-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, Fer50oOP8XNzM91VY8wrQJtOTdGLTWATTYfoJZV/7posIHtjbmyzhgMr4fXmfP3l 9hg1U1ZspCzkBj5yKwQ+yQ== 0000950123-94-001657.txt : 19941020 0000950123-94-001657.hdr.sgml : 19941020 ACCESSION NUMBER: 0000950123-94-001657 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19940101 FILED AS OF DATE: 19941019 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FEDERAL PAPER BOARD CO INC CENTRAL INDEX KEY: 0000034891 STANDARD INDUSTRIAL CLASSIFICATION: 2631 IRS NUMBER: 220904830 STATE OF INCORPORATION: NY FISCAL YEAR END: 1229 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-03838 FILM NUMBER: 94553968 BUSINESS ADDRESS: STREET 1: 75 CHESTNUT RIDGE RD CITY: MONTVALE STATE: NJ ZIP: 07645 BUSINESS PHONE: 2013911776 10-K/A 1 FEDERAL PAPER BOARD COMPANY, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K/A-2 / X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 1, 1994 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-3838 FEDERAL PAPER BOARD COMPANY, INC. (Exact name of Registrant as specified in its charter) NORTH CAROLINA 22-0904830 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 75 CHESTNUT RIDGE ROAD, MONTVALE, NEW JERSEY 07645 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (201) 391-1776 The undersigned Registrant hereby amends the following items, financial statements, exhibits or other portions of its Report on Form 10-K for the fiscal year ended January 1, 1994 as set forth in the pages attached hereto: Part II Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 8. Financial Statements and Supplementary Data Part IV. Exhibits: 11 Statement of Computation of Earnings (Loss) Per Common Share 12 Computation of Ratio of Earnings to Fixed Charges 13 1993 Annual Report to Shareholders of the Company 23 Independent Auditors' Consent Financial Statement Schedules Consolidated Balance Sheet Consolidated Statement of Income Consolidated Statement of Cash Flows Consolidated Statement of Shareholders' Equity Notes to Financial Statements Additional Financial Data Independent Auditors' Report Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized. FEDERAL PAPER BOARD COMPANY, INC. Date: October 18, 1994 BY: /s/ QUENTIN J. KENNEDY ------------------------------ Quentin J. Kennedy Director, Executive Vice President and Secretary 2 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information required by Item 5 is included on page 36 of the Annual Report and is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA. The information required by Item 6 is included on page 37 of the Annual Report and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required by Item 7 is included on pages 18 through 21 of the Annual Report and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by Item 8 is included on pages 22 through 36 of the Annual Report and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The directors of the Company and their business experience are set forth on pages 3 through 5 of the Company's Notice of Annual Meeting and Proxy Statement, dated March 15, 1994 (the "Proxy Statement") and are incorporated herein by reference. The discussion of executive officers of the Company is included in Part I under "Executive Officers of the Company." ITEM 11. EXECUTIVE COMPENSATION. A description of the compensation of the Company's executive officers is set forth on pages 5 through 15 of the Proxy Statement, and with the exception of the section headed "Compensation Committee Report" on pages 12 and 13, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. A description of the security ownership of certain beneficial owners and management is set forth on pages 2 and 3 of the Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. None, other than those described under Items 11 and 12. 10 3 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. EXHIBITS: A list of the exhibits required to be filed as part of this Report on Form 10-K is set forth in the "Exhibit Index", which immediately precedes such exhibits, and is incorporated herein by reference. REPORTS ON FORM 8-K: No reports on Form 8-K were filed for the sixteen weeks ended January 1, 1994. FINANCIAL STATEMENT SCHEDULES: The consolidated balance sheets as of January 1, 1994 and January 2, 1993, and related consolidated statements of income, cash flows and shareholders' equity for each of the three fiscal years in the period ended January 1, 1994, as restated, and the related notes to financial statements, together with the Independent Auditors' Report thereon of Deloitte & Touche LLP, dated February 7, 1994 (October 17, 1994 as to Note 10), appearing on pages 22 through 35 of the Annual Report, are incorporated herein by reference. With the exception of the aforementioned information and the information incorporated by reference in Items 1 and 5 through 8, the Annual Report is not to be deemed filed as part of this report. The following additional financial data should be read in conjunction with the financial statements in the Annual Report. Schedules not included with this additional financial data have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. ADDITIONAL FINANCIAL DATA FISCAL YEARS 1993, 1992, AND 1991
Page ---- Independent Auditors' Report 12 Financial Statement Schedules: II Amounts Receivable from Related Parties and Underwriters, Promoters and Employees other than Related Parties 13-14 V Property, Plant and Equipment 15 VI Accumulated Depreciation and Amortization of Property, Plant and Equipment 16 VIII Valuation and Qualifying Accounts 17 IX Short-Term Borrowings 18 X Supplementary Income Statement Information 19
11 4 INDEPENDENT AUDITORS' REPORT - ---------------------------- To the Shareholders and Board of Directors of Federal Paper Board Company, Inc. We have audited the consolidated financial statements of Federal Paper Board Company, Inc. and its subsidiary companies as of January 1, 1994 and January 2, 1993 and for each of the three fiscal years in the period ended January 1, 1994, and have issued our report thereon dated February 7, 1994 (October 17, 1994 as to Note 10), which report includes explanatory paragraphs as to (i) changes in the method of accounting for income taxes and postretirement benefits other than pensions and (ii) the restatement of the financial statements for the fiscal year ended January 1, 1994; such financial statements and report are included in your 1993 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the financial statement schedules of Federal Paper Board Company, Inc. and its subsidiary companies, listed in Item 14. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ DELOITTE & TOUCHE LLP Parsippany, New Jersey February 7, 1994 (October 17, 1994 as to Note 10) 12 5 EXHIBIT INDEX Exhibit No. Description - ------- ----------- 11 Statement of Computation of Earnings (Loss) Per Common Share 12 Computation of Ratio of Earnings to Fixed Charges 13 1993 Annual Report to Shareholders of the Company 23 Independent Auditors' Consent EX-11 2 COMPUTATION OF EARNINGS (LOSS) PER SHARE 1 EXHIBIT 11 FEDERAL PAPER BOARD COMPANY, INC. STATEMENT OF COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Fiscal Years Restated 1993 1992 1991 ---- ---- ---- Assuming No Dilution: - -------------------- Income Before Cumulative Effect of Accounting Change $ 6,400 $ 82,600 $ 82,400 (Deduct) Dividends on Convertible Preferred Stock (6,610) (7,060) (8,129) ---------- ---------- --------- Income (Loss) Before Cumulative Effect of Accounting Change available to Common Shares (210) 75,540 74,271 Cumulative Effect of Accounting Change -- 9,000 -- ---------- ---------- --------- Net Income (Loss) Available to Common Shares $ (210) $ 84,540 $ 74,271 ========== ========== ========= Actual Weighted Average Number of Common Shares Outstanding 41,995 41,448 40,540 ========== ========== ========= Income (Loss) Before Cumulative Effect of Accounting Change $ (.01) $ 1.82 $ 1.83 Cumulative Effect of Accounting Change -- .22 -- ---------- ---------- --------- Earnings (Loss) Per Common Share Assuming No Dilution $ (.01) $ 2.04 $ 1.83 ========== ========== ========= Assuming Full Dilution: - ---------------------- Income Before Cumulative Effect of Accounting Change $ 6,400 $ 82,600 $ 82,400 (Deduct) Dividends on Convertible Preferred Stock (6,610) -- -- ---------- ---------- --------- Income (Loss) Before Cumulative Effect of Accounting Change Applicable to Common Shares, Common Equivalent Shares and Dilutive Securities (210) 82,600 82,400 Cumulative Effect of Accounting Change -- 9,000 -- ---------- ---------- --------- Net Earnings (Loss) Applicable to Common Shares, Common Equivalent Shares and Dilutive Securities $ (210) $ 91,600 $ 82,400 ========== ========== ========= Shares: Adjusted Weighted Average Number of Common Shares Outstanding 41,995 40,900 40,525 Dilutive Common Equivalent Shares Issuable Under Stock Option Plans (a) 381 459 Common Shares Issuable Upon Conversion of $1.20 Convertible Preferred Stock (a) 324 354 Common Shares Issuable Assuming Conversion of $2.875 Convertible Preferred Stock (a) 5,090 5,091 ---------- ---------- --------- Weighted Average Number of Common and Diluted Common Equivalent Shares and Dilutive Securities 41,995 46,695 46,429 ========== ========== ========= Income (Loss) Before Cumulative Effect of Accounting Change $ (.01) $ 1.77 $ 1.77 Cumulative Effect of Accounting Change -- .19 -- ---------- ---------- --------- Earnings (Loss) Per Common Share Assuming Full Dilution, As Reported $ (.01) $ 1.96 $ 1.77 ========== ========== =========
2 EXHIBIT 11 (Continued) FEDERAL PAPER BOARD COMPANY, INC. STATEMENT OF COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) The calculation of primary earnings per share is presented below in accordance with Securities Exchange Act of 1934 Release No. 9083 although not required by footnote 3 paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%. Earnings loss applicable to common shares are the same as in the calculation assuming no dilution. PRIMARY EARNINGS PER SHARE: - -------------------------- Shares: Weighted Average Number of Common Shares Outstanding 41,995 41,448 40,540 Dilutive Common Equivalent Shares Issuable Under Stock Option Plans (a) 381 388 ------------ ----------- ------------ Weighted Average Number of Common and Dilutive Common Equivalent Shares 41,995 41,829 40,928 ============ =========== ============ Income (Loss) Before Cumulative Effect of Accounting Change $ (.01) $ 1.80 $ 1.81 Cumulative Effect of Accounting Change -- .22 -- Primary Earnings (Loss) Per Common Share Assuming ------------ ----------- ------------- No Dilution from Common Equivalent Shares $ (.01) $ 2.02 $ 1.81 ============ =========== =============
(a) Antidilutive Issue. *Further information on the 1993 restatement is contained in Note 10 of the Company's 1993 Annual Report to Shareholders, as amended. EX-12 3 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12 FEDERAL PAPER BOARD COMPANY, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (IN THOUSANDS)
Fiscal Years Restated* 1993 1992 1991 1990 1989 ---- ---- ---- ---- ---- Income Before Taxes and Cumulative Effect of Accounting Change per Consolidated Statement of Income $ 26,300 $ 135,700 $ 144,200 $202,200 $336,780 Add: Interest on Indebtedness 84,509 85,018 90,243 43,111 28,332 Amortization of Previously Capitalized Interest 8,221 7,656 6,716 4,354 2,901 Portion of Rents Representative of Interest Factor 7,433 8,316 9,451 9,835 10,059 -------- --------- --------- -------- -------- Income as Adjusted $126,463 $ 236,690 $ 250,610 $259,500 $378,072 ======== ========= ========= ======== ======== Fixed Charges: Interest on Indebtedness $ 84,509 $ 85,018 $ 90,243 $ 43,111 $28,332 Capitalized Interest 6,136 11,274 18,807 47,247 29,057 Portion of Rents Representative of Interest Factor 7,433 8,316 9,451 9,835 10,059 -------- --------- --------- -------- ------- Fixed Charges $ 98,078 $ 104,608 $ 118,501 $100,193 $67,448 ======== ========= ========= ======== ======= Ratio of Earnings to Fixed Charges 1.29 2.26 2.11 2.59 5.61 ======== ========= ========= ======== =======
Note: Interest on indebtedness includes amortization of debenture discount and other debt related expenses. *Further information on the 1993 restatement is contained in Note 10 of the Company's 1993 Annual Report to Shareholders, as amended. EX-13 4 1993 ANNUAL REPORT TO SHAREHOLDERS 1 Exhibit 13 REVIEW OF OPERATIONS PAPER, PAPERBOARD AND PULP [PHOTO -- SEE EDGAR APPPENDIX] Operating results for the paper, paperboard and pulp group were lower than those of last year. The principal cause of the reduction was lower selling prices for market pulp which continued to deteriorate throughout most of the year. Paperboard average selling prices were somewhat less than last year due partially to the mix of business. In addition, the Company curtailed production in these product lines for completion of various capital projects. RIEGELWOOD OPERATION The Riegelwood, NC pulp and paperboard mill produced 530,000 tons of market pulp and 310,000 tons of bleached paperboard, in 1993, despite the loss of production of approximately 19,000 tons of market pulp and 3,000 tons of bleached paperboard in the third quarter resulting from downtime taken in connection with the modernization of the mill. A substantial portion of the modernization of the mill was completed during the year. The total cost of the project is expected to be $190 million. It includes the rebuild of the No. 18 paperboard machine and the installation of new winders, rollwrapping equipment and refiners. The completion of the project is scheduled for mid-1994 and will result in improved quality to better serve our various customers. [PULP CHART -- SEE EDGAR APPENDIX] Federal Paper Board Company, Inc. 1993 Annual Report Page 6 2 AUGUSTA OPERATION Bleached paperboard production at the Augusta, GA mill in 1993 was 615,000 tons, an increase over last year's production and a record for the mill. In addition, the mill produced 26,000 tons of market pulp, slightly below the prior year. All of the major modernizations and renovations were completed at the Augusta mill in 1992. It is among one of the most efficient and highest quality producers of bleached paperboard in the world. SERVICE DISTRIBUTION CENTERS [PHOTO -- SEE EDGAR APPENDIX] The service distribution centers of the