10-K 1 FORM 10-K ANNUAL REPORT 1 =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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 of (I.R.S. Employer 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 Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Title of each Class on which registered ------------------- --------------------- Common Stock, $5.00 par value per share New York Stock Exchange $1.20 Cumulative Convertible Preferred Stock, $1.00 par value per share New York Stock Exchange $2.875 Cumulative Convertible Preferred Stock, $1.00 par value per share New York Stock Exchange 10% Debentures, due 2011 Not applicable 8 1/8% Debentures, due 2002 Not applicable 8 7/8% Debentures, due 2012 Not applicable
Indicate by check mark ("X") whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months and (2) has been subject to the filing requirements for at least the past 90 days. YES X NO --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The number of shares outstanding of the Registrant's common stock, as of February 25, 1995, was 42,599,683 shares. The aggregate market value on February 25, 1995 of voting stock held by non-affiliates of the Company was $1,136,545,197. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's 1994 Annual Report to Shareholders are incorporated by reference in Part I, Part II and Part IV hereof. Portions of the Registrant's 1994 Proxy Statement dated March 15, 1995 are incorporated by reference in Part III hereof. =============================================================================== 2 PART I ITEM 1. BUSINESS Federal Paper Board Company, Inc. (the "Registrant") was incorporated in the State of North Carolina in October, 1993. It was incorporated as a wholly owned subsidiary of Federal Paper Board Company, Inc., a New York corporation, organized in 1916, which was merged with and into the Registrant on April 20, 1994. The sole purpose of the merger was to change the state of incorporation from New York to North Carolina. The merger did not result in any change of the Company's Board of Directors, management, operations or financial condition. The term "Company" used in this report means the Registrant and its consolidated subsidiaries unless the context indicates otherwise. In 1991, the Company sold or leased four of its eight folding carton plants and its mechanical packaging operation. The folding carton plants located in Palmer, MA, Versailles, CT, and York, PA were sold to a group of former employees. In this transaction, the Company received a note for approximately $20.5 million. In 1993, this note was settled and the Company received cash and preferred stock. The folding carton plant located in Marseilles, IL was leased with the option for the lessee to purchase the facility at the end of the lease term. The mechanical packaging operation was sold and the Company received cash in this transaction. In 1990, the Company acquired Continental Bondware, Inc., a manufacturer of paper cups with plants located in Chicago and Shelbyville, IL, for approximately $146.5 million. In 1989, the Company acquired Imperial Cup Corp., a manufacturer of paper and plastic cups with plants located in Kenton, OH; LaFayette, GA; Salisbury, MD and Visalia, CA for approximately $95 million. These two businesses were combined and operate under the name of Imperial Bondware Corp. The Company's products have been grouped into the following three industry segments: Paper, Paperboard and Pulp, consisting of bleached and recycled paperboard, bleached softwood and hardwood pulp and uncoated free-sheet paper; Wood Products, consisting of dimensional lumber, wood chips and land management activities; and Converting Operations, consisting of disposable foodservice products and specialty packaging products. Financial information regarding industry segments is included on pages 24 and 25 of the Company's 1994 Annual Report to Shareholders (the "Annual Report"), which information is incorporated herein by reference. PAPER, PAPERBOARD AND PULP The principal products of this business segment are bleached and recycled paperboard, hardwood and softwood pulp and uncoated free-sheet paper. Bleached paperboard is produced on three paperboard machines at the Augusta, GA mill and on two paperboard machines at the Riegelwood, NC mill. Recycled paperboard is produced on one paperboard machine at the Sprague, CT mill. The majority of the paperboard produced at the Company's mills is sold to outside customers and converted into packaging for various consumer goods or used in printing applications including menus, greeting cards and brochure covers. Bleached paperboard produced at the Augusta and Riegelwood mills is also used by the Company's Converting Operations to produce folding cartons, paper cups and other disposable foodservice products. Recycled paperboard produced at the Sprague mill is converted into packaging products by outside customers and the Company's folding carton plants. The Company's mills produced 937,000 tons of bleached paperboard and 196,000 tons of recycled paperboard for total paperboard production of 1,133,000 tons in 1994. The Company's mills sold approximately 935,000 tons of bleached paperboard and 202,000 tons of recycled paperboard for total sales of 1,137,000 tons of paperboard in 1994. Paperboard accounted for 41% of total sales for the Company in 1994. The Company produces hardwood and softwood market pulp at the Riegelwood mill, which is sold in both the domestic and export markets. The Augusta mill produces softwood pulp which is sold, in slush form, to a neighboring newsprint mill under a long-term supply contract. In 1994, of the 1,421,000 tons of pulp produced, approximately 864,000 tons were used to produce paperboard at the Company's mills and the remaining 557,000 tons were available for sale as market pulp. Approximately 67% of market pulp shipped was sold in the export market. The Company's mills sold 567,000 tons of market pulp and this product accounted for 12% of total sales for the Company in 1994. 2 3 The Company produces uncoated free-sheet paper at one mill located in Inverurie, Scotland. Paper is produced on two paper machines and is marketed and sold throughout Europe. The mill uses bleached pulp as its primary raw material which it purchases from the Company's Riegelwood mill and outside producers. The mill produced 189,000 metric tons of uncoated free-sheet paper in 1994. The mill sold approximately 194,000 metric tons of uncoated free-sheet paper in 1994, and this product accounted for 9% of total sales for the Company in 1994. Also in this business segment, the Company operates five distribution centers and one extrusion coating plant. Four of the distribution centers and the one extrusion coating plant are located in the United States while one sheeting distribution center is located in the United Kingdom. These facilities receive paperboard from the Company's mills which is then sheeted to customer specifications. The extrusion coating plant provides poly-coated board to the Company's cup operations and also sells this product to outside customers. These facilities are geographically located so the Company's customers may be serviced quickly and efficiently. Further information regarding the Paper, Paperboard and Pulp business is included in the Review of Operations on pages 6 through 10 of the Annual Report and is incorporated herein by reference. WOOD PRODUCTS The principal products of this business segment are dimensional lumber and wood chips. The segment also performs land management activities. The Company produces both dimensional lumber and wood chips at five lumber plants which are located near the Company's paperboard and pulp mills. Two of the plants, located in Augusta, GA and Johnston, SC, are within a 60 mile radius of the Augusta paperboard and pulp mill and supply 91% and 51% of their wood chips to this mill, respectively, with the balance being sold to outside customers. The plant located in Washington, GA supplies approximately 2% of its wood chips to the Augusta paperboard and pulp mill with the balance being sold to outside customers. The plant located in Newberry, SC is between the Augusta and Riegelwood paperboard and pulp mills and supplies approximately 9% of its wood chips to those mills with the balance being sold to outside customers. The plant located in Armour, NC is two miles from the Riegelwood paperboard and pulp mill and provides 100% of its softwood chips to such mill. The Company also owns five chip mills, which are strategically located to provide the Company's paperboard and pulp mills with wood chips. The lumber plants produce dimensional lumber which is used in the construction and retail home improvement industries. In 1994, the lumber plants produced 618.2 million board feet of lumber and sold 610.3 million board feet. The Company presently owns or controls under long-term leases approximately 692,000 acres of timberlands. In the vicinity of its Riegelwood paperboard and pulp mill, the Company directly owns 260,000 acres and holds 116,000 acres under long-term leases with purchase options. In the vicinity of its Augusta paperboard and pulp mill, the Company owns 309,000 acres and has lease rights to 7,000 acres. Further information regarding the Wood Products business is included in the Review of Operations on pages 10 through 14 of the Annual Report and is incorporated herein by reference. CONVERTING OPERATIONS The principal products of this business segment are paper and plastic cups, plastic lids, containers and packaging products. The Company's cup operations manufacture paper and plastic disposable drinking cups and food containers at six locations. These products are marketed for use by industrial vending operations, fast food restaurants, soft drink bottlers, paper distributors, theaters and convenience stores. Its primary raw materials are paperboard, resins and corrugated containers. In 1994, approximately 77% of the paperboard consumed by the Company's cup operations was obtained from the Company's own paperboard mills. The cup operations accounted for approximately 15% of total sales for the Company in 1994. 3 4 The Company also produces folding cartons, used in the packaging of products such as food, laundry soap, tobacco, drug and health aids, consumer paper products, hardware and toys at four folding carton plants. The Company's folding carton plants are equipped with lithographic, gravure, and flexographic printing, giving the Company the capability of producing high quality multi-colored packaging. The packaging products produced are specially designed to serve the packaging and marketing needs of individual customers, which include manufacturers of numerous nationally known consumer goods. Approximately 80% of the paperboard consumed in the Company's packaging operations was obtained from the Company's own recycled and bleached paperboard mills. The packaging operations accounted for approximately 7% of total sales for the Company in 1994. Further information regarding the Converting Operations is included in the Review of Operations on pages 14 through 16 of the Annual Report and is incorporated herein by reference. COMPETITION AND CUSTOMERS The Company's businesses are highly competitive. There are a number of companies involved in these businesses whose total assets and sales are substantially greater than those of the Company, although the Company is a nationally recognized market participant in pulp, recycled paperboard, foodservice disposables and folding cartons and enjoys a leadership position in the bleached paperboard market. The principal method of selling the Company's products is through its own sales force. Customers may place orders with the Company for various reasons which may include one or more of the considerations of price, quality and the ability of the Company to deliver and service the customers' needs on a timely basis. Bleached and recycled paperboard, market pulp and foodservice disposables are also sold overseas through the Company's sales force and/or through agents. Competition in export markets is based on the same considerations mentioned above. The sale of market pulp is highly competitive and subject to wide fluctuations in price. No single customer accounted for more than 10% of the Company's consolidated sales in any of the last three fiscal years. ENERGY AND RAW MATERIALS The Company is a large user of electricity and steam in its manufacturing operations. At the Riegelwood mill, steam and electricity are produced by its own power plant which utilizes black liquor (spent pulping chemicals), oil, natural gas and waste wood (bark and sawdust) as fuels. In 1994, approximately 73% of the Riegelwood mill's energy requirements were self-generated. The Company's Augusta mill also generates steam and electricity by its own power plant which utilizes coal in addition to similar fuels as described above for Riegelwood. In 1994, approximately 65% of the Augusta mill's energy requirements were self-generated. At the Sprague mill, steam and electric power are produced by the mill's own power plant utilizing oil or natural gas. In 1993, the Sprague mill completed a capital program which involved installing a natural gas pipeline allowing the mill to substitute natural gas for oil in the power plant or propane in the mill. This allows the mill to choose the source of energy which is more cost effective at a given time. In 1992, the Company's Inverurie mill reduced energy costs by replacing a coal fired power plant with a new natural gas power plant. Electricity is purchased to some degree at all plants to satisfy total demand. The Company believes its sources of supply with respect to oil, natural gas and purchased power to be generally adequate. The Company's annual wood needs supplied from other than Company lands are available in ample quantities from sources within an economical transportation area and are believed to be adequate to meet both the present and future needs of the Company's facilities. The Company's converting operations use paperboard, resin and corrugated containers in the manufacturing process, and the Company believes that these materials are in ample supply from sources within an economical transportation area to meet both the present and future needs. Approximately 80% of the converting operations' paperboard needs are supplied by the Company's mills. During 1994, the supply of wastepaper used in the manufacture of recycled paperboard has become increasingly short. Even under current difficult market conditions, the Sprague mill has been able to obtain an adequate supply of wastepaper to meet its present needs. The Company expects to be able to obtain wastepaper in ample quantities to meet future needs. 4 5 ENVIRONMENTAL CONSIDERATIONS The Company is subject to various laws and regulations relating to the environment in the countries in which the Company operates. These regulations require the Company to obtain permits and licenses from appropriate governmental authorities with respect to its facilities. The Company has obtained, has applied for, or in the future will apply for such permits and authorizations and believes that it is in compliance with all existing material environmental regulations. The Company's Riegelwood, NC mill operates its waste water treatment and disposal facilities under an NPDES (National Pollutant Discharge Elimination System) permit issued by the State of North Carolina and an administrative Consent Order which provides temporary relief of the BOD (biochemical oxygen demand) limitations contained in the NPDES permit. The Consent Order requires that studies and improvements be completed at various times extending to October 1995. The Company and the State of North Carolina have agreed that a new waste water holding pond will be constructed at the Riegelwood mill no later than October 31, 1995 at a cost of approximately $25 million. However, construction can not begin until all permits are obtained, which the Company is actively pursuing. Therefore, construction may not be completed by the October 31, 1995 deadline. This project is included in the Company's estimates of future environmental capital expenditures as discussed in the Annual Report on page 23. The Company's Augusta, GA mill was under an administrative Consent Order with the State of Georgia to build a new landfill. The landfill was completed in April 1994 at a cost of approximately $8.2 million. The process of manufacturing bleached kraft pulp produced at both the Riegelwood and Augusta mills has been found to produce small amounts of dioxin as an unintended by-product. The Riegelwood mill has a permitted effluent limit for dioxin of 0.9 parts per quadrillion ("PPQ"). The effluent dioxin found at the Riegelwood mill is below the limits of detection (10 PPQ) and therefore it is not known whether the dioxin exceeds the permitted level. The Company has voluntarily entered into a judicial Consent Order for the Riegelwood mill which gives the mill relief from its permitted effluent limit until December 1996 while additional mill facilities are being constructed to assure compliance. The Augusta mill is in compliance with its permitted effluent limit for dioxin of 180 PPQ. Steps are being taken by the Company to further reduce dioxin at both the Riegelwood and Augusta mills. The Company's Sprague, CT mill discharges its waste waters under an NPDES permit from the Connecticut Department of Environmental Protection ("DEP") which expires in May 1995. The mill is evaluating alternatives for long-term compliance with its future waste water discharge requirements and expects to submit a plan to the Connecticut DEP in 1995 which could result in additional operating and/or capital costs. The Sprague mill entered into an administrative Consent Order with the Connecticut DEP to evaluate and control sporadic odors originating from the mill site. The Company has made improvements to its waste water treatment system which has reduced odor generation. The Consent Order is expected to expire in March 1995. The Company will also incur further costs at certain of its other properties as the result of soil contamination from chemical or solvent spills including sites of former folding carton plants which are now inactive. In some cases, the remediation projects are subject to Consent Orders with the state environmental agencies. A further discussion of environmental issues is included on pages 16 and 23 of the Annual Report, which information is incorporated herein by reference. EMPLOYEES The Company employed approximately 6,890 and 6,850 employees as of February 25, 1995 and February 26, 1994, respectively. Approximately one-half of the employees are covered by collective bargaining agreements, the majority of which are at the Company's four mills: the agreement at the Inverurie mill expires in December 1995; the agreement at the Riegelwood, NC paperboard and pulp mill expires in September 1995; and the agreements at the Augusta, GA paperboard and pulp mill and the Sprague, CT recycled paperboard mill expire in August 1996 and July 1996, respectively. 5 6 ITEM 2. PROPERTIES. The following table sets forth the location and use of each of the principal facilities of the Company. All of the facilities are owned by the Company except as indicated in the table.
LOCATION USE -------- --- Paper, Paperboard and Pulp: Augusta, Georgia Manufacture of bleached paperboard and softwood pulp. Hazleton, Pennsylvania Service Distribution Center - Sheeting of paperboard. Inverurie, Scotland Manufacture of uncoated free-sheet paper. Ontario, California (a) Service Distribution Center - Sheeting of paperboard. Prosperity, South Carolina Service Distribution Center - Poly-coating of paperboard. Riegelwood, North Carolina Manufacture of bleached paperboard and bleached hardwood and softwood pulp. Sprague, Connecticut Manufacture of recycled paperboard. Sturgis, Michigan Service Distribution Center - Sheeting of paperboard. Wharfedale, England Service Distribution Center - Sheeting of paperboard. Wilmington, North Carolina Distribution Center - Storage and shipment of paperboard. Wood Products: Armour, North Carolina Manufacture of dimensional lumber and chips. Augusta, Georgia Manufacture of dimensional lumber and chips. Johnston, South Carolina Manufacture of dimensional lumber and chips. Newberry, South Carolina Manufacture of dimensional lumber and chips. Washington, Georgia Manufacture of dimensional lumber and chips.
