FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number: 0-20704
GRAPHIC PACKAGING INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Colorado 84-1208699
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4455 Table Mountain Drive, Golden, Colorado 80403
(Address of principal executive offices) (Zip Code)
(303) 215-4600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
There were 29,396,002 shares of common stock outstanding as of
August 1, 2000.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GRAPHIC PACKAGING INTERNATIONAL CORPORATION
CONSOLIDATED INCOME STATEMENT
(In thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
Net sales $262,285 $163,595 $525,734 $329,571
Cost of goods sold 229,696 132,272 461,761 268,684
-------- -------- -------- --------
Gross profit 32,589 31,323 63,973 60,887
Selling, general and
administrative expense 15,966 16,414 31,643 31,709
Goodwill amortization 4,202 1,944 8,500 3,951
Restructuring charge --- --- 3,420 ---
-------- -------- -------- --------
Operating income 12,421 12,965 20,410 25,227
Gain on sale of assets - net --- --- 5,407 ---
Interest expense - net (16,437) (3,786) (31,387) (8,294)
-------- -------- -------- --------
Income (loss) from continuing
operations before income taxes (4,016) 9,179 (5,570) 16,933
Income tax (expense) benefit 1,547 (3,399) 2,168 (6,645)
-------- -------- -------- --------
Income (loss) from continuing
operations (2,469) 5,780 (3,402) 10,288
Discontinued operations, net
of tax
Income from discontinued
operations of CoorsTek --- 5,482 --- 10,692
Loss from discontinued
operations of Kalamazoo
Board Mill (1,792) --- (4,315) ---
-------- -------- -------- --------
Net income (loss) ($4,261) $11,262 ($7,717) $20,980
======== ======== ======== ========
Income (loss) per basic share:
Continuing operations ($0.09) $0.20 ($0.12) $0.36
Discontinued operations (0.06) 0.20 (0.15) 0.38
-------- -------- -------- --------
Net income (loss) ($0.15) $0.40 ($0.27) $0.74
======== ======== ======== ========
Income (loss) per diluted
share:
Continuing operations ($0.09) $0.20 ($0.12) $0.36
Discontinued operations (0.06) 0.19 (0.15) 0.37
-------- -------- -------- --------
Net income (loss) ($0.15) $0.39 ($0.27) $0.73
======== ======== ======== ========
Weighted average shares
outstanding - basic 28,985 28,443 28,824 28,435
======== ======== ======== ========
Weighted average shares
outstanding - diluted 29,355 28,748 29,188 28,734
======== ======== ======== ========
See Notes to Consolidated Financial Statements.
GRAPHIC PACKAGING INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
June 30, December 31,
2000 1999
----------- ----------
ASSETS
Current assets:
Cash and cash equivalents $3,923 $15,869
Accounts receivable, net 78,374 68,762
Note receivable --- 200,000
Inventories:
Finished 67,966 55,451
In process 20,495 20,466
Raw materials 39,119 43,472
----------- ----------
Total inventories 127,580 119,389
Other assets 29,450 25,444
Net current assets of
discontinued operations 17,368 4,501
----------- ----------
Total current assets 256,695 433,965
Properties at cost, less
accumulated depreciation
of $173,997 in 2000 and
$144,656 in 1999 411,117 427,489
Goodwill, net 487,872 490,558
Other assets 43,333 54,527
Net noncurrent assets of
discontinued operations 211,913 220,499
----------- ----------
Total assets $1,410,930 $1,627,038
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current maturities of long-term debt $206,000 $400,000
Other current liabilities 117,697 141,191
----------- ----------
Total current liabilities 323,697 541,191
Long-term debt 622,000 615,500
Other long-term liabilities 47,498 47,037
----------- ----------
Total liabilities 993,195 1,203,728
Shareholders' equity
Preferred stock, $0.01 par
value, 20,000,000 shares
authorized and no shares
issued or outstanding --- ---
Common stock, $0.01 par value
100,000,000 shares authorized
and 29,229,768 and 28,576,771
issued and outstanding at
June 30, 2000, and December
31, 1999, respectively 292 286
Paid-in capital 425,029 422,885
Retained earnings (deficit) (7,717) ---
Accumulated other comprehensive
income 131 139
----------- ----------
Total shareholders' equity 417,735 423,310
----------- ----------
Total liabilities and shareholders'
equity $1,410,930 $1,627,038
=========== ==========
See Notes to Consolidated Financial Statements.
