<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 2, 1999
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 1 - 3506
-------------------
GEORGIA-PACIFIC CORPORATION
(Exact Name of Registrant as Specified in its Charter)
GEORGIA 93-0432081
(State of Incorporation) (IRS Employer Id. Number)
133 PEACHTREE STREET, N.E., ATLANTA, GEORGIA 30303
(Address of Principal Executive Offices)
(404) 652 - 4000
(Telephone Number of Registrant)
-------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of the close of business on November 4, 1999, Georgia-Pacific Corporation
had 170,988,313 shares of Georgia-Pacific Group Common Stock outstanding and
82,476,033 shares of The Timber Company Common Stock outstanding.
<PAGE>
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Georgia-Pacific Corporation and Subsidiaries
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- -------------------------
October 2, Sept. 30, October 2, Sept. 30,
(In millions, except per share amounts) 1999 1998 1999 1998
- --------------------------------------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Net sales $ 5,526 $ 3,398 $ 12,785 $ 9,928
---------- --------- ---------- ---------
Costs and expenses
Cost of sales, excluding depreciation, amortization
and cost of timber harvested
shown below 4,192 2,572 9,445 7,572
Depreciation, amortization and cost of
timber harvested 260 261 735 752
Selling and distribution 263 145 547 412
General and administrative 230 165 582 478
Interest 133 113 350 338
Other income - - (84) -
---------- --------- ---------- ---------
Total costs and expenses 5,078 3,256 11,575 9,552
---------- --------- ---------- ---------
Income before income taxes and
extraordinary item 448 142 1,210 376
Provision for income taxes 169 62 474 160
---------- --------- ---------- ---------
Income before extraordinary item 279 80 736 216
Extraordinary item, net of taxes, - - - (15)
---------- --------- ---------- ---------
Net income $ 279 $ 80 $ 736 $ 201
========== ========= ========== =========
Georgia-Pacific Group
Income before extraordinary item $ 230 $ 39 $ 541 $ 85
Extraordinary item, net of taxes - - - (13)
---------- --------- ---------- ---------
Net income $ 230 $ 39 $ 541 $ 72
========== ========= ========== =========
Basic per common share:
Income before extraordinary item $ 1.34 $ 0.22 $ 3.15 $ 0.47
Extraordinary item, net of taxes - - - (0.07)
---------- --------- ---------- ---------
Net income $ 1.34 $ 0.22 $ 3.15 $ 0.40
========== ========= ========== =========
Diluted per common share:
Income before extraordinary item $ 1.31 $ 0.22 $ 3.07 $ 0.46
Extraordinary item, net of taxes - - - (0.07)
---------- --------- ---------- ---------
Net income $ 1.31 $ 0.22 $ 3.07 $ 0.39
========== ========= ========== =========
Average number of shares outstanding:
Basic 171.4 180.5 171.9 181.5
Diluted 175.9 181.0 176.2 183.2
========== ========= ========== =========
The Timber Company
Income before extraordinary item $ 49 $ 41 $ 195 $ 131
Extraordinary item, net of taxes - - - (2)
---------- --------- ---------- ---------
Net income $ 49 $ 41 $ 195 $ 129
========== ========= ========== =========
Basic per common share:
Income before extraordinary item $ 0.59 $ 0.46 $ 2.30 $ 1.43
Extraordinary item, net of taxes - - - (0.02)
---------- --------- ---------- ---------
Net income $ 0.59 $ 0.46 $ 2.30 $ 1.41
========== ========= ========== =========
Diluted per common share:
Income before extraordinary item $ 0.59 $ 0.46 $ 2.29 $ 1.42
Extraordinary item, net of taxes - - - (0.02)
---------- --------- ---------- ---------
Net income $ 0.59 $ 0.46 $ 2.29 $ 1.40
========== ========= ========== =========
Average number of shares outstanding:
Basic 82.8 89.6 84.6 91.4
Diluted 83.4 89.9 85.1 92.0
========== ========= ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
3
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Georgia-Pacific Corporation and Subsidiaries
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
(In millions) October 2, 1999 Sept. 30, 1998
- ------------- --------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 736 $ 201
Adjustments to reconcile net income to
Cash provided by operations:
Depreciation 552 561
Cost of timber harvested 134 134
Other income (84) -
Deferred income taxes (5) 56
Amortization of goodwill 49 45
Amortization of debt issue costs 9 12
Stock compensation programs (1) 8
Gain on sales of assets (28) (4)
Increase in receivables (401) (40)
(Increase) decrease in inventories (26) 67
Decrease (increase) in other working
capital 109 (40)
Change in other assets and other
long-term liabilities (13) 33
---------- ----------
Cash provided by operations 1,031 1,033
---------- ----------
Cash flows from investing activities
Property, plant and equipment
investments (411) (389)
Timber and timberland purchases (143) (165)
Acquisitions (897) (102)
Proceeds from sales of assets 95 91
Other (1) 2
---------- ----------
Cash used for investing activities (1,357) (563)
---------- ----------
Cash flows from financing activities
Repayments of long-term debt (528) (798)
Additions to long-term debt 87 511
Fees paid to issue debt (30) (5)
Increase in bank overdrafts 78 4
Increase in commercial paper and
other short-term notes 298 322
Issuance of senior deferrable notes 863 -
Stock repurchases (370) (376)
Proceeds from option plan exercises 115 8
Cash dividends paid (128) (137)
---------- ----------
Cash provided by (used for) financing
activities 385 (471)
---------- ----------
Increase (decrease) in cash 59 (1)
Balance at beginning of period 5 8
---------- ----------
Balance at end of period $ 64 $ 7
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
4
CONSOLIDATED BALANCE SHEETS (Unaudited)
Georgia-Pacific Corporation and Subsidiaries
(In millions, except shares and per share amounts)
<TABLE>
<CAPTION>
October 2, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Current assets
Cash $ 64 $ 5
Receivables, less allowances of $26
and $25, respectively 2,394 1,233
Inventories 1,740 1,280
Deferred income tax assets 61 61
Other current assets 151 66
----------- ------------
Total current assets 4,410 2,645
----------- ------------
Timber and timberlands, net 1,229 1,210
----------- ------------
Property, plant and equipment
Land, buildings, machinery and
equipment, at cost 14,996 14,453
Accumulated depreciation (8,648) (8,204)
----------- ------------
Property, plant and equipment, net 6,348 6,249
----------- ------------
Goodwill, net 2,430 1,677
----------- ------------
Other assets 1,052 919
----------- ------------
Total assets $ 15,469 $ 12,700
=========== ============
</TABLE>
<PAGE>
5
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
Current liabilities
Bank overdrafts, net $ 273 $ 195
Commercial paper and other short-term notes 1,708 1,209
Current portion of long-term debt 37 22
Accounts payable 970 556
Accrued compensation 305 247
Other current liabilities 660 419
---------- ----------
Total current liabilities 3,953 2,648
---------- ----------
Long-term debt, excluding current portion 4,147 4,125
---------- ----------
Senior deferrable notes 863 -
---------- ----------
Other long-term liabilities 1,729 1,572
---------- ----------
Deferred income tax liabilities 1,272 1,231
---------- ----------
Commitments and contingencies
Shareholders' equity
Common stock 153 150
Georgia-Pacific Group, par value $.80; 400,000,000
shares authorized; 190,725,000 and 186,564,000
shares issued
The Timber Company, par value $.80; 250,000,000 shares authorized;
93,294,000 and 92,785,000 shares issued
Treasury stock, at cost (863) (492)
19,493,000 and 13,525,000 shares of Georgia-Pacific
Group common stock and 10,751,000 and 5,704,000
shares of The Timber Company common stock
Additional paid-in capital 1,468 1,331
Retained earnings 2,786 2,178
Accumulated other comprehensive income (39) (43)
---------- ----------
Total shareholders' equity 3,505 3,124
---------- ----------
Total liabilities and shareholders' equity $ 15,469 $ 12,700
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
6
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Georgia-Pacific Corporation and Subsidiaries
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------ -------------------------
October 2, Sept. 30, October 2, Sept. 30,
1999 1998 1999 1998
(In millions) ---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 279 $ 80 $ 736 $ 201
Other comprehensive income (loss) before tax:
Foreign currency translation adjustments (3) (13) 7 (19)
Income tax (expense) benefit related to
items of other comprehensive income 1 5 (3) 7
------ ------ ------ ------
Comprehensive income $ 277 $ 72 $ 740 $ 189
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
GEORGIA-PACIFIC CORPORATION
1. PRINCIPLES OF PRESENTATION. The consolidated financial statements include
the accounts of Georgia-Pacific Corporation and subsidiaries (the
"Corporation"). All significant intercompany balances and transactions are
eliminated in consolidation. The interim financial information included
herein is unaudited; however, such information reflects all adjustments
which are, in the opinion of management, necessary for a fair presentation
of the Corporation's financial position, results of operations, and cash
flows for the interim periods. All such adjustments are of a normal,
recurring nature except for the item discussed in Note 3 below. Certain
1998 amounts have been reclassified to conform with the 1999 presentation.
The Timber Company's and the Georgia-Pacific Group's combined financial
statements should be read in conjunction with the Corporation's
consolidated financial statements.
On or about April 22, 1999, the Corporation determined to change its fiscal
year from December 31 to end on the Saturday closest to December 31.
Additionally, the Corporation reports its quarterly periods on a 13-week
basis ending on a Saturday. The impact of one less day and two additional
days on the three months and nine months ended October 2, 1999,
respectively, was not material. There will be no transition period on which
to report.
2. OTHER INCOME. During the second quarter of 1999, the Corporation sold
approximately 390,000 acres of timberlands in the Canadian province of New
Brunswick and approximately 440,000 acres of timberlands in Maine for
approximately $92 million and recognized a pre-tax gain of $84 million ($50
million after tax).
3. EXTRAORDINARY ITEM. The Corporation redeemed approximately $600 million of
its outstanding debt during the first nine months of 1998. As a result, the
Corporation recognized an after-tax extraordinary loss of $15 million, of
which $14 million was recognized in the first quarter of 1998 and $1
million was recognized in the second quarter of 1998.
4. EARNINGS PER SHARE. The Corporation's common stock was redesignated in
December 1997 to reflect separately the performance of the Corporation's
pulp, paper and building products businesses, which are now known as
Georgia-Pacific Group. A separate class of common stock was distributed to
reflect the performance of the Corporation's timber operating group, which
is now known as The Timber Company. Basic earnings per share is computed
based on net income and the weighted average number of common shares
outstanding. Diluted earnings per share reflect the annual issuance of
common shares under long-term incentive stock option and stock purchase
plans. The computation of diluted earnings per share does not assume
conversion or exercise of securities that would have an antidilutive effect
on earnings per share. Earnings per share are computed for each class of
common stock based on the separate earnings attributed to each of the
respective businesses.
<PAGE>
7
The following table provides earnings and per share data for Georgia-
Pacific Group and The Timber Company for 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
(In millions, except October 2, Sept. 30, October 2, Sept. 30,
per share amounts) 1999 1998 1999 1998
---- ---- ---- ----
Georgia-Pacific Group
---------------------
<S> <C> <C> <C> <C>
Basic and diluted income available to Shareholders (numerator):
Income before extraordinary item $ 230 $ 39 $ 541 $ 85
Extraordinary item, net of taxes - - - (13)
-------- ------ ------- ------
Net income $ 230 $ 39 $ 541 $ 72
======== ====== ======= ======
Shares (denominator):
Average shares outstanding 171.4 180.5 171.9 181.5
Dilutive securities:
Stock incentive and option plans 4.0 0.5 3.8 1.6
Employee stock purchase plans 0.5 - 0.5 0.1
-------- ------ ------- ------
Total assuming conversion 175.9 181.0 176.2 183.2
======== ====== ======= ======
Basic per share amounts:
Income before extraordinary item $ 1.34 $ 0.22 $ 3.15 $ 0.47
Extraordinary item, net of taxes - - - (0.07)
-------- ------ ------- ------
Net income $ 1.34 $ 0.22 $ 3.15 $ 0.40
======== ====== ======= ======
Diluted per share amounts:
Income before extraordinary item $ 1.31 $ 0.22 $ 3.07 $ 0.46
Extraordinary item, net of taxes - - - (0.07)
-------- ------ ------- ------
Net income $ 1.31 $ 0.22 $ 3.07 $ 0.39
======== ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- -------------------------
(In millions, except October 2, Sept. 30, October 2, Sept. 30,
per share amounts) 1999 1998 1999 1998
---- ---- ---- ----
The Timber Company
------------------
<S> <C> <C> <C> <C>
Basic and diluted income available to
Shareholders (numerator):
Income before extraordinary item $ 49 $ 41 $ 195 $ 131
Extraordinary item, net of taxes - - - (2)
------- ------- -------- -------
Net income $ 49 $ 41 $ 195 $ 129
======= ======= ======== =======
Shares (denominator):
Average shares outstanding 82.8 89.6 84.6 91.4
Dilutive securities:
Stock incentive and option plans 0.5 0.3 0.4 0.6
Employee stock purchase plans 0.1 - 0.1 -
------- ------- -------- -------
Total assuming conversion 83.4 89.9 85.1 92.0
======= ======= ======== =======
Basic per share amounts:
Income before extraordinary item $ 0.59 $ 0.46 $ 2.30 $ 1.43
Extraordinary item, net of taxes - - - (0.02)
------- ------- -------- -------
Net income $ 0.59 $ 0.46 $ 2.30 $ 1.41
======= ======= ======== =======
Diluted per share amounts:
Income before extraordinary item $ 0.59 $ 0.46 $ 2.29 $ 1.42
Extraordinary item, net of taxes - - - (0.02)
------- ------- -------- -------
Net income $ 0.59 $ 0.46 $ 2.29 $ 1.40
======= ======= ======== =======
</TABLE>
<PAGE>
8
5. SUPPLEMENTAL DISCLOSURES - STATEMENTS OF CASH FLOWS. The cash impact of
interest and income taxes is reflected in the table below. The effect of
foreign currency exchange rate changes on cash was not material in any
period.
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------
(In millions) October 2, Sept. 30,
1999 1998
---- ----
<S> <C> <C>
Total interest costs $ 354 $ 342
Interest capitalized (4) (4)
------- ------
Interest Expense $ 350 $ 338
======= ======
Interest paid $ 305 $ 324
======= ======
Income taxes paid, net $ 434 $ 49
======= ======
Debt assumed in acquisition $ 669 $ 58
======= ======
</TABLE>
6. INVENTORY VALUATION. Inventories include costs of materials, labor, and
plant overhead. The Corporation uses the dollar value pool method for
computing LIFO inventories. The major components of inventories were as
follows:
<TABLE>
<CAPTION>
(In millions) October 2, December 31,
1999 1998
---------- ------------
<S> <C> <C>
Raw materials $ 389 $ 418
Finished goods 1,242 760
Supplies 319 311
LIFO reserve (210) (209)
---------- ------------
Total inventories $ 1,740 $ 1,280
========== ============
</TABLE>
7. ACQUISITIONS. At the end of the second quarter of 1999, the Corporation,
through its wholly owned subsidiary Atlanta Acquisition Corp., conducted a
tender offer for all of the outstanding shares of common stock of Unisource
Worldwide, Inc. ("Unisource"), the largest independent marketer and
distributor of printing and imaging paper and supplies in North America.
Pursuant thereto, the Corporation acquired 90.7% of the then outstanding
shares of Unisource. On July 6, 1999, Atlanta Acquisition Corp. was merged
with and into Unisource and by virtue of such merger, shares of Unisource
that were not tendered to the Corporation (other than shares held by
Unisource and the Corporation and its subsidiaries) were converted into the
right to receive $12.00 per Unisource share in cash, subject to dissenters
rights. The Corporation is purchasing the remaining outstanding shares of
Unisource as they are delivered to the exchange agent for cancellation.
Through October 2, 1999, the Corporation paid approximately $828 million
for shares of Unisource.
Unisource's results of operations were consolidated with those of the
Corporation beginning July 4, 1999. The Corporation has accounted for this
transaction using the purchase method to record a new cost basis for assets
acquired and liabilities assumed. The allocation of the purchase price and
acquisition costs to the assets acquired and liabilities assumed is
preliminary as of October 2, 1999, and is subject to change pending
finalization of studies of fair value and the finalization of management's
plans. The Corporation has begun to assess and formulate plans to
restructure existing Unisource activities, including the consolidation of
certain distribution centers, closure of the Unisource headquarters
facility, termination of redundant headcount and the relocation of certain
administrative functions. In connection with the acquisition of Unisource,
the Corporation assumed liabilities totaling approximately $84 million for
employee termination and relocation costs, and $15 million for facility
closure costs. The Corporation has not yet completed its evaluation of
Unisource activities; accordingly, finalization of the Corporation's plans
may result in additional liabilities for termination, relocation or
facility closure costs that could increase the amount of liabilities
assumed in the acquisition. The difference between the purchase price and
the fair market value of the assets acquired and liabilities assumed was
recorded as goodwill and will be amortized over 40 years. The preliminary
allocation of the purchase price of the acquisition is summarized as
follows:
<TABLE>
<CAPTION>
(In millions)
---------------
<S> <C>
Current assets $ 1,061
Property, plant and equipment 225
Other non current assets 16
Goodwill 767
Liabilities (1,241)
-------
Net cash paid for Unisource $ 828
=======
</TABLE>
The following unaudited pro forma financial data has been prepared assuming
that the acquisition of Unisource and related financings were consummated
on January 1, 1998. This pro forma financial data is presented for
informational purposes and is not necessarily indicative of the operating
results that would have occurred had the acquisition been consummated on
January 1, 1998, nor does it include adjustments for expected synergies or
cost savings. Accordingly, this pro forma data is not necessarily
indicative of future operations.
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------
October 2, Sept. 30,
(In millions, except per share amount) 1999 1998
- ------------------------------------- ---- ----
<S> <C> <C>
Net sales $ 17,505 $ 15,175
Income before extraordinary items $ 821 $ 285
Net income $ 821 $ 270
Georgia-Pacific Group data:
Income before extraordinary items $ 626 $ 154
Net income $ 626 $ 141
Basic income before extraordinary items
per share $ 3.64 $ 0.85
Diluted income before extraordinary items
per share $ 3.55 $ 0.84
Basic earnings per share $ 3.64 $ 0.78
Diluted earnings per share $ 3.55 $ 0.77
</TABLE>
The Timber Company's results of operations are not impacted by the
Unisource transaction.
The 1998 pro forma financial data includes non-recurring restructuring and
asset write-down charges of $202 million ($155 million after tax) taken by
Unisource in the first nine months of 1998.
In addition, during the first nine months of 1999, the Corporation
completed the acquisition of a packaging plant, four treated lumber
facilities and a chemical business for a total consideration of
approximately $69 million in cash. The results of operations of the
packaging plant and treated lumber facilities were consolidated with those
of the Corporation beginning in the second quarter of 1999. The operating
results of the chemical business were consolidated with those of the
Corporation beginning in the third quarter of 1999. The Corporation has
accounted for these business combinations using the purchase method to
record a new cost basis for assets acquired and liabilities assumed.
Effective October 3, 1999, the Corporation and Chesapeake Corp.
("Chesapeake") completed a previously announced agreement to create
Georgia-Pacific Tissue, a joint venture in which the two companies have
combined their away-from-home tissue businesses. The Corporation
contributed substantially all of the assets of its commercial tissue
business to the joint venture. The Corporation controls and manages the
joint venture and owns 95 percent of the equity in joint venture.
Chesapeake contributed the assets of its Wisconsin Tissue business to the
joint venture, for which it received a 5 percent equity interest in the
joint venture and an initial cash distribution of approximately $755
million. The results of the Wisconsin Tissue operations will be
consolidated with those of the Corporation beginning on October 3, 1999.
On June 30, 1998, the Corporation completed its acquisition of CeCorr Inc.
("CeCorr"), a leading independent producer of corrugated sheets in the
United States. On June 30, 1998, the Corporation paid approximately $93
million in cash (net of $2 million of cash acquired) and issued
approximately 3.2 million shares of Georgia-Pacific Group stock valued at
approximately $28.94 per share for all the outstanding shares of CeCorr. In
addition, the Corporation assumed approximately $92 million of CeCorr's
debt, of which $34 million was owed to the Corporation ($58 million net
debt assumed). On July 2, 1998, a former owner of CeCorr exercised his
right to resell to the Corporation approximately 2.2 million shares of
Georgia-Pacific Group stock issued in the transaction. CeCorr's results of
operations were consolidated with those of the Corporation beginning July
1, 1998. The Corporation accounted for the CeCorr acquisition using the
purchase method to record a new cost basis for assets acquired and
liabilities assumed.
<PAGE>
9
8. DEBT. In June 1999, the Corporation renegotiated its accounts receivable
sale program and increased the amount outstanding under the program from
$280 million to $750 million. The program expires in April 2000. In
connection with the acquisition of Unisource, the Corporation retained
former Unisource agreements to sell up to $150 million of certain
qualifying U.S. accounts receivable and up to CN$70 million of certain
eligible Canadian accounts receivable. The U.S. agreement expires in April
2000 and the Canadian agreement expires in May 2004. At October 2, 1999,
approximately $947 million was outstanding under the Corporation's and
Unisource's programs in the aggregate. The receivables outstanding under
these programs and the corresponding debt are included as current
receivables and short-term debt, respectively on the accompanying balance
sheets. The agreements are accounted for as a secured borrowing. As
collections reduce previously sold interests, new receivables may be sold.
Also in June 1999, the Board of Directors increased the corporate target
debt level under which management can purchase shares of Georgia-Pacific
Group and The Timber Company common stock on the open market from $5.75
billion to $6.8 billion. In addition, the Board of Directors increased the
Georgia-Pacific Group's target debt level from $4.75 billion to $5.8
billion. The Timber Company's target debt level remains at $1.0 billion.
On July 22, 1999, the Corporation increased the amount of its unsecured
revolving credit facility from $1.5 billion to $2.0 billion. This unsecured
revolving credit facility is used for direct borrowings and as support for
commercial paper and other short-term borrowings. As of October 2, 1999,
$1,239 million of committed credit was available in excess of all short-
term borrowings outstanding under or supported by the facility. The
revolving credit agreement contains certain restrictive covenants,
including a maximum leverage ratio (funded indebtedness, including senior
deferrable notes, to earnings before interest, taxes, depreciation and
amortization ("EBITDA")) of 4.5 to 1.0, which is to be maintained
throughout the term of the credit agreement. As of October 2, 1999, the
leverage ratio was 2.3 to 1.0.
During the second quarter of 1999, the Corporation registered for sale up
to $2.975 billion of debt and equity securities under a shelf registration
statement filed with the Securities and Exchange Commission. The
Corporation registered $1.725 billion under such registration statement
related to the PEPS Units ($862.5 million of which was received on July 7,
1999 in exchange for senior deferrable notes, which notes will be converted
into $862.5 million of equity (Georgia-Pacific Group common stock) upon
exercise of the purchase contract) (see Note 9). The $862.5 million of cash
(less expenses) raised in this sale of the PEPS Units was used to pay for
the acquisition of Unisource.
In connection with the formation of Georgia-Pacific Tissue (see Note 7),
Georgia-Pacific Tissue financed the $755 million initial distribution to
Chesapeake with short-term borrowings from a bank syndicate in October
1999. In the fourth quarter of 1999, the Corporation expects to sell debt
under the shelf registration statement filed with the Securities and
Exchange Commission and loan or contribute the proceeds through the use of
one or more subsidiaries to Georgia-Pacific Tissue in order for Georgia-
Pacific Tissue to retire such syndicated bank debt. This short-term
financing temporarily increased the Corporation's total debt above the $6.8
billion target debt level for repurchasing stock. The Corporation expects
to be able to repurchase stock again in the fourth quarter once the debt
level falls below the target.
9. SENIOR DEFERRABLE NOTES. On July 7, 1999, the Corporation issued 17,250,000
of 7.5% Premium Equity Participating Security Units ("PEPS Units") for
$862.5 million. Each PEPS Unit had an issue price of $50 and consists of a
contract to purchase shares of Georgia-Pacific Group common stock on or
prior to August 16, 2002 and a senior deferrable note of Georgia-Pacific
Group due August 16, 2004. Each purchase contract yields interest of 0.35%
per year, paid quarterly, on the $50 stated amount of the PEPS Unit. Each
senior deferrable note yields interest of 7.15% per year, paid quarterly,
until August 16, 2002. On August 16, 2002, following a remarketing of the
senior deferrable notes, the interest rate will be reset at a rate that
will be equal to or greater than 7.15%. The liability related to the PEPS
Units is classified as Senior deferrable notes on the consolidated balance
sheets and will not be included in the debt amount for purposes of
determining the corporate and Georgia-Pacific Group debt targets.
10. STOCK SPLIT. On May 4, 1999, the Board of Directors declared a two-for-one
split of Georgia-Pacific Group's common stock in the form of a special
dividend to shareholders of record on May 14, 1999. The special dividend
was paid as one share of Georgia-Pacific Group common stock for each share
of Georgia-Pacific Group outstanding on June 3, 1999. A total of 95,126,911
additional shares were issued in conjunction with the stock split. The
Georgia-Pacific Group's par value of $0.80 remained unchanged. As a result,
$76 million of stockholders' equity was reclassified from Additional paid-
in capital to Common stock. All historical share and per share amounts have
been restated to reflect retroactively the stock split.
11. SHARE REPURCHASES. During the first nine months of 1999, Georgia-Pacific
Group purchased on the open market approximately 5,994,000 shares of
Georgia-Pacific Group common stock at an aggregate price of $247 million
($41.22 average per share). Of these repurchased shares, approximately
5,969,000 shares were held as treasury and 25,000 shares were purchased
during the first nine months of 1999 and settled after October 2, 1999.
During the first nine months of 1999, The Timber Company purchased on the
open market approximately 5,047,000 shares of The Timber Company common
stock, all of which were held as treasury stock at October 2, 1999, at an
aggregate price of $124 million ($24.48 average per share).
During the first nine months of 1998, the Georgia-Pacific Group purchased
in private transactions and on the open market approximately 4,794,000
shares of Georgia-Pacific Group common stock at an aggregate price of $277
million ($57.78 average per share). Of these repurchased shares,
approximately 3,586,000 shares were held as treasury, 284,000 shares were
purchased during the first nine months of 1998 and settled after September
30, 1998, and 924,000 shares were cancelled. In addition, during the first
nine months of 1998, The Timber Company purchased on the open market
4,860,000 shares of The Timber Company common stock at an aggregate price
of $105 million ($21.60 average per share). Of these repurchased shares,
approximately 4,829,000 shares were held as treasury and 31,000 shares were
purchased during the first nine months of 1998 and settled after September
30, 1998.
12. COMMITMENTS AND CONTINGENCIES. The Corporation is a party to various legal
proceedings incidental to its business and is subject to a variety of
environmental and pollution control laws and regulations in all
jurisdictions in which it operates. As is the case with other companies in
similar industries, the Corporation faces exposure from actual or potential
claims and legal proceedings involving environmental matters. Liability
insurance in effect during the last several years provides only very
limited coverage for environmental matters.
The Corporation is involved in environmental remediation activities at
approximately 184 sites, both owned by the Corporation and owned by others,
where it has been notified that it is or may be a potentially responsible
party under the Comprehensive Environmental Response, Compensation and
Liability Act or similar state "superfund" laws. Of the known sites in
which it is involved, the Corporation estimates that approximately 49
percent are being investigated, approximately 27 percent are being
remediated and approximately 24 percent are being monitored (an activity
that occurs after either site investigation or remediation has been
completed). The ultimate costs to the Corporation for the investigation,
remediation and monitoring of many of these sites cannot be predicted with
certainty, due to the often unknown magnitude of the pollution or the
necessary cleanup, the varying costs of alternative cleanup methods, the
amount of time necessary to accomplish such cleanups, the evolving nature
of cleanup technologies and government regulations, and the inability to
determine the Corporation's share of multiparty cleanups or the extent to
which contribution will be available from other parties. The Corporation
has established reserves for environmental remediation costs for these
sites in amounts that it believes are probable and reasonably estimable.
Based on analysis of currently available information and previous
experience with respect to the cleanup of hazardous substances, the
Corporation believes it is reasonably possible that costs associated with
these sites may exceed current reserves by amounts that may prove
insignificant or that could range, in the aggregate, up to approximately
$56 million. This estimate of the range of reasonably possible additional
costs is less certain than the estimates upon which reserves are based, and
in order to establish the upper limit of such range, assumptions least
favorable to the Corporation among the range of reasonably possible
outcomes were used. In estimating both its current reserve for
environmental remediation and the possible range of additional costs, the
Corporation has not assumed it will bear the entire cost of remediation of
every site to the exclusion of other known potentially responsible parties
who may be jointly and severally liable. The ability of other potentially
responsible parties to participate has been taken into account, based
generally on the parties' financial condition and probable contribution on
a per site basis.
<PAGE>
10
The Corporation and many other companies are defendants in suits brought in
various courts around the nation by plaintiffs who allege that they have
suffered personal injury as a result of exposure to asbestos-containing
products. These suits allege a variety of lung and other diseases based on
alleged exposure to products previously manufactured by the Corporation. In
many cases, the plaintiffs are unable to demonstrate that they have
suffered any compensable loss as a result of such exposure, or that any
injuries they have incurred in fact resulted from exposure to the
Corporation's products.
The Corporation generally settles asbestos cases for amounts it considers
reasonable given the facts and circumstances of each case. The amounts it
has paid to date to defend and settle these cases have been substantially
covered by product liability insurance. The Corporation is currently
defending claims of approximately 77,000 such plaintiffs as of November 3,
1999 and anticipates that additional suits will be filed against it over
the next several years. The Corporation has insurance available in amounts
that it believes are adequate to cover substantially all of the reasonably
foreseeable damages and settlement amounts arising out of claims and suits
currently pending. The Corporation has further insurance coverage available
for the disposition of suits that may be filed against it in the future,
but there can be no assurance that the amounts of such insurance will be
adequate to cover all future claims. The Corporation has established
reserves for liabilities and legal defense costs it believes are probable
and reasonably estimable with respect to pending suits and claims, and has
also established a receivable for expected insurance recoveries.
On May 6, 1998, suit was filed in state court in Columbus, Ohio, against
the Corporation and Georgia-Pacific Resins, Inc., a wholly owned subsidiary
of the Corporation. The lawsuit was filed by eight plaintiffs who seek to
represent a class of individuals who at any time from 1985 to the present
lived, worked, resided, owned, frequented or otherwise occupied property
located within a three-mile radius of the Corporation's resins
manufacturing operation in Columbus, Ohio. The lawsuit alleges that the
individual plaintiffs and putative class members have suffered personal
injuries and/or property damage because of (i) alleged "continuing and
long-term releases and threats of releases of noxious fumes, odors and
harmful chemicals, including hazardous substances" from the Corporation's
operations and/or (ii) a September 10, 1997 explosion at the Columbus
facility and alleged release of hazardous material resulting from that
explosion. Prior to the lawsuit, the Corporation had received a number of
explosion-related claims from nearby residents and businesses. These claims
were for property damage, personal injury and business interruption and
were being reviewed and adjusted on a case-by-case basis. The Corporation
has denied the material allegations of the lawsuit. While it is premature
to evaluate the claims asserted in the lawsuit, the Corporation believes it
has meritorious defenses.
In May 1997, the Corporation and nine other companies were named as
defendants in a suit brought by the Attorney General of the State of
Florida alleging that they engaged in conspiracy to fix the prices of
sanitary commercial paper products, such as towels and napkins, in
violation of federal and state laws. Approximately 45 similar suits have
been filed by private plaintiffs in federal courts in California, Florida,
Georgia and Wisconsin, and in the state courts of California, Wisconsin,
Minnesota and Tennessee. On July 28, 1999, the Corporation and the Attorney
General of the State of Florida entered into a Settlement Agreement
pursuant to which the State will dismiss its claims against the
Corporation. The Settlement Agreement states that the Attorney General is
dismissing its claims in the public interest and consistent with its
responsibilities. The Agreement also provides that the Corporation
continues to deny that there is any evidence that it engaged in the alleged
price fixing conspiracy. In addition, the Corporation agreed to donate
certain real property to the State of Florida, Board of Trustees of the
Internal Improvement Trust. The value of this real property is not material
to the results of operations or financial position of the Corporation.
In addition, as part of the formation of the joint venture with Chesapeake
described in Note 7, the Corporation and Wisconsin Tissue assigned, and
Georgia-Pacific Tissue agreed to assume, the liabilities of both companies
in connection with these cases. The Corporation and Wisconsin Tissue have
denied that they have engaged in any of the illegal conduct alleged in
these cases and intend to defend themselves vigorously.
Although the ultimate outcome of these environmental matters and legal
proceedings cannot be determined with certainty, based on presently
available information, management believes that adequate reserves have been
established for probable losses with respect thereto. Management further
believes that the ultimate outcome of such environmental matters and legal
proceedings could be material to operating results in any given quarter or
year but will not have a material adverse effect on the long-term results
of operations, liquidity or consolidated financial position of the
Corporation.
13. SUBSEQUENT EVENT. On November 1, 1999, the Corporation signed a definitive
agreement to sell approximately 194,000 acres of its redwood and Douglas
fir timberlands in northern California for a purchase price of
approximately $397 million. The sale is expected to close by the end of the
year, subject to the buyer obtaining required financing and approval by the
Corporation's board of directors.
<PAGE>
11
14. OPERATING SEGMENT INFORMATION. The Corporation has six reportable operating
segments: building products, building products distribution, timber,
containerboard and packaging, pulp and paper, and paper distribution. The
following represents selected operating data for each reportable segment
for the three and nine months ended October 2, 1999 and September 30, 1998.
CONSOLIDATED SELECTED OPERATING SEGMENT DATA (Unaudited)
Georgia-Pacific Corporation and Subsidiaries
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
(In millions) October 2, 1999 Sept. 30, 1998
------------------ ------------------
<S> <C> <C> <C> <C>
NET SALES TO UNAFFILIATED CUSTOMERS
Building products $ 1,015 18% $ 866 25%
Building products distribution 1,346 24 1,113 33
Timber 49 1 38 1
Containerboard and packaging 612 11 530 16
Pulp and paper 809 15 858 25
Paper distribution 1,698 31 - -
Other (3) - (7) -
-------- ------ ------- ------
Total net sales to
unaffiliated customers $ 5,526 100% $ 3,398 100%
======== ====== ======= ======
INTERSEGMENT SALES
Building products $ 591 $ 617
Building products distribution 5 2
Timber 90 105
Containerboard and packaging 15 15
Pulp and paper 122 8
Paper distribution 2 -
Other* (825) (747)
-------- -------
Total intersegment sales $ - $ -
======== =======
TOTAL NET SALES
Building products $ 1,606 29% $ 1,483 44%
Building products distribution 1,351 24 1,115 33
Timber 139 3 143 4
Containerboard and packaging 627 11 545 16
Pulp and paper 931 17 866 25
Paper distribution 1,700 31 - -
Other* (828) (15) (754) (22)
-------- ------ ------- ------
Total net sales $ 5,526 100% $ 3,398 100%
======== ====== ======= ======
OPERATING PROFITS
Building products $ 333 57% $ 185 72%
Building products distribution 4 1 17 7
Timber 95 17 84 33
Containerboard and packaging 88 15 33 13
Pulp and paper 81 14 18 7
Paper distribution 43 7 - -
Other (63) (11) (82) (32)
-------- ------ ------- ------
Total operating profits 581 100% 255 100%
====== ======
Interest expense (133) (113)
Provision for income taxes (169) (62)
-------- -------
Net income $ 279 $ 80
======== =======
</TABLE>
<PAGE>
12
CONSOLIDATED SELECTED OPERATING SEGMENT DATA (Unaudited)
Georgia-Pacific Corporation and Subsidiaries
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
(In millions) October 2, 1999 Sept. 30, 1998
----------------------- ----------------------
<S> <C> <C> <C> <C>
NET SALES TO UNAFFILIATED CUSTOMERS
Building products $ 2,953 23% $ 2,451 25%
Building products distribution 3,761 30 3,208 32
Timber 153 1 99 1
Containerboard and packaging 1,708 13 1,515 15
Pulp and paper 2,522 20 2,664 27
Paper distribution 1,698 13 - -
Other (10) - (9) -
-------- -------- ------- --------
Total net sales to unaffiliated customers $ 12,785 100% $ 9,928 100%
======== ======== ======= ========
INTERSEGMENT SALES
Building products $ 1,765 $ 1,848
Building products distribution 9 6
Timber 265 308
Containerboard and packaging 44 45
Pulp and paper 135 24
Paper distribution 2 -
Other* (2,220) (2,231)
-------- -------
Total intersegment sales $ - $ -
======== =======
TOTAL NET SALES
Building products $ 4,718 37% $ 4,299 43%
Building products distribution 3,770 29 3,214 32
Timber 418 3 407 4
Containerboard and packaging 1,752 14 1,560 16
Pulp and paper 2,657 21 2,688 27
Paper distribution 1,700 13 - -
Other* (2,230) (17) (2,240) (22)
-------- -------- ------- --------
Total net sales $ 12,785 100% $ 9,928 100%
======== ======== ======= ========
OPERATING PROFITS
Building products $ 945 60% $ 408 57%
Building products distribution 57 4 - -
Timber 371 24 267 37
Containerboard and packaging 209 13 97 14
Pulp and paper 134 9 143 20
Paper distribution 43 3 - -
Other (199) (13) (201) (28)
-------- -------- ------- --------
Total operating profits 1,560 100% 714 100%
======== ========
Interest expense (350) (338)
Provision for income taxes (474) (160)
Extraordinary item, net of taxes - (15)
-------- -------
Net income $ 736 $ 201
======== =======
</TABLE>
*Includes elimination of intersegment sales.
<PAGE>
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
THIRD QUARTER 1999 COMPARED WITH THIRD QUARTER 1998
The Corporation reported net sales of approximately $5.5 billion for the third
quarter of 1999 and $3.4 billion for the third quarter of 1998. Included in 1999
are $1.7 billion of net sales from the recently acquired Unisource operations.
Net income for the 1999 third quarter was $279 million compared with $80 million
in 1998.
The remaining discussion refers to the "Combined Selected Operating Segment
Data" table (included in Note 14 to the Consolidated Financial Statements).
The Corporation's building products segment reported net sales of $1.6 billion
for the third quarter of 1999 compared with $1.5 billion in 1998. Operating
profits were $333 million in 1999 compared with $185 million in 1998. Return on
sales was 21 percent and 12 percent for the three months ended October 2, 1999
and September 30, 1998, respectively. The higher quarter-over-quarter profits
resulted principally from increases in average selling prices for most of this
segment's products. Lumber selling prices were up 15 percent from the prior
year's quarter; gypsum selling prices increased 25 percent; plywood selling
prices increased 23 percent; and oriented strand board selling prices increased
11 percent. The year-over-year improvement in selling prices was primarily a
result of continued strength in home building activity driven by a strong U.S.
economy. Selling prices for plywood, oriented strand board and lumber peaked in
July of 1999 and declined sharply during the last two months of the third
quarter. The Corporation expects selling prices for plywood, oriented strand
board and lumber to continue to decline through the remainder of the year, while
selling prices for gypsum are expected to remain strong through the fourth
quarter of 1999.
The Corporation's building products distribution segment reported net sales of
$1.4 billion for the third quarter of 1999 compared with $1.1 billion in 1998.
Operating profits for the distribution segment were $4 million in the third
quarter of 1999 compared with $17 million in the third quarter of 1998. The 1998
results included one-time gains, principally on sales of assets related to a
restructuring plan, of approximately $6 million. The decrease in the
distribution segment operating profits in 1999 reflects lower margins related
primarily to the sale of lumber, structural panels and oriented strand board
inventories at prices below the segment's cost.
The timber segment reported net sales of approximately $139 million and $143
million for the third quarter of 1999 and 1998, respectively. Operating income
increased $11 million to $95 million in the third quarter of 1999, compared with
$84 million in the third quarter of 1998. The 1998 third quarter results
included a $1.4 million write-off for the loss of pre-merchantable timber
destroyed by forest fires in Florida in June 1998. In addition, the pre-tax
impact from reduced selling prices for timber salvaged from these fires is
estimated to be approximately $5 million in the third quarter of 1998. Strong
Western sawtimber prices in 1999 offset lower prices for Southern sawtimber,
while total third quarter 1999 harvest volumes were almost identical to the
third quarter of 1998. Total 1999 harvest volumes are anticipated to remain
comparable to 1998. As a result, harvest volumes will decrease in the fourth
quarter of 1999 compared to the third quarter of 1998.
The Corporation's containerboard and packaging segment reported net sales of
$627 million and operating profits of $88 million in the third quarter of 1999,
compared with net sales of $545 million and operating profits of $33 million in
the third quarter of 1998. Return on sales was 14 percent and 6 percent in the
third quarter of 1999 and 1998, respectively. The improvement in earnings was
attributable to higher selling prices and volume, offset somewhat by higher
secondary fiber costs. Containerboard and packaging selling prices increased
steadily over the quarter, ending the quarter at higher levels than a year ago.
The Corporation expects continued selling price improvement in the
containerboard and packaging segment through the remainder of 1999.
The Corporation's pulp and paper segment reported net sales of $931 million and
operating profits of $81 million in the 1999 third quarter. For the same period
in 1998, the segment reported net sales of $866 million and operating profits of
$18 million. Return on sales was 9 percent and 2 percent in the third quarter of
1999 and 1998, respectively. During the third quarter of 1998, the Corporation
closed its hardwood pulp operations at its Port Hudson, Louisiana and Ashdown,
Arkansas facilities, resulting in a one-time, before tax charge of $15 million.
Excluding this one-time charge, return on sales in the third quarter of 1998 was
4 percent. Compared with a year ago, the Corporation has maintained lower levels
of inventory in 1999 for most pulp and paper products. Selling prices and demand
for pulp steadily increased during the third quarter of 1999 and ended the
period at levels higher than the prior year. Despite higher sales volume,
operating results for the tissue business were lower than in the 1998 third
quarter due primarily to lower selling prices. Communication papers 1999
operating results were higher than the third quarter of 1998, due principally to
higher demand. Although steadily improving during the third quarter of 1999,
average selling prices for communication papers were consistent with the third
quarter 1998. Average communication papers selling prices for the third quarter
of 1999 were above those of the 1999 second quarter. The Corporation expects
continued pricing improvements for products in this segment through the
remainder of the year.
The Corporation's paper distribution segment reported net sales of $1.7 billion
and operating profits of $43 million for the third quarter of 1999, which
represent the operating results of Unisource since its acquisition by the
Corporation at the end of the second quarter of 1999. Unisource sells and
distributes high quality printing, writing and copying papers to printers,
publishers, business forms manufacturers and direct mail firms, as well as
corporate and retail copy centers, in-plant print facilities, government
institutions and other paper-intensive businesses. Unisource also sells and
distributes a broad range of packaging and maintenance supplies, equipment and
services, principally to manufacturers, food processors and retail and other
institutional customers. Products distributed include disposable paper and
plastic products; maintenance supplies and equipment such as towels, tissues,
can liners and sanitation chemicals; packaging supplies and equipment such as
carton erectors, baggers and filers as well as films, shrinkwrap and cushioning
materials; shipping room supplies such as corrugated boxes, cushioning
materials, tapes and labeling; and food service supplies such as films and food
wraps, food containers and disposable apparel for food serviced workers.
Operating results for the paper distribution segment have historically been
seasonal, with the strongest operating results occurring in the third quarter.
The operating loss in the "Other" nonreportable segment, which includes some
miscellaneous businesses, certain goodwill amortization, unallocated corporate
operating expenses and the elimination of profit on intersegment sales,
decreased by $19 million to a loss of $63 million in 1999 from a loss of $82
million in the 1998 third quarter. This decrease is primarily the result of
income from insurance proceeds recorded in the 1999 third quarter and the write-
off of goodwill in the third quarter of 1998 related to the closure of the
hardwood pulp operations at the Ashdown, Arkansas facilities.
Interest expense increased $20 million to $133 million in the third quarter of
1999 compared with $113 million in the third quarter of 1998, principally as a
result of higher debt levels and the issuance of the senior deferrable notes.
The effective income tax rate was 38 percent and 44 percent for the three months
ended October 2, 1999 and September 30, 1998, respectively. The effective tax
rate in 1999 and 1998 was higher than the statutory tax rate primarily because
of nondeductible goodwill amortization expense. The reduction in the 1999
effective tax rate resulted principally from higher pre-tax income and an
increased utilization of foreign sales corporation tax benefits.
<PAGE>
14
YEAR-TO-DATE THIRD QUARTER 1999 COMPARED WITH YEAR-TO-DATE THIRD QUARTER 1998
The Corporation reported net sales of $12.8 billion, including $1.7 billion of
net sales from the recently acquired Unisource operations, and net income of
$736 million for the nine months ended October 2, 1999. The Corporation reported
net sales of $9.9 billion and net income of $201 million for the nine months
ended September 30, 1998. The 1998 results included an extraordinary, after-tax
loss of $15 million for the early retirement of debt.
The remaining discussion refers to the "Combined Selected Operating Segment
Data" table (included in Note 14 to the Consolidated Financial Statements).
The Corporation's building products segment reported net sales of $4.7 billion
and operating profits of $945 million for the nine months ended October 2, 1999,
compared with net sales of $4.3 billion and operating profits of $408 million in
1998. Return on sales increased to 20 percent in 1999 from 9 percent a year ago,
resulting primarily from higher selling prices. Average selling prices for
plywood, oriented strand board, lumber and gypsum increased by 24 percent, 28
percent, 7 percent, and 20 percent, respectively, in the first nine months of
1999. Selling prices for plywood, oriented strand board and lumber peaked in
July of 1999 and sharply declined during the last two months of the third
quarter. The Corporation expects selling prices for plywood, oriented strand
board and lumber to continue to decline through the remainder of the year, while
selling prices for gypsum are expected to remain strong through the fourth
quarter of 1999.
The building products distribution division reported net sales of $3.8 billion
and operating profits of $57 million for the nine months ended October 2, 1999,
compared with net sales of $3.2 billion and break even operating profits in
1998. The 1998 results included one-time gains, principally on sales of assets
related to the restructuring plan, of approximately $19 million. The increase in
profitability is due primarily to higher margins in commodity and specialty
products and lower operating cost.
The Corporation's timber segment reported net sales of approximately $418
million and operating profits of $371 million for the nine-month period ended
October 2, 1999 compared to net sales of $407 million and operating profits of
$267 million for the nine months ended September 30, 1998. The 1999 results
included a one-time, pre-tax gain of $84 million from the sale of company
timberlands in Maine and New Brunswick. Excluding the gain on the sale of
timberlands in Maine and New Brunswick, operating profits increased $20 million
to $287 million in the first nine months of 1999 compared to the same period of
1998. The 7 percent increase resulted primarily from an increase in gains on
miscellaneous land sales of $12 million over the 1998 third quarter, and from
the negative impact on 1998 results of the forest fires in Florida. Overall, 9
percent higher total harvest volumes helped to offset the year over year 8
percent decline in average sales price.
The Corporation's containerboard and packaging segment reported net sales of
$1.8 billion and operating profits of $209 million in the first nine months of
1999 compared with net sales of $1.6 billion and operating profits of $97
million in the same 1998 period. Return on sales increased to 12 percent from 6
percent in 1998. Although year-to-date average prices are comparable to year ago
levels, pricing has increased throughout 1999 and, during the third quarter of
1999, was above year ago levels. Cost decreases in wood and energy as well as
higher sales volume contributed to the increased profit margins. The Corporation
expects continued price improvement in the containerboard and packaging segment
through the remainder of 1999.
The Corporation's pulp and paper segment reported net sales of $2.7 billion and
operating profits of $134 million for the nine-month period ended October 2,
1999, compared with net sales of $2.7 billion and operating profits of $143
million in 1998. Return on sales were 5 percent for the first nine months of
both 1999 and 1998. Excluding the one-time, $15 million charge in the third
quarter of 1998 for closure of two hardwood market pulp operations, return on
sales in 1998 was 6 percent. The decline in profitability was principally due to
a decrease in average prices for most of the Corporation's pulp and paper
products. Average selling prices in the first nine months of 1999 for pulp,
communication papers and tissue were approximately 2 percent, 8 percent and 4
percent, respectively, below selling prices in the same 1998 period. Prices for
most of the Corporation's pulp and communication paper products have increased
steadily throughout the first nine months of 1999 and the Corporation
anticipates this upward trend to continue through the remainder of 1999. During
the first nine months of 1999, the Corporation incurred market-related downtime
at its pulp and paper mills and reduced pulp production by 242,000 tons and
communication papers production by 14,000 tons. In the same 1998 period, the
Corporation incurred market-related downtime at its pulp and paper mills and
reduced pulp and communication papers production by 167,000 tons and 53,000
tons, respectively.
The Corporation's paper distribution segment reported net sales of $1.7 billion
and operating profits of $43 million for the third quarter of 1999, which
represent the operating results of Unisource since its acquisition by the
Corporation at the end of the second quarter of 1999. Operating results for the
paper distribution segment have historically been seasonal, with the strongest
operating results occurring in the third quarter.
The operating loss in the "Other" nonreportable segment, which includes some
miscellaneous businesses, certain goodwill amortization, unallocated corporate
operating expenses and the elimination of profit on intersegment sales,
decreased by $2 million to a loss of $199 million in the first nine months of
1999 from a loss of $201 million in the first nine months of 1998.
Interest expense increased $12 million to $350 million in the nine months of
1999, compared with $338 million in the first nine months of 1998, principally
as a result of higher debt levels and the issuance of the senior deferrable
notes, slightly offset by a decrease in average interest rates.
The effective income tax rate for the first nine months of 1999 and 1998 was 39
percent and 43 percent for the three months ended October 2, 1999 and September
30, 1998, respectively. The effective tax rate in 1999 and 1998 was higher than
the statutory tax rate primarily because of nondeductible goodwill amortization
expense. The reduction in the 1999 effective tax rate resulted principally from
higher pre-tax income and an increased utilization of foreign sales corporation
tax benefits.
<PAGE>
15
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. The Corporation generated cash from operations of $1.0
billion during the first nine months of both 1999 and 1998. Strong demand and
improved prices for several building products items were offset by higher
working capital levels related principally to accounts receivable associated
with the increase in net sales.
INVESTING ACTIVITIES. Capital expenditures for property, plant and equipment for
the nine months ended October 2, 1999 were $411 million, which included $159
million in the building products segment, $8 million in the building products
distribution segment, $1 million in the timber segment, $50 million in the
containerboard and packaging segment, $159 million in the pulp and paper
segment, $7 million in the paper distribution segment, and $27 million of other
and corporate. The Corporation expects to make capital expenditures for
property, plant and equipment of approximately $700 million in 1999, excluding
the cost of any acquisitions.
Cash paid for timber and timberlands was $143 million in the first nine months
of 1999 compared with $165 million in 1998.
At the end of the second quarter of 1999, the Corporation, through its wholly
owned subsidiary Atlanta Acquisition Corp., conducted a tender offer for all of
the outstanding shares of common stock of Unisource, the largest independent
marketer and distributor of printing and imaging paper and supplies in North
America. Pursuant thereto, the Corporation acquired 90.7% of the then
outstanding shares of Unisource. On July 6, 1999, Atlanta Acquisition Corp. was
merged with and into Unisource and by virtue of such merger, shares of Unisource
that were not tendered to the Corporation (other than shares held by Unisource
and the Corporation and its subsidiaries) were converted into the right to
receive $12.00 per Unisource share in cash, subject to dissenters rights. The
Corporation is purchasing the remaining outstanding shares of Unisource as they
are delivered to the exchange agent. Through October 2, 1999, the Corporation
paid approximately $828 million for shares of Unisource. Unisource's results of
operations were consolidated with those of the Corporation beginning July 4,
1999.
During the first nine months of 1999, the Corporation also completed the
acquisition of a packaging plant, four treated lumber facilities and a chemical
business for a total consideration of approximately $69 million in cash.
On June 30, 1998, the Corporation completed its acquisition of CeCorr, a leading
independent producer of corrugated sheets in the United States. On June 30,
1998, the Corporation paid approximately $93 million in cash (net of $2 million
of cash acquired) and issued approximately 3.2 million shares of Georgia-Pacific
Group stock valued at approximately $28.94 per share for all the outstanding
shares of CeCorr. In addition, the Corporation assumed approximately $92 million
of CeCorr's debt, of which $34 million was owed to the Corporation ($58 million
net debt assumed). On July 2, 1998, a former owner of CeCorr exercised his right
to resell to the Corporation approximately 2.2 million shares of Georgia-Pacific
Group stock issued in the transaction. CeCorr's results of operations were
consolidated with those of the Corporation beginning July 1, 1998.
During the first nine months of 1999, the Corporation received $95 million of
proceeds from the sale of assets, compared with $91 million in the same period
of 1998. During the second quarter of 1999, the Corporation sold approximately
390,000 acres of timberlands in the Canadian province of New Brunswick and
approximately 440,000 acres of timberlands in Maine for approximately $92
million and recognized a pre-tax gain of $84 million ($50 million after tax).
The 1998 proceeds were principally from sales of real estate development
properties located in South Carolina and Florida.
Effective October 3, 1999, the Corporation and Chesapeake completed a previously
announced agreement to create Georgia-Pacific Tissue, a joint venture in which
the two companies have combined their away-from-home tissue businesses. The
Corporation contributed substantially all of the assets of its commercial tissue
business to the joint venture. The Corporation controls and manages the joint
venture and owns 95 percent of the equity in joint venture. Chesapeake
contributed the assets of its Wisconsin Tissue business to the joint venture,
for which it received a 5 percent equity interest in the joint venture and an
initial cash distribution of approximately $755 million.
On November 1, 1999, the Corporation signed a definitive agreement to sell
approximately 194,000 acres of its redwood and Douglas fir timberlands in
northern California for a purchase price of approximately $397 million. The sale
is expected to close by the end of the year, subject to the buyer obtaining
required financing and approval by the Corporation's board of directors. In
conjunction with the sale, the Corporation expects to receive notes receivable
from the purchaser for the purchase price. The Corporation expects these notes
receivable to be fully secured by a stand by letter of credit with an
unaffiliated third party. Additionally, the Corporation expects to monetize
these notes through the issuance of notes payable in a private placement during
the first half of 2000. The Corporation expects to use the proceeds of the
monetization to repay debt. The estimated annual harvest from these California
timberlands for 1999 is approximately 83 million board feet of softwood
sawtimber. The estimated annual operating profit and capital expenditures for
1999 related to these timberlands is $30 million and $1 million, respectively.
The Fort Bragg sawmill has a wood supply agreement with The Timber Company
through 2000 that was transferred as part of the sale agreement.
In 1999, the Corporation expects its cash flow from operations, together with
proceeds from any asset sales and available financing sources, to be sufficient
to fund planned capital investments, pay dividends and make scheduled debt
payments.
<PAGE>
16
FINANCING ACTIVITIES. The Corporation's total debt, excluding senior deferrable
notes, increased by $614 million to $6,165 million at October 2, 1999 from
$5,551 million at December 31, 1998. At October 2, 1999 and December 31, 1998,
$5,198 million and $4,568 million, respectively, of such total debt was Georgia-
Pacific Group's debt and $967 million and $983 million, respectively, was The
Timber Company's debt.
In June 1999, the Corporation renegotiated its accounts receivable sale program
and increased the amount outstanding under the program from $280 million to $750
million. The program expires in April 2000. In connection with the acquisition
of Unisource, the Corporation retained former Unisource agreements to sell up to
$150 million of certain qualifying U.S. accounts receivable and up to CN$70
million of certain eligible Canadian accounts receivable. The U.S. agreement
expires in April 2000 and the Canadian agreement expires in May 2004. At October
2, 1999, approximately $947 million was outstanding under the Corporation's and
Unisource's programs in the aggregate. The receivables outstanding under these
programs and the corresponding debt are included as current receivables and
short-term debt, respectively on the accompanying balance sheets. The agreements
are accounted for as a secured borrowing. As collections reduce previously sold
interests, new receivables may be sold.
Also in June 1999, the Board of Directors increased the corporate target debt
level under which management can purchase shares of Georgia-Pacific Group and
The Timber Company common stock on the open market from $5.75 billion to $6.8
billion. In addition, the Board of Directors increased the Georgia-Pacific
Group's target debt level from $4.75 billion to $5.8 billion. The Timber
Company's target debt level remains at $1.0 billion.
On July 22, 1999, the Corporation increased the amount of its unsecured
revolving credit facility from $1.5 billion to $2.0 billion. This unsecured
revolving credit facility is used for direct borrowings and as support for
commercial paper and other short-term borrowings. As of October 2, 1999, $1,239
million of committed credit was available in excess of all short-term borrowings
outstanding under or supported by the facility. The revolving credit agreement
contains certain restrictive covenants, including a maximum leverage ratio
(funded indebtedness, including senior deferrable notes, to earnings before
interest, taxes, depreciation and amortization ("EBITDA")) of 4.5 to 1.0, which
is to be maintained throughout the term of the credit agreement. As of October
2, 1999, the leverage ratio was 2.3 to 1.0.
On July 7, 1999, the Corporation issued 17,250,000 of 7.5% PEPS Units for $862.5
million. Each PEPS Unit had an issue price of $50 and consists of a contract to
purchase shares of Georgia-Pacific Group common stock on or prior to August 16,
2002 and a senior deferrable note of Georgia-Pacific Group due August 16, 2004.
Each purchase contract yields interest of 0.35% per year, paid quarterly, on the
$50 stated amount of the PEPS Unit. Each senior deferrable note yields interest
of 7.15% per year, paid quarterly, until August 16, 2002. On August 16, 2002,
following a remarketing of the senior deferrable notes, the interest rate will
be reset at a rate that will be equal to or greater than 7.15%. The liability
related to the PEPS Units is classified as Senior deferrable notes on the
consolidated balance sheets and will not be included in the debt amount for
purposes of determining the corporate and Georgia-Pacific Group debt targets.
During the first nine months of 1999, approximately $79 million of fixed and
floating rate industrial revenue bonds were replaced, of which $66 million were
refunded by fixed rate instruments and $13 million were refunded by variable
rate instruments.
In connection with the acquisition of Unisource, the Corporation retained former
Unisource industrial revenue bonds in the amount of $9 million and capital
leases in the amount of $12 million. These amounts are included in the
Corporation's total debt.
As of October 2, 1999, the Corporation had registered for sale up to $2.975
billion of debt and equity securities under a shelf registration statement filed
with the Securities and Exchange Commission. The Corporation registered $1.725
billion under such registration statement related to the PEPS Units ($862.5
million of which was received on July 7, 1999 in exchange for senior deferrable
notes, which notes will be converted into $862.5 million of equity (Georgia-
Pacific Group common stock) upon exercise of the purchase contracts. The $862.5
million of cash (less expenses) raised in the sale of the PEPS Units was used to
pay for the acquisition of Unisource. Proceeds from the issuance of securities
under this registration statement will be used for general corporate purposes,
including the reduction of short-term debt, acquisitions, investments in, or
extension of credit to, the Corporation's subsidiaries and the acquisition of
real property.
In connection with the formation of Georgia-Pacific Tissue, Georgia-Pacific
Tissue financed the $755 million initial distribution to Chesapeake with short-
term borrowings from a bank syndicate in October 1999. In the fourth quarter of
1999, the Corporation expects to sell debt under the shelf registration
statement filed with the Securities and Exchange Commission and loan or
contribute the proceeds through the use of one or more subsidiaries to Georgia-
Pacific Tissue in order for Georgia-Pacific Tissue to retire such syndicated
bank debt. This short-term financing temporarily increased the Corporation's
total debt above the $6.8 billion target debt level for repurchasing stock. The
Corporation expects to be able to repurchase stock again in the fourth quarter
once the debt level falls below the target.
On October 7, 1999, approximately $10 million of floating rate industrial
revenue bonds, due December 1, 2025, were replaced by $10 million fixed rate
industrial revenue bonds issued on October 1, 1999.
<PAGE>
17
The Corporation's senior management establishes the parameters of the
Corporation's financial risk, which have been approved by the Board of
Directors. Hedging interest rate exposure through the use of swaps and options
and hedging foreign exchange exposure through the use of forward contracts are
specifically contemplated to manage risk in keeping with the management policy.
Derivative instruments, such as swaps, forwards, options or futures, which are
based directly or indirectly upon interest rates, currencies, equities and
commodities, may be used by the Corporation to manage and reduce the risk
inherent in price, currency and interest rate fluctuations.
The Corporation does not utilize derivatives for speculative purposes.
Derivatives are transaction-specific so that a specific debt instrument,
contract or invoice determines the amount, maturity and other specifics of the
hedge. Counterparty risk is limited to institutions with long-term debt ratings
of A or better.
The table below presents principal (or notional) amounts and related weighted
average interest rates by year of expected maturity for the Corporation's debt
obligations as of October 2, 1999. For obligations with variable interest rates,
the table sets forth payout amounts based on current rates and does not attempt
to project future interest rates.
