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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File
December 31, 1993 Number 1-5313
POTLATCH
Potlatch Corporation
A Delaware Corporation (IRS Employer Identification
Number 82-0156045)
One Maritime Plaza
San Francisco, California 94111
Telephone (415) 576-8800
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, New York Stock Exchange
($1 par value) Pacific Stock Exchange
Chicago Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant at January 31, 1994, was approximately $1,222 million.
The number of shares of common stock outstanding as of January 31, 1994:
29,207,946 shares of Common Stock, par value of $1 per share.
Documents Incorporated by Reference
Portions of the definitive proxy statement for the 1994 annual meeting of
stockholders are incorporated by reference in Part III hereof.
POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
Index to 1993 Form 10-K
Page
Number
PART I
ITEM 1. Business 2 - 4
ITEM 2. Properties 5
ITEM 3. Legal Proceedings 6
ITEM 4. Submission of Matters to a Vote of Security Holders 6
Executive Officers of the Registrant 6 - 7
PART II
ITEM 5. Market for Registrant's Common Equity and
Related Stockholder Matters 8
ITEM 6. Selected Financial Data 8
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
ITEM 8. Financial Statements and Supplementary Data 8
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 9
PART III
ITEM 10. Directors and Executive Officers of the
Registrant 9
ITEM 11. Executive Compensation 9
ITEM 12. Security Ownership of Certain Beneficial
Owners and Management 9
ITEM 13. Certain Relationships and Related Transactions 9
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 9
SIGNATURES 10
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES 11
EXHIBIT INDEX 38 - 40
-1-
PART I
ITEM 1. Business
General
Potlatch Corporation (the "company"), incorporated in 1903, is an
integrated forest products company with substantial timber resources. It is
engaged principally in the growing and harvesting of timber and the manufacture
and sale of wood products, printing papers and other pulp-based products. Its
timberlands and all of its manufacturing facilities are located within the
continental United States.
Information relating to the amounts of revenue, operating profit or loss
and identifiable assets attributable to each of the company's industry segments
for 1991-1993 is included in Note 12 to the financial statements on pages 31-32
of this report.
Fiber Resources
The principal source of raw material used in the company's operations is
timber, obtained from its own timberlands and purchased on the open market. The
company owns in fee approximately 1.5 million acres of timberland: 504,000 acres
in Arkansas, 678,000 acres in Idaho and 318,000 acres in Minnesota. In addition,
the company is developing 10,000 acres in Oregon as a hybrid poplar tree farm
for pulp fiber.
The amount of timber harvested in any one year from company-owned lands
varies according to the requirements of sound forest management, as well as the
supply of timber available for purchase on the open market. By use of forestry
and silviculture techniques and other forest management practices, the company
seeks to increase the volume of wood fiber available from its timberlands and to
provide for a continuous supply of wood fiber in the future. In most cases, the
cost of timber from company land is substantially less than that of timber
obtained on the open market.
The company's fee lands provided approximately 57 percent of its sawlogs
and plywood logs in 1993 and an average of 64 percent over the past five years.
Including the raw materials used for pulp and oriented strand board, the
percentages decline to 36 percent for 1993 and 39 percent for the past five
years. Additional logs were obtained principally under cutting contracts from
lands owned by federal, state and local governments and, to a lesser extent,
from private purchases. Such cutting contracts cover areas of varying size and
generally have terms ranging from a few months to several years. The company
enters into many such contracts each year. At December 31, 1993, the market
value of uncut timber remaining under timber cutting contracts approximated
$95.4 million. The company is not unconditionally obligated for that amount on
such contracts and uncut timber values are subject to change depending on the
on the market value at time of harvest.
At the present time, timber from the company's own lands, together with
outside purchases, is adequate to support manufacturing operations. In recent
years the timber supply from federal lands has been increasingly curtailed
largely due to environmental pressures. Although this trend has had a favorable
effect on earnings for the company as a whole, it has had an adverse effect on
wood costs for the Lewiston, Idaho, pulp mill. The company has implemented
plans to develop additional fiber supplies, primarily hybrid poplar, for this
mill. The long-term effect of this trend on company earnings cannot be
predicted.
The company assumes substantially all risk of loss from fire and other
hazards on the standing timber it owns, as do most owners of timber tracts in
the United States.
-2-
Wood Products
The company manufactures and markets oriented strand board, plywood,
particleboard, lumber and other wood products. These products are sold
through the company's sales offices primarily to wholesalers for nationwide
distribution.
To produce these solid wood products, the company owns and operates
several manufacturing facilities in Arkansas, Idaho and Minnesota. A
description of these facilities is included under Item 2 of this report.
The forest products industry is highly competitive, and the company
competes with substantially larger forest products companies and companies which
manufacture substitutes for wood and wood fiber products. For both lumber and
plywood products, the company's share of the market is not significant to the
total U. S. market for these products. However, the company does have a
significant market share of oriented strand board, which is a product that
competes with plywood. The company's principal methods of competing are product
quality, service and price.
Printing Papers
The company produces coated free sheet printing papers at facilities in
Minnesota. A description of these facilities is included under Item 2 of this
report.
Pulp for the paper mills is supplied primarily by the company's bleached
kraft pulp mill in Minnesota and secondarily by purchases of market pulp,
including recycled pulp. Coated papers are used for annual reports, showroom
catalogs, art reproductions and high quality advertising.
Printing papers are sold through various company sales offices located in
the United States, principally to paper merchants for distribution. Although
the company does not consider itself among the larger manufacturers of printing
papers, it is one of the nation's leading producers of high-value-added coated
papers. The principal methods of competing are product quality, service and
price.
Other Pulp-Based Products
The company produces and sells bleached kraft pulp and paperboard, tissue,
toweling and napkins. A description of the facilities used to produce these
products is included under Item 2 of this report.
The company is a major producer of bleached kraft paperboard in the United
States. Bleached kraft paperboard is used for the packaging of milk and other
foods, pharmaceuticals and toiletries, and for paper cups and file folder stock.
The company does not consider itself among the larger national manufacturers of
any of its other pulp-based products. However, the company is the leading west
coast producer of private label household tissue products. The company's
principal methods of competing are product quality, service and price.
The company produces household tissues which are packaged to order for
grocery and drug chains, and club stores as well as for cooperative buying
organizations. Facial and bathroom tissues and paper towels and napkins are
sold to consumers under customer brand names and, to a minor extent, as generic
products and under a Potlatch brand name. These products compete with other
private label and generic tissue products as well as advertised brands.
-3-
ITEM 1. Business (cont.)
Other Pulp-Based Products (cont.)
Methods of sale and distribution of the company's other pulp-based
products vary for its several products. The majority of pulp sales are
generally through brokers. Late in 1993, the company temporarily discontinued
the sale of market pulp and will not reenter the market until significant
pricing improvements are possible. The company, in general, maintains domestic
sales offices through which it sells paperboard to packaging converters. The
majority of international paperboard sales are made through sales representative
offices in Japan and Australia. The balance of such sales are made through
brokers. Tissue products are sold through food brokers or directly to major
retail outlets.
Environment
The company is subject to federal and state environmental control
regulations at its operating facilities. The company endeavors to comply with
all environmental regulations and monitors its activities on a regular basis
for such compliance. Compliance with environmental regulations requires capital
expenditures as well as additional operating costs. Capital expenditures
specifically designated for environmental compliance totaled approximately $17.0
million during 1993. In addition, the company made expenditures for pollution
control facilities as part of major mill modernizations and expansions currently
underway.
In late 1993, the Environmental Protection Agency published proposed
regulations applicable to the pulp and paper industry. This extensive set of
regulations is designed to address both air and water emissions. As proposed,
the regulations would require modifications to process equipment and procedures.
It is not possible to estimate the aggregate amount of capital expenditures or
operating costs which might be required in the future to comply with environ-
mental regulations. However, the company does not expect that such compliance
costs would have a material adverse effect on its competitive position.
Employees
As of December 31, 1993, the company had approximately 7,000 employees.
Late in 1993, following completion of a $400.0 million modernization project at
the Lewiston, Idaho, pulp and paperboard mill, the company announced the
potential elimination of up to 200 jobs. Management is in the process of
formulating a plan, which is expected to be implemented in the first half of
1994. Labor contracts expiring in 1994 are as follows:
Contract Approximate
Expiration Date Location Union Hourly Employees
May 8 Wood Products International 380
Southern Division Woodworkers of
Warren, Arkansas America
June 15 Northwest Paper United Paperworkers 1,420
Cloquet & Brainerd, International Union
Minnesota & International
Brotherhood of
Firemen and Oilers
September 1 Fire Department United Paperworkers 10
Lewiston, Idaho International Union
-4-
ITEM 2. Properties
The principal manufacturing facilities of the company, together with their
respective 1993 capacities and production are as follows:
Capacity Production
Wood Products
Oriented Strand Board Plants: (A)
Bemidji, Minnesota 494,600 m.sq.ft. 490,237 m.sq.ft.
Cook, Minnesota 243,000 m.sq.ft. 240,259 m.sq.ft.
Grand Rapids, Minnesota 350,000 m.sq.ft. 347,647 m.sq.ft.
Sawmills:
Prescott, Arkansas 63,400 m.bd.ft. 63,901 m.bd.ft.
Warren, Arkansas (B) 69,300 m.bd.ft. 77,481 m.bd.ft.
Lewiston, Idaho 115,100 m.bd.ft. 117,966 m.bd.ft.
St. Maries, Idaho 77,200 m.bd.ft. 77,255 m.bd.ft.
Bemidji, Minnesota 77,900 m.bd.ft. 77,264 m.bd.ft.
Plywood Plants: (A)
Jaype, Idaho 154,600 m.sq.ft. 150,291 m.sq.ft.
St. Maries, Idaho 163,500 m.sq.ft. 161,852 m.sq.ft.
Particleboard Plant: (C)
Post Falls, Idaho 64,600 m.sq.ft. 64,290 m.sq.ft.
Split-Cedar Mill:
Santa, Idaho 6,000 m.bd.ft. 4,446 m.bd.ft.
Hardwood Flooring Plant:
Stuttgart, Arkansas 2,600 m.bd.ft. 1,279 m.bd.ft.