GRAPHIC PACKAGING INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Six months ended
June 30,
2000 1999
-------- --------
Cash flows from operating
activities:
Net income (loss) ($7,717) $20,980
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Restructuring charge 3,420 ---
Gain on sale of assets (5,407) ---
Depreciation and amortization 42,758 30,049
Change in current assets and
current liabilities and
other (44,450) 4,278
-------- --------
Net cash provided by (used in)
operating activities (11,396) 55,307
-------- --------
Cash flows from investing
activities:
Collection of note receivable 200,000 ---
Capital expenditures (17,102) (37,513)
Sale of assets 5,596 ---
Acquisitions, net of cash
acquired --- (55,008)
Other --- 4,076
-------- --------
Net cash provided by (used in)
investing activities 188,494 (88,445)
-------- --------
Cash flows from financing
activities:
Repayment of debt (219,000) (9,500)
Proceeds from borrowings 31,500 53,763
Other (1,544) ---
-------- --------
Net cash provided by (used in)
financing activities (189,044) 44,263
-------- --------
Cash and cash equivalents:
Net increase (decrease) in cash
and cash equivalents (11,946) 11,125
Balance at beginning of period 15,869 26,196
-------- --------
Balance at end of period $3,923 $37,321
======== ========
Cash flows from discontinued operations are included in the
Consolidated Statement of Cash Flows.
See Notes to Consolidated Financial Statements
GRAPHIC PACKAGING INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nature of Operations: Graphic Packaging International
Corporation (the "Company" or "Graphic Packaging") is a
manufacturer of packaging products used by consumer product
companies as primary packaging for their end-use products. The
Company's strategy is to maximize its competitive position and
growth opportunities in its core business, folding cartons.
Toward this end, over the past several years the Company has
acquired two significant folding carton businesses and has
disposed of several non-core businesses and under-performing
assets.
Amounts included in the notes to the consolidated financial
statements pertain to continuing operations only, except where
otherwise noted.
Note 1. Discontinued Operations
The historical operating results of the following business
segments have been segregated as discontinued operations on the
accompanying Consolidated Income Statement for the three-month
and six-month periods ended June 30, 2000 and 1999. Net assets
from these discontinued operations are similarly segregated on
the face of the accompanying Consolidated Balance Sheet for the
applicable periods. Discontinued operations have not been
segregated on the Consolidated Statement of Cash Flows.
CoorsTek Spin-off
On December 31, 1999, the Company distributed 100% of
CoorsTek's shares of common stock to the Graphic Packaging
shareholders in a tax-free transaction. Shareholders received
one share of CoorsTek stock for every four shares of Graphic
Packaging stock held. CoorsTek issued a promissory note to
Graphic Packaging on December 31, 1999 totaling $200 million in
satisfaction of outstanding intercompany obligations at the time
of the spin-off and as a one-time, special dividend. The note
was paid in full on January 4, 2000. No gain or loss was
recognized by Graphic Packaging as a result of the spin-off
transaction.
Kalamazoo Mill
The Company purchased the Kalamazoo Mill on August 2, 1999
as part of the acquisition of the Fort James packaging business.
The Kalamazoo Mill produces coated recycled paperboard. In
December 1999, the Board of Directors approved a plan to offer
the Kalamazoo Mill for sale and to use the anticipated proceeds
from the sale to repay a one-year term loan originally due on
August 1, 2000. The Company has been unable to sell the
Mill and therefore, as discussed below, has recently extended
the $169 million one-year term loan to August 15, 2000 and
is in negotiations to further restructure its capital structure
by that date. An estimated fair value of $225 million was
ascribed to the net assets of the Kalamazoo Mill, which
includes approximately $106 million of preliminary goodwill
allocated from the continuing operations of the Fort James
packaging business acquisition. The amount of preliminary
goodwill allocated to the Kalamazoo Mill is subject to change
upon sale or other disposition. As a result, no gain or loss
will be recorded upon any sale. The Company allocated approxi-
mately $5.2 million of interest expense to the Kalamazoo Mill for
the three months ended June 30, 2000 and $9.9 million for the six
months ended June 30, 2000, based upon the estimated fair value
of $225 million.