Georgia-Pacific Corporation and Subsidiaries
<TABLE>
<CAPTION>
(In millions) 1999 2000 2001 2002
- ------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Debt
Commercial paper and other short-term
notes - - - -
Average interest rates - - - -
Notes and debentures - - - $ 300
Average interest rates - - - 10%
Revenue bonds $ 10 $ 24 $ 6 $ 74
Average interest rates 5.3% 4.2% 3.9% 3.8%
Other loans - $ 13 - -
Average interest rates - 8.0% - -
Accounts receivable sale program - - - -
Average interest rates - - - -
Senior deferrable notes - - - -
Average interest rates - - - -
Notional principal amount of interest rate exchange
agreements $ 100 $ 177 - $ 131
Average interest rate paid (fixed) 6.4% 7.7% - 5.9%
Average interest rate received (variable) 5.5% 5.5% - 5.4%
</TABLE>
Georgia-Pacific Corporation and Subsidiaries
<TABLE>
<CAPTION>
Fair value
(In millions) 2003 Thereafter Total July 3, 1999
- ------------- ------ ---------- ------- ------------
<S> <C> <C> <C> <C>
Debt
Commercial paper and other short-term notes - $ 761 $ 761 $ 761
Average interest rates - 5.7% 5.7% 5.7%
Notes and debentures $ 300 $ 2,900 $ 3,500 $ 3,490
Average interest rates 5.7% 8.6% 8.4% 8.0%
Revenue bonds - $ 550 $ 664 $ 573
Average interest rates - 5.3% 5.1% 8.0%
Other loans $ 14 - $ 27 $ 27
Average interest rates 5.7% - 6.8% 7.3%
Accounts receivable sale program - $ 947 $ 947 $ 947
Average interest rates - 5.6% 5.6% 5.6%
Senior deferrable notes - $ 863 $ 863 $ 870
Average interest rates - 7.15% 7.15% 7.3%
Notional principal amount of interest rate
exchange agreements $ 300 - $ 708 $ 4
Average interest rate paid (fixed) 5.9% - 6.4% 6.4%
Average interest rate received (variable) 5.9% - 5.7% 5.7%
</TABLE>
The Corporation has the intent and ability to refinance commercial paper, other
short-term notes and the accounts receivable sale program as they mature. The
Corporation intends to re-market the senior deferrable notes on or before August
16, 2002 at an interest rate that will be equal to or greater than 7.15%; thus
extending the maturity of the senior deferrable notes to August 16, 2004.
Therefore, maturities of these obligations are reflected as cash flows expected
to be made after 2003. The fair value of interest rate exchange agreements
exclude amounts used to determine the fair value of related notes and
debentures.
At October 2, 1999, the Corporation's weighted average interest rate on its
debt, excluding the senior deferrable notes, was 7.0% including the accounts
receivable sale program and outstanding interest rate exchange agreements. At
October 2, 1999, these interest rate exchange agreements effectively converted
approximately $708 million of floating rate obligations with a weighted average
interest rate of 5.7% to fixed rate obligations with an average effective
interest rate of 6.4%. These agreements have a weighted average maturity of
approximately 2.5 years. As of October 2, 1999, the Corporation's total floating
rate debt, including the accounts receivable sale program, exceeded related
interest rate exchange agreements by $1.6 billion.
The Corporation also enters into foreign currency exchange agreements and
commodity futures and swaps, the amounts of which were not material to the
consolidated financial position of the Corporation at October 2, 1999.
During the first nine months of 1999, Georgia-Pacific Group purchased on the
open market approximately 5,994,000 shares of Georgia-Pacific Group common stock
at an aggregate price of $247 million ($41.21 average per share). Of these
repurchased shares, approximately 5,969,000 shares were held as treasury and
25,000 shares were purchased during the first nine months of 1999 and settled
after October 2, 1999. During the first nine months of 1999, The Timber Company
purchased on the open market approximately 5,046,000 shares of The Timber
Company common stock, all of which were held as treasury stock at October 2,
1999, at an aggregate price of $124 million ($24.57 average per share).
During the first nine months of 1998, the Georgia-Pacific Group purchased in
private transactions and on the open market approximately 4,794,000 shares of
Georgia-Pacific Group common stock at an aggregate price of $277 million ($57.78
average per share). Of these repurchased shares, approximately 3,586,000 shares
were held as treasury, 284,000 shares were purchased during the first nine
months of 1998 and settled after September 30, 1998, and 924,000 shares were
cancelled. In addition, during the first nine months of 1998, The Timber Company
purchased on the open market 4,860,000 shares of The Timber Company common stock
at an aggregate price of $105 million ($21.60 average per share). Of these
repurchased shares, approximately 4,829,000 shares were held as treasury and
31,000 shares were purchased during the first nine months of 1998 and settled
after September 30, 1998.
<PAGE>
18
Subsequent to October 2, 1999 through November 3, 1999, the Corporation
purchased on the open market approximately 178,000 shares of the Georgia-Pacific
Group stock at an aggregate price of $7 million ($38.12 average per share) and
approximately 53,000 shares of The Timber Company stock at an aggregate price of
$1 million ($23.68 average per share). The Corporation expects to repurchase
shares of the Georgia-Pacific Group and The Timber Company stock throughout 1999
as long as debt levels are below the established thresholds.
During the first nine months of 1999, the Corporation received $106 million and
$9 million from the exercise of stock options of Georgia-Pacific Group common
stock and The Timber Company common stock, respectively.
During the first nine months of 1999 and 1998, the Corporation paid $128 million
and $137 million, respectively, in dividends. On May 4, 1999, the Board of
Directors declared a two-for-one split of Georgia-Pacific Group's common stock
in the form of a special dividend to shareholders of record on May 14, 1999. The
special dividend was paid as one share of Georgia-Pacific Group common stock for
each share of Georgia-Pacific Group outstanding on June 3, 1999. A total of
95,126,911 additional shares were issued in conjunction with the stock split.
The Georgia-Pacific Group's par value of $0.80 remained unchanged. As a result,
$76 million of stockholders' equity was reclassified from Additional paid-in
capital to Common stock. All historical share and per share amounts have been
restated to reflect retroactively the stock split.
OTHER. In July 1999, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 137, providing for a one year delay of the effective date of SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities"("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instrument and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities on the balance sheet
and measure those instruments at fair value. Georgia-Pacific Corporation will be
required to adopt SFAS No. 133 in 2001. Management is evaluating the effect of
this statement on Georgia-Pacific's derivative instruments: primarily interest
rate swaps, foreign currency forward contracts and long-term purchase
commitments. The impact of adjustments to fair value is not expected to be
material to the Corporation's consolidated financial position.
The Corporation has worked to resolve the effects of the Year 2000 problem on
its information systems, the operating systems used in its manufacturing
operations as well as its facilities systems. The Year 2000 problem, which is
common to most businesses, concerns the inability of such systems to properly
recognize and process dates and date-sensitive information on and beyond January
1, 2000. In 1996, the Corporation began a company wide assessment of the
vulnerability of its systems to the Year 2000 problem. Based on such assessment,
the Corporation developed a Year 2000 plan, under which all key systems were
tested, and noncompliant software or technology was modified or replaced. The
Corporation is continuing to survey and assess the Year 2000 readiness status
and compatibility of customers' and suppliers' systems and processes that
interface with the Corporation's systems or could otherwise impact the
Corporation's operations.
<PAGE>
19
The Corporation completed the necessary revisions and unit testing to most
systems and processes in 1998 with the few remaining systems completed in March
1999. Full integration testing and verification of such systems and processes
for Year 2000 readiness was completed in September 1999 and follow-up
reverification testing will continue as necessary throughout the remainder of
1999 and into 2000. At the end of September 1999, 99.8 percent of the
Corporation's information systems are considered fully Year 2000 ready, and less
than 1 percent are in the final stages of full integration testing. The systems
in final stages of testing are not considered critical. Early in 1998, the
Corporation completed an inventory of the process control systems and embedded
chips used in its manufacturing operations and believes that only a small
percentage of such systems and chips could be subject to Year 2000 problems. At
the end of September 1999, over 97 percent of the process control and embedded
chip inventory has been fully analyzed and remediated as necessary with the
remaining 3 percent of the inventory in the repair or test phase. Final post-
repair testing on these non-critical outstanding items is scheduled to be
complete by mid November 1999. Due to system acquisitions and the number and
complexity of existing systems, the Corporation expects some continuing
additions of noncritical systems to the inventory list.
The Corporation has contacted each of its critical suppliers and service
providers including government services, transportation, energy and
communication providers to ascertain their respective levels of readiness to
address and remediate Year 2000 problems and is continuing to review their
responses and conduct follow-up reviews as necessary. The Corporation has
identified and contacted critical customers to ascertain their respective levels
of Year 2000 readiness and will continue to assess the need for further testing
with customers as appropriate. While the Corporation currently believes that it
will be able to modify or replace its affected systems in time to minimize any
detrimental effects on its operations, failure to do so, or the failure of the
Corporation's major customers, suppliers and service providers to modify or
replace their affected systems, could have a material adverse impact on the
Corporation's results of operations, liquidity or consolidated financial
position in the future. The most reasonably likely worst-case scenario of
failure by the Corporation or its customers or suppliers to resolve the Year
2000 problem would be a temporary slowdown or cessation of manufacturing
operations at one or more of the Corporation's facilities, including its limited
foreign operations, and a temporary inability on the part of the Corporation to
process orders and billings in a timely manner and to deliver finished products
to customers. The Corporation's individual business units and corporate offices
have developed plans for various contingency options, including identification
of alternate suppliers, vendors and service providers as well as direct access
to qualified vendor technical support and manual alternatives to systems
operations. These options will allow them to minimize the risks of any
unresolved Year 2000 problems on their operations and to minimize the effect of
any unforeseen Year 2000 failures in areas outside the Corporation's control.
The primary goal of the Corporation's contingency plan is to minimize the
adverse impact to personnel safety, environmental safety and assets.
The Corporation currently estimates the incremental cost of the work needed to
resolve the Year 2000 problem at approximately $32 million (including
approximately $4 million of capital costs), of which $24 million has been
incurred to date and $1 million is included for the impact of contingency
activities and unexpected events. As the Corporation has effectively completed
its Year 2000 readiness efforts, prior estimates of total costs and
contingencies for unknowns have been adjusted accordingly. In addition, the
Corporation expects to incur internal costs totaling approximately $20 million
related to the Year 2000 problem, of which approximately $16 million has been
incurred to date. Although the costs were not as high as expected because of
warranties or lower cost corrections, the bulk of the incremental costs relate
to replacement or modification of affected process control systems in the
Corporation's manufacturing operations and the cost of creating and maintaining
isolated test environments for its information systems. The majority of the
internal costs relates to code or process system assessment, remediation and
testing and is projected to be incurred through 1999 and first quarter 2000.
These incremental and internal costs will be expensed as incurred, except for
new systems purchased that will be capitalized in accordance with corporate
policy. Such costs may be material to the Corporation's results of operations in
one or more fiscal quarters or years but are not expected to have a material
adverse effect on the long-term results of operations, liquidity or consolidated
financial position of the Corporation.
The Corporation has reviewed Unisource's Year 2000 project methodology and
progress, including its foreign operations. All mission critical systems have
been remediated and tested and final certification was completed in October
1999. Unisource has contacted its technology and service providers as well as
its key customers and suppliers to determine the extent to which their systems
are Year 2000 ready and the extent to which Unisource could be affected if they
are not. Contingency planning activities are ongoing and are scheduled to be
reviewed by executive management by mid-November. Unisource estimates the total
incremental cost of its Year 2000 project to be approximately $13 million. Of
this amount, approximately $12 million has been incurred through October 2,
1999. Unisource expects to incur internal costs totaling approximately $1
million related to the Year 2000 problem, $0.7 million of which was incurred
through October 2, 1999.
The Corporation has reviewed Wisconsin Tissue's Year 2000 project methodology
and progress, including its foreign operations. All mission critical systems
have been remediated and tested and final certification has been completed.
Wisconsin Tissue has contacted its technology and service providers as well as
its key customers and suppliers to determine the extent to which their systems
are Year 2000 ready and the extent to which Wisconsin Tissue could be affected
if they are not. Contingency plans have been developed.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. The statements under "Management's
Discussion and Analysis" and other statements contained herein that are not
historical facts are forward-looking statements (as such term is defined under
the Private Securities Litigation Reform Act of 1995) based on current
expectations. The accuracy of such statements is subject to a number of risks,
uncertainties and assumptions. In addition to the risks, uncertainties and
assumptions discussed elsewhere herein, factors that could cause or contribute
to actual results differing materially from such forward-looking statements
include the following: the Corporation's production capacity continuing to
exceed demand for its pulp and paper products, necessitating market-related
downtime; the ability of the Corporation, and its customers and suppliers, to
address the Year 2000 problem in a timely and efficient manner; changes in the
productive capacity and production levels of other building products and pulp
and paper producers; the effect on the Corporation of changes in environmental
and pollution control laws and regulations; the general level of economic
activity in U.S. and export markets, particularly the Asian markets; variations
in the level of housing starts and home remodeling in the United States;
fluctuations in interest rates and currency exchange rates; the availability and
cost of wood fiber; material variation in the Corporation's earnings or cash
flow as a result of the Unisource acquisition, including its inability to
integrate and rationalize the business of Unisource into the Corporation in a
manner that realizes cost savings and synergies, and effective continuing
implementation of the Unisource restructuring announced July 29, 1998; and other
risks, uncertainties and assumptions discussed in the Corporation's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, the
Corporation's Quarterly Report on Form 10-Q/A for the quarter ended July 3,
1999, and the Corporation's Form 8-K dated October 17, 1996.
For a discussion of commitments and contingencies refer to Note 12 of the Notes
to Consolidated Financial Statements.
<PAGE>
20
COMBINED STATEMENTS OF INCOME (Unaudited)
Georgia-Pacific Corporation--Georgia-Pacific Group
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- -------------------------
October 2, Sept. 30, October 2, Sept. 30,
(In millions, except per share amounts) 1999 1998 1999 1998
- --------------------------------------- ------- ------- -------- -------
<S> <C> <C> <C> <C>
Net sales $ 5,483 $ 3,368 $ 12,644 $ 9,840
-------- -------- -------- -------
Costs and expenses
Cost of sales excluding depreciation, amortization and
cost of timber harvested shown below
The Timber Company 30 27 75 70
Third parties 4,178 2,540 9,392 7,501
-------- -------- -------- -------
Total cost of sales 4,208 2,567 9,467 7,571
-------- -------- -------- -------
Depreciation, amortization and cost
of timber harvested
The Timber Company 60 78 190 238
Third parties 248 250 701 720
-------- -------- -------- -------
Total depreciation, amortization and cost of
timber harvested 308 328 891 958
-------- -------- -------- -------
Selling and distribution 263 145 547 412
General and administrative 218 157 550 452
Interest 116 96 298 286
-------- -------- -------- -------
Total costs and expenses 5,113 3,293 11,753 9,679
-------- -------- -------- -------
Income before income taxes 370 75 891 161
and extraordinary item
Provision for income taxes 140 36 350 76
-------- -------- -------- -------
Income before extraordinary item 230 39 541 85
Extraordinary item, net of taxes - - - (13)
-------- -------- -------- -------
Net income $ 230 $ 39 $ 541 $ 72
======== ======== ======== =======
Basic per common share:
Income before extraordinary item $ 1.34 $ 0.22 $ 3.15 $ 0.47
Extraordinary item, net of taxes - - - (0.07)
-------- -------- -------- -------
Net income $ 1.34 $ 0.22 $ 3.15 $ 0.40
======== ======== ======== =======
Diluted per common share:
Income before extraordinary item $ 1.31 $ 0.22 $ 3.07 $ 0.46
Extraordinary item, net of taxes - - - (0.07)
-------- -------- -------- -------
Net income $ 1.31 $ 0.22 $ 3.07 $ 0.39
======== ======== ======== =======
Average number of shares outstanding:
Basic 171.4 180.5 171.9 181.5
Diluted 175.9 181.0 176.2 183.2
======== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
21
COMBINED STATEMENTS OF CASH FLOWS (Unaudited)
Georgia-Pacific Corporation--Georgia-Pacific Group
<TABLE>
<CAPTION>
Nine Months Ended
------------------------
(In millions) October 2, 1999 Sept. 30, 1998
- ---------------- --------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 541 $ 72
Adjustments to reconcile net income to
cash provided by operations:
Depreciation 547 557
Cost of timber harvested - The Timber Company 190 238
Cost of timber harvested - Third Parties 105 106
Deferred income taxes (24) 53
Amortization of goodwill 49 45
Stock compensation programs (3) 8
Gain on sales of assets - 12
Increase in receivables (400) (36)
(Increase) decrease in inventories (26) 67
(Increase) decrease in other working capital 97 (49)
Change in other assets and other
long-term liabilities (56) 45
--------------- --------------
Cash provided by operations 1,020 1,118
--------------- --------------
Cash flows from investment activities
Property, plant and equipment investments (410) (386)
Timber purchases from The Timber Company (179) (252)
Timber contract purchases from third parties (95) (118)
Acquisitions (897) (102)
Proceeds from sales of assets 15 53
Other 26 1
--------------- --------------
Cash used for investment activities (1,540) (804)
--------------- --------------
Cash flows from financing activities
(Repayments of) additions to long-term debt (79) 17
Common stock repurchased (246) (272)
Issuance of senior deferrable notes 863 -
Cash dividends paid (65) (68)
Proceeds from option plan exercises 106 8
--------------- --------------
Cash provided by (used for) financing activities 579 (315)
--------------- --------------
Increase (decrease) in cash 59 (1)
Balance at beginning of period 5 8
--------------- --------------
Balance at end of period $ 64 7
=============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
22
COMBINED BALANCE SHEETS (Unaudited)
Georgia-Pacific Corporation--Georgia-Pacific Group
<TABLE>
<CAPTION>
(In millions) October 2, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Current assets
Cash $ 64 $ 5
Receivables, less allowances of $26
and $25, respectively 2,391 1,231
Inventories 1,739 1,278
Deferred income tax assets 61 61
Other current assets 132 65
----------- ------------
Total current assets 4,387 2,640
----------- ------------
Timber contracts 60 78
----------- ------------
Property, plant and equipment
Land and improvements, buildings,
machinery and equipment and construction
in progress, at cost 14,928 14,387
Accumulated depreciation (8,602) (8,162)
----------- ------------
Property, plant and equipment, net 6,326 6,225
----------- ------------
Goodwill, net 2,430 1,677
----------- ------------
Other assets 1,050 918
----------- ------------
Total assets $ 14,253 $ 11,538
=========== ============
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt $ 1,701 $ 1,173
Accounts payable 964 553
Accrued compensation 299 243
Other current liabilities 629 412
----------- ------------
Total current liabilities 3,593 2,381
----------- ------------
Long-term debt, excluding current portion 3,497 3,395
----------- ------------
Senior deferrable notes 863 -
----------- ------------
Other long-term liabilities 1,720 1,566
----------- ------------
Deferred income tax liabilities 1,009 987
----------- ------------
Commitments and contingencies
Shareholders' equity 3,571 3,209
----------- ------------
Total liabilities and shareholders' equity $ 14,253 $ 11,538
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
23
COMBINED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Georgia-Pacific Corporation--Georgia-Pacific Group
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- -------------------------
October 2, Sept. 30, October 2, Sept. 30,
(In millions) 1999 1998 1999 1998
- ------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $ 230 $ 39 $ 541 $ 72
Other comprehensive income (loss) before tax:
Foreign currency translation adjustments (3) (13) 7 (19)
Income tax (expense) benefit related to
items of other comprehensive income 1 5 (3) 7
------ ------ ------- -------
Comprehensive income $ 228 $ 31 $ 545 $ 60
====== ===== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
NOTES TO COMBINED FINANCIAL STATEMENTS (Unaudited)
Georgia-Pacific Corporation--Georgia-Pacific Group
1. PRINCIPLES OF PRESENTATION. The combined financial statements include the
accounts of Georgia-Pacific Group and subsidiaries. All significant
intercompany balances and transactions are eliminated in consolidation. The
interim financial information included herein is unaudited; however, such
information reflects all adjustments which are, in the opinion of
management, necessary for a fair presentation of the Georgia-Pacific
Group's financial position, results of operations, and cash flows for the
interim periods. All such adjustments are of a normal, recurring nature
except for the item discussed in Note 2 below. Certain 1998 amounts have
been reclassified to conform with the 1999 presentation. The Georgia-
Pacific Group's combined financial statements should be read in conjunction
with the Corporation's consolidated financial statements and The Timber
Company's combined financial statements.
On or about April 22, 1999, the Georgia-Pacific Group determined to change
its fiscal year from December 31 to end on the Saturday closest to December
31. Additionally, the Georgia-Pacific Group reports its quarterly periods
on a 13-week basis ending on a Saturday. The impact of one less day and two
additional days on the three months and nine months ended October 2, 1999,
respectively, was not material. There will be no transition period on which
to report.
2. EXTRAORDINARY ITEM. The Corporation redeemed approximately $600 million of
its outstanding debt during the first nine months of 1998. As a result, an
after-tax extraordinary charge of $13 million ($0.07 per share) was
allocated to the Georgia-Pacific Group based on the ratio of the Georgia-
Pacific Group's debt to the Corporation's total debt, of which $12 million
was recognized in the first quarter of 1998 and $1 million was recognized
in the second quarter of 1998.
3. EARNINGS PER SHARE. The Corporation's common stock was redesignated in
December 1997 to reflect separately the performance of the Corporation's
pulp, paper and building products businesses, which are now known as
Georgia-Pacific Group. A separate class of common stock was distributed to
reflect the performance of the Corporation's timber operating group, which
is now known as The Timber Company. Basic earnings per share is computed
based on net income and the weighted average number of common shares
outstanding. Diluted earnings per share reflect the annual issuance of
common shares under long-term incentive stock option and stock purchase
plans. The computation of diluted earnings per share does not assume
conversion or exercise of securities that would have an antidilutive effect
on earnings per share.
The following table provides earnings and per share data for the Georgia-
Pacific Group for 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- -------------------------
October 2, Sept. 30, October 2, Sept. 30,
(In millions, except per share amounts) 1999 1998 1999 1998
- -------------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Basic and diluted income available to
shareholders (numerator):
Income before extraordinary item $ 230 $ 39 $ 541 $ 85
Extraordinary item, net of taxes - - - (13)
--------- ------- -------- -------
Net income $ 230 $ 39 $ 541 $ 72
========= ======= ======== =======
Shares (denominator):
Average shares outstanding 171.4 180.5 171.9 181.5
Dilutive securities:
Stock incentive and option plans 4.0 0.5 3.8 1.6
Employee stock purchase plans 0.5 - 0.5 0.1
--------- ------- -------- -------
Total assuming conversion 175.9 181.0 176.2 183.2
========= ======= ======== =======
Basic per share amounts:
Income before extraordinary item $ 1.34 $ 0.22 $ 3.15 $ 0.47
Extraordinary item, net of taxes - - - (0.07)
--------- ------- -------- -------
Net income $ 1.34 $ 0.22 $ 3.15 $ 0.40
========= ======= ======== =======
Diluted per share amounts:
Income before extraordinary item $ 1.31 $ 0.22 $ 3.07 $ 0.46
Extraordinary item, net of taxes - - - (0.07)
--------- ------- -------- -------
Net income $ 1.31 $ 0.22 $ 3.07 $ 0.39
========= ======= ======== =======
</TABLE>
<PAGE>
24
4. INVENTORY VALUATION. Inventories include costs of materials, labor, and
plant overhead. The Georgia-Pacific Group uses the dollar value pool method
for computing LIFO inventories. The major components of inventories were as
follows:
<TABLE>
<CAPTION>
October 2, December 31,
(In millions) 1999 1998
- ------------- ---------- ------------
<S> <C> <C>
Raw materials $ 389 $ 417
Finished goods 1,242 760
Supplies 318 310
LIFO reserve (210) (209)
---------- -----------
Total inventories $ 1,739 $ 1,278
========== ===========
</TABLE>
5. ACQUISITIONS. At the end of the second quarter of 1999, the Georgia-
Pacific Group, through its wholly owned subsidiary Atlanta Acquisition
Corp., conducted a tender offer for all of the outstanding shares of common
stock of Unisource, the largest independent marketer and distributor of
printing and imaging paper and supplies in North America. Pursuant thereto,
the Georgia-Pacific Group acquired 90.7% of the then outstanding shares of
Unisource. On July 6, 1999, Atlanta Acquisition Corp. was merged with and
into Unisource and by virtue of such merger, shares of Unisource that were
not tendered to the Georgia-Pacific Group (other than shares held by
Unisource and the Georgia-Pacific Group and its subsidiaries) were
converted into the right to receive $12.00 per Unisource share in cash,
subject to dissenters rights. The Georgia-Pacific Group is purchasing the
remaining outstanding shares of Unisource as they are delivered to the
exchange agent for cancellation. Through October 2, 1999, the Georgia-
Pacific Group paid approximately $828 million for shares of Unisource.
Unisource's results of operations were consolidated with those of the
Georgia-Pacific Group beginning July 4, 1999. The Georgia-Pacific Group has
accounted for this transaction using the purchase method to record a new
cost basis for assets acquired and liabilities assumed. The allocation of
the purchase price and acquisition costs to the assets acquired and
liabilities assumed is preliminary as of October 2, 1999, and is subject to
change pending finalization of studies of fair value and the finalization
of management's plans. The Georgia-Pacific Group has begun to assess and
formulate plans to restructure existing Unisource activities, including the
consolidation of certain distribution centers, closure of the Unisource
headquarters facility, termination of redundant headcount and the
relocation of certain administrative functions. In connection with the
acquisition of Unisource, the Georgia-Pacific Group assumed liabilities
totaling approximately $84 million for employee termination and relocation
costs, and $15 million for facility closure costs. The Georgia-Pacific
Group has not yet completed its evaluation of Unisource activities;
accordingly, finalization of the Georgia-Pacific Group's plans may result
in additional liabilities for termination, relocation or facility closure
costs that could increase the amount of liabilities assumed in the
acquisition. The difference between the purchase price and the fair market
value of the assets acquired and liabilities assumed was recorded as
goodwill and will be amortized over 40 years. The preliminary allocation of
the purchase price of the acquisition is summarized as follows:
<TABLE>
<CAPTION>
(In millions)
-------------
<S> <C>
Current assets $ 1,061
Property, plant and equipment 225
Other non current assets 16
Goodwill 767
Liabilities (1,241)
--------
Net cash paid for Unisource $ 828
========
</TABLE>
The following unaudited pro forma financial data has been prepared assuming
that the acquisition of Unisource and related financings were consummated
on January 1, 1998. This pro forma financial data is presented for
informational purposes and is not necessarily indicative of the operating
results that would have occurred had the acquisition been consummated on
January 1, 1998, nor does it include adjustments for expected synergies or
cost savings. Accordingly, this pro forma data is not necessarily
indicative of future operations.
<TABLE>
<CAPTION>
Nine Months Ended
------------------------
October 2, Sept. 30,
(In millions, except per share amounts) 1999 1998
--------------------------------------- ------ -------
<S> <C> <C>
Net sales $ 17,364 $15,087
Income before extraordinary items $ 626 $ 154
Net income $ 626 $ 141
Basic income before extraordinary
items per share $ 3.64 $ 0.85
Diluted income before extraordinary
items per share $ 3.55 $ 0.84
Basic earnings per share $ 3.64 $ 0.78
Diluted earnings per share $ 3.55 $ 0.77
</TABLE>
The 1998 pro forma financial data includes non-recurring restructuring and
asset write-down charges of $202 million ($155 million after tax) taken by
Unisource in the first nine months of 1998.
<PAGE>
25
In addition, during the first nine months of 1999, the Georgia-Pacific
Group completed the acquisition of a packaging plant, four treated lumber
facilities and a chemical business for a total consideration of
approximately $69 million in cash. The results of operations of the
packaging plant and treated lumber facilities were consolidated with those
of the Georgia-Pacific Group beginning in the second quarter of 1999. The
operating results of the chemical business were consolidated with those of
the Georgia-Pacific Group beginning in the third quarter of 1999. The
Georgia-Pacific Group has accounted for these business combinations using
the purchase method to record a new cost basis for assets acquired and
liabilities assumed.
Effective October 3, 1999, the Georgia-Pacific Group and Chesapeake
completed a previously announced agreement to create Georgia-Pacific
Tissue, a joint venture in which the two companies have combined their
away-from-home tissue businesses. The Georgia-Pacific Group contributed
substantially all of the assets of its commercial tissue business to the
joint venture. The Georgia-Pacific Group controls and manages the joint
venture and owns 95 percent of the equity in joint venture. Chesapeake
contributed the assets of its Wisconsin Tissue business to the joint
venture, for which it received a 5 percent equity interest in the joint
venture and an initial cash distribution of approximately $755 million. The
results of the Wisconsin Tissue operations will be consolidated with those
of the Georgia-Pacific Group beginning on October 4, 1999.
On June 30, 1998, the Georgia-Pacific Group completed its acquisition of
CeCorr Inc., a leading independent producer of corrugated sheets in the
United States. On June 30, 1998, the Georgia-Pacific Group paid
approximately $93 million in cash (net of $2 million of cash acquired) and
issued approximately 3.2 million shares of Georgia-Pacific Group stock
valued at approximately $28.94 per share for all the outstanding shares of
CeCorr. In addition, the Georgia-Pacific Group assumed approximately $92
million of CeCorr's debt, of which $34 million was owed to the Corporation
($58 million net debt assumed). On July 2, 1998, a former owner of CeCorr
exercised his right to resell to the Georgia-Pacific Group approximately
2.2 million shares of Georgia-Pacific Group stock issued in the
transaction. CeCorr's results of operations were consolidated with those of
the Georgia-Pacific Group beginning July 1, 1998. The Georgia-Pacific Group
accounted for the CeCorr acquisition using the purchase method to record a
new cost basis for assets acquired and liabilities assumed.
6. DEBT. In June 1999, the Corporation renegotiated its accounts receivable
sale program and increased the amount outstanding under the program from
$280 million to $750 million. The program expires in April 2000. In
connection with the acquisition of Unisource, the Corporation retained
former Unisource agreements to sell up to $150 million of certain
qualifying U.S. accounts receivable and up to CN$70 million of certain
eligible Canadian accounts receivable. The U.S. agreement expires in April
2000 and the Canadian agreement expires in May 2004. At October 2, 1999,
approximately $947 million was outstanding under the Corporation's and
Unisource's programs in the aggregate. The receivables outstanding under
these programs and the corresponding debt are included as current
receivables and short-term debt, respectively on the accompanying balance
sheets. The agreements are accounted for as a secured borrowing. As
collections reduce previously sold interests, new receivables may be sold.
Also in June 1999, the Board of Directors increased the corporate target
debt level under which management can purchase shares of Georgia-Pacific
Group and The Timber Company common stock on the open market from $5.75
billion to $6.8 billion. In addition, the Board of Directors increased the
Georgia-Pacific Group's target debt level from $4.75 billion to $5.8
billion. The Timber Company's target debt level remains at $1.0 billion.
On July 22, 1999, the Corporation increased the amount of its unsecured
revolving credit facility from $1.5 billion to $2.0 billion. This unsecured
revolving credit facility is used for direct borrowings and as support for
commercial paper and other short-term borrowings. As of October 2, 1999,
$1,239 million of committed credit was available in excess of all short-
term borrowings outstanding under or supported by the facility. The
revolving credit agreement contains certain restrictive covenants,
including a maximum leverage ratio (funded indebtedness, including senior
deferrable notes, to earnings before interest, taxes, depreciation and
amortization ("EBITDA")) of 4.5 to 1.0, which is to be maintained
throughout the term of the credit agreement. As of October 2, 1999, the
leverage ratio was 2.3 to 1.0.
During the second quarter of 1999, the Corporation registered for sale up
to $2.975 billion of debt and equity securities under a shelf registration
statement filed with the Securities and Exchange Commission. The
Corporation registered $1.725 billion under such registration statement
related to the PEPS Units ($862.5 million of which was received on July 7,
1999 in exchange for senior deferrable notes, which notes will be converted
into $862.5 million of equity (Georgia-Pacific Group common stock) upon
exercise of the purchase contract) (see Note 7). The $862.5 million of cash
(less expenses) raised in this sale of the PEPS Units was used to pay for
the acquisition of Unisource.
In connection with the formation of Georgia-Pacific Tissue (see Note 5),
Georgia-Pacific Tissue financed the $755 million initial distribution to
Chesapeake with short-term borrowings from a bank syndicate in October
1999. In the fourth quarter of 1999, the Corporation expects to sell debt
under the shelf registration statement filed with the Securities and
Exchange Commission and loan or contribute the proceeds through the use of
one or more subsidiaries to Georgia-Pacific Tissue in order for Georgia-
Pacific Tissue to retire such syndicated bank debt. This short-term
financing temporarily increased the Corporation's total debt above the $6.8
billion target debt level for repurchasing stock. The Corporation expects
to be able to repurchase stock again in the fourth quarter once the debt
level falls below the target.
7. SENIOR DEFERRABLE NOTES. On July 7, 1999, the Corporation issued 17,250,000
of 7.5% PEPS Units for $862.5 million. Each PEPS Unit had an issue price of
$50 and consists of a contract to purchase shares of Georgia-Pacific Group
common stock on or prior to August 16, 2002 and a senior deferrable note of
Georgia-Pacific Group due August 16, 2004. Each purchase contract yields
interest of 0.35% per year, paid quarterly, on the $50 stated amount of the
PEPS Unit. Each senior deferrable note yields interest of 7.15% per year,
paid quarterly, until August 16, 2002. On August 16, 2002, following a
remarketing of the senior deferrable notes, the interest rate will be reset
at a rate that will be equal to or greater than 7.15%. The liability
related to the PEPS Units is classified as Senior deferrable notes on the
condensed balance sheets and will not be included in the debt amount for
purposes of determining the corporate and Georgia-Pacific Group debt
targets.
8. STOCK SPLIT. On May 4, 1999, the Board of Directors declared a two-for-one
split of Georgia-Pacific Group's common stock in the form of a special
dividend to shareholders of record on May 14, 1999. The special dividend
was paid as one share of Georgia-Pacific Group common stock for each share
of Georgia-Pacific Group outstanding on June 3, 1999. A total of 95,126,911
additional shares were issued in conjunction with the stock split. The
Georgia-Pacific Group's par value of $0.80 remained unchanged. As a result,
$76 million of stockholders' equity was reclassified from Additional paid-
in capital to Common stock. All historical share and per share amounts have
been restated to reflect retroactively the stock split.
9. SHARE REPURCHASES. During the first nine months of 1999, Georgia-Pacific
Group purchased on the open market approximately 5,994,000 shares of
Georgia-Pacific Group common stock at an aggregate price of $247 million
($41.22 average per share). Of these repurchased shares, approximately
5,969,000 shares were held as treasury and 25,000 shares were purchased
during the first nine months of 1999 and settled after October 2, 1999.
During the first nine months of 1998, the Georgia-Pacific Group purchased
in private transactions and on the open market approximately 4,794,000
shares of Georgia-Pacific Group common stock at an aggregate price of $277
million ($57.78 average per share). Of these repurchased shares,
approximately 3,586,000 shares were held as treasury, 284,000 shares were
purchased during the first nine months of 1998 and settled after September
30, 1998, and 924,000 shares were cancelled.
10. COMMITMENTS AND CONTINGENCIES. The Georgia-Pacific Group is subject to
various legal proceedings and claims that arise in the ordinary course of
its business. As is the case with other companies in similar industries,
the Georgia-Pacific Group faces exposure from actual or potential claims
and legal proceedings involving environmental matters. Liability insurance
in effect during the last several years provides very limited coverage for
environmental matters.
The following sets forth legal proceedings and claims arising out of the
operations of the Georgia-Pacific Group to which the Corporation is a
party. The holders of Georgia-Pacific Group stock are shareholders of the
Corporation and are subject to all of the risks associated with an
investment in the Corporation, including any legal proceedings and claims
involving The Timber Company.
The Corporation is involved in environmental remediation activities at
approximately 184 sites, both owned by the Corporation and owned by others,
where it has been notified that it is or may be a potentially responsible
party under the Comprehensive Environmental Response, Compensation and
Liability Act or similar state "superfund" laws. Of the known sites in
which it is involved, the Corporation estimates that approximately 49
percent are being investigated, approximately 27 percent are being
remediated and approximately 24 percent are being monitored (an activity
that occurs after either site investigation or remediation has been
completed). The ultimate costs to the Corporation for the investigation,
remediation and monitoring of many of these sites cannot be predicted with
certainty, due to the often unknown magnitude of the pollution or the
necessary cleanup, the varying costs of alternative cleanup methods, the
amount of time necessary to accomplish such cleanups, the evolving nature
of cleanup technologies and government regulations, and the inability to
determine the Corporation's share of multiparty cleanups or the extent to
which contribution will be available from other parties. The Corporation
has established reserves for environmental remediation costs for these
sites in amounts that it believes are probable and reasonably estimable.
Based on analysis of currently available information and previous
experience with respect to the cleanup of hazardous substances, the
Corporation believes it is reasonably possible that costs associated with
these sites may exceed current reserves by amounts that may prove
insignificant or that could range, in the aggregate, up to approximately
$56 million. This estimate of the range of reasonably possible additional
costs is less certain than the estimates upon which reserves are based, and
in order to establish the upper limit of such range, assumptions least
favorable to the Corporation among the range of reasonably possible
outcomes were used. In estimating both its current reserve for
environmental remediation and the possible range of additional costs, the
Corporation has not assumed it will bear the entire cost of remediation of
every site to the exclusion of other known potentially responsible parties
who may be jointly and severally liable. The ability of other potentially
responsible parties to participate has been taken into account, based
generally on the parties' financial condition and probable contribution on
a per site basis.
<PAGE>
26
The Corporation and many other companies are defendants in suits brought in
various courts around the nation by plaintiffs who allege that they have
suffered personal injury as a result of exposure to asbestos-containing
products. These suits allege a variety of lung and other diseases based on
alleged exposure to products previously manufactured by the Corporation. In
many cases, the plaintiffs are unable to demonstrate that they have
suffered any compensable loss as a result of such exposure, or that any
injuries they have incurred in fact resulted from exposure to the
Corporation's products.
The Corporation generally settles asbestos cases for amounts it considers
reasonable given the facts and circumstances of each case. The amounts it
has paid to date to defend and settle these cases have been substantially
covered by product liability insurance. The Corporation is currently
defending claims of approximately 77,000 such plaintiffs as of November 3,
1999 and anticipates that additional suits will be filed against it over
the next several years. The Corporation has insurance available in amounts
that it believes are adequate to cover substantially all of the reasonably
foreseeable damages and settlement amounts arising out of claims and suits
currently pending. The Corporation has further insurance coverage available
for the disposition of suits that may be filed against it in the future,
but there can be no assurance that the amounts of such insurance will be
adequate to cover all future claims. The Corporation has established
reserves for liabilities and legal defense costs it believes are probable
and reasonably estimable with respect to pending suits and claims, and has
also established a receivable for expected insurance recoveries.
On May 6, 1998, suit was filed in state court in Columbus, Ohio, against
the Corporation and Georgia-Pacific Resins, Inc., a wholly owned subsidiary
of the Corporation. The lawsuit was filed by eight plaintiffs who seek to
represent a class of individuals who at any time from 1985 to the present
lived, worked, resided, owned, frequented or otherwise occupied property
located within a three-mile radius of the Corporation's resins
manufacturing operation in Columbus, Ohio. The lawsuit alleges that the
individual plaintiffs and putative class members have suffered personal
injuries and/or property damage because of (i) alleged "continuing and
long-term releases and threats of releases of noxious fumes, odors and
harmful chemicals, including hazardous substances" from the Corporation's
operations and/or (ii) a September 10, 1997 explosion at the Columbus
facility and alleged release of hazardous material resulting from that
explosion. Prior to the lawsuit, the Corporation had received a number of
explosion-related claims from nearby residents and businesses. These claims
were for property damage, personal injury and business interruption and
were being reviewed and adjusted on a case-by-case basis. The Corporation
has denied the material allegations of the lawsuit. While it is premature
to evaluate the claims asserted in the lawsuit, the Corporation believes it
has meritorious defenses.
In May 1997, the Corporation and nine other companies were named as
defendants in a suit brought by the Attorney General of the State of
Florida alleging that they engaged in conspiracy to fix the prices of
sanitary commercial paper products, such as towels and napkins, in
violation of federal and state laws. Approximately 45 similar suits have
been filed by private plaintiffs in federal courts in California, Florida,
Georgia and Wisconsin, and in the state courts of California, Wisconsin,
Minnesota and Tennessee. On July 28, 1999, the Corporation and the Attorney
General of the State of Florida entered into a Settlement Agreement
pursuant to which the State will dismiss its claims against the
Corporation. The Settlement Agreement states that the Attorney General is
dismissing its claims in the public interest and consistent with its
responsibilities. The Agreement also provides that the Corporation
continues to deny that there is any evidence that it engaged in the alleged
price fixing conspiracy. In addition, the Corporation agreed to donate
certain real property to the State of Florida, Board of Trustees of the
Internal Improvement Trust. The value of this real property is not material
to the results of operations or financial position of the Corporation.
In addition, as part of the formation of the joint venture with Chesapeake
described in Note 7, the Corporation and Wisconsin Tissue assigned, and
Georgia-Pacific Tissue agreed to assume, the liabilities of both companies
in connection with these cases. The Corporation and Wisconsin Tissue have
denied that they have engaged in any of the illegal conduct alleged in
these cases and intend to defend themselves vigorously.
Although the ultimate outcome of these environmental matters and legal
proceedings cannot be determined with certainty, based on presently
available information, management believes that adequate reserves have been
established for probable losses with respect thereto. Management further
believes that the ultimate outcome of such environmental matters and legal
proceedings could be material to operating results in any given quarter or
year but will not have a material adverse effect on the long-term results
of operations, liquidity or consolidated financial position of the
Corporation.
<PAGE>
27
11. OPERATING SEGMENT INFORMATION. Georgia-Pacific Group has five reportable
operating segments: building products, building products distribution,
containerboard and packaging, pulp and paper, and paper distribution. The
following represents selected operating data for each reportable segment
for the three and nine months ended October 2, 1999 and September 30, 1998.
COMBINED SELECTED OPERATING SEGMENT DATA (Unaudited)
Georgia-Pacific Group
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
(In millions) October 2, 1999 Sept. 30, 1998
- ------------- ------------------ ------------------
<S> <C> <C> <C> <C>
NET SALES TO UNAFFILIATED CUSTOMERS
Building products $ 1,015 18% $ 866 26%
Building products distribution 1,346 25 1,113 33
Containerboard and packaging 612 11 530 16
Pulp and paper 809 15 858 25
Paper distribution 1,698 31 - -
Other 3 - 1 -
-------- ------- -------- -------
Total net sales to
unaffiliated customers $ 5,483 100% $ 3,368 100%
-------- ------- -------- -------
INTERSEGMENT SALES
Building products $ 591 $ 617
Building products distribution 5 2
Containerboard and packaging 15 15
Pulp and paper 122 8
Paper distribution 2 -
Other* (735) (642)
-------- --------
Total intersegment sales $ - -
======== ========
TOTAL NET SALES
Building products $ 1,606 29% $ 1,483 44%
Building products distribution 1,351 25 1,115 33
Containerboard and packaging 627 11 545 16
Pulp and paper 931 17 866 26
Paper distribution 1,700 31 - -
Other* (732) (13) (641) (19)
-------- ------- -------- -------
Total net sales $ 5,483 100% $ 3,368 100%
======== ======= ======== =======
OPERATING PROFITS
Building products $ 333 68% $ 185 108%
Building products distribution 4 1 17 10
Containerboard and packaging 88 18 33 19
Pulp and paper 81 17 18 10
Paper distribution 43 9 - -
Other (63) (13) (82) (47)
-------- ------- -------- -------
Total operating profits 486 100% 171 100%
======= =======
Interest expense (116) (96)
Provision for income taxes (140) (36)
Extraordinary item, net of taxes - -
-------- --------
Net income $ 230 $ 39
======== ========
</TABLE>
<PAGE>
28
COMBINED SELECTED OPERATING SEGMENT DATA (Unaudited)
Georgia-Pacific Group
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
(In millions) October 2, 1999 Sept. 30, 1998
- ------------- ---------------------- ------------------------
<S> <C> <C> <C> <C>
NET SALES TO UNAFFILIATED CUSTOMERS
Building products $ 2,953 23% $ 2,451 25%
Building products distribution 3,761 30 3,208 33
Containerboard and packaging 1,708 14 1,515 15
Pulp and paper 2,522 20 2,664 27
Paper distribution 1,698 13 - -
Other 2 - 2 -
--------- ------- --------- --------
Total net sales to Unaffiliated customers $ 12,644 100% $ 9,840 100%
========= ======= ========= ========
INTERSEGMENT SALES
Building products $ 1,765 $ 1,848
Building products distribution 9 6
Containerboard and packaging 44 45
Pulp and paper 135 24
Paper distribution 2 -
Other* (1,955) (1,923)
--------- ---------
Total intersegment sales $ - $ -
========= =========
TOTAL NET SALES
Building products $ 4,718 37% $ 4,299 44%
Building products distribution 3,770 30 3,214 33
Containerboard and packaging 1,752 14 1,560 16
Pulp and paper 2,657 21 2,688 27
Paper distribution 1,700 14 - -
Other* (1,953) (16) (1,921) (20)
--------- ------- --------- --------
Total net sales $ 12,644 100% $ 9,840 100%
========= ======= ========= ========
OPERATING PROFITS
Building products $ 945 79% $ 408 91%
Building products distribution 57 5 - -
Containerboard and packaging 209 18 97 22
Pulp and paper 134 11 143 32
Paper distribution 43 4 - -
Other (199) (17) (201) (45)
--------- ------- --------- --------
Total operating profits 1,189 100% 447 100%
======= ========
Interest expense (298) (286)
Provision for income taxes (350) (76)
Extraordinary item, net of taxes - (13)
--------- ---------
Net income $ 541 $ 72
========= =========
</TABLE>
*Includes elimination of intersegment sales.
<PAGE>
29
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
THIRD QUARTER 1999 COMPARED WITH THIRD QUARTER 1998
The Georgia-Pacific Group reported net sales of approximately $5.5 billion for
the third quarter of 1999 and $3.4 billion for the third quarter of 1998.
Included in 1999 are $1.7 billion of net sales from the recently acquired
Unisource operations. Net income for the 1999 third quarter was $230 million
compared with $39 million in 1998.
The remaining discussion refers to the "Combined Selected Operating Segment
Data" table (included in Note 11 to the Combined Financial Statements).
The Georgia-Pacific Group's building products segment reported net sales of $1.6
billion for the third quarter of 1999 compared with $1.5 billion in 1998.
Operating profits were $333 million in 1999 compared with $185 million in 1998.
Return on sales was 21 percent and 12 percent for the three months ended October
2, 1999 and September 30, 1998, respectively. The higher quarter-over-quarter
profits resulted principally from increases in average selling prices for most
of this segment's products. Lumber selling prices were up 15 percent from the
prior year's quarter; gypsum selling prices increased 25 percent; plywood
selling prices increased 23 percent; and oriented strand board selling prices
increased 11 percent. The year-over-year improvement in selling prices was
primarily a result of continued strength in home building activity driven by a
strong U.S. economy. Selling prices for plywood, oriented strand board and
lumber peaked in July of 1999 and declined sharply during the last two months of
the third quarter. The Georgia-Pacific Group expects selling prices for plywood,
oriented strand board and lumber to continue to decline through the remainder of
the year, while selling prices for gypsum are expected to remain strong through
the fourth quarter of 1999.
The Georgia-Pacific Group's building products distribution segment reported net
sales of $1.4 billion for the third quarter of 1999 compared with $1.1 billion
in 1998. Operating profits for the distribution segment were $4 million in the
third quarter of 1999 compared with $17 million in the third quarter of 1998.
The 1998 results included one-time gains, principally on sales of assets related
to a restructuring plan, of approximately $6 million. The decrease in the
distribution segment operating profits in 1999 reflects lower margins related
primarily to the sale of lumber, structural panels and oriented strand board
inventories at prices below the segment's cost.
The Georgia-Pacific Group's containerboard and packaging segment reported net
sales of $627 million and operating profits of $88 million in the third quarter
of 1999, compared with net sales of $545 million and operating profits of $33
million in the third quarter of 1998. Return on sales was 14 percent and 6
percent in the third quarter of 1999 and 1998, respectively. The improvement in
earnings was attributable to higher selling prices and volume, offset somewhat
by higher secondary fiber costs. Containerboard and packaging selling prices
increased steadily over the quarter, ending the quarter at higher levels than a
year ago. The Georgia-Pacific Group expects continued selling price improvement
in the containerboard and packaging segment through the remainder of 1999.
The Georgia-Pacific Group's pulp and paper segment reported net sales of $931
million and operating profits of $81 million in the 1999 third quarter. For the
same period in 1998, the segment reported net sales of $866 million and
operating profits of $18 million. Return on sales was 9 percent and 2 percent in
the third quarter of 1999 and 1998, respectively. During the third quarter of
1998, the Georgia-Pacific Group closed its hardwood pulp operations at its Port
Hudson, Louisiana and Ashdown, Arkansas facilities, resulting in a one-time,
before tax charge of $15 million. Excluding this one-time charge, return on
sales in the third quarter of 1998 was 4 percent. Compared with a year ago, the
Georgia-Pacific Group has maintained lower levels of inventory in 1999 for most
pulp and paper products. Selling prices and demand for pulp steadily increased
during the third quarter of 1999 and ended the period at levels higher than the
prior year. Despite higher sales volume, operating results for the tissue
business were lower than in the 1998 third quarter due primarily to lower
selling prices. Communication papers 1999 operating results were higher than the
third quarter of 1998, due principally to higher demand. Although steadily
improving during the third quarter of 1999, average selling prices for
communication papers were consistent with the third quarter 1998. Average
communication papers selling prices for the third quarter of 1999 were above
those of the 1999 second quarter. The Georgia-Pacific Group expects continued
pricing improvements for products in this segment through the remainder of the
year.
The Georgia-Pacific Group's paper distribution segment reported net sales of
$1.7 billion and operating profits of $43 million for the third quarter of 1999,
which represent the operating results of Unisource since its acquisition by the
Corporation at the end of the second quarter of 1999. Unisource sells and
distributes high quality printing, writing and copying papers to printers,
publishers, business forms manufacturers and direct mail firms, as well as
corporate and retail copy centers, in-plant print facilities, government
institutions and other paper-intensive businesses. Unisource also sells and
distributes a broad range of packaging and maintenance supplies, equipment and
services, principally to manufacturers, food processors and retail and other
institutional customers. Products distributed include disposable paper and
plastic products; maintenance supplies and equipment such as towels, tissues,
can liners and sanitation chemicals; packaging supplies and equipment such as
carton erectors, baggers and filers as well as films, shrinkwrap and cushioning
materials; shipping room supplies such as corrugated boxes, cushioning
materials, tapes and labeling; and food service supplies such as films and food
wraps, food containers and disposable apparel for food serviced workers.
Operating results for the paper distribution segment have historically been
seasonal, with the strongest operating results occurring in the third quarter.
The operating loss in the "Other" nonreportable segment, which includes some
miscellaneous businesses, certain goodwill amortization, unallocated corporate
operating expenses and the elimination of profit on intersegment sales,
decreased by $19 million to a loss of $63 million in 1999 from a loss of $82
million in the 1998 third quarter. This decrease is primarily the result of
income from insurance proceeds recorded in the 1999 third quarter and the
write-off of goodwill in the third quarter of 1998 related to the closure of the
hardwood pulp operations at the Ashdown, Arkansas facilities.
Interest expense increased $20 million to $116 million in the third quarter of
1999 compared with $96 million in the third quarter of 1998, principally as a
result of higher debt levels and the issuance of the senior deferrable notes.
The effective income tax rate was 38 percent and 48 percent for the three months
ended October 2, 1999 and September 30, 1998, respectively. The effective tax
rate in 1999 and 1998 was higher than the statutory tax rate primarily because
of nondeductible goodwill amortization expense. The reduction in the 1999
effective tax rate resulted principally from higher pre-tax income and an
increased utilization of foreign sales corporation tax benefits.
<PAGE>
30
YEAR-TO-DATE THIRD QUARTER 1999 COMPARED WITH YEAR-TO-DATE THIRD QUARTER 1998
The Georgia-Pacific Group reported net sales of $12.6 billion, including $1.7
billion of net sales from the recently acquired Unisource operations, and net
income of $541 million for the nine months ended October 2, 1999.
Georgia-Pacific Group reported net sales of $9.8 billion and net income of $72
million for the nine months ended September 30, 1998. The 1998 results included
an extraordinary, after-tax loss of $13 million for the early retirement of
debt.
The remaining discussion refers to the "Combined Selected Operating Segment
Data" table (included in Note 11 to the Combined Financial Statements).
The Georgia-Pacific Group's building products segment reported net sales of $4.7
billion and operating profits of $945 million for the nine months ended October
2, 1999, compared with net sales of $4.3 billion and operating profits of $408
million in 1998. Return on sales increased to 20 percent in 1999 from 9 percent
a year ago, resulting primarily from higher selling prices. Average selling
prices for plywood, oriented strand board, lumber and gypsum increased by 24
percent, 28 percent, 7 percent, and 20 percent, respectively, in the first nine
months of 1999. Selling prices for plywood, oriented strand board and lumber
peaked in July of 1999 and declined sharply during the last two months of the
third quarter. The Georgia-Pacific Group expects selling prices for plywood,
oriented strand board and lumber to continue to decline through the remainder of
the year, while selling prices for gypsum are expected to remain strong through
the fourth quarter of 1999.
The building products distribution division reported net sales of $3.8 billion
and operating profits of $57 million for the nine months ended October 2, 1999,
compared with net sales of $3.2 billion and break even operating profits in
1998. The 1998 results included one-time gains, principally on sales of assets
related to the restructuring plan, of approximately $19 million. The increase in
profitability is due primarily to higher margins in commodity and specialty
products and lower operating cost.
The Georgia-Pacific Group's containerboard and packaging segment reported net
sales of $1.8 billion and operating profits of $209 million in the first nine
months of 1999 compared with net sales of $1.6 billion and operating profits of
$97 million in the same 1998 period. Return on sales increased to 12 percent
from 6 percent in 1998. Although year-to-date average prices are comparable to
year ago levels, pricing has increased throughout 1999 and, during the third
quarter of 1999, was above year ago levels. Cost decreases in wood and energy as
well as higher sales volume contributed to the increased profit margins. The
Georgia-Pacific Group expects continued price improvement in the containerboard
and packaging segment through the remainder of 1999.
The Georgia-Pacific Group's pulp and paper segment reported net sales of $2.7
billion and operating profits of $134 million for the nine-month period ended
October 2, 1999, compared with net sales of $2.7 billion and operating profits
of $143 million in 1998. Return on sales were 5 percent for the first nine
months of both 1999 and 1998. Excluding the one-time, $15 million charge in the
third quarter of 1998 for closure of two hardwood market pulp operations, return
on sales in 1998 was 6 percent. The decline in profitability was principally due
to a decrease in average prices for most of the Georgia-Pacific Group's pulp and
paper products. Average selling prices in the first nine months of 1999 for
pulp, communication papers and tissue were approximately 2 percent, 8 percent
and 4 percent, respectively, below selling prices in the same 1998 period.
Prices for most of the Georgia-Pacific Group's pulp and communication papers
products have increased steadily throughout the first nine months of 1999 and
the Georgia-Pacific Group anticipates this upward trend to continue through the
remainder of 1999. During the first nine months of 1999, the Georgia-Pacific
Group incurred market-related downtime at its pulp and paper mills and reduced
pulp production by 242,000 tons and communication papers production by 14,000
tons. In the same 1998 period, the Georgia-Pacific Group incurred market-related
downtime at its pulp and paper mills and reduced pulp and communication papers
production by 167,000 tons and 53,000 tons, respectively.
The Georgia-Pacific Group's paper distribution segment reported net sales of
$1.7 billion and operating profits of $43 million for the third quarter of 1999,
which represent the operating results of Unisource since its acquisition by the
Corporation at the end of the second quarter of 1999. Operating results for the
paper distribution segment have historically been seasonal, with the strongest
operating results occurring in the third quarter.
The operating loss in the "Other" nonreportable segment, which includes some
miscellaneous businesses, certain goodwill amortization, unallocated corporate
operating expenses and the elimination of profit on intersegment sales,
decreased by $2 million to a loss of $199 million in the first nine months of
1999 from a loss of $201 million in the first nine months of 1998.
Interest expense increased $12 million to $298 million in the first nine months
of 1999, compared with $286 million in the first nine months of 1998, primarily
as a result of higher debt levels and the issuance of the senior deferrable
notes, slightly offset by a decrease in average interest rates.
The effective income tax rate for the first nine months of 1999 and 1998 was 39
percent and 47 percent for the three months ended October 2, 1999 and September
30, 1998, respectively. The effective tax rate in 1999 and 1998 was higher than
the statutory tax rate primarily because of nondeductible goodwill amortization
expense. The reduction in the 1999 effective tax rate resulted principally from
higher pre-tax income and an increased utilization of foreign sales corporation
tax benefits.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. The Georgia-Pacific Group generated cash from operations
of $1.0 billion for the nine months ended October 2, 1999 compared with $1.1
billion a year ago. The decrease in cash provided from operating activities is
primarily a result of higher working capital levels, principally accounts
receivable associated with the increase in net sales; offset somewhat by strong
demand and improved prices for several building products items.
INVESTING ACTIVITIES. Capital expenditures for property, plant and equipment for
the nine months ended October 2, 1999 were $410 million, which included $159
million in the building products segment, $8 million in the building products
distribution segment, $50 million in the containerboard and packaging segment,
$159 million in the pulp and paper segment, $7 million in the paper distribution
segment, and $27 million of other and corporate. The Georgia-Pacific Group
expects to make capital expenditures for property, plant and equipment of
approximately $700 million in 1999, excluding the cost of any acquisitions.
Cash paid for timber and timber contracts in the first nine months of 1999 and
1998 was $274 million and $370 million, respectively.
At the end of the second quarter of 1999, the Georgia-Pacific Group, through its
wholly owned subsidiary Atlanta Acquisition Corp., conducted a tender offer for
all of the outstanding shares of common stock of Unisource, the largest
independent marketer and distributor of printing and imaging paper and supplies
in North America. Pursuant thereto, the Georgia-Pacific Group acquired 90.7% of
the then outstanding shares of Unisource. On July 6, 1999, Atlanta Acquisition
Corp. was merged with and into Unisource and by virtue of such merger, shares of
Unisource that were not tendered to the Georgia-Pacific Group (other than shares
held by Unisource and the Georgia-Pacific Group and its subsidiaries) were
converted into the right to receive $12.00 per Unisource share in cash, subject
to dissenters rights. The Georgia-Pacific Group is purchasing the remaining
outstanding shares of Unisource as they are delivered to the exchange agent.
Through October 2, 1999, the Georgia-Pacific Group paid approximately $828
million for shares of Unisource. Unisource's results of operations were
consolidated with those of the Georgia-Pacific Group beginning July 4, 1999.
During the first nine months of 1999, the Georgia-Pacific Group also completed
the acquisition of a packaging plant, four treated lumber facilities and a
chemical business for a total consideration of approximately $69 million in
cash.
On June 30, 1998, the Georgia-Pacific Group completed its acquisition of CeCorr,
a leading independent producer of corrugated sheets in the United States. On
June 30, 1998, the Georgia-Pacific Group paid approximately $93 million in cash
(net of $2 million of cash acquired) and issued approximately 3.2 million shares
of Georgia-Pacific Group stock valued at approximately $28.94 per share for all
the outstanding shares of CeCorr. In addition, the Georgia-Pacific Group assumed
approximately $92 million of CeCorr's debt, of which $34 million was owed to the
Georgia-Pacific Group ($58 million net debt assumed). On July 2, 1998, a former
owner of CeCorr exercised his right to resell to the Georgia-Pacific Group
approximately 2.2 million shares of Georgia-Pacific Group stock issued in the
transaction. CeCorr's results of operations were consolidated with those of the
Georgia-Pacific Group beginning July 1, 1998.
Effective October 3, 1999, the Georgia-Pacific Group and Chesapeake completed a
previously announced agreement to create Georgia-Pacific Tissue, a joint venture
in which the two companies have combined their away-from-home tissue businesses.
The Georgia-Pacific Group contributed substantially all of the assets of its
commercial tissue business to the joint venture. The Georgia-Pacific Group
controls and manages the joint venture and owns 95 percent of the equity in
joint venture. Chesapeake contributed the assets of its Wisconsin Tissue
business to the joint venture, for which it received a 5 percent equity interest
in the joint venture and an initial cash distribution of approximately $755
million.
On November 1, 1999, The Timber Company signed a definitive agreement to sell
approximately 194,000 acres of its redwood and Douglas fir timberlands in
northern California for a purchase price of approximately $397 million. The sale
is expected to close by the end of the year, subject to the buyer obtaining
required financing and approval by the Corporation's board of directors. The
Fort Bragg sawmill has a wood supply agreement with The Timber Company through
2000 that was transferred as part of the sale agreement.
In 1999, the Georgia-Pacific Group expects its cash flow from operations,
together with proceeds from any asset sales and available financing sources, to
be sufficient to fund planned capital investments, pay dividends and make
scheduled debt payments.