6 7
LOCATION USE -------- --- Converting Operations: Chicago, Illinois Manufacture of foodservice disposables. Durham, North Carolina Manufacture of folding cartons. Hendersonville, North Carolina Manufacture of folding cartons. Kenton, Ohio Manufacture of foodservice disposables. LaFayette, Georgia (b) Manufacture of plastic cups and plastic lids. Salisbury, Maryland (c) Manufacture of foodservice disposables. Shelbyville, Illinois Manufacture of foodservice disposables. Thomaston, Georgia Manufacture of folding cartons. Visalia, California Manufacture of foodservice disposables. Wilmington, North Carolina Manufacture of folding cartons.
(a) Leased through 1997. (b) Leased through 1997 with the option to purchase the facility. (c) Leased through 1997 with the option to purchase the facility. The Company will discontinue the use of this facility for manufacturing purposes in 1995. The Company believes that its facilities are in good working condition and are suitable for its current operations. While the productive capacity is deemed adequate for each business unit, the Company continually invests in projects that are designed to improve both the quality and quantity of goods produced. In some cases, facilities have the ability to expand productive capacity through additional work shifts as opposed to additional capital requirements. ITEM 3. LEGAL PROCEEDINGS. The Company is not a party to any significant legal proceedings other than those matters discussed in Item 1, under "Environmental Considerations." ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 7 8 SPECIAL ITEM. EXECUTIVE OFFICERS OF THE COMPANY. The following table sets forth the name, age, principal occupation and business experience during the last five years for each of the executive officers of the Company. JOHN R. KENNEDY(a), 64, Director, President and Chief Executive Officer. President and Chief Executive Officer from 1975 to date. QUENTIN J. KENNEDY(a), 61, Director, Executive Vice President, Secretary and Treasurer. Executive Vice President, Secretary and Treasurer from July 1994 to date; Executive Vice President and Secretary from 1983 to July 1994. ROBERT D. BALDWIN, 57, Director and Senior Vice President, Marketing, Forest Products Division. Senior Vice President, Marketing, Forest Products Division from 1985 to date. W. MARK MASSEY, JR., 56, Director and Senior Vice President, Manufacturing, Forest Products Division. Senior Vice President, Manufacturing, Forest Products Division from 1990 to date. MICHAEL J. BALDUINO, 44, Senior Vice President, Converted Products Division from May 1994 to date; Vice President and General Manager Imperial Bondware Corp. from February 1992 to May 1994; Vice President of Marketing, Commercial Products, James River Corp. from September 1990 to February 1992; Director of Consumer Marketing and Support, James River Corp. from June 1989 to September 1990. JOHN E. ABODEELY, 51, Vice President and General Manager Packaging Operations from November 1991 to date; Vice President, Manufacturing, Packaging & Printing Operations from 1986 to November 1991. CARL L. BUMGARDNER, III, 37, Vice President, Printing Paper Sales from July 1993 to date; General Manager, Bleached Paperboard Printing Sales from November 1991 to July 1993; Marketing and Sales Manager, Bleached Paperboard Packaging from July 1991 to November 1991; National Marketing Manager from 1989 to July 1991. MICHAEL G. CULBRETH, 46, Vice President, Employee Relations from April 1991 to date; Director, Employee Relations, Forest Products Division from August 1989 to April 1991. ROBERT F. DANSBY, 55, Vice President, Augusta Operations from May 1990 to date; Manager, Manufacturing Services, Augusta Mill from 1987 to May 1990. THOMAS F. GRADY, JR., 52, Vice President, Sales, Imperial Bondware Corp. from November 1991 to date; Vice President, Paperboard Sales from May 1989 to November 1991. LOUIS O. GRISSOM, 48, Vice President, Riegelwood Operations from 1991 to date; Assistant Resident Manager, Riegelwood Mill from May 1990 to 1991; Production Manager, Augusta Mill from 1987 to May 1990. RICHARD W. HUGHES, 55, Vice President, Woodlands from 1987 to date. STEWART MONROE, JR., 61, Vice President, Pulp Sales from 1986 to date. ROGER L. SANDERS, II, 50, Controller from 1989 to date. F. JOHN SECURCHER, 50, Vice President, Manufacturing, Imperial Bondware Corp. from December 1992 to date; Vice President and General Manager, Sherry Cup from January 1991 to December 1992; Vice President, Systems and Technology, Imperial Bondware Corp. from October 1990 to January 1991; Vice President, Manufacturing, Continental Bondware, Inc. (acquired by the Registrant in 1990) from September 1986 to October 1990. 8 9 L. KIRK SEMKE, 58, Vice President, Manufacturing Technology from 1991 to date; Vice President, Riegelwood Operations from 1987 to 1991. WILLIAM R. SNELLINGS, JR., 46, Vice President, Paperboard Sales from April 1991 to date; General Sales Manager, Bleached Board Packaging from August 1989 to April 1991. THOMAS J. TAIT, O.B.E., 47, Vice President, Managing Director, Thomas Tait & Sons, Ltd. from March 1989 to date. J. RONALD TILLMAN, 50, Vice President, Wood Products from 1991 to date; General Manager, Wood Products from 1990 to 1991. IVAN D. WILSON, 58, Vice President, Service Distribution Centers, from April 1992 to date; Controller, Riegelwood Operations from 1973 to April 1992. Messrs. J. R. Kennedy, Q. J. Kennedy, R. D. Baldwin, and W. M. Massey, Jr. have Employment Agreements with the Company by the terms of which Mr. J. R. Kennedy will act as President, Mr. Q. J. Kennedy will act as Executive Vice President, and Messrs. R. D. Baldwin and W. M. Massey, Jr. will act as Senior Vice Presidents for the Company or in such other capacities as the Board of Directors shall determine. The Agreements with Messrs. J. R. Kennedy and Q. J. Kennedy extend through 1995 and 1998, respectively. The Agreement with Mr. W.M. Massey, Jr. extends through 1996, the Agreement with Mr. R.D. Baldwin extends through 1997. All other Executive Officers are elected to their respective offices annually by the Board of Directors. (a) Messrs. J. R. Kennedy and Q. J. Kennedy are brothers. 9 10 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 39 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 40 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 20 through 23 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 24 through 39 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 page 4 of the Company's Notice of Annual Meeting of Stockholders, dated March 15, 1995 (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 6 through 16 of the Proxy Statement, and with the exception of the section headed "Compensation Committee Report on Executive Compensation" on pages 13 and 14, 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. Certain relationships and related transactions with management are described on pages 5 and 15 of the Proxy Statement and in Items 11 and 12, and are incorporated herein by reference. 10 11 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. FINANCIAL STATEMENT SCHEDULES: The consolidated balance sheets as of December 31, 1994 and January 1, 1994, and related consolidated statements of income, cash flows and shareholders' equity for each of the three fiscal years in the period ended December 31, 1994 and the related notes to financial statements, together with the Independent Auditors' Report thereon of Deloitte & Touche LLP, dated February 3, 1995, appearing on pages 24 through 38 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 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. REPORTS ON FORM 8-K: The Company filed one report on Form 8-K dated December 19, 1994. The Company reported that it had reached an agreement with Bankers Trust Company with respect to various financial instruments. Under the terms of the agreement, two foreign currency forward contracts and collars were cancelled resulting in a $12.0 million pre-tax gain. The Company remains a party to two other financial arrangements with Bankers Trust, with both arrangements terminating in July, 1998. The Company agreed that, except for fulfilling the terms of the two open financial arrangements, Bankers Trust will have no further responsibilities to the Company in regard to any such arrangements. No financial statements were filed as part of this Form 8-K. ADDITIONAL FINANCIAL DATA FISCAL YEARS 1994, 1993 AND 1992
Page ---- Independent Auditors' Report 12 Financial Statement Schedule: II Valuation and Qualifying Accounts 13
11 12 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 December 31, 1994 and January 1, 1994 and for each of the three fiscal years in the period ended December 31, 1994, and have issued our report thereon dated February 3, 1995, which report includes an explanatory paragraph as to changes in the method of accounting for income taxes and in the method of accounting for postretirement benefits other than pensions; such financial statements and report are included in your 1994 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the financial statement schedule of Federal Paper Board Company, Inc. and its subsidiary companies, listed in Item 14. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/DELOITTE & TOUCHE LLP ------------------------ Deloitte & Touche LLP Parsippany, New Jersey February 3, 1995 12 13 SCHEDULE II FEDERAL PAPER BOARD COMPANY, INC. VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
----------------------------------------------------------------------------------------------------------- Additions Balance at Charged to Charged to Balance at Beginning Costs and Other End of Classification of Period Expenses Accounts(1) Deductions(2) Period ----------------------------------------------------------------------------------------------------------- ALLOWANCE FOR DOUBTFUL ACCOUNTS Fiscal Year Ended December 31, 1994 $1,284 557 137 460 $1,518 Fiscal Year Ended January 1, 1994 $1,672 89 147 624 $1,284 Fiscal Year Ended January 2, 1993 $2,272 861 (682) 779 $1,672
(1) Includes recoveries on accounts previously written-off, purchase accounting adjustments, reclassifications and foreign currency translation adjustments. (2) Represents accounts written-off. 13 14 For the purposes of complying with amendments to the rules governing Form S-8 under the Securities Act of 1933, the undersigned Registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into Registrant's Registration Statements on Form S-8 Nos. 33-64258 and 33-64256 (filed June 11, 1993), 2-56623 (filed June 23, 1983), 33-34440 (filed April 19, 1990) and 33-48654 (filed June 22, 1992). Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FEDERAL PAPER BOARD COMPANY, INC. March 27, 1995 By /s/ QUENTIN J. KENNEDY ----------------------- Quentin J. Kennedy Director, Executive Vice President, Secretary and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, or in their behalf by their duly appointed attorney-in-fact, on behalf of the Registrant in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ JOHN R. KENNEDY Director, President and March 27, 1995 -------------------------------- Chief Executive Officer (John R. Kennedy) (Principal Executive Officer) /s/ ROGER L. SANDERS, II Controller March 27, 1995 -------------------------------- (Principal Accounting Officer) (Roger L. Sanders, II) /s/ ROBERT D. BALDWIN * Director March 27, 1995 -------------------------------- (Robert D. Baldwin)
14 15
SIGNATURE TITLE DATE --------- ----- ---- /s/ THOMAS L. CASSIDY * Director March 27, 1995 -------------------------------- (Thomas L. Cassidy) /s/ W. RAN CLERIHUE * Director March 27, 1995 -------------------------------- (W. Ran Clerihue) /s/ JAMES T. FLYNN * Director March 27, 1995 -------------------------------- (James T. Flynn) /s/ EDMUND J. KELLY * Director March 27, 1995 -------------------------------- (Edmund J. Kelly) /s/ JOHN L. KELSEY * Director March 27 ,1995 -------------------------------- (John L. Kelsey) /s/ W. MARK MASSEY, JR. * Director March 27, 1995 -------------------------------- (W. Mark Massey, Jr.) *BY /s/ QUENTIN J. KENNEDY ------------------------------------- (Quentin J. Kennedy, Attorney-in-fact) March 27, 1995
15 16 Federal Paper Board Company, Inc. Exhibit Index
EXHIBIT NO. ----------- 3 Amended articles of incorporation as of January 18, 1994, filed as Exhibits 3.1 and 3.2 to Form 8-B Registration of Securities of Certain Successor Issuers dated August 19, 1994, and is incorporated herein by reference. 3.1 Current bylaws of the Registrant, filed as Exhibit 3.3 to Form 8-B Registration of Securities of Certain Successor Issuers dated August 19, 1994, and is incorporated herein by reference. 4 Agreement dated March 27, 1995 of the Company to furnish to the Commission upon request copies of certain instruments with respect to long-term debt. 10 Amendment No. 3 to the employment contract of Mr. J.R. Kennedy. Amendments No. 1 and No. 2 to the employment contract of Mr. J.R. Kennedy were filed as Exhibit 10 to the Company's Annual Report on Form 10-K for the 1991 fiscal year ended December 28, 1991 and is incorporated herein by reference. The original contract was filed as Exhibit 10 to the Company's Annual Report on Form 10-K for the 1987 fiscal year ended January 2, 1988, and is incorporated herein by reference. 10.1 Amendments No. 1 and No. 2 to the employment contract of Mr. Q.J. Kennedy filed as Exhibit 10.1 to the Company's Annual Report on Form 10-K for the 1991 fiscal year ended December 28, 1991 and is incorporated herein by reference. The original contract was filed as Exhibit 10 to the Company's Annual Report on Form 10-K for the 1987 fiscal year ended January 2, 1988, and is incorporated herein by reference. 10.2 The employment contract of Mr. R.D. Baldwin filed as Exhibit 10.2 to the Company's Annual Report on Form 10-K for the 1991 fiscal year ended December 28, 1991, and is incorporated herein by reference. 10.3 The employment contract of Mr. W.M. Massey, Jr. filed as Exhibit 10.2 to the Company's Annual Report on Form 10-K for the 1990 fiscal year ended December 29, 1990, and is incorporated herein by reference. 10.4 Federal Paper Board Company, Inc. 1992 Key Employees Stock Option Plan filed as Exhibit 28 to Form S-8 Registration Statement No. 33-48654 dated June 22, 1992, and is incorporated herein by reference. 10.5 Federal Paper Board Company, Inc. 1989 Key Employees Stock Option Plan filed as Exhibit 28 to Form S-8 Registration Statement No. 33-34440 dated April 19, 1990, and is incorporated herein by reference. 10.6 Federal Paper Board Company, Inc. 1992 Key Employees Long-Term Compensation Plan, filed as Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 26, 1994, and is incorporated herein by reference. 10.7 Federal Paper Board Company, Inc. Supplemental Executive Retirement Plan, dated April 18, 1991, filed as Exhibit 10.8 to the Company's Annual Report on Form 10-K for the 1992 fiscal year ended January 2, 1993, and is incorporated herein by reference.
16 17 Federal Paper Board Company, Inc. Exhibit Index (Continued)
10.8 Federal Paper Board Company, Inc. 1988 plan for the Compensation of Directors, as amended, dated June 18, 1991, filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K for the 1992 fiscal year ended January 2, 1993, and is incorporated herein by reference. 10.9 Federal Paper Board Company, Inc. 1992 Stock Option Plan for Non-Employee Directors, filed as Exhibit 10.10 to the Company's Annual Report on Form 10-K for the 1992 fiscal year ended January 2, 1993, and is incorporated herein by reference. 10.10 Federal Paper Board Company, Inc. Retirement Plan for Outside Directors, dated September 20, 1988, filed as Exhibit 10.11 to the Company's Annual Report on Form 10-K for the 1992 fiscal year ended January 2, 1993, and is incorporated herein by reference. 11 Statement of Computation of Earnings Per Common Share. 12 Computation of Ratio of Earnings to Fixed Charges. 13 1994 Annual Report to Shareholders of the Company. 21 List of Subsidiaries. 22 Notice of Annual Meeting of Stockholders and Proxy Statement, dated March 15, 1995 filed with the Commission on March 17, 1995 and is incorporated herein by reference. 23 Independent Auditors' Consent. 24 Powers of Attorney. 27 Financial Data Schedule for the fiscal year ended December 31, 1994. 99 Annual Report on Form 11-K Savings and Stock Ownership Plan for Salaried Employees (to be filed by amendment). 99.1 Annual Report on Form 11-K Savings and Stock Ownership Plan for Hourly Employees (to be filed by amendment).