Printing Papers
Pulp Mill:
Cloquet, Minnesota 189,700 tons 190,808 tons
Printing Paper Mills:
Brainerd, Minnesota 127,900 tons 129,980 tons
Cloquet, Minnesota 191,900 tons 191,844 tons
Other Pulp-Based Products
Pulp Mills:
Cypress Bend, Arkansas 237,800 tons 224,656 tons
Lewiston, Idaho 482,900 tons 395,158 tons
Bleached Paperboard Mills:
Cypress Bend, Arkansas 258,600 tons 244,060 tons
Lewiston, Idaho 340,600 tons 300,601 tons
Tissue Mill:
Lewiston, Idaho 140,500 tons 130,647 tons
Tissue Converting Facilities:
Lewiston, Idaho 102,800 tons 96,140 tons
North Las Vegas, Nevada (D) 23,600 tons 8,290 tons
(A) 3/8" Basis
(B) With the completion of the new sawmill and the simultaneous shutdown of the
old pine sawmill in early 1994, there will be two facilities with a capacity
of approximately 115,900 m.bd.ft.
(C) 3/4" Basis
(D) The North Las Vegas facility began operation in May 1993. Annual operating
capacity is presented.
-5-
ITEM 3. Legal Proceedings
Since November 1992, the company has been discussing with representatives
of the United States Department of Justice and the Environmental Protection
Agency ("EPA") alleged violations of the Clean Air Act in connection with an
asbestos removal and demolition project at the company's facility in Lewiston,
Idaho. The project, which was completed in early 1990, was performed by an
independent contractor and its subcontractor, both of which specialized in
asbestos abatement. In late 1993, the two agencies and the company exchanged
drafts of a proposed Consent Decree which includes injunctive relief and a civil
penalty. The company expects to conclude the discussions and enter into the
Consent Decree during 1994. The company believes that the independent
contractor retained for the project is responsible for any monetary penalties
which may be paid by the company.
In June 1993, the United States EPA, Region 10, requested certain
information under section 114 of the Clean Air Act relating to air quality and
emission compliance issues at the company's Lewiston, Idaho complex. As a
result of the information furnished in late 1993, both the EPA and the Idaho
Department of Health and Welfare ("IDHW") informed the company of potential
violations of federal and state environmental laws and that any enforcement
follow up would be undertaken by the IDHW. The company believes it has legal
and equitable defenses to any federal violations. The company has not received
sufficient information from the IDHW to be able to determine the specific state
violations that may be alleged or the likelihood of their success.
In August 1993, the company received a Notice of Violation ("NOV") from
the United States EPA, Region 5, which alleged that the emissions from the
dryers at the company's Grand Rapids, Minnesota, oriented strand board plant
exceed the applicable emission limits for particulate matter. The allegations
contained in the NOV issued by the EPA arise from the same facts and are the
same allegations set forth in a NOV previously issued by the Minnesota Pollution
Control Agency ("MPCA"). In early January 1994, the company entered into an
agreement with the MPCA, requiring the company to: (a) install two electrostatic
precipitators at its Grand Rapids plant, to be in operation no later than
September 1, 1994; and (b) pay a civil penalty of $300,000.
The company believes that the results of any actions taken in any or all
of the above matters will not, in the aggregate, have a material adverse effect
on the business or financial condition of the company.
ITEM 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1993.
Executive Officers of the Registrant
Information as of March 1, 1994, and for the past five years concerning
the executive officers of the company is as follows:
Richard B. Madden (age 64), elected Chief Executive Officer upon his
joining the company in 1971, is Chairman of the Board and Chief Executive
Officer. Mr. Madden will retire as Chairman and Chief Executive Officer
effective in May 1994, when he reaches the company's mandatory retirement age.
He will continue as a member of the Board of Directors. From May 1987 through
April 1989, he also served as President. He is a member of the Nominating
Committee of the Board of Directors.
-6-
John M. Richards (age 56), first elected an officer in 1972, has served
as President and Chief Operating Officer since May 1989. At the February 24,
1994, Board of Directors meeting, Mr. Richards was elected to replace Mr. Madden
as Chairman of the Board and Chief Executive Officer effective upon Mr. Madden's
retirement in May 1994. Prior to May 1989, he was Executive Vice President,
Finance and Administration. He was elected a director of the company effective
January 1, 1991. He is a member of the Finance Committee of the Board of
Directors.
L. Pendleton Siegel (age 51), first elected an officer in 1983, has served
as Executive Vice President, Pulp-Based Operations and Planning since August 1,
1993. At the February 24, 1994, Board of Directors meeting, Mr. Siegel was
elected to replace Mr. Richards as President and Chief Operating Officer
effective in May 1994. From March 1992 through July 1993, he was Group Vice
President, Pulp and Paperboard. In addition, since October 1990, he has also
been responsible for planning and business development. From October 1989
through February 1992, he was Group Vice President, Wood Products. From May
1989 through September 1989, he was Senior Vice President, Finance and
Administration. Prior to that he was Senior Vice President, Finance and
Treasurer.
Robert V. Hershey (age 61), was elected an officer in 1993, becoming Vice
President, Northwest Paper Division on August 1, 1993. From June 1991 through
July 1993, he was an appointed officer serving as Vice President, Manufacturing,
Northwest Paper Division. Prior to that he served as Vice President,
Manufacturing, for the Northwest Paper Division's Cloquet plant.
Richard L. Paulson (age 52), first elected an officer in 1992, has served
as Vice President, Consumer Products since January 1, 1993. From April 1989
through December 1992, he was an appointed officer serving as Vice President,
Manufacturing, for the Northwest Paper Division's Brainerd plant. Prior to that
he was production manager for the Brainerd plant.
George E. Pfautsch (age 58), first elected an officer in 1971, has served
as Senior Vice President, Finance and Treasurer since January 1, 1993. From
October 1989 through December 1992, he was Senior Vice President, Finance.
Prior to that he was Controller.
Charles R. Pottenger (age 54), first elected an officer in 1991, has
served as Group Vice President, Pulp and Paperboard since August 1, 1993. From
February 1991 through July 1993, he was Vice President, Northwest Paper
Division. Prior to February 1991, he was an appointed officer serving in the
following capacities: from September 1989 through January 1991, he was Northwest
Paper Division Vice President, Manufacturing; from July 1989 through August
1989, he was Pulp and Paperboard Vice President, Manufacturing; and prior to
to that he was Idaho Pulp and Paperboard Division Vice President.
Thomas J. Smrekar (age 51), first elected an officer in 1992, has served
as Group Vice President, Wood Products since March 1992. Prior to March 1992,
he was an appointed officer serving as Minnesota Wood Products Division Vice
President.
NOTE: The aforementioned officers of the company are elected to hold office
until the next annual meeting of the Board of Directors. Each officer holds
office until the officer's successor has been duly elected and has qualified or
until the earlier of the officer's death, resignation, retirement or removal by
the board.
-7-
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
The company's common stock is traded on the New York, Chicago and Pacific
Stock Exchanges. Quarterly and yearly price ranges were:
1993 1992
Quarter High Low High Low
1st $51.88 $44.25 $48.38 $36.75
2nd 50.50 40.75 50.00 41.88
3rd 44.63 38.25 46.00 41.00
4th 47.75 40.00 47.50 42.75
Year 51.88 38.25 50.00 36.75
In general, all holders of Potlatch common stock who own shares 48
consecutive calendar months or longer ("long-term holders") are entitled to
exercise four votes per share of stock so held, while stockholders who are not
long-term holders are entitled to one vote per share. All stockholders are
entitled to only one vote per share on matters arising under certain provisions
of the company's charter. There were approximately 3,600 common stockholders of
record at December 31, 1993.
Quarterly dividend payments per common share for the past two years were:
Quarter 1993 1992
1st $ .375 $ .35
2nd .375 .35
3rd .375 .35
4th .39 .375
------ ------
$1.515 $1.425
====== ======
ITEMS 6, 7 and 8.
The information called for by Items 6, 7 and 8, inclusive, of Part II of
this form, is contained in the following sections of this Report at the pages
indicated below:
Page
Number
ITEM 6 Selected Financial Data 12
ITEM 7 Management's Discussion
and Analysis of Financial
Condition and Results of
Operations 12-16
ITEM 8 Financial Statements and
Supplementary Data 17-37
-8-
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no circumstances requiring the company to report a change
in accountants in connection with a disagreement on accounting or financial
disclosure matters.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Information regarding the directors of the company is set forth under the
heading "Information with Respect to Nominees for Election and Directors
Continuing in Office" on pages 3-5 of the company's definitive proxy statement,
dated March 24, 1994, for the 1994 annual meeting of stockholders (the "1994
Proxy Statement"), which information is incorporated herein by reference.
Information concerning Executive Officers is included in Part I of this report
following Item 4.
ITEM 11. Executive Compensation
Information set forth under the heading "Compensation of Directors and the
Named Executive Officers" on pages 9-18 of the 1994 Proxy Statement, is
incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of management, included under the
heading "Stock Ownership of Directors and Executive Officers" on pages 7-8 of
the 1994 Proxy Statement, is incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions
Information set forth under the headings "Executive Compensation and
Personnel Policies Committee Interlocks and Insider Participation" and "Certain
Transactions" on pages 17-18 of the 1994 Proxy Statement, is incorporated herein
by reference.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
1. Exhibits are listed in the Exhibit Index on pages 38-40 of this Form 10-K.
2. Financial statement schedules are listed in the Index to Consolidated
Financial Statements and Schedules on page 11 of this Form 10-K.
3. No reports on Form 8-K were filed for the quarter ended December 31, 1993.
-9-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
POTLATCH CORPORATION
(Registrant)
Date: March 23, 1994 By Richard B. Madden
-----------------
Richard B. Madden
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 23, 1994, by the following persons on
behalf of the company in the capacities indicated.
By Richard B. Madden
------------------------------
Richard B. Madden RICHARD A. CLARKE*
Director and Chairman of Director
the Board and Chief KENNETH T. DERR*
Executive Officer Director
(Principal Executive Officer) ALLEN F. JACOBSON*
Director
By John M. Richards GEORGE F. JEWETT, JR.*
------------------------------ Director
John M. Richards RICHARD M. MORROW*
Director, President and Director
Chief Operating Officer VIVIAN W. PIASECKI*
(Principal Operating Officer) Director
TONI REMBE*
By George E. Pfautsch Director
------------------------------ REUBEN F. RICHARDS*
George E. Pfautsch Director
Senior Vice President, RICHARD M. ROSENBERG*
Finance and Treasurer Director
(Principal Financial Officer) ROBERT G. SCHWARTZ*
Director
By Terry L. Carter CHARLES R. WEAVER*
------------------------------ Director
Terry L. Carter FREDERICK T. WEYERHAEUSER*
Controller Director
(Principal Accounting Officer) DR. WILLIAM T. WEYERHAEUSER*
Director
*By Sandra T. Powell
------------------
Sandra T. Powell
(Attorney-in-fact)
-10-
POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
Index to Consolidated Financial Statements and Schedules
Page
Number
The following documents are filed as part of this Report:
Consolidated Financial Statements:
Selected Financial Data 12
Management's Discussion and Analysis of
Financial Condition and Results of Operations 12 - 16
Statements of Earnings for the years ended December 31,
1993, 1992 and 1991 17
Balance Sheets at December 31, 1993 and 1992 18
Statements of Cash Flows for the years ended December 31,
1993, 1992 and 1991 19
Statements of Stockholders' Equity for the years ended
December 31, 1993, 1992 and 1991 20
Summary of Principal Accounting Policies 21 - 22
Notes to Financial Statements 23 - 33
Independent Auditors' Report 34
Schedules:
V. Property, Plant and Equipment 35
VI. Accumulated Depreciation of Property, Plant and
Equipment 36
VIII. Valuation and Qualifying Accounts 37
All other schedules are omitted because they are
not required, not applicable or the required
information is given in the consolidated
financial statements.
