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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File
DECEMBER 31, 1998 NUMBER 1-4001
UNION CAMP CORPORATION
A Virginia Corporation 13-5652423
I.R.S. Employer
Identification No.
1600 Valley Road
Wayne, New Jersey 07470
Telephone (973) 628-2000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Common Stock, $1 par value.........New York Stock Exchange;
The Pacific Exchange
Preferred Stock Purchase Rights....New York Stock Exchange;
The Pacific Exchange
8 5/8% Sinking Fund
Debentures Due April 15, 2016....New York Stock Exchange
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 Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
On March 4, 1999, 69,801,823 shares of Registrant's Common Stock, $1 par
value, were outstanding. On March 4, 1999, the closing price per share for the
Common Stock as reported on the Composite Tape for issues listed on the New York
Stock Exchange was $63.50 and the aggregate market value of the Common Stock
held by non-affiliates of the Registrant was $4,420,589,901.
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COPIES OF THE EXHIBITS MAY BE OBTAINED BY STOCKHOLDERS UPON WRITTEN REQUEST
DIRECTED TO THE SECRETARY, UNION CAMP CORPORATION, 1600 VALLEY ROAD, WAYNE, NEW
JERSEY 07470, ACCOMPANIED BY A CHECK IN THE AMOUNT OF $10.00 PAYABLE TO UNION
CAMP CORPORATION TO COVER PROCESSING AND MAILING COSTS. COSTS OF INDIVIDUAL
EXHIBITS ARE AVAILABLE UPON REQUEST TO THE SECRETARY.
PART 1
ITEM 1. BUSINESS
GENERAL
Union Camp Corporation is a Virginia corporation resulting from a merger in
1956 of Union Bag and Paper Corporation and Camp Manufacturing Company,
Incorporated. Predecessor businesses were started in 1861 and 1887,
respectively. As used in this report, the terms "Union Camp" and the "company"
mean Union Camp Corporation and its subsidiaries unless the context otherwise
requires.
On November 24, 1998, Union Camp and International Paper Company announced
that they had entered into a merger agreement pursuant to which Union Camp would
be acquired by International Paper. The proposed transaction is a stock for
stock exchange. It is subject to approval by the shareholders of both Union Camp
and International Paper. Required antitrust clearances from the U.S. Department
of Justice and the European Commission have been received.
Union Camp's principal business segments are the manufacture and sale of
paperboard and packaging, fine paper and wood products, the production and sale
of chemicals, including flavors and fragrances, and the distribution of business
and printing papers and related products. The company operates four large paper
mills at Savannah, Georgia, Prattville, Alabama, Franklin, Virginia and
Eastover, South Carolina. They are integrated in that the pulp required to
support paper manufacturing is produced at the mill sites.
The mills use sulfate pulping chemistry, also referred to as the kraft
process. Both hardwood and pine timber are used at all four mills. Approximately
34% of the company's wood pulp production utilizes timber harvested from lands
owned or controlled by the company. Timber use at the Prattville, Savannah and
Franklin mills is supplemented with recycled waste paper acquired from others
and the company's converting plants.
Information about the company's research and development costs appears
under the caption "Research and Development Costs" in Note 1 of Notes to
Consolidated Financial Statements on page 37 herein and is incorporated by
reference in this Item 1. In September 1998, the company announced its decision
to close its principal corporate research and development facility in Princeton,
New Jersey in order to significantly reduce the cost of corporate research and
development activity. Most of the approximately 190 positions at the Princeton
facility were eliminated in the fourth quarter of 1998. Future research and
development will be pursued by each business unit in a more decentralized and
focused way.
1
Revenue, operating profits and other financial data for the principal
business segments and for the foreign and domestic operations and the dollar
amounts of export sales of Union Camp for the years ended December 31, 1998,
1997 and 1996 appear in Note 13 of Notes to Consolidated Financial Statements on
pages 55 to 57 herein. The international operations of Union Camp and its
subsidiaries are subject to the risks of doing business abroad, including
currency fluctuations, foreign government regulation and changes in political
environments.
During 1998, Union Camp's consolidated sales and operating profit were
generated primarily by domestic operations.
PAPERBOARD AND PACKAGING
The Paperboard and Packaging segment consists of the mills in Savannah,
Georgia and Prattville, Alabama that produce kraft paper and linerboard, the
woodlands that support these mills and the company's corrugated container,
flexible packaging and folding carton manufacturing plants.
The Savannah, Georgia mill produces kraft linerboard and paper, including
saturating kraft, a specialized paper which is used by others as core material
for decorative and industrial laminates. Kraft paper is used primarily in the
manufacture of multiwall bags and kraft linerboard is used primarily in the
manufacture of corrugated shipping containers. There are six machines at the
Savannah mill. In 1998 production at the Savannah mill was approximately 1.05
million tons.
The two paper machines at the Prattville, Alabama mill produce kraft
linerboard, and in 1998, production at the Prattville mill was approximately 950
thousand tons.
In 1998, the Savannah and Prattville mills produced approximately 2.0
million tons of kraft paper and linerboard, about 57% of which was converted by
the company into packaging products and essentially all of the rest was sold to
others for conversion into similar products. Kraft linerboard and paper
production capacity for 1999 is estimated to be approximately 2.3 million tons.
Union Camp's Container Division produces corrugated and solid fibre
containers used to ship and store canned, bottled and packaged products for a
wide variety of customers, including food processors and textile, furniture,
chemical and automotive manufacturers.
The International Packaging Division manufactures corrugated containers at
wholly-owned, consolidated subsidiaries in Chile, Spain, the Republic of Ireland
and Puerto Rico. Union Camp holds a 30% interest in Zucamor S.A., Argentina's
leading independent corrugated container company, which it purchased during
1994. The company has a joint venture in Turkey with KAV Orman Sanayii A.S., a
subsidiary of KOC Holding Company, one of the world's largest industrial
companies, to operate a corrugated container plant serving agricultural and
industrial markets in Turkey. In August 1997, a consolidated joint venture
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corrugated container plant in Guangzhou, Peoples Republic of China commenced
operations. A second joint venture container plant is under construction in the
Peoples Republic of China. This plant, located in Chengdu, is scheduled to begin
operations during 1999.
Union Camp's Flexible Packaging Division produces multiwall and consumer
bags used to package cement, feed, fertilizer, clay, pet food, chemical and
mineral products and specialty bags used in packaging pet food, charcoal,
produce, sugar, flour, seed, coffee, cookies, microwaveable popcorn and other
miscellaneous items. Union Camp also produces linear low density plastic
products including film for consumer applications and for industrial
applications, such as plastic shipping sacks to package salt, bark, soil,
insulation, resins and chemicals. The company owns 75% of the capital stock of
Puntapel, S.A., which is located in San Luis, Argentina and manufactures
multiwall bags used primarily to package cement, flour, feed and sugar.
The company's Folding Carton Division operates three plants which produce
cartons with high quality gravure and lithographic printing, which are used
principally by the cosmetics and toiletries industries for shelf packaging in
retail stores.
FINE PAPER
The Fine Paper segment consists of the mills in Franklin, Virginia and
Eastover, South Carolina and the woodlands that support these mills.
The Franklin, Virginia mill produces uncoated free sheet which is sold in
roll and sheet form. These sales are to converters who use uncoated free sheet
primarily to make envelopes and forms, to merchant distributors, retail stores
and major end users who use it in business communications, printing, direct
response mail and reprographic use. The mill also produces coated and uncoated
bleached board which is sold for a variety of end uses, such as publishing,
greeting cards, book covers and advertising and promotional printing. There are
four paper machines and two board machines at this mill. In 1998, production at
the Franklin mill was approximately 780 thousand tons.
The Franklin mill includes a recycled (deinked) pulp facility. The deinked
facility removes ink from office waste paper and produces recycled pulp for the
manufacture of recycled content white paper and board. Recycled content paper is
sold as Union Camp branded products such as Collage'TM'and Great White'TM'.
The Eastover, South Carolina mill produces uncoated free sheet which, is
sold to others in roll form for the same end uses as the Franklin mill's
production. The two-machine Eastover mill has an excess of pulp capacity which
is used together with an on-site pulp dryer to produce bleached pulp for sale to
others in domestic and international markets. In 1998, production at the
Eastover mill was approximately 710 thousand tons.
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In 1998, Union Camp sold about 33% of its fine paper and bleached
paperboard production in converted or sheet form. This includes approximately
1.5% converted by its own plants into folding cartons, bags and envelopes.
Production capacity for 1999 for the Fine Paper segment is estimated to be
approximately 1.5 million tons.
A new business unit of the Fine Paper Division called the Great White
Consumer Products'TM' unit sells branded business and computer paper products
manufactured at the Franklin and Eastover mills as well as specialty coated and
colored paper products produced by others to office superstores, mass
merchandisers and other retailers.
DISTRIBUTION
The Alling & Cory Company, a distributor of business communications and
printing papers, industrial packaging and business products with its
headquarters in Rochester, New York, is a wholly owned subsidiary of the
company. Alling & Cory operates 15 distribution centers and 20 retail paper
shops in Maryland, New Jersey, New York, Ohio, Pennsylvania, Virginia and West
Virginia. Alling & Cory's wholly owned subsidiary, the Alcor Envelope Company,
Inc. operates an envelope converting facility in Hamburg, New York. Alling &
Cory employs approximately 1,200 people.
WOOD PRODUCTS
Union Camp produces southern pine lumber, plywood and particleboard. Its
wood products mills have the capacity to produce 568 million board feet of
lumber, 230 million square feet (3/8" basis) of plywood and 112 million square
feet (3/4" basis) of particleboard annually. Union Camp's wood products mills
(except for a new facility for the production of engineered wood known as
laminated veneer lumber) produced at 97% of capacity in 1998. Its wood products
are used in home construction and industrial markets such as furniture, cabinets
and fixtures. The wood products mills also produce significant quantities of
wood chips for use in Union Camp's papermaking operations.
The company's newest facility, a laminated veneer lumber and I-joist
manufacturing plant, adjacent to its existing veneer plant in Thorsby, Alabama
started operations on schedule in the third quarter of 1998 and is completing
its start-up. The facility is expected to reach its full performance level by
the end of second quarter of 1999. Products from the facility are used in home
and building construction markets.
CHEMICAL GROUP
The Chemical Group consists of two operating units: Chemical Products
Division and Bush Boake Allen Inc.
4
The Chemical Products Division produces a variety of wood-based and
non-wood-based chemicals. Wood-based chemicals, which are by-products of pulp
mill operations, include tall oil and turpentine chemicals. Tall oil is a
mixture of rosin and fatty acids which are by-products of the pulping process.
Tall oil rosins are converted into rosin-based resins and fatty acids are
converted into dimer acids and polyamide resins. These products are used in
coatings, adhesives, printing inks, paper sizing and oil field chemicals.
Non-wood-based chemicals, which are complementary to Union Camp's pulp-derived
tall oil fatty acids, are produced by converting vegetable oils into a variety
of esters and other derivatives. These are sold primarily for use in cosmetics,
lubricants, plastics, surfactants and rubber. The Chemical Products Division has
five processing facilities, three of which are in the United States and two of
which are in England.
In 1994, Bush Boake Allen made an initial public offering of 32% of its
outstanding common stock. Union Camp owns the remaining 68% of the stock.
Bush Boake Allen Inc. is a producer of flavors (including essential oils,
seasonings and spice extracts) and fragrances and aroma chemicals. The flavor
products impart a desired taste and smell to a broad range of consumer products,
including soft drinks, confections, dietary foods, snack foods, dairy products,
pharmaceuticals and alcoholic beverages. The fragrance products are used in a
wide variety of items, including fine fragrances, soaps, detergents, air
fresheners, cosmetics and toiletries and related products. The flavor and
fragrance compounds are sold primarily to major consumer product companies which
use these products in conjunction with other natural and synthetic ingredients
to make their products more appealing to consumers. The majority of the aroma
chemicals produced by Bush Boake Allen are used by major multinational consumer
product manufacturers and other fragrance and flavor compounders as fragrance
raw materials. The remainder is sold to agrichemical and specialty chemical
manufacturers or internally used by Bush Boake Allen in its production of
fragrance compounds. Bush Boake Allen has developed a broad-based global
presence with operations in 39 countries in North and South America, Europe,
Asia, Australia, the Middle East and Africa.
LAND DEVELOPMENT AND HOUSING
Union Camp's real estate subsidiary, The Branigar Organization, Inc., is
engaged in the sale and development of land in Georgia, South Carolina and North
Carolina for residential, recreational and commercial use.
CAPITAL EXPENDITURES
Information about Union Camp's 1998 and estimated 1999 capital expenditures
appears on page 38 of this report under the caption "Capital Expenditures" (and
is incorporated by reference in this Item 1).
5
MARKETING
Most of Union Camp's sales, other than its chemical sales, are made in the
United States east of the Rocky Mountains through a variety of distribution
methods. Paper and paperboard are sold both directly to converters and through
merchants. Packaging materials are sold directly to the industrial and
agricultural trades primarily by Union Camp sales representatives and, to a
lesser extent, through distributors. Wood products are sold through building
supply dealers and directly to industrial users.
Union Camp chemicals are sold worldwide with most sales being made to
customers in the United States and European Economic Community countries.
Through various overseas subsidiaries and related companies of Bush Boake Allen,
Union Camp sells in the worldwide markets for flavors and fragrances and related
products. Chemical products generally are sold directly to industrial users and
to a lesser extent through agents and distributors. During 1998, Union Camp's
chemical exports from the United States were about 7.1% of the total chemical
sales of Union Camp and its subsidiaries. In addition, approximately 53.5% of
such total chemical sales originated from the production facilities of
subsidiaries located outside the United States.
In 1998, Union Camp sold in the export market approximately 14% of its
production of paper and paperboard.
COMPETITION
All of Union Camp's products are sold in highly competitive markets in
which there are many large and well-established companies, of which Union Camp
is one. Competition in each of Union Camp's markets is based on price, quality
of product, service and product innovation.
TIMBER RESOURCES
The basic raw material for Union Camp's business is timber, a renewable
resource. Union Camp controls approximately 1,564,000 acres of timberlands in
Georgia, Alabama, Virginia, Florida, North Carolina, and South Carolina, of
which approximately 1,532,000 acres are owned by the company and the balance is
held under long-term leases. In 1998, Union Camp obtained approximately 44% of
its total timber requirements from its own timberlands and purchased the balance
from others.
Union Camp operates its timberlands on a sustained yield basis. Union Camp
began reforestation on its timberlands in the mid-1950's and now has
approximately 936,000 acres in plantation growth. It planted about 59,000 acres
under the plantation program in 1998 and expects to plant approximately 63,000
acres in 1999. These plantation programs result in increased yield per acre. The
current growing cycle for most of Union Camp's plantations
6
averages between 23 and 28 years. Union Camp anticipates that for the
foreseeable future there will be an adequate supply of timber for its operations
from its own lands and other sources.
ENVIRONMENTAL PROTECTION ACTIVITIES
Union Camp is committed to complying with applicable environmental
protection control laws. Wastewater treatment facilities and/or atmospheric
emission control equipment at various Union Camp locations, which currently
comply with applicable restrictions, may from time to time have to be upgraded
to comply with new limitations. Such new limits may be imposed when federal and
state permits are renewed or as regulations are promulgated implementing
revisions to federal and state air and water pollution control laws.
Union Camp invested approximately $17 million in environmental control
facilities in 1998 and approximately $123 million over the past five years. Over
the next two years, it is estimated that environmental control expenditures will
average approximately 10% of projected capital spending. Environmental control
expenditures utilize capital and may increase operating and financing costs. To
that extent, they have an adverse impact on earnings.
During the next several years, the cost of compliance with environmental
control laws will depend upon the application of existing and new regulations
and on revisions to existing statutes. Union Camp believes such costs will not
adversely affect its competitive position within the paper and chemical
industries since most paper and chemical companies have similar air, water and
solid waste disposal concerns.
In August 1992, Union Camp entered into a Consent Order with Region V of
the U.S. Environmental Protection Agency (the "EPA") to conduct an investigation
to ascertain existing conditions at the company's Dover, Ohio facility under the
Resource Conservation and Recovery Act. The company submitted a final risk
assessment and site investigation report in late 1996 which was approved with
modifications by the EPA. In September 1998, the EPA issued a Statement of
Basis, which is its proposed remedy for the site. In particular, the EPA
indicated that it would require Union Camp to cap or cover many solid waste
management units. Union Camp's position is that capping some of the units is an
inappropriate remedy since other equally protective remedies are available at
substantially reduced costs. The company submitted a corrective measures study
to the EPA with its recommendations for corrective action. On the basis of the
information presently available to it, Union Camp believes that remedial action
required as a result of the investigation will not result in a material adverse
effect on its business or financial condition.
EMPLOYEES
Union Camp and its subsidiaries employ approximately 18,300 people,
approximately 36% of whom are represented by a total of 60 unions under
collective bargaining agreements. Contracts involving approximately 2,000 hourly
employees were concluded during
7
1998. Contracts involving approximately 780 hourly employees are subject to
renegotiation and renewal in 1999. Union Camp believes that its relationship
with its employees is favorable and it has not experienced a strike at any major
facility since 1974.
ITEM 2. PROPERTIES
Union Camp's mills and plants, domestic and foreign, are at the locations
listed below and primarily produce the items described in the heading for each
group. Union Camp's corporate headquarters are in Wayne, New Jersey. Except for
a few facilities which in the aggregate are not material, Union Camp owns all of
the following mills and plants, in some cases subject to financing leases or
similar arrangements.
PAPERBOARD AND PACKAGING SEGMENT
Kraft Paper and Linerboard
The two mills located at the sites listed below are the segment's principal
facilities. Item 1 of this report provides information regarding their general
character, including the products they produce, their productive capacity and
the extent of utilization.
Prattville, Alabama
Savannah, Georgia
CONTAINER DIVISION
Corrugated Containers
The plants listed below use a corrugator to manufacture corrugated sheets
by gluing a fluted paperboard material called medium between two or more flat
facings of linerboard. These corrugated sheets are then sold or made into boxes
or corrugated containers in a separate operation at these plants. During 1998,
the company decided to exit the Central Florida corrugated container market and,
therefore, sold its Lakeland, Florida container plant and its Eaton Park,
Florida finishing plant as ongoing operations. The company's Newtown,
Connecticut container plant was sold as an ongoing operation in December 1998.
8
Ashbourne, Republic of Ireland La Laguna, Tenerife, Spain
Atlanta, Georgia Las Palmas de Gran Canaria, Spain
Auburn, Maine Madrid, Spain
Bayamon, Puerto Rico Morristown, Tennessee
Chicago, Illinois Rancagua, Chile
Decatur, Alabama Richmond, Virginia
Gandia, Spain San Antonio, Texas
Guangzhou, P.R.C. Savannah, Georgia
Hanford, California Spartanburg, South Carolina
Houston, Mississippi Washington, Pennsylvania
Kalamazoo, Michigan
Lafayette, Louisiana
Finishing
The plants listed below use equipment that converts corrugated sheets into
boxes or laminates a printed sheet of paper to one panel of a box or applies a
wax coating to a finished box.
Conway, Arkansas Kings Mountain, North Carolina
Edinburg, Texas Los Angeles, California
Fort Worth, Texas Statesboro, Georgia
West Deptford, New Jersey
Graphics
The plants listed below use a process that adheres medium to a single
linerboard sheet to produce singleface and then glues a printed label to the
singleface. These sheets are then made into boxes at these plants.
Cleveland, Ohio
Conway, Arkansas
Stockton, California
Solid Fibre Products
The plant listed below manufactures solid fibre sheets by gluing two or
more flat linerboard sheets together. These solid fibre sheets are then made
into boxes or slip sheets in a separate operation. Slip sheets are used in
material handling in lieu of wooden pallets.
Lancaster, Pennsylvania
9
FLEXIBLE PACKAGING DIVISION
Multiwall and Consumer Bags
The plants listed below produce multiwall and consumer bags of various
substrates for packaging products such as cement, seed, feed, pet food, sugar,
cookies and popcorn.