FINANCING ACTIVITIES. The Corporation's total debt, excluding senior deferrable
notes, increased by $614 million to $6,165 million at October 2, 1999 from
$5,551 million at December 31, 1998. At October 2, 1999 and December 31, 1998,
$5,198 million and $4,568 million, respectively, of such total debt was
Georgia-Pacific Group's debt and $967 million and $983 million, respectively,
was The Timber Company's debt.
In June 1999, the Corporation renegotiated its accounts receivable sale program
and increased the amount outstanding under the program from $280 million to $750
million. The program expires in April 2000. In connection with the acquisition
of Unisource, the Corporation retained former Unisource agreements to sell up to
$150 million of certain qualifying U.S. accounts receivable and up to CN$70
million of certain eligible Canadian accounts receivable. The U.S. agreement
expires in April 2000 and the Canadian agreement expires in May 2004. At October
2, 1999, approximately $947 million was outstanding under the Corporation's and
Unisource's programs in the aggregate. The receivables outstanding under these
programs and the corresponding debt are included as current receivables and
short-term debt, respectively on the accompanying balance sheets. The agreements
are accounted for as a secured borrowing. As collections reduce previously sold
interests, new receivables may be sold.
Also in June 1999, the Board of Directors increased the corporate target debt
level under which management can purchase shares of Georgia-Pacific Group and
The Timber Company common stock on the open market from $5.75 billion to $6.8
billion. In addition, the Board of Directors increased the Georgia-Pacific
Group's target debt level from $4.75 billion to $5.8 billion. The Timber
Company's target debt level remains at $1.0 billion.
On July 22, 1999, the Corporation increased the amount of its unsecured
revolving credit facility from $1.5 billion to $2.0 billion. This unsecured
revolving credit facility is used for direct borrowings and as support for
commercial paper and other short-term borrowings. As of October 2, 1999, $1,239
million of committed credit was available in excess of all short-term borrowings
outstanding under or supported by the facility. The revolving credit agreement
contains certain restrictive covenants, including a maximum leverage ratio
(funded indebtedness, including senior deferrable notes, to earnings before
interest, taxes, depreciation and amortization ("EBITDA")) of 4.5 to 1.0, which
is to be maintained throughout the term of the credit agreement. As of October
2, 1999, the leverage ratio was 2.3 to 1.0.
On July 7, 1999, the Corporation issued 17,250,000 of 7.5% PEPS Units for $862.5
million. Each PEPS Unit had an issue price of $50 and consists of a contract to
purchase shares of Georgia-Pacific Group common stock on or prior to August 16,
2002 and a senior deferrable note of Georgia-Pacific Group due August 16, 2004.
Each purchase contract yields interest of 0.35% per year, paid quarterly, on the
$50 stated amount of the PEPS Unit. Each senior deferrable note yields interest
of 7.15% per year, paid quarterly, until August 16, 2002. On August 16, 2002,
following a remarketing of the senior deferrable notes, the interest rate will
be reset at a rate that will be equal to or greater than 7.15%. The liability
related to the PEPS Units is classified as Senior deferrable notes in the
combined balance sheets and will not be included in the debt amount for purposes
of determining the corporate and Georgia-Pacific Group debt targets.
During the first nine months of 1999, approximately $79 million of fixed and
floating rate industrial revenue bonds were replaced, of which $66 million were
refunded by fixed rate instruments and $13 million were refunded by variable
rate instruments.
In connection with the acquisition of Unisource, the Corporation retained former
Unisource industrial revenue bonds in the amount of $9 million and capital
leases in the amount of $12 million. These amounts are included in the
Corporation's total debt.
As of October 2, 1999, the Corporation had registered for sale up to $2.975
billion of debt and equity securities under a shelf registration statement filed
with the Securities and Exchange Commission. The Corporation registered $1.725
billion under such registration statement related to the PEPS Units ($862.5
million of which was received on July 7, 1999 in exchange for senior deferrable
notes, which notes will be converted into $862.5 million of equity
(Georgia-Pacific Group common stock) upon exercise of the purchase contracts.
The $862.5 million of cash (less expenses) raised in the sale of the PEPS Units
was used to pay for the acquisition of Unisource. Proceeds from the issuance of
securities under this registration statement will be used for general corporate
purposes, including the reduction of short-term debt, acquisitions, investments
in, or extension of credit to, the Corporation's subsidiaries and the
acquisition of real property.
In connection with the formation of Georgia-Pacific Tissue, Georgia-Pacific
Tissue financed the $755 million initial distribution to Chesapeake with
short-term borrowings from a bank syndicate in October 1999. In the fourth
quarter of 1999, the Corporation expects to sell debt under the shelf
registration statement filed with the Securities and Exchange Commission and
loan or contribute the proceeds through the use of one or more subsidiaries to
Georgia-Pacific Tissue in order for Georgia-Pacific Tissue to retire such
syndicated bank debt. This short-term financing temporarily increased the
Corporation's total debt above the $6.8 billion target debt level for
repurchasing stock. The Corporation expects to be able to repurchase stock again
in the fourth quarter once the debt level falls below the target.
On October 7, 1999, approximately $10 million of floating rate industrial
revenue bonds, due December 1, 2025, were replaced by $10 million fixed rate
industrial revenue bonds issued on October 1, 1999.
<PAGE>
31
The Corporation's senior management establishes the parameters of the
Corporation's financial risk, which have been approved by the Board of
Directors. Hedging interest rate exposure through the use of swaps and options
and hedging foreign exchange exposure through the use of forward contracts are
specifically contemplated to manage risk in keeping with the management policy.
Derivative instruments, such as swaps, forwards, options or futures, which are
based directly or indirectly upon interest rates, currencies, equities and
commodities, may be used by the Corporation to manage and reduce the risk
inherent in price, currency and interest rate fluctuations.
The Corporation does not utilize derivatives for speculative purposes.
Derivatives are transaction-specific so that a specific debt instrument,
contract or invoice determines the amount, maturity and other specifics of the
hedge. Counterparty risk is limited to institutions with long-term debt ratings
of A or better.
The table below presents principal (or notional) amounts and related weighted
average interest rates by year of expected maturity for the Corporation's debt
obligations as of October 2, 1999. For obligations with variable interest rates,
the table sets forth payout amounts based on current rates and does not attempt
to project future interest rates.
Georgia-Pacific Corporation and Subsidiaries
<TABLE>
<CAPTION>
(In millions) 1999 2000 2001 2002
- ------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Debt
Commercial paper and other short-term notes - - - -
Average interest rates - - - -
Notes and debentures - - - $ 300
Average interest rates - - - 10%
Revenue bonds $ 10 $ 24 $ 6 $ 74
Average interest rates 5.3% 4.2% 3.9% 3.8%
Other loans - $ 13 - -
Average interest rates - 8.0% - -
Accounts receivable sale program - - - -
Average interest rates - - - -
Senior deferrable notes - - - -
Average interest rates - - - -
Notional principal amount of interest rate exchange
agreements $ 100 $ 177 - $ 131
Average interest rate paid (fixed) 6.4% 7.7% - 5.9%
Average interest rate received (variable) 5.5% 5.5% - 5.4%
</TABLE>
Georgia-Pacific Corporation and Subsidiaries
<TABLE>
<CAPTION>
Fair value July
(In millions) 2003 Thereafter Total 3, 1999
- ------------- ------- ------------- -------- ---------------
<S> <C> <C> <C> <C>
Debt
Commercial paper and other short-term notes - $ 761 $ 761 $ 761
Average interest rates - 5.7% 5.7% 5.7%
Notes and debentures $ 300 $ 2,900 $3,500 $ 3,490
Average interest rates 5.7% 8.6% 8.4% 8.0%
Revenue bonds - $ 550 $ 664 $ 573
Average interest rates - 5.3% 5.1% 8.0%
Other loans $ 14 - $ 27 $ 27
Average interest rates 5.7% - 6.8% 7.3%
Accounts receivable sale program - $ 947 $ 947 $ 947
Average interest rates - 5.6% 5.6% 5.6%
Senior deferrable notes - $ 863 $ 863 $ 870
Average interest rates - 7.15% 7.15% 7.3%
Notional principal amount of interest rate exchange
agreements $ 300 - $ 708 $ 4
Average interest rate paid (fixed) 5.9% - 6.4% 6.4%
Average interest rate received (variable) 5.9% - 5.7% 5.7%
</TABLE>
The Corporation has the intent and ability to refinance commercial paper, other
short-term notes and the accounts receivable sale program as they mature. The
Corporation intends to re-market the senior deferrable notes on or before August
16, 2002 at an interest rate that will be equal to or greater than 7.15%; thus
extending the maturity of the senior deferrable notes to August 16, 2004.
Therefore, maturities of these obligations are reflected as cash flows expected
to be made after 2003. The fair value of interest rate exchange agreements
exclude amounts used to determine the fair value of related notes and
debentures.
At October 2, 1999, the Corporation's weighted average interest rate on its
debt, excluding the senior deferrable notes, was 7.0% including the accounts
receivable sale program and outstanding interest rate exchange agreements. At
October 2, 1999, these interest rate exchange agreements effectively converted
approximately $708 million of floating rate obligations with a weighted average
interest rate of 5.7% to fixed rate obligations with an average effective
interest rate of 6.4%. These agreements have a weighted average maturity of
approximately 2.5 years. As of October 2, 1999, the Corporation's total floating
rate debt, including the accounts receivable sale program, exceeded related
interest rate exchange agreements by $1.6 billion.
The Corporation also enters into foreign currency exchange agreements and
commodity futures and swaps, the amounts of which were not material to the
consolidated financial position of the Corporation at October 2, 1999.
During the first nine months of 1999, the Georgia-Pacific Group purchased on the
open market approximately 5,994,000 shares of Georgia-Pacific Group common stock
at an aggregate price of $247 million ($41.21 average per share). Of these
repurchased shares, approximately 5,969,000 shares were held as treasury, 25,000
shares were purchased during the first nine months of 1998 and settled after
October 2, 1999. During the first nine months of 1998, the Georgia-Pacific Group
purchased in private transactions on the open market approximately 4,794,000
shares of Georgia-Pacific Group common stock at an aggregate price of $277
million ($57.78 average per share). Of these repurchased shares, approximately
3,586,000 shares were held as treasury and 284,000 shares were purchased during
the first nine months of 1998 and settled after September 30, 1998, and 924,000
shares were cancelled.
<PAGE>
32
Subsequent to October 2, 1999 through November 3, 1999, the Georgia-Pacific
Group purchased on the open market approximately 178,000 shares of the
Georgia-Pacific Group stock at an aggregate price of $7 million ($38.12 average
per share). The Georgia-Pacific Group expects to repurchase shares of the
Georgia-Pacific Group stock throughout 1999 as long as debt levels are below the
established thresholds.
During the first nine months of 1999, the Georgia-Pacific Group received $106
million from the exercise of Georgia-Pacific Group common stock options.
During the first nine months of 1999 and 1998, the Georgia-Pacific Group was
paid $65 million and $68 million, respectively, in dividends. On May 4, 1999,
the Board of Directors declared a two-for-one split of Georgia-Pacific Group's
common stock in the form of a special dividend to shareholders of record on May
14, 1999. The special dividend was paid as one share of Georgia-Pacific Group
common stock for each share of Georgia-Pacific Group outstanding on June 3,
1999. A total of 95,126,911 additional shares were issued in conjunction with
the stock split. The Georgia-Pacific Group's par value of $0.80 remained
unchanged. As a result, $76 million of stockholders' equity was reclassified
from Additional paid-in capital to Common stock. All historical share and per
share amounts have been restated to reflect retroactively the stock split.
OTHER. In July 1999, ("FASB") issued SFAS No. 133, providing for a one year
delay of the effective date of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133" establishes accounting and
reporting standards for derivative instrument and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
Georgia-Pacific Group will be required to adopt SFAS No. 133 in 2001. Management
is evaluating the effect of this statement on Georgia-Pacific's derivative
instruments: primarily interest rate swaps, foreign currency forward contracts
and long-term purchase commitments. The impact of adjustments to fair value is
not expected to be material to the Group's consolidated financial position.
The Georgia-Pacific Group has worked to resolve the effects of the Year 2000
problem on its information systems, the operating systems used in its
manufacturing operations as well as its facilities systems. The Year 2000
problem, which is common to most businesses, concerns the inability of such
systems to properly recognize and process dates and date-sensitive information
on and beyond January 1, 2000. In 1996, the Georgia-Pacific Group began a
company wide assessment of the vulnerability of its systems to the Year 2000
problem. Based on such assessment, the Georgia-Pacific Group developed a Year
2000 plan, under which all key systems were tested, and noncompliant software or
technology was modified or replaced. The Georgia-Pacific Group is continuing to
survey and assess the Year 2000 readiness status and compatibility of customers'
and suppliers' systems and processes that interface with the Georgia-Pacific
Group's systems or could otherwise impact the Georgia-Pacific Group's
operations.
The Georgia-Pacific Group completed the necessary revisions and unit testing to
most systems and processes in 1998 with the few remaining systems completed in
March 1999. Full integration testing and verification of such systems and
processes for Year 2000 readiness was completed in September 1999 and follow-up
reverification testing will continue as necessary throughout the remainder of
1999 and into 2000. At the end of September 1999, 99.8 percent of the Georgia-
Pacific Group's information systems are considered fully Year 2000 ready, and
less than 1 percent are in the final stages of full integration testing. The
systems in final stages of testing are not considered critical. Early in 1998,
the Georgia-Pacific Group completed an inventory of the process control systems
and embedded chips used in its manufacturing operations and believes that only a
small percentage of such systems and chips could be subject to Year 2000
problems. At the end of September 1999, over 97 percent of the process control
and embedded chip inventory has been fully analyzed and remediated as necessary
with the remaining 3 percent of the inventory in the repair or test phase. Final
post-repair testing on these non-critical outstanding items is scheduled to be
complete by mid November 1999. Due to system acquisitions and the number and
complexity of existing systems, the Georgia-Pacific Group expects some
continuing additions of noncritical systems to the inventory list.
The Georgia-Pacific Group has contacted each of its critical suppliers and
service providers including government services, transportation, energy and
communication providers to ascertain their respective levels of readiness to
address and remediate Year 2000 problems and is continuing to review their
responses and conduct follow-up reviews as necessary. The Georgia-Pacific Group
has identified and contacted critical customers to ascertain their respective
levels of Year 2000 readiness and will continue to assess the need for further
testing with customers as appropriate. While the Georgia-Pacific Group currently
believes that it will be able to modify or replace its affected systems in time
to minimize any detrimental effects on its operations, failure to do so, or the
failure of the Georgia-Pacific's Group's major customers, suppliers and service
providers to modify or replace their affected systems, could have a material
adverse impact on the Georgia-Pacific Group's results of operations, liquidity
or consolidated financial position in the future. The most reasonably likely
worst-case scenario of failure by the Georgia-Pacific Group or its customers or
suppliers to resolve the Year 2000 problem would be a temporary slowdown or
cessation of manufacturing operations at one or more of the Georgia-Pacific
Group 's facilities, including its limited foreign operations, and a temporary
inability on the part of the Georgia-Pacific Group to process orders and
billings in a timely manner and to deliver finished products to customers. The
Georgia-Pacific Group individual business units and corporate offices have
developed plans for various contingency options, including identification of
alternate suppliers, vendors and service providers as well as direct access to
qualified vendor technical support and manual alternatives to systems
operations. These options will allow them to minimize the risks of any
unresolved Year 2000 problems on their operations and to minimize the effect of
any unforeseen Year 2000 failures in areas outside the Georgia-Pacific Group
control. The primary goal of the Georgia-Pacific Group's contingency plan is to
minimize the adverse impact to personnel safety, environmental safety and assets
The Georgia-Pacific Group currently estimates the incremental cost of the work
needed to resolve the Year 2000 problem at approximately $32 million (including
approximately $4 million of capital costs), of which $24 million has been
incurred to date and $1 million is included for the impact of contingency
activities and unexpected events. As the Georgia-Pacific Group has effectively
completed its Year 2000 readiness efforts, prior estimates of total costs and
contingencies for unknowns have been adjusted accordingly. In addition, the
Georgia-Pacific Group expects to incur internal costs totaling approximately $20
million related to the Year 2000 problem, of which approximately $16 million has
been incurred to date. Although the costs were not as high as expected because
of warranties or lower cost corrections, the bulk of the incremental costs
relate to replacement or modification of affected process control systems in the
Georgia-Pacific Group's manufacturing operations and the cost of creating and
maintaining isolated test environments for its information systems. The majority
of the internal costs relates to code or process system assessment, remediation
and testing and is projected to be incurred through 1999 and first quarter 2000.
These incremental and internal costs will be expensed as incurred, except for
new systems purchased that will be capitalized in accordance with corporate
policy. Such costs may be material to the Georgia-Pacific Group's results of
operations in one or more fiscal quarters or years but are not expected to have
a material adverse effect on the long-term results of operations, liquidity or
consolidated financial position of the Georgia-Pacific Group .
The Georgia-Pacific Group reviewed Unisource's Year 2000 project methodology
and progress, including its foreign operations. All mission critical systems
have been remediated and tested and final certification was completed in October
1999. Unisource has contacted its technology and service providers as well as
its key customers and suppliers to determine the extent to which their systems
are Year 2000 ready and the extent to which Unisource could be affected if they
are not. Contingency planning activities are ongoing and are scheduled to be
reviewed by executive management by mid-November. Unisource estimates the total
incremental cost of its Year 2000 project to be approximately $13 million. Of
this amount, approximately $12 million has been incurred through October 2,
1999. Unisource expects to incur internal costs totaling approximately $1
million related to the Year 2000 problem, $0.7 million of which was incurred
through October 2, 1999.
The Georgia-Pacific Group has reviewed Wisconsin Tissue's Year 2000 project
methodology and progress, including its foreign operations. All mission critical
systems have been remediated and tested and final certification has been
completed. Wisconsin Tissue has contacted its technology and service providers
as well as its key customers and suppliers to determine the extent to which
their systems are Year 2000 ready and the extent to which Wisconsin Tissue could
be affected if they are not. Contingency plans have been developed.
For a discussion of commitments and contingencies refer to Note 10 of the Notes
to Combined Financial Statements.
REFER TO THE "CAUTIONARY STATEMENT FOR PURPOSES OF THE 'SAFE HARBOR' PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995" ON PAGE 19 OF THIS FORM
10-Q.
<PAGE>
33
COMBINED STATEMENTS OF INCOME (Unaudited)
Georgia-Pacific Corporation--The Timber Company
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- ------------------------
October 2, Sept. 30, October 2, Sept. 30,
(In millions, except per share amounts) 1999 1998 1999 1998
- --------------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales
Timber-Georgia-Pacific Group $ 90 $ 105 $ 265 $ 308
Timber-third parties
Delivered 10 17 36 42
Stumpage 32 12 100 39
Other 7 9 17 18
------- ------- ------- -------
Total net sales 139 143 418 407
------- ------- ------- -------
Costs and expenses
Cost of sales, excluding depreciation, amortization
and cost of timber harvested shown below 20 40 65 82
Depreciation, amortization and cost
of timber harvested 12 11 34 32
General and administrative 12 8 32 26
Interest 17 17 52 52
Other income - - (84) -
------- ------- ------- -------
Total costs and expenses 61 76 99 192
------- ------- ------- -------
Income before income taxes and
extraordinary item 78 67 319 215
Provision for income taxes 29 26 124 84
------- ------- ------- -------
Income before extraordinary item 49 41 195 131
Extraordinary item, net of taxes - - - (2)
------- ------- ------- -------
Net income $ 49 $ 41 $ 195 $ 129
======= ======= ======= =======
Basic per share:
Income before extraordinary item $ 0.59 $ 0.46 $ 2.30 $ 1.43
Extraordinary item, net of taxes - - - (0.02)
------- ------- ------- -------
Net income $ 0.59 $ 0.46 $ 2.30 $ 1.41
======= ======= ======= =======
Diluted per share:
Income before extraordinary item $ 0.59 $ 0.46 $ 2.29 $ 1.42
Extraordinary item, net of taxes - - - (0.02)
------- ------- ------- -------
Net income $ 0.59 $ 0.46 $ 2.29 $ 1.40
======= ======= ======= =======
Average number of shares outstanding:
Basic 82.8 89.6 84.6 91.4
Diluted 83.4 89.9 85.1 92.0
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
34
COMBINED STATEMENTS OF CASH FLOWS (Unaudited)
Georgia-Pacific Corporation--The Timber Company
<TABLE>
<CAPTION>
Nine Months Ended
------------------------
(In millions) October 2, 1999 September 30, 1998
- --------------- ------------------- ------------------------
<S> <C> <C>
Cash flows from operations
Net income $ 195 $ 129
Adjustments to reconcile net income to
cash provided by operations:
Depreciation 5 4
Cost of timber harvested 29 28
Other income (84) -
Deferred income taxes 19 3
Gain on sales of assets (28) (16)
Change in other assets and other
liabilities 3 19
------- -------
Cash provided by operations 139 167
------- -------
Cash flows from investment activities
Property, plant and equipment
investments (1) (3)
Timber and timberlands purchases (48) (47)
Proceeds from sales of assets 104 39
------- -------
Cash provided by(used for)investment activities 55 (11)
------- -------
Cash flows from financing activities
Share repurchases (124) (104)
Proceeds from option plan exercises 9 -
(Repayments of) additions to debt (16) 17
Cash dividends paid (63) (69)
------- -------
Cash used for financing activities (194) (156)
------- -------
Increase in cash - -
Balance at beginning of period - -
------- -------
Balance at end of period $ - $ -
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
35
COMBINED BALANCE SHEETS (Unaudited)
Georgia-Pacific Corporation--The Timber Company
<TABLE>
<CAPTION>
October 2, December 31,
(In millions) 1999 1998
- --------------- ------------ ------------
<S> <C> <C>
ASSETS
Timber and timberlands
Timberlands $ 302 $ 303
Fee timber 563 580
Reforestation 253 227
Other 53 34
---------- ---------
Total timber and timberlands 1,171 1,144
---------- ---------
Property, plant and equipment, less accumulated
depreciation of $46 and $42, respectively 22 24
---------- ---------
Other assets 25 6
---------- ---------
Total assets $ 1,218 $ 1,174
========== =========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Debt $ 967 $ 983
--------- ---------
Other liabilities 54 32
--------- ---------
Deferred income tax liabilities 263 244
--------- ---------
Total liabilities 1,284 1,259
Commitments and contingencies
Shareholders' equity (66) (85)
--------- ---------
Total liabilities and shareholders' equity $ 1,218 $ 1,174
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
GEORGIA-PACIFIC CORPORATION
1. PRINCIPLES OF PRESENTATION. The consolidated financial statements include
the accounts of Georgia-Pacific Corporation and subsidiaries (the
"Corporation"). All significant intercompany balances and transactions are
eliminated in consolidation. The interim financial information included
herein is unaudited; however, such information reflects all adjustments
which are, in the opinion of management, necessary for a fair presentation
of the Corporation's financial position, results of operations, and cash
flows for the interim periods. All such adjustments are of a normal,
recurring nature except for the item discussed in Note 3 below. Certain
1998 amounts have been reclassified to conform with the 1999 presentation.
The Timber Company's and the Georgia-Pacific Group's combined financial
statements should be read in conjunction with the Corporation's
consolidated financial statements.
On or about April 22, 1999, the Corporation determined to change its fiscal
year from December 31 to end on the Saturday closest to December 31.
Additionally, the Corporation reports its quarterly periods on a 13-week
basis ending on a Saturday. The impact of one less day and two additional
days on the three months and nine months ended October 2, 1999,
respectively, was not material. There will be no transition period on which
to report.
2. OTHER INCOME. During the second quarter of 1999, the Corporation sold
approximately 390,000 acres of timberlands in the Canadian province of New
Brunswick and approximately 440,000 acres of timberlands in Maine for
approximately $92 million and recognized a pre-tax gain of $84 million ($50
million after tax).
3. EXTRAORDINARY ITEM. The Corporation redeemed approximately $600 million of
its outstanding debt during the first nine months of 1998. As a result, the
Corporation recognized an after-tax extraordinary loss of $15 million, of
which $14 million was recognized in the first quarter of 1998 and $1
million was recognized in the second quarter of 1998.
4. EARNINGS PER SHARE. The Corporation's common stock was redesignated in
December 1997 to reflect separately the performance of the Corporation's
pulp, paper and building products businesses, which are now known as
Georgia-Pacific Group. A separate class of common stock was distributed to
reflect the performance of the Corporation's timber operating group, which
is now known as The Timber Company. Basic earnings per share is computed
based on net income and the weighted average number of common shares
outstanding. Diluted earnings per share reflect the annual issuance of
common shares under long-term incentive stock option and stock purchase
plans. The computation of diluted earnings per share does not assume
conversion or exercise of securities that would have an antidilutive effect
on earnings per share. Earnings per share are computed for each class of
common stock based on the separate earnings attributed to each of the
respective businesses.
The following table provides earnings and per share data for Georgia-Pacific
Group and The Timber Company for 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ ------------------
(In millions, except October 2, Sept. 30, October 2, Sept. 30,
per share amounts) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic and diluted income available to
Shareholders (numerator):
Income before extraordinary item $ 49 $ 41 $ 195 $ 131
Extraordinary item, net of taxes - - - (2)
--------- --------- --------- --------
Net income $ 49 $ 41 $ 195 $ 129
========= ========= ========= ========
Shares (denominator): 82.8 89.6 84.6 91.4
Average shares outstanding
Dilutive securities:
Stock incentive and option plans 0.5 0.3 0.4 0.6
Employee stock purchase plans 0.1 - 0.1 -
--------- --------- --------- --------
Total assuming conversion 83.4 89.9 85.1 92.0
========= ========= ========= ========
Basic per share amounts:
Income before extraordinary item $ 0.59 $ 0.46 $ 2.30 $ 1.43
Extraordinary item, net of taxes - - - (0.02)
--------- --------- --------- --------
$ 0.59 $ 0.46 $ 2.30 $ 1.41
========= ========= ========= ========
Net income
Diluted per share amounts:
Income before extraordinary item $ 0.59 $ 0.46 $ 2.29 $ 1.42
Extraordinary item, net of taxes - - - (0.02)
--------- --------- --------- --------
Net income $ 0.59 $ 0.46 $ 2.29 $ 1.40
========= ========= ========= ========
</TABLE>
<PAGE>
37
5. COMPREHENSIVE INCOME. The Timber Company's total comprehensive income was
$49 million and $195 million, respectively, for the three months and nine
months ended October 2, 1999 and was $41 million and $129 million,
respectively, for the three months and nine months ended September 30,
1998. Other comprehensive income was insignificant for The Timber Company
during each of the three and nine months ended October 2, 1999 and
September 30, 1998.
6. DEBT. At June 30, 1997, $1.0 billion of the Corporation's total debt was
allocated to The Timber Company for financial statement purposes, and the
balance of the Corporation's total debt was allocated to the Georgia-
Pacific Group. The Corporation's debt was allocated between the groups
based upon a number of factors including expected future cash flows,
volatility of earnings, and the ability to pay debt service and dividends.
In addition, the Corporation considered certain measures of
creditworthiness, such as coverage ratios and various tests of liquidity,
as a means of ensuring that each group could continue to pay debt service
during a business downcycle. Management believes that such allocation is
equitable and reasonable. The Timber Company's debt increases or decreases
by the amount of any cash provided by or used for its operating activities,
investing activities, dividend payments, share repurchases or issuances and
other nondebt-related financing activities.
On June 1999, the Corporation renegotiated its accounts receivable sale
program and increased the amount outstanding under the program from $280
million to $750 million. The program expires in April 2000. In connection
with the acquisition of Unisource, the Corporation retained former
Unisource agreements to sell up to $150 million of certain qualifying U.S.
accounts receivable and up to CN$70 million of certain eligible Canadian
accounts receivable. The U.S. agreement expires in April 2000 and the
Canadian agreement expires in May 2004. At October 2, 1999, approximately
$947 million was outstanding under the Corporation's and Unisource's
programs in the aggregate. The receivables outstanding under these programs
and the corresponding debt are included as current receivables and short-
term debt, respectively on the accompanying balance sheets. The agreements
are accounted for as a secured borrowing. As collections reduce previously
sold interests, new receivables may be sold.
Also in June 1999, the Board of Directors increased the corporate target
debt level under which management can purchase shares of Georgia-Pacific
Group and The Timber Company common stock on the open market from $5.75
billion to $6.8 billion. In addition, the Board of Directors increased the
Georgia-Pacific Group's target debt level from $4.75 billion to $5.8
billion. The Timber Company's target debt level remains at $1.0 billion.
On July 22, 1999, the Corporation increased the amount of its unsecured
revolving credit facility from $1.5 billion to $2.0 billion. This unsecured
revolving credit facility is used for direct borrowings and as support for
commercial paper and other short-term borrowings. As of October 2, 1999,
$1,239 million of committed credit was available in excess of all short-
term borrowings outstanding under or supported by the facility. The
revolving credit agreement contains certain restrictive covenants,
including a maximum leverage ratio (funded indebtedness, including senior
deferrable notes, to earnings before interest, taxes, depreciation and
amortization ("EBITDA")) of 4.5 to 1.0, which is to be maintained
throughout the term of the credit agreement. As of October 2, 1999, the
leverage ratio was 2.3 to 1.0.
During the second quarter of 1999, the Corporation registered for sale up
to $2.975 billion of debt and equity securities under a shelf registration
statement filed with the Securities and Exchange Commission. The
Corporation registered $1.725 billion under such registration statement
related to the PEPS Units ($862.5 million of which was received on July 7,
1999 in exchange for senior deferrable notes, which notes will be converted
into $862.5 million of equity (Georgia-Pacific Group common stock) upon
exercise of the purchase contract) (see Note 7). The $862.5 million of cash
(less expenses) raised in this sale of the PEPS Units was used to pay for
the acquisition of Unisource.
Effective October 3, 1999, the Corporation and Chesapeake completed a
previously announced agreement to create Georgia-Pacific Tissue, a joint
venture in which the two companies have combined their away-from-home
tissue businesses. In connection with the formation of Georgia-Pacific
Tissue, Georgia-Pacific Tissue financed the $755 million initial
distribution to Chesapeake with short-term borrowings from a bank syndicate
in October 1999. In the fourth quarter of 1999, the Corporation expects to
sell debt under the shelf registration statement filed with the Securities
and Exchange Commission and loan or contribute the proceeds through the use
of one or more subsidiaries to Georgia-Pacific Tissue in order for Georgia-
Pacific Tissue to retire such syndicated bank debt. This short-term
financing temporarily increased the Corporation's total debt above the $6.8
billion target debt level for repurchasing stock. The Corporation expects
to be able to repurchase stock again in the fourth quarter once the debt
level falls below the target.
7. SENIOR DEFERRABLE NOTES. On July 7, 1999, the Corporation issued 17,250,000
of 7.5% PEPS Units for $862.5 million. Each PEPS Unit had an issue price of
$50 and consists of a contract to purchase shares of Georgia-Pacific Group
common stock on or prior to August 16, 2002 and a senior deferrable note of
Georgia-Pacific Group due August 16, 2004. Each purchase contract yields
interest of 0.35% per year, paid quarterly, on the $50 stated amount of the
PEPS Unit. Each senior deferrable note yields interest of 7.15% per year,
paid quarterly, until August 16, 2002. On August 16, 2002, following a
remarketing of the senior deferrable notes, the interest rate will be reset
at a rate that will be equal to or greater than 7.15%. The liability
related to the PEPS Units will not be included in the debt amount for
purposes of determining the corporate and Georgia-Pacific Group debt
targets.
8. SHARE REPURCHASES. During the first nine months of 1999, The Timber Company
purchased on the open market approximately 5,047,000 shares of The Timber
Company common stock, all of which were held as treasury stock at October
2, 1999, at an aggregate price of $124 million ($24.48 average per share).
During the first nine months of 1998, The Timber Company purchased on the
open market 4,860,000 shares of The Timber Company common stock at an
aggregate price of $105 million ($21.60 average per share). Of these
repurchased shares, approximately 4,829,000 shares were held as treasury
and 31,000 shares were purchased during the first nine months of 1998 and
settled after September 30, 1998.
9. COMMITMENTS AND CONTINGENCIES. The Corporation is a party to various legal
proceedings incidental to the businesses of the Georgia-Pacific Group and
The Timber Company and is subject to a variety of environmental and
pollution control laws and regulations in all jurisdictions in which it
operates. As is the case with other companies in similar industries, the
Corporation faces exposure from actual or potential claims and legal
proceedings involving environmental matters. Liability insurance in effect
during the last several years provides very limited coverage for
environmental matters. The management of The Timber Company believes that
the Corporation has established adequate reserves for probable losses with
respect to such environmental matters and legal proceedings. However,
holders of The Timber Company stock are shareholders of the Corporation and
are subject to all of the risks associated with an investment in the
Corporation, including the environmental matters and legal proceedings
involving the Georgia-Pacific Group discussed below.
COMMITMENTS AND CONTINGENCIES WITH RESPECT TO THE TIMBER COMPANY. The
Timber Company is subject to various legal proceedings and claims that
arise in the ordinary course of its business. Although the ultimate outcome
of these matters and legal proceedings cannot be determined with certainty,
based on presently available information, management of the Corporation
believes that the final outcome of such matters and legal proceedings could
be material to the operating results of The Timber Company in any given
quarter or year, but will not have a material adverse effect on the long-
term results of operations, liquidity or financial position of The Timber
Company.
COMMITMENTS AND CONTINGENCIES WITH RESPECT TO GEORGIA-PACIFIC GROUP. The
following sets forth legal proceedings to which the Corporation is a party
and claims related to the operations of the Georgia-Pacific Group.
The Corporation is involved in environmental remediation activities at
approximately 184 sites, both owned by the Corporation and owned by others,
where it has been notified that it is or may be a potentially responsible
party under the Comprehensive Environmental Response, Compensation and
Liability Act or similar state "superfund" laws. Of the known sites in
which it is involved, the Corporation estimates that approximately 49
percent are being investigated, approximately 27 percent are being
remediated and approximately 24 percent are being monitored (an activity
that occurs after either site investigation or remediation has been
completed). The ultimate costs to the Corporation for the investigation,
remediation and monitoring of many of these sites cannot be predicted with
certainty, due to the often unknown magnitude of the pollution or the
necessary cleanup, the varying costs of alternative cleanup methods, the
amount of time necessary to accomplish such cleanups, the evolving nature
of cleanup technologies and government regulations, and the inability to
determine the Corporation's share of multiparty cleanups or the extent to
which contribution will be available from other parties. The Corporation
has established reserves for environmental remediation costs for these
sites in amounts that it believes are probable and reasonably estimable.
Based on analysis of currently available information and previous
experience with respect to the cleanup of hazardous substances, the
Corporation believes it is reasonably possible that costs associated with
these sites may exceed current reserves by amounts that may prove
insignificant or that could range, in the aggregate, up to approximately
$56 million. This estimate of the range of reasonably possible additional
costs is less certain than the estimates upon which reserves are based, and
in order to establish the upper limit of such range, assumptions least
favorable to the Corporation among the range of reasonably possible
outcomes were used. In estimating both its current reserve for
environmental remediation and the possible range of additional costs, the
Corporation has not assumed it will bear the entire cost of remediation of
every site to the exclusion of other known potentially responsible parties
who may be jointly and severally liable. The ability of other potentially
responsible parties to participate has been taken into account, based
generally on the parties' financial condition and probable contribution on
a per site basis.
<PAGE>
38
The Corporation and many other companies are defendants in suits brought in
various courts around the nation by plaintiffs who allege that they have
suffered personal injury as a result of exposure to asbestos-containing
products. These suits allege a variety of lung and other diseases based on
alleged exposure to products previously manufactured by the Corporation. In
many cases, the plaintiffs are unable to demonstrate that they have
suffered any compensable loss as a result of such exposure, or that any
injuries they have incurred in fact resulted from exposure to the
Corporation's products.
The Corporation generally settles asbestos cases for amounts it considers
reasonable given the facts and circumstances of each case. The amounts it
has paid to date to defend and settle these cases have been substantially
covered by product liability insurance. The Corporation is currently
defending claims of approximately 77,000 such plaintiffs as of November 3,
1999 and anticipates that additional suits will be filed against it over
the next several years. The Corporation has insurance available in amounts
that it believes are adequate to cover substantially all of the reasonably
foreseeable damages and settlement amounts arising out of claims and suits
currently pending. The Corporation has further insurance coverage available
for the disposition of suits that may be filed against it in the future,
but there can be no assurance that the amounts of such insurance will be
adequate to cover all future claims. The Corporation has established
reserves for liabilities and legal defense costs it believes are probable
and reasonably estimable with respect to pending suits and claims, and has
also established a receivable for expected insurance recoveries.
On May 6, 1998, suit was filed in state court in Columbus, Ohio, against
the Corporation and Georgia-Pacific Resins, Inc., a wholly owned subsidiary
of the Corporation. The lawsuit was filed by eight plaintiffs who seek to
represent a class of individuals who at any time from 1985 to the present
lived, worked, resided, owned, frequented or otherwise occupied property
located within a three-mile radius of the Corporation's resins
manufacturing operation in Columbus, Ohio. The lawsuit alleges that the
individual plaintiffs and putative class members have suffered personal
injuries and/or property damage because of (i) alleged "continuing and
long-term releases and threats of releases of noxious fumes, odors and
harmful chemicals, including hazardous substances" from the Corporation's
operations and/or (ii) a September 10, 1997 explosion at the Columbus
facility and alleged release of hazardous material resulting from that
explosion. Prior to the lawsuit, the Corporation had received a number of
explosion-related claims from nearby residents and businesses. These claims
were for property damage, personal injury and business interruption and
were being reviewed and adjusted on a case-by-case basis. The Corporation
has denied the material allegations of the lawsuit. While it is premature
to evaluate the claims asserted in the lawsuit, the Corporation believes it
has meritorious defenses.
In May 1997, the Corporation and nine other companies were named as
defendants in a suit brought by the Attorney General of the State of
Florida alleging that they engaged in conspiracy to fix the prices of
sanitary commercial paper products, such as towels and napkins, in
violation of federal and state laws. Approximately 45 similar suits have
been filed by private plaintiffs in federal courts in California, Florida,
Georgia and Wisconsin, and in the state courts of California, Wisconsin,
Minnesota and Tennessee. On July 28, 1999, the Corporation and the Attorney
General of the State of Florida entered into a Settlement Agreement
pursuant to which the State will dismiss its claims against the
Corporation. The Settlement Agreement states that the Attorney General is
dismissing its claims in the public interest and consistent with its
responsibilities. The Agreement also provides that the Corporation
continues to deny that there is any evidence that it engaged in the alleged
price fixing conspiracy. In addition, the Corporation agreed to donate
certain real property to the State of Florida, Board of Trustees of the
Internal Improvement Trust. The value of this real property is not material
to the results of operations or financial position of the Corporation.
In addition, as part of the formation of the joint venture with Chesapeake
described in Note 7, the Corporation and Wisconsin Tissue assigned, and
Georgia-Pacific Tissue agreed to assume, the liabilities of both companies
in connection with these cases. The Corporation and Wisconsin Tissue have
denied that they have engaged in any of the illegal conduct alleged in
these cases and intend to defend themselves vigorously.
Although the ultimate outcome of these environmental matters and legal
proceedings cannot be determined with certainty, based on presently
available information, management believes that adequate reserves have been
established for probable losses with respect thereto. Management further
believes that the ultimate outcome of such environmental matters and legal
proceedings could be material to operating results in any given quarter or
year but will not have a material adverse effect on the long-term results
of operations, liquidity or consolidated financial position of the
Corporation.
<PAGE>
39
10. RELATED PARTY TRANSACTIONS. During 1999 and 1998, The Timber Company
sold timber deeds to Georgia-Pacific Group. The Timber Company
recognizes revenues and earnings from these related party timber deed
contracts as the timber is cut by the Georgia-Pacific Group. Had The
Timber Company recognized revenues and earnings on these related party
timber deed contracts at the time of the agreement (which is the
accounting policy for timber deed sales to third parties), pro forma
net sales, depreciation and cost of timber harvested, income before
income taxes and extraordinary item, net income and basic and diluted
earnings per share would have been as follows:
<TABLE>
<CAPTION>
Georgia-Pacific Corporation--The Timber Company
Three Months Ended Three Months Ended
October 2, 1999 September 30, 1998
------------------------ ----------------------------
(In millions, except per share amounts) As Reported Pro forma (a) As Reported Pro forma (a)
- -------------------------------------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Net Sales $ 139 $ 139 $ 143 $ 133
Depreciation and cost of timber harvested 12 12 11 10
Income before income taxes and
Extraordinary item 78 78 67 58
Net income 49 49 41 35
Basic earnings per share 0.59 0.59 0.46 0.39
Diluted earnings per share 0.59 0.59 0.46 0.39
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
October 2, 1999 September 30, 1998
----------------------- ---------------------------
In millions, except per share amounts) As Reported Pro forma (a) As Reported Pro forma (a)
- ------------------------------------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Net Sales $ 418 $ 412 $ 407 $ 421
Depreciation and cost of timber harvested 34 33 32 34
Income before income taxes and
Extraordinary item 319 314 215 277
Net income 195 192 129 136
Basic earnings per share 2.30 2.27 1.41 1.49
Diluted earnings per share 2.29 2.26 1.40 1.48
</TABLE>
(a) Reported on a pro forma basis as if The Timber Company had recognized
revenues and earnings on timber deed sales to Georgia-Pacific Group at
the time of the contract, which is the accounting treatment utilized in
the case of timber deeds sold to third parties.
11. SUBSEQUENT EVENT. On November 1, 1999, The Timber Company signed a
definitive agreement to sell approximately 194,000 acres of its redwood
and Douglas fir timberlands in northern California for a purchase price
of approximately $397 million. The sale is expected to close by the end
of the year, subject to the buyer obtaining required financing and
approval by the Corporation's board of directors.
<PAGE>
40
SELECTED COMBINED SALES DATA (Unaudited)
Georgia-Pacific Corporation--The Timber Company
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- ------------------------
October 2, Sept. 30, October 2, Sept. 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
VOLUME (in thousand tons)
Southern softwood sawtimber 1,582 1,506 5,233 4,376
Western softwood sawtimber 413 491 1,110 1,260
Softwood pulpwood 1,126 1,208 3,319 3,195
Hardwood sawtimber 181 139 409 297
Hardwood pulpwood 679 665 1,621 1,601
---------- ---------- ---------- ----------
Total volume 3,981 4,009 11,692 10,729
========== ========== ========== ==========
SELLING PRICES (per ton)
Southern softwood sawtimber $ 46 $ 48 $ 47 $ 51
Western softwood sawtimber 87 69 82 71
Softwood pulpwood 11 12 12 15
Hardwood sawtimber 36 41 34 37
Hardwood pulpwood 6 10 7 11
Weighted average price 34 33 34 37
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
THIRD QUARTER 1999 COMPARED WITH THIRD QUARTER 1998
The Timber Company reported net sales of approximately $139 and $143 million for
the third quarter of 1999 and 1998, respectively. Net income for the 1999 third
quarter was $49 million, or $0.59 diluted earnings per share, compared with $41
million, or $0.46 diluted earnings per share, in 1998. The 1998 third quarter
results included a $1.4 million write-off for the loss of pre-merchantable
timber destroyed by forest fires in Florida in June 1998. In addition, the
pre-tax impact from reduced selling prices for timber salvaged from these fires
is estimated to be approximately $5 million in the third quarter of 1998.
Timber sales were relatively unchanged from the prior year third quarter,
decreasing $2 million, from $134 million in the third quarter of 1998 to $132
million in the third quarter of 1999. This is primarily a result of strong
Western sawtimber prices offset by slightly lower prices for Southern sawtimber.
Western sawtimber volumes decreased 16 percent compared to the third quarter of
1998, due in part to harvesting restrictions brought about by dry weather and
associated fire hazards in the Northwest. The decline in volume for Western
sawtimber was more than offset by a 26 percent increase in price for the same
period. Southern sawtimber harvest volumes were approximately 5 percent higher
than the third quarter of 1998. Total third quarter harvest volumes in 1999 were
almost identical to the third quarter of 1998.
Total 1999 harvest volumes are anticipated to remain comparable to 1998.
Year-to-date harvest volumes are ahead of plan and, as a result, harvest volumes
will decrease in the fourth quarter of 1999 compared to the third quarter of
1999. Additionally, as a result of the land sales in the Northeast, The Timber
Company expects hardwood pulpwood harvest volumes to be slightly lower for the
year. In the fourth quarter 1999, revenues from hunting permits will be minimal
as these revenues are seasonal, with the majority of the revenues recognized
when received in the second and third quarters of each year.
Western sawtimber prices increased 26 percent quarter over quarter, primarily
due to a shift in product mix and a significant increase in Douglas Fir prices
early in the third quarter of 1999. These price increases were due in part to
recovering Asian markets and the related effect of export log markets. Douglas
Fir prices declined and leveled off as the quarter came to a close. Southern
sawtimber prices decreased slightly from 1998, reaching their seasonal lows and
began trending upward towards the end of the quarter. Softwood pulpwood prices
were down 8 percent compared to the third quarter of 1998 due in part to dry
weather. Hardwood pulpwood prices also continued to drop, as expected.
The Timber Company expects Southern sawtimber prices to continue to trend upward
in the fourth quarter, though the prices will vary across the basins. In the
south, seasonally wet weather impacts available harvestable timber supply which
may translate into rising prices. Prices for pulpwood are beginning to trend
upward, but notable increases are not anticipated before the end of the year
without significant wet weather conditions. The Timber Company expects pricing
of Western sawtimber to continue to be good, with some seasonal moderation in
both price and volume.
Earnings before interest and taxes increased $11 million from the same period a
year ago to $95 million in the third quarter of 1999. The 13 percent increase
resulted primarily from an increase in gains on miscellaneous land sales of $15
million over the 1998 third quarter.
General and administrative expense was $12 million for the third quarter 1999
compared with $8 million for the same period in 1998. The 1999 third quarter
includes $2 million of one-time, non-recurring charges, primarily related to
charitable contributions.
Interest expense remained unchanged at $17 million for both the third quarters
of 1999 and 1998. Interest on slightly higher average debt levels in the third
quarter of 1999 compared with the 1998 third quarter, was offset by a decrease
in the weighted average interest rate.
YEAR-TO-DATE THIRD QUARTER 1999 COMPARED WITH YEAR-TO-DATE THIRD QUARTER 1998
The Timber Company reported net sales of approximately $418 million and net
income of $195 million, or $2.29 diluted earnings per share, for the nine-month
period ended October 2, 1999 compared to net sales of $407 million and net
income of $129 million, or $1.40 cents diluted earnings per share, for the nine
months ended September 30, 1998. The 1999 results included a one-time, after-tax
gain of $50 million ($0.59 cents diluted earnings per share) from the sale of
company timberlands in Maine and New Brunswick. The 1998 results included an
extraordinary, after-tax loss of $2 million, or $0.02 diluted earnings per
share, for the early retirement of debt.
Timber sales increased $12 million year-to-date, from $389 million as of
September 30, 1998 to $401 million as of October 2, 1999, primarily as a result
of strong Southern sawtimber harvest volumes and an increase in Western
sawtimber prices. Southern sawtimber harvest volumes increased 20 percent
compared to the first nine months of 1998, which substantially offset the
decrease in price for the same period. Total harvest volumes were up by 9
percent due to strong demand for building products as well as recovering Asian
markets in 1999; however, full year 1999 harvest volumes are expected to remain
relatively constant with 1998 full year harvest levels. Year-to-date harvest
volumes are ahead of plan and as a result, harvest volumes will decrease in the
fourth quarter of 1999. In addition, softwood pulpwood volume increased 4
percent compared to the first nine months of 1998. Western sawtimber volumes
decreased 12 percent compared to the first nine months of 1998 due in part to
weather conditions which restricted harvesting in the Northwest during the first
nine months of 1999. The decline in Western sawtimber volume was offset by an
increase in price for the same period. Additionally, The Timber Company
increased its total sales revenue to third parties from 21 percent in the first
nine months of 1998 to 34 percent in the first nine months of 1999.
Southern sawtimber prices decreased 8 percent from record levels in 1998 due in
part to the dry ground conditions in the south and a change in the operating
policy between The Timber Company and The Georgia-Pacific Group. This operating
policy change, which was effective July 1, 1998, impacted the prices for
southern timber by adjusting them monthly, rather than quarterly. The decline in
Southern sawtimber prices was offset by increased harvest volumes due in part to
strong demand in the building products business. Softwood pulpwood prices were
down 20 percent compared to the first nine months of 1998 due to a combination
of dry weather, the change in the operating policy between The Timber Company
and The Georgia-Pacific Group (as described above) and pulp mill curtailments
and/or shutdowns in the first half of 1999. Though pulp and paper pricing is
beginning to recover, prices for these products remain below last year levels.
Increased harvest volumes helped to mitigate the impact of this softening in
price. Hardwood pulpwood prices also continued to drop, as anticipated. Western
sawtimber prices increased 15 percent year over year, primarily due to
recovering western markets. Also contributing was the increased demand in the
building products business that was experienced during the first half of 1999.
Excluding the pre-tax gain on the sale of timberlands in Maine and New Brunswick
of $84 million in the second quarter of 1999, earnings before interest and taxes
increased $20 million to $287 million in the first nine months of 1999 compared
with $267 million in the first nine months of 1998. The 7 percent increase
resulted primarily from an increase in gains on miscellaneous land sales of $12
million over the 1998 third quarter and the negative impact on 1998 of the
forest fires in Florida. Overall, 9 percent higher total harvest volumes helped
to offset the year over year 8 percent decline in average sales price.
General and administrative expense was $32 million for the first nine months of
1999 compared with $26 million for the same period in 1998. The increase is due
to higher incentive compensation accruals, higher litigation costs and $2
million of one-time, non-recurring charges in the third quarter of 1999,
primarily related to charitable contributions.
Interest expense remained unchanged at $52 million for both the first nine
months of 1999 and 1998. Interest on slightly higher average debt levels during
1999 compared with the 1998, was offset by a decrease in the weighted average
interest rate.
<PAGE>
41
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. The Timber Company generated cash from operations of $139
million during the nine months ended October 2, 1999 compared with $167 million
for the same period a year ago. The decrease is due in part to the cash received
from the sale of a timber deed sold to The Georgia-Pacific Group in the second
quarter of 1998 for approximately $23 million and to taxes paid on gains from
the 1999 timberland sales.
INVESTING ACTIVITIES. Expenditures during the first nine months of 1999,
including acquisitions, were $49 million of which $32 is related to
silvicultural investments. Expenditures for the same period in 1998 totaled $50
million, with $32 million related to silvicultural investments. The Timber
Company expects to invest approximately $50 million in 1999, without considering
the cost of any acquisitions, primarily for silvicultural investments.
Proceeds from sales of assets were $104 million for the first nine months of
1999. In addition to miscellaneous land sales, during the year, The Timber
Company sold approximately 390,000 acres of timberlands in the Canadian province
of New Brunswick and approximately 440,000 acres of timberlands in Maine for
approximately $92 million. In conjunction with the sale of the Maine
timberlands, the Corporation received notes receivable from the purchaser for
approximately $51 million. The Corporation expects to monetize these notes
through the issuance of notes payable in a private placement during the fourth
quarter of 1999. These notes are included in "Other Assets" on the Corporation's
balance sheet at October 2, 1999. The proceeds from both these timberland sales
are reflected as "Proceeds from sales of assets" on The Timber Company's
Statements of Cash Flows. The proceeds received by The Timber Company were used
primarily to repurchase shares of The Timber Company's stock. During the first
nine months of 1998, The Timber Company received $39 million in proceeds from
the sale of assets, principally real estate development properties located in
South Carolina and Florida. These proceeds were used to repay outstanding debt.
On November 1, 1999, The Timber Company signed a definitive agreement to sell
approximately 194,000 acres of its redwood and Douglas fir timberlands in
northern California for a purchase price of approximately $397 million. The sale
is expected to close by the end of the year, subject to the buyer obtaining
required financing and approval by the Corporation's board of directors. In
conjunction with the sale, the Corporation expects to receive notes receivable
from the purchaser for the purchase price. The Corporation expects these notes
receivable to be fully secured by a stand by letter of credit with an
unaffiliated third party. Additionally, the Corporation expects to monetize
these notes through the issuance of notes payable in a private placement during
the first half of 2000. The Timber Company expects to use the proceeds of the
monetization to repay debt. This sale concludes The Timber Company's strategic
repositioning of its timberland portfolio. The estimated annual harvest from
these California timberlands for 1999 is approximately 83 million board feet of
softwood sawtimber. The estimated annual operating profit and capital
expenditures for 1999 related to these timberlands is $30 million and $1
million, respectively. The Georgia-Pacific's Fort Bragg sawmill has a wood
supply agreement with The Timber Company through 2000 which was transferred as
part of the sale agreement.
The Timber Company expects to continue to optimize its timber portfolio for the
remainder of 1999, selling selected properties that have a greater alternative
value, as conservation, commercial or recreational sites. There are currently
approximately 130,000 acres of scattered parcels which have been identified for
such sales.
FINANCING ACTIVITIES. The Corporation's total debt, excluding senior deferrable
notes, increased by $614 million to $6,165 million at October 2, 1999 from
$5,551 million at December 31, 1998. At October 2, 1999 and December 31, 1998,
$5,198 million and $4,568 million, respectively, of such total debt was
Georgia-Pacific Group's debt and $967 million and $983 million, respectively,
was The Timber Company's debt.
In June 1999, the Corporation renegotiated its accounts receivable sale program
and increased the amount outstanding under the program from $280 million to $750
million. The program expires in April 2000. In connection with the acquisition
of Unisource, the Corporation retained former Unisource agreements to sell up to
$150 million of certain qualifying U.S. accounts receivable and up to CN$70
million of certain eligible Canadian accounts receivable. The U.S. agreement
expires in April 2000 and the Canadian agreement expires in May 2004. At October
2, 1999, approximately $947 million was outstanding under the Corporation's and
Unisources programs in the aggregate. The receivables outstanding under these
programs and the corresponding debt are included as current receivables and
short-term debt, respectively on the accompanying balance sheets. The agreements
are accounted for as a secured borrowing. As collections reduce previously sold
interests, new receivables may be sold.
Also in June 1999, the Board of Directors increased the corporate target debt
level under which management can purchase shares of Georgia-Pacific Group and
The Timber Company common stock on the open market from $5.75 billion to $6.8
billion. In addition, the Board of Directors increased the Georgia-Pacific
Group's target debt level from $4.75 billion to $5.8 billion. The Timber
Company's target debt level remains at $1.0 billion.
On July 22, 1999, the Corporation increased the amount of its unsecured
revolving credit facility from $1.5 billion to $2.0 billion. This unsecured
revolving credit facility is used for direct borrowings and as support for
commercial paper and other short-term borrowings. As of October 2, 1999, $1,239
million of committed credit was available in excess of all short-term borrowings
outstanding under or supported by the facility. The revolving credit agreement
contains certain restrictive covenants, including a maximum leverage ratio
(funded indebtedness, including senior deferrable notes, to earnings before
interest, taxes, depreciation and amortization ("EBITDA")) of 4.5 to 1.0, which
is to be maintained throughout the term of the credit agreement. As of October
2, 1999, the leverage ratio was 2.3 to 1.0.
On July 7, 1999, the Corporation issued 17,250,000 of 7.5% PEPS Units for $862.5
million. Each PEPS Unit had an issue price of $50 and consists of a contract to
purchase shares of Georgia-Pacific Group common stock on or prior to August 16,
2002 and a senior deferrable note of Georgia-Pacific Group due August 16, 2004.
Each purchase contract yields interest of 0.35% per year, paid quarterly, on the
$50 stated amount of the PEPS Unit. Each senior deferrable note yields interest
of 7.15% per year, paid quarterly, until August 16, 2002. On August 16, 2002,
following a remarketing of the senior deferrable notes, the interest rate will
be reset at a rate that will be equal to or greater than 7.15%. The liability
related to the PEPS Units will not be included in the debt amount for purposes
of determining the corporate and Georgia-Pacific Group debt targets.
During the first nine months of 1999, approximately $79 million of fixed and
floating rate industrial revenue bonds were replaced, of which $66 million were
refunded by fixed rate instruments and $13 million were refunded by variable
rate instruments.
In connection with the acquisition of Unisource, the Corporation retained former
Unisource industrial revenue bonds in the amount of $9 million and capital
leases in the amount of $12 million. These amounts are included in the
Corporation's total debt.
As of October 2, 1999, the Corporation had registered for sale up to $2.975
billion of debt and equity securities under a shelf registration statement filed
with the Securities and Exchange Commission. The Corporation registered $1.725
billion under such registration statement related to the PEPS Units ($862.5
million of which was received on July 7, 1999 in exchange for senior deferrable
notes, which notes will be converted into $862.5 million of equity
(Georgia-Pacific Group common stock) upon exercise of the purchase contracts.
The $862.5 million of cash (less expenses) raised in the sale of the PEPS Units
was used to pay for the acquisition of Unisource. Proceeds from the issuance of
securities under this registration statement may be used for general corporate
purposes, including the reduction of short-term debt, acquisitions, investments
in, or extension or credit to, the Corporation's subsidiaries and the
acquisition of real property.
In connection with the formation of Georgia-Pacific, Georgia-Pacific Tissue
financed the $755 million initial distribution to Chesapeake with short-term
borrowings from a bank syndicate in October 1999. In the fourth quarter of 1999,
the Corporation expects to sell debt under the shelf registration statement
filed with the Securities and Exchange Commission and loan or contribute the
proceeds through the use of one or more subsidiaries to Georgia-Pacific Tissue
in order for Georgia-Pacific Tissue to retire such syndicated bank debt. This
short-term financing temporarily increased the Corporation's total debt above
the $6.8 billion target debt level for repurchasing stock. The Corporation
expects to be able to repurchase stock again in the fourth quarter once the debt
level falls below the target.
On October 7, 1999, approximately $10 million of floating rate industrial
revenue bonds, due December 1, 2025, were replaced by $10 million fixed rate
industrial revenue bonds issued on October 1, 1999.
<PAGE>
42
The Corporation's senior management establishes the parameters of the
Corporation's financial risk, which have been approved by the Board of
Directors. Hedging interest rate exposure through the use of swaps and options
and hedging foreign exchange exposure through the use of forward contracts are
specifically contemplated to manage risk in keeping with the management policy.
Derivative instruments, such as swaps, forwards, options or futures, which are
based directly or indirectly upon interest rates, currencies, equities and
commodities, may be used by the Corporation to manage and reduce the risk
inherent in price, currency and interest rate fluctuations.
The Corporation does not utilize derivatives for speculative purposes.
Derivatives are transaction-specific so that a specific debt instrument,
contract or invoice determines the amount, maturity and other specifics of the
hedge. Counterparty risk is limited to institutions with long-term debt ratings
of A or better.
The table below presents principal (or notional) amounts and related weighted
average interest rates by year of expected maturity for the Corporation's debt
obligations as of October 2, 1999. For obligations with variable interest rates,
the table sets forth payout amounts based on current rates and does not attempt
to project future interest rates.
Georgia-Pacific Corporation and Subsidiaries
<TABLE>
<CAPTION>
(In millions) 1999 2000 2001 2002
- ------------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
Debt
Commercial paper and other short-term notes - - - -
Average interest rates - - - -
Notes and debentures - - - $ 300
Average interest rates - - - 10%
Revenue bonds $ 10 $ 24 $ 6 $ 74
Average interest rates 5.3% 4.2% 3.9% 3.8%
Other loans - $ 13 - -
Average interest rates - 8.0% - -
Accounts receivable sale program - - - -
Average interest rates - - - -
Senior deferrable notes - - - -
Average interest rates - - - -
Notional principal amount of interest rate exchange
agreements $ 100 $ 177 - $ 131
Average interest rate paid (fixed) 6.4% 7.7% - 5.9%
Average interest rate received (variable) 5.5% 5.5% - 5.4%
</TABLE>
Georgia-Pacific Corporation and Subsidiaries
<TABLE>
<CAPTION>
Fair value July
(In millions) 2003 Thereafter Total 3, 1999
- ------------- ------- ------------- ------- ---------------
<S> <C> <C> <C> <C>
Debt
Commercial paper and other short-term notes - $ 761 $ 761 $ 761
Average interest rates - 5.7% 5.7% 5.7%
Notes and debentures $ 300 $ 2,900 $ 3,500 $ 3,490
Average interest rates 5.7% 8.6% 8.4% 8.0%
Revenue bonds - $ 550 $ 664 $ 573
Average interest rates - 5.3% 5.1% 8.0%
Other loans $ 14 - $ 27 $ 27
Average interest rates 5.7% - 6.8% 7.3%
Accounts receivable sale program - $ 947 $ 947 $ 947
Average interest rates - 5.6% 5.6% 5.6%
Senior deferrable notes - $ 863 $ 863 $ 870
Average interest rates - 7.15% 7.15% 7.3%
Notional principal amount of interest rate exchange $
agreements $ 300 - 708 $ 4
Average interest rate paid (fixed) 5.9% - 6.4% 6.4%
Average interest rate received (variable) 5.9% - 5.7% 5.7%
</TABLE>
The Corporation has the intent and ability to refinance commercial paper, other
short-term notes and the accounts receivable sale program as they mature. The
Corporation intends to re-market the senior deferrable notes on or before August
16, 2002 at an interest rate that will be equal to or greater than 7.15%; thus
extending the maturity of the senior deferrable notes to August 16, 2004.
