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 July 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 August 10, 1999, Georgia-Pacific Corporation
had 171,499,099 shares of Georgia-Pacific Group Common Stock outstanding and
82,857,948 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
Three Months Ended Six Months Ended
------------------ ---------------- -
(In millions, except per share July 3, June 30, July 3, June 30,
amounts) 1999 1998 1999 1998
----- -------- ------- --------
- ----------------------------------------------------------------------
Net sales $ 3,850 $ 3,305 $ 7,255 $ 6,526
- ----------------------------------------------------------------------
Costs and expenses
Cost of sales, excluding depreciation
and cost of timber harvested
shown below 2,789 2,576 5,320 5,070
Selling, general and
Administrative 306 265 604 536
Depreciation and cost of
timber harvested 223 236 444 461
Interest 106 111 217 225
Other income (86) - (86) -
- ----------------------------------------------------------------------
Total costs and expenses 3,338 3,188 6,499 6,292
- ----------------------------------------------------------------------
Income before income taxes and
extraordinary item 512 117 756 234
Provision for income taxes 203 49 302 98
- ----------------------------------------------------------------------
Income before extraordinary item 309 68 454 136
Extraordinary item , net of taxes, - (1) - (15)
- ----------------------------------------------------------------------
Net income $ 309 $ 67 $ 454 $ 121
======================================================================
Georgia-Pacific Group
Income before extraordinary item $ 212 $ 30 $ 311 $ 46
Extraordinary item, net of taxes - (1) - (13)
- ----------------------------------------------------------------------
Net Income $ 212 $ 29 $ 311 $ 33
- ----------------------------------------------------------------------
Basic per common share:
Income before extraordinary item $ 1.23 $ 0.17 $ 1.81 $ 0.25
Extraordinary item, net of taxes - (0.01) - (0.07)
- ----------------------------------------------------------------------
Net income $ 1.23 $ 0.16 $ 1.81 $ 0.18
- ----------------------------------------------------------------------
Diluted per common share:
Income before extraordinary item $ 1.20 $ 0.17 $ 1.76 $ 0.25
Extraordinary item, net of taxes - (0.01) - (0.07)
- ----------------------------------------------------------------------
Net income $ 1.20 $ 0.16 $ 1.76 $ 0.18
======================================================================
Average number of shares outstanding:
Basic 171.8 181.0 172.2 182.0
Diluted 176.4 184.4 176.3 184.7
======================================================================
The Timber Company
Income before extraordinary item $ 97 $ 38 $ 143 $ 90
Extraordinary item, net of taxes - - - (2)
- ----------------------------------------------------------------------
Net Income $ 97 $ 38 $ 143 $ 88
- ----------------------------------------------------------------------
Basic per common share:
Income before extraordinary item $ 1.15 $ 0.41 $ 1.67 $ 0.97
Extraordinary item, net of taxes - - - (0.02)
- ----------------------------------------------------------------------
Net income $ 1.15 $ 0.41 $ 1.67 $ 0.95
- ----------------------------------------------------------------------
Diluted per common share:
Income before extraordinary item $ 1.14 $ 0.41 $ 1.66 $ 0.96
Extraordinary item, net of taxes - - - (0.02)
- ----------------------------------------------------------------------
Net income $ 1.14 $ 0.41 $ 1.66 $ 0.94
- ----------------------------------------------------------------------
Average number of shares
outstanding:
Basic 84.6 92.3 85.5 92.3
Diluted 85.3 93.2 85.9 93.2
======================================================================
The accompanying notes are an integral part of these financial statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Georgia-Pacific Corporation and Subsidiaries
Six Months Ended
-----------------
(In millions) July 3, 1999 June 30, 1998
-------------- --------------
- ----------------------------------------------------------------------
Cash flows from operating activities
Net income $ 454 $ 121
Adjustments to reconcile net
income to
Cash provided by operations:
Depreciation 364 371
Cost of timber harvested 80 90
Other income (86) -
Deferred income taxes (4) 52
Amortization of goodwill 31 30
Amortization of debt issue costs 1 11
Stock compensation programs 1 14
Gain on sales of assets (8) (30)
Increase in receivables (312) (57)
(Increase) decrease in inventories (64) 88
Decrease (increase) in other
working capital 85 (190)
Change in other assets and other
long-term liabilities (11) 5
- ----------------------------------------------------------------------
Cash provided by operations 531 505
- ----------------------------------------------------------------------
Cash flows from investing activities
Property, plant and equipment
investments (250) (240)
Timber and timberland purchases (73) (128)
Acquisitions (818) (93)
Proceeds from sales of assets 51 70
Other 20 18
- ----------------------------------------------------------------------
Cash used for investing activities (1,070) (373)
- ----------------------------------------------------------------------
Cash flows from financing activities (72) (746)
Repayments of long-term debt
Additions to long-term debt 68 507
Fees paid to issue debt (2) (4)
Increase (decrease) in bank 12 (3)
overdrafts
Increase in commercial paper and 844 360
other short-term notes
Stock repurchases (299) (163)
Proceeds from option plan 113 8
exercises
Cash dividends paid (86) (92)
- ----------------------------------------------------------------------
Cash provided by (used for)
financing activities 578 (133)
- ----------------------------------------------------------------------
Increase (decrease) in cash 39 (1)
Balance at beginning of period 5 8
- ----------------------------------------------------------------------
Balance at end of period $ 44 $ 7
======================================================================
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 July 3, December 31,
share amounts) 1999 1998
----------- -------------
- ----------------------------------------------------------------------
ASSETS (Unaudited)
Current assets
Cash $ 44 $ 5
Receivables, less allowances of
$24 and $25, respectively 2,304 1,233
Inventories 1,777 1,280
Deferred income tax assets 61 61
Other current assets 143 66
- ----------------------------------------------------------------------
Total current assets 4,329 2,645
- ----------------------------------------------------------------------
Timber and timberlands, net 1,204 1,210
- ----------------------------------------------------------------------
Property, plant and equipment
Land, buildings, machinery and
equipment, at cost 14,896 14,453
Accumulated depreciation (8,512) (8,204)
- ----------------------------------------------------------------------
Property, plant and equipment, net 6,384 6,249
- ----------------------------------------------------------------------
Goodwill, net 2,433 1,677
- ----------------------------------------------------------------------
Other assets 997 919
- ----------------------------------------------------------------------
Total assets $ 15,347 $ 12,700
======================================================================
5
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank overdrafts, net $ 207 $ 195
Commercial paper and other short-
term notes 2,250 1,209
Current portion of long-term debt 23 22
Accounts payable 984 556
Accrued compensation 300 247
Other current liabilities 631 419
- ----------------------------------------------------------------------
Total current liabilities 4,395 2,648
- ----------------------------------------------------------------------
Long-term debt, excluding current
portion 4,588 4,125
- ----------------------------------------------------------------------
Other long-term liabilities 1,751 1,572
- ----------------------------------------------------------------------
Deferred income tax liabilities 1,272 1,231
- ----------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity
Common stock 153 150
Georgia-Pacific Group, par value $.80;
400,000,000 shares authorized;
190,609,000 and 186,564,000 shares issued
The Timber Company, par value $.80;
250,000,000 shares authorized; 93,326,000
and 92,785,000 shares issued
Treasury stock, at cost (793) (492)
18,637,000 and 13,525,000 shares of
Georgia-Pacific Group common stock and
9,559,000 and 5,704,000 shares of The
Timber Company common stock
Additional paid-in capital 1,472 1,331
Retained earnings 2,546 2,178
Accumulated other comprehensive
income (37) (43)
- ----------------------------------------------------------------------
Total shareholders' equity 3,341 3,124
- ----------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 15,347 $ 12,700
======================================================================
The accompanying notes are an integral part of these financial statements.
6
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Georgia-Pacific Corporation and Subsidiaries
Three Months Six Months
Ended Ended
---------------- ----------------
July 3, June 30, July 3, June 30,
(In millions) ------- -------- ------- -------
- -------------------------------------------------------------------------
Net income $ 309 $ 67 $ 454 $ 121
Other comprehensive income (loss)
before tax:
Foreign currency translation
adjustments 4 (5) 10 (6)
Income tax (expense) benefit
related to items of other
comprehensive income (2) 2 (4) 2
- -------------------------------------------------------------------------
Comprehensive income $ 311 $ 64 $ 460 $ 117
=========================================================================
The accompanying notes are an integral part of these financial statements.
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 4 below. Certain 1998 amounts have been
reclassified to conform with the 1999 presentation. The Timber
Company's and the Georgia-Pacific Group's combined financial
statements should be read in conjunction with the Corporation's
consolidated financial statements.
On or about April 22, 1999, the Corporation determined to change
its fiscal year from December 31 to end on the Saturday closest
to December 31. Additionally, the Corporation reports its
quarterly periods on a 13-week basis ending on a Saturday. The
impact of three additional days on the six months ended July 3,
1999 was not material. There will be no transition period on
which to report.
2. OTHER INCOME. During the second quarter of 1999, The
Corporation sold approximately 390,000 acres of timberlands in
the Canadian province of New Brunswick and approximately 440,000
acres of timberlands in Maine for approximately $92 million and
recognized a pretax gain of $86 million ($52 million after tax).
3. PROVISION FOR INCOME TAXES. The effective tax rate was 40
percent and 42 percent for the three months ended July 3, 1999,
and June 30, 1998, respectively. The effective tax rate was 40
percent and 42 percent for the six months ended July 3, 1999, and
June 30, 1998, respectively. The effective tax rate for each
period was different than the statutory rate primarily because of
nondeductible goodwill amortization expense.
4. EXTRAORDINARY ITEM. The Corporation redeemed approximately
$600 million of its outstanding debt during the first six months
of 1998. As a result, the Corporation recognized an after-tax
extraordinary loss of $15 million, of which $14 million was
recognized in the first quarter of 1998 and $1 million was
recognized in the second quarter of 1998.
5. EARNINGS PER SHARE. The Corporation's common stock was
redesignated in December 1997 to reflect separately the
performance of the Corporation's pulp, paper and building
products businesses, which are now known as Georgia-Pacific
Group. A separate class of common stock was distributed to
reflect the performance of the Corporation's timber operating
group, which is now known as The Timber Company. Basic earnings
per share is computed based on net income and the weighted
average number of common shares outstanding. Diluted earnings per
share reflect the annual issuance of common shares under long-
term incentive stock option and stock purchase plans. The
computation of diluted earnings per share does not assume
conversion or exercise of securities that would have an
antidilutive effect on earnings per share. Earnings per share
are computed for each class of common stock based on the separate
earnings attributed to each of the respective businesses.
7
The following table provides earnings and per share data for
Georgia-Pacific Group and The Timber Company for 1999 and 1998.
Three Months Ended Six Months Ended
------------------ ----------------
(In millions, except July 3, June 30, July 3, June 30
per share amounts) 1999 1998 1999 1998
------- ------- ------- -------
- ---------------------------------------------------------------
Georgia-Pacific Group
- ---------------------------------------------------------------
Basic and diluted income available to
Shareholders (numerator):
Income before extraordinary item $ 212 $ 30 $ 311 $ 46
Extraordinary item, net of taxes - (1) - (13)
- ---------------------------------------------------------------
Net income $ 212 $ 29 $ 311 $ 33
================================================================
Shares (denominator):
Average shares outstanding 171.8 181.0 172.2 182.0
Dilutive securities:
Stock incentive and option plans 4.1 3.0 3.6 2.5
Employee stock purchase plans 0.5 0.4 0.5 0.2
- ---------------------------------------------------------------
Total assuming conversion 176.4 184.4 176.3 184.7
================================================================
Basic per share amounts:
Income before extraordinary item $ 1.23 $ 0.17 $ 1.81 $ 0.25
Extraordinary item, net of taxes - (0.01) - (0.07)
- ---------------------------------------------------------------
Net income $ 1.23 $ 0.16 $ 1.81 $ 0.18
================================================================
Diluted per share amounts:
Income before extraordinary item $ 1.20 $ 0.17 $ 1.76 $ 0.25
Extraordinary item, net of - (0.01) - (0.07)
- ---------------------------------------------------------------
Net income $ 1.20 $ 0.16 $ 1.76 $ 0.18
================================================================
Three Months Ended Year to Date
------------------ ------------
(In millions, except July 3, June 30, July 3, June 30,
per share amounts) 1999 1998 1999 1998
------- ------- ------- -------
- ---------------------------------------------------------------
The Timber Company
- ---------------------------------------------------------------
Basic and diluted income available to
Shareholders (numerator):
Income before extraordinary item $ 97 $ 38 $ 143 $ 90
Extraordinary item, net of taxes - - - (2)
- ---------------------------------------------------------------
Net income $ 97 $ 38 $ 143 $ 88
================================================================
Shares (denominator):
Average shares outstanding 84.6 92.3 85.5 92.3
Dilutive securities:
Stock incentive and option plans 0.6 0.8 0.4 0.8
Employee stock purchase plans 0.1 0.1 - 0.1
- ---------------------------------------------------------------
Total assuming conversion 85.3 93.2 85.9 93.2
================================================================
Basic per share amounts:
Income before extraordinary item $ 1.15 $ 0.41 $ 1.67 $ 0.97
Extraordinary item, net of taxes - - - (0.02)
- ---------------------------------------------------------------
Net income $ 1.15 $ 0.41 $ 1.67 $ 0.95
- ---------------------------------------------------------------
Diluted per share amounts:
Income before extraordinary item $ 1.14 $ 0.41 $ 1.66 $ 0.96
Extraordinary item, net of taxes - - - (0.02)
- ---------------------------------------------------------------
Net income $ 1.14 $ 0.41 $ 1.66 $ 0.94
================================================================
8
6. SUPPLEMENTAL DISCLOSURES - STATEMENTS OF CASH FLOWS. The
cash impact of interest and income taxes is reflected in the
table below. The effect of foreign currency exchange rate changes
on cash was not material in any period.
Six Months Ended
-----------------
(In millions) July 3, June 30,
1999 1998
------ -------
Total interest costs $ 219 $ 227
Interest capitalized (2) (2)
- ---------------------------------------------------------------
Interest Expense $ 217 $ 225
===============================================================
Interest paid $ 233 $ 244
===============================================================
Income taxes paid, net $ 255 $ 44
===============================================================
Debt assumed in acquisition $ 669 $ 58
===============================================================
7. 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) July 3, December 31,
1999 1998
- ---------------------------------------------------------------
Raw materials $ 348 $ 418
Finished goods 1,322 760
Supplies 316 311
LIFO reserve (209) (209)
- ---------------------------------------------------------------
Total inventories $ 1,777 $ 1,280
===============================================================
8. ACQUISITIONS. At the end of the second quarter of 1999, the
Corporation acquired approximately 91% of the outstanding shares
of Unisource Worldwide, Inc. ("Unisource"), the largest
independent marketer and distributor of printing and imaging
paper and supplies in North America. The Corporation expects to
pay for the outstanding shares of Unisource as they are
prescribed to the exchange agent. The value of the transaction
was $12 per share of Unisource stock, or approximately $843
million (assuming all outstanding Unisource shares are tendered),
plus the assumption of approximately $669 million in debt.
Unisource's results of operations will be consolidated with
those of the Corporation beginning July 4, 1999. The
Corporation has accounted for this transaction using the
purchase method to record a new cost basis for assets
acquired and liabilities assumed. The allocation of the
purchase price and acquisition costs to the assets acquired
and liabilities assumed is preliminary as of July 3, 1999,
and is subject to change pending finalization of studies of
fair value and the finalization of management's plans. The
Corporation has begun to assess and formulate plans to
restructure existing Unisource activities, including the
consolidation of certain distribution centers, closure of
the Unisource headquarters facility, termination of
redundant headcount and the relocation of certain
administrative functions. In connection with the acquisition
of Unisource, the Corporation assumed liabilities totaling
approximately $84 million for employee termination and
relocation costs, and $15 million for facility closure
costs. The Corporation has not yet completed its evaluation
of Unisource activities; accordingly, finalization of the
Corporation's plans may result in additional liabilities for
termination, relocation or facility closure costs which
could increase the amount of liabilities assumed in the
acquisition. The difference between the purchase price and
the fair market value of the assets acquired and liabilities
assumed was recorded as goodwill and will be amortized over
40 years. The preliminary allocation of the purchase price
of the acquisition is summarized as follows:
(In millions)
Current assets $ 1,258
Property, plant and equipment 225
Other non current assets 19
Goodwill 756
Liabilities (1,497)
--------------------------------------------------
Net cash paid for Unisource $ 761
===================================================
The following unaudited pro forma financial data has been
prepared assuming that the acquisition of Unisource and
related financings were consummated on January 1, 1998.
This pro forma financial data is presented for informational
purposes and is not necessarily indicative of the operating
results that would have occurred had the acquisition been
consummated on January 1, 1998, nor does it include
adjustments for expected synergies or cost savings.
Accordingly, this pro forma data is not necessarily
indicative of future operations.
Three Months Ended Six Months Ended
------------------ ------------------ -
(In millions, except per share July 3, June 30, July 3, June 30,
amount) 1999 1998 1999 1998
------- -------- ------ --------
Net Sales $ 5,355 $ 5,028 $ 10,277 $ 10,006
Income before extraordinary items $ 307 $ 52 $ 447 $ 119
Net Income $ 307 $ 51 $ 447 $ 104
Georgia-Pacific Group per share data:
Basic income before extraordinary
items per share $ 1.22 $ 0.08 $ 1.76 $ 0.16
Diluted income before extraordinary
items per share $ 1.19 $ 0.08 $ 1.72 $ 0.16
Basic earnings per share $ 1.22 $ 0.07 $ 1.76 $ 0.09
Diluted earnings per share $ 1.19 $ 0.07 $ 1.72 $ 0.09
The Timber Company's results of operations are not impacted.
The 1998 pro forma financial data includes a non-recurring
restructuring charge of $28 million ($18 million after tax)
taken by Unisource in the second quarter of 1998.
In addition during the first six months of 1999, the Corporation
completed the acquisition of a packaging plant and two treated
lumber facilities for a total consideration of approximately $57
million in cash. The results of operations of these acquired
businesses were consolidated with those of the Corporation
beginning in the second quarter of 1999. The Corporation has
accounted for these business combinations using the purchase
method to record a new cost basis for assets acquired and
liabilities assumed.
On June 25, 1999, the Corporation and Chesapeake Corp.
announced that the two companies signed a letter of intent
to combine their commercial tissue business in a new
partnership. The Corporation will contribute the assets of
its commercial tissue business to the partnership. The
Corporation will control and manage the partnership and is
expected to own approximately 90 percent of the equity in
the partnership. Chesapeake Corp. will contribute the
assets of its Wisconsin Tissue business to the partnership,
for which it will receive a 10 percent equity interest in
the partnership and an initial cash distribution of
approximately $730 million. Formation of the partnership is
subject to completion of definitive agreements, completion
of due diligence by both parties and customary regulatory
approvals. Completion is anticipated in the third quarter
of 1999.