Hanford, California Seymour, Indiana
Hazleton, Pennsylvania Sibley, Iowa
Monticello, Arkansas Spartanburg, South Carolina
St. Louis, Missouri Tifton, Georgia
San Luis, Argentina
Plastic Products
The plants listed below produce polyethylene packaging and roll stock for
packaging a variety of agricultural and industrial products and consumer items
such as ice, salt, insulation, fertilizer, pet food, resin and towel and tissue.
Griffin, Georgia
Monticello, Arkansas
Tomah, Wisconsin
FOLDING CARTON DIVISION
Folding Cartons and Gravure Printing
The plants listed below produce folding cartons with high quality gravure
and lithographic printing which are used to package cosmetics, toiletries and
fragrance products.
Clifton, New Jersey
Englewood, New Jersey
Moonachie, New Jersey
FINE PAPER SEGMENT
The two mills located at the sites listed below are the segment's principal
facilities. Item 1 of this report provides information regarding their general
character, including the products they produce, their productive capacity and
the extent of utilization.
Eastover, South Carolina
Franklin, Virginia
10
Paper Finishing
The three converting plants listed below convert large rolls of paper
produced by the company's fine paper mills into folio sheets for commercial
printers and office size sheets for home and business use. A new converting
plant called the Converting Innovation Center began operating in Franklin during
1997. This plant specializes in shorter cycle, smaller count retail oriented
package design concepts.
Franklin, Virginia (2)
Sumter, South Carolina
DISTRIBUTION
The Alling & Cory Company, a wholly owned subsidiary of the company
headquartered in Rochester, New York, distributes business communications and
printing papers, industrial packaging and business products.
The Alcor Envelope Company, Inc. a wholly owned subsidiary of Alling &
Cory, manufactures envelopes in a plant in Hamburg, New York.
The facilities listed below are distribution centers which handle the
distribution of more than 20,000 products and retail paper stores which sell
fine writing and printing papers, janitorial products, magnetic media supplies
and other selected office supplies under the name "The Paper Shop". All of the
properties listed are leased by Alling & Cory except for the distribution
centers in Buffalo and Syracuse, New York.
Distribution Centers
Albany, New York Harrisburg, Pennsylvania
Allentown, Pennsylvania Marlton, New Jersey
Baltimore, Maryland Pittsburgh, Pennsylvania
Buffalo, New York Rochester, New York
Cleveland, Ohio Scranton, Pennsylvania
Erie, Pennsylvania Syracuse, New York
Fairmont, West Virginia Toledo, Ohio
Hagerstown, Maryland
Retail Paper Shops
Albany, New York Cheektowaga, New York
Allentown, Pennsylvania Cleveland, Ohio
Bridgeville, Pennsylvania Cranberry, Pennsylvania
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East Syracuse, New York Pittsburgh, Pennsylvania
Edison, New Jersey Rochester, New York
Havertown, Pennsylvania Scranton, Pennsylvania
Malvern, Pennsylvania Trenton, New Jersey
Maple Shade, New Jersey Utica, New York
Middleburg Heights, Ohio Willow Grove, Pennsylvania
Philadelphia, Pennsylvania (2)
WOOD PRODUCTS SEGMENT
Lumber
The sawmills listed below produce small timbers and/or dimension lumber and
wood chips.
Chapman, Alabama Meldrim, Georgia
Folkston, Georgia Opelika, Alabama
Franklin, Virginia Seaboard, North Carolina
Plywood
The plants listed below produce veneer and/or plywood panels for sale
primarily for industrial applications including furniture, truck trailers and
sound equipment.
Chapman, Alabama
Thorsby, Alabama
Engineered Wood
The plant listed below uses some veneer from Union Camp's two plywood
facilities and purchase the remaining need from the outside sources. It produces
LVL (laminated veneer lumber) and I-Joist, which is used primarily in the
housing market.
Thorsby, Alabama
Particleboard
The plant listed below uses wood shavings and other wood residues to
produce particleboard which is cut to size and sold primarily to the furniture
industry.
Franklin, Virginia
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CHEMICAL GROUP SEGMENT
The chemical industry segment has two operating units, Bush Boake Allen
Inc. and the Chemical Products Division.
The facilities listed below are part of Bush Boake Allen which produces
aroma chemicals, flavors, fragrances, essential oils, spices and seasonings. The
process used and products produced by each facility are shown below.
Location Products Process
- -------- -------- -------
Carrollton, Texas Seasonings Compounding, i.e., mixing
and blending
Chicago, Illinois Flavors, Vanilla Extract Extraction and Compounding
Guangzhou, China Flavors and Fragrances Compounding
Jacksonville, Florida Terpene Derivatives Chemical Processing
and Aroma Chemicals
Johannesburg, Flavors, Fragrances and Compounding
South Africa Seasonings
Jurong, Singapore Flavors and Fragrances Compounding
London, England Flavors and Fragrances Compounding
Long Melford, England Spices, Essential Oils Extraction and Compounding
and Seasonings
Madras, India Flavors and Fragrances Compounding
Manila, Philippines Flavors, Fragrances and Compounding
Seasonings
Melbourne, Australia Flavors, Fragrances Extraction and Compounding
and Seasonings
Norwood, New Jersey Fragrances and Compounding
Essential Oils
Sydney, Australia Flavors and Seasonings Compounding
Widnes, England Aroma Chemicals Chemical Processing
13
Witham, England Flavors Compounding
The chemical processing facilities listed below are part of the Chemical
Products Division which produces a variety of wood-based and non-wood-based
chemicals. Shown below are the principal products of each facility.
Location Products
- -------- --------
Bedlington, England Ink, adhesive and coatings resins
Chester-le-Street, England Tall oil derivatives, ink and adhesive resins
Dover, Ohio Ink and adhesive resins, plasticizers and esters
Savannah, Georgia Tall oil derivatives, ink and adhesive resins
Valdosta, Georgia Printing ink resins
In addition, in the chemical industry segment, Union Camp has small
consolidated subsidiary manufacturing (compounding and mixing) facilities at the
following locations: Kingston, Jamaica; Auckland, New Zealand; Atlacomulco,
Mexico; Buenos Aires, Argentina; Istanbul, Turkey; Knislinge, Sweden; Bangkok,
Thailand; LaSalle, Canada and Bogor, Indonesia. The aggregate 1998 revenue from
these small facilities was approximately $32.5 million.
Also see Item 1 for a discussion of Union Camp's timberland holdings used
in Union Camp's Paper and Paperboard and Wood Products industry segments.
ITEM 3. LEGAL PROCEEDINGS
In addition to the proceedings described below, the company is a party to
other legal proceedings incidental to its business which the company does not
believe are material to it.
Union Camp has been designated a potentially responsible party at a number
of hazardous waste sites pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") and similar state laws. At the present
time the company is actively involved with proceedings at approximately 12 sites
including the cases in Connecticut and Mississippi which are described below.
Designated employees of the company meet quarterly to review the status of such
proceedings. When the facts known to the company indicate that liability is
probable and a reasonable estimate of the company's share of remediation costs
can be made, the company records such estimated amount. Amounts reserved are
adjusted as additional facts become known. In some cases, a determination of
liability cannot be made. For example, it may not have been established that the
company is a potentially responsible party. In other cases, no estimate of
remediation costs is possible. In many instances, the cost of remediation is
speculative because
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remedial investigations and feasibility studies have not yet been contracted
for, have not been completed or, alternatively, have been completed but an
acceptable remedy has not been chosen. In other cases, it is uncertain whether
the company will seek, be offered or accept a settlement with payment of a
premium over otherwise estimated liability in order to secure full release. Some
settled cases also have "reopeners" for contamination discovered after full
implementation of the remedy. Finally, insurance reimbursement is usually
uncertain until matters are finally resolved.
In May 1996, the EPA filed a civil suit against the company and several
other potentially responsible parties in the U.S. District Court for the
District of Louisiana under CERCLA for recovery of past and future response
costs incurred by the EPA at the Bayou Bonfouca Superfund Site at Slidell,
Louisiana which operated as a wood treatment facility from 1882 to 1972.
Subsequently, the State of Louisiana filed a similar suit against the company
seeking to recover the share of the response costs for which it is responsible
under CERCLA. EPA records indicate there have been expenditures over a number of
years of approximately $100 million for remediation at the site. The EPA
estimated that future response costs would be approximately $30 million. In
1956, a subsidiary of Union Camp acquired the assets of American Creosoting
Company which included the stock of a subsidiary which had owned and operated
the Slidell facility since 1933. The subsidiary sold the Slidell facility in
1958. The subsidiary was sold in 1964. The EPA alleged that Union Camp had owner
and/or operator status under CERCLA arising from its ownership of the subsidiary
which owned the Slidell facility. Union Camp denied it ever owned and/or
operated the Slidell facility. Based on a recent decision of the United States
Supreme Court, United States v. Best Foods, Union Camp filed a motion for
summary judgment in this case. Prior to oral argument on the motion, which was
scheduled for late fall 1998, the EPA and the State of Louisiana dismissed their
lawsuits with prejudice.
Union Camp is also party to an action in the U.S. District Court for the
District of Connecticut in which private litigants are seeking contribution
associated with past and future cost of remediating property used for creosoting
operations from 1921 through 1964. Such remediation costs are currently
estimated at approximately $3 million. A subsidiary of Union Camp conducted
activities at the property from 1956 to 1964. Union Camp was dismissed on
summary judgment from the lawsuit in June 1995, but on appeal the summary
judgment order was vacated and the matter was remanded to the District Court to
determine whether Union Camp could be held liable as an operator under federal
and state superfund laws. The litigation has been stayed since the fall of 1996
for the review of the various potential remedies. Union Camp believes the facts
do not support a claim that Union Camp was an operator of the site and has filed
another motion for summary judgment based on the application of the holding in
the recent Supreme Court decision in Best Foods mentioned above to the facts of
this case.
In 1994, Union Camp was made a party to an action brought in state court in
Forest County, Mississippi by the Hattiesburg Public School District seeking
future remediation costs for property previously used in creosoting operations.
In the second half of 1996 a suit was commenced in the U.S. District Court for
the Southern District of Mississippi, Hattiesburg Division by car dealers who
lease the property from Hattiesburg Public School District. These plaintiffs
seek damages for diminution in the value of the property, lost profits and
potential relocation expenses based upon the alleged pollution of the property.
No remediation of the property has begun or been
15
ordered. These cases are currently stayed pending remedial investigation. These
cases, like the cases in the two previous paragraphs, alleges that Union Camp
should be responsible for the activities of its subsidiary at the properties.
Union Camp disputes these allegations because Union Camp did not own or operate
the facilities. Although Union Camp believes it has a strong legal position with
respect to the above described claims involving the creosoting activities of its
former subsidiary, an estimate of the likely outcome of the proceedings in
Connecticut and Mississippi cannot be made at this time.
In the second quarter of 1995 the company was named as one of approximately
60 defendants in a lawsuit filed in Jefferson County, Texas state court on
behalf of approximately 2,400 plaintiffs who allege that they were exposed to
asbestos while performing work at various plant sites in Alabama. Subsequent
amendments and filings brought the number of plaintiffs to approximately 12,000.
About 7,600 of these cases have settled, leaving approximately 4,600 cases
remaining. Union Camp's contributions to the settlements have been funded by its
insurance carrier. The defendants named include asbestos manufacturers,
distributors of asbestos-containing products, insurance companies, a
manufacturer of safety equipment, parties who allegedly misrepresented the
dangers of asbestos exposure, and the owners of the premises where the
plaintiffs allege they were working when they were exposed to asbestos. Union
Camp is included in the premises owner category of defendants and the amount of
damages sought is unspecified. Approximately 200 of the plaintiffs allege
exposure to asbestos while on Union Camp premises.
In its Quarterly Report on Form 10-Q for the quarter ended June 30, 1991
the company reported that a subsidiary of the company was added as a defendant
in approximately 7,000 asbestos-related cases which had been pending in
Mississippi state court for several years. Subsequently, this subsidiary was
named as a defendant in additional asbestos-related consolidated actions so that
the total number of such cases was in excess of 10,000. The subsidiary was named
in these cases because it allegedly was part of the chain of distribution of
asbestos-containing products to facilities where the plaintiffs worked. The
period of alleged exposure ranges from 1930 through the present. The subsidiary
did not manufacture asbestos or asbestos-containing products. The number of
defendants named in these suits ranges from approximately 40 to 170, and
includes asbestos manufacturers, distributors of asbestos containing products,
an insurance company and a manufacturer of safety equipment. In March 1993, the
company's subsidiary settled approximately 10,500 of these cases, with the
settlement being funded by the company's insurance carrier. The company's
subsidiary settled approximately 2,600 cases during 1997 and additional cases
were settled in 1998, all of which was funded by the company's insurance
carrier. This subsidiary is a defendant in approximately 7,200 remaining cases.
During 1998 the company discovered that a small power boiler constructed at
its Franklin, Virginia mill in 1986 had been operated for brief periods at a
rate in excess of its permit limit for sulfur dioxide emissions. Such rate would
have required the boiler to meet more stringent emission limits on sulfur
dioxide under New Source Performance Standard regulations for stationary sources
within the time frame under which the boiler was constructed. The company
notified the Virginia Department of Environmental Quality and Region III of the
EPA and received a notice of violation from the Virginia Department of
Environmental Quality. The company anticipates that a penalty will be imposed.
Although the precise nature and amount of the penalty is not known at this
16
time, based upon the information currently available to it, the company believes
the penalty could exceed $100,000.
Although the final outcome of any legal proceeding is subject to many
variables and cannot be predicted with any degree of certainty, the company
presently believes the pending legal proceedings alleging liability on account
of exposure to asbestos to which Union Camp or its subsidiary is a party will
not have a material adverse effect on the financial position or results of
operations of the company and its subsidiaries taken as a whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not applicable.
17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The company's Common Stock trades on the New York Stock Exchange and the
Pacific Exchange. The following table sets forth the high and low sales prices
and the dividends for the Common Stock for each quarterly period within 1998 and
1997.
STOCK PRICE
----------- DIVIDENDS
HIGH LOW PER SHARE
---- --- ---------
1998 Fourth Quarter $68 $38 3/8 $0.45
Third Quarter 49 3/4 34 0.45
Second Quarter 64 7/16 49 1/8 0.45
First Quarter 63 1/4 50 3/8 0.45
1997 Fourth Quarter $64 9/16 $49 3/4 $0.45
Third Quarter 63 1/8 50 1/4 0.45
Second Quarter 54 7/8 45 1/8 0.45
First Quarter 52 1/4 46 7/8 0.45
The company's Common Stock is listed on the New York Stock Exchange and the
Pacific Exchange. The number of stockholders of record at December 31, 1998 was
7,144.
18
ITEM 6. UNION CAMP CORPORATION SELECTED FINANCIAL DATA
(in thousands)
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS
Net Sales $4,502,885 $4,476,761 $4,013,197 $4,211,709 $3,395,825
Costs and Other Charges 4,334,120* 4,219,549 3,760,658** 3,370,320 3,111,539
- -----------------------------------------------------------------------------------------------------------------------------------
Income From Operations 168,765 257,212 252,539 841,389 284,286
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Expense, net of capitalized interest 118,018 117,290 112,286 113,705 109,172
Other (Income) Expense - Net 246 (3,888) (10,792) (3,173) (20,050)***
- -----------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes, Minority
Interest, and Accounting Changes 50,501 143,810 151,045 730,857 195,164
Income Taxes 20,103 51,804 55,250 268,895 71,420
Minority Interest, net of tax (11,088) (10,936) (10,487) (10,889) (6,518)
Effect of Accounting Changes, net of tax -- -- -- -- (3,716)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income 19,310 81,070 85,308 451,073 113,510
- -----------------------------------------------------------------------------------------------------------------------------------
Per Common Share
Net Income:
Basic Earnings 0.28 1.17 1.23 6.45 1.62
Diluted Earnings 0.28 1.16 1.23 6.39 1.61
Dividends 1.80 1.80 1.80 1.66 1.56
Stockholders' Equity 27.98 29.39 30.25 30.71 26.23
- -----------------------------------------------------------------------------------------------------------------------------------
Financial Position
Current Assets 1,186,023 1,211,577 1,134,110 1,033,817 951,133
Current Liabilities 889,018 803,018 779,869 620,113 883,924
- -----------------------------------------------------------------------------------------------------------------------------------
Working Capital 297,005 408,559 354,241 413,704 67,209
Total Assets 5,176,414 5,241,701 5,096,307 4,838,343 4,776,578
- -----------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt 1,290,083 1,367,450 1,252,475 1,151,536 1,252,249
Deferred Income Taxes 741,605 744,677 723,431 709,850 605,643
Stockholders' Equity 1,943,906 2,035,718 2,093,594 2,121,692 1,836,321
- -----------------------------------------------------------------------------------------------------------------------------------
Percent of Long-Term Debt to Total Capital 32.5% 33.0% 30.8% 28.9% 33.9%
- -----------------------------------------------------------------------------------------------------------------------------------
Additional Data
Cash Provided by Operations 426,648 381,116 503,145 758,880 377,587
Cash Used for Investing Activities (301,677) (330,684) (435,661) (245,307) (232,383)
Cash Used for Financing Activities (105,486) (59,771) (54,638) (496,416) (170,582)
Capital Expenditures (excluding acquisitions) 273,293 337,226 386,443 266,799 324,939
Depreciation, Amortization and Cost of
Company Timber Harvested 315,124 310,618 298,457 287,738 270,850
Tons Sold - Paper and Paperboard 3,546,960 3,674,476 3,473,415 3,485,221 3,452,604
Average Shares of Common
Stock Outstanding 69,271,058 69,439,150 69,220,157 69,940,397 69,954,082
===================================================================================================================================
Years prior to 1997 have been restated to reflect the reclassification of
certain items from other (income) expense to income from operations.
* 1998 includes a $39.8 million special charge relating to restructuring
costs and asset write downs.
** 1996 includes a $39.4 million special charge relating to restructuring
costs and asset write downs.
*** Includes $34.7 million pre-tax gain on sale of minority interest in Bush
Boake Allen.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The company experienced difficult operating conditions in a majority of its
businesses through almost all of 1998. The slow recovery in selling prices that
began in mid-1997 was not sustained. In early 1998, deteriorating economic
conditions in Asia placed significant pressures on the U.S. paper and packaging
markets. Industry inventories increased with resulting selling price pressure
across most product lines in the second half of 1998. The company responded by
taking an unprecedented amount of market related downtime at its mills.
Operational efficiencies and cost reductions attributable to the profit
enhancement plan announced at the end of 1996 and the cost reductions announced
in the third quarter of 1998 were not sufficient to offset the negative impact
of reduced sales volume, increased costs associated with mill downtime, and
lower profit margins from the non-paper businesses.
Consolidated sales in 1998 were $4.5 billion, level with 1997, and 12%
above the $4.0 billion reported in 1996. Consolidated net income in 1998 was
$19.3 million or $.28 per diluted share after a special charge of $39.8 million
($26.4 million after-tax or $.38 per share), down from $81.1 million or $1.16
per diluted share in 1997 and $85.3 million or $1.23 per diluted share in 1996
after a special charge of $39.4 million ($24.3 million after-tax or $.35 per
share).
During the third quarter of 1998, the company recorded a $39.8 million
pre-tax special charge ($26.4 million after-tax) to operating profit. Included
in the charge was $31.7 million for employee termination benefits related to the
elimination of approximately 540 positions, and $8.1 million for asset write
downs. Included in the job elimination program are approximately 190 positions
eliminated through a re-organization and restructuring of the company's research
and development activities, about 190 positions to be eliminated through the
consolidation of the Packaging Group's administrative support functions, and
about 160 positions to be eliminated through a series of other organizational
changes. Substantially all of the 540 positions are expected to be eliminated by
the end of 1999; however, the announced merger with International Paper Company
may affect the timing. As of December 31, 1998, approximately 25% of the
employees had been terminated under this program at a cost of $8 million. No
adjustments have been or are anticipated to be made to the special charge
reserve established in 1998.