Therefore, maturities of these obligations are reflected as cash flows expected
to be made after 2003. The fair value of interest rate exchange agreements
exclude amounts used to determine the fair value of related notes and
debentures.
At October 2, 1999, the Corporation's weighted average interest rate on its
debt, excluding the senior deferrable notes, was 7.0% including the accounts
receivable sale program and outstanding interest rate exchange agreements. At
October 2, 1999, these interest rate exchange agreements effectively converted
approximately $708 million of floating rate obligations with a weighted average
interest rate of 5.7% to fixed rate obligations with an average effective
interest rate of 6.4%. These agreements have a weighted average maturity of
approximately 2.5 years. As of October 2, 1999, the Corporation's total floating
rate debt, including the accounts receivable sale program, exceeded related
interest rate exchange agreements by $1.6 billion.
The Corporation also enters into foreign currency exchange agreements and
commodity futures and swaps, the amounts of which were not material to the
consolidated financial position of the Corporation at October 2, 1999.
During the first nine months of 1999, The Timber Company purchased on the open
market approximately 5,046,000 shares of The Timber Company common stock, all of
which were held as treasury stock at October 2, 1999, at an aggregate price of
$124 million ($24.57 average per share).
During the first nine months of 1998, The Timber Company purchased on the open
market 4,860,000 shares of The Timber Company common stock at an aggregate price
of $105 million ($21.60 average per share). Of these repurchased shares,
approximately 4,829,000 shares were held as treasury and 31,000 shares were
purchased during the first nine months of 1998 and settled after September 30,
1998
<PAGE>
43
Subsequent to October 2, 1999 through November 3, 1999, The Timber Company
purchased on the open market approximately 53,000 shares of The Timber Company
stock at an aggregate price of $1 million ($23.68 average per share). The Timber
Company expects to repurchase shares of The Timber Company common stock
throughout 1999 as long as debt levels are below the established thresholds.
During the first nine months of 1999, The Timber Company received $9 million
from the exercise of options to purchase The Timber Company common stock.
During the first nine months of 1999 and 1998, The Timber Company paid $63
million and $69 million, respectively, in dividends.
In 1999, The Timber Company expects its cash flow from operations, together with
proceeds from any asset sales and available financing sources, to be sufficient
to fund planned capital investments, pay dividends and make scheduled debt
payments.
OTHER. In July 1999, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 137, providing for a one year delay of the effective date of SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities"("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instrument and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities on the balance sheet
and measure those instruments at fair value. Georgia-Pacific Corporation will be
required to adopt SFAS No. 133 in 2001. Management is evaluating the effect of
this statement on Georgia-Pacific's derivative instruments: primarily interest
rate swaps, foreign currency forward contracts and long-term purchase
commitments. The impact of adjustments to fair value is not expected to be
material to The Timber financial position.
The Timber Company has worked to resolve the effects of the Year 2000 problem on
its information systems. The Year 2000 problem, which is common to most
businesses, concerns the inability of such systems to properly recognize and
process dates and date-sensitive information on and beyond January 1, 2000. In
1996, the Corporation began a companywide assessment of the vulnerability of its
systems to the Year 2000 problem. Based on such assessment, The Timber Company
has developed a Year 2000 plan, under which all of its key information systems
were tested, and noncompliant software or technology has being modified or
replaced. The Timber Company is also surveying the Year 2000 compliance status
and compatibility of customers' and suppliers' systems that interface with The
Timber Company's systems or could otherwise impact The Timber Company's
operations.
The Timber Company has completed testing and verification of its systems and
processes for Year 2000 readiness. The Timber Company completed an inventory of
the systems and embedded chips used in its operations and found that only a
small percentage of such systems and chips could be subject to Year 2000
problems. The work needed to resolve the Year 2000 problem with regard to its
operations was performed as part of normal systems maintenance and replacement
practices. The Timber Company did not accelerate its internal maintenance
schedule or incur any incremental cost for such work. The Timber Company
continues its process of identifying critical suppliers and customers and
communicating with each of them to ascertain their level of readiness to address
and remediate Year 2000 problems. The most reasonably likely worst-case scenario
of failure by The Timber Company or its customers or suppliers to resolve the
Year 2000 problem would be a temporary inability on the part of The Timber
Company to process timber sales and billings in a timely manner. The Timber
Company continues to identify and consider various contingency options,
including identification of alternate suppliers, vendors and service providers,
and manual alternatives to systems operations, which will allow it to minimize
the risks of any unresolved Year 2000 problems on its operations and to minimize
the effect of any unforeseen Year 2000 failures.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR' PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. The statements under this
"Management's Discussion and Analysis" and other statements contained herein
that are not historical facts, including statements regarding pricing trends,
expected harvest rotations and The Timber Company's expectations regarding
resolution of issues associated with the Year 2000 problem, are forward-looking
statements (as such term is defined under the Private Securities Litigation
Reform Act of 1995) based on current expectations. The accuracy of such
statements is subject to a number of risks, uncertainties and assumptions. In
addition to the risks, uncertainties and assumptions discussed elsewhere herein,
factors that could cause or contribute to actual results differing materially
from such forward-looking statements include the following: the effect on The
Timber Company of government, legislative and environmental restrictions;
catastrophic losses from fires, floods, windstorms, earthquakes, volcanic
eruptions, insect infestations or diseases; material variations in regional
market demand for timber products; fluctuations in interest rates; the ability
of The Timber Company, and its customers and suppliers, to address the Year 2000
problem in a timely and efficient manner; and other risks, uncertainties and
assumptions discussed in the Corporation's filings with the Securities and
Exchange Commission, including the Corporation's Form 10-K dated December 31,
1998, the Corporation's Quarterly Report on Form 10-Q/A for the quarter ended
July 3, 1999, and the Corporation's Form 8-K dated October 17, 1996.
For a discussion of commitments and contingencies refer to Note 8 of the Notes
to Combined Financial Statements.
<PAGE>
PART II - OTHER INFORMATION
-----------------
GEORGIA-PACIFIC CORPORATION
October 2, 1999
Item 1. Legal Proceedings.
The information contained in Note 12 "Commitments and
Contingencies" of the Notes to Consolidated Financial
Statements--Georgia-Pacific Corporation, Note 10 "Commitments
and Contingencies" of the Notes to Combined Financial
Statements--Georgia-Pacific Group and Note 9 "Commitments and
Contingencies" of the Notes to Consolidated Financial
Statements--The Timber Company filed as part of this Quarterly
Report on Form 10-Q is incorporated herein by reference.
Representatives from the United States Environmental
Protection Agency completed an extended inspection of the
Nekoosa, Wisconsin mill the week of November 1 as part of the
Agency's announced Pulp and Paper Enforcement Initiative
designed to seek out alleged shortcomings in preconstruction
permitting and controls for plant modifications made over the
last two decades. This is a follow up to an extensive
Information Request pursuant to Section 114 of the Clean Air
Act this part summer.
The Corporation recently discovered and disclosed to the
Louisiana Department of Environmental Quality some lapses in
appropriate air permitting for modifications made over ten
years ago at the Port Hudson pulp and paper mill. Negotiations
with the state on how to resolve the issue are currently
underway.
Item 5. Other Information.
Effective as of October 3, 1999, the Company and Wisconsin
Tissue Mills Inc. ("WTM"), a wholly owned subsidiary of
Chesapeake Corporation ("Chesapeake), completed the formation
of a joint venture through which the two companies combined
their commercial tissue businesses. WTM contributed
substantially all of its assets and certain related
liabilities to the joint venture, known as Georgia-Pacific
Tissue, LLC (the "JV"), and received a 5% equity interest in
the JV and a cash distribution of approximately $755 million.
The Company contributed certain of its commercial tissue
assets and related liabilities to the JV in return for a 95%
equity interest.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1 Joint Venture Agreement Among Georgia-
Pacific Corporation, Chesapeake
Corporation, Wisconsin Tissue Mills
Inc., and Georgia-Pacific Tissue, LLC
dated as of October 4, 1999.
Exhibit 10.2 Operating Agreement of Georgia-Pacific
Tissue, LLC, dated as of October 4,
1999, among Wisconsin Tissue Mills Inc.
and Georgia-Pacific Corporation.
Exhibit 12.1 Statements re Computation of Ratios
Exhibit 27.1 Financial Data Schedule.
(b) The Corporation filed the following Current Reports on
Form 8-K during and subsequent to the end of the
quarter ended October 2, 1999:
Date 8-K Description of 8-K
July 15, 1999 Filed pursuant to Item 7 - Financial
Statements, Pro Forma Financial
Information and Exhibits, regarding
the unaudited pro forma consolidated
statements of operations data based
on historical financial statements of
the Corporation and on the historical
financial statements of Unisource
Worldwide, Inc., adjusted to give
effect to the acquisition of
Unisource by the Corporation under
the purchase method of accounting.
October 4, 1999 Submitted a copy of the Corporation's
News Release issued October 4, 1999,
reporting Georgia-Pacific Group's
regarding the completion of the joint
venture with Chesapeake Corporation
in their respective away-from-home
tissue businesses.
<PAGE>
45
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: November 9, 1999 GEORGIA-PACIFIC CORPORATION
(Registrant)
by /s/Danny W. Huff
----------------------------
Danny W. Huff,
Executive Vice President -
Finance and Chief
Financial Officer
by /s/James E. Terrell
----------------------------
James E. Terrell,
Vice President and Controller
(Chief Accounting Officer)
<PAGE>
GEORGIA-PACIFIC CORPORATION
-----------------
INDEX TO EXHIBITS
FILED WITH THE QUARTERLY REPORT
ON FORM 10-Q FOR THE
QUARTER ENDED OCTOBER 2, 1999
Number Description
- ------ -----------
10.1 Joint Venture Agreement among Georgia-Pacific Corporation,
Chesapeake Corporation, Wisconsin Tissue Mills Inc. and
Georgia-Pacific Tissue Company, LLC dated as of October 4,
1999.
10.2 Operating Agreement of Georgia-Pacific Tissue, LLC, dated
as of October 4, 1999, among Wisconsin Tissue Mills Inc.
and Georgia-Pacific Corporation.
12.1 Statements re Computation of Ratios.
27.1 Financial Data Schedule.
- --------------------------------------------------------------------------------
(1) Filed by EDGAR
<PAGE>
EXHIBIT 10.1
GEORGIA-PACIFIC CORPORATION
JOINT VENTURE AGREEMENT
AMONG
GEORGIA-PACIFIC CORPORATION,
CHESAPEAKE CORPORATION,
WISCONSIN TISSUE MILLS INC., AND
GEORGIA-PACIFIC TISSUE, LLC
DATED AS OF OCTOBER 4, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I ORGANIZATION OF THE COMPANY...................................... 1
1.1 FORMATION OF THE COMPANY.............................................. 1
ARTICLE II CONTRIBUTION OF THE BUSINESSES.................................. 2
2.1 CONTRIBUTION OF ASSETS; ASSUMPTION OF LIABILITIES..................... 2
2.2 RETAINED G-P ASSETS AND LIABILITIES................................... 3
2.3 RETAINED WISCO ASSETS AND LIABILITIES................................. 3
2.4 CLOSING OF TRANSACTION................................................ 3
2.5 POST-CLOSING ADJUSTMENT............................................... 6
2.6 TRANSFER TAXES AND RECORDING FEES..................................... 8
2.7 REQUIRED CONSENTS..................................................... 8
2.8 OWNERSHIP OF THE COMPANY; SPECIAL DISTRIBUTION........................ 8
ARTICLE III REPRESENTATIONS AND WARRANTIES OF CSK PARTIES.................. 9
3.1 ORGANIZATION AND QUALIFICATION........................................ 9
3.2 CORPORATE AUTHORIZATION............................................... 9
3.3 CONSENTS AND APPROVALS................................................ 9
3.4 NON-CONTRAVENTION..................................................... 10
3.5 BINDING EFFECT........................................................ 10
3.6 FINANCIAL STATEMENTS: ABSENCE OF CERTAIN CHANGES...................... 10
3.7 LITIGATION AND CLAIMS................................................. 11
3.8 TAXES................................................................. 11
3.9 EMPLOYEES, PENSION AND OTHER BENEFIT PLANS............................ 12
3.10 COMPLIANCE WITH LAWS................................................. 14
3.11 ENVIRONMENTAL MATTERS................................................ 15
3.12 INTELLECTUAL PROPERTY................................................ 15
3.13 LABOR MATTERS........................................................ 16
3.14 CONTRACTS............................................................ 17
3.15 REAL ESTATE LEASES................................................... 18
3.16 ENTIRE BUSINESS; TITLE TO PROPERTY................................... 18
3.17 FINDER'S FEES........................................................ 19
3.18 INSURANCE............................................................ 19
3.19 NO UNDISCLOSED LIABILITIES........................................... 19
3.20 NO MATERIAL ADVERSE CHANGE........................................... 20
3.21 INDEBTEDNESS FOR BORROWED MONEY...................................... 21
3.22 KNOWLEDGE AS OF CLOSING DATE......................................... 21
3.23 NO OTHER REPRESENTATIONS OR WARRANTIES............................... 21
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF G-P........................... 21
4.1 ORGANIZATION AND QUALIFICATION........................................ 21
4.2 CORPORATE AUTHORIZATION............................................... 22
4.3 CONSENTS AND APPROVALS................................................ 22
4.4 NON-CONTRAVENTION..................................................... 22
4.5 BINDING EFFECT........................................................ 22
4.6 FINANCIAL STATEMENTS: ABSENCE OF CERTAIN CHANGES...................... 23
4.7 LITIGATION AND CLAIMS................................................. 23
</TABLE>
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<TABLE>
<S> <C>
4.8 TAXES................................................................. 24
4.9 EMPLOYEES, PENSION AND OTHER BENEFIT PLANS............................ 25
4.10 COMPLIANCE WITH LAWS................................................. 26
4.11 ENVIRONMENTAL MATTERS................................................ 27
4.12 INTELLECTUAL PROPERTY................................................ 27
4.13 LABOR MATTERS........................................................ 28
4.14 CONTRACTS............................................................ 29
4.15 REAL ESTATE LEASES................................................... 29
4.16 ENTIRE BUSINESS; TITLE TO PROPERTY................................... 30
4.17 FINDER'S FEES........................................................ 30
4.18 INSURANCE............................................................ 30
4.19 NO UNDISCLOSED LIABILITIES........................................... 31
4.20 NO MATERIAL ADVERSE CHANGE........................................... 31
4.21 INDEBTEDNESS FOR BORROWED MONEY...................................... 32
4.22 KNOWLEDGE AS OF CLOSING DATE......................................... 33
4.23 ORGANIZATION OF COMPANY.............................................. 33
4.24 AUTHORIZATION OF COMPANY............................................. 33
4.25 ACTIVITIES OF COMPANY................................................ 33
4.26 NO OTHER REPRESENTATIONS OR WARRANTIES............................... 33
ARTICLE V COVENANTS........................................................ 33
5.1 COVENANTS REGARDING EMPLOYEES......................................... 33
5.2 COMPLIANCE WITH WARN AND SIMILAR LAWS................................. 33
5.3 FURTHER ASSURANCES.................................................... 33
5.4 USE OF G-P INTELLECTUAL PROPERTY AND CSK MARKS........................ 34
5.5 CERTAIN MATTERS RELATED TO RETAINED AND ASSUMED LIABILITIES........... 34
5.6 INTERCOMPANY AGREEMENTS............................................... 34
5.7 RECORDS AND RETENTION AND ACCESS...................................... 35
5.8 INSURANCE............................................................. 35
5.9 SPECIAL CSK RETAINED LIABILITY........................................ 35
5.10 PREPARATION OF REGISTRATION STATEMENT................................ 36
5.11 USE OF WISCO NAME.................................................... 36
5.12 PRORATION OF CERTAIN CHARGES......................................... 36
ARTICLE VI CONDITIONS TO CLOSING........................................... 37
[Intentionally Deleted]................................................... 37
ARTICLE VII SURVIVAL; INDEMNIFICATION...................................... 37
7.1 SURVIVAL.............................................................. 37
7.2 INDEMNIFICATION BY G-P................................................ 37
7.3 INDEMNIFICATION BY CSK................................................ 38
7.4 INDEMNIFICATION BY THE COMPANY........................................ 38
7.5 INDEMNIFICATION PROCEDURES............................................ 39
7.6 ACKNOWLEDGMENT REGARDING ENVIRONMENTAL LIABILITIES.................... 41
7.7 CHARACTERIZATION OF INDEMNIFICATION PAYMENTS.......................... 41
ARTICLE VIII TAX COVENANTS................................................. 41
8.1 LIABILITY FOR TAXES................................................... 41
8.2 PREPARATION OF TAX RETURNS............................................ 43
8.3 AMENDED TAX RETURNS................................................... 44
</TABLE>
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<TABLE>
<S> <C>
8.4 CARRY BACKS AND CARRY FORWARDS........................................ 45
8.5 ADDITIONAL TAX MATTERS................................................ 45
8.6 TAX CONTROVERSIES; COOPERATION........................................ 46
ARTICLE IX TERMINATION..................................................... 47
[Intentionally Deleted]................................................... 47
ARTICLE X MISCELLANEOUS.................................................... 47
10.1 NOTICES.............................................................. 47
10.2 AMENDMENT; WAIVER.................................................... 48
10.3 ASSIGNMENT........................................................... 48
10.4 ENTIRE AGREEMENT..................................................... 49
10.5 FULFILLMENT OF OBLIGATIONS........................................... 49
10.6 PARTIES IN INTEREST.................................................. 49
10.7 PUBLIC DISCLOSURE.................................................... 49
10.8 EXPENSES............................................................. 49
10.9 SCHEDULES............................................................ 49
10.10 BULK TRANSFER LAWS.................................................. 49
10.11 GOVERNING LAW; SUBMISSION TO JURISDICTION; SELECTION OF FORUM....... 49
10.12 COUNTERPARTS........................................................ 50
10.13 HEADINGS............................................................ 50
10.14 SEVERABILITY........................................................ 50
10.15 INJUNCTIVE RELIEF................................................... 50
ARTICLE XI DEFINITIONS AND TERMS........................................... 50
11.1 SPECIFIC DEFINITIONS................................................. 50
11.2 OTHER TERMS.......................................................... 66
11.3 OTHER DEFINITIONAL PROVISIONS........................................ 66
</TABLE>
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<PAGE>
JOINT VENTURE AGREEMENT
This JOINT VENTURE AGREEMENT (the "Agreement") dated as of October 4, 1999,
among Chesapeake Corporation, a Virginia corporation ("CSK"), Wisconsin Tissue
Mills Inc., a Delaware corporation and a wholly owned subsidiary of CSK
("WISCO"), Georgia-Pacific Corporation, a Georgia corporation ("G-P"), and
Georgia-Pacific Tissue, LLC, a Delaware limited liability company (the
"Company").
PRELIMINARY STATEMENTS
WHEREAS, G-P is engaged, in part, in the business of producing, selling,
licensing and manufacturing tissue products for the "away from home" markets and
certain related products (the "Commercial Tissue Business");
WHEREAS, G-P has determined that it will contribute certain assets and
liabilities of its Commercial Tissue Business to the Company;
WHEREAS, WISCO is engaged in the Commercial Tissue Business through WISCO
and its Contributed Subsidiaries (the "WISCO Business"); and
WHEREAS, G-P and CSK have determined that it is in the best interests of
their respective shareholders to engage in the Commercial Tissue Business
through a joint venture.
NOW, THEREFORE, G-P, the CSK Parties and the Company agree as follows:
ARTICLE I
ORGANIZATION OF THE COMPANY
1.1 FORMATION OF THE COMPANY. G-P has caused each of the following to
------------------------
occur:
(a) ORGANIZATION OF THE COMPANY. The Company is organized as a limited
---------------------------
liability company under the laws of the State of Delaware.
(b) ORGANIZATIONAL DOCUMENTS. The Company's Certificate of Formation was
------------------------
filed with the Secretary of State of Delaware, a copy of which is set forth as
Exhibit 1.1A hereto.
<PAGE>
ARTICLE II
CONTRIBUTION OF THE BUSINESSES
2.1 CONTRIBUTION OF ASSETS; ASSUMPTION OF LIABILITIES. On the terms and
-------------------------------------------------
subject to the conditions set forth herein and in the Ancillary Agreements, at
the Closing the parties shall take the following actions, which shall be deemed
to take place simultaneously with the execution of this Agreement as part of the
Closing:
(a) WISCO CONTRIBUTION; ASSUMPTION OF LIABILITIES. (i) WISCO shall
---------------------------------------------
contribute, convey, transfer, assign and deliver to the Company, and the Company
shall accept and acquire from WISCO, all right, title and interest of the CSK
Parties in and to the WISCO Contributed Assets, free and clear of all
Encumbrances (other than Permitted Encumbrances); and (ii) WISCO shall assign to
the Company and the Company shall assume and agree to pay, honor, discharge and
perform the WISCO Assumed Liabilities. The parties agree that the WISCO Assumed
Liabilities are intended to be, and the parties shall treat them as, "qualified
liabilities" under Section 1.707-5(a)(6) of the Treasury Regulations unless
different treatment is required under applicable law.
(b) BORROWING BY THE COMPANY; SPECIAL DISTRIBUTION. The Company will incur
----------------------------------------------
the Company Debt in such amounts and on such terms as set forth on Exhibit 2.8A
and will use the net proceeds of the Company Debt solely (after deducting
borrowing expenses consisting of legal fees, accounting fees, printing fees,
filing fees and underwriting fees, not to exceed $8 million, including
refinancings and replacements thereof) to fund the Special Distribution to WISCO
in the amount of $755,200,000 which shall be declared and paid to WISCO
immediately after the contribution of the WISCO Contributed Assets in accordance
with Section 2.8 hereof. The parties agree that Company Debt (other than amounts
borrowed and used to pay expenses incurred in connection with the related
borrowing expenses) is allocable to, and shall be allocated to, WISCO under
Sections 1.752-2 and 1.707-5(b) of the Treasury Regulations.
(c) G-P CONTRIBUTION; ASSUMPTION OF LIABILITIES. (i) G-P shall contribute,
-------------------------------------------
convey, transfer, assign and deliver to the Company, and the Company shall
accept and acquire from G-P, all right, title and interest of G-P in and to the
G-P Contributed Assets, free and clear of all Encumbrances (other than Permitted
Encumbrances); and (ii) G-P shall assign to the Company and the Company shall
assume and agree to pay, honor, discharge and perform the G-P Assumed
Liabilities. The parties agree that the G-P Assumed Liabilities are intended to
be, and the parties shall treat them as, "qualified liabilities" under Section
1.707-5(a)(6) of the Treasury Regulations unless different treatment is required
under applicable law.
(d) ISSUANCE OF UNITS. The Company will issue to WISCO and G-P the number
-----------------
of Units, evidencing their respective equity interests in the Company, in
accordance with Section 2.8(b) hereof.
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<PAGE>
(e) OPERATING AGREEMENT. G-P and WISCO shall enter into an Operating
-------------------
Agreement, substantially in the form of Exhibit 2.1E hereto, the terms of which
shall govern the management and operations of the Company.
2.2 RETAINED G-P ASSETS AND LIABILITIES. Notwithstanding anything herein
-----------------------------------
to the contrary, (i) from and after the Closing each of G-P and its Affiliates
shall retain all of its direct or indirect right, title and interest in and to,
and there shall be excluded from the sale, conveyance, assignment or transfer to
the Company hereunder, the G-P Retained Assets and the G-P Retained Liabilities,
and (ii) the G-P Retained Liabilities shall not be assumed by the Company
hereunder.
2.3 RETAINED WISCO ASSETS AND LIABILITIES. Notwithstanding anything herein
-------------------------------------
to the contrary, (i) from and after the Closing each of the CSK Parties and
their Affiliates shall retain all of its direct or indirect right, title and
interest in and to, and there shall be excluded from the sale, conveyance,
assignment or transfer to the Company hereunder, the WISCO Retained Assets and
the WISCO Retained Liabilities, and (ii) the WISCO Retained Liabilities shall
not be assumed by the Company hereunder.
2.4 CLOSING OF TRANSACTION. The Closing of the transactions contemplated
----------------------
by this Agreement shall take place at the offices of G-P at 10:00 a.m. (Atlanta
time), on October 4, 1999, or at such other time and place as the parties hereto
may mutually agree. The date on which the Closing occurs is called the "Closing
Date." The Closing shall be deemed effective at 12:01 a.m. (Atlanta time), on
October 3, 1999 (the "Effective Time"). To effect the steps set forth in Section
2.1 hereof, the parties shall execute and deliver to each other and to third
parties, as appropriate, all documents reasonably necessary to effect the
Closing. Without limiting the generality of the foregoing,
(a) CSK PARTIES' DELIVERIES. The appropriate CSK Parties shall execute and
-----------------------
deliver:
(i) to the Company, limited warranty deeds, in form and substance
reasonably acceptable to G-P, transferring all WISCO Owned Real Property to the
Company;
(ii) to the Company, assignments, or where necessary subleases, in
form and substance reasonably acceptable to G-P, assigning or subleasing to the
Company all WISCO Real Property Leases;
(iii) to the Company, assignments, in form and substance reasonably
acceptable to G-P, assigning to the Company all WISCO Intellectual Property;
(iv) to the Company, bills of sale, certificates of title,
assignments, and all other instruments of transfer, in form and substance
reasonably acceptable to G-P, transferring to the Company all WISCO Contributed
Assets other than the WISCO Real Property or the WISCO Intellectual Property
which are being transferred to the Company pursuant to the conveyance documents
described in clauses (i) - (iii) above;
3
<PAGE>
(v) to the Company, such instruments of assumption and other
instruments or documents, in form and substance reasonably acceptable to G-P, as
may be necessary to effect assignment of the WISCO Assumed Liabilities to the
Company;
(vi) to the Company or G-P, as appropriate, a duly executed copy of
each of the Ancillary Agreements to which any CSK Party is a party;
(vii) to G-P and the Company, the opinion of Hunton & Williams,
counsel to the CSK Parties, substantially in the form of Exhibit 2.4A(vii)
hereto;
(viii) to the Company, evidence reasonably satisfactory to G-P that
all Encumbrances other than Permitted Encumbrances on any of the WISCO
Contributed Assets have been released;
(ix) to the Company, stock certificates or other evidence of
ownership of each of the Contributed Subsidiaries, in each case duly endorsed
for transfer to the Company;
(x) to G-P and the Company from WISCO, a duly executed Operating
Agreement;
(xi) to G-P, the WISCO Debt Indemnity;
(xii) to G-P, current title reports for all WISCO owned Real
Property;
(xiii) to G-P, evidence that all officers (other than officers of
WMex) and directors of the WISCO Contributed Subsidiaries have resigned,
effective as of the Closing, except as G-P shall otherwise request; and
(xiv) to G-P and/or the Company, as appropriate, such other
instruments or documents, in form and substance reasonably acceptable to G-P, as
may be necessary to effect the Closing and the contribution of the WISCO
Contributed Assets in accordance with this Agreement.
(b) G-P DELIVERIES. G-P shall execute and deliver:
--------------
(i) to the Company, limited warranty deeds, in form and substance
reasonably acceptable to WISCO, transferring all G-P Owned Real Property to the
Company;
(ii) to the Company, assignments, or where necessary subleases, in
form and substance reasonably acceptable to WISCO, assigning or subleasing to
the Company all G-P Real Property Leases;
(iii) to the Company, a royalty free license, substantially in the
form set forth in Schedule 5.4, licensing to the Company the G-P Intellectual
Property;
4
<PAGE>
(iv) to the Company, bills of sale, certificates of title,
assignments, and all other instruments of transfer, in form and substance
reasonably acceptable to WISCO, transferring to the Company all G-P Contributed
Assets other than the G-P Real Property or the G-P Intellectual Property which
are being transferred or licensed to the Company pursuant to the conveyance
documents described in clauses (i) - (iii) above;
(v) to the Company, such instruments of assumption and other
instruments or documents, in form and substance reasonably acceptable to WISCO,
as may be necessary to effect assignment of the G-P Assumed Liabilities to the
Company;
(vi) to the Company or WISCO, as appropriate, a duly executed copy
of each of the Ancillary Agreements, including the G-P Guarantee, to which G-P
is a party;
(vii) to the Company, WISCO and CSK, a copy of the opinion of the
General Counsel of G-P, substantially in the form of Exhibit 2.4B(vii) hereto;
(viii) to the Company, evidence reasonably satisfactory to WISCO that
all Encumbrances other than Permitted Encumbrances on any of the G-P Contributed
Assets have been released;
(ix) to WISCO and the Company, a duly executed Operating Agreement;
(x) to WISCO, current title reports for all G-P owned Real
Property; and
(xi) to WISCO and/or the Company, as appropriate, such other
instruments or documents, in form and substance reasonably acceptable to WISCO,
as may be necessary to effect the Closing and the contribution of the G-P
Contributed Assets in accordance with this Agreement.
(c) DELIVERIES BY THE COMPANY. The Company shall execute and deliver:
-------------------------
(i) to the CSK Parties and G-P, such instruments of assumption and
other instruments or documents, in form and substance reasonably acceptable to
WISCO and G-P, as may be necessary to effect the Company's assumption of the
Assumed Liabilities;
(ii) to G-P or the CSK Parties, as appropriate, a duly executed copy
of each of the Ancillary Agreements to which the Company is a party;
(iii) to G-P, certificates representing the number of Units issuable
to G-P as determined in accordance with Section 2.8 hereof;
(iv) to WISCO, certificates representing the number of Units
issuable to WISCO as determined in accordance with Section 2.8 hereof;
5
<PAGE>
(v) to WISCO, the Special Distribution; and
(vi) to G-P and WISCO, as appropriate, such other instruments or
documents, in form and substance reasonably acceptable to WISCO and G-P, as may
be necessary to effect the Closing.
2.5 POST-CLOSING ADJUSTMENT.
-----------------------
(a) Within 90 days following the Closing, the Company shall prepare, or
cause to be prepared, and deliver to G-P and WISCO a statement (the "Closing
Working Capital Statement") which shall set forth the Working Capital of each of
the G-P Business and the WISCO Business as of the Determination Date (the
"Closing Working Capital"). The amounts so computed shall be used to determine
the final amount of the Working Capital of each of the Businesses (the "Post-
Closing Adjustment"). The Closing Working Capital Statement shall be prepared in
accordance with GAAP using the same principles, practices and procedures that
were used in preparing the WISCO Financial Statements and the G-P Financial
Statements .
(b) G-P, WISCO and their respective accountants and the Company's
accountants shall have 30 days after the delivery of the Closing Working Capital
Statement to review the Closing Working Capital Statement. In the event that G-P
or WISCO determines that the Closing Working Capital for either party, as
derived from the Closing Working Capital Statement, has not been determined on
the basis set forth in Section 2.5(a), G-P or WISCO shall inform the other in
writing (the "Objection"), setting forth a specific description of the basis of
the Objection and the adjustments to the Closing Working Capital which either G-
P or WISCO believes should be made, which Objection must be delivered to the
other party on or before the last day of such 30-day period. The party receiving
an Objection shall then have 30 days to review and respond to the Objection. The
parties shall attempt in good faith to reach an agreement with respect to any
matters in dispute. If the parties are unable to resolve all of their
disagreements with respect to the determination of the foregoing items within 45
days following the delivery of an Objection, they shall refer their remaining
differences to Ernst & Young LLP or such other firm mutually agreed to by the
parties (the "CPA Firm"), who shall, acting as experts and not as arbitrators,
determine in accordance with this Agreement, and only with respect to the
remaining differences so submitted, whether and to what extent, if any, the
Closing Working Capital as derived from the Closing Working Capital Statement
requires adjustment. The parties shall direct the CPA Firm to use its best
efforts to render its determination within 30 days after such submission. The
CPA Firm's determination shall be conclusive and binding upon G-P, WISCO and the
Company. The fees and disbursements of the CPA Firm shall be paid one-half by G-
P and one-half by WISCO. G-P, the Company and WISCO shall make readily available
to the CPA Firm all relevant Books and Records and any work papers (including
those of the parties' respective accountants) Relating to the Closing Working
Capital Statement and all other items reasonably requested by the CPA Firm. The
"Final Working Capital Statement" shall be deemed to be (i) the Closing Working
Capital Statement in the event that no Objection is delivered by G-P or WISCO
during the 30-day period specified above, or (ii) if an objection is delivered
by G-P or WISCO, the Closing Working Capital Statement, as adjusted by either
(A) the agreement of the parties or (B) the CPA Firm.
6
<PAGE>
(c) G-P and WISCO shall have the opportunity to participate in the
preparation of the Closing Working Capital Statement by (i) observing the
physical inventory taken in connection therewith (which may begin prior to the
Closing Date), (ii) attending any audit planning meetings in connection
therewith, (iii) meeting with and discussing procedures with the Company and its
accountants, and (iv) otherwise having full access to all information used by
the Company in preparing the Closing Working Capital Statement, including the
Books and Records and the work papers of its accountants (subject to execution
of any necessary waivers or indemnifications required by the Company's
accountants).
(d) In reviewing any Objection, G-P and WISCO and their respective
accountants shall have full access to all information used by the other party in
preparing such Objection, including the work papers of the other party's and the
Company's accountants (subject to the reviewing party executing any necessary
waivers or indemnifications required by the objecting party's accountants).
(e) If the Closing Working Capital of either Business as reflected on the
Final Working Capital Statement is less than $32,515,000 with respect to the G-P
Business or $73,218,000 with respect to the WISCO Business (the "Target Working
Capital"), then within 10 Business Days following issuance of the Final Working
Capital Statement, any party whose Closing Working Capital is below its Target
Working Capital shall (as an additional contribution to the Company) make a
payment in immediately available funds to the Company equal to the difference
between such Business' Target Working Capital, plus interest at the prime rate
(as set forth in the "Money Rates" section of The Wall Street Journal) on such
-----------------------
amount from the Closing Date through the date of payment. If the Closing Working
Capital of either Business as reflected on the Final Working Capital Statement
is greater than the Target Working Capital of such Business, then within 10
Business Days following issuance of the Final Working Capital Statement, the
Company shall refund such excess by (i) making a payment to any party whose
Closing Working Capital exceeded its Target Working Capital, in immediately
available funds, equal to such excess to the extent of the sum of the amount of
cash theretofor contributed to the Company by such party plus the amount of
accounts receivable contributed by such party to and collected by the Company,
and (ii) if the excess is greater than the amount described in (i), the
remainder of the excess shall be refunded by the Company's reassignment to such
party of accounts receivable (theretofor contributed by such party) in an
aggregate amount equal to such remainder. In addition, the Company shall pay
such party interest at the prime rate (as set forth in the "Money Rates" section
of The Wall Street Journal) on such excess from the Closing Date through the
-----------------------
date of payment.
(f) In preparing the Closing Working Capital Statement, (i) liabilities of
the Company Related to this transaction shall not be treated as liabilities, and
(ii) no liabilities or reserves shall be established for matters for which G-P,
CSK or the Company is (or but for the Cap or the Deductible would be) entitled
to indemnification hereunder.
(g) Any payments made to or from the Company pursuant to Section 2.5(e)
shall not result in any change in the value of either party's Business as set
forth in Section 2.8 hereof or
7
<PAGE>
either party's Capital Account or Percentage Interest (as both terms are defined
in the Operating Agreement).
2.6 TRANSFER TAXES AND RECORDING FEES. Each party shall be responsible for
---------------------------------
any and all Taxes or fees imposed or incurred by reason of the transfer of its
Contributed Assets and Assumed Liabilities hereunder and/or the filing or
recording of any instruments necessary to effect the transfer of its Contributed
Assets and Assumed Liabilities hereunder, regardless of when such Taxes or fees
are levied or imposed, including sales, use, value-added, excise, real estate
transfer, lease assignment, stamp, documentary and similar Taxes and fees (the
"Transfer Cost"). To the extent under applicable law the transferee is
responsible for filing Tax Returns in respect of Transfer Costs, the Company
shall prepare all such Tax Returns. The parties shall provide such certificates
and other information and otherwise cooperate to the extent reasonably required
to minimize Transfer Costs.
2.7 REQUIRED CONSENTS. Each of G-P and the CSK Parties shall use
-----------------
commercially reasonable efforts to obtain, at its sole expense, each Consent
Related to its own Business listed on Schedule 3.3(a) for the CSK Parties and
Schedule 4.3(a) for G-P (other than those Consents marked with an asterisk on
either such Schedule), and any other material Consent not listed on Schedule 3.3
or Schedule 4.3, if any, if such Consent is required to operate such Business
after Closing as such Business has been operated over the 12-month period
immediately prior to Closing. If a party has not obtained a Consent (other than
a Required Consent), the Closing of the transactions contemplated by this
Agreement shall not constitute a transfer, or any attempted transfer, of any
Contract or asset, the transfer of which requires such Consent. Rather,
following the Closing, such party shall use commercially reasonable efforts at
its sole expense, and the other party (or parties) and the Company shall
cooperate in such efforts, to obtain promptly such Consent or to enter into
reasonable and lawful arrangements (including subleasing or subcontracting if
permitted) reasonably acceptable to the other party to provide to the Company
the full economic (taking into account Tax Costs and benefits) and operational
benefits and liabilities and for substantially similar time periods, as the
Company would have had if such Consent had been obtained as of Closing. Once
such Consent for the transfer of a Contributed Asset not transferred at the
Closing is obtained, the party receiving such Consent shall promptly transfer,
or cause to be transferred, such Contributed Asset to the Company for no
additional consideration and without changing any party's Capital Account or
Percentage Interest (as both terms are defined in the Operating Agreement).
2.8 OWNERSHIP OF THE COMPANY; SPECIAL DISTRIBUTION.
----------------------------------------------
(a) The value of contributions of each of G-P and WISCO has been
determined by multiplying 7.38 by the actual 1998 EBITDA for the G-P Business
and the WISCO Business respectively. The value of the WISCO Business for
purposes of this Agreement shall be $775,000,000 and the value of the G-P
Business for purposes of this Agreement shall be $376,400,000.
(b) Simultaneously with the Closing, the Company shall incur debt in an
amount sufficient to fund a special distribution to WISCO (the "Company Debt")
that will result in a
8
<PAGE>
reduction in WISCO's Percentage Interest (as defined in the Operating Agreement)
in the Company to a 5% equity interest in the Company (the "Special
Distribution") immediately after payment of the Special Distribution. The
Company Debt shall be in such amount and on such terms as is set forth on
Exhibit 2.8A. G-P shall provide to the Company's lenders a full and
unconditional guaranty of payment of the Company Debt substantially in the form
of Exhibit 2.8B hereto (the "G-P Guarantee"). WISCO shall provide to G-P an
indemnity substantially in the form of Exhibit 2.8C hereto (the "WISCO Debt
Indemnity") indemnifying G-P against certain amounts which may be incurred or
paid by, or assessed against, G-P under the G-P Guarantee.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CSK PARTIES
The CSK Parties represent and warrant to G-P and the Company as follows:
3.1 ORGANIZATION AND QUALIFICATION.
------------------------------
(a) Each of the CSK Parties is a corporation or limited liability company,
duly organized, validly existing and in good standing under the laws of its
state of organization as set forth on Schedule 3.1. The CSK Parties collectively
have all requisite corporate or limited liability company power and authority to
own and operate the WISCO Contributed Assets and to carry on the WISCO Business
as currently conducted.
(b) Each of the CSK Parties is duly qualified to do business and is in
good standing as a foreign corporation or limited liability company in the
jurisdictions listed on Schedule 3.1, which are the only jurisdictions where the
ownership or operation of the WISCO Contributed Assets or the conduct of the
WISCO Business requires such qualification, except where the failure to be so
qualified would not have a Material Adverse Effect.
3.2 CORPORATE AUTHORIZATION. Each of the CSK Parties has full corporate
-----------------------
power and authority to execute and deliver this Agreement, and to perform its
obligations hereunder and under any agreement or contract contemplated hereby,
including the Ancillary Agreements. The execution, delivery and performance by
the CSK Parties of this Agreement and any agreement or contract contemplated
hereby has been duly and validly authorized by all necessary corporate action
and no additional corporate authorization is required in connection with the
execution, delivery and performance by each of the CSK Parties of this Agreement
and any agreement or contract contemplated hereby.
3.3 CONSENTS AND APPROVALS. Except as specifically set forth in Schedule
----------------------
3.3 or as required by the HSR Act, no Consent is required to be obtained by the
CSK Parties from, and no notice or filing is required to be given by the CSK
Parties to, or made by the CSK Parties with, any Governmental Authority or other
Person or under any Contract listed, or required to be listed, on Schedule 3.14
in connection with the execution, delivery and performance by the CSK Parties of
this Agreement, each of the Ancillary Agreements, any other
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agreement or contract contemplated hereby and the contribution of the WISCO
Contributed Assets, except where the failure to obtain any such Consent or
Consents, give any such notice or notices or make any such filing or filings
would not have a Material Adverse Effect.
3.4 NON-CONTRAVENTION. Except as set forth on Schedule 3.3, the execution,
-----------------
delivery and performance by the CSK Parties of this Agreement and each of the
Ancillary Agreements, and the consummation of the transactions contemplated
hereby and thereby, does not and will not (i) violate any provision of the
certificate of incorporation or bylaws of any of the CSK Parties or any
Contributed Subsidiary; (ii) subject to obtaining the Consents referred to in
Section 3.3, conflict with, or result in the breach of, or constitute a default
under, or result in the termination, cancellation or acceleration (whether after
the filing of notice or the lapse of time or both) of any right or obligation of
any of the CSK Parties or any Contributed Subsidiary under, or to a loss of any
benefit to which any of the CSK Parties or any Contributed Subsidiary is
entitled under, any Contract or result in the creation of any Encumbrance (other
than a Permitted Encumbrance) upon any of the WISCO Contributed Assets; or (iii)
assuming compliance with the matters set forth in Section 3.3, violate, or
result in a breach of or constitute a default under any Law, rule, regulation,
judgment, injunction, order, decree or other restriction of any court or
Governmental Authority to which any of the CSK Parties or any Contributed
Subsidiary is subject, including any Governmental Authorization, except in each
case, such matter or matters that would not have a Material Adverse Effect.
3.5 BINDING EFFECT. This Agreement constitutes, and each of the Ancillary
--------------
Agreements when executed and delivered by the parties thereto will constitute, a
valid and legally binding obligation of each of the CSK Parties that is a party
thereto, enforceable with respect to such party in accordance with its terms,
except as the enforceability thereof may be limited or otherwise effected by
bankruptcy, insolvency, reorganization, moratorium and similar laws of general
applicability Relating to, or affecting, creditors rights and to general equity
principles.
3.6 FINANCIAL STATEMENTS: ABSENCE OF CERTAIN CHANGES.
------------------------------------------------
(a) Attached as Schedule 3.6(a) are the following financial statements of
the WISCO Business: Unaudited Balance Sheet, Statement of Income and Statement
of Cash Flows, as of and for (i) the years ended December 31, 1997 and 1998 (the
"WISCO Annual Financial Statements"); and (ii) the period ended April 30, 1999
(the "WISCO April Financial Statements"). (Collectively the financial statements
described in this Section 3.6(a) shall be referred to as the "WISCO Financial
Statements.")
(b) Exhibit 3.6(b) sets forth the line items and a definition for each
such line item contained in each of the WISCO Financial Statements.
(c) The WISCO Financial Statements are true and correct in all material
respects, present fairly the combined financial position and results of
operation, divisional equity and cash flows of the WISCO Business as of the
dates and for the periods presented, and were prepared in accordance with GAAP
applied on a basis consistent with past practice of the WISCO Business.
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The WISCO Financial Statements reflect the underlying Books and Records of the
WISCO Business, which are complete and accurate in all material respects. Except
as described on Schedule 3.6(c), consistent accounting policies and accrual
methods were used in all periods presented. All non-recurring or unusual income
or expense items over $500,000, as reflected in the 1998 Statement of Income of
WISCO, have been disclosed in footnotes to the WISCO Financial Statements.
(d) Except as described in the notes to the WISCO Financial Statements,
all accounts receivable reflected on the WISCO Financial Statements are bona
fide receivables, accounted for in accordance with GAAP (including, without
limitation, appropriate reserves), and represent amounts due with respect to
actual transactions in the operation of the WISCO Business; it being understood
that this representation shall not be deemed to constitute a warranty or
guaranty that all such accounts receivable shall be collected.
3.7 LITIGATION AND CLAIMS. Except as disclosed on Schedule 3.7:
---------------------
(a) There is no action (whether civil, criminal or administrative), suit,
demand, claim, dispute, hearing, proceeding (including condemnation or other
proceeding in eminent domain) or investigation pending or, to the Knowledge of
any of the CSK Parties, threatened, Related to the WISCO Business or any of the
WISCO Contributed Assets or included in the WISCO Assumed Liabilities, that
individually or in the aggregate is reasonably expected to have a Material
Adverse Effect.
(b) None of the WISCO Contributed Assets is subject to any order, writ,
judgment, award, injunction, or decree of or settlement enforceable in any court
or governmental or regulatory authority of competent jurisdiction or any
arbitrator or arbitrators.
3.8 TAXES. Except as disclosed on Schedule 3.8:
-----
(a) The CSK Parties have duly and timely filed (or have caused to be duly
and timely filed), taking into account any valid extension of the time for
filing, each Tax Return required to be filed with any Tax Authority which
includes or is based upon the WISCO Contributed Assets, or the operations,
ownership or activities of the WISCO Business, and all Taxes due and payable
(whether or not shown on or required to be shown on a Tax Return) have been paid
prior to their due dates; provided, however, that the representations and
warranties set forth in this paragraph are made only to the extent that (i) such
Taxes are or may become Encumbrances on the WISCO Contributed Assets, or (ii)
the Company is or may be liable in the capacity of transferee of the Contributed
Assets.
(b) The CSK Parties have duly and timely filed (or have caused to be duly
and timely filed), taking into account any valid extension of the time for
filing, each Tax Return which includes or is based upon the assets, operations,
ownership or activities of any of the WISCO Contributed Subsidiaries, and all
Taxes due and payable (whether or not shown on or required to be shown on a Tax
Return) have been paid prior to their due dates.
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(c) None of the WISCO Contributed Assets, including the assets of the
WISCO Contributed Subsidiaries (i) is subject to any lien (other than a
Permitted Encumbrance) arising in connection with any failure or alleged failure
to pay any Taxes, (ii) secures any debt the interest on which is tax-exempt
under Section 103(a) of the Code, (iii) is required to be or is being
depreciated under the alternative depreciation system under Section 168(g)(2) of
the Code, (iv) is "limited use property" with the meaning of Revenue Procedure
76-30, or (v) will be treated as owned by any other Person pursuant to the
provisions of former Section 168(f)(8) of the Code.
(d) The CSK Parties (with respect to the WISCO Business) or the WISCO
Contributed Subsidiaries have withheld and paid all material Taxes required to
have been withheld and paid in connection with amounts paid or owing to any
Employee, independent contractor, creditor, shareholder or other party.
(e) There are no pending, proposed or, to the knowledge of WISCO,
threatened audits, assessments or claims from any Tax Authority for
deficiencies, penalties or interest against any of the CSK Parties (with respect
to the WISCO Contributed Assets or the WISCO Business), any of the WISCO
Contributed Subsidiaries or any of their assets, operations or activities;
provided, however, that the representations and warranties set forth in this
paragraph are made only to the extent that (i) such Taxes are or may become
Encumbrances on the WISCO Contributed Assets, or (ii) the Company is or may be
liable in the capacity of transferee of the Contributed Assets.
(f) No CSK Party nor any WISCO Contributed Subsidiary owns, directly or
indirectly, and none of the WISCO Contributed Assets consists of, any interest
in any entity classified as a partnership for United States federal income Tax
purposes.
(g) With respect to the WISCO Business, other than WMex, the CSK Parties
do not have and have not had a permanent establishment in any foreign country as
defined in any applicable Tax treaty or convention between the United States and
such foreign country.
3.9 EMPLOYEES, PENSION AND OTHER BENEFIT PLANS.
------------------------------------------
(a) Schedule 3.9(a) lists all the Employees who, as of August 31,
1999, were employed by WISCO or the WISCO Contributed Subsidiaries with respect
to the WISCO Business, together with their respective positions, years of
employment, and rates of remuneration, as of August 31, 1999.
(b) Except as disclosed on Schedule 3.9(b), no CSK Party is a party to nor
does it sponsor, maintain, or contribute to any Employee Plans that provide
benefits to Employees or Retired Employees of the WISCO Business.
(c) WISCO has delivered to G-P true, complete and up-to-date copies of
all documents embodying the CSK Plans including, without limitation, all
amendments thereto, all funding agreements thereunder (including, but not
limited to, trust agreements), all summaries of such CSK Plans provided to
Employees, Retired Employees, directors, officers, shareholders or
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their dependents with respect to the WISCO Business, and all material
communications received from or sent to regulatory authorities within the prior
two (2) plan years with respect to each such CSK Plan as well as the most recent
valuation for each defined contribution retirement plan maintained by any of the
CSK Parties and the most recent actuarial valuation for each of the CSK Plans
for which such valuations are required. The applicable CSK Party has delivered
to G-P a complete written description of all unwritten CSK Plans, and will
deliver such other documentation with respect to any CSK Plan as is reasonably
requested by G-P.
(d) Except as disclosed on Schedule 3.9(d), no promise or commitment
has been made by any CSK Party (i) to amend any of the CSK Plans or to provide
increased benefits thereunder to any Employees, Retired Employees, directors,
officers, shareholders of the WISCO Business or the WISCO Contributed
Subsidiaries, or their dependents, except pursuant to the requirements, if any,
of the CSK Plans or any collective bargaining agreement, or (ii) to establish
any new Employee Plan. Except as disclosed on Schedule 3.9(d), no amendment to
any CSK Plan has been adopted by any CSK Party since June 30, 1999. Except as
disclosed on Schedule 3.9(d), one or more of the CSK Parties has the right
pursuant to the terms of each CSK Plan and all agreements Related to such plan
unilaterally to terminate such plan (or its participation in such plan) or to
amend the terms of such plan at any time except as provided under a collective
bargaining agreement. Except as disclosed on Schedule 3.6(a) or Schedule 3.9(d)
or as set forth in the Human Resources Agreement, the transactions contemplated
by this Agreement will not result in any additional payments to, or increase the
vested interest of, any Employee, Retired Employee, director, officer,
shareholder, or their dependents under any CSK Plan; and the transactions
contemplated by this Agreement will not result in any payment to any Employee or
Retired Employee, director, officer, or shareholder of any CSK Party which will
be subject to Section 280G of the Code.
(e) Each CSK Plan has been established, maintained, and administered
in substantial compliance with its terms and all related documents or agreements
and in substantial compliance with applicable provisions of ERISA, the Code, and
other applicable Laws.
(f) Except as disclosed on Schedule 3.9(f), all required employer
contributions, premium payments and employee contributions under the CSK Plans
have been made and remitted to the funding agents or accrued or booked
thereunder within the time prescribed by any such CSK Plan and the Laws. All
insurance premiums required with respect to any CSK Plan, including any premiums
payable to the Pension Benefit Guarantee Corporation, have been paid, made,
accrued or booked within the time prescribed by any such CSK Plan and the
applicable Law. All benefits, expenses and other amounts due and payable to or
under any CSK Plan, and all contributions, transfers or payments required to be
made to any CSK Plan, have been paid, made, accrued or booked within the time
prescribed by any such CSK Plan and the Laws. Except as disclosed on Schedule
3.9(f), all of the assets which have been set aside in a trust or account (other
than an account which is part of a CSK Party's general assets) to satisfy any
obligation under any CSK Plan are shown on the books and records of each such
trust and each such account at their fair market value, such current fair market
value as of the last valuation date is equal to or exceeds the present value of
any obligation under the CSK Plan, and the liabilities for all other obligations
under any CSK Plan are accurately set forth in the WISCO Financial Statements.
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(g) Except as disclosed on Schedule 3.9(g), there is no pending or, to
the Knowledge of the CSK Parties, threatened claim with respect to a CSK Plan
(other than routine and reasonable claims for benefits made in the ordinary
course of the WISCO Business) or with respect to the terms and conditions of
employment or termination of employment by any Employee, or Retired Employee,
and no audit or investigation by any governmental or other law enforcement
agency is pending or has been proposed with respect to any CSK Plan.
(h) Except as disclosed on Schedule 3.9(h), no CSK Plan is subject to
Title IV of ERISA. Neither any of the CSK Parties nor any Related Person has
incurred any material liability under or pursuant to Title I or IV of ERISA or
the penalty, excise tax or joint and several liability provisions of the Code
relating to employee benefit plans and, to the Knowledge of the CSK Parties, no
event or condition has occurred or exists which could result in any material
liability to a CSK Party, such Related Person or the Company or G-P under or
pursuant to Title I or IV of ERISA or such penalty, excise tax or joint and
several liability provisions of the Code. No CSK Plan has incurred an
"accumulated funding deficiency" within the meaning of such sections of the Code
and ERISA, whether or not waived; and no such CSK Plan has been terminated.
Except as disclosed on Schedule 3.9(h), none of the CSK Parties contribute to,
nor do they have any obligation to contribute to, a multiemployer plan as
defined in Section 4001(a)(3) of ERISA with regard to the Employees or Retired
Employees.
(i) Each of the CSK Plans that is intended to be qualified under Section
401(a) of the Code, and the trust, if any, forming a part thereof, has received
a favorable determination letter from the Internal Revenue Service as to the
qualification of its form under the Code and to the effect that each such trust
is exempt from taxation under Section 501(a) of the Code and, to the Knowledge
of the CSK Parties, nothing has occurred since the date of such determination
letter that adversely affects such qualification or tax-exempt status. Except as
disclosed in Schedule 3.9(i), all reports and other documents required to be
filed with any governmental agency or distributed to plan participants or
beneficiaries (including, but not limited to, actuarial reports, audits or Tax
Returns) have been duly filed or distributed on a timely basis, and copies
thereof have been or will be furnished to G-P prior to the Closing.
3.10 COMPLIANCE WITH LAWS. Except as set forth in Schedule 3.10, the WISCO
--------------------
Business is being conducted in compliance with all Laws applicable to the WISCO
Business and, as of the Closing, the Company will have (subject to obtaining the
Consents) all Governmental Authorizations necessary for the conduct of the WISCO
Business as currently conducted, except for such non-compliance or the failure
to obtain such Consent or Consents which would not have a Material Adverse
Effect; it being understood that nothing in this representation is intended to
address any compliance issue that is the subject of the representations and
warranties set forth in Sections 3.7, 3.8, 3.9, 3.11, 3.12, or 3.13 hereof, and
that the CSK Parties make no representations in this Section 3.10 as to the
transferability or assignability of any such Governmental Authorizations. None
of the CSK Parties has received written notice that any material Governmental
Authorization may be suspended, revoked, modified or canceled.
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3.11 ENVIRONMENTAL MATTERS.
---------------------
(a) Schedule 3.11(a) sets forth a list of all material Environmental
Permits in connection with the WISCO Business.
(b) Except as would not have a Material Adverse Effect, or as disclosed
on Schedule 3.11(b):
(i) The Environmental Permits are all the permits, licenses,
certificates and authorizations of, and registrations with, any of the
Environmental Authorities pursuant to the Environmental Laws necessary to
conduct the WISCO Business substantially as presently conducted. The
Environmental Permits are in full force and effect and the CSK Parties are in
compliance in all respects thereunder. The consummation of the transactions
contemplated hereunder will not require any renewal, consent, amendment or other
action in connection with any of the Environmental Permits. The CSK Parties are
in compliance with the Environmental Laws applicable to the conduct of the WISCO
Business.
(ii) There is no claim, suit, action or other proceeding, including
appeals and applications for review, outstanding or pending against any CSK
Party pursuant to any of the Environmental Laws Relating to the WISCO Business.
(iii) No CSK Party has any liability for any release, spill, leakage,
pumping, emission, emptying, discharge, injection, escape, leaching, disposal or
dumping of any Hazardous Substances on or from any of the WISCO Real Property,
except in such manner or quantity as would not constitute a violation of any of
the Environmental Laws or Environmental Permits.
(iv) The CSK Parties have maintained all records in respect of the
WISCO Business required by the Environmental Laws and Environmental Permits in
the manner and for the time periods so required.
(v) Since June 30, 1994, no CSK Party has received any notice of
investigation or non-compliance or written order from any of the Environmental
Authorities, including any notice of contamination or clean-up requirements,
pursuant to any of the Environmental Laws with respect to the WISCO Business.
3.12 INTELLECTUAL PROPERTY.
---------------------
(a) Schedule 3.12 sets forth a list and description (including the
country of registration) of all issued or registered foreign and domestic
Intellectual Property currently (or, to the Knowledge of the CSK Parties, within
the last 12 months) used in the WISCO Business (other than "shrink wrap"
consumer software licenses). No third party has rights in, or otherwise has the
right to restrict use of, WISCO Intellectual Property owned by any CSK Party,
and, to the Knowledge of the CSK Parties, no third party has rights in, or
otherwise has the right to restrict the Company's use of, the WISCO Intellectual
Property owned by any CSK Party as of and following the Closing.
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(b) To the Knowledge of the CSK Parties, no product, component, method,
process, or material (including computer software) used, sold or manufactured by
the WISCO Business infringes on, misappropriates, or otherwise violates a valid
and enforceable intellectual property right of any other Person.
(c) There are no demands, actions or proceedings pending or, to the
Knowledge of the CSK Parties, threatened, against the CSK Parties Relating to
the WISCO Business alleging infringement, misappropriation, or violation of any
intellectual property right of any other Person, and, to the Knowledge of the
CSK Parties, no Person is infringing, misappropriating, challenging or
violating, the Intellectual Property owned by any CSK Party, except for
challenges, infringements, misappropriation or violations which, individually or
in the aggregate, would not have a Material Adverse Effect.
(d) All of the WISCO Intellectual Property will be transferred to the
Company at Closing, except to the extent certain Intellectual Property used by
the CSK Parties to provide services under the Transition Services Agreement is
specifically excluded thereunder. The CSK Parties agree that Intellectual
Property provided under the Transition Services Agreement will be provided to
the Company on and after Closing on the same terms and conditions under which it
was available to the WISCO Business prior to the Closing in accordance with the
terms of the Transition Services Agreement.
(e) Schedule 3.12(e) sets forth the CSK Parties' efforts at addressing
the Year 2000 issue in the WISCO Business. The information set forth therein is
accurate as of the date hereof, in all material respects. The CSK Parties have
developed and begun implementing a Project Plan to remediate and/or replace
Computer Systems that are used or relied upon in the WISCO Business but are not
Year 2000 Ready. Such remediation and/or replacement is scheduled to be
completed in 1999.
3.13 LABOR MATTERS. Except as disclosed on Schedule 3.13:
-------------
(a) As of the date hereof, none of the CSK Parties is a party to any
labor or collective bargaining agreement or similar agreement with respect to
Employees of the WISCO Business, no such Employees are represented by any labor
organization and, to the Knowledge of the CSK Parties, there are no organizing
or de-certification activities (including any demand for recognition or
certification proceedings pending or threatened to be brought or filed with the
National Labor Relations Board or other labor relations tribunal) involving the
WISCO Business;
(b) As of the date hereof, there are no strikes, work stoppages,
slowdowns, lockouts, unfair labor practice charges pending or, to the Knowledge
of the CSK Parties, threatened against or involving the Employees of the WISCO
Business;
(c) Within the 90-day period immediately preceding the Effective Time, no
Employee of the WISCO Business has been laid off or terminated for reasons other
than a discharge for cause, voluntary resignation or retirement.
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(d) There are no complaints, charges, claims or grievances against the
CSK Parties pending or, to the Knowledge of the CSK Parties, threatened to be
brought or filed with any Governmental Authority, arbitrator or court based on
or arising out of the employment by the CSK Parties of any Employee of the WISCO
Business, except for those which, individually or in the aggregate, would not
have a Material Adverse Effect;
(e) The CSK Parties are in compliance with all Laws Relating to the
employment of labor, including all such Laws Relating to wages, hours,
collective bargaining, discrimination, civil rights, safety and health,
immigration, workers' compensation, layoffs, and the collection and payment of
withholding and/or Social Security Taxes and similar Taxes, except where the
failure to be in compliance would not have a Material Adverse Effect; and
(f) The CSK Parties have given all notices required to be given prior to
the Closing Date under the Worker Adjustment and Retraining Notification Act, 29
U.S.C. Section 2101 et seq. ("WARN"), or under any similar provision of any
federal, state, regional, foreign, or local Law, rule, or regulation (referred
to collectively with WARN as "WARN Obligations") Relating to any plant closing
or mass layoff that occurred during the 90 days immediately preceding the
Effective Time and pertaining to the WISCO Business.