-11-
Potlatch Corporation and Consolidated Subsidiaries
Selected Financial Data
(Dollars in thousands - except per-share amounts)
1993 1992 1991 1990 1989
- -------------------------------------------------------------------------------------------------------------------
Net sales $1,368,854 $1,326,612 $1,236,988 $1,252,906 $1,227,622
Net earnings:
Before accounting changes 38,339 78,914 55,802 98,612 136,715
After accounting changes 6,635 78,914 55,802 98,612 136,715
Working capital* 129,138 153,537 125,190 86,187 321,308
Current ratio* 1.7 to 1 2.0 to 1 1.7 to 1 1.5 to 1 2.8 to 1
Long-term debt
(noncurrent portion) $ 707,131 $ 634,209 $ 563,014 $ 391,892 $ 458,511
Stockholders' equity 919,664 955,581 914,750 896,122 829,460
Debt to stockholders'
equity ratio .77 to 1 .66 to 1 .62 to 1 .44 to 1 .55 to 1
Capital expenditures $ 201,655 $ 179,539 $ 267,038 $ 317,650 $ 142,744
Total assets 2,066,759 1,998,808 1,891,781 1,707,849 1,685,978
Net earnings per common share:
Before accounting changes $ 1.31 $ 2.71 $1.92 $3.41 $4.79
After accounting changes .22 2.71 1.92 3.41 4.79
Cash dividends
per common share 1.515 1.425 1.34 1.23 1.08
===================================================================================================================
*1989-1992 amounts have been restated to conform to the 1993 balance sheet presentation.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity
Liquidity of a company can be measured by several factors. Of major
importance are:
Capability of generating earnings and cash flow
Maintenance of a sound financial structure
Access to capital markets
Maintenance of adequate working capital
In 1993, the company's net cash provided by operations, excluding working
capital changes, as presented in the Statements of Cash Flows on page 19,
totaled $170.7 million, compared with $166.2 million in 1992 and $155.3 million
in 1991.
The ratio of long-term debt to stockholders' equity was .77 to 1 at
December 31, 1993, compared with .66 to 1 at December 31, 1992, and .62 to 1 at
December 31, 1991. The 1993 increase was largely due to a decrease in
stockholders'equity as a result of the net effect of accounting changes and the
issuance in 1993 of $75.0 million of commercial paper, which was outstanding at
December 31, 1993, the proceeds of which are being used for general corporate
purposes.
-12-
At December 31, 1993, the company had credit lines totaling $150.0 million
for general corporate purposes. Of that amount, $50.0 million was in short-term
lines and $100.0 million was in a revolving credit agreement. At December 31,
1993, none of the short-term lines were being utilized, while a portion of the
revolving credit was being used to back outstanding commercial paper. Because
of the availability of long-term financing and the likelihood of the commercial
paper being outstanding for more than a year, these borrowings have been
classified as long-term debt.
One of the company's stated objectives is to maintain a sound financial
structure. The company's long-term debt to equity ratio of .77 to 1 at
December 31, 1993, is above the range of its targeted financial structure. The
company plans to make sufficient reductions in capital spending to return to its
targeted range within the next two years. The company also believes that debt
ratings within investment grade categories are important for long-term access
to capital markets. With such access and its ability to generate cash flow, the
company believes it is capable of funding capital expenditures, working capital
and other liquidity needs for the foreseeable future. At the end of 1993, the
company's senior long-term debt was rated A- by Standard & Poors and Duff and
Phelps, and Baa1 by Moody's.
At December 31, 1993, working capital was $129.1 million, compared with
$153.5 million at December 31, 1992, and $125.2 million at December 31, 1991.
The 1993 decrease was attributable to an increase of $14.6 million in accounts
payable and accrued liabilities combined with decreases of $11.8 million in cash
and $9.1 million in prepaid expenses, which were partially offset by an increase
of $6.8 million in short-term investments.
Capital Resources and Funding
Capital expenditures totaled $201.7 million in 1993, compared with $179.5
million in 1992 and $267.0 million in 1991.
Of the 1993 program, $97.6 million was spent in the wood products segment.
A significant portion of this amount related to the construction of a new
sawmill in Warren, Arkansas, replacing an outdated company sawmill located
there. The new sawmill, which began operation in early 1994, will improve
lumber quality and increase the yield from the available log supply, and at the
same time make more efficient use of manpower. In addition to other timberland
purchases totaling $2.9 million, the company purchased approximately 23,850
acres of timberland and a one-half interest in an additional 23,500 acres of
timberland located in northern Idaho for $53.6 million. While the purchase was
not originally included in the 1993 capital program, it afforded the company an
excellent opportunity to expand its land base in Idaho. Capital spending in the
printing papers segment was $42.5 million, which included expenditures related
to the first phase of the modernization and expansion of the pulp mill in
Cloquet, Minnesota. A total of $59.6 million was spent in the other pulp-based
products segment. Several of the major projects were in the Consumer Products
Division and included the completion of the new tissue converting facility in
North Las Vegas, Nevada, and the final expenditures for the new tissue machine
in Lewiston, Idaho. Both projects had successful startups during the first half
of 1993. The division also began the rebuild of an older tissue machine located
in Lewiston. Other pulp-based products segment spending also included the
initial development of acreage near Boardman, Oregon, to grow hybrid poplar
trees for pulp fiber to be used at the Lewiston pulp mill.
Authorized but unexpended appropriations totaled $212.1 million at
December 31, 1993. Of that amount, $168.2 million is budgeted to be expended in
1994. Of these 1994 expenditures, $63.2 million relates to projects under way
at the end of 1993. Such
-13-
projects include the completion of the new sawmill in Warren, the continuing
modernization and expansion of the Cloquet pulp mill, the continued rebuild of
the tissue machine in Lewiston and the continued development of the hybrid
poplar tree farm in Boardman. New projects in 1994 will include the rebuild of
a paper machine at the company's printing papers manufacturing facility in
Brainerd, Minnesota. This project was originally budgeted to begin in 1993 but
has been rescheduled to commence in 1994. The 1994 capital program will be
funded primarily from internally generated sources.
Historically, the company has spent less on capital expenditures than the
annual amount budgeted. In 1993, the company spent $53.2 million less than the
$201.3 million budgeted, excluding the $53.6 million of unbudgeted expenditures
related to the timberlands purchase in Idaho. Spending on projects may be
delayed due to acquisition of environmental permits, acquisition of equipment,
engineering, weather and other factors. It is likely that the company will
again spend less than the budgeted amount in 1994.
Results of Operations
Comparison of 1993 with 1992
Potlatch consolidated net sales of $1.37 billion increased slightly over
1992's $1.33 billion. Before the effects of accounting changes, earnings were
$38.3 million, a decline from $78.9 million in 1992. Earnings per common share
before accounting changes were $1.31 compared with $2.71 for 1992. Including a
one-time, after-tax charge of $75.5 million related to new accounting require-
ments for postretirement benefits other than pensions and a $43.8 million credit
for a change in accounting for income taxes, the company earned $6.6 million
or $.22 per common share in 1993. The results for 1992 include a nonrecurring,
net after-tax gain of $14.7 million or $.51 per common share from the sale of
the company's packaging operations and a charge related to a litigation
settlement.
Despite very favorable market conditions for wood products, earnings
continued to be adversely affected by weak market conditions throughout the year
for the company's pulp-based products. Operating difficulties at the Lewiston,
Idaho, pulp and paperboard mill also negatively affected earnings. However, the
most serious of these problems, which involved the chlorine dioxide plant and
washers, are largely resolved.
Earnings for the wood products segment were $160.2 million, an increase of
61 percent over 1992's $99.8 million. Substantially higher net sales
realizations for most of the company's wood products was the primary reason for
the improved results. Also contributing to the improvement was the sale of
surplus timberland in Idaho and Arkansas, which resulted in a pre-tax gain of
$8.6 million. Timber supply constraints in the Pacific Northwest continued to
have a significant positive influence on product pricing in 1993, as they did in
1992. This trend is likely to continue into the foreseeable future.
At the present time, timber from the company's own lands, together with
outside purchases, is adequate to support manufacturing operations. In recent
years the timber supply from federal lands has been increasingly curtailed
largely due to environmental pressures. Although this trend has had a favorable
effect on earnings for the company as a whole, it has had an adverse effect on
wood costs for the Lewiston pulp mill. The company has implemented plans to
develop additional fiber supplies for this mill. The long-term effect of this
trend on company earnings cannot be predicted.
-14-
The printing papers segment reported earnings of $15.8 million, down from
the $27.3 million earned in 1992. The poor market conditions for printing
papers of the past few years continued in 1993. Shipments increased modestly
during the year, but realizations were lower than in 1992.
The other pulp-based products segment, which includes the Pulp and
Paperboard Group and the Consumer Products Division, reported a loss of $40.9
million for 1993, compared with earnings of $33.3 million in 1992. Lower
paperboard shipments and sales realizations as a result of very depressed market
conditions combined with higher wood costs in Idaho, as discussed previously,
were largely responsible for the decline. Operating difficulties and extended
shutdowns at both of the company's pulp and paperboard mills in Lewiston, Idaho,
and Cypress Bend, Arkansas, during the year also contributed to the
disappointing results. Late in 1993, the company temporarily discontinued the
sale of market pulp and will not reenter the market until significant pricing
improvements are possible. Also late in 1993, following the completion of a
$400.0 million modernization project at the Lewiston pulp and paperboard mill,
the company announced the potential elimination of up to 200 jobs. Management
is in the process of formulating a plan, which is expected to be implemented in
the first half of 1994. Any liability associated with the plan cannot be
estimated until details of the plan are finalized. The Consumer Products
Division also incurred a loss for the year due to very competitive markets and
higher operating costs associated with the startup of the new tissue machine in
Lewiston and the new converting facility in North Las Vegas, Nevada. However,
tissue product shipments increased 22 percent during the year largely as a
result of the successful startup and operation of these new facilities.
