Item 1. Business
Item 1, "Business" and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this report contains, and other periodic reports and press releases of the Company may contain, certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. General Binding Corporation ("GBC" or the "Company") intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of invoking these safe harbor provisions. These forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "forecast," "project," "plan," or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain and actual results may differ from those predicted. The Company undertakes no obligation to update these forward-looking statements in the future.
Factors which could have a material adverse effect on operations and could affect management's outlook or future prospects of the Company and its subsidiaries include, but are not limited to: a) competition within the office products, document finishing and film lamination markets; b) the effects of economic and political conditions; c) the issues associated with the restructuring of certain of GBC's operations; d) the ability of GBC's distributors to successfully market and sell GBC's products; e) the ability of GBC to obtain capital to finance anticipated operating and capital requirements; f) the availability and price of raw materials; g) dependence on certain suppliers of manufactured products; h) the effect of consolidation in the office products industry; and i) other factors indicated in GBC's registration statements and reports filed with the SEC.
General Development and Description of Business and Segment Information
GBC, incorporated in 1947, and its subsidiaries are engaged in the design, manufacture and distribution of branded office equipment, related supplies and laminating equipment and films. Between 1995 and 1998, GBC grew rapidly through a series of acquisitions. While the acquired entities contributed a significant amount of revenue to GBC, they also added significant new infrastructure and high debt levels. Further, integration of the acquisitions proved more difficult than management expected. Recognizing these issues, in 1999, the Company began implementation of a multi-phase process with the goal of returning GBC to long-term profitability. The first phase of the program included rationalization of SKU's and facilities, as well as headcount reductions. In 2000, GBC's operating results improved, and its debt levels were reduced. While the overall economic environment had a negative impact on the Company's results in 2001, GBC management continued to move forward with Phase II of the profit improvement program. In the fourth quarter of 2001, after a comprehensive six-month operational review, the Company launched its "Operational Excellence Program." This program is based upon a continuous improvement process which uses the "80/20 principles" of simplification, segmentation and intense focus. The goals of this program include: a) focusing on greater profitability and long-term revenue growth; b) streamlining and improving worldwide
infrastructure; and c) generating cash to increase financial flexibility. The program has produced positive results in 2002 and 2003 and is expected to continue with further operational and financial improvements in 2004, although there can be no assurance that such improvement will continue and to what extent. The savings from this program have helped to offset the effect of a challenging sales environment, fund investments related to new sales, marketing and product development initiatives, and reduce the Company's debt levels.
In 2003, GBC modified its segment reporting to reflect the Company's organizational changes. The changes primarily consisted of combining three of GBC's four business units into the following two new groups - Commercial and Consumer Group ("CCG") and Industrial and Print Finishing Group ("IPFG"). The CCG was created through the combination of the former Document Finishing and Office Products Groups and is responsible for marketing the Company's binding, laminating, visual display (writing boards, bulletin boards, easels, etc.), and other products for use by consumers and commercial customers. The IPFG, which is comprised of the former Films Group and what was the Automated Products division of the Document Finishing Group, targets "print-for-pay" and other finishing customers who use GBC's professional grade finishing equipment and supplies.
The Commercial and Consumer Group's major products include binding, punching and laminating equipment and related supplies, visual communications products (writing boards, bulletin boards, easels, etc.), document shredders, custom binders and folders, and desktop accessories, as well as maintenance and repair services for these products. The Industrial and Print Finishing Group's primary products include thermal and pressure-sensitive laminating films, mid-range and commercial high-speed laminators, and large-format digital print laminators. The Europe Group distributes the Commercial and Consumer Groups' products to customers in Europe. The Company's products are either manufactured in one of GBC's 14 plants located throughout the world or sourced from third parties. GBC products and services are sold directly through the Company's sales force, telemarketing personnel and internet portals, and indirectly through a network of distributors, office product superstores, wholesalers, contract/commercial stationers and other retail dealers.
The following table summarizes the percentage of revenue derived from the sale of office equipment and supplies and service for the last three fiscal years:
Office equipment
44%
45%
44%
Related supplies and service
56%
55%
56%
Financial information by business group and geographical area is included in note 13 to the consolidated financial statements.
Competition
GBC's products and services are sold in highly competitive markets. The Company believes that the principal points of competition in its markets are product and service quality, price, design and engineering capabilities, product development, conformity to customer specifications, timeliness and completeness of delivery and quality of post-sale support. Competitive conditions often require GBC to match or better competitors' prices to retain business or market share. The Company believes that it can maintain and/or improve its competitive position through continued
investment in manufacturing, quality standards, marketing and customer service and support. However, there can be no assurance that GBC will have sufficient resources to continue to make such investments or that it will be successful in maintaining its competitive position. There are no significant barriers to entry into the markets for most of GBC's products and services. Certain of GBC's current and potential competitors may have greater financial, marketing and research and development resources than GBC.
Dependence on Major Customers
No single customer accounted for more than 10% of GBC's net sales. GBC does, however, have certain major customers. The loss of, or major reduction in business from, one or more of GBC's major customers could have a material adverse effect on GBC's financial position or results of operations.
Order Backlog and Seasonal Variations
GBC's order backlog is not considered a material factor in the Company's business, nor is the business seasonal in any significant respect.
Fluctuations in Raw Material Prices
The primary materials used in the manufacturing of many of GBC's products are polyester and polypropylene substrates, wood and aluminum. These materials are available from a number of suppliers, and GBC is not dependent upon any single supplier for any of these materials. In general, GBC's gross profit may be affected from time to time by fluctuations in the prices of these materials because competitive markets for GBC's products make it difficult to pass through raw material price increases to customers. Based on its experience, GBC believes that adequate quantities of these materials will be available in adequate supplies in the foreseeable future. However, there can be no assurance that such materials will continue to be available in adequate supply in the future or that shortages in supply will not result in price increases that could have a material adverse effect on GBC's financial position or results of operations.
Dependence on Key Personnel
GBC is dependent on the continued services of certain members of its senior management team. GBC believes it could replace key personnel in an orderly fashion should the need arise; however, the loss of, and inability to attract replacements for, any of such key personnel could have a material adverse effect on GBC's financial position or results of operations.
Dependence on Certain Manufacturing Sources
GBC relies on GMP Co. Ltd. ("GMP"), in which the Company holds an equity interest of approximately 20%, as its sole supplier of many of the laminating machines it distributes. GBC has a long-term supply agreement with GMP. However, there can be no assurance that GMP will be able to perform any or all of its obligations to the Company. GMP's equipment manufacturing facility is located in the Republic of Korea, and its ability to fulfill GBC's requirements for laminating machines could be affected by Korean and other regional and worldwide economic, political and governmental conditions. Additionally, GMP has a highly leveraged capital structure and its ability to continue to obtain financing is required to ensure the orderly continuation of its operations. See the "Restructuring and Other" and the "GMP
Relationship " sections of Item 7, "Management Discussion and Analysis of Financial Condition and Results of Operations" for further discussion of GBC's investment in and relationship with GMP. Although GBC believes alternative suppliers could be found, changing suppliers for the laminating machines manufactured by GMP would require lead times of a duration that are likely to result in a disruption of supply. There can be no assurance that GBC would be able to find an alternative supplier or suppliers on a timely basis or on favorable terms. Any material disruption in GBC's ability to deliver orders for laminating machines on a timely basis could have a material adverse effect on GBC's reputation with customers and its financial position or results of operations.
Risks Associated with International Operations
GBC has significant operations outside the United States. Approximately 38% of GBC's 2003 revenues were from international sales. GBC's international operations may be significantly affected by economic, political and governmental conditions in the countries where GBC sources products or has manufacturing facilities or where its products and services are sold. In addition, changes in economic or political conditions in any of the countries in which GBC operates could result in unfavorable exchange rates, new or additional currency or exchange controls, other restrictions being imposed on the operations of GBC or expropriation of the Company's assets. GBC's operations and financial position may also be adversely affected by significant fluctuations in the value of the US dollar relative to international currencies. As discussed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", GBC's international operations benefited from a weaker U.S. dollar in 2003 compared to 2002. A strengthening of the U.S. dollar in 2004 compared to 2003 levels would have a negative impact on the Company's results.
Patents and Trademarks
Many of the equipment and supply products manufactured and/or sold by GBC and certain application methods related to such products are covered by United States and foreign patents either owned by GBC or licensed from others. Although the patents owned or licensed by GBC
are important to its business, the loss of any or all such patents would not have a significant effect on GBC's business.
The Company has registered the GBC, Quartet, Ibico, Shredmaster, VeloBind and Bates trademarks in the United States and numerous foreign countries and considers those trademarks material to its business. GBC has also registered numerous other important trademarks related to specific products in the United States and many foreign countries; however, GBC does not consider its business dependent on any of those trademarks.
Environmental Matters
GBC and its operations, both in the U.S. and abroad, are subject to national, state, provincial and/or local laws and regulations that impose limitations and prohibitions on the discharge and emission of, and establish standards for the use, disposal, and management of, certain materials and waste, as well as impose liability for the costs of investigating and cleaning up, and certain damages resulting from present and past spills, disposals, or other releases of hazardous substances or materials (collectively, "Environmental Laws"). Environmental Laws can be complex and may change often. Capital and operating expenses required to comply with
Environmental Laws can be significant, and violations may result in substantial fines and penalties. In addition, Environmental Laws, such as the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA," also known as "Superfund"), in the United States impose liability on several grounds for the investigation and cleanup of contaminated soil, ground water, buildings, and for damages to natural resources at a wide range of properties. For example, contamination at properties formerly owned or operated by GBC, as well as at properties the Company currently owns and operates, and properties to which hazardous substances were sent by GBC, may result in liability for the Company under Environmental Laws. While the Company currently has no claims outstanding, GBC has an inherent risk of liability under Environmental Laws both with respect to ongoing operations and with respect to contamination that may have occurred in the past on its properties or as a result of its operations. There can be no assurance that the costs of complying with Environmental Laws and any claims concerning noncompliance, or liability with respect to contamination will not in the future have a material adverse effect on the Company's financial position or results of operations.
Employees
As of December 31, 2003, GBC employed approximately 3,800 people worldwide. Employee relations are considered to be excellent.
Available Information
The Company's internet website address is www.gbc.com. Through the investor relations section of the website, GBC makes available its Annual, Quarterly and Current Reports (Forms 10-K, 10-Q, and 8-K) in addition to reports on Forms 3, 4 and 5 filed by its executive officers and directors, free of charge shortly after the reports are electronically filed with or furnished to the Securities and Exchange Commission.
Item 2.
Item 2. Properties
In addition to the manufacturing and distribution locations listed below, GBC operates sales and service offices throughout the world. GBC also owns a 65,000 square foot world headquarters building in Northbrook, Illinois and a 33,000 square foot business group headquarters building in
Skokie, Illinois. Management believes that the Company's manufacturing facilities are suitable and adequate for its operations and are maintained in a good state of repair.
Major manufacturing and distribution is conducted at the following locations with the principal business group user indicated by footnote:
Item 3.
Item 3. Legal Proceedings
In the normal course of business, from time to time there may be various actions pending against the Company or its subsidiaries, but in the opinion of management, these actions are unlikely, individually or in the aggregate, to have a material adverse effect on the Company's financial statements.
GBC is not a party to any material pending legal proceedings, and neither GBC nor any of its officers or directors are aware of any material contemplated proceeding.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Part II.
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Principal Market and Price Range
The Company's Common Stock, $0.125 par value share, trades on the Nasdaq National Market under the symbol "GBND." The following table shows high, low and closing prices for GBC's Common Stock, $0.125 par value, as quoted on the Nasdaq National Market for the calendar quarters indicated below:
Approximate Number of Equity Security Holders:
Title of Class
Number of Shareholders of Record
as of February 27, 2004
Common Stock, $0.125 par value
Class B Common Stock, $0.125 par value
* Per the latest report from the Transfer Agent. Each security dealer holding shares in a street name for one or more individuals is counted as only one shareholder of record.
Dividends
The Company paid no cash dividends on its Common Stock in 2003, 2002 and 2001 and does not anticipate paying any cash dividend in the near future. The Company is limited by existing covenants in the Company's Primary Credit Facility (as defined in the "Liquidity and Capital Resources" section of Item 7, "Management Discussion and Analysis of Financial Condition and Results of Operations" of this report), with regard to paying dividends. The Company has retained, and expects to continue to retain, its earnings for reinvestment in its business. The declaration and payment of any dividends in the future, and their amounts will be determined by GBC's Board of Directors in light of conditions then existing, including the Company's earnings, its financial condition, working capital and capital expenditure requirements and other factors.
Item 6.
Item 6. Selected Financial Data
(000 omitted except per share and ratio data):
Net sales
$697,908
$701,728
$711,943
$824,581
$835,550
Net income (loss) before cumulative effect of accounting change (1)
(3,262)
(986)
(19,471)
2,433
(56,676)
Net (loss) income (1)
(3,262)
(80,010)
(19,471)
2,433
(56,676)
Net (loss) income per common share
basic and diluted (2)
$(0.20)
$(5.04)
$(1.24)
$0.15
$(3.60)
Cash dividends declared per common share (2)
-
-
-
-
0.30
Capital expenditures
8,468
9,010
14,897
19,609
22,823
Current assets
258,113
266,793
305,052
320,625
359,033
Current liabilities
156,367
163,692
139,729
161,300
168,727
Working capital
101,746
103,101
165,323
159,325
190,306
Current ratio
1.7
1.6
2.2
2.0
2.1
Total assets
$530,583
$554,509
$719,170
$761,308
$822,492
Long-term debt
282,019
314,766
410,668
397,005
454,459
Stockholders' equity
54,209
42,131
123,855
147,679
149,611
(1)In 2002, GBC adopted SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). The cumulative effect of accounting change related to the adoption of SFAS No. 142 was $79.0 million, net of taxes.
