 | .2 | | Stockholders Agreement, dated as of March 25, 2003, by and among Registrant, the Family Stockholders named therein, Clayton Dubilier & Rice Fund V Limited Partnership and EXOR Group S.A. Filed as Exhibit 10.2 to Registrant’s Registration Statement onForm S-4 filed on May 2, 2003 (RegistrationNo. 333-104928), and incorporated herein by reference. | | 10 | .3 | | Amendment No. 1 to Stockholders Agreement, dated as of April 29, 2003, by and among Registrant, the Family Stockholders named therein, Clayton Dubilier & Rice Fund V Limited Partnership and EXOR Group S.A. Filed as Exhibit 10.3 to Registrant’s Registration Statement onForm S-4 filed on May 2, 2003 (RegistrationNo. 333-104928), and incorporated herein by reference. |
80
| | | | | Exhibit
| | | Number | | Description | | | | 10 | .4 | | Amendment No. 2 to Stockholders Agreement, dated as of June 12, 2003, by and among Registrant, the Family Stockholders named therein, Clayton Dubilier & Rice Fund V Limited Partnership and EXOR Group S.A. Filed as Exhibit 10.4 to Registrant’s Amendment No. 1 to Registration Statement onForm S-4 filed on June 13, 2003 (RegistrationNo. 333-104928), and incorporated herein by reference. | | 10 | .5 | | Amendment No. 3 to Stockholders Agreement, dated as of July 20, 2006, by and among Registrant, the Family Stockholders named therein, Clayton, Dubilier & Rice Fund V Limited Partnership and EXOR Group S.A. Filed as Exhibit 10.9 to the Registrant’s Current Report onForm 8-K filed on July 24, 2006 and incorporated herein by reference. | | 10 | .6* | | Employment Agreement, dated as of July 20, 2006, by and among Graphic Packaging International, Inc., Registrant and Jeffrey H. Coors. Filed as Exhibit 10.1 to Registrant’s Current Report onForm 8-K filed on July 24, 2006 (Commission FileNo. 001-13182) and incorporated herein by reference. | | 10 | .7* | | Employment Agreement, dated as of July 20, 2006, by and among Graphic Packaging International, Inc., Registrant and David W. Scheible. Filed as Exhibit 10.3 to Registrant’s Current Report onForm 8-K filed on July 24, 2006 (Commission FileNo. 001-13182) and incorporated herein by reference. | | 10 | .8* | | Employment Agreement, dated as of July 20, 2006, by and among Graphic Packaging International, Inc., Registrant and Stephen M. Humphrey. Filed as Exhibit 10.2 to Registrant’s Current Report onForm 8-K filed on July 24, 2006 (Commission FileNo. 001-13182) and incorporated herein by reference. | | 10 | .9* | | Employment Agreement, dated as of July 20, 2006, by and among Graphic Packaging International, Inc., Registrant and Daniel J. Blount. Filed as Exhibit 10.4 to Registrant’s Current Report onForm 8-K filed on July 24, 2006 (Commission FileNo. 001-13182) and incorporated herein by reference. | | 10 | .10* | | Employment Agreement, dated as of July 20, 2006, by and among Graphic Packaging International, Inc., Registrant and Stephen A. Hellrung. Filed as Exhibit 10.5 to Registrant’s Current Report onForm 8-K filed on July 24, 2006 (Commission FileNo. 001-13182) and incorporated herein by reference. | | 10 | .11* | | Employment Agreement, dated as of July 20, 2006, by and among Graphic Packaging International, Inc., Registrant and Wayne E. Juby. Filed as Exhibit 10.6 to Registrant’s Current Report onForm 8-K filed on July 24, 2006 (Commission FileNo. 001-13182) and incorporated herein by reference. | | 10 | .12* | | Employment Agreement, dated as of July 20, 2006, by and among Graphic Packaging International, Inc., Registrant and Michael R. Schmal. Filed as Exhibit 10.7 to Registrant’s Current Report onForm 8-K filed on July 24, 2006 (Commission FileNo. 001-13182) and incorporated herein by reference. | | 10 | .13* | | Employment Agreement, dated as of July 20, 2006, by and among Graphic Packaging International, Inc., Registrant and Robert M. Simko. Filed as Exhibit 10.8 to Registrant’s Current Report onForm 8-K filed on July 24, 2006 (Commission FileNo. 001-13182) and incorporated herein by reference. | | 10 | .14* | | Employment Agreement, dated as of July 20, 2006, by and among Graphic Packaging International, Inc., Registrant and Michael P. Doss. Filed as Exhibit 10.1 to Registrant’s Current Report onForm 8-K filed on September 25, 2006 (Commission FileNo. 001-13182) and incorporated herein by reference. | | 10 | .15* | | Riverwood Holding, Inc. Stock Incentive Plan. Filed as Exhibit 10.10 to Registration Statement onForm S-1 (RegistrationNo. 33-80475) of New River Holding, Inc. (renamed Riverwood Holding, Inc.) and incorporated herein by reference. | | 10 | .16* | | Riverwood Holding, Inc. Supplemental Long-Term Incentive Plan. Filed as Exhibit 10.15 to Riverwood Holding, Inc.’s Annual Report onForm 10-K filed on March 17, 2000 (Commission FileNo. 1-11113) and incorporated herein by reference. |
81
| | | | | Exhibit
| | | Number | | Description | | | 4 | .3 | | Credit Agreement, dated as of August 8, 2003, among Graphic Packaging International, Inc., the several lenders from time to time parties thereto, JPMorgan Chase Bank, as administrative agent, Deutsche Bank Securities Inc., as syndication agent, and Goldman Sachs Credit Partners L.P. and Morgan Stanley Senior Funding, Inc., as documentation agents. Filed as Exhibit 4.2 to Registrant’s Current Report onForm 8-K filed on August 13, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 4 | .4 | | Guarantee and Collateral Agreement, dated as of August 8, 2003, made by Registrant, Riverwood Acquisition Sub LLC, GPI Holding, Inc., Graphic Packaging International, Inc., and certain of its subsidiaries in favor of JPMorgan Chase Bank as administrative agent. Filed as Exhibit 4.3 to Registrant’s Current Report onForm 8-K filed on August 13, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 4 | .5 | | Indenture, dated as of August 8, 2003, among Graphic Packaging International, Inc., as Issuer, Registrant and GPI Holding, Inc., as Note Guarantors, and Wells Fargo Bank Minnesota, National Association, as Trustee, relating to the 8.50% Senior Notes due 2011 of Graphic Packaging International, Inc. Filed as Exhibit 4.4 to Registrant’s Current Report onForm 8-K filed on August 13, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 4 | .6 | | Indenture, dated as of August 8, 2003, among Graphic Packaging International, Inc., as Issuer, Registrant and GPI Holding, Inc., as Note Guarantors, and Wells Fargo Bank Minnesota, National Association, as Trustee, relating to the 9.50% Senior Subordinated Notes due 2013 of Graphic Packaging International, Inc. Filed as Exhibit 4.5 to