EXHIBIT 99.1
GULF STATES PAPER CORPORATION
PAPERBOARD AND PACKAGING DIVISIONS
CONSOLIDATED STATEMENTS OF CERTAIN ASSETS & LIABILITIES
January 2, 2005 December 28, 2003
--------------- -----------------
(In thousands)
ASSETS
CURRENT ASSETS:
Cash $ 1,411 $ 3,616
Accounts receivable, net 44,503 29,150
Inventories 51,746 46,556
Deferred income tax assets 2,283 1,558
Assets held for sale 2,774 1,087
Other current assets 1,841 4,079
--------------- ---------------
Total current assets 104,558 86,046
--------------- ---------------
OTHER ASSETS:
Goodwill 35,002 35,002
Other assets 397 436
--------------- ---------------
Total other assets 35,399 35,438
--------------- ---------------
PROPERTY, PLANT AND EQUIPMENT:
Buildings 43,332 42,912
Machinery and equipment 694,794 689,817
Other 9,760 10,292
Construction in progress 1,967 7,333
--------------- ---------------
Property, plant and equipment, at cost 749,853 750,354
Accumulated depreciation (528,083) (502,347)
--------------- ---------------
Property, plant and equipment, net 221,770 248,007
--------------- ---------------
TOTAL ASSETS $ 361,727 $ 369,491
=============== ===============
LIABILITIES AND PARENT'S INVESTMENT
CURRENT LIABILITIES:
Long-term debt, current installments $ 68 $ 61
Accounts payable 20,264 14,925
Accrued liabilities 9,475 8,658
--------------- ---------------
29,807 23,644
--------------- ---------------
DEFERRED INCOME TAXES 52,083 53,276
--------------- ---------------
MINORITY INTEREST 10,244 10,648
--------------- ---------------
LONG-TERM DEBT 266 339
--------------- ---------------
OTHER LIABILITIES 223 -
--------------- ---------------
PARENT'S INVESTMENT 269,104 281,584
--------------- ---------------
TOTAL LIABILITIES AND EQUITY $ 361,727 $ 369,491
=============== ===============
(The accompanying notes are an integral part of these financial statements.)
GULF STATES PAPER CORPORATION
PAPERBOARD AND PACKAGING DIVISIONS
CONSOLIDATED STATEMENTS OF OPERATIONS
Fifty-Three Fifty-Two Thirty Fifty-Two Weeks
Weeks Ended Weeks Ended Weeks Ended Ended
January 2, 2005 December 28, 2003 December 29, 2002 June 2, 2002
--------------- ----------------- ----------------- ---------------
(In thousands)
Net sales $ 474,771 $ 453,681 $ 256,530 $ 526,790
Other income 981 1,968 933 3,207
------------- ------------- ------------- -----------
475,752 455,649 257,463 529,997
------------- ------------- ------------- -----------
Cost of products sold 356,856 348,472 200,062 413,362
Selling and administrative expenses 45,121 49,483 25,406 50,872
Depreciation and amortization 39,335 40,825 23,111 41,721
Interest expense 7 10 5 13
Restructuring and impairment charges 1,825 1,310 2,000 3,565
------------- ------------- ------------- -----------
443,144 440,100 250,584 509,533
------------- ------------- ------------- -----------
Income before income tax provision,
minority interest and cumulative effect
of a change in accounting principle 32,608 15,549 6,879 20,464
Income tax provision 10,135 3,366 2,333 3,154
------------- ------------- ------------- -----------
Income before minority interest and
cumulative effect of a change in
accounting principle 22,473 12,183 4,546 17,310
Minority interest 1,796 1,462 838 12,555
------------- ------------- ------------- -----------
Income before cumulative effect of a
change in accounting principle 20,677 10,721 3,708 4,755
Cumulative effect of a change in
accounting principle, net of tax
benefit of $7,830 - - - (12,509)
------------- ------------- ------------- -----------
Net income (loss) $ 20,677 $ 10,721 $ 3,708 $ (7,754)
============= ============= ============= ===========
(The accompanying notes are an integral part of these financial statements.)
GULF STATES PAPER CORPORATION
PAPERBOARD AND PACKAGING DIVISIONS
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fifty-Three
Weeks Ended Fifty-Two Weeks Thirty Fifty-Two
January 2, Ended December Weeks Ended Weeks Ended
2005 28, 2003 December 29, 2002 June 2, 2002
----------- --------------- ----------------- ------------
(In thousands)
Cash flows from operating activities:
Net income (loss) $ 20,677 $ 10,721 $ 3,708 $ (7,754)
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of a change in
accounting principle, net of tax
benefit of $7,830 - - - 12,509
Depreciation and amortization 39,335 40,825 23,111 41,721
Restructuring and impairment charges 1,825 795 2,000 2,412
Loss on sale of assets 74 283 10 175
Deferred income tax provision (1,918) (7) (747) 1,301
Minority interest 1,796 1,462 838 12,555
Change in operating assets and
liabilities:
Accounts receivable (15,353) 1,289 13,097 12,043
Inventories (5,190) 7,463 (772) 7,178
Accounts payable 5,339 3,087 (4,447) 1,397
Accrued liabilities 817 (2,555) 3,080 (2,615)
Other 3,251 917 (520) (2,433)
---------- ------------ -------------- -----------
Net cash provided by operating activities 50,653 64,280 39,358 78,489
---------- ------------ -------------- -----------
Cash flows from investing activities:
Capital expenditures (18,879) (30,166) (20,066) (17,360)
Proceeds from sale of assets 1,252 240 84 1,103
Distribution to minority shareholders (2,200) (1,600) (1,200) (23,659)
Other assets 192 107 143 (290)
---------- ------------ -------------- -----------
Net cash used in investing activities (19,635) (31,419) (21,039) (40,206)
---------- ------------ -------------- -----------
Cash flows from financing activities:
Net transactions with Gulf States Paper
Corporation (33,157) (30,928) (19,732) (36,066)
Payments on debt (66) (71) (33) (63)
---------- ------------ -------------- -----------
Net cash used in financing activities (33,223) (30,999) (19,765) (36,129)
----------- ------------- --------------- ------------
Net (decrease) increase in cash (2,205) 1,862 (1,446) 2,154
Cash at beginning of year 3,616 1,754 3,200 1,046
----------- ------------- --------------- -----------
Cash at end of year $ 1,411 $ 3,616 $1,754 $ 3,200
=========== ============= =============== ===========
Supplemental cash flow disclosure:
Interest paid during the year $ 7 $ 10 $ 5 $ 13
(The accompanying notes are an integral part of these financial statements.)