(2)Amounts represent per share amounts for both Common Stock and Class B Common Stock.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
The following section highlights significant factors impacting GBC's operations and financial condition. The following discussion should be read in conjunction with Item 6, "Selected Financial Data" and Item 8, "Financial Statements and Supplementary Data".
GBC is engaged in the design, manufacture and distribution of office equipment, related supplies and laminating equipment and films. As described in more detail in "Item 1. Business," in 2003, GBC implemented organizational changes and created two business groups - Commercial and Consumer Group ("CCG") and Industrial and Print Finishing Group ("IPFG"). CCG, created through the combination of the former Document Finishing and Office Products Groups, focuses on marketing strategies for "consumer-ready" products that leverage GBC's leadership among customers of its binding, laminating and information-display products in the work, school and home environments. IPFG, created through the combination of the former Films Group and the Automated Products Division of the Document Finishing Group, targets print-for-pay and other finishing customers who use GBC's professional-grade finishing equipment and supplies as part of their mass production of sophisticated, professional applications.
The Groups' revenues are primarily derived from:
Commercial and Consumer Group
Products
Customers/Channels
Binding, punching and laminating equipment
Indirect (approximately 69%)
Binding, punching and laminating supplies
Direct (approximately 31%)
Visual communications products
Document shredders
Custom binders and folders
Desktop accessories
Related maintenance and repair services
Industrial and Print Finishing Group
Products
Customers/Channels
Thermal and pressure sensitive-laminating films
Primarily direct
Mid-range and commercial high-speed laminators
Large-format digital print laminators
Europe Group
Products
Customers/Channels
The Europe Group primarily distributes the Commercial and
Consumer Groups' products to customers in Europe.
Indirect (approximately 80%)
CCG's products are sold through both indirect channels (resellers, including office product superstores, contract/commercial stationers, wholesalers, mail order companies, mass markets and other dealers) and direct channels (salespersons, telemarketers, internet portals, etc.). This group's products and services are sold to customers, which include the home and office markets, commercial reprographic centers, educational and training markets, and governmental agencies throughout North and South America and the Asia/Pacific region. IPFG's products and services are sold worldwide through direct and dealer channels primarily to commercial reprographic centers and commercial printers. The Europe Group distributes many of CCG's products to customers in Europe.
The Company's results are dependent upon sales of CCG and IPFG products, which are susceptible to changes in economic conditions, customer and industry consolidation, reseller business strategy (e.g., private label vs. branded products) and other factors which are difficult to predict. During periods of deteriorating economic conditions, GBC may be increasingly affected by competitive pricing pressures and decreased customer demand. During 2003, sales in GBC's CCG continued to be negatively affected by reduced corporate spending for products that are capital in nature (e.g., visual communication and binding and laminating machines). IPFG experienced pricing pressures for commercial laminating films due to industry overcapacity, along with a continuing trend of contraction in the publishing industry, which reduced demand for these products. While worldwide economic conditions may improve in 2004, GBC believes that factors impacting its business will continue to be challenging. To offset its challenging business environment, the Company has continued to identify and work to achieve cost reductions and operating efficiencies through its Operational Excellence Program, as described in more detail in Item 1 "Business", and to introduce new products to market.
Fluctuations in foreign currency exchange rates also have a significant impact on GBC's results, as a significant portion of GBC's revenues and operations are located outside the U.S. In 2003, due to the impact of foreign currency translation, the weakened U.S. dollar helped to offset reduced sales for GBC's business groups. This trend may continue in 2004; however, GBC would expect that a strengthening of the U.S. dollar would have an opposite and negative impact on the Company's results.
Financial Results - 2003 Compared to 2002
Sales
GBC's net sales for the year ended December 31, 2003 decreased 0.5% to $697.9 million compared to $701.7 million in 2002. The Company's net sales were favorably impacted by a weaker U.S. dollar in 2003 compared to 2002. The effect of foreign exchange rates benefited sales by approximately 4.0% in 2003. Net sales by business segment are summarized below (000 omitted):
The Commercial and Consumer Group's sales decreased $7.3 million (or 1.6%) in 2003 when compared to 2002. Lower demand for the Group's visual communication products and binding and laminating machines was partially offset by increased sales of private label three-ring binders and paper shredders. Sales for the Industrial and Print Finishing Group decreased $1.2 million or 0.9%. The impact of favorable exchange rates benefited the Group's sales by approximately 6.0%. A decrease in sales in the U.S. commercial film business, which has been affected by pricing pressures and lower purchasing levels by certain of the Group's customers, was the primary reason for the sales decrease. In addition, the Group's U.S. commercial film business continues to be affected by weak market conditions. Sales in the Europe Group increased by $4.7 million. The impact of foreign exchange benefited sales in the Europe Group by approximately 15.0%. The Group's sales in local currencies declined due to a competitive, currency-related pricing environment, weak economic conditions in certain European markets, and the timing of new product introductions.
Gross Margins, Costs and Expenses
GBC's gross profit margin in 2003 increased by 0.3 points to 39.9% compared to 2002. Gross profit margins in the Commercial and Consumer Group were down due to an unfavorable product mix (higher sales of private label three-ring binders and lower sales of visual communication products and binding and laminating machines) and increased rebate and allowance programs. The Industrial and Print Finishing Group gross profit margins were up slightly due to reduced spending on research and development. The Europe Group's gross profit margin increased significantly due to favorable foreign exchange, increased manufacturing volumes, along with lower product costs due to sourcing initiatives.
Total selling, service and administrative expenses in 2003 decreased $3.8 million compared to 2002, primarily due to lower spending by the Commercial and Consumer Group, coupled with lower corporate expenses. Efficiencies achieved in connection with the creation of the Commercial and Consumer Group resulted in reduced expenditures on certain administrative functions. Additionally, the Group benefited from increased equity earnings from its joint venture in Australia. Corporate expenses were down in 2003 primarily as a result of reduced spending on information systems. These savings were partially offset by the recognition of GBC's share of the operating loss of GMP Co., Ltd. (see the "Restructuring and Other" and "GMP Relationship" sections of this "Management Discussion and Analysis of Financial Condition and Results of Operations" for further discussion regarding GBC's investment in GMP). Selling, service and administrative expenses as a percentage of sales decreased slightly to 31.9% in 2003 from 32.3% in 2002.
Segment Operating Income
Segment operating income for GBC's business groups, which is calculated as net sales less product cost of sales, selling, service and administrative expenses and amortization of other intangibles, is summarized below (000 omitted):
Segment operating income for 2003 increased 6.6% or $3.4 million compared to 2002. Operating income in the Commercial and Consumer Group decreased by $1.9 million, or 3.3%, in 2003 primarily due to the lower level of sales and reduced gross profit margin, which was partially offset by lower expenses. The Industrial and Print Finishing Group's operating income decreased 6.0% or $1.1 million due to the lower sales volume and higher selling, service and administrative expenses. The Europe Group's operating income increased $4.7 million due primarily to improved gross profit margins. Unallocated corporate items decreased $1.7 million primarily due to reduced information systems costs.
Inventory Rationalization
During 2002, GBC recorded inventory charges of approximately $1.0 million primarily related to the Commercial and Consumer Group. This charge relates to GBC's product line rationalization and reflects an adjustment to the realizable value of certain products which the Company decided to discontinue in 2001.
Restructuring and Other
Beginning in 2001, GBC launched its Operational Excellence Program, an on-going effort to improve the Company's financial performance and flexibility. Initiatives undertaken in connection with this program have resulted in restructuring and other expenses in both 2003 and 2002.
Pre-tax restructuring charges in 2003 totaled $11.1 million, related to the following projects: a) relocating the manufacturing of labor intensive visual communication products from the Company's facility in Booneville, Mississippi to Nuevo Laredo, Mexico; b) closing a manufacturing plant in Amelia, Virginia and consolidating production in the Company's plant in Lincolnshire, Illinois; c) company-wide workforce reduction programs; and d) subleasing a manufacturing facility as part of a previously announced restructuring.
The restructuring charges associated with the 2003 projects consist of the following (in millions):
Project
Severance
Asset Impairments and Other
Exit Costs
Lease
Cost
Total
Relocating manufacturing from Booneville to Nuevo Laredo
$2.6
$4.5
-
$ 7.1
Plant closure - Amelia, Virginia
0.2
-
-
0.2
Reduction-in-force programs
2.4
-
-
2.4
Sublease manufacturing facility
-
-
1.4
1.4
$5.2
===
$4.5
===
$1.4
===
$11.1
====
The relocation of manufacturing operations from Booneville, Mississippi to Nuevo Laredo, Mexico began in July 2003, and is expected to be completed by the end of the second quarter of 2004. The closing of the Amelia, Virginia plant commenced in the first quarter of 2004 and is expected to be completed by the end of second quarter of 2004. Initiatives related to work force reductions were implemented during the second half of 2003.
During 2002, GBC recorded pre-tax restructuring charges of $8.0 million for expenses related the following projects: a) closing the Company's facility in Buffalo Grove, Illinois and transferring the manufacturing and administrative functions to other GBC locations; b) downsizing a binder manufacturing facility in Amelia, Virginia; c) severance costs associated with the creation of the Commercial Consumer Group; and d) charges related to the reorganization of certain corporate and other support functions.
The restructuring charges associated with the 2002 projects consist of the following (in millions):
Project
Severance
Asset Impairments and Other
Exit Costs
Lease
Cost
Total
Buffalo Grove facility closure
$0.7
$1.6
$0.8
$ 3.1
Downsizing of Amelia facility
0.8
0.3
-
1.1
Commercial and Consumer Group
1.6
0.2
-
1.8
Reduction in support functions
2.0
-
-
2.0
$5.1
===
$2.1
===
$0.8
===
$8.0
===
The transition of manufacturing operations from the Buffalo Grove facility was completed in 2002; administrative and support personnel previously located in the Buffalo Grove facility were transferred to other GBC locations by early 2003. Actions associated with the Amelia facility and other reductions in force were completed in 2002.
The Company has an investment in GMP Co., Ltd. of approximately 20%, and accounts for its investment under the equity method of accounting. In the fourth quarter of 2003, GBC recognized its share (approximating $1.2 million) of GMP's fourth quarter 2003 loss. As a result of GMP's poor financial performance and other business factors, GBC evaluated whether its investment in GMP was impaired. The GMP investment was valued based upon the traded value of GMP shares on the KOSDAQ exchange (Korean over-the-counter market) and projections of cash flow, earnings and sales developed by GMP management. Based upon the analysis performed, and GBC's determination that the decline in value of its investment in GMP was other than temporary, an impairment charge of $4.7 million was recognized.
During 2002, GBC incurred $1.1 million in other expenses primarily related to costs associated with the transition of production from the closed and down-sized facilities to other GBC facilities.
Interest Expense
Interest expense decreased by $5.5 million to $34.4 million in 2003 compared to 2002 due to reduced debt levels and lower average interest rates. Included in interest expense in 2003 was $1.1 million related to the loss on the extinguishment of the Company's previous credit facility which was refinanced in June 2003.
Other (Income) Expense
Other expense was approximately $0.2 million in both 2003 and 2002. In 2002, other expense included non-cash losses of $1.1 million on the sale of a previously closed facility in Mexico and $1.1 million on the disposal of GBC's investment in an Indian joint venture. These non-cash losses were offset by net interest income of $0.9 million received in connection with the settlement of a U.S. Federal income tax refund claim, as well as currency gains which primarily related to the translation of liabilities denominated in other than functional currencies.
Income Taxes
Income tax expense was $7.6 million in 2003 on pre-tax income of $4.4 million. Factors that affected income tax expense in 2003 included: a) the non-cash write-off of deferred tax assets as a result of the reorganization of certain international subsidiaries ($4.4 million); and b) the combined effect of the pre-tax impairment charge and GBC's share of the loss incurred in fiscal 2003 by GMP. These items were not tax deductible.
In 2002, income tax expense was approximately $2.0 million on pre-tax income of approximately $1.1 million. During 2002, new U.S. tax legislation enabled GBC to carry back its 2001 domestic tax loss to 1996 and 1997. The carryback generated a $7.5 million tax refund and reduced previously utilized tax credits. The tax credits became deferred tax assets which GBC was not able to use before the expiration of the carryover period. The resulting write-off of these deferred tax assets created additional income tax expense of $1.5 million. Additionally, GBC settled a U.S. Federal income tax contingency resulting in a refund of approximately $0.9 million which is reflected as a reduction to GBC's 2002 income tax provision.
See note 11 to the consolidated financial statements for more information on income taxes.
Cumulative Effect of Accounting Change
Effective January 1, 2002, GBC implemented SFAS No. 142, "Goodwill and Other Intangible Assets." In accordance with SFAS No. 142, the Company tested its goodwill balances to determine whether these assets were impaired. Based upon the testing performed, GBC recorded a non-cash impairment charge of $110 million ($79 million, net of tax), primarily related to the impairment of goodwill in the Commercial and Consumer Group.
