SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 3, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number 1 - 3506
-------------------
GEORGIA-PACIFIC CORPORATION
(Exact Name of Registrant as Specified in its Charter)
GEORGIA 93-0432081
(State of Incorporation) (IRS Employer Id. Number)
133 PEACHTREE STREET, N.E., ATLANTA, GEORGIA 30303
(Address of Principal Executive Offices)
(404) 652 - 4000
(Telephone Number of Registrant)
-------------------
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities and Exchange Act of 1934 during the preceding 12
months and (2) has been subject to such filing requirements for
the past 90 days. Yes X . No .
------ ------
As of the close of business on May 13, 1999, Georgia-Pacific
Corporation had 85,818,888 shares of Georgia-Pacific Group Common
Stock outstanding and 84,909,044 shares of The Timber Company
Common Stock outstanding.
2
PART I - FINANCIAL INFORMATION
-------------------------------------------
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Georgia-Pacific Corporation and Subsidiaries
First Quarter
-----------------
(In millions, except per share amounts) 1999 1998
- ----------------------------------------------------------------------
Net sales $ 3,405 $ 3,221
- ----------------------------------------------------------------------
Costs and expenses
Cost of sales, excluding depreciation and 2,531 2,494
cost of timber harvested shown below
Selling, general and 298 271
administrative
Depreciation and cost of 221 225
timber harvested
Interest 111 114
- ----------------------------------------------------------------------
Total costs and expenses 3,161 3,104
- ----------------------------------------------------------------------
Income before income taxes and 244 117
extraordinary item
Provision for income taxes 99 49
- ----------------------------------------------------------------------
Income before extraordinary item 145 68
Extraordinary item, net of taxes - (14)
- ----------------------------------------------------------------------
Net income $ 145 $ 54
======================================================================
Georgia-Pacific Group
Income before extraordinary item $ 99 $ 16
Extraordinary item, net of taxes - (12)
- ----------------------------------------------------------------------
Net income $ 99 $ 4
- ----------------------------------------------------------------------
Basic per common share:
Income before extraordinary item $ 1.15 $ 1.17
Extraordinary item, net of taxes - (0.13)
- ----------------------------------------------------------------------
Net income $ 1.15 $ 0.04
- ----------------------------------------------------------------------
Diluted per common share:
Income before extraordinary item $ 1.13 $ 0.17
Extraordinary item, net of taxes - (0.13)
- ----------------------------------------------------------------------
Net income $ 1.13 $ 0.04
- ----------------------------------------------------------------------
Average number of shares outstanding:
Basic 86.3 91.5
Diluted 87.7 92.5
======================================================================
The Timber Company
Income before extraordinary item $ 46 $ 52
Extraordinary item, net of taxes - (2)
- ----------------------------------------------------------------------
Net income $ 46 $ 50
- ----------------------------------------------------------------------
Basic and diluted per common share:
Income before extraordinary item $ 0.53 $ 0.56
Extraordinary item, net of taxes - (0.02)
- ----------------------------------------------------------------------
Net income $ 0.53 $ 0.54
- ----------------------------------------------------------------------
Average number of shares outstanding:
Basic 86.4 92.3
Diluted 86.6 93.0
======================================================================
The accompanying notes are an integral part of these financial statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Georgia-Pacific Corporation and Subsidiaries
First quarter
--------------- ---
(In millions) 1999 1998
- ----------------------------------------------------------------------
Cash flows from operating activities
Net income $ 145 $ 54
Adjustments to reconcile net income to cash 183 186
provided by operations:
Depreciation
Cost of timber harvested 38 39
Deferred income taxes 13 15
Amortization of goodwill 15 15
Stock compensation programs 2 5
Gain on sales of assets (5) (9)
Increase in receivables (109) (1)
(Increase) decrease in inventories (46) 40
Decrease (increase) in other working capital 10 (154)
Increase in taxes payable 14 47
Change in other assets and other (2) 1
long-term liabilities
- ----------------------------------------------------------------------
Cash provided by operations 258 238
- ----------------------------------------------------------------------
Cash flows from investing activities
Property, plant and equipment investments (107) (118)
Timber and timberland purchases (30) (68)
Acquisitions (38) -
(Increase) in cash restricted for capital - (26)
expenditures
Proceeds from sales of assets 8 33
Other 10 8
- ----------------------------------------------------------------------
Cash (used for) investing activities (157) (171)
- ----------------------------------------------------------------------
Cash flows from financing activities
Repayments of long-term debt (59) (601)
Additions to long-term debt 46 117
Fees paid to issue debt - (1)
Increase (decrease) in bank overdrafts (35) 17
Increase in commercial paper and 68 531
other short-term notes
Stock repurchases (114) (65)
Proceeds from option plan exercises 36 2
Cash dividends paid (43) (46)
- ----------------------------------------------------------------------
Cash (used for) financing activities (101) (46)
- ----------------------------------------------------------------------
Increase in cash - 21
Balance at beginning of period 5 8
- ----------------------------------------------------------------------
Balance at end of period $ 5 $ 29
======================================================================
The accompanying notes are an integral part of these financial statements.
4
CONSOLIDATED BALANCE SHEETS
Georgia-Pacific Corporation and Subsidiaries
(In millions, except shares and per share amounts) April 3, December 31,
amounts) 1999 1998
- ----------------------------------------------------------------------
ASSETS (Unaudited)
Current assets
Cash $ 5 $ 5
Receivables, less allowances of $24
and $25, respectively 1,342 1,233
Inventories 1,337 1,280
Deferred income tax assets 61 61
Other current assets 55 66
- ----------------------------------------------------------------------
Total current assets 2,800 2,645
- ----------------------------------------------------------------------
Timber and timberlands, net 1,197 1,206
- ----------------------------------------------------------------------
Property, plant and equipment
Land, buildings, machinery and equipment, at cost 14,551 14,453
Accumulated depreciation (8,368) (8,204)
- ----------------------------------------------------------------------
Property, plant and equipment, net 6,183 6,249
- ----------------------------------------------------------------------
Goodwill, net 1,693 1,677
- ----------------------------------------------------------------------
Other assets 932 923
- ----------------------------------------------------------------------
Total assets $ 12,805 $ 12,700
======================================================================
5
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank overdrafts, net $ 160 $ 195
Commercial paper and other short-term notes 1,277 1,209
Current portion of long-term debt 22 22
Accounts payable 571 556
Accrued compensation 196 247
Other current liabilities 490 419
- ----------------------------------------------------------------------
Total current liabilities 2,716 2,648
- ----------------------------------------------------------------------
Long-term debt, excluding current portion 4,112 4,125
- ----------------------------------------------------------------------
Other long-term liabilities 1,586 1,572
- ----------------------------------------------------------------------
Deferred income tax liabilities 1,246 1,231
- ----------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity 75 75
Common stock
Georgia-Pacific Group, par value $.80; 400,000,000
shares authorized; 93,824,000 and 93,282,000
shares issued
The Timber Company, par value $.80; 250,000,000
shares authorized; 92,893,000 and 92,785,000
shares issued
Treasury stock, at cost (615) (492)
7,932,000 and 6,762,000 shares of Georgia-Pacific
Group common stock and 7,113,700 and 5,704,000
shares of The Timber Company common stock
Additional paid-in capital 1,444 1,406
Retained earnings 2,280 2,178
Accumulated other comprehensive income (39) (43)
- ----------------------------------------------------------------------
Total shareholders' equity 3,145 3,124
- ----------------------------------------------------------------------
Total liabilities and shareholders' equity $ 12,805 $ 12,700
======================================================================
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Georgia-Pacific Corporation and Subsidiaries
First quarter
------------------
(In millions) 1999 1998
- ----------------------------------------------------------------------
Net income $ 145 $ 54
Other comprehensive income (loss) before tax:
Foreign currency translation adjustments 6 (1)
Income tax expense related to
items of other comprehensive income (2) -
- ----------------------------------------------------------------------
Comprehensive income $ 149 $ 53
======================================================================
The accompanying notes are an integral part of these financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
GEORGIA-PACIFIC CORPORATION
APRIL 3, 1999
1. PRINCIPLES OF PRESENTATION. The consolidated financial
statements include the accounts of Georgia-Pacific Corporation
and subsidiaries (the "Corporation"). All significant
intercompany balances and transactions are eliminated in
consolidation. The interim financial information included herein
is unaudited; however, such information reflects all adjustments
which are, in the opinion of management, necessary for a fair
presentation of the Corporation's financial position, results of
operations, and cash flows for the interim periods. All such
adjustments are of a normal, recurring nature except for the item
discussed in Note 3 below. Certain 1998 amounts have been
reclassified to conform with the 1999 presentation. The Timber
Company's and the Georgia-Pacific Group's combined financial
statements should be read in conjunction with the Corporation's
consolidated financial statements.
On or about April 22, 1999, the Corporation determined to
change its fiscal year from December 31 to end on the
Saturday closest to December 31. Additionally, the
Corporation reports its quarterly periods on a 13-week
basis ending on a Saturday. The impact on the current
quarter of three additional days was not material. There
will be no transition period on which to report.
2. PROVISION FOR INCOME TAXES. The effective tax rate was 41
percent for the three months ended April 3, 1999, and 42
percent for the three months ended March 31, 1998. The
effective tax rate for each period was different than the
statutory rates primarily because of nondeductible goodwill
amortization expense.
3. EXTRAORDINARY ITEM. The Corporation redeemed approximately
$400 million of its outstanding debt during the first
quarter of 1998. As a result, the Corporation recognized
an after-tax extraordinary loss of $14 million.
4. EARNINGS PER SHARE. The Corporation's common stock was
redesignated in December 1997 to reflect separately the
performance of the Corporation's pulp, paper and building
products businesses, which are now known as Georgia-Pacific
Group. A separate class of common stock was distributed to
reflect the performance of the Corporation's timber
operating group, which is now known as The Timber Company.
Basic earnings per share is computed based on net income
and the weighted average number of common shares
outstanding. Diluted earnings per share reflect the annual
issuance of common shares under long-term incentive stock
option and stock purchase plans. The computation of
diluted earnings per share does not assume conversion or
exercise of securities that would have an antidilutive
effect on earnings per share. Earnings per share for 1998
are computed for each class of common stock based on the
separate earnings attributed to each of the respective
businesses.
7
The following table provides earnings and per share data
for Georgia-Pacific Group and The Timber Company for 1999
and 1998.
First Quarter
-------------------------
(In millions, except 1999 1998
per share amounts)
- ---------------------------------------------------------------
Georgia-Pacific Group
- ---------------------------------------------------------------
Basic and diluted income available to
shareholders (numerator):
Income before extraordinary item $ 99 $ 16
Extraordinary item, net of taxes - (12)
- ---------------------------------------------------------------
Net income $ 99 $ 4
================================================================
Shares (denominator): 86.3 91.5
Average shares outstanding
Dilutive securities: 1.3 0.9
Stock incentive and option plans
Employee stock purchase plans 0.1 0.1
- ---------------------------------------------------------------
Total assuming conversion 87.7 92.5
================================================================
Basic per share amounts:
Income before extraordinary item $ 1.15 $ 0.17
Extraordinary item, net of taxes - (0.13)
- ---------------------------------------------------------------
Net income $ 1.15 $ 0.04
================================================================
Diluted per share amounts:
Income before extraordinary item $ 1.13 $ 0.17
Extraordinary item, net of taxes - (0.13)
- ---------------------------------------------------------------
Net income $ 1.13 $ 0.04
================================================================
First Quarter
-------------------------
(In millions, except 1999 1998
per share amounts)
- ---------------------------------------------------------------
The Timber Company
- ---------------------------------------------------------------
Basic and diluted income available to
shareholders (numerator):
Income before extraordinary item $ 46 $ 52
Extraordinary item, net of taxes - (2)
- ---------------------------------------------------------------
Net income $ 46 50
================================================================
Shares (denominator):
Average shares outstanding 86.4 92.3
Dilutive securities:
Stock incentive and option plans 0.2 0.7
- ---------------------------------------------------------------
Total assuming conversion 86.6 93.0
================================================================
Basic and diluted per share amounts:
Income before extraordinary item $ 0.53 $ 0.56
Extraordinary item, net of taxes - (0.02)
- ---------------------------------------------------------------
Net income $ 0.53 0.54
================================================================
8
5. SUPPLEMENTAL DISCLOSURES - STATEMENTS OF CASH FLOWS. The
cash impact of interest and income taxes is reflected in
the table below. The effect of foreign currency exchange
rate changes on cash was not material in either period.
First quarter
-------------------
(In millions) 1999 1998
- ---------------------------------------------------------------
Total interest costs $ 112 $ 115
Interest capitalized (1) (1)
- ---------------------------------------------------------------
Interest expense $ 111 $ 114
================================================================
Interest paid $ 80 $ 107
================================================================
Income taxes paid (refunded), net $ 73 (23)
================================================================
6. INVENTORY VALUATION. Inventories include costs of
materials, labor, and plant overhead. The Corporation uses
the dollar value pool method for computing LIFO
inventories. The major components of inventories were as
follows:
(In millions) April 3, December 31,
1999 1998
- ---------------------------------------------------------------
Raw materials $ 373 $ 418
Finished goods 859 760
Supplies 314 311
LIFO reserve (209) (209)
- ---------------------------------------------------------------
Total inventories $ 1,337 $ 1,280
===============================================================
7. ACQUISITIONS. At the end of the first quarter of 1999, the
Corporation completed the acquisition of a packaging plant
and a treated lumber facility and paid approximately $38
million in cash. The results of operations of these
acquired businesses will be consolidated with that of the
Corporation beginning April 4, 1999. The Corporation has
accounted for these business combinations using the purchase
method to record a new cost basis for assets acquired and
liabilities assumed. The difference between the purchase
price and the market value of the assets acquired and
liabilities assumed was recorded as goodwill. Goodwill
related to the packaging plant and treated lumber facility
will be amortized over 40 years and 15 years, respectively.