GULF STATES PAPER CORPORATION
PAPERBOARD AND PACKAGING DIVISIONS
CONSOLIDATED STATEMENTS OF PARENT'S INVESTMENT
(In Thousands)
January 2, 2005 December 28, 2003 December 29, 2002 June 2, 2002
--------------- ----------------- ----------------- ------------
PARENT'S INVESTMENT:
Balance at beginning of year $ 281,584 $ 301,791 $ 317,815 $ 361,635
Net income (loss) 20,677 10,721 3,708 (7,754)
Net transactions with Gulf
States Paper Corporation (33,157) (30,928) (19,732) (36,066)
-------------- ---------------- ---------------- -----------
Balance at end of year $ 269,104 $ 281,584 $ 301,791 $ 317,815
============== ================ ================ ===========
(The accompanying notes are an integral part of these financial statements.)
GULF STATES PAPER CORPORATION
PAPERBOARD AND PACKAGING DIVISIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
NOTE 1 - BASIS OF PRESENTATION AND BACKGROUND
Basis of Presentation
The financial statements of the Paperboard and Packaging Divisions (the
"Divisions") of Gulf States Paper Corporation (the "Company" or "Gulf States")
reflect the accounts and results of certain operations of the business conducted
by the Divisions. Two joint ventures are also included in the Divisions'
consolidated financial statements (see Note 9). The accompanying consolidated
financial statements of the Divisions have been prepared from Gulf States'
historical accounting records and are presented on a carve-out basis reflecting
these certain assets, liabilities and operations. The Divisions are an
unincorporated business of the Company and, accordingly, Gulf States' net
investment in these operations ("parent's investment") is presented in lieu of
stockholder's equity. All significant intradivision transactions have been
eliminated. The financial statements are not necessarily indicative of the
financial position, results of operations and cash flows that might have
occurred had the Divisions been an independent entity not integrated into Gulf
States' other operations. Also, they may not be indicative of the actual
financial position that might have otherwise resulted, or of future results of
operations or financial positions of the Divisions.
Allocation of Costs from Gulf States
The Company charges the Divisions for the estimated cost of certain functions
that are managed by the Company and can reasonably be directly attributed to the
operation of the Divisions. These costs include corporate senior management,
dedicated human resource, legal, accounting and information systems support. The
charges to the Divisions are based on management's estimate of such services
specifically used by the Divisions. Where determinations based on specific usage
alone have been impracticable, other methods and criteria were used that
management believes are equitable and provide a reasonable estimate of the cost
attributable to the Divisions. The total of these allocations was $19,458,
$18,190, $10,604 and $16,705 for the periods ended January 2, 2005 and December
28, 2003, the transition period ended December 29, 2002 and the period ended
June 2, 2002, respectively. Such allocations are not intended to represent the
costs that would be or would not be incurred if the Divisions were an
independent business.
- 2 -
The amount of parent's investment included in the balance sheet represents a net
balance as the result of various transactions between the Divisions and Gulf
States. There are no terms of settlement or interest charges associated with the
account balance. The balance is primarily the result of the Divisions'
participation in Gulf States' central cash management program, wherein all the
Divisions' cash receipts are remitted to Gulf States and all cash disbursements
are funded by Gulf States. Other transactions include intercompany purchases and
sales, certain direct and allocated portions of legal, environmental,
self-insurance and human resource obligations administered by Gulf States, as
well as the Divisions' share of the current portion of the parent's consolidated
federal and state income tax liability and various other administrative expenses
incurred by the parent on the Divisions' behalf. As a result, obligations for
these matters are not reflected on the accompanying balance sheet. The Company
is unable to provide estimates of the components of the intercompany balances at
January 2, 2005 and December 28, 2003.
Business and Summary of Accounting Policies
The Pulp and Paperboard Division converts wood fiber into bleached kraft pulp
and solid bleached sulfate ("SBS") paperboard. The Paperboard Packaging Division
produces folding cartons primarily for the consumer products industry. Net sales
by product category are summarized below:
FISCAL YEAR ENDED
---------------------------------------------------------------------------
DECEMBER 29, 2002
JANUARY 2, 2005 DECEMBER 28, 2003 (30 WEEKS) JUNE 2, 2002
----------------- ----------------- ----------------- ---------------
Sales by Category
Pulp & Paperboard $ 143,391 $ 135,570 $ 73,004 $ 178,120
Paperboard Packaging 331,380 318,111 183,526 348,670
----------------- ----------------- ----------------- ---------------
Total Sales $ 474,771 $ 453,681 $ 256,530 $ 526,790
================= ================= ================= ===============
Other Financial Activities
The Divisions have not been allocated any portion of Gulf States' unsecured
consolidated debt. No portion of Gulf States' related interest expense has been
allocated to the Divisions. Debt secured by the Divisions' real property has
been reflected in these consolidated financial statements. The secured debt was
$334 and $400 at January 2, 2005 and December 28, 2003, respectively.
- 3 -
Organization
The Company reorganized effective December 30, 2002. Gulf States Paper
Corporation elected Subchapter S status for income tax purposes. GSPC
Enterprises, Inc. was formed at the reorganization date as a wholly-owned
subsidiary. GSPC Enterprises was formed as a Subchapter C corporation, which is
subject to federal and state income taxes. As a result of the Subchapter S
election, Gulf States will generally be exempt from federal and state income
taxes.
Prior to the reorganization, all business of the divisions was conducted within
Gulf States Paper Corporation and the income was subject to federal and state
income taxes. Effective with the reorganization date, certain of the Divisions'
business assets and liabilities were contributed in a tax-free transaction to
GSPC Enterprises, Inc. The result of the reorganization was to have GSPC
Enterprises own and operate the Demopolis paperboard mill ("Pulp & Paperboard
Division") and to own and operate the Paperboard Packaging Division's six
folding carton plants located within Missouri, Texas, Kentucky and North
Carolina. Gulf States Paper Corporation retained a folding carton plant within
Alabama and the member interest in the joint venture (GSD Packaging, LLC
("GSD")). These assets, along with the six folding carton plants owned by GSPC
Enterprises, Inc., comprise the Paperboard Packaging Division.
Reporting Period
The Divisions use a 52-53 week year ending on the Sunday nearest the end of
December.
Effective with the reorganization, the Company changed its fiscal year-end from
the last Sunday nearest the end of May to the last Sunday nearest the end of
December. Accordingly, the consolidated Financial Statements include the results
of operations for the periods ended January 2, 2005 (53 weeks) and December 28,
2003 (52 weeks), the transition period ended December 29, 2002 (30 weeks) and
the period ended June 2, 2002 (52 weeks).
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid debt instruments purchased with
an original maturity of three months or less.
Inventories
Inventories are stated at the lower of cost or market. Over 90% of product and
manufacturing materials inventories is determined by the last in, first out
("LIFO") method. The remaining manufacturing materials inventories are valued
using the first in, first out ("FIFO") method, or moving average cost methods.
The cost of other inventories is determined principally by the average cost
method.