On June 30, 1998, the Corporation completed its acquisition of
CeCorr Inc. ("CeCorr"), a leading independent producer of
corrugated sheets in the United States. On June 30, 1998, the
Corporation paid approximately $93 million in cash (net of $2
million of cash acquired) and issued approximately 3.2 million
shares of Georgia-Pacific Group stock valued at approximately
$28.94 per share for all the outstanding shares of CeCorr. In
addition, the Corporation assumed approximately $92 million of
CeCorr's debt, of which $34 million was owed to the Corporation
($58 million net debt assumed). On July 2, 1998, a former owner
of CeCorr exercised his right to resell to the Corporation
approximately 2.2 million shares of Georgia-Pacific Group stock
issued in the transaction. CeCorr's results of operations were
consolidated with those of the Corporation beginning July 1,
1998. The Corporation accounted for the CeCorr acquisition
using the purchase method to record a new cost basis for assets
acquired and liabilities assumed.
9
9. DEBT. In connection with the acquisition of Unisource, the
Corporation incurred $600 million of short-term bridge financing
until it closed on the issuance of the Premium Equity
Participating Security Units on July 7, 1999 (see below).
In June 1999, the Corporation renegotiated its accounts
receivable sale program and increased the amount outstanding
under the program from $280 million to $750 million. This
program is accounted for as a secured borrowing. The
receivables outstanding under this program and the
corresponding debt are included as current receivables and
short-term debt, respectively, on the Corporation's balance
sheets. Under the accounts receivable sale agreement, the
maximum amount of the purchasers' investment is subject to
change based on the level of eligible receivables and
restrictions on concentrations of receivables. The program
expires in May 2000.
In connection with the acquisition of Unisource, the
Corporation retained former Unisource agreements to sell up
to $150 million of certain qualifying U.S. accounts
receivable and up to CN$95 million of certain eligible
Canadian accounts receivable. At July 3, 1999,
approximately $197 million was outstanding under these
programs. The receivables outstanding under these programs
and the corresponding debt are included as current
receivables and short-term debt, respectively on the
accompanying balance sheet. The agreements are accounted
for as a secured borrowing. As collections reduce
previously sold interests, new receivables may be sold.
These agreements expire in September, 1999.
Also in June 1999, the Board of Directors increased the
corporate target debt level under which management can
purchase shares of Georgia-Pacific Group and The Timber
Company common stock on the open market from $5.75 billion
to $6.8 billion. In addition, the Board of Directors
increased the Georgia-Pacific Group's target debt level from
$4.75 billion to $5.8 billion. The Timber Company's target
debt level remains at $1.0 billion.
As of July 3, 1999, the Corporation had 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. At July 3, 1999, $797 million was
available in excess of all short-term borrowings outstanding
under or supported by the facility. On July 22, 1999, the
Corporation increased the amount of this unsecured credit
facility to $2.0 billion.
On July 7, 1999, the Corporation issued 17,250,000 of 7.5%
Premium Equity Participating Security Units ("PEPS Units")
for $862.5 million. Each PEPS Unit had an issue price of
$50 and consists of a contract to purchase shares of Georgia-
Pacific Group common stock on or prior to August 16, 2002
and a senior deferrable note of Georgia-Pacific Group due
August 16, 2004. Each purchase contract yields interest of
0.35% per year, paid quarterly, on the $50 stated amount of
the PEPS Unit. Each senior deferrable note yields interest
of 7.15% per year, paid quarterly, until August 16, 2002. On
August 16, 2002, following a remarketing of the senior
deferrable notes, the interest rate will be reset at a rate
that will be equal to or greater than 7.15%. The liability
related to the PEPS Units will not be included in the debt
amount for purposes of determining the corporate and Georgia-
Pacific Group debt targets.
During the second quarter of 1999, the Corporation
registered for sale up to $2.975 billion of debt and equity
securities under a shelf registration statement filed with
the Securities and Exchange Commission, of which $1.725
billion relates to the PEPS Units ($862.5 million of which
was received on July 7, 1999, and $862.5 million is to be
received upon exercise of the purchase contracts).
10. STOCK SPLIT. On May 4, 1999, the Board of Directors declared
a two-for-one split of Georgia-Pacific Group's common stock in
the form of a special dividend to shareholders of record on May
14, 1999. The special dividend was paid as one share of Georgia-
Pacific Group common stock for each share of Georgia-Pacific
Group on June 3, 1999. A total of 95,126,911 additional shares
were issued in conjunction with the stock split. The Georgia-
Pacific Group's par value of $0.80 remained unchanged. As a
result, $76.1 million was reclassified from Additional paid-in
capital to Common stock. All historical share and per share
amounts have been restated to reflect retroactively the stock
split.
11. SHARE REPURCHASES. During the first six months of 1999,
Georgia-Pacific Group purchased on the open market approximately
5,113,000 shares of Georgia-Pacific Group common stock, all of
which were held as treasury stock at July 3, 1999, at an
aggregate price of $206 million ($40.24 average per share).
During the first six months of 1999, The Timber Company purchased
on the open market approximately 3,946,000 shares of The Timber
Company common at an aggregate price of $95 million ($24.16
average per share). Of these repurchased shares, approximately
3,855,000 shares of The Timber Company common stock were held as
treasury and 91,000 shares were purchased during the first six
months of 1999 and settled after July 3, 1999.
During the first six months of 1998, Georgia-Pacific Group
purchased on the open market approximately 4,625,000 shares
of Georgia-Pacific Group common stock at an aggregate price
of $150 million ($32.43 average per share). In addition
during the first six months, The Timber Company purchased on
the open market 975,500 shares of The Timber Company common
stock at an aggregate price of $21 million ($21.53 average
per share).
12. COMMITMENTS AND CONTINGENCIES. The Corporation is a party to
various legal proceedings incidental to its business and is
subject to a variety of environmental and pollution control laws
and regulations in all jurisdictions in which it operates. As is
the case with other companies in similar industries, the
Corporation faces exposure from actual or potential claims and
legal proceedings involving environmental matters. Liability
insurance in effect during the last several years provides only
very limited coverage for environmental matters.
The Corporation is involved in environmental remediation
activities at approximately 176 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 46 percent are being investigated, approximately
30 percent are being remediated and approximately 24 percent are
being monitored (an activity that occurs after either site
investigation or remediation has been completed). The ultimate
costs to the Corporation for the investigation, remediation and
monitoring of many of these sites cannot be predicted with
certainty, due to the often unknown magnitude of the pollution
or the necessary cleanup, the varying costs of alternative
cleanup methods, the amount of time necessary to accomplish such
cleanups, the evolving nature of cleanup technologies and
government regulations, and the inability to determine the
Corporation's share of multiparty cleanups or the extent to
which contribution will be available from other parties. The
Corporation has established reserves for environmental
remediation costs for these sites in amounts that it believes
are probable and reasonably estimable. Based on analysis of
currently available information and previous experience with
respect to the cleanup of hazardous substances, the Corporation
believes it is reasonably possible that costs associated with
these sites may exceed current reserves by amounts that may
prove insignificant or that could range, in the aggregate, up to
approximately $56 million. This estimate of the range of
reasonably possible additional costs is less certain than the
estimates upon which reserves are based, and in order to
establish the upper limit of such range, assumptions least
favorable to the Corporation among the range of reasonably
possible outcomes were used. In estimating both its current
reserve for environmental remediation and the possible range of
additional costs, the Corporation has not assumed it will bear
the entire cost of remediation of every site to the exclusion of
other known potentially responsible parties who may be jointly
and severally liable. The ability of other potentially
responsible parties to participate has been taken into account,
based generally on the parties' financial condition and probable
contribution on a per site basis.
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 73,000 such plaintiffs as
of July 26, 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.
On July 28, 1999, the Corporation and the Attorney General
of the State of Florida entered into a Settlement Agreement
pursuant to which the State will dismiss its claims against
the Corporation which alleged that the Corporation engaged
in a conspiracy to fix the prices of sanitary commercial
paper products. The Settlement Agreement states that the
Attorney General is dismissing its claims in the public
interest and consistent with its responsibilities. The
Agreement also provides that the Corporation continues to
deny that there is any evidence that it engaged in the
alleged price fixing conspiracy. In addition, the
Corporation agreed to donate certain real property to the
State of Florida, Board of Trustees of the Internal
Improvement Trust. The value of this real property is not
material to the results of operations or financial position
of the Corporation.
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
13. 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 three and six months ended July 3, 1999 and June
30, 1998.
CONSOLIDATED SELECTED OPERATING SEGMENT DATA (Unaudited)
Georgia-Pacific Corporation and Subsidiaries
(Dollar amounts, except Three Months Ended Three Months Ended
per share, in millions) July 3, 1999 June 30, 1998
------------------- -----------------
- -------------------------------------------------------------
NET SALES TO UNAFFILIATED CUSTOMERS
Building products $ 1,047 27% $ 820 25%
Distribution 1,317 34 1,071 32
Timber 46 1 33 1
Containerboard and packaging 573 15 497 15
Pulp and paper 870 23 887 27
Other (3) - (3) -
- --------------------------------------------------------------
Total net sales to
unaffiliated customers $ 3,850 100% $ 3,305 100%
==============================================================
INTERSEGMENT SALES
Building products $ 624 $ 629
Distribution 2 2
Timber 89 86
Containerboard and packaging 14 15
Pulp and paper 7 8
Other* (736) (740)
- --------------------------------------------------------------
Total intersegment sales $ - $ -
==============================================================
TOTAL NET SALES
Building products $ 1,671 43% $ 1,449 44%
Distribution 1,319 34 1,073 33
Timber 135 4 119 4
Containerboard and packaging 587 15 512 15
Pulp and paper 877 23 895 27
Other* (739) (19) (743) (23)
- --------------------------------------------------------------
Total net sales $ 3,850 100% $ 3,305 100%
==============================================================
OPERATING PROFITS
Building products $ 364 59% $ 120 53%
Distribution 35 6 - -
Timber 176 28 80 35
Containerboard and packaging 81 13 31 13
Pulp and paper 33 5 54 24
Other (71) (11) (57) (25)
- --------------------------------------------------------------
Total operating profits 618 100% 228 100%
=== ===
Interest expense (106) (111)
Provision for income taxes (203) (49)
Extraordinary item, net of taxes - (1)
- --------------------------------------------------------------
Net income $ 309 $ 67
==============================================================
12
CONSOLIDATED SELECTED OPERATING SEGMENT DATA (Unaudited)
Georgia-Pacific Corporation and Subsidiaries
(Dollar amounts, except Six Months Ended Six Months Ended
per share, in millions) July 3, 1999 June 30, 1998
------------------ -----------------
NET SALES TO UNAFFILIATED CUSTOMERS
Building products $ 1,937 27% $ 1,585 24%
Distribution 2,415 33 2,095 32
Timber 99 1 61 1
Containerboard and packaging 1,096 15 985 15
Pulp and paper 1,710 24 1,802 28
Other (2) - (2) -
- ---------------------------------------------------------------
Total net sales to
unaffiliated customers $ 7,255 100% $ 6,526 100%
===============================================================
INTERSEGMENT SALES
Building products $ 1,174 $ 1,231
Distribution 4 4
Timber 175 203
Containerboard and packaging 29 30
Pulp and paper 13 16
Other* (1,395) (1,484)
- ---------------------------------------------------------------
Total intersegment sales $ - $ -
===============================================================
TOTAL NET SALES
Building products $ 3,111 43% $ 2,816 43%
Distribution 2,419 33 2,099 32
Timber 274 4 264 4
Containerboard and packaging 1,125 15 1,015 16
Pulp and paper 1,723 24 1,818 28
Other* (1,397) (19) (1,486) (23)
- ---------------------------------------------------------------
Total net sales $ 7,255 100% $ 6,526 100%
===============================================================
OPERATING PROFITS
Building products $ 612 63% $ 223 49%
Distribution 53 5 (17) (4)
Timber 270 28 183 40
Containerboard and packaging 121 12 64 14
Pulp and paper 53 5 125 27
Other (136) (13) (119) (26)
- ---------------------------------------------------------------
Total operating profits 973 100% 459 100%
=== ===
Interest expense (217) (225)
Provision for income taxes (302) (98)
Extraordinary item, net of taxes - (15)
- ---------------------------------------------------------------
Net income $ 454 $ 121
===============================================================
*Includes elimination of intersegment sales.
13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
SECOND QUARTER 1999 COMPARED WITH SECOND QUARTER 1998
The Corporation reported consolidated net sales of approximately
$3.9 billion for the second quarter of 1999 and $3.3 billion for
the second quarter of 1998. Net income for the 1999 second
quarter was $309 million compared with $67 million in 1998. Net
income in the second quarter of 1998 included an after-tax
extraordinary charge of $1 million for the early retirement of
debt.
The remaining discussion refers to the "Consolidated Selected
Operating Segment Data" table (included in Note 13 to the
Consolidated Financial Statements).
The Corporation's building products segment reported net sales of
$1,671 million for the second three months of 1999 compared with
$1,449 million in 1998. Operating profits were $364 million in
1999 compared with $120 million in 1998. Return on sales was 22
percent and 8 percent for the three months ended July 3, 1999 and
June 30, 1998, respectively. The higher quarter-over-quarter
profits resulted from increases in selling prices for most of
this segment's products. Lumber prices were up 8 percent from the
prior year's quarter; Gypsum prices increased 21 percent; Plywood
prices increased 28 percent; and Oriented strand board prices
increased 49 percent. Mild weather and the home building activity
driven by a strong economy and low inventory have resulted in
high prices in both Plywood and Oriented strand board. The
Corporation expects continued strength in the building products
segment into the fourth quarter of 1999.
The Corporation's distribution segment reported net sales of
$1,319 million for the second three months of 1999 compared with
$1,073 million in 1998. Operating profits for the distribution
segment were $35 million in the second quarter of 1999 compared
with approximately break even results in the second quarter of
1998. The 1998 results included one-time gains, principally on
sales of assets related to the 1997 restructuring plan, of
approximately $11 million. The improvement in the distribution
segment profits in 1999 reflects higher commodity and specialty
products margins related to higher prices for building products
generally.
The timber segment reported net sales of approximately $135
million and $119 million for the second quarter of 1999 and 1998,
respectively. Operating income for the 1999 second quarter was
$176 million, including a one-time, pre tax gain of $86 million
from the sale of company timberlands in Maine and New Brunswick.
Excluding the pre-tax gain on the sale of timberlands in Maine
and New Brunswick, operating earnings increased $10 million to
$90 million in the second quarter of 1999, compared with $80
million in the second quarter of 1998. The 13 percent increase
resulted from a mix of higher harvest volumes and improved sales
to third parties. Total harvest volumes in 1999 are anticipated
to remain comparable to 1998.
The Corporation's containerboard and packaging segment reported
net sales of $587 million and operating profits of $81 million in
the second quarter of 1999, compared with net sales of $512
million and operating profits of $31 million in the second
quarter of 1998. Return on sales was 14 percent and 6 percent in
the second quarter of 1999 and 1998, respectively. Containerboard
and packaging prices increased steadily over the quarter, ending
the quarter at approximately the same levels as a year ago. The
packaging division cost reductions noted in the first quarter
continued into the second quarter. The positive price trend
together with cost reductions and the profits from CeCorr which
was acquired on June 30, 1998, resulted in higher quarter-over-
quarter profits for this segment. The Corporation expects
continued price improvement in the containerboard and packaging
segment through the remainder of 1999.
The Corporation's pulp and paper segment reported net sales of
$877 million and operating profits of $33 million in the 1999
second quarter. For the same period in 1998, the segment reported
net sales of $895 million and operating profits of $54 million.
Return on sales was 4 percent and 6 percent in the second quarter
of 1999 and 1998, respectively. Compared with a year ago, the
Corporation has maintained lower levels of inventory for most
pulp and paper products. In the 1999 second quarter the pulp and
paper segment took market-related down time at its pulp and paper
mills and reduced pulp production by 28,000 tons and
communication papers production by 13,000 tons. During the second
quarter of 1998, the Corporation took market-related downtime at
its pulp and paper mills, and reduced pulp and communication
papers production by approximately 20,000 tons and 25,000 tons,
respectively. Although steadily increasing throughout the second
quarter, prices and demand for pulp remained slightly below the
prior year quarter average. Tissue and communication paper
results were lower than in the 1998 second quarter due to lower
prices than in the prior year period. However, average prices for
the second quarter of 1999 are above those of the 1999 first
quarter. Demand for tissue was above 1998 levels during the
second quarter of 1999. The Corporation expects demand and
pricing for products in this segment to improve through the
remainder of the year.
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 $16
million to a loss of $71 million in 1999 from a loss of $57
million in the 1998 second quarter. This increase is primarily
the result of higher expenses for the Corporation's stock
compensation programs.
Interest expense decreased $5 million to $106 million in the
second quarter of 1999 compared with $111 million in the second
quarter of 1998 as a result of lower average interest rates,
despite slightly higher average debt levels.
14
YEAR-TO-DATE SECOND QUARTER 1999 COMPARED WITH YEAR-TO-DATE
SECOND QUARTER 1998
The Corporation reported consolidated net sales of $7.3 billion
and net income of $454 million for the six months ended July 3,
1999, compared with net sales of $6.5 billion and net income of
$121 million for the six months ended June 30, 1998. The 1998
results include an extraordinary, after-tax loss of $15 million
for the early retirement of debt.
The remaining discussion refers to the "Consolidated Selected
Operating Segment Data" table (included in Note 13 to the
Consolidated Financial Statements).
The Corporation's building products segment reported net sales of
$3.1 billion and operating profits of $612 million for the six
months ended July 3, 1999, compared with net sales of $2.8
billion and operating profits of $223 million in 1998. Return on
sales increased to 19.7 percent from 7.9 percent a year ago. A
24 percent increase in average plywood prices, 42 percent
increase in average oriented strand board prices, and an 18
percent increase in average gypsum prices in the first six months
of 1999 resulted in significantly higher profit margins over
those realized in the same 1998 period.
The distribution division reported net sales of $2.4 billion and
operating profits of $53 million for the six months ended July 3,
1999, compared with net sales of $2.1 billion and an operating
loss of $17 million in the first half of 1998. The 1998 results
included one-time gains, principally on sales of assets related
to the 1997 restructuring plan, of approximately $13 million.
Continued high margins in commodity and specialty products, and
lower operating costs have contributed to the increased profits.
The Corporation's timber segment reported net sales of
approximately $274 million and operating profit of $270 million
for the six-month period ended July 3, 1999 compared to net
sales of $264 million and operating profit of $183 million for
the six-months ended June 30, 1998. The 1999 results included a
one-time, pre tax gain of $86 million from the sale of company
timberlands in Maine and New Brunswick. Excluding the gain on
the sale of timberlands in Maine and New Brunswick, operating
profit increased $1 million to $184 million in the first six
months of 1999 compared to the same period of 1998. Overall, 15%
higher total harvest volumes helped to offset the year over year
10% decline in average sales prices.