Financial data for the Kalamazoo Mill and CoorsTek are
summarized as follows (in thousands, except for per share
information):
Three months Six months Three months Six months
ended ended ended ended
June 30, 2000 June 30, 2000 June 30, 1999 June 30, 1999
Kalamazoo Mill Kalamazoo Mill CoorsTek CoorsTek
-------------- -------------- ------------- -------------
Net sales $10,904 $23,775 $95,411 $171,990
============== ============== ============= =============
Income (loss)
from operations
before income
taxes ($2,986) ($7,191) $8,983 $17,547
Income tax
(expense)
benefit 1,194 2,876 (3,501) (6,855)
-------------- -------------- ------------- -------------
Net income
(loss) ($1,792) ($4,315) $5,482 $10,692
============== ============== ============= =============
Per basic share
of common stock ($0.06) ($0.15) $0.20 $0.38
============== ============== ============= =============
Per diluted share
of common stock ($0.06) ($0.15) $0.19 $0.37
============== ============== ============= =============
June 30, 2000 December 31, 1999
Kalamazoo Mill Kalamazoo Mill
-------------- -----------------
Current assets $19,743 $18,449
Current
liabilities (2,375) (13,948)
-------------- -----------------
Net current
assets $17,368 $4,501
============== =================
Noncurrent
assets $216,559 $224,619
Noncurrent
liabilities (4,646) (4,120)
-------------- -----------------
Net noncurrent
assets $211,913 $220,499
============== =================
Significant estimates have been made by management with
respect to the estimated fair value of the Kalamazoo Mill and the
resultant goodwill and interest allocations. Actual results
could differ from these estimates making it reasonably possible
that a change in these estimates could occur in the near term.
Note 2. Asset Impairment and Restructuring Charges
On May 12, 2000, the Company announced the planned closure
of the Perrysburg, Ohio folding carton plant. The shutdown and
related restructuring plan for the Perrysburg facility included
asset impairments totaling $6.50 million and restructuring
reserves of $1.35 million, which were recorded in the second
quarter. The costs to shut down the Perrysburg facility, which
was part of the acquisition of the Fort James packaging business,
have been accounted for as a cost of the acquisition, with a
resultant adjustment to goodwill. The Company plans to complete
the closure of the plant and the transition of the plant's
business to other Company facilities by the end of the third
quarter of 2000.
The Company recorded a restructuring charge of $3.4 million
in the first quarter of 2000 for anticipated severance costs as a
result of the announced closure of the Saratoga Springs, New York
plant. The Saratoga Springs plant is being closed pursuant to a
plant rationalization plan approved by the Company's Board of
Directors in the fourth quarter of 1999. The Company plans to
complete the closure of the Saratoga Springs plant and the
transition of the plant's business to other Company facilities by
the end of the third quarter of 2000.
A restructuring charge of $1.9 million was recorded in the
fourth quarter of 1999 primarily related to severance costs at
the Lawrenceburg, Tennessee plant. The Company initially planned
to complete this restructuring, including the closure of the
Boulder, Colorado plant and the reduction in force at the
Lawrenceburg, Tennessee plant, by the end of the third quarter of
2000. However, customer needs in both Boulder and Lawrenceburg,
coupled with the timing of the transition of business to the
Company's new Golden, Colorado facility, will delay completion of
the restructuring until the end of 2000.
The following summarizes the activity related to the
Company's restructuring charges for the six months ended June 30,
2000 (in thousands):
Restructuring reserve balance
at December 31, 1999 $1,720
First quarter restructuring charge 3,420
Second quarter restructuring charge 1,350
Cash paid (860)
------
Restructuring reserve balance
at June 30, 2000 $5,630
======
Note 3. Gain on Sale of Assets
The Company sold patents and various long-lived assets of
its former developmental businesses during the first quarter of
2000 for consideration of approximately $6.2 million. A pre-tax
gain of $5.4 million was recognized relating to these asset
sales.
The Company is also actively pursuing the sale of another
non-core asset. Any proceeds will be used to reduce the
Company's debt.
Note 4. Segment Information
The Company's reportable segments are based on its method of
internal reporting, which is based on product category. The
Company has one reportable segment in 2000 - Packaging. The
Company's 1999 reportable segments, after consideration for
discontinued operations, include an "Other" segment and are
presented for comparative purposes. The Other segment includes a
real estate development partnership, a majority interest in a
group of solar electric distribution companies prior to their
sale in August 1999, and several technology-based businesses
prior to March 1999.
The tables below summarize information, in thousands, about
the Company's reportable segments. Discontinued operations
include the Kalamazoo Mill in 2000 and CoorsTek in 1999.