9
8. SHARE REPURCHASES. During the first three months of 1999,
Georgia-Pacific Group purchased on the open market approximately
1,270,000 shares of Georgia-Pacific Group common stock at an
aggregate price of $91 million ($71.69 average per share). Of
these share repurchases, approximately 1,170,000 shares of
Georgia-Pacific Group common stock were held as treasury stock
and 100,000 shares were purchased during the first quarter of
1999 and settled after April 3, 1999. During the first quarter
of 1999, The Timber Company purchased on the open market
approximately 1,474,000 shares of The Timber Company common stock
at an aggregate price of $32 million ($22.10 average per share).
Of these repurchased shares, approximately 1,409,700 shares of
The Timber Company common stock were held as treasury stock and
64,300 shares were purchased during the first quarter of 1999 and
settled after April 3, 1999.
During the first three months of 1998, Georgia-Pacific Group
purchased on the open market approximately 983,500 shares of
Georgia-Pacific Group common stock at an aggregate price of
$60 million ($61.48 average per share), of which 60,000
shares settled after March 31, 1998. In addition during the
first quarter of 1998, the Georgia-Pacific Group paid $8
million for 129,000 shares of Georgia-Pacific Group common
stock that were purchased during December 1997 and settled
in January 1998. During the first quarter of 1998, no shares
of The Timber Company common stock were repurchased.
9. COMMITMENTS AND CONTINGENCIES. The Corporation is a party to
various legal proceedings incidental to its business and is
subject to a variety of environmental and pollution control
laws and regulations in all jurisdictions in which it
operates. As is the case with other companies in similar
industries, the Corporation faces exposure from actual or
potential claims and legal proceedings involving
environmental matters. Liability insurance in effect during
the last several years provides only very limited coverage
for environmental matters.
The Corporation is involved in environmental remediation
activities at approximately 182 sites, both owned by the
Corporation and owned by others, where it has been notified
that it is or may be a potentially responsible party under
the Comprehensive Environmental Response, Compensation and
Liability Act or similar state "superfund" laws. Of the
known sites in which it is involved, the Corporation
estimates that approximately 44 percent are being
investigated, approximately 30 percent are being remediated
and approximately 26 percent are being monitored (an
activity that occurs after either site investigation or
remediation has been completed). The ultimate costs to the
Corporation for the investigation, remediation and
monitoring of many of these sites cannot be predicted with
certainty, due to the often unknown magnitude of the
pollution or the necessary cleanup, the varying costs of
alternative cleanup methods, the amount of time necessary to
accomplish such cleanups, the evolving nature of cleanup
technologies and government regulations, and the inability
to determine the Corporation's share of multiparty cleanups
or the extent to which contribution will be available from
other parties. The Corporation has established reserves for
environmental remediation costs for these sites in amounts
that it believes are probable and reasonably estimable.
Based on analysis of currently available information and
previous experience with respect to the cleanup of hazardous
substances, the Corporation believes it is reasonably
possible that costs associated with these sites may exceed
current reserves by amounts that may prove insignificant or
that could range, in the aggregate, up to approximately $56
million. This estimate of the range of reasonably possible
additional costs is less certain than the estimates upon
which reserves are based, and in order to establish the
upper limit of such range, assumptions least favorable to
the Corporation among the range of reasonably possible
outcomes were used. In estimating both its current reserve
for environmental remediation and the possible range of
additional costs, the Corporation has not assumed it will
bear the entire cost of remediation of every site to the
exclusion of other known potentially responsible parties who
may be jointly and severally liable. The ability of other
potentially responsible parties to participate has been
taken into account, based generally on the parties'
financial condition and probable contribution on a per site
basis.
10
The Corporation and many other companies are defendants in
suits brought in various courts around the nation by
plaintiffs who allege that they have suffered personal
injury as a result of exposure to asbestos-containing
products. These suits allege a variety of lung and other
diseases based on alleged exposure to products previously
manufactured by the Corporation. In many cases, the
plaintiffs are unable to demonstrate that they have suffered
any compensable loss as a result of such exposure, or that
any injuries they have incurred in fact resulted from
exposure to the Corporation's products.
The Corporation generally settles asbestos cases for amounts
it considers reasonable given the facts and circumstances of
each case. The amounts it has paid to date to defend and
settle these cases have been substantially covered by
product liability insurance. The Corporation is currently
defending claims of approximately 73,700 such plaintiffs as
of April 22, 1999 and anticipates that additional suits will
be filed against it over the next several years. The
Corporation has insurance available in amounts that it
believes are adequate to cover substantially all of the
reasonably foreseeable damages and settlement amounts
arising out of claims and suits currently pending. The
Corporation has further insurance coverage available for the
disposition of suits that may be filed against it in the
future, but there can be no assurance that the amounts of
such insurance will be adequate to cover all future claims.
The Corporation has established reserves for liabilities and
legal defense costs it believes are probable and reasonably
estimable with respect to pending suits and claims, and has
also established a receivable for expected insurance
recoveries.
On May 6, 1998, suit was filed in state court in Columbus,
Ohio, against the Corporation and Georgia-Pacific Resins,
Inc., a wholly owned subsidiary of the Corporation. The
lawsuit was filed by eight plaintiffs who seek to represent
a class of individuals who at any time from 1985 to the
present lived, worked, resided, owned, frequented or
otherwise occupied property located within a three-mile
radius of the Corporation's resins manufacturing operation
in Columbus, Ohio. The lawsuit alleges that the individual
plaintiffs and putative class members have suffered personal
injuries and/or property damage because of (i) alleged
"continuing and long-term releases and threats of releases
of noxious fumes, odors and harmful chemicals, including
hazardous substances" from the Corporation's operations
and/or (ii) a September 10, 1997 explosion at the Columbus
facility and alleged release of hazardous material resulting
from that explosion. Prior to the lawsuit, the Corporation
had received a number of explosion-related claims from
nearby residents and businesses. These claims were for
property damage, personal injury and business interruption
and were being reviewed and adjusted on a case-by-case
basis. The Corporation has denied the material allegations
of the lawsuit. While it is premature to evaluate the claims
asserted in the lawsuit, the Corporation believes it has
meritorious defenses.
In May 1997, the Corporation and nine other companies were
named as defendants in a suit brought by the Attorney
General of the State of Florida alleging that they engaged
in a conspiracy to fix the prices of sanitary commercial
paper products, such as towels and napkins, in violation of
federal and state laws. Approximately 45 similar suits have
been filed by private plaintiffs in federal courts in
California, Florida, Georgia and Wisconsin, and in the state
courts of California, Wisconsin, Minnesota and Tennessee. On
October 15, 1997, the Federal Judicial Panel on Multi-
District Litigation consolidated all federal court cases in
the federal district court in Gainesville, Florida. On July
24, 1998, the court certified the suit as a class action
consisting of nongovernmental direct purchasers of the
defendants' products. Discovery in the federal and state
cases is ongoing. The Corporation has denied that it has
engaged in any of the illegal conduct alleged in these cases
and intends to defend itself vigorously.
Although the ultimate outcome of these environmental matters
and legal proceedings cannot be determined with certainty,
based on presently available information, management
believes that adequate reserves have been established for
probable losses with respect thereto. Management further
believes that the ultimate outcome of such environmental
matters and legal proceedings could be material to operating
results in any given quarter or year but will not have a
material adverse effect on the long-term results of
operations, liquidity or consolidated financial position of
the Corporation.
11
10. OPERATING SEGMENT INFORMATION. The Corporation has five
reportable operating segments: building products, distribution,
timber, containerboard and packaging, and pulp and paper. The
following represents selected operating data for each reportable
segment for the first quarter of 1999 and 1998.
CONSOLIDATED SELECTED OPERATING SEGMENT DATA (Unaudited)
Georgia-Pacific Corporation and Subsidiaries
(Dollar amounts, except First
per share, in millions) Quarter
- -------------------------------------------------------------
1999
NET SALES TO UNAFFILIATED CUSTOMERS
Building products $ 890 26%
Distribution 1,098 32
Timber 53 2
Containerboard and packaging 523 15
Pulp and paper 840 25
Other 1 -
- --------------------------------------------------------------
Total net sales to $ 3,405 100%
Unaffiliated customers
==============================================================
INTERSEGMENT SALES
Building products $ 550
Distribution 2
Timber 86
Containerboard and packaging 15
Pulp and paper 6
Other* (659)
- --------------------------------------------------------------
Total intersegment sales $ -
==============================================================
TOTAL NET SALES
Building products $ 1,440 42%
Distribution 1,100 32
Timber 139 4
Containerboard and packaging 538 16
Pulp and paper 846 25
Other* (658)(19)
- --------------------------------------------------------------
Total net sales $ 3,405 100%
==============================================================
OPERATING PROFITS
Building products $ 248 70%
Distribution 18 5
Timber 94 26
Containerboard and packaging 40 11
Pulp and paper 20 6
Other (65) (18)
- --------------------------------------------------------------
Total operating profits 355 100%
===
Interest expense (111)
Provision for income taxes (99)
- --------------------------------------------------------------
Net income $ 145
==============================================================
12
CONSOLIDATED SELECTED OPERATING SEGMENT DATA (Unaudited)
Georgia-Pacific Corporation and Subsidiaries
(Dollar amounts, except First
per share, in millions) Quarter
- ---------------------------------------------------------------
1998
NET SALES TO UNAFFILIATED CUSTOMERS
Building products $ 765 24%
Distribution 1,024 32
Timber 28 1
Containerboard and packaging 488 15
Pulp and paper 915 28
Other 1 -
- ---------------------------------------------------------------
Total net sales to
Unaffiliated customers $ 3,221 100%
===============================================================
INTERSEGMENT SALES $
Building products 354
Distribution 2
Timber 117
Containerboard and packaging 15
Pulp and paper 8
Other* (496)
- ---------------------------------------------------------------
Total intersegment sales $ -
===============================================================
TOTAL NET SALES
Building products $ 1,119 35%
Distribution 1,026 32
Timber 145 4
Containerboard and packaging 503 16
Pulp and paper 923 29
Other* (495) (16)
- ---------------------------------------------------------------
Total net sales $ 3,221 100%
===============================================================
OPERATING PROFITS
Building products 103 45%
Distribution (17) (7)
Timber 103 45
Containerboard and packaging 33 14
Pulp and paper 71 30
Other (62) (27)
- ---------------------------------------------------------------
Total operating profits 231 100%
===
Interest expense (114)
Provision for income taxes (49)
- ---------------------------------------------------------------
Income before extraordinary item 68
Extraordinary item, net of taxes (14)
- ---------------------------------------------------------------
Net income $ 54
===============================================================
*Includes elimination of intersegment sales.
13
11. SUBSEQUENT EVENTS. In April 1999, The Timber Company
reached an agreement to sell approximately 390,000 acres of
timberlands in the Canadian province of New Brunswick to the
provincial government for approximately $41 million ($62.5
million Canadian). The properties are located in Charlotte and
York counties. The transaction closed on May 6, 1999.
Also in April 1999, The Timber Company reached an agreement
to sell approximately 440,000 acres of timberlands in Maine
to an institutional investor. The properties are located in
Washington, Aroostook and Penebscot counties. This
transaction is expected to close late in the second quarter
or early in the third quarter of 1999.
On May 4, 1999, the Board of Directors declared a two-for-
one split of Georgia-Pacific Group's common stock in the
form of a special dividend to shareholders of record on May
14, 1999. The stock dividend of one share of Georgia-
Pacific Group common stock for each share of Georgia-Pacific
Group will be paid June 3, 1999.
On May 7, 1999, the Corporation offered to acquire all
outstanding shares of Unisource Worldwide, Inc.
("Unisource") in a cash merger for $12 per share. No
definitive agreement between the Corporation and Unisource
has been reached. As of January 31, 1999, Unisource had
approximately 70 million shares of common stock outstanding.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
FIRST QUARTER 1999 COMPARED WITH FIRST QUARTER 1998
The Corporation reported consolidated net sales of approximately
$3.4 billion for the first quarter of 1999 and $3.2 billion for
the first quarter of 1998. Net income for the 1999 first quarter
was $145 million compared with $54 million in 1998. Net income
in the first quarter of 1998 included an after-tax extraordinary
charge of $14 million for the early retirement of debt.
The remaining discussion refers to the "Consolidated Selected
Operating Segment Data"table (included in Note 10 to the
Consolidated Financial Statements).
The Corporation's building products segment reported net sales of
$1,440 million for the first three months of 1999 compared with
$1,119 million in 1998. Operating profits were $248 million in
1999 compared with $103 million in 1998. The 1999 first quarter
building products results included a $5 million pre-tax charge
for the closure of a hardboard manufacturing facility. Return on
sales was 17 percent and 9 percent for the three months ended
April 3, 1999 and March 31, 1998, respectively. The higher
quarter-over-quarter profits resulted principally from increases
in structural panels and gypsum selling prices as well as
increased demand for these products. Oriented strand board prices
were approximately 33 percent above the prior year's quarter,
Gypsum prices increased 16 percent, and plywood prices were up 19
percent. The Corporation expects continued strength in building
products businesses related to the robust U.S. economy.
The Corporation's distribution segment reported net sales of
$1,100 million for the first three months of 1999 compared with
$1,026 million in 1998. Operating profits for the distribution
segment were $18 million in the first quarter of 1999 compared
with a loss of $17 million in the first quarter of 1998. The
improvement in the distribution segment operating profits
reflects higher pricing in 1999 and the benefits from the
implementation of the restructuring plan initiated in the fourth
quarter of 1997.
The timber segment reported net sales of approximately $139
million and $145 million for the first quarter of 1999 and 1998,
respectively. Operating profit in the timber segment decreased
$9 million to $94 million in 1999 compared to $103 million in
1998, primarily as a result of declining timber prices offset
somewhat by slightly higher harvest volumes.
14
The Corporation's containerboard and packaging segment reported
net sales of $538 million and operating profits of $40 million in
the first quarter of 1999, compared with net sales of $503
million and operating profits of $33 million in the first quarter
of 1998. Return on sales was 7 percent for both periods. Despite
lower selling prices for containerboard and packaging in the
first quarter of 1999, the increase in year-over-year operating
profit was due primarily to cost reductions in the packaging
business. Average containerboard prices for the first quarter of
1999 were approximately 16 percent below the prior year first
quarter.