The Corporation's containerboard and packaging segment reported
net sales of $1.1 billion and operating profits of $121 million
in the first half of 1999 compared with net sales of $1.0
billion and operating profits of $64 million in the same 1998
period. Return on sales increased to 10.8 percent from 6.3
percent in 1998. Although year-to-date average prices are below
year ago levels, pricing has increased throughout 1999 and at
July 3, 1999, were very close to year ago levels. Cost decreases
in wood, secondary fibers and energy, as well as increased
production contributed to the increased profit margins.
The Corporation's pulp and paper segment reported net sales of
$1.7 billion and operating profits of $53 million for the six-
month period ended July 3, 1999, compared with net sales of $1.8
billion and operating profits of $125 million in 1998. Return on
sales decreased to 3.1 percent compared with 6.9 percent for the
same period a year ago, principally due to a decrease in average
prices for all of the Corporation's pulp and paper products.
Average pulp prices for the first six months of 1999 were
approximately 7.5% below prices in the same 1998 period, and
average prices of communications papers for the first six months
of 1999 were approximately 11% below year ago levels. Prices for
most of the Corporation's pulp and paper products have increased
steadily throughout the first half of 1999, but still remain
below year ago levels. The Corporation anticipates this upward
trend to continue through the remainder of 1999. Compared with a
year ago, the Corporation has maintained lower inventory levels
for pulp and paper products. During the first half of 1999, the
Corporation incurred market-related downtime at its pulp and
paper mills and reduced pulp production by 62,000 tons and
communication papers production by 24,000 tons. In the same 1998
period, the Corporation incurred market-related downtime at its
pulp and paper mills and reduced pulp and communication papers
production by 100,000 tons and 40,000 tons, respectively.
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 $17
million to a loss of $136 million in the first half of 1999 from
a loss of $119 million in the first half of 1998. This increase
is primarily the result of higher expenses for the Corporation's
stock compensation programs and higher litigation and
environmental remediation costs.
Interest expense decreased $8 million to $217 million in the
first half of 1999, compared with $225 million in the first half
of 1998 as a result of lower interest rates, despite higher
average debt levels.
15
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. The Corporation generated cash from
operations of $531 million for the six months ended July 3, 1999
compared with $505 million a year ago. The increase in cash
provided from operating activities is primarily a result of very
strong demand and improved prices for several building products'
items, offset in part by higher working capital levels, primarily
accounts receivable associated with the increase in net sales.
INVESTING ACTIVITIES. Capital expenditures for property, plant
and equipment for the six months ended July 3, 1999 were $250
million, which included $101 million in the building products
segment, $5 million in the distribution segment, $1 million in
the timber segment, $32 million in the containerboard and
packaging segment, $91 million in the pulp and paper segment and
$20 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 $73 million in the first
six months of 1999 compared with $128 million in 1998.
At the end of the second quarter of 1999, the Corporation
acquired approximately 91% of the outstanding shares of
Unisource, the largest independent marketer and distributor of
printing and imaging paper and supplies in North America. The
Corporation expects to pay for the remaining shares of Unisource
as they are prescribed to the exchange agent. The value of the
transaction was $12 per share of Unisource stock, or
approximately $843 million (assuming all outstanding Unisource
shares are tendered), plus the assumption of approximately $669
million in debt. Through July 3, 1999, the Corporation had paid
approximately $761 million (net of $34 million of cash acquired)
for shares of Unisource stock that had been tendered.
Unisource's results of operations will be consolidated with those
of the Corporation beginning July 4, 1999.
During the first six months of 1999, the Corporation also completed
the acquisition of a packaging plant and two treated lumber
facilities for a total consideration of approximately $57 million in
cash. The results of operations of these acquired businesses were
consolidated with those of the Corporation beginning in the second
quarter of 1999.
On June 30, 1998, the Corporation completed its acquisition of
CeCorr, a leading independent producer of corrugated sheets in
the United States. On June 30, 1998, the Corporation paid
approximately $93 million in cash (net of $2 million of cash
acquired) and issued approximately 3.2 million shares of Georgia-
Pacific Group stock valued at approximately $28.94 per share for
all the outstanding shares of CeCorr. In addition, the
Corporation assumed approximately $92 million of CeCorr's debt,
of which $34 million was owed to the Corporation ($58 million net
debt assumed). On July 2, 1998, a former owner of CeCorr
exercised his right to resell to the Corporation approximately
2.2 million shares of Georgia-Pacific Group stock issued in the
transaction. CeCorr's results of operations were consolidated
with those of the Corporation beginning July 1, 1998.
During the first six months of 1999, the Corporation received $51
million of proceeds from the sale of assets, compared with $70
million in the same quarter of 1998. During the second quarter of
1999, the Corporation sold approximately 390,000 acres of
timberlands in the Canadian province of New Brunswick and
approximately 440,000 acres of timberlands in Maine for
approximately $92 million and recognized a pretax gain of $86
million ($52 million after tax). The 1998 proceeds were
principally from sales of real estate development properties
located in South Carolina and Florida.
In June 1999, the Corporation announced that it intends to sell
approximately 196,000 acres of its redwood and Douglas fir
timberlands in northern California. The Corporation does not
expect that this potential timberland sale will have an impact on
the wood supply for the Fort Bragg, California sawmill operations
in the near term. The Fort Bragg sawmill has a supply agreement
with The Timber Company through 1999 that will remain intact with
the potential new owner.
On June 25, 1999, the Corporation and Chesapeake Corp. announced
that the two companies signed a letter of intent to combine their
commercial tissue business in a new partnership. The Corporation
will contribute the assets of its commercial tissue business to
the partnership. The Corporation will control and manage the
partnership and is expected to own approximately 90 percent of
the equity in the partnership. Chesapeake Corp. will contribute
the assets of its Wisconsin Tissue business to the partnership,
for which it will receive a 10 percent equity interest in the
partnership and an initial cash distribution of approximately
$730 million. Formation of the partnership is subject to
completion of definitive agreements, completion of due diligence
by both parties and customary regulatory approvals. Completion
is anticipated in the third quarter of 1999.
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.
16
FINANCING ACTIVITIES. The Corporation's total debt increased by
$1.52 billion to $7.07 billion at July 3, 1999 from $5.55 billion
at December 31, 1998. At July 3, 1999 and December 31, 1998,
$6.11 billion and $4.57 billion, respectively, of such total debt
was Georgia-Pacific Group's debt and $963 million and $983
million, respectively, was The Timber Company's debt.
In connection with the acquisition of Unisource, the Corporation
incurred $600 million of short-term bridge financing until it
closed on the issuance of the PEPS Units on July 7, 1999.
In June 1999, the Corporation renegotiated its accounts
receivable sale program and increased the amount outstanding
under the program from $280 million to $750 million. This
program is accounted for as a secured borrowing. The receivables
outstanding under this program and the corresponding debt are
included as current receivables and short-term debt,
respectively, on the Corporation's balance sheets. Under the
accounts receivable sale agreement, the maximum amount of the
purchasers' investment is subject to change based on the level of
eligible receivables and restrictions on concentrations of
receivables. The program expires in May 2000.
In connection with the acquisition of Unisource, the Corporation
retained former Unisource agreements to sell up to $150 million
of certain qualifying U.S. accounts receivable and up to CN$95
million of certain eligible Canadian accounts receivable. At
July 3, 1999, approximately $197 million was outstanding under
these programs. The receivables outstanding under these programs
and the corresponding debt are included as current receivables
and short-term debt, respectively on the accompanying balance
sheets. The agreements are accounted for as a secured borrowing.
As collections reduce previously sold interests, new receivables
may be sold. These agreements expire in September, 1999.
Also in June 1999, the Board of Directors increased the corporate
target debt level under which management can purchase shares of
Georgia-Pacific Group and The Timber Company common stock on the
open market from $5.75 billion to $6.8 billion. In addition, the
Board of Directors increased the Georgia-Pacific Group's target
debt level from $4.75 billion to $5.8 billion. The Timber
Company's target debt level remains at $1.0 billion.
On July 7, 1999, the Corporation issued 17,250,000 of 7.5% PEPS
Units for $862.5 million. Each PEPS Unit had an issue price of
$50 and consists of a contract to purchase shares of Georgia-
Pacific Group common stock on or prior to August 16, 2002 and a
senior deferrable note of Georgia-Pacific Group due August 16,
2004. Each purchase contract yields interest of 0.35% per year,
paid quarterly, on the $50 stated amount of the PEPS Unit. Each
senior deferrable note yields interest of 7.15% per year, paid
quarterly, until August 16, 2002. On August 16, 2002, following a
remarketing of the senior deferrable notes, the interest rate
will be reset at a rate that will be equal to or greater than
7.15%. The liability related to the PEPS Units will not be
included in the debt amount for purposes of determining the
corporate and Georgia-Pacific Group debt targets.
During the first six months of 1999, approximately $70 million of
fixed and floating rate industrial revenue bonds were replaced,
of which $57 million were refunded by fixed rate instruments and
$13 million were refunded by variable rate instruments.
17
At July 3, 1999, the Corporation had 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 July 3, 1999, $797 million of committed credit was
available in excess of all short-term borrowings outstanding
under or supported by the facility. On July 22, 1999, the
Corporation increased the amount of this unsecured credit
facility to $2.0 billion.
The Corporation's senior management establishes the parameters of
the Corporation's financial risk, which have been approved by the
Board of Directors. Hedging interest rate exposure through the
use of swaps and options and hedging foreign exchange exposure
through the use of forward contracts are specifically
contemplated to manage risk in keeping with the management
policy. Derivative instruments, such as swaps, forwards, options
or futures, which are based directly or indirectly upon interest
rates, currencies, equities and commodities, may be used by the
Corporation to manage and reduce the risk inherent in price,
currency and interest rate fluctuations.
The Corporation does not utilize derivatives for speculative
purposes. Derivatives are transaction-specific so that a specific
debt instrument, contract or invoice determines the amount,
maturity and other specifics of the hedge. Counterparty risk is
limited to institutions with long-term debt ratings of A or
better.
The table below presents principal (or notional) amounts and
related weighted average interest rates by year of expected
maturity for the Corporation's debt obligations as of July 3,
1999. For obligations with variable interest rates, the table
sets forth payout amounts based on current rates and does not
attempt to project future interest rates.
Georgia-Pacific Corporation and Subsidiaries
(In millions) 1999 2000 2001 2002
- ------------------------------------------------------------
Debt
Commercial paper and other
short-term notes - - - -
Average interest rates - - - -
Notes and debentures $ 4 - - $ 300
Average interest rates 25.4% - - 10%
Revenue bonds $ 8 $ 24 $ 6 $ 74
Average interest rates 3.5% 4.3% 3.9% 2.5%
Other loans - $ 13 - -
Average interest rates - 8.0% - -
Accounts receivable sale program - - - -
Average interest rates - - - -
Notional principal amount of
interest rate exchange
agreements $ 100 $ 177 - 131
Average interest rate paid
(fixed) 6.6% 7.5% - 6.1%
Average interest rate received
(variable) 5.4% 5.1% - 6.1%
- ------------------------------------------------------------
Georgia-Pacific Corporation and Subsidiaries
(In millions) Fair value
July 3,
2003 Thereafter Total 1999
- ------------------------------------------------------------
Debt
Commercial paper and other
short-term notes - $ 1,758 $ 1,758 $ 1,758
Average interest rates - 5.9% 5.9% 5.9%
Notes and debentures $ 300 $ 2,900 $ 3,504 $ 3,591
Average interest rates 4.9% 8.6% 8.4% 8.4%
Revenue bonds - $ 532 $ 644 $ 550
Average interest rates - 5.2% 4.8% 4.8%
Other loans $ 14 - $ 27 $ 27
Average interest rates 5.7% - 6.8% 6.8%
Accounts receivable sale program - $ 947 $ 947 $ 947
Average interest rates - 5.3% 5.3% 5.3%
Notional principal amount of
interest rate exchange
agreements $ 300 - $ 708 $ (6)
Average interest rate paid
(fixed) 5.9% - 6.3% 6.3%
Average interest rate received
(variable) 5.1% - 5.3% 5.3%
- ------------------------------------------------------------
The Corporation has the intent and ability to refinance
commercial paper, other short-term notes and the accounts
receivable sale program as they mature. Therefore, maturities of
these obligations are reflected as cash flows expected to be made
after 2003. The fair value of interest rate exchange agreements
exclude amounts used to determine the fair value of related notes
and debentures.
At July 3, 1999, the Corporation's weighted average interest rate
on its total debt was 6.9% including the accounts receivable sale
program and outstanding interest rate exchange agreements. At
July 3, 1999, these interest rate exchange agreements effectively
converted approximately $400 million of floating rate obligations
with a weighted average interest rate of 5.1% to fixed rate
obligations with an average effective interest rate of 6.5%.
These agreements have a weighted average maturity of
approximately 3.4 years. As of July 3, 1999, the Corporation's
total floating rate debt, including the accounts receivable sale
program, exceeded related interest rate exchange agreements by
$2.2 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 July 3, 1999.
As of July 3, 1999, the Corporation had registered for sale up to
$2.975 billion of debt and equity securities under a shelf
registration statement filed with the Securities and Exchange
Commission, of which $1.725 billion relates to the PEPS Units
($862.5 million of which was received on July 7, 1999, and $862.5
million is to be received upon exercise of the purchase
contracts). Proceeds from the issuance of securities under this
registration statement may be used for general corporate
purposes, including the reduction of short-term debt,
acquisitions, investments in, or extension or credit to, the
Corporation's subsidiaries and the acquisition of real property.
During the first six months of 1999, Georgia-Pacific Group
purchased on the open market approximately 5,113,000 shares of
Georgia-Pacific Group common stock, all of which were held as
treasury stock at July 3, 1999, at an aggregate price of $206
million ($40.24 average per share). During the first six months
of 1999, The Timber Company purchased on the open market
approximately 3,946,000 shares of The Timber Company common at an
aggregate price of $95 million ($24.16 average per share). Of
these repurchased shares, approximately 3,855,000 shares of The
Timber Company common stock were held as treasury stock and
91,000 shares were purchased during the first six months of 1999
and settled after July 3, 1999.
During the first six months of 1998, Georgia-Pacific Group
purchased on the open market approximately 4,625,000 shares of
Georgia-Pacific Group common stock at an aggregate price of $150
million ($32.43 average per share). In addition during the first
six months of 1998, The Timber Company purchased on the open
market 975,500 shares of The Timber Company common stock at an
aggregate price of $21 million ($21.53 average per share).
18
Subsequent to July 3, 1999 through August 2, 1999, the
Corporation purchased on the open market approximately 353,300
shares of the Georgia-Pacific Group stock at an aggregate price
of $18 million ($49.86 average per share) and approximately
595,300 shares of The Timber Company stock at an aggregate price
of $15 million ($25.46 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 six months of 1999, the Corporation received
$105 million and $8 million from the exercise of stock options of
Georgia-Pacific Group common stock and The Timber Company common
stock, respectively.
During the first six months of 1999 and 1998, the Corporation
paid $86 million and $92 million, respectively, in dividends. On
May 4, 1999, the Board of Directors declared a two-for-one split
of Georgia-Pacific Group's common stock in the form of a special
dividend to shareholders of record on May 14, 1999. The special
dividend was paid as one share of Georgia-Pacific Group common
stock for each share of Georgia-Pacific Group on June 3, 1999. A
total of 95,126,911 additional shares were issued in conjunction
with the stock split. The Georgia-Pacific Group's par value of
$0.80 remained unchanged. As a result, $76.1 million was
reclassified from Additional paid-in capital to Common stock.
All historical share and per share amounts have been restated to
reflect retroactively the stock split. 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 July 1999, the Financial Accounting Standards Board
("FASB") issued SFAS No. 137, providing for a one year delay of
the effective date of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities"("SFAS No. 133"). SFAS No. 133
establishes accounting and reporting standards for derivative
instrument and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities on the
balance sheet and measure those instruments at fair value.
Georgia-Pacific Corporation will be required to adopt SFAS No.
133 in 2001. Management is evaluating the effect of this
statement on Georgia-Pacific's derivative instruments: primarily
interest rate swaps, foreign currency forward contracts and long-
term purchase commitments. The impact of adjustments to fair
value is not expected to be material to the Corporation's
consolidated financial position.
The Corporation 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.
19
The Corporation completed the necessary revisions and unit
testing to most systems and processes in 1998 with the few
remaining systems completed in March 1999. Full integration
testing and verification of such systems and processes for Year
2000 readiness has been ongoing and will continue during 1999. At
the end of June 1999, 86 percent of the Corporation's systems are
considered fully Year 2000 ready, and 14 percent are in the final
stages of full integration testing. 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
June 1999, over 93 percent of the process control and embedded
chip inventory has been fully analyzed and remediated as
necessary with the remaining 7 percent of the inventory in the
repair or test phase. 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.
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 and corporate offices have developed plans for various
contingency options, including identification of alternate
suppliers, vendors and service providers as well as direct access
to qualified vendor technical support and manual alternatives to
systems operations. These options will allow them to minimize the
risks of any unresolved Year 2000 problems on their operations
and to minimize the effect of any unforeseen Year 2000 failures
in areas outside the Corporation's control. The primary goal of
the Corporation's contingency plan is to minimize the adverse
impact to personnel safety, environmental safety and assets.
The Corporation currently estimates the incremental cost of the
work needed to resolve the Year 2000 problem at approximately $40
million (including approximately $2 million of capital costs), of
which $23 million has been incurred to date and $6 million is
included for the impact of contingency 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 $15 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 the cost of creating
and maintaining isolated test environments for its information
systems. The majority of the internal costs relates to code or
process system assessment, remediation and testing and is
projected to be incurred through 1999. These incremental and
internal costs will be expensed as incurred, except for new
systems purchased that will be capitalized in accordance with
corporate policy. Such costs may be material to the Corporation's
results of operations in one or more fiscal quarters or years but
are not expected to have a material adverse effect on the long-
term results of operations, liquidity or consolidated financial
position of the Corporation.
The Corporation has reviewed the Unisource Year 2000 project
methodology and progress, including its foreign operations. All
mission critical systems have been remediated and full testing
and final certification efforts are expected to be completed by
the end of September 1999. Unisource has contacted its
technology and service providers as well as its key customers and
suppliers to determine the extent to which their systems are year
2000 ready and the extent to which Unisource could be affected if
they are not. Contingency planning activities are ongoing and
are also expected to be complete by the end of September 1999.
Unisource estimates the total cost of its Year 2000 project to be
approximately $14 million. Of this amount, approximately $11
million has been incurred through July 3, 1999.