- 4 -
Property, Plant and Equipment
Property, plant and equipment are stated at cost and depreciated on a
straight-line basis over their estimated useful lives. Major overhauls that
extend the useful lives of existing assets are capitalized. Expenditures for
repairs and maintenance are charged to expense as incurred. Gains and losses
from the sale of property, plant and equipment are included in other income.
Goodwill
Goodwill is accounted for in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 142. See Note 7.
Asset Impairment
The Divisions evaluate long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. When undiscounted future
cash flows will not be sufficient to recover an asset's carrying amount, the
asset is written down to its fair value. Long-lived assets to be disposed of by
sale are classified as held for sale and are reported at the lower of carrying
amount or fair value less cost to sell, and depreciation is ceased. See Note 5.
Income Taxes
The Divisions computed income tax provisions as if separate returns were filed.
For the years ended January 2, 2005 and December 28, 2003, the income earned
from operations conducted within Gulf States has been treated as exempt income
due to the Subchapter S election. The Divisions' remaining operations are
included in the consolidated C Corporation tax return filed by GSPC Enterprises,
Inc. Current taxes are paid by this corporation and any obligations thereto are
not reflected in the accompanying balance sheet.
The provision for income taxes has been determined using the asset and liability
approach of accounting for income taxes. Under this approach, deferred taxes
represent the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. The provision for
income taxes represents income taxes paid or payable for the current year plus
the change in deferred taxes during the year. Deferred taxes result from
differences between the financial and tax bases of the Company's assets and
liabilities and are adjusted for changes in tax rates and tax laws when changes
are enacted. A valuation allowance has not been recorded to reduce deferred tax
assets as it is more likely than not the future tax benefits will be realized.
See Note 4.
- 5 -
Revenue Recognition
The Divisions recognize revenue at the time the product is shipped or as title
passes subject to the terms of the agreement with the customer.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Recent Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), Consolidation
of Variable Interest Entities ("VIE"). FIN 46 requires the primary beneficiary
of a variable interest entity to consolidate that entity. The primary
beneficiary of a VIE is the party that absorbs a majority of the VIE's expected
losses, receives a majority of the entity's expected residual returns, or both,
as a result of ownership, contractual or other financial interests in the
entity. Prior to the issuance of FIN 46, an enterprise generally consolidated an
entity when the enterprise had a controlling interest in the entity through
ownership of a majority voting interest. In December 2003, the FASB issued FIN
46 Revised ("FIN 46-R"), which included amendments to FIN 46 and also required
application of the interpretation to all affected entities no later than March
31, 2004, for calendar year reporting companies. The Divisions adopted FIN 46-R
effective December 28, 2003. The adoption of FIN 46-R resulted in the
consolidation of GSD, a previously unconsolidated joint venture (see Note 9).
For purposes of these statements, the Divisions consolidated GSD for all periods
presented.
NOTE 2 - CONCENTRATION OF CREDIT RISK
The Divisions conduct business with customers primarily in the consumer products
and paperboard converting industries. The Company believes its accounts
receivable allowance is sufficient to cover any risk of credit losses.
- 6 -
NOTE 3 - INVENTORIES
January 2, 2005 December 28, 2003
--------------- -----------------
Raw materials $ 11,773 $ 10,851
Finished goods and work in process 45,927 40,477
Supplies and repair parts 13,530 13,060
LIFO reserve (19,484) (17,832)
-------------- ----------------
$ 51,746 $ 46,556
============== ================
NOTE 4 - INCOME TAX
As discussed in Note 1, Gulf States Paper Corporation elected effective December
30, 2002 to be taxed under Subchapter S of the Internal Revenue Code.
Accordingly, the stockholders of the Company are taxed on their proportionate
share of Gulf States Paper Corporation's taxable income. Consequently, the
Divisions' income earned by the Company will generally be exempt from federal
and state income taxes unless a disposition of property occurs that is subject
to the built-in gains tax. The built-in gains tax is imposed at corporate rates
if certain appreciated property is disposed of within ten years of the
Subchapter S election.
The Livingston Box plant and GSD joint venture member interests are owned by
Gulf States Paper Corporation. At the date of the S election, the net deferred
tax liability applicable to the Livingston Box plant and GSD joint venture was
$458. As a result of the change in tax status, the Divisions have reduced the
tax provision in the year ended December 28, 2003 by the amount of the above net
deferred tax liability. The remaining business operations of the Divisions are
owned by GSPC Enterprises, Inc. ("Enterprises"). Enterprises is a wholly owned
subsidiary of Gulf States Paper Corporation that remains a Subchapter C
corporation subject to federal and state income taxes. Accordingly, the
financial statements reflect liabilities for current and deferred taxes related
to Enterprises.
- 7 -
The provision for income taxes before cumulative effect of change in accounting
principle consists of the following:
JANUARY 2, 2005 DECEMBER 28, 2003 DECEMBER 29, 2002 JUNE 2, 2002
--------------- ----------------- ----------------- ------------
Current:
Federal $ 10,336 $ 2,636 $ 2,527 $ 9,296
State 1,717 738 552 387
Deferred:
Federal (1,453) 716 (482) (6,719)
State (465) (266) (264) 190
Adjustment to deferred
tax liability due to
change in tax status
- (458) - -
-------------- -------------- -------------- -----------
Total $ 10,135 $ 3,366 $ 2,333 $ 3,154
============== ============== ============== ===========
The federal statutory rate was 35%. The provision for income taxes is reconciled
to the federal statutory rate:
JANUARY 2, 2005 DECEMBER 28, 2003 DECEMBER 29, 2002 JUNE 2, 2002
--------------- ----------------- ----------------- ------------
Taxes at federal
statutory rate $ 10,784 $ 4,930 $ 2,114 $ 2,768
Subchapter S income
not subject to tax (1,469) (1,412) - -
State income taxes net
of federal income tax
benefit 814 307 187 375
Miscellaneous items 6 (1) 32 11
Change in tax status - (458) - -
-------------- ---------------- ----------------- ------------
Total $ 10,135 $ 3,366 $ 2,333 $ 3,154
============== ================ ================= ============
The net deferred income tax liability includes the following components as of:
JANUARY 2, 2005 DECEMBER 28, 2003
--------------- -----------------
Current deferred tax asset $ 2,283 $ 1,558
Non-current deferred tax liability (52,083) (53,276)
-------------- ----------------
Net deferred tax liability $ (49,800) $ (51,718)
============== ================
- 8 -
The tax effect of significant temporary differences representing deferred tax
assets and liabilities is as follows as of:
JANUARY 2, 2005 DECEMBER 28, 2003
--------------- -----------------
Intangible assets $ 2,522 $ 3,764
Other assets 1,665 1,211
Post-Retirement benefit 84 -
Plant, property & equipment (54,570) (57,187)
Vacation accrual 499 494
-------------- ----------------
Net deferred tax liability $ (49,800) $ (51,718)
============== ================
NOTE 5 - RESTRUCTURING AND IMPAIRMENT CHARGES
During the year ended June 2, 2002, the Divisions closed the Newark, NJ
packaging plant and recorded a $3,402 restructuring charge. The charge included
a $2,248 non-cash asset impairment charge and a $1,154 accrual for severance and
termination benefits. The Divisions also removed equipment from service at the
Marion packaging plant and incurred a non-cash impairment charge of $163.