The Corporation's pulp and paper segment reported net sales of
$846 million and operating profits of $20 million in the 1999
first quarter. For the same period in 1998, the segment reported
net sales of $923 million and operating profits of $71 million.
The pulp and paper segment 1999 first quarter results included a
$3 million pre-tax charge for the closure of a chlor/alkali
manufacturing operation.
Return on sales decreased to 2 percent in 1999 from 8 percent in
1998 principally due to a decrease in average selling prices for
all of the Corporation's pulp and paper products. Quarter over
quarter pulp prices were approximately 11 percent lower,
communication papers prices were approximately 14 percent lower
and tissue prices were approximately 2 percent lower. During the
first quarter of 1999, the pulp and paper segment took market-
related down time at its pulp and paper mills and reduced pulp
production by 91,000 tons and communication papers production by
11,000 tons. The pulp and paper segment expects to continue this
pattern in the second quarter of 1999. Pulp and paper prices have
been increasing since the 1998 fourth quarter. The Corporation
expects improvement in the pulp and paper segment as global
markets improve, combined with capacity growth and price
recovery.
The operating loss in the "Other" nonreportable segment, which
includes some miscellaneous businesses, certain goodwill
amortization, unallocated corporate operating expenses and the
elimination of profit on intersegment sales, increased by $3
million to a loss of $65 million in 1999 from a loss of $62
million in the 1998 first quarter. This increase was primarily a
result of the continuing trend of higher litigation costs offset
by lower incentive plan compensation costs for the 1990 Long-Term
Incentive Plan.
Interest expense decreased $3 million to $111 million in the
first quarter of 1999 compared with $114 million in the first
quarter of 1998 as a result of lower average interest rates.
The Corporation redeemed approximately $400 million of its
outstanding debt during the first quarter of 1998. As a result,
the Corporation recognized an after-tax extraordinary loss of $14
million during that quarter.
15
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. The Corporation generated cash from
operations of $258 million for the three months ended April 3,
1999 compared with $238 million a year ago. The increase is
primarily a result of very strong demand and improved prices for
several building products' items. This increase was partially
offset by higher working capital levels.
INVESTING ACTIVITIES. Capital expenditures for property, plant
and equipment for the three months ended April 3, 1999 were $107
million, which included $44 million in the building products
segment, $2 million in the distribution segment, $12 million in
the containerboard and packaging segment, $40 million in the pulp
and paper segment and $9 million of other and general corporate.
The Corporation expects to make capital expenditures for
property, plant and equipment of approximately $700 million in
1999, excluding the cost of any acquisitions.
Cash paid for timber and timberlands was $30 million in the first
quarter of 1999 compared with $68 million in 1998.
At the end of the first quarter of 1999, the Corporation
completed the acquisition of a packaging plant and a treated
lumber facility and paid approximately $38 million in cash. The
results of operations of these acquired businesses will be
consolidated with that of the Corporation beginning April 4,
1999. The Corporation has accounted for these business
combinations using the purchase method to record a new cost basis
for assets acquired and liabilities assumed. The difference
between the purchase price and the market value of the assets
acquired and liabilities assumed was recorded as goodwill.
Goodwill related to the packaging plant and treated lumber
facility will be amortized over 40 years and 15 years,
respectively.
During the first quarter of 1999, the Corporation received $8
million of proceeds from the sale of assets, compared with $33
million in the same quarter of 1998. The 1998 proceeds were
principally from sales of real estate development properties
located in South Carolina and Florida.
In 1999, the Corporation expects its cash flow from operations,
together with proceeds from any asset sales and available
financing sources, to be sufficient to fund planned capital
investments, pay dividends and make scheduled debt payments.
In April 1999, The Timber Company reached an agreement to sell
approximately 390,000 acres of timberlands in the Canadian
province of New Brunswick to the provincial government for
approximately $41 million ($62.5 million Canadian). The
properties are located in Charlotte and York counties. The
transaction closed on May 6, 1999.
Also in April 1999, The Timber Company reached an agreement to
sell approximately 440,000 acres of timberlands in Maine to an
institutional investor. The properties are located in
Washington, Aroostook and Penebscot counties. This transaction
is expected to close late in the second quarter or early in the
third quarter of 1999.
On May 7, 1999, the Corporation offered to acquire all
outstanding shares of Unisource Worldwide, Inc. ("Unisource") in
a cash merger for $12 per share. No definitive agreement between
the Corporation and Unisource has been reached. As of January
31, 1999, Unisource had approximately 70 million shares of common
stock outstanding.
FINANCING ACTIVITIES. The Corporation's total debt increased by
$20 million to $5.57 billion at April 3, 1999 from $5.55 billion
at December 31, 1998. At April 3, 1999 and December 31, 1998,
$4.58 billion and $4.57 billion, respectively, of such total debt
was Georgia-Pacific Group's debt and $989 million and $983
million, respectively, was The Timber Company's debt.
During the first quarter of 1999, approximately $59 million of
fixed and floating rate industrial revenue bonds were replaced of
which $48 million were refunded by fixed rate instruments and $11
million were refunded by variable rate instruments.
16
The Corporation has a $1.5 billion unsecured revolving credit
facility which is used for direct borrowings and as support for
commercial paper and other short-term borrowings. As of April
3, 1999, $503 million of committed credit was available in
excess of all short-term borrowings outstanding under or
supported by the facility.
The Corporation's senior management establishes the parameters
of the Corporation's financial risk, which have been approved by
the Board of Directors. Hedging interest rate exposure through
the use of swaps and options and hedging foreign exchange
exposure through the use of forward contracts are specifically
contemplated to manage risk in keeping with the management
policy. Derivative instruments, such as swaps, forwards, options
or futures, which are based directly or indirectly upon interest
rates, currencies, equities and commodities, may be used by the
Corporation to manage and reduce the risk inherent in price,
currency and interest rate fluctuations. There have been no
significant changes to reported market risk since December 31,
1998.
The Corporation does not utilize derivatives for speculative
purposes. Derivatives are transaction-specific so that a specific
debt instrument, contract or invoice determines the amount,
maturity and other specifics of the hedge. Counterparty risk is
limited to institutions with long-term debt ratings of A or
better.
At April 3, 1999, the Corporation's weighted average interest
rate on its total debt was 7.1% including the accounts
receivable sale program and outstanding interest rate exchange
agreements. At April 3, 1999, these interest rate exchange
agreements effectively converted $456 million of floating rate
obligations with a weighted average interest rate of 5.0% to
fixed rate obligations with an average effective interest rate
of 6.8%. These agreements have a weighted average maturity of
approximately 3.2 years. As of April 3, 1999, the Corporation's
total floating rate debt, including the accounts receivable sale
program, exceeded related interest rate exchange agreements by
$1.3 billion.
The Corporation also enters into foreign currency exchange
agreements and commodity futures and swaps, the amounts of which
were not material to the consolidated financial position of the
Corporation at April 3, 1999.
As of April 3, 1999, the Corporation had registered for sale up
to $500 million of debt securities under a shelf registration
statement filed with the Securities and Exchange Commission.
During the first three months of 1999, Georgia-Pacific Group
purchased on the open market approximately 1,270,000 shares of
Georgia-Pacific Group common stock at an aggregate price of $91
million ($71.69 average per share). Of these share repurchases,
approximately 1,170,000 shares of Georgia-Pacific Group common
stock were held as treasury stock and 100,000 shares were
purchased during the first quarter of 1999 and settled after
April 3, 1999. During the first quarter of 1999, The Timber
Company purchased on the open market approximately 1,474,000
shares of The Timber Company common stock at an aggregate price
of $32 million ($22.10 average per share). Of these repurchased
shares, approximately 1,409,700 shares of The Timber Company
common stock were held as treasury stock and 64,300 shares were
purchased during the first quarter of 1999 and settled after
April 3, 1999.
Since December 1997 through April 3, 1999, The Corporation
purchased on the open market approximately 9,314,000 shares of
the Georgia-Pacific Group stock at an aggregate price of $540
million ($57.94 average per share) and approximately 7,178,000
shares of The Timber Company stock at an aggregate price of $153
million ($21.45 average per share).
17
Subsequent to April 3, 1999 through May 11, 1999, The Corporation
purchased on the open market approximately 1,104,000 shares of
the Georgia-Pacific Group stock at an aggregate price of $99
million ($89.51 average per share) and approximately 962,000
shares of The Timber Company stock at an aggregate price of $23
million ($24.28 average per share). The Corporation expects to
repurchase shares of the Georgia-Pacific Group and The Timber
Company stock throughout 1999 as long as debt levels are below
the established thresholds.
During the first quarter of 1999, the Corporation received $33
million and $3 million from the exercise of stock options of
Georgia-Pacific Group common stock and The Timber Company common
stock, respectively.
During the first quarter of 1999 and 1998, The Corporation paid
$43 million and $46 million, respectively, in dividends. On May
4, 1999, the Board of Directors declared a two-for-one split of
Georgia-Pacific Group's common stock in the form of a special
dividend to shareholders of record on May 14, 1999. The stock
dividend of one share of Georgia-Pacific Group common stock for
each share of Georgia-Pacific Group will be paid June 3, 1999.
Also on May 4, 1999, the Board of Directors declared a regular
quarterly dividend of 25 cents per share on each of the Georgia-
Pacific Group and The Timber Company common stocks. These
dividends are payable May 27, 1999, to shareholders of record May
13, 1999. It is anticipated that future dividends on Georgia-
Pacific Group common stock will be declared at the rate of 12.5
cents per share as a result of the stock split.
OTHER. In June 1998, the FASB issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an
entity recognizes all derivatives as either assets or liabilities
on the balance sheets and measures those instruments at fair
value. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the
resulting designation. The Corporation will be required to adopt
the new statement in 2000; early adoption is encouraged, but no
prior period restatement is permitted. Management is evaluating
the effect of this statement on the Corporation's derivative
instruments, primarily interest rate swaps and foreign currency
forward contracts. The impact of adjustments to fair value is not
expected to be material to the Corporation's consolidated
financial position.
The Corporation is working to resolve the effects of the Year
2000 problem on its information systems, the operating systems
used in its manufacturing operations as well as its facilities
systems. The Year 2000 problem, which is common to most
businesses, concerns the inability of such systems to properly
recognize and process dates and date-sensitive information on and
beyond January 1, 2000. In 1996, the Corporation began a
companywide assessment of the vulnerability of its systems to the
Year 2000 problem. Based on such assessment, the Corporation
developed a Year 2000 plan, under which all key systems are being
tested, and noncompliant software or technology is being modified
or replaced. The Corporation is also surveying and assessing the
Year 2000 readiness status and compatibility of customers' and
suppliers' systems and processes that interface with the
Corporation's systems or could otherwise impact the Corporation's
operations.
The Corporation completed the necessary revisions and unit
testing to most systems and processes in 1998 with a few systems
scheduled for revision in early 1999. Full integration testing
and verification of such systems and processes for Year 2000
readiness will continue and be completed during 1999. At the end
of March 1999, 64 percent of the Corporation's systems are
considered fully Year 2000 ready, and 35 percent are in the final
stages of full integration testing. The remaining 1 percent are
non mission critical systems expected to be completed by June or
early July 1999. Early in 1998, the Corporation completed an
inventory of the process control systems and embedded chips used
in its manufacturing operations and currently believes that only
a small percentage of such systems and chips could be subject to
Year 2000 problems. At the end of March 1999, over 80 percent of
the process control and embedded chip inventory has been fully
analyzed and remediated as necessary; 13 percent of the inventory
is currently in the repair or test phase, with the remaining 7
percent still being assessed. Final post-repair testing is
scheduled to be complete at all operations by the end of
September 1999. Due to system acquisitions and the number and
complexity of existing systems, the Corporation expects some
continuing additions of noncritical systems to the inventory
list.
18
The Corporation has contacted each of its critical suppliers and
service providers including government services, transportation,
energy and communication providers to ascertain their respective
levels of readiness to address and remediate Year 2000 problems
and is currently reviewing their responses and conducting follow-
up reviews as necessary. The Corporation has identified and
contacted critical customers to ascertain their respective levels
of Year 2000 readiness and will be assessing the need for further
testing with customers as appropriate. While the Corporation
currently believes that it will be able to modify or replace its
affected systems in time to minimize any detrimental effects on
its operations, failure to do so, or the failure of the
Corporation's major customers, suppliers and service providers to
modify or replace their affected systems, could have a material
adverse impact on the Corporation's results of operations,
liquidity or consolidated financial position in the future. The
most reasonably likely worst-case scenario of failure by the
Corporation or its customers or suppliers to resolve the Year
2000 problem would be a temporary slowdown or cessation of
manufacturing operations at one or more of the Corporation's
facilities, including its limited foreign operations and a
temporary inability on the part of the Corporation to process
orders and billings in a timely manner and to deliver finished
products to customers. The Corporation's individual business
units are currently identifying and considering various
contingency options, including identification of alternate
suppliers, vendors and service providers as well as direct access
to qualified vendor technical support and manual alternatives to
systems operations. These options will allow them to minimize the
risks of any unresolved Year 2000 problems on their operations
and to minimize the effect of any unforeseen Year 2000 failures
in areas outside the Corporation's control. The primary goal of
the Corporation's contingency plan is to minimize the adverse
impact to personnel safety, environmental safety and assets.
Contingency plans will be finalized by July 1999.