The asset write downs were principally attributable to the impairment of
goodwill specific to two packaging businesses. In 1990, Union Camp acquired
Chase Packaging Corporation. As part of this acquisition, Union Camp recorded
goodwill of $14.5 million. Subsequently, several of the acquired Chase
facilities were sold or closed. Union Camp wrote off a pro-rata share of
goodwill with each sale. In the third quarter of 1998, after an ongoing pattern
of declining operating performance over several years at the remaining three
Chase facilities, management assessed the carrying value of the goodwill and
wrote off the remaining $5.4 million. The other write-off is associated with
Union Camp's 1996 purchase of a 50% interest in a packaging plant in Turkey. The
20
company's investment in the plant resulted in losses for Union Camp of $2.5
million and $1.7 million in 1997 and 1998, respectively. Upon reviewing the
historical and projected operating results for the business, management
concluded that expected future cash flows did not fully support the carrying
value of this asset and wrote off $1.2 million.
Income from operations for 1998 also included two significant charges. The
company recorded higher than normal environmental/OSHA remediation expenses of
$6 million. Additionally, the company recorded a $10.7 million reserve for a
potential loss relating to an outstanding trade receivable and loan guarantee
for a customer with questionable future cash flows, of which $8.7 million was
recorded in the third quarter. On-going events and future business conditions
may require the company to record additional charges. The company has security
interests in the customer's assets and is in contact with the customer regarding
its prospects and results of operations.
Operations in 1998 continued to benefit from the profit enhancement plan
announced at the end of 1996. By the end of 1998, the program was essentially
complete although the full annual benefit from process and systems improvements
have not yet been realized. A significant part of the program was the
elimination of 400 positions. The cost of the program, $24.3 million after-tax,
was reflected in income from operations in 1996 and reported as a special
charge. Included in the charge was $12.9 million for employee termination
benefits and $11.4 million for asset write downs.
In 1997, consolidated net income was $81.1 million or $1.16 per diluted
share, down from $85.3 million or $1.23 per diluted share in 1996 after a
special charge of $24.3 million or $.35 per share after-tax relating to
restructuring costs and asset write-downs. The decline in earnings in 1997
reflects the impact of significantly lower average selling prices for linerboard
and uncoated free sheet, offset partially by improvements in manufacturing cost
efficiencies and better volume and mix
Operating results and other financial information for the company's
principal business segments are presented on page 56. A discussion of the
results of these segments follows.
PAPERBOARD AND PACKAGING
The principal operations in this segment are the two kraft paper and board
mills, woodlands that support these mills, and corrugated container, flexible
packaging, and folding carton operations. Kraft paper and board is produced at
two mills, and packaging products are produced at 38 locations in the U.S. and
nine locations overseas. Sales for the segment were $1.8 billion in 1998, up
slightly from $1.7 billion in 1997, and level with 1996. Segment operating
profit before special charges was $59.7 million in 1998, compared to $61.9
million in 1997, and $126 million in 1996. After special charges, segment
operating profit was $42.9 million in 1998, and $114.8 million in 1996. The
decrease in operating profit in 1998 is partially attributable to a $10.7
million reserve for a potential loss relating to an outstanding trade receivable
and loan guarantee for a customer with
21
questionable future cash flows. Operating profit declined significantly in 1997
compared with 1996, primarily due to sharply lower demand in the linerboard
markets.
The company is the fifth largest producer of linerboard in the United
States. Operating profit from the two kraft mills improved approximately 3% from
1997. The improvement was attributable primarily to kraft linerboard selling
prices which were on average 5% higher than in 1997. The improvement in selling
prices began to weaken gradually at the beginning of the second quarter.
Year-end selling prices in the domestic market were almost 10% below the
previous year-end. Offsetting higher average selling prices was an 8% drop in
shipments, mainly export related, an increase in wood costs in the early part of
the year, higher maintenance, repairs, and inefficiencies associated with the
unprecedented downtime which totaled approximately 14% of kraft capacity, and a
$10.7 million reserve for a potential loss relating to an outstanding trade
receivable and loan guarantee for a customer with questionable future cash
flows. In response to weak market conditions, the company took approximately
217,000 tons of market-related downtime at its linerboard mills during the year.
Operating profit for the Kraft Division in 1997 declined from 1996,
primarily due to lower average selling prices. Domestic and export linerboard
prices averaged 14% and 4% below 1996, respectively. Although customer shipments
increased 18% and 39% in the domestic and export markets, respectively, these
increases were not enough to offset the weakness in pricing.
The Container Division is the next largest unit in the segment. Primary
products include laminated bulk and triplewall containers, graphics packaging
and display items, and solid fiber products sold from 25 plants in the United
States. Operating profit decreased significantly in 1998 despite an 8% increase
in the average selling prices of corrugated boxes. Lower gross profit margins,
an increase in fixed costs, and decreased profitability among the graphics
packaging plants more than offset the benefits of improved pricing. Segment
results in 1998 include gains relating to the sales of the company's Lakeland,
Florida, and Newtown, Connecticut container plants. Largely due to the sale of
these plants, corrugated shipments were off 2% from 1997.
Operating profit for the Container Division increased 41% in 1997. The
primary sources of the increase were improved productivity, a gain relating to
the sale of the Denver, Colorado container plant as an ongoing business, and
OSHA remediation expenses of $1.7 million which were recorded in 1996 but not
repeated in 1997. Offsetting a portion of the gain was the write down of certain
non-performing assets.
Revenues for the company's International Packaging Division, which
manufactures corrugated containers overseas, increased by 7% in 1998. Operating
profit declined by 11% in 1998, primarily due to a drop in average gross
margins, which were impacted by the startup of a new plant in China and
associated business development expenses. These factors were partially offset by
a 10% increase in shipments.
Operating profit for the International Packaging Division decreased
substantially in 1997 compared with 1996, primarily the result of a 16% decline
in average selling prices which was partially offset by reduced manufacturing
costs and improved volume.
22
The Flexible Packaging Division produces a broad variety of industrial and
consumer bags, polyethylene film and other flexible packaging at 10 plants in
the U.S. as well as an industrial bag plant in Argentina. Operating profit
increased by 1% in 1998. An increase in paper shipments and improved margins
were partially offset by higher fixed costs. Operating profit decreased in 1997,
despite a 4% increase in sales over 1996. Lower average selling prices and
higher fixed costs more than offset the 4% increase in sales.
The company's Folding Carton Division operates three plants, which produce
consumer products packaging with high quality graphics, principally for the
cosmetics and personal products industries. Operating profit increased by 35% in
1998, primarily due to increased sales volume and improved margins.
FINE PAPER
The principal operations in this segment are the bleached paper mills and
the woodlands that support these mills. The Fine Paper segment produces uncoated
business papers, coated and uncoated bleached paperboard, and market pulp at two
mills in the U.S. Sales for the segment were $961 million, down 5% and 4% from
1997 and 1996, respectively. Segment operating profit before special charges was
$40.2 million in 1998, $81.7 million in 1997, and $75.2 million in 1996. After
special charges, segment operating profit was $34.4 million in 1998, and $62.1
million in 1996. The decrease in operating profit in 1998 was primarily due to
lower average selling prices, higher wood costs, higher fixed costs including
systems development expenses, and a 4% decrease in shipments. Average selling
prices of uncoated free sheet declined 2% from 1997, however, year-end selling
prices were down 18% from the prior year-end. In response to weaker market
conditions, the company took approximately 48,000 tons of market related
downtime at its bleached paper and board mills in 1998. Operating rates were
down slightly compared to 1997.
The increase in operating profit in 1997 compared with 1996 was primarily
due to a 3% increase in total shipments and lower manufacturing costs, which
were partially offset by a 4% decrease in average selling prices.
DISTRIBUTION
Acquired by Union Camp in 1996, The Alling & Cory Company is a leading
regional distributor of business communications and printing papers, industrial
packaging, and business products. The company operates 15 distribution centers
and 20 retail paper shops, in addition to Alcor Envelope, an envelope converting
operation. Segment sales increased by 4% in 1998 to $723 million. Segment
operating profit before special charges was $4.4 million in 1998, compared with
$5.0 million in 1997, and $5.3 million in 1996. After the special charge,
segment operating profit was $3.6 million in 1998. The decrease in operating
profit in 1998 was primarily due to margin erosion, higher fixed costs, and a
decline in contribution from Alcor Envelope, a wholly owned subsidiary of Alling
& Cory.
23
WOOD PRODUCTS
The Wood Products segment consists of lumber, plywood, and particleboard
operations and woodlands that support them. Sales revenue for the segment
decreased to $313 million in 1998, down from $326 million in 1997. Operating
profit before special charges was $54.9 million in 1998, $86.3 million in 1997,
and $59.2 million in 1996. After special charges, segment operating profit was
$53.3 million in 1998, and was unchanged at $59.2 million in 1996. The
significant decrease from 1997 was due largely to a 10% decrease in the average
selling price of lumber, higher wood stumpage costs, as well as start up
expenses associated with the company's new laminated veneer lumber plant. These
factors were partially offset by an 11% increase in plywood shipments, and
modest improvements in both lumber and particleboard shipments. The strong
lumber market conditions, which had carried over from 1996 and 1997, began to
weaken mid-way through the second quarter as market supply improved.
In 1997, segment revenue increased by 16%, and operating profit increased
by 46%. The increase in profits was largely the result of an improvement in
overall market conditions in the lumber business, with prices and volume
increasing by 15% and 7%, respectively. Lumber operations posted both record
profits and production in 1997. Particleboard and plywood prices remained level
with 1996, while volume increased 2% over 1996 levels.
CHEMICAL GROUP
Net sales for the Chemical segment were $750 million in 1998, compared with
$759 million in 1997, and $701 million in 1996. Operating profit before special
charges was $66.9 million in 1998, down 8% from 1997 and 2% below 1996. After
special charges, operating profit was $66.1 million in 1998, and $66.8 million
in 1996.
Bush Boake Allen, the largest operating unit in this segment, conducts
operations on six continents and has locations in 39 countries worldwide. Union
Camp is a majority owner of this global business with a 68% holding. Bush Boake
Allen supplies flavors and fragrances for use in foods, beverages, cosmetics and
toiletries. Sales were $485 million in 1998, down from $491 million in 1997.
Operating profit was $56.8 million in 1998, an 8% increase over the $52.7
million reported in 1997. The increase was primarily due to strong growth in the
U.S. flavor and fragrance business and improved aroma chemical plant operating
efficiencies, which were partially offset by the unfavorable impact of exchange
rates and the economic turmoil in the Asia Pacific region.
In 1997, operating profit for Bush Boake Allen increased by 13% over 1996,
resulting from improved performance in both flavors and fragrances and chemicals
operations.
The company's Chemical Products Division, with facilities in the United
States and United Kingdom, upgrades papermaking residual by-products and other
raw materials into a wide range of specialized chemicals, primarily for use in
inks, coatings and adhesives. Operating profit
24
decreased substantially in 1998 due to unfavorable pound sterling exchange
rates, a significant drop in average selling prices, the absence of growth in
the Asia Pacific region, and higher fixed costs. While sales continued to
increase in domestic markets, results were hampered by disappointing performance
in the division's U. K. operations. These factors were offset by a 2% increase
in shipments and higher margins from the division's efficiency improvement
program.
In 1997, operating profit for the Chemical Products Division decreased by
9% from 1996. The decrease was primarily due to a 6% increase in the cost of
crude tall oil, a primary raw material.
OTHER
The company's other operations primarily consist of The Branigar
Organization, Inc., a wholly owned subsidiary that develops high-value land for
residential, recreational, and commercial use. Before special charges, segment
operating profit was $17.9 million in 1998, $9.6 million in 1997 and $21.3
million in 1996. After special charges, operating profit was $17.3 million in
1998, and $14.9 million in 1996. The 1998 improvement in operating profit was
the result of increased high-value land sales from development projects.
INTEREST EXPENSE
Net interest expense for 1998 was $118.0 million, compared to $117.3
million in 1997 and $ 112.3 million in 1996. The increase in interest expense
for 1998 was primarily due to the higher level of commercial paper borrowings,
partially offset by higher capitalized interest and lower short-term interest
rates. The increase in 1997 was the result of higher outstanding debt, in
addition to slightly higher interest rates, offset partially by increased
capitalized interest.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Net working capital (the excess of current assets over current liabilities)
decreased by $112 million to $297 million at the end of 1998, reflecting higher
commercial paper borrowings and the increased current portion of long-term debt,
and a reduction in accounts receivable. The company's current ratio is 1.3,
compared to 1.5 for the prior two years. The interest coverage ratio for 1998
was 1.4 compared to 2.1 for 1997. Stockholders' equity was $1.9 billion or
$27.98 per share at the end of 1998 as compared to $2.0 billion or $29.39 per
share at the end of 1997.
Internally generated cash flow continues to be the primary source of
working capital. Cash flow from operations was $427 million in 1998 compared to
$381 million in 1997 and $503 million in 1996. The increase in 1998 is primarily
attributable to a reduction in accounts receivable. Cash used for investing
activities decreased by $29 million in 1998, primarily due to a lower level of
capital spending. Cash used for financing activities increased by $46 million in
1998 reflective of
25
reduced proceeds from the issuance of debt in 1998 as compared to 1997,
partially offset by a decrease in the level of common stock repurchases.
The ratio of long-term debt to capital employed (the sum of long-term debt,
deferred taxes and stockholders' equity) was 32.5% at December 31, 1998 compared
to 33.0% at December 31, 1997. Total debt to total capital employed for the
current year increased to 37.8% compared to 36.8% at the end of the prior year.
FINANCIAL MARKET RISK
The company's primary risk exposures consist of interest rate risk and
foreign currency exchange risk. See Note 7 "Financial Instruments" to the
company's consolidated financial statements for the company's objectives and
strategies for managing potential exposures related to these risks.
Management primarily uses derivative instruments, the majority of which are
forward exchange contracts, to hedge exposures to certain foreign currency
fluctuations as described in Note 7. As hedges, gains and losses on forward
contracts are offset by the effects of currency movements on respective
underlying hedged transactions. Therefore, with respect to derivative
instruments outstanding at December 31, 1998, a change of 10% in the currency
rates would not have a material effect on the company's consolidated financial
position, liquidity, cash flows or results of operations.
The company holds certain instruments, primarily debt obligations, which
are sensitive to changes in market interest rates. At December 31, 1998, the
majority of the company's variable rate debt consisted of short-term commercial
paper which is subject to changes in market interest rates. However, at December
31, 1998, a change of 10% in interest rates would not have a material effect on
the company's consolidated financial position, liquidity, cash flows or results
of operations.
CAPITAL EXPENDITURES
Capital spending totaled $273 million in 1998 compared with $337 million in
1997 and $386 million in 1996. Included in capital expenditures for 1998 is
paper mill spending of $95 million. This includes $28 million of a $131 million
project that consists of four paper machine rebuilds at the Franklin and
Eastover mills and an expansion of the recently constructed sheet converting
plant at Franklin. This project addresses quality improvements that affect core
products in strategic market segments and modernization of aging equipment.
Completion is scheduled for late 1999 to early 2000. Investment at domestic and
international packaging plants was $57 million, including construction of a
second joint venture corrugated plant in China which is scheduled for start up
in mid-1999. Chemical sector spending, including Bush Boake Allen, totaled $53
million. Spending at Wood Products facilities was $24 million, which included
$16 million to complete a $45 million laminated veneer lumber (LVL) production
facility in Thorsby, Alabama. Expenditures related to the company's timberlands
totaled $32 million.
26
($ in millions) 1998 1997 1996
----------------------------------------------------------------------------
Plant and Equipment
(excludes acquisitions):
Expansion & Cost Reduction $ 150 $ 145 $ 139
Replacement & Other 83 146 148
Capitalized Interest 8 10 4
Timberlands (acquisition and
regeneration) 32 36 95
----------------------------------------------------------------------------
Total $ 273 $ 337 $ 386
============================================================================
At year-end 1998, purchase commitments related to capital projects
in-progress were approximately $61 million.
ACQUISITIONS AND DISPOSITIONS
During 1998, the company sold its converting facilities in Lakeland,
Florida, and Newtown, Connecticut. Net sales for these facilities prior to their
sale were $26 million.
In 1997, the company made several acquisitions to strengthen its
competitive position. These included Phoenix Display and Packaging Corporation,
a merchandising and point-of-purchase display company; an acquisition of a
merchant distribution company by Alling & Cory, the company's paper distribution
business; and the purchase of a 75% interest in Puntapel, S.A., located in San
Luis, Argentina. The combined cost of these acquisitions was $20 million.
Also in 1997, the company sold its Denver, Colorado container plant and its
multiwall plant in Denton, Texas. It also contributed approximately 25 thousand
acres of timberland valued at $30.7 million for a 50% interest in Forestmax,
LLC. The deferred gain ($27.0 million) will be recognized on the basis of timber
cut. During 1998, $2 million of that gain was recognized.
ANNOUNCED MERGER
In November 1998, Union Camp announced that it would be acquired by
International Paper Company through an exchange of International Paper common
shares for Union Camp common shares valued at approximately $4.9 billion. The
exchange ratio will be based on the average price of International Paper's stock
prior to closing. The transaction, which is expected to be finalized early in
the second quarter of 1999, is subject to shareholder approval and is expected
to be accounted for as a pooling of interests.
27
DIVIDENDS AND STOCK REPURCHASES
Cash dividends paid in 1998 were $124.7 million compared with $125.1
million in 1997 and $124.7 million in 1996. The dividend rate was $1.80 per
share for all three years.
During 1998, the company repurchased 276,800 shares of its common stock at
a cost of $13 million as part of the stock repurchase program authorized in
1995. In 1997 and 1996, 687,600 and 1,714,400 shares were repurchased at a cost
of $36.9 million and $86.5 million, respectively. On November 23, 1998, the
Board of Directors rescinded the 5,000,000 share repurchase authorization which
it had approved in the third quarter of 1998. The remaining portion, 1,169,700
shares, of the 1995 repurchase authorization was rescinded in March 1999.
ENVIRONMENTAL MATTERS
The company invested approximately $17 million in pollution control
facilities in 1998. Over the past five years the company has invested
approximately $123 million in such facilities, which is about 8% of total
capital spending. In 1998, the company recorded expenses of $8 million for
study, testing and remediation in compliance with environmental regulations.
The U. S. Environmental Protection Agency has adopted regulations known as
the Cluster Rule. As applicable to Union Camp, these regulations establish
various compliance completion dates, which fall within the 2001--2006 time
frame. The company's current assessment of the capital cost required to achieve
compliance is in the range of $140 million to $175 million. Compliance involves
various initiatives with different completion dates spread over a six-year
period. Some degree of flexibility exists with respect to the timing of required
capital spending. However, the company expects that a majority of this spending
will be completed by 2001. The incremental operating cost is estimated to be
immaterial. The company believes compliance with these rules will not adversely
affect its competitive position since these regulations also apply in varying
degrees to its domestic competitors.
ACCOUNTING MATTERS
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments. The statement, which is effective for the
first quarter of 2000, requires all derivatives to be measured at fair value and
recognized as either assets or liabilities. Management does not expect adoption
of this statement to have a material effect on the company's consolidated
financial position or results of operations.
28
EUROPEAN ECONOMIC AND MONETARY UNION
On January 1, 1999 certain member nations of the European Economic and
Monetary Union (EMU) adopted a common currency, the "Euro". For a three-year
transition period, both the Euro and the members' national currencies will
remain in circulation. After June 30, 2002, the Euro will be the sole legal
tender for EMU countries. The company's current accounting systems will
accommodate the Euro conversion with minimal intervention. In addition, the
company does not expect that the adoption of the Euro currency unit will have a
material impact on its operations, financial condition or liquidity. The costs
of addressing the Euro conversion are not expected to be material and will be
charged to operations as incurred.
IMPACT OF YEAR 2000
The Year 2000 problem relates to computer systems that have time and
date-sensitive programs that were designed to read years beginning with "19,"
but may not properly recognize the year 2000. If a computer system or software
application used by the company or a third party dealing with the company fails
because of the inability of the system or application to properly read the year
"2000," the results could conceivably have a material adverse effect on the
company.
State of Readiness. The company has instituted a Year 2000 Compliance Program
which embraces internal business systems, manufacturing and logistics systems,
process control systems, security and mechanical systems, and associated
software. The program includes, where appropriate and significant, efforts to
determine whether relevant third party vendors, suppliers and service providers
are also actively engaged in achieving Year 2000 compliance in products,
services, and software, whichever may apply. The company began its Year 2000
compliance efforts in mid-1996 with an initial emphasis on the business
applications of information technology.
Individual sites are responsible to their division management for achieving
Year 2000 compliance. Project coordinators at each division oversee the site
activities and provide consolidated progress reporting for the business unit.