17 EX-4 2 AGREEMENT DATED MARCH 27, 1995 1 EXHIBIT 4 In reliance upon Item 601(b)(4)(iii)(A) of Regulation S-K, there are not being filed various instruments defining the rights of holders of long-term debt of the Registrant and its subsidiaries because the total amount of securities authorized and outstanding under each such instrument does not exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. The Registrant hereby agrees to furnish a copy of any such instrument to the Commission upon request. Federal Paper Board Company, Inc. March 27, 1995 EX-10 3 AMEND. NO. 3 TO COMP. CONTRACT OF MR. J.R. KENNEDY 1 EXHIBIT 10 AMENDMENT NO. 3 to the Agreement dated as of the 1st day of January, 1988 (which together with Amendment Nos. 1 and 2 are hereafter referred to as the "Agreement") between FEDERAL PAPER BOARD COMPANY, INC. (the "Company") and JOHN R. KENNEDY (the "Executive"). W I T N E S S E T H: WHEREAS, the Executive remains in the employ of the Company and the Executive and the Company have agreed to this Amendment No. 3. NOW, THEREFORE, in consideration of the premises and mutual agreements of the parties herein contained, it is agreed: Paragraph 3(c) of the Agreement is hereby revised to read in its entirety as follows: (c) If the Executive (i) should be deemed to be eligible for and deemed to have applied for early retirement pursuant to subparagraph (b) above; (ii) elects early retirement subsequent to December 31, 1993; (iii) becomes permanently physically or mentally incapacitated; or (iv) dies during the term of this Agreement, benefits to be paid to the Executive or his beneficiary pursuant to the Plan, the Equalization Plan and the SERP will be calculated pursuant to the formulae set forth in such Plans adjusted for any optional benefits he may have elected under the Plans (including without limitation any actuarial reduction attributable to the election of a joint and survivor benefit under the Plans) and, notwithstanding the provisions of the Equalization Plan and subject to Paragraph 3(d) of this Agreement, the benefits paid pursuant to the Equalization Plan shall, if the Executive is married at the starting date of the distribution of such benefits, be paid in the form of a "100% Joint and Survivor Annuity" in the case of the occurrence of an event described in clauses (i) through (iii) immediately above and in the form of a "100% Preretirement Survivor Annuity" in the case of the occurrence of the event described in clause (iv) immediately above. A "100% Joint and Survivor Annuity" is an annuity (i) for the life of the Executive with a survivor annuity for the life of his spouse which is equal to 100 percent of the amount of the annuity payable during the joint lives of the Executive and his spouse and (ii) which is the actuarial equivalent of a single life annuity for the life of the Executive, determined pursuant to such actuarial assumptions as are used by the Company to determine a 50% qualified joint and survivor annuity under the Plan. A "100% Preretirement Survivor Annuity" is a survivor annuity for the life of the Executive's surviving spouse where payments to the surviving spouse under such annuity are equal to the amounts which would be payable as a survivor annuity under a 100% Joint and Survivor Annuity (or the actuarial equivalent thereof) if the Executive had retired with an immediate 100% Joint and Survivor Annuity on the day before his death, determined pursuant to such actuarial assumptions as are used by the Company to determine a qualified preretirement survivor annuity under the Plan. Notwithstanding the foregoing, any benefits payable under the Plan, the Equalization Plan and the SERP shall not be reduced as provided in any such plan for early retirement and shall be calculated on a proforma basis as if the Executive had continued as an employee and a participant in the Plans through December 31, 1995, at a salary equal to his annual salary at the time of his early retirement and a bonus equal to the last bonus received or accrued prior to his early retirement and with both salary and bonuses increased annually thereafter at a compounded rate of 8%, but in no event calculated at a five year average of less than $1,878,246 and benefits to be paid to the Executive pursuant to the SERP will be calculated at a salary equal to his annual salary at the time of his early retirement and a bonus equal to the last bonus received or accrued prior to his early retirement and increased annually thereafter at a compounded rate of 8%, but in no event calculated at a three year average of less than $2,020,525. If the Executive continues in the employ of the Company through the term of this Agreement, benefits to be paid to the Executive or his beneficiary pursuant to the Plan, the Equalization Plan and the SERP will be calculated pursuant to the formulae set forth in such Plans, but in no event calculated at a five year average of less than $1,878,246 for purposes of the Plan and Equalization Plan and a three year average of less than $2,020,525 for purposes of the SERP. 2 EXHIBIT 10 (Continued) The Company may not withhold any pension payments hereunder for any reason unless the Company has first obtained a final decision of an arbitrator, pursuant to paragraph 8 hereof, to the effect that the Company is legally entitled to do so. IN WITNESS WHEREOF, the Company and the Executive have caused this Amendment No. 3 to the Agreement to be executed as of the 15th day of November, 1994. FEDERAL PAPER BOARD COMPANY, INC. By: /s/ W. RAN CLERIHUE ------------------- W. Ran Clerihue By: /s/ JOHN R. KENNEDY ------------------- John R. Kennedy EX-11 4 COMPUTATION OF EARNINGS PER COMMON SHARE 1 EXHIBIT 11 FEDERAL PAPER BOARD COMPANY, INC. Computation of Earnings Per Common Share (In thousands except per share amounts)
Fiscal Years 1994 1993 1992 ---- ---- ---- ASSUMING NO DILUTION: Income Before Cumulative Effect of Accounting Change $72,000 $ 6,400 $82,600 (Deduct) Dividends on Convertible Preferred Stock (6,519) (6,610) (7,060) ------- ------- ------- Income (Loss) Before Cumulative Effect of Accounting Change available to Common Shares 65,481 (210) 75,540 Cumulative Effect of Accounting Change - - 9,000 ------- ------- ------- Net Income (Loss) Available to Common Shares $65,481 $ (210) $84,540 ======= ======= ======= Actual Weighted Average Number of Common Shares Outstanding 42,296 41,995 41,448 ======= ======= ======= Income (Loss) Before Cumulative Effect of Accounting Change $ 1.55 $ (.01) $ 1.82 Cumulative Effect of Accounting Change - - .22 ------- ------- ------- Net Income (Loss) Per Common Share Assuming No Dilution $ 1.55 $ (.01) $ 2.04 ======= ======= ======= ASSUMING FULL DILUTION: Income Before Cumulative Effect of Accounting Change $72,000 $ 6,400 $82,600 (Deduct) Dividends on Convertible Preferred Stock (6,455) (6,610) - ------- ------- ------- Income (Loss) Before Cumulative Effect of Accounting Change Applicable to Common Shares, Common Equivalent Shares and Dilutive Securities 65,545 (210) 82,600 Cumulative Effect of Accounting Change - - 9,000 ------- ------- ------- Net Income (Loss) Applicable to Common Shares, Common Equivalent Shares and Dilutive Securities $65,545 $ (210) $91,600 ======= ======== ======= Shares: Adjusted Weighted Average Number of Common Shares Outstanding 42,239 41,995 40,900 Dilutive Common Equivalent Shares Issuable Under Stock Option Plans 650 (a) 381 Common Shares Issuable Upon Conversion of $1.20 Convertible Preferred Stock 289 (a) 324 Common Shares Issuable Assuming Conversion of $2.875 Convertible Preferred Stock (a) (a) 5,090 ------- ------- ------- Weighted Average Number of Common and Diluted Common Equivalent Shares and Dilutive Securities 43,178 41,995 46,695 ======= ======= ======= Income (Loss) Before Cumulative Effect of Accounting Change $ 1.52 $ ( .01) $ 1.77 Cumulative Effect of Accounting Change - - .19 ------- ------- ------- Net Income (Loss) Per Common Share Assuming Full Dilution, As Reported $ 1.52 $ (.01) $ 1. 96 ======= ======= =======
2 EXHIBIT 11 (Continued) FEDERAL PAPER BOARD COMPANY, INC. Computation of Earnings 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 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 42,296 41,995 41,448 Dilutive Common Equivalent Shares Issuable Under Stock Option Plans 460 (a) 381 ------- ------- ------- Weighted Average Number of Common and Dilutive Common Equivalent Shares 42,756 41,995 41,829 ======= ======= ======= Income (Loss) Before Cumulative Effect of Accounting Change $ 1.53 $ (.01) $ 1.80 Cumulative Effect of Accounting Change - - .22 ------- ------- ------- Primary Earnings (Loss) Per Common Share Assuming No Dilution from Common Equivalent Shares $ 1.53 $ (.01) $ 2.02 ======= ======= =======
(a) Antidilutive Issue. EX-12 5 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 1994 1993 1992 1991 1990 -------------------------------------------------------------------------------------------------------------------- Income Before Taxes and Cumulative Effect of Accounting Change per Consolidated Statement of Income $100,900 $ 26,300 $135,700 $144,200 $202,200 Add: Interest on Indebtedness 88,281 84,509 85,018 90,243 43,111 Amortization of Previously Capitalized Interest 8,528 8,221 7,656 6,716 4,354 Portion of Rents Representative of Interest Factor 7,817 7,433 8,316 9,451 9,835 -------- -------- -------- -------- -------- Income as Adjusted $205,526 $126,463 $236,690 $250,610 $259,500 ======== ======== ======== ======== ======== Fixed Charges: Interest on Indebtedness $ 88,281 $ 84,509 $ 85,018 $ 90,243 $ 43,111 Capitalized Interest 6,745 6,136 11,274 18,807 47,247 Portion of Rents Representative of Interest Factor 7,817 7,433 8,316 9,451 9,835 -------- -------- -------- -------- -------- Fixed Charges $102,843 $ 98,078 $104,608 $118,501 $100,193 ======== ======== ======== ======== ======== Ratio of Earnings to Fixed Charges 2.00 1.29 2.26 2.11 2.59 ======== ======== ======== ======== ========
Note: Interest on indebtedness includes amortization of debenture discount and other debt related expenses. EX-13 6 1994 ANNUAL REPORT TO SHAREHOLDERS OF THE CO. 1 EXHIBIT 13 Review of Operations PAPER, PAPERBOARD AND PULP The paper, paperboard and pulp segment is a significant portion of the Company's business accounting for 62% of net sales in 1994. Operating profits for this segment increased substantially in 1994 to $157.3 million, a 77% increase over 1993. This segment benefited from increased selling prices for market pulp and uncoated free-sheet paper along with increased shipments of paperboard, pulp and uncoated free-sheet paper during 1994. Demand for these products increased as the overall economic conditions of the United States and Europe improved throughout the year. PAPERBOARD The Company produces bleached paperboard on five coated paperboard machines located in Riegelwood, NC and Augusta, GA. Total 1994 production of bleached paperboard was 937,000 tons, a slight increase over 1993 production of 925,000 tons. Both the Riegelwood and Augusta mills operated well during 1994 with new production records being set at both mills. In mid-1994, the Company completed a modernization program at the Riegelwood mill at a total cost of approximately $190 million. This capital project included the rebuild of the No. 18 paperboard machine and the installation of new winders, rollwrapping equipment and refiners. The focus of the modernization program was to improve quality to better serve the Company's various customers in the lightweight bleached bristol market. With the rebuild and modernization at both the Riegelwood and Augusta mills over the past four years, the Company is positioned to enhance productivity efficiencies while providing our customers with quality products. In early 1994, the Riegelwood mill received International Standards Organization (ISO) 9002 certification for the manufacture of bleached paperboard and the production of market pulp. The award is part of the ISO 9000 series of standards, which were developed in Geneva, Switzerland in 1987 and is given to operations demonstrating excellence in implementing total quality processes. Market conditions and backlogs for bleached paperboard strengthened during the latter half of 1994 resulting in pricing improvements with a further price increase announced in January 1995. Shipments of bleached paperboard in [Illustration 1] [Paperboard Chart 1] Federal Paper Board Company, Inc. 1994 Annual Report Page 6 [photo 1] Federal Paper Board Company, Inc. 1994 Annual Report Page 7 2 1994 increased by 45,000 tons, or 5% over 1993 shipments. In addition, 1994 shipments included a greater quantity of high margin specialty-type business. The Company continues to focus on moving its product mix from commodity-type businesses into value added premium and specialty markets. The Company's Sprague mill once again achieved a production record in 1994 by producing 196,000 tons of recycled paperboard, an increase from the record high of 179,000 tons produced last year. However, the recycled paperboard business was negatively impacted during 1994 by the effects of the rising cost of wastepaper, the primary raw material in recycled paperboard. With five bleached paperboard machines and one recycled paperboard machine, the Company is able to supply a wide variety of paperboard grades. The ability to supply such a wide variety of grades is very beneficial to our customers as they can choose the total packaging solution best for any particular situation. The Company's service distribution centers consisting of five sheeting plants and one extrusion plant, all located near our markets, have given us the ability to better serve our customers. To ensure the Company's leadership position in the printing market and continue to meet the growth and quality needs in the marketplace, five new state-of-the-art sheeters will be installed at our various service distribution centers in 1995. MARKET PULP The Riegelwood mill produced 540,000 tons of market pulp in 1994 compared to 530,000 tons in 1993. In addition, the Augusta mill produced 17,000 tons of market pulp which is below the 26,000 tons produced in 1993. The Augusta mill sells market pulp in slurry form to a neighboring mill and the decline in production reflects a change in the supply requirements of this customer. Shipments of market pulp in 1994 increased 7% over 1993 shipments including a 7% increase in export shipments. The market pulp business improved throughout 1994. Increased worldwide demand and a number of price increases implemented during the year have brought market pulp back to profitability. Additional price increases took effect in January 1995 and further price increases have been announced for the first quarter of 1995. [Illustration 2] [Pulp Chart 2] Federal Paper Board Company, Inc. 1994 Annual Report Page 8 [photo 2] Federal Paper Board Company, Inc. 1994 Annual Report Page 9 3 EXPORT The Company is a major exporter, principally of market pulp, to many parts of the world with export sales in 1994 of $196.3 million, a 49% increase over 1993. The Company continues its efforts to expand its presence in foreign markets. We currently have sales and marketing offices in Zurich, London and Tokyo which enhance the Company's ability to better serve our worldwide pulp and paperboard customers. UNCOATED FREE-SHEET PAPER The Company's mill in Inverurie, Scotland produces, on two paper machines, uncoated free-sheet paper for the United Kingdom and European markets. 1994 was another record production year for the Inverurie mill with 189,000 metric tons produced. Capital projects completed at the mill during the year have enabled it to increase productive capacity and thereby reduce overall costs. Demand for uncoated free-sheet paper improved throughout 1994 enabling the Company to institute a series of price increases. The Company continues its efforts to improve its product mix into higher value-added markets with a new brighter product, called Presentation, to be introduced in February, 1995. It will be used for letterheads and color copying. As the Company enters 1995, the market for uncoated free-sheet paper remains positive with further price increases expected. WOOD PRODUCTS The wood products segment includes the results of the Company's lumber plants and land management activities. This segment accounted for 16% of the Company's net sales in 1994. Operating profits for this segment decreased from the prior year due to the rising cost of timber, caused by a combination of increased demand and the curtailment of logging on certain government owned lands. LUMBER PLANTS The lumber market continued its strong performance during 1994 as average selling prices increased over the prior year due to continued strength in construction and increased demand in retail home centers. The principal product of our lumber plants is dimensional lumber which is used in the construction and retail home improvement industries. The plants also produce wood chips which are the basic raw material used in the [Illustration 3] [Paper Chart 3] Federal Paper Board Company, Inc. 1994 Annual Report Page 10 [photo 3] Federal Paper Board Company, Inc. 1994 Annual Report Page 11 4 production of pulp and paperboard. The Company's lumber operations performed very well in 1994 with net sales and average selling prices above last year. The Company operates five lumber plants and is committed to maintaining its position as a low cost producer. The lumber plants produced a record 618.2 million board feet in 1994. In recent years the Company has invested in computerized manufacturing processes in order to reduce costs and optimize timber yields. Safety has also played a key role in cost reductions with our lumber plants incurring no lost workday accidents in 1994. One facility has operated four years without a lost workday accident. The customer base of the lumber market has changed recently, as evidenced by the demand for specialty lumber products in the retail home center segment, and we have responded to this opportunity. Our lumber operations' quality assurance program is dedicated to providing our customers with a high quality grade lumber product, on time and as ordered. Demand and industry production is projected to remain high throughout 1995. The Company's lumber business is expected to perform well in 1995, as our efficient low cost facilities enable us to maintain our competitive edge. WOODLANDS The Company owns 569,000 acres of timberlands and leases another 123,000 acres of timberlands with purchase options, of which the Company owns the timber on the leased land. The acreage is located in proximity to our pulp and paperboard mills and our lumber plants in North Carolina, South Carolina and Georgia. Our woodlands are an integral source of current and future timber needs. The woodlands operations provided approximately 30% of our softwood needs and procured the remainder of our timber requirements for our lumber plants and pulp and paperboard mills through outside sources. The Company understands the value of our woodlands to our business and our communities and practices responsible forest management techniques. To do this, we follow recognized measures to protect the integrity of the soil, water and waterways and regenerate harvested lands through the planting of [Illustration 4] [Wood Products Chart 4] Federal Paper Board Company, Inc. 1994 Annual Report Page 12 [photo 4] Federal Paper Board Company, Inc. 1994 Annual Report Page 13 5 genetically improved seedlings or through natural regeneration. We continue to participate in several research cooperatives which provide information for tree improvement, forest nutrition and forest management. CONVERTING OPERATIONS The Company is a leading manufacturer of converted paperboard products including disposable foodservice products, folding cartons and various other packaging products. This segment of the Company's business accounted for 22% of net sales for the current year. Strong competitive conditions and a change in the availability and demand for raw materials contributed to a slight decline in operating profits. The converting operations have faced many challenges in 1994. The marketplace experienced rapid change during the year with a tightening in the supply of the major components of the manufacturing process including bleached paperboard, resins and corrugated