The Corporation currently estimates the incremental cost of the
work needed to resolve the Year 2000 problem at approximately $60
million (including approximately $10 million of capital costs),
of which $20 million has been incurred to date and $20 million is
included for the impact of contingency planning activities and
unexpected events. In addition, the Corporation expects to incur
internal costs totaling approximately $20 million related to the
Year 2000 problem, of which approximately $13 million has been
incurred to date. The bulk of the incremental costs relates to
replacement or modification of affected process control systems
in the Corporation's manufacturing operations and is projected to
be incurred in the second and third quarters of 1999. The
majority of the internal costs relates to code remediation and
testing and is projected to be incurred through 1999. These
incremental and internal costs will be expensed as incurred,
except for new systems purchased that will be capitalized in
accordance with corporate policy. Such costs may be material to
the Corporation's results of operations in one or more fiscal
quarters or years but are not expected to have a material adverse
effect on the long-term results of operations, liquidity or
consolidated financial position of the Corporation.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. The
statements under "Management's Discussion and Analysis" and other
statements contained herein that are not historical facts are
forward-looking statements (as such term is defined under the
Private Securities Litigation Reform Act of 1995) based on
current expectations. The accuracy of such statements is subject
to a number of risks, uncertainties and assumptions. In addition
to the risks, uncertainties and assumptions discussed elsewhere
herein, factors that could cause or contribute to actual results
differing materially from such forward-looking statements include
the following: the Corporation's production capacity continuing
to exceed demand for its pulp and paper products, necessitating
market-related downtime; the ability of the Corporation, and its
customers and suppliers, to address the Year 2000 problem in a
timely and efficient manner; changes in the productive capacity
and production levels of other building products and pulp and
paper producers; the effect on the Corporation of changes in
environmental and pollution control laws and regulations; the
general level of economic activity in U.S. and export markets,
particularly the Asian markets; variations in the level of
housing starts; fluctuations in interest rates and currency
exchange rates; the availability and cost of wood fiber; and
other risks, uncertainties and assumptions discussed in the
Corporation's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 and the Corporation's Form 8-K dated
October 17, 1996.
For a discussion of commitments and contingencies refer to Note 9
of the Notes to Consolidated Financial Statements.
19
COMBINED STATEMENTS OF INCOME (Unaudited)
Georgia-Pacific Corporation--Georgia-Pacific Group
First Quarter,
-----------------
(In millions, except per share amounts) 1999 1998
- -----------------------------------------------------------------------
Net sales $ 3,352 $ 3,193
- -----------------------------------------------------------------------
Costs and expenses
Cost of sales excluding depreciation and
cost of timber harvested shown below
The Timber Company 20 24
Third parties 2,507 2,475
- -----------------------------------------------------------------------
Total cost of sales 2,527 2,499
Selling, general and
administrative 288 262
Depreciation and cost of
timber harvested
The Timber Company 66 93
Third parties 210 211
- -----------------------------------------------------------------------
Total depreciation and cost of
timber harvested 276 304
Interest 93 96
- -----------------------------------------------------------------------
Total costs and expenses 3,184 3,161
- -----------------------------------------------------------------------
Income before income taxes
and extraordinary item 168 32
Provision for income taxes 69 16
- -----------------------------------------------------------------------
Income before extraordinary item 99 16
Extraordinary item, net of taxes - (12)
- -----------------------------------------------------------------------
Net income $ 99 $ 4
======================================================================
Basic per common share:
Income before extraordinary item $ 1.15 $ 0.17
Extraordinary item, net of taxes - (0.13)
- -----------------------------------------------------------------------
Net income $ 1.15 $ 0.04
======================================================================
Diluted per common share:
Income before extraordinary item $ 1.13 $ 0.17
Extraordinary item, net of taxes - (0.13)
- -----------------------------------------------------------------------
Net income $ 1.13 $ 0.04
======================================================================
Average number of shares outstanding:
Basic 86.3 91.5
Diluted 87.7 92.5
======================================================================
The accompanying notes are an integral part of these financial statements.
20
COMBINED STATEMENTS OF CASH FLOWS (Unaudited)
Georgia-Pacific Corporation--Georgia-Pacific Group
First Quarter,
------------------
(In millions) 1999 1998
- -----------------------------------------------------------------------
Cash flows from operating activities
Net income $ 99 $ 4
Adjustments to reconcile net income to cash 182 185
provided by operations:
Depreciation
Cost of timber harvested - The Timber Company 66 93
Cost of timber harvested - Third Parties 28 26
Deferred income taxes 13 14
Amortization of goodwill 15 15
Stock compensation programs 1 5
Gain on sales of assets (1) (1)
(Increase) decrease in receivables (108) 3
(Increase) Decrease in inventories (46) 40
Decrease (increase) in other working capital 6 (158)
Increase in taxes payable 14 47
Change in other assets and other (2) 2
long-term liabilities
- -----------------------------------------------------------------------
Cash provided by operations 267 275
- -----------------------------------------------------------------------
Cash flows from investment activities (107) (117)
Property, plant and equipment investments
Timber purchases from The Timber Company (61) (94)
Timber contract purchases from third parties (19) (48)
Acquisitions (38) -
(Increase) in cash restricted for capital - (26)
expenditures
Proceeds from sales of assets 3 6
Other 12 13
- -----------------------------------------------------------------------
Cash (used for) investment activities (210) (266)
- -----------------------------------------------------------------------
Cash flows from financing activities 14 98
Additions to long-term debt
Common stock repurchased (83) (65)
Cash dividends paid (21) (23)
Proceeds from option plan exercises 33 2
- -----------------------------------------------------------------------
Cash (used for) provided by financing activities (57) 12
- -----------------------------------------------------------------------
Increase in cash - 21
Balance at beginning of period 5 8
- -----------------------------------------------------------------------
Balance at end of period $ 5 $ 29
======================================================================
The accompanying notes are an integral part of these financial statements.
21
COMBINED BALANCE SHEETS
Georgia-Pacific Corporation--Georgia-Pacific Group
(In millions) April 3, December 31,
1999 1998
- ------------------------------------------------------------------------
ASSETS (Unaudited)
Current assets
Cash $ 5 $ 5
Receivables, less allowances of $24 1,340 1,231
and $25, respectively
Inventories 1,336 1,278
Deferred income tax assets 61 61
Other current assets 51 65
- ------------------------------------------------------------------------
Total current assets 2,793 2,640
- ------------------------------------------------------------------------
Timber contracts 65 78
- ------------------------------------------------------------------------
Property, plant and equipment 14,485 14,387
Land and improvements, buildings,
machinery and equipment and
construction in
progress, at cost
Accumulated depreciation (8,325) (8,162)
- ----------------------------------------------------------------------
Property, plant and equipment, net 6,160 6,225
- -----------------------------------------------------------------------
Goodwill, net 1,693 1,677
- -----------------------------------------------------------------------
Other assets 924 918
- -----------------------------------------------------------------------
Total assets $ 11,635 $11,538
======================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt $ 1,200 $ 1,173
Accounts payable 565 553
Accrued compensation 193 243
Other current liabilities 480 412
- ----------------------------------------------------------------------
Total current liabilities 2,438 2,381
- ----------------------------------------------------------------------
Long-term debt, excluding current portion 3,382 3,395
- ----------------------------------------------------------------------
Other long-term liabilities 1,579 1,566
- ----------------------------------------------------------------------
Deferred income tax liabilities 1,002 987
- ----------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity 3,234 3,209
- ----------------------------------------------------------------------
Total liabilities and shareholders' equity $ 11,635 $ 11,538
======================================================================
The accompanying notes are an integral part of these financial
statements.
COMBINED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Georgia-Pacific Corporation--Georgia-Pacific Group
First quarter
------------------
(In millions) 1999 1998
- ----------------------------------------------------------------------
Net income $ 99 $ 4
Other comprehensive income (loss) before tax:
Foreign currency translation adjustments 6 (1)
Income tax expense related to
items of other comprehensive income (2) -
- ----------------------------------------------------------------------
Comprehensive income $ 103 $ 3
======================================================================
The accompanying notes are an integral part of these financial
statements.
22
NOTES TO COMBINED FINANCIAL STATEMENTS (Unaudited)
Georgia-Pacific Corporation--Georgia-Pacific Group
APRIL 3, 1999
1. PRINCIPLES OF PRESENTATION. The combined financial
statements include the accounts of Georgia-Pacific Group and
subsidiaries. All significant intercompany balances and
transactions are eliminated in consolidation. The interim
financial information included herein is unaudited; however, such
information reflects all adjustments which are, in the opinion of
management, necessary for a fair presentation of the Georgia-
Pacific Group's financial position, results of operations, and
cash flows for the interim periods. All such adjustments are of a
normal, recurring nature except for the item discussed in Note 3
below. Certain 1998 amounts have been reclassified to conform
with the 1999 presentation. The Georgia-Pacific Group's combined
financial statements should be read in conjunction with the
Corporation's consolidated financial statements and The Timber
Company's combined financial statements.
On or about April 22, 1999, the Georgia-Pacific Group
determined to change its fiscal year from December 31 to
end on the Saturday closest to December 31. Additionally,
the Georgia-Pacific Group reports its quarterly periods on
a 13-week basis ending on a Saturday. The impact on the
current quarter of three additional days was not material.
There will be no transition period on which to report.
2. PROVISION FOR INCOME TAXES. The effective tax rates for
the periods were different than the statutory rates
primarily because of nondeductible goodwill amortization
expense.
3. EXTRAORDINARY ITEM. Georgia-Pacific Corporation called
approximately $400 million of its outstanding debt during
the 1998 first quarter. As a result, an after-tax
extraordinary charge of $12 million (13 cents per share)
was allocated to the Georgia-Pacific Group based on the
ratio of the Georgia-Pacific Group's debt to the
Corporation's total debt.
4. EARNINGS PER SHARE. The Corporation's common stock was
redesignated in December 1997 to reflect separately the
performance of the Corporation's pulp, paper and building
products businesses, which are now known as Georgia-Pacific
Group. A separate class of common stock was distributed to
reflect the performance of the Corporation's timber
operating group, which is now known as The Timber Company.
Basic earnings per share is computed based on net income
and the weighted average number of common shares
outstanding. Diluted earnings per share reflect the annual
issuance of common shares under long-term incentive stock
option and stock purchase plans. The computation of
diluted earnings per share does not assume conversion or
exercise of securities that would have an antidilutive
effect on earnings per share.
The following table provides earnings and per share data
for the Georgia-Pacific Group for 1999 and 1998.
First Quarter
---------------------
(In millions, except per share amounts) 1999 1998
- ---------------------------------------------------------------
Basic and diluted income available to
shareholders (numerator):
Income before extraordinary item $ 99 $ 16
Extraordinary item, net of taxes - (12)
- ---------------------------------------------------------------
Net income $ 99 $ 4
================================================================
Shares (denominator): 86.3 91.5
Average shares outstanding
Dilutive securities: 1.3 0.9
Stock incentive and option plans
Employee stock purchase plans 0.1 0.1
- ---------------------------------------------------------------
Total assuming conversion 87.7 92.5
================================================================
Basic per share amounts:
Income before extraordinary item $ 1.15 $ 0.17
Extraordinary item, net of taxes - (0.13)
- ---------------------------------------------------------------
Net income $ 1.15 $ 0.04
================================================================
Diluted per share amounts:
Income before extraordinary item $ 1.13 $ 0.17
Extraordinary item, net of taxes - (0.13)
- ---------------------------------------------------------------
Net income $ 1.13 0.04
================================================================
23
5. INVENTORY VALUATION. Inventories include costs of
materials, labor, and plant overhead. The Georgia-Pacific
Group uses the dollar value pool method for computing LIFO
inventories. The major components of inventories were as
follows:
(In millions) April 3, December 31,
1999 1998
- ---------------------------------------------------------------
Raw materials $ 373 $ 417
Finished goods 858 760
Supplies 314 310
LIFO reserve (209) (209)
- ---------------------------------------------------------------
Total inventories $ 1,336 $ 1,278
===============================================================
6. ACQUISITIONS. At the end of the first quarter of 1999,
the Georgia-Pacific Group completed the acquisition of a
packaging plant and a treated lumber facility and paid
approximately $38 million in cash. The results of
operations of these acquired businesses will be
consolidated with that of the Georgia-Pacific Group
beginning April 4, 1999. The Georgia-Pacific Group has
accounted for these business combinations using the
purchase method to record a new cost basis for assets
acquired and liabilities assumed. The difference between
the purchase price and the market value of the assets
acquired and liabilities assumed was recorded as goodwill.
Goodwill related to the packaging plant and treated lumber
facility will be amortized over 40 years and 15 years,
respectively.
7. SHARE REPURCHASES. During the first three months of 1999,
Georgia-Pacific Group purchased on the open market
approximately 1,270,000 shares of Georgia-Pacific Group
common stock at an aggregate price of $91 million ($71.69
average per share). Of these share repurchases,
approximately 1,170,000 shares of Georgia-Pacific Group
common stock were held as treasury stock and 100,000 shares
were purchased during the first quarter of 1999 and settled
after April 3, 1999.
During the first three months of 1998, Georgia-Pacific Group
purchased on the open market approximately 983,500 shares of
Georgia-Pacific Group common stock at an aggregate price of
$60 million ($61.48 average per share), of which 60,000
shares settled after March 31, 1998. In addition during the
first quarter of 1998, the Georgia-Pacific Group paid $8
million for 129,000 shares of Georgia-Pacific Group common
stock that were purchased during December 1997 and settled
in January 1998.
24
8. COMMITMENTS AND CONTINGENCIES. The Georgia-Pacific Group is
subject to various legal proceedings and claims that arise
in the ordinary course of its business. As is the case with
other companies in similar industries, the Georgia-Pacific
Group faces exposure from actual or potential claims and
legal proceedings involving environmental matters.
Liability insurance in effect during the last several years
provides very limited coverage for environmental matters.
The following sets forth legal proceedings and claims
arising out of the operations of the Georgia-Pacific Group
to which the Corporation is a party. The holders of Georgia-
Pacific Group stock are shareholders of the Corporation and
are subject to all of the risks associated with an
investment in the Corporation, including any legal
proceedings and claims involving The Timber Company.