Company consist of five sheeting plants and one extrusion plant, all located near our markets. During the year, the Company acquired a sheeting plant in Wharfedale, England. This operation enables the Company to export rolls of paperboard from the United States for sheeting at the Wharfedale plant, and delivery to customers both in the United Kingdom and on the Continent. The distribution centers processed more than 257,000 tons of bleached paperboard during the year, an increase over prior years. It is expected that the tonnage processed through the distribution centers will continue to increase and provide the Company with an important tool in servicing our customers. [PAPERBOARD CHART -- SEE EDGAR APPENDIX] Federal Paper Board Company, Inc. 1993 Annual Report Page 7 3 INVERURIE OPERATION [PHOTO -- SEE EDGAR APPENDIX] The Company's uncoated free-sheet paper mill in Inverurie, Scotland had record production in 1993 producing more than 180,000 metric tons of paper compared to 136,000 metric tons last year. Operating income for 1993 was adversely affected by continued low selling prices. The market and selling prices began to improve toward year-end and have further strengthened in the early months of 1994. The capital expenditures made at the mill through 1993 have substantially increased productivity and reduced production costs. As the European economies improve, operating earnings will increase. Construction of a new warehouse, in excess of 100,000 sq. ft., was started during the year and will be completed in mid-1994, further reducing costs. SPRAGUE OPERATION The Company's recycled paperboard mill in Sprague, CT produced a record 179,000 tons during the year, an increase from the record high of 178,000 tons last year. The Sprague mill continues to supply recycled paperboard to the Company's folding carton plants, but the majority of its products are sold to the open market. Operating income for the year was slightly ahead of last year, reflecting improved efficiencies and reduced costs. An eight mile natural gas [PAPER CHART -- SEE EDGAR APPENDIX] Federal Paper Board Company, Inc. 1993 Annual Report Page 8 4 pipeline was completed in 1993 giving the mill the option of using either natural gas or oil in its boiler depending on which is more cost beneficial. The mill uses about 185,000 tons of various grades of wastepaper per year, which is its primary raw material. WOOD PRODUCTS LUMBER PLANTS [PHOTO -- SEE EDGAR APPENDIX] Lumber continued to be in short supply in 1993, resulting principally from the curtailment of logging in the Pacific Northwest and reasonably strong housing starts. Operating income for our lumber plants was substantially higher than last year as lumber prices escalated rapidly during the year. The Company's five lumber plants produced 588.7 million board feet of lumber in 1993 slightly above last year's record production. Lumber prices are expected to continue to escalate as the economy recovers. With continued low mortgage rates, housing starts should increase, putting further upward pressure on lumber selling prices. The Company's lumber plants are modern, efficient, and low cost and are expected to continue to contribute to the profitability of the Company. WOODLANDS The Company owns 568,000 acres of timberlands and leases another 125,000 acres of timberlands, with purchase options. The acreage is located in North Carolina, South Carolina and Georgia and is [WOOD PRODUCTS CHART -- SEE EDGAR APPENDIX] Federal Paper Board Company, Inc. 1993 Annual Report Page 9 5 [PHOTO -- SEE EDGAR APPENDIX] generally in close proximity to our pulp and paperboard mills at Riegelwood, NC and Augusta, GA and our lumber plants. The Woodlands operation, in addition to managing the Company's timberlands, also procures all of the wood needs of the lumber plants and pulp and paperboard mills. Approximately 20% of the Company's softwood needs come from the Company's own timberlands, the balance and substantially all its hardwood needs are purchased by the Woodlands group from outside sources. CONVERTING OPERATIONS CUP OPERATIONS Operating results from our cup operations were below last year and reflect a further reduction in selling prices of this product line. A cost reduction program was implemented to reduce costs and consolidate various operations of the business. The initial stages of the program include the consolidation of functions to the corporate office, overall reduction in personnel and the construction of a new distribution center adjacent to the Shelbyville, IL plant. The cost reduction program, which will be completed by the end of 1995, is on schedule and savings are beginning to be realized. [CONVERTING OPERATIONS CHART -- SEE EDGAR APPENDIX] Federal Paper Board Company, Inc. 1993 Annual Report Page 10 6 1993 production was 9% above last year. Working with the Company's packaging group, the cup operations now provide paperboard trays in addition to cups to a number of customers. The cup plants use approximately 100,000 tons of bleached paperboard annually from the Company's mills. An improvement in earnings is expected in 1994 as the cost reduction plan continues and the economy improves. PACKAGING OPERATIONS [PHOTO -- SEE EDGAR APPENDIX] At our Packaging Operations, the Company manufactures printed folding cartons for a variety of consumer products. Operating income in 1993 was below that of 1992, reflecting once again, the weak economic conditions which have prevailed for the last several years. The Packaging group operates four plants, each serving different market segments. The largest plant is in Wilmington, NC and has four gravure presses; the other plants have offset and flexographic printing equipment. The plants consume more than 75,000 tons of paperboard each year, 80% of which is produced at the Company's own mills. Federal Paper Board Company, Inc. 1993 Annual Report Page 11 7 Federal Paper Board Company, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS RESULTS OF OPERATIONS OVERVIEW Results for fiscal years 1993 and 1991 include 52 weeks while fiscal year 1992 includes 53 weeks. The effect of the inclusion of 53 weeks of the Company's operations in fiscal year 1992 is not deemed material to the Company's financial position and results of operations. Results for the fiscal year 1993 were negatively impacted by weak economic and market conditions which persisted throughout the year. Net sales were $1,386.4 million in 1993, decreasing 5% from 1992 and 3% from 1991. Income before cumulative effect of accounting change was $6.4 million, a 92% decline from both 1992 and 1991. Net income for 1993 includes a charge of $18.9 million for nonhedged financial instrument transactions. Net income for 1993 also includes a non-cash charge of $9.5 million resulting from a change in the Federal statutory tax rate from 34% to 35%. This charge includes the cumulative effect of the recalculation of the deferred tax liability under Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". Net income of $91.6 million for fiscal year 1992 includes a non-cash gain of $9.0 million from the cumulative effect of accounting change related to the adoption of SFAS No. 109. PAPER, PAPERBOARD AND PULP The paper, paperboard and pulp segment manufactures bleached and recycled paperboard, hardwood and softwood market pulp and uncoated free-sheet paper. The Company operates one recycled paperboard mill, two bleached paperboard and pulp mills, one uncoated free-sheet paper mill, five sheeting and distribution centers and one extrusion coating plant. Net sales for this segment declined 12% compared to fiscal year 1992. Paperboard sales declined approximately 6% compared to the prior year reflecting a reduction in shipments along with a decline in average selling prices. Paperboard accounted for 72% and 67% of the segment's sales for 1993 and 1992, respectively. Market pulp sales declined 38% from last year reflecting a 30% decline in average selling prices and a reduction in shipments. Shipments of this product to the export market declined 11% compared to the prior year reflecting the continuation of poor economic conditions throughout Europe. Market pulp accounted for 15% and 21% of the segment's sales in 1993 and 1992, respectively. Improvement in demand, during 1993, caused a 3% increase in sales of uncoated free-sheet paper over the prior year. Paper sales accounted for 13% and 12% of the segment's sales in 1993 and 1992, respectively. Operating profits for this segment declined 55% compared to 1992. The decline in operating profits reflects reduced average selling prices for market pulp and bleached paperboard, partially offset by increased selling prices of recycled paperboard. Demand for these products remained strong throughout the year with shipments of all products, except uncoated free-sheet paper, declining only slightly from the prior year. The Augusta paperboard and pulp mill operated efficiently during the year attaining record production levels on two of its machines. In previous years, the mill underwent a major capital expansion program to increase production capacity and improve quality. Since the start-up in early 1992, the upgraded machines have been operating efficiently and have been achieving higher production levels. The Riegelwood paperboard and pulp mill also operated efficiently during 1993 but was negatively impacted by lower average selling prices for market pulp. Weak economic conditions along with high worldwide market pulp inventory levels have caused a 30% decline, compared to 1992, in the average selling price of market pulp. At year-end selling prices, this product is unprofitable and cannot return to profitability until selling prices are restored to adequate levels. Prices improved slightly at the end of the fourth quarter and further improvement is anticipated in 1994. The Company anticipates market pulp prices to return to profitable levels in the near future. The results for the mill were also impacted by lower shipments and lower average selling prices for bleached paperboard. This decline in average selling prices was generally caused by a change in product mix. The Sprague recycled paperboard mill had an excellent year setting an overall production record producing 179,200 tons of recycled paperboard in 1993. Operating profits improved 19% over the prior year primarily due to improved operating efficiencies and increased average selling prices. In 1993, the mill completed a natural gas pipeline which enabled the substitution of lower priced natural gas for oil and propane used during the manufacturing process. The Inverurie uncoated free-sheet paper mill showed an improvement in both sales and operating profits over 1992. The mill set an overall production record mainly due to the completion, in 1992, of a capital expansion program which significantly increased production capacity. Demand for uncoated free-sheet paper strengthened during the year with shipments 37% above the prior year. Average selling prices declined compared to last year due to poor economic conditions throughout Europe, a change in product mix and an increase in industry capacity. In early 1994, a price increase was implemented for this product and further price increases are anticipated as the economy improves. Net sales for this segment were 6% higher in 1992 than in 1991. A decrease in uncoated free-sheet paper sales partially offset increases in both paperboard and market pulp sales. The primary factor contributing to the increased sales was an increase in shipments of all products. The increase in sales was partially offset by decreases in the average selling prices of bleached paperboard, mainly caused by a change in product mix, and of uncoated free-sheet paper, caused by weak economic conditions in Europe. Average selling prices of market pulp improved slightly in 1992 compared to 1991. Federal Paper Board Company, Inc. 1993 Annual Report Page 18 8 Federal Paper Board Company, Inc. Operating profits for this segment declined 4% in 1992 compared to 1991. This decline was mainly attributable to lower average selling prices for all product lines generally caused by weak economic conditions, extremely competitive market conditions and changes in product mix. The Company's mills all operated efficiently during 1992 with the Riegelwood and Inverurie mills setting production records. During 1992, capital programs were successfully completed at the Inverurie and Augusta mills while other programs were begun at the Sprague and Riegelwood mills. WOOD PRODUCTS The wood products segment is involved in the manufacture of dimensional lumber and land management activities. The Company operates five lumber plants and owns or leases approximately 693,000 acres of timberlands. Net sales for this segment increased 28% compared to fiscal year 1992. Average selling prices of dimensional lumber reached record levels during the year and ended 1993 approximately 31% above last year. Demand remained strong during the year with shipments slightly below the 1992 level. Operating profits more than doubled for this segment in fiscal year 1993 compared to 1992. Market conditions for lumber were favorable during the year reflecting improved housing starts and a reduced supply of lumber. The completion of various modernization programs at some of the lumber plants improved operating efficiencies, positively impacting operating profits for the year. Net sales in 1992 increased 34% compared to fiscal year 1991 due to increased shipments and average selling prices for lumber. Shipments of lumber reached 582.2 million board feet compared to 513.5 million board feet in 1991. Average selling prices increased 18% in 1992 compared to 1991. Operating profits in 1992 were substantially higher than 1991. Strong demand for lumber along with improved average selling prices had a favorable impact on the profitability of this segment. In 1992, the Company completed various modernization programs at the lumber plants which increased production efficiencies and positively impacted earnings. CONVERTING OPERATIONS The converting operations segment manufactures paper and plastic cups and specialty packaging products. The company operates six cup plants and four folding carton plants. Net sales for this segment declined slightly compared to the prior year. The decrease reflects a 