Comparison of 1992 with 1991
Potlatch consolidated net sales of $1.33 billion increased 7 percent over
1991's $1.24 billion. Earnings per common share were $2.71, compared with $1.92
in 1991. The earnings for 1992 include a $26.2 million pre-tax gain from the
sale of the company's packaging operations and a $3.3 million pre-tax charge
related to a litigation settlement. The after-tax effect of these nonrecurring
items was a net gain of $14.7 million or $.51 per common share.
The wood products segment reported earnings of $99.8 million,
significantly higher than the $12.6 million earned in 1991. The earnings
improvement was largely the result of higher selling prices for lumber and panel
products brought about by timber supply constraints in the Pacific Northwest and
increased demand. Operational improvements and new facilities within the
segment also contributed to the increase.
Earnings for the printing papers segment were $27.3 million, compared with
$30.2 million reported in 1991. The weak market conditions for printing papers
which characterized 1991 worsened during 1992 resulting in a 10 percent earnings
decrease for this segment.
The other pulp-based products segment reported 1992 earnings of $33.3
million, down from 1991's $89.0 million. Results for the Pulp and Paperboard
Group generally reflected lower paperboard sales realizations, higher wood costs
due to timber supply constraints in the Pacific Northwest and operational
difficulties in Idaho. The Consumer Products Division continued to experience
very competitive market conditions during 1992, with lower sales realizations
for tissue products resulting in reduced earnings for the division.
-15-
Income Taxes
The company's effective tax rates for 1993, 1992 and 1991 were 41.0
percent, 36.7 percent and 34.5 percent, respectively.
Effective January 1, 1993, the company adopted the provisions of Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes. The
statement requires the liability method for recording differences in financial
and taxable income with an initial adjustment of deferred tax balances from
prior years to reflect the tax rates in effect at adoption. The company
recorded the cumulative effect of the above-mentioned adjustment in the first
quarter of 1993, which increased income by $43.8 million or $1.50 per share.
In the third quarter of 1993, the federal statutory tax rate was increased
from 34 percent to 35 percent retroactive to January 1, 1993. In addition to
the effect of the tax increase on 1993 earnings, the provision for taxes on
income for 1993 includes $3.2 million of expense for the effect of the tax
increase on beginning of the year deferred tax balances.
Postretirement Benefits Other Than Pensions
Effective January 1, 1993, the company adopted Statement of Financial
Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits
Other Than Pensions. The statement requires accrual basis recognition of the
projected future cost of providing postretirement benefits, such as health care
and life insurance, rather than the pay-as-you-go (cash) basis which the company
had been using prior to adoption. The company elected immediate recognition of
the transition obligation, which amounted to $118.0 million ($75.5 million after
income tax benefits or $2.59 per share).
Postemployment Benefits
Effective January 1, 1993, the company adopted Statement of Financial
Accounting Standards No. 112, Employers' Accounting for Postemployment Benefits.
The statement requires accrual basis recognition of postemployment benefits
provided to former or inactive employees after employment but before retirement.
The effect of implementing the new standard was not material.
-16-
Potlatch Corporation and Consolidated Subsidiaries
Statements of Earnings
(Dollars in thousands - except per-share amounts)
For the years ended December 31 1993 1992 1991
- --------------------------------------------------------------------------------------------
Net sales $1,368,854 $1,326,612 $1,236,988
- --------------------------------------------------------------------------------------------
Costs and expenses:
Depreciation, amortization and cost of
fee timber harvested 123,544 107,165 96,924
Materials, labor and other operating
expenses 1,064,260 1,006,887 945,888
Selling, general and administrative
expenses 83,958 83,409 74,998
- --------------------------------------------------------------------------------------------
1,271,762 1,197,461 1,117,810
- --------------------------------------------------------------------------------------------
Earnings from operations 97,092 129,151 119,178
Interest expense, net of capitalized
interest of $6,384 ($16,581 in 1992 and
$14,375 in 1991) (46,230) (34,902) (28,882)
Interest and dividend income 1,352 3,790 5,493
Other income (expense), net 12,790 26,575 (10,594)
- --------------------------------------------------------------------------------------------
Earnings before taxes on income and cumulative
effect of accounting changes 65,004 124,614 85,195
Provision for taxes on income (Note 4) 26,665 45,700 29,393
- --------------------------------------------------------------------------------------------
Net earnings before cumulative
effect of accounting changes 38,339 78,914 55,802
Cumulative effect of
accounting changes:
Change in accounting for post-
retirement benefits other than
pensions, net of tax (Note 10) (75,494) - -
Change in accounting for
income taxes (Note 4) 43,790 - -
- --------------------------------------------------------------------------------------------
Net earnings $ 6,635 $ 78,914 $ 55,802
============================================================================================
Net earnings per common share:
Before accounting changes $1.31 $2.71 $1.92
After accounting changes .22 2.71 1.92
============================================================================================
Other income (expense), net for 1992 includes unusual items which produced a net after-tax
gain of $14.7 million ($.51 per share).
The accompanying notes and summary of principal accounting policies are an integral part of
these financial statements.
-17-
Potlatch Corporation and Consolidated Subsidiaries
Balance Sheets
(Dollars in thousands - except per-share amounts)
At December 31 1993 1992
- ----------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash (Note 8) $ (12,080) $ (232)
Short-term investments (Note 8) 20,421 13,660
Receivables, net of allowance for doubtful
accounts of $2,057 ($1,781 in 1992) 118,601 115,018
Inventories (Note 1) 155,560 151,629
Prepaid expenses (Note 4) 25,758 34,831
- ----------------------------------------------------------------------------------------
Total current assets 308,260 314,906
Land, other than timberlands 9,105 7,780
Plant and equipment, at cost less
accumulated depreciation of $926,032
($825,284 in 1992) (Note 2) 1,340,028 1,311,946
Timber, timberlands and related logging
facilities, net (Note 3) 343,044 279,669
Other assets 66,322 84,507
- ----------------------------------------------------------------------------------------
$2,066,759 $1,998,808
========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments on long-term debt (Notes 5 and 8) $ 7,057 $ 3,942
Accounts payable and accrued liabilities (Note 6) 172,065 157,427
- ----------------------------------------------------------------------------------------
Total current liabilities 179,122 161,369
- ----------------------------------------------------------------------------------------
Long-term debt (Notes 5 and 8) 707,131 634,209
- ----------------------------------------------------------------------------------------
Other long-term obligations (Note 7) 120,388 22,299
- ----------------------------------------------------------------------------------------
Deferred taxes (Note 4) 140,454 225,350
- ----------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock
Authorized 4,000,000 shares - -
Common stock, $1 par value
Authorized 40,000,000 shares, issued 32,721,980 shares 32,722 32,722
Additional paid-in capital 125,346 124,865
Retained earnings 836,845 874,424
Common shares in treasury 3,522,834 (3,578,159 in 1992) (75,249) (76,430)
- ----------------------------------------------------------------------------------------
Total stockholders' equity 919,664 955,581
- ----------------------------------------------------------------------------------------
$2,066,759 $1,998,808
========================================================================================
December 31, 1992 amounts have been restated to conform to the 1993 presentation.
The accompanying notes and summary of principal accounting policies are an
integral part of these financial statements.
-18-
Potlatch Corporation and Consolidated Subsidiaries
Statements of Cash Flows
(Dollars in thousands)
For the years ended December 31 1993 1992 1991
- -----------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATIONS
Net earnings $ 6,635 $ 78,914 $ 55,802
Adjustments to reconcile net earnings
to cash provided by operations:
Cumulative effect of change in accounting
for postretirement benefits other than
pensions, net of tax 75,494 - -
Cumulative effect of change in accounting
for income taxes (43,790) - -
Depreciation, amortization and cost of
fee timber harvested 123,544 107,165 96,924
Deferred taxes 18,069 7,291 3,903
Net gain on disposition of plant
and properties (9,254) (27,156) (1,315)
- -----------------------------------------------------------------------------------------
Cash provided by operations excluding
working capital changes 170,698 166,214 155,314
- -----------------------------------------------------------------------------------------
Increase in receivables (3,583) (14,336) (4,121)
Decrease (increase) in inventories (3,931) (3,907) 1,193
Decrease (increase) in prepaid expenses (5,619) (3,821) 5,147
Increase (decrease) in accounts payable
and accrued liabilities 14,638 2,608 (14,738)
- -----------------------------------------------------------------------------------------
Cash provided by (used for) working
capital changes 1,505 (19,456) (12,519)
- -----------------------------------------------------------------------------------------
Net cash provided by operations 172,203 146,758 142,795
- -----------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING
Increase (decrease) in notes payable - (14,981) 5,022
Proceeds from long-term debt (Note 5) 79,525 75,124 175,020
Repayment of long-term debt (3,488) (3,846) (3,903)
Issuance of treasury stock 1,181 2,366 1,316
Dividends on common stock (44,214) (41,476) (38,869)
- -----------------------------------------------------------------------------------------
Net cash provided by financing 33,004 17,187 138,586
- -----------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING
Decrease (increase) in short-term investments (6,761) 1,003 (1,056)
Decrease (increase) in deferred charges
included in other assets 3,575 (14,359) 5,325
Increase in investments included in other assets (12,152) (9,911) (10,542)
Additions to plant and equipment, and to
land other than timberlands (137,898) (170,857) (256,190)
Additions to timber, timberlands and
related logging facilities (63,757) (8,682) (10,848)
Disposition of plant and properties 10,349 37,158 3,155
Other, net (10,411) (5,843) 8,032
- -----------------------------------------------------------------------------------------
Net cash used for investing (217,055) (171,491) (262,124)
- -----------------------------------------------------------------------------------------
Increase (decrease) in cash (11,848) (7,546) 19,257
Balance at beginning of year (232) 7,314 (11,943)
- -----------------------------------------------------------------------------------------
Balance at end of year $ (12,080) $ (232) $ 7,314
=========================================================================================
Net interest paid (net of amounts capitalized) in 1993, 1992 and 1991 was $44.0 million, $34.5 million and $27.3 million,
respectively. Net income taxes paid in 1993, 1992 and 1991 were $13.0 million, $55.8 million and $33.3 million,
respectively.
The accompanying notes and summary of principal accounting policies are an integral part of these financial statements.