Net Loss
GBC realized a net loss of $3.3 million for 2003 compared to a net loss of $80.0 million for 2002. The 2003 net loss was impacted by the previously described restructuring charges of $11.1 million, other expense of $4.7 million, the loss on extinguishment of debt of $1.1 million as well as the $4.4 million write-off of deferred tax assets. In 2002, the net loss was impacted by the cumulative effect of accounting change of $79.0 million, net of taxes, along with $9.1 million in restructuring and other costs.
Financial Results - 2002 Compared to 2001
Sales
Net sales in 2002 were $701.7 million, a decrease of 1.4% from 2001. The Company's sales were negatively impacted by weak economic conditions in the United States. Net sales by business segment are summarized below (000 omitted):
The Commercial and Consumer Group's sales increased by $2.4 million or 0.5% in 2002 when compared to 2001. The increase was primarily related to higher sales of certain supply items to retail customers, which was off-set by weak equipment sales as a result of lower corporate capital spending, along with lower sales of custom supply products due to reduced corporate spending on meetings, training and presentations. The Industrial and Print Finishing Group's sales decreased by $8.0 million or 5.4% in 2002 when compared to 2001. The sales decline was primarily due to lower sales of commercial laminating and digital print finishing supplies in the U.S. market. Sales of commercial laminating films were negatively impacted by weakness in the book publishing market, while the digital print finishing business has experienced lower corporate spending for advertising, trade shows and media presentations. Net sales in Europe decreased $4.7 million or 4.7% in 2002 when compared to 2001, partially due to planned customer and product rationalization, along with overall economic weakness in Europe.
Gross Margins, Costs and Expenses
The Company's gross profit margin percentage in 2002 was 39.6% compared to 37.6% in 2001. Compared to the prior year, gross profit margin percentages increased in all business groups, except for Industrial and Print Finishing, which was negatively impacted by higher spending on research and development. The improvement in business unit gross profit margin, despite lower manufacturing volumes, was primarily a result of selective price increases and GBC's continuing emphasis on efficiencies and cost reductions through its Operational Excellence Program. Additionally, the Company's overall gross profit margin improved in 2002 due to a significantly lower level of inventory rationalization and write-down charges compared to 2001.
Total selling, service and administrative expenses decreased $5.4 million in 2002 when compared to 2001. As a percentage of sales, selling, service and administrative expenses decreased 0.3 percentage points to 32.3% in 2002 compared to 2001. With the exception of the Commercial and Consumer Group, which experienced a planned increase in spending on new product development and marketing programs, each of GBC's business groups realized lower expenses in 2002 when compared to 2001. The decreases were primarily due to lower variable selling expenses and cost management programs.
Operating Income
Segment operating income for GBC's business groups, which is calculated as net sales less product cost of sales, selling, service and administrative expenses and amortization of other intangibles, is summarized below (000 omitted):
Operating income in the Commercial and Consumer Group decreased $5.0 million due primarily to increased selling, service and administrative expenses. Operating income for the Industrial and Print Finishing Group decreased $0.4 million due to lower levels of sales and lower gross profit margins. The increase of $2.0 million in the Europe Group's operating income during 2002 compared to the operating loss in 2001 was due to higher gross profit percentages and lower selling, service and administrative expenses.
Inventory Rationalization and Write-Down Charges
During 2002, GBC recorded inventory rationalization and write-down charges of $1.0 million. These charges related to product line rationalization and reflect an adjustment to the realizable value of certain products which the Company decided to discontinue in 2001. During 2001, GBC recorded inventory rationalization and write-down charges of $8.8 million. These charges relate to product line rationalization and efforts to reduce the number of SKU's offered. Charges by business group were: Consumer and Commercial Group, $4.9 million; Industrial and Print Finishing Group, $0.1 million; and Europe Group, $3.8 million.
Amortization of Goodwill and Other Intangibles
Effective January 1, 2002, GBC implemented SFAS No. 142, which eliminates the amortization of goodwill and indefinite-lived intangible assets for current and future periods. Prior periods are not restated for this change. As a result, there was no goodwill amortization in 2002, while 2001 included goodwill amortization of approximately $9.7 million.
Restructuring and Other
In 2001, GBC launched its Operational Excellence Program. Activities undertaken in connection with this program resulted in restructuring and other expenses in both 2002 and 2001.
During 2002, GBC recorded pre-tax restructuring charges of $8.0 million for expenses related to the following projects: a) closing the Company's facility in Buffalo Grove, Illinois and transferring the manufacturing and administrative functions to other GBC locations; b) downsizing a binder manufacturing facility in Amelia, Virginia; c) severance costs associated with the creation of the Commercial Consumer Group; and d) charges related to the reorganization of certain corporate and other support functions.
The restructuring charges associated with the 2002 projects consist of the following (in millions):
Project
Severance
Asset Impairments and Other
Exit Costs
Lease
Cost
Total
Buffalo Grove facility closure
$0.7
$1.6
$0.8
$ 3.1
Downsizing of Amelia facility
0.8
0.3
-
1.1
Commercial and Consumer Group
1.6
0.2
-
1.8
Reduction in support functions
2.0
-
-
2.0
$5.1
===
$2.1
===
$0.8
===
$8.0
===
The relocation of manufacturing operations from the Buffalo Grove facility was completed in 2002; administrative and support personnel previously located in the Buffalo Grove facility were transferred to other GBC locations by early 2003. Actions associated with the Amelia facility and other reductions-in-force were completed in 2002.
Restructuring activities in 2001 resulted in a $7.3 million pre-tax charge for expenses related to: a) the closing of manufacturing, warehouse and administrative facilities in Ashland, Mississippi, Germany, and Mexico; b) the shutdown of operations in Poland; c) facility reductions in Amelia, Virginia and the United Kingdom; and d) workforce reductions in the Company's Europe, Commercial and Consumer, and Industrial and Print Finishing Groups.
During 2002, GBC incurred $1.1 million in other expenses primarily related to costs associated with the transition of production from the closed and down-sized facilities to other GBC facilities.
During 2001, GBC incurred other charges of $6.2 million primarily related to contractual severance payments and other benefits to be paid to GBC's former CEO ($2.4 million), a signing bonus and other transition expenses for GBC's new Chairman and CEO ($1.6 million), and severance costs to be paid to the Company's former CFO and others ($1.1 million). In addition, GBC recorded a $1.1 million non-cash loss on the sale of the assets of its New Zealand operations.
Interest Expense
Interest expense increased by $2.7 million to $39.9 million in 2002 compared to 2001. The increase in interest expense primarily resulted from higher effective interest rates during 2002 on GBC's Revolving Credit Facility, which were only partially offset by lower average borrowings.
Other (Income) Expense
Other expense was $0.2 million in 2002 compared to income of $1.0 million during 2001. In 2002, GBC recorded non-cash losses of $1.1 million on the sale of a previously closed facility in Mexico, and $1.1 million on the disposal of GBC's investment in an Indian joint venture. The losses were partially offset by net interest income of $0.9 million received in connection with the settlement of a U.S. Federal income tax refund claim, as well as currency gains recognized which primarily related to the translation of liabilities denominated in other than functional currencies. In 2001, other income primarily consisted of interest income.
Cumulative Effect of Accounting Change
Effective January 1, 2002 GBC implemented SFAS No. 142, "Goodwill and Other Intangible Assets." In accordance with SFAS No. 142, the Company tested its goodwill balances to determine whether these assets were impaired. Based upon the testing performed, GBC recorded a non-cash impairment charge of $110 million ($79 million, net of tax), primarily related to the impairment of goodwill in the Commercial and Consumer Group.
Income Taxes
GBC recorded income tax expense of $2.0 million in 2002 on pre-tax income of $1.1 million, compared to a benefit of $4.8 million in 2001. The 2002 tax provision included: a) the write-off of $1.5 million in deferred tax assets in the first quarter of 2002; b) the receipt of a $0.9 million income tax refund in the second quarter of 2002; and c) an increase in 2002 pre-tax earnings over 2001.
In 2002, new U.S. tax legislation enabled GBC to carry back its 2001 domestic tax loss to 1996 and 1997. The carryback generated a $7.5 million tax refund and reduced previously utilized tax credits. The tax credits became deferred tax assets which GBC was not able to use before the expiration of the carryover period. The resulting write-off of these deferred tax assets created additional income tax expense of $1.5 million. Separately, GBC settled a U.S. Federal income tax contingency resulting in a refund of approximately $0.9 million which is reflected as a reduction to GBC's 2002 income tax provision.
See note 11 to the consolidated financial statements for more information on income taxes.
Net Loss
GBC reported a net loss of $80.0 million in 2002, or $(5.04) per basic and diluted share, compared to a net loss of $19.5 million, or $(1.24) per basic and diluted share in 2001. The net loss in 2002 was due primarily to the cumulative effect of accounting change of $79.0 million, net of taxes. The Company also had a higher effective income tax rate in 2002 compared to 2001, along with higher interest expenses. These items were partially offset in 2002 by higher gross profit margins (including inventory rationalization and write-down charges), lower selling, service and administrative expenses, and lower restructuring and other costs compared to 2001. Additionally, due to the implementation of SFAS No. 142, beginning in 2002 goodwill was no longer amortized.
Liquidity and Capital Resources
Primary Credit Facility
Management assesses the Company's liquidity in terms of its overall debt capacity and ability to generate cash from operations to fund its operating activities, capital needs and debt service requirements. Significant factors affecting liquidity are cash flows generated from operating activities, capital expenditures, interest and debt service requirements, adequate bank lines of credit and financial flexibility to attract long-term capital with satisfactory terms. GBC's primary sources of liquidity and capital resources are internally-generated cash flows, and borrowings under GBC's revolving credit facility.
During 2003, GBC entered into three new financing agreements. On June 26, 2003, the Company completed the refinancing of its primary senior credit facility (the "Primary Facility"). The new $197.5 million Primary Facility includes a $72.5 million multicurrency revolving credit line and a $125 million term loan. The maturity date on the Primary Facility is January 15, 2008, and it provides for significantly lower interest rate spreads than the previous senior credit facility (the "Previous Primary Facility"). In the fourth quarter of 2003, a payment of $2.5 million was made on the term loan, reducing it to $122.5 million. As of December 31, 2003, outstanding borrowings under the Primary Facility included $122.5 million for the term loan, and outstanding letters of credit of $13.8 million which reduce GBC's availability under the revolving credit line. Concurrent with the completion of the Primary Facility, GBC entered into a mortgage financing arrangement under which its real estate holdings in Northbrook and Skokie, Illinois and its real estate and equipment in Addison, Illinois are pledged as collateral ("Mortgage Financing"). The $14.8 million proceeds from the Mortgage Financing were used to repay a portion of the Previous Primary Facility. As of December 31, 2003, the outstanding balance on the Mortgage Financing was $13.8 million. In April 2003, GBC entered into a new multicurrency revolving credit facility in the Netherlands (the "Netherlands Facility"). The maturity date on the Netherlands Facility is April 9, 2008. The majority of $16.8 million that had been borrowed under the Netherlands Facility was used to repay a portion of the Previous Primary Facility. As of December 31, 2003, there were no outstanding borrowings under the Netherlands Facility.
Interest rates on the Primary Facility are variable and are set at LIBOR plus 3.75% for borrowings under the $72.5 million multicurrency revolving credit line, and LIBOR plus 4.50% for the term loan. Borrowings under the Primary Facility are subject to a "pricing grid" which provides for lower interest rates in the event that certain of GBC's financial ratios improve in future periods.
Primary Credit Facility - Financial Covenants
GBC must meet certain restrictive financial covenants as defined under the Primary Facility. The covenants become more restrictive over time and require the Company to maintain certain ratios related to total leverage, senior leverage, fixed charge coverage, as well as a minimum level of consolidated net worth. There are also other covenants, including restrictions on dividend payments, acquisitions, additional indebtedness, and capital expenditures. In addition to the restrictive covenants, multicurrency revolving credit line borrowings are subject to a "borrowing base" which is determined based upon certain formulas tied to GBC's trade receivables and inventory. With the exception of its assets pledged under the Mortgage Financing, substantially all of the assets of General Binding Corporation and its domestic subsidiaries, as well as a portion of equity in certain foreign subsidiaries are pledged as collateral under the Primary Facility.
The most restrictive financial covenants under the Primary Facility require the Company to maintain the following targets and ratios:
Minimum Leverage Ratios:
There are two leverage ratio tests under the Primary Facility. The ratios are computed by dividing the cumulative four quarter trailing EBITDA (as defined under the Primary Facility) into the Company's total debt and its senior debt (total debt less subordinated debt).
The Primary Facility requires that GBC's leverage ratios as of the end of each quarter be no higher than:
Total Leverage
Senior Leverage
Q-4 2003- Q-3 2004
4.50 to 1
2.50 to 1
Q-4 2004- Q-3 2005
4.25 to 1
2.25 to 1
Q-4 2005- Q-3 2006
3.75 to 1
1.75 to 1
Thereafter
3.50 to 1
1.50 to 1
Fixed Charge Coverage Ratio:
The fixed charge coverage ratio is computed based upon consolidated trailing four quarter EBITDA (as defined under the Primary Facility) less consolidated capital expenditures, divided by consolidated fixed charges (as defined under the Primary Facility). As of the end of each quarter through the fourth quarter of 2005, GBC must maintain a ratio in excess of 1.10 to 1 and must maintain a ratio in excess of 1.15 to 1 for each quarter thereafter.