Registrant’s Current Report onForm 8-K filed on August 13, 2003 (Commission File No.001-13182), and incorporated herein by reference. | | 4 | .7 | | Form of 8.50% Senior Notes due 2011 of Graphic Packaging International, Inc. (included in Exhibit 4.5). Filed as Exhibit A to the Indenture, dated as of August 8, 2003, among Graphic Packaging International, Inc., as Issuer, Registrant and GPI Holding, Inc., as Note Guarantors, and Wells Fargo Bank Minnesota, National Association, as Trustee, relating to the 8.50% Senior Notes due 2011 of Graphic Packaging International, Inc. filed as Exhibit 4.4 to Registrant’s Current Report onForm 8-K filed on August 13, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 4 | .8 | | Form of 9.50% Senior Subordinated Notes due 2013 of Graphic Packaging International, Inc. (included in Exhibit 4.6). Filed as Exhibit A to the Indenture, dated as of August 8, 2003, among Graphic Packaging International, Inc., as Issuer, Registrant and GPI Holding, Inc., as Note Guarantors, and Wells Fargo Bank Minnesota, National Association, as Trustee, relating to the 9.50% Senior Subordinated Notes due 2013 of Graphic Packaging International, Inc. filed as Exhibit 4.5 to Registrant’s Current Report onForm 8-K filed on August 13, 2003 (Commission File No.001-13182), and incorporated herein by reference. | | 4 | .9 | | First Amendment to Credit Agreement dated as of October 1, 2004 among Graphic Packaging International, Inc., the Several Lenders Parties thereto, JPMorgan Chase Bank, as administrative agent, and J.P. Morgan Securities Inc., as lead arranger and sole bookrunner. Filed as Exhibit 99.1 to the Registrant’s Current Report onForm 8-K filed on October 7, 2004 and incorporated herein by reference. | | 4 | .10 | | Second Amendment to Credit Agreement dated as of October 17, 2005 among Graphic Packaging International, Inc., the Lenders, JPMorgan Chase Bank, as administrative agent, and J.P. Morgan Securities Inc., as lead arranger and sole bookrunner. Filed as Exhibit 10.1 to the Registrant’s Current Report onForm 8-K filed on October 20, 2005 and incorporated herein by reference. | | 10 | .1 | | Amended and Restated Registration Rights Agreement, dated as of March 25, 2003, among Registrant, the Family Stockholders named therein, Clayton Dubilier & Rice Fund V Limited Partnership, EXOR Group S.A., and the Other Riverwood Stockholders named therein. Filed as Exhibit 10.1 to Registrant’s Registration Statement onForm S-4 filed on May 2, 2003 (RegistrationNo. 333-104928), and incorporated herein by reference. |
| | | | | Exhibit
| | | Number | | Description | | | | 10 | .17* | | 2003 Riverwood Holding, Inc. Long-Term Incentive Plan. Filed as Exhibit 10.15 to Registration Statement onForm S-4 (Registration StatementNo. 333-104928) filed on May 2, 2003 and incorporated herein by reference. | | 10 | .18* | | Riverwood Holding, Inc. 2002 Stock Incentive Plan. Filed as Exhibit 10.19 to Registrant’s Annual Report onForm 10-K filed April 15, 2003 (Commission FileNo. 1-11113) and incorporated herein by reference. | | 10 | .19* | | Amendment No. 1 to Riverwood Holding, Inc. Stock Incentive Plan, Riverwood Holding, Inc. Supplemental Long-Term Incentive Plan and Riverwood Holding, Inc. 2002 Stock Incentive Plan. Filed as Exhibit 10.11 to Registrant’s Quarterly Report onForm 10-Q filed on November 14, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 10 | .20* | | Form of Restricted Unit Agreement, dated as of August 8, 2003, between Registrant and each of Jeffrey H. Coors, David W. Scheible and Donald W. Sturdivant. Filed as Exhibit 10.12 to Registrant’s Quarterly Report onForm 10-Q filed on November 14, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 10 | .21* | | Form of Management Stock Option Agreement entered into by and between Registrant and each of Wayne E. Juby, Michael R. Schmal, Daniel J. Blount, and Stephen A. Hellrung. Filed as Exhibit 10.13 to Registrant’s Quarterly Report onForm 10-Q filed on November 14, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 10 | .22* | | Form of Restricted Unit Agreement entered into by and between Registrant and each of Wayne E. Juby, Michael R. Schmal, Daniel J. Blount, and Stephen A. Hellrung. Filed as Exhibit 10.14 to Registrant’s Quarterly Report onForm 10-Q filed on November 14, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 10 | .23* | | Form of Option Cancellation Acknowledgement of Wayne E. Juby and Michael R. Schmal. Filed as Exhibit 10.15 to Registrant’s Quarterly Report onForm 10-Q filed on November 14, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 10 | .24* | | Management Stock Option Agreement, dated as of August 8, 2003 entered into by and between Registrant and Stephen M. Humphrey. Filed as Exhibit 10.17 to Registrant’s Quarterly Report onForm 10-Q filed on November 14, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 10 | .25* | | Restricted Unit Agreement, dated as of August 8, 2003, entered into by and between Registrant and Stephen M. Humphrey. Filed as Exhibit 10.18 to Registrant’s Quarterly Report onForm 10-Q filed on November 14, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 10 | .26* | | Form of Officers’ Salary Continuation Agreement, as amended. Filed as Exhibit 10.10 to Graphic Packaging International Corporation’s Annual Report onForm 10-K filed on March 20, 1995 (Commission FileNo. 0-20704), and incorporated herein by reference. | | 10 | .27* | | Graphic Packaging Equity Incentive Plan, as amended and restated, effective as of March 1, 2001. Filed as Exhibit 10.9 to Graphic Packaging International Corporation’s Annual Report onForm 10-K filed on March 23, 2001 (Commission FileNo. 001-14060), and incorporated herein by reference. | | 10 | .28* | | Graphic Packaging Equity Compensation Plan for Non-Employee Directors, as amended and restated. Filed as Exhibit 10.10 to Graphic Packaging International Corporation’s Annual Report onForm 10-K filed on March 23, 2001 (Commission FileNo. 001-14060), and incorporated herein by reference. | | 10 | .29* | | ACX Technologies, Inc. Phantom Equity Plan. Filed as Exhibit 10.11 to Graphic Packaging International Corporation’s Current Report onForm 8-K filed on November 19, 1992 (Commission FileNo. 0-20704), and incorporated herein by reference. | | 10 | .30* | | Graphic Packaging Excess Benefit Plan, as restated, effective as of January 1, 2000. Filed as Exhibit 10.12 to Graphic Packaging International Corporation’s Annual Report onForm 10-K filed on March 23, 2001 (Commission FileNo. 001-14060), and incorporated herein by reference. | | 10 | .31* | | Graphic Packaging Supplemental Retirement Plan, as restated, effective as of January 1, 2000. Filed as Exhibit 10.13 to Graphic Packaging International Corporation’s Annual Report onForm 10-K filed on March 23, 2001 (Commission FileNo. 001-14060), and incorporated herein by reference. |