containers. Prices of these raw materials increased significantly in the second half of the year posing a challenge to all producers of converted paperboard products. Costs of these raw materials are expected to continue to rise throughout 1995 as the paperboard market continues to improve. However, we continue to focus primarily on productivity improvements and cost reductions so that a streamlined and efficient manufacturing process allows us to compete effectively in the marketplace. CUP OPERATIONS At six strategically located cup manufacturing facilities, paper and plastic cups and other disposable foodservice products are manufactured for a wide variety of customers ranging from small convenience stores to national fast food chains. The Company's bleached paperboard mills offer a unique combination of raw material supply and paper-coating technologies which allows complete control of the production process and a more reliable source of products during tightening market conditions. Our cup plants utilize various production processes which make these operations uniquely positioned to meet any customer's order requirements large or small. In 1994, the cup operations were recognized by the Flexographic Technical Association for excellent work in narrow web printing, demonstrating their commitment to producing quality products. [Illustration 5] [Converting Operations Chart 5] Federal Paper Board Company, Inc. 1994 Annual Report Page 14 [Photo 5] Federal Paper Board Company, Inc. 1994 Annual Report Page 15 6 Over the past several years, the Company focused on reducing costs and consolidating various operations of this business. Results for 1994 reflect cost savings realized from these programs. As part of the continuing effort to be the highest quality producer of low cost converted paper products, the Company has announced the closing of the Salisbury, MD plant. Business from this plant will be divided among the other facilities in order to better meet the needs of particular customers. The effect of these cost reduction programs are expected to benefit the Company and its customers now and in future years. PACKAGING OPERATIONS At four packaging facilities, the Company offers a wide variety of print production and finishing capabilities to its customers. High speed printing presses produce some of the most intricate packaging products in the industry, both in terms of graphic and structural designs. Various printing processes are utilized to produce complex multi-colored folding cartons for many of the nation's most familiar consumer products. Because of the operations' investment in modern equipment, its customers benefit from the most cost effective production methods for their particular needs. In 1994, the packaging operations received a formal supplier certification from a major customer. This certification signified the operations' commitment to meeting the exacting standards of process control and improvement. ENVIRONMENTAL We are committed to ongoing investments that will protect both the environment and our ability to operate profitably. We continue to be environmentally conscious and our record in the Environmental Protection Agency's (EPA) 33/50 program represents our contribution to the national effort to eliminate environmental problems. In 1994, the EPA honored our Company as one of only seven paper companies to make rapid progress in reducing reported releases of its high priority toxic chemicals. We are very pleased with our results so far and anticipate being able to sustain these reductions on a long-term basis. [Illustration 6] Federal Paper Board Company, Inc. 1994 Annual Report Page 16 7 Federal Paper Board Company, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS RESULTS OF OPERATIONS OVERVIEW Results for the fiscal year 1994 significantly improved over the prior year and are a reflection of sales price increases implemented during the second half of the year. Net sales were $1,569.6 million in 1994, an increase of 13% from 1993 and 7% from 1992, and represented a new record sales level for the Company. Income before cumulative effect of accounting change was $72.0 million in 1994, a substantial improvement from 1993 but a 13% decrease from 1992. Net income for 1994 includes a net pre-tax loss of $3.5 million associated with nonhedged financial instrument transactions, including the release from certain financial instrument obligations, and an after-tax non-cash gain of $6.0 million due to the cumulative recalculation of deferred taxes reflecting a change in the effective state tax rate. Net income for 1993 includes a net pre-tax loss of $31.9 million associated with financial instrument transactions and a non-cash charge of $9.5 million resulting from a change in the federal statutory tax rate from 34% to 35%. Net income for 1992 includes a non-cash gain of $9.0 million from the cumulative effect of accounting change related to the adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Results for fiscal years 1994 and 1993 include 52 weeks while fiscal 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. 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 increased 15% compared to fiscal year 1993. Paperboard sales increased approximately 6% compared to the prior year reflecting an increase in shipments during the year slightly offset by a decline in the overall average selling price. Paperboard accounted for 66% and 72% of the segment's sales for 1994 and 1993, respectively. Market pulp sales were significantly higher in 1994 compared to 1993, increasing 45% compared to the prior year. The increase in market pulp sales reflects an increase in average selling prices along with an increase in shipments for 1994. Shipments of this product to the export market increased 7% in 1994 reflecting improvement in the general economic conditions throughout the United Kingdom, Europe and Asia. Market pulp accounted for 19% and 15% of the segment's sales for 1994 and 1993, respectively. Sales of uncoated free-sheet paper increased 31% compared to the prior year reflecting a 22% increase in average selling prices and an increase in shipments for 1994. Paper sales accounted for 15% and 13% of the segment's sales in 1994 and 1993, respectively. Operating profits for this segment increased substantially in 1994 to $157.3 million, 77% above 1993 levels. Operating profits for market pulp increased substantially compared to the prior year. Numerous price increases were implemented in 1994 which helped return this product line to profitability. Strengthened demand for this product, the result of improved worldwide economic conditions, resulted in increased shipments of market pulp of 7% during 1994, while the average selling price increased 42% compared to the prior year. Operating profits for bleached paperboard declined compared to the prior year. The decrease is attributable to a slight decrease in the average selling prices and an increase in raw material costs. Shipments for this product remained strong in 1994, and should continue this trend in 1995. Price increases implemented in the fourth quarter of 1994 should have a positive impact on operating profits for this product line in 1995. Operating profits for the Company's uncoated free-sheet paper operation substantially improved compared to the prior year. Average selling prices for this product increased 22% compared to the prior year, while shipments increased 8% in 1994. Average selling prices rebounded from prior year levels as numerous price increases were implemented during the year, the result of increased demand as economic conditions improved in Europe. Operating profits for recycled paperboard decreased 10% compared to the prior year. The decrease in 1994 is primarily attributable to increased wastepaper costs, the primary component of recycled paperboard. Average selling prices for recycled paperboard declined 2% compared to the prior year, while shipments of recycled paperboard increased 15% in 1994 compared to the prior year. Overall, the Company's mills operated well during 1994 as production records were achieved at all of the Company's mills. Capital expansion programs completed in prior years contributed to the overall production records at the mills. Net sales in 1993 for this segment declined 12% compared to 1992. Sales of paperboard were down approximately 6% in 1993 compared to 1992 as a result of reduced shipments and a decrease in the average selling price. Sales of market pulp declined approximately 38% in 1993 compared to 1992 as a result of average selling prices falling 30% below the prior year levels. Decreased shipments of market pulp during 1993 also contributed to the lower sales, including an 11% decline in export market shipments reflecting the poor economic conditions that existed throughout Europe. Sales of uncoated free-sheet paper improved 3% in 1993 compared to 1992, the result of increased shipments to meet the rise in demand for paper. Operating profits for this segment fell considerably in 1993, decreasing 55% compared to 1992. The primary factor for the reduction was the continued deterioration in market pulp prices, which caused the product line to be unprofitable for the Company. Increased average selling prices of recycled paperboard partially offset the decline. Shipments of paperboard and pulp were slightly lower compared to 1992 levels, while shipments of uncoated free-sheet paper were up slightly compared to the prior year. Operating profits for market pulp decreased substantially in 1993 compared to the prior year due to the continued deterioration in average selling prices. This product line became unprofitable in 1993 as high worldwide inventory levels of market pulp and weak economic conditions combined to force the average selling price of this product well below the cost of production. Operating profits for bleached paperboard declined in 1993 compared to the prior year. The decrease is primarily attributable to Federal Paper Board Company, Inc. 1994 Annual Report Page 20 8 Federal Paper Board Company, Inc. lower average selling prices in 1993, as the Company's product mix changed during the year, with a greater quantity of lower margin business. Shipments for this product declined slightly in 1993, further contributing to the decline in operating profits for the year. Operating profits for recycled paperboard increased 19% in 1993 compared to the prior year. The increase is attributable to increased average selling prices and improved operating efficiencies. In 1993, the Company's Sprague recycled paperboard mill was able to use lower cost natural gas in the manufacturing process of recycled paperboard which reduced production costs for this product. Operating profits for the Company's uncoated free-sheet paper operation improved in 1993 compared to the prior year. Shipments for this product improved substantially in 1993, increasing 37% compared to the prior year, while average selling prices decreased compared to the prior year. Average selling prices declined in 1993 due to poor economic conditions in Europe coupled with industry overcapacity. WOOD PRODUCTS The wood products segment manufactures dimensional lumber and is responsible for land management activities. The Company operates five lumber plants and owns or leases approximately 692,000 acres of timberlands. Net sales increased 17% compared to fiscal year 1993. Average selling prices of lumber achieved record levels during the year and ended 1994 approximately 11% above the prior year. Shipments of lumber were 610.3 million board feet compared to 579.7 million board feet in 1993. Demand for lumber remained strong in 1994 due to increased housing starts and a reduced supply of lumber. Operating profits for this segment in 1994 decreased 2% compared to the prior year. The decline is primarily attributable to an increase in production costs in 1994. However, operating efficiencies at most of the lumber plants improved in 1994, primarily the result of the completion of modernization programs at the plants in prior years. Net sales in 1993 for this segment improved 28% compared to 1992. Average selling prices of lumber were substantially higher in 1993 compared to 1992, increasing 31% during the year. Shipments of lumber were slightly lower in 1993 compared to 1992. Demand for lumber increased in the second half of 1993, due to a strong increase in housing starts during this period. Operating profits for this segment in 1993 increased substantially compared to 1992. Favorable market conditions for lumber continued throughout the year reflecting improved housing starts and a reduced supply of lumber. CONVERTING OPERATIONS The converting operations segment manufactures paper and plastic cups, packaging products and other disposable foodservice products. The Company currently operates six cup plants and four folding carton plants. Results for this segment were mixed in 1994. Net sales for this segment increased 6% compared to the prior year. Sales of the cup operations increased 6% compared to the prior year. Shipments for the cup operations increased 8% over 1993 levels, reflecting an improving economy and increased demand for the product in 1994. The increase in shipments was partially offset by a slight decrease in the average selling price of approximately 2% compared to the prior year. The cup operations accounted for 70% of this segment's sales in 1994 and 1993. Sales of packaging products increased 6% compared to the prior year, the result of increased customer orders. Packaging products accounted for 30% of this segment's sales in 1994 and 1993. Operating profits for this segment declined 8% compared to 1993. Included in 1994 operating profits is a $2.1 million charge associated with the restructuring of the cup operations. As part of the restructuring, the Company has announced the closing of the Salisbury, MD plant. In addition, the Company has implemented cost reduction programs which are expected to improve operating and distribution efficiencies in the near future. Excluding the restructuring charge, the cup operations results improved in 1994 compared to the prior year. The Company's packaging operations performed well for the year contributing to operating profits. Net sales for this segment in 1993 were slightly lower than the prior year. A 15% decrease in sales of the packaging operations caused by an unfavorable change in product mix and reduced volume was slightly offset by a 4% increase in sales of the cup operations. The foodservice disposable market experienced increased demand in 1993 and this was reflected in the 9% increase in shipments for this product in 1993. However, average selling prices declined during the year due to increased competition in this market. Operating profits for this segment were sharply lower in 1993, declining 49% compared to the prior year. The decline is partly attributable to a $1.0 million charge associated with the restructuring of the cup operations. The restructuring, combined with capital expenditures and various cost reduction programs, has enhanced manufacturing and distribution efficiencies for these operations. Lower average selling prices, reduced volume and a change in product mix for the packaging operations coupled with lower average selling prices for the cup operations further contributed to the decline. OTHER ITEMS The Company entered into several nonhedged off-balance-sheet financial instrument transactions in 1994, 1993 and 1992. The value of these instruments changes as currency markets and interest rates fluctuate, requiring adjustments of the market value to be recorded. Net losses of approximately $3.5 and $31.9 million were recorded in 1994 and 1993, respectively, and a net gain of approximately $5.3 million was recorded in 1992 associated with nonhedged financial instrument transactions. In fiscal year 1994, the Company was released from its obligation on two foreign currency forward contracts as part of a settlement with an outside party. The net loss for fiscal year 1994 includes a gain of $12.0 million as a result of this settlement. The items above are included in Other - net in the Consolidated Statement of Income. INCOME TAXES The Company's overall effective tax rate for 1994 was 28.6%, compared to 75.7% in 1993 and 39.1% in 1992. The lower effective rate for 1994 compared to 1993 is attributable to various factors. In 1994, the Company recorded a favorable adjustment of $2.9 million reflecting the settlement of prior year tax audits and recorded a $6.0 Federal Paper Board Company, Inc. 1994 Annual Report Page 21 9 Federal Paper Board Company, Inc. million favorable adjustment of deferred taxes due to a change in the Company's effective state tax rate due to the withdrawal from several states. In 1993, the overall effective tax rate was significantly impacted by the federal statutory tax rate change from 34% to 35%. As a result, the Company's 1993 provision for income taxes included $9.2 million for the cumulative effect of the recalculation of the deferred tax liability under Statement No. 109, "Accounting for Income Taxes". The Company adopted this Statement in 1992, recording a gain of $9.0 million from the cumulative effect of an accounting change in the Consolidated Statement of Income. The adoption of Statement No. 109 resulted in higher depreciation expense for 1994, 1993 and 1992. OTHER ACCOUNTING MATTERS Effective January 2, 1994 the Company adopted Statement No. 112, "Employers' Accounting for Postemployment Benefits". This Statement requires the Company to accrue for postemployment benefits provided to former or inactive employees, their beneficiaries and covered dependents after employment but before retirement. The Company previously expensed the cost of these benefits as claims were incurred. The impact of adopting this Statement was not material to the Company's financial position and results of operations for fiscal year 1994. CAPITAL RESOURCES AND LIQUIDITY Cash flows generated from operations in 1994 were $239.6 million compared to $232.3 million in 1993 and $223.8 million in 1992. The slight increase in 1994 is attributable to increased operating earnings and proceeds on hedged financial instrument transactions partially offset by a change in working capital in the current year. The deferred income tax provision for 1994 includes a favorable adjustment of $2.9 million reflecting the settlement of prior year tax audits and a $6.0 million favorable adjustment reflecting a change in the Company's overall effective state tax rate. The deferred income tax provision for 1993 includes a charge of $9.2 million for the recalculation of the deferred tax liability due to an increase in the federal statutory tax rate. The major changes in working capital reflect an increase in receivables and an increase in inventory levels in 1994. The increase in receivables in 1994 is attributable to a higher level of sales during the year, partially offset by an increase of the amount of sold receivables. Inventory levels increased reflecting increased production during the year in response to improved market demand for the Company's products as discussed in the Results of Operations. The Company is party to an agreement, initially entered into in 1991, which allows for the sale of a fractional interest in a defined pool of trade accounts receivable. During 1994, the maximum allowable amount of receivables to be sold, initially $88 million, was increased to $105 million. During 1993, the maximum allowable amount of receivables to be sold, initially $75 million, was increased to $88 million. Proceeds from the increase in the receivables sold of $17 million and $13 million in 1994 and 1993, respectively, are reported as operating cash flows. Cash flows used for investing activities are primarily associated with capital investment programs. Capital expenditures, including capitalized interest, were $139.1 million in 1994, $161.2 million in 1993 and $149.1 million in 1992. In 1994, capital spending was primarily attributable to the capital program at the Company's Riegelwood mill. The mill underwent a modernization program which has improved quality and ensured the Company's leadership position in the lightweight bleached bristol market. Capital spending also includes the construction of a new warehouse at the Company's Shelbyville cup plant which will improve distribution