Consolidated Net Worth:
GBC must maintain consolidated net worth (as defined under the Primary Facility) of $37.0 million plus the sum of 50% of consolidated net income of each quarterly period subsequent to June 30, 2003.
Primary Facility - Term Loan Amortization and Maturity
Principal payments on the term loan are due quarterly beginning with the fourth quarter of 2003. The required quarterly payments are as follows:
Q-4 2003 - Q-3 2004
$2.5 million
Q-4 2004 - Q-3 2005
3.0 million
Q-4 2005 - Q-3 2007
3.5 million
The remaining balance of the term loan is due on the maturity date of the Primary Facility, January 15, 2008.
Primary Facility - Financial Covenant Compliance
As of and for the period ended December 31, 2003, GBC was in compliance with all covenants under the Primary Facility.
Based upon its current financial forecast, the Company expects to remain in compliance with the covenants under the Primary Facility. The financial forecast assumes that there will be no further significant deterioration of worldwide economic conditions, no significant increases in competitive pressure, and that certain objectives of the Operational Excellence Program will be achieved. If these assumptions are not met or if other unforeseen events occur, it is possible that the Company will fail one or more of its covenants. In that situation, if GBC were unable to obtain an amendment to the Primary Facility or a waiver in the event of a major covenant violation, the Company's liquidity would be severely impacted.
Primary Facility - Borrowing Base Availability
The Primary Facility includes a $72.5 million multicurrency borrowing facility that GBC uses to fund its working capital requirements. The Company's borrowing capacity under the facility is limited by a "borrowing base," which is specifically defined in the facility and is computed as 85% of eligible trade receivables and 50% of eligible inventory. Eligible receivables are generally defined as current domestic and Canadian receivables which are reduced by certain obligations of the Company, and eligible inventory is generally defined as inventory owned by GBC's domestic and Canadian operations. At December 31, 2003, GBC's borrowing base was adequate to support GBC's expected future working capital requirements. If, however, there were to be a significant deterioration in the quality of GBC's eligible receivables or inventory, there can be no assurance that adequate liquidity would be available under the Facility.
Cash Flows
Cash provided by operating activities was $51.6 million for the year ended December 31, 2003, compared to $46.5 million for 2002, an increase of $5.1 million. The increase in cash provided by operating activities in 2003 compared to 2002 is primarily due to a reduction in the use of working capital, lower cash interest payments and increased segment operating income, all of which were partially offset by cash income taxes paid in 2003 compared to refunds in 2002.
Net cash used in investing activities was $10.6 million during 2003, compared to $7.7 million in 2002. In 2003, GBC invested $2.2 million in a joint venture arrangement for the Industrial and Print Finishing Group.
Net cash used in financing activities was $41.4 million during 2003, compared to $78.9 million during 2002. In the latter part of 2001, GBC increased the Company's borrowings under the facility above normal levels. Approximately $52.8 million of the borrowings were repaid in January 2002. Excluding these additional borrowings at December 31, 2001, GBC would have reported a reduction in debt of approximately $25.3 million during 2002.
GBC is restricted under its credit agreements from paying dividends, and therefore no dividends were paid during either 2003 or 2002.
As discussed in note 1 to the consolidated financial statements, GBC is included in the consolidated U.S. Federal Income tax return and certain U.S. State Income tax returns of its majority shareholder, Lane Industries, Inc. The Internal Revenue Service has an open examination of Lane Industries, Inc. and subsidiaries for the years 1999 through 2002. Additionally, there are ongoing audits in the U.S. and several international jurisdictions. In the opinion of management, GBC has made adequate tax provisions for all years subject to examination, and currently has adequate liquidity available to settle any known claims.
As required by SFAS No. 87, "Employers' Accounting for Pensions," if the accumulated benefit obligation ("ABO") relating to a pension plan exceeds the fair value of the plans' assets, the Company's established liability for a plan must be at least equal to the unfunded ABO. In 2002, as a result of unfavorable asset returns and a decline in market interest rates, the Company recorded a reduction of approximately $10.2 million to other comprehensive income ("OCI"), which is a component of stockholders' equity, in order to establish an additional minimum liability for one of its defined benefit pension plans. In 2003, asset returns improved and the
Company recorded an offsetting increase to OCI of $1.7 million. Depending on market conditions and interest rate movements in the future, additional increases or decreases to OCI might be required based on valuations performed at future measurement dates. Based on the most recent valuation of the plan, GBC will be required to make additional annual contributions in the amount of approximately $1.3 million to fund the plan shortfall. This additional contribution could increase or decrease in future years based upon market conditions.
GMP Relationship
GBC sources many of its laminating machines from GMP Co. Ltd, a company whose manufacturing facility is located in the Republic of Korea. GBC also has an equity ownership interest in GMP of approximately 20%. While GBC has a long-term supply arrangement with GMP, there can be no assurance that GMP will be able to continue to fulfill any or all of its obligations to the Company. GMP's ability to fulfill GBC's requirements for laminating machines could be affected by Korean and other regional and worldwide economic, political and governmental conditions. Additionally, GMP has a highly leveraged capital structure. In order to ensure the continuation of its operations, GMP requires on-going sources of financing. There can be no assurance that such financing will continue to be available. At times during 2003 and in the first quarter of 2004, the Company accelerated its payment terms to GMP to provide it with liquidity assistance. The amount of any advance payments to GMP outstanding at any one time has not exceeded $1 million, and GMP has complied with all conditions imposed by GBC in connection with the advances. In the event GMP seeks additional financial assistance in the future in the form of advance payments from GBC, the Company will consider such requests taking into consideration then existing market, liquidity and other factors; however, there can be no assurance that the Company would make any such advances, or provide other financial support.
If GMP were unable to supply GBC with laminating machines, there are alternative sources available. However, changing suppliers for the laminating machines manufactured by GMP would require lead times of a duration that could result in a disruption of supply. If GBC's supply chain were disrupted, the Company's results of operations and its financial position would be negatively impacted. It is estimated that during 2004, absent a disruption in supply, GBC will have sales of laminating machines supplied by GMP within the range of $17-20 million.
During 2003, GBC recorded a $1.0 million loss related to its portion of GMP's 2003 operating results, which were negatively impacted by non-recurring, non-cash charges. As a result of GMP's operating loss and other business factors, GBC performed an evaluation and determined its investment in GMP was impaired and recorded a non-cash charge of $4.7 million to reduce the value of its investment. As of December 31, 2003, GBC's remaining investment in GMP is $2.8 million. If the fair value of GBC's investment in GMP were to decline further, and if the decline were determined to be other than temporary, the Company may have to write-off all or part of its remaining investment. While such a write-off would be non-cash in nature, it may negatively impact GBC's computations of certain financial covenants under the Facility.
Off-Balance Sheet Arrangements and Contractual Financial Obligations
The Company does not have any material off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on its financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
The table below sets forth GBC's contractual cash obligations at December 31, 2003 (in millions):
(1) Excludes related interest.
(2) GBC's purchase obligations primarily consist of open purchase orders to acquire raw materials used in the manufacture of product or to acquire finished product sourced from third-party vendors. A substantial majority of the Company's open purchase orders are non-binding and can be cancelled with up to 90 days notice. For purposes of this disclosure, an estimate of 90 days of open purchase orders, based upon purchases made in 2003, has been used. Assuming such purchase orders are not cancelled, we believe our purchase obligations for 2004, based on prior years' experience, will be approximately $324 million.
(3) The Company's primary obligations related to other long-term liabilities consist of payments under retirement benefit plans. Future contributions, where not fixed, have been estimated based upon actual 2003 payments.
Commercial Financial Commitments
At December 31, 2003, GBC had commercial financial commitments of approximately $5.0 million consisting of standby letters of credit which primarily support domestic workers compensation claims and a real estate operating lease on one of the Company's facilities.
Credit Concentration
GBC has several customers of the Commercial and Consumer Group which, in the normal course of business, make significant purchases from the Company. Trade receivable balances from these customers have ranged from $5 million - $15 million. As a result, at any point in time, GBC may have a significant concentration of its accounts receivable balance among this customer group. To mitigate the credit risk among this group of customers, management closely monitors trends in the office products market, as well as the financial condition and payment trends of these customers. However, should one or more of those customers fail, such failure could have a material adverse affect on GBC's financial position and results of operations.
New Accounting Standards
In January 2003, the FASB issued Interpretation No. 46 (FIN No. 46), "Consolidation of Variable Interest Entities." The objective of FIN No. 46 is to improve financial reporting by companies with transactions involving variable interest entities. Prior to FIN No. 46, companies generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. Under FIN No. 46, a variable interest entity would be consolidated by a company if that company is subject to a majority of the risk or loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. In
December 2003, the FASB issued a revision to FIN No. 46 ("46R") to clarify certain provisions of FIN No. 46 and to exempt certain entities from its requirements. Special effective dates apply to enterprises that have fully or partially applied FIN No. 46 prior to issuance of 46R. Otherwise, application of 46R or FIN No. 46 is required in financial statements of public entities for periods ending after December 15, 2003. GBC is still assessing the impact, if any, 46R and FIN No. 46 will have on the Company's results or financial position.
In December 2003, the FASB issued a revision to SFAS No. 132, " Employers Disclosures about Pensions and Other Postretirement Benefits." This statement revises certain disclosures about pension plans and other postretirement benefit plans. The additional disclosures required by this statement include: information describing the types of plan assets; investment strategy; measurement date(s); plan obligations; cash flows; and components of net periodic benefit cost to be recognized during interim periods. GBC is required to adopt the new disclosures about foreign plans and estimated future benefit payments in 2004.
In July 2002, the FASB issued SFAS No.146, "Accounting for Costs Associated with Exit and Disposal Activities." This statement revises the accounting for exit and disposal activities under EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and other Costs to Exit an Activity," by spreading out the reporting of expenses related to restructuring activities. Commitment to a plan to exit an activity or dispose of long-lived assets will no longer be sufficient to record a one-time charge for most anticipated costs. Instead, companies will record exit or disposal costs when they are "incurred" and can be measured at fair value, and they will subsequently adjust the recorded liability for changes in estimated cash flows. The provisions of SFAS No.146 are effective prospectively for exit or disposal activities initiated after December 31, 2002. Companies may not restate previously issued financial statements for the effect of the provisions of SFAS No. 146, and liabilities that a company previously recorded under EITF Issue 94-3 are grandfathered. GBC's adoption of SFAS No. 146 in 2003 has not have a material impact on its consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees of Indebtedness of Others" (FIN No. 45). The initial recognition and measurement provisions of this interpretation, which require a guarantor to recognize a liability at the inception of a guarantee at fair value, are effective on a prospective basis to guarantees issued or modified after January 1, 2003. GBC's adoption of FIN No. 45 has not had a material impact on GBC's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Compensation - Transition and Disclosure", which amends SFAS No. 123. The new standard provides alternative methods for transition to the fair value-based method of accounting for stock-based employee compensation from the intrinsic method. GBC currently accounts for stock-based employee compensation under the intrinsic method and has not made a determination as to when, or if, the Company would change to the fair value-based method. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 to require more prominent and frequent disclosures in financial statements about the effects of stock-based compensation. The required disclosures have been adopted in the Company's consolidated financial statements.
Related Party Transactions
As discussed in notes 1 and 11 to the consolidated financial statements, GBC and Lane Industries, Inc. (the Company's majority shareholder) have entered into Tax Allocation Agreements, which determine GBC's U.S. Federal and U.S. State income liabilities. Other related party transactions are detailed in GBC's 2003 Proxy Statement. No other related party transactions had a material impact on GBC's financial position, cash flow, or results of operations.
Critical Accounting Policies
The following accounting policies are considered to be critical to the understanding of GBC's financial statements because their application requires significant management judgement. The Company's reported financial results rely upon estimates and assumptions which are uncertain. For all of these policies, management cautions that future events rarely develop exactly as forecast, and even the best estimates may require adjustment.
Allowance for Doubtful Accounts and Sales Returns
The provision for doubtful accounts is established based upon historical losses on trade receivables, the aging of customer account balances, and the creditworthiness of specific customers. Historically, GBC has not realized significant losses on trade receivables. As discussed under Credit Concentration, certain of GBC's customers routinely carry significant trade receivable balances. Deterioration of the creditworthiness of such customers could have a significant negative impact on the financial results of GBC.
An allowance for potential sales returns is established as revenue is recognized. This allowance is based upon historical trends for specific customer groups. Additionally, the Company monitors the "sell through" information provided by significant resellers of its products. The allowance is adjusted periodically based upon such information. Management believes that the allowance is susceptible to reasonable estimation and adequately provides for future returns; however, market changes and customer strategies could impact this estimate in the future.
Allowance for Slow-moving and Obsolete Inventory
GBC's inventory is valued at manufactured cost or purchase cost. An allowance is established to adjust the cost of inventory to its net realizable value. The allowance is based upon historical and estimated future sales of specific inventory items. Changes in future demand for products or inaccurate estimates of demand for new products could have a significant impact on the Company's allowance. Additionally, a decision by major resellers of GBC's products to no longer carry these products could have a significant impact on the Company's future results.
Deferred Income Tax Valuation Allowance
An allowance for deferred income taxes and net loss carryforwards is established for those items which are expected to expire unused. GBC determines the valuation allowances by considering currently available data, historical and projected taxable earnings and losses by jurisdiction, the Company's current financial condition and other relevant factors. If GBC is unable to generate sufficient future taxable income, or if there is a material change in the time period within which
the underlying temporary differences become taxable or deductible, the Company could be required to increase the valuation allowance against all or a significant portion of its remaining net deferred tax assets resulting in an increase in the effective tax rate.