Their effort emphasizes the identification of business risk related to business
systems, technology infrastructure and process controls.
The Year 2000 program is organized to proceed in phases and to be
implemented by each production operation, information systems group, and
administrative unit. The management of this activity is being conducted by
internal resources. In the case of process controls, management is by engineers
in maintenance or project management at operational sites. In the case of
Information Systems, management is by system professionals in division offices
or operating sites.
Year 2000 work has been assigned the following five phases:
Phase 1: Awareness: Awareness of the problem is communicated, compliance is
defined, and goals set.
29
Phase 2: Inventory: Inventory plans are developed. All sites complete
inventories. Information Services' data is inventoried for in-house
analysis.
Phase 3: Triage/Set Priorities: Assess the devices and software with potential
Year 2000 problems, consider likely impact on operations, and
prioritize remediation actions.
Phase 4: Detailed Assessment: Investigate devices and software that have a Year
2000 compliance problem. Retain vendors as required and obtain
proposals for fixes or replacements.
Phase 5: Resolution, Testing, and Deployment: Repair, replace, provide work
arounds for non-compliant devices and software. Define test plans and
implement. Deployment upgrades and perform verification testing.
The company's information services group currently has identified 237 major
business and technology systems. Ninety-one of these systems have been
designated as having higher risk. Approximately 90% of these systems are in the
final resolution, testing and deployment phase. In aggregate, all information
technology compliance efforts are scheduled to be completed by September 1999.
The company is primarily utilizing internal staff in the Year 2000 effort. No
significant consulting or contract personnel are being used for the Year 2000
effort. In 1999, less than 10% of the information services budget is expected to
be spent for the Year 2000 effort.
For each division, and for the corporation as a whole, major new systems
are in their fourth year of development, implementation or operation. Over this
period, the entire information technology infrastructure of the corporation has
been upgraded, providing Year 2000 compliance as a by-product in most instances.
Process Control Systems. The Awareness and Inventory phases are complete at all
the company's mills and plant facilities. Most of these sites are well into the
Triage phase where potential Year 2000 problems are assessed and the Resolution,
Testing and Deployment phase. Currently, no operation has reported the need to
replace a major system. The company expects to complete its Process Control Y2K
efforts within the third quarter of 1999.
Supplier Relationships. The company has taken substantial actions to address its
critical supply chain relationships. It has reviewed the risks and exposures and
has identified and prioritized its critical suppliers. The company's shared
services purchasing function is tracking and monitoring an active dialogue with
critical suppliers. This dialog includes questionnaires and surveys originating
from both the shared services group and from operating locations. Transportation
and energy providers are the main focus of the company's supply chain
initiative. The company is satisfied that adequate planning and coordination
will provide the basis for uninterrupted operations or an efficient recovery.
Specifically, the company's four large paper mills are fully integrated in
that all pulp required to support paper manufacturing is produced at the mill
sites. Other critical raw materials can be inventoried. Logistically, all mills
have dual rail line access (CSX and Norfolk Southern) as
30
well as motor carriage transportation links. Barge transportation is also an
alternative for two of these operations.
The company has contacted its major power/energy suppliers and discussed
their state of readiness and back-up. Its primary mill operations can also meet
their electricity needs on a short-term basis through self generating activities
(burning of bark/chips and black liquors created in the manufacturing process).
The company also has the capability of increasing its fuel reserves, i.e. coal.
Reporting and Progress Tracking. The company is utilizing a comprehensive
project management methodology. Reporting requirements are consistent in most of
the operating units of the corporation. Summaries of detailed division plans are
reviewed for progress according to business area, risk of non-compliance and
scheduled completion of the standard phases.
Costs. Both internal and external resources are being used to reprogram or
replace non-compliant technologies, and to appropriately test Year 2000
modifications. Such modifications are being funded through operating cash flows.
The company estimates the incremental cost of corrective actions will be
approximately $18 million. Included in these costs are $2 million of capital
expenditures. Approximately $5 million of the total estimated cost was spent in
1998. The company believes all necessary work will be completed by September
1999. While it is possible that the costs of these remedial efforts may be
material to the results of operations in one or more quarters, management
believes these costs will not have a material adverse impact on the long-term
results of operations, liquidity, or consolidated financial position of the
company.
Contingency Planning. While the company currently expects no material adverse
consequences on its financial condition or results of operations due to Year
2000 issues, the company's beliefs and expectations are based on certain
assumptions that ultimately may prove to be inaccurate. Divisions are developing
specific contingency plans for the most reasonably likely worst case scenarios.
These plans are expected to be complete by September 1999. The company's worst
case scenarios revolve around transportation links, energy availability, and the
potential for process equipment failures. Individual business units are
developing specific contingency plans and actively assessing and correcting
identified deficiencies. In addition, the company has the ability to inventory
critical raw materials and stores items, increase finished goods inventories
and, as noted above, switch to alternate transportation and energy sources.
- --------------------------------------------------------------------------------
Statements in this report or in other company announcements that are not
historical are forward-looking statements that are subject to risks and
uncertainties that could cause actual results to differ materially. Such risks
and uncertainties with respect to the company include the effect of general
economic conditions, fluctuations in supply and demand for the company's
products including exports and potential imports, paper industry production
capacity, operating rates, competitive pricing pressures, that the company's
"Year 2000" efforts are unsuccessful or reveal the costs of corrective action to
be higher than presently estimated and that, if the obligor of the $15 million
trade receivable and $15 million note guaranteed by the company defaults in its
payment obligations, the company's remedies may be insufficient.
- --------------------------------------------------------------------------------
31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not material. See also "Financial Market Risk" included within Management's
Discussion and Analysis of Financial Condition and Results of Operations on page
26.
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
RESPONSIBILITY FOR FINANCIAL STATEMENTS
Union Camp management is responsible for all information and
representations contained in the accompanying consolidated financial statements.
These statements were prepared in accordance with generally accepted accounting
principles appropriate in the circumstances and by necessity include some
amounts determined using management's best judgement and estimates. The company
maintains a system of internal accounting controls, policies and procedures that
provide reasonable assurance that assets are safeguarded, transactions are
executed in accordance with management's authorization and financial records are
reliable as a basis for preparation of financial statements. This system of
internal controls, policies and procedures is reviewed regularly by the
company's internal audit staff to confirm that it is adequate and operating
effectively.
As indicated in the report of independent accountants,
PricewaterhouseCoopers LLP performs a separate independent audit of the
consolidated financial statements for the purpose of forming an opinion as to
whether the statements are presented fairly, in all material respects, in
conformity with generally accepted accounting principles. The independent
accountants are appointed by the Board of Directors and their appointment is
ratified by the stockholders.
The Audit Committee of the Board of Directors, composed of four outside
directors, meets regularly with the company's management, internal auditors and
independent accountants, to review matters relating to the quality of financial
reporting and internal accounting controls and the nature, extent and results of
the audit effort. The independent accountants and the chief internal auditor
have full and free access to the Audit Committee.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF UNION CAMP CORPORATION
In our opinion, the accompanying consolidated financial statements listed
in the index appearing under Item 14(a)(1) and (2) on page 72 present fairly, in
all material respects, the financial position of Union Camp Corporation and its
subsidiaries at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As described in Note 1 to the consolidated financial statements, the
company changed its method of accounting for costs of computer software
developed or obtained for internal use effective January 1, 1998.
PricewaterhouseCoopers LLP
New York, New York
February 5, 1999
33
UNION CAMP CORPORATION
CONSOLIDATED STATEMENT OF INCOME
($ in thousands, except per share)
For The Years Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------
Net sales $4,502,885 $4,476,761 $4,013,197
Costs and other charges:
Costs of products sold 3,479,142 3,399,559 2,972,208
Selling and administrative expenses 500,104 509,372 450,558
Depreciation, amortization and
cost of company timber harvested 315,124 310,618 298,457
Special charge 39,750 -- 39,435
- --------------------------------------------------------------------------------------------
Income from operations 168,765 257,212 252,539
- --------------------------------------------------------------------------------------------
Interest expense, net of capitalized interest 118,018 117,290 112,286
Other expense (income) - net 246 (3,888) (10,792)
- --------------------------------------------------------------------------------------------
Income before income taxes and minority interest 50,501 143,810 151,045
- --------------------------------------------------------------------------------------------
Income taxes 20,103 51,804 55,250
- --------------------------------------------------------------------------------------------
Minority interest, net of tax 11,088 10,936 10,487
- --------------------------------------------------------------------------------------------
Net income $ 19,310 $ 81,070 $ 85,308
- --------------------------------------------------------------------------------------------
Earnings per share: Basic $ 0.28 $ 1.17 $ 1.23
Diluted $ 0.28 $ 1.16 $ 1.23
============================================================================================
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
($ in thousands)
For The Years Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------
Net Income $19,310 $ 81,070 $85,308
Other comprehensive income, pre-tax:
Foreign currency translation 1,135 (15,182) 8,990
- --------------------------------------------------------------------------------------------
Comprehensive Income $20,445 $ 65,888 $94,298
============================================================================================
See the accompanying notes to consolidated financial statements.
34
UNION CAMP CORPORATION
CONSOLIDATED BALANCE SHEET
($ in thousands)
December 31, 1998 1997
- ---------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 55,511 $ 34,878
Receivables - net 557,201 638,130
Inventories 496,409 495,313
Other 76,902 43,256
- ---------------------------------------------------------------------------------------
1,186,023 1,211,577
- ---------------------------------------------------------------------------------------
Property
Plant and equipment, at cost 6,924,482 6,800,477
Less: accumulated depreciation 3,618,454 3,404,918
- ---------------------------------------------------------------------------------------
3,306,028 3,395,559
Timberlands, less cost of company timber harvested 376,082 364,226
- ---------------------------------------------------------------------------------------
3,682,110 3,759,785
- ---------------------------------------------------------------------------------------
Other Assets 308,281 270,339
- ---------------------------------------------------------------------------------------
Total Assets $ 5,176,414 $ 5,241,701
- ---------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current installments of long-term debt $ 70,101 $ 40,439
Notes payable 273,457 212,900
Accounts payable 284,351 298,641
Other accrued liabilities 241,369 212,973
Income and other taxes 19,740 38,065
- ---------------------------------------------------------------------------------------
889,018 803,018
- ---------------------------------------------------------------------------------------
Long-Term Debt 1,290,083 1,367,450
- ---------------------------------------------------------------------------------------
Deferred Income Taxes 741,605 744,677
- ---------------------------------------------------------------------------------------
Other Liabilities and Minority Interest 311,802 290,838
- ---------------------------------------------------------------------------------------
Stockholders' Equity
Common stock - par value $1.00 per share 69,484 69,264
Capital in excess of par value 53,428 41,172
Accumulated other comprehensive income (18,206) (19,341)
Retained earnings 1,839,200 1,944,623
- ---------------------------------------------------------------------------------------
Shares outstanding, 1998 - 69,484,343; 1997 - 69,264,160
Stockholders' Equity - Net 1,943,906 2,035,718
- ---------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 5,176,414 $ 5,241,701
=======================================================================================
See the accompanying notes to consolidated financial statements.
35
UNION CAMP CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
For The Years Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
Cash (Used For) Provided By Operations:
Net income $ 19,310 $ 81,070 $ 85,308
Adjustments to reconcile net income to cash
provided by operations:
Depreciation, amortization and cost of
company timber harvested 315,124 310,618 298,457
Deferred income taxes (1,997) 17,858 7,877
Special charge 39,750 -- 39,435
Other 28,561 24,807 25,011
Changes in operational assets and liabilities:
Receivables 71,039 (89,489) 43,963
Inventories 1,198 1,200 13,139
Other assets 2,102 9,139 1,511
Accounts payable, taxes and other liabilities (48,439) 25,913 (11,556)
- ---------------------------------------------------------------------------------------------------------
Cash Provided By Operations 426,648 381,116 503,145
- ---------------------------------------------------------------------------------------------------------
Cash (Used For) Provided By Investment Activities:
Capital expenditures:
Plant and equipment (241,757) (301,517) (291,345)
Timberlands (31,536) (35,709) (95,098)
--------------------------------------
(273,293) (337,226) (386,443)
Sale of assets 12,747 9,518 22,009
Acquisitions -- (13,890) (49,452)
Other (41,131) 10,914 (21,775)
- ---------------------------------------------------------------------------------------------------------
Cash Used For Investment Activities (301,677) (330,684) (435,661)
- ---------------------------------------------------------------------------------------------------------
Cash (Used For) Provided By Financing Activities:
Change in short-term notes payable 58,861 28,211 52,156
Repayments of long-term debt (69,203) (108,172) (48,954)
Issuance of long-term debt 21,500 160,000 150,000
Proceeds from issuance of common stock 21,091 22,105 3,377
Common stock repurchases (13,002) (36,864) (86,499)
Dividends paid (124,733) (125,051) (124,718)
- ---------------------------------------------------------------------------------------------------------
Cash Used For Financing Activities (105,486) (59,771) (54,638)
- ---------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 1,148 (700) 1,739
- ---------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 20,633 (10,039) 14,585
Balance at beginning of year 34,878 44,917 30,332
- ---------------------------------------------------------------------------------------------------------
Balance at end of year $ 55,511 $ 34,878 $ 44,917
=========================================================================================================
See the accompanying notes to consolidated financial statements.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS, EXCEPT PER SHARE)
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND PREPARATION OF FINANCIAL STATEMENTS: The
consolidated financial statements present the operating results and the
financial position of the company and all of its subsidiaries. All significant
intercompany transactions are eliminated.
In accordance with generally accepted accounting principles, the
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts of some assets and liabilities and,
in some instances, the reported amounts of revenues and expenses during the
reporting period.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include all highly liquid
investment instruments with an original maturity of three months or less.
INVENTORIES: Inventories are stated at the lower of cost or market and include
the cost of materials, labor and manufacturing overhead. Finished goods and raw
materials of domestic operations are valued principally at last in, first out
(LIFO) cost. Supplies and all inventories of foreign operations are valued at
first in, first out (FIFO) or average cost.
PROPERTY AND DEPRECIATION: Plant and equipment is recorded at cost, less
accumulated depreciation. Upon sale or retirement, the asset cost and related
depreciation are removed from the balance sheet and the resulting gain or loss
is included in income.
Depreciation is principally calculated on a straight-line basis with lives
for buildings from 15 to 33 years and for machinery and equipment from 10 to 20
years. For major expansion projects, the company uses the units-of-production
depreciation method until design level production is reasonably sustained.
Accelerated depreciation methods are used for tax purposes.
The cost of company timber harvested is charged to income as timber is cut.
The charge to income is the product of the volume of timber cut multiplied by
annually developed unit cost rates.
Depreciation and cost of company timber harvested was $301.6 million,
$293.2 million and $280.3 million in 1998, 1997 and 1996, respectively.
GOODWILL: The excess of the cost over the fair value of net assets of acquired
businesses is recorded as goodwill and is amortized on a straight-line basis
over appropriate periods not to exceed 40 years. The company reviews the
goodwill for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be fully recoverable.
37
RESEARCH AND DEVELOPMENT COSTS: Research and development costs are expensed as
incurred. These expenditures totaled $56.2 million in 1998, $57.3 million in
1997, and $55.9 million in 1996.
CAPITALIZED INTEREST: Interest is capitalized on major capital expenditures
during the period of construction. Total interest costs incurred and amounts
capitalized were:
1998 1997 1996
---------------------------------------------------------------
Total interest $ 128,911 $ 126,978 $ 116,748
Interest capitalized (10,893) (9,688) (4,462)
---------------------------------------------------------------
Net interest expense $ 118,018 $ 117,290 $ 112,286
===============================================================
STOCK-BASED COMPENSATION: In accordance with Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation" the company
has elected to continue to account for its employee stock option plan in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and to disclose supplementally the pro forma effect
of accounting for these plans as if the provisions of SFAS No. 123 had been
adopted. (See also Note 9.)
RECENT ACCOUNTING PRONOUNCEMENTS: In 1998, the company adopted several FASB
statements, including SFAS No. 130, "Reporting Comprehensive Income," which
establishes standards for the reporting and display of comprehensive income and
its components in the company's financial statements. The components of Other
Comprehensive Income consist entirely of the Foreign Currency Translation
Adjustment as reported in the Consolidated Statement of Comprehensive Income for
the years ended December 31, 1998, 1997 and 1996, and as reported in the
Consolidated Balance Sheet as of December 31, 1998 and 1997. Union Camp
Corporation does not provide any Federal or state deferred income taxes on the
cumulative undistributed earnings of foreign subsidiaries, including cumulative
translation adjustments with respect to such foreign subsidiaries, because it is
management's intention to permanently reinvest the earnings of foreign
subsidiaries within the businesses of those companies.
SFAS No. 131, "Disclosures About Segments of a Business and Related
Information" establishes standards for the reporting of financial information
about a company's operating segments for both interim and annual reporting. (See
also Note 13.)
SFAS No. 132, "Employers' Disclosures About Pensions and Postretirement
Benefits" revises employers' disclosures about pensions and other postretirement
benefit plans and standardizes the format. This statement does not change the
measurement or recognition of those plans. (See also Note 10.)
These statements affect only financial statement presentation and
disclosure. Adoption of these new standards did not have an impact on the
company's consolidated financial position or results of operations.
38
Also in 1998, the company adopted SOP 98-1 "Accounting for Costs of
Computer Software Developed or Obtained for Internal Use." This statement
requires capitalization of qualifying costs relating to developing or obtaining
internal-use software. The effect of this change in accounting was an increase
in pre-tax income of approximately $9 million.
ENVIRONMENTAL LIABILITIES: Environmental expenditures that improve the condition
of the property are generally capitalized, and all other environmental
expenditures are expensed as incurred. Liabilities are recorded when remedial
efforts are probable and the costs can be reasonably estimated. The timing of
these accruals generally coincides with the completion of a feasibility study or
the company's commitment to a formal plan of action.
INCOME TAXES: Deferred income taxes are recorded using enacted tax rates in
effect for the year temporary differences are expected to reverse. Federal and
state income taxes are not accrued on the cumulative undistributed earnings of
foreign subsidiaries because the earnings have been reinvested in the businesses
of those companies. As of December 31, 1998, the total of all such undistributed
earnings amounted to $221.7 million. It is not practical to estimate the amount
of tax that might be payable on the distribution of the foreign earnings. The
company has, as required, provided for tax potentially payable on the
distribution of its share of $108.8 million, the undistributed earnings of Bush
Boake Allen Inc. and subsidiaries earned subsequent to 1992. (See also Note 8.)
FOREIGN CURRENCY TRANSLATION: The assets and liabilities of the company's
foreign subsidiaries and affiliates are translated into U. S. dollars at
year-end exchange rates, while income and expense accounts are translated at
average annual rates. The primary factor used to determine the functional
currencies of the company's foreign subsidiaries is the local currency cash
flows resulting from manufacturing, sales and financing activities. Gains and
losses resulting from foreign currency translation are reflected in a separate
component of Stockholders' Equity entitled Accumulated Other Comprehensive
Income. The effect of these cumulative adjustments was to reduce equity by $18.2
million at December 31, 1998 and $19.3 million at December 31, 1997.
DERIVATIVES: The company hedges foreign currency transactions by entering into
forward foreign exchange contracts. Gains and losses associated with the forward
contracts are matched with the offsetting gains and losses recorded for exchange
rate fluctuations on the underlying assets and liabilities. Gains and losses on
interest rate swap agreements are charged or credited to interest expense over
the life of the agreement. (See also Note 7.)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments. This statement, which is effective for the
first quarter of 2000, requires all derivatives to be measured at fair value and
recognized as either assets or liabilities. Based on the company's current use
of financial instruments, management does not expect adoption of this statement
to have a material effect on the company's consolidated financial position or
results of operations.
39
REVENUE RECOGNITION: The company recognizes revenue upon the passage of title,
which is generally at the time of shipment.
EARNINGS PER SHARE: In accordance with the provisions of SFAS No. 128, "Earnings
Per Share," the company is presenting net income per share on a basic and
diluted basis. Basic earnings per share is computed using the weighted average
number of shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of shares outstanding adjusted for
dilutive common stock equivalents.