efficiencies. In 1993, the major portion of capital spending pertained to the Riegelwood mill program and the Shelbyville plant program mentioned above, as well as other ongoing capital investment programs for the paper, paperboard and pulp segment. Spending in 1992 was primarily attributable to various ongoing programs for the paper, paperboard and pulp segment, including the Riegelwood mill program. Capital expenditures for 1995, including capitalized interest, are expected to be approximately $175 million. The majority of the spending in 1995 will be for the capital project to upgrade the fiber capacity at the Company's Riegelwood mill. Cash flows used for financing activities pertain to payments of long-term borrowings and dividends. Cash paid for dividends was $48.8 million, $48.6 million and $48.4 million in 1994, 1993 and 1992, respectively. In the fourth quarter of 1994, the Company's cash dividend increased from a quarterly rate of $.25 to a quarterly rate of $.30 per common share. For 1993 and 1992, the quarterly dividend rate was $.25 per common share. Total debt of the Company was reduced by $35.5 million and $28.8 million in 1994 and 1993, respectively. The ratio of total debt to total capitalization was 52.6% and 54.2% in 1994 and 1993, respectively. During 1994, the Company entered into a revolving credit agreement providing for borrowings of up to $250 million which expires in December 1999. This agreement replaced the existing $75 million and $225 million revolving credit agreements. In 1994, the Company also repaid a $25 million bank note and subsequently borrowed $25 million under a new bank note maturing in 1996. In addition, in 1994, $25 million of debt pertaining to the Senior Notes - Series H was repaid. Debt repayments in 1995 are expected to be $74.5 million. The Company is confident that 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. At December 31, 1994, the Company was in compliance with all loan covenant requirements and does not foresee noncompliance with any of its loan covenant requirements in 1995. The Company has entered into a variety of interest rate swap agreements to manage the impact of interest rate fluctuations. During 1994, the Company was a party to both hedged and nonhedged interest rate swap agreements. The Company's outstanding hedged interest rate swap agreements effectively converted $175 million of fixed rate debt to variable rate debt at December 31, 1994 and January 1, 1994. These agreements have various expiration dates through 1998. The Company's market risk under these agreements is primarily subject to changes in the London Inter Bank Offered Rate (LIBOR). The Company does not believe a reasonably likely change in LIBOR rates would have a material impact on its financial position and results of operations. The Company also had nonhedged interest rate swap agreements outstanding at December 31, 1994 and January 1, 1994. One nonhedged interest rate swap agreement which was outstanding at December 31, 1994 and January 1, 1994 is based on a notional Federal Paper Board Company, Inc. 1994 Annual Report Page 22 10 Federal Paper Board Company, Inc. amount of $175 million. In this agreement, the Company will receive LIBOR and will pay LIBOR in arrears plus 1.72% plus a leveraged coupon rate based on various interest rate spreads. At December 31, 1994 the estimated fair value of this agreement was a loss of $10.5 million. At January 1, 1994, the Company had two other nonhedged interest rate swap agreements outstanding which were both terminated during fiscal year 1994. One agreement was based on a notional amount of $25 million in which the Company received a fixed rate of 10% and paid LIBOR plus 4.228% plus a leveraged coupon rate based on various interest rate spreads. The other agreement was based on a notional amount of $50 million in which the Company received a fixed rate of 10% and paid LIBOR plus 4.4% plus a leveraged coupon rate based on various interest rate spreads. The Company is exposed to credit loss in the event of nonperformance by the counterparty to its interest rate swap agreements. The risk of loss to the Company in the event of nonperformance by the counterparty under these agreements is not significant. The Company does not anticipate nonperformance by the counterparty. The Company utilized nonhedged foreign currency option contracts since the majority of the Company's export sales are sold in U.S. dollars, and a rise in the value of the dollar could have adversely effected sales prices and volumes. Strategic hedges were used to provide the Company with currency gains to offset reduced profits resulting from the rising U.S. dollar. The strategic hedge program was global in nature and was not intended to hedge firm commitments. During 1994, the Company entered into and terminated various nonhedged foreign currency option contracts. At December 31, 1994, the Company was not a party to any nonhedged foreign currency option contracts. The impact of terminating the nonhedged foreign currency option contracts in 1994 is discussed in Other Items. The net losses include $14.9 million associated with two complex foreign currency contracts which were entered into and terminated by the Company during 1994. However, as part of a settlement with an outside party, the Company was released from $12.0 million of this obligation. 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. Over the past three years, the Company spent $449.4 million on its capital investment program of which $61.0 million was related to environmental capital expenditures. In fiscal years 1994, 1993 and 1992, $11.6 million, $17.2 million and $32.2 million, respectively, was spent on environmental capital projects. Capital expenditures for environmental purposes are estimated to be approximately $66.7 million and $46.6 million for fiscal years 1995 and 1996, respectively. However, spending on these environmental projects may be undertaken in years beyond 1996. 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. The Environmental Protection Agency ("EPA") Cluster Rules, proposed in 1993, could have a significant impact on future environmental expenditures for the Company and our industry. Based on the current proposed EPA Cluster Rules, the Company will be required to spend between an estimated $250 million and $400 million to comply. 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 affect its competitive position within the United States. However, the Company does believe that the EPA Cluster Rules may impact its own and the industry's competitive edge in the world market. The Company has been designated a potentially responsible party, under the Comprehensive Environmental Response, Compensation and Liability Act and by certain state agencies, with respect to the cleanup of hazardous substances at approximately 13 sites which are not owned or controlled by the Company. In all of these sites, other potentially responsible parties also have been designated. 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 recorded accruals in the Consolidated Balance Sheet for environmental costs of $7.0 million and $4.7 million at December 31, 1994 and January 1, 1994, respectively. In the opinion of management, these accruals are sufficient to cover probable and estimable environmental costs. EFFECTS OF INFLATION Inflation increased during fiscal year 1994 as the overall economic conditions improved in the Company's domestic and foreign markets. However, the current level of inflation is moderate in comparison to prior historical levels and has not had a material impact on the Company's operating results in recent years. Prices and volumes for the Company's products are more closely related to supply and demand factors in specific markets than by inflationary factors. FUTURE OUTLOOK The Company finds itself well positioned to capitalize upon the favorable economic and market conditions that exist as we enter into 1995. Economic conditions in the United States, Europe and Asia are all showing improvement from prior years. The Company anticipates increased average selling prices in 1995 due to expected price increases along with increased demand for its major products. Recent capital expenditures coupled with ongoing Company-wide cost reduction programs will enhance manufacturing and distribution efficiencies and reduce production costs which will further benefit the Company in 1995. The absence of significant new capacity for any of the Company's product lines should ensure strong demand for the Company's products. The combination of improved average selling prices, increased demand and improved operating efficiencies in 1995 should result in improved operating results for the Company compared to recent years. Federal Paper Board Company, Inc. 1994 Annual Report Page 23 11 Federal Paper Board Company, Inc. INDUSTRY SEGMENT INFORMATION
------------------------------------------------------------------------------------------- Net Sales to Unaffiliated Intersegment Total In thousands Customers Sales Sales ------------------------------------------------------------------------------------------- FOR FISCAL YEAR 1994 Paper, Paperboard and Pulp $ 971,968 $ 98,993 $1,070,961 Wood Products 251,479 16,422 267,901 Converting Operations 346,130 -- 346,130 ------------------------------------------------------------------------------------------- Total segment operations 1,569,577 115,415 1,684,992 Intersegment eliminations -- (115,415) (115,415) General corporate items - net -- -- -- ------------------------------------------------------------------------------------------- Consolidated total $1,569,577 $ -- $1,569,577 ------------------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------------------
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; Wharfedale, England and Wilmington, NC. Net sales to unaffiliated customers are as follows:
------------------------------------------------------------------------------------------- In thousands 1994 1993 1992 ------------------------------------------------------------------------------------------- Paper $148,766 $113,263 $109,601 Paperboard 641,829 605,632 644,844 Pulp 181,373 124,880 201,533 -------------------------------------------------------------------------------------------
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 or market prices from the lumber plants and woodlands to the Paperboard and Pulp Operations. Federal Paper Board Company, Inc. 1994 Annual Report Page 24 12 Federal Paper Board Company, Inc.
------------------------------------------------------------------------------------------- Income Before Taxes Depreciation, and Cumulative Effect Identifiable Amortization and Cost Capital of Accounting Change Assets of Timber Harvested Expenditures ------------------------------------------------------------------------------------------- $157,264 $1,850,112 $110,167 $ 99,549 69,892 300,590 13,094 10,813 7,197 335,823 19,290 24,124 ------------------------------------------------------------------------------------------- 234,353 2,486,525 142,551 134,486 (796) -- -- -- (132,657) 123,124 3,895 4,572 ------------------------------------------------------------------------------------------- $100,900 $2,609,649 $146,446 $139,058 ------------------------------------------------------------------------------------------- $ 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 -------------------------------------------------------------------------------------------
Identifiable assets by segment are principally those assets which are used in the Company's operations in each industry. Corporate assets primarily include cash, prepaid items, non-trade receivables, 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 1994 1993 1992 ----------------------------------------------------------- North America $ 23,832 $ 16,033 $ 14,727 Europe 54,762 43,324 91,794 Asia 112,614 67,377 96,338 Other 5,083 5,278 6,980 ----------------------------------------------------------- Total $ 196,291 $ 132,012 $ 209,839 -----------------------------------------------------------
Federal Paper Board Company, Inc. 1994 Annual Report Page 25 13 Federal Paper Board Company, Inc. CONSOLIDATED STATEMENT OF INCOME
-------------------------------------------------------------------------------------------------------------------------------- In thousands except per share amounts For Fiscal Year 1994 1993 1992 -------------------------------------------------------------------------------------------------------------------------------- NET SALES $1,569,577 $1,386,386 $1,460,819 -------------------------------------------------------------------------------------------------------------------------------- COSTS AND EXPENSES: Cost of products sold 1,143,382 1,038,785 1,034,854 Depreciation, amortization and cost of timber harvested 146,446 144,087 146,566 Selling and administrative expenses 74,187 60,149 64,769 Interest expense 88,281 84,509 85,018 Other - net 16,381 32,556 (6,088) -------------------------------------------------------------------------------------------------------------------------------- TOTAL COSTS AND EXPENSES 1,468,677 1,360,086 1,325,119 -------------------------------------------------------------------------------------------------------------------------------- Income before taxes and cumulative effect of accounting change 100,900 26,300 135,700 Provision for income taxes 28,900 19,900 53,100 -------------------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of accounting change 72,000 6,400 82,600 Cumulative effect of accounting change -- -- 9,000 -------------------------------------------------------------------------------------------------------------------------------- NET INCOME 72,000 6,400 91,600 Preferred dividend requirements 6,519 6,610 7,060 -------------------------------------------------------------------------------------------------------------------------------- Net income (loss) available to common shares $ 65,481 $ (210) $ 84,540 -------------------------------------------------------------------------------------------------------------------------------- Average number of common shares outstanding: Assuming no dilution 42,296 41,995 41,448 Assuming full dilution 43,178 41,995 46,695 -------------------------------------------------------------------------------------------------------------------------------- EARNINGS (LOSS) PER COMMON SHARE -------------------------------------------------------------------------------------------------------------------------------- Assuming no dilution: Income (loss) before cumulative effect of accounting change $1.55 $(.01) $1.82 Cumulative effect of accounting change -- -- .22 -------------------------------------------------------------------------------------------------------------------------------- Net Income (Loss) $1.55 $(.01) $2.04 -------------------------------------------------------------------------------------------------------------------------------- Assuming full dilution: Income (loss) before cumulative effect of accounting change $1.52 $(.01) $1.77 Cumulative effect of accounting change -- -- .19 -------------------------------------------------------------------------------------------------------------------------------- Net Income (Loss) $1.52 $(.01) $1.96 --------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. Federal Paper Board Company, Inc. 1994 Annual Report Page 26 14 Federal Paper Board Company, Inc. CONSOLIDATED STATEMENT OF CASH FLOWS
--------------------------------------------------------------------------------------------------------------------------------- In thousands For Fiscal Year 1994 1993 1992 --------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATIONS: Net income $ 72,000 $ 6,400 $ 91,600 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 146,446 144,087 146,566 Deferred income tax provision 8,644 13,076 26,857 Net loss (gain) on financial instrument transactions 3,524 31,854 (5,258) Net loss on disposal of property, plant and equipment and timber 6,548 401 4,778 Net proceeds for hedged financial instrument transactions 10,710 1,307 -- Other - net (7,755) (11,543) (10,371) Changes in current assets and liabilities, net of effects from acquisitions: Accounts and notes receivable (20,373) 36,271 (4,762) Inventories (7,131) (21,651) (21,488) Other current assets (15,170) 12,464 (794) Accounts payable and other current liabilities 42,135 19,619 5,718 --------------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATIONS 239,578 232,285 223,846 --------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (139,058) (161,238) (149,130) Net (payments) proceeds for nonhedged financial instrument transactions (19,183) (5,697) 5,258 Proceeds received on settlement of note receivable -- 10,000 -- Other (1,225) (152) (5,988) --------------------------------------------------------------------------------------------------------------------------------- NET CASH USED FOR INVESTING ACTIVITIES (159,466) (157,087) (149,860) --------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends paid (48,750) (48,591) (48,414) Increase in long-term debt 27,518 1,909 209,966 Payments on long-term debt (61,883) (34,348) (239,896) Issuance of equity capital 4,180 3,593 5,845 Change in short-term bank debt (1,155) 2,230 (1,724) --------------------------------------------------------------------------------------------------------------------------------- NET CASH USED FOR FINANCING ACTIVITIES (80,090) (75,207) (74,223) --------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH: 22 (9) (237) Cash: Beginning of year 271 280 517 End of year $ 293 $ 271 $ 280 --------------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL CASH FLOW DISCLOSURE: Cash paid during the year for: Interest (net of amount capitalized) $ 76,892 $ 84,948 $ 78,864 Income taxes 9,844 7,171 26,885 ---------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. Federal Paper Board Company, Inc. 1994 Annual Report Page 27 15 Federal Paper Board Company, Inc. CONSOLIDATED BALANCE SHEET
------------------------------------------------------------------------------------------------------------------------------------ In thousands At Year End 1994 1993 ------------------------------------------------------------------------------------------------------------------------------------ ASSETS CURRENT ASSETS: Cash $ 293 $ 271 Accounts and notes receivable, less allowance for doubtful accounts of $1,518 in 1994 and $1,284 in 1993 73,856 52,062 Inventories: Raw materials 74,489 58,720 Work in process 18,365 15,469 Finished goods 90,316 99,329 Supplies 52,533 51,701 ------------------------------------------------------------------------------------------------------------------------------------ Subtotal 235,703 225,219 LIFO reserve (5,156) (2,819) ------------------------------------------------------------------------------------------------------------------------------------ Total inventories 230,547 222,400 Deferred tax asset 24,661 15,142 Other current assets 27,884 17,250 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL CURRENT ASSETS 357,241 307,125 ------------------------------------------------------------------------------------------------------------------------------------ PROPERTY, PLANT AND EQUIPMENT, AT COST: Land 18,128 16,227 Buildings, including leasehold improvements 285,957 238,859 Machinery and equipment 2,434,729 2,259,622 Construction in progress 55,902 151,715 ------------------------------------------------------------------------------------------------------------------------------------ Subtotal 2,794,716 2,666,423 Accumulated depreciation and amortization (897,077) (769,869) ------------------------------------------------------------------------------------------------------------------------------------ PROPERTY, PLANT AND EQUIPMENT - NET 1,897,639 1,896,554 ------------------------------------------------------------------------------------------------------------------------------------ TIMBER AND TIMBERLANDS 188,896 189,674 GOODWILL AND OTHER INTANGIBLES 114,812 118,418 OTHER ASSETS 51,061 50,132 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $2,609,649 $2,561,903 ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. Federal Paper Board Company, Inc. 1994 Annual Report Page 28 16 Federal Paper Board Company, Inc.