Tax reserves
In the normal course of business, GBC is regularly audited by U.S. Federal, U.S. State and Foreign tax authorities, and is periodically challenged regarding the amount of taxes due. These challenges include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. Management believes the Company's tax positions comply with applicable tax laws. In evaluating the exposure associated with various tax filing positions, GBC maintains accruals for uncertain tax positions. While the Company believes these reserves are adequate, its effective income tax rate in a given period could be impacted if matters for which accruals have been established are resolved in amounts in excess of or/less than the accruals.
Long-lived Assets
In accordance with SFAS No. 144, "Accounting for the Impairment of or Disposal of Long-lived Assets," the Company reviews potential impairment of long-lived assets whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. During 2003, 2002 and 2001, provisions were established for certain assets impacted by restructuring activities. Such provisions were based upon a comparison of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group to the carrying amount asset or asset group. If the undiscounted cash flows are less than the carrying amount, an impairment is recognized based upon the fair value of the asset or asset groups.
During 2003, the Company evaluated its investment in GMP for potential impairment. As a result of this review, GBC recorded a non-cash charge of $4.7 million to reduce its investment. See the "GMP Relationship" section of Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion of GBC's relationship with GMP.
In accordance with SFAS No. 142, GBC tests its goodwill balances at least annually to determine whether these assets are impaired. GBC recorded a non-cash impairment charge of $110 million ($79 million after-tax) effective January 1, 2002, as the cumulative effect of adopting this standard. The Company performs its annual impairment test at January 1 of each fiscal year. In addition, SFAS No. 142 also requires that previously recognized intangible assets, other than goodwill, be reassessed to determine the appropriateness of the estimated useful lives of these assets. Intangible assets determined to have finite lives are amortized over those lives and intangible assets that have indefinite lives are not amortized. As of December 31, 2003, there have been no events or circumstances which would warrant a revision to the remaining useful lives of these assets.
Acquisitions and Other Business Combinations
GBC made no acquisitions nor was it involved in any other business combination transactions during the years 2001 through 2003.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
GBC is exposed to market risk from changes in foreign currency exchange rates and interest rates which may affect the results of its operations and financial condition. GBC seeks to manage these risks through its regular operating and financing activities, and when deemed appropriate, through the use of derivative financial instruments. GBC does not use any derivative instruments for trading or other speculative purposes and is not a party to any leveraged financial instruments. The methods used by GBC to assess and mitigate the market risks discussed herein should not be considered projections of future events and exposures.
Foreign Exchange Risk Management
As a result of GBC's global activities, the Company has assets, liabilities, loans and cash flows denominated in currencies other than the U.S. dollar. From time to time, GBC utilizes a foreign exchange risk management program to manage its foreign exchange exposures to help minimize the adverse impact of currency movements. Certain loans and cash flows in the U.S. and in foreign countries are currently hedged through foreign currency forward contracts.
The majority of GBC's exposures to currency movements are in Europe, the Asia/Pacific region, Canada and Mexico, and the significant hedging transactions related to these areas outstanding as of December 31, 2003 are presented below. All of the outstanding contracts have maturity dates in 2004. Increases and decreases in the fair market values of the forward agreements are completely offset by changes in the values of the net underlying foreign currency transaction exposures. GBC's contracts are primarily for the sale or purchase of foreign currencies in exchange for U.S. dollars. Selected information related to GBC's foreign exchange contracts as of December 31, 2003 is as follows (all items except exchange rates in millions):
Forward contracts as of
December 31, 2003
Average
Exchange
Rate
Notional
Amount
Fair
Market
Value
Gain
(Loss) (1)
Currency sold (2)
Sell Euro/Buy USD
0.89
$35.2
$37.2
$(2.0)
Sell CAD/Buy USD
1.41
11.9
12.8
(0.9)
Sell GBP/Buy USD
0.63
4.0
4.4
(0.4)
Sell USD/Buy Euro
1.13
6.2
6.8
0.6
Sell USD/Buy MXN
0.09
6.4
6.3
(0.1)
Sell GBP/Buy Euro
0.81
4.0
4.0
0.0
Sell Euro /Buy CAD
0.64
4.8
5.0
(0.2)
Other
7.7
8.0
(0.3)
Total
$(3.3)
====
(1)As of December 31, 2003, GBC recorded cumulative unrealized losses of approximately $0.9 million in its consolidated statement of income related to hedges of intercompany loans (hedge accounting has not been applied to these transactions). Unrealized losses of approximately $2.4 million related to hedges of intercompany inventory purchases have been recorded in Other Comprehensive Income.
(2)CAD = Canadian Dollars; GBP = Pound Sterling; MXN = Mexican Pesos
Interest Rate Risk Management
As a result of GBC's funding program for its global activities, GBC has various debt obligations upon which interest is paid on the basis of fixed and floating rates. GBC utilizes an interest rate
management program to reduce its exposures to floating interest rates and achieve a desired risk profile. To accomplish this objective, GBC currently hedges these exposures by using interest rate swap agreements.
The table below provides information about GBC's derivative financial instruments and other financial instruments that are sensitive to changes in interest rates, including interest rate swaps and debt obligations. For debt obligations, the table presents significant principal cash flows and related weighted average interest rates by expected maturity dates. For interest rate swaps, the table presents notional amounts and weighted average interest rates by contractual maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contracts. Weighted average variable rates are based on implied forward rates in the yield curve at the reporting date and the current interest rate spreads under the Company's credit facilities. The information is presented in U.S. dollar equivalents, which is GBC's reporting currency. Significant interest rate sensitive instruments as of December 31, 2003, are presented below (in millions):
(1)Rates presented are as of December 31, 2003. Refer to "Liquidity and Capital Resources" for further discussion of the interest rate spreads on GBC's Facility borrowings in 2003.
Refer to notes 1, 3, 7 and 8 of the consolidated financial statements for additional discussion of GBC's foreign exchange and financial instruments.
Item 8.
Item 8. Financial Statements and Supplementary Data
Page
Report of Independent Auditors
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders' Equity
Notes to Consolidated Financial Statements
Report of Independent Auditors
To the Board of Directors and Shareholders of General Binding Corporation:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, cash flows and stockholders' equity present fairly, in all material respects, the financial position of General Binding Corporation ("GBC") and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of GBC's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The financial statements of General Binding Corporation as of, and for the year ended December 31, 2001, (prior to the adjustments discussed in notes 1, 2 and 13), were audited by other independent accountants who have ceased operations. Those accountants expressed an unqualified opinion on those financial statements in their report, dated January 25, 2002 (except with respect to the matters discussed in Note 13 of the 2001 financial statements, as to which the date was March 9, 2002).
As discussed in notes 1 and 2 to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No.142, "Goodwill and Other Intangible Assets" (SFAS No. 142).
As discussed above, the financial statements of General Binding Corporation as of, and for the year ended December 31, 2001, were audited by other independent accountants who have ceased operations. As described in note 2, these financial statements have been revised to include the transitional disclosures required by SFAS No.142, which was adopted by the Company as of January 1, 2002. Further, as described in note 13, the Company revised the reporting of segment information. We audited such disclosures and revisions in segment information as described in notes 2 and 13. In our opinion, such transitional disclosures and revisions in segment information for 2001 in notes 2 and 13 are appropriate and have been properly applied. Also as described in notes 1 and 13, these financial statements have been revised to reflect the adoption of EITF 01-09, as of January 1, 2002. We audited the revisions to the 2001 statements described in notes 1 and 13 as a result of the adoption of EITF 01-09. In our opinion, such revisions for 2001 in notes 1 and 13 are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2001 financial statements of the Company other than with respect to such disclosures and revisions and, accordingly, we do not express an opinion or any other form of assurance on the 2001 financial statements taken as a whole.
PricewaterhouseCoopers LLP
Chicago, Illinois
February 25, 2004
Predecessor Auditor (Arthur Andersen LLP) Opinion
The following report is a copy of a report previously issued by Arthur Andersen LLP and has not been reissued by Arthur Andersen LLP. As discussed in notes (1), (2) and (13) to the consolidated financial statements, the Company adopted the provisions of Emerging Issues Task Force Issue No. 01-09, "Accounting for Consideration Given by a Vendor to a Customer" (Issue 01-09), and Statement of Financial Accounting Standards No.142, "Goodwill and Other Intangible Assets"(SFAS No. 142). As discussed in notes (1), (2), and (13) the Company has reflected the impact of adopting Issue 01-09 in the 2001 consolidated financial statements, the transitional disclosures for 2001 as required by SFAS No. 142 in the notes to the consolidated financial statements and revisions to the reporting of segment information. The Arthur Andersen LLP report does not extend to these changes to the 2001 consolidated financial statements and notes thereto. The adjustments to the 2001 consolidated financial statements and notes thereto were reported on by PricewaterhouseCoopers LLP as stated in their report appearing herein. Also, the Arthur Andersen LLP report is dual dated with a reference to note 13 of the consolidated financial statements. The reference to note 13 of the consolidated financial statements is no longer applicable as such information from prior years has been incorporated into other notes of the consolidated financial statements.
Report of Independent Public Accountants
To the Board of Directors and Stockholders of General Binding Corporation:
We have audited the accompanying consolidated balance sheets of General Binding Corporation ("GBC," a Delaware corporation) and Subsidiaries as of December 31, 2001* and 2000*, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001*. These consolidated financial statements are the responsibility of GBC's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of General Binding Corporation and Subsidiaries as of December 31, 2001* and 2000*, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001*, in conformity with accounting principles generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II** is the responsibility of GBC's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule** has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Chicago, Illinois
January 25, 2002
(Except with respect to the matters discussed in Note 13, as to which the date is March 9, 2002)
* The balance sheets as of December 31, 2001 and 2000 and the statements of income and cash flow for the years ended December 31, 2000 and 1999 are not presented in this Annual Report on Form 10-K.
**This report on Schedule II applies for the years ending December 31, 2001, 2000 and 1999. Schedule II for the years ended December 31, 2000 and 1999 are not presented in this Annual Report on Form 10-K.
General Binding Corporation and Subsidiaries
Consolidated Statements of Income
(000 omitted, except per share data)
General Binding Corporation and Subsidiaries
Consolidated Balance Sheets
(000 omitted, except share data)
General Binding Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
(000 omitted excepts share data)
General Binding Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of General Binding Corporation ("GBC") and its domestic and international subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. Investments in companies which are 20% to 50% owned are treated as equity investments, and GBC's share of earnings is included in income. Investments in companies where GBC owns in excess of 50% have been consolidated.
Certain amounts for prior years have been reclassified to conform to the 2003 presentation.
Cash and Cash Equivalents
Temporary cash investments with original maturities of three months or less are classified as cash equivalents.
Inventory Valuation
Inventories are valued at the lower of cost or market on a first-in, first-out basis. Inventory costs include labor, material and overhead. Inventory balances are net of valuation allowances.
Depreciation of Capital Assets
Depreciation of capital assets for financial reporting is computed principally using the straight-line method over the following estimated lives:
Buildings
8-50 years
Machinery and equipment
3-20 years
Computer hardware and software
2-10 years
Leasehold improvements
Lesser of lease term or useful life
Routine repair and maintenance costs are expensed as incurred. Significant repair or maintenance costs incurred which extend the useful lives of assets are capitalized.
Goodwill and Other Intangible Assets
In 2001, for financial reporting purposes, goodwill and other intangible assets were amortized using the straight-line method over their estimated useful lives, generally 10 to 40 years.
Effective January 1, 2002, GBC adopted SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." With the adoption of SFAS No 142, goodwill is no longer subject to amortization over its useful life. Rather, goodwill is subject to at least an annual assessment for impairment by applying a fair-value-based test. GBC performs its annual impairment test during the first quarter of each year, commencing with
the first quarter of 2002. Also, under the new rules, an acquired intangible asset (other than goodwill) would be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer's intent to do so.
f. Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax benefits, such as net operating loss carry forwards, are recognized to the extent that realization of such benefits is more likely than not.
GBC's policy is to record U.S. income taxes on the earnings of its international subsidiaries that are expected to be distributed to GBC. As of December 31, 2003, the cumulative amount of undistributed earnings of international subsidiaries upon which U.S. income taxes have not been recorded was approximately $45.1 million. In the opinion of management, this amount remains permanently invested in the international subsidiaries.
GBC is included in the consolidated U.S. Federal Income tax return and certain U.S. State Income tax returns of its majority shareholder, Lane Industries, Inc. The amount of income tax liability for which GBC will be responsible is determined by Tax Allocation Agreements between the Company and Lane Industries. Differences between GBC's liability on a "separate return" basis and that computed under the Tax Allocation Agreements are reflected in GBC's financial statements as either a capital contribution or distribution.
Revenue Recognition
GBC recognizes revenues from product sales and services when earned, as defined by GAAP, and in accordance with SEC Staff Accounting Bulletin No. 101 (SAB No. 101). Specifically, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, and collectibility is reasonably assured. For product sales, revenue is not recognized until title and risk of loss have transferred to the customer, generally upon shipment. The Company also derives income from service maintenance agreements. Income from such agreements is deferred and recognized over the term of the agreement (generally one to three years), primarily on a
straight-line basis. GBC provides for its estimate of doubtful accounts, sales returns, and sales incentives at the time of revenue recognition.