3.14 CONTRACTS. Schedule 3.14 sets forth a list, as of the date
---------
hereof, of each Contract that is Related to the WISCO Business other than (a)
WISCO Leased Real Property, which are listed on Schedule 3.15, and collective
bargaining agreements which are listed on Schedule 3.13, (b) purchase orders or
similar agreements for the purchase or sale of goods or services in the ordinary
course of business, (c) confidentiality agreements entered into in the ordinary
course of business in connection with the purchase and sale of Inventory, and
(d) any Contract which requires a payment or imposes an obligation on either
party thereto of less than $1,000,000 in the aggregate. Schedule 3.14 also
identifies any Contract that contains a non-compete covenant or similar
provision that could materially restrict the Company in its conduct of the WISCO
Business following Closing, any employment agreement with any Employee of the
WISCO Business, any employment agreement included in the WISCO Contributed
Assets or WISCO Assumed Liabilities, any Contract between any Affiliates of CSK,
on one hand, and any of the CSK Parties or any of the WISCO Contributed
Subsidiaries, on the other, any agreements Related to payments in lieu of taxes,
any agreement or license Related to Intellectual Property (other than "shrink
wrap" consumer software licenses), leases and license agreements for any
Computer Systems (other than "shrink wrap" consumer software licenses), all
material agreements for telecommunications voice (including without limitation,
local, long distance and toll free service) and data services, Internet access,
hosting and use services. Schedule 3.14 also identifies any Contract concerning
any environmental liability with respect to the WISCO Business. Each Contract
set forth on Schedule 3.14 is a valid and binding agreement of the applicable
CSK Party and, to the Knowledge of the CSK Parties, is in full force and effect.
Except as otherwise provided in Schedule 3.14, no CSK Party is, and, to their
Knowledge, no other party thereto is, in default in any material respect under
any Contract listed on Schedule 3.14 or any collective bargaining agreement
listed on Schedule 3.13.
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3.15 REAL ESTATE LEASES. Schedule 3.15 sets forth a list, as of the
------------------
date hereof, of each written WISCO Real Estate Lease with a term of more than
one month that is Related to the WISCO Business. Each WISCO Real Estate Lease
set forth on Schedule 3.15 is a valid and binding agreement of a CSK Party and
is in full force and effect. There are no defaults by the applicable CSK Party
under any WISCO Real Estate Lease listed on Schedule 3.15 which defaults have
not been cured or waived and which would, individually or in the aggregate, have
a Material Adverse Effect.
3.16 ENTIRE BUSINESS; TITLE TO PROPERTY.
----------------------------------
(a) Except as set forth in Schedule 3.16(a) and Schedule 3.6(a), the
WISCO Contributed Assets, the assets held by the WISCO Contributed Subsidiaries,
the WISCO Retained Assets (including cash and cash accounts, disbursement
accounts, invested securities and other short and medium term investments, the
CSK Marks and CSK Plans, and WISCO's and CSK's insurance policies), and the
rights specifically provided or made available to the Company under the
Ancillary Agreements, include all of the buildings, machinery, equipment and
other assets (whether tangible or intangible) necessary for the Company
immediately after Closing to conduct in all material respects the WISCO Business
as conducted as of the date hereof, and as conducted during the 12-month period
prior to the date hereof (subject to changes expressly permitted by the terms
hereof to be made after the date hereof); provided, however, that no
representation is made as to the assignability of Government Authorizations.
(b) A CSK Party has good (and, in the case of its Owned Real Property,
marketable) title to, or a valid and binding leasehold interest in, the WISCO
Contributed Assets, free and clear of all Encumbrances, except (i) as set forth
in Schedule 3.16(b), and (ii) any Permitted Encumbrances.
(c) The capital structure of each of the WISCO Contributed Subsidiaries
is as set forth in Schedule 3.16(c). The shares of stock or membership
interests, as applicable, of the WISCO Contributed Subsidiaries included in the
WISCO Contributed Assets constitute 100% of the issued and outstanding shares of
stock or membership interests, as applicable, of each WISCO Contributed
Subsidiary. All shares of stock , membership interests or other form of
ownership of the WISCO Contributed Subsidiaries included in the WISCO
Contributed Assets are validly issued, fully paid and non-assessable. Except as
set forth on Schedule 3.16(c), (i) there are no options, warrants, or similar
rights to purchase any of the shares or membership interests of any of the WISCO
Contributed Subsidiaries, and no obligations binding upon any WISCO Contributed
Subsidiary to issue, sell, redeem, purchase or exchange any of its capital stock
or membership interests or any right relating thereto, and (ii) there are no
shareholders' agreements, voting agreements, voting trusts or other agreements
or rights of third parties with respect to or affecting any of the WISCO
Contributed Subsidiaries or any of their shares of stock or membership
interests, as applicable. Wisconsin Tissue Management, LLC has entered into no
agreements and conducted no business and contains only those assets and
liabilities specifically set forth in Schedule 3.16(c), except, in each case, as
set forth in the Human Resources Agreement. WMex assumed no liabilities or
obligations of any other CSK Party Related to or arising from the sale of
18
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its capital stock to WISCO. CSK has provided G-P with true and correct copies of
all documentation Related to such sale.
(d) The WISCO Contributed Assets and the assets of the WISCO Contributed
Subsidiaries are in good operating condition and repair (subject to normal wear
and tear). Except as set forth on Schedule 3.16(d), the CSK Parties have no
Knowledge of any material structural or mechanical defects with respect to any
buildings, improvements or equipment included in the WISCO Contributed Assets,
which defects are reasonably likely to have a Material Adverse Effect.
(e) None of the WISCO Owned Real Property or the WISCO Leased Real
Property or other assets of the WISCO Business (except as set forth in the
Transition Services Agreement) are owned, used or occupied in whole or in part
by CSK or any of its Affiliates other than in connection with the operation of
the WISCO Business.
3.17 FINDER'S FEES. Except for Salomon Smith Barney & Co., whose
-------------
fees will be paid by CSK, there is no investment banker, broker or finder which
has been retained by or is authorized to act on behalf of any CSK Party who
might be entitled to any fee or commission from G-P or the Company in connection
with the transactions contemplated by this Agreement.
3.18 INSURANCE. Schedule 3.18 attached hereto sets forth the following
---------
information with respect to each insurance policy to which any CSK Party or a
WISCO Contributed Subsidiary, with respect to the WISCO Business, has been a
party, a named insured, or otherwise the beneficiary of coverage at any time
within the past five years:
(a) the name of the insurer, the name of the policyholder, and the name
of each covered insured;
(b) the scope, period and amount of coverage; and
(c) a description of any retroactive premium adjustments or other loss-
sharing arrangements.
Schedule 3.18 also describes any self insurance arrangements affecting the
WISCO Business. As of the date hereof, no CSK Party has received any written
notice of any retroactive premium increase or assessment applicable to the WISCO
Business. Except as disclosed on Schedule 3.18, all of such policies are in
full force and effect.
3.19 NO UNDISCLOSED LIABILITIES. With respect to the WISCO Business no
--------------------------
CSK Party has any obligations or liabilities (whether accrued, absolute,
contingent, unliquidated or otherwise, whether or not known to such CSK Party,
whether due or to become due and regardless of when asserted) arising out of
transactions entered into at or prior to the Closing, or any action or inaction
at or prior to the Closing, or any state of facts existing at or prior to the
Closing other than: (a) liabilities set forth on the WISCO Financial Statements
(including any notes thereto, if any); (b) liabilities and obligations arising
from or in connection with matters
19
<PAGE>
disclosed pursuant to the CSK Parties' representations and warranties in this
Agreement or in the Disclosure Schedules (none of which, except as set forth on
Schedule 3.7, is a liability resulting from a breach of contract, breach of
warranty, tort, infringement claim or lawsuit), other than liabilities and
obligations arising from or in connection with matters disclosed pursuant to
Section 3.11; (c) liabilities and obligations arising from or in connection with
matters disclosed pursuant to Section 3.11; (d) liabilities and obligations
which have arisen after April 30, 1999 in the ordinary course of business (none
of which, except as set forth on Schedule 3.7, is a liability resulting from a
breach of contract, breach of warranty, tort, infringement claim or lawsuit);
and (e) such other liabilities or obligations that do not have a Material
Adverse Effect.
3.20 NO MATERIAL ADVERSE CHANGE. Except as disclosed on Schedule 3.20,
--------------------------
since April 30, 1999, the CSK Parties have conducted the WISCO Business in the
ordinary course and in a manner consistent with the practices applied during the
periods specified in the WISCO Financial Statements, and there has been no
Material Adverse Effect in the WISCO Business. Except as set forth on Schedule
3.20, and except as such does not have a Material Adverse Effect, no CSK Party
has with respect to the WISCO Business:
(a) been a party to any corporate reorganization, restructuring or merger
or amalgamation or amended its certificate or articles of incorporation or
bylaws;
(b) declared or paid any dividend or declared or made any other
distribution (whether in cash, stock or property) on any of the shares of its
capital stock;
(c) incurred or discharged any obligation or liability (whether accrued,
absolute or contingent) other than in the ordinary course of and in a manner
consistent with past practices for the WISCO Business;
(d) entered into any transaction, contract, agreement, indenture,
instrument or commitment other than in the ordinary course of and in a manner
consistent with past practices for the WISCO Business;
(e) suffered or incurred any material damage, destruction, loss or
liability (whether or not covered by any insurance);
(f) experienced any strike, lockout or other labor trouble such as slow
down or work stoppage, or any loss of any of its key Employees, customers,
suppliers or distributors;
(g) suffered any shortage or cessation or interruption of raw materials,
supplies or utilities that could have a Material Adverse Effect on the WISCO
Business;
(h) made any change in its accounting principles, policies and practices
as utilized in the preparation of the WISCO Financial Statements;
(i) made any loan or advance, or assumed, guaranteed, endorsed or
otherwise become liable with respect to the liabilities or obligations of any
other Person or entity, or permitted any of its assets to be subjected to any
lien or security interest (except for Permitted Encumbrances);
20
<PAGE>
(j) granted to any customer any allowance or discount or changed its
pricing, credit or payment policies other than in the ordinary course of and in
a manner consistent with past practices for the WISCO Business (except for non-
material variations therefrom in the aggregate);
(k) incurred any indebtedness, liability or obligation (absolute,
accrued, contingent or otherwise) other than in the ordinary course of and in a
manner consistent with past practices for the WISCO Business;
(l) sold, leased or otherwise disposed of any of its assets or any right,
title or interest therein other than in the ordinary course of and in a manner
consistent with past practices for the WISCO Business;
(m) made any payment to, or for the benefit of, any present or former
Employee, director, officer or shareholder otherwise than at the regular rates
payable to them, by way of salary, pension, bonus or other remuneration
consistent with past practices for the WISCO Business;
(n) committed to any capital expenditure project or made any investment,
in either case in excess of Five Hundred Thousand Dollars ($500,000) not
disclosed to G-P prior to the date of this Agreement; or
(o) authorized or agreed to do any of the foregoing matters referred to
in this Section 3.20.
3.21 INDEBTEDNESS FOR BORROWED MONEY. There is no indebtedness for
-------------------------------
borrowed money included in the WISCO Assumed Liabilities.
3.22 KNOWLEDGE AS OF CLOSING DATE. The CSK Parties have no Knowledge,
----------------------------
as of the Closing Date, that any representation or warranty made by G-P in
Article IV (and related schedules) is untrue.
3.23 NO OTHER REPRESENTATIONS OR WARRANTIES. Except for the
--------------------------------------
representations and warranties contained in this Article III, no CSK Party nor
any other Person makes any other express or implied representation or warranty
on behalf of the CSK Parties.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF G-P
G-P represents and warrants to the CSK Parties and the Company as follows:
4.1 ORGANIZATION AND QUALIFICATION. G-P is a corporation duly
------------------------------
organized, validly existing and in good standing under the laws of the State of
Georgia and has all requisite corporate power and authority to own and operate
the G-P Contributed Assets and to carry on the G-P Business as currently
conducted. G-P is duly qualified to do business and is in
21
<PAGE>
good standing as a foreign corporation in the jurisdictions listed on Schedule
4.1, which are the only jurisdictions where the ownership or operation of the
G-P Contributed Assets or the conduct of the G-P Business requires such
qualification, except where the failure to be so qualified would not have a
Material Adverse Effect.
4.2 CORPORATE AUTHORIZATION. G-P has full corporate power and authority
-----------------------
to execute and deliver this Agreement, and to perform its obligations hereunder
and under any agreement or contract contemplated hereby, including the Ancillary
Agreements. The execution, delivery and performance by G-P of this Agreement and
the agreements and contracts contemplated hereby has been duly and validly
authorized by all necessary corporate action and no additional corporate
authorization is required in connection with the execution, delivery and
performance by G-P of this Agreement and the agreements and contracts
contemplated hereby.
4.3 CONSENTS AND APPROVALS. Except as specifically set forth in
----------------------
Schedule 4.3 or as required by the HSR Act, no Consent is required to be
obtained by G-P from, and no notice or filing is required to be given by G-P to
or made by G-P with, any Governmental Authority or other Person or under any
Contract listed, or required to be listed, on Schedule 4.14 in connection with
the execution, delivery and performance by G-P of this Agreement, each of the
Ancillary Agreements, any other agreement or contract contemplated hereby and
the contribution of the G-P Contributed Assets, except where the failure to
obtain any such Consent or Consents, give any such notice or notices or make any
such filing or filings would not have a Material Adverse Effect.
4.4 NON-CONTRAVENTION. Except as set forth on Schedule 4.3, the
-----------------
execution, delivery and performance by G-P of this Agreement and each of the
Ancillary Agreements, and the consummation of the transactions contemplated
hereby and thereby, does not and will not (i) violate any provision of the
certificate of incorporation or bylaws of G-P; (ii) subject to obtaining the
Consents referred to in Section 4.3, conflict with, or result in the breach of,
or constitute a default under, or result in the termination, cancellation or
acceleration (whether after the filing of notice or the lapse of time or both)
of any right or obligation of G-P under, or to a loss of any benefit to which
G-P is entitled under, any Contract or result in the creation of any Encumbrance
(other than a Permitted Encumbrance) upon any of the G-P Contributed Assets; or
(iii) assuming compliance with the matters set forth in Section 4.3, violate, or
result in a breach of or constitute a default under any Law, rule, regulation,
judgment, injunction, order, decree or other restriction of any court or
Governmental Authority to which G-P is subject, including any Governmental
Authorization, except in each case, such matter or matters that would not have a
Material Adverse Effect.
4.5 BINDING EFFECT. This Agreement constitutes, and each of the
--------------
Ancillary Agreements when executed and delivered by the parties thereto will
constitute, a valid and legally binding obligation of G-P, enforceable with
respect to G-P in accordance with its terms, except as the enforceability
thereof may be limited or otherwise effected by bankruptcy, insolvency,
reorganization, moratorium and similar laws of general applicability Relating
to, or affecting, creditors rights and to general equity principles.
22
<PAGE>
4.6 FINANCIAL STATEMENTS; ABSENCE OF CERTAIN CHANGES.
------------------------------------------------
(a) Attached as Schedule 4.6(a) are the following financial statements of
the G-P Business: Unaudited Balance Sheet, Statement of Income and Statement of
Cash Flows, as of and for (i) the years ended December 31, 1997 and 1998 (the
"G-P Annual Financial Statements"); and (ii) the period ended April 30, 1999
(the"G-P April Financial Statements"). (Collectively the financial statements
described in this Section 4.6(a) shall be referred to as the "G-P Financial
Statements.")
(b) Exhibit 3.6(b) sets forth the line items and a definition for each
such line item contained in each of the G-P Financial Statements.
(c) The G-P Financial Statements are true and correct in all material
respects, present fairly the combined financial position and results of
operation, divisional equity and cash flows of the G-P Business as of the dates
and for the periods presented, and were prepared in accordance with GAAP applied
on a basis consistent with past practice of the G-P Business. The G-P Financial
Statements reflect the underlying Books and Records of the G-P Business, which
are complete and accurate in all material respects. Except as described in the
footnotes to the G-P Financial Statements, consistent accounting policies and
accrual methods were used in all periods presented. All non-recurring or unusual
income or expense items over $500,000, as reflected in the 1998 Statement of
Income of G-P, have been disclosed in footnotes to the G-P Financial Statements.
(d) Except as described in the notes to the G-P Financial Statements, all
accounts receivable reflected on the G-P Financial Statements are bona fide
receivables, accounted for in accordance with GAAP (including, without
limitation, appropriate reserves), representing amounts due with respect to
actual transactions in the operation of the G-P Business; it being understood
that this representation shall not be deemed to constitute a warranty or
guaranty that all such accounts receivable shall be collected.
4.7 LITIGATION AND CLAIMS. Except as disclosed on Schedule 4.7:
---------------------
(a) There is no action (whether civil, criminal or administrative), suit,
demand, claim, dispute, hearing, proceeding (including condemnation or other
proceeding in eminent domain) or investigation pending or, to the Knowledge of
G-P, threatened, Related to the G-P Business or any of the G-P Contributed
Assets or included in the G-P Assumed Liabilities, that individually or in the
aggregate is reasonably expected to have a Material Adverse Effect.
(b) None of the G-P Contributed Assets is subject to any order, writ,
judgment, award, injunction, or decree of or settlement enforceable in any court
or governmental or regulatory authority of competent jurisdiction or any
arbitrator or arbitrators.
23
<PAGE>
4.8 TAXES. Except as disclosed on Schedule 4.8:
-----
(a) G-P has duly and timely filed (or has caused to be duly and timely
filed) taking into account any valid extension of the time for filing, each Tax
Return required to be filed with any Tax Authority which includes or is based
upon the G-P Contributed Assets, or the operations, ownership or activities of
the G-P Business, and all Taxes due and payable (whether or not shown on or
required to be shown on a Tax Return) have been paid prior to their due dates;
provided, however, that the representations and warranties set forth in this
paragraph are made only to the extent that (i) such Taxes are or may become
Encumbrances on the G-P Contributed Assets, or (ii) the Company is or may be
liable in the capacity of transferee of the Contributed Assets.
(b) G-P has duly and timely filed (or has caused to be duly and timely
filed), taking into account any valid extension of the time for filing, each Tax
Return which includes or is based upon the assets, operations, ownership or
activities of the G-P Business, and all Taxes due and payable (whether or not
shown on or required to be shown on a Tax Return) have been paid prior to their
due dates.
(c) None of the G-P Contributed Assets (i) is subject to any lien (other
than a Permitted Encumbrance) arising in connection with any failure or alleged
failure to pay any Taxes, (ii) secures any debt the interest on which is Tax-
exempt under Section 103(a) of the Code, (iii) is required to be or is being
depreciated under the alternative depreciation system under Section 168(g)(2) of
the Code, (iv) is "limited use property" with the meaning of Revenue Procedure
76-30, or (v) will be treated as owned by any other Person pursuant to the
provisions of former Section 168(f)(8) of the Code.
(d) G-P (with respect to the G-P Business) has withheld and paid all
material Taxes required to have been withheld and paid in connection with
amounts paid or owing to any Employee, independent contractor, creditor,
shareholder or other party.
(e) There are no pending, proposed or, to the Knowledge of G-P, threatened
audits, assessments or claims from any Tax Authority for deficiencies, penalties
or interest against G-P (with respect to the G-P Contributed Assets or the G-P
Business or any of its assets, operations or activities); provided, however,
that the representations and warranties set forth in this paragraph are made
only to the extent that (i) such Taxes are or may become Encumbrances on the G-P
Contributed Assets, or (ii) the Company is or may be liable in the capacity of
transferee of the Contributed Assets.
(f) None of the G-P Contributed Assets consists of any interest in any
entity classified as a partnership for United States federal income Tax
purposes.
(g) With respect to the G-P Business, G-P does not have and has not had a
permanent establishment in any foreign country, as defined in any applicable Tax
treaty or convention between the United States and such foreign country.
24
<PAGE>
4.9 EMPLOYEES, PENSION AND OTHER BENEFIT PLANS.
------------------------------------------
(a) Schedule 4.9(a) lists all the Employees who, as of October 1, 1999,
were employed by G-P with respect to the G-P Business, together with their
respective positions, years of employment, and rates of remuneration, as of
August 20, 1999.
(b) Except as disclosed on Schedule 4.9(b), G-P is not a party to nor does
it sponsor, maintain, or contribute to any Employee Plans that provide benefits
to Employees or Retired Employees of the G-P Business.
(c) G-P has delivered to CSK true, complete and up-to-date copies of all
documents embodying the G-P Plans including, without limitation, all amendments
thereto, all funding agreements thereunder (including, but not limited to, trust
agreements), all summaries of such G-P Plans provided to any of their Employees,
directors, officers, shareholders or their dependents with respect to the G-P
Business, as well as the most recent valuation for each defined contribution
retirement plan maintained by G-P and the most recent actuarial valuation for
each of the G-P Plans for which such valuations are required. G-P has delivered
to CSK a complete written description of all unwritten G-P Plans, and will
deliver such other documentation with respect to any G-P Plan as is reasonably
requested by CSK.
(d) Except as disclosed on Schedule 4.6(a) or Schedule 4.9(d) or as set
forth in the Human Resources Agreement, the transactions contemplated by this
Agreement will not result in any additional payments to, or increase the vested
interest of, any Employee, Retired Employee, director, officer, shareholder, or
their dependents under any G-P Plan; and the transactions contemplated by this
Agreement will not result in any payment to any Employee or Retired Employee,
director, officer, or shareholder of G-P which will be subject to Section 280G
of the Code.
(e) Each G-P Plan has been established, maintained and administered in
substantial compliance with its terms and all related documents or agreements
and in substantial compliance with applicable provisions of ERISA, the Code, and
other applicable Laws.
(f) Except as disclosed on Schedule 4.9(f), all required employer
contributions, premium payments and employee contributions under the G-P Plans
have been made and remitted to the funding agents or accrued or booked
thereunder within the time prescribed by any such G-P Plan and the Laws. All
insurance premiums required with respect to any G-P Plan, including any premiums
payable to the Pension Benefit Guarantee Corporation, have been paid, made,
accrued or booked within the time prescribed by any such G-P Plan and the
applicable Law. All benefits, expenses and other amounts due and payable to or
under any G-P Plan, have been paid, made, accrued or booked within the time
prescribed by any such G-P Plan and the Laws. Except as disclosed on Schedule
4.9(f), all of the assets which have been set aside in a trust or account (other
than an account which is part of G-P's general assets) to satisfy any obligation
under any G-P Plan are shown on the books and records of each such trust and
each such account at their fair market value, such current fair market value as
of the last valuation date
25
<PAGE>
is equal to or exceeds the present value of any obligation under the G-P Plan,
and the liabilities for all other obligations under any G-P Plan are accurately
set forth in the G-P Financial Statements.
(g) Except as disclosed on Schedule 4.9(g), there is no pending or, to
the Knowledge of G-P, threatened claim with respect to a G-P Plan (other than
routine and reasonable claims for benefits made in the ordinary course of the
G-P Business) or with respect to the terms and conditions of employment or
termination of employment by any Employee, or Retired Employee, and no audit or
investigation by any governmental or other law enforcement agency is pending or
has been proposed with respect to any G-P Plan.
(h) Except as disclosed on Schedule 4.9(h), no G-P Plan is subject to
Title IV of ERISA. Neither G-P nor any Related Person has incurred any material
liability under or pursuant to Title I or IV of ERISA or the penalty, excise tax
or joint and several liability provisions of the Code Relating to employee
benefit plans and, to the Knowledge of G-P, no event or condition has occurred
or exists which could result in any material liability to G-P, such Related
Person or the Company or a CSK Party under or pursuant to Title I or IV of ERISA
or such penalty, excise tax or joint and several liability provisions of the
Code. No G-P Plan has incurred an "accumulated funding deficiency" within the
meaning of such sections of the Code and ERISA, whether or not waived; and no
such G-P Plan has been terminated. Except as disclosed on Schedule 4.9(h), G-P
does not contribute to, or have any obligation to contribute to, a multiemployer
plan as defined in Section 4001(a)(3) of ERISA with regard to the Employees or
Retired Employees.
(i) Each of the G-P Plans that is intended to be qualified under Section
401(a) of the Code, and the trust, if any, forming a part thereof, has received
a favorable determination letter from the Internal Revenue Service as to the
qualification of its form under the Code and to the effect that each such trust
is exempt from taxation under Section 501(a) of the Code and, to the Knowledge
of G-P nothing has occurred since the date of such determination letter that
adversely affects such qualification or tax-exempt status. Except as disclosed
in Schedule 4.9(i), all reports and other documents required to be filed with
any governmental agency or distributed to plan participants or beneficiaries
(including, but not limited to, actuarial reports, audits or Tax Returns) have
been duly filed or distributed on a timely basis, and copies thereof have been
or will be furnished to CSK upon reasonable request.
4.10 COMPLIANCE WITH LAWS. Except as set forth in Schedule 4.10, the G-P
--------------------
Business is being conducted in compliance with all applicable Laws to the G-P
Business and, as of the Closing, the Company will have (subject to obtaining the
Consents) all Governmental Authorizations necessary for the conduct of the G-P
Business as currently conducted, except for such non-compliance or the failure
to obtain such Consent or Consents which would not have a Material Adverse
Effect; it being understood that nothing in this representation is intended to
address any compliance issue that is the subject of the representations and
warranties set forth in Sections 4.7, 4.8, 4.9, 4.11, 4.12, or 4.13 hereof, and
that G-P makes no representations in this Section 4.10 as to the transferability
or assignability of any such Governmental Authorizations. G-P has not received
written notice that any Governmental Authorization may be suspended, revoked,
materially modified or canceled.
26
<PAGE>
4.11 ENVIRONMENTAL MATTERS.
---------------------
(a) Schedule 4.11(a) sets forth a list of all material Environmental
Permits in connection with the G-P Business.
(b) Except as would not have a Material Adverse Effect, or as disclosed
on Schedule 4.11(b):
(i) The Environmental Permits are all the permits, licenses,
certificates and authorizations of, and registrations with, any of the
Environmental Authorities pursuant to the Environmental Laws necessary to
conduct the G-P Business substantially as presently conducted. The Environmental
Permits are in full force and effect and G-P is in compliance in all respects
thereunder. The consummation of the transactions contemplated hereunder will not
require any renewal, consent, amendment or other action in connection with any
of the Environmental Permits. G-P is in compliance with the Environmental Laws
applicable to the conduct of the G-P Business.
(ii) There is no claim, suit, action or other proceeding, including
appeals and applications for review, outstanding or pending against G-P pursuant
to any of the Environmental Laws Relating to the G-P Business.
(iii) G-P has no liability for any release, spill, leakage, pumping,
emission, empty, discharge, injection, escape, leaching, disposal or dumping of
any Hazardous Substances on or from any of the G-P Real Property, except in such
manner or quantity as would not constitute a violation of any of the
Environmental Laws or Environmental Permits.
(iv) G-P has maintained all records in respect of the G-P Business
required by the Environmental Laws and Environmental Permits, in the manner and
for the time periods as so required.
(v) Since June 30, 1994, G-P has received no notice of
investigation or non-compliance or written order from any of the Environmental
Authorities, including any notice of contamination or clean-up requirements,
pursuant to any of the Environmental Laws with respect to the G-P Business.
(c) G-P has no liability for release of PCB's and other Hazardous
Substances into the Fox River, Wisconsin or its associated waterways.
4.12 INTELLECTUAL PROPERTY.
---------------------
(a) Schedule 4.12 sets forth a list and description (including the
country of registration) of all issued or registered U.S., Canadian and Mexican
patents and trademarks comprising the owned G-P Intellectual Property currently
(or, to the Knowledge of G-P, within the last 12 months) used in the G-P
Business (other than "shrink wrap" consumer software licenses). No third party
has rights in, or otherwise has the right to restrict G-P's use of, G-P
Intellectual Property owned by G-P, and, to G-P's Knowledge, no third party has
rights in,
27
<PAGE>
or otherwise has the right to restrict the Company's use of the G-P Intellectual
Property as of and following the Closing.
(b) To the Knowledge of G-P, no product, component, method, process, or
material (including computer software) used, sold or manufactured by the G-P
Business infringes on, misappropriates, or otherwise violates a valid and
enforceable intellectual property right of any other Person.
(c) There are no demands, actions or proceedings pending or, to the
Knowledge of G-P, threatened, against G-P Relating to the G-P Business alleging
infringement, misappropriation or violation of any intellectual property right
of any other Person, and, to the Knowledge of G-P, no Person is infringing,
misappropriating, challenging, or violating, the Intellectual Property owned by
G-P, except for challenges, infringements, misappropriation or violations which,
individually or in the aggregate, would not have a Material Adverse Effect.
(d) All of the G-P Intellectual Property will be licensed to the Company
at Closing, except to the extent certain Intellectual Property used by G-P to
provide services under the Operational Support Agreement is specifically
excluded thereunder. G-P agrees that Intellectual Property provided under the
Operational Support Agreement will be provided to the Company on and after
Closing on the same terms and conditions under which it was available to the G-P
Business prior to the Closing in accordance with the terms of the Transition
Services Agreement.
(e) Schedule 4.12(e) sets forth G-P's efforts at addressing the Year 2000
issue in the G-P Business. The information set forth therein is accurate as of
the date hereof, in all material respects. G-P has developed and begun
implementing a Project Plan to remediate and/or replace Computer Systems that
are used or relied upon in the G-P Business but are not Year 2000 Ready. Such
remediation and/or replacement is scheduled to be completed in 1999.
4.13 LABOR MATTERS. Except as disclosed on Schedule 4.13:
-------------
(a) As of the date hereof, G-P is not a party to any labor or collective
bargaining agreement or similar agreement with respect to Employees of the G-P
Business, no such Employees are represented by any labor organization and, to
the Knowledge of G-P, there are no organizing or de-certification activities
(including any demand for recognition or certification proceedings pending or
threatened to be brought or filed with the National Labor Relations Board or
other labor relations tribunal) involving the G-P Business;
(b) As of the date hereof, there are no strikes, work stoppages,
slowdowns, lockouts, unfair labor practice charges pending or, to the Knowledge
of G-P, threatened against or involving the Employees of the G-P Business;
(c) There are no complaints, charges, claims or grievances against G-P
pending or, to the Knowledge of G-P, threatened to be brought or filed with any
Governmental Authority, arbitrator or court based on or arising out of the
employment by G-P of any Employee of the G-P
28
<PAGE>
Business, except for those which, individually or in the aggregate, would not
have a Material Adverse Effect;
(d) G-P is in compliance with all Laws Relating to the employment of
labor, including all such Laws Relating to wages, hours, collective bargaining,
discrimination, civil rights, safety and health, immigration, workers'
compensation, layoffs, and the collection and payment of withholding and/or
Social Security Taxes and similar Taxes, except where the failure to be in
compliance would not have a Material Adverse Effect; and
(e) G-P has given all notices required to be given prior to the Closing
Date under WARN Obligations Relating to any plant closing or mass layoff that
occurred during the 90 days immediately preceding the Effective Time pertaining
to the G-P Business.
4.14 CONTRACTS. Schedule 4.14 sets forth a list, as of the date hereof,
---------
of each Contract that is Related to the G-P Business other than (a) G-P Real
Property Leases, which are listed on Schedule 4.15, and collective bargaining
agreements, which are listed on Schedule 4.13, (b) purchase orders or similar
agreements for the purchase or sale of goods or services in the ordinary course
of business, (c) confidentiality agreements entered into in the ordinary course
of business in connection with the purchase and sale of Inventory, and (d) any
Contract which requires a payment or imposes an obligation on either party
thereto of less than $1,000,000 in the aggregate. Schedule 4.14 also identifies
any Contract that contains a non-compete covenant or similar provision that
could materially restrict the Company in its conduct of the G-P Business
following Closing, any employment agreement with any Employee of the G-P
Business, any employment agreement included in the G-P Contributed Assets or G-P
Assumed Liabilities, any Contract between any Affiliates of G-P, on one hand,
and G-P on the other hand, any agreements Related to payments in lieu of taxes,
any agreement or license Related to Intellectual Property (other than "shrink
wrap" consumer software licenses), leases and license agreements for any
Computer Systems (other than "shrink wrap" consumer software licenses), all
material agreements for telecommunications voice (including without limitation,
local, long distance and toll free service) and data services, Internet access,
hosting and use services. Each Contract set forth on Schedule 4.14 is a valid
and binding agreement of G-P and, to the Knowledge of G-P, is in full force and
effect. Except as otherwise provided in Schedule 4.14, G-P is not, and, to G-P's
Knowledge, no other party thereto is, in default in any material respect under
any Contract listed on Schedule 4.14 or any collective bargaining agreement
listed on Schedule 4.13.
4.15 REAL ESTATE LEASES. Schedule 4.15 sets forth a list, as of the
------------------
date hereof, of each material written G-P Real Estate Lease with a term of more
than one month that is Related to the G-P Business. Each G-P Real Estate Lease
set forth on Schedule 4.15 is a valid and binding agreement of G-P and is in
full force and effect. There are no defaults under any G-P Real Estate Lease
listed on Schedule 4.15 which defaults have not been cured or waived and which
would, individually or in the aggregate, have a Material Adverse Effect.
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4.16 ENTIRE BUSINESS; TITLE TO PROPERTY.
----------------------------------
(a) Except as set forth in Schedule 4.16(a) and Schedule 4.6(a), the G-P
Contributed Assets, the G-P Retained Assets (including cash and cash accounts,
disbursement accounts, invested securities and other short and medium term
investments, the G-P Marks, the G-P Plans, and G-P's insurance policies), and
the rights specifically provided or made available to the Company under the
Ancillary Agreements, include all of the buildings, machinery, equipment and
other assets (whether tangible or intangible) necessary for the Company
immediately after Closing to conduct in all material respects the G-P Business
as conducted as of the date hereof, and as conducted during the 12-month period
prior to the date hereof (subject to changes expressly permitted by the terms
hereof to be made after the date hereof); provided, however, that no
representation is made as to the assignability of Government Authorizations.
(b) G-P has good (and, in the case of its Owned Real Property,
marketable) title to, or a valid and binding leasehold interest in, the G-P
Contributed Assets, free and clear of all Encumbrances, except (i) as set forth
in Schedule 4.16(b) and (ii) any Permitted Encumbrances.
(c) G-P Contributed Assets do not include any equity interest in any
Subsidiary.
(d) The G-P Contributed Assets are in good operating condition and repair
(subject to normal wear and tear). Except as set forth on Schedule 4.16(d), to
G-P's Knowledge, there are no material structural or mechanical defects with
respect to any buildings, improvements or equipment included in the G-P
Contributed Assets, which defects are reasonably likely to have a Material
Adverse Eff ect.
4.17 FINDER'S FEES. Except for Morgan Stanley Dean Witter Co., whose
-------------
fees will be paid by G-P, there is no investment banker, broker or finder which
has been retained by or is authorized to act on behalf of G-P who might be
entitled to any fee or commission from G-P or the Company in connection with the
transactions contemplated by this Agreement.
4.18 INSURANCE. Schedule 4.18 attached hereto sets forth the following
---------
information with respect to each insurance policy to which G-P, with respect to
the G-P Business, has been a party, a named insured, or otherwise the
beneficiary of coverage at any time with in the past five years:
(a) the name of the insurer, the name of the policyholder, and the name
of each covered insured;
(b) the scope, period and amount of coverage; and
(c) a description of any retroactive premium adjustments or other loss-
sharing arrangements.
Schedule 4.18 also describes any self insurance arrangements affecting the G-P
Business. As of the date hereof, G-P has not received any written notice of any
retroactive premium increase or
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assessment applicable to the G-P Business. Except as disclosed on Schedule 4.18,
all of such policies are in full force and effect.
4.19 NO UNDISCLOSED LIABILITIES. With respect to the G-P Business, G-P does
--------------------------
not have any obligations or liabilities (whether accrued, absolute, contingent,
unliquidated or otherwise, whether or not known to G-P, whether due or to become
due and regardless of when asserted) arising out of transactions entered into at
or prior to the Closing, or any action or inaction at or prior to the Closing,
or any state of facts existing at or prior to the Closing other than: (a)
liabilities set forth on G-P's Financial Statements (including any notes
thereto, if any); (b) liabilities and obligations arising from or in connection
with matters disclosed pursuant to G-P's representations and warranties in this
Agreement or in the Disclosure Schedules (none of which, except as set forth on
Schedule 4.7, is a liability resulting from a breach of contract, breach of
warranty, tort, infringement claim or lawsuit), other than liabilities and
obligations arising from or in connection with matters disclosed pursuant to
Section 4.11; (c) liabilities and obligations arising from or in connection with
matters disclosed pursuant to Section 4.11; (d) liabilities and obligations
which have arisen after April 30, 1999 in the ordinary course of business (none
of which, except as set forth on Schedule 4.7, is a liability resulting from a
breach of contract, breach of warranty, tort, infringement claim or lawsuit);
and (e) such other liabilities or obligations that do not have a Material
Adverse Effect.
4.20 NO MATERIAL ADVERSE CHANGE. Except as disclosed on Schedule 4.20,
--------------------------
since April 30, 1999, G-P has conducted the G-P Business in the ordinary course
and in a manner consistent with the practices applied during the periods
specified in the G-P Financial Statements, and there has been no Material
Adverse Effect in the G-P Business. Except as set forth on Schedule 4.20, and
except as such does not have a Material Adverse Effect, G-P has not with respect
to the G-P Business:
(a) been a party to any corporate reorganization, restructuring or
merger or amalgamation or amended its certificate or articles of incorporation
or bylaws;
(b) declared or paid any dividend or declared or made any other
distribution (whether in cash, stock or property) on any of the shares of its
capital stock;
(c) incurred or discharged any obligation or liability (whether
accrued, absolute or contingent) other than in the ordinary course of and in a
manner consistent with past practices for the G-P Business;
(d) entered into any transaction, contract, agreement, indenture,
instrument or commitment other than in the ordinary course of and in a manner
consistent with past practices for the G-P Business;
(e) suffered or incurred any material damage, destruction, loss or
liability (whether or not covered by any insurance);
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<PAGE>
(f) experienced any strike, lockout or other labor trouble such as
slow down or work stoppage, or any loss of any of its key Employees, customers,
suppliers or distributors;
(g) suffered any shortage or cessation or interruption of raw
materials, supplies or utilities that could have a Material Adverse Effect on
the G-P Business;
(h) made any change in its accounting principles, policies and
practices as utilized in the preparation of the G-P Financial Statements;
(i) made any loan or advance, or assumed, guaranteed, endorsed or
otherwise become liable with respect to the liabilities or obligations of any
other Person or entity, or permitted any of its assets to be subjected to any
lien or security interest (except for Permitted Encumbrances);
(j) granted to any customer any allowance or discount or changed its
pricing, credit or payment policies other than in the ordinary course of and in
a manner consistent with past practices for the G-P Business (except for non-
material variations therefrom in the aggregate;
(k) incurred any indebtedness, liability or obligation (absolute,
accrued, contingent or otherwise) other than in the ordinary course of and in a
manner consistent with past practices for the G-P Business;
(l) sold, leased or otherwise disposed of any of its assets or any
right, title or interest therein other than in the ordinary course of and in a
manner consistent with past practices for the G-P Business;
(m) made any payment to, or for the benefit of, any present or former
Employee, director, officer or shareholder otherwise than at the regular rates
payable to them, by way of salary, pension, bonus or other remuneration
consistent with past practices for the G-P Business;
(n) committed to any capital expenditure project or made any
investment, in either case in excess of Five Hundred Thousand Dollars ($500,000)
not disclosed to CSK prior to the date of this Agreement; or
(o) authorized or agreed to do any of the foregoing matters referred
to in this Section 4.20.
4.21 INDEBTEDNESS FOR BORROWED MONEY. There is no indebtedness for borrowed
-------------------------------
money included in the G-P Assumed Liabilities.
4.22 KNOWLEDGE AS OF CLOSING DATE. G-P has no Knowledge, as of the Closing
----------------------------
Date, that any representation or warranty made by the CSK Parties in Article III
(and related schedules) is untrue.
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4.23 ORGANIZATION OF COMPANY. The Company is a limited liability company,
-----------------------
duly organized, validly existing and in good standing under the laws of the
State of Delaware.
4.24 AUTHORIZATION OF COMPANY. The Company has full limited liability
------------------------
company power and authority to execute and deliver this Agreement, and to
perform its obligations hereunder and under any agreement or contract
contemplated hereby, including the Ancillary Agreements. The execution, delivery
and performance by the Company of this Agreement and the agreements and
contracts contemplated hereby has been duly and validly authorized and no
additional limited liability company authorization or consent is required in
connection with the execution, delivery and performance by the Company of this
Agreement and the agreements and contracts contemplated hereby.
4.25 ACTIVITIES OF COMPANY. Other than entering into this Agreement and the
---------------------
agreements and contracts contemplated hereby, the Company has not entered into
any agreements or conducted any other business.
4.26 NO OTHER REPRESENTATIONS OR WARRANTIES. Except for the representations
--------------------------------------
and warranties contained in this Article IV, neither G-P, nor any other Person
makes any other express or implied representation or warranty on behalf of G-P.
ARTICLE V
COVENANTS
5.1 COVENANTS REGARDING EMPLOYEES.
-----------------------------
(a) At the Closing, G-P, the CSK Parties and the Company shall enter into
the Human Resources Agreement, and shall take all actions required by them
pursuant to such Human Resources Agreement.
(b) CSK shall retain sponsorship of the CSK Plans, and neither the Company
nor G-P shall be entitled to any assets or be liable for any obligations of the
CSK Plans except as provided in the Human Resources Agreement.
(c) G-P shall retain sponsorship of the G-P Plans and no CSK Party shall
be entitled to any assets or be liable for any obligations of the G-P Plans
except as provided in the Human Resources Agreement.
5.2 COMPLIANCE WITH WARN AND SIMILAR LAWS. The Company will timely give
-------------------------------------
all notices required to be given with respect to WARN Obligations Relating to
actions taken on and after the Closing Date.
5.3 FURTHER ASSURANCES. At any time after the Closing Date, the CSK
------------------
Parties, G-P and the Company shall promptly execute, acknowledge and deliver any
other assurances or
33
<PAGE>
documents reasonably requested by the Company, G-P or the CSK Parties, as the
case may be, and necessary for them or it to satisfy their or its respective
obligations hereunder or obtain the benefits contemplated hereby. Without
limiting the generality of the foregoing, the Company agrees that if any of the
Contributed Subsidiaries are found to own assets that are not part of the WISCO
Contributed Assets, or if any Retained Assets are inadvertently transferred to
the Company, the Company shall transfer such assets to G-P or the appropriate
CSK Party, as applicable, at G-P's or such CSK Party's expense, as applicable,
but without consideration. If after the Closing either the Company, a CSK Party
or G-P identifies any assets of any CSK Party or G-P that Relates to the
Business and is not a Retained Asset of the CSK Party or GP, the party retaining
any such assets shall transfer such assets to the Company at the transferring
party's expense without further consideration.
5.4 USE OF G-P INTELLECTUAL PROPERTY AND CSK MARKS. At Closing, G-P shall
----------------------------------------------
provide to the Company a non-exclusive license, substantially in the form set
forth in Schedule 5.4(a) hereto, to use the G-P Intellectual Property.
5.5 CERTAIN MATTERS RELATED TO RETAINED AND ASSUMED LIABILITIES.
-----------------------------------------------------------
(a) With respect to all Retained Liabilities and in particular
indemnification under Sections 7.2(a)(ii) and 7.3(a)(ii), the Company shall, at
the expense of the CSK Parties or G-P as applicable, provide reasonable
cooperation including providing the CSK Parties or G-P, as applicable, as
promptly as practicable with any notices and other information received by the
Company as well as all relevant materials, information and data requested by the
CSK Parties or G-P, as applicable, including reasonable access (without charge)
to Employees of the Company and to the Real Property.
(b) With respect to all Assumed Liabilities, G-P or the CSK Parties, as
the case may be, shall, at the Company's expense, reasonably cooperate with the
Company, provide the Company as promptly as possible with any notices and other
information received by such parties as well as all relevant materials,
information and data requested by the Company and shall grant the Company,
without charge, reasonable access to Employees of the CSK Parties or G-P, as
applicable.
5.6 INTERCOMPANY AGREEMENTS.
-----------------------
(a) As of the Effective Time, G-P shall terminate and shall cause its
Affiliates to terminate, any and all agreements between G-P and its Affiliates
to the extent such agreements Relate to the G-P Business, except as contemplated
in the Ancillary Agreements. Without limiting the foregoing, all intercompany
loans between G-P and any of its Affiliates Relating to the G-P Business shall
be paid or otherwise eliminated prior to the Effective Time.
(b) As of the Effective Time, the CSK Parties shall terminate and shall
cause its Affiliates to terminate, any and all agreements between any of the CSK
Parties and its Affiliates to the extent such agreements Relate to the WISCO
Business, except as contemplated in the
34
<PAGE>
Ancillary Agreements. Without limiting the foregoing, all intercompany loans
between the CSK Parties and any of its Affiliates Relating to the WISCO Business
shall be paid or otherwise eliminated prior to the Effective Time.
5.7 RECORDS AND RETENTION AND ACCESS. The Company shall keep and preserve
--------------------------------
in an organized and retrievable manner the Books and Records it receives from
either party for at least seven years from the Closing Date. The Company shall
neither dispose of nor destroy such Books and Records without first offering to
turn over possession thereof to the party that contributed such Books and
Records by written notice to such party at least thirty (30) days prior to the
proposed date of such disposition or destruction. While such Books and Records
remain in existence, each party shall allow the other party, its
representatives, attorneys and accountants, at the requesting party's expense,
access to the Books and Records upon reasonable request and advance notice and
during normal business hours for the purpose of interviewing, examining and
copying in connection with such parties' preparation of financial statements.
5.8 INSURANCE.
---------
(a) G-P and the CSK Parties shall use commercially reasonable efforts to
assign to the Company, to the fullest extent, all of the benefits and rights
under any insurance policies held by them and/or any of their Affiliates with
respect to any Losses arising out of, Related to or in connection with the
Contributed Assets, the Assumed Liabilities and their respective Businesses
(other than benefits and rights to the extent Related to Retained Assets or
Liabilities) with respect to events occurring prior to the Closing Date (it
being understood that to the extent rights under such insurance policies include
claims for Losses related to Contributed Assets, then such claims shall be
reflected as an insurance receivable on the Closing Working Capital Statement).
The Company shall have the right to such benefits and rights only to the extent
actually paid or payable, and exclusive of any deductibles (including pass
through deductibles for which either party or any Affiliate of such party is
required to reimburse the insurer). To the extent such assignment is not
permitted, G-P or the CSK Parties, as applicable, shall use commercially
reasonable efforts on the Company's behalf to obtain such proceeds or benefits
for the Company, or otherwise to provide the Company with the benefit equivalent
to that which would have been available had such assignment been permitted.
(b) The CSK Parties and G-P shall cooperate with the Company in obtaining
insurance policies for the Business to be in effect from and after Closing.
Notwithstanding such assistance, all decisions with respect to such policies
shall be made solely by the Company, and neither the CSK Parties nor G-P shall
have any liability, whether to the Company or to any other Person, whether as an
advisor, broker or otherwise, under any other theory, in connection with
providing such assistance and cooperation. The CSK Parties and G-P make no
assurances whatsoever with respect to such insurance coverage, including the
availability or price thereof.
5.9 SPECIAL CSK RETAINED LIABILITY. Notwithstanding Section 2.1(a) hereof,
------------------------------
CSK shall retain and be solely responsible for, and CSK and WISCO shall
indemnify and hold harmless the Company, G-P and all G-P Affiliates from and
against, any and all costs, liabilities, damages, expenses or Losses of any kind
whatsoever which may be incurred by or assessed
35
<PAGE>
against any of them arising out of or in any way related to the release, spill,
leak, pumping, pouring, emitting, emptying, discharge, injecting, escaping,
leaching, dumping, disposal or arranging for disposal (hereinafter "release") of
(i) PCBs and/or any other Hazardous Substance into, on or around the Fox River
in Wisconsin and its associated waterways by any CSK Parties, and (ii) PCBs
into, on or around any landfill, disposal site or dump located in Wisconsin, by
CSK, WISCO or any of their Affiliates or successors or predecessors in interest
(the "Fox River Liability"). The Company shall provide reasonable cooperation to
CSK, WISCO and their predecessors or successors in interest in their defense of
any liability for the release of PCBs and/or other Hazardous Substances into, on
or around the Fox River and its associated waterways, and all costs incurred by
the Company in so cooperating will be reimbursed to it by CSK or WISCO. Such
indemnification shall not be limited by any Survival Period, Deductible or WISCO
Cap set forth in Article VII. For purposes of this Section 5.9, the term "Fox
River Liability" shall not include liability for dumping or disposal of
Hazardous Substances by WISCO at the Vinland #1 and #2 disposal sites owned by
WISCO.
5.10 PREPARATION OF REGISTRATION STATEMENT. As soon as practicable after
-------------------------------------
the execution and delivery of this Agreement, the Company and G-P shall prepare
and file with the Securities and Exchange Commission the Registration Statement
in connection with the registration under the Securities Act of debt to be
incurred by the Company to refinance the Company Debt. The CSK Parties each
shall cooperate to the extent such cooperation is reasonably required to file
such Registration Statement; provided that the CSK Parties shall not be required
to execute any documents other than a WISCO debt indemnity as contemplated in
the Operating Agreement.
5.11 USE OF WISCO NAME. As soon as practicable and in any event within
-----------------
three months following the Closing, WISCO shall change its corporate name, and
immediately following the Closing neither WISCO, CSK nor any Subsidiary or
Affiliate of CSK shall make use of the names "Wisconsin Tissue Mills",
"Wisconsin Tissue" or "WISCO" or any names confusingly similar to such names
other than in connection with the defense of litigation.
5.12 PRORATION OF CERTAIN CHARGES. The following charges and payments may
----------------------------
be prorated on a per diem basis and apportioned between each party transferring
Contributed Assets on the one hand and the Company on the other, as of the
Closing Date: property taxes, utility charges, prepaid items, license and permit
fees, and similar charges imposed with respect to the Contributed Assets. To the
extent not reflected on the Final Working Capital Statement, each party
transferring Contributed Assets shall be liable for (and shall reimburse the
Company to the extent the Company shall have paid) that portion of such charges
Relating to, or arising in respect to, periods on or prior to the Closing Date,
and the Company shall be liable for (and shall reimburse the Party contributing
such assets to the extent the contributing party shall have paid) that portion
of the charges Relating to, or arising in respect to, periods after the Closing
Date.
36
<PAGE>
ARTICLE VI
CONDITIONS TO CLOSING
[Intentionally Deleted]
ARTICLE VII
SURVIVAL; INDEMNIFICATION
7.1 SURVIVAL. The representations and warranties contained in this
--------
Agreement shall survive the Closing (regardless of any investigation, inquiry or
examination made by or on behalf of, or any Knowledge of any party hereto or the
acceptance of any party or on its behalf of a certificate and opinion) for the
respective periods (each, a "Survival Period") set forth in this Section 7.1.
All of the representations and warranties of the CSK Parties and G-P contained
in this Agreement and all claims and causes of action with respect thereto shall
terminate on April 30, 2001, except that (a) the representations and warranties
set forth in Section 3.11, 3.19(c) and 4.11(a)-(b) shall terminate upon the
expiration of the 36 month period commencing on the Closing Date, (b) the
representations and warranties set forth in Sections 3.8, 3.9, 3.12, and 4.8,
4.9, and 4.12 shall survive until the expiration of the applicable statute of
limitation (including any extension thereof), and (c) the representations and
warranties set forth in Sections 3.1, 3.2, 3.5, 3.17, and 4.1, 4.2, 4.5,
4.11(c), and 4.17 shall have no expiration date. Any claim for indemnification
for breach of a representation and warranty must be made during the applicable
Survival Period. In the event notice (within the meaning of Section 7.5(a)) of
any claim for indemnification for a breach of a representation or warranty is
given within the applicable Survival Period, an Indemnifying Party's obligations
with respect to such indemnification claim shall survive until such time as such
claim is finally resolved.
7.2 INDEMNIFICATION BY G-P
----------------------
(a) G-P shall indemnify, defend and hold harmless CSK, WISCO, their
Affiliates and, if applicable, their respective directors, officers,
shareholders, partners, members, attorneys, accountants, agents and Employees
and their heirs, successors and assigns (the "WISCO Indemnified Parties") and
the Company from, against and in respect of any damages, claims, losses,
charges, actions, suits, proceedings, deficiencies, Taxes, interest, penalties,
and reasonable costs and expenses (including reasonable attorneys' fees, removal
costs, remediation costs, closure costs, fines, penalties and expenses of
investigation and ongoing monitoring) (collectively, the "Losses") imposed on,
sustained, incurred or suffered by or asserted against any of the WISCO
Indemnified Parties or the Company, directly or indirectly, Relating to or
arising out of:
(i) subject to Section 7.2(b), any breach of any representation or
warranty made by G-P in this Agreement;
(ii) the G-P Retained Liabilities; and
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<PAGE>
(iii) the breach of any covenant or agreement of G-P contained in this
Agreement.
(b) G-P shall not be liable to the WISCO Indemnified Parties or the
Company for any Losses with respect to the matters contained in Section
7.2(a)(i) (other than the representation in Section 4.6) until the Losses
therefrom first exceed an aggregate amount equal to $3,760,000 (the "G-P
Deductible"), and in that event, G-P shall be liable for all Losses in excess
thereof up to an aggregate amount equal to 50% of the value of the G-P Business
as set forth in Section 2.8(a) hereof (the "G-P Cap"); provided, however, that
-------- -------
the G-P Deductible and the G-P Cap shall not apply to claims arising out of the
breach of a representation or warranty, if such representation or warranty was
made fraudulently by G-P or if such representation or warranty was, to the
Knowledge of G-P, false at the time made.
7.3 INDEMNIFICATION BY CSK.
----------------------
(a) CSK and its Affiliates shall indemnify, defend and hold harmless G-P,
its Affiliates and, if applicable, their respective directors, officers,
shareholders, partners, members, lenders, attorneys, accountants, agents and
Employees and their heirs, successors and assigns (the "G-P Indemnified
Parties") and the Company from, against and in respect and to the extent of any
Losses imposed on, sustained, incurred or suffered by or asserted against each
of the G-P Indemnified Parties or the Company, directly or indirectly, Relating
to or arising out of:
(i) subject to Section 7.3(b), any breach of any representation or
warranty made by any CSK Party in this Agreement;
(ii) the WISCO Retained Liabilities; and
(iii) the breach of any covenant or agreement of any CSK Party
contained in this Agreement.
(b) CSK shall not be liable to the G-P Indemnified Parties or the Company
for any Losses with respect to the matters contained in Section 7.3(a)(i) (other
than the representation in Section 3.6) until the Losses therefrom first exceed
an aggregate amount equal to $7,750,000 (the "WISCO Deductible"), and in that
event, WISCO shall be liable for all Losses in excess thereof paid or suffered
by G-P or the Company up to an aggregate amount equal to 50% of the value of the
WISCO Business as set forth in Section 2.8 hereof (the "WISCO Cap"); provided,
--------
however, that the WISCO Deductible and the WISCO Cap shall not apply to claims
- -------
arising out of the breach of a representation or warranty, if such
representation or warranty was made fraudulently by WISCO or if such
representation or warranty was, to the Knowledge of WISCO, false at the time
made.
7.4 INDEMNIFICATION BY THE COMPANY.
------------------------------
The Company shall indemnify, defend and hold harmless the G-P
Indemnified Parties or the WISCO Indemnified Parties, as the case may be, from
and against and in respect
38
<PAGE>
and to the extent of any Losses imposed on, sustained, incurred or suffered by
or asserted against either the G-P Indemnified Parties or the WISCO Indemnified
Parties, directly or indirectly, Relating to or arising out of (i) the breach of
any covenant or agreement of the Company in this Agreement; or (ii) the Assumed
Liabilities; provided that the Company shall have no indemnification obligations
hereunder for any Losses resulting from a payment of a claim made pursuant to
clauses (i) and (ii) above and incurred or suffered by any Person solely in such
Person's capacity as a member of the Company, equity owner or debt holder of the
Company, including Losses for diminution of the value of such equity, debt or
member interest.
7.5 INDEMNIFICATION PROCEDURES.
--------------------------
(a) Any Indemnified Person making a claim for indemnification pursuant to
Section 7.2, 7.3 or 7.4 above (an "Indemnified Party") must give the party from
whom indemnification is sought (an "Indemnifying Party") notice of such claim
(in a manner consistent with Section 10.1 hereof) describing such claim with
reasonable particularity and the nature and amount of the Loss to the extent
that the nature and amount of such Loss is known at such time (an
"Indemnification Claim Notice") promptly after the Indemnified Party receives
any written notice of any action, lawsuit, proceeding, investigation or other
claim (a "Proceeding") against or involving the Indemnified Party by a
Governmental Authority or other third party or otherwise discovers the
liability, obligations or facts giving rise to such claim for indemnification;
provided that the failure to notify or delay in notifying an Indemnifying Party
will not relieve the Indemnifying Party of its obligations pursuant to Section
7.2, 7.3 or 7.4, as applicable, except to the extent that (and only to the
extent that) such failure shall have (i) caused or materially increased the
Indemnifying Party's liability, (ii) resulted in the forfeiture by the
Indemnifying Party of substantial rights and defenses or (iii) otherwise
materially prejudiced the Indemnifying Party.
(b) The Indemnifying Party shall have 30 days from the date the
Indemnification Claim Notice is deemed given pursuant to Section 10.1 hereof
(the "Notice Period") to notify the Indemnified Party (i) whether or not the
Indemnifying Party disputes the liability of the Indemnifying Party to the
Indemnified Party with respect to such claim or demand and (ii) whether or not
it desires to defend the Indemnified Party against such claim or demand.
(c) If (i) the Indemnifying Party agrees in writing that the subject
matter of the claim is subject to indemnification under this Article VII and
(ii) the claim for indemnification does not relate to a matter (A) that, if
determined adversely, could reasonably be expected to expose the Indemnified
Party to criminal prosecution or penalties, (B) that, if determined adversely,
could reasonably be expected to result in the imposition of a consent order,
injunction or decree which would significantly restrict the activity or conduct
of the Indemnified Party or any Affiliate thereof, or (C) as to which the
Indemnified Party shall have reasonably concluded, in good faith, after
consultation with the Indemnifying Party, that such representation is likely to
result in a conflict of interest or materially jeopardize the viability of such
defense, then the Indemnifying Party shall have the right to defend the
Indemnified Party by appropriate proceedings and shall have the sole power to
direct and control such defense. If any Indemnified Party desires to participate
in any such defense, it may do so at its sole cost and expense.
39
<PAGE>
(d) If the claim relates to a matter for which both the Indemnifying Party
and any Indemnified Party could be liable or responsible hereunder, such as a
Loss for which both parties could be partially liable due to the applicable Cap
and the Deductible, the Indemnifying Party and the Indemnified Parties shall
cooperate in good faith in the defense of such action. In such event, no party
shall settle any claim without the prior consent of the other party (which
consent shall not be unreasonably withheld); provided, however, that neither an
Indemnified Party nor an Indemnifying Party shall be required to consent to any
settlement if the proposed settlement (i) does not provide for a full release of
all claims against such party, (ii) is on a basis which would result in the
imposition of a consent order, injunction or decree or any other restriction on
the activity or conduct of such party, or (iii) is on a basis which could, in
such party's judgment, expose such party to criminal liability or requires an
admission of wrongdoing by such party. If an Indemnified Party or an
Indemnifying Party does not consent to a definitive settlement proposed by the
other party (with respect to which a settlement agreement has been agreed to by
all parties other than such party) which settlement satisfies the foregoing
clauses (i) through (iii), then the party declining such settlement shall
thereafter have full control of the defense of such claim, and the maximum
liability of the party that proposed such settlement shall be as though such
matter had settled on the terms so proposed, including the amount of the
proposed settlement, together with all legal costs and expenses incurred in
connection with such matter through and including the proposed settlement date.
For purposes of Section 7.2 or 7.3, the actual amount of the Loss up to the
amount of such party's maximum liability (determined in accordance with the
preceding sentence) shall be the amount of the Loss of such Party for purposes
of determining whether the applicable Deductible has been met. Notwithstanding
anything in Section 7.2 or 7.3 to the contrary, if an Indemnified Party and all
other parties other than the Indemnifying Parties have reached a definitive
settlement agreement which satisfies the foregoing clauses (i) through (iii),
the amount of the Loss for purposes of determining whether the applicable Cap
has been met shall equal the amount contemplated by such definitive settlement
regardless of the actual amount of such Loss. If the parties agree to the
settlement, the relative liabilities of the parties for such Losses shall be
determined as provided in the other provisions of this Article VII.
(e) All costs and expenses incurred by the Indemnifying Party in defending
a claim or demand under Section 7.4(c), and all costs and expenses incurred by
the Indemnified Party in defending a claim or demand which the Indemnifying
Party has elected not to defend (including by virtue of its failure to give
timely notice to the Indemnified Party) or is not permitted to defend under
Section 7.4(c) shall be a liability of, and shall be paid by, the Indemnifying
Party, subject to any applicable Deductible and Cap.
(f) To the extent the Indemnifying Party shall direct, control or
participate in the defense or settlement of any third-party claim or demand, the
Indemnified Party will give the Indemnifying Party and its counsel access to,
during normal business hours, the relevant business records and other documents,
and shall permit them to consult with the Employees and counsel of the
Indemnified Party. The Indemnifying Party and Indemnified Parties shall use
their best efforts in the defense of all such claims.