------------------------------------------------------------------------------------------------------------------------------------ 1994 1993 ------------------------------------------------------------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 100,796 $ 90,356 Current portion of long-term debt 74,544 56,148 Short-term bank debt 24,242 25,304 Dividends payable 12,788 10,554 Accrued compensation 33,874 24,867 Accrued interest 19,443 18,885 Other current liabilities 72,068 48,029 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL CURRENT LIABILITIES 337,755 274,143 ------------------------------------------------------------------------------------------------------------------------------------ LONG-TERM DEBT 921,227 973,825 OTHER LIABILITIES 78,832 78,872 DEFERRED TAX LIABILITY 353,643 342,757 SHAREHOLDERS' EQUITY: Preferred stock - $1.20 cumulative convertible, $1 par value (aggregate liquidation value at December 31, 1994 - $1,045); authorized 1,900 shares; issued: 1994 - 52 shares; 1993 - 58 shares 52 58 Preferred stock - Class A Second Series, $2.875 cumulative convertible, $1 par value (aggregate liquidation value at December 31, 1994 - $107,876); authorized 10,000 shares; issued: 1994 - 2,158 shares; 1993 - 2,274 shares 2,158 2,274 Common Stock - $5 par value; authorized 240,000 shares; issued: 1994 - 42,619 shares; 1993 - 42,356 shares 213,094 211,779 Other capital 250,183 249,800 Retained earnings 453,977 432,961 Treasury stock - at cost: Common stock - 1994 - 46 shares; 1993 - 209 shares (1,272) (4,566) ------------------------------------------------------------------------------------------------------------------------------------ TOTAL SHAREHOLDERS' EQUITY 918,192 892,306 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,609,649 $2,561,903 ------------------------------------------------------------------------------------------------------------------------------------
Federal Paper Board Company, Inc. 1994 Annual Report Page 29 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 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 $ 2,332 42,356 $ 211,779 $ 249,800 $ 432,961 209 $(4,566) Net income 72,000 Dividends declared: Preferred stocks (6,519) Common stock (44,465) Stock options exercised 23 118 768 (163) 3,294 Conversion of preferred stock (122,256 shares) (122) 240 1,197 (1,075) Cumulative foreign translation adjustment 6,775 Minimum pension liability adjustment (6,085) ------------------------------------------------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1994 $ 2,210 42,619 $ 213,094 $ 250,183 $ 453,977 46 $(1,272) -------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. Federal Paper Board Company, Inc. 1994 Annual Report Page 30 18 Federal Paper Board Company, Inc. NOTES TO FINANCIAL STATEMENTS 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 1992, the Company began a program to evaluate the estimated useful lives assigned to certain productive assets. As a result of this program, the Company changed the estimated useful lives used to calculate depreciation for certain productive assets. These changes were made to properly reflect the expected use of these assets. The effect on income before taxes was an increase of $1.5 million, $4.1 million and $2.4 million in 1994, 1993 and 1992, respectively. The effect on income after taxes was an increase of $.9 million, $2.5 million and $1.4 million or $.02, $.06 and $.03 per fully diluted common share in 1994, 1993 and 1992, respectively. 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 $6.7 million in 1994, $6.1 million in 1993 and $11.3 million in 1992. Goodwill, Intangibles and Other Assets Goodwill, the excess of the purchase price over the fair value of the net assets of acquired companies 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 $23.6 million and $20.5 million at year end 1994 and 1993, respectively. The Company incurs certain incremental and nonrecurring 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 $12.4 million and $17.1 million at year end 1994 and 1993, 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 utilizes hedged and nonhedged interest rate swap agreements and foreign currency contracts. Hedged financial instruments are accounted for based on settlement accounting. Interest rate swap agreements which hedge the Company's debt 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, on a semi-annual basis, is accrued as interest rates change and is recognized over the life of the agreement as an adjustment to interest expense. Gains and losses associated with hedged transactions are deferred and included as a component of the related commitment, while cash payments or proceeds are included as operating cash flows. Deferred gains and losses are amortized over the life of the related agreements. Nonhedged financial instruments are recorded at market value and are included in Current Liabilities and Other Liabilities. The market value of interest rate swap agreements and foreign currency option contracts are obtained from dealer quotes. Gains and losses associated with nonhedged transactions are recorded as a component of Other-net, while cash payments or proceeds associated with these transactions are classified as investing activities. Income Taxes Income taxes are accounted for under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Under Statement 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 Statement No. 109, the Company adjusted the carrying amounts of previous acquisitions accounted for using the purchase method of accounting. 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 were not included in the computation since any dilutive effect was not material. Federal Paper Board Company, Inc. 1994 Annual Report Page 31 19 Federal Paper Board Company, Inc. 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, if any, of stock options outstanding and the conversion of the Company's preferred stocks. 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 balance included in other capital was a decrease of $11.8 million and $18.6 million at December 31, 1994 and January 1, 1994, respectively. Revenue Recognition The Company generally recognizes revenues when goods are shipped. Reclassifications and Restatement Certain amounts in prior year financial statements have been reclassified to conform with the current year presentation. The accompanying consolidated financial statements for fiscal year 1993 were previously restated to account for certain interest rate swap agreements at market value. NOTE 2 FINANCIAL INSTRUMENTS Derivative Financial Instruments The Company utilizes a variety of derivative financial instruments to limit its exposure to foreign currency fluctuations and changing interest rates but does not hold or issue such financial instruments for trading purposes. The Company has entered into a variety of interest rate swap agreements to manage the impact of interest rate fluctuations. At December 31, 1994 and January 1, 1994, the Company was a party to both hedged and nonhedged interest rate swap agreements. Under the hedged interest rate swap agreements, the Company exchanges fixed rate payments for variable rate payments periodically over the life of the agreements. The Company deferred gains and losses related to various hedged interest rate swap agreements since the underlying debt was outstanding. At December 31, 1994 and January 1, 1994, the Company had deferred net losses of $.3 million and $2.0 million, respectively and deferred net gains of $9.2 million and $.7 million, respectively. At December 31, 1994 and 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 of 7.9% and 7.1%, respectively. The variable rate is based on the London Inter Bank Offered Rate (LIBOR) plus a predetermined spread. The predetermined spread increased from 3.22% to 5.14%. The agreements terminate on various dates through July 1, 1998. The Company's exposure related to these interest rate swap agreements is limited to fluctuations in LIBOR, however LIBOR has been set through January 1, 1996. The estimated fair value of these agreements at December 31, 1994 and January 1, 1994 was a loss of $19.9 million and $3.2 million, respectively. The Company had nonhedged interest rate swap agreements outstanding at December 31, 1994 and January 1, 1994. One nonhedged interest rate swap agreement outstanding at December 31, 1994 and January 1, 1994 is based on a notional amount of $175 million. The terms of the agreement become effective on July 1, 1995 and terminate on July 1, 1998. In this agreement, the Company will receive LIBOR and will pay LIBOR in arrears plus 1.72% plus a leveraged coupon rate based on various interest rate spreads. At December 31, 1994 and January 1, 1994, the estimated fair value of this agreement was a loss of $10.5 million and $20.6 million, respectively, which has been recorded in the accompanying Consolidated Financial Statements. At January 1, 1994, the Company had two other nonhedged interest rate swap agreements outstanding which were both terminated during fiscal year 1994 resulting in losses of $10.5 million included in the accompanying Consolidated Statement of Income. One agreement was based on a notional amount of $25 million in which the Company received a fixed rate of 10% and paid LIBOR plus 4.228% plus a leveraged coupon rate based on various interest rate spreads. The other agreement was based on a notional amount of $50 million in which the Company received a fixed rate of 10% and paid LIBOR plus 4.4% plus a leveraged coupon rate based on various interest rate spreads. The estimated fair value of these two agreements outstanding at January 1, 1994 was a loss of $3.8 million and a gain of $.3 million, respectively. The Company is exposed to credit loss in the event of nonperformance by the counterparty to its interest rate swap agreements. The risk of loss to the Company in the event of nonperformance by the counterparty under these agreements is not significant. The Company does not anticipate nonperformance by the counterparty. The Company entered into nonhedged foreign currency option contracts. Since most of the Company's export sales are sold in U.S. dollars, a rise in the value of the dollar could have adversely effected sales prices and volumes. Therefore, strategic hedges were put into place to provide the Company with currency gains to offset reduced profits resulting from the rising U.S. dollar. This strategic hedge program was global in nature and was not intended to hedge firm commitments. At December 31, 1994 the Company was not party to any nonhedged foreign currency option contracts. During fiscal year 1993, the Company sold certain foreign exchange contracts. The sold nonhedged contracts outstanding at January 1, 1994 were foreign currency call option contracts with a notional amount of 15.0 million British pounds and foreign currency put option contracts with notional amounts of 15.0 million U.S. dollars, 5.0 million British pounds and 8.5 Federal Paper Board Company, Inc. 1994 Annual Report Page 32 20 Federal Paper Board Company, Inc. million German marks. During fiscal year 1993, the Company also held certain purchased foreign currency option contracts. The purchased nonhedged contracts outstanding at January 1, 1994 were foreign currency call option contracts with notional amounts of 5.0 million U.S. dollars and 5.0 million British pounds, and foreign currency put option contracts with notional amounts of 25.0 million U.S. dollars and 5.0 million British pounds. In addition, at January 1, 1994 the Company had nonhedged forward foreign exchange contracts outstanding with notional amounts of 5.0 million U.S. dollars. The estimated fair value of nonhedged foreign currency contracts outstanding at January 1, 1994 was not material. In some instances, the Company also enters into foreign currency contracts to hedge a specific export sale or purchase to guard against currency losses. Since these contracts hedge a firm commitment, gains and losses are deferred and included as a component of the related transaction. There were no significant hedged foreign currency instruments outstanding at December 31, 1994 or January 1, 1994 and the effect on net income was not material for these activities in either year. Fair Value of Other Financial Instruments The estimated fair value of the Company's other financial instruments which are not held for trading purposes at December 31, 1994 and January 1, 1994 were as follows:
---------------------------------------------------------------------------------------------------------- 1994 1993 ---------------------------------------------------------------------------------------------------------- Carrying Estimated Carrying Estimated In thousands Amount Fair Value Amount Fair Value ---------------------------------------------------------------------------------------------------------- Accounts and notes receivable $ 73,856 $ 73,856 $ 52,062 $ 52,062 Note receivable non-current 2,413 2,413 2,418 2,418 Long-term debt 995,771 1,031,518 1,029,973 1,181,193 ----------------------------------------------------------------------------------------------------------
The estimated fair value amounts have been determined by the Company, using available market information and appropriate valuation methodologies as of December 31, 1994 and January 1, 1994. 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 instruments for which it is practicable to estimate the value. Accounts and notes receivable: The carrying amounts of these items are a reasonable estimate of fair value. Note receivable non-current: The estimated fair value of the Company's note receivable 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 quoted market prices for the same or similar issues or on the current rates offered to the Company for debt with similar remaining maturities. NOTE 3 LONG-TERM DEBT
------------------------------------------------------------------------------------------ In thousands 1994 1993 ------------------------------------------------------------------------------------------ Revolving credit agreements, variable interest rates $ 33,750 $ 50,000 Notes: 9.06% - 10.5% Senior notes, due 1993 - 2009 450,000 475,000 4.9% - 6.61% Bank notes, due 1994 - 1996 45,000 45,000 Other 55,000 45,000 8.125% - 10% Debentures, due 2002-2012 375,000 375,000 Industrial revenue bonds, due 2000-2012 29,941 29,870 Capitalized lease obligations 1,680 2,118 Other 5,400 7,985 ------------------------------------------------------------------------------------------ Total 995,771 1,029,973 Current portion (74,544) (56,148) ------------------------------------------------------------------------------------------ Total long-term debt $ 921,227 $ 973,825 ------------------------------------------------------------------------------------------
The aggregate maturities of long-term debt for the five years subsequent to December 31, 1994 are as follows: 1995 - $74,544; 1996 - $25,775; 1997 - $33,157; 1998 - $27,631; 1999 - $113,854. The Company has a revolving credit agreement with a syndicate of banks. The agreement provides for borrowings of up to $250 million and expires in 1999. The agreement requires the payment of a facility fee on the total commitment and a commitment fee based on the unused portion of the line of credit. This agreement became effective in the fourth quarter of 1994 and replaced the Company's $75 million and $225 million revolving credit agreements. The revolving credit agreement provides for borrowing at variable interest rates based on the prime rate or, at the Company's option, on 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 1994 and 1993 was 4.9% and 3.9%, respectively. The Company classified $55 million and $45 million of other notes as long-term debt at December 31, 1994 and January 1, 1994, respectively. The Company has the intent and ability under the revolving credit agreement to renew or convert these obligations through 1999. The industrial revenue bonds had a weighted average interest rate of 4.3% and 4.8% in 1994 and 1993, respectively. The short-term bank debt outstanding at December 31, 1994 and January 1,1994 had a weighted average interest rate of 6.3% and 3.5%, respectively. Federal Paper Board Company, Inc. 1994 Annual Report Page 33 21 Federal Paper Board Company, Inc. Certain loan agreements contain various restrictive covenants, including restrictions on the amount of net earnings available for dividends, the purchase of Company stock and certain cash flow coverage requirements. Unrestricted retained earnings under the most restrictive provision amounted to $135.3 million at December 31, 1994. NOTE 4 LEASES & OTHER COMMITMENTS Leases The Company leases certain buildings, machinery and equipment under various operating leases. Rental expense for operating leases was $21.5 million, $19.3 million and $20.9 million in 1994, 1993, and 1992, respectively. Minimum lease payments for operating leases existing as of December 31, 1994 are as follows: $9.7 million in 1995; $5.9 million in 1996; $3.8 million in 1997; $2.6 million in 1998; $2.2 million in 1999 and $8.2 million in years after 1999. 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 December 31, 1994 and January 1, 1994, were $7.0 million and $4.7 million, respectively, which in the opinion of management are sufficient to cover probable and estimable environmental costs. NOTE 5 INCOME TAXES The Company adopted Statement 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 fiscal year 1992. As a result of applying Statement No. 109, pre-tax income for the fiscal year ended January 2, 1993 was reduced by $6.3 million representing the effects 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 1994 1993 1992 ---------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE: Domestic $ 87,167 $ 28,128 $ 137,059 Foreign 13,733 (1,828) (1,359) ---------------------------------------------------------------------------------------------------- Income before taxes and cumulative effect of accounting change $ 100,900 $ 26,300 $ 135,700 ---------------------------------------------------------------------------------------------------- PROVISION FOR INCOME TAXES: Current tax expense: Federal $ 19,503 $ 6,310 $ 26,119 State 753 514 124 ---------------------------------------------------------------------------------------------------- Total current provision $ 20,256 $ 6,824 $ 26,243 ---------------------------------------------------------------------------------------------------- Deferred tax expense: Federal $ 9,097 $ 11,890 $ 14,881 State (5,153) 1,786 11,976 Foreign 4,700 (600) -- ---------------------------------------------------------------------------------------------------- Total deferred provision $ 8,644 $ 13,076 $ 26,857 ---------------------------------------------------------------------------------------------------- Total provision for income taxes $ 28,900 $ 19,900 $ 53,100 ----------------------------------------------------------------------------------------------------
The provision for income taxes differs from amounts computed by applying the statutory federal income tax rate of 35% for fiscal years 1994 and 1993 and 34% for fiscal year 1992 to income before taxes and cumulative effect of accounting change due to the following:
---------------------------------------------------------------------------------------------------- In thousands 1994 1993 1992 ---------------------------------------------------------------------------------------------------- Federal income taxes at statutory rate $35,315 $ 9,205 $ 46,138 State income taxes less federal income tax effect 3,590 1,517 7,986 Tax rate change (6,000) 9,200 -- Amortization of intangibles 684 696 780 Adjustment of prior years accruals (2,900) (934) (1,498) Other - net (1,789) 216 (306) ---------------------------------------------------------------------------------------------------- Provision for income taxes $28,900 $ 19,900 $ 53,100 Effective tax rate 28.6% 75.7% 39.1% ----------------------------------------------------------------------------------------------------
The tax rate change in fiscal year 1994 represents a change in the Company's overall effective state tax rate due to withdrawal from several states. Fiscal year 1993 represents a change in the federal statutory rate from 34% to 35%. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1994, January 1, 1994 and January 2, 1993 were as follows: Federal Paper Board Company, Inc. 1994 Annual Report Page 34 22 Federal Paper Board Company, Inc.