Three months Depreciation
ended Net Operating And Capital
June 30, 2000 Sales Income Amortization Expenditures
- ------------- -------- --------- ------------ ------------
Packaging $262,285 $12,421 $16,868 $7,351
Discontinued
operations --- --- 4,453 783
-------- --------- ------------ ------------
Consolidated
total $262,285 $12,421 $21,321 $8,134
======== ========= ============ ============
Three months
ended
June 30, 1999
- -------------
Packaging $148,534 $14,784 $8,727 $15,294
Other 15,061 2 101 493
-------- --------- ------------ ------------
Segment total 163,595 14,786 8,828 15,787
Corporate --- (1,821) 67 18
Discontinued
operations --- --- 6,702 2,423
-------- --------- ------------ ------------
Consolidated
total $163,595 $12,965 $15,597 $18,228
======== ========= ============ ============
Six months Depreciation
ended Net Operating and Capital
June 30, 2000 Sales Income Amortization Expenditures Assets
- ------------- -------- --------- ------------ ------------ ----------
Packaging $525,734 $20,410 $33,882 $15,965 $1,181,649
Discontinued
operations,
net assets --- --- 8,876 1,137 229,281
-------- -------- ------------ ------------ ----------
Consolidated
total $525,734 $20,410 $42,758 $17,102 $1,410,930
======== ======== ============ ============ ==========
Six months
ended
June 30, 1999
- -------------
Packaging $299,261 $27,623 $17,293 $32,565 $568,385
Other 30,310 427 531 959 54,426
-------- --------- ------------ ------------ ----------
Segment total 329,571 28,050 17,824 33,524 622,811
Corporate --- (2,823) 135 18 110,569
Discontinued
operations,
net assets --- --- 12,090 3,971 195,413
-------- -------- ------------ ------------ ----------
Consolidated
total $329,571 $25,227 $30,049 $37,513 $928,793
======== ======== ============ ============ ==========
Note 5. Shareholders' Rights Plan
On June 1, 2000, the Company effected a dividend
distribution of shareholder rights (the Rights) that carry
certain conversion rights in the event of a significant change in
beneficial ownership of the Company. One right is attached to
each share of the Company's common stock outstanding and is not
detachable until such time as beneficial ownership of 15% or more
of the Company's outstanding common stock has occurred (a
Triggering Event) by a person or group of affiliated or
associated persons (an Acquiring Person). Each Right entitles
each registered holder (excluding the Acquiring Person) to
purchase from the Company one-thousandth of a share of Series A
Junior Participating Preferred Stock, par value $.01 per share,
at a purchase price of $42.00. Registered holders receive shares
of the Company's common stock valued at twice the exercise price
of the Right upon exercise. Upon a Triggering Event, the Company
is entitled to exchange one share of the Company's common stock
for each right outstanding or to redeem the Rights at a price of
$.001 per Right. The Rights will expire on June 1, 2010.
Note 6. Subsequent Events
As discussed above, the Company has been unable to close on
the planned sale of the Kalamazoo Mill. As the Company planned to
use the proceeds from this sale to repay the remaining balance of
$169 million on its one-year term loan due August 1, 2000,
alternative measures have been pursued to meet the Company's debt
obligation.
In July 2000, the Company secured an extension of the due
date on the $169 million one-year term loan until August 15,
2000. During the extension period, the Company has pursued a
strategy to strengthen its capital structure, as detailed below.
On August 2, 2000, the Company announced the planned
issuance of 1 million shares of 10% Series B Convertible
Preferred Stock to the Grover C. Coors Trust, an existing share-
holder, for $100 per share. The expected closing date is August
15, 2000 and the proceeds are to be used to reduce the one-year
term loan balance to $69 million. The preferred stock issuance
is contingent, among other conditions, upon the necessary
approvals and loan modifications by the Company's banking group,
a further extension of the remaining $69 million balance due
on the one-year term loan to August 15, 2001, receiving fairness
opinions and the absence of legal proceedings that would prevent
the sale. Terms of the preferred stock issuance include a 10%
cumulative participating dividend payable quarterly, liquidation
preferences and voting and registration rights, as well as a
conversion feature at 125% of the Company's common stock market
value based on the average closing price for five trading days
before closing. The Company has a redemption option beginning
in 2005, while the security holder may redeem all or part of the
preferred stock after ten years. The security holder's redemp-
tion provision is subject to termination under certain conditions.
In addition, negotiations continue to move forward toward
the sale of another non-core asset in the third quarter, and the
Company is marketing subordinated debt which would complete the
capital restructuring needed to satisfy the Company's short-term
obligations under its existing debt facilities.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General Business Overview
Graphic Packaging International Corporation (the "Company"
or "Graphic Packaging") is a manufacturer of packaging products
used by consumer product companies as primary packaging for their
end-use products. Over the past several years, and culminating
with the spin-off of CoorsTek on December 31, 1999, the Company
has moved from a diversified group of subsidiaries - each
operating in different markets - to a Company focused on the
folding carton segment of the packaging industry. By
strategically disposing of non-core businesses and under-
performing assets; acquiring two major businesses in the folding
carton industry; and executing rationalization plans, the Company
has developed into one of the largest folding carton companies in
North America.
On August 2, 1999, the Company purchased the Fort James
packaging business, which included 12 folding carton converting
operations located throughout North America and a recycled
paperboard mill located in Kalamazoo, Michigan (the Kalamazoo
Mill) for approximately $849 million. The Kalamazoo Mill is
currently being offered for sale.