82
| | | | | | | | | Exhibit
| Exhibit
| | | Exhibit
| | | Number | Number | | Description | Number | | Description | | | 10 | .2 | | Stockholders Agreement, dated as of March 25, 2003, by and among Registrant, the Family Stockholders named therein, Clayton Dubilier & Rice Fund V Limited Partnership and EXOR Group S.A. Filed as Exhibit 10.2 to Registrant’s Registration Statement onForm S-4 filed on May 2, 2003 (RegistrationNo. 333-104928), and incorporated herein by reference. | | 10 | .3 | | Amendment No. 1 to Stockholders Agreement, dated as of April 29, 2003, by and among Registrant, the Family Stockholders named therein, Clayton Dubilier & Rice Fund V Limited Partnership and EXOR Group S.A. Filed as Exhibit 10.3 to Registrant’s Registration Statement onForm S-4 filed on May 2, 2003 (RegistrationNo. 333- 104928), and incorporated herein by reference. | 10 | .32* | | ACX Technologies, Inc. Deferred Compensation Plan, as amended. Filed as Exhibit 10.15 to Graphic Packaging International Corporation’s Annual Report onForm 10-K filed on March 7, 1996 (Commission FileNo. 0-20704), and incorporated herein by reference. | | 10 | .4 | | Amendment No. 2 to Stockholders Agreement, dated as of June 12, 2003, by and among Registrant, the Family Stockholders named therein, Clayton Dubilier & Rice Fund V Limited Partnership and EXOR Group S.A. Filed as Exhibit 10.4 to Registrant’s Amendment No. 1 to Registration Statement onForm S-4 filed on June 13, 2003 (RegistrationNo. 333-104928), and incorporated herein by reference. | 10 | .33* | | First Amendment to the Graphic Packaging Deferred Compensation Plan. Filed as Exhibit 10.16 to Graphic Packaging International Corporation’s Annual Report onForm 10-K filed on March 23, 2001 (Commission FileNo. 001-14060), and incorporated herein by reference. | | 10 | .5 | | Third Amended and Restated Graphic Packaging International Corporation Executive Employment Agreement, dated as of March 25, 2003, among Graphic Packaging International Corporation, each of the Affiliated Companies named therein and Jeffrey H. Coors. Filed as Exhibit 10.24 to Registrant’s Registration Statement onForm S-4 filed on May 2, 2003 (Registration No.333-104928), and incorporated herein by reference. | 10 | .34* | | Graphic Packaging Executive Incentive Plan, as amended and restated, effective February 1, 2002. Filed as Exhibit 10.1 to Graphic Packaging International Corporation’s Quarterly Report onForm 10-Q filed on October 31, 2002 (Commission FileNo. 001-14060), and incorporated herein by reference. | | 10 | .6 | | Third Amended and Restated Graphic Packaging International Corporation Executive Employment Agreement, dated as of March 25, 2003, among Graphic Packaging International Corporation, the Affiliated Companies named therein and David W. Scheible. Filed as Exhibit 10.25 to Registrant’s Registration Statement onForm S-4 filed on May 2, 2003 (Registration No.333-104928), and incorporated herein by reference. | 10 | .35 | | Form of Indemnification Agreement, dated as of September 10, 2003, entered into by and among Registrant, GPI Holding, Inc., Graphic Packaging International, Inc. and each of Jeffrey H. Coors, Stephen M. Humphrey, Kevin J. Conway, G. Andrea Botta, John D. Beckett, Harold R. Logan, Jr., John R. Miller, Robert W. Tieken, B. Charles Ames (as emeritus director) and William K. Coors (as emeritus director). Filed as Exhibit 10.30 to Registrant’s Annual Report onForm 10-K filed on March 16, 2004 (Commission FileNo. 001-13182) and incorporated herein by reference. | | 10 | .7 | | Employment Agreement, dated as of November 30, 2005, among Graphic Packaging International, Inc., Registrant and Daniel J. Blount. Filed as Exhibit 10.1 to Registrant’s Current Report onForm 8-K filed on December 2, 2005 (Commission FileNo. 001-13182), and incorporated herein by reference. | 10 | .36 | | Indemnification Agreement, dated as of September 10, 2003, entered into by and among Registrant, GPI Holding, Inc., Graphic Packaging International, Inc. and Lawrence C. Tucker. Filed as Exhibit 10.31 to Registrant’s Annual Report onForm 10-K filed on March 16, 2004 (Commission FileNo. 001-13182) and incorporated herein by reference. | | 10 | .8 | | Third Amended and Restated Graphic Packaging International Corporation Executive Employment Agreement, dated as of March 25, 2003, among Graphic Packaging International Corporation, the Affiliated Companies named therein and Donald W. Sturdivant. Filed as Exhibit 10.31 to Registrant’s Amendment No. 1 to Registration Statement onForm S-4 filed on June 13, 2003 (RegistrationNo. 333-104928), and incorporated herein by reference. | 10 | .37* | | 2004 Stock and Incentive Compensation Plan of Graphic Packaging Corporation. Filed as Appendix B to the Company’s definitive proxy statement filed on April 5, 2004 (Commission FileNo. 001-13182) and incorporated herein by reference. | | 10 | .9 | | Employment Agreement, dated as of August 8, 2003, among Riverwood International Corporation, Registrant and Michael R. Schmal. Filed as Exhibit 10.10 to Registrant’s Quarterly Report onForm 10-Q filed on November 14, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | 10 | .38* | | Amended and Restated Riverwood Holding, Inc. Stock Incentive Plan effective May 17, 2005. | | 10 | .10 | | Amendment No. 1 to Riverwood Holding, Inc. Stock Incentive Plan, Riverwood Holding, Inc. Supplemental Long-Term Incentive Plan and Riverwood Holding, Inc. 2002 Stock Incentive Plan. Filed as Exhibit 10.11 to Registrant’s Quarterly Report onForm 10-Q filed on November 14, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | 10 | .39* | | Form of Service Restricted Stock Unit Award Agreement granted on March 16, 2005 under the 2004 Stock and Incentive Compensation Plan. Filed as Exhibit 10.32 to Registrant’s Annual Report on Form 10-K filed on March 3, 2006 (Commission File No 001-13182) and incorporated herein by reference. | | 10 | .11 | | Form of Restricted Unit Agreement, dated as of August 8, 2003, entered into by and between Registrant and each of Jeffrey H. Coors, David W. Scheible and Donald W. Sturdivant. Filed as Exhibit 10.12 to Registrant’s Quarterly Report onForm 10-Q filed on November 14, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | 10 | .40* | | Graphic Packaging International, Inc. Supplemental Executive Pension Plan, effective April 7, 2006. Filed as Exhibit 10.1 to Registrant’s Current Report onForm 8-K filed on April 11, 2006 (Commission FileNo. 