15% decline in sales of packaging products partially offset by a 4% increase in sales of paper and plastic cups. Demand for paper and plastic cups improved throughout the year with shipments 9% higher than the prior year. The increase in shipments was partially offset by a decline in average selling prices along with a change in product mix. Paper and plastic cups accounted for 70% and 65% of this segment's sales in 1993 and 1992, respectively. Operating profits declined 49% for this segment in 1993 compared to 1992. The primary factors contributing to these lower earnings were reduced volume and a change in product mix from the Company's packaging operations. Results for the cup operations were also below the prior year due to lower average selling prices, along with a change in product mix partially offset by an increase in volume. The current year's results for the cup operations include a charge of $1.0 million associated with the restructuring of these operations. As part of the restructuring, the Company has implemented various cost reduction programs which, combined with recent capital expenditures, are expected to enhance manufacturing and distribution efficiencies. These programs are expected to have a positive impact on operating profits as general economic conditions improve. A decrease in net sales of 17% in 1992 compared to 1991 reflects lower sales of all products in this segment. The majority of the decline was attributable to a 14% decrease in the sale of paper and plastic cups. This business was significantly impacted by the weak economy and industry overcapacity which had a negative impact on average selling prices of paper and plastic cups. Net sales of packaging products decreased in 1992 due to the divestiture of folding carton plants in 1991. Operating profits declined significantly in 1992 compared to 1991 mainly due to the erosion of average selling prices of cups caused by the weak economy. The Company's packaging operations performed well during 1992 benefiting from reduced costs associated with the reorganization of the operations due to the divestiture of four plants in 1991. Federal Paper Board Company, Inc. 1993 Annual Report Page 19 9 Federal Paper Board Company, Inc. OTHER ITEMS The Company entered into several nonhedged off-balance-sheet financial instrument transactions in 1993, 1992 and 1991. The cost of transacting these instruments along with gains or losses to mark these instruments to market was a pre-tax loss in fiscal year 1993 of approximately $31.9 million and pre-tax gains of approximately $5.3 million and $5.0 million for fiscal years 1992 and 1991, respectively. The Company recorded a gain in 1991 of approximately $4.7 million from the divestiture of folding carton plants. The items above are included in Other - net in the Consolidated Statement of Income. INCOME TAXES The Federal statutory tax rate changed in 1993 from 34% to 35%. The 1993 provision for income taxes includes $9.2 million for the cumulative effect of the recalculation of the deferred tax liability under SFAS No. 109, "Accounting for Income Taxes", which bases future taxes on the current statutory rate. The Company had adopted this Statement in 1992 and recorded a gain of $9.0 million from the cumulative effect of an accounting change in the Consolidated Statement of Income. The adoption of SFAS No. 109 resulted in higher depreciation expense for the fiscal years 1993 and 1992. The Company's overall effective tax rate was 75.7%, 39.1% and 42.9% in 1993, 1992 and 1991, respectively. The higher effective tax rate for 1993 compared to 1992 and 1991 reflects the change in the Federal statutory rate. OTHER ACCOUNTING MATTERS The Company adopted, in fiscal year 1993, SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions", electing to amortize the transition obligation over twenty years. This Statement requires the Company to accrue the estimated cost of retiree benefit payments during the years the employee provides services. The Company previously expensed the cost of these benefits as claims were incurred. The incremental pre-tax cost for 1993, as a result of adopting SFAS No. 106, including amortization, service and interest cost was approximately $2.8 million. Certain postemployment benefits are provided to former or inactive employees, their beneficiaries and covered dependents after employment but before retirement. In November 1992, SFAS No. 112, "Employers' Accounting for Postemployment Benefits", was issued and must be adopted for fiscal years beginning after December 15, 1993. The impact of adopting this Statement in fiscal year 1993 would not have been material to the Company's financial position and results of operations. CAPITAL RESOURCES AND LIQUIDITY Despite lower net income in 1993, the Company's cash flows from operations remained strong. Cash generated by operations in 1993 was $231.0 million compared to $223.8 million in 1992 and $269.2 million in 1991. In 1991, the Company entered into an agreement which allows for the sale of a fractional interest in a defined pool of trade accounts receivable. During 1993, the maximum allowable amount of receivables to be sold, initially $75 million, was increased to $88 million. Proceeds from the sold receivables of $13 million and $75 million in 1993 and 1991, respectively are reported as operating cash flows. Cash flows used for investing activities were primarily associated with capital investment programs. Capital expenditures, including capitalized interest, totaled $161.2 million in 1993, $149.1 million in 1992 and $227.4 million in 1991. The majority of the capital spending in 1993 related to a modernization program at the Company's Riegelwood mill which will improve quality and ensure the Company's leadership position in the lightweight bleached bristol market. In 1993, the Company also began a capital spending program to construct a new warehouse for its cup operations in order to improve distribution efficiencies. A major portion of the spending in 1992 was related to ongoing capital investment programs for the paper, paperboard and pulp segment, including some spending on the Riegelwood mill program mentioned above. Spending in 1991 was primarily associated with the completion of capital expansion programs at the Company's Augusta and Inverurie mills which related to increasing production capacity and improving quality. Capital expenditures for 1994, including capitalized interest, are expected to be consistent with the 1993 level. Cash flows used for financing activities were associated with the payment of dividends and the repayment of long-term debt. Cash paid for dividends was $48.6 million, $48.4 million and $48.6 million in 1993, 1992 and 1991, respectively. The Company's cash dividend was maintained at a quarterly rate of $.25 per common share for the fourth straight year. During 1993, the Company reduced total debt by $28.8 million. The ratio of total debt to total capitalization was 54.2%, 53.5% and 54.8% in 1993, 1992 and 1991, respectively. During 1993, the Company entered into two revolving credit agreements. The first agreement provides for borrowings of up to $75 million and expires in September 1994 and the second agreement provides for borrowings of up to $225 million and expires in September 1996. Both of these agreements may be extended until 1998 upon mutual consent of all parties. These agreements replaced the existing $200 million revolving credit and term loan agreement. Federal Paper Board Company, Inc. 1993 Annual Report Page 20 10 Federal Paper Board Company, Inc. Debt repayments in 1994 for outstanding borrowings are projected to be $56.1 million. The Company believes cash flows from operations supplemented by the revolving credit agreement and $75 million remaining under a previously filed shelf registration statement will be sufficient to meet the repayment requirements and fund capital spending programs. During 1993, the Company entered into $50 million and terminated $175 million of interest rate swap agreements in order to effectively lower interest costs. The Company's outstanding interest rate swap agreements effectively converted $175 million and $300 million of fixed rate debt to variable rate debt at January 1, 1994 and January 2, 1993, respectively. These agreements have various expiration dates through 1997. The Company had various nonhedged interest rate swap agreements outstanding at January 1, 1994 of which two were complex in nature. One interest rate swap agreement outstanding is based on a notional amount of $175 million in which the Company receives LIBOR and pays LIBOR in arrears, a predetermined spread plus a leveraged coupon based on various interest rate spreads. The estimated fair value of this interest rate swap agreement at January 1, 1994 was a loss of $20.6 million. The second interest rate swap agreement outstanding is based on a notional amount of $25 million in which the Company receives a fixed rate of 10% and pays LIBOR, a predetermined spread plus a leveraged coupon based on various interest rate spreads. The estimated fair value of this interest rate swap agreement at January 1, 1994 was a loss of $3.8 million. The Company manages certain portions of its exposure to foreign currency fluctuations through a variety of nonhedged off-balance-sheet financial instruments including foreign currency option and forward contracts. The Company's market risk under these agreements is subject to currency rate changes of the British pound sterling, the German mark and the Japanese yen along with changes in U.S. and German interest rates. At January 1, 1994, the Company had outstanding foreign currency call option contracts with a notional amount of 5.0 million U.S. dollars and 20.0 million British pounds, foreign currency put option contracts with a notional amount of 40.0 million U.S. dollars, 8.5 million German marks and 10.0 million British pounds and forward foreign exchange contracts with a notional amount of 5.0 million U.S. dollars. Certain loan agreements the Company is party to contain various restrictive covenants. At January 1, 1994, as restated, the Company was unable to comply with the cash flow coverage test in the revolving credit agreements. The Company has obtained waivers from the syndicate of banks related to this item of default through June 18, 1994, at which time the Company was in compliance with all restrictive covenants. ENVIRONMENTAL MATTERS The Company operates in an industry subject to extensive environmental regulations. In order to meet the standards established by the various federal, state and local environmental laws and regulations, the Company has made substantial capital and operating expenditures. Environmental capital expenditures totaled $17.2 million in 1993, $32.2 million in 1992 and $48.0 million in 1991. Capital expenditures for environmental purposes are estimated to be approximately $25 million and $70 million for fiscal years 1994 and 1995, respectively. However, spending on these environmental projects may be undertaken in years beyond 1995. Additional amounts to be incurred for environmental purposes in future years will depend on new laws and regulations, other changes in legal requirements, changes in environmental control technology and changes in the economic environment. In the latter part of 1993, the United States Environmental Protection Agency issued regulations which could result in significant expenditures being incurred in our industry in future years. The Company is not yet in a position to establish a meaningful estimate of such costs or predict what potential financial impact changes to other existing regulations would have on the Company. All companies in our industry are subject to the same or similar environmental laws and regulations and the Company does not believe that compliance with applicable laws and regulations will materially effect its competitive position. The Company is involved in environmental remediation activities at 11 sites where it has been named a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act and by certain state agencies. The total costs to the Company to remediate these sites cannot be predicted with certainty due to the amount of time necessary to complete the cleanups, the extent to which contributions will be available from other parties or the availability of insurance coverage. However, based upon its experience with such matters, the Company does not believe that its expected share of such known actual and potential cleanup costs will have a materially adverse effect on its financial position and results of operations. The Company has accruals for probable and estimable environmental costs of $4.7 million and $3.8 million, at January 1, 1994 and January 2, 1993, respectively. EFFECTS OF INFLATION The moderate level of inflation during the past few years has not had a material impact on the Company's operating results. Prices and volumes for the Company's products are more closely related to supply and demand factors in specific markets and by exchange rate fluctuations than by inflationary factors. FUTURE OUTLOOK The Company anticipates an improvement in the general economic and market conditions affecting its business in 1994. Expected increases in demand for its major products should allow for overall higher average selling prices in 1994. In addition, ongoing Company-wide cost reduction programs, along with recent capital expenditures, are expected to enhance manufacturing and distribution efficiencies throughout the Company. Therefore, with improved demand and pricing of its major product lines and overall lower costs, 1994 results should be improved over 1993. Federal Paper Board Company, Inc. 1993 Annual Report Page 21 11 Federal Paper Board Company, Inc. INDUSTRY SEGMENT INFORMATION