On September 2, 1999, the Company sold its flexible
packaging plants for approximately $105 million in cash. On
August 3, 1999 the Company sold its interest in a solar energy
distribution business (Golden Genesis Company) for approximately
$21 million in cash, plus $10 million in repayment of
intercompany debt.
Segment Information
The Company's continuing operations include one reportable
business segment in 2000 - Packaging. Discontinued operations
include the Kalamazoo Mill and CoorsTek, operating in the
paperboard milling and ceramics industries, respectively. The
Company's operations in 1999 included an "Other" segment,
consisting of a real estate development partnership, a majority
interest in a group of solar electric distribution companies
prior to their sale in August 1999, and several technology-based
businesses prior to March 1999.
Results from Continuing Operations
Consolidated net sales for the three months ended June 30,
2000 increased to $262.3 million as compared to consolidated net
sales of $163.6 million for the same period in 1999. For the six
months ended June 30, consolidated net sales increased $196.2
million to $525.7 million compared to the first half of 1999.
The 60% increases over 1999 are primarily due to the additional
revenues generated by the former Fort James plants in 2000,
partially off-set by the loss of revenues from the flexible
plants sold in the third quarter of 1999. The Company has also
gained approximately $30 million of annual additional business
in the second quarter of 2000, which management attributes to the
Company's focus on customer service and to the benefits of having
acquired the capacity to better service large accounts through
the Fort James acquisition.
Consolidated gross profit margins for the second quarter and
the six months ended June 30, 2000 were 12.4% and 12.2%,
respectively, decreasing from the 19.1% and 18.5% gross profit
margins achieved in the comparable periods of 1999. The decrease
corresponds to the higher volume, lower margin product mix in the
Company's business in 2000 when compared to the product mix in
1999 - which included the flexible plant products. The plant
rationalization activity undertaken in the first half of 2000 and
the startup of the Golden facility, coupled with higher raw
material and energy costs, have also impacted margins.
Depreciation and goodwill amortization have nearly doubled
in the first half of 2000 from amounts recognized in the first
half of 1999. This is the result of having doubled the Company's
asset holdings through the purchase of the Fort James plants in
the third quarter of 1999.
Consolidated operating income margin in the three months
ended June 30, 2000 was 4.7%, compared to 7.9% in the second
quarter of 1999. Operating income margin for the six months
ended June 30, 2000 was 3.9%, compared to 7.7% in the first half
of 1999. The decreases are due to reduced productivity in 2000
because of plant rationalization activity and the startup of the
Golden facility, combined with an increased mix of lower margin
business and increases in depreciation and goodwill amortization,
as discussed above.
Net interest expense for the second quarter of 2000 totaled
$16.4 million, a $12.6 million increase from the $3.8 million of
net interest expense recorded in the second quarter of 1999.
Likewise, net interest expense for the first half of 2000
increased $23.1 million when compared to the $8.3 million of net
interest expense recorded in the comparable 1999 period. The
increased interest expense is due to the borrowings used to
purchase the Fort James packaging business.
The consolidated effective tax rate for the second quarter
and the first half of 2000 was approximately 40%. The Company
does not expect the effective tax rate to vary significantly over
the next year.
Asset Impairment and Restructuring Charges
On May 12, 2000, the Company announced the planned closure
of the Perrysburg, Ohio folding carton plant. The shutdown and
related restructuring plan for the Perrysburg facility included
asset impairments totaling $6.50 million and restructuring
reserves of $1.35 million, which were recorded in the second
quarter. The asset impairment and restructuring costs to shut
down the Perrysburg facility, which was part of the acquisition
of the Fort James packaging business, have been accounted for
as a cost of the acquisition, with a resultant adjustment to
goodwill. The Company plans to complete the closure of the
plant and the transition of the plant's business to other
Company facilities by the end of the third quarter of 2000.
The Company recorded a restructuring charge of $3.4 million
in the first quarter of 2000 for anticipated severance costs as a
result of the announced closure of the Saratoga Springs, New York
plant. The Saratoga Springs plant is being closed pursuant to a
plant rationalization plan approved by the Company's Board of
Directors in the fourth quarter of 1999. The Company plans to
complete the closure of the Saratoga Springs plant and the
transition of the plant's business to other Company facilities by
the end of the third quarter of 2000.
