SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
___________
FORM 10-Q/A
AMENDMENT NO. 1
___________
[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.
1
The undersigned registrant hereby amends and restates Item 1. Financial
Statements and Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations of the previously filed Quarterly Report on
Form 10-Q for the quarterly period ended July 3, 1999 with respect to Georgia-
Pacific Corporation and The Timber Company. As more fully explained in Note 1
to the Notes to Consolidated Financial Statements of Georgia-Pacific Corporation
and Note 1 to the Notes to Combined Financial Statements of The Timber Company,
the restatement was caused by revenues from the sale of small land parcels,
income from hunting permits and other miscellaneous transactions that were
erroneously omitted from The Timber Company's results of operations for the
second quarter.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The following does not amend the Combined Financial Statements and related
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the Georgia-Pacific Group because the adjustments herein do not
impact the Georgia-Pacific Group's previously filed information.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Georgia-Pacific Corporation and Subsidiaries
Three Months Ended Six Months Ended
------------------ -----------------
(In millions, except per share amounts) July 3, June 30, July 3, June 30,
1999 1998 1999 1998
------- ------- ------ -------
Net sales $3,849 $ 3,305 $7,256 $ 6,526
------- ------- ------ -------
Costs and expenses
Cost of sales, excluding depreciation
and cost of timber harvested
shown below 2,782 2,576 5,313 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 (84) - (84) -
------- ------- ------ -------
Total costs and expenses 3,333 3,188 6,494 6,292
------- ------- ------ -------
Income before income taxes and
extraordinary item 516 117 762 234
Provision for income taxes 205 49 305 98
------- ------- ------ -------
Income before extraordinary item 311 68 457 136
Extraordinary item , net of taxes, - (1) - (15)
------- ------- ------ -------
Net income $ 311 $ 67 $ 457 $ 121
======= ======= ====== =======
Georgia-Pacific Group $ 212 $ 30 $ 311 $ 46
Income before extraordinary item
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: $ 1.20 $ 0.17 $ 1.76 $ 0.25
Income before extraordinary item
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 $ 99 $ 38 $ 146 $ 90
Extraordinary item, net of taxes - - - (2)
------- ------ ------ -------
Net Income $ 99 $ 38 $ 146 $ 88
------- ------ ------ -------
Basic per common share:
Income before extraordinary item $ 1.17 $ 0.41 $ 1.71 $ 0.97
Extraordinary item, net of taxes - - - (0.02)
------- ------ ------ -------
Net income $ 1.17 $ 0.41 $ 1.71 $ 0.95
------- ------ ------ -------
Diluted per common share:
Income before extraordinary item $ 1.16 $ 0.41 $ 1.70 $ 0.96
Extraordinary item, net of taxes - - - (0.02)
------- ------ ------ -------
Net income $ 1.16 $ 0.41 $ 1.70 $ 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.
2
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 $ 457 $ 121
Adjustments to reconcile net income to
Cash provided by operations:
Depreciation 364 371
Cost of timber harvested 80 90
Other income (84) -
Deferred income taxes (1) 52
Amortization of goodwill 31 30
Amortization of debt issue costs 1 11
Stock compensation programs 1 14
Gain on sales of assets (10) (30)
Increase in receivables (312) (57)
(Increase) decrease in inventories (64) 88
Decrease (increase) in other working
capital 82 (190)
Change in other assets and other
long-term liabilities (11) 5
------------ -------------
Cash provided by operations 534 505
------------ -------------
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
Repayments of long-term debt (72) (746)
Additions to long-term debt 68 507
Fees paid to issue debt (2) (4)
Increase (decrease) in bank overdrafts 12 (3)
Increase in commercial paper and
other short-term notes 844 360
Stock repurchases (299) (163)
Proceeds from option plan exercises 113 8
Cash dividends paid (86) (92)
------------ -------------
Cash provided by (used for) financing
activities 578 (133)
------------ -------------
Increase (decrease) in cash 42 (1)
Balance at beginning of period 5 8
------------ -------------
Balance at end of period $ 47 $ 7
============ =============
The accompanying notes are an integral part of these financial statements.