The Corporation is involved in environmental remediation
activities at approximately 182 sites, both owned by the
Corporation and owned by others, where it has been notified
that it is or may be a potentially responsible party under
the Comprehensive Environmental Response, Compensation and
Liability Act or similar state "superfund" laws. Of the
known sites in which it is involved, the Corporation
estimates that approximately 44 percent are being
investigated, approximately 30 percent are being remediated
and approximately 26 percent are being monitored (an
activity that occurs after either site investigation or
remediation has been completed). The ultimate costs to the
Corporation for the investigation, remediation and
monitoring of many of these sites cannot be predicted with
certainty, due to the often unknown magnitude of the
pollution or the necessary cleanup, the varying costs of
alternative cleanup methods, the amount of time necessary to
accomplish such cleanups, the evolving nature of cleanup
technologies and government regulations, and the inability
to determine the Corporation's share of multiparty cleanups
or the extent to which contribution will be available from
other parties. The Corporation has established reserves for
environmental remediation costs for these sites in amounts
that it believes are probable and reasonably estimable.
Based on analysis of currently available information and
previous experience with respect to the cleanup of hazardous
substances, the Corporation believes it is reasonably
possible that costs associated with these sites may exceed
current reserves by amounts that may prove insignificant or
that could range, in the aggregate, up to approximately $56
million. This estimate of the range of reasonably possible
additional costs is less certain than the estimates upon
which reserves are based, and in order to establish the
upper limit of such range, assumptions least favorable to
the Corporation among the range of reasonably possible
outcomes were used. In estimating both its current reserve
for environmental remediation and the possible range of
additional costs, the Corporation has not assumed it will
bear the entire cost of remediation of every site to the
exclusion of other known potentially responsible parties who
may be jointly and severally liable. The ability of other
potentially responsible parties to participate has been
taken into account, based generally on the parties'
financial condition and probable contribution on a per site
basis.
The Corporation and many other companies are defendants in
suits brought in various courts around the nation by
plaintiffs who allege that they have suffered personal
injury as a result of exposure to asbestos-containing
products. These suits allege a variety of lung and other
diseases based on alleged exposure to products previously
manufactured by the Corporation. In many cases, the
plaintiffs are unable to demonstrate that they have suffered
any compensable loss as a result of such exposure, or that
any injuries they have incurred in fact resulted from
exposure to the Corporation's products.
25
The Corporation generally settles asbestos cases for amounts
it considers reasonable given the facts and circumstances of
each case. The amounts it has paid to date to defend and
settle these cases have been substantially covered by
product liability insurance. The Corporation is currently
defending claims of approximately 73,700 such plaintiffs as
of April 22, 1999 and anticipates that additional suits will
be filed against it over the next several years. The
Corporation has insurance available in amounts that it
believes are adequate to cover substantially all of the
reasonably foreseeable damages and settlement amounts
arising out of claims and suits currently pending. The
Corporation has further insurance coverage available for the
disposition of suits that may be filed against it in the
future, but there can be no assurance that the amounts of
such insurance will be adequate to cover all future claims.
The Corporation has established reserves for liabilities and
legal defense costs it believes are probable and reasonably
estimable with respect to pending suits and claims, and has
also established a receivable for expected insurance
recoveries.
On May 6, 1998, suit was filed in state court in Columbus,
Ohio, against the Corporation and Georgia-Pacific Resins,
Inc., a wholly owned subsidiary of the Corporation. The
lawsuit was filed by eight plaintiffs who seek to represent
a class of individuals who at any time from 1985 to the
present lived, worked, resided, owned, frequented or
otherwise occupied property located within a three-mile
radius of the Corporation's resins manufacturing operation
in Columbus, Ohio. The lawsuit alleges that the individual
plaintiffs and putative class members have suffered personal
injuries and/or property damage because of (i) alleged
"continuing and long-term releases and threats of releases
of noxious fumes, odors and harmful chemicals, including
hazardous substances" from the Corporation's operations
and/or (ii) a September 10, 1997 explosion at the Columbus
facility and alleged release of hazardous material resulting
from that explosion. Prior to the lawsuit, the Corporation
had received a number of explosion-related claims from
nearby residents and businesses. These claims were for
property damage, personal injury and business interruption
and were being reviewed and adjusted on a case-by-case
basis. The Corporation has denied the material allegations
of the lawsuit. While it is premature to evaluate the claims
asserted in the lawsuit, the Corporation believes it has
meritorious defenses.
In May 1997, the Corporation and nine other companies were
named as defendants in a suit brought by the Attorney
General of the State of Florida alleging that they engaged
in a conspiracy to fix the prices of sanitary commercial
paper products, such as towels and napkins, in violation of
federal and state laws. Approximately 45 similar suits have
been filed by private plaintiffs in federal courts in
California, Florida, Georgia and Wisconsin, and in the state
courts of California, Wisconsin, Minnesota and Tennessee. On
October 15, 1997, the Federal Judicial Panel on Multi-
District Litigation consolidated all federal court cases in
the federal district court in Gainesville, Florida. On July
24, 1998, the court certified the suit as a class action
consisting of nongovernmental direct purchasers of the
defendants' products. Discovery in the federal and state
cases is ongoing. The Corporation has denied that it has
engaged in any of the illegal conduct alleged in these cases
and intends to defend itself vigorously.
Although the ultimate outcome of these environmental matters
and legal proceedings cannot be determined with certainty,
based on presently available information, management
believes that adequate reserves have been established for
probable losses with respect thereto. Management further
believes that the ultimate outcome of such environmental
matters and legal proceedings could be material to operating
results in any given quarter or year but will not have a
material adverse effect on the long-term results of
operations, liquidity or consolidated financial position of
the Corporation.
26
9. OPERATING SEGMENT INFORMATION. Georgia-Pacific Group has
four reportable operating segments: building products,
distribution, containerboard and packaging, and pulp and paper.
The following represents selected operating data for each
reportable segment for the first quarter of 1999 and 1998.
CONSOLIDATED SELECTED OPERATING SEGMENT DATA (Unaudited)
Georgia-Pacific Corporation and Subsidiaries
(Dollar amounts, except First
per share, in millions) Quarter
- -------------------------------------------------------------
1999
NET SALES TO UNAFFILIATED CUSTOMERS
Building products $ 890 26%
Distribution 1,098 33
Containerboard and packaging 523 16
Pulp and paper 840 25
Other 1 -
- --------------------------------------------------------------
Total net sales to
Unaffiliated customers 3,352 100%
==============================================================
INTERSEGMENT SALES
Building products $ 550
Distribution 2
Containerboard and packaging 15
Pulp and paper 6
Other* (573)
- --------------------------------------------------------------
Total intersegment sales $ -
==============================================================
TOTAL NET SALES
Building products $ 1,440 43%
Distribution 1,100 33
Containerboard and packaging 538 16
Pulp and paper 846 25
Other* (572) (17)
- --------------------------------------------------------------
Total net sales $ 3,352 100%
==============================================================
OPERATING PROFITS
Building products $ 248 95%
Distribution 18 7
Containerboard and packaging 40 15
Pulp and paper 20 8
Other (65) (25)
- --------------------------------------------------------------
Total operating profits 261 100%
===
Interest expense (93)
Provision for income taxes (69)
- --------------------------------------------------------------
Net income $ 99
==============================================================
27
CONSOLIDATED SELECTED OPERATING SEGMENT DATA (Unaudited)
Georgia-Pacific Corporation and Subsidiaries
(Dollar amounts, except First
per share, in millions) Quarter
- ---------------------------------------------------------------
1998
NET SALES TO UNAFFILIATED CUSTOMERS
Building products $ 765 24%
Distribution 1,024 32
Containerboard and packaging 488 15
Pulp and paper 915 29
Other 1 -
- ---------------------------------------------------------------
Total net sales to
Unaffiliated customers $ 3,193 100%
===============================================================
INTERSEGMENT SALES
Building products $ 354
Distribution 2
Containerboard and packaging 15
Pulp and paper 8
Other* (379)
- ---------------------------------------------------------------
Total intersegment sales $ -
===============================================================
TOTAL NET SALES
Building products $ 1,119 35%
Distribution 1,026 32
Containerboard and packaging 503 16
Pulp and paper 923 29
Other* (378) (12)
- ---------------------------------------------------------------
Total net sales $ 3,193 100%
===============================================================
OPERATING PROFITS
Building products $ 103 80%
Distribution (17) (13)
Containerboard and packaging 33 26
Pulp and paper 71 55
Other (62) (48)
- ---------------------------------------------------------------
Total operating profits 128 100%
===
Interest expense (96)
Provision for income taxes (16)
- ---------------------------------------------------------------
Income before extraordinary item 16
Extraordinary item, net of taxes (12)
- ---------------------------------------------------------------
Net income $ 4
===============================================================
*Includes elimination of intersegment sales.
10. SUBSEQUENT EVENTS. On May 4, 1999, the Board of Directors
declared a two-for-one split of Georgia-Pacific Group's common
stock in the form of a special dividend to shareholders of record
on May 14, 1999. The stock dividend of one share of Georgia-
Pacific Group common stock for each share of Georgia-Pacific
Group will be paid June 3, 1999.
On May 7, 1999, the Corporation offered to acquire all
outstanding shares of Unisource Worldwide, Inc.
("Unisource") in a cash merger for $12 per share. No
definitive agreement between the Corporation and Unisource
has been reached. As of January 31, 1999, Unisource had
approximately 70 million shares of common stock outstanding.
28
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
FIRST QUARTER 1999 COMPARED WITH FIRST QUARTER 1998
Georgia-Pacific Group reported net sales of approximately $3.4
billion for the three months ended April 3,1999 and $3.2 billion
for the three months ended March 31, 1998. Net income for the
1999 first quarter was $99 million compared with net income of
$4 million in 1998. Net income in the first quarter of 1998
included an after-tax extraordinary charge of $12 million for
the early retirement of debt.
The remaining discussion refers to the "Combined Selected
Operating Segment Data" table (included in Note 9 to the
Combined Financial Statements).
The Georgia-Pacific Group's building products segment reported
net sales of $1,440 million for the first three months of 1999
compared with $1,119 million in 1998. Operating profits were $248
million in 1999 compared with $103 million in 1998. The 1999
first quarter building products results included a $5 million pre-
tax charge for the closure of a hardboard manufacturing facility.
Return on sales was 17 percent and 9 percent for the three months
ended April 3, 1999 and March 31, 1998, respectively. The higher
quarter-over-quarter profits resulted principally from increases
in structural panels and gypsum selling prices as well as
increased demand for these products. Oriented strand board prices
were approximately 33 percent above the prior year's quarter,
Gypsum prices increased 16 percent, and plywood prices were up 19
percent. The Georgia-Pacific Group expects continued strength in
building products businesses related to the robust U.S. economy.
The Georgia-Pacific Group's distribution segment reported net
sales of $1,100 million for the first three months of 1999
compared with $1,026 million in 1998. Operating profits for the
distribution segment were $18 million in the first quarter of
1999 compared with a loss of $17 million in the first quarter of
1998. The improvement in the distribution segment operating
profits reflects higher pricing in 1999 and the benefits from the
implementation of the restructuring plan initiated in the fourth
quarter of 1997.
The Georgia-Pacific Group's containerboard and packaging segment
reported net sales of $538 million and operating profits of $40
million in the first quarter of 1999, compared with net sales of
$503 million and operating profits of $33 million in the first
quarter of 1998. Return on sales was 7 percent for both periods.
Despite lower selling prices for containerboard and packaging in
the first quarter of 1999, the increase in year-over-year
operating profit was due primarily to cost reductions in the
packaging business. Average containerboard prices for the quarter
of 1999 were approximately 16 percent below the prior year first
quarter.
The Georgia-Pacific Group's pulp and paper segment reported net
sales of $846 million and operating profits of $20 million in the
1999 first quarter. For the same period in 1998, the segment
reported net sales of $923 million and operating profits of $71
million. The pulp and paper segment 1999 first quarter results
included a $3 million pre-tax charge for the closure of a
chlor/alkali manufacturing operation.
Return on sales decreased to 2 percent in 1999 from 8 percent in
1998 principally due to a decrease in average selling prices for
all of the Georgia-Pacific Group's pulp and paper products.
Quarter over quarter pulp prices were approximately 11 percent
lower, communication papers prices were approximately 14 percent
lower and tissue prices were approximately 2 percent lower.
During the first quarter of 1999, the pulp and paper segment took
market-related downtime at its pulp and paper mills and reduced
pulp production by 91,000 tons and communication papers
production by 11,000 tons. The pulp and paper segment expects to
continue this pattern in the second quarter of 1999. Pulp and
paper prices have been increasing since the 1998 fourth quarter.
The Georgia-Pacific Group expects improvement in the pulp and
paper segment as global markets improve, combined with capacity
growth and price recovery.
29
The operating loss of the "Other" nonreportable segment, which
includes some miscellaneous businesses, certain goodwill
amortization, unallocated corporate operating expenses and the
elimination of profit on intersegment sales, increased by $3
million to a loss of $65 million in 1999 from a loss of $62
million in the 1998 first quarter. This increase was primarily a
result of the continuing trend of higher litigation costs offset
by lower incentive plan compensation costs from the 1990 Long-
Term Incentive Plan.
Interest expense decreased $3 million to $93 million in the first
quarter of 1999 compared with $96 million in the first quarter of
1998 as a result of lower average interest rates.
The Corporation redeemed approximately $400 million of its
outstanding debt during the first quarter of 1998. The
Corporation recorded an after-tax extraordinary loss of
approximately $14 million in that quarter related to these
redemptions, of which $12 million was allocated to the Group
based on the ratio of the Group's debt to the Corporation's total
debt.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. The Georgia-Pacific Group generated cash
from operations of $267 million for the three months ended April
3, 1999 compared with $275 million a year ago. The decrease is
primarily a result of very strong demand and improved prices for
several building products' items; offset by higher working
capital levels.
INVESTING ACTIVITIES. Capital expenditures for property, plant
and equipment for the three months ended April 3, 1999 were $107
million, which included $44 million in the building products
segment, $2 million in the distribution segment, $12 million in
the containerboard and packaging segment $40 million in the pulp
and paper segment, and $9 million of other and general
corporate. The Georgia-Pacific Group expects to make capital
expenditures for property, plant and equipment of approximately
$700 million in 1999, excluding the cost of any acquisitions.