001-13182) and incorporated herein by reference. | | 10 | .12 | | Form of Management Stock Option Agreement entered into by and between Registrant and each of Wayne E. Juby, Michael R. Schmal, Daniel J. Blount, and Stephen A. Hellrung. Filed as Exhibit 10.13 to Registrant’s Quarterly Report onForm 10-Q filed on November 14, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | 10 | .41* | | Graphic Packaging International, Inc. 2006 Management Incentive Plan. | | | 14 | .1 | | Code of Business Conduct and Ethics. Filed as Exhibit 14.1 to Registrant’s Annual Report onForm 10-K filed on March 16, 2004 (Commission FileNo. 001-13182) and incorporated herein by reference. | | | 21 | .1 | | List of Subsidiaries. | | | 23 | .1 | | Consent of PricewaterhouseCoopers LLP. | | | 31 | .1 | | Certification required byRule 13a-14(a). | | | 31 | .2 | | Certification required byRule 13a-14(a). | | | 32 | .1 | | Certification required by Section 1350 of Chapter 63 of Title 18 of the United States Code. | | | 32 | .2 | | Certification required by Section 1350 of Chapter 63 of Title 18 of the United States Code. |
| | | * | | Executive compensation plan or agreement. |
83
| | | | | Exhibit
| | | Number | | Description | | | 10 | .13 | | Form of Restricted Unit Agreement entered into by and between Registrant and each of Wayne E. Juby, Michael R. Schmal, Daniel J. Blount, and Stephen A. Hellrung. Filed as Exhibit 10.14 to Registrant’s Quarterly Report onForm 10-Q filed on November 14, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 10 | .14 | | Form of Option Cancellation Acknowledgement of Wayne E. Juby and Michael R. Schmal. Filed as Exhibit 10.15 to Registrant’s Quarterly Report onForm 10-Q filed on November 14, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 10 | .15 | | Form of Amendment to Employment Agreement, dated as of August 7, 2003, entered into by and among Graphic Packaging International, Inc., Registrant and Wayne E. Juby. Filed as Exhibit 10.16 to Registrant’s Quarterly Report onForm 10-Q filed on November 14, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 10 | .16 | | Management Stock Option Agreement, dated as of August 8, 2003 entered into by and between Registrant and Stephen M. Humphrey. Filed as Exhibit 10.17 to Registrant’s Quarterly Report onForm 10-Q filed on November 14, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 10 | .17 | | Restricted Unit Agreement, dated as of August 8, 2003, entered into by and between Registrant and Stephen M. Humphrey. Filed as Exhibit 10.18 to Registrant’s Quarterly Report onForm 10-Q filed on November 14, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 10 | .18 | | Form of Officers’ Salary Continuation Agreement, as amended. Filed as Exhibit 10.10 to Graphic Packaging International Corporation’s Annual Report onForm 10-K filed on March 20, 1995 (Commission FileNo. 0-20704), and incorporated herein by reference. | | 10 | .19 | | Employment Agreement, dated as of October 6, 2003, entered into by and between Registrant, Graphic Packaging International, Inc. and Stephen A. Hellrung. Filed as Exhibit 10.21 to Registrant’s Quarterly Report onForm 10-Q filed on November 14, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 10 | .20 | | Graphic Packaging Equity Incentive Plan, as amended and restated, effective as of March 1, 2001. Filed as Exhibit 10.9 to Graphic Packaging International Corporation’s Annual Report onForm 10-K filed on March 23, 2001 (Commission FileNo. 001-14060), and incorporated herein by reference. | | 10 | .21 | | Graphic Packaging Equity Compensation Plan for Non-Employee Directors, as amended and restated. Filed as Exhibit 10.10 to Graphic Packaging International Corporation’s Annual Report onForm 10-K filed on March 23, 2001 (Commission FileNo. 001-14060), and incorporated herein by reference. | | 10 | .22 | | ACX Technologies, Inc. Phantom Equity Plan. Filed as Exhibit 10.11 to Graphic Packaging International Corporation’s Current Report onForm 8-K filed on November 19, 1992 (Commission FileNo. 0-20704), and incorporated herein by reference. | | 10 | .23 | | Graphic Packaging Excess Benefit Plan, as restated, effective as of January 1, 2000. Filed as Exhibit 10.12 to Graphic Packaging International Corporation’s Annual Report onForm 10-K filed on March 23, 2001 (Commission FileNo. 001-14060), and incorporated herein by reference. | | 10 | .24 | | Graphic Packaging Supplemental Retirement Plan, as restated, effective as of January 1, 2000. Filed as Exhibit 10.13 to Graphic Packaging International Corporation’s Annual Report onForm 10-K filed on March 23, 2001 (Commission FileNo. 001-14060), and incorporated herein by reference. | | 10 | .25 | | ACX Technologies, Inc. Deferred Compensation Plan, as amended. Filed as Exhibit 10.15 to Graphic Packaging International Corporation’s Annual Report onForm 10-K filed on March 7, 1996 (Commission FileNo. 0-20704), and incorporated herein by reference. | | 10 | .26 | | First Amendment to the Graphic Packaging Deferred Compensation Plan. Filed as Exhibit 10.16 to Graphic Packaging International Corporation’s Annual Report onForm 10-K filed on March 23, 2001 (Commission File No.001-14060), and incorporated herein by reference. | | 10 | .27 | | Graphic Packaging Executive Incentive Plan, as amended and restated, effective May 15, 2001. Filed as Exhibit 10.17 to Graphic Packaging International Corporation’s Quarterly Report onForm 10-Q filed on October 31, 2002 (Commission FileNo. 001-14060), and incorporated herein by reference. |
84
| | | | | Exhibit