Net Sales to Unaffiliated Intersegment Total In thousands Customers Sales Sales - ------------------------------------------------------------------------------------------------------------------------ FOR FISCAL YEAR 1993 Paper, Paperboard and Pulp $ 843,775 $ 91,302 $ 935,077 Wood Products 214,913 19,217 234,130 Converting Operations 327,698 -- 327,698 - ------------------------------------------------------------------------------------------------------------------------ Total segment operations 1,386,386 110,519 1,496,905 Intersegment eliminations -- (110,519) (110,519) General corporate items - net -- -- -- - ------------------------------------------------------------------------------------------------------------------------ Consolidated total $ 1,386,386 $ -- $1,386,386 - ------------------------------------------------------------------------------------------------------------------------ FOR FISCAL YEAR 1992 Paper, Paperboard and Pulp $ 955,978 $ 93,039 $1,049,017 Wood Products 168,330 19,286 187,616 Converting Operations 336,511 -- 336,511 - ------------------------------------------------------------------------------------------------------------------------ Total segment operations 1,460,819 112,325 1,573,144 Intersegment eliminations -- (112,325) (112,325) General corporate items - net -- -- -- - ------------------------------------------------------------------------------------------------------------------------ Consolidated total $ 1,460,819 $ -- $1,460,819 - ------------------------------------------------------------------------------------------------------------------------ FOR FISCAL YEAR 1991 Paper, Paperboard and Pulp $ 905,022 $ 81,870 $ 986,892 Wood Products 126,063 20,287 146,350 Converting Operations 403,936 -- 403,936 - ------------------------------------------------------------------------------------------------------------------------ Total segment operations 1,435,021 102,157 1,537,178 Intersegment eliminations -- (102,157) (102,157) General corporate items - net -- -- -- - ------------------------------------------------------------------------------------------------------------------------ Consolidated total $ 1,435,021 $ -- $1,435,021 ========================================================================================================================
The Paper, Paperboard and Pulp segment consists of the Company's operations at Riegelwood, NC; Augusta, GA; Sprague, CT; Inverurie, Scotland; Sturgis, MI; Ontario, CA; Hazleton, PA; Prosperity, SC; and Wharfedale, England. Net sales to unaffiliated customers were as follows:
In thousands 1993 1992 1991 - --------------------------------------------------------- Paper $113,263 $109,601 $115,750 Paperboard 605,632 644,844 603,486 Pulp 124,880 201,533 185,786 =========================================================
The Wood Products segment includes the results of the Company's lumber plants and land management group. The Converting Operations segment includes the results of the Company's cup operations and packaging operations. Intersegment sales are comprised principally of the sale of paperboard at market prices to the Converting Operations and the sale of wood chips and pulpwood at cost from the lumber plants and woodlands to the Paperboard and Pulp Operations. Identifiable assets by segment are principally those assets which are used in the Company's operations in each industry. Federal Paper Board Company, Inc. 1993 Annual Report Page 22 12 Federal Paper Board Company, Inc.
Restated Income Before Taxes Restated Depreciation, and Cumulative Effect Identifiable Amortization and Cost Capital of Accounting Change Assets of Timber Harvested Expenditures - ------------------------------------------------------------------------------------------------------------------------ $ 88,646 $1,845,876 $106,303 $130,901 71,633 309,228 12,997 14,760 7,829 312,509 20,898 15,054 - ------------------------------------------------------------------------------------------------------------------------ 168,108 2,467,613 140,198 160,715 1,399 -- -- -- (143,207) 94,290 3,889 523 - ------------------------------------------------------------------------------------------------------------------------ $ 26,300 $2,561,903 $144,087 $161,238 - ------------------------------------------------------------------------------------------------------------------------ $ 198,361 $1,860,734 $106,817 $121,891 31,431 290,763 13,475 12,050 15,480 321,008 22,347 14,993 - ------------------------------------------------------------------------------------------------------------------------ 245,272 2,472,505 142,639 148,934 (92) -- -- -- (109,480) 100,994 3,927 196 - ------------------------------------------------------------------------------------------------------------------------ $ 135,700 $2,573,499 $146,566 $149,130 - ------------------------------------------------------------------------------------------------------------------------ $ 207,680 $1,810,891 $ 86,055 $194,124 10,277 266,583 10,958 15,283 38,971 317,245 21,949 17,414 - ------------------------------------------------------------------------------------------------------------------------ 256,928 2,394,719 118,962 226,821 (989) -- -- -- (111,739) 97,971 3,733 582 - ------------------------------------------------------------------------------------------------------------------------ $ 144,200 $2,492,690 $122,695 $227,403 ========================================================================================================================
Corporate assets include cash, prepaid items, non-trade receivables, unamortized debenture expenses, investments and non-operating assets. General corporate items - net include administrative expenses, interest expense and other items. Export sales from the Company's United States operations to unaffiliated customers by major geographic area were as follows:
In thousands 1993 1992 1991 - --------------------------------------------------------- North America $ 16,033 $ 14,727 $ 13,570 Europe 43,324 91,794 90,050 Asia 67,377 96,338 79,325 Other 5,278 6,980 5,691 - --------------------------------------------------------- Total $ 132,012 $ 209,839 $ 188,636 =========================================================
Further information on the 1993 restatement is contained in Note 10 of the financial statments. Federal Paper Board Company, Inc. 1993 Annual Report Page 23 13 Federal Paper Board Company, Inc. CONSOLIDATED STATEMENT OF INCOME
In thousands except per share amounts Restated For Fiscal Year 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------------ NET SALES $1,386,386 $1,460,819 $1,435,021 - ------------------------------------------------------------------------------------------------------------------------ COSTS AND EXPENSES: Cost of products sold 1,038,785 1,034,854 1,008,508 Depreciation, amortization and cost of timber harvested 144,087 146,566 122,695 Selling and administrative expenses 60,149 64,769 64,144 Interest expense 84,509 85,018 90,243 Other -- net 32,556 (6,088) 5,231 - ------------------------------------------------------------------------------------------------------------------------ TOTAL COSTS AND EXPENSES 1,360,086 1,325,119 1,290,821 - ------------------------------------------------------------------------------------------------------------------------ Income before taxes and cumulative effect of accounting change 26,300 135,700 144,200 Provision for income taxes 19,900 53,100 61,800 - ------------------------------------------------------------------------------------------------------------------------ Income before cumulative effect of accounting change 6,400 82,600 82,400 Cumulative effect of accounting change -- 9,000 -- - ------------------------------------------------------------------------------------------------------------------------ NET INCOME 6,400 91,600 82,400 Preferred dividend requirements 6,610 7,060 8,129 - ------------------------------------------------------------------------------------------------------------------------ Net income (loss) available to common shares $ (210) $ 84,540 $ 74,271 - ------------------------------------------------------------------------------------------------------------------------ Average common shares outstanding: Assuming no dilution 41,995 41,448 40,540 Assuming full dilution 41,995 46,695 46,429 - ------------------------------------------------------------------------------------------------------------------------ EARNINGS (LOSS) PER COMMON SHARE - ------------------------------------------------------------------------------------------------------------------------ Assuming no dilution: Income (loss) before cumulative effect of accounting change $ (.01) $ 1.82 $ 1.83 Cumulative effect of accounting change -- .22 -- - ------------------------------------------------------------------------------------------------------------------------ Net Income (Loss) $ (.01) $ 2.04 $ 1.83 - ------------------------------------------------------------------------------------------------------------------------ Assuming full dilution: Income (loss) before cumulative effect of accounting change $ (.01) $ 1.77 $ 1.77 Cumulative effect of accounting change -- .19 -- - ------------------------------------------------------------------------------------------------------------------------ Net Income (Loss) $ (.01) $ 1.96 $ 1.77 ========================================================================================================================
See accompanying notes to financial statements and Note 10 as to the 1993 restatement. Federal Paper Board Company, Inc. 1993 Annual Report Page 24 14 Federal Paper Board Company, Inc. CONSOLIDATED STATEMENT OF CASH FLOWS
In thousands Restated For Fiscal Year 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATIONS: Net income $ 6,400 $ 91,600 $ 82,400 Adjustments to reconcile net income to net cash provided by operations: Cumulative effect of accounting change -- (9,000) -- Depreciation, amortization and cost of timber harvested 144,087 146,566 122,695 Deferred income tax provision 13,076 26,857 35,056 Net loss (gain) on financial instrument transactions 31,854 (5,258) (4,989) Net loss on disposal of property, plant and equipment and timber 401 4,778 10,787 Net gains on sales of facilities -- -- (4,668) Other - net (11,543) (10,371) 3,293 Changes in current assets and liabilities, net of effects from acquisitions: Accounts and notes receivable 36,271 (4,762) 69,532 Inventories (21,651) (21,488) (26,472) Other current assets 12,464 (794) 11,332 Accounts payable and other current liabilities 19,619 5,718 (29,788) - ------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY OPERATIONS 230,978 223,846 269,178 - ------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (161,238) (149,130) (227,403) Proceeds from disposal of property, plant and equipment 1,213 3,083 13,725 Net (payments) proceeds for financial instrument transactions (4,390) 5,258 4,989 Proceeds received on settlement of note receivable 10,000 -- -- Other (1,365) (9,071) (11,478) - ------------------------------------------------------------------------------------------------------------------------ NET CASH USED FOR INVESTING ACTIVITIES (155,780) (149,860) (220,167) - ------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends paid (48,591) (48,414) (48,645) Increase in long-term debt 1,909 209,966 200,623 Payments on long-term debt (34,348) (239,896) (224,447) Issuance of equity capital 3,593 5,845 7,942 Change in short-term bank debt 2,230 (1,724) 15,032 - ------------------------------------------------------------------------------------------------------------------------ NET CASH USED FOR FINANCING ACTIVITIES (75,207) (74,223) (49,495) - ------------------------------------------------------------------------------------------------------------------------ DECREASE IN CASH: (9) (237) (484) Cash: Beginning of year 280 517 1,001 End of year $ 271 $ 280 $ 517 - ------------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL CASH FLOW DISCLOSURE: Cash paid during the year for: Interest (net of amount capitalized) $ 84,948 $ 78,864 $ 86,189 Income taxes 7,171 26,885 30,557 ========================================================================================================================
See accompanying notes to financial statements and Note 10 as to the 1993 restatement. Federal Paper Board Company, Inc. 1993 Annual Report Page 25 15 Federal Paper Board Company, Inc. CONSOLIDATED BALANCE SHEET
In thousands Restated At Year End 1993 1992 - ------------------------------------------------------------------------------------------------------------------------ ASSETS CURRENT ASSETS: Cash $ 271 $ 280 Accounts and notes receivable, less allowance for doubtful accounts of $1,284 in 1993 and $1,672 in 1992 52,062 88,351 Inventories: Raw materials 58,720 59,680 Work in process 15,469 9,404 Finished goods 99,329 87,680 Supplies 51,701 52,485 - ------------------------------------------------------------------------------------------------------------------------ Subtotal 225,219 209,249 LIFO reserve (2,819) (8,257) - ------------------------------------------------------------------------------------------------------------------------ Total inventories 222,400 200,992 Deferred tax asset 15,142 11,010 Other current assets 17,250 15,254 - ------------------------------------------------------------------------------------------------------------------------ TOTAL CURRENT ASSETS 307,125 315,887 - ------------------------------------------------------------------------------------------------------------------------ PROPERTY, PLANT AND EQUIPMENT, AT COST: Land 16,227 14,990 Buildings, including leasehold improvements 238,859 227,437 Machinery and equipment 2,259,622 2,198,152 Construction in progress 151,715 92,105 - ------------------------------------------------------------------------------------------------------------------------ Subtotal 2,666,423 2,532,684 Accumulated depreciation and amortization (769,869) (654,334) - ------------------------------------------------------------------------------------------------------------------------ PROPERTY, PLANT AND EQUIPMENT - NET 1,896,554 1,878,350 - ------------------------------------------------------------------------------------------------------------------------ TIMBER AND TIMBERLANDS 189,674 191,840 GOODWILL AND OTHER INTANGIBLES 118,418 123,200 OTHER ASSETS 50,132 64,222 - ------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $ 2,561,903 $ 2,573,499 ========================================================================================================================
See accompanying notes to financial statements and Note 10 as to the 1993 restatement. Federal Paper Board Company, Inc. 1993 Annual Report Page 26 16 Federal Paper Board Company, Inc.