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; material
variation of earnings or cash flow arising from Unisource, the
inability of the Corporation to integrate and rationalize the
business of Unisource into the Corporation in a manner that
realizes cost savings and synergies, including effective
continuing implementation of the Unisource restructuring
announced July 29, 1998 and other risks, uncertainties and
assumptions discussed in the Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 1998, the
Corporation's Quarterly Report on Form 10-Q for the quarter ended
April 3, 1999, and the Corporation's Form 8-K dated October 17,
1996.
For a discussion of commitments and contingencies refer to Note
12 of the Notes to Consolidated Financial Statements.
20
COMBINED STATEMENTS OF INCOME (Unaudited)
Georgia-Pacific Corporation-Georgia-Pacific Group
Three Months Ended Six Months Ended
------------------ ----------------
(In millions, except per share July 3, June 30, July 3, June 30,
amounts) 1999 1998 1999 1998
------- ------- ------- --------
- -----------------------------------------------------------------------
Net sales $ 3,807 $ 3,275 $ 7,159 $ 6,468
- -----------------------------------------------------------------------
Costs and expenses
Cost of sales excluding depreciation
and cost of timber harvested shown
below
The Timber Company 25 19 45 43
Third parties 2,768 2,556 5,275 5,031
- -----------------------------------------------------------------------
Total cost of sales 2,793 2,575 5,320 5,074
Selling, general and
Administrative 296 256 584 518
Depreciation and cost of
timber harvested
The Timber Company 64 67 130 160
Third parties 212 229 422 440
- -----------------------------------------------------------------------
Total depreciation and cost of
timber harvested 276 296 552 600
Interest 89 94 182 190
- -----------------------------------------------------------------------
Total costs and expenses 3,454 3,221 6,638 6,382
- -----------------------------------------------------------------------
Income before income taxes
and extraordinary item 353 54 521 86
Provision for income taxes 141 24 210 40
- -----------------------------------------------------------------------
Income before extraordinary item 212 30 311 46
Extraordinary item, net of taxes - (1) - (13)
- -----------------------------------------------------------------------
Net income $ 212 $ 29 $ 311 $ 33
======================================================================
Basic per common share:
Income before extraordinary item $ 1.23 $ 0.17 $ 1.81 $ 0.25
Extraordinary item, net of taxes - (0.01) - (0.07)
- -----------------------------------------------------------------------
Net income $ 1.23 $ 0.16 $ 1.81 $ 0.18
======================================================================
Diluted per common share:
Income before extraordinary item $ 1.20 $ 0.17 $ 1.76 $ 0.25
Extraordinary item, net of taxes - (0.01) - (0.07)
- -----------------------------------------------------------------------
Net income $ 1.20 $ 0.16 $ 1.76 $ 0.18
======================================================================
Average number of shares
outstanding:
Basic 171.8 181.0 172.2 182.0
Diluted 176.4 184.4 176.3 184.7
======================================================================
The accompanying notes are an integral part of these financial statements.
21
COMBINED STATEMENTS OF CASH FLOWS (Unaudited)
Georgia-Pacific Corporation-Georgia-Pacific Group
Six Months Ended
-------------------
(In millions) July 3, 1999 June 30, 1998
-------------- ---------------
- -----------------------------------------------------------------------
Cash flows from operating activities
Net income $ 311 $ 33
Adjustments to reconcile net income to
cash provided by operations:
Depreciation 361 369
Cost of timber harvested - The Timber
Company 130 160
Cost of timber harvested - Third
Parties 61 71
Deferred income taxes (15) 50
Amortization of goodwill 31 30
Stock compensation programs (1) 14
(Loss) gain on sales of assets 1 (16)
Increase in receivables (310) (49)
(Increase) decrease in inventories (65) 88
(Increase) decrease in other working
capital 80 (202)
Change in other assets and other
long-term liabilities (62) 15
- -----------------------------------------------------------------------
Cash provided by operations 522 563
- -----------------------------------------------------------------------
Cash flows from investment activities
Property, plant and equipment
investments (249) (238)
Timber purchases from The Timber Company (121) (184)
Timber contract purchases from third
parties (48) (96)
Acquisitions (818) (93)
Proceeds from sales of assets 2 35
Other 25 28
- -----------------------------------------------------------------------
Cash used for investment activities (1,209) (548)
- -----------------------------------------------------------------------
Cash flows from financing activities
Additions to long-term debt 870 177
Common stock repurchased (206) (155)
Cash dividends paid (43) (46)
Proceeds from option plan exercises 105 8
- -----------------------------------------------------------------------
Cash provided by (used for) financing
Activities 726 (16)
- -----------------------------------------------------------------------
Increase (decrease) in cash 39 (1)
Balance at beginning of period 5 8
- -----------------------------------------------------------------------
Balance at end of period $ 44 $ 7
======================================================================
The accompanying notes are an integral part of these financial statements.
22
COMBINED BALANCE SHEETS
Georgia-Pacific Corporation-Georgia-Pacific Group
(In millions) July 3, December 31,
1999 1998
---------------- -------------
- ------------------------------------------------------------------------
ASSETS (Unaudited)
Current assets
Cash $ 44 $ 5
Receivables, less allowances of
$24 and $25, respectively 2,300 1,231
Inventories 1,776 1,278
Deferred income tax assets 61 61
Other current assets 123 65
- ------------------------------------------------------------------------
Total current assets 4,304 2,640
- ------------------------------------------------------------------------
Timber contracts 59 78
- ------------------------------------------------------------------------
Property, plant and equipment
Land and improvements, buildings,
machinery and equipment and construction
in progress, at cost 14,828 14,387
Accumulated depreciation (8,467) (8,162)
- ----------------------------------------------------------------------
Property, plant and equipment, net 6,361 6,225
- -----------------------------------------------------------------------
Goodwill, net 2,433 1,677
- -----------------------------------------------------------------------
Other assets 996 918
- -----------------------------------------------------------------------
Total assets $ 14,153 $ 11,538
======================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt $ 2,160 $ 1,173
Accounts payable 974 553
Accrued compensation 296 243
Other current liabilities 607 412
- ----------------------------------------------------------------------
Total current liabilities 4,037 2,381
- ----------------------------------------------------------------------
Long-term debt, excluding current portion 3,945 3,395
- ----------------------------------------------------------------------
Other long-term liabilities 1,743 1,566
- ----------------------------------------------------------------------
Deferred income tax liabilities 1,017 987
- ----------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity 3,411 3,209
- ----------------------------------------------------------------------
Total liabilities and shareholders' equity $ 14,153 $ 11,538
======================================================================
The accompanying notes are an integral part of these financial statements.
23
COMBINED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Georgia-Pacific Corporation-Georgia-Pacific Group
Three Months Ended Six Months Ended
------------------- ---------------- -
July 3, June 30, July 3, June 30,
1999 1998 1999 1998
(In millions) ------- -------- ------- --------
- ----------------------------------------------------------------------
Net income $ 212 $ 29 $ 311 $ 33
Other comprehensive income (loss)
before tax:
Foreign currency translation
adjustments 4 (5) 10 (6)
Income tax (expense) benefit related
to items of other comprehensive income (2) 2 (4) 2
- ----------------------------------------------------------------------
Comprehensive income $ 214 $ 26 $ 317 $ 29
======================================================================
The accompanying notes are an integral part of these financial statements.
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 of three additional days on the
six months ended July 3, 1999 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. The Corporation redeemed approximately $600
million of its outstanding debt during the first six months of
1998. As a result, an after-tax extraordinary charge of $13
million ($0.07 per share) was allocated to the Georgia-Pacific
Group based on the ratio of the Georgia-Pacific Group's debt to
the Corporation's total debt, of which $12 million was
recognized in the first quarter of 1998 and $1 million was
recognized in the second quarter of 1998.
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.
Three Months Ended Six Months Ended
------------------ ---------------- -
(In millions, except per share July 3, June 30, July 3, June 30,
amounts) 1999 1998 1999 1998
------- -------- ------- --------
- ---------------------------------------------------------------
Basic and diluted income available to
shareholders (numerator):
Income before extraordinary item $ 212 $ 30 $ 311 $ 46
Extraordinary item, net of taxes - (1) - (13)
- ---------------------------------------------------------------
Net income $ 212 $ 29 $ 311 $ 33
================================================================
Shares (denominator):
Average shares outstanding 171.8 181.0 172.2 182.0
Dilutive securities:
Stock incentive and option plans 4.1 3.0 3.6 2.5
Employee stock purchase plans 0.5 0.4 0.5 0.2
- ---------------------------------------------------------------
Total assuming conversion 176.4 184.4 176.3 184.7
================================================================
Basic per share amounts:
Income before extraordinary item $ 1.23 $ 0.17 $ 1.81 $ 0.25
Extraordinary item, net of taxes - (0.01) - (0.07)
- ---------------------------------------------------------------
Net income $ 1.23 $ 0.16 $ 1.81 $ 0.18
================================================================
Diluted per share amounts:
Income before extraordinary item $ 1.20 $ 0.17 $ 1.76 $ 0.25
Extraordinary item, net of taxes - (0.01) - (0.07)
- ---------------------------------------------------------------
Net income $ 1.20 $ 0.16 $ 1.76 $ 0.18
================================================================
24
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) July 3, December 31,
1999 1998
------------- ---------------
- ---------------------------------------------------------------
Raw materials $ 347 $ 417
Finished goods 1,322 760
Supplies 316 310
LIFO reserve (209) (209)
- ---------------------------------------------------------------
Total inventories $ 1,776 $ 1,278
===============================================================
6. ACQUISITIONS. At the end of the second quarter of 1999,
Georgia-Pacific Group acquired approximately 91% of the
outstanding shares of Unisource, the largest independent marketer
and distributor of printing and imaging paper and supplies in
North America. Georgia-Pacific Group expects to pay for the
remaining shares of Unisource as they are prescribed to the
exchange agent. The value of the transaction was $12 per share
of Unisource stock, or approximately $843 million (assuming all
outstanding Unisource shares are tendered), plus the assumption
of approximately $669 million in debt.
Unisource's results of operations will be consolidated with
those of Georgia-Pacific Group beginning July 4, 1999. The
Georgia-Pacific Group has accounted for this transaction
using the purchase method to record a new cost basis for
assets acquired and liabilities assumed. The allocation of
the purchase price and acquisition costs to the assets
acquired and liabilities assumed is preliminary as of July
3, 1999, and is subject to change pending finalization of
studies of fair value and the finalization of management's
plans. The Corporation has begun to assess and formulate
plans to restructure existing Unisource activities,
including the consolidation of certain distribution centers,
closure of the Unisource headquarters facility, termination
of redundant headcount and the relocation of certain
administrative functions. In connection with the
acquisition of Unisource, the Corporation assumed
liabilities totaling approximately $84 million for employee
termination and relocation costs, and $15 million for
facility closure costs. The Corporation has not yet
completed its evaluation of Unisource activities;
accordingly, finalization of the Corporation's plans may
result in additional liabilities for termination, relocation
or facility closure costs which could increase the amount
of liabilities assumed in the acquisition. The difference
between the purchase price and the fair market value of the
assets acquired and liabilities assumed was recorded as
goodwill and will be amortized over 40 years. The
preliminary allocation of the purchase price of the
acquisition is summarized as follows:
(In millions)
Current assets $ 1,258
Property, plant and equipment 225
Other non current assets 19
Goodwill 756
Liabilities (1,497)
--------------------------------------------------
Net cash paid for Unisource $ 761
==================================================
The following unaudited pro forma financial data has been
prepared assuming that the acquisition of Unisource and
related financings were consummated on January 1, 1998.
This pro forma financial data is presented for informational
purposes and is not necessarily indicative of the operating
results that would have occurred had the acquisition been
consummated on January 1, 1998, nor does it include
adjustments for expected synergies or cost savings.
Accordingly, this pro forma data is not necessarily
indicative of future operations.
Three Months Ended Six Months Ended
------------------ ---------------- -
(In millions, except per share July 3, June 30, July 3, June 30,
amounts) 1999 1998 1999 1998
------- -------- ------ -------
Net Sales $ 5,312 $ 4,998 $ 10,181 $ 9,948
Income before extraordinary items $ 210 $ 14 $ 304 $ 29
Net Income $ 210 $ 13 $ 304 $ 16
Basic income before
extraordinary Items per share $ 1.22 $ 0.08 $ 1.76 $ 0.16
Diluted income before
extraordinary Items per share $ 1.19 $ 0.08 $ 1.72 $ 0.16
Basic earnings per share $ 1.22 $ 0.07 $ 1.76 $ 0.09
Diluted earnings per share $ 1.19 $ 0.07 $ 1.72 $ 0.09
The 1998 pro forma financial data includes a non-recurring
restructuring charge of $28 million ($18 million after tax) taken
by Unisource in the second quarter of 1998.
25
In addition during the first six months of 1999, the Georgia-
Pacific Group completed the acquisition of a packaging plant and
two treated lumber facilities for a total consideration of
approximately $57 million in cash. The results of operations of
these acquired businesses were consolidated with those of the
Corporation beginning in the second quarter of 1999. The
Georgia-Pacific Group has accounted for these business
combinations using the purchase method to record a new cost
basis for assets acquired and liabilities assumed.
On June 25, 1999, the Georgia-Pacific Group and Chesapeake
Corp. announced that the two companies signed a letter of
intent to combine their commercial tissue business in a new
partnership. The Georgia-Pacific Group will contribute the
assets of its commercial tissue business to the partnership.
The Georgia-Pacific Group will control and manage the
partnership and is expected to own approximately 90 percent
of the equity in the partnership. Chesapeake Corp. will
contribute the assets of its Wisconsin Tissue business to
the partnership, for which it will receive a 10 percent
equity interest in the partnership and an initial cash
distribution of approximately $730 million. Formation of
the partnership is subject to completion of definitive
agreements, completion of due diligence by both parties and
customary regulatory approvals. Completion is anticipated
in the third quarter of 1999.
On June 30, 1998, the Georgia-Pacific Group completed its
acquisition of CeCorr, a leading independent producer of
corrugated sheets in the United States. On June 30, 1998, the
Georgia-Pacific Group paid approximately $93 million in cash
(net of $2 million of cash acquired) and issued approximately
3.2 million shares of Georgia-Pacific Group stock valued at
approximately $28.94 per share for all the outstanding shares of
CeCorr. In addition, the Georgia-Pacific Group assumed
approximately $92 million of CeCorr's debt, of which $34 million
was owed to the Corporation ($58 million net debt assumed). On
July 2, 1998, a former owner of CeCorr exercised his right to
resell to the Corporation approximately 2.2 million shares of
Georgia-Pacific Group stock issued in the transaction. CeCorr's
results of operations were consolidated with those of the
Corporation beginning July 1, 1998. The Georgia-Pacific Group
accounted for the CeCorr acquisition using the purchase method
to record a new cost basis for assets acquired and liabilities
assumed.
7. DEBT. In connection with the acquisition of Unisource, the
Georgia-Pacific Group incurred $600 million of short-term bridge
financing until it closed on the issuance of the Premium Equity
Participating Security Units on July 7, 1999 (see below).
In June 1999, the Georgia-Pacific Group renegotiated its
accounts receivable sale program and increased the amount
outstanding under the program from $280 million to $750
million. This program is accounted for as a secured
borrowing. The receivables outstanding under this program
and the corresponding debt are included as current
receivables and short-term debt, respectively, on the
Georgia-Pacific Group's balance sheets. Under the accounts
receivable sale agreement, the maximum amount of the
purchasers' investment is subject to change based on the
level of eligible receivables and restrictions on
concentrations of receivables. The program expires in May 2000.
In connection with the acquisition of Unisource, the
Corporation retained former Unisource agreements to sell up
to $150 million of certain qualifying U.S. accounts
receivable and up to CN$95 million of certain eligible
Canadian accounts receivable. At July 3, 1999,
approximately $197 million was outstanding under these
programs. The receivables outstanding under these programs
and the corresponding debt are included as current
receivables and short-term debt, respectively on the
accompanying balance sheets. The agreements are accounted
for as a secured borrowing. As collections reduce
previously sold interests, new receivables may be sold.
These agreements expire in September, 1999.
Also in June 1999, the Board of Directors increased the
corporate target debt level under which management can
purchase shares of Georgia-Pacific Group and The Timber
Company common stock on the open market from $5.75 billion
to $6.8 billion. In addition, the Board of Directors
increased the Georgia-Pacific Group's target debt level from
$4.75 billion to $5.8 billion. The Timber Company's target
debt level remains at $1.0 billion.
As of July 3, 1999, the Corporation had 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. At July 3, 1999, $797 million was
available in excess of all short-term borrowings outstanding
under or supported by the facility. On July 22, 1999, the
Corporation increased the amount of this unsecured credit
facility to $2.0 billion.
On July 7, 1999, the Corporation issued 17,250,000 of 7.5%
PEPS Units for $862.5 million. Each PEPS Unit had an issue
price of $50 and consists of a contract to purchase shares
of Georgia-Pacific Group common stock on or prior to August
16, 2002 and a senior deferrable note of Georgia-Pacific
Group due August 16, 2004. Each purchase contract yields
interest of 0.35% per year, paid quarterly, on the $50
stated amount of the PEPS Unit. Each senior deferrable note
yields interest of 7.15% per year, paid quarterly, until
August 16, 2002. On August 16, 2002, following a remarketing
of the senior deferrable notes, the interest rate will be
reset at a rate that will be equal to or greater than 7.15%.
The liability related to the PEPS Units will not be included
in the debt amount for purposes of determining the corporate
and Georgia-Pacific Group debt targets.
During the second quarter of 1999, the Corporation
registered for sale up to $2.975 billion of debt and equity
securities under a shelf registration statement filed with
the Securities and Exchange Commission, of which $1.725
billion relates to the PEPS Units ($867.5 million of which
was received on July 7, 1999, and $862.5 million is to be
received upon exercise of the purchase contracts).
8. STOCK SPLIT. On May 4, 1999, the Board of Directors declared
a two-for-one split of Georgia-Pacific Group's common stock in
the form of a special dividend to shareholders of record on May
14, 1999. The special dividend was paid as one share of Georgia-
Pacific Group common stock for each share of Georgia-Pacific
Group on June 3, 1999. A total of 95,126,911 additional shares
were issued in conjunction with the stock split. The Georgia-
Pacific Group's par value of $0.80 remained unchanged. As a
result, $76.1 million was reclassified from Additional paid-in
capital to Common stock. All historical share and per share
amounts have been restated to reflect retroactively the stock
split.
9. SHARE REPURCHASES. During the first six months of 1999,
Georgia-Pacific Group purchased on the open market approximately
5,113,000 shares of Georgia-Pacific Group common stock, all of
which were held as treasury stock at July 3, 1999, at an
aggregate price of $206 million ($40.24 average per share).
During the first six months of 1998, Georgia-Pacific Group
purchased on the open market approximately 4,625,000 shares
of Georgia-Pacific Group common stock at an aggregate price
of $150 million ($32.43 average per share).