A restructuring charge of $1.9 million was recorded in the
fourth quarter of 1999 primarily related to severance costs at
the Lawrenceburg, Tennessee plant. The Company initially planned
to complete this restructuring, including the closure of the
Boulder, Colorado plant and the reduction in force at the
Lawrenceburg, Tennessee plant, by the end of the third quarter of
2000. However, customer needs in both Boulder and Lawrenceburg,
coupled with the timing of the transition of business to the
Company's new Golden, Colorado facility, will delay completion of
the restructuring until the end of 2000.
Gain on Sale of Assets
The Company sold patents and various long-lived assets of
its former developmental businesses during the first quarter of
2000 for consideration of approximately $6.2 million. A pre-tax
gain of $5.4 million was recognized relating to these asset
sales.
The Company is also actively pursuing the sale of another
non-core asset. Any proceeds will be used to reduce the
Company's debt.
Discontinued Operations
Discontinued operations consist of the Kalamazoo Mill and,
through December 31, 1999, CoorsTek.
The Company purchased the Kalamazoo Mill on August 2, 1999
as part of the acquisition of the Fort James packaging business.
The Kalamazoo Mill produces coated recycled paperboard. In
December 1999, the Board of Directors approved a plan to offer
the Kalamazoo Mill for sale and to use the anticipated proceeds
from the sale to repay a one-year term loan originally due on
August 1, 2000. The Company has been unable to sell the
Mill and therefore, as discussed below, has recently extended
the $169 million one-year term loan to August 15, 2000 and is
in negotiations to further restructure its capital structure by
that date. An estimated fair value of $225 million was ascribed
to the net assets of the Kalamazoo Mill, which includes approxi-
mately $106 million of preliminary goodwill allocated from the
continuing operations of the Fort James packaging business
acquisition. The amount of preliminary goodwill allocated to
the Kalamazoo Mill is subject to change upon sale or other
disposition. As a result, no gain or loss will be recorded upon
any sale. The Company allocated approximately $5.2 million of
interest expense to the Kalamazoo Mill for the three months
ended June 30, 2000 and $9.9 million for the six months ended
June 30, 2000, based upon the estimated fair value of $225
million.
CoorsTek develops, manufactures and sells advanced technical
products across a wide range of product lines for a variety of
applications. It has been in business since 1911 and is the
largest U.S.-owned independent manufacturer of advanced technical
ceramics.
Liquidity and Capital Resources
The Company's liquidity is generated from both internal and
external sources and is used to fund short-term working capital
needs, capital expenditures and acquisitions.
On August 2, 1999, the Company entered into a $1.3 billion
revolving credit and term loan agreement (the Credit Agreement)
with a group of lenders, with Bank of America, N.A. as agent.
During the first quarter of 2000, the Company reduced the amount
available under the Credit Agreement by $50 million. The Credit
Agreement is comprised of four senior credit facilities including
a $125 million 180-day term facility, a $400 million one-year
facility, a $325 million five-year term loan facility and a $400
million five-year revolving credit facility (collectively, the
Senior Credit Facilities). Proceeds from the Senior Credit
Facilities were used to finance the August 2, 1999 $849 million
acquisition of the Fort James packaging business and to prepay
the Company's other outstanding borrowings.
During the first half of 2000, the Company utilized $200
million of proceeds from the CoorsTek spin-off to reduce
outstanding debt. As of June 30, 2000, the Company's borrowings
under the Senior Credit Facilities totaled approximately $828
million and bore interest at a blended rate of approximately
11.2%, including amortization of debt issuance costs.
Amounts outstanding under the Senior Credit Facilities at
June 30, 2000 were as follows (in thousands):
One-year term loan; originally due
August 1, 2000, subsequently
extended to August 15, 2000 $168,500
Five-year term loan; including
current maturities of $6.25 million
due September 30, 2000 and December 31,
2000 and $12.5 million due March 31,
2001 and June 30, 2001 312,500
Five-year revolving credit facility 347,000
--------
Total 828,000
Less: current maturities (206,000)
--------
Long-term maturities $622,000
========
Amounts borrowed under the Senior Credit Facilities bear
interest under various pricing alternatives plus a spread
depending on the Company's leverage ratio. The various pricing
alternatives include (i) LIBOR, or (ii) the higher of the Federal
Funds Rate plus 0.5% or the prime rate. In addition, the Company
pays a commitment fee that varies based upon the Company's
leverage ratio and the unused portion of the revolving credit
facility. Mandatory prepayments under the Senior Credit
Facilities are required from the proceeds of any significant
asset sale or from the issuance of any debt or equity securities.
In addition, the five-year term loan is due in quarterly
installments beginning with the first quarter of 2000. Total
installments for 2000 through 2004, respectively, are $25
million, $50 million, $70 million, $80 million and $100 million.