| | | Number | | Description | | | 10 | .28 | | Form of Indemnification Agreement, dated as of September 10, 2003, entered into by and among Registrant, GPI Holding, Inc., Graphic Packaging International, Inc. and each of Jeffrey H. Coors, Stephen M. Humphrey, Kevin J. Conway, G. Andrea Botta, John D. Beckett, Harold R. Logan, Jr., John R. Miller, Robert W. Tieken, B. Charles Ames (as emeritus director) and William K. Coors (as emeritus director). Filed as Exhibit 10.30 to Registrant’s Annual Report onForm 10-K filed on March 16, 2004 (Commission FileNo. 001-13182) and incorporated herein by reference. | | 10 | .29 | | Indemnification Agreement, dated as of September 10, 2003, entered into by and among Registrant, GPI Holding, Inc., Graphic Packaging International, Inc. and Lawrence C. Tucker. Filed as Exhibit 10.31 to Registrant’s Annual Report onForm 10-K filed on March 16, 2004 (Commission FileNo. 001-13182) and incorporated herein by reference. | | 10 | .30 | | 2004 Stock and Incentive Compensation Plan of Graphic Packaging Corporation. Filed as Appendix B to the Company’s definitive proxy statement filed on April 5, 2004 (Commission FileNo. 001-13182) and incorporated herein by reference. | | 10 | .31 | | Employment Agreement dated August 8, 2003 by and between Riverwood International Corporation and Robert M. Simko, as amended by that certain Amendment to Employment Agreement dated February 21, 2006. Filed as Exhibit 10.1 to the Registrant’s Current Report onForm 8-K filed on February 24, 2006 and incorporated herein by reference. | | 10 | .32 | | Form of Service Restricted Stock Unit Award Agreement granted on March 16, 2005 under the 2004 Stock and Incentive Compensation Plan. | | 14 | .1 | | Code of Business Conduct and Ethics. Filed as Exhibit 14.1 to Registrant’s Annual Report onForm 10-K filed on March 16, 2004 (Commission FileNo. 001-13182) and incorporated by reference. | | 21 | .1 | | List of Subsidiaries. | | 23 | .1 | | Consent of PricewaterhouseCoopers LLP. | | 31 | .1 | | Certification required byRule 13a-14(a). | | 31 | .2 | | Certification required byRule 13a-14(a). | | 32 | .1 | | Certification required by Section 1350 of Chapter 63 of Title 18 of the United States Code. | | 32 | .2 | | Certification required by Section 1350 of Chapter 63 of Title 18 of the United States Code. |
85
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GRAPHIC PACKAGING CORPORATION (Registrant) | | | | | | | | | | | | /s/ STEPHEN M. HUMPHREYDAVID W. SCHEIBLE
Stephen M. HumphreyDavid W. Scheible | | President and Chief Executive Officer
(Principal (Principal Executive Officer) | | March 3, 20062, 2007 | | | | | | /s/ DANIEL J. BLOUNT Daniel J. Blount | | Senior Vice President and Chief Financial Officer (Principal Financial Officer) | | March 3, 20062, 2007 | | | | | | /s/ DEBORAH R. FRANK Deborah R. Frank | | Vice President and Controller (Principal Accounting Officer) | | March 3, 20062, 2007 |
POWER OF ATTORNEY Pursuant to the requirements of the Securities Exchange Act of 1934, this report onForm 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Each of the directors of the Registrant whose signature appears below hereby appoints Daniel J. Blount and Stephen A. Hellrung, and each of them severally, as his or herattorney-in-fact to sign in his or her name and behalf, in any and all capacities stated below, and to file with the Securities and Exchange Commission any and all amendments to this report onForm 10-K, making such changes in this report onForm 10-K as appropriate, and generally to do all such things on their behalf in their capacities as directorsand/or officers to enable the Registrant to comply with the provisions of the Securities Exchange Act of 1934, and all requirements of the Securities and Exchange Commission. | | | | | | | Signatures | | Title | | Date | | /s/ JOHN R. MILLER John R. Miller | | Non-Executive Chairman and Director | | March 2, 2007 | | | | | | /s/ JEFFREY H. COORSJOHN D. BECKETT
Jeffrey H. CoorsJohn D. Beckett | | Executive Chairman and Director | | March 3, 20062, 2007 | | | | | | /s/ KEVIN J. CONWAY
Kevin J.Conway | | Director | | March 3, 2006 | | | | | | /s/ G. ANDREA BOTTA G. Andrea Botta | | Director | | March 3, 20062, 2007 | | | | | | /s/ JOHN D. BECKETTKEVIN J. CONWAY
John D. BeckettKevin J. Conway | | Director | | March 3, 20062, 2007 | | | | | | /s/ HAROLD R. LOGAN, JR.JEFFREY H. COORS
Harold R. Logan, Jr. Jeffrey H. Coors | | Director | | March 3, 20062, 2007 | | | | | | /s/ WILLIAM R. FIELDS William R. Fields | | Director | | March 2, 2007 |
8684
| | | | | | | Signatures | | Title | | Date | | /s/ HAROLD R. LOGAN, JR. Harold R. Logan, Jr. | | Director | | March 2, 2007 | | | | | | /s/ JOHN R. MILLERDAVID W. SCHEIBLE
John R. MillerDavid W. Scheible | | Director | | March 3, 20062, 2007 | | | | | | /s/ WILLIAM R. FIELDS
William R. Fields | | Director | | March 3, 2006 | | | | | | /s/ ROBERT W. TIEKEN Robert W. Tieken | | Director | | March 3, 2006 | | | | | | /s/ STEPHEN M. HUMPHREY
Stephen M. Humphrey | | Director | | March 3, 20062, 2007 |
87 85
GRAPHIC PACKAGING CORPORATION
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance
| | Increase
| | (Credits) Charges
| | | | Balance
| | | Balance
| | Charges
| | | | Balance
| | | | Beginning
| | Due to
| | to Costs and
| | (Deductions)
| | at End
| | | Beginning
| | to Costs and
| | (Deductions)
| | at End
| | In millions | | | of Period | | Expenses | | Additions | | of Period | | | | | | (Classification) | | of Period | | Merger | | Expenses | | Additions | | of Period | | | | | | | | | | | | | Year ended December 31, 2006 | | | | | | | | | | | | | | | | | | Allowances Reducing the Assets in the Balance Sheet: | | | | | | | | | | | | | | | | | | Accounts receivable | | | $ | 2.8 | | | $ | 24.7 | | | $ | (25.1 | ) | | $ | 2.4 | | Deferred tax assets | | | | 283.4 | | | | 23.5 | | | | 35.6 | | | | 342.5 | | | | | | | | Total | | | $ | 286.2 | | | $ | 48.2 | | | $ | 10.5 | | | $ | 344.9 | | | | | | | (Amounts in millions) | | | | | Year ended December 31, 2005 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Allowances Reducing the Assets in the Balance Sheet: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accounts receivable | | $ | 3.7 | | | | — | | | | 21.2 | | | | (22.1 | ) | | $ | 2.8 | | | $ | 3.7 | | | $ | 21.2 | | | $ | (22.1 | ) | | $ | 2.8 | | Deferred tax assets | | | 221.7 | | | | — | | | | 25.6 | | | | 4.8 | | | | 252.1 | | | | 221.7 | | | | 25.6 | | | | 36.1 | | | | 283.4 | | | | | | | | | | | | | | | | | | Total | | $ | 225.4 | | | $ | — | | | $ | 46.8 | | | $ | (17.3 | ) | | $ | 254.9 | | | $ | 225.4 | | | $ | 46.8 | | | $ | 14.0 | | | $ | 286.2 | | | | | | | | | | | | | | | | | | | | | Year ended December 31, 2004 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Allowances Reducing the Assets in the Balance Sheet: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accounts receivable | | $ | 7.1 | | | | — | | | | 22.5 | | | | (25.9 | ) | | $ | 3.7 | | | $ | 7.1 | | | $ | 22.5 | | | $ | (25.9 | ) | | $ | 3.7 | | Deferred tax assets | | | 260.2 | | | | — | | | | 22.3 | | | | (60.8 | ) | | | 221.7 | | | | 260.2 | | | | 22.3 | | | | (60.8 | ) | | | 221.7 | | | | | | | | | | | | | | | Total | | $ | 267.3 | | | $ | — | | | $ | 44.8 | | | $ | (86.7 | ) | | $ | 225.4 | | | | | | | | | | | | | | | | Year ended December 31, 2003 | | | | | | | | | | | | | | | | | | | | | | Allowances Reducing the Assets in the Balance Sheet: | | | | | | | | | | | | | | | | | | | | | | Accounts receivable | | $ | 3.9 | | | | 3.2 | | | | 16.8 | | | | (16.8 | ) | | $ | 7.1 | | | Deferred tax assets | | | 257.9 | | | | — | | | | 8.9 | | | | (6.6 | ) | | | 260.2 | | | | | | | | | | | | | | | | Total | | $ | 261.8 | | | $ | 3.2 | | | $ | 25.7 | | | $ | (23.4 | ) | | $ | 267.3 | | | $ | 267.3 | | | $ | 44.8 | | | $ | (86.7 | ) | | $ | 225.4 | | | | | | | | | | | | | | | | | |