3
CONSOLIDATED BALANCE SHEETS
Georgia-Pacific Corporation and Subsidiaries
(In millions, except shares and per share amounts)
July 3, December 31,
1999 1998
----------- -------------
ASSETS (Unaudited)
Current assets
Cash $ 47 $ 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 4,332 2,645
---------- ------------
Timber and timberlands, net 1,206 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 $ 15,352 $ 12,700
========== ============
4
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 630 419
-------- -------
Total current liabilities 4,394 2,648
-------- -------
Long-term debt, excluding current portion 4,588 4,125
-------- -------
Other long-term liabilities 1,751 1,572
-------- -------
Deferred income tax liabilities 1,275 1,231
-------- -------
Commitments and contingencies
Shareholders' equity
Common stock
Georgia-Pacific Group, par value $.80; 400,000,000
shares authorized; 190,609,000 and 186,564,000
shares issued 153 150
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 2,549 2,178
Accumulated other comprehensive income (37) (43)
-------- -------
Total shareholders' equity 3,344 3,124
-------- -------
Total liabilities and shareholders' equity $ 15,352 $12,700
======== =======
The accompanying notes are an integral part of these financial statements.
5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Georgia-Pacific Corporation and Subsidiaries
Three Months Ended Six Months Ended
------------------ ------------------
July 3, June 30, July 3, June 30,
1999 1998 1999 1998
(In millions) ------- -------- -------- -------
Net income $ 311 $ 67 $ 457 $ 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) 24
------- ------- -------- -------
Comprehensive income $ 313 $ 64 $ 463 $ 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. RESTATEMENT OF RESULTS OF OPERATIONS AND PRINCIPLES OF PRESENTATION. On
September 13, 1999, the Corporation restated its results of operations for
the second quarter of 1999. The restatement was caused by revenues from
the sale of small land parcels, income from hunting permits and other
miscellaneous transactions that were erroneously omitted from the
Corporation's results of operations for the second quarter. Certain of the
corrections made in the second quarter resulted in moving a total of $1.0
million of net income related to timber deed sales from the second quarter
to the first quarter of 1999. This change will be reflected in future
filings that include first quarter 1999 financial statements. The
following summarizes the impact of the restatement on the three and six
months ended July 3, 1999:
Georgia-Pacific Corporation and Subsidiaries
Three Months Ended
July 3, 1999
------------------
As
(In millions, except per share amounts) Originally
Reported Adjustment Notes Restated
-------------- ---------------- -------------- -------------
Net sales $ 3,850 $ (1) (a) $ 3,849
Cost of sales, excluding depreciation and cost of
timber harvested shown below 2,789 (7) (b) 2,782
Other income (86) 2 (c) (84)
Income before income taxes and
extraordinary item 512 4 516
Provision for income taxes 203 2 (d) 205
Net income 309 2 311
The Timber Company:
Basic earnings per share 1.15 0.02 1.17
Diluted earnings per share 1.14 0.02 1.16
============== ================ ============== =============
Six Months Ended
July 3, 1999
----------------
As
(In millions, except per share amounts) Originally
Reported Adjustment Notes Restated
-------------- ----------------- -------------- -------------
Net sales $7,255 $ 1 (a) $7,256
Cost of sales, excluding depreciation and cost of
timber harvested shown below 5,320 (7) (b) 5,313
Other income (86) 2 (c) (84)
Income before income taxes and
extraordinary item 756 6 762
Provision for income taxes 302 3 (d) 305
Net income 454 3 457
The Timber Company:
Basic earnings per share 1.67 0.04 1.71
Diluted earnings per share 1.66 0.04 1.70
============== ================= ============== =============
(a) To properly reflect the recognition of timber deed sales in the appropriate
period of 1999.
(b) To properly reflect the recognition of hunting permits income and the sale
of small land parcels in the second quarter of 1999.
(c) To properly reflect expenses associated with the sale of the New Brunswick
and Maine timberlands in the second quarter of 1999.
(d) To properly reflect the income tax effect of the above adjustments.
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 $84 million ($50
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.
6
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 taxes - (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 $ 99 $ 38 $ 146 $ 90
Shareholders (numerator):
Income before extraordinary item
Extraordinary item, net of taxes - - - (2)
------- ------- ------- -------
Net income $ 99 $ 38 $ 146 $ 88
======= ======= ======= =======
Shares (denominator): 84.6 92.3 85.5 92.3
Average shares outstanding
Dilutive securities: 0.6 0.8 0.4 0.8
Stock incentive and option plans
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: $ 1.17 $ 0.41 $ 1.71 $ 0.97
Income before extraordinary item
Extraordinary item, net of taxes - - - (0.02)
------- ------- ------- -------
Net income $ 1.17 $ 0.41 $ 1.71 $ 0.95
------- ------- ------- -------
Diluted per share amounts: $ 1.16 $ 0.41 $ 1.70 $ 0.96
Income before extraordinary item
Extraordinary item, net of taxes - - - (0.02)
------- ------- ------- -------
Net income $ 1.16 $ 0.41 $ 1.70 $ 0.94
======= ======= ======= =======
7
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 amount) July 3, June 30, July 3, June 30,
1999 1998 1999 1998
------ ------- ------ -------
Net Sales $5,354 $ 5,028 $10,278 $ 10,006
------ ------- ------- --------
Income before extraordinary items $ 309 $ 52 $ 449 $ 119
------ ------- ------- --------
Net Income $ 309 $ 51 $ 449 $ 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 by the
Unisource transaction.