The weighted average number of shares outstanding for basic earnings per
share were 69,271,058 for 1998, 69,439,150 for 1997 and 69,220,157 for 1996. For
diluted earnings per share, these amounts increased by 433,192 in 1998, 491,292
in 1997, and 385,379 in 1996, due to potentially dilutive common stock
equivalents issuable under the company's stock option plan. Potential common
shares excluded from the computation of diluted earnings per share because the
effect would have been antidilutive, were 951,700 in 1998, 949,700 in 1997, and
28,000 in 1996.
RECLASSIFICATIONS: Certain amounts have been reclassified for 1997 and 1996 to
conform with the 1998 presentation.
2. SPECIAL AND OTHER CHARGES
1998 SPECIAL CHARGE: During the third quarter of 1998, the company recorded a
$39.8 million pre-tax special charge ($26.4 million after-tax) to operating
income. Included in the charge was $31.7 million for employee termination
benefits related to the elimination of approximately 540 positions, and $8.1
million for asset write downs. Included in the job elimination program are
approximately 190 positions eliminated through a re-organization and
restructuring of the company's research and development activities, about 190
positions to be eliminated through the consolidation of the Packaging Group's
administrative support functions, and about 160 positions to be eliminated
through a series of other organizational changes. As of December 31, 1998,
approximately 25% of the employees were terminated under this program at a cost
of $8 million. Substantially all of the 540 positions are expected to be
eliminated by the end of 1999; however, the announced merger with International
Paper Company may affect timing. No adjustments have been or are anticipated to
be made to the special charge reserve established in 1998.
The asset write downs were principally attributable to the impairment of
goodwill specific to two packaging businesses. After an ongoing pattern of
declining operating performance over several years at the Chase Packaging
facilities acquired in 1990, management assessed the carrying value of the
remaining goodwill and wrote off $5.4 million. The other write-off is associated
with Union Camp's 1996 purchase of a 50% interest in a packaging plant in
Turkey. The company's investment in the plant has resulted in Union Camp
incurring losses of $2.5 million and $1.7 million in 1997 and 1998,
respectively. Upon reviewing the historical and projected operating results for
the business, management concluded that expected future cash
40
flows did not fully support the carrying value of this asset and wrote off $1.2
million. The business segments affected by these write downs were as follows:
Paperboard and Packaging, $6.6 million; Fine Paper, $.5 million; Other, $1
million.
1998 OTHER CHARGES: Income from operations for 1998 also included two
significant charges. The company recorded a $10.7 million reserve for a
potential loss relating to an outstanding trade receivable and loan guarantee
for a customer with questionable future cash flows, with $8.7 million recorded
in the third quarter. Additionally, in the third quarter the company recorded
higher than normal environmental/OSHA remediation expenses of $6 million.
1996 SPECIAL CHARGE: During the fourth quarter of 1996, the company recorded a
$39.4 million pre-tax charge ($24.3 million after-tax) to operating income. The
Special Charge related to restructuring costs associated with the company's
profit enhancement plan announced at the end of 1996 and asset write downs.
Included in the charge was $21.0 million for employee severance costs and $18.4
million for asset write downs. The employee severance costs related to the
elimination of approximately 400 positions. As of December 31, 1998, all 400
positions had been eliminated under this program at a cost of $21.0 million. No
adjustments were made to the special charge reserve established at the end of
1996. Asset write-downs of $18.4 million consisted of $9.0 million for obsolete
equipment, $6.4 million for a real estate development project and $3.0 million
for an intangible asset related to propriety technology. The business segments
affected by these write downs were as follows: Paperboard and Packaging, $6.6
million; Fine Paper, $2.0 million; Other, $9.8 million.
1996 OTHER CHARGES: Also included in 1996 income from operations are
environmental/OSHA remediation expenses of $5 million, demolition costs of $2.1
million, and other costs of $0.4 million which were previously included in the
1996 special charge and have been reclassified to "Cost of Products Sold" and
"Selling and Administrative Expenses".
3. MERGERS AND ACQUISITIONS
Merger with International Paper - In November 1998, Union Camp announced that it
would be acquired by International Paper Company through an exchange of
International Paper common shares for Union Camp common shares valued at
approximately $4.9 billion. The exchange ratio will be based on the average
price of International Paper's stock prior to closing. The transaction, which is
expected to be finalized early in the second quarter of 1999, is subject to
shareholder approval and is expected to be accounted for as a pooling of
interests.
Acquisitions - In October 1997, the company acquired the outstanding shares of
Phoenix Display and Packaging Corporation, a leading merchandising and
point-of-purchase display company. In June, Alling and Cory, the company's paper
distribution business, acquired the Antietam Paper Company. In March, the
company acquired a 75% interest in Puntapel, S. A., a multiwall plant located in
San Luis, Argentina. The cost of these acquisitions, accounted for as purchases,
was $20 million in the aggregate.
41
In August 1997, the company contributed 25 thousand acres of timberlands
valued at $30.7 million for a 50% equity investment in Forestmax LLC, which has
as its primary assets timberland holdings. The company will recognize a gain of
$27 million over a future period on the basis of timber cut.
On August 2, 1996, the company acquired The Alling & Cory Company (Alling &
Cory), a paper distribution business, for a consideration totaling $88.5
million, consisting of 1.7 million shares of company common stock and $5.4
million cash. This acquisition was accounted for under the purchase method and,
accordingly, the net assets and results of operations have been included in the
consolidated financial statements since the date of acquisition. The excess of
purchase price over the estimated fair values of the net assets acquired has
been treated as goodwill.
The pro forma effect of these acquisitions is not material.
42
4. SUPPLEMENTAL BALANCE SHEET INFORMATION
December 31, 1998 1997
-------------------------------------------------------------
Receivables
Trade $ 534,646 $ 598,105
Other 42,508 57,810
-------------------------------------------------------------
577,154 655,915
Less estimated doubtful accounts,
discounts and allowances 19,953 17,785
-------------------------------------------------------------
Net $ 557,201 $ 638,130
=============================================================
Inventories
Finished goods $ 284,601 $ 275,112
Raw materials 103,195 109,352
Supplies 108,613 110,849
-------------------------------------------------------------
Total $ 496,409 $ 495,313
=============================================================
At December 31, 1998 and 1997, finished goods and raw materials totaling
$253.4 million and $240.1 million, respectively, were valued at LIFO cost. The
excess of current cost over LIFO value was $91.2 million and $99.0 million in
1998 and 1997, respectively.
December 31, 1998 1997
---------------------------------------------------------------
Other Current Assets
Prepayments $ 33,510 $ 24,212
Short-term timber leases 10,219 19,044
Assets held for resale 33,173 --
---------------------------------------------------------------
Total $ 76,902 $ 43,256
===============================================================
Plant and Equipment,
at cost
Land $ 32,225 $ 36,429
Buildings and improvements 564,031 568,506
Machinery and equipment 6,178,635 5,974,738
Construction-in-progress 149,591 220,804
---------------------------------------------------------------
Total $6,924,482 $6,800,477
===============================================================
At December 31, 1998, property (principally machinery and equipment) having
an original cost of approximately $388 million and a net book value of $139
million is pledged against lease obligations and notes payable to industrial
development authorities (see also Note 5). These obligations and notes payable
have outstanding long-term balances totaling approximately $333 million.
43
4. SUPPLEMENTAL BALANCE SHEET INFORMATION (CONTINUED)
DECEMBER 31, 1998 1997
- ---------------------------------------------------------
OTHER ASSETS
Goodwill $ 73,845 $ 82,783
Investment in affiliates 70,658 76,019
Other intangibles 68,653 44,383
Pension assets 55,335 42,593
Other 39,790 24,561
- ---------------------------------------------------------
Total $308,281 $270,339
=========================================================
SHORT-TERM DEBT: Included in Notes Payable at December 31, 1998 and 1997 were
$194.5 million and $112.8 million, respectively, of commercial paper borrowings.
The weighted average interest rate on these borrowings for the years 1998 and
1997 were 5.67% and 5.76%, respectively.
The company has short-term revolving credit facilities in numerous
countries primarily outside the United States, which provide for aggregate
availability of $172 million. At December 31, 1998 and 1997, approximately $72
million and $92 million, respectively, was outstanding and included in
short-term borrowings. Related commitment fees are either nominal or zero.
DECEMBER 31, 1998 1997
- ---------------------------------------------------------
OTHER ACCRUED LIABILITIES
Payrolls $ 66,048 $ 72,276
Interest 28,902 29,652
Special charge reserve 15,359 3,647
Pension liabilities 30,977 15,552
Other 100,083 91,846
- ---------------------------------------------------------
Total $241,369 $212,973
=========================================================
OTHER LIABILITIES AND MINORITY INTEREST
Postretirement and
postemployment benefits $136,034 $130,412
Minority interest 112,659 102,429
Minimum pension liability 15,067 7,210
Other 48,042 50,787
- ---------------------------------------------------------
Total $311,802 $290,838
=========================================================
44
5. LONG-TERM DEBT
The current portion of long-term debt at December 31, 1998 amounted to
$70.1 million. Amounts payable in the years 2000 through 2003 are $38.7 million,
$48.1 million, $140.5 million and $18.8 million, respectively.
At December 31, 1998, $46 million of commercial paper borrowings was
classified as long-term debt, since the company has the ability and intent to
renew these obligations through the year 2001. The effective interest rate on
these borrowings was 5.67%.
The company has revolving credit and term loan agreements which provide for
unsecured borrowings up to $500 million in the United States through the year
2001. Any borrowings under these agreements would incur interest at the
prevailing prime rate or other market rates. Nominal commitment fees are paid on
the unused portion. At December 31, 1998 and 1997, no borrowings were
outstanding under these agreements.
DECEMBER 31, 1998 1997
- ----------------------------------------------------------------------
Sinking fund debentures:
8-5/8% due 2000-2016 $ 22,500 $ 42,674
10% due 2000-2019 100,000 100,000
9-1/4% due 2002-2021 117,780 117,780
Debentures:
9-1/2% due 2002 100,000 100,000
9-1/4% due 2011 124,800 124,800
8-1/2% due 2022 100,000 100,000
Notes:
7-3/8% due 1999 -- 50,000
7% due 2006 150,000 150,000
6-1/2% due 2007 150,000 150,000
Medium-term notes due
2000-2001; 7.75% to 9.54%;
weighted average rate 8.38% 41,000 53,000
Industrial Development Revenue
Bonds due 2001-2013; 5.19%
to 8.0%; weighted average
rate 6.28% 35,843 36,944
Pollution Control Revenue Bonds
due 2000-2028; 4.7% to 7.45%;
weighted average rate 6.50% 296,845 297,500
Other notes due 2000-2004 11,135 5,024
Commercial paper 46,000 46,000
Less unamortized discount (5,820) (6,272)
- ----------------------------------------------------------------------
Total $ 1,290,083 $ 1,367,450
======================================================================
45
6. STOCKHOLDERS' EQUITY
Accumulated
Capital in Other
Common Excess of Retained Comprehensive
Stock Par Value Earnings Income
- -----------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $69,078 $37,749 $2,028,014 $(13,149)
Net Income -- -- 85,308 --
Cash dividends ($1.80 per share) -- -- (124,718) --
Common stock repurchases (1,714) (84,785) -- --
Issuance of stock for options and award plans 152 5,638 -- --
Shares issued for business acquisitions 1,701 81,330 -- --
Foreign currency translation -- -- -- 8,990
- -----------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $69,217 $39,932 $1,988,604 $(4,159)
Net Income -- -- 81,070 --
Cash dividends ($1.80 per share) -- -- (125,051) --
Common stock repurchases (688) (36,176) -- --
Issuance of stock for options and award plans 551 26,033 -- --
Shares issued for business acquisitions 184 11,383 -- --
Foreign currency translation -- -- -- (15,182)
- -----------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $69,264 $41,172 $1,944,623 $(19,341)
Net Income -- -- 19,310 --
Cash dividends ($1.80 per share) -- -- (124,733) --
Common stock repurchases (277) (12,725) -- --
Issuance of stock for options and award plans 497 24,981 -- --
Foreign currency translation -- -- -- 1,135
- -----------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $69,484 $53,428 $1,839,200 $(18,206)
- -----------------------------------------------------------------------------------------------------------
The authorized capital stock of the company at December 31, 1998, 1997 and 1996
consisted of 125,000,000 shares of common stock, $1.00 par value, and 1,000,000
shares of authorized but unissued preferred stock, $1.00 par value.
Common stock repurchased is included in the authorized but unissued shares of
the company.
Shareholder Rights Agreement: The company has a Shareholders' Rights Agreement
pursuant to which preferred stock purchase rights are issued to the common
stockholders at the rate of one right for each share of common stock. The
Shareholder Rights Agreement was amended on November 23, 1998 to make it
inapplicable to the transaction contemplated by the Merger Agreement, dated as
of November 24, 1998, among the company, International Paper Company, and Maple
Acquisition, Inc., a subsidiary of International Paper.
Where applicable, each right entitles shareholders to purchase, under
certain conditions (i) one one-thousandth of a share of the company's Series A
Junior Participating Preferred Stock at an exercise price of $175 or (ii) common
stock of the company having a market value of two times the exercise price.
Alternatively, the Board of Directors may permit holders to surrender each right
in exchange for one share of common stock. The rights will be exercisable only
if a person or group acquires 15% or more of the outstanding common stock or
46
announces a tender offer for 15% or more of the common stock. The rights expire
February 26, 2006 and may be redeemed for $.001 per right by the Board of
Directors prior to the time the rights become exercisable. In addition, if after
any person acquires 15% or more of the company's common stock, the company is
involved in a merger or other business combination transaction with another
person after which its common stock does not remain outstanding, or the company
sells 50% or more of its assets or earning power, each right will entitle its
holder to purchase, at the then current exercise price, shares of the acquiring
company's common stock having a market value equal to two times the purchase
price.
7. FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of certain financial
instruments: cash, short-term investments, trade receivables and payables
approximate their fair values. The fair value of the company's long-term debt
varies with market conditions and is estimated based on quoted market prices for
similar financial instruments by obtaining quotes from brokers.
At December 31, 1998, the book value of long-term debt was $1.3 billion and
the fair value was approximately $1.4 billion. The book value of all other
financial instruments approximates their fair value.
DERIVATIVE FINANCIAL INSTRUMENTS: Derivative instruments are used by the company
only to hedge the risk associated with underlying business transactions such as
existing floating rate debt and existing foreign currency commitments.
Derivatives are not used for trading or speculative purposes. The book value of
these derivatives approximates their fair value.
At December 31, 1998, the company had outstanding foreign exchange
contracts valued at $77.7 million. The purpose of $76.6 million of these
contracts is to neutralize foreign currency transaction risk generated by the
company's firm foreign currency business commitments resulting from the sale and
purchase of products. The change in value of these contracts resulting from
changes in the respective foreign currency rates versus the U. S. dollar is
accrued monthly and credited or charged to foreign exchange gain or loss. These
foreign currency commitment exposures are evaluated on an ongoing basis and the
amount of the related foreign currency contracts are adjusted as required to
offset the risk associated with the underlying transactions.
Cash settlements are executed whenever the contracts are adjusted, which
occurs at least monthly. The additional $1.1 million of foreign exchange
contracts at December 31, 1998 represent hedges of specific firm commitments for
certain capital expenditure and raw material purchase transactions denominated
in foreign currencies. The company enters into these contracts, from time to
time, to establish with certainty the U. S. dollar amount of the specific firm
commitments. All foreign exchange contracts are limited to currencies with
established forward markets and to counterparties, which have Moody's credit
ratings of A1 or better. As a result, the company considers the credit risk of
counterparty default to be minimal.
47
At December 31, 1998, the company had an outstanding interest rate swap
agreement, the purpose of which is to convert $19.0 million of floating rate
commercial paper to fixed rate debt. The swap agreement is based on a declining
principal balance schedule which terminates in April 2000. The differential
between fixed and floating rate obligations is accrued as interest rates change
and is charged or credited to interest expense over the life of the agreement.
Cash settlements are payable semi-annually. The counterparty has a Moody's
credit rating of Aa3.
48
8. INCOME TAXES
The components of income before income taxes and minority interest are as
follows:
1998 1997 1996
- ----------------------------------------------------------------------
Domestic $ 17,858 $ 99,071 $ 97,187
Foreign 32,643 44,739 53,858
- ----------------------------------------------------------------------
Total $ 50,501 $143,810 $151,045
======================================================================
The provision for income taxes is comprised of the following:
1998 1997 1996
- ---------------------------------------------------------------------
CURRENT:
Federal $11,849 $ 19,493 $ 34,313
State and local 1,325 3,132 3,831
Foreign 8,926 11,321 9,229
- ---------------------------------------------------------------------
$22,100 $ 33,946 $ 47,373
- ---------------------------------------------------------------------
DEFERRED:
Federal ($ 1,570) $ 13,870 $ 2,094
State (1,193) 1,297 (206)
Foreign 766 2,691 5,989
- ---------------------------------------------------------------------
($ 1,997) $ 17,858 $ 7,877
- ---------------------------------------------------------------------
Total $20,103 $ 51,804 $ 55,250
=====================================================================
The company follows the provisions of SFAS No. 109, "Accounting for Income
Taxes," whereby deferred taxes represent estimated liabilities to be paid or
assets to be received in the future and tax rate changes would immediately
affect those liabilities or assets. The cumulative deferred tax liability at
December 31, 1998 and 1997 was $741.6 million and $744.7 million, respectively.
The significant components of these liabilities (assets) are as follows:
December 31, 1998 1997
- ----------------------------------------------------------------
Deferred federal taxes:
Accelerated depreciation $ 709,452 $ 713,436
Alternative minimum tax (33,805) (45,540)
Postretirement benefits (46,282) (44,294)
Other 18,057 26,553
- ----------------------------------------------------------------
Total deferred federal taxes $ 647,422 $ 650,155
Deferred state taxes $ 63,378 $ 64,467
Deferred foreign taxes 30,805 30,055
- ----------------------------------------------------------------
Total deferred taxes $ 741,605 $ 744,677
================================================================
49
A detailed analysis of the effective tax rate is as follows:
1998 1997 1996
- -------------------------------------------------------
Statutory federal tax rate 35.0% 35.0% 35.0%
State taxes (net of
federal tax impact) (1.7) 2.4 1.5
Foreign income taxes (1.0) (1.2) (2.3)
Goodwill 5.3 - -
Other 2.2 (0.2) 2.4
- -------------------------------------------------------
Effective rate 39.8% 36.0% 36.6%
=======================================================
9. EMPLOYEE STOCK OPTION PLANS
Under the stock option plans adopted in 1982 and 1989 (as amended), a
maximum of 2,175,000 shares and 6,370,680 shares, respectively, of the company's
common stock were made available for the granting of options and stock
appreciation rights to officers and other key employees of the company and its
subsidiaries at prices not less than 100% of fair market value at the dates of
grant. Such options generally become exercisable two years after the date of
grant and expire ten years from that date. No further options may be granted
under the 1982 plan. At the end of 1998, 12,580 options were available for
future grants under the 1989 plan.
Under the 1989 plan, 1,274,135 shares may be awarded as restricted stock to
selected officers and other key employees of the company and its subsidiaries.
Recipients of restricted stock are entitled to receive cash dividends and to
vote their respective shares. Restrictions limit the sale or transfer of these
shares during a specified period.
Common shares issued as restricted stock under this plan were 6,631 in
1998, 4,533 shares in 1997 and 38,890 shares in 1996. The weighted average fair
value on the date of grant was $55.07 for restricted stock granted in 1998,
$48.56 for restricted stock granted in 1997, and $49.50 for restricted stock
granted in 1996. Unearned compensation, equivalent to the market price of the
restricted shares at date of grant, is included within Stockholders' Equity and
is amortized to expense over the five-year restriction period.
The following table summarizes activity in the company's stock option plans
for 1998, 1997 and 1996. The options outstanding that had related stock
appreciation rights attached were 1,067,101 at December 31, 1996. In the third
quarter of 1997, all outstanding stock appreciation rights previously granted in
tandem with nonqualified stock options were relinquished. This did not have a
material impact on reported earnings. The related stock options were not
affected and remain outstanding.