During the transition period ended December 29, 2002, the Divisions recorded a
non-cash impairment charge of $2,000 on a recovery boiler. The remaining fair
value of the boiler was $4,500.
During the year ended December 28, 2003, the Divisions announced the closing of
the Towaco, NJ packaging plant. A restructuring charge of $815 was recorded. The
charge included a $300 non-cash asset impairment charge and a $515 accrual for
severance and termination benefits. In addition, the GSD joint venture removed a
printing press from service and recorded a non-cash impairment charge of $495.
The Divisions reduced the carrying value of the recovery boiler and recorded a
non-cash impairment charge of $1,800 during the year ended January 2, 2005. The
boiler's fair value was reduced to $2,700 and the boiler's classification was
changed from property, plant and equipment to held for sale. The Divisions also
recorded a $25 non-cash impairment charge to reduce the fair value of printing
equipment held for sale.
- 9 -
NOTE 6 - RETIREMENT, SAVINGS AND OTHER POST RETIREMENT BENEFITS
Employees of the Divisions participate in various pension, defined contribution
plans and postretirement benefit plans sponsored by the Company. A portion of
the Company's employee benefit costs has been allocated to the Divisions for
their participation in the noncontributory designed benefit pension plans,
defined contribution and postretirement health care and life insurance benefit
plans. The following are the costs including curtailment (gains) and losses
allocated in the Statements of Operations:
JANUARY 2, 2005 DECEMBER 28, 2003 DECEMBER 29, 2002 JUNE 2, 2002
--------------- ----------------- ----------------- ------------
Pension plans $ 2,451 $ 7,990 $ 3,204 $ 3,863
Defined contribution
plans 2,964 1,783 1,023 1,931
Postretirement benefit
plans (195) 649 394 392
-------------- ----------------- ----------------- ------------
$ 5,220 $ 10,422 $ 4,621 $ 6,186
============== ================= ================= ============
The obligations for a significant portion of these future costs are not
reflected in the Statements of Certain Assets and Liabilities because these
obligations will remain with the Company and allocation of these obligations to
the division level was not possible.
The allocation of these costs has been based on a combination of the number of
employees, employee salaries, or specifically attributable benefits within each
plan. The allocated pension defined contribution plan and postretirement benefit
plan costs are the resulting proportional amount of that cost calculated in
accordance with SFAS No. 87, Employers' Accounting for Pensions and SFAS No.
106, Employers' Accounting for Postretirement Benefits Other Than Pensions,
respectively. Management believes the method of allocation is equitable and
provides a reasonable estimate of the costs attributable to the Divisions. Such
allocations are not intended to represent the costs that would be incurred as if
the Divisions had operated on an independent basis.
NOTE 7 - GOODWILL
GOODWILL
---------------------------------------------------------
GULF STATES
RESOLUTION LIVINGSTON BOX PACKAGING TOTAL
------------ -------------- ----------- -----------
Balance @ June 4, 2001 $ 44,369 $ 2,148 $ 8,824 $ 55,341
Impairment charge (20,339) - - (20,339)
----------- -------------- --------- ----------
Balance @ June 2, 2002 and
subsequent years $ 24,030 $ 2,148 $ 8,824 $ 35,002
=========== ============== ========= ==========
- 10 -
On June 5, 2001, the Company adopted SFAS No. 142. The Divisions determined that
the goodwill assigned to the Resolution Packaging unit was impaired. The
estimate of fair value was based upon the Divisions' projection of the present
value of future cash flows.
The after-tax effect of the above impairment charge was $12,509. This charge is
reflected as a cumulative effect of an accounting charge in the Statements of
Operations for the year ended June 2, 2002.
NOTE 8 - COMMITMENTS
Total rental expense was approximately:
PERIOD ENDED RENTAL EXPENSE
- ------------------------------------------- --------------
Period Ended June 2, 2002 $ 2,495
Transitional Period Ended December 29, 2002 $ 1,445
Period Ended December 28, 2003 $ 2,246
Period Ended January 2, 2005 $ 1,548
At January 2, 2005, the Divisions were committed under non-cancelable leases
expiring on various dates to 2033. Most leases require payment of property taxes
and insurance. Minimum rentals under such leases are as follows:
Fiscal Year Transportation
Ending Buildings Equipment Equipment Total
- ----------- --------- -------------- --------- -----
2005 338 20 132 490
2006 40 - 112 152
2007 - - 106 106
2008 - - 14 14
2009 - - 1 1
Contingent rental payments imposed by lease agreements are not significant.
- 11 -
The Divisions have commitments under contracts for the purchase of property and
equipment. Portions of such contracts not completed at year-end are not
reflected in the consolidated financial statements. These commitments amounted
to approximately $1,355 and $1,944 at January 2, 2005 and December 28, 2003,
respectively.
NOTE 9 - JOINT VENTURES
For a portion of the year ended June 2, 2002, the Divisions were the majority
member of a joint venture ("Alpha Venture L.L.C.") with Georgia-Pacific
Corporation. The joint venture was formed during 1998 to sell solid bleached
sulfate paperboard produced by both companies. The results of the joint venture
are included in the Divisions' consolidated financial statements.
The Divisions received notice from Georgia-Pacific Corporation on March 9, 2001
of their election to dissolve Alpha Venture L.L.C. Members of the joint venture
agreed to dissolve Alpha Venture on December 30, 2001. Operations ceased as of
that date.
The Divisions formed the GSD joint venture with Dopaco Corporation in September
1998 to manufacture and sell folding cartons. The Divisions have a 60% member
interest, however, operating control is shared equally by agreement of the
members. The results of the joint venture are included in the Divisions'
consolidated financial statements.
NOTE 10 - ENVIRONMENTAL AND LEGAL MATTERS
Controlling pollutants discharged into the air, water and groundwater to avoid
adverse impact on the environment, making continual improvements in
environmental performance and achieving compliance with applicable regulations
are continuing objectives of the Company. The Divisions have invested
substantial funds to modify facilities to assure compliance. For the periods
ended January 2, 2005 and December 28, 2003, the transition period ended
December 29, 2002 and the period ended June 2, 2002, pollution control capital
expenditures were $4,361, $2,033, $130 and $1,750, respectively.
The Divisions have taken major steps to comply with the regulations promulgated
under the Clean Air Act and Clean Water Act (the "Cluster Rules") designed to
reduce air and water discharges of specific substances from U.S. pulp and paper
mills by 2006. The Divisions estimate future capital expenditures to comply with
these regulations will be insignificant.