10. COMMITMENTS AND CONTINGENCIES. The Georgia-Pacific Group is
subject to various legal proceedings and claims that arise in the
ordinary course of its business. As is the case with other
companies in similar industries, the Georgia-Pacific Group faces
exposure from actual or potential claims and legal proceedings
involving environmental matters. Liability insurance in effect
during the last several years provides very limited coverage for
environmental matters.
The following sets forth legal proceedings and claims
arising out of the operations of the Georgia-Pacific Group
to which the Corporation is a party. The holders of Georgia-
Pacific Group stock are shareholders of the Corporation and
are subject to all of the risks associated with an
investment in the Corporation, including any legal
proceedings and claims involving The Timber Company.
The Corporation is involved in environmental remediation
activities at approximately 176 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 46 percent are being investigated, approximately
30 percent are being remediated and approximately 24 percent are
being monitored (an activity that occurs after either site
investigation or remediation has been completed). The ultimate
costs to the Corporation for the investigation, remediation and
monitoring of many of these sites cannot be predicted with
certainty, due to the often unknown magnitude of the pollution
or the necessary cleanup, the varying costs of alternative
cleanup methods, the amount of time necessary to accomplish such
cleanups, the evolving nature of cleanup technologies and
government regulations, and the inability to determine the
Corporation's share of multiparty cleanups or the extent to
which contribution will be available from other parties. The
Corporation has established reserves for environmental
remediation costs for these sites in amounts that it believes
are probable and reasonably estimable. Based on analysis of
currently available information and previous experience with
respect to the cleanup of hazardous substances, the Corporation
believes it is reasonably possible that costs associated with
these sites may exceed current reserves by amounts that may
prove insignificant or that could range, in the aggregate, up to
approximately $56 million. This estimate of the range of
reasonably possible additional costs is less certain than the
estimates upon which reserves are based, and in order to
establish the upper limit of such range, assumptions least
favorable to the Corporation among the range of reasonably
possible outcomes were used. In estimating both its current
reserve for environmental remediation and the possible range of
additional costs, the Corporation has not assumed it will bear
the entire cost of remediation of every site to the exclusion of
other known potentially responsible parties who may be jointly
and severally liable. The ability of other potentially
responsible parties to participate has been taken into account,
based generally on the parties' financial condition and probable
contribution on a per site basis.
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.
26
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 73,000 such plaintiffs as
of July 26, 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.
On July 28, 1999, the Corporation and the Attorney General
of the State of Florida entered into a Settlement Agreement
pursuant to which the State will dismiss its claims against
the Corporation which alleged that the Corporation engaged
in a conspiracy to fix the prices of sanitary commercial
paper products. The Settlement Agreement states that the
Attorney General is dismissing its claims in the public
interest and consistent with its responsibilities. The
Agreement also provides that the Corporation continues to
deny that there is any evidence that it engaged in the
alleged price fixing conspiracy. In addition, the
Corporation agreed to donate certain real property to the
State of Florida, Board of Trustees of the Internal
Improvement Trust. The value of this real property is not
material to the results of operations or financial position
of the Corporation.
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.
27
11. 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 second quarter of 1999 and 1998.
COMBINED SELECTED OPERATING SEGMENT DATA (Unaudited)
Georgia-Pacific Group
(Dollar amounts, except Three Months Ended Three Months Ended
per share, in millions) July 3, 1999 June 30, 1998
------------------ -----------------
- -------------------------------------------------------------
NET SALES TO UNAFFILIATED CUSTOMERS
Building products $ 1,047 27% $ 820 25%
Distribution 1,317 35 1,071 33
Containerboard and packaging 573 15 497 15
Pulp and paper 870 23 887 27
Other - - - -
- --------------------------------------------------------------
Total net sales to
unaffiliated customers $ 3,807 100% $ 3,275 100%
==============================================================
INTERSEGMENT SALES
Building products $ 624 $ 629
Distribution 2 2
Containerboard and packaging 14 15
Pulp and paper 7 8
Other* (647) (654)
- --------------------------------------------------------------
Total intersegment sales $ - -
==============================================================
TOTAL NET SALES
Building products $ 1,671 44% $ 1,449 44%
Distribution 1,319 35 1,073 33
Containerboard and packaging 587 15 512 16
Pulp and paper 877 23 895 27
Other* (647) (17) (654) (20)
- --------------------------------------------------------------
Total net sales $ 3,807 100% $ 3,275 100%
==============================================================
OPERATING PROFITS
Building products $ 364 82% $ 120 81%
Distribution 35 8 - -
Containerboard and packaging 81 18 31 21
Pulp and paper 33 8 54 37
Other (71) (16) (57) (39)
- --------------------------------------------------------------
Total operating profits 442 100% 148 100%
=== ===
Interest expense (89) (94)
Provision for income taxes (141) (24)
Extraordinary item, net of taxes - (1)
- ---------------------------------------------------------------
Net income $ 212 $ 29
===============================================================
28
COMBINED SELECTED OPERATING SEGMENT DATA (Unaudited)
Georgia-Pacific Group
(Dollar amounts, except Six Months Ended Six Months Ended
per share, in millions) July 3, 1999 June 30, 1998
---------------- -----------------
- ---------------------------------------------------------------
NET SALES TO UNAFFILIATED CUSTOMERS
Building products $ 1,937 27% $ 1,585 25%
Distribution 2,415 34 2,095 32
Containerboard and packaging 1,096 15 985 15
Pulp and paper 1,710 24 1,802 28
Other 1 - 1 -
- ---------------------------------------------------------------
Total net sales to
unaffiliated customers $ 7,159 100% $ 6,468 100%
===============================================================
INTERSEGMENT SALES
Building products $ 1,174 $ 1,231
Distribution 4 4
Containerboard and packaging 29 30
Pulp and paper 13 16
Other* (1,220) (1,281)
- ---------------------------------------------------------------
Total intersegment sales $ - $ -
===============================================================
TOTAL NET SALES
Building products $ 3,111 43% $ 2,816 44%
Distribution 2,419 34 2,099 32
Containerboard and packaging 1,125 16 1,015 16
Pulp and paper 1,723 24 1,818 28
Other* (1,219) (17) (1,280) (20)
- ---------------------------------------------------------------
Total net sales $ 7,159 100% $ 6,468 100%
===============================================================
OPERATING PROFITS
Building products $ 612 87% $ 223 81%
Distribution 53 7 (17) (6)
Containerboard and packaging 121 17 64 23
Pulp and paper 53 8 125 45
Other (136) (19) (119) (43)
- ---------------------------------------------------------------
Total operating profits 703 100% 276 100%
=== ===
Interest expense (182) (190)
Provision for income taxes (210) (40)
Extraordinary item, net of taxes - (13)
- ---------------------------------------------------------------
Net income $ 311 $ 33
===============================================================
*Includes elimination of intersegment sales.
29
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
SECOND QUARTER 1999 COMPARED WITH SECOND QUARTER 1998
The Georgia-Pacific Group reported net sales of approximately
$3.8 billion for the second quarter of 1999 and $3.3 billion for
the second quarter of 1998. Net income for the 1999 second
quarter was $212 million compared with $29 million in 1998. Net
income in the second quarter of 1998 included an after-tax
extraordinary charge of $1 million for the early retirement of
debt.
The remaining discussion refers to the "Combined Selected
Operating Segment Data" table (included in Note 11 to the
Combined Financial Statements).
The Georgia-Pacific Group's building products segment reported
net sales of $1,671 million for the second three months of 1999
compared with $1,449 million in 1998. Operating profits were $364
million in 1999 compared with $120 million in 1998. Return on
sales was 22 percent and 8 percent for the three months ended
July 3, 1999 and June 30, 1998, respectively. The higher quarter-
over-quarter profits resulted from increases in selling prices
for most of this segment's products. Lumber prices were up 8
percent from the prior year's quarter; Gypsum prices increased 21
percent; Plywood prices increased 28 percent; and Oriented strand
board prices increased 49 percent. Mild weather, home building
activity driven by a strong economy and low inventory have
resulted in high prices in both Plywood and Oriented strand
board. The Georgia-Pacific Group expects continued strength in
the building products segment into the fourth quarter of 1999.
The Georgia-Pacific Group's distribution segment reported net
sales of $1,319 million for the second three months of 1999
compared with $1,073 million in 1998.Operating profits for the
distribution segment were $35 million in the second quarter of
1999 compared with approximately break even results in the second
quarter of 1998. The 1998 results included one-time gains,
principally on sales of assets related to the 1997 restructuring
plan, of approximately $11 million. The improvement in the
distribution segment profits in 1999 reflects higher commodity
and specialty products margins related to higher prices for
building products generally.
The Georgia-Pacific Group's containerboard and packaging segment
reported net sales of $587 million and operating profits of $81
million in the second quarter of 1999, compared with net sales of
$512 million and operating profits of $31 million in the second
quarter of 1998. Return on sales was 14 percent and 6 percent in
the second quarter of 1999 and 1998, respectively. Containerboard
and packaging prices increased steadily over the quarter, ending
the quarter at approximately the same levels as a year ago. The
packaging division cost reductions noted in the first quarter
continued into the second quarter. The positive price trend
together with cost reductions and the profits from CeCorr which
was acquired on June 30, 1998, resulted in higher quarter-over-
quarter profits for this segment. The Georgia-Pacific Group
expects continued price improvement in the containerboard and
packaging segment through the remainder of 1999.
The Georgia-Pacific Group's pulp and paper segment reported net
sales of $877 million and operating profits of $33 million in the
1999 second quarter. For the same period in 1998, the segment
reported net sales of $895 million and operating profits of $54
million. Return on sales was 4 percent and 6 percent in the
second quarter of 1999 and 1998, respectively. Compared with a
year ago, the Corporation has maintained lower levels of
inventory for most pulp and paper products. In the 1999 second
quarter the pulp and paper segment took market-related down time
at its pulp and paper mills and reduced pulp production by 28,000
tons and communication papers production by 13,000 tons. During
the second quarter of 1998, the Georgia-Pacific Group took market-
related downtime at its pulp and paper mills, and reduced pulp
and communication papers production by approximately 20,000 tons
and 25,000 tons, respectively. Although steadily increasing
throughout the second quarter, prices and demand for pulp
remained slightly below the prior year quarter average. Tissue
and communication paper results were lower than in the 1998
second quarter due to lower prices than in the prior year period.
However, average prices for the second quarter of 1999 are above
those of the 1999 first quarter. Demand for tissue was above
1998 levels for each period during the second quarter of 1999.
The Georgia-Pacific Group expects demand and pricing for products
in this segment to improve through the remainder of the year.
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 $14
million to a loss of $71 million in 1999 from a loss of $57
million in the 1998 second quarter. This increase is primarily
the result of higher expenses for the Corporation's stock
compensation programs.
Interest expense decreased $5 million to $89 million in the
second quarter of 1999 compared with $94 million in the second
quarter of 1998 as a result of lower average interest rates,
despite slightly higher average debt levels.
30
YEAR-TO-DATE SECOND QUARTER 1999 COMPARED WITH YEAR-TO-DATE
SECOND QUARTER 1998
The Georgia-Pacific Group reported net sales of $7.2 billion and
net income of $311 million for the six months ended July 3, 1999,
compared with net sales of $6.5 billion and net income of $33
million for the six months ended June 30, 1998. The 1998 results
include an extraordinary, after-tax loss of $13 million for the
early retirement of debt.
The remaining discussion refers to the "Combined Selected
Operating Segment Data" table (included in Note 11 to the
Combined Financial Statements).
The Georgia-Pacific Group's building products segment reported
net sales of $3.1 billion and operating profits of $612 million
for the six months ended July 3, 1999, compared with net sales of
$2.8 billion and operating profits of $223 million in 1998.
Return on sales increased to 19.7 percent from 7.9 percent a year
ago. A 24 percent increase in average plywood prices, 42
percent increase in average oriented strand board prices, and an
18 percent increase in average gypsum prices in the first six
months of 1999 resulted in significantly higher profit margins
over those realized in the same 1998 period.
The distribution division reported net sales of $2.4 billion and
operating profits of $53 million for the six months ended July 3,
1999, compared with net sales of $2.1 billion and an operating
loss of $17 million in the first half of 1998. The 1998 results
included one-time gains, principally on sales of assets related
to the 1997 restructuring plan, of approximately $13 million.
Continued high margins in commodity and specialty products, and
lower operating cost have contributed to the increased profits.
The Georgia-Pacific Group's containerboard and packaging segment
reported net sales of $1.1 billion and operating profits of $121
million in the first half of 1999 compared with net sales of
$1.0 billion and operating profits of $64 million in the same
1998 period. Return on sales increased to 10.8 percent from 6.3
percent in 1998. Although year-to-date average prices are below
year ago levels, pricing has increased throughout 1999 and at
July 3, 1999, were very close to year ago levels. Cost
decreases in wood, secondary fibers and energy as well as
increased production contributed to the increased profit
margins.
The Georgia-Pacific Group's pulp and paper segment reported net
sales of $1.7 billion and operating profits of $53 million for
the six-month period ended July 3, 1999, compared with net sales
of $1.8 billion and operating profits of $125 million in 1998.
Return on sales decreased to 3.1 percent compared with 6.9
percent for the same period a year ago, principally due to a
decrease in average prices for all of the Georgia-Pacific Group's
pulp and paper products. Average pulp prices for the first six
months of 1999 were approximately 7.5% below prices in the same
1998 period, and average prices of communications papers for the
first six months of 1999 were approximately 11% below year ago
levels. Prices for most of the Georgia-Pacific Group's pulp and
paper products have increased steadily throughout the first half
of 1999, but still remain below year ago levels. The Georgia-
Pacific Group anticipates this upward trend to continue through
the remainder of 1999. Compared with a year ago, the Georgia-
Pacific Group has maintained lower inventory levels for pulp and
paper products. During the first half of 1999, the Georgia-
Pacific Group incurred market-related downtime at its pulp and
paper mills and reduced pulp production by 62,000 tons and
communication papers production by 24,000 tons. In the same 1998
period, the Corporation incurred market-related downtime at its
pulp and paper mills and reduced pulp and communication papers
production by 100,000 tons and 40,000 tons, respectively.
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 $17
million to a loss of $136 million in the first half of 1999 from
a loss of $119 million in the first half of 1998. This increase
is primarily the result of higher expenses for the Corporation's
stock compensation programs and higher litigation and
environmental remediation costs.
Interest expense decreased $8 million to $182 million in the
first half of 1999, compared with $190 million in the first half
of 1998 as a result of lower interest rates, despite higher
average debt levels.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. The Georgia-Pacific Group generated cash
from operations of $522 million for the six months ended July 3,
1999 compared with $563 million a year ago. The decrease in cash
provided from operating activities is primarily a result of
higher working capital levels, primarily accounts receivable
associated with the increase in net sales; offset somewhat by
strong demand and improved prices for several building products'
items.
INVESTING ACTIVITIES. Capital expenditures for property, plant
and equipment for the six months ended July 3, 1999 were $249
million, which included $101 million in the building products
segment, $5 million in the distribution segment, $32 million in
the containerboard and packaging segment $91 million in the pulp
and paper segment, and $20 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 six months
of 1999 and 1998 was $169 million and $280 million, respectively.
At the end of the second quarter of 1999, the Georgia-Pacific
Group acquired approximately 91% of the outstanding shares of
Unisource, the largest independent marketer and distributor of
printing and imaging paper and supplies in North America. The
Georgia-Pacific Group expects to pay for the remaining shares of
Unisource as they are prescribed to the exchange agent. The
value of the transaction was $12 per share of Unisource stock, or
approximately $843 million (assuming all outstanding Unisource
shares are tendered), plus the assumption of approximately $669
million in debt. Through July 3, 1999, the Georgia-Pacific Group
had paid approximately $761 million (net of $34 million of cash
acquired) for shares of Unisource stock that had been tendered.
Unisource's results of operations will be consolidated with those
of the Georgia-Pacific Group beginning July 4, 1999.
During the first six months of 1999, the Georgia-Pacific Group also
completed the acquisition of a packaging plant and two treated lumber
facilities for a total consideration of approximately $57 million in
cash. The results of operations of these acquired businesses were
consolidated with those of the Georgia-Pacific Group beginning in the
second quarter of 1999.
On June 30, 1998, the Georgia-Pacific Group completed its
acquisition of CeCorr, a leading independent producer of
corrugated sheets in the United States. On June 30, 1998, the
Georgia-Pacific Group paid approximately $93 million in cash (net
of $2 million of cash acquired) and issued approximately 3.2
million shares of Georgia-Pacific Group stock valued at
approximately $28.94 per share for all the outstanding shares of
CeCorr. In addition, the Georgia-Pacific Group assumed
approximately $92 million of CeCorr's debt, of which $34 million
was owed to the Georgia-Pacific Group ($58 million net debt
assumed). On July 2, 1998, a former owner of CeCorr exercised
his right to resell to the Georgia-Pacific Group approximately
2.2 million shares of Georgia-Pacific Group stock issued in the
transaction. CeCorr's results of operations were consolidated
with those of the Georgia-Pacific Group beginning July 1, 1998.
In June 1999, The Timber Company announced that it intends to
sell approximately 196,000 acres of its redwood and Douglas fir
timberlands in northern California. The Georgia-Pacific Group
does not expect that this potential timberland sale will have an
impact on the wood supply for its Fort Bragg, California sawmill
operations in the near term. The Fort Bragg sawmill has a supply
agreement with The Timber Company through 1999 that will remain
intact with the potential new owner.
On June 25, 1999, the Georgia-Pacific Group and Chesapeake Corp.
announced that the two companies signed a letter of intent to
combine their commercial tissue business in a new partnership.
The Georgia-Pacific Group will contribute the assets of its
commercial tissue business to the partnership. The Georgia-
Pacific Group will control and manage the partnership and is
expected to own approximately 90 percent of the equity in the
partnership. Chesapeake Corp. will contribute the assets of its
Wisconsin Tissue business to the partnership, for which it will
receive a 10 percent equity interest in the partnership and an
initial cash distribution of approximately $730 million.
Formation of the partnership is subject to completion of
definitive agreements, completion of due diligence by both
parties and customary regulatory approvals. Completion is
anticipated in the third quarter of 1999.
In 1999, the Georgia-Pacific Group expects its cash flow from
operations, together with proceeds from any asset sales and
available financing sources, to be sufficient to fund planned
capital investments, pay dividends and make scheduled debt
payments.
FINANCING ACTIVITIES. The Corporation's total debt increased by
$1.52 billion to $7.07 billion at July 3, 1999 from $5.55 billion
at December 31, 1998. At July 3, 1999 and December 31, 1998,
$6.11 billion and $4.57 billion, respectively, of such total debt
was Georgia-Pacific Group's debt and $963 million and $983
million, respectively, was The Timber Company's debt.
In connection with the acquisition of Unisource, the Corporation
incurred $600 million of short-term bridge financing until it
closed on the issuance of the PEPS Units on July 7, 1999.