50
- ----------------------------------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------------------
Options outstanding at
beginning of year 4,429,836 $ 48.48 4,120,426 $ 44.86 3,582,626 $ 43.57
Granted 929,583 48.93 949,700 58.84 722,000 49.38
Exercised (503,280) 43.42 (544,225) 41.08 (96,427) 38.97
Forfeited (26,900) 54.66 (96,065) 35.33 (76,598) 34.24
Expired (380) 34.13 - - (11,175) 47.90
- ----------------------------------------------------------------------------------------------------------------------
Options outstanding
at end of year 4,828,859 $ 49.10 4,429,836 $ 48.48 4,120,426 $ 44.86
- ----------------------------------------------------------------------------------------------------------------------
Options exercisable
at end of year 2,964,576 $ 46.08 2,758,136 $ 44.75 2,741,526 $ 42.57
======================================================================================================================
For options outstanding as of the end of 1998, the range of exercise prices
was $33.69 to $58.84 per share and the weighted average remaining life was 7.0
years. The weighted average fair values of the options granted during 1998, 1997
and 1996 were $13.00, $12.60 and $9.66 per share, respectively.
Fair value was determined through use of the Black-Scholes options pricing
formula. For options granted in 1998, the risk-free interest rate was 4.69%, the
expected life was 7 years, the expected volatility was 26% and expected dividend
yield was 2.7%, all calculated on a weighted average basis. For options granted
in 1997 and 1996, the risk-free interest rate was 5.70% and 5.74%, respectively,
the expected life was 7 years and 6 years, the expected volatility was 19% and
18%, respectively, and the expected dividend yield was 3.4%, all calculated on a
weighted average basis.
Total compensation cost recognized in income for stock-based compensation
awards was $0.7 million in 1998, $3.3 million in 1997 and $0.7 million in 1996.
If the company had elected to adopt the provisions of SFAS No. 123, the pro
forma net income and earnings per share would have been $13.3 million or $0.19
per basic share in 1998 ($0.19 per diluted share), $76.7 million or $1.10 per
basic share in 1997 ($1.10 per diluted share), and $83.1 million or $1.20 per
basic share in 1996 ($1.19 per diluted share).
In connection with the contemplated business combination, existing options
will convert to options of International Paper at the same intrinsic value. No
adjustment has been made to the options disclosure above to give effect to the
merger with International Paper.
10. PENSION PLANS AND POSTRETIREMENT BENEFITS
The company and certain foreign subsidiaries have non-contributory defined
benefit pension plans covering substantially all of their employees. Benefits
are based on years of service and, for salaried employees, final average
earnings. The company funds its plans annually based upon a consistently applied
formula which amortizes the unfunded liability
51
adjusted for actuarial gains or losses. Assets of the plans are primarily fixed
income instruments and publicly traded stocks.
The company also sponsors a defined contribution plan for substantially all
U. S. salaried and certain hourly employees of the company. Under the provisions
of the plan, the company matches a portion of the employees' voluntary
contributions. The company's matching contributions to the plan were
approximately $10.6 million, $9.5 million, and $11.1 million for 1998, 1997, and
1996, respectively.
The company has a contributory postretirement health care plan covering
primarily its U. S. salaried employees. Employees become eligible for these
benefits when they meet minimum age and service requirements. The company funds
its plan on a "pay-as-you-go" basis, in an amount equal to the retirees' medical
claims paid.
Summarized information on the company's retirement plans is as follows:
-------------------------------------------------- -------------------------
Pension Benefits Postretirement Benefits
-------------------------------------------------- -------------------------
1998 1997 1998 1997
-------------------------------------------------- -------------------------
Domestic Foreign Domestic Foreign
--------------------------------------------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at January 1, $ 982,743 $168,467 $844,820 $150,340 $ 145,077 $ 124,094
Service cost 25,941 4,998 23,780 4,383 4,787 4,798
Interest cost 66,835 11,888 63,466 11,568 8,931 9,458
Participant contributions -- 494 -- 468 812 699
Plan amendments 10,210 -- 9,227 -- -- --
Exchange rate changes -- 2,877 -- (3,458)
Actuarial loss (gain) 46,130 14,617 97,108 11,369 (18,759) 16,252
Settlement 185 -- 491 -- -- --
Special termination benefits 10,818 -- -- -- 3,384 --
Benefits paid (61,234) (6,512) (56,149) (6,203) (10,433) (10,224)
-------------------------------------------------- -------------------------
Benefit obligation at December 31, $1,081,628 $196,829 $982,743 $168,467 $ 133,799 $ 145,077
================================================== =========================
CHANGE IN PLAN ASSETS:
Fair value of plan assets at January 1, $ 955,000 $181,667 $859,806 $160,213 $ -- $ --
Actual return on plan assets 115,309 (1,368) 149,135 28,647 -- --
Administrative expenses (6,594) -- (5,244) -- (385) (381)
Exchange rate changes -- 2,696 -- (3,663)
Company contribution 3,782 4,220 7,452 2,205 10,006 9,906
Participant contributions -- 494 -- 468 812 699
Benefits paid (61,234) (6,512) (56,149) (6,203) (10,433) (10,224)
-------------------------------------------------- -------------------------
Fair value of plan assets at December 31, $1,006,263 $181,197 $955,000 $181,667 $ -- $ --
================================================== =========================
RECONCILIATION OF FUNDED STATUS:
Funded status $ (75,365) $(15,632) $(27,743) $ 13,200 $(133,799) $(145,077)
Unrecognized actuarial loss (gain) (2,997) 56,167 (28,542) 21,303 (652) 16,122
Unrecognized prior service cost 28,955 (1,225) 22,709 (1,351) 2,217 2,402
Unrecognized transition (asset) obligation 3,634 (756) 5,451 (1,486) --
-------------------------------------------------- -------------------------
Net (liability) asset recognized on
Balance Sheet $ (45,773) $ 38,554 $(28,125) $ 31,666 $(132,234) $(126,553)
================================================== =========================
AMOUNTS RECOGNIZED IN THE STATEMENT OF
FINANCIAL POSITION CONSIST OF:
Accrued benefit liability $ (60,840) $ -- $(35,335) $ -- $(132,234) $(126,553)
Prepaid benefit cost -- 38,554 -- 31,666 -- --
Intangible pension asset 15,067 -- 7,210 -- -- --
-------------------------------------------------- -------------------------
Net amount recognized $ (45,773) $ 38,554 $(28,125) $ 31,666 $(132,234) (126,553)
================================================== =========================
52
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31,
--------------------------------------------------
Pension Benefits
--------------------------------------------------
1998 1997
--------------------------------------------------
Domestic Foreign Domestic Foreign
--------------------------------------------------
Discount rate 6.75% 6.5% 7.0% 7.0%
Expected return on plan assets 9.5% 9.7% 9.5% 10.5%
Rate of compensation increase 4.75% 4.5% 4.75% 6.0%
PENSION PLANS WITH ACCUMULATED BENEFIT OBLIGATIONS IN EXCESS OF PLAN ASSETS
($ IN MILLIONS):
----------------------------
1998 1997
----------------------------
Projected benefit obligation $ 323.6 $ 296.9
Accumulated benefit obligation 315.8 290.7
Fair value of plan assets 269.9 259.5
THE COMPONENTS OF NET PERIODIC BENEFIT COST FOLLOW:
---------------------------------------- ----------------------------------------
PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------------------------------- ----------------------------------------
1998 1997 1996 1998 1997 1996
---------------------------------------- ----------------------------------------
Service cost $ 30,939 $ 28,165 $ 28,747 $ 4,787 $ 4,798 $ 5,311
Interest cost 78,723 75,032 68,613 8,931 9,458 8,819
Expected return on plan assets (107,431) (96,089) (85,657) - - -
Amortization of prior service cost 4,496 3,855 3,126 185 185 185
Amortization of transitional obligation 1,079 1,079 1,068 - - -
Recognized actuarial loss 294 206 675 - - -
---------------------------------------- ----------------------------------------
Net periodic benefit cost $ 8,100 $ 12,248 $ 16,572 $ 13,903 $ 14,441 $ 14,315
======================================== ========================================
The discount rates used to determine the postretirement benefit obligation
at December 31, 1998 and 1997 were 6.75% and 7.0%, respectively. For measurement
purposes, a 7% annual rate of increase in the per capita cost of covered health
care benefits was assumed for the first half of 1998, and a 5% annual rate of
increase was assumed for the second half of 1998. After 1998, the rate will
remain level at 5%.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one percentage point increase in
1998 in the health care cost trend rates would increase the postretirement
benefit expense by $1.7 million and the postretirement benefit obligation by
$14.2 million. A one percentage point decrease in 1998 in the health care cost
trend rates would decrease the postretirement benefit expense by $1.5 million
and the postretirement benefit obligation by $12.6 million.
Included in the 1998 Special Charge was $14.2 million for special
termination benefits attributable to the elimination of approximately 540
positions in connection with an employee severance program.
Included in the 1996 Special Charge was $8.2 million for special
termination benefits primarily attributable to the elimination of approximately
400 positions in connection with an employee severance program.
53
Under these employee severance programs, designated participants in the
Union Camp Salaried plan who met the eligibility requirements were able to
retire and receive enhanced benefits. These benefits involved increased periodic
future payments and were provided for under the pension plan.
11. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes was $34.3 million in 1998, $29.7 million in 1997
and $52.1 million in 1996. Cash paid for interest, net of amounts capitalized,
was $118.8 million in 1998, $118.4 million in 1997 and $109.4 million in 1996.
The following table summarizes non-cash investing and financing activities
related to the company's acquisitions in 1997 and 1996.
1997 1996
- -----------------------------------------------------
Fair value of assets
acquired $ 42,085 $235,139
Less: cash paid 13,890 49,452
Common stock issued 11,567 83,031
- -----------------------------------------------------
Liabilities incurred or
assumed $ 16,628 $102,656
=====================================================
12. COMMITMENTS AND CONTINGENT LIABILITIES
The company is involved in various legal proceedings and environmental
actions. Although the outcome of these matters is subject to many variables and
cannot be predicted with any degree of certainty, based upon the company's
evaluation of the information presently available, management believes the
ultimate resolution of any such legal proceedings and environmental actions will
not have a material adverse effect on the company's consolidated financial
position. However, it is remotely possible that such legal proceedings and
environmental actions could have a material effect on quarterly or annual
operating results when they are resolved in future reporting periods.
The company guaranteed a loan of $15 million made by a financial
institution to a customer. The loan guarantee has a term of four years and is
secured by the entity's assets. In addition, this customer is past due on a
trade account receivable of $15 million. The customer's recent results of
operations and anticipated cash flows indicate that it is doubtful that its
obligations relative to the loan guaranteed by the company and the past due
receivable will be fully met. As a result, the company has estimated the
potential for loss and recorded a $10.7 million reserve against the exposure. As
a result of on-going events and future business conditions, the company may
incur additional losses that cannot be reasonably estimated. The outstanding
balance of the loan was $13.3 million at December 31, 1998. Payments totaling
$2.1 million toward principal were made by this borrower subsequent to year-end.
54
13. SEGMENTS
Union Camp is a leading manufacturer of paper, packaging, chemicals and
wood products serving both U.S. and international markets. The company's
divisions are classified into reportable segments based on the nature of their
products or services. The Paperboard and Packaging segment includes revenue from
the sales of paper and packaging products, such as linerboard, kraft paper,
corrugated containers, flexible packaging and folding cartons. The Fine Paper
segment includes revenue from the sale of uncoated free sheet. The company's
Distribution segment, The Alling & Cory Company, is a leading distributor of
business communication and printing papers, industrial packaging, and business
products. The company's Wood products segment produces southern pine lumber,
plywood, and particleboard panels. The Chemical Group is involved in the
manufacture of chemicals used in inks, coatings and adhesives and, through its
Bush Boake Allen subsidiary, the manufacture of flavor, fragrance and aroma
chemicals. In addition, the company also manages a woodlands base of about 1.6
million acres, supplying raw materials for its linerboard, packaging and paper
making business, as well as for the manufacture of wood products.
In the fourth quarter of 1998, the company implemented SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information." This
statement establishes revised standards for the reporting of financial
information about a company's operating segments. In accordance with the
provisions of this statement, the company has revised its segment presentation
to be consistent with the basis used by management to organize the businesses
within the company, make operating decisions, and assess performance. Prior
years' information has been restated to conform with the current year
presentation.
Operating results and other financial data are presented for the principal
business segments of the company for the years ended December 31, 1998, 1997 and
1996. Total revenue and operating profit by business segment include both sales
to customers, as reported in the company's consolidated income statement, and
intersegment sales, which are accounted for at prices charged to customers and
eliminated in consolidation. The amount of the elimination of intersegment
profit on any product that remains in inventory at the end of the period is
determined by changes in quantities of inventory and changes in the margins of
profit. The operating results and identifiable assets of the company's Woodlands
operation have been allocated to the Fine Paper, Paperboard and Packaging, and
Wood Products segments, which are directly supported by those operations.
Operating profit by business segment is total revenue less operating
expenses. In computing operating profit by business segment, none of the
following items has been added or deducted: other income, portions of
administrative expenses, interest expense, income taxes and unusual items.
Identifiable assets by business segment are those assets used in company
operations in each segment. Corporate assets are principally cash, intangible
assets, deferred charges and assets held for resale. Included within Other is
the company's real estate operation, The Branigar Organization.
55
Total revenue and operating profit from the company's foreign subsidiaries
was $567 and $40 million in 1998, $564 and $51 million in 1997, and $538 and $48
million in 1996. No geographic area outside the United States was material
relative to consolidated revenues, operating profits or identifiable assets.
Export sales from the United States were $322 million in 1998, $384 million in
1997, and $359 million in 1996.
- ------------------------------------------------------------------------------------------------------------------------------------
PAPERBOARD WOOD CHEMICAL TOTAL
&
PACKAGING FINE PAPER DISTRIBUTION PRODUCTS GROUP OTHER SEGMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
Sales to customers $1,769,269 $ 903,647 $ 723,200 $ 313,065 $ 748,830 $ 44,874 $4,502,885
Intersegment sales 19,482 57,392 -- 83 675 -- 77,632
-----------------------------------------------------------------------------------------
TOTAL REVENUE 1,788,751 961,039 723,200 313,148 749,505 44,874 4,580,517
OPERATING PROFIT 59,662 40,194 4,374 54,946 66,880 17,907 243,963
Identifiable assets 2,110,696 1,867,548 188,345 279,531 649,826 29,359 5,125,305
Depreciation, amortization & cost
of company timber harvested 136,913 128,816 2,948 15,460 28,365 128 312,630
Capital expenditures 104,753 73,737 467 30,888 53,118 119 263,082
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
Sales to customers $1,705,471 $ 952,062 $ 693,947 $ 326,373 $ 758,607 $ 40,301 $4,476,761
Intersegment sales 19,860 60,708 -- 114 347 -- 81,029
-----------------------------------------------------------------------------------------
TOTAL REVENUE 1,725,331 1,012,770 693,947 326,487 758,954 40,301 4,557,790
OPERATING PROFIT 61,869 81,710 4,957 86,293 72,739 9,605 317,173
Identifiable assets 2,198,586 1,897,833 196,568 260,880 636,916 29,652 5,220,435
Depreciation, amortization & cost
of company timber harvested 134,282 129,513 3,143 13,695 26,392 488 307,513
Capital expenditures 104,359 119,568 1,140 41,405 57,627 199 324,298
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
Sales to customers $1,739,123 $ 969,539 $ 278,859 $ 281,467 $ 700,662 $ 43,547 $4,013,197
Intersegment sales 16,660 30,538 -- 72 -- -- 47,270
-----------------------------------------------------------------------------------------
TOTAL REVENUE 1,755,783 1,000,077 278,859 281,539 700,662 43,547 4,060,467
OPERATING PROFIT 125,954 75,212 5,327 59,179 68,552 21,263 355,487
Identifiable assets 2,109,215 1,905,169 179,658 235,897 590,454 37,118 5,057,511
Depreciation, amortization & cost
of company timber harvested 131,992 126,807 1,399 11,896 22,065 552 294,711
Capital expenditures 138,565 133,044 1,257 47,379 54,925 98 375,268
- ------------------------------------------------------------------------------------------------------------------------------------
56
1998 1997 1996
------ ------ ------
RECONCILIATION:
REVENUES
Revenues for reportable segments $ 4,580,517 $ 4,557,790 $ 4,060,467
Elimination of intersegment revenues (77,632) (81,029) (47,270)
----------- ----------- -----------
TOTAL CONSOLIDATED REVENUES $ 4,502,885 $ 4,476,761 $ 4,013,197
=========== =========== ===========
OPERATING PROFIT
Total operating profit for reportable segments $ 243,963 $ 317,173 $ 355,487
Unallocated amounts:
Unallocated corporate admin. expenses (41,494) (64,404) (63,394)
Unallocated LIFO 6,046 4,443 (119)
Special Charge(1) (39,750) -- (39,435)
----------- ----------- -----------
CONSOLIDATED OPERATING PROFIT 168,765 257,212 252,539
----------- ----------- -----------
Interest expense - net 118,018 117,290 112,286
Other expense (income) - net 246 (3,888) (10,792)
----------- ----------- -----------
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST $ 50,501 $ 143,810 $ 151,045
=========== =========== ===========
ASSETS
Total assets for reportable segments $ 5,125,305 $ 5,220,435 $ 5,057,511
Unallocated corporate assets 51,109 21,266 38,796
----------- ----------- -----------
CONSOLIDATED ASSETS $ 5,176,414 $ 5,241,701 $ 5,096,307
=========== =========== ===========
DEPRECIATION, AMORTIZATION, AND COST OF
TIMBER HARVESTED
Depreciation, amortization and cost of timber
harvested for reportable segments $ 312,630 $ 307,513 $ 294,711
Corporate depreciation and amortization 2,494 3,105 3,746
----------- ----------- -----------
TOTAL DEPRECIATION, AMORTIZATION, AND COST
OF TIMBER HARVESTED $ 315,124 $ 310,618 $ 298,457
=========== =========== ===========
CAPITAL EXPENDITURES
Total capital expenditures for reportable segments $ 263,082 $ 324,298 $ 375,268
Corporate capital expenditures 10,211 12,928 11,175
----------- ----------- -----------
TOTAL CAPITAL EXPENDITURES $ 273,293 $ 337,226 $ 386,443
=========== =========== ===========
(1) If the 1998 special charge had been allocated, segment operating
profits would have been as follows: Paperboard and Packaging, $42.9 million;
Fine Paper, $34.4 million; Distribution, $3.6 million; Wood Products, $53.3
million; Chemical Group, $66.1 million; and Other, $17.3 million.
If the 1996 special charge had been allocated, segment operating profits
would have been as follows: Paperboard and Packaging, $114.8 million; Fine
Paper, $62.1 million; Distribution, $5.3 million; Wood Products, $59.2 million;
Chemical Group, $66.8 million; and Other, $14.9 million.
57
UNION CAMP CORPORATION
SELECTED QUARTERLY FINANCIAL DATA
($ in thousands, except share and per share)
- ------------------------------------------------------------------------------------------------
Gross Net Basic
Net Sales Profit Income Earnings Diluted Earnings
(Loss) Per Share Per Share(1)
- ------------------------------------------------------------------------------------------------
1998 Fourth Quarter $1,116,937 $225,703 $(4,401) $(0.06) $(0.06)
Third Quarter 1,107,305 184,287 (21,821)* (0.32)* (0.32)*
Second Quarter 1,134,069 252,937 18,813 0.27 0.27
First Quarter 1,144,574 269,465 26,719 0.39 0.38
- ------------------------------------------------------------------------------------------------
1997 Fourth Quarter $1,187,143 $283,841 $33,282 $0.48 $0.47
Third Quarter 1,126,902 266,707 27,559 0.40 0.40
Second Quarter 1,105,591 251,809 10,611 0.15 0.15
First Quarter 1,057,125 232,034 9,618 0.14 0.14
================================================================================================
* Includes a special charge relating to restructuring costs, asset write downs
and other costs which reduced income from operations by $39.8 million pre-tax
and after-tax income by $26.4 million.
(1) Each quarter is calculated as a discrete period, the sum of the four
quarters may not equal the calculated full-year amount. All calculations are in
accordance with prescribed reporting requirements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
58
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages and positions of the
directors and executive officers of the company as of March 1, 1999.