- 12 -
The Company has been named a defendant in asbestos-related personal injury
litigation. These suits also name many other corporate defendants. There have
been six lawsuits filed against the Company. The number of defendants in the
suits has ranged from forty to one hundred sixty-one. The lawsuits are based
upon claims of personal injuries resulting from exposure to asbestos while
employed by third-party contractors at the Company's mills. The plaintiffs have
not produced any evidence to date that they performed services at any of the
Company's facilities.
Management believes that the Company has valid defenses to the above personal
injury claims and intends to defend them vigorously. The Company also has
substantial insurance coverage, subject to applicable deductibles and policy
limits, with respect to asbestos claims. To date, the costs resulting from the
litigation have not been significant. The Company settled one lawsuit during
2004 for $40. However, the other five lawsuits are in the discovery phase.
Although the outcome of this type of litigation is subject to many
uncertainties, after consulting with legal counsel, the Company does not believe
that such claims will have a material adverse effect on its consolidated
financial condition, results of operations or cash flows. Accordingly, no
liability has been recorded by the Divisions.
The Divisions' operations are parties to or targets of other lawsuits, claims,
investigations and proceedings, which are being handled and defended in the
ordinary course of business. No such pending matters are expected to have a
material effect on the Divisions' financial position, results of operations or
cash flows.
NOTE 11 - OTHER TRANSACTIONS WITH GULF STATES
The Pulp and Paperboard Division purchases softwood chips and pulpwood from Gulf
States. The purchases are in the ordinary course of business at negotiated
prices determined between the Division and Gulf States and may not reflect spot
market prices.
Purchases of chips and pulpwood from Gulf States were as follows:
AMOUNT
---------
Period Ended June 2, 2002 $ 20,164
Transitional Period Ended December 29, 2002 $ 4,183
Period Ended December 28, 2003 $ 10,391
Period Ended January 2, 2005 $ 11,508
Amounts payable to Gulf States are settled through intercompany accounts at the
end of each month. All settlements with Gulf States are classified as "net
transactions with Gulf States Paper Corporation" in the accompanying combined
statements of parent's investment and cash flows.
- 13 -
The Company is obligated to provide certain administrative services during the
fiscal year ending January 1, 2006 to GSD. The agreement provides that the
Company will be reimbursed at a weekly rate of approximately $13.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Gulf States Paper Corporation:
In our opinion, the accompanying consolidated statements of certain assets and
liabilities and the related statements of operations, parent's investments and
cash flows, present fairly, in all material respects, the financial position of
the Paperboard and Packaging Divisions of Gulf States Paper Corporation as of
January 2, 2005 and December 28, 2003, and the results of their operations and
their cash flows for the fifty three weeks ended January 2, 2005, the fifty two
weeks ended December 28, 2003 and June 2, 2002 and the thirty weeks ended
December 29, 2002, 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 auditing standards generally
accepted in the United States of America. 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 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 described in Note 1, the statements referred to above have been prepared for
the purpose of a possible sale of the Paperboard and Packaging Divisions of Gulf
States Paper Corporation, and are not intended to be a complete presentation of
the Divisions' financial position, results of operations or cash flows as if it
were operated on a stand-alone basis.
PricewaterhouseCoopers LLP
April 27, 2005
GULF STATES PAPER CORPORATION
PAPERBOARD AND PACKAGING DIVISIONS
CONSOLIDATED STATEMENT OF CERTAIN ASSETS & LIABILITIES
(UNAUDITED)
April 3, 2005 March 28, 2004
------------- --------------
(In thousands)
ASSETS
CURRENT ASSETS:
Cash $ 462 $ 1,928
Accounts receivable, net 42,973 33,068
Inventories 53,143 45,517
Deferred income tax assets 2,478 1,510
Assets held for sale 2,718 767
Other current assets 1,620 3,548
--------- ---------
Total current assets 103,394 86,338
--------- ---------
OTHER ASSETS:
Goodwill 35,002 35,002
Other assets 414 362
--------- ---------
Total other assets 35,416 35,364
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Buildings 43,580 43,121
Machinery and equipment 695,940 681,492
Other 9,352 10,181
Construction in progress 3,231 6,548
--------- ---------
Property, plant and equipment, at cost 752,103 741,342
Accumulated depreciation (537,551) (502,939)
--------- ---------
Property, plant and equipment, net 214,552 238,403
--------- ---------
TOTAL ASSETS $ 353,362 $ 360,105
========= =========
LIABILITIES AND PARENT'S INVESTMENT
CURRENT LIABILITIES:
Long-term debt, current installments $ 68 $ 61
Accounts payable 17,062 14,717
Accrued liabilities 9,114 8,520
--------- ---------
26,244 23,298
--------- ---------
DEFERRED INCOME TAXES 51,622 51,754
--------- ---------
MINORITY INTEREST 10,285 10,359
--------- ---------
LONG-TERM DEBT 249 323
--------- ---------
OTHER LIABILITIES 205 -
--------- ---------
PARENT'S INVESTMENT 264,757 274,371
--------- ---------
TOTAL LIABILITIES AND EQUITY $ 353,362 $ 360,105
========= =========
(The accompanying notes are an integral part of these financial statements.)
GULF STATES PAPER CORPORATION
PAPERBOARD AND PACKAGING DIVISIONS
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Thirteen Thirteen
Weeks Ended Weeks Ended
April 3, 2005 March 28, 2004
------------- --------------
(In thousands)
Net sales $128,802 $116,374
Other income 228 245
-------- --------
129,030 116,619
-------- --------
Cost of products sold 94,451 89,172
Selling and administrative expenses 13,870 11,168
Depreciation and amortization 9,621 9,826
Interest expense 2 2
Impairment charge 25 1,800
-------- --------
117,969 111,968
-------- --------
Income before income tax provision
and minority interest 11,061 4,651
Income tax provision 3,426 1,190
-------- --------
Income before minority interest 7,635 3,461
Minority interest 720 551
-------- --------
Net income $ 6,915 $ 2,910
======== ========
(The accompanying notes are an integral part of these financial statements.)