In June 1999, the Corporation renegotiated its accounts
receivable sale program and increased the amount outstanding
under the program from $280 million to $750 million. This
program is accounted for as a secured borrowing. The receivables
outstanding under this program and the corresponding debt are
included as current receivables and short-term debt,
respectively, on the Corporation's balance sheets. Under the
accounts receivable sale agreement, the maximum amount of the
purchasers' investment is subject to change based on the level of
eligible receivables and restrictions on concentrations of
receivables. The program expires in May 2000.
In connection with the acquisition of Unisource, the Corporation
retained former Unisource agreements to sell up to $150 million
of certain qualifying U.S. accounts receivable and up to CN$95
million of certain eligible Canadian accounts receivable. At
July 3, 1999, approximately $197 million was outstanding under
these programs. The receivables outstanding under these programs
and the corresponding debt are included as current receivables
and short-term debt, respectively on the accompanying balance
sheet. The agreements are accounted for as a secured borrowing.
As collections reduce previously sold interests, new receivables
may be sold. These agreements expire in September, 1999.
Also in June 1999, the Board of Directors increased the corporate
target debt level under which management can purchase shares of
Georgia-Pacific Group and The Timber Company common stock on the
open market from $5.75 billion to $6.8 billion. In addition, the
Board of Directors increased the Georgia-Pacific Group's target
debt level from $4.75 billion to $5.8 billion. The Timber
Company's target debt level remains at $1.0 billion.
On July 7, 1999, the Corporation issued 17,250,000 of 7.5% PEPS
Units for $862.5 million. Each PEPS Unit had an issue price of
$50 and consists of a contract to purchase shares of Georgia-
Pacific Group common stock on or prior to August 16, 2002 and a
senior deferrable note of Georgia-Pacific Group due August 16,
2004. Each purchase contract yields interest of 0.35% per year,
paid quarterly, on the $50 stated amount of the PEPS Unit. Each
senior deferrable note yields interest of 7.15% per year, paid
quarterly, until August 16, 2002. On August 16, 2002, following a
remarketing of the senior deferrable notes, the interest rate
will be reset at a rate that will be equal to or greater than
7.15%. The liability related to the PEPS Units will not be
included in the debt amount for purposes of determining the
corporate and Georgia-Pacific Group debt targets.
During the first six months of 1999, approximately $70 million of
fixed and floating rate industrial revenue bonds were replaced,
of which $57 million were refunded by fixed rate instruments and
$13 million were refunded by variable rate instruments.
31
At July 3, 1999, the Corporation had 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 July 3, 1999, $797 million of committed credit was
available in excess of all short-term borrowings outstanding
under or supported by the facility. On July 22, 1999, the
Corporation increased the amount of this unsecured credit
facility to $2.0 billion.
The Corporation's senior management establishes the parameters of
the Corporation's financial risk, which have been approved by the
Board of Directors. Hedging interest rate exposure through the
use of swaps and options and hedging foreign exchange exposure
through the use of forward contracts are specifically
contemplated to manage risk in keeping with the management
policy. Derivative instruments, such as swaps, forwards, options
or futures, which are based directly or indirectly upon interest
rates, currencies, equities and commodities, may be used by the
Corporation to manage and reduce the risk inherent in price,
currency and interest rate fluctuations.
The Corporation does not utilize derivatives for speculative
purposes. Derivatives are transaction-specific so that a specific
debt instrument, contract or invoice determines the amount,
maturity and other specifics of the hedge. Counterparty risk is
limited to institutions with long-term debt ratings of A or
better.
The table below presents principal (or notional)amounts and
related weighted average interest rates by year of expected
maturity for the Corporation's debt obligations as of July 3,
1999. For obligations with variable interest rates, the table
sets forth payout amounts based on current rates and does not
attempt to project future interest rates.
Georgia-Pacific Corporation and Subsidiaries
(In millions) 1999 2000 2001 2002
- ------------------------------------------------------------
Debt
Commercial paper and other
short-term notes - - - -
Average interest rates - - - -
Notes and debentures $ 4 - - $ 300
Average interest rates 25.4% - - 10.0%
Revenue bonds $ 8 $ 24 $ 6 $ 74
Average interest rates 3.5% 4.3% 3.9% 2.5%
Other loans - $ 13 - -
Average interest rates - 8.0% - -
Accounts receivable sale program - - - -
Average interest rates - - - -
Notional principal amount of
interest rate exchange
agreements $ 100 $ 177 - 131
Average interest rate paid
(fixed) 6.6% 7.5% - 6.1%
Average interest rate received
(variable) 5.4% 5.1% - 6.1%
- ------------------------------------------------------------
Georgia-Pacific Corporation and Subsidiaries
(In millions) 2003 Thereafter Total Fair value
July 3,
1999
- ------------------------------------------------------------
Debt
Commercial paper and other
short-term notes - $ 1,758 $ 1,758 $ 1,758
Average interest rates - 5.9% 5.9% 5.9%
Notes and debentures $ 300 $ 2,900 $ 3,504 $ 3,591
Average interest rates 4.9% 8.6% 8.4% 8.4%
Revenue bonds - $ 532 $ 644 $ 550
Average interest rates - 5.2% 4.8% 4.8%
Other loans $ 14 - $ 27 $ 27
Average interest rates 5.7% - 6.8% 6.8%
Accounts receivable sale program - $ 947 $ 947 $ 947
Average interest rates - 5.3% 5.3% 5.3%
Notional principal amount of
interest rate exchange
agreements $ 300 - $ 708 $ (6)
Average interest rate paid 5.9% - 6.3% 6.3%
(fixed)
Average interest rate received
(variable) 5.1% - 5.3% 5.3%
- ------------------------------------------------------------
The Corporation has the intent and ability to refinance
commercial paper, other short-term notes and the accounts
receivable sale program as they mature. Therefore, maturities of
these obligations are reflected as cash flows expected to be made
after 2003. The fair value of interest rate exchange agreements
excludes amounts used to determine the fair value of related
notes and debentures.
At July 3, 1999, the Corporation's weighted average interest rate
on its total debt was 6.9% including the accounts receivable sale
program and outstanding interest rate exchange agreements. At
July 3, 1999, these interest rate exchange agreements effectively
converted approximately $400 million of floating rate obligations
with a weighted average interest rate of 5.1% to fixed rate
obligations with an average effective interest rate of 6.5%.
These agreements have a weighted average maturity of
approximately 3.4 years. As of July 3, 1999, the Corporation's
total floating rate debt, including the accounts receivable sale
program, exceeded related interest rate exchange agreements by
$2.2 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 July 3, 1999.
As of July 3, 1999, the Corporation had registered for sale up to
$2.975 billion of debt and equity securities under a shelf
registration statement filed with the Securities and Exchange
Commission, of which $1.725 billion relates to the PEPS Units
($862.5 million of which was received on July 7, 1999, and $862.5
million is to be received upon exercise of the purchase
contracts). Proceeds from the issuance of securities under this
registration statement may be used for general corporate
purposes, including the reduction of short-term debt,
acquisitions, investments in, or extension or credit to, the
Corporation's subsidiaries and the acquisition of real property.
During the first six months of 1999, Georgia-Pacific Group
purchased on the open market approximately 5,113,000 shares of
Georgia-Pacific Group common stock, all of which were held as
treasury stock at July 3, 1999, at an aggregate price of $206
million ($40.24 average per share). During the first six months
of 1998, Georgia-Pacific Group purchased on the open market
approximately 4,625,000 shares of Georgia-Pacific Group common
stock at an aggregate price of $150 million ($32.43 average per
share). In addition during the first six months of 1998, The
Timber Company purchased on the open market 975,500 shares of The
Timber Company common stock at an aggregate price of $21 million
($21.53 average per share).
32
Subsequent to July 3, 1999 through August 2, 1999, the Georgia-
Pacific Group purchased on the open market approximately 353,300
shares of the Georgia-Pacific Group stock at an aggregate price
of $18 million ($49.86 average per share). The Georgia-Pacific
Group expects to repurchase shares of the Georgia-Pacific Group
stock throughout 1999 as long as debt levels are below the
established thresholds.
During the first six months of 1999, the Georgia-Pacific Group
received $105 million from the exercise of Georgia-Pacific Group
common stock options.
During the first six months of 1999 and 1998, the Georgia-Pacific
Group 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 special dividend was paid as one share of Georgia-Pacific
Group common stock for each share of Georgia-Pacific Group on
June 3, 1999. A total of 95,126,911 additional shares were issued
in conjunction with the stock split. The Georgia-Pacific Group's
par value of $0.80 remained unchanged. As a result, $76.1
million was reclassified from Additional paid-in capital to
Common stock. All historical share and per share amounts have
been restated to reflect retroactively the stock split. 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 July 1999, the FASB issued SFAS No. 137, providing for
a one year delay of the effective date of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities".
SFAS No. 133 establishes accounting and reporting standards for
derivative instrument and for hedging activities. It requires
that an entity recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at
fair value. Georgia-Pacific Group will be required to adopt SFAS
No. 133 in 2001. Management is evaluating the effect of this
statement on Georgia-Pacific's derivative instruments: primarily
interest rate swaps, foreign currency forward contracts and long-
term purchase commitments. The impact of adjustment to fair value
is not expected to be material to the Group's consolidated
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.
33
The Georgia-Pacific Group completed the necessary revisions and
unit testing to most systems and processes in 1998 with the few
remaining systems completed in March 1999. Full integration
testing and verification of such systems and processes for Year
2000 readiness has been ongoing and will continue during 1999. At
the end of June 1999, 86 percent of the Georgia-Pacific Group's
systems are considered fully Year 2000 ready, and 14 percent are
in the final stages of full integration testing. 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 June 1999, over 93 percent of the process control
and embedded chip inventory has been fully analyzed and
remediated as necessary with the remaining 7 percent of the
inventory in the repair or test phase. 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 consolidated financial position in the future. The
most reasonably likely worst-case scenario of failure by the
Georgia-Pacific Group or its customers or suppliers to resolve
the Year 2000 problem would be a temporary slowdown or cessation
of manufacturing operations at one or more of the Georgia-Pacific
Group's facilities, including its limited foreign operations and
a temporary inability on the part of the Georgia-Pacific Group to
process orders and billings in a timely manner and to deliver
finished products to customers. The Georgia-Pacific Group's
individual business units and corporate offices have developed
plans for various contingency options, including identification
of alternate suppliers, vendors and service providers as well as
direct access to qualified vendor technical support and manual
alternatives to systems operations. These options will allow them
to minimize the risks of any unresolved Year 2000 problems on
their operations and to minimize the effect of any unforeseen
Year 2000 failures in areas outside the 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.
The Georgia-Pacific Group currently estimates the incremental
cost of the work needed to resolve the Year 2000 problem at
approximately $40 million (including approximately $2 million of
capital costs), of which $23 million has been incurred to date
and $6 million is included for the impact of contingency
activities and unexpected events. In addition, the Georgia-
Pacific Group expects to incur internal costs totaling
approximately $20 million related to the Year 2000 problem, of
which approximately $15 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 the cost of creating
and maintaining isolated test environments for its information
systems. The majority of the internal costs relates to code or
process system assessment, remediation and testing and is
projected to be incurred through 1999. 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.
The Georgia-Pacific Group has reviewed the Unisource Year 2000
project methodology and progress, including its foreign
operations. All mission critical systems have been remediated
and full testing and final certification efforts are expected to
be completed by the end of September 1999. Unisource has
contacted its technology and service providers as well as its key
customers and suppliers to determine the extent to which their
systems are year 2000 ready and the extent to which Unisource
could be affected if they are not. Contingency planning
activities are ongoing and are also expected to be complete by
the end of September 1999. Unisource estimates the total cost of
its Year 2000 project to be approximately $14 million. Of this
amount, approximately $11 million has been incurred through July
3, 1999.
For a discussion of commitments and contingencies refer to Note
10 of the Notes to Combined Financial Statements.
REFER TO THE "CAUTIONARY STATEMENT FOR PURPOSES OF THE `SAFE
HARBOR' PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995" ON PAGE 19 OF THIS FORM 10-Q.
34
COMBINED STATEMENTS OF INCOME (Unaudited)
Georgia-Pacific Corporation-The Timber Company
Three Months Ended Six Months Ended
---------------- ---------------
(In millions, except per share July 3, June 30, July 3, June 30,
amounts) 1999 1998 1999 1998
------- -------- ------- --------
- ----------------------------------------------------------------------
Net sales
Timber-Georgia-Pacific Group $ 89 $ 86 $ 175 $ 203
Timber-third parties
Delivered 13 18 26 25
Stumpage 29 10 67 27
Other 4 5 6 9
- ----------------------------------------------------------------------
Total net sales 135 119 274 264
- ----------------------------------------------------------------------
Costs and expenses
Cost of sales, excluding
depreciation and cost of
timber harvested shown below 24 23 48 42
Selling, general and administrative 10 9 20 18
Depreciation and cost of
timber harvested 11 7 22 21
Interest 17 17 35 35
Other Income (86) - (86) -
- ----------------------------------------------------------------------
Total costs and expenses (24) 56 39 116
- ----------------------------------------------------------------------
Income before income taxes and
extraordinary item 159 63 235 148
Provision for income taxes 62 25 92 58
- ----------------------------------------------------------------------
Income before extraordinary item 97 38 143 90
Extraordinary item, net of taxes - - - (2)
- ----------------------------------------------------------------------
Net income $ 97 $ 38 $ 143 $ 88
======================================================================
Basic per share:
Income before extraordinary item $ 1.15 $0.41 $ 1.67 $0.97
Extraordinary item, net of taxes - - - (0.02)
- ----------------------------------------------------------------------
Net income $ 1.15 $0.41 $ 1.67 $0.95
- ----------------------------------------------------------------------
Diluted per share:
Income before extraordinary item $ 1.14 $0.41 $ 1.66 $0.96
Extraordinary item, net of taxes - - - (0.02)
- ----------------------------------------------------------------------
Net income $ 1.14 $0.41 $ 1.66 $0.94
======================================================================
Average number of shares
outstanding:
Basic 84.6 92.3 85.5 92.3
Diluted 85.3 93.2 85.9 93.2
======================================================================
The accompanying notes are an integral part of these financial statements.
35
COMBINED STATEMENTS OF CASH FLOWS (Unaudited)
Georgia-Pacific Corporation-The Timber Company
Six Months Ended
-----------------
(In millions) July 3, 1999 June 30, 1998
--------------- ---------------
- -----------------------------------------------------------------------
Cash flows from operations
Net income $ 143 $ 88
Adjustments to reconcile net
income to Cash provided by operations:
Depreciation 3 2
Cost of timber harvested 19 19
Other income (86) -
Deferred income taxes 11 2
Gain on sales of assets (9) (14)
Change in other assets and other
Liabilities (2) 29
- -----------------------------------------------------------------------
Cash provided by operations 79 126
- -----------------------------------------------------------------------
Cash flows from investment activities
Property, plant and equipment
investments (1) (2)
Timber and timberlands purchases (25) (32)
Proceeds from sales of assets 95 25
- -----------------------------------------------------------------------
Cash provided by (used for)investment
activities 69 (9)
- ----------------------------------------------------------------------
Cash flows from financing activities
Share repurchases (93) (8)
Proceeds from option plan exercises 8 -
Repayments of long-term debt (20) (63)
Cash dividends paid (43) (46)
- -----------------------------------------------------------------------
Cash used for financing activities (148) (117)
- -----------------------------------------------------------------------
Increase in cash - -
Balance at beginning of period - - -
- -----------------------------------------------------------------------
Balance at end of period $ - $ -
======================================================================
The accompanying notes are an integral part of these financial statements.
36
COMBINED BALANCE SHEETS
Georgia-Pacific Corporation-The Timber Company
(In millions) July 3, December 31,
1999 1998
----------- ------------
- ----------------------------------------------------------------------
ASSETS (Unaudited)
Timber and timberlands
Timberlands $ 301 $ 303
Fee timber 564 580
Reforestation 245 227
Other 40 34
- ------------------------------------------------------------------------
Total timber and timberlands 1,150 1,144
- ------------------------------------------------------------------------
Property, plant and equipment, less
accumulated depreciation of $45 and $42,
respectively 23 24
- ------------------------------------------------------------------------
Other assets 26 6
- ------------------------------------------------------------------------
Total assets $ 1,199 $ 1,174
======================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt $ 963 $ 983
- ------------------------------------------------------------------------
Other liabilities 51 32
- ------------------------------------------------------------------------
Deferred income tax liabilities 255 244
- ------------------------------------------------------------------------
Total liabilities 1,269 1,259
- ------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity (70) (85)
- ------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 1,199 $ 1,174
======================================================================
The accompanying notes are an integral part of these financial
statements.
37
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 six months ended
July 3, 1999 of three additional days was not material.
There will be no transition period on which to report.
2. OTHER INCOME. During the second quarter of 1999, The Timber
Company sold approximately 390,000 acres of timberlands in the
Canadian province of New Brunswick and approximately 440,000
acres of timberlands in Maine for approximately $92 million and
recognized a pretax gain of $86 million ($52 million after tax,
or $0.61 diluted earnings per share).
3. EXTRAORDINARY ITEM. The Corporation called approximately $600
million of its outstanding debt during the first six months of
1998. As a result, an after-tax extraordinary charge of $2
million ($0.02) per share) was allocated to The Timber Company
during the first quarter of 1998 based on the ratio of The Timber
Company'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
Timber Company for 1999 and 1998.
Three Months Ended Year to Date
------------------ ----------------
(In millions, except July 3, June 30, July 3, June 30,
per share amounts) 1999 1998 1999 1998
------- -------- ------- --------
- ---------------------------------------------------------------
Basic and diluted income
available to shareholders
(numerator):
Income before extraordinary item $ 97 $ 38 $ 143 $ 90
Extraordinary item, net of taxes - - - (2)
- ---------------------------------------------------------------
Net income $ 97 $ 38 $ 143 $ 88
================================================================
Shares (denominator):
Average shares outstanding 84.6 92.3 85.5 92.3
Dilutive securities:
Stock incentive and option plans 0.6 0.8 0.4 0.8
Employee stock purchase plans 0.1 0.1 - 0.1
- ----------------------------------------------------------------
Total assuming conversion 85.3 93.2 85.9 93.2
================================================================
Basic per share amounts:
Income before extraordinary item $ 1.15 $ 0.41 $ 1.67 $ 0.97
Extraordinary item, net of taxes - - - (0.02)
Net income $ 1.15 $ 0.41 $ 1.67 $ 0.95
- ---------------------------------------------------------------
Diluted per share amounts:
Income before extraordinary item $ 1.14 $ 0.41 $ 1.66 $ 0.96
Extraordinary item, net of taxes - - - (0.02)
- ---------------------------------------------------------------
Net income $ 1.14 $ 0.41 $ 1.66 $ 0.94
================================================================
38
5. COMPREHENSIVE INCOME. The Timber Company's total
comprehensive income was $97 million and $143 million,
respectively, for the three months and six months ended July 3,
1999 and was $38 million and $88 million, respectively, for the
three months and six months ended June 30, 1998. Other
comprehensive income was insignificant for The Timber Company
during each of the three and six months ended July 3, 1999 and
June 30, 1998.