---------------------------------------------------------------------------------------------------- In thousands 1994 1993 1992 ---------------------------------------------------------------------------------------------------- Alternative minimum tax credit carryforwards $ 79,550 $ 59,802 $ 56,484 Net operating loss carryforwards 20,406 32,842 11,141 Other 49,906 40,558 25,705 ---------------------------------------------------------------------------------------------------- Total deferred tax assets $ 149,862 $ 133,202 $ 93,330 ---------------------------------------------------------------------------------------------------- Property, plant, and equipment $ (411,712) $(387,602) $(344,340) Capitalized interest (40,085) (40,661) (39,471) Other (27,047) (32,554) (20,909) ---------------------------------------------------------------------------------------------------- Total deferred tax liabilities $ (478,844) $(460,817) $(404,720) ----------------------------------------------------------------------------------------------------
The Company has capital loss and net operating loss carryforwards for domestic income tax purposes which are available to offset future taxable income through 1999 and 2009, respectively. At December 31, 1994, the capital loss and net operating loss carryforwards were $11.0 million and $31.7 million, respectively. The Company also has alternative minimum tax credit carryforwards of approximately $79.6 million at December 31, 1994, which are available to reduce future federal regular income taxes over an indefinite period. In addition, the Company acquired net operating loss carryforwards and an advance corporation tax for United Kingdom tax purposes, with no expirations, as a result of an acquisition. Using the exchange rate at December 31, 1994, the net operating loss carryforwards were approximately $22.8 million and the advance corporation tax was $1.2 million. Deferred taxes are not provided on undistributed earnings of foreign subsidiaries, which at December 31, 1994 were $18.9 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. 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 1994 1993 1992 ---------------------------------------------------------------------------------------------------- Service cost $ 6,948 $ 5,690 $ 5,618 Interest cost 19,336 16,915 16,566 Actual return on assets 2,883 (27,904) (11,289) Net amortization and deferral (13,449) 15,594 (70) ---------------------------------------------------------------------------------------------------- Net periodic pension cost $ 15,718 $ 10,295 $ 10,825 ---------------------------------------------------------------------------------------------------- Discount rate 8.5% 7.5% 8.75% Projected increase in future compensation levels 5.0% 5.0% 5.0% Expected long-term return on plan assets 10.5% 10.5% 10.5% ----------------------------------------------------------------------------------------------------
The Company has recorded liabilities that are equal to the unfunded accumulated benefit obligations of its plans in fiscal year 1994 and 1993. This has resulted in recognition of an intangible asset of $16.0 million and a net-of-tax reduction to other capital of $30.1 million as of December 31, 1994. The intangible asset and net-of-tax reduction to other capital as of January 1, 1994 were $14.5 million and $24.1 million, respectively. The following table sets forth the funded status and the amounts reflected in the Company's Consolidated Balance Sheet at December 31, 1994 and January 1, 1994:
---------------------------------------------------------------------------------------------------- In thousands 1994 1993 ---------------------------------------------------------------------------------------------------- Actuarial present value of: Vested benefit obligation $(192,305) $ (182,617) ---------------------------------------------------------------------------------------------------- Accumulated benefit obligation (243,700) (231,011) ---------------------------------------------------------------------------------------------------- Projected benefit obligation (252,235) (241,918) Plan assets at fair value 194,213 190,171 ---------------------------------------------------------------------------------------------------- Projected benefit obligation in excess of plan assets (58,022) (51,747) ---------------------------------------------------------------------------------------------------- Unrecognized net loss 56,072 49,377 Unrecognized prior service costs 13,189 9,567 Unrecognized net initial obligation 4,198 4,962 Adjustment to meet minimum liability (65,649) (54,214) ---------------------------------------------------------------------------------------------------- Pension liabilities $ (50,212) $ (42,055) ----------------------------------------------------------------------------------------------------
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 while others may be 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 Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions". Statement 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. The cost of providing such benefits was not material to the Company's financial position and results of operations. Statement No. 106 allows recognition of the cumulative effect of Federal Paper Board Company, Inc. 1994 Annual Report Page 35 23 Federal Paper Board Company, Inc. the liability in the year of the adoption or the amortization of the obligation over a period of up to twenty years. The Company elected to amortize this obligation of $27.2 million over a period of twenty years. As a result of applying Statement 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 1994 1993 --------------------------------------------------------------------------------- Service cost of benefits earned $ 606 $ 660 Interest cost on accumulated postretirement benefit obligation 2,403 2,686 Amortization of transition obligation 1,247 1,358 --------------------------------------------------------------------------------- Net periodic postretirement benefit cost $4,256 $ 4,704 ---------------------------------------------------------------------------------
The following table sets forth the funded status and the amounts reflected in the Company's Consolidated Balance Sheet at December 31, 1994 and January 1, 1994:
--------------------------------------------------------------------------------- In thousands 1994 1993 --------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $(17,930) $ (19,185) Fully eligible plan participants (829) (1,064) Other active plan participants (13,037) (13,560) --------------------------------------------------------------------------------- Total accumulated postretirement benefit obligation (31,796) (33,809) Unrecognized net (gain) loss (1,806) 966 Unrecognized prior service cost (38) - Unrecognized transition obligation 22,800 24,392 --------------------------------------------------------------------------------- Accrued postretirement benefit cost $(10,840) $ (8,451) ---------------------------------------------------------------------------------
The discount rates used in determining the accumulated postretirement benefit obligation was 8.5% in 1994 and 7.5% in 1993. The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 11% and 13% in 1994 and 1993, respectively, decreasing gradually each successive year until it reaches 6% in 2004, after which it remains constant. If the health care cost trend rates were increased by 1%, the accumulated postretirement benefit obligation as of December 31, 1994 and January 1, 1994 would have increased by 11% for each year. The effect of this change on the aggregate of the service and interest cost components of net periodic postretirement benefit cost for fiscal years 1994 and 1993 would be an increase of 12% for each respective year. 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. During 1994, the Company match was restored to 50%. 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 Effective January 2, 1994, the Company adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits". Statement No. 112 requires the Company to accrue for postemployment benefits provided to former or inactive employees, their beneficiaries and covered dependents after employment but before retirement. The impact of adopting this Statement was not material to the Company's financial position and results of operations. NOTE 7 SHAREHOLDERS' EQUITY Preferred Stocks The Company had two preferred stocks outstanding at December 31, 1994 and January 1, 1994. 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 $50.86 per share which declines gradually each year to $50 per share on or after March 15, 1997. Common Stock Shares of common stock were reserved for the following purposes at December 31, 1994:
----------------------------------------------------------------- 1994 ----------------------------------------------------------------- Conversion of $1.20 convertible preferred stock 262,415 Conversion of $2.875 convertible preferred stock 3,922,785 Exercise of outstanding stock options 3,452,067 Granting of additional stock options 579,700 ----------------------------------------------------------------- Total common shares reserved 8,216,967 -----------------------------------------------------------------
Stock Option Plans The Company has two stock option plans, both of 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. Federal Paper Board Company, Inc. 1994 Annual Report Page 36 24 Federal Paper Board Company, Inc. The Company adopted stock option plans in 1989 and 1992 each of which authorized the granting of 1.5 million shares of common stock. The combined activity of both plans is presented below:
--------------------------------------------------------------------------------- Shares Under Price Range Option Per Share --------------------------------------------------------------------------------- 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 Granted 1,117,100 28.13-28.25 Exercised (188,933) 15.00-24.63 Expired or cancelled (188,675) 15.00-30.25 --------------------------------------------------------------------------------- OUTSTANDING DECEMBER 31, 1994 3,452,067 $15.00-30.25 EXERCISABLE DECEMBER 31, 1994 881,524 $15.00-30.25 ---------------------------------------------------------------------------------
At the Annual Meeting of Shareholders to be held in April 1995, the shareholders will be asked to approve an amendment to the 1992 stock option plan to increase the shares issuable to 3.0 million shares from 1.5 million shares. At December 31, 1994 stock options outstanding include 1.1 million shares which were granted in December 1994, but are contingent upon shareholder approval. NOTE 8 SUPPLEMENTAL FINANCIAL 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 and $105 million in 1994. The amount outstanding at any measurement date varies based upon the level of eligible receivables. Under this agreement, $105 million and $88 million were sold at December 31, 1994 and January 1, 1994, respectively. The sale is reflected as a reduction 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 $4.1 million in 1994, $2.8 million in 1993 and $3.4 million in 1992 are based upon the Company's debt ratings and the purchaser's 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 packaging 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 64% of total inventories at December 31, 1994 and 69% of total inventories at January 1, 1994. 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 1994, 1993 and 1992 were $1.0 million or $.02 lower, $1.7 million or $.04 higher and $.4 million or $.01 higher, respectively. Other-Net The components of Other - net included in the Consolidated Statement of Income were (income) or expense as presented below:
---------------------------------------------------------------------------------------------------- In thousands 1994 1993 1992 ---------------------------------------------------------------------------------------------------- Net loss on disposal of property, plant and equipment and timber $ 6,548 $ 401 $ 4,778 Interest income (381) (1,141) (2,455) Financial Instruments: Foreign currency options 18,225 7,220 (2,738) Interest rate swaps (2,701) 24,634 (2,520) Release from obligation (12,000) -- -- Other 6,690 1,442 (3,153) ---------------------------------------------------------------------------------------------------- Total $ 16,381 $ 32,556 $(6,088) ----------------------------------------------------------------------------------------------------
In fiscal year 1994, the Company was released from its obligation on two foreign currency forward contracts as part of a settlement with an outside party. NOTE 9 INDUSTRY SEGMENT INFORMATION Information about the Company's operations in different industry segments for fiscal years 1994, 1993, and 1992 is included on pages 24 and 25 of this Annual Report. NOTE 10 FINANCIAL RESULTS BY QUARTER (UNAUDITED) Selected quarterly financial information for the fiscal years 1994 and 1993 is included on page 39 of this Annual Report. Federal Paper Board Company, Inc. 1994 Annual Report Page 37 25 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 December 31, 1994 and January 1, 1994, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three fiscal years in the period ended December 31, 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 December 31, 1994 and January 1, 1994, and the results of their operations and their cash flows for each of the three fiscal years in the period ended December 31, 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. /s/ DELOITTE & TOUCHE LLP ------------------------- Parsippany, New Jersey February 3, 1995 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 LLP 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 Committee 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 /s/ ROGER L. SANDERS, II ------------------------- ------------------------ Quentin J. Kennedy Roger L. Sanders, II Executive Vice President, Controller Secretary and Treasurer Federal Paper Board Company, Inc. 1994 Annual Report Page 38 26 Federal Paper Board Company, Inc. FINANCIAL RESULTS BY QUARTER (unaudited)
-------------------------------------------------------------------------------------------------------------------------------- In thousands except per share amounts Quarter (A) 1st 2nd 3rd 4th Year (B) -------------------------------------------------------------------------------------------------------------------------------- 1994 Net Sales $319,454 $347,976 $373,871 $528,276 $1,569,577 Gross Profit 40,046 54,653 67,342 117,708 279,749 Net Income (Loss) (C) (3,300) 12,000 15,200 48,100 72,000 -------------------------------------------------------------------------------------------------------------------------------- Earnings (Loss) Per Common Share: Assuming No Dilution $(.11) $.25 $.32 $1.09 $1.55 Assuming Full Dilution (E) (.11) .25 .32 1.02 1.52 -------------------------------------------------------------------------------------------------------------------------------- Dividends Declared per Share: Common Stock $.25 $.25 $.25 $.30 $1.05 $1.20 Cumulative Convertible Preferred Stock .30 .30 .30 .30 1.20 $2.875 Cumulative Convertible Preferred Stock .72 .72 .72 .72 2.88 -------------------------------------------------------------------------------------------------------------------------------- Price Range of Common Stock (F) High $27.25 $24.00 $31.25 $31.50 $31.50 Low 21.75 20.50 22.63 25.88 20.50 -------------------------------------------------------------------------------------------------------------------------------- 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) (D) 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 (E) .18 (.16) (.21) .18 (.01) -------------------------------------------------------------------------------------------------------------------------------- Dividends Declared per Share: Common Stock $.25 $.25 $.25 $.25 $1.00 $1.20 Cumulative Convertible Preferred Stock .30 .30 .30 .30 1.20 $2.875 Cumulative Convertible Preferred Stock .72 .72 .72 .72 2.88 -------------------------------------------------------------------------------------------------------------------------------- Price Range of Common Stock (F) High $27.63 $25.63 $23.50 $23.38 $27.63 Low 23.13 21.88 21.63 19.50 19.50 --------------------------------------------------------------------------------------------------------------------------------