86
EXHIBIT INDEX | | | | | Exhibit
| | | Number | | Description | | | | 2 | .1 | | Agreement and Plan of Merger, dated as of March 25, 2003, among Registrant, Riverwood Acquisition Sub LLC and Graphic Packaging International Corporation. Filed as Exhibit 2.1 to Registrant’s Current Report onForm 8-K filed on March 27, 2003 (Commission FileNo. 001-11113), and incorporated herein by reference. | | 2 | .2 | | Amendment No. 1 to Agreement and Plan of Merger, dated as of July 11, 2003, among Registrant, Riverwood Acquisition Sub LLC and Graphic Packaging International Corporation. Filed as part of Annex A to Registrant’s Amendment No. 3 to Registration Statement onForm S-4 filed on July 17, 2003 (RegistrationNo. 333-104928), and incorporated herein by reference. | | 3 | .1 | | Restated Certificate of Incorporation of Graphic Packaging Corporation. Filed as Exhibit 3.1 to Registrant’s Current Report onForm 8-K filed on August 13, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 3 | .2 | | Bylaws of Graphic Packaging Corporation, as amended and restated as of September 20, 2006. Filed as Exhibit 3.1 to Registrant’s Current Report onForm 8-K filed on September 25, 2006 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 3 | .3 | | Graphic Packaging Corporation Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock. Filed as Exhibit 3.3 to Registrant’s Current Report onForm 8-K filed on August 13, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 4 | .1 | | Form of Certificate for the Common Stock, par value $0.01 per share. Filed as Exhibit 4.1 to Registrant’s Amendment No. 1 to Registration Statement onForm S-4 filed on June 13, 2003 (RegistrationNo. 333-104928), and incorporated herein by reference. | | 4 | .2 | | Rights Agreement, dated as of August 7, 2003, between Registrant and Wells Fargo Bank Minnesota, National Association. Filed as Exhibit 4.1 to Registrant’s Current Report onForm 8-K filed on August 13, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 4 | .3 | | Credit Agreement, dated as of August 8, 2003, among Graphic Packaging International, Inc., the several lenders from time to time parties thereto, JPMorgan Chase Bank, as administrative agent, Deutsche Bank Securities Inc., as syndication agent, and Goldman Sachs Credit Partners L.P. and Morgan Stanley Senior Funding, Inc., as documentation agents. Filed as Exhibit 4.2 to Registrant’s Current Report onForm 8-K filed on August 13, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 4 | .4 | | Guarantee and Collateral Agreement, dated as of August 8, 2003, made by Registrant, Riverwood Acquisition Sub LLC, GPI Holding, Inc., Graphic Packaging International, Inc., and certain of its subsidiaries in favor of JPMorgan Chase Bank as administrative agent. Filed as Exhibit 4.3 to Registrant’s Current Report onForm 8-K filed on August 13, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 4 | .5 | | Indenture, dated as of August 8, 2003, among Graphic Packaging International, Inc., as Issuer, Registrant and GPI Holding, Inc., as Note Guarantors, and Wells Fargo Bank Minnesota, National Association, as Trustee, relating to the 8.50% Senior Notes due 2011 of Graphic Packaging International, Inc. Filed as Exhibit 4.4 to Registrant’s Current Report onForm 8-K filed on August 13, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 4 | .6 | | Indenture, dated as of August 8, 2003, among Graphic Packaging International, Inc., as Issuer, Registrant and GPI Holding, Inc., as Note Guarantors, and Wells Fargo Bank Minnesota, National Association, as Trustee, relating to the 9.50% Senior Subordinated Notes due 2013 of Graphic Packaging International, Inc. Filed as Exhibit 4.5 to Registrant’s Current Report onForm 8-K filed on August 13, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. |
87
| | | | | Exhibit
| | | Number | | Description | | | | 4 | .7 | | Form of 8.50% Senior Notes due 2011 of Graphic Packaging International, Inc. (included in Exhibit 4.5). Filed as Exhibit A to the Indenture, dated as of August 8, 2003, among Graphic Packaging International, Inc., as Issuer, Registrant and GPI Holding, Inc., as Note Guarantors, and Wells Fargo Bank Minnesota, National Association, as Trustee, relating to the 8.50% Senior Notes due 2011 of Graphic Packaging International, Inc. filed as Exhibit 4.4 to Registrant’s Current Report onForm 8-K filed on August 13, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 4 | .8 | | Form of 9.50% Senior Subordinated Notes due 2013 of Graphic Packaging International, Inc. (included in Exhibit 4.6). Filed as Exhibit A to the Indenture, dated as of August 8, 2003, among Graphic Packaging International, Inc., as Issuer, Registrant and GPI Holding, Inc., as Note Guarantors, and Wells Fargo Bank Minnesota, National Association, as Trustee, relating to the 9.50% Senior Subordinated Notes due 2013 of Graphic Packaging International, Inc. filed as Exhibit 4.5 to Registrant’s Current Report onForm 8-K filed on August 13, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 4 | .9 | | First Amendment, dated as of October 1, 2004, to the Credit Agreement dated as of August 8, 2003 among Graphic Packaging International, Inc., the Several Lenders Parties thereto, JPMorgan Chase Bank, as administrative agent, and J.P. Morgan Securities Inc., as lead arranger and sole bookrunner. Filed as Exhibit 99.1 to Registrant’s Current Report onForm 8-K filed on October 7, 2004 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 4 | .10 | | Second Amendment, dated as of October 17, 2005, to the Credit Agreement dated as of August 8, 2003 among Graphic Packaging International, Inc., the Lenders, JPMorgan Chase Bank, as administrative agent, and J.P. Morgan Securities Inc., as lead arranger and sole bookrunner. Filed as Exhibit 10.1 to Registrant’s Current Report onForm 8-K filed on October 20, 2005 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 10 | .1 | | Amended and Restated Registration Rights Agreement, dated as of March 25, 2003, among Registrant, the Family Stockholders named therein, Clayton Dubilier & Rice Fund V Limited Partnership, EXOR Group S.A., and the Other Riverwood Stockholders named therein. Filed as Exhibit 10.1 to Registrant’s Registration Statement onForm S-4 filed on May 2, 2003 (RegistrationNo. 