GULF STATES PAPER CORPORATION
PAPERBOARD AND PACKAGING DIVISIONS
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Thirteen Thirteen
Weeks Ended Weeks Ended
April 3, 2005 March 28, 2004
------------- --------------
(In thousands)
Cash flows from operating activities:
Net income $ 6,915 $ 2,910
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,621 9,826
Impairment charge 25 1,800
Loss on sale of assets 255 57
Deferred income tax provision (656) (1,474)
Minority interest 720 551
Change in operating assets and liabilities:
Accounts receivable 1,530 (3,918)
Inventories (1,397) 1,039
Accounts payable (3,202) (208)
Accrued liabilities (361) (138)
Other 277 851
-------- --------
Net cash provided by operating activities 13,727 11,296
-------- --------
Cash flows from investing activities:
Capital expenditures (2,705) (2,415)
Proceeds from sale of assets 32 365
Distribution to minority shareholders (679) (840)
Other assets (45) 45
-------- --------
Net cash used in investing activities (3,397) (2,845)
-------- --------
Cash flows from financing activities:
Net transactions with Gulf States Paper Corporation (11,262) (10,123)
Payments on debt (17) (16)
-------- --------
Net cash used in financing activities (11,279) (10,139)
-------- --------
Net decrease in cash (949) (1,688)
Cash at beginning of quarter 1,411 3,616
-------- --------
Cash at end of quarter $ 462 $ 1,928
======== ========
Supplemental cash flow disclosure:
Interest paid during the year $ 2 $ 2
(The accompanying notes are an integral part of these financial statements.)
GULF STATES PAPER CORPORATION
PAPERBOARD AND PACKAGING DIVISIONS
CONSOLIDATED STATEMENT OF PARENT'S INVESTMENT
(UNAUDITED)
April 3, 2005 March 28, 2004
------------- --------------
(In thousands)
PARENT'S INVESTMENT:
Balance at beginning of quarter 269,104 281,584
Net income 6,915 2,910
Net transactions with Gulf States Paper Corporation (11,262) (10,123)
------- -------
Balance at end of quarter 264,757 274,371
======= =======
(The accompanying notes are an integral part of these financial statements.)
GULF STATES PAPER CORPORATION
PAPERBOARD AND PACKAGING DIVISIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in Thousands)
NOTE 1 - BASIS OF PRESENTATION AND BACKGROUND
Basis of Presentation
The financial statements of the Paperboard and Packaging Divisions (the
"Divisions") of Gulf States Paper Corporation (the "Company" or "Gulf States")
reflect the accounts and results of certain operations of the business conducted
by the Divisions. A joint venture is also included in the Divisions'
consolidated financial statements (see Note 9). The accompanying consolidated
financial statements of the Divisions have been prepared from Gulf States'
historical accounting records and are presented on a carve-out basis reflecting
these certain assets, liabilities and operations. The Divisions are an
unincorporated business of the Company and, accordingly, Gulf States' net
investment in these operations ("parent's investment") is presented in lieu of
stockholder's equity. All significant intradivision transactions have been
eliminated. The financial statements are not necessarily indicative of the
financial position, results of operations and cash flows that might have
occurred had the Divisions been an independent entity not integrated into Gulf
States' other operations. Also, they may not be indicative of the actual
financial position that might have otherwise resulted, or of future results of
operations or financial positions of the Divisions.
Allocation of Costs from Gulf States
The Company charges the Divisions for the estimated cost of certain functions
that are managed by the Company and can reasonably be directly attributed to the
operation of the Divisions. These costs include corporate senior management,
dedicated human resource, legal, accounting and information systems support. The
charges to the Divisions are based on management's estimate of such services
specifically used by the Divisions. Where determinations based on specific usage
alone have been impracticable, other methods and criteria were used that
management believes are equitable and provide a reasonable estimate of the cost
attributable to the Divisions. The total of these allocations were $5,568 and
$5,386 for the quarters ended April 3, 2005 and March 28, 2004, respectively.
Such allocation is not intended to represent the costs that would be or would
not be incurred if the Divisions were an independent business.
- 2 -
The amount of parent's investment included in the balance sheet represents a net
balance as the result of various transactions between the Divisions and Gulf
States. There are no terms of settlement or interest charges associated with the
account balance. The balance is primarily the result of the Divisions'
participation in Gulf States' central cash management program, wherein all the
Divisions' cash receipts are remitted to Gulf States and all cash disbursements
are funded by Gulf States. Other transactions include intercompany purchases and
sales, certain direct and allocated portions of legal, environmental,
self-insurance and human resource obligations administered by Gulf States, as
well as the Divisions' share of the current portion of the parent's consolidated
federal and state income tax liability and various other administrative expenses
incurred by the parent on the Divisions' behalf. As a result, obligations for
these matters are not reflected on the accompanying balance sheet. The Company
is unable to provide estimates of the components of the intercompany balances at
April 3, 2005 and March 28, 2004.
Business and Summary of Accounting Policies
The Pulp and Paperboard Division converts wood fiber into bleached kraft pulp
and solid bleached sulfate ("SBS") paperboard. The Paperboard Packaging Division
produces folding cartons primarily for the consumer products industry. Net sales
by product category are summarized below:
QUARTER ENDED
-------------------------------
APRIL 3, 2005 MARCH 28, 2004
------------- --------------
Sales by Category
Pulp & Paperboard $ 39,628 $ 37,181
Paperboard Packaging 89,174 79,193
------------- --------------
Total Sales $ 128,802 $ 116,374
============= ==============
Other Financial Activities
The Divisions have not been allocated any portion of Gulf States' unsecured
consolidated debt. No portion of Gulf States' related interest expense has been
allocated to the Divisions. Debt secured by the Divisions' real property has
been reflected in these consolidated financial statements. The secured debt was
$317 and $384 at April 3, 2005 and March 28, 2004, respectively.
- 3 -
Organization
The Company reorganized effective December 30, 2002. Gulf States Paper
Corporation elected Subchapter S status for income tax purposes. GSPC
Enterprises, Inc. was formed at the reorganization date as a wholly-owned
subsidiary. GSPC Enterprises was formed as a Subchapter C corporation, which is
subject to federal and state income taxes. As a result of the Subchapter S
election, Gulf States will generally be exempt from federal and state income
taxes.
Prior to the reorganization, all business of the divisions was conducted within
Gulf States Paper Corporation and the income was subject to federal and state
income taxes. Effective with the reorganization date, certain of the Divisions'
business assets and liabilities were contributed in a tax-free transaction to
GSPC Enterprises, Inc. The result of the reorganization was to have GSPC
Enterprises own and operate the Demopolis paperboard mill ("Pulp & Paperboard
Division") and to own and operate the Paperboard Packaging Division's six
folding carton plants located within Missouri, Texas, Kentucky and North
Carolina. Gulf States Paper Corporation retained a folding carton plant within
Alabama and the member interest in the joint venture (GSD Packaging, LLC
("GSD")). These assets, along with the six folding carton plants owned by GSPC
Enterprises, Inc., comprise the Paperboard Packaging Division.
Reporting Period
The Divisions use a 52-53 week year ending on the Sunday nearest the end of
December.
Effective with the reorganization, the Company changed its fiscal year-end from
the last Sunday nearest the end of May to the last Sunday nearest the end of
December. Accordingly, the consolidated Financial Statements include the results
of operations for the period of thirteen weeks ended April 3, 2005 and March 28,
2004.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid debt instruments purchased with
an original maturity of three months or less.