NAME AGE POSITION
---- --- --------
John C. Albert 53 Senior Vice President
Susan M. Arseven 57 Senior Vice President and
Chief Information Officer
Jerry H. Ballengee 61 President and Chief Operating Officer, Director
George D. Busbee 71 Director
Jerome N. Carter 50 Senior Vice President
Raymond E. Cartledge 69 Director
Sir Colin R. Corness 67 Director
Charles H. Greiner, Jr. 51 Executive Vice President
A. William Hamill 51 Executive Vice President and
Chief Financial Officer
John F. Haren 51 Controller
John T. Heald, Jr. 53 Executive Vice President
Robert D. Kennedy 66 Director
Thomas G. Lambrix 50 Senior Vice President
Gary E. MacDougal 62 Director
W. Craig McClelland 64 Chairman of the Board, Chief Executive Officer
and Director
Ann D. McLaughlin 57 Director
59
Willis J. Potts, Jr. 52 Senior Vice President
LH Puckett 50 Senior Vice President
George J. Sella, Jr. 70 Director
Jeremiah J. Sheehan 60 Director
Dirk R. Soutendijk 60 Vice President, General Counsel and
Secretary
The principal occupations during at least the past five years, other
directorships held and certain other biographical information are set forth
below for the directors and executive officers of the company. Each director's
term will end upon the approval by the company's stockholders of the Agreement
and Plan of Merger made November 24, 1998 with International Paper or, if the
merger is not approved, at the annual meeting in the year stated below. Unless
earlier terminated as consequence of the merger with International Paper
Company, each officer's term will continue until elections by the Board at its
meeting following the next annual meeting of stockholders, which is scheduled to
be held July 27, 1999. There are no family relationships among directors and
executive officers.
Mr. Albert became Senior Vice President, Forest Resources Group in December
1995. Prior to that, he had been Vice President and General Manager of the
Forest Resources Group since January 1991.
Ms. Arseven became Senior Vice President and Chief Information Officer in
January 1998. She joined the company in May 1995 as Vice President and Chief
Information Officer. Previously, she was Director, Information Services Division
of American Cyanamid Company.
Mr. Ballengee was elected President and Chief Operating Officer of the
company in July 1994. He had been an Executive Vice President of the company
since November 1988 and prior to that he was a Senior Vice President of the
company. He has been a director of the company since 1988. Mr. Ballengee is a
director of Chicago Bridge and Iron Company N.V. Mr. Ballengee's term expires in
2001.
Mr. Busbee is a retired Senior Partner of and Of Counsel to the law firm of
King & Spalding, Atlanta, Georgia* and a former Governor of the State of
Georgia. Mr. Busbee has been a director of the company since 1983. He is a
director of Weeks Corporation. Mr. Busbee's term expires in 1999.
- -------------------
* The company retained the law firm of King & Spalding on several matters during
1998.
60
Mr. Carter became Senior Vice President in January 1997. Previously he had
been a Vice President since December 1995. Prior to that, he had been Kraft
Paper and Board Division Manager of Industrial Relations.
Mr. Cartledge was Chairman of the Board and Chief Executive Officer of the
company from January 1986 until his retirement in June 1994. From April 1996
until December 1997, he was Chairman of the Board of Savannah Foods &
Industries, Inc. Mr. Cartledge has been a director of the company since 1983. He
is a director of Blount, Inc., Chase Brass Industries, Inc., Delta Air Lines,
Incorporated, Sun Company, Inc. and UCAR International Inc. Mr. Cartledge's term
expires in 1999.
Sir Colin Corness was Chairman of the Board of Glaxo Wellcome plc (an
international pharmaceutical company) until his retirement in May 1997. From May
1991 until his retirement in May 1995, Sir Colin was Chairman of the Board of
Redland PLC (an international construction materials producer). Prior to May
1991, he was Chairman of the Board and Chief Executive Officer of Redland PLC.
Sir Colin has been a director of the company since 1991. He is a director of
Taylor Woodrow plc. Sir Colin's term expires in 2000.
Mr. Greiner became Executive Vice President in January 1998. Previously, he
was Senior Vice President and General Manager, Fine Paper Division from December
1993 to December 1997. Prior to that he had been a Vice President and General
Manager of the Fine Paper Division.
Mr. Hamill became Executive Vice President and Chief Financial Officer in
June 1997. Mr. Hamill joined the company in June 1996 as Senior Vice President,
Finance. From March 1993 to June 1996, he was a partner in SCI Investors Inc.,
an investment firm in Richmond, Virginia, and a stockholder and director of
Custom Papers Group Inc., a specialty paper producer which was privately held
during this period. Prior to March 1993, he was Senior Vice President and Chief
Financial Officer of Specialty Coatings International Inc.
Mr. Haren became Controller in November 1996. Previously, he was an
Assistant Controller.
Mr. Heald became Executive Vice President in January 1998. Previously, he
was Senior Vice President, Converting Group from June 1993 to December 1997.
Prior to that, he had been a Vice President and General Manager of the Container
Division since November 1988.
Mr. Kennedy is Chairman of the Board of UCAR International, Inc. (an
international manufacturer of graphite and carbon electrodes). From March 1998
to June 1998 Mr. Kennedy was Chairman of the Board and Chief Executive Officer
of UCAR International Inc. He is the retired Chairman of the Board and Chief
Executive Officer of Union Carbide Corporation (an international petrochemical
corporation). Mr. Kennedy has been a director of the company since 1990. He is a
Director of Kmart Corporation, LionOre Mining International Ltd., Sun Company,
Inc., UCAR International Inc. and Union Carbide Corporation. Mr. Kennedy's term
expires in 2000.
61
Mr. Lambrix became Senior Vice President in January 1998. Previously he had
been a Vice President with responsibility for corporate communications and
public affairs since 1992.
Mr. MacDougal served as Chairman of the Board and Chief Executive Officer
of Mark Controls Corporation (building control systems and flow controls
manufacturer) from November 1969 until May 1988. He is Senior Advisor to the
Governor of Illinois on Human Services Reform and a Trustee of the Annie Casey
Foundation (for disadvantaged children). He was the General Director of the New
York City Ballet from 1993 to 1994. Prior to March 1990, he was United States
delegate and Alternate Representative to the United Nations. Mr. MacDougal has
been director of the company since 1975. He is a director of the
Bulgarian-American Enterprise Fund, Saratoga Partners and United Parcel Service
of America, Inc. Mr. MacDougal's term expires in 1999.
Mr. McClelland is Chairman of the Board and Chief Executive Officer of the
company. He was President and Chief Operating Officer of the company from
December 1989 to July 1994. Previously, he was an Executive Vice President of
the company since November 1988. From September 1986 until November 1988, Mr.
McClelland was a Director and Executive Vice President of International Paper
Company and President and Chief Executive Officer of Hammermill Paper Company (a
subsidiary of International Paper Company). Prior to September 1986, he was a
Director and President and Chief Executive Officer of Hammermill Paper Company.
Mr. McClelland has been a director of the company since 1988. He is a director
of Allegheny Teledyne, Inc. and PNC Financial Corporation. Mr. McClelland's term
expires in 2000.
Ms. McLaughlin is Chairman of The Aspen Institute (a non-profit
organization assisting in formulating the policies and developing the
values-based leadership of democratic institutions). She was Vice Chairman of
The Aspen Institute from 1993 to October 1996. From 1990 to 1995 she was
President of the Federal City Council, Washington, D.C (a non-profit
organization to improve the Nation's capital). Ms. McLaughlin was a director of
the company in 1987, resigned to become United States Secretary of Labor and
rejoined the Board of Directors in 1989. She is a director of AMR Corporation,
Donna Karan International Inc., Fannie Mae, General Motors Corporation, Harman
International Industries, Inc., Host Marriott Corporation, Kellogg Company,
Nordstrom and Vulcan Materials Company. Ms. McLaughlin's term expires in 2001.
Mr. Potts became Senior Vice President and General Manager, Kraft Paper and
Board Division in December 1995. Prior to that, he had been a Vice President and
General Manager, Kraft Paper and Board Division since June 1994. He was Vice
President and General Operations Manager, Kraft Paper and Board Division from
December 1992 to June 1994.
Mr. Puckett became Senior Vice President and General Manager of the Fine
Paper Division in January 1998. Previously he had been a Vice President since
January 1995 and
62
General Sales and Marketing Manager prior to that time, with responsibility for
sales and marketing for the Fine Paper Division.
Mr. Sella, Jr. is the retired Chairman of the Board and Chief Executive
Officer of American Cyanamid Company (a research-based biotechnology company).
He has been a director of the company since 1985. Mr. Sella is a director of
Bush Boake Allen Inc., Coulter Pharmaceutical, The Equitable Companies
Incorporated and The Equitable Life Assurance Society of the United States. Mr.
Sella's term expires in 2001.
Mr. Sheehan is Chairman of the Board and Chief Executive Officer of
Reynolds Metals Company (international aluminum and packaging corporation). He
was President and Chief Operating Officer of Reynolds Metals Company from
January 1994 until October 1996 and prior to that he was an Executive Vice
President of Reynolds Metals Company. Mr. Sheehan has been a director of the
company since 1996. He is a director of Reynolds Metals Company, Federal Reserve
Bank of Richmond and Universal Corporation. Mr. Sheehan's term expires in 1999.
Mr. Soutendijk became Vice President, General Counsel and Secretary in
1978.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Not applicable.
63
ITEM 11. EXECUTIVE COMPENSATION
The following table shows information with respect to the annual and
long-term compensation for services in all capacities to the company and its
subsidiaries during the company's fiscal years which ended December 31, 1998,
1997 and 1996, paid or accrued to the chief executive officer and the other four
most highly compensated executive officers of the company.
SUMMARY COMPENSATION TABLE
- -----------------------------------------------------------------------------------------------------------------------------------
Long Term
Compensation Awards
---------------------------------
Annual Compensation Restricted Securities
------------------------------------- Stock Underlying All Other
Name and Principal Position Year Salary Bonus Awards($)(1) Options(#) Compensation (2)
- ------------------------------------------------------------------------------------------------------------------------------------
W. Craig McClelland..................... 1998 $747,500 $115,343 $92,512 88,000 $42,202
Chairman of the Board and Chief 1997 $695,000 $386,000 $65,829 84,600 $38,465
Executive Officer 1996 $650,000 $123,455 $36,330 80,000 $35,732
- ------------------------------------------------------------------------------------------------------------------------------------
Jerry H. Ballengee...................... 1998 $499,000 $ 69,451 $61,047 41,051 $31,405
President and Chief Operating Officer 1997 $471,500 $211,600 $44,487 39,100 $27,146
1996 $442,500 $ 69,552 $24,768 39,100 $24,515
- ------------------------------------------------------------------------------------------------------------------------------------
Charles H. Greiner, Jr.................. 1998 $321,083 $ 38,675 $39,509 19,073 $12,596
Executive Vice President 1997 $280,000 $112,500 $26,692 17,000 $10,545
1996 $257,000 $ 31,878 $14,569 14,500 $ 9,349
- ------------------------------------------------------------------------------------------------------------------------------------
A. William Hamill....................... 1998 $311,667 $ 35,263 $39,120 21,073 $14,082
Executive Vice President 1997 $275,000 $103,600 $27,649 15,000 $10,348
and Chief Financial Officer 1996 $135,417 --- $98,125 21,000 $ 4,516
- ------------------------------------------------------------------------------------------------------------------------------------
John T. Heald, Jr....................... 1998 $321,083 $ 38,675 $39,509 19,073 $14,338
Executive Vice President 1997 $280,000 $101,600 $26,692 17,000 $12,186
1996 $257,000 $ 31,878 $14,569 14,500 $10,913
- ------------------------------------------------------------------------------------------------------------------------------------
(1) The value of the restricted stock awards was determined by
multiplying the closing price of the company's common stock on the date of grant
by the number of shares awarded. The restricted stock awards were granted on
January 25, 1999 for fiscal year 1998, January 27, 1998 for fiscal year 1997 and
January 28, 1997 for fiscal year 1996. As of December 31, 1998, the number of
shares and the value of aggregate restricted stockholdings were as follows:
8,225 shares ($552,103) by Mr. McClelland; 5,605 shares ($376,236) by Mr.
Ballengee; 2,780 shares ($186,608) by Mr. Greiner; 1,891 shares ($126,933) by
Mr. Hamill; and 2,780 shares ($186,608) by Mr. Heald. On January 25, 1999
restricted stock awards were made with respect to services rendered during 1998.
As of February 1, 1999, the number of shares and the value of aggregate
restricted stockholdings were as follows: 6,779 shares ($429,619) by Mr.
McClelland; 4,581 shares ($290,321) by Mr. Ballengee; 2,546 shares ($161,353) by
Mr. Greiner; 2,196 shares ($139,172) by Mr. Hamill and 2,546 shares ($161,353)
by Mr. Heald. Each award becomes free of restrictions in equal installments over
5 years except all restricted stock shall vest upon the approval by stockholders
of the merger of the company with International Paper. The number of shares
awarded was as follows: 751 for 1996, 1,169 for 1997 and 1,426 for 1998
64
to Mr. McClelland; 512 for 1996, 790 for 1997 and 941 for 1998 to Mr. Ballengee;
300 for 1996, 474 for 1997 and 609 for 1998 to Mr. Greiner; 2,000 for 1996, 491
for 1997 and 603 for 1998 to Mr. Hamill; 300 for 1996, 474 for 1997 and 609 for
1998 to Mr. Heald. Common Stock dividends are payable on restricted stock.
(2) The compensation reported represents (a) company contributions under
the Salaried Employees Savings and Investment Plan and related supplemental
plan; and (b) amounts imputed or credited to the named executive officer for
premiums paid for group life insurance. The company contributions for 1998
pursuant to the Salaried Employees Savings and Investment Plan were as follows:
$22,425 to Mr. McClelland; $14,970 to Mr. Ballengee; $9,633 to Mr. Greiner;
$9,350 to Mr. Hamill and $9,633 to Mr. Heald. The amounts imputed or credited
for life insurance premiums were as follows: $19,777 to Mr. McClelland; $16,435
to Mr. Ballengee; $2,963 to Mr. Greiner; $4,732 to Mr. Hamill and $4,705 to Mr.
Heald.
OPTIONS
The following two tables summarize option grants to and exercises by the
executive officers named in the Summary Compensation Table during 1998 and the
value of the options held by them as of December 31, 1998.
OPTION GRANTS IN 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Individual Grants Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation
for Option Term(3)
- ------------------------------------------------------------------------------------------------
Number of % of Total
Securities Options
Underlying Granted to Exercise (2)
Options Employees Or Base Expiration
Name Granted(#)(1) In Fiscal 1998 Price ($/Sh) Date
- ------------------------------------------------------------------------------------------------------------------------------------
5% (4) 10% (5)
Appreciation Appreciation
- ------------------------------------------------------------------------------------------------------------------------------------
W. Craig McClelland... 88,000 9.47 $48.9063 11/22/08 $2,711,280 $6,842,880
- ------------------------------------------------------------------------------------------------------------------------------------
Jerry H. Ballengee.......... 41,051 4.41 $48.9063 11/22/08 $1,264,781 $3,192,125
- ------------------------------------------------------------------------------------------------------------------------------------
Charles H. Greiner, Jr...... 19,073 2.05 $48.9063 11/22/08 $ 587,639 $1,483,116
- ------------------------------------------------------------------------------------------------------------------------------------
A. William Hamill.......... 19,073 2.05 $48.9063 11/22/08 $ 587,639 $1,483,116
2,000 0.02 $58.8438 6/29/08 $ 74,140 $ 187,120
- ------------------------------------------------------------------------------------------------------------------------------------
John T. Heald, Jr............ 19,073 2.05 $48.9063 11/22/08 $ 587,639 $1,483,116
- ------------------------------------------------------------------------------------------------------------------------------------
(1) The options become exercisable two years from the date of grant, i.e., on
June 30, 2000 and November 23, 2000.
(2) The options granted June 30, 1998 were granted at an exercise price in
excess of the fair market value of the underlying stock on the date of
grant. The options granted on
65
November 23, 1998 were granted at an exercise price equal to the fair market
value of the underlying stock on the date of the option grant.
(3) The dollar amounts under these columns are the result of calculations at the
5% and 10% rates set by the SEC and are not intended to forecast possible
future appreciation, if any, of Union Camp's common stock.
(4) Union Camp common stock would be trading at (i) $95.91 per share for the
values with respect to the options granted on June 30, 1998 to be realizable
and (ii) at $79.72 per share for the values with respect to the options
granted November 23, 1998 to be realizable, an increase in stock price which
will benefit all stockholders commensurately.
(5) Union Camp common stock would be trading at (i) $152.40 per share for the
values with respect to the options granted on June 30, 1998 to be realizable
and (ii) at $126.67 per share for the values with respect to the options
granted November 23, 1998 to be realizable, an increase in stock price which
will benefit all stockholders commensurately.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTIONS VALUES
- --------------------------------------------------------------------------------------------------------------------------------
Number of Shares
Underlying Value of Unexercised
Shares Acquired Value Unexercised Options at In-the-Money Options
Name On Exercise Realized(1) End of 1998 at End of 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Exercisable/Unexercisable Exercisable/Unexercisable (2)
- ------------------------------------------------------------------------------------------------------------------------------------
W. Craig McClelland....... -- -- 281,455 172,600 $5,527,724 $2,249,898
- ------------------------------------------------------------------------------------------------------------------------------------
Jerry H. Ballengee........ 6,500 $169,203 168,457 80,151 $3,527,023 $1,046,644
- ------------------------------------------------------------------------------------------------------------------------------------
Charles H. Greiner, Jr.... 2,500 $ 68,203 54,200 36,073 $1,068,481 $ 476,993
- ------------------------------------------------------------------------------------------------------------------------------------
A. William Hamill......... -- -- 21,000 36,073 $ 327,688 $ 476,993
- ------------------------------------------------------------------------------------------------------------------------------------
John T. Heald, Jr......... -- -- 62,700 36,073 $1,312,263 $ 476,993
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Value is the difference between the market value of the company's common
stock on the date of exercise and the exercise price.
(2) Value is the difference between the market value of the company's common
stock on December 31, 1998, i.e., $66.8125, and the exercise price.
RETIREMENT PLANS
The Retirement Plan for Salaried Employees is a defined benefit plan funded
solely by company contributions. The calculation of benefits under the
Retirement Plan is based upon average earnings, which include salary, overtime
and vacation payments, bonuses and incentive compensation received during the
highest 60 consecutive months of the 120 months preceding retirement ("Final
Average Earnings"). The amount of the retirement benefit provided
66
to a participating employee under the Retirement Plan equals the product of the
sum of 1.05% of the participating employee's Final Average Earnings plus .45% of
those Final Average Earnings in excess of the average applicable Social Security
wage base at the date of retirement, multiplied by the number of years of
credited service of the employee with the company or one of its participating
subsidiaries. Benefits under the Retirement Plan are not subject to any
deduction for Social Security benefits or other offset amounts. If retirement
benefits exceed payments permitted from tax qualified trusts, the excess amount
will be paid by the company on an unfunded basis out of its general assets.
The company has adopted a Supplemental Retirement Income Plan for Executive
Officers (the "Plan") under which the Personnel, Compensation and Nominating
Committee of the Board of Directors (the "Committee") may from time to time
designate certain executive officers as participants if such officers are (i)
members of the company's policy committee and/or (ii) hired at mid-career and
responsible for a significant segment of the company's business. The Plan
currently covers twelve policy committee members. The Plan provides for a
minimum pension upon retirement at age 65 (or earlier with Committee approval)
following at least 10 years of service of 40% of the participant's average
earnings, which include salary, vacation payments and annual target incentive,
during the highest 60 consecutive months of the 120 months preceding retirement
("Average Pension Compensation") which increases by 1 1/2% for each year of
additional service up to a maximum of 55% of Average Pension Compensation after
20 years of service. However, participants with a vested interest in the Plan
who are terminated within two years (or while their severance agreements are in
effect, if longer) of the merger with International Paper will be paid their
supplemental pension benefit in a lump sum. The payment will be the actuarial
equivalent of their supplemental pension benefit, determined, after crediting
the participant with up to three additional years of age and service, but not
beyond age 65 and 20 years of service, as a straight life annuity commencing at
the greater of age 62, the age with which the participant is credited or the
participant's age at his date of termination. Payments under the Plan will be
reduced by (i) pensions under the Retirement Plan for Salaried Employees and the
related Supplemental Retirement Plan, (ii) any other pensions which may be
payable by other employers and (iii) one-half of the amount of primary Social
Security benefits.