The Senior Credit Facilities are secured with first priority
liens on all material assets of the Company and all of its
domestic subsidiaries. The Credit Agreement currently limits the
Company's ability to pay dividends and imposes limitations on the
incurrence of additional debt, acquisitions, capital expenditures
and the sale of assets. At June 30, 2000, the Company was in
compliance with all of the financial covenants.
As noted above, $169 million of borrowings are currently due
on August 15, 2000. The Company expects to sell $100 million of
convertible preferred stock on August 15, 2000, thereby reducing
the outstanding balance to $69 million. The issuance of
preferred stock is contingent upon obtaining a 12 month extension
of the $69 million remaining balance as well as obtaining
revisions to covenant, debt amortization and dividend payment
restrictions. In addition, fairness opinions to the buyer and
the Company are a prerequisite to closing the preferred stock
issuance. Although there can be no assurance that these events
will occur, the Company currently believes that it is likely that
the preferred stock will be issued and that the Senior Credit
Facilities will be restructured. If the Company is unable to
accomplish this restructuring on August 15, 2000, the Company
would seek a further extension of the one-year term facility to
complete the restructuring. If that further extension is not
granted, the Company would be in default of its Senior Credit
Facilities. In this event, the lenders would have the right to
call the Senior Credit Facilities immediately due and refrain
from making further advances to the Company. If the Company is
unable to pay the accelerated payments, the lenders could elect
to proceed against the collateral in order to satisfy the
Company's obligations.
The Company has entered into interest rate swap arrangements
to hedge a portion of its borrowings under the Senior Credit
Facilities. Under these interest rate swap agreements, the
Company pays interest at an average risk-free fixed rate of 5.94%
on $100 million of its borrowings and an average risk-free fixed
rate of 6.98% on $125 million of its borrowings. In addition,
the Company has interest rate contracts that provide interest
rate cap protection on $350 million of its floating rate debt.
The Consolidated Statement of Cash Flows includes cash
generated or used by the operations shown in the income statement
as discontinued operations, namely CoorsTek and the Kalamazoo
Mill. On this basis, net cash provided by (used in) operations
was ($11.4) million, and $55.3 million for the six months ended
June 30, 2000 and 1999, respectively.
The Company currently expects that cash flows from
operations, the sale of certain non-core assets, and the proposed
changes to the Company's capital structure will be adequate to
meet the Company's needs for working capital, temporary financing
for capital expenditures and debt repayments. The Company's
working capital position as of June 30, 2000 was a negative $67.0
million, which includes the one-year term note of $169 million
currently due August 15, 2000. The Company plans to use proceeds
from the issuance of the series B preferred stock and the sale of
a non-core asset to repay debt.
The impact of inflation on the Company's financial position
and results of operations has been minimal and is not expected to
adversely affect future results.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
Interest Rate Risk
As of August 1, 2000, the Company's capital structure
includes approximately $828 million of debt that bears interest
with an underlying rate based upon short-term interest rates.
The Company has entered into interest rate swap agreements that
lock in a risk-free interest rate of 5.94% on $100 million of the
borrowings, and a risk-free interest rate of 6.98% on $125
million of the borrowings. In addition, the Company has capped
its LIBOR base rate to 8.13% on $200 million of borrowings and
6.75% on $150 million of borrowings. With these swaps and caps
in place and based upon current debt outstanding, a 1% increase
in interest rates could impact annual pre-tax results by
approximately $4.8 million.
Factors That May Affect Future Results
Certain statements in this document are forward looking and
so involve uncertainties that may cause actual results to be
materially different from those stated or implied. Specifically,
a) revenue projections for the third and fourth quarters of 2000
might be reduced because customers find alternative suppliers, or
because the Company, as a result of plant closures, is unable to
efficiently move business or to qualify that business at other
plants; b) operating margins might not increase in the second
half of 2000 due to competitive pricing of products sold and due
to increases in operating and materials costs; c) the benefits of
reorganization and optimization to be realized, including the
startup of the Golden plant and the closure and transfer of
production from the Boulder plant, are uncertain because of
possible delays and increases in costs; d) the Company is exposed
to higher than predicted interest rates on the unhedged portion
of its debt and on any new debt it might incur; e) the sale or
other disposition of the Kalamazoo mill and other non-core assets
is dependent on finding a buyer or making other financial
arrangements on satisfactory terms; f) the Company might not be
able to raise subordinated debt on reasonable terms; g) the
Company might not meet its estimates for 2000 as a result of
higher integration costs, competition on pricing, higher than
predicted interest rates, and other business factors; and h) if
the Company is unable to restructure the terms of its debt
facilities, to obtain fairness opinions and to close on the
convertible preferred offering, the lenders could elect to
proceed against their collateral in order to satisfy the
Company's obligations.