333-104928), and incorporated herein by reference. | | 10 | .2 | | Stockholders Agreement, dated as of March 25, 2003, by and among Registrant, the Family Stockholders named therein, Clayton Dubilier & Rice Fund V Limited Partnership and EXOR Group S.A. Filed as Exhibit 10.2 to Registrant’s Registration Statement onForm S-4 filed on May 2, 2003 (RegistrationNo. 333-104928), and incorporated herein by reference. | | 10 | .3 | | Amendment No. 1 to Stockholders Agreement, dated as of April 29, 2003, by and among Registrant, the Family Stockholders named therein, Clayton Dubilier & Rice Fund V Limited Partnership and EXOR Group S.A. Filed as Exhibit 10.3 to Registrant’s Registration Statement onForm S-4 filed on May 2, 2003 (RegistrationNo. 333-104928), and incorporated herein by reference. | | 10 | .4 | | Amendment No. 2 to Stockholders Agreement, dated as of June 12, 2003, by and among Registrant, the Family Stockholders named therein, Clayton Dubilier & Rice Fund V Limited Partnership and EXOR Group S.A. Filed as Exhibit 10.4 to Registrant’s Amendment No. 1 to Registration Statement onForm S-4 filed on June 13, 2003 (RegistrationNo. 333-104928), and incorporated herein by reference. | | 10 | .5 | | Amendment No. 3 to Stockholders Agreement, dated as of July 20, 2006, by and among Registrant, the Family Stockholders named therein, Clayton, Dubilier & Rice Fund V Limited Partnership and EXOR Group S.A. Filed as Exhibit 10.9 to the Registrant’s Current Report onForm 8-K filed on July 24, 2006 and incorporated herein by reference. | | 10 | .6* | | Employment Agreement, dated as of July 20, 2006, by and among Graphic Packaging International, Inc., Registrant and Jeffrey H. Coors. Filed as Exhibit 10.1 to Registrant’s Current Report onForm 8-K filed on July 24, 2006 (Commission FileNo. 001-13182) and incorporated herein by reference. |
88
| | | | | Exhibit
| | | Number | | Description | | | | 10 | .7* | | Employment Agreement, dated as of July 20, 2006, by and among Graphic Packaging International, Inc., Registrant and David W. Scheible. Filed as Exhibit 10.3 to Registrant’s Current Report onForm 8-K filed on July 24, 2006 (Commission FileNo. 001-13182) and incorporated herein by reference. | | 10 | .8* | | Employment Agreement, dated as of July 20, 2006, by and among Graphic Packaging International, Inc., Registrant and Stephen M. Humphrey. Filed as Exhibit 10.2 to Registrant’s Current Report onForm 8-K filed on July 24, 2006 (Commission FileNo. 001-13182) and incorporated herein by reference. | | 10 | .9* | | Employment Agreement, dated as of July 20, 2006, by and among Graphic Packaging International, Inc., Registrant and Daniel J. Blount. Filed as Exhibit 10.4 to Registrant’s Current Report onForm 8-K filed on July 24, 2006 (Commission FileNo. 001-13182) and incorporated herein by reference. | | 10 | .10* | | Employment Agreement, dated as of July 20, 2006, by and among Graphic Packaging International, Inc., Registrant and Stephen A. Hellrung. Filed as Exhibit 10.5 to Registrant’s Current Report onForm 8-K filed on July 24, 2006 (Commission FileNo. 001-13182) and incorporated herein by reference. | | 10 | .11* | | Employment Agreement, dated as of July 20, 2006, by and among Graphic Packaging International, Inc., Registrant and Wayne E. Juby. Filed as Exhibit 10.6 to Registrant’s Current Report onForm 8-K filed on July 24, 2006 (Commission FileNo. 001-13182) and incorporated herein by reference. | | 10 | .12* | | Employment Agreement, dated as of July 20, 2006, by and among Graphic Packaging International, Inc., Registrant and Michael R. Schmal. Filed as Exhibit 10.7 to Registrant’s Current Report onForm 8-K filed on July 24, 2006 (Commission FileNo. 001-13182) and incorporated herein by reference. | | 10 | .13* | | Employment Agreement, dated as of July 20, 2006, by and among Graphic Packaging International, Inc., Registrant and Robert M. Simko. Filed as Exhibit 10.8 to Registrant’s Current Report onForm 8-K filed on July 24, 2006 (Commission FileNo. 001-13182) and incorporated herein by reference. | | 10 | .14* | | Employment Agreement, dated as of July 20, 2006, by and among Graphic Packaging International, Inc., Registrant and Michael P. Doss. Filed as Exhibit 10.1 to Registrant’s Current Report onForm 8-K filed on September 25, 2006 (Commission FileNo. 001-13182) and incorporated herein by reference. | | 10 | .15* | | Riverwood Holding, Inc. Stock Incentive Plan. Filed as Exhibit 10.10 to Registration Statement onForm S-1 (RegistrationNo. 33-80475) of New River Holding, Inc. (renamed Riverwood Holding, Inc.) and incorporated herein by reference. | | 10 | .16* | | Riverwood Holding, Inc. Supplemental Long-Term Incentive Plan. Filed as Exhibit 10.15 to Riverwood Holding, Inc.’s Annual Report onForm 10-K filed on March 17, 2000 (Commission FileNo. 1-11113) and incorporated herein by reference. | | 10 | .17* | | 2003 Riverwood Holding, Inc. Long-Term Incentive Plan. Filed as Exhibit 10.15 to Registration Statement onForm S-4 (Registration StatementNo. 333-104928) filed on May 2, 2003 and incorporated herein by reference. | | 10 | .18* | | Riverwood Holding, Inc. 2002 Stock Incentive Plan. Filed as Exhibit 10.19 to Registrant’s Annual Report onForm 10-K filed April 15, 2003 (Commission FileNo. 1-11113) and incorporated herein by reference. | | 10 | .19* | | Amendment No. 1 to Riverwood Holding, Inc. Stock Incentive Plan, Riverwood Holding, Inc. Supplemental Long-Term Incentive Plan and Riverwood Holding, Inc. 2002 Stock Incentive Plan. Filed as Exhibit 10.11 to Registrant’s Quarterly Report onForm 10-Q filed on November 14, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 10 | .20* | | Form of Restricted Unit Agreement, dated as of August 8, 2003, between Registrant and each of Jeffrey H. Coors, David W. Scheible and Donald W. Sturdivant. Filed as Exhibit 10.12 to Registrant’s Quarterly Report onForm 10-Q filed on November 14, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. |
89
| | | | | Exhibit