Cash paid for timber and timber contracts in the first quarter
of 1999 and 1998 was $80 million and $142 million, respectively.
At the end of the first quarter of 1999, the Georgia-Pacific
Group completed the acquisition of a packaging plant and a
treated lumber facility and paid approximately $38 million in
cash. The results of operations of these acquired businesses
will be consolidated with that of the Georgia-Pacific Group
beginning April 4, 1999. The Georgia-Pacific Group has accounted
for these business combinations using the purchase method to
record a new cost basis for assets acquired and liabilities
assumed. The difference between the purchase price and the
market value of the assets acquired and liabilities assumed was
recorded as goodwill. Goodwill related to the packaging plant
and treated lumber facility will be amortized over 40 years and
15 years, respectively.
In 1999, the Georgia-Pacific Group expects its cash flow from
operations, together with proceeds from any asset sales and
available financing sources, to be sufficient to fund planned
capital investments, pay dividends and make scheduled debt
payments.
On May 7, 1999, the Corporation offered to acquire all
outstanding shares of Unisource Worldwide, Inc. ("Unisource") in
a cash merger for $12 per share. No definitive agreement
between the Corporation and Unisource has been reached. As of
January 31, 1999, Unisource had approximately 70 million shares
of common stock outstanding.
FINANCING ACTIVITIES.
The Corporation's total debt was $5.57 billion and $5.55 billion
at April 3, 1999 and December 31, 1998, respectively, of which
$4.58 billion and $4.57 billion, respectively, of such total debt
was Georgia-Pacific Group's debt.
During the first quarter of 1999, approximately $59 million of
fixed and floating rate industrial revenue bonds were replaced of
which $48 million were refunded by fixed rate instruments and $11
million were refunded by variable rate instruments.
30
The Corporation has a $1.5 billion unsecured revolving credit
facility which is used for direct borrowings and as support for
commercial paper and other short-term borrowings. As of April
3, 1999, $503 million of committed credit was available in
excess of all short-term borrowings outstanding under or
supported by the facility.
The Corporation's senior management establishes the parameters
of the Corporation's financial risk, which have been approved by
the Board of Directors. Hedging interest rate exposure through
the use of swaps and options and hedging foreign exchange
exposure through the use of forward contracts are specifically
contemplated to manage risk in keeping with the management
policy. Derivative instruments, such as swaps, forwards, options
or futures, which are based directly or indirectly upon interest
rates, currencies, equities and commodities, may be used by the
Corporation to manage and reduce the risk inherent in price,
currency and interest rate fluctuations. There have been no
significant changes to reported market risk since December 31,
1998.
The Corporation does not utilize derivatives for speculative
purposes. Derivatives are transaction-specific so that a specific
debt instrument, contract or invoice determines the amount,
maturity and other specifics of the hedge. Counterparty risk is
limited to institutions with long-term debt ratings of A or
better.
At April 3, 1999, the Corporation's weighted average interest
rate on its total debt was 7.1% including the accounts
receivable sale program and outstanding interest rate exchange
agreements. At April 3, 1999, these interest rate exchange
agreements effectively converted $456 million of floating rate
obligations with a weighted average interest rate of 5.0% to
fixed rate obligations with an average effective interest rate
of 6.8%. These agreements have a weighted average maturity of
approximately 3.2 years. As of April 3, 1999, the Corporation's
total floating rate debt, including the accounts receivable sale
program, exceeded related interest rate exchange agreements by
$1.3 billion.
The Corporation also enters into foreign currency exchange
agreements and commodity futures and swaps, the amounts of which
were not material to the financial position of the Group at
April 3, 1999.
As of April 3, 1999, the Corporation had registered for sale up
to $500 million of debt securities under a shelf registration
statement filed with the Securities and Exchange Commission.
During the first three months of 1999, The Georgia-Pacific Group
purchased on the open market approximately 1,270,000 shares of
the Georgia-Pacific Group stock at an aggregate price of $91
million ($71.69 average per share). Of these share repurchases,
approximately 1,170,000 shares were held as treasury stock and
100,000 shares were purchased during the first quarter of 1999
and settled after April 3, 1999.
Since December 1997 through April 3, 1999, The Georgia-Pacific
Group purchased on the open market approximately 9,314,000 shares
of the Georgia-Pacific Group stock at an aggregate price of $540
million ($57.94 average per share).
Subsequent to April 3, 1999 through May 11, 1999, the Georgia-
Pacific Group purchased on the open market approximately
1,104,000 shares of the Georgia-Pacific Group stock at an
aggregate price of $99 million ($89.51 average per share). The
Georgia-Pacific Group expects to repurchase stock throughout 1999
as long as debt levels are below the established thresholds.
During the first quarter of 1999 and 1998, the Georgia-Pacific
Group received $33 million and $2 million, respectively, from the
exercise of stock options.
During the first quarter of 1999 and 1998, the Georgia-Pacific
Group paid $21 million and $23 million, respectively, in
dividends. On May 4, 1999, the Board of Directors declared a two-
for-one split of Georgia-Pacific Group's common stock in the form
of a special dividend to shareholders of record on May 14, 1999.
The stock dividend of one share of Georgia-Pacific Group common
stock for each share of Georgia-Pacific Group will be paid June
3, 1999. Also on May 4, 1999, the Board of Directors declared a
regular quarterly dividend of 25 cents per share on Georgia-
Pacific Group common stock payable May 27, 1999, to shareholders
of record on May 13, 1999. It is anticipated that future
dividends on Georgia-Pacific Group common stock will be declared
at the rate of 12.5 cents per share as a result of the stock
split.
31
OTHER. In June 1998, the FASB issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an
entity recognizes all derivatives as either assets or
liabilities on the balance sheets and measures those instruments
at fair value. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the
resulting designation. The Georgia-Pacific Group will be
required to adopt the new statement in 2000; early adoption is
encouraged, but no prior period restatement is permitted.
Management is evaluating the effect of this statement on The
Georgia-Pacific Group's derivative instruments, primarily
interest rate swaps and foreign currency forward contracts. The
impact of adjustments to fair value is not expected to be
material to The Georgia-Pacific Group's financial position.
The Georgia-Pacific Group is working to resolve the effects of
the Year 2000 problem on its information systems, the operating
systems used in its manufacturing operations as well as its
facilities systems. The Year 2000 problem, which is common to
most businesses, concerns the inability of such systems to
properly recognize and process dates and date-sensitive
information on and beyond January 1, 2000. In 1996, The Georgia-
Pacific Group began a companywide assessment of the vulnerability
of its systems to the Year 2000 problem. Based on such
assessment, The Georgia-Pacific Group developed a Year 2000 plan,
under which all key systems are being tested, and noncompliant
software or technology is being modified or replaced. The Georgia-
Pacific Group is also surveying and assessing the Year 2000
readiness status and compatibility of customers' and suppliers'
systems and processes that interface with The Georgia-Pacific
Group's systems or could otherwise impact The Georgia-Pacific
Group's operations.
The Georgia-Pacific Group completed the necessary revisions and
unit testing to most systems and processes in 1998 with a few
systems scheduled for revision in early 1999. Full integration
testing and verification of such systems and processes for Year
2000 readiness will continue and be completed during 1999. At the
end of March 1999, 64 percent of The Georgia-Pacific Group's
systems are considered fully Year 2000 ready, and 35 percent are
in the final stages of full integration testing. The remaining 1
percent are non mission critical systems expected to be completed
by June or early July 1999. Early in 1998, the Georgia-Pacific
Group completed an inventory of the process control systems and
embedded chips used in its manufacturing operations and currently
believes that only a small percentage of such systems and chips
could be subject to Year 2000 problems. At the end of March
1999, over 80 percent of the process control and embedded chip
inventory has been fully analyzed and remediated as necessary; 13
percent of the inventory is currently in the repair or test
phase, with the remaining 7 percent still being assessed. Final
post-repair testing is scheduled to be complete at all operations
by the end of September 1999. Due to system acquisitions and the
number and complexity of existing systems, the Georgia-Pacific
Group expects some continuing additions of noncritical systems to
the inventory list.
The Georgia-Pacific Group has contacted each of its critical
suppliers and service providers including government services,
transportation, energy and communication providers to ascertain
their respective levels of readiness to address and remediate
Year 2000 problems and is currently reviewing their responses and
conducting follow-up reviews as necessary. The Georgia-Pacific
Group has identified and contacted critical customers to
ascertain their respective levels of Year 2000 readiness and will
be assessing the need for further testing with customers as
appropriate. While the Georgia-Pacific Group currently believes
that it will be able to modify or replace its affected systems in
time to minimize any detrimental effects on its operations,
failure to do so, or the failure of the Georgia-Pacific Group's
major customers, suppliers and service providers to modify or
replace their affected systems, could have a material adverse
impact on the Georgia-Pacific Group's results of operations,
liquidity or financial position in the future. The most
reasonably likely worst-case scenario of failure by the Georgia-
Pacific Group or its customers or suppliers to resolve the Year
2000 problem would be a temporary slowdown or cessation of
manufacturing operations at one or more of the Georgia-Pacific
Group's facilities, including its limited foreign operations and
a temporary inability on the part of the Georgia-Pacific Group to
process orders and billings in a timely manner and to deliver
finished products to customers. The Georgia-Pacific Group's
individual business units are currently identifying and
considering various contingency options, including identification
of alternate suppliers, vendors and service providers as well as
direct access to qualified vendor technical support and manual
alternatives to systems operations. These options will allow them
to minimize the risks of any unresolved Year 2000 problems on
their operations and to minimize the effect of any unforeseen
Year 2000 failures in areas outside the Georgia-Pacific Group's
control. The primary goal of the Georgia-Pacific Group's
contingency plan is to minimize the adverse impact to personnel
safety, environmental safety and assets. Contingency plans will
be finalized by July 1999.
The Georgia-Pacific Group currently estimates the incremental
cost of the work needed to resolve the Year 2000 problem at
approximately $60 million (including approximately $10 million of
capital costs), of which $20 million has been incurred to date
and $20 million is included for the impact of contingency
planning activities and unexpected events. In addition, the
Corporation expects to incur internal costs totaling
approximately $20 million related to the Year 2000 problem, of
which approximately $13 million has been incurred to date. The
bulk of the incremental costs relates to replacement or
modification of affected process control systems in the Georgia-
Pacific Group's manufacturing operations and is projected to be
incurred in the second and third quarters of 1999. The majority
of the internal costs relates to code remediation and testing and
is projected to be incurred through 1999. These incremental and
internal costs will be expensed as incurred, except for new
systems purchased that will be capitalized in accordance with
corporate policy. Such costs may be material to the Georgia-
Pacific Group's results of operations in one or more fiscal
quarters or years but are not expected to have a material adverse
effect on the long-term results of operations, liquidity or
combined financial position of the Georgia-Pacific Group.
For a discussion of commitments and contingencies refer to Note 8
of the Notes to Combined Financial Statements.
REFER TO THE "CAUTIONARY STATEMENT FOR PURPOSES OF THE `SAFE
HARBOR' PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995" ON PAGE 18 OF THIS FORM 10-Q.
32
COMBINED STATEMENTS OF INCOME (Unaudited)
Georgia-Pacific Corporation--The Timber Company
First Quarter
-----------------
(In millions, except per share amounts) 1999 1998
- ----------------------------------------------------------------------
Net sales
Timber-Georgia-Pacific Group $ 86 $ 117
Timber-third parties
Delivered 13 7
Stumpage 38 17
Other 2 4
- ----------------------------------------------------------------------
Total net sales 139 145
- ----------------------------------------------------------------------
Costs and expenses
Cost of sales, excluding depreciation and 24 19
cost of timber harvested shown below
Selling, general and 10 9
administrative
Depreciation and cost of 11 14
timber harvested
Interest 18 18
- ----------------------------------------------------------------------
Total costs and expenses 63 60
- ----------------------------------------------------------------------
Income before income taxes and 76 85
extraordinary item
Provision for income taxes 30 33
- ----------------------------------------------------------------------
Income before extraordinary item 46 52
Extraordinary item, net of taxes - (2)
- ----------------------------------------------------------------------
Net income $ 46 $ 50
======================================================================
Basic and diluted per share:
Income before extraordinary item $ 0.53 $ 0.56
Extraordinary item, net of taxes - (0.02)
- ----------------------------------------------------------------------
Net income $ 0.53 $ 0.54
======================================================================
Average number of shares outstanding:
Basic 86.4 92.3
Diluted 86.6 93.0
======================================================================
The accompanying notes are an integral part of these financial statements.
33
COMBINED STATEMENTS OF CASH FLOWS (Unaudited)
Georgia-Pacific Corporation--The Timber Company
First Quarter
------------------
(In millions) 1999 1998
- -----------------------------------------------------------------------
Cash flows from operations
Net income $ 46 $ 50
Adjustments to reconcile net income to cash 1 1
provided by operations:
Depreciation
Cost of timber harvested 10 13
Deferred income taxes - 1
Gain on sales of assets (4) (8)
- -----------------------------------------------------------------------
Cash provided by operations 53 57
- -----------------------------------------------------------------------
Cash flows from investment activities
Property, plant and equipment investments - (1)
Timber and timberlands purchases (11) (20)
Change in assets held for tax-free exchange (3) (5)
Proceeds from sales of assets 5 27
- -----------------------------------------------------------------------
Cash (used for) provided by investment activities (9) 1
- ----------------------------------------------------------------------
Cash flows from financing activities
Share repurchases (31) -
Proceeds from option plan exercises 3 -
Additions to (repayments of) long-term debt 6 (35)
Cash dividends paid (22) (23)
- -----------------------------------------------------------------------
Cash (used for) financing activities (44) (58)
- -----------------------------------------------------------------------
Increase in cash - -
Balance at beginning of period - - -
- -----------------------------------------------------------------------
Balance at end of period $ - $ -
======================================================================
The accompanying notes are an integral part of these financial statements.