Sales Incentives
GBC offers a variety of sales incentives to resellers and consumers of its products. The incentives primarily consist of rebates, volume and growth incentives, marketing development funds, catalog allowances and cooperative advertising. The cost of these incentives is estimated based upon the terms of the customer agreements, along with historical and projected customer purchase volumes, and is recorded as a reduction in revenue.
i. Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires the use of certain estimates by management in determining the entity's assets, liabilities, revenues and expenses. Actual results could differ from those estimates.
j. Financial Instruments
Many of GBC's financial instruments (including cash and cash equivalents, accounts receivable, notes payable, and other accrued liabilities) carry short-term maturities; as a result, their fair values approximate carrying values. As of December 31, 2003, approximately 43% of GBC's long-term debt obligations, including current maturities of long-term debt obligations, had floating interest rates, and the remaining debt obligations had a fixed interest rate. With the exception of the senior subordinated notes (see note 7), the fair value of these instruments approximates the carrying value.
Amounts currently due to or due from interest rate swap counterparties are recorded in interest expense in the period in which they accrue. Gains and losses on hedging firm foreign currency commitments are deferred and included as a component of the related transaction which is being hedged.
k. Related Parties
GBC has relationships with several related parties. Lane Industries, Inc. is GBC's majority shareholder, and controls a majority of the voting shares of GBC. Transactions between GBC and Lane Industries, which primarily relate to shared administrative services, are immaterial. However, as described in note1(f), GBC and Lane Industries have entered into "Tax Allocation Agreements," which may significantly impact the amount of U.S. taxes received or paid by GBC in any year.
GBC also has relationships with certain unconsolidated joint ventures. As part of the on-going relationships with these entities, GBC both buys and sells products from/to these entities. Transactions, with respect to sales and credit terms, are conducted at "arms-length" terms.
l New Accounting Standards
In January 2003, the FASB issued Interpretation No. 46 (FIN No. 46), "Consolidation of Variable Interest Entities." The objective of FIN No. 46 is to improve financial reporting by companies with transactions involving variable interest entities. Prior to FIN No. 46, companies generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. Under FIN 46, a variable interest entity would be consolidated by a company if that company is subject to a majority of the risk or loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. In December 2003, the FASB issued a revision to FIN No. 46 ("46R") to clarify certain provisions of FIN No. 46 and to exempt certain entities from its requirements. Special effective dates apply to enterprises that have fully or partially applied FIN No. 46 prior to issuance of 46R. Otherwise, application of 46R or FIN No. 46 is required in financial statements of public entities for periods ending after December 15, 2003. GBC is
still assessing the impact, if any, 46R and FIN No. 46 will have on the Company's results or financial position. In December 2003, the FASB issued a revision to SFAS No. 132, " Employers Disclosures about Pensions and Other Postretirement Benefits." This statement revises certain disclosures about pension plans and other postretirement benefit plans. The additional disclosures required by this statement include: information describing the types of plan assets; investment strategy; measurement date(s); plan obligations; cash flows; and components of net periodic benefit cost to be recognized during interim periods. GBC is required to adopt the new disclosures about foreign plans and estimated future benefit payments in 2004.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit and Disposal Activities." This statement revises the accounting for exit and disposal activities under EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity," by spreading out the reporting of expenses related to restructuring activities. Commitment to a plan to exit an activity or dispose of long-lived assets will no longer be sufficient to record a one-time charge for most anticipated costs. Instead, companies will record exit or disposal costs when they are "incurred" and can be measured at fair value, and they will subsequently adjust the recorded liability for changes in estimated cash flows. The provisions of SFAS No.146 are effective prospectively for exit or disposal activities initiated after December 31, 2002. Companies may not restate previously issued financial statements for the effect of the provisions of SFAS No. 146, and liabilities that a company previously recorded under EITF Issue 94-3 are grandfathered. GBC's adoption of SFAS No. 146 in 2003, did not have a material impact on its consolidated financial statements.
On January 1, 2001 GBC adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities." These statements establish accounting and reporting standards for certain derivative financial instruments and hedging activities (including certain derivative instruments embedded in other contracts) and require GBC to recognize all derivatives as either assets or liabilities on the balance sheet and measure them at fair market value. The adjustments to GBC's financial statements as a result of adopting these standards were not significant.
Effective January 1, 2002, GBC implemented EITF Issue No. 01-09 "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)." This pronouncement specifies when companies are required to record the cost of certain sales incentives and how the costs are to be classified in the income statement. GBC previously recorded the costs of such sales incentives as selling expenses in its income statement; these costs are now recorded as a reduction in sales. The prior years' results have been restated for this change. The impact on the prior years' results was to reduce both net sales and selling, service and administrative expenses by $72.3 million in 2001. There has been no change to operating income as a result of the implementation of this standard; however, operating income margins have increased.
Effective January 1, 2002, GBC implemented SFAS No. 141, "Business Combinations," and SFAS No. 142, " Goodwill and Other Intangible Assets." With the adoption of SFAS No
142, goodwill is no longer subject to amortization over its useful life. Rather, goodwill is subject to at least an annual assessment for impairment by applying a fair-value-based test. Under the new rules, an acquired intangible asset would be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer's intent to do so.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees of Indebtedness of Others" (FIN No. 45). The initial recognition and measurement provisions of this interpretation, which require a guarantor to recognize a liability at the inception of a guarantee at fair value, are effective on a prospective basis to guarantees issued or modified after January 1, 2003. The adoption of FIN No. 45 has not had a material impact on GBC's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Compensation - Transition and Disclosure", which amends SFAS No. 123. The new standard provides alternative methods for transition to the fair value-based method of accounting for stock-based employee compensation from the intrinsic method. GBC currently accounts for stock-based employee compensation under the intrinsic method and has not made a determination as to when, or if, the Company would change to the fair value-based method. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 to require more prominent and frequent disclosures in financial statements about the effects of stock-based compensation. The required disclosures have been adopted by the Company.
m. Stock Compensation Plan
GBC has a stock-based employee compensation plan that provides for stock options and restricted stock units. The Company applies the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for these plans. In accordance with the intrinsic value method, no compensation expense is recognized for the Company's fixed stock option plans. The following table illustrates the effect on net income and earnings per share (EPS) if the company had applied the fair value provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", to all stock-based employee compensation (000 omitted):
Pro forma compensation expense for stock options was calculated using the Black-Scholes model, with the following weighted-average assumptions for grants in 2003, 2002, and 2001
respectively: expected life of ten years for 2003 and 2002, and eight years for 2001; expected volatility of 56%, 50% and 55%; and risk-free interest rates of 3.75%, 4.87%, and 5.29%. The weighted-average fair values of stock options granted were $6.07, $8.89 and $5.31 in 2003, 2002 and 2001, respectively.
(2) Goodwill and Other Intangible Assets
In accordance with SFAS No. 142, GBC tests its goodwill balances to determine whether these assets are impaired. The annual impairment test is performed as of January 1. After performing the impairment test in 2002, GBC recorded a non-cash charge of $110 million ($79 million after-tax), primarily related to the impairment of goodwill in the office products business of the Commercial and Consumers Group.
SFAS No. 142 also requires that previously recognized intangible assets, other than goodwill, be reassessed to determine the appropriateness of the estimated useful lives of these assets. Intangible assets determined to have finite lives are amortized over those lives, and intangible assets that have indefinite lives are not amortized. As of December 31, 2003, there have been no events or circumstances which would warrant a revision to the remaining useful lives of these assets.
GBC's carrying values for goodwill by business segment as of December 31, 2003 and 2002 are summarized below (000 omitted). The change in the carrying amount for goodwill between December 31, 2002 and December 31, 2003 is related to the impairment charge of GBC's investment in GMP Co. Ltd. ("GMP") and changes in foreign currency exchange rates (000 omitted).
In 2003, GBC recorded a $4.7 million non-cash charge to reflect the impairment of GBC's investment in GMP. The Company has an ownership interest in GMP of approximately 20%, and accounts for its investment under the equity method of accounting. In the fourth quarter of 2003, GBC recognized its share (approximating $1.2 million) of GMP's fourth quarter 2003 loss. As a result of GMP's poor financial performance and other business factors, GBC determined that its investment in GMP was impaired.
GBC's other intangible assets as of December 31, 2003 and 2002 are summarized below (000 omitted):
Amortization expense related to GBC's other intangible assets is summarized below (000 omitted):
Fiscal year ended December 31,
Amortization
Expense
$1,047
(3) Foreign Currency Exchange and Translation
The assets and liabilities of GBC's subsidiaries outside the U.S. are translated from their local currencies at year end rates of exchange, and income and cash flow statements are translated at weighted-average rates of exchange. Foreign currency translation adjustments are included in other comprehensive income in the consolidated statements of income and as a separate component of stockholders' equity.
The accompanying consolidated statements of income include net gains and losses on foreign currency transactions. Such amounts are reported as other income (expense) and are summarized as follows (000 omitted):
Foreign Currency
Year Ended December 31,
Transaction Gain/(Loss) (1)
$ (899)
(322)
(1) Foreign currency transaction gains/losses are subject to income taxes at the respective country's effective tax rate.
(4) Inventories
Inventories are summarized as follows (000 omitted):
(5) Restructuring and Other
Pre-tax restructuring charges in 2003 totaled $11.1 million, related to the following projects: a) relocating the manufacturing of labor intensive visual communication products from the Company's facility in Booneville, Mississppi to Nuevo Laredo, Mexico; b) closing a binder manufacturing plant in Amelia, Virginia and consolidating production in the Company's plant in Lincolnshire, Illinois; c) company-wide workforce reduction programs; and d) subleasing a manufacturing facility as part of a previously announced restructuring. Approximately 420 employees will be affected as a result of these actions.
The restructuring charges associated with the 2003 projects consist of the following (in millions):
Project
Severance
Asset Impairments and Other
Exit Costs
Lease
Cost
Total
Relocating manufacturing from Booneville to Nuevo Laredo
$2.6
$4.5
-
$ 7.1
Plant closure-Amelia, Virginia
0.2
-
-
0.2
Reduction-in-force programs
2.4
-
-
2.4
Sublease manufacturing facility
-
-
1.4
1.4
$5.2
===
$4.5
===
$1.4
===
$11.1
====
The transition of manufacturing operations from Booneville, Mississippi to Nuevo Laredo, Mexico began in July 2003, and is expected to be completed by the end of the second quarter of 2004. The closing of the Amelia, Virginia plant commenced in the first quarter of 2004 and is expected to be completed by the end of second quarter of 2004. Initiatives related to work force reductions were implemented during the second half of 2003.
During 2002, GBC recorded pre-tax restructuring charges of $8.0 million for expenses related the following projects: a) closing the Company's facility in Buffalo Grove, Illinois and transfer the manufacturing and administrative functions to other GBC locations; b) downsizing a binder manufacturing facility in Amelia, Virginia; c) severance costs associated with the creation of the Commercial Consumer Group; and d) charges related to the reorganization of certain corporate and other support functions.
The restructuring charges associated with the 2002 projects consist of the following (in millions):
Project
Severance
Asset Impairments and Other
Exit Costs
Lease
Cost
Total
Buffalo Grove facility closure
$0.7
$1.6
$0.8
$ 3.1
Downsizing of Amelia facility
0.8
0.3
-
1.1
Commercial and Consumer Group
1.6
0.2
-
1.8
Reduction in support functions
2.0
-
-
2.0
$5.1
===
$2.1
===
$0.8
===
$8.0
===
The transition of manufacturing operations from the Buffalo Grove facility was completed in 2002; administrative and support personnel previously located in the Buffalo Grove facility were transferred to other GBC locations by early 2003. Actions associated with the Amelia facility and other reductions in force were completed in 2002.
During 2001, GBC recorded pre-tax restructuring charges of $7.3 million, which consisted of: a) $2.7 million related to the shutdown of GBC's Ashland, Mississippi operations; b) $2.0 million related to closure of GBC's distribution and administrative facility in Germany; c) $0.5 million related to facility reductions in the United Kingdom; d) $0.4 million related to the shutdown of operations in Poland; and e) $1.7 million for work force reductions in the Company's, Europe, Commercial and Consumer, and Industrial and Print Finishing Groups.
The components of the restructuring expenses are as follows (000 omitted):
Management believes that the restructuring provisions recorded will be adequate to cover estimated restructuring costs related to these activities that will be paid in future periods. The balance in the restructuring reserve at December 31, 2003 is primarily related to severance, asset write-downs, lease expenses, early retirement and other benefit expenses to be paid in the future periods.
Changes in the restructuring reserve for the years ended December 31, 2003 and 2002 were as follows (000 omitted):
Severance
Asset
Impairment
and Other
Exit Costs
Lease Cancellation Costs
Total
Balance at December 31, 2001
$ 3,223
$ 1,983
$ -
$ 5,206
Activities during the year:
Provision
5,092
2,076
8,013
Cash charges
(4,289)
(675)
(145)
(5,109)
Non-cash charges
-
(2,574)
-
(2,574)
Balance at December 31, 2002
4,026
5,536
Activities during the year:
Provision
5,240
4,457
1,405
11,102
Cash charges
(3,850)
(210)
(676)
(4,736)
Non-cash charges
-
(4,497)
(3,658)
Balance at December 31, 2003(1)
$ 5,416
=====
$ 560
====
$ 2,268
=====
$ 8,244
=====
(1)The restructuring reserve at December 31, 2003 consisted of $6.3 million related to current items reported in the balance sheet as a separate item and $1.9 million related to long term lease cancellation costs reported in the balance sheet as a component of other long-term liabilities.