These statements should be read in conjunction with the
financial statements and notes thereto included in the Company's
Form 10-K for the year ended December 31, 1999. The accompanying
financial statements have not been examined by independent
accountants in accordance with generally accepted auditing
standards, but in the opinion of management, such financial
statements include all adjustments necessary to summarize fairly
the Company's financial position and results of operations.
Except for certain reclassifications made to consistently report
the information contained in the financial statements, all
adjustments made to the interim financial statements presented
are of a normal recurring nature. The results of operations for
the six months ended June 30, 2000, may not be indicative of
results that may be expected for the year ending December 31,
2000.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On April 14, 2000, Lemelson Medical, Education & Research
Foundation, a Limited Partnership (the "Foundation"), filed suit
against the Company and 75 other defendants in the United States
District Court for the District of Arizona. The Foundation is
claiming patent infringement and is seeking injunctive relief and
an unspecified amount in monetary damages. The Foundation has
filed suit against hundreds of other manufacturers over the past
several years and the Company is in the process of investigating
the Foundation's claims. The Company does not believe that the
lawsuit will have a material adverse effect on the Company's
financial position or results of operations.
Item 2. Changes in Securities and Use of Proceeds
On August 2, 2000 the Company announced its intent to issue
a new class of convertible preferred stock to the Grover C. Coors
Trust (the Trust), an existing shareholder, on August 15, 2000.
The Company will issue 1 million shares of 10% Series B
Convertible Preferred Stock to the Trust at $100 per share. Net
proceeds from the issuance will be used to partially repay a term
loan currently due on August 15, 2000. The closing of the
transaction is contingent upon receipt of fairness opinions,
agreements with the lenders of the Company's senior debt
facilities, necessary approvals, and other matters. Key features
of the preferred stock include:
> 10% per annum, cumulative dividends, payable quarterly
commencing on October 1, 2000
> Liquidation preference
> Registration rights
> Conversion option at 125% of the market price of the
Company's common stock at closing
> Voting rights
> Redemption features
> Control of the Board of Directors in the event of
extended dividend payment default
The conversion options have a dilutive effect on the
outstanding shares of the Company's common stock. On
conversion, the Trust would own approximately 65% of the
outstanding common shares, and all the Coors family trusts and
family members together would own a total of about 80% (based
upon the common stock closing price of $1.69 on August 11, 2000).
Due to the time constraints in putting this refinancing
package together, the Company, with the approval of its Audit
Committee, asked the New York Stock Exchange for an exception to
its rule requiring shareholder approval for the convertible
preferred issue. The Exchange has allowed the transaction to
proceed without shareholder approval pursuant to Section 312.05
of the Listed Companies Manual of the NYSE. This section
provides for an exception from the shareholder approval policy
when the delay in securing such approval would seriously
jeopardize the financial viability of the Company.
Item 4. Submission of Matters to a Vote of the Shareholders
At the May 9, 2000 annual meeting of the Company's
shareholders, the following matters were submitted for a vote of
the shareholders. The report of the Inspectors of Election is
below.
There were 28,777,284 shares of Common Stock entitled to
vote at the meeting and a total of 25,099,462 shares (87.22%)
were represented at the meeting.
(1) Election of two directors for a three-year term.
FOR WITHHOLD
John D. Beckett 24,982,331 117,131
William K. Coors 24,966,674 132,788
(2) Approval of the amendment to the Company's Articles of
Incorporation to change the Company's name to "Graphic Packaging
International Corporation."
FOR AGAINST ABSTAIN BROKER NON-VOTE
24,641,544 132,434 325,484 0
(3) Approval of amendments to the Company's Executive
Incentive Plan to include return on invested capital in the
financial measurements and to update the eligible participants
and maximum awards.
FOR AGAINST ABSTAIN BROKER NON-VOTE
24,501,036 299,301 299,125 0
(4) Approval of the amendment to the Company's Equity
Compensation Plan for Non-Employee Directors to increase the
number of shares of Common Stock authorized for issuance to
150,000 shares.
FOR AGAINST ABSTAIN BROKER NON-VOTE
24,104,051 408,878 586,533 0
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number Document Description
27 Financial Data Schedule
99 Certificate of Stock, Graphic Packaging International
Corporation
(b) Reports on Form 8-K
On May 31, 2000, the Company filed a Current Report on Form
8-K disclosing a shareholder rights plan which was declared by
the Company's Board of Directors on May 9, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: August 14, 2000 By /s/ Gail A. Constancio
----------------------------------
Gail A. Constancio
(Chief Financial Officer)
Date: August 14, 2000 By /s/ John S. Norman
----------------------------------
John S. Norman
(Corporate Controller)