Restated 1993 1992 - ------------------------------------------------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 90,356 $ 79,252 Current portion of long-term debt 56,148 31,140 Short-term bank debt 25,304 23,100 Dividends payable 10,554 10,506 Accrued compensation 24,867 26,933 Accrued interest 18,885 18,923 Other current liabilities 48,029 37,370 - ------------------------------------------------------------------------------------------------------------------------ TOTAL CURRENT LIABILITIES 274,143 227,224 - ------------------------------------------------------------------------------------------------------------------------ LONG-TERM DEBT 973,825 1,029,874 OTHER LIABILITIES 78,872 53,586 DEFERRED TAX LIABILITY 342,757 322,400 SHAREHOLDERS' EQUITY: Preferred stock - $1.20 cumulative convertible, $1 par value (aggregate liquidation value at January 1, 1994 - $1,153); authorized 1,900 shares; issued: 1993 - 58 shares; 1992 - 61 shares 58 61 Preferred stock - Class A Second Series, $2.875 cumulative convertible, $1 par value (aggregate liquidation value at January 1, 1994 - $113,721); authorized 10,000 shares; issued: 1993 - 2,274 shares; 1992 - 2,274 shares 2,274 2,274 Common stock - $5 par value; authorized 240,000 shares; issued: 1993 - 42,356 shares; 1992 - 42,269 shares 211,779 211,344 Other capital 249,800 257,379 Retained earnings 432,961 475,200 Treasury stock - at cost: Common stock - 1993 - 209 shares; 1992 - 317 shares (4,566) (5,843) - ------------------------------------------------------------------------------------------------------------------------ TOTAL SHAREHOLDERS' EQUITY 892,306 940,415 - ------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,561,903 $2,573,499 ========================================================================================================================
Federal Paper Board Company, Inc. 1993 Annual Report Page 27 17 Federal Paper Board Company, Inc. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Preferred Common Stock Other Retained Treasury Stock In thousands Stocks Shares Amount Capital Earnings Shares Amount - ------------------------------------------------------------------------------------------------------------------------ BALANCE DECEMBER 29, 1990 $2,871 40,529 $202,645 $284,356 $398,702 365 $(5,607) Net income 82,400 Dividends declared: Preferred stocks (8,129) Common stock (40,645) Amortization of compensation expense 135 Stock options exercised 524 2,620 6,267 31 (945) Conversion of preferred stocks (6,287 shares) (7) 30 151 (144) Restricted common shares forfeited (12) (59) (154) Cumulative foreign translation adjustment (1,847) Minimum pension liability adjustment (1,410) - ------------------------------------------------------------------------------------------------------------------------ BALANCE DECEMBER 28, 1991 $2,864 41,071 $205,357 $287,203 $432,328 396 $(6,552) Net income 91,600 Dividends declared: Preferred stocks (7,060) Common stock (41,668) Stock options exercised 224 1,116 4,646 (79) 709 Conversion of preferred stocks (529,089 shares) (529) 974 4,871 (4,968) Cumulative foreign translation adjustment (23,339) Minimum pension liability adjustment (6,163) - ------------------------------------------------------------------------------------------------------------------------ BALANCE JANUARY 2, 1993 $2,335 42,269 $211,344 $257,379 $475,200 317 $(5,843) Net income 6,400 Dividends declared: Preferred stocks (6,610) Common stock (42,029) Stock options exercised 72 362 1,954 (108) 1,277 Conversion of preferred stock (2,908 shares) (3) 15 73 (70) Cumulative foreign translation adjustment (286) Minimum pension liability adjustment (9,177) - ------------------------------------------------------------------------------------------------------------------------ BALANCE JANUARY 1, 1994 (Restated) $2,332 42,356 $211,779 $249,800 $432,961 209 $(4,566) ========================================================================================================================
See accompanying notes to financial statements and Note 10 as to the 1993 restatement. Federal Paper Board Company, Inc. 1993 Annual Report Page 28 18 Federal Paper Board Company, Inc. NOTES TO FINANCIAL STATEMENTS (Restated) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include all subsidiary companies. Significant intercompany transactions have been eliminated. Fiscal Year The Company's fiscal year is comprised of 52 or 53 weeks, ending on the Saturday nearest December 31st. The fiscal year 1992 includes 53 weeks while the other years presented include 52 weeks. Inventories Inventories are valued at the lower of cost or market. Inventory costs include all direct manufacturing costs and applied overhead. Finished goods, work in process and raw materials for the Bleached Paperboard, Pulp, Wood Products and Converting Operations are determined on the last-in, first-out (LIFO) basis. Inventories for the Recycled Paperboard and Paper facilities are determined on the first-in, first-out (FIFO) basis. Supply inventories are determined on an average cost basis. Property, Plant and Equipment Property, plant and equipment is recorded at cost. Depreciation is computed on the straight-line method based on the estimated useful lives of related assets except for the Augusta, GA paperboard mill, where the units-of-production method is used. Depreciable lives are 20 to 33 years for buildings and 3 to 30 years for machinery and equipment. Cost of timber harvested is computed at unit cost rates calculated annually based on the estimated volume of recoverable timber and the related costs. In the first quarter of 1993 and the fourth quarter of 1992, the Company changed the estimated useful lives used to calculate depreciation for certain productive assets to properly reflect the expected use of these assets. The change in estimated useful lives made in 1993 resulted in an increase of $4.1 million on income before taxes, $2.5 million on income after taxes and $.06 on earnings per fully diluted common share. The change in estimated useful lives made in 1992 resulted in an increase of $2.4 million on income before taxes, $1.4 million on income after taxes and $.03 on earnings per fully diluted common share. Costs of the construction of certain long-term assets include capitalized interest which is amortized over the estimated useful life of the related asset. The Company capitalized interest costs of $6.1 million in 1993, $11.3 million in 1992 and $18.8 million in 1991. Intangibles and Other Assets The excess of the purchase price over the fair value of the net assets of acquired companies is goodwill and is amortized over 40 years. Other identified intangible assets are amortized, if applicable, on a straight-line basis over their estimated useful lives which range from 3 to 40 years. Accumulated amortization of goodwill and other intangibles amounted to $20.5 million, $16.2 million and $11.3 million in 1993, 1992 and 1991, respectively. The Company incurs certain start-up costs during the process of bringing a project into commercial production. Such start-up costs on major capital projects are capitalized and amortized on a straight-line basis over five years. Unamortized start-up costs, included in other assets, were $17.1 million, $22.5 million and $18.5 million in 1993, 1992 and 1991, respectively. Management periodically evaluates the recoverability of long-term assets, including goodwill, based upon current and anticipated net income and undiscounted future cash flows. Financial Instruments The Company enters into hedged interest rate swap agreements which involve the exchange of fixed and floating rate interest payments periodically over the life of the agreement without the exchange of the underlying principal amounts. The differential to be paid or received is accrued as interest rates change and recognized over the life of the agreements as an adjustment to interest expense. The Company enters into nonhedged interest rate swap agreements along with hedged and nonhedged foreign exchange instruments. Gains and losses associated with nonhedged transactions are recorded currently in income. If the contract hedges a firm commitment, gains and losses are deferred and included as a component of the related commitment. Income Taxes Effective December 29, 1991, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes", and has reported the cumulative effect of this change in the method of accounting for income taxes in the Consolidated Statement of Income for fiscal year 1992. Under SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In adopting SFAS No. 109, the Company adjusted the carrying amounts of previous acquisitions accounted for using the purchase method of accounting. Under APB Opinion 11, which was applied in 1991 and prior years, provisions were made for deferred income taxes resulting from differences between the time transactions were recorded for financial statement purposes and the time they affected taxable income. Earnings Per Common Share Earnings per common share assuming no dilution is based on the weighted average number of shares and common equivalent shares outstanding during the year. Outstanding stock options are common equivalent shares but are not included in the computation since the dilutive effect is not material. Earnings per common share assuming full dilution is based on the weighted average number of common shares outstanding during the year, including the dilutive effects of stock options outstanding and the conversion of the Company's preferred stocks. Federal Paper Board Company, Inc. 1993 Annual Report Page 29 19 Federal Paper Board Company, Inc. Foreign Currency Translation Adjustments resulting from the translation of foreign subsidiaries' financial statements into U.S. dollars are included as cumulative foreign translation adjustments in shareholders' equity. The net cumulative foreign currency translation adjustments included in other capital were decreases of $18.6 million and $18.3 million at January 1, 1994 and January 2, 1993, respectively. Revenue Recognition The Company generally recognizes revenues when goods are shipped. Reclassifications Certain amounts in prior year financial statements have been reclassified to conform with the current year presentation. NOTE 2 SUPPLEMENTAL BALANCE SHEET INFORMATION Accounts and Notes Receivable In 1991, the Company entered into an agreement which allows for the sale, without recourse, of a fractional interest in a defined pool of trade accounts receivable. The maximum allowable amount of receivables to be sold, initially $75 million, was increased to $88 million in 1993. The amount available at any measurement date varies based upon the level of eligible receivables. Under this agreement, $88 million and $75 million were sold as of January 1, 1994 and January 2, 1993, respectively. These sales are reflected as reductions of accounts receivable in the accompanying Consolidated Balance Sheet and as operating cash flows in the accompanying Consolidated Statement of Cash Flows. The costs of this program, which were $2.8 million in 1993, $3.4 million in 1992 and $1.9 million in 1991, are based upon the Company's debt ratings and the purchasers' level of investment and borrowing costs and are charged to selling and administrative expenses in the accompanying Consolidated Statement of Income. During 1993, the Company settled a $20.5 million note receivable it had received in 1991 when three folding carton plants were sold to a group of former employees. In the settlement of this receivable, the Company received cash and preferred stock. The preferred stock is included in Other Assets in the accompanying Consolidated Balance Sheet. Inventories The Company used the LIFO method of valuing its inventories for approximately 69% of total inventories at January 1, 1994 and 67% of total inventories at January 2, 1993. A reduction of certain inventory quantities resulted in the liquidation of certain LIFO inventory layers. As a result of these liquidations, net income and earnings per common share assuming full dilution for the fiscal years 1993, 1992 and 1991 were higher by $1.7 million or $.04, $.4 million or $.01 and $2.3 million or $.05, respectively. Financial Instruments The estimated fair values of the Company's financial instruments at January 1, 1994 and January 2, 1993 were as follows:
1993 1992 -------------------------------------------- Carrying Estimated Carrying Estimated In thousands Amount Fair Value Amount Fair Value - ----------------------------------------------------------------------- Accounts and notes receivable $ 52,062 $ 52,062 $ 88,351 $ 88,351 Notes receivable non-current 2,418 2,418 22,913 26,289 Long-term debt 1,029,973 1,181,193 1,061,014 1,149,644 Interest rate swap agreements-settlement basis: In a loss position -- 1,830 -- 8,800 Interest rate swaps -- marked to market: In a gain position 260 260 -- -- In a loss position 25,706 25,706 -- -- =======================================================================
The estimated fair value amounts have been determined by the Company, using available market information and appropriate valuation methodologies as of January 1, 1994 and January 2, 1993. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and current estimates of fair value may differ significantly from amounts presented herein. The following are the methods used for each class of financial instrument for which it is practicable to estimate the value. Accounts and notes receivable: The carrying amounts of these items are a reasonable estimate of their fair value. Notes receivable non-current: The estimated fair value of notes receivable to the Company is based on market prices for the same or similar instruments with similar maturities. Long-term debt: The estimated fair value of the Company's long-term debt is based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt with the same remaining maturities. Interest rate swap agreements: The estimated fair value of interest rate swap agreements is obtained from dealer quotes. The Company had various nonhedged interest rate swap agreements outstanding at January 1, 1994 of which two were complex in nature. One interest rate swap agreement outstanding is based on a notional amount of $175 million in which the Company receives LIBOR and pays LIBOR in arrears, a predetermined spread plus a leveraged coupon based on various interest rate spreads. The estimated fair value of this interest rate swap agreement at January 1, 1994 was a loss of $20.6 million. The second interest rate swap agreement outstanding is based on a notional amount of $25 million in which the Company receives a fixed rate of 10% and pays LIBOR, a predetermined spread plus a leveraged coupon based on various interest rate spreads. The estimated fair value of this interest rate swap agreement at January 1, 1994 was a loss of $3.8 million. The Company manages certain portions of its exposure to foreign currency fluctuations through a variety of financial instruments with off-balance-sheet market risk including foreign currency option and foreign currency forward contracts. The risk of loss to the Company in the event of non-performance by any party under these agreements is not significant. The Company's market risk under these agreements is subject to currency rate differentials. At January 1, 1994, the Company had outstanding foreign currency call option contracts with a notional amount of 5.0 million U.S. dollars and 20.0 million British pounds, foreign currency put option contracts with a notional amount of 40.0 million U.S. dollars, 8.5 million German marks, 10.0 million British pounds and forward foreign exchange contracts with a notional amount of 5.0 million U.S. dollars. At January 2, 1993, the Company had outstanding foreign currency call option contracts with a notional amount of $185.0 million, foreign currency put option contracts with a notional amount of $20.0 million and forward foreign exchange contracts with a notional amount of $10.0 million. The estimated fair values of the nonhedged foreign currency contracts outstanding at January 1, 1994 and January 2, 1993 were immaterial. Federal Paper Board Company, Inc. 1993 Annual Report Page 30 20 NOTE 3 LONG-TERM DEBT Federal Paper Board Company, Inc.