The following table shows the approximate annual pensions payable under all
the plans described to the executive officers named in the Summary Compensation
Table assuming retirement at age 65, whose Average Pension Compensation and
years of service at retirement would be in the classifications indicated. The
amounts shown have not been reduced by any pension payable by another employer
or Social Security benefits which are offsets to the pensions payable under the
plan.
67
PENSION PLAN TABLE
Average Pension
---------------
Years of Service
----------------
Compensation 10 15 20 25 30
------------ -- -- -- -- --
$ 400,000 $160,000 $190,000 $220,000 $220,000 $220,000
$ 500,000 $220,000 $237,500 $275,000 $275,000 $275,000
$ 600,000 $240,000 $285,000 $330,000 $330,000 $330,000
$ 700,000 $280,000 $332,500 $385,000 $385,000 $385,000
$ 800,000 $320,000 $380,000 $440,000 $440,000 $440,000
$ 900,000 $360,000 $427,500 $495,000 $495,000 $495,000
$1,000,000 $400,000 $475,000 $550,000 $550,000 $550,000
$1,100,000 $440,000 $522,500 $605,000 $605,000 $605,000
$1,200,000 $480,000 $570,000 $660,000 $660,000 $660,000
$1,300,000 $520,000 $617,500 $715,000 $715,000 $715,000
The calculation of the amounts shown assumes that the employee remains in
the service of the company or one of its participating subsidiaries until age
65, that the retirement program is continued in its present form and that the
individual receives the benefits in the form of a single life annuity. As of
December 31, 1998, Messrs. Ballengee, Greiner, Hamill, Heald and McClelland were
credited with 17, 26, 2, 21 and 10 years of service, respectively, under the
Retirement Plan. The current compensation covered by the Plan is $782,300 for
Mr. Ballengee; $491,083 for Mr. Greiner; $466,667 for Mr. Hamill; $491,083 for
Mr. Heald; and $1,251,500 for Mr. McClelland.
COMPENSATION OF DIRECTORS
Directors who are employees of the company do not receive any additional
compensation by reason of their membership on, or attendance at meetings of, the
Board or committees thereof.
Non-employee directors receive an annual retainer fee of $32,000. This is
composed of $23,000 in cash plus shares of company common stock pursuant to the
Stock Compensation Plan for Non-Employee Directors (the "Stock Compensation
Plan"). The Stock Compensation Plan provides that immediately after each Annual
Meeting, each non-employee director shall receive as part of his annual fee the
number of whole shares of company common stock provided in the Plan for that
year, or if there is no provision for that year, whole shares with a fair market
value of approximately $5,000. The fair market value of any annual grant of such
stock may not exceed $40,000 for each non-employee director. During 1998, each
non-employee director received 153 shares of company common stock pursuant to
the Stock Compensation Plan which had a fair market value of approximately
$9,000 at the time of its grant. Non-employee directors are also paid $1,500 for
each meeting of the Board they attend,
68
$1,000 for each committee meeting they attend and $2,000 per year for serving as
the Chair of a committee. A fee of $1,000 is paid for special directors'
meetings which are typically held the evening prior to a Board meeting.
The Retirement Plan for Outside Directors was terminated effective December
31, 1997. Each participating director made an election to allocate the present
value of his accrued benefit under the plan. The choices were deferred stock
units as provided in the Deferred Stock Unit Plan for Outside Directors and an
unfunded cash account which will be credited with the rate earned by the fixed
income fund in the company's savings plan. Amounts converted to deferred stock
units will be paid in stock, while cash accounts will be paid in cash, in each
case after the director leaves the Board.
SEVERANCE ARRANGEMENTS
The individuals named in the Summary Compensation Table and seven other
executive officers have executed individual severance agreements with the
company. Each agreement provides that if, while the agreement is in effect
following a "change in control of the company," the company terminates the
executive's employment without "cause" or the executive terminates his
employment for "good reason" (as such terms are defined in the severance
agreements), the executive will receive a lump sum severance benefit from the
company up to three times the sum of his annual salary and up to three times the
amount of his annual target incentive. An executive would also be entitled to
continue to receive certain welfare insurance benefits for up to three years.
The company will also make an additional payment to the executive so that
benefits received in connection with a change in control, whether pursuant to
the severance agreements or otherwise, will not be subject to net reduction due
to the imposition of excise taxes under Section 4999 of the Code. The individual
severance agreements provide for the distribution in a lump sum to the
executives if their employment is terminated following a change in control while
the severance agreement is in effect of (i) supplemental savings amounts
credited to the executives and (ii) the actuarial equivalent of the supplemental
pension benefit accrued under the company's Supplemental Retirement Plan. In
addition, amounts due pursuant to the company's Supplemental Retirement Income
Plan for Executive Officers, determined as if the executive were credited with
up to three additional years of age and service, shall be distributed to the
executives in a lump sum if termination of employment occurs while the agreement
is in effect and after a change in control. The merger with International Paper
Company will constitute a change in control for purposes of the severance
agreements.
69
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF MANAGEMENT
AS OF DECEMBER 31, 1998
- -------------------------------------------------------------------------------------------------------------------------------
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP
-----------------------------------------------------------------------------
BUSH BOAKE
NAME OF UNION CAMP PERCENT DEFERRED ALLEN INC. PERCENT
BENEFICIAL OWNER COMMON STOCK(1) OF CLASS STOCK UNITS(2) COMMON STOCK(3) OF CLASS
- ---------------- ---------------- -------- -------------- --------------- --------
- ------------------------------------------------------------------------------------------------------------------------------------
Jerry Ballengee 204,070 * -- -- *
- ------------------------------------------------------------------------------------------------------------------------------------
George D. Busbee 4,061 * -- -- *
- ------------------------------------------------------------------------------------------------------------------------------------
Raymond E. Cartledge 210,722(4) * 514 5,000 *
- ------------------------------------------------------------------------------------------------------------------------------------
Sir Colin Corness 3,482 * -- 1,000 *
- ------------------------------------------------------------------------------------------------------------------------------------
Charles H. Greiner, Jr. 61,433 * -- -- *
- ------------------------------------------------------------------------------------------------------------------------------------
A. William Hamill 23,761 * -- 2,000 *
- ------------------------------------------------------------------------------------------------------------------------------------
John T. Heald, Jr. 71,300 * -- -- *
- ------------------------------------------------------------------------------------------------------------------------------------
Robert D. Kennedy 3,821 * 3,065 -- *
- ------------------------------------------------------------------------------------------------------------------------------------
Gary E. MacDougal 2,540 * 2,848 -- *
- ------------------------------------------------------------------------------------------------------------------------------------
W. Craig McClelland 330,651 * -- 1,000 *
- ------------------------------------------------------------------------------------------------------------------------------------
Ann D. McLaughlin 1,874 * 2,990 -- *
- ------------------------------------------------------------------------------------------------------------------------------------
George J. Sella, Jr. 3,761 * 2,071 4,200 *
- ------------------------------------------------------------------------------------------------------------------------------------
Jeremiah J. Sheehan 2,540 * 71 -- *
====================================================================================================================================
Directors and 1,019,653 1.5% 11,559 13,200 *
Executive Officers as
a Group (20 persons)
- ------------------------------------------------------------------------------------------------------------------------------------
* Less than one percent of the shares outstanding.
(1) The shares shown as beneficially owned include the number of shares of
company common stock that directors and executive officers had the right to
acquire within 60 days after December 31, 1998 pursuant to unexercised
options under the company's stock option plans as follows: 168,457 shares
for Mr. Ballengee, 1,200 shares for Mr. Busbee, 177,232 shares for Mr.
Cartledge, 1,200 shares for Sir Colin Corness, 54,200 shares for Mr.
Greiner, 21,000 shares for Mr. Hamill, 62,700 shares for Mr. Heald, 1,200
shares for Mr. Kennedy, 1,200 shares for Mr. MacDougal, 281,455 shares for
Mr. McClelland, 1,200 shares for Ms. McLaughlin, 1,200 shares for Mr. Sella,
1,200 shares for Mr. Sheehan and 1,019,653 for all directors and executive
officers as a group (21 persons). The shares shown include restricted stock
held by executive officers which become free of restrictions on sale over a
period of five years from the date of grant as follows: 5,605 shares for Mr.
Ballengee, 2,780 shares for Mr. Greiner, 1,891 shares for Mr. Hamill, 2,780
shares for Mr. Heald, 8,225 shares for Mr. McClelland and 26,042 shares for
all executive officers as a group.
(2) Deferred stock units will be converted to shares of Union Camp Common Stock
or, if the proposed merger with International Paper Company is approved, to
shares of
70
International Paper common stock, and distributed to the director after he
ceases to be a member of the Board.
(3) Union Camp Corporation is the beneficial owner of 68% of the outstanding
common stock of Bush Boake Allen Inc. which is listed on the New York Stock
Exchange. The shares shown as beneficially owned include the number of
shares of Bush Boake Allen common stock that directors and executive
officers had the right to acquire within 60 days after December 31, 1998
pursuant to unexercised options under Bush Boake Allen stock option plans as
follows: 70 shares for Mr. Sella.
(4) The shares of common stock shown as beneficially owned by Mr. Cartledge
include 5,068 shares that are owned by his spouse as to which beneficial
ownership is disclaimed.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
To the knowledge of the company, and based on filings on Schedule 13G in
February 1999 with the Securities and Exchange Commission, no person or group
owned beneficially more than five percent of the outstanding common stock of the
company except:
Name and Address of Amount and Nature of Percent
Beneficial Owner Beneficial Ownership(1) of Class
- -------------------------------------------------------------------------------------------
Sanford C. Bernstein & Co., Inc. 7,602,379(2) 11.0%
767 Fifth Avenue
New York NY 10153
Capital Research and Management Company 7,995,000(3) 11.6%
333 South Hope Street
Los Angeles, CA 90071
Delaware Management Holdings Inc. 5,187,949(4) 7.4%
2005 Market Street
Philadelphia, PA 19103
T. Rowe Price Associates, Inc. 4,862,156(5) 7.0%
100 E. Pratt Street
Baltimore, MD 21202
(1) "Beneficially owned" means the sole or shared power to direct the voting of
a security or the sole or shared power to direct the disposition of a
security.
(2) Sanford C. Bernstein & Co., Inc. had sole voting power as to 4,310,261
shares, shared voting power as to 805,330 shares and sole dispositive power
as to 7,602,379 shares.
71
(3) Capital Research and Management Company, an investment advisor, as of
December 31, 1998, had sole investment discretion with respect to the above
shares, but did not own any of these shares for its own account.
(4) Delaware Management Holdings, Inc., in its capacity as investment advisor,
had sole voting power as to 4,918,849 shares, shared voting power as to
269,100 shares, sole dispositive power as to 5,187,949 shares and no shared
dispositive power.
(5) T. Rowe Price Associates, Inc., in its capacity as investment advisor, had
sole voting power as to 586,720 shares, no shared voting power, sole
dispositive power as to 4,862,156 shares and no shared dispositive power.
For purposes of the reporting requirements of the Securities Exchange Act of
1934, T. Rowe Price Associates, Inc. is deemed to be a beneficial owner of
the shares; however, T. Rowe Price Associates, Inc. expressly disclaims that
it is the beneficial owner of such shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Index of financial statements
The following financial statements are included at the indicated page in
this Annual Report:
Page
----
Consolidated Statement of Income for the years ended
December 31, 1998, 1997 and 1996....................................... 34
Consolidated Statement of Comprehensive Income
for the years ended December 31, 1998, 1997 and 1996
Consolidated Balance Sheet -
December 31, 1998 and 1997............................................. 35
Consolidated Statement of Cash Flows
for the years ended December 31, 1998,
1997 and 1996.......................................................... 36
Notes to Consolidated Financial Statements............................. 37
72
Report of Independent Accountants...................................... 33
(2) The following schedules, for the three years ended December 31, 1998,
to the Financial Statements are included beginning at the indicated page in this
Annual Report on Form 10-K:
Page
----
Schedule II-Valuation and Qualifying Accounts.......................... 78
All schedules other than those indicated above are omitted because of the
absence of the conditions under which they are required or because the required
information is set forth in the financial statements and their notes.
(3) All exhibits, including those incorporated by reference:
NO. DESCRIPTION
- --- -----------
2.1 Agreement and Plan of Merger among Union Camp Corporation, International
Paper Company and Maple Acquisition, Inc. dated November 24, 1998 (filed
as Exhibit 2.1 to Union Camp's Current Report on Form 8-K filed November
27, 1998 and incorporated herein by reference).
3.1 Articles of Incorporation of Union Camp, as amended February 26, 1996
(filed as Exhibit 3.1 to Union Camp's Annual Report on Form 10-K for the
year ended December 31, 1995 and incorporated herein by reference).
3.2 By-Laws of Union Camp, as amended October 27, 1998 (filed as Exhibit 3.2
to Union Camp's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998 and incorporated herein by reference).
4.1 Union Camp hereby agrees to furnish copies of instruments defining the
rights of holders of long-term debt of Union Camp and its consolidated
subsidiaries to the Commission upon its request.
4.2 Rights Agreement, dated as of January 25, 1996, as amended and restated
as of June 25, 1996, between Union Camp Corporation and The Bank of New
York as Rights Agent (filed as Exhibit 1 to the company's Registration
Statement on Form 8-A/A filed July 3, 1996 and incorporated herein by
reference).
4.3 Amendment No. 1 to the Amended and Restated Rights Agreement dated as of
November 23, 1998 (filed as Exhibit 4.2 to the company's Registration
Statement on Form 8-A/A filed November 27, 1998 and incorporated herein
by reference).
73
10.1 1989 Stock Option and Stock Award Plan, as amended October 29, 1996
(filed as Exhibit 10.2 to Union Camp's Annual Report on Form 10-K for
the year ended December 31, 1996 and incorporated herein by reference).*
10.2 Executive Annual Incentive Plan (filed as Exhibit 10(c) to Union Camp's
Annual Report on Form 10-K for the year ended December 31, 1988 and
incorporated herein by reference).*
10.3 Restricted Stock Performance Plan (filed as Exhibit 10.1 to Union Camp's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and
incorporated herein by reference).*
10.4 Union Camp's Directors' Fees Deferral Plan (filed as Exhibit 10(d) to
Union Camp's Annual Report on Form 10-K for the year ended December 31,
1982 and incorporated herein by reference).*
10.5 Union Camp's Retirement Plan for Outside Directors as amended November
25, 1997 (filed as Exhibit 10.6 to Union Camp's Annual Report on Form
10-K for the year ended December 31, 1997 and incorporated herein by
reference).*
10.6 Form of Severance Agreement between Union Camp and certain executive
officers of Union Camp (filed as Exhibit 10.7 to Union Camp's Annual
Report on Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference).*
10.7 Union Camp Corporation Severance Policy for Key Employees (filed as
Exhibit 10.2 to Union Camp's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 and incorporated herein by reference).*
10.8 Union Camp's Stock Compensation Plan for Non-Employee Directors as
amended February 24, 1998 (filed as Exhibit 10.8 to Union Camp's Annual
Report on Form 10-K for the year ended December 31, 1997 and
incorporated herein by reference).*
10.9 Union Camp Corporation Supplemental Retirement Income Plan for Executive
Officers as amended and restated October 29, 1996 (filed as Exhibit 10.1
to Union Camp's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998, and incorporated herein by reference).*
10.10 Description of post-retirement office arrangements between Union Camp
Corporation and Raymond E. Cartledge (filed as Exhibit 10.2 to Union
Camp's Quarterly Report on Form 10-Q for the quarter ended June 30,
1994, and incorporated herein by reference).*
74
10.11 Description of post-retirement office arrangements between Union Camp
Corporation and W. Craig McClelland.*
21 List of subsidiaries of Union Camp (filed as Exhibit 21 to Union Camp's
Annual Report on Form 10-K for the year ended December 31, 1997 and
incorporated by reference).
23 Consent of Independent Accountants.
27.1 Financial Data Schedule - Annual Period Ended December 31, 1998.
* Denotes a management contract or compensatory plan or arrangement
required to be filed as exhibits pursuant to Item 14(c) of Form 10-K.
(b) Reports on Form 8-K.
A Current Report on Form 8-K was filed by the Registrant on November 27,
1998 and amended and restated on November 30, 1998 to announce the
execution of the Agreement and Plan of Merger Dated November 24, 1998,
among the company, International Paper, and Maple Acquisition, Inc.
75
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the Township of
Wayne, and State of New Jersey, on March 31, 1999.
UNION CAMP CORPORATION
By /s/ W. Craig McClelland
------------------------------
(W. Craig McClelland)
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities stated below on March 31, 1999.
Signature Title
--------- -----
/s/ W. Craig McClelland Chairman of The Board and
- ----------------------------------- Chief Executive Officer and
(W. Craig McClelland) Director (Principal Executive
Officer)
/s/ Jerry H. Ballengee President and Chief Operating
- ----------------------------------- Officer and Director
(Jerry H. Ballengee)
/s/ A. William Hamill Executive Vice President and
- ----------------------------------- Chief Financial Officer
(A. William Hamill) (Principal Financial Officer)
/s/ John F. Haren Controller
- ----------------------------------- (Principal Accounting Officer)
(John F. Haren)
76
Signature Title
--------- -----
Director
- -------------------------------------
(George D. Busbee)
/s/ Raymond E. Cartledge Director
- -------------------------------------
(Raymond E. Cartledge)
/s/ Sir Colin R. Corness Director
- -------------------------------------
(Sir Colin R. Corness)
/s/ Robert D. Kennedy Director
- -------------------------------------
(Robert D. Kennedy)
/s/ Gary E. MacDougal Director
- -------------------------------------
(Gary E. MacDougal)
/s/ Ann D. McLaughlin Director
- -------------------------------------
(Ann D. McLaughlin)
/s/ George J. Sella, Jr. Director
- -------------------------------------
(George J. Sella, Jr.)
/s/ Jeremiah J. Sheehan Director
- -------------------------------------
(Jeremiah J. Sheehan)
77
SCHEDULE II
UNION CAMP CORPORATION AND CONSOLIDATED SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(THOUSANDS OF DOLLARS)
- ----------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ----------------------------------------------------------------------------------------------------------------
Additions
Balance at Charged to Charged Deductions Balance at
Beginning Costs and (Credited) from End
Description of Year Expenses to Other Reserves of Year
(1) Accounts (3)
(2)
- ----------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998:
Reserves deducted from assets
to which they apply:
Reserve for doubtful accounts ... $15,084 $ 7,396 $ -- $4,953 $17,527
Reserve for discounts and
Allowances ...................... 2,701 (275) -- -- 2,426
------- ------- ------ ------ -------
Total .......................... $17,785 $ 7,121 $ -- $4,953 $19,953
======= ======= ====== ====== =======
YEAR ENDED DECEMBER 31, 1997:
Reserves deducted from assets
to which they apply:
Reserve for doubtful accounts ... $14,717 $ 2,902 $(271) $2,264 $15,084
Reserve for discounts and
Allowances ...................... 2,553 148 -- -- 2,701
------- ------- ------ ------ -------
Total .......................... $17,270 $ 3,050 $(271) $2,264 $17,785
======= ======= ===== ====== =======
YEAR ENDED DECEMBER 31, 1996:
Reserves deducted from assets
to which they apply:
Reserve for doubtful accounts ... $13,740 $ 5,634 $ (25) $4,632 $14,717
Reserve for discounts and
Allowances ...................... 2,726 (173) -- -- 2,553
------- ------- ------ ------ -------
Total .......................... $16,466 $ 5,461 $ (25) $4,632 $17,270
======= ======= ===== ====== =======
NOTES:
(1) Discounts and allowances are charged to income as incurred and not to the
reserve. The Reserve is adjusted at the end of each period, by a charge or
credit to income, for the estimated discounts and allowances applicable to
the accounts receivable then outstanding.
(2) Foreign currency translation adjustments.
(3) Uncollectible accounts written off, net of recoveries.
STATEMENT OF DIFFERENCES
The trademark symbol shall be expressed as ........'TM'
78