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.
8
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.
9
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.
10
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 45 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 $3,849 100% $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 134 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 $3,849 100% $3,305 100%
====== === ====== ===
OPERATING PROFITS
Building products $ 364 58% $ 120 53%
Distribution 35 6 - -
Timber 180 29 80 35
Containerboard and packaging 81 13 31 13
Pulp and paper 33 5 54 24
Other (71) (11) (57) (25)
------ --- ------ ---
Total operating profits 622 100% 228 100%
=== ===
Interest expense (106) (111)
Provision for income taxes (205) (49)
Extraordinary item, net of taxes - (1)
------ ------
Net income $ 311 $ 67
====== ======
11
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 100 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 $ 7,256 100% $ 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 275 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 $ 7,256 100% $ 6,526 100%
======= === ======= ===
OPERATING PROFITS $ 612 63% $ 223 49%
Building products
Distribution 53 5 (17) (4)
Timber 276 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 979 100% 459 100%
=== ===
Interest expense (217) (225)
Provision for income taxes (305) (98)
Extraordinary item, net of taxes - (15)
------- -------
Net income $ 457 $ 121
======= =======
*Includes elimination of intersegment sales.
12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following does not amend the Combined Financial Statements and related
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the Georgia-Pacific Group because the changes herein do not
impact the Georgia-Pacific Group's previously filed information.
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 $311 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 $134 million and $119
million for the second quarter of 1999 and 1998, respectively. Operating income
for the 1999 second quarter was $180 million, including a one-time, pre-tax gain
of $84 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 $16 million to $96 million in the second
quarter of 1999, compared with $80 million in the second quarter of 1998. The 20
percent increase resulted primarily from a mix of higher harvest volumes,
improved sales to third parties and higher seasonal hunting permits income.
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.
13
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 $457 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 $275
million and operating profit of $276 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 $84 million from the sale of company timberlands in Maine
and New Brunswick. Excluding the gain on the sale of timberlands in Maine and
New Brunswick, operating profit increased $9 million to $192 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.
14
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. The Corporation generated cash from operations of $534
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.
15
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.
16
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 $ 100 $ 177 - 131
exchange agreements
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,
---- ---------- ----- ------------------
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).
17
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.
18
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.
19
COMBINED STATEMENTS OF INCOME (Unaudited)
Georgia-Pacific Corporation--The Timber Company
Three Months Ended Six Months Ended
------------------------- ------------------------
(In millions, except per share amounts) July 3, June 30, July 3, June 30,
1999 1998 1999 1998
------- ------- ------- -------
Net sales
Timber-Georgia-Pacific Group $ 89 $ 86 $ 175 $ 203
Timber-third parties 13 18 26 25
Delivered
Stumpage 28 10 68 27
Other 8 5 10 9
------- ------- ------- -------
Total net sales 138 119 279 264
------- ------- ------- -------
Costs and expenses
Cost of sales, excluding depreciation
and cost of timber harvested shown below 21 23 45 42
Selling, general and administrative 10 9 20 18
Depreciation and cost of 11 7 22 21
timber harvested
Interest 17 17 35 35
Other Income (84) - (84) -
------- ------- ------- -------
Total costs and expenses (25) 56 38 116
------- ------- ------- -------
Income before income taxes and
extraordinary item 163 63 241 148
Provision for income taxes 64 25 95 58
------- ------- ------- -------
Income before extraordinary item 99 38 146 90
Extraordinary item, net of taxes - - - (2)
------- ------- ------- -------
Net income $ 99 $ 38 $ 146 $ 88
======= ======= ======= =======
Basic per share:
Income before extraordinary item $1.17 $0.41 $1.71 $ 0.97
Extraordinary item, net of taxes - - - (0.02)
------- ------- ------- -------
Net income $1.17 $0.41 $1.71 $ 0.95
------- ------- ------- -------
Diluted per share:
Income before extraordinary item $1.16 $0.41 $1.70 $ 0.96
Extraordinary item, net of taxes - - - (0.02)
------- ------- ------- -------
Net income $1.16 $0.41 $1.70 $ 0.94
======= ======= ======= =======
Average number of shares outstanding: 84.6 92.3 85.5 92.3
Basic
Diluted 85.3 93.2 85.9 93.2
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
20
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 $ 146 $ 88
Adjustments to reconcile net income to 3 2
Cash provided by operations:
Depreciation
Cost of timber harvested 19 19
Other income (84) -
Deferred income taxes 14 2
Gain on sales of assets (11) (14)
Change in other assets and other
liabilities (5) 29
----- -----
Cash provided by operations 82 126
----- -----
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 3 -
Balance at beginning of period - - -
----- -----
Balance at end of period $ 3 $ -
===== =====
The accompanying notes are an integral part of these financial statements.