In thousands 1993 1992 - ----------------------------------------------------------------------- Revolving credit agreements, variable interest rates $ 50,000 $ 20,000 Notes: 9.39% - 10.5% Senior notes, due 1993 - 2009 475,000 500,000 4.9% Bank note, due 1994 25,000 25,000 5.85% Bank note, due 1995 20,000 20,000 Other 45,000 75,000 8.125% - 10% Debentures, due 2002-2012 375,000 375,000 Industrial revenue bonds, due 1992-2012 29,870 32,799 Capitalized lease obligations 2,118 1,056 Other 7,985 12,159 - ----------------------------------------------------------------------- Total 1,029,973 1,061,014 Current portion (56,148) (31,140) - ----------------------------------------------------------------------- Total long-term debt $ 973,825 $1,029,874 =======================================================================
The aggregate maturities of long-term debt for the five years subsequent to January 1, 1994 are as follows: 1994 - $56,148; 1995 - $71,954; 1996 - $95,538; 1997 - $32,912; 1998 - $27,591. The Company has two revolving credit agreements with a syndicate of banks. The first agreement provides for borrowings of up to $75 million and expires in 1994 and the second agreement provides for borrowings of up to $225 million and expires in 1996. Both of these agreements may be extended, by mutual consent of all parties, until 1998. The agreements require the payment of a facility fee and the $225 million agreement requires the payment of a commitment fee based on the unused portion of the line of credit. These agreements became effective in the third quarter of 1993 and replaced the Company's $200 million revolving credit and term loan agreement. The agreements referenced above provide for borrowing at variable interest rates based on the prime rate or, at the Company's option, on the London Interbank Offered Rate (LIBOR) or the average secondary market offering rate for certificates of deposit in New York City. The rate can be reduced or increased depending on the Company's ratio of debt to total capitalization and cash flow coverage. The weighted average interest rate for 1993 and 1992 was 3.9% and 4.9%, respectively. The weighted average interest rate for 1992 reflects the impact of interest rate swap agreements, which expired in March of 1992, on a portion of the outstanding loans. The Company classified $45 million and $75 million of other notes as long-term debt at January 1, 1994 and January 2, 1993, respectively. The Company has the ability and intent under the revolving credit agreements to renew these obligations through 1996. During 1993, the Company executed and terminated various interest rate swap agreements which reduced the interest costs on certain fixed rate debt. At January 1, 1994, the Company had hedged interest rate swap agreements outstanding with a notional principal amount of $175 million which converted fixed rate debt with a weighted average interest rate of 8.66% to variable rates, based on LIBOR plus a predetermined spread, with a weighted average interest rate of 7.1%. These swap agreements terminate on various dates through the year 1997. The Company is exposed to credit loss in the event of nonperformance by the other party to the interest rate swap agreements. However, the Company does not anticipate nonperformance by the counterparty. The industrial revenue bonds had a weighted average interest rate of 4.8% and 6.6% in 1993 and 1992, respectively. Certain loan agreements contain various restrictive covenants, including a restriction on the amount of net earnings available for dividends and the purchases of Company stock. Unrestricted retained earnings under the most restrictive provision amounted to $94.7 million at January 1, 1994. At January 1, 1994, as restated, the Company was unable to comply with the cash flow coverage test in the revolving credit agreements. The Company has obtained waivers from the syndicate of banks related to this item of default through June 18, 1994, at which time the Company was in compliance with all restrictive covenants. NOTE 4 LEASES & OTHER COMMITMENTS Leases The Company leases certain buildings and machinery and equipment under various operating leases. Rental expense for operating leases was $19.1 million, $20.6 million and $23.0 million in 1993, 1992, and 1991, respectively. Minimum lease payments for operating leases existing as of January 1, 1994 are as follows: $15.4 million in 1994; $13.0 million in 1995; $10.3 million in 1996; $9.0 million in 1997; $7.5 million in 1998 and $15.4 million in years after 1998. Environmental Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. These amounts are recorded when environmental assessments and/or remedial efforts are probable, and the cost can be reasonably estimated. The timing of these accruals generally coincides with completion of a feasibility study or the Company's commitment to a formal action plan. Amounts included in the accompanying Consolidated Balance Sheet for estimated environmental costs, at January 1, 1994 and January 2, 1993, were $4.7 million and $3.8 million, respectively, which in the opinion of management are sufficient to cover probable and estimable environmental costs. Federal Paper Board Company, Inc. 1993 Annual Report Page 31 21 Federal Paper Board Company, Inc. NOTE 5 INCOME TAXES As discussed in Note 1, the Company adopted SFAS No. 109 as of December 29, 1991 and the cumulative effect of this change in accounting for income taxes is reported separately in the Consolidated Statement of Income for the fiscal year 1992. As a result of applying SFAS No. 109, pre-tax income for the fiscal year ended January 2, 1993 was reduced by $6.3 million representing the effect of adjustments for prior purchase business combinations. The components of income before income taxes and cumulative effect of accounting change and the provision for income taxes included in the Consolidated Statement of Income consist of the following:
In thousands 1993 1992 1991 - ----------------------------------------------------------------------------- INCOME (LOSS) BEFORE TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE: Domestic $ 28,128 $137,059 $134,800 Foreign (1,828) (1,359) 9,400 - ----------------------------------------------------------------------------- Income before taxes and cumulative effect of accounting change $26,300 $135,700 $144,200 ============================================================================= PROVISION FOR INCOME TAXES: Current tax expense: Federal $ 6,310 $ 26,119 $ 26,729 State 514 124 15 - ----------------------------------------------------------------------------- Total current provision $ 6,824 $ 26,243 $ 26,744 - ----------------------------------------------------------------------------- Deferred tax expense: Federal $ 11,890 $ 14,881 $ 21,070 State 1,786 11,976 10,950 Foreign (600) -- 3,036 - ----------------------------------------------------------------------------- Total deferred provision $ 13,076 $ 26,857 $ 35,056 - ----------------------------------------------------------------------------- Total provision $ 19,900 $ 53,100 $ 61,800 =============================================================================
The provision for income taxes differs from amounts computed by applying the statutory Federal income tax rate of 35% for fiscal year 1993 and 34% for fiscal years 1992 and 1991 to income before taxes and cumulative effect of accounting change due to the following:
In thousands 1993 1992 1991 - ----------------------------------------------------------------------------- Federal income taxes at statutory rate $ 9,205 $46,138 $49,028 State income taxes less Federal income tax effect 1,517 7,986 7,237 Enacted statutory rate change 9,200 -- -- Excess of book over tax basis of acquired assets -- -- 4,782 Amortization of intangibles 696 780 1,051 Adjustment of prior years accruals (934) (1,498) 795 Other - net 216 (306) (1,093) - ----------------------------------------------------------------------------- Provision for income taxes $19,900 $53,100 $61,800 Effective tax rate 75.7% 39.1% 42.9% =============================================================================
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at January 1, 1994 and January 2, 1993 were as follows:
In thousands 1993 1992 - ----------------------------------------------------------------------------- Alternative minimum tax credit carryforwards $ 59,802 $ 56,484 Net operating loss carryforwards 32,842 11,141 Other 40,558 25,705 - ----------------------------------------------------------------------------- Total deferred tax assets $ 133,202 $ 93,330 - ----------------------------------------------------------------------------- Property, plant, and equipment $ (387,602) $ (344,340) Capitalized interest (40,661) (39,471) Other (32,554) (20,909) - ----------------------------------------------------------------------------- Total deferred tax liabilities $ (460,817) $ (404,720) =============================================================================
The tax effects of timing differences that give rise to components of the deferred tax provision for income taxes for the fiscal year ended December 28, 1991 were as follows:
In thousands 1991 - --------------------------------------------------------- Depreciation $ 56,428 Alternative minimum tax (27,265) Capitalized interest 3,085 Pension costs 2,891 Foreign loss carryforward 3,036 Other - net (3,119) - --------------------------------------------------------- Total deferred provision for taxes $ 35,056 =========================================================
The Company has capital loss and net operating loss carryforwards for domestic income tax purposes which are available to offset future taxable income through 1998 and 2008, respectively. At January 1, 1994, the capital loss and net operating loss carryforwards were $2.8 million and $54.5 million, respectively. The Company also has alternative minimum tax credit carryforwards of approximately $59.8 million at January 1, 1994, which are available to reduce future federal regular income taxes over an indefinite period. In addition, the Company acquired a net operating loss carryforward and an advance corporation tax for United Kingdom tax purposes, with no expirations, as a result of an acquisition. Using the exchange rate at January 1, 1994, the net operating loss carryforward was approximately $32.2 million and the advance corporation tax was $1.1 million. The foreign deferred provision for fiscal year 1991 reflects a charge for income taxes which will not result in a cash payment because of the utilization of these credit carryforwards. This item resulted in a reduction to property, plant and equipment and did not impact the deferred income tax liability. Deferred taxes are not provided on undistributed earnings of foreign subsidiaries, which at January 1, 1994 were $9.9 million. These earnings have been and will continue to be reinvested. It is not practicable to estimate the tax liability that might arise if these earnings were remitted. Federal Paper Board Company, Inc. 1993 Annual Report Page 32 22 Federal Paper Board Company, Inc. NOTE 6 EMPLOYEE BENEFIT PLANS Pension Plans The Company maintains non-contributory, defined benefit pension plans covering substantially all employees. Benefits for salaried employees are based on salary and years of service, while hourly plans are based on a fixed benefit rate and years of service. The Company's funding policy is to contribute at least the minimum amount required by applicable regulations. The assets of the plans are principally invested in equity and debt securities. The net periodic pension cost and actuarial assumptions of the Company's plans were as follows:
In thousands 1993 1992 1991 - ----------------------------------------------------------------------------- Service cost $ 5,690 $ 5,618 $ 5,761 Interest cost 16,915 16,566 15,760 Actual return on assets (27,904) (11,289) (20,491) Net amortization and deferral 15,594 (70) 10,200 - ----------------------------------------------------------------------------- Net periodic pension cost $ 10,295 $10,825 $ 11,230 - ----------------------------------------------------------------------------- Discount rate 7.5% 8.75% 9.0% Projected increase in future compensation levels 5.0% 5.0% 6.0% Expected long-term return on plan assets 10.5% 10.5% 11.0% ==============================================================================