-19-
Potlatch Corporation and Consolidated Subsidiaries
Statements of Stockholders' Equity
(Dollars in thousands - except per-share amounts)
For the years ended December 31 1993 1992 1991
- -------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year $124,865 $123,838 $123,459
Exercise of stock options 481 1,027 379
- -------------------------------------------------------------------------------------
Balance at end of year $125,346 $124,865 $123,838
=====================================================================================
RETAINED EARNINGS
Balance at beginning of year $874,424 $836,986 $820,053
Net earnings 6,635 78,914 55,802
Common dividends, $1.515 per share ($1.425 per
share in 1992 and $1.34 per share in 1991) (44,214) (41,476) (38,869)
- -------------------------------------------------------------------------------------
Balance at end of year $836,845 $874,424 $836,986
=====================================================================================
COMMON SHARES IN TREASURY
Balance at beginning of year 3,578,159 shares
(3,688,899 in 1992 and 3,750,524 in 1991) $ 76,430 $ 78,796 $ 80,112
Exercise of stock options 55,325 shares
(110,740 in 1992 and 61,625 in 1991) (1,181) (2,366) (1,316)
- -------------------------------------------------------------------------------------
Balance at end of year 3,522,834 shares
(3,578,159 in 1992 and 3,688,899 in 1991) $ 75,249 $ 76,430 $ 78,796
=====================================================================================
The accompanying notes and summary of principal accounting policies are an integral part of these financial statements.
-20-
Potlatch Corporation and Consolidated Subsidiaries
Summary of Principal Accounting Policies
Consolidation
The financial statements include the accounts of Potlatch Corporation and
its subsidiaries after elimination of significant intercompany transactions and
accounts. There are no significant unconsolidated subsidiaries.
Inventories
Inventories are stated at the lower of cost or market. The last-in,
first-out method is used to determine cost of most solid wood products. The
average cost method is used to determine cost of all other inventories.
Earnings Per Common Share
Earnings per common share are computed on the weighted average number of
common shares outstanding each year. Outstanding stock options are common stock
equivalents but are excluded from earnings per common share computations due to
immateriality. The weighted average number of common shares used in earnings
per common share computations for 1993, 1992 and 1991 were 29,183,871,
29,110,179 and 29,012,079, respectively.
Properties
Property, plant and equipment are valued at cost less accumulated
depreciation. Depreciation of buildings, equipment and other depreciable assets
is determined by using the straight-line method on estimated useful lives.
Estimated useful lives of plant and equipment range from 2 to 40 years.
Timber, timberlands and related logging facilities are valued at cost net
of the cost of fee timber harvested and depreciation or amortization. Logging
roads and related facilities are amortized over their useful lives or as related
timber is removed. Cost of fee timber harvested is determined annually based on
the estimated volumes of recoverable timber and related cost.
Major improvements and replacements of property are capitalized.
Maintenance, repairs, and minor improvements and replacements are expensed.
Amounts expensed in 1993, 1992 and 1991 were $166.6 million, $155.1 million and
$146.3 million, respectively. Upon retirement or other disposition of property,
applicable cost and accumulated depreciation or amortization are removed from
the accounts. Any gains or losses are included in earnings.
Income Taxes
Effective January 1, 1993, the company adopted the provisions of Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes, which
requires the liability method for recording differences in financial and taxable
income.
-21-
Postretirement Benefits Other Than Pensions
Effective January 1, 1993, the company adopted Statement of Financial
Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits
Other Than Pensions, which requires accrual basis recognition of postretirement
benefits rather than the pay-as-you-go (cash) basis which the company had been
using prior to adoption.
Postemployment Benefits
Effective January 1, 1993, the company adopted Statement of Financial
Accounting Standards No. 112, Employers' Accounting for Postemployment Benefits.
The statement requires accrual basis recognition of postemployment benefits
provided to former or inactive employees after employment but before retirement.
The effect of implementing the new standard was not material.
Preoperating and Startup Costs
Preoperating costs are expensed as incurred except for charges relating to
major new facilities. Deferred preoperating costs are amortized over a 60-month
period. Startup costs are expensed as incurred.
-22-
Potlatch Corporation and Consolidated Subsidiaries
Notes to Financial Statements
Note 1. Inventories
(Dollars in thousands) 1993 1992
- ------------------------------------------------------------------------
Logs, pulpwood, chips and sawdust $ 18,391 $ 21,643
Lumber and other manufactured wood products 8,184 10,829
Pulp, paper and converted paper products 71,479 64,599
Materials and supplies 57,506 54,558
- ------------------------------------------------------------------------
$155,560 $151,629
========================================================================
Valued at lower of cost or market:
Last-in, first-out basis $ 15,241 $ 18,376
Average cost basis 140,319 133,253
- ------------------------------------------------------------------------
$155,560 $151,629
========================================================================
If the last-in, first-out inventory had been priced at lower of current
average cost or market, the values would have been approximately $27.8 million
higher at December 31, 1993, and $24.5 million higher at December 31, 1992. In
1993 and 1992, reductions in quantities of LIFO inventories valued at lower
costs prevailing in prior years had the effect of increasing earnings, net of
income taxes, by approximately $2.4 million ($.08 per common share) and $1.1
million ($.04 per common share), respectively.
Note 2. Plant and Equipment
(Dollars in thousands) 1993 1992
- -------------------------------------------------------------------------
Land improvements $ 53,900 $ 50,063
Buildings and structures 354,678 315,495
Machinery and equipment 1,685,432 1,501,236
Other 78,564 60,658
Construction in progress 93,486 209,778
- -------------------------------------------------------------------------
$2,266,060 $2,137,230
=========================================================================
Depreciation charged against income amounted to $108.4 million in 1993
($95.8 million in 1992 and $87.5 million in 1991).
Authorized but unexpended appropriations totaled $212.1 million at
December 31, 1993. Of that amount, $168.2 million is budgeted to be expended
in 1994.
Note 3. Timber, Timberlands and Related Logging Facilities
(Dollars in thousands) 1993 1992
- -------------------------------------------------------------------------
Timber and timberlands $319,305 $259,168
Related logging facilities 23,739 20,501
- -------------------------------------------------------------------------
$343,044 $279,669
=========================================================================
Timber, timberlands and related logging facilities are stated at cost less
cost of fee timber harvested and amortization. Cost of fee timber harvested
amounted to $12.0 million in 1993 ($9.1 million in 1992 and $7.6 million in
1991). Amortization of logging roads and related facilities amounted to $.7
million in 1993, 1992 and 1991.
-23-
Note 4. Taxes on Income
Effective January 1, 1993, the company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
The statement requires the liability method for recording differences in
financial and taxable income with an initial adjustment of deferred tax balances
from prior years to reflect the tax rates in effect at adoption. The company
recorded the cumulative effect of the above-mentioned adjustment in the first
quarter of 1993, which increased income by $43.8 million or $1.50 per share.
Prior years' financial statements were not restated.
Under the provisions of SFAS No. 109, the effect of a change in tax laws
or rates is included in income in the period the change is enacted and includes
a cumulative recalculation of deferred tax balances based on the new tax laws or
rates in effect. Such a change occurred in the third quarter of 1993 with the
enactment of the Omnibus Budget Reconciliation Act of 1993, which increased
the statutory federal tax rate from 34 percent to 35 percent retroactive to
January 1, 1993. In addition to the effect of the tax increase on 1993
earnings, the provision for taxes on income for 1993 includes $3.2 million of
expense for the effect of the tax increase on beginning of the year deferred tax
balances.
Significant components of the provision for taxes on income:
(Dollars in thousands) 1993 1992 1991
- ----------------------------------------------------------------------------------
Current:
Federal $ 15,311 $31,689 $23,011
State 1,646 5,874 4,593
- ----------------------------------------------------------------------------------
Total current 16,957 37,563 27,604
- ----------------------------------------------------------------------------------
Deferred:
Depreciation 26,139 12,694 10,115
Alternative minimum tax (15,222) (2,000) (4,375)
Pension costs 2,803 (1,357) (4,204)
Postretirement benefits and related funding (4,943) (1,332) (108)
Net operating loss (1,897) - -
Federal tax rate change 3,245 - -
Other (417) 132 361
- ----------------------------------------------------------------------------------
Total deferred 9,708 8,137 1,789
- ----------------------------------------------------------------------------------
Provision for taxes on income $ 26,665 $45,700 $29,393
==================================================================================
The provision for taxes on income differs from the amount computed by
applying the statutory federal income tax rate (35 percent in 1993 and 34
percent in 1992 and 1991) to earnings before taxes on income and cumulative
effect of accounting changes due to the following:
(Dollars in thousands) 1993 1992 1991
- ----------------------------------------------------------------------------------
Computed "expected" tax expense $22,751 $42,369 $28,966
State and local taxes, net of federal
income tax benefits 2,695 5,355 3,913
Federal tax rate change 3,245 - -
All other items (2,026) (2,024) (3,486)
- ----------------------------------------------------------------------------------
Provision for taxes on income $26,665 $45,700 $29,393
Effective tax rate 41.0% 36.7% 34.5%
==================================================================================
-24-
Principal current and noncurrent defered tax assets and liabilities at
December 31:
(Dollars in thousands) 1993
- -------------------------------------------------------------------------
Current deferred tax assets:
Employee benefits $ 15,523
Inventories 2,289
Net operating loss 1,897
Other 1,284
- -------------------------------------------------------------------------
Total current asset(1) 20,993
- -------------------------------------------------------------------------
Noncurrent deferred tax assets (liabilities):
Postretirement benefits 37,745
Alternative minimum tax 21,481
Depreciation (198,498)
Other, net (1,182)
- -------------------------------------------------------------------------
Total net noncurrent liability (140,454)
- -------------------------------------------------------------------------
Net deferred tax liability $(119,461)
=========================================================================
(1) Included in Prepaid expenses in the Balance Sheets.
Noncurrent deferred tax assets at December 31, 1993, are net of an $8.1
million valuation allowance. Based on the company's history of operating
earnings and its expectations for the future, management has determined that
operating income will more likely than not be sufficient to recognize fully all
other deferred tax assets.
Deferred income taxes of $225.4 million at December 31, 1992, resulted
principally from using accelerated depreciation for federal tax purposes.
Prepaid expenses include the tax effects of other timing differences in the
amount of $27.3 million at December 31, 1992.
The company's federal income tax returns have been examined and settlements
have been reached for all years through 1986, except a petition which has been
filed with the U.S. Tax Court regarding the deductibility of certain expenses on
the company's 1985 federal income tax return. Assessments made for the years
1987 through 1988 are presently being negotiated at the appellate level. The
company believes that adequate provision has been made for possible assessments
of additional taxes.