34
COMBINED BALANCE SHEETS
Georgia-Pacific Corporation--The Timber Company
(In millions) April 3, December 31,
1999 1998
- ----------------------------------------------------------------------
ASSETS (Unaudited)
Timber and timberlands
Timberlands $ 303 $ 303
Fee timber 574 580
Reforestation 234 227
Other 30 30
- ------------------------------------------------------------------------
Total timber and timberlands 1,141 1,140
- ------------------------------------------------------------------------
Property, plant and equipment, less accumulated
depreciation of $43 and $42, respectively 23 24
- ------------------------------------------------------------------------
Other assets 15 10
- ------------------------------------------------------------------------
Total assets $ 1,179 $ 1,174
======================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt $ 989 $ 983
- ------------------------------------------------------------------------
Other liabilities 35 32
- ------------------------------------------------------------------------
Deferred income tax liabilities 244 244
- ------------------------------------------------------------------------
Total liabilities 1,268 1,259
- ------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity (89) (85)
- ------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,179 1,174
======================================================================
The accompanying notes are an integral part of these financial
statements.
35
NOTES TO COMBINED FINANCIAL STATEMENTS (Unaudited)
GEORGIA-PACIFIC CORPORATION--THE TIMBER COMPANY
APRIL 3, 1999
1. PRINCIPLES OF PRESENTATION. The combined financial
statements include the accounts of The Timber Company and
subsidiaries. All significant intercompany balances and
transactions are eliminated in consolidation. The interim
financial information included herein is unaudited; however, such
information reflects all adjustments which are, in the opinion of
management, necessary for a fair presentation of The Timber
Company's financial position, results of operations, and cash
flows for the interim periods. All such adjustments are of a
normal, recurring nature except for the item discussed in Note 3
below. Certain 1998 amounts have been reclassified to conform
with the 1999 presentation. The Timber Company's combined
financial statements should be read in conjunction with the
Corporation's consolidated financial statements and Georgia-
Pacific Group's combined financial statements.
On or about April 22, 1999, The Timber Company determined
to change its fiscal year from December 31 to end on the
Saturday closest to December 31. Additionally, The Timber
Company reports its quarterly periods on a 13-week basis
ending on a Saturday. The impact on the current quarter of
three additional days was not material. There will be no
transition period on which to report.
2. EARNINGS PER SHARE. The Corporation's common stock was
redesignated in December 1997 to reflect separately the
performance of the Corporation's pulp, paper and building
products businesses, which are now known as Georgia-Pacific
Group. A separate class of common stock was distributed to
reflect the performance of the Corporation's timber
operating group, which is now known as The Timber Company.
Basic earnings per share is computed based on net income
and the weighted average number of common shares
outstanding. Diluted earnings per share reflect the annual
issuance of common shares under long-term incentive stock
option and stock purchase plans. The computation of
diluted earnings per share does not assume conversion or
exercise of securities that would have an antidilutive
effect on earnings per share.
The following table provides earnings and per share data
for The Timber Company for 1999 and 1998.
First Quarter,
---------------------
(In millions, except per share amounts) 1999 1998
- ---------------------------------------------------------------
Basic and diluted income available to
shareholders (numerator):
Income before extraordinary item $ 46 $ 52
Extraordinary item, net of taxes - (2)
- ---------------------------------------------------------------
Net income $ 46 50
================================================================
Shares (denominator):
Average shares outstanding 86.4 92.3
Dilutive securities:
Stock incentive and option plans 0.2 0.7
- ---------------------------------------------------------------
Total assuming conversion 86.6 93.0
================================================================
Basic and diluted per share amounts:
Income before extraordinary item $ 0.53 $ 0.56
Extraordinary item, net of taxes - (0.02)
- ---------------------------------------------------------------
Net income $ 0.53 $ 0.54
================================================================
3. EXTRAORDINARY ITEM. The Corporation called approximately
$400 million of its outstanding debt during the first
quarter of 1998. As a result, an after-tax extraordinary
charge of $2 million ($0.02 per share) was allocated to The
Timber Company based on the ratio of The Timber Company's
debt to the Corporation's total debt.
36
4. COMPREHENSIVE INCOME. The Timber Company's total
comprehensive income for the first quarter of 1999 and 1998 was
$46 million and $50 million, respectively. Other comprehensive
income was insignificant for The Timber Company during each of
the first quarter of 1999 and 1998.
5. SHARE REPURCHASES. During the first three months of 1999,
The Timber Company purchased on the open market approximately
1,474,000 shares of The Timber Company stock at an aggregate
price of $32 million ($22.10 average per share). Of these
repurchased shares, approximately 1,409,700 shares were held as
treasury stock and 64,300 shares were purchased during the first
quarter of 1999 and settled after April 3, 1999.
6. COMMITMENTS AND CONTINGENCIES. The Corporation is a party to
various legal proceedings incidental to the businesses of the
Georgia-Pacific Group and The Timber Company and is subject to a
variety of environmental and pollution control laws and
regulations in all jurisdictions in which it operates. As is the
case with other companies in similar industries, the Corporation
faces exposure from actual or potential claims and legal
proceedings involving environmental matters. Liability insurance
in effect during the last several years provides very limited
coverage for environmental matters. The management of The Timber
Company believes that the Corporation has established adequate
reserves for probable losses with respect to such environmental
matters and legal proceedings. However, holders of The Timber
Company stock are shareholders of the Corporation and are subject
to all of the risks associated with an investment in the
Corporation, including the environmental matters and legal
proceedings involving the Georgia-Pacific Group discussed below.
COMMITMENTS AND CONTINGENCIES WITH RESPECT TO THE TIMBER
COMPANY. The Timber Company is subject to various legal
proceedings and claims that arise in the ordinary course of
its business. Although the ultimate outcome of these
matters and legal proceedings cannot be determined with
certainty, based on presently available information,
management of the Corporation believes that the final
outcome of such matters and legal proceedings could be
material to the operating results of The Timber Company in
any given quarter or year, but will not have a material
adverse effect on the long-term results of operations,
liquidity or financial position of The Timber Company.
COMMITMENTS AND CONTINGENCIES WITH RESPECT TO GEORGIA-
PACIFIC GROUP. The following sets forth legal proceedings
to which the Corporation is a party and claims related to
the operations of the Georgia-Pacific Group.
The Corporation is involved in environmental remediation
activities at approximately 182 sites, both owned by the
Corporation and owned by others, where it has been notified
that it is or may be a potentially responsible party under
the Comprehensive Environmental Response, Compensation and
Liability Act or similar state "superfund" laws. Of the
known sites in which it is involved, the Corporation
estimates that approximately 44 percent are being
investigated, approximately 30 percent are being remediated
and approximately 26 percent are being monitored (an
activity that occurs after either site investigation or
remediation has been completed). The ultimate costs to the
Corporation for the investigation, remediation and
monitoring of many of these sites cannot be predicted with
certainty, due to the often unknown magnitude of the
pollution or the necessary cleanup, the varying costs of
alternative cleanup methods, the amount of time necessary to
accomplish such cleanups, the evolving nature of cleanup
technologies and government regulations, and the inability
to determine the Corporation's share of multiparty cleanups
or the extent to which contribution will be available from
other parties. The Corporation has established reserves for
environmental remediation costs for these sites in amounts
that it believes are probable and reasonably estimable.
Based on analysis of currently available information and
previous experience with respect to the cleanup of hazardous
substances, the Corporation believes it is reasonably
possible that costs associated with these sites may exceed
current reserves by amounts that may prove insignificant or
that could range, in the aggregate, up to approximately $56
million. This estimate of the range of reasonably possible
additional costs is less certain than the estimates upon
which reserves are based, and in order to establish the
upper limit of such range, assumptions least favorable to
the Corporation among the range of reasonably possible
outcomes were used. In estimating both its current reserve
for environmental remediation and the possible range of
additional costs, the Corporation has not assumed it will
bear the entire cost of remediation of every site to the
exclusion of other known potentially responsible parties who
may be jointly and severally liable. The ability of other
potentially responsible parties to participate has been
taken into account, based generally on the parties'
financial condition and probable contribution on a per site
basis.
37
The Corporation and many other companies are defendants in
suits brought in various courts around the nation by
plaintiffs who allege that they have suffered personal
injury as a result of exposure to asbestos-containing
products. These suits allege a variety of lung and other
diseases based on alleged exposure to products previously
manufactured by the Corporation. In many cases, the
plaintiffs are unable to demonstrate that they have suffered
any compensable loss as a result of such exposure, or that
any injuries they have incurred in fact resulted from
exposure to the Corporation's products.
The Corporation generally settles asbestos cases for amounts
it considers reasonable given the facts and circumstances of
each case. The amounts it has paid to date to defend and
settle these cases have been substantially covered by
product liability insurance. The Corporation is currently
defending claims of approximately 73,700 such plaintiffs as
of April 22, 1999 and anticipates that additional suits will
be filed against it over the next several years. The
Corporation has insurance available in amounts that it
believes are adequate to cover substantially all of the
reasonably foreseeable damages and settlement amounts
arising out of claims and suits currently pending. The
Corporation has further insurance coverage available for the
disposition of suits that may be filed against it in the
future, but there can be no assurance that the amounts of
such insurance will be adequate to cover all future claims.
The Corporation has established reserves for liabilities and
legal defense costs it believes are probable and reasonably
estimable with respect to pending suits and claims, and has
also established a receivable for expected insurance
recoveries.
On May 6, 1998, suit was filed in state court in Columbus,
Ohio, against the Corporation and Georgia-Pacific Resins,
Inc., a wholly owned subsidiary of the Corporation. The
lawsuit was filed by eight plaintiffs who seek to represent
a class of individuals who at any time from 1985 to the
present lived, worked, resided, owned, frequented or
otherwise occupied property located within a three-mile
radius of the Corporation's resins manufacturing operation
in Columbus, Ohio. The lawsuit alleges that the individual
plaintiffs and putative class members have suffered personal
injuries and/or property damage because of (i) alleged
"continuing and long-term releases and threats of releases
of noxious fumes, odors and harmful chemicals, including
hazardous substances" from the Corporation's operations
and/or (ii) a September 10, 1997 explosion at the Columbus
facility and alleged release of hazardous material resulting
from that explosion. Prior to the lawsuit, the Corporation
had received a number of explosion-related claims from
nearby residents and businesses. These claims were for
property damage, personal injury and business interruption
and were being reviewed and adjusted on a case-by-case
basis. The Corporation has denied the material allegations
of the lawsuit. While it is premature to evaluate the claims
asserted in the lawsuit, the Corporation believes it has
meritorious defenses.
In May 1997, the Corporation and nine other companies were
named as defendants in a suit brought by the Attorney
General of the State of Florida alleging that they engaged
in a conspiracy to fix the prices of sanitary commercial
paper products, such as towels and napkins, in violation of
federal and state laws. Approximately 45 similar suits have
been filed by private plaintiffs in federal courts in
California, Florida, Georgia and Wisconsin, and in the state
courts of California, Wisconsin, Minnesota and Tennessee. On
October 15, 1997, the Federal Judicial Panel on Multi-
District Litigation consolidated all federal court cases in
the federal district court in Gainesville, Florida. On July
24, 1998, the court certified the suit as a class action
consisting of nongovernmental direct purchasers of the
defendants' products. Discovery in the federal and state
cases is ongoing. The Corporation has denied that it has
engaged in any of the illegal conduct alleged in these cases
and intends to defend itself vigorously.
Although the ultimate outcome of these environmental matters
and legal proceedings cannot be determined with certainty,
based on presently available information, management
believes that adequate reserves have been established for
probable losses with respect thereto. Management further
believes that the ultimate outcome of such environmental
matters and legal proceedings could be material to operating
results in any given quarter or year but will not have a
material adverse effect on the long-term results of
operations, liquidity or consolidated financial position of
the Corporation.
38
7. RELATED PARTY TRANSACTIONS. During the first quarter of
1999 and 1998, The Timber Company sold timber deeds to Georgia-
Pacific Group. The Timber Company recognizes revenues and
earnings from these related party timber deed contracts as the
timber is cut by the Georgia-Pacific Group. Had The Timber
Company recognized revenues and earnings on these related party
timber deed contracts at the time of the agreement (which is the
accounting policy for timber deed sales to third parties), pro
forma net sales, depreciation and cost of timber harvested,
income before income taxes and extraordinary item, net income and
basic and diluted earnings per share would have been as follows:
Georgia-Pacific Corporation--The Timber Company
First Quarter, 1999
(In millions, except per share amounts) As Reported Pro forma (a)
- ---------------------------------------------------------------
Net Sales $ 139 $ 138
Depreciation and cost of timber harvested 11 11
Income before income taxes and
extraordinary item 76 75
Net income 46 45
Basic and diluted earnings per share 0.53 0.52
============================================================
First Quarter, 1999
(In millions, except per share amounts) As Reported Pro forma (a)
- ---------------------------------------------------------------
Net Sales $ 145 $ 145
Depreciation and cost of timber harvested 14 14
Income before income taxes and
extraordinary item 85 85
Net income 50 50
Basic and diluted earnings per share 0.54 0.54
============================================================
(a) Reported on a pro forma basis as if The Timber Company
had recognized revenues and earnings on timber deed sales to
Georgia-Pacific Group at the time of the contract, which is
the accounting treatment utilized in the case of timber
deeds sold to third parties.
8. SUBSEQUENT EVENTS. In April 1999, The Timber Company
reached an agreement to sell approximately 390,000 acres of
timberlands in the Canadian province of New Brunswick to the
provincial government for approximately $41 million ($62.5
million Canadian). The properties are located in Charlotte and
York counties. The transaction is expected to close in the
second quarter of 1999.
Also in April 1999, The Timber Company reached an agreement
to sell approximately 440,000 acres of timberlands in Maine
to an institutional investor. The properties are located in
Washington, Aroostook and Penebscot counties. This
transaction closed on May 6, 1999.