The Company has recorded liabilities that are equal to the unfunded accumulated benefit obligations of its plans in fiscal 1993 and 1992. This has resulted in recognition of an intangible asset of $14.5 million and a net-of-tax reduction to other capital of $24.1 million as of January 1, 1994. The intangible asset and net-of-tax reduction to other capital as of January 2, 1993 was $15.0 million and $14.9 million, respectively. The following table sets forth the funded status and the amounts reflected in the Company's Consolidated Balance Sheet at January 1, 1994 and January 2, 1993:
In thousands 1993 1992 - ----------------------------------------------------------------------------- Actuarial present value of: Vested benefit obligation $ (182,617) $ (153,241) Accumulated benefit obligation (231,011) (190,503) Projected benefit obligation (241,918) (197,691) Plan assets at fair value 190,171 149,782 - ----------------------------------------------------------------------------- Projected benefit obligation in excess of plan assets (51,747) (47,909) - ----------------------------------------------------------------------------- Unrecognized net loss 49,377 30,271 Unrecognized prior service costs 9,567 9,428 Unrecognized net initial obligation 4,962 5,650 Adjustment to meet minimum liability (54,214) (39,431) - ----------------------------------------------------------------------------- Pension liabilities $ (42,055) $ (41,991) =============================================================================
All of the Company's retirement plans have accumulated benefits in excess of plan assets. Other Postretirement Plans The Company provides certain health care and life insurance benefits to eligible retired employees. The Company continues to fund benefit costs on a pay-as-you-go basis, with retirees paying a portion of the costs. Salaried participants generally become eligible for retiree health care benefits after reaching age 55 with 15 years of service. Benefits, eligibility and cost-sharing provisions for hourly employees vary by location. Most hourly employees are not eligible for retiree health care benefits and others are eligible for retiree health care benefits similar to those provided to salaried employees. Generally, Company provided health care benefits terminate when covered individuals become eligible for Medicare benefits or reach age 65, whichever occurs first. Certain retired employees of businesses acquired by the Company are covered under other health care plans that differ from current plans in coverage, plan design and retiree contributions. Effective January 3, 1993, the Company adopted SFAS No. 106 "Employers' Accounting for Postretirement Benefits Other than Pensions". SFAS No. 106 requires the Company to accrue the estimated cost of retiree benefit payments during the years the employee provides services. The Company previously expensed the cost of these benefits as claims were incurred. SFAS No. 106 allows recognition of the cumulative effect of the liability in the year of the adoption or the amortization of the obligation over a period of up to twenty years. The Company has elected to amortize this obligation of $27.2 million over a period of twenty years. As a result of applying SFAS No. 106, pre-tax income for the fiscal year ended January 1, 1994 was reduced by approximately $2.8 million. The net periodic postretirement benefit cost of the Company's plans were as follows:
In thousands 1993 - -------------------------------------------------------- Service cost of benefits earned $ 660 Interest cost on accumulated postretirement benefit obligation 2,686 Amortization of transition obligation 1,358 - -------------------------------------------------------- Net periodic postretirement benefit cost $ 4,704 ========================================================
The following table sets forth the funded status and the amounts reflected in the Company's Consolidated Balance Sheet at January 1, 1994:
In thousands 1993 - -------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $ (19,185) Fully eligible plan participants (1,064) Other active plan participants (13,560) - -------------------------------------------------------- Total accumulated postretirement benefit obligation (33,809) Unrecognized loss 966 Unrecognized transition obligation 24,392 - -------------------------------------------------------- Accrued postretirement benefit cost $ (8,451) ========================================================
The discount rate used in determining the accumulated postretirement benefit obligation was 7.5%. The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 13% in 1993, decreasing gradually each successive year until it reaches 5% in 2004, after which it remains constant. Federal Paper Board Company, Inc. 1993 Annual Report Page 33 23 Federal Paper Board Company, Inc. If the health care cost trend rates were increased by 1%, the accumulated postretirement benefit obligation as of January 1, 1994 would have increased by 11%. The effect of this change on the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1993 would be an increase of 12%. Savings and Stock Ownership Plans The Company has two savings and stock ownership plans in effect which cover all domestic salaried and non-union hourly employees. These plans were established to enhance the existing retirement plans for all eligible employees. Participants may contribute up to 15% of their annual compensation on a deferred or a non-deferred tax basis, or both. The Company match, which is paid in Company stock and is based on employee contributions of up to 6% of their annual compensation, was decreased from 50% to 25% during 1993. The Company match is fully vested after an employee has completed three years of service while employee contributions are fully vested when they are contributed. Postemployment Plans The Company provides certain postemployment benefits to former or inactive employees, their beneficiaries and covered dependents after employment but before retirement. In November 1992, SFAS No. 112, "Employers' Accounting for Postemployment Benefits" was issued, which establishes new standards of accounting for postemployment benefits and requires adoption for fiscal years beginning after December 15, 1993. The impact of adopting this Statement, for the fiscal year 1993, would not have been material to the Company's financial position and results of operations. NOTE 7 SHAREHOLDERS' EQUITY The $1.20 cumulative convertible preferred stock has a liquidation value of $20 per share and is convertible at any time into 5.02 shares of common stock. The shares are callable at $20. The $2.875 cumulative convertible preferred stock has a liquidation value of $50 per share and is convertible at any time into 1.8182 shares of common stock subject to adjustment under certain conditions. This preferred stock is also redeemable, in whole or in part, at the option of the Company at a price of $51.15 per share which declines gradually each year to $50 per share on or after March 15, 1997. Shares of common stock were reserved for the following purposes at January 1, 1994:
1993 - -------------------------------------------------------- Conversion of $1.20 convertible stock 289,303 Conversion of $2.875 convertible stock 4,135,332 Exercise of outstanding stock options 2,712,575 Granting of additional stock options 68,125 - -------------------------------------------------------- Total common shares reserved 7,205,335 - --------------------------------------------------------
The Company has stock option plans, which were approved by the shareholders, which authorize the granting of options to officers and certain key employees to purchase the Company's common stock at a price equal to the market price on the date of grant. Options become exercisable in annual installments of 25% of the amount granted per optionee one year after the date of grant and expire five years after the date of grant. Employees may exchange Company stock as payment when exercising their options, and such stock used as payment becomes treasury stock. Also, the Company may issue stock from treasury when employees exercise these options. The Company's 1982 stock option plan expired in 1993 and the 1989 and 1992 stock option plans each authorized the granting of 1.5 million shares of common stock. The combined activity of all plans is presented below:
Shares Under Price Range Option Per Share - -------------------------------------------------------------------- Outstanding December 29,1990 2,279,522 $12.00-24.63 Granted 81,000 28.50 Exercised (535,118) 12.00-24.63 Expired or cancelled (44,200) 15.00-28.50 - -------------------------------------------------------------------- Outstanding December 28,1991 1,781,204 $15.00-28.50 Granted 1,010,800 25.50-30.25 Exercised (314,979) 15.00-24.63 Expired or cancelled (65,625) 15.00-30.25 - -------------------------------------------------------------------- Outstanding January 2, 1993 2,411,400 $15.00-30.25 Granted 2,007,900 20.88-25.50 Exercised (184,125) 15.00-20.63 Expired or cancelled (1,522,600) 15.00-30.25 Outstanding January 1, 1994 2,712,575 $15.00-30.25 Exercisable January 1, 1994 549,331 $15.00-30.25 ====================================================================
Note 8 Supplemental Income Statement Information The components of Other - net included in the Consolidated Statement of Income were (income) or expense as presented below:
In thousands 1993 1992 1991 - ----------------------------------------------------------------------------------- Net loss on disposal of property, plant and equipment and timber $ 401 $ 4,778 $10,787 Interest income (1,141) (2,455) (2,233) Financial instrument transactions 31,854 (5,258) (4,989) Other 1,442 (3,153) 1,666 - ----------------------------------------------------------------------------------- Total $ 32,556 $(6,088) $ 5,231 ===================================================================================
NOTE 9 INDUSTRY SEGMENT INFORMATION Information about the Company's operations in different industry segments for fiscal years 1993, 1992, and 1991 is included on pages 22 and 23 of this Annual Report. NOTE 10 RESTATEMENT OF FINANCIAL STATEMENTS The accompanying consolidated financial statements for fiscal year 1993 have been restated to account for certain interest rate swap agreements at market value. The Company, in agreement with its outside auditors, previously accounted for these interest rate swap agreements based on settlement accounting but has determined that this was not an appropriate accounting method. When the Company entered into these interest rate swap agreements the intent was to change the interest rate characteristics of specific fixed rate debt obligations of the Company. However, it has been determined because of the risk and leverage factors inherent in these interest rate swap agreements, the swap transactions did not effectively offset the rate characteristics of the underlying debt obligations. As a result, these instruments are required to be marked to market. The effects of the restatement on the Company's financial results are as follows (in thousands, except per share amounts)
Fiscal Year 1993 ----------- Net income as previously reported $20,800 Adjustment (14,400) ------ Restated net income $ 6,400 ====== Earnings (loss) per common share: Assuming no dilution: As reported $ .34 Adjustment (.35) ---- Restated net income (loss) $(.01) ==== Assuming full dilution: As reported $ .34 Adjustment (.35) ---- Restated net income (loss) $(.01) ====