6. DEBT. In connection with the acquisition of Unisource, the
Corporation incurred $600 million of short-term bridge financing
until it closed on the issuance of the Premium Equity
Participating Security Units on July 7, 1999 (see below).
In June 1999, the Corporation renegotiated its accounts
receivable sale program and increased the amount outstanding
under the program from $280 million to $750 million. This
program is accounted for as a secured borrowing. The
receivables outstanding under this program and the
corresponding debt are included as current receivables and
short-term debt, respectively, on the Corporation's balance
sheets. Under the accounts receivable sale agreement, the
maximum amount of the purchasers' investment is subject to
change based on the level of eligible receivables and
restrictions on concentrations of receivables. The program
expires in May 2000.
In connection with the acquisition of Unisource, the
Corporation retained former Unisource agreements to sell up
to $150 million of certain qualifying U.S. accounts
receivable and up to CN$95 million of certain eligible
Canadian accounts receivable. At July 3, 1999,
approximately $197 million was outstanding under these
programs. The receivables outstanding under these programs
and the corresponding debt are included as current
receivables and short-term debt, respectively on the
accompanying balance sheets. The agreements are accounted
for as a secured borrowing. As collections reduce
previously sold interests, new receivables may be sold.
These agreements expire in September, 1999.
Also in June 1999, the Board of Directors increased the
corporate target debt level under which management can
purchase shares of Georgia-Pacific Group and The Timber
Company common stock on the open market from $5.75 billion
to $6.8 billion. In addition, the Board of Directors
increased the Georgia-Pacific Group's target debt level from
$4.75 billion to $5.8 billion. The Timber Company's target
debt level remains at $1.0 billion.
As of July 3, 1999, the Corporation had 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. At July 3, 1999, $797 million was
available in excess of all short-term borrowings outstanding
under or supported by the facility. On July 22, 1999, the
Corporation increased the amount of this unsecured credit
facility to $2.0 billion.
On July 7, 1999, the Corporation issued 17,250,000 of 7.5%
PEPS Units for $862.5 million. Each PEPS Unit had an issue
price of $50 and consists of a contract to purchase shares
of Georgia-Pacific Group common stock on or prior to August
16, 2002 and a senior deferrable note of Georgia-Pacific
Group due August 16, 2004. Each purchase contract yields
interest of 0.35% per year, paid quarterly, on the $50
stated amount of the PEPS Unit. Each senior deferrable note
yields interest of 7.15% per year, paid quarterly, until
August 16, 2002. On August 16, 2002, following a remarketing
of the senior deferrable notes, the interest rate will be
reset at a rate that will be equal to or greater than 7.15%.
The liability related to the PEPS Units will not be included
in the debt amount for purposes of determining the corporate
and Georgia-Pacific Group debt targets.
During the second quarter of 1999, the Corporation
registered for sale up to $2.975 billion of debt and equity
securities under a shelf registration statement filed with
the Securities and Exchange Commission, of which $1.725
billion relates to the PEPS Units ($862.5 million of which
was received on July 7, 1999, and $862.5 million is to be
received upon exercise of the purchase contracts).
7. SHARE REPURCHASES. During the first six months of 1999, The
Timber Company purchased on the open market approximately
3,946,000 shares of The Timber Company common stock at an
aggregate price of $95 million ($24.16 average per share).
Of these repurchased shares, approximately 3,855,000 shares
of The Timber Company common stock were held as treasury and
91,000 shares were purchased during the first six months of
1999 and settled after July 3, 1999. During the first six
months of 1998, The Timber Company purchased on the open
market 975,500 shares of The Timber Company common stock
at an aggregate price of $21 million ($21.53 average per share).
8. 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 176 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 46 percent are being investigated, approximately
30 percent are being remediated and approximately 24 percent are
being monitored (an activity that occurs after either site
investigation or remediation has been completed). The ultimate
costs to the Corporation for the investigation, remediation and
monitoring of many of these sites cannot be predicted with
certainty, due to the often unknown magnitude of the pollution
or the necessary cleanup, the varying costs of alternative
cleanup methods, the amount of time necessary to accomplish such
cleanups, the evolving nature of cleanup technologies and
government regulations, and the inability to determine the
Corporation's share of multiparty cleanups or the extent to
which contribution will be available from other parties. The
Corporation has established reserves for environmental
remediation costs for these sites in amounts that it believes
are probable and reasonably estimable. Based on analysis of
currently available information and previous experience with
respect to the cleanup of hazardous substances, the Corporation
believes it is reasonably possible that costs associated with
these sites may exceed current reserves by amounts that may
prove insignificant or that could range, in the aggregate, up to
approximately $56 million. This estimate of the range of
reasonably possible additional costs is less certain than the
estimates upon which reserves are based, and in order to
establish the upper limit of such range, assumptions least
favorable to the Corporation among the range of reasonably
possible outcomes were used. In estimating both its current
reserve for environmental remediation and the possible range of
additional costs, the Corporation has not assumed it will bear
the entire cost of remediation of every site to the exclusion of
other known potentially responsible parties who may be jointly
and severally liable. The ability of other potentially
responsible parties to participate has been taken into account,
based generally on the parties' financial condition and probable
contribution on a per site basis.
39
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 73,000 such plaintiffs as of July 26, 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.
On July 28, 1999 the Corporation and the Attorney General of
the State of Florida entered into a Settlement Agreement
pursuant to which the State will dismiss its claims against
the Corporation alleging a conspiracy to fix the prices of
sanitary commercial paper products. The Settlement
Agreement states that the Attorney General is dismissing its
claims consistent with its responsibilities and that the
Corporation continues to deny that there is any evidence
that it engaged in the alleged price fixing conspiracy. The
Corporation will donate 271 acres of real property in Levy
County, Florida, which has minimal commercial value, to the
State of Florida for recreational purposes.
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.
40
9. RELATED PARTY TRANSACTIONS. During 1999 and 1998, The
Timber Company sold timber deeds to Georgia-Pacific Group. The
Timber Company recognizes revenues and earnings from these
related party timber deed contracts as the timber is cut by the
Georgia-Pacific Group. Had The Timber Company recognized
revenues and earnings on these related party timber deed
contracts at the time of the agreement (which is the accounting
policy for timber deed sales to third parties), pro forma net
sales, depreciation and cost of timber harvested, income before
income taxes and extraordinary item, net income and basic and
diluted earnings per share would have been as follows:
Georgia-Pacific Corporation-The Timber Company
Three Months Ended Three Months Ended
July 3, 1999 June 30, 1998
------------------ ------------------
(In millions, except per share As Pro As Pro
amounts) Reported forma Reported forma
(a) (a)
- ---------------------------------------------------------------
Net Sales $ 135 $ 131 $ 119 $ 143
Depreciation and cost of timber
harvested 11 10 7 9
Income before income taxes and
Extraordinary item 159 155 63 85
Net income 97 95 38 51
Basic earnings per share 1.15 1.12 0.41 0.55
Diluted earnings per share 1.14 1.11 0.41 0.55
============================================================
Six Months Ended Six Months Ended
July 3, 1999 June 30, 1998
---------------- ----------------
(In millions, except per share As Pro As Pro
amounts) Reported forma Reported forma
(a) (a)
- ---------------------------------------------------------------
Net Sales $ 274 $ 268 $ 264 $ 288
Depreciation and cost of timber
harvested 22 21 21 23
Income before income taxes and
Extraordinary item 235 230 148 170
Net income 143 140 88 101
Basic earnings per share 1.67 1.64 0.95 1.09
Diluted earnings per share 1.66 1.63 0.94 1.08
============================================================
(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.
41
SELECTED COMBINED SALES DATA (Unaudited)
Georgia-Pacific Corporation-The Timber Company
Three Months Ended Year to Date
------------------ -----------------
July 3, June 30, July 3, June 30,
1999 1998 1999 1998
------- ------- ------- -------
- ----------------------------------------------------------------------
VOLUME (in thousand tons)
Southern softwood sawtimber 1,686 1,055 3,634 2,870
Western softwood sawtimber 398 468 697 769
Softwood pulpwood 1,091 852 2,193 1,987
Hardwood sawtimber 105 91 228 158
Hardwood pulpwood 453 454 942 936
- ----------------------------------------------------------------------
Total volume 3,733 2,920 7,694 6,720
======================================================================
SELLING PRICES (per ton)
Southern softwood sawtimber $ 46 $ 55 $ 47 $ 53
Western softwood sawtimber 85 73 79 72
Softwood pulpwood 13 18 13 16
Hardwood sawtimber 36 32 32 34
Hardwood pulpwood 5 10 7 11
- ----------------------------------------------------------------------
Weighted average price 35 39 35 39
======================================================================
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
SECOND QUARTER 1999 COMPARED WITH SECOND QUARTER 1998
The Timber Company reported net sales of approximately $135 and
$119 million for the second quarter of 1999 and 1998,
respectively. Net income for the 1999 second quarter was $97
million, or $1.14 diluted earnings per share, compared with $38
million, or $0.41 diluted earnings per share, in 1998. The 1999
results included a one-time, after-tax gain of $52 million ($0.61
cents diluted earnings per share) from the sale of company
timberlands in Maine and New Brunswick.
Timber sales increased $17 million, from $114 million in the
second quarter of 1998 to $131 million in the second quarter of
1999, primarily as a result of strong Southern sawtimber harvest
volumes and an increase in Western sawtimber prices. Southern
sawtimber harvest volumes increased 60 percent compared to the
second quarter of 1998, which substantially offset the 16%
decrease in price for the same period. Total second quarter
harvest volumes were up due to a strong increase in demand for
building products as well as recovering Asian markets, and were
approximately 28 percent higher than the same period in 1998. In
addition, softwood pulpwood volume increased 28 percent compared
to second quarter 1998. Western sawtimber volumes decreased 15
percent compared to the second quarter of 1998, due in part to
the wet weather in the Northwest. The decline in volume for
Western sawtimber was fully offset by a 16% increase in price for
the same period. Additionally, The Timber Company increased its
total sales volume to third parties from 25 percent in the second
quarter of 1998 to 32 percent in the second quarter of 1999.
Total 1999 harvest volumes are anticipated to remain comparable
to 1998. Some harvest volumes are expected to shift from the
third quarter of 1999 to the fourth quarter of 1999 in order to
take advantage of expected better pricing in the fourth quarter.
As a result of the land sales in the Northeast, The Timber
Company expects hardwood pulpwood harvest volumes to be slightly
lower for the year.
Southern sawtimber prices decreased 16 percent from record levels
in 1998 due in part to the dry ground conditions in the south and
a change in the operating policy between The Timber Company and
The Georgia-Pacific Group. This operating policy change, which
was effective July 1, 1998, impacted the prices for southern
timber by adjusting them monthly, rather than quarterly. The
decline in Southern sawtimber prices was offset by strong demand
in the building products business. Softwood pulpwood prices were
down 28 percent compared to the second quarter of 1998 due to a
combination of dry weather, the change in the operating policy
between The Timber Company and The Georgia-Pacific Group (as
described above) and pulp mill curtailments and/or shutdowns.
Increased harvest volumes helped to mitigate the impact of this
softening in price. Hardwood pulpwood prices also continued to
drop, as expected. Western sawtimber prices increased 16 percent
quarter over quarter, primarily due to a significant increase in
Douglas Fir prices driven by recovering Asian markets.
The Timber Company expects Southern sawtimber prices to trend
upward, though the prices will vary across the basins. In the
south, seasonally wet weather may impact available harvestable
timber supply which should translate into rising prices. Prices
for pulpwood are stabalizing, but notable increases are not
anticipated before the end of the year without significant wet
weather conditions. The Timber Company expects pricing of
Western sawtimber to continue to remain strong with some
improvements expected in the fourth quarter as the log export
markets continue to recover.
Excluding the pre-tax gain on the sale of timberlands in Maine
and New Brunswick of $86 million in the second quarter of 1999,
earnings before interest and taxes increased $10 million from the
same period a year ago to $90 million in the second quarter of
1999. The 13 percent increase resulted from a mix of higher
harvest volumes and improved sales to third parties.
Selling, general and administrative expense was $10 million for
the second quarter 1999 compared with $9 million for the same
period in 1998.
Interest expense remained unchanged at $17 million for both the
second quarters of 1999 and 1998. Interest on slightly higher
debt levels in the second quarter of 1999 compared with the 1998
second quarter, was offset by a decrease in the weighted average
interest rate.
YEAR-TO-DATE SECOND QUARTER 1999 COMPARED WITH YEAR-TO-DATE
SECOND QUARTER 1998
The Timber Company reported net sales of approximately $274
million and net income of $143 million, or $1.66 diluted earnings
per share, for the six-month period ended July 3, 1999 compared
to net sales of $264 million and net income of $88 million, or
$0.94 cents diluted earnings per share, for the six-months ended
June 30, 1998. The 1999 results included a one-time, after-tax
gain of $52 million ($0.61 cents diluted earnings per share) from
the sale of company timberlands in Maine and New Brunswick. The
1998 results included an extraordinary, after-tax loss of $2
million, or $0.02 diluted earnings per share, for the early
retirement of debt.
Timber sales increased $13 million year-to-date, from $255
million as of June 30, 1998 to $268 million as of July 3, 1999,
primarily as a result of strong Southern sawtimber harvest
volumes and an increase in Western sawtimber prices. Southern
sawtimber harvest volumes increased 27 percent compared to the
first half of 1998, which substantially offset the decrease in
price for the same period. Total harvest volumes were up 14
percent due to a continued increase in demand for building
products as well as recovering Asian markets; however, full year
1999 volumes are expected to remain relatively constant with
1998 full year harvest levels. In addition, softwood pulpwood
sawtimber volume increased 10 percent compared to the first half
of 1998. Western sawtimber volumes decreased 9 percent compared
to the first six-months of 1998 due in part to the wet weather in
the Northwest during the second quarter of 1999. The decline in
volume for Western sawtimber was mostly offset by an increase in
price for the same period. Additionally, The Timber Company
increased its total sales volume to third parties from 28 percent
in the first half of 1998 to 35 percent in the first half of
1999.
Southern sawtimber prices decreased 11 percent from record levels
in 1998 due in part to the dry ground conditions in the south and
a change in the operating policy between The Timber Company and
The Georgia-Pacific Group. This operating policy change, which
was effective July 1, 1998, impacted the prices for southern
timber by adjusting them monthly, rather than quarterly. The
decline in Southern sawtimber prices was offset by strong demand
in the building products business. Softwood pulpwood prices were
down 19 percent compared to the first half of 1998 due to a
combination of dry weather, the change in the operating policy
between The Timber Company and The Georgia-Pacific Group (as
described above) and pulp mill curtailments and/or shutdowns.
Though pulp and paper pricing is beginning to recover, prices and
demand remain below last year levels. Increased harvest volumes
helped to mitigate the impact of this softening in price.
Hardwood pulpwood prices also continued to drop, as anticipated.
Western sawtimber prices increased 9 percent year over year,
primarily due to a significant increase in Douglas Fir prices in
the second quarter of 1999 driven by recovering Asian markets.
Also contributing was the continued increased demand in the
building products business that was initially experienced towards
the end of the first quarter 1999.
Excluding the pre-tax gain on the sale of timberlands in Maine
and New Brunswick of $86 million in the second quarter of 1999,
earnings before interest and taxes increased $1 million to $184
million in the first six-months of 1999 compared with $183
million in the first six-months of 1998. Overall, 15 percent
higher total harvest volumes helped to offset the year over year
10 percent decline in average sales price.
Selling, general and administrative expense was $20 million for
the first half of 1999 compared with $18 million for the same
period in 1998.
Interest expense remained unchanged at $35 million for both the
first half of 1999 and 1998. Interest on slightly higher debt
levels in the second quarter of 1999 compared with the 1998
second quarter, was offset by a decrease in the weighted average
interest rate.
42
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. The Timber Company generated cash from
operations of $79 million during the six-months ended July 3,
1999 compared with $126 million for the same period a year ago.
The decrease is due in part to the cash received from the sale of
a timber deed sold to The Georgia-Pacific Group in the second
quarter of 1998 for approximately $23 million and to taxes paid
on gains from the 1999 timberland sales.
INVESTING ACTIVITIES. Expenditures during the first half of 1999
were $26 million of which $22 is related to silvicultural
investments. Expenditures for the same period in 1998 totaled $34
million, with $18 million related to silvicultural investments.
The Timber Company expects to invest approximately $50 million in
1999, without considering the cost of any acquisitions, primarily
for silvicultural investments.
Proceeds from sales of assets were $95 million for the first six-
months of 1999. In addition to miscellaneous land sales, during
the second quarter of 1999, The Timber Company sold approximately
390,000 acres of timberlands in the Canadian province of New
Brunswick and approximately 440,000 acres of timberlands in Maine
for approximately $92 million. In conjunction with the sale of
the Maine timberlands, the Corporation received notes receivable
from the purchaser for approximately $51 million. The
Corporation expects to monetize these notes through the issuance
of notes payable in a private placement during the second half of
1999. These notes are included in "Other Assets" on the
Corporation's balance sheet at July 3, 1999. The proceeds from
both these timberland sales are reflected as "Proceeds from sales
of assets" on The Timber Company's Statements of Cash Flows. The
proceeds received by The Timber Company were used primarily to
repurchase shares of The Timber Company's stock. During the first
six-months of 1998, The Timber Company received $25 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 June, 1999, The Timber Company announced that it intends to
sell approximately 196,000 acres of redwood and Douglas fir
timberlands located in northern California. The Georgia-Pacific
Group's Fort Bragg sawmill has a supply agreement with The Timber
Company which extends through the end of 1999.
The Timber Company expects to continue to optimize its timber
portfolio for the remainder of 1999, selling selected properties
that have a greater alternative value, (as conservation,
commercial or recreational sites). There are currently
approximately 125,000 acres of scattered parcels which have been
identified for such sales.
FINANCING ACTIVITIES. The Corporation's total debt was $7.07
billion and $5.55 billion at July 3, 1999 and December 31, 1998,
respectively, of which $963 and $983 million, respectively, was
The Timber Company's debt.
In June 1999, the Corporation renegotiated its accounts
receivable sale program and increased the amount outstanding
under the program from $280 million to $750 million. This
program is accounted for as a secured borrowing. The receivables
outstanding under this program and the corresponding debt are
included as current receivables and short-term debt,
respectively, on the Corporation's balance sheets. Under the
accounts receivable sale agreement, the maximum amount of the
purchasers' investment is subject to change based on the level of
eligible receivables and restrictions on concentrations of
receivables. The program expires in May 2000.