39
SELECTED COMBINED SALES DATA (Unaudited)
Georgia-Pacific Corporation--The Timber Company
1999 1998
------------- --------------
First Quarter First Quarter
- ----------------------------------------------------------------------
VOLUME (in thousand tons)
Southern softwood sawtimber 1,948 1,815
Western softwood sawtimber 299 301
Softwood pulpwood 1,102 1,135
Hardwood sawtimber 123 67
Hardwood pulpwood 489 482
- ----------------------------------------------------------------------
Total volume 3,961 3,800
======================================================================
SELLING PRICES (per ton)
Southern softwood sawtimber $ 48 $ 52
Western softwood sawtimber 70 71
Softwood pulpwood 13 15
Hardwood sawtimber 29 36
Hardwood pulpwood 10 12
- ----------------------------------------------------------------------
Weighted average price 34 37
======================================================================
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
FIRST QUARTER 1999 COMPARED WITH FIRST QUARTER 1998
The Timber Company reported net sales of approximately $139 and
$145 million for the first quarter of 1999 and 1998,
respectively. Net income for the 1999 first quarter was $46
million, or $0.53 per share, compared with $50 million, or $0.54
per share, in 1998. The 1998 results included an extraordinary,
after-tax loss of $2 million, or $0.02 per share, for the early
retirement of debt.
Timber sales decreased $4 million, from $141 million in the first
quarter of 1998 to $137 million in the first quarter of 1999,
primarily as a result of declining timber prices. Southern
sawtimber prices decreased 8 percent from record levels in 1998
and softwood pulpwood prices were down 13 percent compared to the
first quarter of 1998. Western sawtimber prices remained
relatively flat quarter over quarter. The decline in Southern
sawtimber prices was mitigated by strong demand in the building
products business. Additionally, improvement in Western
sawtimber prices began to materialize toward the latter part of
the first quarter due to a combination of improvement in building
products demand, and the beginning of a recovery in the log
export market. The Timber Company expects pricing of Western
sawtimber to continue to improve into the second quarter as
building products business demand continues and log export
markets recover.
Overall, the decline in selling prices was offset somewhat by
slightly higher harvest volumes. First quarter total harvest
volumes were up seasonally, and were approximately 4 percent
higher than the same period in 1998. Southern sawtimber harvest
volumes increased 7 percent compared to the first quarter of
1998. Most significantly, The Timber Company more than doubled
its total sales volume to third parties quarter over quarter.
The ability to opportunistically time sales of timber was
responsible for partially mitigating the impact of softening
prices on 1999 first quarter results.
Other sales generated $2 million in income for the period
compared to $4 million in 1998. The decrease was due to the fact
that The Timber Company is no longer engaged in certain
businesses related to real estate development properties located
in South Carolina and Florida. These operations were divested at
the end of the first quarter 1998.
Earnings before interest and taxes decreased $9 million to $94
million in the first quarter of 1999, compared with $103 million
in the first quarter of 1998. The decrease resulted from
slightly lower sales referenced above, and a reduction of gain on
asset sales of $4 million in the current period as compared to
first quarter 1998.
Selling, general and administrative expense was $10 million for
the first quarter 1999 compared with $9 million for the same
period in 1998.
Interest expense remained unchanged at $18 million for both the
first quarters of 1999 and 1998. Debt levels were slightly
higher in the first quarter of 1999 compared with the 1998 first
quarter, however this was offset by a decrease in the weighted
average interest rate from 7.8% in 1998 to 7.2% in 1999.
40
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. The Timber Company generated cash from
operations of $53 million during the first quarter of 1999
compared with $57 million for the same period a year ago.
INVESTING ACTIVITIES. Expenditures during the first quarter of
1999 were $11 million and generally comprised silvicultural
investments. Expenditures for the same period in 1998 totaled
$21 million, with $7 million related to silvicultural
investments. The Timber Company expects to invest approximately
$50 million in 1999, without considering the cost of any
acquisitions, primarily for silvicultural investments.
Proceeds from miscellaneous land sales were $5 million in the
first quarter of 1999; the proceeds used to repurchase shares of
The Timber Company's stock. During the first quarter of 1998,
The Timber Company received $27 million in proceeds from the
sale of assets, principally real estate development properties
located in South Carolina and Florida. These proceeds were used
to repay outstanding debt.
In April, 1999, The Timber Company reached an agreement to sell
approximately 390,000 acres of timberlands in the Canadian
province of New Brunswick to the provincial government for
approximately $41 million ($62.5 million Canadian). The
properties are located in Charlotte and York counties. The
transaction closed on May 6, 1999.
Also in April,1999, The Timber Company reached an agreement to
sell approximately 440,000 acres of timberlands in Maine to an
institutional investor. The properties are located in
Washington, Aroostock, and Penebscott counties. This
transaction is expected to close late in the second quarter or
early in the third quarter of 1999. The Timber Company expects
to continue to evaluate its land base in 1999, selling selected
properties that are nonstrategic and have a greater value as
conservation, commercial or recreational sites.
FINANCING ACTIVITIES. The Corporation's total debt was $5.57
billion and $5.55 billion at April 3, 1999 and December 31,
1998, respectively, of which $989 million and $983 million,
respectively, was The Timber Company's debt. The slight increase
in debt for The Timber Company for the first quarter of 1999 was
due primarily to the use of funds to pay dividends and
repurchase shares.
During the first quarter of 1999, approximately $59 million of
fixed and floating rate industrial revenue bonds were replaced
of which $48 million were refunded by fixed rate instruments and
$11 million were refunded by variable rate instruments.
41
The Corporation has a $1.5 billion unsecured revolving credit
facility which is used for direct borrowings and as support for
commercial paper and other short-term borrowings. As of April
3, 1999, $503 million of committed credit was available in
excess of all short-term borrowings outstanding under or
supported by the facility.
The Corporation's senior management establishes the parameters
of the Corporation's financial risk, which have been approved by
the Board of Directors. Hedging interest rate exposure through
the use of swaps and options and hedging foreign exchange
exposure through the use of forward contracts are specifically
contemplated to manage risk in keeping with the management
policy. Derivative instruments, such as swaps, forwards, options
or futures, which are based directly or indirectly upon interest
rates, currencies, equities and commodities, may be used by the
Corporation to manage and reduce the risk inherent in price,
currency and interest rate fluctuations. There have been no
significant changes to reported market risk since December 31,
1998.
The Corporation does not utilize derivatives for speculative
purposes. Derivatives are transaction-specific so that a specific
debt instrument, contract or invoice determines the amount,
maturity and other specifics of the hedge. Counterparty risk is
limited to institutions with long-term debt ratings of A or
better.
At April 3, 1999, the Corporation's weighted average interest
rate on its total debt was 7.1% including the accounts
receivable sale program and outstanding interest rate exchange
agreements. At April 3, 1999, these interest rate exchange
agreements effectively converted $456 million of floating rate
obligations with a weighted average interest rate of 5.0% to
fixed rate obligations with an average effective interest rate
of 6.8%. These agreements have a weighted average maturity of
approximately 3.2 years. As of April 3, 1999, the Corporation's
total floating rate debt, including the accounts receivable sale
program, exceeded related interest rate exchange agreements by
$1.3 billion.
The Corporation also enters into foreign currency exchange
agreements and commodity futures and swaps, the amounts of which
were not material to the consolidated financial position of the
Corporation at April 3, 1999.
As of April 3, 1999, the Corporation had registered for sale up
to $500 million of debt securities under a shelf registration
statement filed with the Securities and Exchange Commission.
During the first three months of 1999, The Timber Company
purchased on the open market approximately 1,474,000 shares of
The Timber Company stock at an aggregate price of $32 million
($22.10 average per share). Of the repurchased shares,
approximately 1,409,700 shares were held as treasury stock and
64,300 shares were purchased during the first quarter of 1999 and
settled after April 3, 1999.
Since June, 1998 through April 3, 1999, The Timber Company
purchased on the open market approximately 7,178,000 shares of
The Timber Company stock at an aggregate price of $153 million
($21.45 average per share).
Subsequent to April 3, 1999 through May 11, 1999, The Timber
Company purchased on the open market approximately 962,000 shares
of The Timber Company stock at an aggregate price of $23 million
($24.28 average per share). The Timber Company expects to
continue to repurchase shares of The Timber Company stock
throughout 1999 as long as debt levels are below the established
thresholds.
During the first quarter of 1999 and 1998, The Timber Company
paid $22 million and $23 million, respectively, in dividends.
In 1999, The Timber Company expects its cash flow from
operations, together with proceeds from any asset sales and
available financing sources, to be sufficient to fund planned
capital investments, pay dividends and make scheduled debt
payments.
42
OTHER. In June 1998, the FASB issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities
on the balance sheets and measure those instruments at fair
value. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the
resulting designation. The Corporation will be required to adopt
the new statement in 2000; early adoption is encouraged, but no
prior period restatement is permitted. Management is evaluating
the effect of this statement on the Corporation's derivative
instruments, primarily interest rate swaps and foreign currency
forward contracts. The impact of adjustments to fair value is not
expected to be material to The Timber Company's financial
position.
The Timber Company is working to resolve the effects of the Year
2000 problem on its information systems. The Year 2000 problem,
which is common to most businesses, concerns the inability of
such systems to properly recognize and process dates and date-
sensitive information on and beyond January 1, 2000. In 1996, the
Corporation began a companywide assessment of the vulnerability
of its systems to the Year 2000 problem. Based on such
assessment, The Timber Company has developed a Year 2000 plan,
under which all of its key information systems are being tested,
and noncompliant software or technology is being modified or
replaced. The Timber Company is also surveying the Year 2000
compliance status and compatibility of customers' and suppliers'
systems that interface with The Timber Company's systems or could
otherwise impact The Timber Company's operations.
The Timber Company has revised most of its systems and processes
and expects to complete testing and verification of such systems
and processes for Year 2000 compliance during 1999. The Timber
Company has completed an inventory of the systems and embedded
chips used in its operations and currently believes that only a
small percentage of such systems and chips could be subject to
Year 2000 problems. The Timber Company currently expects the work
needed to resolve the Year 2000 problem with regard to its
operations to be performed as part of its normal systems
maintenance and replacement practices, and does not currently
expect to accelerate its internal maintenance schedule or to
incur any incremental cost for such work. Internal and external
costs to resolve the Year 2000 problem are not expected to be
significant. The Timber Company is in the process of identifying
critical suppliers and customers and intends to communicate with
each of them to ascertain their level of readiness to address and
remediate Year 2000 problems. The most reasonably likely worst-
case scenario of failure by The Timber Company or its customers
or suppliers to resolve the Year 2000 problem would be a
temporary inability on the part of The Timber Company to process
timber sales and billings in a timely manner. The Timber Company
is currently identifying and considering various contingency
options, including identification of alternate suppliers, vendors
and service providers, and manual alternatives to systems
operations, which will allow it to minimize the risks of any
unresolved Year 2000 problems on its operations and to minimize
the effect of any unforeseen Year 2000 failures.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR' PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. The
statements under this "Management's Discussion and Analysis" and
other statements contained herein that are not historical facts,
including statements regarding pricing trends, expected harvest
rotations and The Timber Company's expectations regarding
resolution of issues associated with the Year 2000 problem, are
forward-looking statements (as such term is defined under the
Private Securities Litigation Reform Act of 1995) based on
current expectations. The accuracy of such statements is subject
to a number of risks, uncertainties and assumptions. In addition
to the risks, uncertainties and assumptions discussed elsewhere
herein, factors that could cause or contribute to actual results
differing materially from such forward-looking statements include
the following: the effect on The Timber Company of government,
legislative and environmental restrictions; catastrophic losses
from fires, floods, windstorms, earthquakes, volcanic eruptions,
insect infestations or diseases; material variations in regional
market demand for timber products; fluctuations in interest
rates; the ability of The Timber Company, and its customers and
suppliers, to address the Year 2000 problem in a timely and
efficient manner; and other risks, uncertainties and assumptions
discussed in the Corporation's filings with the Securities and
Exchange Commission, including the Corporation's Form 10-K dated
December 31, 1998 and the Corporation's Form 8-K dated October
17, 1996.
For a discussion of commitments and contingencies refer to Note
6 of the Notes to Combined Financial Statements.
43
PART II - OTHER INFORMATION
---------------------------
GEORGIA-PACIFIC CORPORATION
April 3, 1999
Item 1. Legal Proceedings
The information contained in Note 9 `"Commitments and
Contingencies" of the Notes to Consolidated Financial
Statements--Georgia-Pacific Corporation, Note 8
`"Commitments and Contingencies" of the Notes to
Combined Financial Statements--Georgia-Pacific Group
and Note 6 `"Commitments and Contingencies" of the
Notes to Consolidated Financial Statements--The Timber
Company filed as part of this Quarterly Report on Form
10-Q is incorporated herein by reference.
The Crossett paper mill has recently received a Notice
of Violation from the United States Environmental
Protection Agency ("EPA") alleging violations of New
Source Performance Standards and other air
requirements. The Corporation has equitable and/or
legal defenses for these claims and expects to contest
these allegations vigorously. Although no negotiations
with the EPA have yet been held, the Corporation
anticipates being able to negotiate a settlement of
these issues with the EPA. No penalties have been
assessed to date.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 3.2 Bylaws, as amended to date.
Exhibit 27. Financial Data Schedule.
(b) The Corporation filed Current Reports on Form 8-K
dated March 18, 1999 and May 4, 1999, in which it
reported under Item 5 - "Other Events."
44
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: May 12, 1999 GEORGIA-PACIFIC CORPORATION
(Registrant)
by /s/John F. McGovern
----------------------------
John F. McGovern,
Executive Vice President -
Finance and Chief
Financial Officer
by /s/James E. Terrell
----------------------------
James E. Terrell,
Vice President and Controller
(Chief Accounting Officer)
45
GEORGIA-PACIFIC CORPORATION
---------------------------
INDEX TO EXHIBITS
FILED WITH THE QUARTERLY REPORT
ON FORM 10-Q FOR THE
QUARTER ENDED April 3, 1999
Number Description
- ------ -----------
3.2 Bylaws, as amended to date.(1)
27. Financial Data Schedule. (1)
- -------------------------------
(1) Filed by EDGAR
/