During 2003, 2002 and 2001, GBC incurred other charges of $4.7 million, $1.1 million and $6.2 million, respectively. The components of these charges are as follows (000 omitted):
(6) Retirement Plans and Post-retirement Benefits
GBC sponsors a 401(k) plan for its full-time domestic employees. The participants of the 401(k) plan may contribute from 1% to 25% of their eligible compensation on a pretax basis. GBC makes annual contributions that match 100% of pretax contributions up to 4.5% of eligible compensation. Substantially all eligible full-time domestic employees can participate in the 401(k) plan. GBC's contributions to the plan were $3,003,000 in 2003, $3,319,000 in 2002 and $3,871,000 in 2001.
GBC's international subsidiaries sponsor a variety of defined benefit and defined contribution plans. These plans provide benefits that are generally based upon the employee's years of credited service. The benefits payable under these plans, for the most part, are provided by the establishment of trust funds or the purchase of insurance annuity contracts. At December
31, 2003, the accumulated benefit obligation (ABO) is in excess of the plan assets for certain of these plans. The projected benefit obligation, ABO, and fair value of plan assets at December 31, 2003 for these plans were $26.8 million, $25.8 million and $15.9 million, respectively, and $23.6 million, $22.7 million and $12.5 million at December 31, 2002, respectively.
In 2001, GBC established a defined benefit Supplemental Employee Retirement Plan ("SERP") for the Company's current Chairman, President and CEO. Benefits under the SERP vest over nine years. At age 62 and, assuming full vesting, the SERP would pay an annual pension benefit of $450,000. This plan is not currently funded.
GBC currently provides certain health care benefits for eligible domestic retired employees. Employees may become eligible for those benefits if they have fulfilled specific age and service requirements. GBC monitors the cost of the plan, and has, from time to time, changed the benefits provided under this plan. GBC does not pre-fund its obligations and reserves the right to make additional changes or terminate these benefits in the future. Any changes in the plan or revisions of the assumptions affecting expected future benefits may have a significant effect on the amount of the obligation and annual expense.
The following tables provide a reconciliation of the changes in GBC's benefit plan obligations and the fair value of assets (000 omitted):
The following table provides the amounts recognized in the consolidated balance sheets as of December 31, 2003 and 2002 (000 omitted):
The following table provides the components of net periodic pension cost for the plans for 2003, 2002, and 2001 (000 omitted):
SFAS No. 87, "Employers' Accounting for Pensions," requires that a minimum liability be established when a pension plan's accumulated benefit obligation ("ABO") exceeds its net assets. The minimum pension liability must be at least equal to the unfunded ABO. As a result of unfavorable asset returns and a decline in interest rates during 2002, GBC recognized a minimum pension liability of $10.2 million. In 2003, this liability was reduced by $1.7 million (to $8.5 million), primarily due to improved asset returns. The minimum pension liability is reflected as a reduction to "other comprehensive income," which is a component of stockholder's equity.
The following table provides the components of net periodic post-retirement benefit cost for the plans for 2003, 2002, and 2001 (000 omitted):
The assumptions used in the measurement of the Company's benefit obligations are shown in the following table:
For measurement purposes, a 6.0 % annual rate of increase in the per capita cost of covered health care benefits was assumed for 2003. The rate was assumed to be 6.0% during 2004 and remain at this level thereafter.
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1.0% change in assumed health care cost trend rates would have the following effects (000 omitted):
1.0% Increase
1.0% Decrease
Effect on total of service and interest cost components of
Net periodic post retirement health care benefit costs
$125
$(111)
Effect on the health care component of the accumulated
Post retirement benefit obligation
$712
$(643)
(7) Debt and Credit Arrangements
During 2003, GBC entered into three new financing agreements. On June 26, 2003, the Company completed the refinancing of its primary senior credit facility (the "Primary Facility"). The new $197.5 million Primary Facility includes a $72.5 million multicurrency revolving credit line and a $125 million term loan. The maturity date on the Primary Facility is January 15, 2008, and it provides for significantly lower interest rate spreads than the previous senior credit facility (the "Previous Primary Facility"). In the fourth quarter of 2003, a payment of $2.5 million was made on the term loan. Outstanding borrowings under the Primary Facility totaled $122.5 million at December 31, 2003. Concurrent with the completion of the Primary Facility, GBC entered into a mortgage financing arrangement under which its real estate holdings in Northbrook and Skokie, Illinois and its real estate and equipment in Addison, Illinois are pledged as collateral (the "Mortgage Financing"). The $14.8 million in proceeds from the Mortgage Financing was used to repay a portion of the Previous Primary Facility. In April 2003, GBC entered into a new multicurrency revolving credit facility in the Netherlands (the "Netherlands Facility"). The maturity date on the Netherlands Facility is April 9, 2008. The majority of the $16.8 million in proceeds from the Netherlands Facility was also used to repay a portion of the Previous Primary Facility. The Netherlands Facility had no outstanding borrowings as of December 31, 2003.
Interest rates on the Primary Facility are variable and are set at LIBOR plus 3.75% for borrowings under the $72.5 million multicurrency revolving credit line, and LIBOR plus 4.50% for the term loan. Borrowings under the Primary Facility are subject to a "pricing grid" which provides for lower interest rates in the event that certain of GBC's financial ratios improve in future periods.
GBC must meet certain restrictive financial covenants as defined under the Primary Facility. The covenants become more restrictive over time and require the Company to maintain certain ratios related to total leverage, senior leverage, fixed charge coverage, as well as a minimum level of consolidated net worth. There are also other covenants, including restrictions on dividend payments, acquisitions, additional indebtedness, and capital expenditures. In addition to the restrictive covenants, multicurrency revolving credit line borrowings are subject to a "borrowing base" which is determined based upon certain formulas tied to GBC's trade receivables and inventory. With the exception of its assets pledged under the Mortgage Financing, substantially all of the assets of General Binding
Corporation and its domestic subsidiaries, as well as a portion of equity in certain foreign subsidiaries are pledged as collateral under the Primary Facility.
As of and for the year ended December 31, 2003, the Company was in compliance with all debt covenants.
The book value of GBC's variable rate debt approximated the fair market value as of December 31, 2003 and 2002. The market value of the Senior Subordinated Notes was approximately 101% of book value as of December 31, 2003.
Long-term debt consists of the following at December 31, 2003 and 2002 (000 omitted):
The scheduled maturities of debt for each of the five years subsequent to December 31, 2003, are as
follows (000 omitted):
Year Ending December 31,
Amount
$19,995
15,716
18,195
13,907
227,154
Thereafter
7,047
Total
$302,014
======
Currently, GBC has various short-term, variable-rate credit arrangements with borrowing capacity of $13.3 million. Outstanding borrowings under these arrangements totaled $5.8 million at December 31, 2003. Interest rates on these arrangements are primarily based on the lenders' costs of funds plus applicable margins. None of the lenders under these credit
arrangements are committed to continue to extend credit after the maturities of outstanding borrowings or to extend the maturities of any borrowings.
Information regarding short-term debt, variable-rate credit arrangements for the three years ended December 31, 2003, 2002 and 2001 is as follows (000 omitted):
Notes
Payable
To Banks
Balance At
End of the Year
Weighted
Average
Interest Rate At
End of Year
Maximum
Month-end Balance
Outstanding
During the Year
Average
Amount
Outstanding
During the Year
Weighted
Average
Interest Rate
During the Year
(1)
(2)
(3)
(4)
(5)
$ 5,819
4.0%
$10,085
$7,919
5.9%
10,806
5.3
10,806
8,111
6.6
7,202
5.2
9,309
8,334
8.8
(1) Notes payable by GBC's foreign subsidiaries were $5,819 at December 31, 2003, $10,806 at December 31, 2002, and $7,202 at December 31, 2001.
(2) The weighted average interest rate is computed by dividing the annualized interest expense for the short-term debt outstanding by the short-term debt outstanding at December 31.
(3) The composition of GBC's short-term debt will vary by category at any point in time during the year.
(4) Average amount outstanding during the year is computed by dividing the total daily outstanding principal balances by 365 days.
(5) The weighted average interest rate during the year is computed by dividing the actual short-term interest expense by the average short-term debt outstanding.
(8) Derivative Financial Instruments
Interest Rate Swap Agreements
From time to time, GBC has entered into interest rate swap agreements to hedge its floating interest rate exposures. Under interest rate swap agreements, GBC agrees with other parties to exchange, at specified intervals, the differences between fixed-rate and floating-rate interest amounts calculated by reference to an agreed-upon notional amount. The swap agreements have various maturity dates through February 2005. GBC has applied hedge accounting for these instruments, and the fair values of the interest rate swap agreements are estimated using the net present value of the anticipated future cash flows. To the extent the hedges are effective, unrealized gains and losses are recorded in other comprehensive income; unrealized gains and losses on ineffective hedges are recognized in the income statement. Selected information related to GBC's interest rate swap agreements is as follows (in millions):
GBC is exposed to potential losses in the event of nonperformance by the counterparties to the interest rate swap, although the Company attempts to mitigate this risk by diversifying its counterparties.
Foreign Exchange Contracts
GBC enters into foreign exchange contracts to hedge foreign currency risks. These contracts hedge firmly committed transactions such as inventory purchases, royalties, management fees, and intercompany loans. Gains and losses on foreign exchange contracts are recorded in a comparable manner to the underlying transaction being hedged (e.g., costs related to inventory purchases are recorded to inventory and recognized in cost of sales). Obligations under foreign exchange contracts are valued at either the spot rate or an appropriate forward rate at the respective balance sheet date. Selected information related to GBC's foreign exchange contracts is as follows (in millions):
(1)As of December 31, 2003, GBC recorded cumulative unrealized losses of approximately $0.9 million in its consolidated statement of income related to hedges of intercompany loans (hedge accounting has not been applied to these transactions). Unrealized losses of approximately $2.4 million related to hedges of intercompany inventory purchases have been recorded in other comprehensive income.
Foreign exchange contracts as of December 31, 2003 had various maturities through December 2004. The unrealized gains and losses are substantially offset by changes in the valuation of the underlying items being hedged.
(9) Rents and Leases
GBC has entered into numerous operating leases, primarily for manufacturing and office facilities. Future minimum rental payments required for all non-cancelable lease terms in excess of one year as of December 31, 2003 are as follows (000 omitted):
Year Ending December 31,
Operating Lease Payments
$13,845
11,514
9,492
8,098
7,097
After 2008
15,024
Total minimum lease payments
$65,070
======
Total rental expense for the years ended December 31, 2003, 2002 and 2001 was $15.4 million, $16.3 million and $16.9 million, respectively.
(10) Common Stock and Stock Options
GBC's Certificate of Incorporation provides for 40,000,000 authorized shares of Common Stock, $0.125 par value per share, and 4,796,550 shares of Class B Common Stock, $0.125 par value per share. Each Class B share is entitled to 15 votes and is to be automatically converted into one share of common stock upon transfer thereof. All of the Class B shares are owned by Lane Industries, Inc., GBC's majority stockholder.
The following table illustrates the computation of basic and diluted earnings per share (000 omitted except per share data):
(1)Weighted average shares includes both Common Stock and Class B Common Stock.
(2)Amounts represent per share amounts for both Common Stock and Class B Common Stock.
(3)GBC had 457,255, 479,648 and 328,191 dilutive shares outstanding as of December 31, 2003, 2002 and 2001
respectively. These options were not included in the calculation of earnings per share as they would have been
anti-dilutive.
GBC has a non-qualified stock incentive plan for employees (the "Employee Plan") and non-employee directors (the "Director Plan"). Options may be granted under both plans at a price not less than the fair market value of the stock on the date of the grant. Options granted under the Employee Plan generally vest at a rate of 25% per year and can begin to be exercised one year after the grant date. Options granted under the Director Plan are generally exercisable six months or one year after the grant. In the event of a change in control of the Company, all options granted become 100% vested and are immediately exercisable.
A summary of the stock option activity is as follows (000 omitted):
The 2,219,000 options outstanding at December 31, 2003 have exercise prices between $7.00 and $30.50 per share, with a weighted average exercise price of $10.37 per share and a weighted average remaining contractual life of 7.50 years.
The following is a summary of stock options outstanding at December 31, 2003 (option shares in 000's):
As of December 31, 2002 and 2001, there were 743,349 and 576,923 options exercisable, respectively, at weighted-average exercise prices of $11.12 and $12.07, respectively.
GBC's stock option plan also provides for the grant of restricted stock units ("RSUs"). In 2003 and 2002, GBC awarded 203,302 and 102,000 RSU's respectively. The RSUs awarded in 2003 vest 33 1/3% in each of the three years subsequent, and are further subject to the achievement of certain business performance criteria. Based upon the level of achieved performance, the number of RSUs actually awarded can vary from 0% to 150% of the original grant. The RSUs awarded in 2002 vest 100% in 2005. Upon vesting, the RSUs will be converted into common stock of the Company unless the RSU award recipient elects to defer receipt of the shares. Compensation expense is recognized over the vesting period for the value of the RSUs based upon the value of GBC common stock. For 2003 and 2002, compensation expense of $727,000 and $389,000 respectively was recognized.