In connection with the acquisition of Unisource, the Corporation
retained former Unisource agreements to sell up to $150 million
of certain qualifying U.S. accounts receivable and up to CN$95
million of certain eligible Canadian accounts receivable. As of
July 3, 1999, approximately $197 million was outstanding under
these programs. The receivables outstanding under these programs
and the corresponding debt are included as current receivables
and short-term debt, respectively on the Corporation's balance
sheet. The agreements are accounted for as a secured borrowing.
As collections reduce previously sold interests, new receivables
may be sold. These agreements expire in September 1999.
Also in June 1999, the Board of Directors increased the corporate
target debt level under which management can purchase shares of
Georgia-Pacific Group and The Timber Company common stock on the
open market from $5.75 billion to $6.8 billion. In addition, the
Board of Directors increased the Georgia-Pacific Group's target
debt level from $4.75 billion to $5.8 billion. The Timber
Company's target debt level remains at $1.0 billion.
43
During the first six months of 1999, approximately $70 million of
fixed and floating rate industrial revenue bonds were replaced,
of which $57 million were refunded by fixed rate instruments and
$13 million were refunded by variable rate instruments.
At July 3, 1999, the Corporation had 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 July 3, 1999, $797 million of committed credit was
available in excess of all short-term borrowings outstanding
under or supported by the facility. On July 22, 1999, the
Corporation increased the amount of this unsecured credit
facility to $2.0 billion.
On July 7, 1999, the Corporation issued 17,250,000 of 7.5% PEPS
Unitsfor $862.5 million. Each PEPS Unit had an issue price of
$50 and consists of a contract to purchase shares of Georgia-
Pacific Group common stock on or prior to August 16, 2002 and a
senior deferrable note of Georgia-Pacific Group due August 16,
2004. Each purchase contract yields interest of 0.35% per year,
paid quarterly, on the $50 stated amount of the PEPS Unit. Each
senior deferrable note yields interest of 7.15% per year, paid
quarterly, until August 16, 2002. On August 16, 2002, following a
remarketing of the senior deferrable notes, the interest rate
will be reset at a rate that will be equal to or greater than
7.15%. The liability related to the PEPS Units will not be
included in the debt amount for purposes of determining the
corporate and Georgia-Pacific Group debt targets.
The Corporation's senior management establishes the parameters of
the Corporation's financial risk, which have been approved by the
Board of Directors. Hedging interest rate exposure through the
use of swaps and options and hedging foreign exchange exposure
through the use of forward contracts are specifically
contemplated to manage risk in keeping with the management
policy. Derivative instruments, such as swaps, forwards, options
or futures, which are based directly or indirectly upon interest
rates, currencies, equities and commodities, may be used by the
Corporation to manage and reduce the risk inherent in price,
currency and interest rate fluctuations.
The Corporation does not utilize derivatives for speculative
purposes. Derivatives are transaction-specific so that a specific
debt instrument, contract or invoice determines the amount,
maturity and other specifics of the hedge. Counterparty risk is
limited to institutions with long-term debt ratings of A or
better.
The table below presents principal (or notional) amounts and
related weighted average interest rates by year of expected
maturity for the Corporation's debt obligations as of July 3,
1999. For obligations with variable interest rates, the table
sets forth payout amounts based on current rates and does not
attempt to project future interest rates.
Georgia-Pacific Corporation and Subsidiaries
(In millions) 1999 2000 2001 2002
- ------------------------------------------------------------
Debt
Commercial paper and other
short-term notes - - - -
Average interest rates - - - -
Notes and debentures $ 4 - - $ 300
Average interest rates 25.4% - - 10.0%
Revenue bonds $ 8 $ 24 $ 6 $ 74
Average interest rates 3.5% 4.3% 3.9% 2.5%
Other loans - $ 13 - -
Average interest rates - 8.0% - -
Accounts receivable sale program - - - -
Average interest rates - - - -
Notional principal amount
of interest rate exchange
agreements $ 100 $ 177 - $ 131
Average interest rate paid
(fixed) 6.6% 7.5% - 6.1%
Average interest rate received 5.4% 5.1% - 6.1%
(variable)
- ------------------------------------------------------------
</TALBE>
Georgia-Pacific Corporation and Subsidiaries
<CAPITON>
(In millions) Fair value
July 3,
2003 Thereafter Total 1999
- ------------------------------------------------------------
Debt
Commercial paper and other
short-term notes - $ 1,758 $ 1,758 $ 1,758
Average interest rates - 5.9% 5.9% 5.9%
Notes and debentures $ 300 $ 2,900 $ 3,504 $ 3,591
Average interest rates 4.9% 8.6% 8.4% 8.4%
Revenue bonds - $ 532 $ 644 $ 550
Average interest rates - 5.2% 4.8% 4.8%
Other loans $ 14 - $ 27 $ 27
Average interest rates 5.7% - 6.8% 6.8%
Accounts receivable sale program - $ 947 $ 947 $ 947
Average interest rates - 5.3% 5.3% 5.3%
Notional principal amount of
interest rate exchange
agreements $ 300 - $ 708 $ (6)
Average interest rate paid
(fixed) 5.9% - 6.3% 6.3%
Average interest rate received
(variable) 5.1% - 5.3% 5.3%
------------------------------------------------------------
The Corporation has the intent and ability to refinance
commercial paper, other short-term notes and the accounts
receivable sale program as they mature. Therefore, maturities of
these obligations are reflected as cash flows expected to be made
after 2003. The fair value of interest rate exchange agreements
excludes amounts used to determine the fair value of related
notes and debentures.
At July 3, 1999, the Corporation's weighted average interest rate
on its total debt was 6.9% including the accounts receivable sale
program and outstanding interest rate exchange agreements. At
July 3, 1999, these interest rate exchange agreements effectively
converted approximately $400 million of floating rate obligations
with a weighted average interest rate of 5.1% to fixed rate
obligations with an average effective interest rate of 6.5%.
These agreements have a weighted average maturity of
approximately 3.4 years. As of July 3, 1999, the Corporation's
total floating rate debt, including the accounts receivable sale
program, exceeded related interest rate exchange agreements by
$2.2 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 July 3, 1999.
As of July 3, 1999, the Corporation had registered for sale up to
$2.975 billion of debt and equity securities under a shelf
registration statement filed with the Securities and Exchange
Commission, of which $1.725 billion relates to the PEPS Units
($862.5 million of which was received on July 7, 1999, and $862.5
million is to be received upon exercise of the purchase
contracts). Proceeds from the issuance of securities under this
registration statement may be used for general corporate
purposes, including the reduction of short-term debt,
acquisitions, investments in, or extension or credit to, the
Corporation's subsidiaries and the acquisition of real property.
During the first six months of 1999, The Timber Company purchased
on the open market approximately 3,946,000 shares of The Timber
Company common at an aggregate price of $95 million ($24.16
average per share). Of these repurchased shares, approximately
3,855,000 shares of The Timber Company common stock were held as
treasury and 91,000 shares were purchased during the first six
months of 1999 and settled after July 3, 1999.
During the first six months of 1998, The Timber Company purchased
on the open market 975,500 shares of The Timber Company common
stock at an aggregate price of $21 million ($21.53 average per
share).
44
Subsequent to July 3, 1999 through August 2, 1999, The Timber
Company purchased on the open market approximately 595,300 shares
of The Timber Company stock at an aggregate price of $15 million
($25.46 average per share). The Timber Company expects to
repurchase shares of The Timber Company common stock throughout
1999 as long as debt levels are below the established thresholds.
During the first six months of 1999, The Timber Company received
$8 million from the exercise of options to purchase The Timber
Company common stock.
During the first six months of 1999 and 1998, The Timber Company
paid $43 million and $46 million, respectively, in dividends.
In 1999, The Timber Company expects its cash flow from
operations, together with proceeds from any asset sales and
available financing sources, to be sufficient to fund planned
capital investments, pay dividends and make scheduled debt
payments.
OTHER. In July 1999, the Financial Accounting Standards Board
("FASB") issued SFAS No. 137, providing for a one year delay of
the effective date of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities"("SFAS No. 133"). SFAS No. 133
establishes accounting and reporting standards for derivative
instrument and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities on the
balance sheet and measure those instruments at fair value.
Georgia-Pacific Corporation will be required to adopt SFAS No.
133 in 2001. Management is evaluating the effect of this
statement on Georgia-Pacific's derivative instruments: primarily
interest rate swaps, foreign currency forward contracts and long-
term purchase commitments. The impact of adjustments to fair
value is not expected to be material to The Timber financial
position.
The Timber Company 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 completed testing and verification of its
systems and processes for Year 2000 readiness. The Timber Company
completed an inventory of the systems and embedded chips used in
its operations and found that only a small percentage of such
systems and chips could be subject to Year 2000 problems. The
work needed to resolve the Year 2000 problem with regard to its
operations was performed as part of normal systems maintenance
and replacement practices. The Timber Company did not accelerate
its internal maintenance schedule or incur any incremental cost
for such work. Internal and external costs to resolve the Year
2000 problem are not significant. The Timber Company continues
its process of identifying critical suppliers and customers and
communicating with each of them to ascertain their level of
readiness to address and remediate Year 2000 problems. The most
reasonably likely worst-case scenario of failure by The Timber
Company or its customers or suppliers to resolve the Year 2000
problem would be a temporary inability on the part of The Timber
Company to process timber sales and billings in a timely manner.
The Timber Company 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, the Corporation's Quarterly Report on Form 10-
Q for the quarter ended April 3, 1999, and the Corporation's Form
8-K dated October 17, 1996.
For a discussion of commitments and contingencies refer to Note 8
of the Notes to Combined Financial Statements.
45
PART II - OTHER INFORMATION
---------------------------
GEORGIA-PACIFIC CORPORATION
JULY 3, 1999
Item 1. Legal Proceedings
The information contained in Note 12 "Commitments and
Contingencies" of the Notes to Consolidated Financial
Statements--Georgia-Pacific Corporation, Note 10
`"Commitments and Contingencies" of the Notes to
Combined Financial Statements--Georgia-Pacific Group
and Note 9 "Commitments and Contingencies" of the Notes
to Consolidated Financial Statements--The Timber
Company filed as part of this Quarterly Report on Form
10-Q is incorporated herein by reference.
The Grand Rapids gypsum plants have received several
Letters (notices) of Violation from the Michigan
Department of Environmental Quality (DEQ) alleging
violations of various state air requirements. The
Corporation has equitable and/or legal defenses for
these claims and expects to contest these allegations
vigorously. Preliminary negotiations with the DEQ have
been held, and the Corporation anticipates being able
to negotiate a settlement of these issues with the DEQ.
No penalties have been assessed to date.
On July 28, 1999 the Corporation and the Attorney
General of the State of Florida entered into a
Settlement Agreement pursuant to which the State will
dismiss its claims against the Corporation alleging a
conspiracy to fix the prices of sanitary commercial
paper products. The Settlement Agreement states that
the Attorney General is dismissing its claims
consistent with its responsibilities and that the
Corporation continues to deny that there is any
evidence that it engaged in the alleged price fixing
conspiracy. The Corporation will donate 271 acres of
real property in Levy County, Florida, which has minimal
commercial value, to the State of Florida for recreational
purposes.
The Nekoosa pulp mill has recently received an
Information Request from the EPA pursuant to Section
114 of the Clean Air Act. The Corporation has
responded thereto and is awaiting reaction from the
agency. The request was part of the national
enforcement initiative EPA is pursuing against the
industry.
On June 21, 1999, an Unilateral Administrative Order
for Removal was issued to the Corporation, by the U.S.
Environmental Protection Agency ("EPA") Region IV
pursuant to the Comprehensive Environmental
Compensation and Liability Act (CERCLA). The removal
action pertains to a hardwood sawmill site located in
Plymouth, North Carolina (the "Site") which was sold by
the Corporation in 1985. The EPA completed a Remedial
Investigation at the Site in 1998, and based on the
analytical results generated during implementation of
the Remedial Investigation, the EPA determined that a
removal action was necessary. The Corporation is
cooperating and expects the removal to be completed in
1999.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the Corporation was
held on May 4, 1999. At the annual meeting, the following
matters were voted on:
Shareholders elected three directors for three-year
terms expiring at the Annual Meeting in 2002, or until
their successors are elected and qualified. The vote
tabulation for individual directors was:
Directors For Withheld
James S. Balloun 93,027,049 531,915
Robert Carswell 92,715,003 843,961
Alston D. Correll 93,039,865 519,098
Other directors whose term of office as a director
continued after the meeting were Jane Evans, Donald V.
Fites, Harvey C. Fruehauf, Jr., Richard V. Giordano,
David R. Goode, M. Douglas Ivester, Louis W. Sullivan,
M.D. and James B. Williams.
A shareholder proposal requesting the Board to promptly
close the Corporation's remaining elemental chlorine
generator, and to report by the 2000 meeting on plans
to phase-out chlorine-based compounds was defeated with
77,312,548 votes against, 2,468,336 votes in favor and
3,886,045 votes abstaining.
A shareholder proposal requesting that the Board redeem
the shareholder rights plan unless such plan is approved
by the affirmative vote of the shareholders or to submit
the continuation of the rights plan to a vote of the
shareholders was approved with 58,990,165 votes in
favor, 23, 232,891 votes against and 991,754 votes
abstaining.
The text of the above proposals is incorporated by
reference to Items 2 and 3 of the Corporation's
definitive Proxy Statement dated March 31, 1999, filed
with the SEC pursuant to Regulation 14A on March 31,
1999.
Item 5 Other Events
1) The Corporation paid a stock dividend on Georgia-
Pacific Group Stock on June 3, 1999 which was
distributed, by book-entry to holders of record of
Georgia-Pacific Group Stock as of May 14, 1999.
Holders of Georgia-Pacific Group Stock received one
share of such stock for each share held as of such
record date.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 2 Agreement and Plan of Merger, dated as
of May 25, 1999, among Georgia-Pacific
Corporation, Atlanta Acquisition Corp.
and Unisource Worldwide, Inc. (filed
as Exhibit (c)(1) to Tender Offer
Statement filed on Schedule 14D-1
(File No. 5-51073) and incorporated
herein by this reference thereto).
Exhibit 3.2 Bylaws, as amended to date.
Exhibit 4.1 Form of Purchase Contract Agreement
relating to Stock Purchase Contracts
and Stock Purchase Units (filed as
Exhibit 4(p) to the Company's
Registration Statement No. 333-80757
and incorporated herein by this
reference thereto).
Exhibit 4.2 Form of Pledge Agreement for Stock
Purchase Contracts and Stock Purchase
Units (filed as Exhibit 4(q) to the
Company's Registration Statement on
Form 8-A relating to File No.333-
35813, and incorporated herein by this
reference thereto).
Exhibit 4.3 Form of Remarketing Agreement between
Georgia-Pacific Corporation and Morgan
Stanley & Co. Incorporated (filed as
Exhibit 4(u) to the Company's
Registration Statement No. 333-80757
and incorporated herein by this
reference thereto).
Exhibit 4.4 Form of Stock Purchase Units (included
as Exhibits A and B of Exhibit 4.3)
(filed as Exhibit 4(v) to the
Company's Registration Statement No.
333-80757 and incorporated herein by
this reference thereto).
Exhibit 4.5 Form of Credit Agreement, dated as of
June 30, 1999, among Georgia-Pacific
Corporation, the Lenders amended
therein and Morgan Stanley Senior
Funding, Inc., as Agent for the
Lenders and as Lead Arranger and Book
Manager (filed as Exhibit 4(w) to the
Company's Registration Statement No.
333-80757 and incorporated herein by
this reference thereto).
Exhibit Credit Agreement, dated as of July 22,
10.1 1999, among Georgia-Pacific
Corporation, the Lenders Named
therein, Bank of America National
Trust and Savings Association, as
Administrative Agent, Commerzbank AG,
New York Branch, as Documentation
Agent, and The Chase Manhattan Bank
and Citibank, N.A. as Co-Syndication
Agents, Banc of America Securities LLC
as Sole Book Manager and Sole Lead
Arranger
Exhibit Credit Agreement, dated as of July 22,
10.2 1999, among North American Timber
Corp., the Lenders Named therein, Bank
of America National Trust and Savings
Association, as Administrative Agent,
Commerzbank AG, New York Branch, as
Documentation Agent, and The Chase
Manhattan Bank and Citibank, N.A. as
Co-Syndication Agents, Banc of America
Securities LLC as Sole Book Manager
and Sole Lead Arranger
Exhibit Form of Parent (Georgia-Pacific
10.3 Corporation) Guaranty (included as
7.01(c) Exhibit 10.2)
Exhibit 27. Financial Data Schedule.
(b) The Corporation filed the following Current
Reports on Form 8-K during and subsequent to the
end of the quarter ended July 3, 1999:
Date of 8-K Description of 8-K
May 4, 1999 Submitted a copy of the
Corporation's News Release issued
May 4, 1999, reporting the
Corporation's announcement of (i) a
stock split of the Georgia-Pacific
Group common stock; (ii) a quarterly
dividend payable on each of the
Corporations common stocks, Georgia-
Pacific Group and the Timber
Company; and (iii) the dismantling
of a hardwood pulp dryer.
June 22, 1999 Submitted a copy of the
Corporation's News Release issued
June 22, 1999, reporting Georgia-
Pacific Group's estimated earnings
for the quarter ended July 3, 1999.
June 28, 1999 Submitted a copy of the
Corporation's News Release issued
June 25, 1999, reporting that
Georgia-Pacific Group signed a
Letter of Intent regarding a
possible joint venture with
Chesapeake Corporation in their
respective away-from-home tissue
businesses.
July 15, 1999 Filed pursuant to "Item 2 -
Acquisition or Disposition of
Assets" regarding the corporation's
successful tender offer and its
wholly owned subsidiary's subsequent
merger with Unisource Worldwide,
Inc. on July 6, 1999.
46
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: August 17, 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)
47
GEORGIA-PACIFIC CORPORATION
---------------------------
INDEX TO EXHIBITS
FILED WITH THE QUARTERLY REPORT
ON FORM 10-Q FOR THE
QUARTER ENDED JULY 3, 1999
Number Description
3.2 Bylaws, as amended to date.(1)
10.1 Credit Agreement, dated as of July 22,
1999, among Georgia-Pacific
Corporation, the Lenders Named therein,
Bank of America National Trust and
Savings Association, as Administrative
Agent, Commerzbank AG, New York Branch,
as Documentation Agent, and The Chase
Manhattan Bank and Citibank, N.A. as Co-
Syndication Agents, Banc of America
Securities LLC as Sole Book Manager and
Sole Lead Arranger (1)
10.2 Credit Agreement, dated as of July 22,
1999, among North American Timber
Corp., the Lenders Named therein, Bank
of America National Trust and Savings
Association, as Administrative Agent,
Commerzbank AG, New York Branch, as
Documentation Agent, and The Chase
Manhattan Bank and Citibank, N.A. as Co-
Syndication Agents, Banc of America
Securities LLC as Sole Book Manager and
Sole Lead Arranger (1)
27 Financial Data Schedule. (1)
(1) Filed by EDGAR