NOTE 11 FINANCIAL RESULTS BY QUARTER (UNAUDITED) Selected quarterly financial information for the fiscal years 1993 and 1992 is included on page 36 of this Annual Report. Federal Paper Board Company, Inc. 1993 Annual Report Page 34 24 Federal Paper Board Company, Inc. INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of Federal Paper Board Company, Inc.: We have audited the accompanying consolidated balance sheets of Federal Paper Board Company, Inc. and its subsidiary companies as of January 1, 1994 and January 2, 1993, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three fiscal years in the period ended January 1, 1994. 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 in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Federal Paper Board Company, Inc. and its subsidiary companies at January 1, 1994 and January 2, 1993, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 1, 1994 in conformity with generally accepted accounting principles. As discussed in Notes 5 and 6 to the financial statements, the Company changed its method of accounting for income taxes, effective December 29, 1991, and its method of accounting for postretirement benefits other than pensions, effective January 3, 1993. As discussed in Note 10, the accompanying financial statements for the fiscal year ended January 1, 1994 have been restated to record certain interest rate swap agreements at market value. /s/ DELOITTE & TOUCHE LLP Parsippany, New Jersey February 7, 1994 (October 17, 1994 as to Note 10) REPORT OF MANAGEMENT The management of Federal Paper Board Company, Inc. is responsible for the integrity and fair presentation of the financial statements and other information contained in this Annual Report. The statements were prepared in accordance with generally accepted accounting principles and reflect management's informed judgements and estimates. The Company maintains a system of internal control designed to provide reasonable assurance that assets are safeguarded, transactions are executed and recorded in accordance with management's authorizations and financial records are maintained to permit the preparation of reliable financial statements. The system of internal control is reviewed by the Company's internal audit staff to confirm that it is adequate and operating effectively. As indicated in the independent auditors' report, Deloitte & Touche performs an independent audit of the consolidated financial statements for the purpose of forming an opinion as to whether the financial statements are presented fairly, in all material respects, in conformity with generally accepted accounting principles. The independent auditors are appointed annually by the Board of Directors and their appointment is ratified by the shareholders. The Audit Committe of the Board of Directors, composed of four outside directors, meets periodically with management, internal auditors and independent auditors to review matters relating to the adequacy of corporate financial reporting, accounting systems and controls, and the internal and independent audit functions. /s/ QUENTIN J. KENNEDY - ------------------------ Quentin J. Kennedy Executive Vice President and Secretary /s/ ROGER L. SANDERS, II - ------------------------ Roger L. Sanders, II Controller Federal Paper Board Company, Inc. 1993 Annual Report Page 35 25 Federal Paper Board Company, Inc. FINANCIAL RESULTS BY QUARTER (UNAUDITED)
In thousands except per share amounts Quarter (A) 1st 2nd 3rd 4th Year (B) - ------------------------------------------------------------------------------------------------------------------------- 1993 Net Sales $319,844 $329,579 $324,025 $412,938 $1,386,386 Gross Profit 50,331 51,728 41,841 59,614 203,514 Net Income (Loss) (C) 9,100 (5,200) (7,200) 9,700 6,400 - ------------------------------------------------------------------------------------------------------------------------ Earnings (Loss) Per Common Share: Assuming No Dilution $.18 $(.16) $(.21) $.18 $(.01) Assuming Full Dilution (D) .18 (.16) (.21) .18 (.01) - ------------------------------------------------------------------------------------------------------------------------ Dividends Declared per Common Share $.25 $.25 $.25 $.25 $1.00 - ------------------------------------------------------------------------------------------------------------------------ Price Range of Common Stock (E) High $27.63 $25.63 $23.50 $23.38 $27.63 Low 23.13 21.88 21.63 19.50 19.50 ======================================================================================================================== 1992 Net Sales $323,042 $345,316 $337,896 $454,565 $1,460,819 Gross Profit 59,093 73,047 70,777 76,482 279,399 Income before cumulative effect of accounting change 16,346 25,303 26,082 14,869 82,600 Net Income 25,346 25,303 26,082 14,869 91,600 - ------------------------------------------------------------------------------------------------------------------------ Earnings Per Common Share: Assuming No Dilution: Income before cumulative effect of accounting change $.36 $.57 $.59 $.31 $1.82 Net Income .58 .57 .59 .31 2.04 Assuming Full Dilution: (D) Income before cumulative effect of accounting change $.35 $.54 $.56 $.30 $1.77 Net Income .54 .54 .56 .30 1.96 - ------------------------------------------------------------------------------------------------------------------------ Dividends Declared per Common Share $.25 $.25 $.25 $.25 $1.00 - ------------------------------------------------------------------------------------------------------------------------ Price Range of Common Stock (E) High $32.75 $33.38 $30.75 $29.63 $33.38 Low 28.50 28.75 27.13 24.25 24.25 ========================================================================================================================
(A) All quarters are comprised of 12 week periods except the fourth quarter, which is comprised of 16 weeks in 1993 and 17 weeks in 1992. The second, third and fourth quarters of 1993 have been restated to account for certain interest rates swap agreements at market value. (B) May not total due to individual quarterly calculations. (C) The second quarter of 1993 includes an after-tax charge of $15.3 million, or $.37 per fully diluted common share, for financial instrument transactions. The third quarter of 1993 includes a charge of $9.2 million for the cumulative effect of the recalculation of the deferred tax liability reflecting the increase in the Federal statutory income tax rate. (D) Earnings per common share assuming full dilution is based on the weighted average number of common shares outstanding during the year, including the dilutive effects of stock options outstanding and the conversion of the Company's preferred stocks. (E) The Company's common stock is traded on the New York Stock Exchange. Data for the Company's $1.20 convertible preferred stock and Class A convertible preferred stocks, also traded on the New York Stock Exchange, is not presented since they are preferred stock issues. At January 1, 1994 there were 5,577 holders of common stock and 998 holders of convertible preferred stocks. Federal Paper Board Company, Inc. 1993 Annual Report Page 36 26 Federal Paper Board Company, Inc. SELECTED FINANCIAL DATA
In millions except per share amounts Restated For Fiscal Year (A) 1993 1992 1991 1990 1989 - ------------------------------------------------------------------------------------------------------------------------ OPERATING RESULTS Net Sales $1,386.4 $1,460.8 $1,435.0 $1,374.1 $1,319.0 Income before Taxes and Cumulative Effect of Accounting Change 26.3 135.7 144.2 202.2 336.8 Income before Cumulative Effect of Accounting Change 6.4 82.6 82.4 118.2 205.5 Cumulative Effect of Accounting Change -- 9.0 -- -- -- - ------------------------------------------------------------------------------------------------------------------------ Net Income 6.4 91.6 82.4 118.2 205.5 - ------------------------------------------------------------------------------------------------------------------------ Earnings (Loss) per Common Share: Assuming No Dilution: Income (Loss) before Cumulative Effect of Accounting Change (.01) 1.82 1.83 2.74 5.00 Cumulative Effect of Accounting Change -- .22 -- -- -- - ------------------------------------------------------------------------------------------------------------------------ Net Income (Loss) (.01) 2.04 1.83 2.74 5.00 - ------------------------------------------------------------------------------------------------------------------------ Assuming Full Dilution: Income (Loss) before Cumulative Effect of Accounting Change (.01) 1.77 1.77 2.58 4.52 Cumulative Effect of Accounting Change -- .19 -- -- -- - ------------------------------------------------------------------------------------------------------------------------ Net Income (Loss) (.01) 1.96 1.77 2.58 4.52 - ------------------------------------------------------------------------------------------------------------------------ FINANCIAL RATIOS Total Debt as a Percentage of Total Capitalization 54.2% 53.5% 54.8% 56.1% 46.9% Return on Shareholders' Equity .7% 9.8% 9.1% 13.9% 28.3% - ------------------------------------------------------------------------------------------------------------------------ FINANCIAL POSITION Property, Plant and Equipment - Net $1,896.6 $1,878.4 $1,828.8 $1,756.5 $1,287.3 Timber and Timberlands 189.7 191.8 188.0 183.2 178.0 Total Assets 2,561.9 2,573.5 2,492.7 2,447.8 1,882.5 Long-Term Debt 973.8 1,029.9 1,076.9 1,092.4 685.6 Deferred Tax Liability 342.8 322.4 237.5 208.0 171.5 Shareholders' Equity 892.3 940.4 921.2 882.9 812.0 - ------------------------------------------------------------------------------------------------------------------------ ADDITIONAL DATA Capital Expenditures $ 161.2 $ 149.1 $ 227.4 $ 509.3 $ 399.7 Depreciation, Amortization and Cost of Timber Harvested 144.1 146.6 122.7 88.4 73.0 Dividends Declared per Common Share 1.00 1.00 1.00 1.00 .95 Book Value per Share - Assuming No Dilution 18.45 19.68 19.17 18.46 16.69 Book Value per Share - Assuming Full Dilution 19.11 20.11 19.79 19.26 17.60 - ------------------------------------------------------------------------------------------------------------------------ Common Shares Outstanding at Year-End (in thousands) 42,147 41,952 40,675 40,164 40,158 ========================================================================================================================
(A) 1992 includes 53 weeks all other years presented include 52 weeks. Total Debt as a Percentage of Total Capitalization - Total debt divided by the sum of shareholders' equity and total debt. Return on Shareholders' Equity - Net income divided by the average of shareholders' equity at the beginning and the end of the year. Book Value per Common Share - Assuming No Dilution - Shareholders' equity available to common shares divided by outstanding shares of common stock. Book Value per Common Share - Assuming Full Dilution - Shareholders' equity divided by outstanding shares of common stock and common stock equivalents. Further information on the 1993 restatement is contained in Note 10 of the financial statements. Federal Paper Board Company, Inc. 1993 Annual Report Page 37 27 EDGAR APPENDIX EXHIBIT 13 (Continued) FEDERAL PAPER BOARD COMPANY, INC. Graphic and Image Material Index 1. The photo on page 6 on this Annual Report shows an employee standing near the Carolina King pulp dryer at our Riegelwood, NC mill. 2. The bar chart on page 6 of this Annual Report shows pulp accounting for 9% of sales. 3. The photo on page 7 of this Annual Report shows an employee standing near rolls of paperboard produced at the Augusta, GA mill. 4. The bar chart on page 7 of this Annual Report shows paperboard accounting for 44% of sales. 5. The photo on page 8 of this Annual Report shows an employee standing near rolls of paperboard at the Augusta, GA mill. 6. The bar chart on page 8 of this Annual Report shows paper accounting for 8% of sales. 7. The photo on page 9 of this Annual Report shows an employee standing near dimensional lumber at the Armour, NC lumber plant. 8. The bar chart on page 9 of this Annual Report shows wood products accounting for 15% of sales. 9. The photo on page 10 of this Annual Report shows printed rolls of paperboard used by our Cup Operations. 10. The bar chart on page 10 of this Annual Report shows the Converting Operations accounting for 24% of sales. 11. The photo on page 11 of this Annual Report shows an employee standing near an eight color gravure press at the Wilmington, NC folding carton plant. EX-23 5 INDEPENDENT AUDITORS' CONSENT 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT - ----------------------------- We consent to the incorporation by reference in Registration Statements of Federal Paper Board Company, Inc. and its subsidiary companies on Form S-3 (Registration Nos. 33-48063, 33-39748 and Post-Effective Amendment No. 1 to Registration Statement No. 33-39748) and Form S-8 (Registration Nos. 33-64258, 33-64256, 33-48654, 33-34440 and Post-Effective Amendment No. 7 to Registration Statement No. 2-56623) of our reports dated February 7, 1994 (October 17, 1994 as to Note 10) which express an unqualified opinion and include explanatory paragraphs relating to (i) changes in the method of accounting for income taxes and postretirement benefits other than pensions and (ii) the restatement of the 1993 financial statements for the fiscal year ended January 1, 1994 ; appearing in and incorporated by reference in the Annual Report on Form 10-K of Federal Paper Board Company, Inc. for the fiscal year ended January 1, 1994. /s/ DELOITTE & TOUCHE LLP Parsippany, New Jersey October 17, 1994 -----END PRIVACY-ENHANCED MESSAGE-----