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(g) In connection with the indemnification obligations set forth in
Sections 7.2(a)(ii) and 7.3(a)(ii), CSK Parties, G-P and the Company shall
comply with the obligations contained in Section 5.5.
7.6 ACKNOWLEDGMENT REGARDING ENVIRONMENTAL LIABILITIES. G-P and each of
--------------------------------------------------
the CSK Parties acknowledge the allocation of relative responsibility for
liabilities under Environmental Laws under this Agreement is a material term of
this Agreement, and that (i) they have taken such matters into consideration in
determining the financial and other terms of this transaction, and (ii) they
understand that the Company is accepting all risks resulting or arising in any
way from any known or unknown liabilities in connection with such matters
arising in connection with or in any way relating to the Businesses (other than
the Retained Environmental Liabilities of either G-P or the CSK Parties) and
that CSK and WISCO are retaining all risks Relating to the Retained
Environmental Liabilities and indemnifying G-P and the Company for certain
Losses Relating to environmental matters under Section 7.3(a) and Section 5.9.
G-P and the CSK Parties acknowledge that none of them shall have any claim of
any nature against the other or the other's Affiliates in connection with any
matters Relating to known or unknown soil or groundwater contamination or any
other claims under any Environmental Laws, other than as set forth herein.
7.7 CHARACTERIZATION OF INDEMNIFICATION PAYMENTS. (a) To the extent
--------------------------------------------
the Company is an Indemnified Party, any payments to the Company pursuant to
this Article VII shall not result in an adjustment to any party's capital
account in the Company or percentage of ownership interest of the Company; and
(b) all amounts paid to G-P, or CSK, as the case may be, under this Article VII
shall not be treated as adjustments to the amount contributed to the Company by
G-P or CSK, pursuant to Section 2.4(a) or (b) hereof.
ARTICLE VIII
TAX COVENANTS
8.1 LIABILITY FOR TAXES.
-------------------
(a) CSK shall be liable for, and shall indemnify, defend and hold the
Company harmless from and against, and shall be entitled to all refunds of, any
and all Taxes imposed on or with respect to the WISCO Contributed Subsidiaries,
or their respective assets, operations or activities for any Pre-Closing Period,
except to the extent that any such Taxes are reflected on the Final Working
Capital Statement or result from a carryback from any Post-Closing Period;
provided, however, that the amount of any indemnity obligation of CSK shall be
reduced by the amount of any Tax Benefits (for any period) realized or to be
realized by the Company, G-P or its Affiliates, or any Contributed Subsidiary as
a result of any adjustment to a Tax item for any Pre-Closing Period.
(b) The Company shall be liable for, and shall indemnify, defend and hold
CSK harmless from and against, any and all Taxes imposed on or with respect to
the Contributed
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Subsidiaries or their respective operations, ownership, assets or activities for
any Post-Closing Period.
(c) Tax items shall be apportioned between Pre-Closing Periods and Post-
Closing Periods based on a closing of the Books and Records of the relevant
entity or entities as of the Closing Date (provided that (i) depreciation,
amortization and depletion for any Straddle Period shall be apportioned on a
daily pro rata basis and (ii) any Taxes imposed on a periodic basis (including
Real Property Taxes, but not including Taxes based on income and receipts) for
any Straddle Period shall be apportioned on a daily pro rata basis).
Notwithstanding anything to the contrary in the preceding sentence, the parties
agree that for U.S. federal income Tax purposes, Tax items for any Straddle
Period shall be apportioned between Pre-Closing Periods and Post-Closing Periods
in accordance with U.S. Treasury Regulation Section 1.1502-76(b), which
regulation shall be reasonably interpreted by the parties in a manner intended
to achieve the method of apportionment described in the preceding sentence.
Neither CSK nor G-P will exercise any option or election (including any election
to ratably allocate a Tax year's items under Treasury Regulation Section 1.1502-
76(b) (2) (ii)) to allocate Tax items in a manner inconsistent with this
section.
(d) G-P shall be liable for, and shall indemnify, defend and hold the
Company harmless from and against, and shall be entitled to all refunds of, any
and all Taxes imposed on or with respect to the G-P Contributed Subsidiaries, or
their respective assets, operations or activities for any Pre-Closing Period,
except to the extent that any such Taxes are reflected on the Final Working
Capital Statement or result from a carryback from any Post-Closing Period;
provided, however, that the amount of any indemnity obligation of G-P shall be
reduced by the amount of any Tax Benefits (for any period) realized or to be
realized by the Company, CSK or its Affiliates, or any Contributed Subsidiary as
a result of any adjustment to a Tax item for any Pre-Closing Period.
(e) The Company shall be liable for, and shall indemnify, defend and hold
G-P harmless from and against, any and all Taxes imposed on or with respect to
the Contributed Subsidiaries or their respective operations, ownership, assets
or activities for any Post-Closing Period.
(f) Tax items shall be apportioned between Pre-Closing Periods and Post-
Closing Periods based on a closing of the Books and Records of the relevant
entity or entities as of the Closing Date (provided that (i) depreciation,
amortization and depletion for any Straddle Period shall be apportioned on a
daily pro rata basis and (ii) any Taxes imposed on a periodic basis (including
Real Property Taxes, but not including Taxes based on income and receipts) for
any Straddle Period shall be apportioned on a daily pro rata basis).
Notwithstanding anything to the contrary in the preceding sentence, the parties
agree that for U.S. federal income Tax purposes, Tax items for any Straddle
Period shall be apportioned between Pre-Closing Periods and Post-Closing Periods
in accordance with U.S. Treasury Regulation Section 1.1502-76(b), which
regulation shall be reasonably interpreted by the parties in a manner intended
to achieve the method of apportionment described in the preceding sentence.
Neither G-P nor CSK will exercise any option or election (including any election
to ratably allocate a Tax year's items
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under Treasury Regulation Section 1.1502-76(b) (2) (ii)) to allocate Tax items
in a manner inconsistent with this section.
8.2 PREPARATION OF TAX RETURNS.
--------------------------
(a) CSK shall have the right and obligation to timely prepare and file,
and cause to be timely prepared and filed, when due (taking into account any
valid extension of the time for filing), any Tax Return that is required to
include the operations, ownership, assets or activities of WISCO, with respect
to the WISCO Contributed Assets, or of any WISCO Contributed Subsidiary for Tax
Periods ending on or before the Closing Date. CSK shall provide the Company with
copies of any such Tax Returns (to the extent that they relate to the WISCO
Contributed Assets or the Business and reasonably may have a material effect on
the Company's or its Affiliates' liability for Taxes) at least 30 days prior to
the due date (as extended) for filing such Tax Returns. In the event that the
Company reasonably determines that any such Tax Return should be modified, the
Company shall notify CSK of the Company's proposed modifications no later than
15 days from the date of receipt of such Tax Return. To the extent that CSK
disagrees with such modifications, the Company and CSK shall endeavor to agree
on the positions to be taken on such return. To the extent that they are unable
to do so, a CPA Firm (other than the regular auditor of CSK, G-P or the Company)
shall be retained to determine the position to be taken, with the fees and
expenses of such CPA Firm to be borne equally by WISCO and the Company. Any such
Tax Return which CSK is required to prepare under the terms hereof shall (to the
extent such Tax Return relates to the WISCO Contributed Assets or the Business
and reasonably may have a material effect on the Company or its Affiliates' Tax
liability) be prepared in accordance with past Tax accounting practices used
with respect to the Tax Returns in question (unless such past practices are no
longer permissible under the Applicable Tax Law), and to the extent any item is
not covered by such past practices (or such past practices are no longer
permissible under the Applicable Tax Law), in accordance with reasonable Tax
accounting practices selected by CSK. The Company shall have the right and
obligation to timely prepare and file, or cause to be timely prepared and filed,
when due (taking into account any valid extension of the time for filing), all
Tax Returns that are required to include the operations, ownership, assets or
activities Related to the Business after the Closing Date or of any WISCO
Contributed Subsidiary for any Tax Period ending after the Closing Date
(including, solely with respect to the WISCO Contributed Subsidiaries, Straddle
Period Tax Returns). The Company shall provide CSK with copies of any Straddle
Period Tax Returns required to be filed by the Company hereunder at least 30
days prior to the due date (as extended) for filing such Tax Returns. In the
event CSK reasonably determines that any Straddle Period Tax Return should be
modified, CSK shall notify the Company of CSK's proposed modifications no later
than fifteen days from the date of receipt of such Tax Return. To the extent
that the Company disagrees with such modifications, the Company and CSK shall
endeavor to agree on the positions to be taken on such return. To the extent
that they are unable to do so, a CPA Firm (other than the regular auditor of
CSK, the Company or G-P) shall be retained to determine the position to be
taken, with the fees and expenses of such accounting firm to be borne equally by
CSK and the Company. Any Straddle Period Tax Return which the Company is
required to prepare under the terms hereof shall be prepared in accordance with
past Tax accounting practices used with respect to the Tax Returns in question
(unless such past practices are no
43
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longer permissible under the Applicable Tax Law), and to the extent any item is
not covered by such past practices (or such past practices are no longer
permissible under the Applicable Tax Law), in accordance with reasonable Tax
accounting practices selected by the Company and CSK.
(b) CSK and the Company shall prepare and provide to each other such Tax
information as is reasonably requested by the other party with respect to the
operations, ownership, assets or activities of the WISCO Business, with respect
to the WISCO Contributed Assets, or of any WISCO Contributed Subsidiary to the
extent such information is relevant to any Tax Return which CSK or the Company
has the right and obligation hereunder to file.
(c) To the extent necessary to comply with the provisions of Section 8.1,
as between CSK and the Company, the party not preparing a Tax Return shall pay
the party preparing such Tax Return an amount equal to the non-preparing party's
share of the Taxes shown on such Tax Return, if any, determined in accordance
with the principles of Section 8.1, not later than 2 Business Days before the
filing of such Tax Return.
8.3 AMENDED TAX RETURNS.
-------------------
(a) Any amended Tax Return or claim for Tax refund for any WISCO
Contributed Subsidiary for any Pre-Closing Period other than a Straddle Period
shall be filed, or caused to be filed, only by CSK, who shall not be obligated
to make (or cause to be made) such filing. CSK shall not, without the prior
written consent of the Company (which consent shall not be unreasonably withheld
or delayed), make or cause to be made, any such filing, to the extent such
filing, if accepted, reasonably might change the Tax liability of the Company or
any Affiliate of the Company for any Post-Closing Period. At the Company's
request, CSK shall file an amended Tax Return with respect to Taxes accrued on
the Final Working Capital Statement, except to the extent CSK reasonably
objects.
(b) Any amended Tax Return or claim for Tax refund for any Straddle Period
shall be filed by the party responsible for filing the original Tax Return
hereunder if either the Company or CSK so requests, except that such filing
shall not be done without the consent (which shall not be unreasonably withheld
or delayed) of the Company (if the request is made by CSK) or of CSK (if the
request is made by the Company).
(c) Any amended Tax Return or claim for Tax refund for any Post-Closing
Period other than a Straddle Period shall be filed, or caused to be filed, only
by the Company, who shall not be obligated to make (or cause to be made) such
filing. The Company shall not, without the prior written consent of CSK file,
or cause to be filed, any such filing to the extent that such filing, if
accepted, reasonably might change the Tax liability of CSK or any Affiliates of
CSK for any Pre-Closing Period or otherwise under this Agreement.
44
<PAGE>
8.4 CARRY BACKS AND CARRY FORWARDS.
------------------------------
(a) Unless CSK, in its sole and absolute discretion, consents, the Company
shall not and shall not permit any WISCO Contributed Subsidiary to carry back
any Losses or credits accruing after the Closing Date to any Tax Return of CSK,
a WISCO Contributed Subsidiary, or any Affiliate of either CSK or a WISCO
Contributed Subsidiary for any Pre-Closing Period. To the extent permitted by
Applicable Tax Law, the Company shall and shall cause each WISCO Contributed
Subsidiary to make any elections and take all such actions necessary to avoid
any such carry back. To the extent that, under Applicable Tax Law, and with
CSK's consent, a WISCO Contributed Subsidiary carries back any Losses or credits
accruing after the Closing Date to any Tax Return of CSK or its Affiliates, CSK
shall pay to the Company the excess of the amount of (i) any Tax Benefit
actually realized by CSK and its Affiliates as a result of such carry back
promptly after such Tax Benefits are realized, over (ii) the amount of any Taxes
incurred by CSK and its Affiliates as a result of such carryback (including
without limitation, any Taxes incurred or to be incurred as a result of any
refund of Taxes or interest thereon). The amount of any Tax Benefit shall be
determined (i) by comparing the liability of CSK and its Affiliates for Taxes,
determined without the carry back, to the liability of CSK and its Affiliates
for Taxes, taking into account the carry back and (ii) by treating the carry
back as the last item claimed by CSK and its Affiliates in any given Tax Period.
(b) CSK shall not be liable hereunder for any decrease to any net
operating loss carry forward or any other Tax attributes available to a WISCO
Contributed Subsidiary resulting from adjustments by any Tax Authority to any
item of income, deduction, credit, or exclusion on Tax Returns for which CSK is
responsible.
8.5 ADDITIONAL TAX MATTERS.
----------------------
(a) As of the Closing Date, CSK shall cause all Tax allocation, Tax
sharing, Tax reimbursement and similar arrangements or agreements applicable to
the WISCO Business between CSK and any Affiliates, on the one hand, and any of
the WISCO Contributed Subsidiaries, on the other, to be extinguished and
terminated with respect to such WISCO Contributed Subsidiaries and any rights or
obligations existing under any such agreement or arrangement to be no longer
enforceable, except to the extent reflected on the Final Working Capital
Statement.
(b) After the Closing Date, the Company will cause appropriate Employees
of the WISCO Contributed Subsidiaries to prepare usual and customary Tax Return
packages with respect to the Tax Period beginning January 1, 1999 and ending as
of the Closing Date. The Company will use its commercially reasonable efforts to
cause such Tax Return packages to be delivered to CSK on or before March 1,
2000, but in any event not later that May 1, 2000.
(c) CSK and G-P agree that the Company will acquire hereunder
substantially all of the property used in the WISCO Business and that in
connection therewith the Company will employ individuals who immediately before
the Closing Date were employed in such trade or business by WISCO or the WISCO
Contributed Subsidiaries. Accordingly, pursuant to the
45
<PAGE>
Alternate Procedure permitted by Rev. Proc. 96-60, 1996-2 C.B. 399, provided
that the applicable CSK Party makes available to the Company all necessary
payroll records for the calendar year that includes the Closing Date, the
Company will furnish a Form W-2 to each Employee employed by the Company who had
been employed by the WISCO Business, disclosing all wages and other compensation
paid for such calendar year, and Taxes withheld therefrom, and WISCO and the
applicable CSK Party will be relieved of the responsibility to do so.
(d) If the Company or any WISCO Contributed Subsidiary receives a refund
with respect to Taxes of any WISCO Contributed Subsidiary attributable to a Pre-
Closing Period (other than a Tax refund accrued as an asset on the Final Working
Capital Statement) or a refund of Taxes accrued as a liability on the Final
Working Capital Statement, the Company shall pay, within the thirty (30) days
following the receipt of such Tax refund, the amount of such Tax refund (reduced
by the amount of any Taxes it incurs or will incur as a result of its accrual or
receipt of such refund or any interest thereon), to CSK. If CSK receives a Tax
refund with respect to Taxes of any WISCO Contributed Subsidiary attributable to
any Post-Closing Period or any Tax refund accrued as an asset on the Final
Working Capital Statement, CSK will pay, within thirty (30) days following the
receipt of such refund, the amount of such Tax refund (reduced by the amount of
any Taxes it incurs or will incur as a result of its accrual or receipt of such
refund or any interest thereon), to the Company. In the case of any refund with
respect to Taxes of a WISCO Contributed Subsidiary attributable to a Straddle
Period, the Tax refund shall be apportioned between Pre-Closing Periods and
Post-Closing Periods in accordance with the principles of Section 8.1(c) hereof;
provided that to the extent any Tax refund for a Straddle Period was accrued on
the Final Working Capital Statement, such refund shall be for the account of the
Company.
8.6 TAX CONTROVERSIES; COOPERATION.
------------------------------
(a) CSK shall control any audit, dispute, administrative, judicial or
other proceeding Related to Tax Returns filed for Pre-Closing Periods, and the
Company shall control any audit, dispute, administrative, judicial or other
proceeding Related to Tax Returns filed for Post-Closing Periods and Straddle
Periods of any WISCO Contributed Subsidiary. Subject to the preceding sentence,
in the event an adverse determination may result in each party having
responsibility for any amount of Taxes, each party shall be entitled to fully
participate in that portion of the proceedings Relating to the Taxes with
respect to which it may incur liability hereunder. For purposes of this Section
8.6(a), the term "participation" shall include (i) participation in conferences,
meetings or proceedings with any Tax Authority, the subject matter of which
includes an item for which such party may have liability hereunder, (ii)
participation in appearances before any court or tribunal, the subject matter of
which includes an item for which a party may have liability hereunder, and (iii)
with respect to the matters described in the preceding clauses (i) and (ii),
participation in the submission and determination of the content of the
documentation, protests, memorandum of fact and law, briefs, and the conduct of
oral arguments and presentations.
46
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(b) The Company and CSK shall not agree to settle any Tax liability or
compromise any claim with respect to Taxes, which settlement or compromise may
affect the liability for Taxes (or right to a Tax Benefit) hereunder of the
other party, without such other party's consent (which consent shall not be
unreasonably withheld or delayed).
(c) G-P and CSK shall bear their own expenses incurred in connection with
audits and other administrative judicial proceedings Relating to Taxes for which
such party or its Affiliates are liable.
(d) The CSK Parties, G-P, the Company, and the Contributed Subsidiaries
shall cooperate (and cause their Affiliates to cooperate) with each other and
with each other's agents, including accounting firms and legal counsel, in
connection with Tax matters Relating to the Contributed Assets or the
Contributed Subsidiaries, including (i) preparation and filing of Tax Returns,
(ii) determining the liability and amount of any Taxes due or the right to and
amount of any refund of Taxes, (iii) examinations of Tax Returns, and (iv) any
administrative or judicial proceeding in respect of Taxes assessed or proposed
to be assessed. Such cooperation shall include (without limitation) each party
making all information and documents in its possession relating to the
Contributed Subsidiaries available to the other party. The parties shall retain
all Tax Returns, schedules and work papers, and all material records and other
documents Relating thereto, until one year after the expiration of the
applicable statute of limitations (including, to the extent notified by any
party, any extension thereof) of the Tax Period to which such Tax Returns and
other documents and information relate. Each of the parties shall also make
available to the other party, as reasonably requested and available, personnel
(including officers, directors, Employees and agents) responsible for preparing,
maintaining, and interpreting information and documents relevant to Taxes, and
personnel reasonably required as witnesses or for purposes of providing
information or documents in connection with any administrative or judicial
proceedings Relating to Taxes.
ARTICLE IX
TERMINATION
[Intentionally Deleted]
ARTICLE X
MISCELLANEOUS
10.1 NOTICES. All notices and other communications required or permitted
-------
by this Agreement shall be in writing and shall be delivered by personal
delivery, by nationally recognized overnight carrier service, by facsimile, by
first class mail or by certified or registered mail, return receipt requested,
addressed to the party for whom it is intended at its address below, or such
other address as may be designated in writing hereafter by such Person. Notices
shall be deemed given one day after sent, if sent by overnight courier; when
delivered and receipted for, if
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hand delivered; when received, if sent by facsimile or other electronic means or
by first class mail; or when receipted for (or upon the date of attempted
delivery where delivery is refused or unclaimed), if sent by certified or
registered mail, return receipt requested.
To G-P: GEORGIA-PACIFIC CORPORATION
133 Peachtree Street, N.E.
Atlanta, GA 30303
Attn: General Counsel
Facsimile: (404) 230-7543
To CSK or WISCO: CHESAPEAKE CORPORATION
1021 East Cary Street
Richmond, VA 23218-2350
Attn: General Counsel
Facsimile: (804) 697-1192
To the Company: GEORGIA-PACIFIC TISSUE, LLC
55 Park Place
Atlanta, GA 30303
Attn: President
Facsimile: (404) 230-1763
With a copy to: GEORGIA-PACIFIC CORPORATION
133 Peachtree Street, N.E.
Atlanta, GA 30303
Attn: General Counsel
Facsimile: (404) 230-7543
10.2 AMENDMENT; WAIVER. Any provision of this Agreement may be amended or
-----------------
waived if, and only if, such amendment or waiver is in writing and signed, in
the case of an amendment, by G-P, CSK and the Company, or in the case of a
waiver, by the party against whom the waiver is to be effective. No failure or
delay by any party in exercising any right, power or privilege hereunder shall
operate as a waiver thereof nor shall any single or partial exercise thereof
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. The rights and remedies herein provided shall be
cumulative and not exclusive of any rights or remedies provided by Law.
10.3 ASSIGNMENT. No party to this Agreement may assign any of its rights
----------
or obligations under this Agreement without the prior written consent of the
other party hereto (which consent shall not be unreasonably withheld), except
that (i) G-P may collaterally assign its rights and obligations under this
Agreement to a lender as security for the Company Debt and (ii) following
Closing, G-P and CSK may assign their rights, but not their obligations, to any
Person to whom G-P or CSK may transfer their Units in the Company if permitted
under the Operating Agreement.
48
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10.4 ENTIRE AGREEMENT. This Agreement (including the Preliminary
----------------
Statements, all Schedules and Exhibits hereto and the Ancillary Agreements)
contains the entire agreement between the parties hereto with respect to the
subject matter hereof and supersedes all prior agreements and understandings,
oral or written, with respect to such matters, except for the obligations of the
parties under the Confidentiality Agreement.
10.5 FULFILLMENT OF OBLIGATIONS. Any obligation of any party to any
--------------------------
other party under this Agreement or any of the Ancillary Agreements, which
obligation is performed, satisfied or fulfilled by an Affiliate of such party,
shall be deemed to have been performed, satisfied or fulfilled by such party.
10.6 PARTIES IN INTEREST. This Agreement shall inure to the benefit of
-------------------
and be binding upon the parties hereto and their respective successors and
permitted assigns. Nothing in this Agreement, express or implied, is intended
to confer upon any Person other than G-P, the CSK Parties, the Company or their
respective successors or permitted assigns, any rights or remedies under or by
reason of this Agreement.
10.7 PUBLIC DISCLOSURE. Notwithstanding anything herein to the contrary,
-----------------
except as may be required to comply with the requirements of any applicable Laws
and the rules and regulations of any stock exchange upon which the securities of
one of the parties (or its Affiliate) is listed, no press release or similar
public announcement or communication shall, prior to the Closing, be made or
caused to be made concerning the execution or performance of this Agreement
unless specifically approved in advance by all parties hereto which approval
shall not be unreasonably withheld, conditioned or delayed.
10.8 EXPENSES. Except as otherwise expressly provided in this Agreement,
--------
whether or not the transactions contemplated by this Agreement are consummated,
all costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be borne by the party incurring such
expenses.
10.9 SCHEDULES. The disclosure of any matter in any Disclosure Schedule
---------
shall not be deemed to constitute an admission by G-P or the CSK Parties or to
otherwise imply that any such matter is material for the purposes of this
Agreement.
10.10 BULK TRANSFER LAWS. The parties acknowledge that none of them has
------------------
taken, and none of them intends to take, any action required to comply with any
applicable bulk sale or bulk transfer laws or similar laws; provided that the
CSK parties on the one hand and G-P on the other shall indemnify the other party
and the Company for any Losses arising from such non-compliance.
10.11 GOVERNING LAW; SUBMISSION TO JURISDICTION; SELECTION OF FORUM.
-------------------------------------------------------------
This Agreement shall be governed by, and construed in accordance with, the laws
of the State of Delaware. Each party hereto agrees that it shall bring any
action or proceeding in respect of any claim arising out of or Related to this
Agreement or the transactions contained in
49
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or contemplated by this Agreement, whether in tort or contract or at law or in
equity, exclusively in the United States District Court or the state court
sitting in New Castle County, Delaware (the "Chosen Court") and (i) irrevocably
submits to the exclusive jurisdiction of the Chosen Court, (ii) waives any
objection to laying venue in any such action or proceeding in the Chosen Court,
(iii) waives any objection that the Chosen Courts are an inconvenient forum or
do not have jurisdiction over any party hereto, and (iv) agrees that service of
process upon such party in any such action or proceeding shall be effective if
notice is given in accordance with Section 10.1 of this Agreement.
10.12 COUNTERPARTS. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, and all of which shall
constitute one and the same Agreement.
10.13 HEADINGS. The heading references herein and the table of contents
--------
hereto are for convenience purposes only, do not constitute a part of this
Agreement and shall not be deemed to limit or affect any of the provisions
hereof.
10.14 SEVERABILITY. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof. If any
provision of this Agreement, or the application thereof to any Person or any
circumstance, is invalid or unenforceable, (a) a suitable and equitable
provision shall be substituted therefor in order to carry out, so far as may be
valid and enforceable, the intent and purpose of such invalid or unenforceable
provision and (b) the remainder of this Agreement and the application of such
provision to other Persons or circumstances shall not be affected by such
invalidity or unenforceability, nor shall such invalidity or unenforceability
affect the validity or enforceability of such provision, or the application
thereof, in any other jurisdiction.
10.15 INJUNCTIVE RELIEF. The parties hereto acknowledge and agree that
-----------------
in the event of breach or non-compliance with any of the provisions of this
Agreement monetary damages shall not constitute a sufficient remedy.
Consequently, in the event of such a breach, G-P, the Company, WISCO or CSK, as
the aggrieved party shall be entitled to injunctive or other equitable relief,
including specific performance, in order to enforce or prevent any violation of
such provisions, in addition to any other rights or remedies to which it may be
entitled at law or otherwise.
ARTICLE XI
DEFINITIONS AND TERMS
11.1 SPECIFIC DEFINITIONS. As used in this Agreement, the following
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terms shall have the meanings set forth or as referenced below:
11.1.1 "AFFILIATES" shall mean, with respect to any Person, any Persons
directly or indirectly controlling, controlled by or under common control with,
such other Person as of the
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date on which, or at any time during the period for which, the determination of
affiliation is being made. For the purpose of this definition, "control" means
(i) the ownership or control of 50% or more of the equity interest in any
Person, or (ii) the ability to direct or cause the direction of the management
or affairs of a Person, whether through the direct or indirect ownership of
voting interests, by contract or otherwise.
11.1.2 "AGREEMENT" shall mean this Agreement (including the Preliminary
Statements set forth above and all Schedules and Exhibits), as the same may be
amended or supplemented from time to time in accordance with the terms hereof.
11.1.3 "ANCILLARY AGREEMENTS" shall mean the Human Resources Agreement,
the Operating Agreement, the Parent Roll Supply Agreement, the Management
Support Agreement, the Operational Support Agreement, the Transition Services
Agreement, the G-P Guarantee and the WISCO Debt Indemnity.
11.1.4 "APPLICABLE TAX LAW" shall mean any Law of any nation, state,
region, province, locality, municipality or other jurisdiction Relating to
Taxes, including regulations and other official pronouncements of any
governmental entity or political subdivision of such jurisdiction charged with
interpreting such Laws.
11.1.5 "ASSUMED LIABILITIES" shall mean all debts, liabilities,
commitments, or obligations whatsoever, other than Retained Liabilities, Related
to either WISCO's or G-P's Business or Related to either WISCO's or G-P's
Contributed Assets, whether arising before or after the Closing and whether
known or unknown, fixed or contingent, including the following:
(i) all debts, liabilities, obligations or commitments Related to or
arising under the Contracts to the extent such Contracts are assigned to the
Company, including the Real Estate Leases;
(ii) all debts, liabilities, obligations or commitments Related to the
Real Property;
(iii) the current liabilities;
(iv) except for the Retained Environmental Liabilities, all liabilities
under Environmental Laws Related to the ownership, operation or conduct of the
Business or the Real Property; and
(v) all liabilities with respect to all actions, suits, proceedings,
disputes, claims or investigations Related to the Business or that otherwise are
Related to the Contributed Assets, at law, in equity or otherwise.
11.1.6 "BOOKS AND RECORDS" shall mean originals or true and correct copies
of all lists, files, data and databases and documents Relating to customers,
suppliers and products of the Business, the Contributed Assets, or the Assumed
Liabilities, all personnel records or files regarding any Employee of the WISCO
Business or the G-P Business as applicable, all
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environmental audit reports (and similar documentation) and assessments with
respect to the Business, and all general ledgers and underlying books of
original entry and other financial records of the Business, except to the extent
included in the Retained Assets.
11.1.7 "BUSINESS" shall mean with respect to either G-P on the one hand,
or the CSK Parties on the other hand, its Commercial Tissue Business.
11.1.8 "BUSINESS DAY" shall mean any day other than a Saturday, a Sunday
or a day on which banks in New York City are authorized or obligated by law or
executive order to close.
11.1.9 "CHOSEN COURT" shall have the meaning set forth in Section 10.11.
11.1.10 "CLOSING" shall mean the closing of the transactions contemplated
by this Agreement.
11.1.11 "CLOSING DATE" shall have the meaning set forth in Section 2.4.
11.1.12 "CLOSING WORKING CAPITAL" shall have the meaning set forth in
Section 2.5(a).
11.1.13 "CLOSING WORKING CAPITAL STATEMENT" shall have the meaning set
forth in Section 2.5(a).
11.1.14 "CODE" shall mean the Internal Revenue Code of 1986, as amended.
11.1.15 "COMMERCIAL TISSUE BUSINESS" shall have the meaning set forth in
the Preliminary Statements to this Agreement.
11.1.16 "COMPANY" shall have the meaning set forth in the preamble to this
Agreement.
11.1.17 "COMPANY DEBT" shall have the meaning set forth in Section 2.8(b).
11.1.18 "COMPUTER SYSTEM" shall mean any and all computers (including
without limitation personal computers, mid-range computers and mainframes),
process and distributed control systems and software applications and operating
systems and any other hardware, equipment, and facilities and infrastructure
systems containing an embedded computer chip.
11.1.19 "CONFIDENTIALITY AGREEMENT" shall mean the Confidentiality
Agreement between CSK and G-P dated as of November 4, 1997, as amended by letter
dated June 11, 1999.
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11.1.20 "CONSENT" shall mean any consent, approval, authorization, waiver,
permit, grant, franchise, concession, agreement, license, exemption or order of,
registration, certificate, declaration or filing with, or report or notice to
any Person, including any Governmental Authority, including those identified on
Schedules 3.3 and 4.3.
11.1.21 "CONTRACTS" shall mean all agreements, contracts, leases, purchase
orders, trade billback, refund and other arrangements, incentive agreements,
commitments, collective bargaining agreements, and licenses that are related to
the G-P Business or the WISCO Business or their respective Contributed Assets or
to which such Contributed Assets are subject, except to the extent included in
such party's Retained Assets.
11.1.22 "CONTRIBUTED ASSETS" shall mean all of the assets of a party which
Relate to the G-P Business or the WISCO Business, whether tangible or
intangible, real or personal, as they exist on the date hereof, with such
changes, deletions or additions thereto as may occur from the date hereof to the
Closing Date in the ordinary course of business or are otherwise permitted by
this Agreement (except, in each case, for the Retained Assets), including the
following:
(i) the Real Property;
(ii) the Fixtures and Equipment;
(iii) the current assets;
(iv) in the case of WISCO, the WISCO Intellectual Property;
(v) the Books and Records;
(vi) the Contracts;
(vii) the stock or other ownership interests of the Contributed
Subsidiaries;
(viii) all Governmental Authorizations which are transferable without
obtaining any Consent; and
(ix) with respect to the WISCO Business, all computer hardware and
peripherals, audio-visual equipment, RF and barcode scanning and
telecommunications equipment, whether owned or leased by any of the CSK Parties,
and all software (including without limitation all operating system and
application software), whether owned or licensed by any of the CSK Parties.
11.1.23 "CPA FIRM" shall have the meaning set forth in Section 2.5(b).
11.1.24A "CSK" shall have the meaning set forth in the preamble to this
Agreement.
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11.1.24B "CSK MARKS" shall mean any mark that is owned by CSK and that is
described in the license agreement between CSK and WISCO that is among the
Contracts assigned by WISCO to the Company at Closing pursuant to Section
2.4(a)(iv) hereof.
11.1.24C "CSK PARTIES" or "CSK PARTY" shall mean, as the context requires,
CSK, WISCO and the WISCO Contributed Subsidiaries, or as the context requires,
any one of the foregoing.
11.1.24D "CSK PLAN" shall mean those Employee Plans (including all assets
and liabilities Related to such Employee Plans) pursuant to which any Employee
or Retired Employee of the WISCO Business or the WISCO Contributed Subsidiaries
is entitled to benefits.
11.1.25 "DEDUCTIBLE" shall have the meaning set forth in Section 7.2(b).
11.1.26 "DETERMINATION DATE" as used in Section 2.5(a) shall mean the
Effective Time.
11.1.27 "DISCLOSURE SCHEDULES" shall mean the Disclosure Schedules dated
the date hereof delivered by G-P or the CSK Parties in connection with this
Agreement.
11.1.28 "EFFECTIVE TIME" shall have the meaning set forth in Section 2.4.
11.1.29 "EMPLOYEE" shall mean, with respect to the G-P Business or the
WISCO Business, an individual who is employed by such party, whether salaried or
hourly and whether on lay-off or medical, family or other authorized leave of
absence; provided that, with respect to the G-P Business, Employee shall not
include any Employee located at G-P's Palatka, Florida, Crossett, Arkansas, Port
Hudson, Louisiana, Plattsburgh, New York or Bellingham, Washington facilities.
11.1.29A "EMPLOYEE PLANS" shall mean as to any party all "employee welfare
benefit plans" and "employee pension benefit plans" as respectively defined in
Sections 3(1) and 3(2) of ERISA, all employee benefit and pension plans, all
other bonus, deferred compensation, retirement, savings, excess benefit, stock
option or purchase, retention, termination, severance and incentive plans,
contracts, programs, funds, arrangements, policies, or practices and all other
plans, contracts, programs, funds, arrangements, policies, or practices (whether
voluntary or compulsory) that provide or may provide money (other than as
current salary or wages), services, property or other benefits, whether written
or oral and whether funded or unfunded, including (without limitation) any that
have been frozen or terminated since April 30, 1999, and any trust, escrow or
similar agreement related thereto, whether written or oral and whether funded or
unfunded, which are established and maintained by any of the parties hereto with
respect to any of their Employees, Retired Employees, independent contractors,
directors, officers, shareholders, or their dependents or which are established
or maintained by any party (or any Person that together with any party is or
would have been as of the date of the Agreement treated as a single employer
under Section 414 of the Code) (the "Related Persons") or with respect to
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which any party or any Affiliate thereof have made or are required to make
payments, transfers or contributions.
11.1.30 "ENCUMBRANCES" shall mean liens, charges, encumbrances, security
interests, options or any other restrictions or third-party rights, including
any required third party consents.
11.1.31A "ENVIRONMENT" means soil, land, water and air in their natural
state, including, without limitation, land surface or subsurface strata, surface
water, ground water and ambient air.
11.1.31B "ENVIRONMENTAL AUTHORITIES" means all federal, state or local
governmental bodies or regulatory agencies, foreign or domestic, charged with
enforcing any of the Environmental Laws.
11.1.31C "ENVIRONMENTAL LAW" shall mean any applicable federal, state,
local, common or foreign law, statute, ordinance, rule, regulation, code, order,
judgment, decree or injunction Relating to (i) the protection of the Environment
(including air, water vapor, surface water, groundwater, drinking water supply,
surface or subsurface land), (ii) the exposure to, or the use, storage,
recycling, treatment, generation, transportation, processing, handling,
labeling, protection, release, spill or discharge or disposal of Hazardous
Substances, or (iii) workplace safety or health.
11.1.31D "ENVIRONMENTAL PERMITS" means all permits, licenses, certificates
and authorizations of, and registrations with, any of the Environmental
Authorities pursuant to any of the Environmental Laws, issued or granted to any
of the CSK Parties or G-P, as the context requires for the purpose of conducting
the WISCO Business or the G-P Business as presently conducted.
11.1.32 "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended, and regulations promulgated thereunder.
11.1.33 "FINAL WORKING CAPITAL STATEMENT" shall have the meaning set
forth in Section 2.5(b).
11.1.34 "FINANCIAL STATEMENTS" shall mean the WISCO Financial Statements,
the G-P Financial Statements or both, as the context may require, as defined in
Sections 3.6 and 4.6 respectively.
11.1.35 "FIXTURES AND EQUIPMENT" shall mean all furniture, fixtures,
furnishings, machinery, vehicles, equipment (including computer hardware,
computer terminals, network servers, and research and development equipment) and
other tangible personal property Related to either the G-P Business or the WISCO
Business.
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11.1.36 "FORMER FACILITY" shall mean a facility or property previously
owned or operated by a party or its predecessors in the conduct of the G-P
Business or the WISCO Business that is not located on the Real Property or the
Retained Real Property.
11.1.37 "FOX RIVER LIABILITY" shall have the meaning set forth in Section
5.9.
11.1.38 "GAAP" shall mean United States generally accepted accounting
principles, consistently applied.
11.1.39A "G-P" shall have the meaning set forth in the preamble to this
Agreement.
11.1.39B "G-P APRIL FINANCIAL STATEMENTS" shall have the meaning set forth
in Section 4.6(a).
11.1.39C "G-P ASSUMED LIABILITIES" shall mean the Assumed Liabilities
transferred to the Company by G-P.
11.1.39D "G-P BUSINESS" shall mean all of the business of G-P conducted at
its Gary, Indiana, Battleboro, Vermont, and LaGrange, Georgia facilities,
together with certain assets and liabilities associated with its Crossett,
Arkansas, and Palatka, Florida facilities, as more fully described in Schedule
2.1(c) hereof.
11.1.39E "G-P CAP" shall have the meaning set forth in Section 7.2(b).
11.1.39F "G-P CONTRIBUTED ASSETS" shall mean the Contributed Assets
transferred to the Company by G-P as set forth on Schedule 2.1(c).
11.1.39G "G-P FINANCIAL STATEMENTS" shall have the meaning set forth in
Section 4.6(a).
11.1.39H "G-P GUARANTEE" shall have the meaning set forth in Section
2.8(b).
11.1.39I "G-P INDEMNIFIED PARTIES" shall have the meaning set forth in
Section 7.3(a).
11.1.39J "G-P INTELLECTUAL PROPERTY" shall mean the Intellectual Property
of G-P.
11.1.39K "G-P OWNED REAL PROPERTY" shall mean the Owned Real Property of
the G-P Business.
11.1.39L "G-P PLAN" shall mean those Employee Plans (including all assets
and liabilities Related to such Employee Plans) of G-P or any Affiliate of G-P
pursuant to which any Employee or Retired Employee of the G-P Business is
entitled to benefits.
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11.1.39M "G-P REAL PROPERTY" shall mean the Real Property of the G-P
Business.
11.1.39N "G-P REAL PROPERTY LEASES" shall mean the leases Relating to the
Leased Real Property of the G-P Business.
11.1.39O "G-P RETAINED ASSETS" shall mean the Retained Assets of the G-P
Business as described in Section 11.1.74 hereof.
11.1.39P "G-P RETAINED LIABILITIES" shall mean the Retained Liabilities of
the G-P Business.
11.1.40 "GOVERNMENTAL AUTHORITY" shall mean any nation or government, any
state, province or other political subdivision thereof and any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government, including any government authority, agency,
department, board, commission or instrumentality of the United States, any State
of the United States or any political subdivision thereof.
11.1.41 "GOVERNMENTAL AUTHORIZATIONS" shall mean all licenses, permits,
franchises, certificates of occupancy, other certificates and other
authorizations and approvals required to carry on a Business as currently
conducted under the applicable laws, ordinances or regulations of any
Governmental Authority.
11.1.42 "HAZARDOUS SUBSTANCES" shall mean (i) petroleum, petroleum
byproducts and any petroleum fractions; (ii) any substance or any material
containing a substance, defined as hazardous or toxic or words of similar
meaning or effect under the following United States federal statutes and their
state counterparts, as well as such statutes' implementing regulations: the
Hazardous Materials Transportation Act, the Resource Conservation and Recovery
Act, the Comprehensive Environmental Response, Compensation and Liability Act,
the Clean Water Act, the Safe Drinking Water Act, the Atomic Energy Act, the
Toxic Substances Control Act, the Federal Insecticide, Fungicide, and
Rodenticide Act, and the Clean Air Act; and (iii) any other materials as to
which liability or standards of conduct are imposed pursuant to any
Environmental Law.
11.1.43 "HSR ACT" shall mean the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
11.1.44 "HUMAN RESOURCES AGREEMENT" shall mean an agreement to be entered
into on the Closing Date by and among G-P, WISCO, CSK and the Company
substantially in the form of Exhibit 11.1.44 attached hereto.
11.1.45 "INDEMNIFICATION CLAIM NOTICE" shall have the meaning set forth
in Section 7.5(a).
11.1.46 "INDEMNIFIED PARTIES" shall have the meaning set forth in Section
7.5(a).
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11.1.47 "INDEMNIFYING PARTY" shall have the meaning set forth in Section
7.5(a).
11.1.48 "INTELLECTUAL PROPERTY" shall mean (except to the extent included
in the Retained Assets) the following intellectual property (and the rights
associated therewith) Related to the G-P Business or the WISCO Business or their
Contributed Assets:
(a) trademarks, service marks, brand names, certification marks, trade
dress, assumed names, Internet domain names, trade names and other indications
of origin, the goodwill associated with the foregoing and registrations in any
jurisdiction of, and applications in any jurisdiction to register, the foregoing
(including any extension, modification or renewal of any such registration or
application);
(b) patents, applications for patents (including provisional, divisional,
continuation, and continuation-in-part applications), and any renewals,
extensions or reissues thereof, in any jurisdiction;
(c) invention disclosures and innovations (whether or not patentable and
whether or not reduced to practice);
(d) non-public information, trade secrets confidential information, know
how, proprietary technology and rights in any jurisdiction to limit the use or
disclosure thereof by any Person;
(e) copyrighted works and registrations or applications for registration
of copyrights in any jurisdiction, and any renewals or extensions thereof;
(f) any similar intellectual property or proprietary rights; and
(g) any claims or causes of action arising out of or Related to any
infringement or misappropriation of any of the foregoing occurring before or
after the Closing.
11.1.49 "INVENTORY" shall mean all inventory held for resale in connection
with the G-P Business or the WISCO Business, all raw materials, work in process,
finished products, office supplies, storeroom inventory, spare parts and
equipment, wrapping, supply and packaging items, of such Business.
11.1.50 "IRS" shall mean the Internal Revenue Service.
11.1.51 "KNOWLEDGE" or any similar phrase means the actual knowledge
without investigation of those management employees of G-P, CSK and WISCO
identified on Exhibit 11.1.51.
11.1.52 "LAWS" shall mean any federal, state, foreign or local law,
statute, ordinance, rule, code, regulation, order, judgment or decree of any
Governmental Authority.
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11.1.53 "LEASED REAL PROPERTY" shall mean all land (including, to the
extent included in any such lease, any timberlands and tree farms associated
with the Contributed Assets), buildings, fixtures and other Real Property leased
on the date hereof by a party or one of the Contributed Subsidiaries as lessee
pursuant to the Real Estate Leases used by the G-P Business or the WISCO
Business.
11.1.54 "LOSSES" shall have the meaning set forth in Section 7.2.
11.1.55 "MANAGEMENT SUPPORT AGREEMENT" shall mean the agreement
substantially in the form set forth as Exhibit 11.1.55 attached hereto between
G-P and the Company pursuant to which G-P shall supply management services to
the Company.
11.1.56 "MATERIAL ADVERSE EFFECT" shall mean any and all events, changes
or effects that have occurred which have a material adverse effect upon the
value of the Contributed Assets or the G-P Business or the WISCO Business, as
the case may be, taken as a whole, involving an aggregate amount equal to or
exceeding $350,000.
11.1.57 "NOTICE PERIOD" shall have the meaning set forth in Section
7.5(b).
11.1.58 "OBJECTION" shall have the meaning set forth in Section 2.5(b).
11.1.59 "OPERATING AGREEMENT" shall mean that certain Operating Agreement
among G-P, CSK and the Company to be dated as of the Closing substantially in
the form of Exhibit 2.1E, that shall govern the rights and obligations of the
Members of the Company.
11.1.60 "OPERATIONAL SUPPORT AGREEMENT" shall mean the agreement
substantially in the form set forth as Exhibit 11.1.60 attached hereto by and
among G-P, WISCO, CSK and the Company.
11.1.61 "OWNED REAL PROPERTY" shall mean all land and all buildings,
fixtures, and other improvements owned by either the WISCO Business or the G-P
Business.
11.1.62 "PARENT ROLL SUPPLY AGREEMENT" shall mean the agreement
substantially in the form of Exhibit 11.1.62 attached hereto pursuant to which
G-P shall supply paper products to the Company.
11.1.63 "PERMITTED ENCUMBRANCES" shall mean, with respect to any party's
Encumbrances, (i) those expressly disclosed in the G-P or WISCO Financial
Statements; (ii) liens for Taxes (which are not related to income, sales or
withholding Taxes), assessments and other governmental charges not yet due and
payable or due but not delinquent as of the Closing Date or being contested in
good faith by appropriate proceedings and for which adequate reserves have been
established on the Final Working Capital Statement; (iii) mechanic's, workmen's,
repairmen's, warehousemen's, carriers, or other like liens arising or incurred
in the ordinary course of business for amounts which are not delinquent and
which will not individually or in the
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aggregate have a Material Adverse Effect, original purchase price conditional
sales contracts and equipment leases with third parties entered into in the
ordinary course of business; (iv) with respect to either the G-P Real Property
or the WISCO Real Property, (A) easements, quasi-easements, licenses, covenants,
rights-of-way and other similar restrictions, including any other agreements,
conditions, restrictions, or other matters which would be shown by a current
title report or other similar report or listing, (B) any conditions that may be
shown by a current survey, title report or physical inspection, and (C) zoning,
building and other similar restrictions; and (v) Encumbrances not described in
the foregoing clauses (i) through (iv) and which, individually or in the
aggregate, would not have a Material Adverse Effect (all items included in the
foregoing clauses (i) through (v), including any matter set forth in Schedules
3.16(b) or 4.16(b), are referred to collectively herein as the "Permitted
Encumbrances").
11.1.64 "PERSON" shall mean an individual, a corporation, a partnership,
an association, a trust or other entity or organization.
11.1.65 "POST-CLOSING PERIOD" shall mean, with respect to any Contributed
Subsidiary, any Tax Period commencing after the Closing Date and the portion of
any Straddle Period commencing after the Closing Date.
11.1.66 "PRE-CLOSING PERIOD" shall-mean, with respect to any Contributed
Subsidiary, any Tax Period ending on or before the Closing Date and the portion
of any Straddle Period ending on the Closing Date.
11.1.67 "PROCEEDING" shall have the meaning set forth in Section 7.5(a).
11.1.68 "PROJECT PLAN" shall mean a plan to remediate and/or replace
Computer Systems that are not Year 2000 Ready.
11.1.69 "REAL ESTATE LEASES" shall mean those agreements pursuant to which
a party or one or more of its Contributed Subsidiaries leases, subleases,
licenses, or otherwise uses or licenses, Real Property, including land (and
everything growing upon the land, to the extent included in such Real Estate
Lease), buildings, structures and improvements thereon or appurtenances thereto,
which are identified on Schedules 3.15 and 4.15.
11.1.70 "REAL PROPERTY" shall mean the Owned Real Property and the Leased
Real Property.
11.1.71 "REGISTRATION STATEMENT" shall mean the Registration Statement on
Form S-1, or other appropriate form, including any pre-effective or post-
effective amendments or supplements thereto, filed with the Securities and
Exchange Commission by the Company under the Securities Act with respect to the
Company Debt.
11.1.72 "RELATED TO" OR "RELATING TO" shall mean primarily related to, or
used primarily in connection with.
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11.1.73 "REQUIRED CONSENT" shall mean any Consents specifically identified
on Schedule 3.3 or Schedule 4.3 as a "Required Consent" and each other material
Consent, which may be a Consent listed on Schedule 3.3 or Schedule 4.3.
11.1.74 "RETAINED ASSETS" shall mean
(i) the assets (including Real Property, tangible personal property,
accounts receivable, intellectual property and contracts) Related to all
businesses conducted by CSK or G-P and any of their respective Affiliates other
than the Commercial Tissue Business, provided, however, with respect to G-P, all
tangible assets located at G-P's Palatka, Florida, Crossett, Arkansas, Port
Hudson, Louisiana, Plattsburgh, New York, Bellingham, Washington and Atlanta,
Georgia facilities and any tangible asset used in part in the consumer tissue
business at G-P's offices located in Atlanta, Georgia shall constitute G-P
Retained Assets, except for the assets specifically listed on Schedule 2.1(c)
consisting of dedicated commercial tissue converting lines which shall be
included in the G-P Contributed Assets, and all G-P Intellectual Property;
(ii) the stock or other ownership interests of all Subsidiaries of either
G-P or CSK other than the Contributed Subsidiaries;
(iii) all cash and cash accounts, disbursement accounts, outstanding
checks and disbursements, investment securities and other short-term and medium-
term investments and non-trade accounts receivable from either G-P or CSK or
their respective Affiliates and owing to the G-P Business or WISCO Business,
respectively;
(iv) all deferred Tax assets of G-P or CSK;
(v) all prepaid Taxes to the extent such prepaid Taxes are not reflected
on the Final Working Capital Statement;
(vi) all refunds of Taxes to the extent such Taxes are not reflected on
the Final Working Capital Statement;
(vii) all Tax Returns and related work papers of G-P, CSK or their
respective Affiliates;
(viii) all Books and Records which G-P or the CSK Parties are required by
law to retain, provided that G-P, CSK or WISCO shall provide the Company with
complete copies of such Books and Records;
(ix) all G-P Plans, all CSK Plans, and all assets of such Plans except as
contemplated by the Human Resources Agreement;
(x) all Governmental Authorizations to the extent not transferable
without obtaining a Consent;
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(xi) the CSK Marks subject to the license assigned pursuant hereto;
(xii) the Retained Real Property and any financial instruments Related to
the Retained Real Property;
(xiii) all of G-P's or CSK's insurance policies, subject to the rights of
WISCO or any Contributed Subsidiary under such insurance policies of CSK and the
rights of the Company if any under such policies;
(xiv) all contracts between either G-P or CSK and their respective
Subsidiaries other than the Contributed Subsidiaries, including Georgia-Pacific
S.A.; and
(xv) those assets of the CSK Parties specifically identified on Schedule
2.3.
11.1.75 "RETAINED ENVIRONMENTAL LIABILITIES" has the meaning set forth in
the definition of "Retained Liabilities."
11.1.76 "RETAINED LIABILITIES" shall mean all of the following debts,
liabilities, commitments or obligations, whether arising before or after the
Closing and whether known or unknown, fixed or contingent:
(i) all liabilities Related to the Retained Assets;
(ii) all (A) liabilities under Environmental Laws with respect to any
Former Facility, (B) liabilities in connection with the Retained Real Property
and (C) with respect to WISCO and CSK, the Fox River Liability (collectively,
the "Retained Environmental Liabilities");
(iii) all liabilities which are retained by G-P or WISCO or CSK under the
Ancillary Agreements;
(iv) all liabilities under the G-P or CSK Plans, except to the extent
such liabilities are specifically assumed by the Company or G-P pursuant to the
Human Resources Agreement;
(v) all liabilities for Taxes imposed with respect to the taxable
periods, or portions thereof, ending on or before the Closing Date except to the
extent that any such Taxes are reflected on the Final Working Capital Statement;
(vi) all liabilities for non-trade accounts payable to CSK or G-P or
their respective Affiliates which arise prior to the Closing Date;
(vii) all liabilities for indebtedness for borrowed money and any other
obligation which are fixed as to amount and certainty as of the Closing or which
are secured by a lien that is not a Permitted Encumbrance on any of the
Contributed Assets, but not including liabilities under Contracts included in
the Contributed Assets and Assumed Liabilities;
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(viii) all severance, termination, change of control and similar
agreements, payments, debts, obligations or liabilities with respect to any
director, officer, employee or consultant of G-P, the CSK Parties or any of
their Subsidiaries which exist as of or prior to the Closing (after taking into
account the transactions contemplated by this Agreement), other than (i)
obligations under any collective bargaining agreement, and (ii) obligations
under any severance employment, consulting, or other agreement entered into or
assumed by the Company;
(ix) all liabilities and obligations with respect to G-P's interest in
Georgia-Pacific S.A., including all contractual obligations;
(x) all liabilities and obligations that any party hereto agrees to
retain in any Ancillary Agreement;
(xi) all other liabilities and obligations for which CSK, WISCO or G-P
has expressly assumed responsibility pursuant to this Agreement or the Ancillary
Agreements;
(xii) all debts, liabilities or obligations whatsoever, that do not Relate
to the G-P Business or the WISCO Business or that do not otherwise Relate to the
Contributed Assets; and
(xiii) all liabilities and obligations of the WISCO Business described on
Schedule 2.3.
11.1.77 "RETAINED REAL PROPERTY" shall mean the Real Property retained by
WISCO or G-P.
11.1.78 "RETIRED EMPLOYEE" means as to any party, former Employees who
retain rights under any of such party's Employee Plans.
11.1.79 "SECURITIES ACT" shall mean the Securities Act of 1933, as
amended.
11.1.80 "STRADDLE PERIOD" shall mean, with respect to any Contributed
Subsidiary, any Tax Period that begins before and ends after the Closing Date.
11.1.81 "SPECIAL DISTRIBUTION" shall have the meaning set forth in Section
2.8(b).
11.1.82 "SUBSIDIARY" shall mean, with respect to any Person, any
corporation, partnership, joint venture or other legal entity of which such
Person, either directly or through or together with any other Subsidiary of such
Person, owns any equity interests.
11.1.83 "SURVIVAL PERIOD" shall have the meaning set forth in Section 7.1.
11.1.84 "TARGET WORKING CAPITAL" shall have the meaning set forth in
Section 2.5(e).
63
<PAGE>
11.1.85 "TAX" or "TAXES" shall mean all federal, state, local or foreign
taxes, including but not limited to income, gross receipts, windfall profits,
goods and services, value added, severance, property, production, sales, use,
license, excise, franchise, employment, withholding or similar taxes, together
with any interest, additions or penalties with respect thereto and any interest
in respect of such additions or penalties.
11.1.86 "TAX AUTHORITY" shall mean, with respect to any Tax, the
governmental entity or political subdivision thereof that imposes such Tax, and
the agency (if any) charged with the administration or collection of such Taxes
for such entity or subdivision.
11.1.87 "TAX BENEFIT" shall mean the amount by which a Person's Tax
liability is actually reduced (including any related interest actually received
from a Tax Authority in connection therewith).
11.1.88 "TAX PERIOD" shall mean, with respect to any Tax, the period for
which the Tax is reported as provided under Applicable Tax Laws.
11.1.89 "TAX RETURN" shall mean, with respect to any Tax, any information
return with respect to such Tax, any report, statement, declaration or document
required to be filed under the Applicable Tax Law in respect of such Tax, any
claim for refund of Taxes paid, and any amendment or supplement to any of the
foregoing.
11.1.90 "TRANSFER COSTS" shall have the meaning set forth in Section 2.6.
11.1.91 "TRANSITION SERVICES AGREEMENT" shall mean the agreement
substantially in the form of Exhibit 11.1.91 attached hereto to be entered into
at the Closing among the Company, CSK and WISCO under which CSK and its
Affiliates will provide transition services requested by the Company in order to
allow it to operate the WISCO Business after the Closing in a manner consistent
with past practices.
11.1.92 "WARN" shall have the meaning set forth in Section 3.13(e).
11.1.93 "WARN OBLIGATIONS" shall have the meaning set forth in Section
3.13(e).
11.1.94A "WISCO" shall have the meaning set forth in the preamble to this
Agreement.
11.1.94B "WISCO APRIL FINANCIAL STATEMENTS" shall have the meaning set
forth in Section 3.6(a).
11.1.94C "WISCO ASSUMED LIABILITIES" shall mean all Assumed Liabilities
transferred to the Company by WISCO.
11.1.94D "WISCO BUSINESS" shall have the meaning set forth in the
Preliminary Statements to this Agreement.
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11.1.94E "WISCO CAP" shall have the meaning set forth in Section 7.3(b).
11.1.94F "WISCO CONTRIBUTED ASSETS" shall mean all assets used directly
and predominantly in the Commercial Tissue Business conducted by CSK whether
directly or through WISCO or its Contributed Subsidiaries.
11.1.94G "WISCO CONTRIBUTED SUBSIDIARIES" shall mean the Contributed
Subsidiaries of WISCO as set forth on Schedule 3.16(c).
11.1.94H "WISCO DEBT INDEMNITY" shall have the meaning set forth in
Section 2.8(b).
11.1.94I "WISCO FINANCIAL STATEMENTS" shall have the meaning set forth in
Section 3.6(a).
11.1.94J "WISCO INDEMNIFIED PARTIES" shall have the meaning set forth in
Section 7.2(a).
11.1.94K "WISCO INTELLECTUAL PROPERTY" shall mean the Intellectual
Property of WISCO (and CSK to the extent utilized in the WISCO Business) and
includes, without limitation, the WISCO Marks.
11.1.94L "WISCO LEASED REAL PROPERTY" shall mean the Leased Real Property
of WISCO.
11.1.94M "WISCO MARKS" shall mean any mark currently owned by the WISCO
Business and any mark owned by the CSK Parties that include the words, phrases
and names "Wisconsin Tissue Mills", "Wisconsin Tissue" or "WISCO", or any
variation thereof, and any trademark, service mark, trade dress, symbol or logo
using such words, phrases or names and any variation thereof.
11.1.94N "WISCO OWNED REAL PROPERTY" shall mean the Owned Real Property
Related to the WISCO Business.
11.1.94O "WISCO REAL PROPERTY" shall mean the Real Property used in
connection with the WISCO Business.
11.1.94P "WISCO REQUIRED CONSENT" shall mean the Required Consents
pursuant to the WISCO Business and set forth on Schedule 3.3.
11.1.94Q "WISCO RETAINED ASSETS" shall mean the Retained Assets of the
WISCO Business as described in Section 11.1.74 hereof.
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11.1.94R "WISCO RETAINED LIABILITIES" shall mean the Retained Liabilities
of the WISCO Business.
11.1.95 "WMEX" shall mean Wisconsin Tissue de Mexico, S.A. de C.V., a
corporation organized under the laws of Mexico and a wholly owned subsidiary of
WISCO.
11.1.96 "WORKING CAPITAL" shall mean the excess of current assets over
current liabilities at the Determination Date on a consolidated basis as
determined in accordance with Section 2.5.
11.1.97 "YEAR 2000 READY" shall mean that the Computer System when used
in accordance with its associated documentation, will not be materially
adversely affected by date data but instead will process such date data
accurately with the implementation of a tested procedure, or is not Year 2000
compliant but will not cause any such processing problem. Year 2000 Ready also
means that the applicable Computer System when used in accordance with its
associated documentation will accurately process date data such that, no value
for a date prior to year 2028 will cause any interruption in processing; date-
based functionality operates consistently for dates prior to, during and after
Year 2000 (through year 2027); in all interfaces and data storage, the century
or any other date is specified either explicitly or by algorithms or inferencing
rules; and leap years will be accurately recognized and processed. If
implemented properly, the Project Plan should be successful in making all
material Computer Systems Year 2000 Ready, except to the extent that a Computer
System interfaces or exchanges data with other software, firmware, hardware or
other similar or related items of automated, computerized or software systems
that are not Year 2000 compliant.
11.2 OTHER TERMS. Other terms may be defined elsewhere in the text of
-----------
this Agreement, and unless otherwise indicated shall have such meanings
throughout this Agreement.
11.3 OTHER DEFINITIONAL PROVISIONS.
-----------------------------
(a) The words "whereof", "herein", and "hereunder" and words of similar
import, when used in this Agreement, shall refer to this Agreement as a
whole and not to any particular provision of this Agreement. The word
"including" means "including without limitation."
(b) The terms defined in the singular shall have a comparable meaning
when used in the plural, and vice versa.
(c) The terms "dollars" and "$" shall mean United States dollars.
66
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Joint Venture Agreement
as of the date first written above.
WISCONSIN TISSUE MILLS INC.