(A) All quarters are comprised of 12 week periods except the fourth quarter which is comprised of 16 weeks. (B) May not total due to individual quarterly calculations. (C) The first quarter of 1994 includes an after-tax charge of $6.4 million or $.15 per fully diluted common share for financial instrument transactions. The second quarter of 1994 includes an after-tax charge of $3.1 million or $.07 per fully diluted common share for financial instrument transactions and a favorable adjustment of $3.2 million or $.07 per fully diluted common share associated with the settlement of prior year tax audits. The third quarter of 1994 includes an after-tax charge of $2.3 million or $.05 per fully diluted common share for financial instrument transactions. The fourth quarter of 1994 includes after-tax gains of $10.0 million or $.21 per fully diluted common share associated with financial instrument transactions including the release from certain financial instrument obligations and $6.0 million for the cumulative recalculation of the deferred tax liability due to a change in the Company's overall effective state tax rate. (D) 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 recalculation of the deferred tax liability reflecting the increase in the federal statutory tax rate. (E) 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 and conversion of the Company's preferred stocks. (F) 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 stock, also traded on the New York Stock Exchange, is not presented since they are preferred stock issues. At December 31, 1994 there were 5,400 holders of common stock and 902 holders of convertible preferred stocks. Federal Paper Board Company, Inc. 1994 Annual Report Page 39 27 Federal Paper Board Company, Inc. SELECTED FINANCIAL DATA
----------------------------------------------------------------------------------------------------------------------- In millions except per share amounts For Fiscal Year (A) 1994 1993 1992 1991 1990 ----------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS Net Sales $1,569.6 $1,386.4 $1,460.8 $1,435.0 $1,374.1 Income before Taxes and Cumulative Effect of Accounting Change 100.9 26.3 135.7 144.2 202.2 Income before Cumulative Effect of Accounting Change 72.0 6.4 82.6 82.4 118.2 Cumulative Effect of Accounting Change -- -- 9.0 -- -- ------------------------------------------------------------------------------------------------------------------------ Net Income 72.0 6.4 91.6 82.4 118.2 ------------------------------------------------------------------------------------------------------------------------ Earnings (Loss) per Common Share: Assuming No Dilution: Income (Loss) before Cumulative Effect of Accounting Change 1.55 (.01) 1.82 1.83 2.74 Cumulative Effect of Accounting Change -- -- .22 -- -- ------------------------------------------------------------------------------------------------------------------------ Net Income (Loss) 1.55 (.01) 2.04 1.83 2.74 ------------------------------------------------------------------------------------------------------------------------ Assuming Full Dilution: Income (Loss) before Cumulative Effect of Accounting Change 1.52 (.01) 1.77 1.77 2.58 Cumulative Effect of Accounting Change -- -- .19 -- -- ------------------------------------------------------------------------------------------------------------------------ Net Income (Loss) 1.52 (.01) 1.96 1.77 2.58 ------------------------------------------------------------------------------------------------------------------------ FINANCIAL RATIOS Total Debt as a Percentage of Total Capitalization 52.6% 54.2% 53.5% 54.8% 56.1% Return on Shareholders' Equity 8.0% 0.7% 9.8% 9.1% 13.9% ------------------------------------------------------------------------------------------------------------------------ FINANCIAL POSITION Property, Plant and Equipment - Net $1,897.6 $1,896.6 $1,878.4 $1,828.8 $1,756.5 Timber and Timberlands 188.9 189.7 191.8 188.0 183.2 Total Assets 2,609.6 2,561.9 2,573.5 2,492.7 2,447.8 Long-Term Debt 921.2 973.8 1,029.9 1,076.9 1,092.4 Deferred Tax Liability 353.6 342.8 322.4 237.5 208.0 Shareholders' Equity 918.2 892.3 940.4 921.2 882.9 ------------------------------------------------------------------------------------------------------------------------ ADDITIONAL DATA Capital Expenditures $ 139.1 $ 161.2 $ 149.1 $ 227.4 $ 509.3 Depreciation, Amortization and Cost of Timber Harvested 146.4 144.1 146.6 122.7 88.4 Dividends Declared per Common Share 1.05 1.00 1.00 1.00 1.00 Book Value per Share - Assuming No Dilution 19.01 18.45 19.68 19.17 18.46 Book Value per Share - Assuming Full Dilution 19.37 19.11 20.11 19.79 19.26 ------------------------------------------------------------------------------------------------------------------------ Common Shares Outstanding at Year-End (in thousands) 42,573 42,147 41,952 40,675 40,164 ------------------------------------------------------------------------------------------------------------------------
(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. Federal Paper Board Company, Inc. 1994 Annual Report Page 40 28 EXHIBIT 13 (Continued) Edgar Appendix Federal Paper Board Company, Inc. Graphic an Image Material Index 1. Illustration 1 on page six of this Annual Report depicts an employee of the Company making a statement about 1994 operations. This employee is quoted as saying, "In 1994, Riegelwood operations turned adversity into advantage: Low pulp prices led to cost-cutting efforts that improved productivity without sacrificing quality, safety or customer service. Key milestones included a $190 million modernization, achieving the British Standards Institutes elite "ISO" registration, and record daily production." John Cowand, Jr. Manager of Manufacturing Services - Riegelwood, NC. 2. The Paperboard Chart 1 on page six of this Annual Report shows paperboard accounting for 41% of sales in 1994. 3. Photo 1 on page seven of this Annual Report shows an employee standing on the pulp dryer at the Riegelwood, NC mill. The caption under the picture reads as follows: The Riegelwood mill produced 327,000 tons of bleached paperboard and 540,000 tons of market pulp...for a total mill production of 867,000 tons in 1994. 4. Illustration 2 on page eight of this Annual Report depicts an employee of the Company making a statement about 1994 operations. This employee is quoted as saying, " Customers have begun to recognize our quality leadership, which we achieved while setting new production records. Our new manufacturing and quality assurance technology not only results in superior bleached board with a better printing surface, it also cuts fiber loss, an economic and environmental plus." Curtis Sears, Paper Mill Superintendent - Augusta, GA. 5. The Pulp Chart 2 on page eight of this Annual Report shows pulp accounting for 12% of sales in 1994. 6. Photo 2 on page nine of this Annual Report shows an employee standing near a paperboard machine at the Augusta, GA mill. The caption under the picture reads as follows: With the completion of its latest expansion, the Augusta, GA bleached paperboard mill will have the capacity to produce 600,000 tons of prime paperboard annually. 7. Illustration 3 on page ten of this Annual Report depicts an employee of the Company making a statement about 1994 operations. This employee is quoted as saying, "The improved UK economy strengthened our markets close to home. Productivity gains set new production records. We also updated our warehouse and distribution system, and achieved 20 percent overall improvement in labor efficiency while building customer satisfaction." Rhoda Littlejohn, Marketing Executive - Inverurie, Scotland. 8. The Paper Chart 3 on page ten of this Annual Report shows paper accounting for 9% of sales in 1994. 9. Photo 3 on page eleven of this Annual Report shows an employee standing between rolls of paper at the Inverurie, Scotland mill. The caption under the picture reads as follows: The Federal-Tait mill in Inverurie, Scotland produces uncoated free-sheet paper for various markets in the United Kingdom and the European continent. It has the capacity to produce 220,000 tons of paper annually. The Sprague, CT recycled paperboard mill has the capacity to produce 200,000 tons of recycled paperboard annually. 10. Illustration 4 on page twelve of this Annual Report depicts an employee of the Company making a statement about 1994 operations. This employee is quoted as saying, " Our $10 million investment in state-of-the-art production equipment boosted yields and enhanced product quality while making us one of the low-cost producers in the solid wood industry. Customer satisfaction reached an all-time high." Janice Larkins, Office Manager - Wood Products. 11. The Wood Products Chart 4 on page twelve of this Annual Report shows wood products accounting for 16% of sales in 1994. 12. Photo 4 on page thirteen of this Annual Report shows an employee standing near dimensional lumber at one of the Company's lumber plants. The caption under the picture reads as follows: Federal owns and operates five lumber plants in the U.S. These state-of-the-art plants produced 618,245,000 board feet of lumber in 1994. 13. Illustration 5 on page fourteen of this Annual Report depicts an employee of the Company making a statement about 1994 operations. This employee is quoted as saying, " Our new 500,000 sq. ft. distribution facility in Shelbyville, IL. will reduce operating costs while improving customer service. Investments in new tooling for larger cups, and in technology to ensure quality and reliability are direct responses to market needs." Thomas F. Grady, Jr., Vice President, Sales - Imperial Bondware Corp. 29 EXHIBIT 13 (Continued) 14. The Converting Operations Chart 5 on page fourteen of this Annual Report shows converting operations accounting for 22% of sales in 1994. 15. Photo 5 on page fifteen of this Annual Report shows an employee standing near printed rolls of paperboard at one of the Company's cup plants. The caption under the picture reads as follows: Imperial Bondware is an industry leader in the production of paper cups and tubs for the foodservice and theatre industries. 1994 production equaled 8,750,000 thousand cups. 16. Illustration 6 on page sixteen of this Annual Report depicts an employee of the Company making a statement about 1994 operations. This employee is quoted as saying, " In a difficult year, we finished ahead of 1993 by meeting customer needs. We broadened our product range, while we cut costs, boosted morale and improved quality. Following a rigorous audit, our Durham plant's largest customer quality-certified us - a status of which we are justly proud." John E. Abodeely, Vice President & General Manager - Packaging Operations. EX-21 7 LIST OF SUBSIDIARIES 1 EXHIBIT 21 FEDERAL PAPER BOARD COMPANY, INC. Subsidiaries of the Company The following are the subsidiary companies of the Company as of February 25, 1995, all of which are 100% owned:
Jurisdiction of Incorporation or Organization ----------------------------- Continental Bleached Leasing Corp. Delaware Federal Air, Inc. Delaware Federal Paper Board Distribution Centers, Inc. Delaware Federal Paper Board Export, Inc. Virgin Islands Federal Paper Board (India), Inc. Delaware Federal Paper Board Marketing, Inc. Delaware Federal International Japan, Inc. Delaware Federal International, Inc. Delaware Fedwill Realty, Inc. Delaware FPB Leasing Corporation Delaware FPB Property Holdings, Inc. Delaware FPB Realty, Inc. Delaware Henton Realty, Inc. Delaware Imperial Bondware Corp. Ohio Thomas Tait & Sons, Ltd. United Kingdom Toga Realty, Inc. Delaware
EX-23 8 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 3, 1995 (which express an unqualified opinion and include an explanatory paragraph relating to changes in the method of accounting for income taxes and in the method of accounting for postretirement benefits other than pensions) 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 December 31, 1994. /s/ DELOITTE & TOUCHE LLP -------------------------- Deloitte & Touche LLP Parsippany, New Jersey March 27, 1995 EX-24 9 POWERS OF ATTORNEY 1 EXHIBIT 24 FEDERAL PAPER BOARD COMPANY, INC. POWER OF ATTORNEY FORM 10-K KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below constitutes and appoints QUENTIN J. KENNEDY AND JOHN T. FLYNN, JR., his true and lawful attorneys-in-fact, with full power to act without the other and with full power of substitution and resubstitution, to sign in the name of such person the Annual Report of FEDERAL PAPER BOARD COMPANY, INC., on Form 10-K for the fiscal year ended December 31, 1994, and to file the same, with all exhibits and other documents thereto and other documents therewith, with the Securities and Exchange Commission. Dated: March 10, 1995 /s/ ROBERT D. BALDWIN --------------------- Robert D. Baldwin 2 EXHIBIT 24 (Continued) FEDERAL PAPER BOARD COMPANY, INC. POWER OF ATTORNEY FORM 10-K KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below constitutes and appoints QUENTIN J. KENNEDY AND JOHN T. FLYNN, JR., his true and lawful attorneys-in-fact, with full power to act without the other and with full power of substitution and resubstitution, to sign in the name of such person the Annual Report of FEDERAL PAPER BOARD COMPANY, INC., on Form 10-K for the fiscal year ended December 31, 1994, and to file the same, with all exhibits and other documents thereto and other documents therewith, with the Securities and Exchange Commission. Dated: March 15, 1995 /s/ THOMAS L. CASSIDY --------------------- Thomas L. Cassidy 3 EXHIBIT 24 (Continued) FEDERAL PAPER BOARD COMPANY, INC. POWER OF ATTORNEY FORM 10-K KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below constitutes and appoints QUENTIN J. KENNEDY AND JOHN T. FLYNN, JR., his true and lawful attorneys-in-fact, with full power to act without the other and with full power of substitution and resubstitution, to sign in the name of such person the Annual Report of FEDERAL PAPER BOARD COMPANY, INC., on Form 10-K for the fiscal year ended December 31, 1994, and to file the same, with all exhibits and other documents thereto and other documents therewith, with the Securities and Exchange Commission. Dated: March 14, 1995 /s/ W. RAN CLERIHUE ------------------ W. Ran Clerihue 4 EXHIBIT 24 (Continued) FEDERAL PAPER BOARD COMPANY, INC. POWER OF ATTORNEY FORM 10-K KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below constitutes and appoints QUENTIN J. KENNEDY AND JOHN T. FLYNN, JR., his true and lawful attorneys-in-fact, with full power to act without the other and with full power of substitution and resubstitution, to sign in the name of such person the Annual Report of FEDERAL PAPER BOARD COMPANY, INC., on Form 10-K for the fiscal year ended December 31, 1994, and to file the same, with all exhibits and other documents thereto and other documents therewith, with the Securities and Exchange Commission. Dated: March 17, 1995 /s/ JAMES T. FLYNN ------------------ James T. Flynn 5 EXHIBIT 24 (Continued) FEDERAL PAPER BOARD COMPANY, INC. POWER OF ATTORNEY FORM 10-K KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below constitutes and appoints QUENTIN J. KENNEDY AND JOHN T. FLYNN, JR., his true and lawful attorneys-in-fact, with full power to act without the other and with full power of substitution and resubstitution, to sign in the name of such person the Annual Report of FEDERAL PAPER BOARD COMPANY, INC., on Form 10-K for the fiscal year ended December 31, 1994, and to file the same, with all exhibits and other documents thereto and other documents therewith, with the Securities and Exchange Commission. Dated: March 10, 1995 /s/ W. MARK MASSEY, JR. ----------------------- W. Mark Massey, Jr. 6 EXHIBIT 24 (Continued) FEDERAL PAPER BOARD COMPANY, INC. POWER OF ATTORNEY FORM 10-K KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below constitutes and appoints QUENTIN J. KENNEDY AND JOHN T. FLYNN, JR., his true and lawful attorneys-in-fact, with full power to act without the other and with full power of substitution and resubstitution, to sign in the name of such person the Annual Report of FEDERAL PAPER BOARD COMPANY, INC., on Form 10-K for the fiscal year ended December 31, 1994, and to file the same, with all exhibits and other documents thereto and other documents therewith, with the Securities and Exchange Commission. Dated: March 14, 1995 /s/ EDMUND J. KELLY ------------------- Edmund J. Kelly 7 EXHIBIT 24 (Continued) FEDERAL PAPER BOARD COMPANY, INC. POWER OF ATTORNEY FORM 10-K KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below constitutes and appoints QUENTIN J. KENNEDY AND JOHN T. FLYNN, JR., his true and lawful attorneys-in-fact, with full power to act without the other and with full power of substitution and resubstitution, to sign in the name of such person the Annual Report of FEDERAL PAPER BOARD COMPANY, INC., on Form 10-K for the fiscal year ended December 31, 1994, and to file the same, with all exhibits and other documents thereto and other documents therewith, with the Securities and Exchange Commission. Dated: March 17, 1995 /s/ JOHN L. KELSEY ------------------ John L. Kelsey EX-27 10 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S 1994 ANNUAL REPORT TO SHAREHOLDERS. 1,000 YEAR DEC-31-1994 JAN-02-1994 DEC-31-1994 293 0 75,374 1,518 230,547 357,241 2,794,716 897,077 2,609,649 337,755 921,227 213,094 0 2,210 702,888 2,609,649 1,569,577 1,569,577 1,143,382 1,364,015 16,381 0 88,281 100,900 28,900 72,000 0 0 0 72,000 0 1.52