Note 5. Debt
(Dollars in thousands) 1993 1992
- ---------------------------------------------------------------------------
Revenue bonds fixed rate 5.8% to 9% due 1994
through 2013 $144,144 $144,137
Revenue bonds variable rate due 2007 through 2014 34,921 29,791
Credit sensitive debentures 9.125% due 2009 100,000 100,000
Sinking fund debentures 9.625% due 2016 100,000 100,000
Medium-term notes fixed rate 7.55% to 9.46% due 1995
through 2022 250,000 250,000
Commercial paper 3.38% to 3.65% 74,841 -
Other notes 10,282 14,223
- ---------------------------------------------------------------------------
714,188 638,151
Less current installments on long-term debt 7,057 3,942
- ---------------------------------------------------------------------------
Long-term debt $707,131 $634,209
===========================================================================
-25 -
The commercial paper is backed by the company's revolving credit agreement,
which enables it to refinance these short-term borrowings to a long-term basis
should the company choose to do so. Because of the availability of long-term
financing and the likelihood of the commercial paper being outstanding for more
than a year, these borrowings have been classified as long-term debt.
The interest rate payable on the 9.125 percent credit sensitive debentures
is subject to adjustment if certain changes in the debt rating of the debentures
occur. No such change in the interest rate payable has occurred.
Certain credit agreements require the company to comply with certain
restrictive covenants. At December 31, 1993, the company was in compliance with
such covenants.
Payments due on long-term debt during each of the five years subsequent to
December 31, 1993:
(Dollars in thousands)
- -------------------------------------------------------------------------
1994 $ 7,100
- -------------------------------------------------------------------------
1995 18,800
- -------------------------------------------------------------------------
1996 37,000
- -------------------------------------------------------------------------
1997 21,400
- -------------------------------------------------------------------------
1998 5,000
- -------------------------------------------------------------------------
The above installments do not include any payments on commercial paper
outstanding.
At December 31, 1993, the company had credit lines totaling $150.0 million
for general corporate purposes. Of that amount, $50.0 million was in short-term
lines and $100.0 million was in a revolving credit agreement. The short-term
credit lines are LIBOR based and permit the company to borrow anytime through
May 31, 1994. The revolving credit agreement permits the company to borrow any
time through October 1, 1996, and may be extended on an annual basis. At
December 31, 1993, none of the short-term lines were being utilized, while a
portion of the revolving credit was being used to back outstanding commercial
paper.
Note 6. Accounts Payable and Accrued Liabilities
(Dollars in thousands) 1993 1992
- -------------------------------------------------------------------------
Trade accounts payable $ 54,726 $ 50,783
Accrued wages, salaries and employee benefits 57,878 57,972
Accrued taxes other than taxes on income 15,517 13,423
Accrued interest 11,623 9,418
Accrued taxes on income 8,464 2,508
Other 23,857 23,323
- -------------------------------------------------------------------------
$172,065 $157,427
=========================================================================
Note 7. Other Long-Term Obligations
(Dollars in thousands) 1993 1992
- -------------------------------------------------------------------------
Postretirement benefits $ 98,366 $ -
Pension and related liabilities 11,345 13,335
Other 10,677 8,964
- -------------------------------------------------------------------------
$120,388 $22,299
=========================================================================
-26-
Note 8. Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
CASH AND SHORT-TERM INVESTMENTS
For short-term investments, the carrying amount approximates fair value.
Short-term investments include bank certificates of deposit, repurchase
agreements, money market preferreds and various other investment grade
securities which can be readily purchased or sold using established markets.
LONG-TERM DEBT
The fair value of the company's long-term debt is estimated based upon the
quoted market prices for the same or similar debt issues. The amount of long-
term debt for which there is no quoted market price is immaterial and the
carrying amount approximates fair value.
Estimated fair values of the company's financial instruments:
1993 1992
Carrying Fair Carrying Fair
(Dollars in thousands) Amount Value Amount Value
- --------------------------------------------------------------------------------
Cash and short-term investments $ 8,341 $ 8,341 $ 13,428 $ 13,428
Long-term debt 714,188 770,014 638,151 669,615
================================================================================
Note 9. Retirement, Incentive and Savings Plans
Substantially all employees and directors of the company are covered by
noncontributory defined benefit pension plans. These include both company-
sponsored and multi-employer plans. Total pension expense was $6.3 million in
1993, $7.3 million in 1992 and $5.9 million in 1991. The 1991 pension expense
presented above excludes $8.0 million for early retirement programs which is
included in Other income and expense in the Statements of Earnings.
Company-sponsored retirement plans cover all employees and directors. The
salaried plan provides benefits based on the participants' final average pay and
years of service. Plans covering hourly employees generally provide benefits of
stated amounts for each year of service. The directors' plan provides a benefit
equal to the retainer in effect at the time the participant ceases to be a
director and is paid for the lesser of 10 years or years of service as a
director.
Pension cost for company-sponsored plans:
(Dollars in thousands) 1993 1992 1991
- --------------------------------------------------------------------------------
Service cost - benefits earned during year $ 7,512 $ 6,861 $ 7,005
Interest cost on projected benefit obligation 24,641 23,807 21,643
Actual return on assets (48,160) (33,153) (57,554)
Net amortization and deferral 19,649 7,201 32,211
- --------------------------------------------------------------------------------
Net periodic pension cost $ 3,642 $ 4,716 $ 3,305
================================================================================
-27-
Funded status and related balance sheet amounts for company-sponsored pension
plans at December 31:
Plans Where Plans Where
Assets Exceed Accumulated
Accumulated Benefits
Benefits Exceed Assets Total
(Dollars in thousands) 1993 1992 1993 1992 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit
obligations:
Vested benefit obligation $ 285,369 $ 198,522 $ 12,926 $ 70,090 $ 298,295 $ 268,612
Accumulated benefit obligation 298,903 203,885 13,973 77,051 312,876 280,936
Projected benefit obligation 313,150 221,926 20,131 78,635 333,281 300,561
============================================================================================================================
Plan assets at fair value,
primarily publicly traded
equity and fixed income
securities $ 349,697 $ 250,709 $ 4,829 $ 66,026 $ 354,526 $ 316,735
Projected benefit obligation (313,150) (221,926) (20,131) (78,635) (333,281) (300,561)
- ----------------------------------------------------------------------------------------------------------------------------
Plan assets above (below)
projected benefit obligation 36,547 28,783 (15,302) (12,609) 21,245 16,174
Unrecognized prior service cost 1,114 530 6,516 8,180 7,630 8,710
Unrecognized net gain (15,124) (14,839) (233) (2,390) (15,357) (17,229)
Unrecognized net transition asset (9,048) (10,958) (283) (798) (9,331) (11,756)
Adjustment required to recognize
minimum liability - - (742) (3,492) (742) (3,492)
- ----------------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) pension cost $ 13,489 $ 3,516 $(10,044) $(11,109) $ 3,445 $ (7,593)
============================================================================================================================
The projected benefit obligation for the company's unfunded, nonqualified
plans at December 31, 1993 and 1992 was $15.2 million and $10.0 million,
respectively. These amounts are included in the total for Plans Where
Accumulated Benefits Exceed Assets.
The projected benefit obligation at December 31, 1993, 1992 and 1991, was
determined using an assumed discount rate of 7.75 percent, 8.5 percent and 9
percent, respectively and an assumed long-term rate of salaried compensation
increase of 5 percent, 6 percent and 6.5 percent, respectively. The assumed
rate of return on plan assets was 9.5 percent for 1993 and 9 percent for 1992
and 1991. The actual return on plan assets has averaged more than 12 percent
over the past 16 years.
Funding of company-sponsored plans is based on accepted actuarial methods
in accordance with applicable governmental regulations and is determined
separately from the net periodic cost presented above.
Hourly employees at two of the company's manufacturing facilities
participate in a multi-employer defined benefit pension plan, the Paper Industry
Union-Management Pension Fund. Company contributions were $2.7 million for
1993, $2.6 million for 1992 and $2.6 million for 1991 and equaled the amounts
charged to pension expense.
Key management employees participate in a management performance award
plan under which awards are based on certain minimum and standard performance
criteria established each year. All company employees are eligible to
participate in 401(k) savings plans.
Note 10. Postretirement Benefits Other Than Pensions
Effective January 1, 1993, the company adopted Statement of Financial
Accounting Standards (SFAS) No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions. The statement requires accrual basis recognition
of the projected future cost of providing postretirement benefits rather than
the pay-as-you-go (cash) basis which the company used prior to adoption. The
company elected immediate recognition of the transition obligation, which
amounted to $118.0 million ($75.5 million after income tax
-28-
benefits or $2.59 per share). The obligation, which is presented in Other long-
term obligations in the Balance Sheets, was partially offset by $31.2 million of
plan assets. Prior to adoption of SFAS No. 106, these assets were included in
Other assets in the Balance Sheets.
The company provides many of its retired employees with health care and
life insurance benefits. Benefits are provided under company-sponsored defined
benefit retiree health care and life insurance plans which cover most salaried
and certain hourly employees. Employees become eligible for these benefits as
they retire from active employment. Most of the retiree health care plans
require retiree contributions and contain other cost sharing features such as
deductibles and coinsurance. The retiree life insurance plans are primarily
noncontributory. The retiree health care plans are partially funded. The
retiree life insurance plans are unfunded.
Net periodic postretirement benefit cost:
(Dollars in thousands) 1993
- --------------------------------------------------------------------------
Service cost - benefits earned during year $ 3,450
Interest cost on accumulated postretirement benefit obligation 11,510
Actual return on assets (2,259)
Net amortization and deferral 449
- --------------------------------------------------------------------------
Net periodic postretirement benefit cost $13,150
==========================================================================
Adopting SFAS No. 106 had the effect of increasing the 1993 postretirement
benefit cost by $7.2 million, excluding the transition amount. Postretirement
benefit cost on a pay-as-you-go basis totaled $5.7 million for 1992 and $5.5
million for 1991 and has not been restated.
Funded status and related balance sheet amounts for postretirement health
care and life insurance plans at December 31:
(Dollars in thousands) 1993
- -------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $ (76,469)
Fully eligible active plan participants (24,080)
Other active plan participants (45,107)
- -------------------------------------------------------------------------
Total accumulated postretirement benefit obligation (145,656)
Plan assets at fair value, primarily publicly traded equity
and fixed income securities 29,884
- -------------------------------------------------------------------------
Accumulated postretirement benefit obligation
in excess of plan assets (115,772)
Unrecognized prior service cost 9,390
Unrecognized net loss 8,016
- -------------------------------------------------------------------------
Accrued postretirement benefit cost $ (98,366)
=========================================================================
The discount rate used in determining the accumulated postretirement
benefit obligation at December 31, 1993, was 7.75 percent. The expected long-
term rate of return on plan assets for 1993 was 9.5 percent.
-29-
The health care cost trend rate assumption used in determining the
accumulated postretirement benefit obligation at December 31, 1993, is based on
an initial rate of 10 percent, decreasing incrementally to 5 percent over an
8-year period and remaining at that level thereafter. This assumption has a
significant effect on the amounts reported. For example, a 1 percent increase
in the health care cost trend rates would have increased the accumulated
postretirement benefit obligation at December 31, 1993, to $169.0 million and
increased the net periodic cost for 1993 to $15.8 million from the $13.2 million
actually recorded.