| | | Number | | Description | | | | 10 | .21* | | Form of Management Stock Option Agreement entered into by and between Registrant and each of Wayne E. Juby, Michael R. Schmal, Daniel J. Blount, and Stephen A. Hellrung. Filed as Exhibit 10.13 to Registrant’s Quarterly Report onForm 10-Q filed on November 14, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 10 | .22* | | Form of Restricted Unit Agreement entered into by and between Registrant and each of Wayne E. Juby, Michael R. Schmal, Daniel J. Blount, and Stephen A. Hellrung. Filed as Exhibit 10.14 to Registrant’s Quarterly Report onForm 10-Q filed on November 14, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 10 | .23* | | Form of Option Cancellation Acknowledgement of Wayne E. Juby and Michael R. Schmal. Filed as Exhibit 10.15 to Registrant’s Quarterly Report onForm 10-Q filed on November 14, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 10 | .24* | | Management Stock Option Agreement, dated as of August 8, 2003 entered into by and between Registrant and Stephen M. Humphrey. Filed as Exhibit 10.17 to Registrant’s Quarterly Report onForm 10-Q filed on November 14, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 10 | .25* | | Restricted Unit Agreement, dated as of August 8, 2003, entered into by and between Registrant and Stephen M. Humphrey. Filed as Exhibit 10.18 to Registrant’s Quarterly Report onForm 10-Q filed on November 14, 2003 (Commission FileNo. 001-13182), and incorporated herein by reference. | | 10 | .26* | | Form of Officers’ Salary Continuation Agreement, as amended. Filed as Exhibit 10.10 to Graphic Packaging International Corporation’s Annual Report onForm 10-K filed on March 20, 1995 (Commission FileNo. 0-20704), and incorporated herein by reference. | | 10 | .27* | | Graphic Packaging Equity Incentive Plan, as amended and restated, effective as of March 1, 2001. Filed as Exhibit 10.9 to Graphic Packaging International Corporation’s Annual Report onForm 10-K filed on March 23, 2001 (Commission FileNo. 001-14060), and incorporated herein by reference. | | 10 | .28* | | Graphic Packaging Equity Compensation Plan for Non-Employee Directors, as amended and restated. Filed as Exhibit 10.10 to Graphic Packaging International Corporation’s Annual Report onForm 10-K filed on March 23, 2001 (Commission FileNo. 001-14060), and incorporated herein by reference. | | 10 | .29* | | ACX Technologies, Inc. Phantom Equity Plan. Filed as Exhibit 10.11 to Graphic Packaging International Corporation’s Current Report onForm 8-K filed on November 19, 1992 (Commission FileNo. 0-20704), and incorporated herein by reference. | | 10 | .30* | | Graphic Packaging Excess Benefit Plan, as restated, effective as of January 1, 2000. Filed as Exhibit 10.12 to Graphic Packaging International Corporation’s Annual Report onForm 10-K filed on March 23, 2001 (Commission FileNo. 001-14060), and incorporated herein by reference. | | 10 | .31* | | Graphic Packaging Supplemental Retirement Plan, as restated, effective as of January 1, 2000. Filed as Exhibit 10.13 to Graphic Packaging International Corporation’s Annual Report onForm 10-K filed on March 23, 2001 (Commission FileNo. 001-14060), and incorporated herein by reference. | | 10 | .32* | | ACX Technologies, Inc. Deferred Compensation Plan, as amended. Filed as Exhibit 10.15 to Graphic Packaging International Corporation’s Annual Report onForm 10-K filed on March 7, 1996 (Commission FileNo. 0-20704), and incorporated herein by reference. | | 10 | .33* | | First Amendment to the Graphic Packaging Deferred Compensation Plan. Filed as Exhibit 10.16 to Graphic Packaging International Corporation’s Annual Report onForm 10-K filed on March 23, 2001 (Commission FileNo. 001-14060), and incorporated herein by reference. | | 10 | .34* | | Graphic Packaging Executive Incentive Plan, as amended and restated, effective February 1, 2002. Filed as Exhibit 10.1 to Graphic Packaging International Corporation’s Quarterly Report onForm 10-Q filed on October 31, 2002 (Commission FileNo. 001-14060), and incorporated herein by reference. |
90
| | | | | Exhibit
| | | Number | | Description | | | | 10 | .35 | | Form of Indemnification Agreement, dated as of September 10, 2003, entered into by and among Registrant, GPI Holding, Inc., Graphic Packaging International, Inc. and each of Jeffrey H. Coors, Stephen M. Humphrey, Kevin J. Conway, G. Andrea Botta, John D. Beckett, Harold R. Logan, Jr., John R. Miller, Robert W. Tieken, B. Charles Ames (as emeritus director) and William K. Coors (as emeritus director). Filed as Exhibit 10.30 to Registrant’s Annual Report onForm 10-K filed on March 16, 2004 (Commission FileNo. 001-13182) and incorporated herein by reference. | | 10 | .36 | | Indemnification Agreement, dated as of September 10, 2003, entered into by and among Registrant, GPI Holding, Inc., Graphic Packaging International, Inc. and Lawrence C. Tucker. Filed as Exhibit 10.31 to Registrant’s Annual Report onForm 10-K filed on March 16, 2004 (Commission FileNo. 001-13182) and incorporated herein by reference. | | 10 | .37* | | 2004 Stock and Incentive Compensation Plan of Graphic Packaging Corporation. Filed as Appendix B to the Company’s definitive proxy statement filed on April 5, 2004 (Commission FileNo. 001-13182) and incorporated herein by reference. | | 10 | .38* | | Amended and Restated Riverwood Holding, Inc. Stock Incentive Plan effective May 17, 2005. | | 10 | .39* | | Form of Service Restricted Stock Unit Award Agreement granted on March 16, 2005 under the 2004 Stock and Incentive Compensation Plan. Filed as Exhibit 10.32 to Registrant’s Annual Report on Form 10-K filed on March 3, 2006 (Commission File No 001-13182) and incorporated herein by reference. | | 10 | .40* | | Graphic Packaging International, Inc. Supplemental Executive Pension Plan, effective April 7, 2006. Filed as Exhibit 10.1 to Registrant’s Current Report onForm 8-K filed on April 11, 2006 (Commission FileNo. 001-13182) and incorporated herein by reference. | | 10 | .41* | | Graphic Packaging International, Inc. 2006 Management Incentive Plan. | | 14 | .1 | | Code of Business Conduct and Ethics. Filed as Exhibit 14.1 to Registrant’s Annual Report onForm 10-K filed on March 16, 2004 (Commission FileNo. 001-13182) and incorporated herein by reference. | | 21 | .1 | | List of Subsidiaries. | | 23 | .1 | | Consent of PricewaterhouseCoopers LLP. | | 31 | .1 | | Certification required byRule 13a-14(a). | | 31 | .2 | | Certification required byRule 13a-14(a). | | 32 | .1 | | Certification required by Section 1350 of Chapter 63 of Title 18 of the United States Code. | | 32 | .2 | | Certification required by Section 1350 of Chapter 63 of Title 18 of the United States Code. |
* | | | | | Executive compensation plan or agreement. |
91
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