21
COMBINED BALANCE SHEETS
Georgia-Pacific Corporation--The Timber Company
(In millions) July 3, December 31,
1999 1998
------------ ------------
ASSETS (Unaudited)
Cash $ 3 $ -
------ ------
Timber and timberlands
Timberlands 301 303
Fee timber 564 580
Reforestation 245 227
Other 42 34
------ ------
Total timber and timberlands 1,152 1,144
------ ------
Property, plant and equipment, less accumulated
depreciation of $45 and $42, respectively 23 24
------ ------
Other assets 26 6
------ ------
Total assets $1,204 $1,174
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt $ 963 $ 983
------ ------
Other liabilities 50 32
------ ------
Deferred income tax liabilities 258 244
------ ------
Total liabilities 1,271 1,259
------ ------
Commitments and contingencies
Shareholders' equity (67) (85)
------ ------
Total liabilities and shareholders' equity $1,204 $1,174
====== ======
The accompanying notes are an integral part of these financial statements.
22
NOTES TO COMBINED FINANCIAL STATEMENTS (Unaudited)
GEORGIA-PACIFIC CORPORATION--THE TIMBER COMPANY
APRIL 3, 1999
1. RESTATEMENT OF RESULTS OF OPERATIONS AND PRINCIPLES OF PRESENTATION. On
September 13, 1999, The Timber Company restated its results of operations
for the second quarter of 1999. The restatement was caused by revenues
from the sale of small land parcels, income from hunting permits and other
miscellaneous transactions that were erroneously omitted from The Timber
Company's results of operations for the second quarter. Certain of the
corrections made in the second quarter resulted in moving a total of $1.0
million of net income related to timber deed sales from the second quarter
to the first quarter of 1999. This change will be reflected in future
filings that include first quarter 1999 financial statements. The
following summarizes the impact of the restatement on the three and six
months ended July 3, 1999:
Georgia-Pacific Corporation--The Timber Company
Three Months Ended
July 3, 1999
----------------
As
(In millions, except per share amounts) Originally
Reported Adjustment Notes Restated
---------------- ---------------- -------------- ---------------
Net sales
Timber - third parties
Stumpage $ 29 $ (1) (a) $ 28
Other 4 4 (b) 8
Cost of sales, excluding depreciation and cost of
timber harvested shown below 24 (3) (c) 21
Other income (86) 2 (d) (84)
Income before income taxes and 159 4 163
extraordinary item
Provision for income taxes 62 2 (e) 64
Net income 97 2 99
Basic earnings per share 1.15 0.02 1.17
Diluted earnings per share 1.14 0.02 1.16
================ ================ ============== ===============
Six Months Ended
July 3, 1999
----------------
As
(In millions, except per share amounts) Originally
Reported Adjustment Notes Restated
---------------- ----------------- -------------- ---------------
Net sales
Timber - third parties
Stumpage $ 67 $ 1 (a) $ 68
Other 6 4 (b) 10
Cost of sales, excluding depreciation and cost of
timber harvested shown below 48 (3) (c) 45
Other income (86) 2 (d) (84)
Income before income taxes and 235 6 241
extraordinary item
Provision for income taxes 92 3 (e) 95
Net income 143 3 146
Basic earnings per share 1.67 0.04 1.71
Diluted earnings per share 1.66 0.04 1.70
================ ================ ============== ===============
(a) To properly reflect the recognition of timber deed sales in the appropriate
period of 1999.
(b) To properly reflect the recognition of hunting permits income in the second
quarter of 1999.
(c) To properly reflect the sale of small land parcels in the second quarter of
1999.
(d) To properly reflect expenses associated with the sale of the New Brunswick
and Maine timberlands in the second quarter of 1999.
(e) To properly reflect the income tax effect of the above adjustments.