By: /s/ William T. Tolley
----------------------------------
Name: William T. Tolley
Title: Vice President
GEORGIA-PACIFIC CORPORATION
By: /s/ Michael C. Burandt
----------------------------------
Name: Michael C. Burandt
Title: Senior Vice President -
Packaged Products
CHESAPEAKE CORPORATION
By: /s/ William T. Tolley
----------------------------------
Name: William T. Tolley
Title: Senior Vice President - Finance
and Chief Financial Officer
GEORGIA-PACIFIC TISSUE, LLC
By: /s/ Michael C. Burandt
----------------------------------
Name: Michael C. Burandt
Title: Manager
67
<PAGE>
SCHEDULES AND EXHIBITS
SCHEDULES
- ---------
Schedule 2.1(c) G-P Contributed Assets
Schedule 2.3 WISCO Retained Assets and Retained Liabilities
Schedule 3.1 CSK Parties Qualifications
Schedule 3.3 WISCO Consent and Approvals
Schedule 3.6(a) Financial Statements
Schedule 3.6(c) Changes in Accounting Methods
Schedule 3.7 Litigation and Claims
Schedule 3.8 Taxes
Schedule 3.9(a) Employees
Schedule 3.9(b) Employee Plans
Schedule 3.9(d) Changes to Plans
Schedule 3.9(f) Funding of Plans
Schedule 3.9(g) Claims Regarding Plans
Schedule 3.9(h) Multi-Employer Plans
Schedule 3.9(i) Plan Documents
Schedule 3.10 Compliance with Laws
Schedule 3.11(a) Environmental Permits
Schedule 3.11(b) Environmental Matters
Schedule 3.12 Intellectual Property
Schedule 3.12(e) Year 2000
Schedule 3.13 Labor Matters
Schedule 3.14 Material Contracts
Schedule 3.15 WISCO Real Estate Leases
Schedule 3.16(a) Exceptions to Entire Business
Schedule 3.16(b) Encumbrances
Schedule 3.16(c) Contributed Subsidiaries
Schedule 3.16(d) Condition of Assets
Schedule 3.18 Insurance
Schedule 3.20 Material Adverse Change
Schedule 4.1 G-P Qualifications
Schedule 4.3 G-P Consent and Approvals
Schedule 4.6(a) Financial Statements
Schedule 4.7 Litigation and Claims
Schedule 4.8 Taxes
Schedule 4.9(a) Employees
Schedule 4.9(b) Employee Plans
Schedule 4.9(d) Changes to Plans
Schedule 4.9(f) Funding of Plans
Schedule 4.9(g) Claims Regarding Plans
Schedule 4.9(h) Multi-Employer Plans
<PAGE>
Schedule 4.9(i) Plan Documents
Schedule 4.10 Compliance with Laws
Schedule 4.11(a) Environmental Permits
Schedule 4.11(b) Environmental Matters
Schedule 4.12 Intellectual Property
Schedule 4.12(e) Year 2000
Schedule 4.13 Labor Matters
Schedule 4.14 Material Contracts
Schedule 4.15 G-P Real Estate Leases
Schedule 4.16(a) Exceptions to Entire Business
Schedule 4.16(b) Encumbrances
Schedule 4.16(c) Condition of Assets
Schedule 4.18 Insurance
Schedule 4.20 Material Adverse Changes
Schedule 5.4(a) G-P Intellectual Property
EXHIBITS
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Exhibit 1.1A Certificate of Formation
Exhibit 2.1E Form of Operating Agreement
Exhibit 2.4A(vii) Opinion of Hunton & Williams
Exhibit 2.4B(vii) Opinion of General Counsel of G-P
Exhibit 2.8A Company Debt Commitment Letter and Promissory Note
Exhibit 2.8B G-P Guarantee
Exhibit 2.8C WISCO Debt Indemnity
Exhibit 3.6(b) Financial Statement Line Items
Exhibit 11.1.44 Form of Human Resources Agreement
Exhibit 11.1.51 Individuals with Knowledge
Exhibit 11.1.55 Form of Management Support Agreement
Exhibit 11.1.60 Form of Operational Support Agreement
Exhibit 11.1.62 Form of Parent Roll Supply Agreement
Exhibit 11.1.91 Form of Transition Services Agreement
<PAGE>
================================================================================
EXHIBIT 10.2
GEORGIA-PACIFIC CORPORATION
OPERATING AGREEMENT
OF
GEORGIA-PACIFIC TISSUE, LLC
Dated As Of:
October 4, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
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<S> <C>
ARTICLE I DEFINITIONS AND TERMS................................................ 1
Section 1.1 Certain Definitions............................................. 1
Section 1.2 Rules of Construction........................................... 11
ARTICLE II GENERAL MATTERS................................................... 12
Section 2.1 Formation....................................................... 12
Section 2.2 Purposes and Business........................................... 12
Section 2.3 Offices......................................................... 12
Section 2.4 Name............................................................ 13
Section 2.5 Term............................................................ 13
Section 2.6 Members......................................................... 13
ARTICLE III FINANCIAL AND TAX MATTERS.......................................... 13
Section 3.1 Capital Contributions........................................... 13
Section 3.2 Loans from Members.............................................. 14
Section 3.3 Restrictions Relating to Capital; Company Property.............. 15
Section 3.4 Tax Treatment................................................... 15
Section 3.5 Allocation of Profits........................................... 15
Section 3.6 Allocation of Losses............................................ 16
Section 3.7 Special Allocations............................................. 16
Section 3.8 Offsetting Special Allocations.................................. 18
Section 3.9 Other Allocation Rules.......................................... 18
Section 3.10 Tax Elections................................................... 19
Section 3.11 Tax Allocations; Code Section 704(c)............................ 19
Section 3.12 Tax Matters Member.............................................. 20
Section 3.13 Regular Distribution Policy..................................... 20
Section 3.14 Special Distribution............................................ 20
Section 3.15 Accelerated Gains Tax Liability of WISCO........................ 21
Section 3.16 Sharing of Company Tax Benefits................................. 24
Section 3.17 Permanent Company Debt.......................................... 26
ARTICLE IV MANAGEMENT.......................................................... 28
Section 4.1 General......................................................... 28
Section 4.2 Board Composition............................................... 28
Section 4.3 Term; Removal; Vacancies........................................ 28
Section 4.4 Notice; Quorum.................................................. 28
Section 4.5 Voting.......................................................... 29
Section 4.6 Telephonic Meeting; Written Consents............................ 30
Section 4.7 Committees of the Board; Officers............................... 30
Section 4.8 Execution of Documents.......................................... 30
</TABLE>
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<TABLE>
<S> <C>
Section 4.9 Reliance on Documents and Reports.............................. 31
Section 4.10 Standard of Care; Indemnification.............................. 31
Section 4.11 Member Action.................................................. 32
Section 4.12 Certain Transactions........................................... 32
ARTICLE V ACCOUNTING, BOOKS AND RECORDS........................................ 33
Section 5.1 Fiscal Year.................................................... 33
Section 5.2 Books and Records.............................................. 33
Section 5.3 Auditors....................................................... 33
Section 5.4 Reporting...................................................... 33
Section 5.5 Banking........................................................ 34
Section 5.6 Tax Return Information......................................... 34
Section 5.7 Delegation of Responsibility for Accounting and Reports........ 34
ARTICLE VI CONFIDENTIALITY..................................................... 34
Section 6.1 Confidentiality Obligation..................................... 34
Section 6.2 Exceptions from Confidentiality Obligation..................... 35
Section 6.3 Employees, Agents and Advisers................................. 36
Section 6.4 Return of Confidential Information............................. 36
Section 6.5 Survival After Termination..................................... 37
ARTICLE VII TRANSFER OF UNITS; PUT AND CALL RIGHTS............................. 37
Section 7.1 General........................................................ 37
Section 7.2 Put and Call Rights............................................ 38
Section 7.3 Member Transfers............................................... 39
Section 7.4 Retirement..................................................... 39
ARTICLE VIII DISSOLUTION AND WINDING UP; BUY OUT RIGHTS........................ 40
Section 8.1 Dissolution.................................................... 40
Section 8.2 Winding Up..................................................... 40
Section 8.3 In-Kind Distributions.......................................... 41
Section 8.4 Cancellation of Certificate of Formation....................... 41
Section 8.5 Buy Out Rights................................................. 41
ARTICLE IX CERTIFICATES EVIDENCING UNITS....................................... 42
Section 9.1 Certificates................................................... 42
Section 9.2 Register....................................................... 42
Section 9.3 New Certificates............................................... 42
Section 9.4 Interest as a Security......................................... 42
Section 9.5 Legends........................................................ 43
ARTICLE X MISCELLANEOUS........................................................ 43
Section 10.1 Notices........................................................ 43
Section 10.2 Amendment; Waiver.............................................. 43
Section 10.3 Assignment..................................................... 44
Section 10.4 Entire Agreement............................................... 44
</TABLE>
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<TABLE>
<S> <C>
Section 10.5 Public Disclosure.............................................. 44
Section 10.6 Parties in Interest............................................ 44
Section 10.7 Governing Law; Submission to Jurisdiction; Selection of Forum.. 44
Section 10.8 Counterparts................................................... 45
Section 10.9 Severability................................................... 45
Section 10.10 Equitable Relief............................................... 45
Section 10.11 No Agency...................................................... 45
Section 10.12 Limitation of Liability........................................ 46
Section 10.13 Non-Exclusive Business......................................... 46
Section 10.14 Dispute Resolution............................................. 46
</TABLE>
EXHIBIT A Form of Unit Certificate
SCHEDULE 1 Identification of Members
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<PAGE>
OPERATING AGREEMENT
OF
GEORGIA-PACIFIC TISSUE, LLC
THIS OPERATING AGREEMENT of GEORGIA-PACIFIC TISSUE, LLC, a Delaware
limited liability company (the "Company"), is made and entered into as of
October 4, 1999, among WISCONSIN TISSUE MILLS INC., a Delaware corporation and a
wholly owned subsidiary of Chesapeake Corporation ("WISCO"), GEORGIA-PACIFIC
CORPORATION, a Georgia corporation ("G-P"), and such other Persons that become
Members as herein provided.
RECITALS
WHEREAS, the Company, G-P, WISCO and certain WISCO Affiliates are
parties to that certain Joint Venture Agreement, dated as of October 4, 1999
(the "Joint Venture Agreement");
WHEREAS, pursuant to and subject to the terms and conditions of the
Joint Venture Agreement, each of WISCO and G-P will contribute, or cause to be
contributed, to the Company certain assets and liabilities in exchange for
equity interests in the Company;
WHEREAS, the Members desire to enter into this Agreement, which shall
constitute the limited liability company agreement of the Members under the
Delaware Act, for the purpose of setting forth the agreements of the Members as
to the affairs of the Company and the conduct of its business;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and undertakings contained herein, the parties agree as follows:
ARTICLE I
DEFINITIONS AND TERMS
Section 1.1 Certain Definitions.
-------------------
As used herein, the following terms shall have the meanings set forth
or as referenced below:
"Adjusted Capital Account Deficit" means, with respect to any Member,
the deficit balance, if any, in such Member's Capital Account as of the end of
the relevant Fiscal Year, after giving effect to the following adjustments:
(i) Add to such Capital Account any amounts which such Member
is treated as obligated to restore pursuant to Regulations Section 1.704-
1(b)(2)(ii)(c) by virtue of such Member's guarantee or indemnity agreement with
respect to the Company Debt or is deemed to be obligated to restore pursuant to
the penultimate sentences of Regulations Sections 1.704-2(g)(1) and 1.704-
2(i)(5); and
-1-
<PAGE>
(ii) Subtract from such Capital Account the items described in
Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) and 1.704-
1(b)(2)(ii)(d)(6) of the Regulations.
The foregoing definition of Adjusted Capital Account Deficit is intended to
comply with the provisions of Section 1.704-1(b)(2)(ii)(d) of the Regulations
and shall be interpreted consistently therewith.
"Adjusted Property" means any property the Carrying Value of which has
been adjusted pursuant to Section 3.5(e);
"Affiliate" means, with respect to any Person, any other Person
directly or indirectly controlling, controlled by or under direct or indirect
common control with such first Person as of the date on which, or at any time
during the period for which, the determination of affiliation is being made. For
the purpose of this definition, "control" means (i) the direct or indirect
ownership or control of more than 50% of the voting stock or general partnership
interest or other voting interest in any Person, or (ii) the ability to direct
or cause the direction of the management or affairs of a Person, whether through
the direct or indirect ownership of voting interests, by contract or otherwise.
"Affiliate Member" shall have the meaning set forth in Section 7.3(a).
"Agreed Value" means the Fair Market Value of Contributed Assets;
provided that the initial Agreed Value of Contributed Assets that a Member is
obligated to transfer, or cause to be transferred, to the Company pursuant to
the Joint Venture Agreement shall be the amount set forth in, or determined
pursuant to, Section 3.1 of this Agreement.
"Agreement" shall mean this Operating Agreement, including the
schedules and exhibits hereto, as the same may be amended or supplemented from
time to time in accordance with the terms hereof.
"Ancillary Agreements" shall have the meaning set forth in the Joint
Venture Agreement.
"Board" means the governance board of the Company consisting of all
Managers or, as may be applicable, any duly appointed committee of the Board.
"Built In Gain" means, with respect to any Contributed Asset, the
excess of the Fair Market Value of such Contributed Asset on the Closing Date as
determined under Section 3.1(a) over the Company's adjusted basis for federal
income tax purposes in such Contributed Asset immediately following its
contribution to the Company.
"Business Day" means a day, other than a Saturday or Sunday, on which
banks generally are open in New York City for a full range of business.
"Call Price" shall have the meaning set forth in Section 7.2(b).
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<PAGE>
"Capital Account" means, with respect to any Member, the Capital
Account maintained for such Member in accordance with the following provisions:
(i) To each Member's Capital Account there shall be added the
amount of money and the initial Gross Asset Value of any property (other than
money) contributed to the Company by such Member (or its predecessors in
interest) with respect to the Interest in the Company held by such Member, such
Member's distributive share of Profits and any items in the nature of income or
gain which are specially allocated pursuant to Section 3.7 or Section 3.8, and
the amount of any Company liabilities assumed by such Member or which are
secured by any Company property distributed to such Member.
(ii) From each Member's Capital Account there shall be
subtracted the amount of money and the Gross Asset Value of any property
distributed to such Member pursuant to any provision of this Agreement, such
Member's distributive share of Losses and any items in the nature of expense or
loss which are specially allocated pursuant to Section 3.7 or Section 3.8, and
the amount of any liabilities of such Member assumed by the Company or which are
secured by any property contributed by such Member to the Company.
(iii) In the event all or a portion of an Interest in the Company
is transferred in accordance with the terms of this Agreement, the transferee
shall succeed to the Capital Account of the transferor to the extent it relates
to the transferred Interest.
(iv) In determining the amount of any liability for purposes of
subparagraphs (i) and (ii) above, there shall be taken into account Code Section
752(c) and any other applicable provisions of the Code and Regulations.
The foregoing provisions and the other provisions of this Agreement
relating to the maintenance of Capital Accounts are intended to comply with
Regulations Section 1.704-1(b), and shall be interpreted and applied in a manner
consistent with such Regulations. In the event the Board shall determine that
it is necessary to modify the manner in which the Capital Accounts, or any
debits or credits thereto (including, without limitation, debits or credits
relating to liabilities which are secured by contributions or distributed
property or which are assumed by the Company or any Member) are computed in
order to comply with such Regulations, the Board may make such modification,
provided that such modification is not likely to have a material adverse effect
on the amounts distributed to any Member upon the dissolution of the Company.
The Board also shall (i) make any adjustments that are necessary or appropriate
to maintain equality between the Capital Accounts of the Members and the amount
of Company capital reflected on the Company's balance sheet, as computed for
book purposes in accordance with Regulations Section 1.704-1(b)(2)(iv)(q), and
(ii) make any appropriate modifications in the event unanticipated events might
otherwise cause this Agreement not to comply with Regulations Section 1.704-
1(b), provided that, to the extent that any such adjustment is inconsistent with
other provisions of this Agreement and would have a material adverse effect on
any Member, such adjustment shall require the consent of such Member.
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<PAGE>
"Capital Contribution" means, with respect to any Member, the amount
of cash and the Agreed Value of Contributed Assets contributed by such Member to
the Company in accordance with Section 3.1.
"Cash Balances" means all cash accounts on a balance sheet
representing paper currency and coins, negotiable money orders, checks and bank
balances as well as cash equivalents in the form of highly liquid securities
with a known market value and a maturity, when acquired, of less than three
months.
"Certificate" means a certificate evidencing Units substantially in
the form of Exhibit A to this Agreement.
---------
"Certificate of Formation" shall have the meaning set forth in Section
2.1.
"Closing" and "Closing Date" shall have the respective meanings set
forth in the Joint Venture Agreement.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time, and any successor to such statute.
"Commercial Tissue Business" shall have the meaning set forth in the
Joint Venture Agreement.
"Company" shall have the meaning set forth in the preamble hereto.
"Company Business" means the business intended to be carried on by the
Company Group, as described in Section 2.2 hereof.
"Company Debt" means the debt incurred by the Company on or about the
Closing Date solely to fund the Special Distribution, as further described in
Section 2.8(b) of the Joint Venture Agreement, and refinancing or replacement
therefor (including up to $8 million of related expenses, including legal fees,
accounting fees, printing fees, filing fees, and underwriting fees).
"Company Group" means the Company and any Subsidiaries of the Company
from time to time.
"Company Group Affiliate" means any Person that is an Affiliate of the
Company.
"Company Property" means any and all property of whatsoever nature,
tangible or intangible, real or personal, of the Company Group from time to
time.
"Confidential Information" shall have the meaning set forth in Section
6.1.
"Contributed Assets" means the property or other consideration (other
than cash) contributed to the Company in exchange for Units in the Company.
-4-
<PAGE>
"CPA Firm" means the independent public auditor determined pursuant to
Section 5.3.
"CSK" means Chesapeake Corporation, a Virginia corporation, of which
WISCO is a wholly-owned subsidiary.
"CSK Group" means CSK, WISCO, and all other CSK Subsidiaries from time
to time.
"CSK Group Affiliate" means any Person that is an Affiliate of CSK.
"Debt" means any liability of the Company (including, without
limitation, liabilities to Members) for borrowed money, or any liability for the
payment of money by the Company in connection with any guarantees, surety
agreements, letters of credit, or other interest bearing liabilities evidenced
by any bond, debenture, note or other similar instrument, excluding any trade
liabilities or any non-interest bearing liabilities or obligations; capital
lease (but not operating lease) liabilities and other liabilities which are in
the nature of financing; and any interest bearing off-balance sheet liabilities
and the net liability of off balance sheet derivative contracts.
"Delaware Act" means the Delaware Limited Liability Company Act, 6
Del. C. (S)(S) 18-101 et seq., as amended from time to time, and any successor
- ------- ------
to such statute.
"Depreciation" means, for each Fiscal Year, an amount equal to the
depreciation, amortization, or other cost recovery deduction allowable for
federal income tax purposes with respect to an asset for such Fiscal Year,
except that if the Gross Asset Value of an asset differs from its adjusted basis
for federal income tax purposes at the beginning of such Fiscal Year,
Depreciation shall be determined by the Board in the manner described in
Regulations Section 1.704-1(b)(2)(iv)(g)(3).
"Distributable Cash" means the amount of cash that the Board
reasonably determines is available for distribution to Members at any applicable
time, taking into account available cash and anticipated cash flow and current
and anticipated expenses of the Company and after setting aside reserves in an
amount reasonably deemed necessary to provide for the Company's planned capital
expenditures, debt service and working capital.
"EBITDA" means, at any time of determination as specified in this
Agreement, the earnings before interest, taxes, depreciation and amortization of
the Company Group, computed on a consolidated basis in accordance with GAAP
consistently applied, for the four fiscal quarters next preceding such date of
determination, excluding any one time, unusual or extraordinary items (and, if
determined at a time prior to the expiration of four fiscal quarters following
the Closing Date, then such EBITDA shall be deemed to be the EBITDA of the
Company Group for post-Closing completed fiscal quarters of the Company plus
combined EBITDA of the WISCO Business and the G-P Business for such number of
pre-Closing fiscal quarters as, together with the completed fiscal quarters of
the Company, shall equal four (4)).
"Exercise Notice" shall have the meaning set forth in Section 7.2(c).
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"Fair Market Value" means, with respect to property, as of any date of
determination, the price for such property that could be negotiated in an arm's-
length free market transaction, for cash, between a willing seller and a willing
buyer, neither of whom is under pressure or compulsion to complete the
transaction, as of such date of determination, as determined in good faith by
the Board using a reasonable valuation method, which determination must include
the vote or consent of the WISCO Member; provided that if the full Board is
unable to reach such a determination with the vote or consent of the WISCO
Member, the WISCO Member and the G-P Member shall each select an independent and
nationally recognized accounting firm as its representative, and such accounting
firms shall select one independent and nationally recognized investment banking
firm, accounting firm or appraisal company as they deem appropriate and in the
best position to determine the Fair Market Value, whose determination of the
Fair Market Value shall be final and binding.
"Final Determination" means (i) a decision, judgment, decree or other
order by any court of competent jurisdiction, which binds WISCO or CSK and has
become final and not subject to further appeal, (ii) a closing agreement which
binds WISCO or CSK entered into under Section 7121 of the Code or any other
binding settlement agreement with the Internal Revenue Service entered into in
connection with or in contemplation of an administrative or judicial proceeding,
or (iii) the completion of Internal Revenue Service administrative proceedings
which binds WISCO or CSK and if a judicial contest is not or is no longer
available or, in the sole discretion of WISCO or CSK, is not to be commenced or
continued.
"Financing Agreements" means any agreement pursuant to which the
Company or any Company Affiliate incurs Debt.
"Fiscal Year" means the fiscal year of the Company as specified in
5.1.
"Formula Price" means, at any date of determination, the EBITDA of the
Company less Net Debt as of such date multiplied by 7.38.
"G-P Books" means any books and records of G-P Related to calculation
of volume, price or cost allocation methodology for purposes of the Ancillary
Agreements.
"G-P Call" shall have the meaning set forth in Section 7.2(b).
"G-P Group" means G-P and its Subsidiaries from time to time.
"G-P Group Affiliate" means any Person that is an Affiliate of G-P.
"G-P Guarantee" shall have the meaning set forth in Section 3.17.
"G-P Member" means, collectively if more than one, the G-P Group
Affiliate(s) who from time to time is (are) Member(s) of the Company.
"Gross Asset Value" means, with respect to any asset, the asset's
adjusted basis for federal income tax purposes, except as follows:
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(i) The initial Gross Asset Value of any asset contributed by a
Member to Company shall be the Agreed Value of such asset except as otherwise
provided in Section 3.1;
(ii) The Gross Asset Values of all Company assets shall be
adjusted to equal their respective gross Fair Market Values as of the following
times: (A) the acquisition of an additional Interest in the Company by any new
or existing Member in exchange for more than a de minimis capital contribution;
(B) the distribution by the Company to a Member of more than a de minimis amount
of money or other property as consideration for an Interest in the Company; and
(C) the liquidation of the Company within the meaning of Regulations Section
1.704-1(b)(2)(ii)(g); provided, however, that adjustments pursuant to clauses
(A) and (B) above shall be made only if such adjustments are reasonably
necessary or appropriate to reflect the relative economic interests of the
Members in the Company;
(iii) The Gross Asset Value of any Company asset distributed to
any Member shall be adjusted to equal the gross Fair Market Value of such asset
on the date of distribution; and
(iv) The Gross Asset Values of Company assets shall be increased
(or decreased) to reflect any adjustments to the adjusted basis of such assets
pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent
that such adjustments are taken into account in determining Capital Accounts
pursuant to Regulation Section 1.704-1(b)(2)(iv)(m) and subparagraph (vi) of the
definition of "Profits" and "Losses" or Section 3.7(g); provided, however, that
Gross Asset Values shall not be adjusted pursuant to this subparagraph (iv) to
the extent the Board makes an adjustment pursuant to subparagraph (ii) that
would otherwise result in an adjustment pursuant to this subparagraph (iv).
If the Gross Asset Value of an asset has been determined or adjusted pursuant to
subparagraphs (i), (ii), or (iv), such Gross Asset Value shall thereafter be
adjusted by the Depreciation taken into account with respect to such asset for
purposes of computing Profits and Losses.
"Group" means the Company Group, the CSK Group or the G-P Group, or
both, as the context may require.
"Independent Third Party" means any Person who, immediately prior to
the contemplated transaction, is not the owner of in excess of a 5% Percentage
Interest in the Company and who is not a Member of any such 5% Owner.
"Indemnitee" shall have the meaning set forth in Section 4.10.
"Interest" means the ownership interest of a Member in the Company
(which shall be considered personal property for all purposes), consisting of
(i) such Member's interest in profits, losses, allocations and distributions,
(ii) such Member's right to vote or grant or withhold consents with respect to
Company matters as provided herein or in the Delaware Act and (iii) such
Member's other rights and privileges as provided herein or under the Delaware
Act.
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"Involuntary Dissolution Event" shall mean any event described in
Section 8.1(d) hereof if no Member filed a motion, petition, or other request
before a court or an administrative agency seeking a dissolution of the Company.
"Joint Venture Agreement" shall have the meaning set forth in the
recitals hereto.
"Law" means any federal, state, foreign or local law, constitutional
provision, code, statute, ordinance, rule, regulation, order, judgment or decree
of any governmental authority.
"Manager" means a person duly elected to the Board pursuant to the
provisions of Section 4.2 or Section 4.3 hereof. Each Manager shall constitute
a "manager" of the Company as such term is defined in Section 18-101 of the
Delaware Act.
"Members" mean WISCO and G-P and all other Persons admitted as
additional or substituted Members pursuant to this Agreement, so long as they
remain Members. Each Member shall constitute a "Member" of the Company, as such
term is defined in Section 18-101 of the Delaware Act.
"Net Debt" means, at any date of determination, the amount of all Debt
of the Company Group on such date, less all Cash Balances held by or on behalf
of any Company Group Member and less loans made to the Members as of such date.
"Nonrecourse Deductions" has the meaning set forth in Section 1.704-
2(b)(1) and 1.704-2(c) of the Regulations.
"Obligations" shall have the meaning set forth in Section 3.17(b).
"Nonrecourse Liability" has the meaning set forth in Section 1.704-
2(b)(3) of the Regulations.
"Option Closing" shall have the meaning set forth in Section 7.2(c).
"Option Right" shall have the meaning set forth in Section 7.2(c).
"Partner Nonrecourse Debt" has the same meaning as the term "partner
nonrecourse debt" set forth in Section 1.704-2(b)(4) of the Regulations.
"Partner Nonrecourse Debt Minimum Gain" means an amount, with respect
to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that
would result if such Partner Nonrecourse Debt were treated as a Nonrecourse
Liability, determined in accordance with Section 1.704-2(i)(3) of the
Regulations.
"Partner Nonrecourse Deductions" has the same meaning as the term
"partner nonrecourse deductions" set forth in Sections 1.704-2(i)(1) and 1.704-
2(i)(2) of the Regulations.
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"Partnership Minimum Gain" has the meaning set forth in Sections
1.704-2(b)(2) and 1.704-2(d) of the Regulations.
"Percentage Interests" means the respective proportions in which the
Members hold their Interests in the Company, determined for any Member as of any
date by dividing the number of Units held by such Member on such date by the
total number of Units outstanding and held by all Members as of such date.
"Permanent Company Debt" shall mean the indebtedness incurred by the
Company to refinance the Company Debt, as further described in Section 3.17
hereof, and shall include, where the context requires, any replacement or
refinancing thereof.
"Person" shall mean an individual, a corporation, a partnership, an
association, a trust, a limited liability company, a governmental authority or
any other entity or organization.
"Products" shall have the meaning set forth in Section 10.13(a).
"Profits" and "Losses" means, for each Fiscal Year, an amount equal to
the Company's taxable income or loss for such Fiscal Year, determined in
accordance with Code Section 703(a) (for this purpose, all items of income,
gain, loss, or deduction required to be stated separately pursuant to Code
Section 703(a)(1) shall be included in taxable income or loss), with the
following adjustments:
(i) Any income of the Company that is exempt from federal
income tax and not otherwise taken into account in computing Profits or Losses
pursuant to this definition of "Profits" and "Losses" shall be added to such
taxable income or loss;
(ii) Any expenditures of the Company described in Code Section
705(a)(2)(B), or treated as Code Section 705(a)(2)(B) expenditures pursuant to
Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account
in computing Profits or Losses pursuant to this definition of "Profits" and
"Losses" shall be subtracted from such taxable income or loss;
(iii) In the event the Gross Asset Value of any Company asset is
adjusted pursuant to subparagraphs (ii) or (iii) of the definition of "Gross
Asset Value," the amount of such adjustment shall be taken into account as gain
or loss from the disposition of such asset for purposes of computing Profits or
Losses;
(iv) Gain or loss resulting from any disposition of property
with respect to which gain or loss is recognized for federal income tax purposes
shall be computed by reference to the Gross Asset Value of the property disposed
of, notwithstanding that the adjusted tax basis of such property differs from
its Gross Asset Value;
(v) In lieu of the depreciation, amortization, and other cost
recovery deductions taken into account in computing such taxable income or loss,
there shall be taken into
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account Depreciation for such Allocation Year, computed in accordance with the
definition of "Depreciation";
(vi) To the extent an adjustment to the adjusted tax basis of
any Company asset pursuant to Code Section 734(b) or Code Section 743(b) is
required pursuant to Regulations Section 1.704-1(b)(2)(iv)(m)(4) to be taken
into account in determining Capital Accounts as a result of a distribution other
than in complete liquidation of a Member's Interest, the amount of such
adjustment shall be treated as an item of gain (if the adjustment increases the
basis of the asset) or loss (if the adjustment decreases the basis of the asset)
from the disposition of the asset and shall be taken into account for purposes
of computing Profits or Losses; and
(vii) Any items which are specially allocated pursuant to Section
3.7 or Section 3.8 shall not be taken into account in computing Profits or
Losses.
The amounts of the items of Company income, gain, loss or deduction available to
be specially allocated pursuant to Sections 3.7 and 3.8 shall be determined by
applying rules analogous to those set forth in subparagraphs (i) through (vi)
above.
"Put Price" shall have the meaning set forth in Section 7.2(a).
"Regulations" means the regulations promulgated by the U.S. Treasury
Department pursuant to the Code.
"Regulatory Allocations" shall have the meaning set forth in Section
3.8.
"Special Distribution" shall have the meaning set forth in Section
2.8(b) of the Joint Venture Agreement.
"Subsidiary" means, with respect to any Person, any corporation,
partnership, association, trust, limited liability company or other legal entity
or organization of which such person, either directly or indirectly or through
or together with any other Subsidiary of such Person, owns more than 50% of the
equity interests.
"Tax Matters Member" shall have the meaning set forth in Section 3.12.
"Tax Opinion" means an opinion of CSK's legal counsel or public
accounting firm to the effect that it is substantially more likely than not that
(1) the transfer of the WISCO Business constituted a sale to the Company (in
whole or in part) for federal income tax purposes, or (2) the Special
Distribution is taxable to WISCO in whole or in part. Such opinion must be
based upon an addition, amendment, or other modification to the Code or the
Regulations, the issuance by the Internal Revenue Service (or any other
administrative agency or authority having jurisdiction over the interpretation,
administration, or enforcement of federal income tax laws) of a ruling, notice,
or other administrative pronouncement, or the issuance or publication of a
decision by a court, in any such event occurring after the Closing but before
the eighth anniversary of the Closing Date.
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<PAGE>
"Transfer" shall have the meaning set forth in Section 7.1.
"Units" means the equal proportional units into which Interests in the
Company shall be divided, which term may include fractions of Units as well as
whole Units. Subject to the Capital Contribution obligations of the Members
hereunder, all Units issued hereunder shall be fully paid and non-assessable.
"Voluntary Dissolution Event" shall mean any event described in
Section 8.1 hereof other than an Involuntary Dissolution Event.
"Voluntary Dissolution Event Without WISCO's Consent" shall mean any
Voluntary Dissolution Event which is described in Section 8.1 hereof if the
event occurs without the consent of the WISCO Member. For this purpose, the
WISCO Member shall be deemed to have consented to (i) any action approved by the
Manager designated by the WISCO Member, (ii) any reduction of the WISCO Member's
(or the CSK Group's) ownership of the outstanding Units below 5% if such
reduction occurs because of an exercise of the WISCO Put, and (iii) the
dissolution of the Company under Section 8.1(d) hereof at the request of the
WISCO Member.
"WISCO" shall have the meaning set forth in the preamble hereto.
"WISCO Business" shall have the meaning set forth in the Joint Venture
Agreement.
"WISCO Indemnity Period" shall have the meaning set forth in Section
3.17.
"WISCO Manager" shall mean a Manager designated by the WISCO Member.
"WISCO Member" means, collectively if more than one, the CSK Group
Affiliate(s) which from time to time is (are) Member(s) of the Company.
"WISCO Put" shall have the meaning set forth in Section 7.2(a).
Section 1.2 Rules of Construction.
---------------------
(a) Words used herein, regardless of the number and gender used,
shall be deemed and construed to include any other number, singular or plural,
and any other gender, masculine, feminine or neuter, as the context requires,
and, as used herein, unless the context requires otherwise, the words "hereof",
"herein", and "hereunder" and words of similar import shall refer to this
Agreement as a whole and not to any particular provision of this Agreement.
(b) A reference to any statute or statutory provision shall be
construed as a reference to the same as it may have been, or may from time to
time be, amended, modified or re-enacted.
(c) The terms "dollars" and "$" shall mean United States dollars.
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(d) The term "including" shall be deemed to mean "including without
limitation."
(e) Article and section headings used in this Agreement are for
convenience of reference only and shall not affect the interpretation of this
Agreement.
(f) This Agreement is among financially sophisticated and
knowledgeable parties and is entered into by the parties in reliance upon the
economic and legal bargains contained herein and shall be interpreted and
construed in a fair and impartial manner without regard to such factors as the
party who prepared, or caused the preparation of, this Agreement or the relative
bargaining power of the parties.
ARTICLE II
GENERAL MATTERS
Section 2.1 Formation.
---------
The Members have caused the formation of the Company as a Delaware
Limited Liability Company pursuant to the Delaware Act by filing a Certificate
of Formation of the Company (the "Certificate of Formation") with the Delaware
Secretary of State in accordance with the Delaware Act and, in connection
therewith, each Member has contributed $10.00 to the capital of the Company
prior to the date hereof. The rights and liabilities of the Members shall be as
provided in the Delaware Act, except as otherwise provided in this Agreement.
Section 2.2 Purposes and Business.
---------------------
Except as may otherwise be approved by the Board (which approval must
include the affirmative vote or consent of the WISCO Manager), the purpose of
the Company and the Company Group shall be to engage in any lawful business in
any way related to the business of producing, licensing for production and
selling commercial tissue products and related products for the "away from home"
market, on a worldwide basis. The Company shall have all powers necessary or
desirable to accomplish the aforesaid purposes. In connection therewith, the
Company may engage in and enter into any and all activities, contracts and
agreements related or incident to the above-stated purposes as the Board may
determine to be appropriate from time to time. The Company shall have the power
to do all things necessary, appropriate, advisable, convenient, or incidental in
connection with the fulfillment of its business purposes. The Company shall
not, and shall not permit any of its Subsidiaries to, engage in any other
activity or business except to the extent approved by the Board (which approval
must include the affirmative vote or consent of the WISCO Manager).
Section 2.3 Offices.
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(a) The principal executive offices of the Company shall be
located at 55 Park Place, Atlanta, Georgia at the offices of G-P or such other
location as determined by the Board from time to time.
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<PAGE>
(b) The registered office of the Company in the State of Delaware
is located at Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware
19801. The registered agent of the Company for service of process at such
address is The Corporation Trust Company. Such registered office or registered
agent may be changed by the Board from time to time.
Section 2.4 Name.
----
The name of the Company shall be Georgia-Pacific Tissue, LLC or such
other name as the Board may from time to time select.
Section 2.5 Term.
----
The existence of the Company commenced on the date its Certificate of
Formation was filed with the Secretary of State of the State of Delaware, and
shall continue in perpetuity unless dissolved in accordance with Section 8.1.
Section 2.6 Members.
-------
The name and business or mailing address of each Member of the Company
are set forth on Schedule 1 to this Agreement. The Board shall cause Schedule 1
---------- ----------
to be amended from time to time to reflect the addition or retirement of
Members, or transfers of Units, in accordance with the terms of this Agreement.
Except in connection with a permitted redemption or transfer of a Member's
entire Interest in accordance with the terms of this Agreement, no Member shall
have the right to retire from the Company prior to the termination of the
Company following dissolution and winding up.
ARTICLE III
FINANCIAL AND TAX MATTERS
Section 3.1 Capital Contributions.
---------------------
(a) Simultaneously with the execution of this Agreement, WISCO is
contributing to the Company the WISCO Business, as defined and identified in the
Joint Venture Agreement, with an aggregate agreed value of $775,000,000 in
exchange for 5 Units, which number of Units reflects the Special Distribution.
Specifically, the various categories of assets comprising the Contributed Assets
of WISCO are as follows:
Shares of Wisconsin Tissue
de Mexico, S.A.
Shares of Wisconsin Tissue
Management LLC
Interest in Alsip Condominium Association
Working Capital
Land
Buildings
Equipment
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Inventory
Goodwill
For purposes of maintaining the Company's books in accordance with Regulations
Section 1.704-1(b)(2)(iv), the initial Gross Asset Value of each asset within
each of the above categories shall be based on the relative Fair Market Values
of the assets within each category.
(b) Simultaneously with the execution of this Agreement, G-P is
contributing to the Company the G-P Contributed Assets, as defined and
identified in the Joint Venture Agreement, with an aggregate agreed value of
$376,400,000 in exchange for 95 Units, which number of Units reflects the
Special Distribution. Specifically, the various categories of assets comprising
the Contributed Assets of G-P are as follows:
Working Capital
Land
Buildings
Equipment
Inventory
Goodwill
For purposes of maintaining the Company's books in accordance with Regulations
Section 1.704-1(b)(2)(iv), the initial Gross Asset Value of each asset within
each of the above categories shall be based on the relative Fair Market Values
of the assets within each category.
(c) Except as may otherwise be unanimously agreed to in writing by
the Members, the Members shall have no right or obligation to make any
additional Capital Contributions to the Company.
(d) Unless otherwise unanimously agreed by the Members, any
additional Capital Contributions made by the Members shall be made in accordance
with the Members' respective Percentage Interests, and additional Units shall be
issued in respect of any such additional Capital Contributions pro rata based on
the Members' respective Percentage Interests.
Section 3.2 Loans from Members.
------------------
Loans by a Member to the Company shall not be considered Capital
Contributions. Such loans shall bear interest at arm's length market rates and
may contain other customary commercial terms as agreed by the Company and the
Member; provided, however, that any such loans shall be fully subordinated to
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the Company Debt and the Permanent Company Debt in accordance with terms that
are reasonably acceptable to each Member. If any Member shall advance funds to
the Company in excess of the amounts required hereunder to be contributed by
such Member to the capital of the Company, such advances shall not increase the
Capital Account of such Member. The amounts of any such advances shall be a
debt of the Company to such Member and shall be payable or collectible only out
of Company assets in accordance with the terms and conditions upon which such
advances are made. The repayment
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of debt owed to a Member upon liquidation of the Company shall be subject to the
order of priority set forth in Section 8.2.
Section 3.3 Restrictions Relating to Capital; Company Property.
--------------------------------------------------
(a) Except as otherwise provided herein or by the Delaware Act, no
Member shall have the right to withdraw, or receive any return of, all or a
portion of such Member's Capital Contribution, nor shall any Member have the
right to demand and receive property other than cash in return for its Capital
Contribution, except as provided in Section 8.3(a).
(b) No interest shall be paid by the Company on Capital
Contributions or on balances in Members' Capital Accounts.
(c) All Company Property, whether contributed by a Member or
otherwise acquired by the Company, shall be owned by the Company as a separate
legal entity and no Member shall have any right of partition with respect to any
Company Property. The Board shall cause the Company to execute, file and record
such documents as may be necessary or appropriate to reflect the Company's
ownership of Company Property in appropriate public offices.
(d) No Member shall be liable to the Company or to any other
Member to restore any deficit balance in its Capital Account (except as may be
required by the Delaware Act) or to reimburse any other Member for any portion
of such other Member's investment in the Company. No Member shall have priority
over any other Member, either as to the return of its Capital Contribution or as
to income, losses, interest, returns, or distributions, except for the priority
of the WISCO Member with respect to the Special Distributions and as set forth
in Section 8.3(a).
(e) The Company shall not enter into any transaction, other than
the Ancillary Agreements, with any Member or any Affiliate of any Member except
on arms length terms.
Section 3.4 Tax Treatment.
-------------
It is the intention of the Members that the Company shall be taxed as
a "partnership" for United States federal, state and local income tax purposes,
and, except as otherwise required by law, no Member shall take any action
inconsistent with the classification of the Company as a partnership for U.S.
tax purposes, including any action to cause the Company to be treated as an
association taxable as a corporation for U.S. tax purposes.
Section 3.5 Allocation of Profits.
---------------------
After giving effect to the special allocations set forth in Sections
3.7 and 3.8, Profits for any Fiscal Year shall be allocated among the Members in
proportion to their respective Percentage Interests.
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Section 3.6 Allocation of Losses.
--------------------
After giving effect to the special allocations set forth in Sections
3.7 and 3.8, Losses for any Fiscal Year shall be allocated as set forth in
Section 3.6(a), subject to the limitation in Section 3.6(b).
(a) Losses for any Fiscal Year shall be allocated among the
Members in proportion to their respective Percentage Interests.
(b) The Losses allocated pursuant to Section 3.6(a) shall not
exceed the maximum amount of Losses that can be so allocated without causing any
Member to have an Adjusted Capital Account Deficit at the end of any Fiscal
Year. In the event some but not all of the Members would have Adjusted Capital
Account Deficits as a consequence of an allocation of Losses pursuant to Section
3.6(a), the limitation set forth in this Section 3.6(b) shall be applied on a
Member by Member basis so as to allocate the maximum permissible Losses to each
Member under Section 1.704-1(b)(2)(ii)(d) of the Regulations.
Section 3.7 Special Allocations.
-------------------
The following special allocations shall be made in the following
order:
(a) Minimum Gain Chargeback. Except as otherwise provided in
-----------------------
Section 1.704-2(f) of the Regulations, notwithstanding any other provision of
this Article III, if there is a net decrease in Partnership Minimum Gain during
any Fiscal Year, each Member shall be specially allocated items of Company
income and gain for such Fiscal Year (and, if necessary, subsequent Fiscal
Years) in an amount equal to such Member's share of the net decrease in
Partnership Minimum Gain, determined in accordance with Regulations Section
1.704-2(g). Allocations pursuant to the previous sentence shall be made in
proportion to the respective amounts required to be allocated to each Member
pursuant thereto. The items to be so allocated shall be determined in accordance
with Sections 1.704-2(f)(6) and 1.704-2(j)(2) of the Regulations. This Section
3.7(a) is intended to comply with the minimum gain chargeback requirement in
Section 1.704-2(f) of the Regulations and shall be interpreted consistently
therewith.
(b) Partner Minimum Gain Chargeback. Except as otherwise provided
-------------------------------
in Section 1.704-2(i)(4) of the Regulations, notwithstanding any other provision
of this Article III, if there is a net decrease in Partner Nonrecourse Debt
Minimum Gain attributable to a Partner Nonrecourse Debt during any Fiscal Year,
each Member who has a share of the Partner Nonrecourse Debt Minimum Gain
attributable to such Partner Nonrecourse Debt, determined in accordance with
Section 1.704-2(i)(5) of the Regulations, shall be specially allocated items of
Company income and gain for such Fiscal Year (and, if necessary, subsequent
Fiscal Years) in an amount equal to such Member's share of the net decrease in
Partner Nonrecourse Debt Minimum Gain attributable to such Partner Nonrecourse
Debt, determined in accordance with Regulations Section 1.704-2(i)(4).
Allocations pursuant to the previous sentence shall be made in proportion to the
respective amounts required to be allocated to each Member pursuant thereto. The
items to be so allocated shall be determined in accordance with Sections 1.704-
2(i)(4) and 1.704-2(j)(2)
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<PAGE>
of the Regulations. This Section 3.7(b) is intended to comply with the minimum
gain chargeback requirement in Section 1.704-2(i)(4) of the Regulations and
shall be interpreted consistently therewith.
(c) Qualified Income Offset. In the event any Member unexpectedly
-----------------------
receives any adjustments, allocations, or distributions described in Section
1.704-1(b)(2)(ii)(d)(4), Section 1.704-1(b)(2)(ii)(d)(5) or Section 1.704-
1(b)(2)(ii)(d)(6) of the Regulations, items of Company income and gain shall be
specially allocated to each such Member in an amount and manner sufficient to
eliminate, to the extent required by the Regulations, the Adjusted Capital
Account Deficit of such Member as quickly as possible, provided that an
allocation pursuant to this Section 3.7(c) shall be made only if and to the
extent that such Member would have an Adjusted Capital Account Deficit after all
other allocations provided for in this Article III have been tentatively made as
if this Section 3.7(c) were not in the Agreement.
(d) Gross Income Allocation. In the event any Member has a deficit
-----------------------
Capital Account at the end of any Fiscal Year which is in excess of the sum of
(i) the amount such Member is treated as obligated to restore pursuant to
Regulations Section 1.704-1(b)(2)(ii)(c) by virtue of such Partner's guarantee
or indemnity with respect to the Company Debt, and (ii) the amount such Member
is deemed to be obligated to restore pursuant to the penultimate sentences of
Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5), each such Member shall be
specially allocated items of Company income and gain in the amount of such
excess as quickly as possible, provided that an allocation pursuant to this
Section 3.7(d) shall be made only if and to the extent that such Member would
have a deficit Capital Account in excess of such sum after all other allocations
provided for in this Article III have been made as if Section 3.7(c) and this
Section 3.7(d) were not in the Agreement.
(e) Partner Nonrecourse Deductions. Any Partner Nonrecourse
------------------------------
Deductions for any Fiscal Year shall be allocated to the Member who bears the
economic risk of loss with respect to the Partner Nonrecourse Debt to which such
Partner Nonrecourse Deductions are attributable in accordance with Regulations
Section 1.704-2(i)(1).
(f) Nonrecourse Deductions. Nonrecourse Deductions for any Fiscal
----------------------
Year shall be allocated to the Members in proportion to their respective
Percentage Interests.
(g) Section 754 Adjustments. To the extent an adjustment to the
-----------------------
adjusted tax basis of any Company asset pursuant to Code Section 734(b) or Code
Section 743(b) is required, pursuant to Regulations Section 1.704-
1(b)(2)(iv)(m)(2) or Regulations Section 1.704-1(b)(2)(iv)(m)(4), to be taken
into account in determining Capital Accounts as the result of a distribution to
a Member in complete liquidation of its interest in the Company, the amount of
such adjustment to Capital Accounts shall be treated as an item of gain (if the
adjustment increases the basis of the asset) or loss (if the adjustment
decreases such basis) and such gain or loss shall be specially allocated to the
Members in accordance with their Interests in the Company in the event that
Regulations Section 1.704-1(b)(2)(iv)(m)(2) applies, or to the Member to whom
such distribution was made in the event that Regulations Section 1.704-
1(b)(2)(iv)(m)(4) applies.
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(h) In the event that the Company makes a distribution to WISCO
pursuant to Section 3.15 hereof, then WISCO shall be specially allocated items
of Company income and gain from each Fiscal Year in which such distribution is
made (and, if necessary, subsequent Fiscal Years in the case of distributions
under Section 3.15(a) or (b)) in an amount equal to the total of such
distributions made to WISCO.
Section 3.8 Offsetting Special Allocations.
------------------------------
The allocations set forth in Sections 3.6(b), and 3.7(a), (b), (c),
(d), (e), (f), and (g) (the "Regulatory Allocations") are intended to comply
with certain requirements of the Regulations. It is the intent of the Members
that, to the extent possible, all Regulatory Allocations shall be offset either
with other Regulatory Allocations or with special allocations of other items of
Company income, gain, loss or deduction pursuant to this Section 3.8.
Therefore, notwithstanding any other provision of this Article III (other than
the Regulatory Allocations), the Board shall make such offsetting special
allocations of Company income, gain, loss or deduction in whatever manner it
determines appropriate so that, after such offsetting allocations are made, each
Member's Capital Account balance is, to the extent possible, equal to the
Capital Account balance such Member would have had if the Regulatory Allocations
were not part of the Agreement and all Company items were allocated pursuant to
Sections 3.5, 3.6(a) and 3.7(h). In exercising its discretion under this
Section 3.8, the Board shall take into account future Regulatory Allocations
under Sections 3.7(a) and 3.7(b) that, although not yet made, are likely to
offset other Regulatory Allocations previously made under Sections 3.7(e) and
3.7(f).
Section 3.9 Other Allocation Rules.
----------------------
(a) Profits, Losses, and any other items of income, gain, loss or
deduction shall be allocated to the Members pursuant to this Article III as of
the last day of each Fiscal Year; provided that Profits, Losses and such other
items shall also be allocated at such times as the Gross Asset Values of Company
Property are adjusted pursuant to subparagraph (ii) of the definition of Gross
Asset Value.
(b) For purposes of determining the Profits, Losses, or any other
items allocable to any period, Profits, Losses, and any such other items shall
be determined on a daily, monthly, or other basis, as determined by the Board
using any permissible method under Code Section 706 and the Regulations
thereunder.
(c) All allocations to the Members pursuant to this Article III
shall, except as otherwise provided, be divided among them in proportion to
their respective Percentage Interests.
(d) The Members are aware of the income tax consequences of the
allocations made by this Article III and hereby agree to be bound by the
provisions of this Article III in reporting their shares of Company income and
loss for income tax purposes, except to the extent otherwise required by law.
(e) Solely for purposes of determining a Member's proportionate
share of the "excess nonrecourse liabilities" of the Company within the meaning
of Regulations
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Section 1.752-3(a)(3), the Members' interests in Company profits are in
proportion to their Percentage Interests.
(f) To the extent permitted by Section 1.704-2(h)(3) of the
Regulations, the Board shall endeavor to treat distributions as having been made
from the proceeds of a Nonrecourse Liability or a Partner Nonrecourse Debt only
to the extent that such distributions would cause or increase an Adjusted
Capital Account Deficit for any Member.
Section 3.10 Tax Elections.
-------------
The Company shall make the following elections on the appropriate tax
returns:
(a) to adopt the accrual method of accounting, if permitted by
the Code, and to keep the Company's books and records in a manner consistent
therewith;
(b) to elect to amortize the organizational expenses and the
start-up expenditures of the Company ratably over a period of sixty (60) months
as permitted by Sections 709(b) and 195(b) of the Code;
(c) if so requested by any Member, an election under Section 754
of the Code to adjust the basis of the Company's property in the circumstances
described therein; and
(d) any other election not inconsistent with this Agreement or
the Joint Venture Agreement that the Tax Matters Member may deem appropriate and
in the best interests of the Members.
Neither the Company nor any Member may make an election for the Company to be
excluded from the application of the provisions of subchapter K of chapter 1 of
subtitle A of the Code or any similar provisions of applicable state law.
Section 3.11 Tax Allocations; Code Section 704(c).
------------------------------------
In accordance with Code Section 704(c) and the Regulations thereunder,
income, gain, loss, and deduction with respect to any Contributed Asset shall,
solely for tax purposes, be allocated among the Members so as to take account of
any variation between the adjusted basis of such Contributed Asset to the
Company for federal income tax purposes and its initial Gross Asset Value
(computed in accordance with subparagraph (i) of the definition of "Gross Asset
Value").
In addition, in the event the Gross Asset Value of any Company asset
is adjusted pursuant to subparagraph (ii) of the definition of the "Gross Asset
Value," subsequent allocations of income, gain, loss, and deduction with respect
to such asset shall take account of any variation between the adjusted basis of
such asset for federal income tax purposes and its Gross Asset Value in the same
manner as under Code Section 704(c) and the Regulations thereunder.
The Company shall adopt and use only the "traditional method"
permitted by the Regulations under Code Section 704(c), and therefore shall not
make any curative allocations
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and/or remedial allocations. Allocations pursuant to this Section 3.11 are
solely for purposes of federal, state, and local taxes and shall not affect, or
in any way be taken into account in computing, any Member's Capital Account or
share of Profits, Losses, other items, or distributions pursuant to any
provision of this Agreement.
Except as otherwise provided in this Agreement, all items of Company
income, gain, loss, deduction, and any other allocations not otherwise provided
for shall be divided among the Members in the same proportions as the Percentage
Interest for the Fiscal Year.
Section 3.12 Tax Matters Member.
------------------
The Member having the highest Percentage Interest shall be the tax
matters partner (the "Tax Matters Member") of the Company pursuant to Section
6231(a)(7) of the Code. Such Member shall take such action as may be necessary
to cause each other Member to become a notice partner within the meaning of
Section 6223 of the Code. Such Member shall inform each other Member of all
significant matters that may come to its attention in its capacity as Tax
Matters Member by giving prompt notice thereof. The Company agrees to defend,
indemnify and hold harmless the Tax Matters Member from and against all claims
and damages relating to actions taken in good faith in discharging its
responsibilities as Tax Matters Member.
Section 3.13 Regular Distribution Policy.
---------------------------
(a) The Board shall determine from time to time, in its complete
discretion whether and to what extent the Company shall distribute any portion
of available Distributable Cash to Members; provided, however, that aside from
the Special Distribution, distributions declared or made on or before January 1,
2002 shall not exceed the Company's "net cash flow from operations" as
determined under Section 1.707-4(b), unless unanimously approved by the Members.
All funds distributed to the Members pursuant to this Section 3.12 shall be
distributed to them in accordance with their respective Percentage Interests.
(b) Subject to Section 8.3 hereof, to the extent that the Board
approves any distribution that consists of property of a type or in a form other
than cash, the types and forms of such property shall be allocated in an
equitable manner among the Members entitled thereto, such that each Member
shall, except for immaterial variances, receive the same type or form of
property.
(c) Any distributions to be made by the Company shall be made
only to the extent permitted by the Company Debt and any other Financing
Agreements to which any Company Group Affiliate is a party and only if and to
the extent permitted by applicable Law (including, without limitation, Sections
18-607 and 18-804 of the Delaware Act).
Section 3.14 Special Distribution.
--------------------
Simultaneous with the Closing, the Company shall use the net proceeds
of the Company Debt (after deducting borrowing expenses) to make the Special
Distribution to the WISCO Member in an amount that will result in the WISCO
Member's Percentage Interest
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equaling 5%. The amount of the Special Distribution shall be determined in
accordance with Section 2.1(b) of the Joint Venture Agreement.
Section 3.15 Accelerated Gains Tax Liability of WISCO.
----------------------------------------
(a) If (on one or more occasions) prior to the tenth anniversary
of the Closing Date, the Company sells or otherwise disposes of all or any part
of the WISCO Contributed Assets, and if WISCO therefore incurs and pays (either
directly or as an offset against a tax refund or overpayment of tax) federal
and/or state income tax liabilities (on a cumulative basis, taking into account
all such sales or other dispositions) exceeding $22 million as a result of the
allocation to it of income or gain(s) recognized by the Company from such sales
or dispositions (up to the total Built In Gain with respect to the WISCO
Contributed Assets sold or disposed of, determined by assuming, absent a Final
Determination or receipt by CSK of a Tax Opinion, that no income or gain is
recognized by WISCO on the transfer of such assets to the Company), then the
Company shall distribute to WISCO (after each such occasion and within 10 days
after WISCO has demonstrated to the Company's reasonable satisfaction the
appropriate amount to be distributed) an amount of money equal to the actual
amount, if any, of WISCO's total federal and state income tax liability in
excess of $22 million resulting from the allocation to it of income or gain so
recognized by the Company. No distribution to WISCO under this Section 3.15(a),
however, shall be made with respect to the Company's sale of inventory, the
collection or disposition of accounts receivable, or the retirement of other
assets in the ordinary course of operating the WISCO Business (it being
understood that the disposition or partial liquidation of a manufacturing
facility or of any stock or other equity interest in any WISCO Contributed
Subsidiary shall not be considered to be a transaction in the ordinary course of
business) regardless of whether the $22 million limit otherwise has been
exceeded.
(b) (i) Subject to the compliance of WISCO with its obligations
under clause (ii) of this Section 3.15(b), if (on one or more occasions) the
Company or G-P (other than satisfying its obligations under the G-P Guarantee)
pays all or any part of the principal amount of the Permanent Company Debt prior
to the thirtieth (30th) anniversary of the Closing Date, or if the Company takes
any action prior to such thirtieth (30th) anniversary that would result in a
reduction, after the funding of the Permanent Company Debt, of the portion of
such debt for which WISCO "bears the economic risk of loss" within the meaning
of Section 1.752-2 of the Regulations, then the Company shall distribute to
WISCO (after each such occasion and within 10 days after WISCO has demonstrated
to the Company's reasonable satisfaction the appropriate amount to be
distributed) an amount of money equal to the actual increase, if any, in WISCO's
total federal and state income tax liability incurred and paid by WISCO (either
directly or as an offset against a tax refund or overpayment of tax) as a result
of such payment or other action by the Company. Similar principles shall apply
if the Company repays the principal amount of the Company Debt other than by
replacing such debt with the Permanent Company Debt as provided in Section 3.17
hereof. WISCO has determined that it "bears the economic risk of loss" within
such meaning for the Company Debt up to the amount of the Special Distribution
as of the Closing Date and acknowledges that it will need to make a similar
determination with respect to the Permanent Company Debt, and the Members
acknowledge that no distribution will be made pursuant to this Section 3.15(b)
to compensate WISCO for any tax liability attributable to the incorrectness of
WISCO's determinations.
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(ii) The Members acknowledge that the Company shall replace the
Company Debt and may replace the Permanent Company Debt from time to time with
other indebtedness so long as (x) such replacement does not result in a
reduction in the total amount of Company indebtedness for which WISCO "bears the
economic risk of loss," (y) such indebtedness is on terms that are no less
favorable to the Company (taking into account the Company's credit rating) than
prevailing terms in the credit markets in all material respects at the time such
indebtedness is incurred, and (z) the Company shall have provided notice to
WISCO of the terms of such indebtedness as soon after agreeing to such terms as
is reasonably practicable. WISCO hereby agrees to cooperate to the extent
reasonably required to facilitate such one or more refinancings, including but
not limited to, executing agreements (in form and substance reasonably
satisfactory to WISCO) necessary for it to "bear the economic risk of loss" for
such replacement indebtedness in an amount not less than the Special
Distribution. In such event, any such replacement indebtedness (and any and all
subsequent replacement indebtedness) shall be treated as Permanent Company Debt
for purposes of this Section 3.15(b).
(c) For the avoidance of doubt, the Members acknowledge that no
distribution will be made pursuant to this Section 3.15 as a result of the
exercise of the WISCO Put, nor shall any distribution be made pursuant to this
Section 3.15 to compensate WISCO for any tax liability resulting from any
treatment of the contribution of the WISCO Contributed Assets to the Company as
a sale in whole or in part for federal and/or state income tax purposes (such
treatment being evidenced by a Final Determination or by a Tax Opinion). In
making any determination of the appropriate amount to be distributed pursuant to
this Section 3.15, any effect on WISCO's taxable income and/or gain resulting
from any distribution made to WISCO pursuant to this Section 3.15, or from any
corresponding special allocation of income under Section 3.7(h), shall be
disregarded.
(d) If G-P purchases WISCO's Interest in the Company pursuant to
Section 7.2(b) hereof, or if a Voluntary Dissolution Event Without WISCO's
Consent occurs, then the Company shall distribute to WISCO an amount of money
equal to the lesser of the following two amounts: (i) the amount of federal and
------
state income tax liability that WISCO actually incurred and paid (either
directly or as an offset against a tax refund or overpayment of tax) as a result
of the income and/or gain it recognized on the sale of its Interest to G-P (or
an Affiliate of G-P) pursuant to Section 7.2(b) or Section 8.5(b) hereof, or
upon the receipt of distributions in liquidation of its Interest pursuant to
Section 8.2 hereof, or (ii) the amount of federal and state income tax liability
that WISCO would have incurred on the sale of its Interest to G-P (or an
Affiliate of G-P), or upon the receipt of distributions in liquidation of its
Interest, if the income or gain recognized from such sale or liquidation were an
amount equal to the excess of (x) the aggregate Built In Gain in all of the
WISCO Contributed Assets over (y) any such Built In Gain previously recognized
by WISCO. For purposes of clause (y) of the preceding sentence, the following
items shall be treated as recognized Built In Gain: (1) any gain actually
recognized by WISCO from action taken by the Company with respect to the Company
Debt if such action would give rise to a distribution obligation under Section
3.15(b) and (2) any Built In Gain in WISCO Contributed Assets consisting of
inventory or accounts receivable (whether or not recognized). For purposes of
this Section 3.15(d), in computing the amount of income and/or
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gain recognized by WISCO on the sale its Interest pursuant to Section 7.2(b) or
Section 8.5(b) hereof, or upon the receipt of distributions in liquidation of
its Interest pursuant to Section 8.2 hereof, there shall be included in the
amount realized by WISCO the entire amount of Company Debt (including for this
purpose the Permanent Company Debt) for which WISCO "bears the economic risk of
loss" within the meaning of Section 1.752-2 of the Regulations immediately
before such sale or liquidation, regardless of whether the indemnity agreement
or other arrangement causing WISCO to "bear the economic risk of loss" remains
in effect after such sale or liquidation. The Company shall distribute to WISCO
the amount determined in this Section 3.15(d) within 10 days after WISCO has
demonstrated to the Company's reasonable satisfaction the amount to be
distributed. If, following a Voluntary Dissolution Event Without WISCO's
Consent, the Company does not have sufficient funds to make the distribution to
WISCO required under this Section 3.15(d), G-P shall pay WISCO the amount of any
shortfall.