Inventories
Inventories are stated at the lower of cost or market. Over 90% of product and
manufacturing materials inventories is determined by the last in, first out
("LIFO") method. The remaining manufacturing materials inventories are valued
using the first in, first out ("FIFO") method, or moving average cost methods.
The cost of other inventories is determined principally by the average cost
method.
- 4 -
Property, Plant and Equipment
Property, plant and equipment are stated at cost and depreciated on a
straight-line basis over their estimated useful lives. Major overhauls that
extend the useful lives of existing assets are capitalized. Expenditures for
repairs and maintenance are charged to expense as incurred. Gains and losses
from the sale of property, plant and equipment are included in other income.
Goodwill
Goodwill is accounted for in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 142. See Note 7.
Asset Impairment
The Divisions evaluate long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. When undiscounted future
cash flows will not be sufficient to recover an asset's carrying amount, the
asset is written down to its fair value. Long-lived assets to be disposed of by
sale are classified as held for sale and are reported at the lower of carrying
amount or fair value less cost to sell, and depreciation is ceased. See Note 5.
Income Taxes
The Divisions computed an income tax provision as if separate returns were
filed. For the quarters ended April 3, 2005 and March 28, 2004, the income
earned from operations conducted within Gulf States has been treated as exempt
income due to the Subchapter S election. The Divisions' remaining operations are
included in the consolidated C Corporation tax return filed by GSPC Enterprises,
Inc. Current taxes are paid by this corporation and any obligations thereto are
not reflected in the accompanying balance sheet.
The provision for income taxes has been determined using the asset and liability
approach of accounting for income taxes. Under this approach, deferred taxes
represent the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. The provision for
income taxes represents income taxes paid or payable for the current year plus
the change in deferred taxes during the year. Deferred taxes result from
differences between the financial and tax bases of the Company's assets and
liabilities and are adjusted for changes in tax rates and tax laws when changes
are enacted. A valuation allowance has not been recorded to reduce deferred tax
assets as it is more likely than not the future tax benefits will be realized.
See Note 4.
- 5 -
Revenue Recognition
The Divisions recognize revenue at the time the product is shipped or as title
passes subject to the terms of the agreement with the customer.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE 2 - CONCENTRATION OF CREDIT RISK
The Divisions conduct business with customers primarily in the consumer products
and paperboard converting industries. The Company believes its accounts
receivable allowance is sufficient to cover any risk of credit losses.
NOTE 3 - INVENTORIES
APRIL 3, 2005 MARCH 28, 2004
------------- --------------
Raw materials $ 12,561 $ 10,987
Finished goods and work in process 46,477 39,040
Supplies and repair parts 13,707 13,446
LIFO reserve (19,602) (17,956)
------------- --------------
$ 53,143 $ 45,517
============= ==============
NOTE 4 - INCOME TAX
As discussed in Note 1, Gulf States Paper Corporation elected effective December
30, 2002 to be taxed under Subchapter S of the Internal Revenue Code.
Accordingly, the stockholders of the Company are taxed on their proportionate
share of Gulf States Paper Corporation's taxable income. Consequently, the
Divisions' income earned by the Company will generally be exempt from federal
and state income taxes unless a disposition of property occurs that is subject
to the built-in gains tax. The built-in gains tax is imposed at corporate rates
if certain appreciated property is disposed of within ten years of the
Subchapter S election.
- 6 -
The Livingston Box plant and the Division's GSD joint venture member interests
are owned by Gulf States Paper Corporation. Therefore, there is not a provision
for federal and state income taxes on this business income for the quarters
ended April 3, 2005 and March 28, 2004. The remaining business operations of the
Divisions are owned by GSPC Enterprises, Inc. ("Enterprises"). Enterprises is a
wholly owned subsidiary of Gulf States Paper Corporation that remains a
Subchapter C corporation subject to federal and state income taxes. Accordingly,
the financial statements reflect a provision for taxes and the related
liabilities for current and deferred taxes.
The provision for income taxes consists of the following:
QUARTER ENDED
APRIL 3, 2005 MARCH, 28, 2004
------------- ---------------
Current:
Federal $ 3,575 $ 2,278
State 507 386
Deferred:
Federal (572) (1,235)
State (84) (239)
------------- ---------------
Total $ 3,426 $ 1,190
============= ===============
The federal statutory rate was 35%. The provision for income taxes is reconciled
to the federal statutory rate:
QUARTER ENDED
APRIL 3, 2005 MARCH, 28, 2004
------------- ---------------
Taxes at federal statutory rate $ 3,619 $ 1,435
Subchapter S income not subject to tax (368) (342)
State income taxes net of federal income tax benefit 275 96
Miscellaneous items (100) 1
------------- ---------------
Total $ 3,426 $ 1,190
============= ===============
The net deferred income tax liability includes the following components as of:
APRIL 3, 2005 MARCH, 28, 2004
------------- ---------------
Current deferred tax asset $ 2,478 $ 1,510
NonCurrent deferred tax liability (51,622) (51,754)
------------- ---------------
Net deferred tax liability $ (49,144) $ (50,244)
============= ===============
- 7 -
The tax effect of significant temporary differences representing deferred tax
assets and liabilities is as follows as of:
APRIL 3, 2005 MARCH, 28, 2004
------------- ---------------
Intangible assets $ 2,210 $ 3,453
Other assets 1,835 1,242
Post-Retirement benefit 78 -
Plant, property & equipment (53,815) (55,433)
Vacation accrual 548 494
------------- ---------------
Net deferred tax liability $ (49,144) $ (50,244)
============= ===============
NOTE 5 - IMPAIRMENT CHARGES
During the quarter ended April 3, 2005, the Divisions reduced the carrying value
of a printing press held for sale by $25.
Property that has been subject to impairment charges and offered for sale is
identified below. Management has determined the fair value to be as follows:
APRIL 3, 2005
-------------
Recovery boiler $ 2,700
Carton equipment 18
-------------
Total $ 2,718
=============
During the quarter ended March 28, 2004, the Divisions recorded a non-cash
impairment charge of $1,800 on a recovery boiler. The boiler is being offered
for sale. However, it appears less than probable the sale will occur within one
year. Accordingly, the boiler's remaining fair value of $2,700 is included in
Property, Plant & Equipment.
Property that has been subject to impairment charges and classified as held for
sale is as follows::
MARCH 28, 2004
--------------
Plant building - Newark $ 529
Carton equipment 238
--------------
Total $ 767
==============
- 8 -
NOTE 6 - RETIREMENT, SAVINGS AND OTHER POST RETIREMENT BENEFITS
Employees of the Divisions participate in various pension, defined contribution
plans and postretirement benefit plans sponsored by the Company. A portion of
the Company's employee benefit costs has been allocated to the Divisions for
their participation in the noncontributory defined benefit pension plans,
defined contribution and postretirement health care and life insurance benefit
plans.