(11) Income Taxes
Income (loss) before taxes is as follows (000 omitted):
The provision for income taxes is as follows (000 omitted):
GBC's income tax expense (benefit) varies from the statutory Federal income tax expense (benefit) as a result of the following factors (000 omitted):
(1)GBC received state income tax refunds in 2003 and a U.S. Federal income tax refund in 2002, related to the settlement of an issue arising from one of its domestic subsidiaries.
(2)In 2002, new U.S. tax legislation enabled GBC to carry back its 2001 domestic tax loss to 1996 and 1997, generating a $7.5 million tax refund. The carryback also displaced previously utilized tax credits, which were written-off because GBC was not able to utilize them before the expiration of the carryover period.
(3)Represents a non-cash write-off of deferred tax assets as a result of a reorganization of certain international subsidiaries.
(4)In 2003, certain international tax audits were closed. As a result, GBC reversed previously accrued taxes, which reduced the income tax provision by approximately $1.3 million.
Significant components of GBC's deferred tax assets and liabilities are as follows (000 omitted):
At December 31, 2003, the Company has $76.4 million of net operating loss carry forwards available to reduce future taxable income of domestic and international companies. These loss carry forwards expire in the years 2004 through 2024 or have an unlimited carryover period. A valuation allowance of has been provided for a portion of the net operating loss carry forwards and other deferred tax assets that are more likely than not expected to expire before the Company can use such benefits.
(12) Contingencies
GBC is currently involved in matters of litigation arising from the normal course of business. None of the litigation matters either individually or in the aggregate is material to the Company. Additionally, GBC has on-going tax audits in the U.S. and various international jurisdictions. Accruals have been provided related to such litigation and tax matters based upon management's current estimate of the most likely outcomes. Based upon consultation with legal counsel and tax experts, GBC believes that if any additional liabilities were to arise from these matters that they would not have a material effect on the Company's financial position, results of operations or cash flows.
(13) Business Segments and Foreign Operations
In 2003, GBC modified its segment reporting to reflect the Company's organizational changes. The changes primarily consisted of combining three of GBC's four business units into the following two new groups:
Commercial and Consumer Group (CCG) - combination of the Document Finishing Group, Office Products Group, the Education division of the Films Group and the Asia/Pacific region which was previously reported under "Other." CCG focuses on marketing strategies for "consumer-ready" products that leverage GBC's leadership among customers of its binding, laminating and information-display products in the work, school and home environments.
Industrial and Print Finishing Group (IPFG) - combination of the Films Group and the Automated Finishing Division of the Document Finishing Group. IPFG targets print-for-pay and other finishing customers who use GBC's professional-grade finishing equipment and supplies as a part of their mass production of sophisticated, professional applications.
The Commercial and Consumer Group's revenues are primarily derived from the sale of binding, punching and laminating equipment and related supplies, visual communications products (writing boards, bulletin boards, easels, etc.), document shredders, custom binders and folders, and desktop accessories, as well as maintenance and repair services through both indirect channels (resellers, including office product superstores, contract/commercial stationers, wholesalers, mail order companies, mass marketers and other dealers) and direct channels (salespersons, telemarketers, internet portals, etc.). The Commercial and Consumer Group's products and services are sold to customers which include the home markets and office markets, commercial reprographic centers, educational and training markets, and government agencies throughout North and South America and the Asia/Pacific region. The Europe Group distributes many of the Commercial and Consumer Group's products to customers in Europe.
The Industrial and Print Finishing Group's revenues are primarily derived through sales of thermal and pressure sensitive films, mid-range and commercial high-speed laminators and large-format digital print laminators. The Industrial and Print Finishing Group's products and services are sold worldwide through direct and dealer channels to commercial reprographic centers, and commercial printers.
Expenses incurred by the three reportable segments described above relate to costs incurred to manufacture or purchase products, as well as selling, general and administrative costs. For internal management purposes and the presentation below, operating income is calculated as net sales less (i) product cost of sales, (ii) selling, service and administrative expenses and (iii) amortization of other intangibles.
GBC does not separately identify interest expense or income taxes for its operating segments. Additionally, certain expenses of a corporate nature and certain shared service expenses are not allocated to the business groups. Sales between business groups are recorded at cost for domestic business units, and cost plus a normal profit margin for sales between domestic and international business units. GBC's business groups record expenses for certain services provided and expense allocations; however, the charges and allocations between business groups are not significant.
Certain segment information for the year ended December 31, 2002 and 2001 has been reclassified to conform to the current year presentation, including corporate costs which were formerly included in "all other" have now been reflected in "unallocated corporate items."
Segment data is provided below for the three years ended December 31, 2003, 2002 and 2001 (000 omitted).
The following is a reconciliation of segment operating income to income before taxes and cumulative effect of accounting change (000 omitted):
(1) In 2001, $2,396 of charges primarily related to product inventory rationalization were included in sales and cost of sales but not allocated to operating groups in GBC's internal management reporting.
No single customer accounts for more than 10% of GBC's net sales. GBC does however, have certain major customers.
GBC's products are sold primarily in North America, Latin America, Europe, Japan and Australia to office products resellers and directly to end-users in the business, education, commercial/professional and government markets. GBC has a large base of customers; however, the loss of, or major reduction in business or failure to collect receivables from one or more of GBC's major customers could have a material adverse effect on GBC's financial position or results of operations.
Financial information for the three years ended December 31, 2003, 2002 and 2001, by geographical area is summarized below. Export sales to foreign customers ($6.1 million in 2003, $7.7 million in 2002, and $8.6 million in 2001) have been classified in the following tables as part of the United States sales (000 omitted):
(14) Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for 2003 and 2002 was as follows (000 omitted except per share data):
(1) Gross profit is computed as sales less cost of sales.
(15) Condensed Consolidating Financial Information
Each of GBC's domestic restricted subsidiaries have jointly and severally, fully and unconditionally guaranteed the Senior Subordinated Notes discussed in note 7 to the consolidated financial statements. Rather than filing separate financial statements for each guarantor subsidiary with the Securities and Exchange Commission, GBC has elected to present the following consolidating financial statements which detail the results of operations, financial position and cash flows of the Parent, Guarantors, and Non-Guarantors (in each case carrying investments under the equity method), and the eliminations necessary to arrive at the information for GBC on a consolidated basis.
Consolidating Balance Sheets (000 omitted)
Consolidating Balance Sheets (000 omitted)
Consolidating Income Statements (000 omitted)
Consolidating Income Statements (000 omitted)
Consolidating Statement of Cash Flows (000 omitted)
Consolidating Statement of Cash Flows (000 omitted)
Consolidating Statement of Cash Flows (000 omitted)
Part II
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, the Company carried out an evaluation, under the supervision and with the participation of GBC's Disclosure Committee and the Company's management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of GBC's disclosure controls and procedures pursuant to Exchange Act Rule 15d-14. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that GBC's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) that would be required to be included in GBC's periodic SEC filings.
Part III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Information required under this Item is contained in the Registrant's 2004 Definitive Proxy Statement, which is to be filed with the Securities and Exchange Commission prior to April 29, 2004 and is incorporated herein by reference.
GBC has adopted a code of ethics as required by the listing standards of the NASDAQ National Market and rules of the SEC. This code applies to all of the Company's directors, officers and employees. The code of ethics is published and available at www.GBC.com/code of ethics on GBC's website. The Company will post on its website any amendments to, or waivers from, our code of ethics applicable to any of its directors or executive officers. The foregoing information will be available in print to any share-holder who requests such information from General Binding Corporation, One GBC Plaza, Northbrook, IL. 60062, Attn: Office of the General Counsel.
Item 11.
Item 11. Executive Compensation
Information required under this Item is contained in the Registrant's 2004 Definitive Proxy Statement, which is to be filed with the Securities and Exchange Commission prior to April 29, 2004 and is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table summarizes information about the Company's common stock that may be issued upon the exercise of options, warrants or rights under all of the Company's equity compensation plans as of December 31, 2003. The following equity compensation plans were approved by the Company's shareholders: The General Binding Corporation 1989 Stock Option
Plan, as amended and restated, the General Binding Corporation 2001 Stock Incentive Plan for Employees, as amended and restated, and the General Binding Corporation Non-Employee Directors 2001 Stock Option Plan. The only equity compensation plan of the Company that has not been approved by the Company's shareholders is a Stock Option Agreement with one of the Company's former directors, Mr. James A. Miller.
Equity Compensation Plan Information
Plan Category
(a)
Number of securities to be issued upon exercise of outstanding options warrants and rights
(b)
Weighted-average exercise price of outstanding options, warrants, and rights
(c)
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders
2,159,464
$10.43
876,589
Equity compensation plans not approved by security holders (1)
60,000
$ 7.81
-
Total
2,219,464
=======
$10.36
====
876,589
======
(1) On June 12, 2000, James A. Miller, one of the Company's directors at that time, was granted an option by the Company to acquire up to 75,000 shares of the Company's common stock at a price of $7.813 per share. Mr. Miller's option was fully exercisable as of December 31, 2003. The options available to Mr. Miller were exercised by him subsequent to December 31, 2003.
Other information required under this Item is contained in the Registrant's 2004 Definitive Proxy Statement, which is to be filed with the Securities and Exchange Commission prior to April 29, 2004 and is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
Information required under this Item is contained in the Registrant's 2004 Definitive Proxy Statement, which is to be filed with the Securities and Exchange Commission prior to April 29, 2004 and is incorporated herein by reference.
Item 14.
Item 14. Principal Accounting Fees and Services
Information required under this Item is contained in the Registrant's 2004 Definitive Proxy Statement, which is to be filed with the Securities and Exchange Commission prior to April 29, 2004 and is incorporated herein by reference.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) List of documents filed as part of this report
The following consolidated statements, schedules and exhibits of General Binding Corporation and its subsidiaries are filed as part of this report:
(1) Financial Statements
The financial statements and notes thereto are located in Part II, Item 8 of this report.
(2) Financial statement schedule
The financial schedule required by Item 15 (d), Valuation and Qualifying Accounts is located on page 74 of this report.
All other financial statements and schedules not listed have been omitted because they are not applicable, not required, or because the required information is included in the consolidated financial statements or notes thereto.
(3) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
No.21: Subsidiaries of the Registrant.
No.23.1: Consent of PricewaterhouseCoopers LLP.
No.23.2: Notice Regarding Absence of Consent of Arthur Andersen LLP.
Exhibit 31.1: Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2: Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1: Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2: Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
Registrant's Press Release dated October 22, 2003 as furnished to the SEC setting forth third quarter 2003 earnings.
Exhibits Filed With the Securities and Exchange Commission
Number and Description of Exhibit
3. Certificates of Incorporation and Bylaws
3.1* Certificate of Incorporation, as amended May 11, 1988. Incorporated by reference to Exhibit 3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993.
3.2* Restated By-Laws of General Binding Corporation Incorporated by reference to Exhibit 3(ii) to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.
10. Material Contracts
10.1* General Binding Corporation 2001 Stock Option Plan for Employees Incorporated by reference to Appendix A to Registrant's Proxy Statement filed with the Commission on April 13, 2001.
10.2* General Binding Corporation Non-Employee Directors 2001 Stock Option Plan. Incorporated by reference to Appendix B to Registrants Proxy statement filed with the Commission on April 13, 2001.
10.3* Amendment to the Revolving Credit Facility dated as of June 26, 2003. Incorporated by reference to Form 10-K dated July 1, 2003.
16.* Letter re: Change in Certifying Accountant. Incorporated by reference to the Registrants
Form 8-K dated April 29, 2002.
21. Subsidiaries of the Registrant 23. Consents of Experts and Counsel
23.1: Consent of PricewaterhouseCoopers LLP.
23.2: Notice Regarding Absence of Consent of Arthur Andersen LLP.
31. Certifications
31.1: Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2: Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.Certifications
32.1: Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2: Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Incorporated by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GENERAL BINDING CORPORATION
By:
/s/ Dennis J. Martin
Dennis J. Martin
Chairman, President and Chief
Executive Officer
By:
/s/ Don Civgin
Don Civgin
Senior Vice President and Chief
Financial Officer
By:
/s/ Jeffrey F. Hayden
Jeffrey F. Hayden
Vice President and Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
By:
/s/ Arthur C. Nielsen, Jr.
Arthur C. Nielsen, Jr.
Director
By:
/s/ G. Thomas Hargrove
G. Thomas Hargrove
Director
By:
/s/ Forrest M. Schneider
Forrest M. Schneider
Director
By:
/s/ Jeffrey P. Lane
Jeffrey P. Lane
Director
Dated: March 15, 2004
Schedule II - Valuation and Qualifying Accounts
Report of Independent Auditors on
Financial Statement Schedule
To the Board of Directors of
General Binding Corporation:
Our audits of the consolidated financial statements referred to in our report dated February 25, 2004 appearing in this Annual Report on Form 10-K also included an audit of the financial statement schedule information for each of the two years in the period ended December 31, 2003 listed in Item 15 (a)(2) of this Form 10-K. In our opinion, the financial statement schedule information for each of the two years in the period ended December 31, 2003 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. The 2001 financial statement schedule information of General Binding Corporation was audited by other independent accountants who have ceased operations. These independent accountants expressed an unqualified opinion on that financial statement schedule information in their report dated January 25, 2002.
PricewaterhouseCoopers LLP
Chicago, Illinois
February 25, 2004
Allowances for Doubtful Accounts and Sales Returns
Changes in the allowances for doubtful accounts and sales returns were as follows (000 omitted):
(1) Amounts primarily relate to the effects of foreign currency exchange rate changes and reclassifications to conform with the current presentation.