Funding of postretirement health care plans is based on accepted actuarial
methods in accordance with applicable governmental regulations and is determined
separately from the net periodic cost presented above.
Effective January 1, 1993, the company adopted Statement of Financial
Accounting Standards No. 112, Employers' Accounting for Postemployment Benefits.
The statement requires accrual basis recognition of postemployment benefits
provided to former or inactive employees after employment but before retirement.
The effect of implementing the new standard was not material.
Note 11. Stock Options
Under the company's stock option plans, options for shares of the
company's common stock have been issued to certain key personnel. Options are
granted at market value and may include a stock appreciation right. Options may
also be issued in the form of restricted stock and other share-based awards,
none of which were outstanding at December 31, 1993. Options are fully
exercisable after two years and expire not later than 10 years from the date of
grant.
Information with respect to the company's stock options:
For the years ended December 31 1993 1992
- -------------------------------------------------------------------------
Option (shares) price range, $ 14.50 $ 14.50
fair market value to to
at date of grant $46.375 $46.375
- -------------------------------------------------------------------------
Options (shares) outstanding at January 1 926,112 1,055,426
Granted 241,350 234,000
Shares exercised (55,325) (110,740)
SARs(1) exercised (109,227) (230,874)
Canceled or expired (12,825) (21,700)
- -------------------------------------------------------------------------
Options (shares) outstanding at December 31 990,085 926,112
=========================================================================
At December 31 1993 1992
- -------------------------------------------------------------------------
Options (shares) exercisable 633,785 565,136
Options (shares) outstanding which include
a stock appreciation right 623,075 578,052
Shares reserved for future grants 493,875 722,400
=========================================================================
(1) Stock appreciation rights (an appropriate accrual has been made).
-30-
Note 12. Segment Information
Potlatch Corporation is an integrated forest products company with
substantial timber resources. It is engaged principally in the growing and
harvesting of timber and the manufacture and sale of wood products, printing
papers and other pulp-based products. Its timberlands and all of its
manufacturing facilities are located within the United States.
Following is a tabulation of business segment information for each of the
past three years:
(Dollars in thousands) 1993 1992 1991
- ------------------------------------------------------------------------------------
Sales to Unaffiliated Customers:(1)
Wood products:
Panel products $ 281,922 $ 250,661 $ 173,047
Lumber 196,544 159,080 113,615
Other 25,159 17,017 17,356
- ------------------------------------------------------------------------------------
503,625 426,758 304,018
- ------------------------------------------------------------------------------------
Printing papers 369,012 365,636 350,413
- ------------------------------------------------------------------------------------
Other pulp-based products:
Bleached kraft pulp and
paperboard 356,334 389,374 378,717
Tissue 139,883 118,162 117,839
Packaging(2) - 26,682 86,001
- ------------------------------------------------------------------------------------
496,217 534,218 582,557
- ------------------------------------------------------------------------------------
Total $1,368,854 $1,326,612 $1,236,988
====================================================================================
Intersegment Sales or Transfers:(3)
Wood products $ 63,618 $ 66,142 $ 64,410
Printing papers - - 313
Other pulp-based products 948 1,733 945
- ------------------------------------------------------------------------------------
Total $ 64,566 $ 67,875 $ 65,668
====================================================================================
Operating Income (Loss):
Wood products $ 160,220 $ 99,833 $ 12,609
Printing papers 15,796 27,316 30,221
Other pulp-based products (40,944) 33,298 88,971
- ------------------------------------------------------------------------------------
135,072 160,447 131,801
Corporate Items:
Administration expense (26,922) (30,022) (23,476)
Interest expense (46,230) (34,902) (28,882)
Interest and dividend income 1,352 3,790 5,493
Other, net 1,732 25,301 259
- ------------------------------------------------------------------------------------
Earnings before taxes on income and
cumulative effect of accounting changes $ 65,004 $ 124,614 $ 85,195
====================================================================================
Identifiable Assets:
Wood products $ 689,263 $ 614,806 $ 616,918
Printing papers 457,406 447,584 428,219
Other pulp-based products 824,015 807,597 717,005
Corporate 96,075 128,821 129,639
- ------------------------------------------------------------------------------------
Total $2,066,759 $1,998,808 $1,891,781
====================================================================================
-31-
(Dollars in thousands) 1993 1992 1991
- ------------------------------------------------------------------------------------
Depreciation, Amortization and
Cost of Fee Timber Harvested:
Wood products $ 39,909 $ 36,092 $ 31,853
Printing papers 30,521 28,788 25,807
Other pulp-based products 52,142 41,320 38,370
Corporate 972 965 894
- ------------------------------------------------------------------------------------
Total $ 123,544 $ 107,165 $ 96,924
====================================================================================
Capital Expenditures:
Wood products $ 97,612 $ 28,077 $ 54,393
Printing papers 42,482 32,292 57,363
Other pulp-based products 59,559 118,503 155,145
Corporate 2,002 667 137
- ------------------------------------------------------------------------------------
Total $ 201,655 $ 179,539 $ 267,038
====================================================================================
(1) Total export sales, including those made through brokers, amounted to $106.1
million, $106.1 million and $94.2 million in 1993, 1992 and 1991, respectively.
Export paperboard sales (a majority of which were shipped to Japan) amounted to
86 percent, 80 percent and 86 percent, respectively, of total export sales.
(2) The company's packaging operations were sold in April 1992.
(3) Intersegment sales for 1991-1993, the majority of which are based on prevailing
market prices, consisted primarily of chips, pulp logs and other fiber sales to
the pulp, papermaking and converting facilities. The company's timber,
timberlands and related logging facilities generally have been assigned to the
wood products segment.
-32-
Note 13. Financial Results by Quarter (Unaudited)
(Dollars in thousands - except per-share amounts) Three Months Ended
- ----------------------------------------------------------------------------------------------------------------------------------
March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------------------------------------------
1993 1992 1993 1992 1993 1992 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
Net sales $361,543 $334,536 $326,624 $328,399 $338,223 $340,113 $342,464 $323,564
- ----------------------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Depreciation, amortization
and cost of fee timber
harvested 28,368 25,432 30,221 25,568 33,132 29,073 31,823 27,092
Materials, labor and other
operating expenses 266,466 257,277 262,202 245,345 273,323 255,746 262,269 248,519
Selling, general and
administrative expenses 21,482 21,734 19,634 19,093 19,615 19,870 23,227 22,712
- ----------------------------------------------------------------------------------------------------------------------------------
316,316 304,443 312,057 290,006 326,070 304,689 317,319 298,323
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings from operations $ 45,227 $ 30,093 $ 14,567 $ 38,393 $ 12,153 $ 35,424 $ 25,145 $ 25,241
==================================================================================================================================
Net earnings (loss) $ (9,542) $ 15,862 $ 2,758 $ 34,734(1) $ (2,179)(2) $ 17,778 $ 15,598 $ 10,540
==================================================================================================================================
Net earnings per common share:
Before accounting changes $ .76 $.55 $.09 $1.19(1) $(.07)(2) $.61 $.53 $.36
After accounting changes (.33) .55 .09 1.19(1) (.07)(2) .61 .53 .36
==================================================================================================================================
(1) Includes a net after-tax gain of $14.7 million or $.51 per common share from the sale of the company's packaging
operations and a litigation settlement.
(2) Includes a retroactive 1 percent federal tax increase on earnings for the first nine months of 1993 and $3.2
million of expense for the effect of the tax increase on deferred tax balances.
-33-
INDEPENDENT AUDITORS' REPORT
The Board of Directors:
We have audited the accompanying balance sheets of Potlatch Corporation and
consolidated subsidiaries as of December 31, 1993 and 1992 and the related
statements of earnings, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1993. In connection with our
audits of the financial statements, we also have audited the financial statement
schedules on pages 35-37. These financial statements and financial statement
schedules are the responsibility of the company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedules 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 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 the financial statements referred to above present fairly,
in all material respects, the financial position of Potlatch Corporation and
consolidated subsidiaries at December 31, 1993 and 1992 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1993, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information set forth herein.
As discussed in the notes to the financial statements, in 1993 the company
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," and Statement of Financial
Accounting Standards No. 112, "Employers'Accounting for Postemployment
Benefits."
KPMG Peat Marwick
Portland, Oregon
January 26, 1994
-34-
POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES Schedule V
Property, Plant and Equipment
For the Years Ended December 31, 1993, 1992 and 1991
(Dollars in thousands)
Balance at Reclassi- Balance at
beginning Additions Retire- fications end
of year at cost ments and Other of year
---------- --------- ------- --------- ----------
Year ended December 31, 1993
- ----------------------------
Land, other than timberlands $ 7,780 $ 1,335 $ (10) $ - $ 9,105
---------- --------- -------- ------- ----------
Plant and equipment:
Land improvements 50,063 3,839 (3) 1 53,900
Buildings and structures 315,495 39,391 (257) 49 354,678
Machinery and equipment 1,501,236 192,029 (7,647) (186) 1,685,432
Capitalized interest and other 60,658 17,596 - 310 78,564
Construction in progress 209,778 (116,292) - - 93,486
---------- --------- -------- ------- ----------
2,137,230 136,563 (7,907) 174 2,266,060
---------- --------- -------- ------- ----------
Timber, timberlands and
related logging facilities 279,669 63,757 (679) 297 A 343,044
---------- --------- -------- ------- ----------
$2,424,679 $ 201,655 $ (8,596) $ 471 $2,618,209
========== ========= ======== ======= ==========
Year ended December 31, 1992
- ----------------------------
Land, other than timberlands $ 7,875 $ 38 $ (139) $ 6 $ 7,780
---------- --------- -------- ------- ----------
Plant and equipment:
Land improvements 47,915 1,769 (512) 891 50,063
Buildings and structures 294,392 24,251 (4,058) 910 315,495
Machinery and equipment 1,326,498 217,801 (41,290) (1,773) 1,501,236
Capitalized interest and other 41,902 18,757 - (1) 60,658
Construction in progress 301,537 (91,759) - - 209,778
---------- --------- -------- ------- ----------
2,012,244 170,819 (45,860) 27 2,137,230
---------- --------- -------- ------- ----------
Timber, timberlands and
related logging facilities 271,906 8,682 (215) (704)A 279,669
---------- --------- -------- ------- ----------
$2,292,025 $ 179,539 $(46,214) $ (671) $2,424,679
========== ========= ======== ======= ==========
Year ended December 31, 1991
- ----------------------------
Land, other than timberlands $ 7,854 $ 25 $ (6) $ 2 $ 7,875
---------- --------- -------- ------- ----------
Plant and equipment:
Land improvements 46,847 1,279 (223) 12 47,915
Buildings and structures 269,855 24,696 (390) 231 294,392
Machinery and equipment 1,174,719 168,359 (15,963) (617) 1,326,498
Capitalized interest and other 37,478 4,424 - - 41,902
Construction in progress 244,130 57,407 - - 301,537
---------- --------- -------- ------- ----------
1,773,029 256,165 (16,576) (374) 2,012,244
---------- --------- -------- ------- ----------
Timber, timberlands and
related logging facilities 266,728 10,848 (184) (5,486)A 271,906
---------- --------- -------- ------- ----------
$2,047,611 $ 267,038 $(16,766) $(5,858) $2,292,025
========== ========= ======== ======= ==========
A-Includes cost of fee timber harvested, amortization of logging roads and facilities,
expenditures for non-fee timber and changes in deposits on timber purchases. Refer
to page 21 of this report for the policy of the company in providing depreciation,
amortization and cost of fee timber harvested.