Under the collective bargaining agreement, all union employees at the Demopolis
paperboard mill had the right on February 28, 2005 to remain in the existing
defined benefit pension plan, or to switch to an enhanced 401(k) plan with their
current pension benefit frozen plus a future pension benefit increase of the
lesser of 2% or the increase in the CPI annually through 2008. In addition,
employees selecting the enhanced 401(k) plan were entitled to a one time
employer plan contribution of $3. Approximately 37% of the union employees
selected the enhanced 401(k) plan. The freezing of the pension benefit for these
employees resulted in a pre-tax curtailment loss of $1,368. The employer
contribution to the enhanced 401 (k) plan was $308. These costs have been
reflected in the Divisions current quarter operating results.
The following are the costs, including the above curtailment loss and employer
contribution amount, allocated in the Statement of Operations:
APRIL 3, 2005
-------------
Pension plans $ 2,059
Defined contribution plans 1,255
Postretirement benefit plans 20
-------------
$ 3,334
=============
During the quarter ended March 28, 2004, the Company separated the salaried
retirees from active employees as a revision to the salaried postretirement
health plan. Salaried retirees are being required to fund all of their health
plan cost for 2004 and subsequent years. The effect of this change resulted in a
postretirement benefit plan settlement gain. The Divisions were allocated $190
of the pre-tax settlement gain.
The following are the costs, exclusive of the postretirement settlement gain,
allocated in the Statement of Operations:
MARCH 28, 2004
--------------
Pension plans $ 601
Defined contribution plans 804
Postretirement benefit plans (119)
--------------
Total cost $ 1,286
==============
The obligations for a significant portion of these future costs are not
reflected in the Statement of Certain Assets and Liabilities because these
obligations will remain with the Company and allocation of these obligations to
the division level was not possible.
The allocation of these costs has been based on a combination of the number of
employees, employee salaries, or specifically attributable benefits within each
plan. The allocated pension defined contribution plan and postretirement benefit
plan costs are the resulting proportional amount of that cost calculated in
accordance with SFAS No. 87, Employers' Accounting for Pensions and SFAS No.
106, Employers' Accounting for Postretirement Benefits Other Than Pensions,
respectively. Management believes the method of allocation is equitable and
provides a reasonable estimate of the costs attributable to the Divisions. Such
allocations are not intended to represent the costs that would be incurred as if
the Divisions had operated on an independent basis.
- 9 -
NOTE 7 - GOODWILL
GOODWILL
-----------------------------------------------------
GULF STATES
RESOLUTION LIVINGSTON BOX PACKAGING TOTAL
---------- -------------- ----------- ---------
Balance @ April 3, 2005 $ 24,030 $ 2,148 $ 8,824 $ 35,002
========== ============== =========== =========
Balance @ March 28, 2004 $ 24,030 $ 2,148 $ 8,824 $ 35,002
========== ============== =========== =========
The carrying amount of goodwill remains unchanged since the period ended January
2, 2005.
NOTE 8 - COMMITMENTS
At April 3, 2005, the Divisions were committed under non-cancelable leases
expiring on various dates to 2009. Most leases require payment of property taxes
and insurance. Minimum rentals under such leases are as follows:
Fiscal Year Transportation
Ending Buildings Equipment Equipment Total
------ --------- --------- --------- -----
2005 338 20 160 518
2006 40 - 141 181
2007 - - 114 114
2008 - - 19 19
2009 - - 3 3
Contingent rental payments imposed by lease agreements are not significant.
The Divisions have commitments under contracts for the purchase of property and
equipment. Portions of such contracts not completed at April 3, 2005 are not
reflected in the consolidated financial statements. These commitments amounted
to approximately $3,417.
NOTE 9 - JOINT VENTURE
The Divisions formed the GSD joint venture with Dopaco Corporation in September
1998 to manufacture and sell folding cartons. The Divisions have a 60% member
interest, however, operating control is shared equally by agreement of the
members. The results of the joint venture are included in the Divisions'
consolidated financial statements.
- 10 -
NOTE 10 - ENVIRONMENTAL AND LEGAL MATTERS
Controlling pollutants discharged into the air, water and groundwater to avoid
adverse impact on the environment, making continual improvements in
environmental performance and achieving compliance with applicable regulations
are continuing objectives of the Company. The Divisions have invested
substantial funds to modify facilities to assure compliance. For the quarters
ended April 3, 2005 and March 28, 2004, capital expenditures were $266 and $100,
respectively.
The Divisions have taken major steps to comply with the regulations promulgated
under the Clean Air Act and Clean Water Act (the "Cluster Rules") designed to
reduce air and water discharges of specific substances from U.S. pulp and paper
mills by 2006. The Divisions estimate future capital expenditures to comply with
these regulations will be insignificant.
The Company has been named a defendant in asbestos-related personal injury
litigation. These suits also name many other corporate defendants. There have
been six lawsuits filed against the Company. The number of defendants in the
suits has ranged from forty to one hundred sixty-one. The lawsuits are based
upon claims of personal injuries resulting from exposure to asbestos while
employed by third-party contractors at the Company's mills. The plaintiffs have
not produced any evidence to date that they performed services at any of the
Company's facilities.
Management believes that the Company has valid defenses to the above personal
injury claims and intends to defend them vigorously. The Company also has
substantial insurance coverage, subject to applicable deductibles and policy
limits, with respect to asbestos claims. To date, the costs resulting from the
litigation have not been significant. The Company settled one lawsuit during
2004 for $40. However, the other five lawsuits are in the discovery phase.
Although the outcome of this type of litigation is subject to many
uncertainties, after consulting with legal counsel, the Company does not believe
that such claims will have a material adverse effect on its consolidated
financial condition, results of operations or cash flows. Accordingly, no
liability has been recorded by the Divisions.
The Divisions' operations are parties to or targets of other lawsuits, claims,
investigations and proceedings, which are being handled and defended in the
ordinary course of business. No such pending matters are expected to have a
material effect on the Divisions' financial position, results of operations or
cash flows.
- 11 -
NOTE 11 - OTHER TRANSACTIONS WITH GULF STATES
The Pulp and Paperboard Division purchases softwood chips and pulpwood from Gulf
States. The purchases are in the ordinary course of business at negotiated
prices determined between the Division and Gulf States and may not reflect spot
market prices.
Purchases of chips and pulpwood from Gulf States amounted to $2,894 and $2,857
for the quarters ended April 3, 2005 and March 28, 2004.
Amounts payable to Gulf States are settled through intercompany accounts at the
end of each month. All settlements with Gulf States are classified as "net
transactions with Gulf States Paper Corporation" in the accompanying combined
statements of parent's investment and cash flows.
The Company is obligated to provide certain administrative services during the
fiscal year ending January 1, 2006 to GSD. The agreement provides that the
Company will be reimbursed at a weekly rate of approximately $13.