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 $84 million ($50
million after tax, or $0.59 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): $ 99 $ 38 $ 146 $ 90
Income before extraordinary item
Extraordinary item, net of taxes - - - (2)
----- ----- ----- ------
Net income $ 99 $ 38 $ 146 $ 88
===== ===== ===== ======
Shares (denominator): 84.6 92.3 85.5 92.3
Average shares outstanding
Dilutive securities: 0.6 0.8 0.4 0.8
Stock incentive and option plans
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 $1.17 $0.41 $1.71 $ 0.97
Extraordinary item, net of taxes - - - (0.02)
----- ----- ----- ------
Net income $1.17 $0.41 $1.71 $ 0.95
----- ----- ----- ------
Diluted per share amounts:
Income before extraordinary item $1.16 $0.41 $1.70 $ 0.96
Extraordinary item, net of taxes - - - (0.02)
----- ----- ----- ------
Net income $1.16 $0.41 $1.70 $ 0.94
===== ===== ===== ======
23
5. COMPREHENSIVE INCOME. The Timber Company's total comprehensive income was
$99 million and $146 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.
24
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.
25
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 amounts) As Reported Pro forma (a) As Reported Pro forma (a)
----------- ------------- ----------- -------------
Net Sales $ 138 $ 134 $ 119 $ 143
Depreciation and cost of timber harvested 11 10 7 9
Income before income taxes and
extraordinary item 163 159 63 85
Net income 99 97 38 51
Basic earnings per share 1.17 1.14 0.41 0.55
Diluted earnings per share 1.16 1.13 0.41 0.55
===== ===== ===== =====
Six Months Ended Six Months Ended
July 3, 1999 June 30, 1998
----------------------------- ----------------------------
(In millions, except per share amounts) As Reported Pro forma (a) As Reported Pro forma (a)
----------- ------------- ----------- -------------
Net Sales $ 279 $ 273 $ 264 $ 288
Depreciation and cost of timber harvested 22 21 21 23
Income before income taxes and
extraordinary item 241 236 148 170
Net income 146 143 88 101
Basic earnings per share 1.71 1.68 0.95 1.09
Diluted earnings per share 1.70 1.67 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.
26
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) 1,667 1,055 3,651 2,870
Southern softwood sawtimber
Western softwood sawtimber 398 468 697 769
Softwood pulpwood 1,090 852 2,193 1,987
Hardwood sawtimber 105 91 228 158
Hardwood pulpwood 452 454 942 936
------ ------ ------ ------
Total volume 3,712 2,920 7,711 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 $138 and $119 million for
the second quarter of 1999 and 1998, respectively. Net income for the 1999
second quarter was $99 million, or $1.16 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 $50 million ($0.59 diluted earnings per
share) from the sale of company timberlands in Maine and New Brunswick.
Timber sales increased $16 million, from $114 million in the second quarter of
1998 to $130 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 58 percent compared to the
second quarter of 1998, which substantially offset the 16 percent 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 27 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
31 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. Revenues from hunting permits are seasonal with the majority of the
revenues recognized when received in the second and third quarters of each
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 as the log export markets
continue to recover.
Excluding the pre-tax gain on the sale of timberlands in Maine and New Brunswick
of $84 million in the second quarter of 1999, earnings before interest and taxes
increased $16 million from the same period a year ago to $96 million in the
second quarter of 1999. The 20 percent increase resulted primarily from a mix
of higher harvest volumes, improved sales to third parties and higher seasonal
hunting permits income.
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 $279 million and net
income of $146 million, or $1.70 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 $50
million ($0.59 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 $14 million year-to-date, from $255 million as of June
30, 1998 to $269 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 15 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 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 10 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 $84 million in the second quarter of 1999, earnings before interest and taxes
increased $9 million to $192 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.
27
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. The Timber Company generated cash from operations of $82
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.
28
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 $ 100 $ 177 - 131
exchange agreements
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 $ 300 - $ 708 $ (6)
exchange agreements
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).
29
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.
30
PART II - OTHER INFORMATION
---------------------------
GEORGIA-PACIFIC CORPORATION
JULY 3, 1999
Item 5 Other Events.
1) The Corporation issued a press release discussing this Form 10-
Q/A on September 13, 1999. The press release is filed herewith
as Exhibit 99.1 and is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 99.1 Press Release issued by the Corporation.
31
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: September 13, 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)
32
GEORGIA-PACIFIC CORPORATION
---------------------------
INDEX TO EXHIBITS
FILED WITH THE QUARTERLY REPORT
ON FORM 10-Q FOR THE
QUARTER ENDED JULY 3, 1999
Number Description
- ------ -----------
99.1 Press Release issued by the Corporation.
- --------------------------------------------------------------------------------
(1) Filed by EDGAR
33