-35-
POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES Schedule VI
Accumulated Depreciation of Property, Plant and Equipment
For the Years Ended December 31, 1993, 1992 and 1991
(Dollars in thousands)
Additions
Balance at charged to Reclassi- Balance at
beginning costs and Retire- fications end
of year expenses ments and Other of year
---------- ---------- ------- --------- ----------
Year ended December 31, 1993
- ----------------------------
Land improvements $ 24,081 $ 1,777 $ (3) $ - $ 25,855
Buildings and structures 116,937 10,780 (252) (67) 127,398
Machinery and equipment 665,913 91,996 (7,246) (70) 750,593
Capitalized interest and other 18,353 3,833 - - 22,186
-------- -------- -------- ----- --------
$825,284 $108,386 $ (7,501) $(137) $926,032
======== ======== ======== ===== ========
Year ended December 31, 1992
- ----------------------------
Land improvements $ 22,669 $ 1,691 $ (313) $ 34 $ 24,081
Buildings and structures 110,418 9,718 (3,105) (94) 116,937
Machinery and equipment 617,107 81,684 (32,794) (84) 665,913
Capitalized interest and other 15,647 2,706 - - 18,353
-------- -------- -------- ----- --------
$765,841 $ 95,799 $(36,212) $(144) $825,284
======== ======== ======== ===== ========
Year ended December 31, 1991
- ----------------------------
Land improvements $ 21,264 $ 1,624 $ (219) $ - $ 22,669
Buildings and structures 101,545 9,164 (284) (7) 110,418
Machinery and equipment 557,119 74,586 (14,431) (167) 617,107
Capitalized interest and other 13,517 2,130 - - 15,647
-------- -------- -------- ----- --------
$693,445 $ 87,504 $(14,934) $(174) $765,841
======== ======== ======== ===== ========
-36-
POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES Schedule VIII
Valuation and Qualifying Accounts
For the Years Ended December 31, 1993, 1992 and 1991
(Dollars in thousands)
Amounts
charged
Balance at (credited) to
beginning costs and Balance at
Description of year expenses Deductions end of year
----------- ---------- ------------- ---------- -----------
Reserve deducted from related assets:
Doubtful accounts - Accounts receivable
Year ended December 31, 1993 $1,781 $ 92 $ 184 (1) $2,057
=============================================
Year ended December 31, 1992 $2,610 $(216) $(613)(1) $1,781
=============================================
Year ended December 31, 1991 $1,914 $ 709 $ (13)(1) $2,610
=============================================
(1) - Accounts written off - net of recoveries.
-37-
POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
Exhibit Index
Exhibit
*(3)(a) Restated Certificate of Incorporation, restated and filed with the
state of Delaware on May 1, 1987, filed as Exhibit (3)(a) to the
Annual Report on Form 10-K for the fiscal year ended December 31,
1992 ("1992 Form 10-K").
(3)(c) By-laws, as amended through May 20, 1993.
(4) See Exhibits (3)(a) and (3)(c). Registrant also undertakes to
file with the Securities and Exchange Commission, upon request,
any instrument with respect to long-term debt.
*(4)(a) Form of Indenture, dated as of April 1, 1986, filed as Exhibit
(4)(a) to the Annual Report on Form 10-K for the fiscal year ended
December 31, 1989 ("1989 Form 10-K").
*(4)(b) Form of Debenture for the $100 Million Principal Amount of 9-5/8%
Sinking Fund Debentures due April 15, 2016, filed as Exhibit
(4)(b) to the 1989 Form 10-K.
*(4)(c) Form of Debenture for the $100 Million Principal Amount of 9-1/8%
Credit Sensitive Debentures due December 1, 2009, filed as Exhibit
(4)(c) to the 1989 Form 10-K.
*(4)(d) Officers' Certificate, dated December 6, 1989, filed as Exhibit
(4)(d) to the 1989 Form 10-K.
*(4)(e) Form of Indenture, dated as of November 27, 1990, filed as
Exhibit (4)(e) to the Annual Report on Form 10-K for the fiscal
year ended December 31, 1990 ("1990 Form 10-K").
*(4)(f) Officers' Certificate, dated January 24, 1991, filed as Exhibit
(4)(f) to the 1990 Form 10-K.
*(4)(g) Officers' Certificate, dated December 12, 1991, filed as Exhibit
(4)(g) to the Annual Report on Form 10-K for the fiscal year ended
December 31, 1991 ("1991 Form 10-K").
*(10)(a) Potlatch Corporation Management Performance Award Plan, as amended
effective January 1, 1986, filed as Exhibit (10)(a) to the 1990
Form 10-K.
*(10)(a)(i) Amendment, dated May 5, 1989, to the Plan described in Exhibit
(10)(a), filed as Exhibit (10)(a)(i) to the 1989 Form 10-K.
(10)(b)(iv) Potlatch Corporation Severance Program for Executive Employees, as
amended and restated as of February 24, 1989.
*Incorporated by reference.
-38-
*(10)(c) Letter agreement, dated May 21, 1979, between Potlatch Corporation
and George F. Jewett, Jr., regarding consulting services, filed as
Exhibit (10)(c) to the 1990 Form 10-K.
*(10)(c)(i) Amendment, dated February 19, 1986, to agreement described in
Exhibit (10)(c), filed as Exhibit (10)(c)(i) to the 1990
Form 10-K.
(10)(d)(i) Potlatch Corporation Salaried Employees' Supplemental Benefit Plan
(As Amended and Restated Effective January 1, 1988).
*(10)(d)(ii) Amendment, effective as of December 31, 1992, to Plan described
in Exhibit (10)(d)(i), filed as Exhibit (10)(d)(ii) to the 1992
Form 10-K.
*(10)(f)(iii) Supplemental Retirement Benefit and Life Insurance Agreement,
dated February 19, 1988, together with Amendment to Agreement
thereto, dated as of January 1, 1992, between Potlatch Corporation
and Richard B. Madden, filed as Exhibit (10)(f)(iii) to the 1992
Form 10-K.
(10)(r) Potlatch Corporation 1983 Stock Option Plan (effective September
24, 1983), together with amendments thereto dated December 14,
1984, February 24, 1989 and February 22, 1990.
*(10)(s)(iii) Form of Stock Option Agreement for the Potlatch Corporation 1983
Stock Option Plan together with the Addendum thereto as used for
options granted on December 14, 1989, filed as Exhibit
(10)(s)(iii) to the 1989 Form 10-K.
*(10)(s)(iv) Form of Amendment to Stock Option Agreement together with the
Addendum thereto to add stock appreciation rights to stock option
agreements issued under the Potlatch Corporation 1983 Stock Option
Plan, filed as Exhibit (10)(s)(iv) to the 1989 Form 10-K.
*(10)(s)(v) Form of Stock Option Agreement for the Potlatch Corporation 1983
Stock Option Plan together with the Addendum thereto as used for
options granted in each December of 1990-1992, filed as Exhibit
(10)(s)(v) to the 1990 Form 10-K.
*(10)(t) Potlatch Corporation Deferred Compensation Plan for Directors,
dated February 20, 1981, as amended December 3, 1982, filed as
Exhibit (10)(t) to the 1992 Form 10-K.
*(10)(t)(i) Potlatch Corporation Directors' Retirement Plan, effective
October 1, 1989, filed as Exhibit (10)(t)(i) to the 1989
Form 10-K.
*Incorporated by reference.
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Exhibit Index (cont.)
*(10)(t)(ii) Amendment dated May 24, 1991, to Exhibit (10)(t), filed as Exhibit
(10)(t)(ii) to the 1991 Form 10-K.
(10)(w)(vi) Compensation of Directors, dated May 20, 1993.
*(10)(x) Form of Indemnification Agreement with each director of Potlatch
Corporation, dated as of the dates set forth on Schedule A and
Amendments 1, 2, 3 and 4 to Schedule A, filed as Exhibit (10)(x)
to the 1991 Form 10-K.
*(10)(x)(i) Amendment No. 5 to Schedule A to Exhibit (10)(x), filed as Exhibit
(10)(x)(i) to the 1992 Form 10-K.
(10)(x)(ii) Amendment No. 6 to Schedule A to Exhibit (10)(x).
*(10)(y) Form of Indemnification Agreement with certain officers of
Potlatch Corporation identified on Schedule A and Amendments 1, 2,
and 3 to Schedule A, filed as Exhibit (10)(y) to the 1991
Form 10-K.
*(10)(y)(i) Amendment No. 4 to Schedule A to Exhibit (10)(y), filed as Exhibit
(10)(y) to the 1992 Form 10-K.
(10)(y)(ii) Amendment No. 5 to Schedule A to Exhibit (10)(y).
(10)(z) Potlatch Corporation 1989 Stock Incentive Plan adopted December 8,
1988 and as amended and restated February 24, 1989.
*(10)(z)(i) Form of Stock Option Agreement for the Potlatch Corporation 1989
Stock Incentive Plan together with the Addendum thereto as used
for options granted on December 14, 1989, filed as Exhibit
(10)(z)(i) to the 1989 Form 10-K.
*(10)(z)(ii) Form of Stock Option Agreement for the Potlatch Corporation 1989
Stock Incentive Plan together with the Addendum thereto as used
for options granted in each December of 1990-1993, filed as
Exhibit (10)(z)(ii) to the 1990 Form 10-K.
*(10)(aa) Form of Amendments to Stock Options and Stock Incentive Plans,
dated March 30, 1990, filed as Exhibit (10)(aa) to the 1990 Form
10-K.
(22) Potlatch Corporation Subsidiaries.
(24) Consent of Independent Auditors.
(25) Powers of Attorney.
*Incorporated by reference.
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