(e) If any distribution to WISCO pursuant to this Section 3.15 is
smaller than it otherwise would have been because the event triggering the
Company's obligation to make the distribution reduced, eliminated, or prevented
the creation of or addition to a net operating loss carryover, capital loss
carryover, tax credit carryover, or other tax attribute of WISCO (collectively,
a "WISCO Tax Attribute"), then the Company shall distribute to WISCO (within 10
days after WISCO has demonstrated to the Company's reasonable satisfaction the
amount to be distributed) an amount equal to any actual increase in WISCO's
federal and state income tax liability in one or more prior or subsequent
taxable years of WISCO, but only to the extent that such increased liability is
attributable to the decrease in such WISCO Tax Attribute.
(f) Upon the occurrence of an event requiring a distribution to WISCO
under Section 3.15(b) or (d), the amount of such distribution shall be increased
pursuant to this Section 3.15(f) if WISCO has theretofore incurred and paid
(either directly or as an offset against a tax refund or overpayment of tax),
and has not been indemnified by the Company pursuant to Section 3.15(a) (due to
the $22 million limit), federal and/or state income tax liabilities resulting
from the allocation to WISCO of Built In Gain in the WISCO Contributed Assets
upon the Company's sale or other disposition of all or any part of such assets.
The amount of the increased distribution, if any, under this Section 3.15(f)
shall be determined by multiplying (i) the federal and/or state income tax
liabilities actually incurred and paid by WISCO (either directly or as an offset
against a tax refund or overpayment of tax) from asset sales or other
dispositions by the Company to the extent that such liabilities were not
indemnified by the Company under Section 3.15(a) by reason of the $22 million
limit times (ii) the "Built In Gain Percentage." For purposes of this Section
-----
3.15(f), the "Built In Gain Percentage" in the case of a distribution to WISCO
pursuant to Section 3.15(b) is the percentage obtained by dividing (i) the
income or gain actually recognized by WISCO from action taken by the Company
with respect to the Company Debt or the Permanent Company Debt if such action
would give rise to a distribution obligation under Section 3.15(b) by (ii) the
aggregate Built In Gain in all of the WISCO Contributed Assets. In the case of
a distribution to WISCO pursuant to Section 3.15(d), the "Built In Gain
Percentage" is 100%.
(h) Notwithstanding anything to the contrary in this Section 3.15, no
distribution shall be made to WISCO pursuant to this Section 3.15 prior to the
day after the
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second anniversary of the Closing Date. If a distribution otherwise would have
been due to WISCO under this Section 3.15 before the second anniversary of the
Closing Date, the amount of the distribution shall be increased by an amount
computed like interest at the prime rate published in the "Money Rates" table
(or any successor thereto) of The Wall Street Journal from time to time from the
date such distribution otherwise would have been due.
(i) For purposes of applying this Section 3.15, the Company's
adjusted basis for federal and state income tax purposes in the stock of
Wisconsin Tissue de Mexico, S.A. de C.V. immediately after the contribution of
such stock to the Company shall be increased by the amount of any intercompany
loss with respect to such stock recognized by the CSK Group as a result of the
contribution. WISCO shall inform the Company of the amount of any such
recognized loss on or before September 15, 2000, and shall inform the Company of
any adjustments to the amount of such recognized loss promptly after any such
adjustment is made (whether by the CSK Group or by the Internal Revenue
Service).
Section 3.16 Sharing of Company Tax Benefits.
-------------------------------
(a) (i) The Members believe that the contribution of the WISCO
Business constitutes a nonrecognition transaction pursuant to Section 721(a) of
the Code, and the Members and the Company shall report and otherwise treat the
transfer of the WISCO Contributed Assets to the Company as solely a
nonrecognition transaction pursuant to Section 721(a) of the Code on all
relevant tax returns and reports unless there is a Final Determination to the
contrary or CSK receives a Tax Opinion to the contrary. In addition, unless
there is a Final Determination to the contrary or CSK receives a Tax Opinion to
the contrary, the Members and the Company agree to treat any excess of the
Special Distribution over WISCO's "allocable share" of the Company Debt (within
the meaning of Regulations Section 1.707-5(b)), and any excess of the Special
Distribution over WISCO's "allocable share" of the Permanent Company Debt
(within the meaning of Regulations Section 1.707-5(b)), as reimbursements of
capital expenditures incurred by WISCO with respect to the WISCO Contributed
Assets during the two-year period prior to the Closing Date to the extent
permitted by Regulations Section 1.707-4(d). If CSK receives a Tax Opinion or,
prior to the eighth anniversary of the Closing Date, there is a Final
Determination that the transfer of the WISCO Business to the Company constituted
a sale to the Company (in whole or in part) for federal income tax purposes,
then WISCO and G-P shall jointly determine the change in the Company's adjusted
basis for federal income tax purposes in the WISCO Contributed Assets (such
change being referred to herein as the "Sale Step-Up").
(ii) If the Company is dissolved because of an Involuntary
Dissolution Event and WISCO recognizes taxable income and/or gain resulting from
the receipt of liquidating distributions pursuant to Section 8.2 hereof or upon
the sale of its Interest pursuant to Section 8.5 hereof, then WISCO and G-P
shall jointly determine the change, if any, in the Company's (or G-P's) adjusted
basis for federal income tax purposes in the WISCO Contributed Assets (such
change being referred to herein as the "Involuntary Dissolution Step-Up," and
together with the Sale Step-Up, the "Step-Up").
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(b) Within 10 days after G-P or an Affiliate of G-P files any federal
or state income tax return (including for this purpose any amended return or
claim for refund) with the Internal Revenue Service or the applicable state
income tax authority, G-P shall pay to WISCO an amount equal to one-half of the
net income tax benefit to G-P or the Affiliate reflected on such return to the
extent that such benefit is attributable to the Step-Up. In the case of any tax
return described in the preceding sentence in which a net operating loss or a
net capital loss is reported, the net income tax benefit attributable to the
Step-Up shall be determined as if each deduction or recognized loss of G-P (or
its Affiliate) claimed on such return were used in proportion to (i) the total
amount of deductions or losses claimed on such return before creating any net
operating loss or net capital loss, divided by (ii) the total amount of
deductions or losses claimed on such return (taking into account the amount of
deductions and losses resulting in a net operating loss or net capital loss for
the year). Any deduction resulting from a net operating loss carryover, and any
net capital loss carryover used to offset a recognized capital gain, shall be
treated as a deduction or loss attributable to the Step-Up in proportion to a
fraction, the numerator of which is any portion of a deduction or loss
attributable to the Step-Up that is deemed not to have been used previously and
the denominator of which is the total amount of the deduction resulting from the
net operating loss carryover or, as the case may be, the total amount of the
capital loss carryover that is used to offset a recognized capital gain. To the
extent that G-P or its Affiliate receives (either directly or as an offset
against a liability) a payment of interest or realizes a reduction in interest
expense as a result of filing a tax return described in the first sentence of
this Section 3.16(b), G-P shall pay to WISCO an amount computed in the same
manner as such interest on the amount described in such sentence.
(c) If CSK receives a Tax Opinion or, prior to the eighth anniversary
of the Closing Date, there is a Final Determination that the transfer of the
WISCO Business to the Company constituted a sale to the Company (in whole or in
part) for federal income tax purposes, and the WISCO Put is exercised in full
following receipt of such Tax Opinion or such Final Determination, G-P shall
continue to make payments to WISCO pursuant to Section 3.16(b) hereof until the
net income tax benefit attributable to the Step-Up is exhausted. If, however,
WISCO exercises the WISCO Put (in whole or in part) prior to CSK's receipt of a
Tax Opinion or prior to a Final Determination that the transfer of the WISCO
Business to the Company constituted a sale to the Company (in whole or in part)
for federal income tax purposes, G-P's payment obligation under Section 3.16(b)
shall not apply to any income tax deductions or losses attributable to the Step-
Up which are claimed in any taxable year (or portion thereof, determined by pro
rating the number of days in such taxable year) of G-P (or its Affiliate) that
occurs after the first such exercise of the WISCO Put.
(d) If G-P makes a payment to WISCO under this Section 3.16 and if
WISCO and G-P jointly determine that there should have been no change in the
basis of assets or that the change was more or less than the amount they
originally determined, then (i) the amount of G-P's income tax savings
previously determined shall be redetermined to reflect the correct change (or no
change) in the basis of assets, and (ii) WISCO shall refund to G-P or G-P shall
pay to WISCO, as appropriate, the difference between the total amount previously
paid by G-P to WISCO under this Section 3.16 and the total amount that should
have been paid based on the redetermined tax savings. To facilitate the
application of this Section 3.16(d), each party shall
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promptly notify the other of any event (of which the party becomes aware) that
the party believes likely would give rise to a redetermination under this
Section 3.16(d).
Section 3.17 Permanent Company Debt.
----------------------
The Company shall refinance the Company Debt (in accordance with
Section 3.15(b)(ii)) with new non-amortizing indebtedness that remains
outstanding for an aggregate term (taking into account the initial refinancing
and any subsequent refinancings) of 30 years from the maturity date of the
Company Debt (the "Permanent Company Debt"). The principal amount of the
Permanent Company Debt shall be equal to the Company Debt plus an amount of
expenses incurred in obtaining the Permanent Company Debt (including any
refinancings thereof) that does not exceed the difference between (i) $8,000,000
in the aggregate and (ii) the amount of any borrowing expenses that were
incurred to obtain the Company Debt and added to the principal amount thereof.
After deducting such expenses, the net proceeds of the Permanent Company Debt
shall be used solely to repay in full the principal amount of the Company Debt
(or, in the case of refinancings of Permanent Company Debt, such refinanced
Debt). In accordance with Section 3.15(b)(ii), WISCO hereby agrees to cooperate
to the extent reasonably required to facilitate the obtaining of the Permanent
Company Debt, including but not limited to, executing agreements (in form and
substance reasonably satisfactory to WISCO) necessary for it to "bear the
economic risk of loss" for such debt in an amount not less than the Special
Distribution. The Company agrees that the Permanent Company Debt shall be issued
pursuant to an indenture or credit agreement that contains covenants that are
substantially similar to those contained in the G-P Member's public bond
indenture dated March 1, 1983, from G-P to Chase Manhattan Bank National
Association, as trustee, a copy of which has been provided to the WISCO Member.
Further, the G-P Member shall fully and unconditionally guarantee all
refinancings of the Company Debt or Permanent Company Debt (such guarantee to be
in substance sufficient for G-P to bear the "economic risk of loss" for such
Debt, but for the WISCO Debt Indemnity (the "G-P Guarantee")), subject to an
indemnity from WISCO on substantially the same terms as the WISCO Debt
Indemnity.
In addition, at all times that WISCO is subject to any continuing
liability under a WISCO debt indemnity (the "WISCO Indemnity Period"), the
Company agrees (and each of the G-P Member and WISCO Member agrees to cause the
Company) to abide by the following covenants:
(a) Notwithstanding Section 3.13 hereof, in the event the Company
or any of its Subsidiaries sells any assets (other than sales of inventory in
the ordinary course of its business) or incurs any indebtedness in addition to
the Permanent Company Debt, the proceeds of such sales or borrowings may not be
distributed to Members, or loaned or contributed to any Person (including,
without limitation, Subsidiaries of the Company); provided, however, that the
-------- -------
Company or any of its Subsidiaries shall be permitted to lend such proceeds to
G-P or a Subsidiary of the Company (such loan to be evidenced by a G-P note or
Company Subsidiary note, as the case may be, that is not subordinated to G-P's
or such Company Subsidiary's, as the case may be, other senior unsecured debt).
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(b) Neither the Company nor any of its Subsidiaries shall guarantee
the debt or other obligations (the "Obligations") of any other Person
(including, without limitation, Subsidiaries of the Company) other than in the
ordinary course, consistent with the past practices of either Business, except
that (i) the Company or such Subsidiary shall be permitted to guarantee the
Obligations of G-P (including, without limitation, Obligations pursuant to G-P's
senior bank credit agreement), and (ii) the Company or such Subsidiary shall be
permitted to guarantee the Obligations of other Persons, provided that, with
--------
respect to clause (ii) hereof, G-P has also guaranteed such Obligations on terms
that provide that the beneficiaries of such guarantees will exhaust their rights
and remedies against G-P before exercising any rights or remedies against the
Company or such Subsidiary, as the case may be, pursuant to its guarantee.
(c) In addition to the negative pledge provisions to be included in
the indenture or credit agreement for the Permanent Company Debt, neither the
Company nor any Subsidiary of the Company shall grant any liens or encumbrances
on any of its assets to secure Obligations of any other Person (including,
without limitation, Subsidiaries of the Company), except (i) the Company or such
Subsidiary of the Company shall be permitted to grant liens to secure
Obligations of G-P, and (ii) the Company or such Subsidiary of the Company shall
be permitted to grant liens on its assets to secure Obligations of other
Persons, provided that with respect to clause (ii), G-P has guaranteed such
--------
Obligations on terms that provide that the beneficiaries of such Obligations
will exhaust their rights and remedies against G-P before exercising any rights
or remedies with respect to the pledged assets of the Company or such Subsidiary
of the Company, as the case may be.
(d) In connection with the G-P guarantees referred to in the provisos
of clauses (b) and (c) of this section, G-P agrees to provide the WISCO Member
with the proposed form of such guarantee (which shall be the same in all
material respects as the actual guarantee entered into by G-P in connection with
the subject transaction) as soon as practicable, but in any event within five
(5) Business Days prior to G-P's execution of such guarantee.
(e) If the WISCO Debt Indemnity has terminated in accordance with its
terms, this Section 3.17 shall have no further effect.
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ARTICLE IV
MANAGEMENT
Section 4.1 General.
-------
Subject to the delegation of rights and powers provided herein, the
Board shall have the sole right to manage the business of the Company and shall
have all powers and rights necessary, appropriate or advisable to effectuate and
carry out the purposes and business of the Company. No Member, by reason of its
status as such, shall have any authority to act for or bind the Company or
otherwise take part in the management of the Company, but shall have only the
right to vote on or approve the matters specifically provided herein or in the
Delaware Act (or hereafter specified by the Board) to be voted on or approved or
determined by the Members.
Section 4.2 Board Composition.
-----------------
The Board shall consist of 5 Managers or such other number as the
Board shall determine. Each Member shall have the right to designate such
number of Managers (rounded up or down to the nearest whole number) as is in
proportion to its respective Percentage Interest; provided that the WISCO Member
shall, so long as it holds any Units in the Company, be entitled to appoint at
least one Manager to the Board. Each of CSK and G-P shall provide notice of its
initial designations of Managers in writing to the other on or prior to the
Closing Date. Each Manager shall hold office until such Manager's resignation,
removal, death or incapacity; provided, however, that if the number of Managers
that a Member is entitled to designate is reduced by reason of a change in Unit
ownership, the one or more affected Managers appointed by such Member shall
automatically cease to be Managers (if more than one, in the reverse order of
the date of their respective appointments).
Section 4.3 Term; Removal; Vacancies.
------------------------
Managers shall hold office at the pleasure of the Member that
designated them. Any Member may at any time, by written notice to the other
Members and the Company, remove (with or without cause) any Manager designated
by such Member. Subject to applicable Law and to the provisions of Section 4.2,
a Manager may not be removed except by written request of the Member that
designated the Manager. In the event a vacancy occurs on the Board for any
reason, the vacancy will be filled by the written designation of the Member that
designated the Manager creating the vacancy.
Section 4.4 Notice; Quorum.
--------------
Meetings of the Board may be called by any Manager on two Business
Days' prior written notice to all Managers stating in general the purpose or
purposes thereof; provided, however, that any Manager may waive such notice
prior to, at or after the meeting. The presence in person of a majority of the
Managers shall constitute a quorum for the transaction of business at any
meeting of the Board. Each Member shall use its reasonable efforts to ensure
that a quorum is present at any duly convened meeting of the Board and each
Member may designate
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by written notice to the others an alternate to act in the absence of any of its
previously designated Managers at any such meeting. If at any meeting of the
Board a quorum is not present, a majority of the Managers present may, without
further notice, adjourn the meeting from time to time until a quorum is
obtained.
Section 4.5 Voting.
------
(a) Each Manager shall be entitled to cast one vote on each matter
considered by the Board. Except as otherwise expressly provided by this
Agreement, the act of a majority of the Managers present at any meeting at which
a quorum is present shall constitute an act of the Board.
(b) The following matters shall require, in addition to any other
vote required by applicable Law or as otherwise provided for herein, the
affirmative vote of a majority of the Board in attendance, which majority must
include a Manager designated by the WISCO Member:
(i) except as provided in Article VIII hereof, and subject
to applicable Law, any dissolution or liquidation of the Company;
(ii) any merger, consolidation, conversion or other
reorganization involving the Company, or the sale or other disposition of all or
substantially all of the assets of the Company in one transaction or a series of
related transactions;
(iii) the admission of an additional Member except as provided
in Section 7.1; and
(iv) any amendment to or waiver or termination of, any
Ancillary Agreement, which amendment or waiver or termination would have the
effect of adversely altering the methodology for establishing the price of goods
or the cost allocation of services provided to the Company in the Ancillary
Agreements (other than the Parent Roll Supply Agreement) or adversely amend or
waive Section 4.1 of the Parent Roll Supply Agreement or terminate the Parent
Roll Supply Agreement.
(c) Any Manager, when making any determination in such capacity,
including voting or acting by consent with respect to any matter, shall be
entitled to act in his or her discretion, considering only such interests and
factors as such Manager desires, and such Manager shall have no duty or
obligation to give any consideration to any interest of, or other factors
affecting, the Company or any Member. Further, a Manager may consider and act
in accordance with the interests of the Member appointing him or her, without
regard to the other interests or factors, including any fiduciary duties, when
acting on any matter presented to the Board for determination, and to the extent
permitted by the Delaware Limited Liability Company Act, the Members hereby
eliminate and waive any and all fiduciary duties and liabilities of the Manager
and their Affiliates to the Company and any other Members.
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Section 4.6 Telephonic Meeting; Written Consents.
------------------------------------
(a) Any meeting of the Board may be held by conference telephone
or similar communication equipment so long as all Managers participating in the
meeting can hear one another. All Managers participating by telephone or similar
communication equipment shall be deemed to be present in person at the meeting.
(b) Any action to be taken by the Managers at a meeting of the
Board may be taken without such meeting by the written consent of a majority of
the Managers then in office (or such higher number of Managers as is required
take such action under the terms of this Agreement or applicable Law). Any such
written consent may be executed and given by telecopy or similar electronic
means and shall be filed with the minutes of the proceedings of the Board. If
any action is so taken by the Board by the written consent of less than all of
the Managers, prior notice of the taking of such action shall be furnished to
each Manager, which notice shall include a copy of the proposed consent, as well
as any other information provided by the Company to any Manager with such
consent (provided that the effectiveness of such action shall not be impaired by
any delay or failure to furnish such notice).
Section 4.7 Committees of the Board; Officers.
---------------------------------
(a) The Managers may, by resolution (which resolution shall have
been approved by the WISCO Manager), delegate any of the Board's powers to one
or more committees of the Board, each consisting of one or more Managers (other
than the power to take the actions specified in Section 4.5(b)). The Board, by
resolution, may adopt further procedures relating to the conduct of business by
any of the committees established by it.
(b) The Company shall have such officers as shall be appointed by
the Board, each having such powers and duties as shall be provided by resolution
of the Board. In addition, the Board may appoint, employ or otherwise cause the
Company to contract with such other Persons for the transaction of the business
of the Company or the performance of services for or on behalf of the Company as
it shall determine in its discretion from time to time. The Board may delegate
to any officer of the Company or to any such other Person such authority to act
on behalf of the Company as the Board may from time to time determine
appropriate in its discretion. The salaries or other compensation, if any, of
the officers and agents of the Company shall be fixed from time to time by the
Board. The Managers shall not be responsible for any misconduct or negligence on
the part of any officer, agent or other Person to whom authority is delegated,
provided that such Person was appointed by the Managers with reasonable care.
Section 4.8 Execution of Documents.
----------------------
No Manager (acting solely in his capacity as such) shall have any
authority to bind the Company to any third party with respect to any action
except pursuant to a resolution authorizing such action. Any Manager or officer
of the Company, or any other persons specifically authorized by the Board, may
execute any contract or other agreement or document on behalf of the Company and
may execute on behalf of the Company and file with the Secretary of State of the
State of Delaware any certificates or filings provided for in the Delaware Act.
The
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filing of the Certificate of Formation with the Secretary of State of the State
of Delaware by the authorized person therein specified is hereby ratified and
confirmed.
Section 4.9 Reliance on Documents and Reports.
---------------------------------
A Manager shall be fully protected in relying in good faith upon the
records of the Company and upon such information, opinions, reports or
statements presented to the Company by any of its other Managers, Members,
officers, employees or committees, or by any other Person, as to matters the
Manager reasonably believes are within such other Person's professional or
expert competence and who has been selected with reasonable care by or on behalf
of the Company (including, without limitation, information, opinions, reports or
statements as to the value and amount of the assets, liabilities, profits, or
losses of the Company or any other facts pertinent to the existence and amount
of assets from which distributions to Members might properly be paid). In
addition, the Managers may consult with legal counsel, accountants, appraisers,
management consultants, investment bankers and other consultants and advisors
selected by them, and reliance upon any opinion of any such Person as to matters
which the Managers reasonably believe to be within such Person's professional or
expert competence shall be full and complete protection in respect of any action
taken or suffered or omitted by the Managers hereunder in good faith and in
accordance with such opinion.
Section 4.10 Standard of Care; Indemnification.
---------------------------------
Subject to Section 4.5(c), in carrying out his duties, a Manager or
officer of the Company shall not be liable to the Company or to any Member for
any actions taken in good faith and reasonably believed by the Manager or
officer to be in, or not opposed to, the best interests of the Company Group, or
for errors of judgment, neglect or omission, including any losses sustained,
liabilities incurred, or benefits not derived by Members in connection with any
action or inaction of the Manager, provided, however, that a Manager or officer
shall be liable for his willful misconduct or gross negligence.
(a) Each Manager shall, and each officer at the discretion of the
Board may (as so indemnified, an "Indemnitee") be indemnified and held harmless
by the Company from and against any and all losses, claims, damages,
liabilities, expenses (including legal fees and disbursements), judgments,
fines, settlements and all other amounts arising from any and all claims,
demands, actions, suits or proceedings, civil, criminal, administrative or
investigative, in which the Indemnitee may be involved, or threatened to be
involved, as a party or otherwise by reason of his status as a Manager or
officer, or his management of the affairs of the Company, or which relate to the
Company, its property, business or affairs, whether or not the Indemnitee
continues to be a Manager or officer at the time any such liability or expense
is paid or incurred, if the Indemnitee (i) acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
Company Group and, (ii) with respect to any criminal proceeding, had no
reasonable cause to believe his conduct to be unlawful; provided however, that
no Indemnitee shall be entitled to indemnification if it shall be finally
determined that such Indemnitee's act or omission constituted willful misconduct
or gross negligence.
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(b) Expenses (including legal fees and disbursements) incurred in
defending any proceeding shall be paid by the Company in advance of the final
disposition of such proceeding upon receipt of an undertaking by or on behalf of
the Indemnitee to repay such amount if it is ultimately determined by a court of
competent jurisdiction that the Indemnitee is not entitled to be indemnified by
the Company as authorized hereunder.
Section 4.11 Member Action.
-------------
In the event that any matter is required to be submitted to the
Members for their approval under the terms of this Agreement or the Delaware
Act, the following provisions shall apply:
(a) The Members may vote on any such matter at a meeting to be
held at such time and place as shall be designated by the Board. Any meeting of
the Members may be held by conference telephone or similar communication
equipment so long as all Members participating in the meeting can hear one
another. All Members participating by telephone or similar communication
equipment shall be deemed to be present in person at the meeting. Members shall
be given at least three Business Days' prior notice of any meeting; provided
that any Member may waive such notice prior to, at or after the meeting. The
notice shall specify the place, date and hour of the meeting and the general
nature of the business to be transacted. Every Member entitled to vote or act on
any matter at a meeting of Members shall have the right to do so either in
person or by proxy.
(b) Each Member shall be entitled to one vote for each Unit owned
by it. At any meeting of Members, the presence in person or by proxy of Members
having the right to vote more than 50% of the Units entitled to vote at such
meeting shall constitute a quorum for the transaction of business. Except as
otherwise required by this Agreement or applicable Law, the affirmative vote of
Members having the right to cast more than 50% of the votes present at a meeting
of Members at which a quorum is present is required to approve any action
requiring the Members' approval at such meeting.
(c) Any action that may be taken at any meeting of Members may be
taken without a meeting and without prior notice if a consent in writing setting
forth the action so taken is signed by all Members. Any such written consent
may be executed and given by telecopy or similar electronic means and such
consents shall be filed with the minutes of the proceedings of the Members.
Section 4.12 Certain Transactions.
--------------------
(a) Without requirement of further consent or action of the
Members or Managers of the Company, the Company is authorized to enter into the
Joint Venture Agreement and each of the Ancillary Agreements and all other
documents and agreements to be delivered by the Company at the Closing pursuant
to the Joint Venture Agreement, to perform the Company's obligations thereunder,
and to consummate the transactions contemplated thereby, all of which actions
are approved, ratified and confirmed by the Members. Without limiting the
foregoing, it is understood and agreed that, pursuant to the Management
Agreement (as defined in the Joint
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Venture Agreement) G-P shall, subject to the authority of the Board, be
responsible for the management and operations of the Company.
(b) Notwithstanding anything herein to the contrary, prior to
agreeing to terminate any Ancillary Agreement (other than the Parent Roll Supply
Agreement, which may not be terminated at any time that WISCO is a Member of the
Company without the WISCO Manager's consent thereto), the Board must make a good
faith determination that it no longer requires the services provided by G-P in
such Ancillary Agreement.
ARTICLE V
ACCOUNTING, BOOKS AND RECORDS
Section 5.1 Fiscal Year.
-----------
The fiscal year and fiscal periods of the Company shall be the same as
the fiscal year and fiscal periods of G-P, as the same may be changed or
modified from time to time. The G-P Member shall give the WISCO Member prompt
notice of any material change in the fiscal year or fiscal periods of G-P.
Section 5.2 Books and Records.
-----------------
The Company shall keep at its principal executive offices books and
records typically maintained by Persons engaged in similar businesses and which
shall set forth a true, and complete account of the Company Business and affairs
of the Company Group in all material respects. Such books and records shall be
kept in accordance with GAAP in a manner reasonably designed to provide such
information as well as permit preparation by Members of their Federal and State
tax returns and to calculate EBITDA of the Company. Each of the Members and
their respective authorized representatives (and with respect to the G-P Books
the WISCO Member) shall have the right, at all reasonable times and upon
reasonable advance written notice to the Company, at such Member's expense, to
inspect, audit and copy the books and records of the Company Group (and with
respect to the G-P Books the WISCO Member) for any purpose reasonably related to
the Member's interests as a Member of the Company. A Member requesting any such
access to books and records shall reimburse the Company or G-P, as the case may
be, for any costs reasonably incurred by it in connection therewith.
Section 5.3 Auditors.
--------
The CPA Firm of the Company shall be the same firm used by G-P, as
such CPA Firm may be changed from time to time so long as it is an auditing firm
of national standing.
Section 5.4 Reporting.
---------
The Company shall use reasonable commercial efforts to deliver to each
Member (i) prior to each fiscal quarter, a quarterly forecast of the results of
operations of the Company
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Group for such quarter, and, as soon as practicable, any material changes to
such forecast; (ii) within 15 days after the close of each fiscal quarter,
estimated financial statements for the Company Group; (iii) within 30 days after
the close of each fiscal quarter, an Unaudited Balance Sheet, Statement of
Income and Statement of Cash Flows for the Company Group, together with the
notes related thereto; and (iv) within 60 days after the close of each Fiscal
Year, an Audited Balance Sheet, Statement of Income and Statement of Cash Flows
for the Company Group for such Fiscal Year, together with the notes related
thereto. The Members acknowledge and agree that the Members shall have no
recourse against the Company or each other in the event the forecast is
incorrect and that no Member shall be entitled to rely on such forecast for any
purpose.
Section 5.5 Banking.
-------
All funds of the Company received from any and all sources shall be
deposited in the Company's name in such separate checking or other such accounts
as shall be determined by the Board. In connection with the maintenance of such
bank accounts, the Board shall designate those individuals who will have
authority to write checks or otherwise disburse funds from such bank accounts on
behalf of the Company in connection with its activities. Nothing contained
herein shall be construed to limit the ability of the Company to obtain and
utilize cash management services pursuant to the Management Agreement, as
defined in the Joint Venture Agreement.
Section 5.6 Tax Return Information.
----------------------
The Company shall prepare all federal, foreign, state and local income
tax returns that the Company is required to file. Within 120 days following the
close of each Fiscal Year, the Company shall send or deliver to each Person that
was a Member at any time during such year such tax information as shall
reasonably be required for the preparation by such Person of its federal,
foreign, state and local income and other income tax returns.
Section 5.7 Delegation of Responsibility for Accounting and Reports.
-------------------------------------------------------
Subject to the provisions of Section 5.3, the Board may cause the
Company to contract with any other Person for the provision of any of the
accounting, cash management and tax services required under Article III or this
Article V and may pay reasonable compensation for such services.
ARTICLE VI
CONFIDENTIALITY
Section 6.1 Confidentiality Obligation.
--------------------------
The WISCO Member (and, in the case of Section 6.1(c) below, the
Company) shall use (and shall ensure that each of its Affiliates shall use) all
reasonable efforts to keep confidential (and to ensure that its officers,
employees, agents and professional and other advisers keep confidential) the
following ("Confidential Information"):
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(a) all technical information, formulae, designs, specifications,
drawings, data, manuals, instructions and other know-how relating to the
products and technical processes of the Company Group, the Company Business or
the business of any other Member;
(b) any information which the WISCO Member may have or acquire
before or after the date of this Agreement with respect to the customers,
business, assets or affairs of any G-P Group Affiliate, or any Company Group
Affiliate, resulting from:
(i) negotiating this Agreement, the Joint Venture Agreement
or any other agreement referred to in or entered into pursuant to this Agreement
or the Joint Venture Agreement;
(ii) being a Member in the Company;
(iii) appointing Managers to the Board and their exercise of
their duties; or
(iv) exercising its rights or performing its obligations
under this Agreement;
(c) any information which the Company may have or acquire before
or after the date of this Agreement in relation to the customers, business,
assets or affairs of any G-P Group Affiliate or any CSK Group Affiliate
resulting from the exercise of its rights or performance of its obligations
under this Agreement, the Joint Venture Agreement or any other agreement
referred to in or entered into pursuant to this Agreement or the Joint Venture
Agreement; or
(d) any information which such Member may have or acquire before
or after the date of this Agreement with respect to the customers, business,
assets or affairs of the Company Business.
The WISCO Member (and, in the case of Section 6.1(c), the Company) shall
not (and shall cause its Affiliates not to) disclose to any third party any
Confidential Information without the consent of the G-P Member. In performing
its obligations under this Article VI, the WISCO Member and the Company shall
(and shall cause its Affiliates to) apply no lesser confidentiality standards
and procedures than it applies generally in relation to its own confidential
information. Notwithstanding anything herein to the contrary, for purposes of
this Agreement, the term Confidential Information shall not include information
of the type described in Sections 6.2(b) and 6.2(g).
Section 6.2 Exceptions from Confidentiality Obligation.
------------------------------------------
The obligation not to disclose Confidential Information to any third
party under this Article VI does not apply to:
(a) the disclosure (subject to Section 6.3) on a `need to know'
basis to a company which is another CSK Group Member where the disclosure is for
a purpose reasonably
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incidental to this Agreement; including, without limitation, as necessary for
the performance of its obligations under any Ancillary Agreement, in which case
such company shall be subject to the confidentiality obligations of Article VI
in this Agreement;
(b) information which is independently developed by the WISCO
Member or acquired from a third party to the extent that it is acquired with the
right to disclose the same after the date hereof;
(c) the disclosure of information to the extent required to be
disclosed by law, any stock exchange regulation or any binding judgment, order
or requirement of any court or other competent authority (subject to the
obligation to consult with the G-P Member in advance and to take account of its
reasonable requirements);
(d) disclosure of information to lenders and rating agencies;
(e) the disclosure of information to any tax authority to the
extent reasonably required for the purposes of the tax affairs of the WISCO
Member concerned or any Member of its Group;
(f) the disclosure (subject to Section 6.3) in confidence to the
WISCO Member's professional advisers of information reasonably required to be
disclosed for a purpose reasonably incidental to this Agreement; or
(g) information which becomes within the public domain (otherwise
than as a result of a breach of Article VI).
Section 6.3 Employees, Agents and Advisers.
------------------------------
The WISCO Member shall inform (and shall ensure that each of its
Subsidiaries or Affiliates shall inform) any officer, employee or agent or any
professional or other adviser advising it in relation to the matters referred to
in this Agreement, or any other Person to whom it provides Confidential
Information, that such information is confidential and shall instruct them (i)
to keep it confidential and (ii) not to disclose it to any third party (other
than those persons to whom it has already been disclosed in accordance with the
terms of this Agreement). The disclosing Member is responsible for any breach
of this Article VI by the person to whom the Confidential Information is
disclosed.
Section 6.4 Return of Confidential Information.
----------------------------------
If the Company dissolves and terminates, either the WISCO Member or
the G-P Member may by notice to any other Member require the other Member to
destroy or return the first Member's (but not the Company's) Confidential
Information. In addition, if at any time either the WISCO Member or the G-P
Member shall cease directly or indirectly to be a Member, the other Member may,
by notice to the first Member, require the first Member to destroy or return the
other Member's Confidential Information. If so, the first Member shall (and
shall ensure that its Affiliates and its officers and employees shall):
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(a) destroy or return all documents containing Confidential
Information which have been provided by or on behalf of the Member demanding the
return of Confidential Information; and
(b) destroy or return any copies of such documents and any
document or other record (including in electronic form) reproducing, containing
or made from or with reference to the Confidential Information
(except, in each case, for a record of any submission to or filings with
governmental, tax or regulatory authorities or papers required for a Member's
board or other corporate records or documents required in connection with
litigation). The first Member shall return or destroy the Confidential
Information as soon as practicable after receiving notice and, in the case of
destruction, shall provide a certificate of an officer of that Member confirming
that destruction.
(c) The provisions of Section 6.4(a) shall not apply in the event
of a dissolution and termination in which the Board has expressed its rights
under Section 8.3(a) hereof.
Section 6.5 Survival After Termination.
--------------------------
The provisions of this Section 6.5 shall survive the dissolution and
termination of the Company and any Transfer of a Member's Units. If either the
WISCO Member or the G-P Member shall cease to be a Member following a Transfer
of Units pursuant to this Agreement, then:
(a) the term Confidential Information for the purposes of this
Article VI shall extend to and include all Confidential Information held by CSK
Group Members or G-P Group Members (as the case may be) about the other
(excluding the Company) and the confidentiality obligations set out in Section
6.1 shall (subject to Section 6.2) thereafter apply to each CSK Group Member
ceasing to be a Member (as the case may be) as if it were a Member; and
(b) the provisions of Section 6.4 relating to return or
destruction of Confidential Information shall similarly apply to such extended
application of the term Confidential Information, pursuant to Section 6.5(a), as
if it were Confidential Information of the remaining Member.
ARTICLE VII
TRANSFER OF UNITS; PUT AND CALL RIGHTS
Section 7.1 General.
-------
Except as permitted by Section 7.2, or with the prior written consent
of all other Members, no Member will directly or indirectly (i) sell, assign,
pledge, encumber, hypothecate, dispose of or otherwise transfer (collectively,
"Transfer") any Units, or any interest in any Units, (ii) agree to any such
Transfer or (iii) permit or suffer any such interest to be subject to Transfer,
directly or indirectly, by merger or other operation of law, agreement or
otherwise. Any
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purported Transfer in any manner not permitted by this Article VII shall be null
and void and shall not be recognized or given effect by the Company or any
Member; provided, however, that a change of control of CSK or G-P shall not be
deemed to be a Transfer.
Section 7.2 Put and Call Rights.
-------------------
(a) At any time on or after the third anniversary of the Closing
Date, the WISCO Member shall have a right to sell to G-P, or to obligate the
Company to redeem, in WISCO's sole discretion, all or any portion of the WISCO
Member's Units (the "WISCO Put") at a purchase or redemption price, as the case
may be, equal to the Formula Price multiplied by a fraction, the numerator of
which shall be the number of Units being sold or redeemed and the denominator of
which shall be the total number of Units of the Company then outstanding (the
"Put Price"); provided, however, that WISCO shall not have the right to exercise
the WISCO Put on more than (3) three occasions.
(b) At any time commencing after the tenth anniversary of the
Closing, G-P shall have the right to purchase, and the WISCO Member shall be
obligated to sell, all but not less than all of the Units owned by the WISCO
Member (the "G-P Call") at a purchase price equal to the Formula Price
multiplied by a fraction, the numerator of which shall be the number of Units
then owned by the WISCO Member and the denominator of which shall be the total
number of Units of the Company then outstanding (the "Call Price").
(c) In the event the WISCO Put or the G-P Call (either being
referred to as "Option Right") is exercised, the following procedure shall be
applicable:
(i) The Member exercising its Option Right shall deliver a
written notice to the other Member and the Company (the "Exercise Notice").
(ii) The Exercise Notice shall: (a) specify the identity of
each Member electing to exercise an Option Right; (b) specify the number of
Units to be sold, purchased or redeemed pursuant to such Exercise Notice; and
(c) be executed by a duly authorized officer of such Member.
(iii) In the event of exercise of a WISCO Put, the G-P Member
or the Company, as specified in any Exercise Notice regarding such WISCO Put,
shall purchase and the WISCO Member shall sell the Units specified in the
Exercise Notice. In the event of exercise of the G-P Call, the WISCO Member
shall sell and the G-P Member shall purchase all Units owned by the WISCO
Member.
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(iv) The closing of a Transfer pursuant to exercise of an
Option Right (an "Option Closing") shall take place at a time and place to be
designated by mutual agreement between the Members; provided, however, that the
date designated for the Option Closing shall not be more than ten (10) Business
Days from the date of receipt by the Company of the Exercise Notice. At the
Option Closing, the WISCO Member shall deliver to the Company certificates
representing the Units subject to the Exercise Notice (free and clear of all
liens, charges and encumbrances) and the Company or the G-P Member, as
applicable, shall pay to the WISCO Member the Put Price or the Call Price, as
applicable, by cashier's or certified check payable to any such WISCO Member, or
by wire transfer of immediately available funds to an account designated by such
WISCO Member.
(v) At the Option Closing, the WISCO Member shall execute
and deliver such documents as reasonably requested by the G-P Member to fully
transfer title to the Units subject to such Exercise Notice, including documents
representing and warranting good and marketable title to such Units and that
such Units are owned free and clear of all liens, charges and encumbrances.
Section 7.3 Member Transfers.
----------------
(a) Upon not less than fifteen (15) days advance written notice to
the Company and effective as of the first day of the next calendar month, any
Member may Transfer any of the Units held by it to any of its Affiliates and
such transferee shall become a Member hereunder (an "Affiliate Member"),
provided that (i) such transferee shall execute a counterpart of this Agreement,
agreeing thereby to be bound by all of the provisions hereof and (ii) in the
event that such transferee would at any time thereafter cease to be an Affiliate
of the CSK Group or the G-P Group, as the case may be, then the Units so
transferred to such former Affiliate shall be Transferred back to CSK or G-P, or
an Affiliate of their respective Groups, as applicable, prior to such CSK Group
Affiliate or G-P Group Affiliate ceasing to be such (and if such transfer back
does not occur prior to the Affiliate ceasing to be such, the transaction which
results in the transferee ceasing to be an Affiliate shall be deemed a Transfer
which is subject to the restrictions of this Section 7.3).
(b) Notwithstanding anything herein to the contrary, G-P or an
Affiliate Member of G-P may transfer its Units or interests in its Units to any
third party at any time after the tenth anniversary of the date hereof, provided
that such transferee shall execute a counterpart of this Agreement, agreeing
thereby to be bound by all of the provisions hereof.
Section 7.4 Retirement.
----------
Any Member that Transfers all of its Units pursuant to the terms
hereof shall be deemed to have retired and to have ceased to be a Member as of
the effective date of such Transfer.
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<PAGE>
ARTICLE VIII
DISSOLUTION AND WINDING UP; BUY OUT RIGHTS
Section 8.1 Dissolution.
-----------
Subject to Section 8.5 hereof, the Company may, at the sole discretion
of the Board, be dissolved and its affairs wound up and terminated upon the
first to occur of the following:
(a) the unanimous consent of all Members to dissolve the Company,
it being expressly understood that Section 18-801(a)(3) of the Delaware Act
shall not apply to the Company;
(b) the sale or other disposition of all or substantially all of
the assets of the Company in one transaction or a series of related
transactions;
(c) the date the WISCO Member or the CSK Group holds less than 5%
of the outstanding Units; and
(d) the occurrence of an event causing a dissolution of the
Company under Section 18-801 of the Delaware Act, unless the Company is
continued as permitted under the Delaware Act.
Section 8.2 Winding Up.
----------
If the Company is dissolved pursuant to Section 8.1, this Agreement
shall remain in full force and effect and shall continue to govern the rights
and obligations of the Members and Managers and the conduct of the Company
during the period of winding up the Company's affairs. The Board shall apply and
distribute the assets of the Company in the following order of priority (subject
to Section 8.3), unless otherwise required by mandatory provisions of applicable
law:
(a) to satisfy the Company Debt or the Permanent Company Debt;
(b) to other creditors, including Members who are creditors, to
the extent otherwise permitted by law, in satisfaction of the liabilities of the
Company (whether by payment, by the establishment of reserves of cash or other
assets of the Company for contingent liabilities in amounts, if any, determined
by the Board to be appropriate for such purposes or by other reasonable
provision for payment), other than liabilities for distributions to Members and
former Members under Sections 18-601 or 18-604 of the Delaware Act;
(c) to Members and former Members in satisfaction of liabilities
for distributions under 18-601 or 18-604 of the Delaware Act; and
(d) thereafter to the Members in proportion to the positive
balances of their respective Capital Accounts (determined after allocating all
income, gain, deduction, loss and
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<PAGE>
other like items arising in connection with the liquidation of Company assets
and otherwise making all Capital Account adjustments required under the
definition of Capital Account);
Section 8.3 In-Kind Distributions.
---------------------
In the event of a dissolution or winding up of the Company, the Board
shall, to the extent permitted by law, (a) distribute to the G-P Member the
amount required by Section 8.2 in kind, from the Company's assets, and to the
WISCO Member the amount required by Section 8.2 in cash, or (b) if the Board
determines (which determination must include the affirmative vote or consent of
the WISCO Manager) that a prompt sale of part or all of the Company's assets
would be impractical or would cause undue loss to the value of Company assets,
the Board may defer for a reasonable time (up to three (3) years) the
liquidation of any assets, except those necessary to timely satisfy liabilities
of the Company (other than those to Members), and/or may distribute to the
Members, in lieu of cash, as tenants in common, undivided interests in such
Company assets as the Board deems not suitable for liquidation. Any such in-kind
distributions shall be made in accordance with the priorities set forth in
Section 8.2 as if cash equal to the Fair Market Value of the distributed assets
were being distributed. Any such distributions in kind shall be subject to such
conditions relating to the disposition and management of such properties as are
reasonable and equitable and to any joint operating agreements or other
agreements governing the operation of such properties at such time. The
liquidating distributions to be made pursuant to this section shall be made
within the time set forth in Regulations Section 1.704-1(b)(2)(ii)(b)(2).
Section 8.4 Cancellation of Certificate of Formation.
----------------------------------------
Upon the completion of the distribution of Company Property as
provided in Sections 8.2 and 8.3, the Company shall be terminated, and the Board
shall cause the cancellation of the Certificate of Formation and all
qualifications of the Company as a foreign limited liability company and shall
take such other actions as may be necessary to terminate the Company.
Section 8.5 Buy Out Rights.
--------------
In the event of the occurrence of any of the events described in
Section 8.1, G-P shall have the option to either (a) cause the dissolution and
wind up the Company pursuant to this Article VIII; or (b) cause a Subsidiary of
G-P to purchase the Units held by the WISCO Member at a purchase price
calculated by multiplying the Formula Price times the WISCO Member's Percentage
Interest, in which case the Company shall not be dissolved; or (c) to the extent
legally permissible, take no action and continue the existence of the Company.
Such option shall be exercised, and notice of such exercise provided to the
WISCO Member, within 120 days after the occurrence of any of such events
described in Section 8.1.
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<PAGE>
ARTICLE IX
CERTIFICATES EVIDENCING UNITS
Section 9.1 Certificates.
------------
The Units owned by each Member shall be evidenced by one or more
Certificates. Each Certificate shall be executed by such Managers or such
officers of the Company as the Board shall designate.
Section 9.2 Register.
--------
The Company shall keep or cause to be kept a register in which,
subject to such regulations as the Board may adopt, the Company will provide for
the registration of Units and the registration of Transfers of Units. Upon
surrender for registration of Transfer of any Certificate, and subject to the
further provisions of this Section 9.2 and Section 9.3 and the limitations on
Transfer contained elsewhere in this Agreement, the Company will cause the
execution, in the name of the registered holder or the designated transferee, of
one or more new Certificates, evidencing the same aggregate number of Units as
did the Certificate surrendered or such other number as is appropriate in the
event such Transfer is pursuant to exercise of an Option Right. Every
Certificate surrendered for registration of Transfer shall be duly endorsed, or
be accompanied by a written instrument of Transfer in form satisfactory to the
Board, duly executed by the registered holder thereof or such holder's
authorized attorney.
Section 9.3 New Certificates.
----------------
The Company shall issue a new Certificate in place of any Certificate
previously issued if the record holder of the Certificate (i) makes proof by
affidavit, in form and substance satisfactory to the Board, that a previously
issued Certificate has been lost, destroyed or stolen, (ii) requests the
issuance of a new Certificate before the Company has received notice that the
Certificate has been acquired by a purchaser for value in good faith and without
notice of an adverse claim, (iii) if requested by the Board, delivers to the
Company a bond, in form and substance satisfactory to the Board, with such
surety or sureties and with fixed or open liability as the Board may direct, to
indemnify the Company, as registrar, against any claim that may be made on
account of the alleged loss, destruction or theft of the Certificate, and (iv)
satisfies any other reasonable requirements imposed by the Board.
Section 9.4 Interest as a Security.
----------------------
A Unit in the Company evidenced by a Certificate shall constitute a
security for all purposes of Article 8 of the Uniform Commercial Code
promulgated by the National Conference of Commissioners on Uniform State Laws,
as in effect in Delaware or any other applicable jurisdiction. Delaware law
shall constitute the local law of the Company's jurisdiction in its capacity as
the issuer of Units.
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<PAGE>
Section 9.5 Legends.
-------
A copy of this Agreement shall be kept with the records of the
Company. Each of the Members hereby agrees that each outstanding Certificate
shall bear a conspicuous legend reading substantially as follows:
The Units represented by this Certificate have not been
registered under the Securities Act of 1933 or applicable
state and other securities laws and may not be sold,
pledged, hypothecated, encumbered, disposed of or otherwise
transferred without compliance with the Securities Act of
1933 or any exemption thereunder and applicable state and
other securities laws. The Units represented by this
Certificate are subject to the restrictions on transfer and
other provisions of an Operating Agreement dated as of
October 4, 1999 (as amended from time to time, the
"Agreement") by and among Company and its Members, and may
not be sold, pledged, hypothecated, encumbered, disposed of
or otherwise transferred except in accordance therewith. A
copy of the Agreement is on file at the principal executive
offices of the Company.
ARTICLE X
MISCELLANEOUS
Section 10.1 Notices.
-------
All notices and other communications required or permitted by this
Agreement shall be in writing and shall be delivered by personal delivery, by
nationally recognized overnight courier service, by facsimile, by first class
mail or by certified or registered mail, return receipt requested, addressed, to
any Member at its address as set forth on Schedule 1 (as the same may be updated
----------
from time to time at the direction of such Member) or to the Company at 55 Park
Place, Atlanta, Georgia 30303 (or to such other address as the Company shall
have designated to each of the Members by written notice given in the manner
hereinabove set forth). Notices shall be deemed given one day after sent, if
sent by overnight courier; when delivered and receipted for, if hand delivered;
when received, if sent by facsimile or other electronic means or by first class
mail; or when receipted for (or upon the date of attempted delivery where
delivery is refused or unclaimed), if sent by certified or registered mail,
return receipt requested.
Section 10.2 Amendment; Waiver.
-----------------
Any provision of this Agreement may, (i) in the case of an amendment,
be amended if, and only if, such amendment is in writing and signed by each
Member, or (ii) in the case of a waiver, be waived if such waiver is contained
in a writing, and signed by the party against whom the waiver is to be
effective. No failure or delay by any party in exercising any
-43-
<PAGE>
right, power or privilege hereunder shall operate as a waiver thereof nor shall
any single exercise thereof preclude any other or further exercise thereof or of
any other right, power or privilege. Except as otherwise provided rights and
remedies herein provided shall be cumulative and not exclusive of any rights or
remedies provided by law.
Section 10.3 Assignment.
----------
Except as otherwise expressly provided herein, no party to this
Agreement may assign any of its rights or obligations under this Agreement
without the prior written consent of the other parties hereto.
Section 10.4 Entire Agreement.
----------------
This Agreement, the Joint Venture Agreement and the Ancillary
Agreements (including the schedules and exhibits hereto and thereto) contain the
entire agreement among the parties hereto with respect to the subject matter
hereof and supersede all prior agreements and understandings, oral or written,
with respect to such matters.
Section 10.5 Public Disclosure.
-----------------
Each Member hereby agrees that, except as may be required to comply
with the requirements of any applicable Laws or the rules and regulations of any
exchange upon which its securities (or the securities of one of its Affiliates)
are traded, it shall not make or permit to be made any press release or similar
public announcement or communication concerning the execution or performance of
this Agreement unless specifically approved in advance by all parties hereto,
which approval shall not be unreasonably withheld, conditioned or delayed. In
the event that, in the absence of such approval, legal counsel for any party is
of the opinion that a press release or similar public announcement or
communication is required by Law or by the rules and regulations of any exchange
on which such party's securities (or the securities of one of its Affiliates)
are traded, then such party may issue a public announcement limited solely to
that which legal counsel for such party advises is required under such Law or
such rules and regulations (and the party making any such announcement shall
provide a copy thereof to the other parties for review before issuing such
announcement).
Section 10.6 Parties in Interest.
-------------------
This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective successors and permitted assigns. Nothing in
this Agreement, express or implied, is intended to confer upon any Person other
than the Company, WISCO, G-P or their respective successors or permitted
assigns, any rights or remedies under or by reason of this Agreement. The
Company is executing this Agreement as a party, and this Agreement shall
constitute a contract among the Members and between the Company and each of the
Members.
Section 10.7 Governing Law; Submission to Jurisdiction; Selection of
-------------------------------------------------------
Forum.
- -----
This Agreement shall be governed by, and construed and enforced in
accordance with the laws of the State of Delaware without giving effect to any
choice of law provision or
-44-
<PAGE>
rule (whether of the State of Delaware or any other jurisdiction) that would
cause the application of the Laws of any jurisdiction other than the internal
Laws of the State of Delaware. Each of the Parties agrees that any legal action
between the parties, or any of them, relating to this Agreement, the
interpretation of the terms hereof or the performance hereof or the consummation
of the transactions contemplated hereby, whether in tort or contract or at law
or in equity, shall exclusively be brought in a Federal or State Court located
in New Castle County, Delaware, having jurisdiction of the subject matter
thereof, and each party irrevocably (i) consents to personal jurisdiction in any
such Federal or State Court, (ii) waives any objection to laying venue in any
such action or proceeding in any such Court, (iii) waives any immunity from suit
and any objection that any such Court is an inconvenient forum or does not have
jurisdiction over any party hereto and (iv) agrees that service of complaint or
other process may be made by certified or registered mail addressed to such
party at its address determined in accordance with Section 10.1 of this
Agreement.
Section 10.8 Counterparts.
------------
This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, and all of which shall constitute one and the
same Agreement.
Section 10.9 Severability.
------------
The provisions of this Agreement shall be deemed severable and the
invalidity or unenforceability of any provision shall not affect the validity or
enforceability of the other provisions hereof. If any provision of this
Agreement, or the application thereof to any Person or any circumstance, is
invalid or unenforceable (i) a suitable and equitable provision shall be
substituted therefor in order to carry out, so far as may be valid and
enforceable, the intent and purpose of such invalid or unenforceable provision
and (ii) the remainder of this Agreement and the application of such provision
to other Persons or circumstances shall not be affected by such invalidity or
unenforceability, nor shall such invalidity or unenforceability affect the
validity or enforceability of such provision, or the application thereof, in any
other jurisdiction.
Section 10.10 Equitable Relief.
----------------
Each party acknowledges that money damages would be inadequate to
protect against any actual or threatened breach of this Agreement by any party
and that each party shall be entitled to equitable relief, including specific
performance and/or injunction, without posting bond or other security, in order
to enforce or prevent any violations of the provisions of this Agreement.
Section 10.11 No Agency.
---------
This Agreement shall not constitute an appointment of any party as the
agent of any other party, nor shall any party have any right or authority to
assume, create or incur in any manner any obligation or other liability of any
kind, express or implied, against, in the name or on behalf of, any other party.
Nothing herein or in the transactions contemplated by this Agreement shall be
construed as, or deemed to be, the formation of a partnership by or among
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<PAGE>
the parties hereto (provided that nothing in this Section 10.11 shall affect the
tax treatment of the Company under Article III hereof).
Section 10.12 Limitation of Liability.
-----------------------
The debts, obligations and liabilities of the Company, whether arising
in contract, tort or otherwise, shall be solely the debts, obligations and
liabilities of the Company, and no Member, Manager or officer of the Company
shall be obligated personally for any such debt, obligation or liability of the
Company solely by reason of being a Member, Manager and/or officer.
Section 10.13 Non-Exclusive Business.
----------------------
(a) Notwithstanding anything herein to the contrary, the parties
hereto agree that the Company shall not be the exclusive vehicle for G-P to
engage in the manufacture or sale of commercial tissue products or "away from
home" tissue products (the "Products"), or to engage in the Commercial Tissue
Business and that G-P shall have the right to engage in the manufacture or sale
of Products and otherwise engage in the Commercial Tissue Business, whether
directly or through other Affiliates, without regard to the Company or any
requirement that G-P make such opportunity or Commercial Tissue Business
available to the Company in any way.
(b) Notwithstanding anything herein to the contrary, the parties
hereto agree that the Company may provide to any member of the G-P Group the
right to use intangible Company Property, and such member of the G-P Group will
have no obligation to reimburse the Company for such use.
(c) In the event G-P or a G-P Affiliate uses production equipment
and machines owned by the Company to produce products for G-P or a G-P
Affiliate, all costs, revenues and profits relating to such products shall be
allocated to the Company.
(d) In the event G-P or a G-P Affiliate uses production equipment
or machines it owns that are located in facilities owned or operated by the
Company to produce products for G-P or a G-P Affiliate, G-P shall reimburse to
the Company an amount equal to the allocated overhead (including facility costs)
determined pursuant to the cost allocation methodology set forth in Exhibit B to
the Operating Support Services Agreement.
Section 10.14 Dispute Resolution.
------------------
Except as otherwise provided in this Agreement, any dispute among the
Members hereto, including disputes related to the Ancillary Agreements and the
review of G-P Books related thereto, shall be resolved by the Members through
good faith negotiations. If such dispute cannot be resolved by such negotiation
it shall be submitted to non-binding commercial arbitration pursuant to the
commercial arbitration rules then in effect of the American Arbitration
Association, before a panel of not less than three arbitrators. All costs and
expenses incurred in connection with such proceeding shall be shared equally by
the Members, however each Member shall bear the cost of its legal fees. Only
upon the conclusion of arbitration proceedings in which
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<PAGE>
a decision was rendered may the Members bring an action in connection with such
dispute in the United States District Court or the state court sitting in New
Castle County, Delaware. Each Member agrees to irrevocably submit to the
exclusive jurisdiction of such court and agrees to waive any objection to laying
venue in such court or that such court is an inconvenient forum or does not have
jurisdiction over the Member.
-47-
<PAGE>
IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as of
the date first written above.
GEORGIA-PACIFIC CORPORATION
By: /s/ Michael C. Burandt
----------------------------------------------
Name: Michael C. Burandt
Title: Senior Vice President - Packaged Products
WISCONSIN TISSUE MILLS INC.
By: /s/ William T. Tolley
----------------------------------------------
Name: William T. Tolley
Title: Senior Vice President -
Finance and Chief Financial Officer
Consented/Agreed To
By the Company as Referenced
In Section 10.6
GEORGIA-PACIFIC TISSUE, LLC
By: /s/ Michael C. Burandt
-------------------------
Name: Michael C. Burandt
Title: Manager
-48-
<PAGE>
EXHIBIT A
Form of
GEORGIA PACIFIC TISSUE COMPANY, LLC
MEMBERSHIP CERTIFICATE
This Certifies that _______________________________________________________
is a member of the above named Limited Liability Company and is entitled to the
full benefits and privileges of such membership, subject to the duties and
obligations, as more fully set forth in the Limited Liability Company Operating
Agreement.
In Witness Whereof, the Limited Liability Company has caused this
Certificate to be executed by its duly authorized members this _____________ day
of ______________, _____ and its Limited Liability Company seal to be hereunto
affixed.
<PAGE>
Schedule 1 to Operating Agreement
---------------------------------
Members of the LLC
------------------
Member Address
- ------ -------
Georgia-Pacific Corporation 133 Peachtree Street, N.E.
Atlanta, Georgia 30303
Attn: General Counsel
Wisconsin Tissue Mills Inc. c/o Chesapeake Corporation
1021 Cary Street
Richmond, Virginia 23218
Attn: General Counsel
<PAGE>
EXHIBIT 12
GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES
STATEMENTS OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
(Dollar amounts in millions)
<TABLE>
<CAPTION>
Three months ended Nine Months ended
--------------------- -----------------
October 2, Sept. 30, October 2, Sept. 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Fixed charges:
Total interest costs $ 134 $ 115 $ 354 $ 342
One-third of rent expense 7 7 20 18
----- ----- ------ -----
Total fixed charges 141 122 374 360
----- ----- ------ -----
Add (deduct):
Income before income taxes,
extraordinary item and
accounting change 448 142 1,210 376
Interest capitalized,
net of amortization 2 2 8 8
----- ----- ------ -----
450 144 1,218 384
----- ----- ------ -----
Earnings for fixed charges $ 591 $ 266 $1,592 $ 744
===== ===== ====== =====
Ratio of earnings to fixed charges 4.19 2.18 4.26 2.07
===== ===== ====== =====
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> JAN-01-2000 JAN-01-2000 JAN-01-2000
<PERIOD-END> OCT-02-1999 JUN-03-1999 APR-03-1999
<CASH> 64 47 5
<SECURITIES> 0 0 0
<RECEIVABLES> 2,420 2,328 1,368
<ALLOWANCES> 26 24 24
<INVENTORY> 1,740 1,777 1,337
<CURRENT-ASSETS> 4,410 4,332 2,802
<PP&E> 14,996 14,896 14,551
<DEPRECIATION> 8,648 8,512 8,368
<TOTAL-ASSETS> 15,469 15,352 12,806
<CURRENT-LIABILITIES> 3,953 4,394 2,716
<BONDS> 5,010 4,588 4,112
0 0 0
0 0 0
<COMMON> 153 153 150
<OTHER-SE> 3,352 3,191 2,996
<TOTAL-LIABILITY-AND-EQUITY> 15,469 15,352 12,806
<SALES> 12,785 7,256 3,407
<TOTAL-REVENUES> 12,785 7,256 3,407
<CGS> 9,545 5,313 2,531
<TOTAL-COSTS> 9,545 5,313 2,531
<OTHER-EXPENSES> 735 444 221
<LOSS-PROVISION> 3 1 0
<INTEREST-EXPENSE> 350 217 111
<INCOME-PRETAX> 1,210 762 246
<INCOME-TAX> 474 305 100
<INCOME-CONTINUING> 736 457 146
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 736 457 146
<EPS-BASIC> 0<F1> 0<F3> 0<F5>
<EPS-DILUTED> 0<F2> 0<F4> 0<F6>
<FN>
<F1> Georgia-Pacific Group EPS-Primary $3.15
The Timber Company EPS-Primary $2.30
<F2> Georgia-Pacific Group EPS-Diluted $3.07
The Timber Company EPS-Diluted $2.29
<F3> Georgia Pacific Group EPS-Primary $1.81
The Timber Company EPS-Primary $1.71
<F4> Georgia Pacific Group EPS-Diluted $1.76
The Timber Company EPS-Diluted $1.70
<F5> Georgia Pacific Group EPS-Primary $0.57
The Timber Company EPS-Primary $0.54
<F6> Georgia Pacific Group EPS-Diluted $0.56
The Timber Company EPS-Diluted $0.54
</FN>
</TABLE>
