-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HCZFvccPDwYyKJdSAd5VvSG5Zx3RLRSxp8VGDfjoM+i4BmT3HrJdDQv6xNR4sZQD QIK62v0UuMgQpF7GDgnHIg== 0000891020-02-000930.txt : 20020624 0000891020-02-000930.hdr.sgml : 20020624 20020624080242 ACCESSION NUMBER: 0000891020-02-000930 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20011031 FILED AS OF DATE: 20020624 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LONGVIEW FIBRE CO CENTRAL INDEX KEY: 0000060302 STANDARD INDUSTRIAL CLASSIFICATION: PAPERBOARD CONTAINERS & BOXES [2650] IRS NUMBER: 910298760 STATE OF INCORPORATION: WA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-10061 FILM NUMBER: 02684912 BUSINESS ADDRESS: STREET 1: P O BOX 639 STREET 2: 300 FIBRE WAY CITY: LONGVIEW STATE: WA ZIP: 98632 BUSINESS PHONE: 2064251550 MAIL ADDRESS: STREET 1: PO BOX 639 CITY: LONGVIEW STATE: WA ZIP: 98632 10-K/A 1 v82571a1e10vkza.txt FORM 10-K/A ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K AMENDMENT NO. 1 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED OCTOBER 31, 2001 COMMISSION FILE NO. 0-1370 ---------------- LONGVIEW FIBRE COMPANY (Exact name of registrant as specified in its charter) WASHINGTON 91-0298760 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 300 FIBRE WAY, LONGVIEW, WASHINGTON 98632 (Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (360) 425-1550 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Stock, $1.50 Ascribed Value New York Stock Exchange Rights to purchase Common Stock New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: 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. [ ] The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant computed by reference to the closing price of such common equity as of November 26, 2001, was $587,775,344. For purposes of this computation, all executive officers and directors of the registrant have been deemed affiliates. This shall not be deemed an admission that such persons are affiliates. The number of shares outstanding of the registrant's Common Stock, $1.50 Ascribed Value per share, as of November 26, 2001 was 51,076,567 shares. DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates by reference portions of the Company's Notice of Annual Meeting of Shareholders and Proxy Statement filed in connection with the Company's Annual Meeting of Stockholders to be held January 22, 2002. ================================================================================ TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business................................................................................... 3 General.................................................................................... 3 Products................................................................................... 3 Energy..................................................................................... 8 Competition................................................................................ 8 Regulation................................................................................. 9 Employees.................................................................................. 11 Item 2. Properties................................................................................. 11 Item 3. Legal Proceedings.......................................................................... 12 Item 4. Submission of Matters to a Vote of Security Holders........................................ 12 Executive Officers of the Registrant....................................................... 13 PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters...................... 14 Item 6. Selected Financial Data.................................................................... 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 16 Factors That May Affect Our Future Operating Results....................................... 24 Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................. 27 Item 8. Financial Statements and Supplementary Data................................................ 27 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....... 39 PART III Item 10. Directors and Executive Officers of the Registrant......................................... 39 Item 11. Executive Compensation..................................................................... 39 Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 39 Item 13. Certain Relationships and Related Transactions............................................. 40 PART IV Item 14. Exhibits, Financial Statements and Reports on Form 8-K..................................... 40 Signatures.......................................................................................... 42
2 PART I This Annual Report on Form 10-K contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as may, will, should, expect, plan, intend, anticipate, believe, estimate, predict, potential or continue, the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks outlined in the "Factors That May Affect Our Operating Results" below. These factors may cause our actual results to differ materially from any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We are under no duty to update any of the forward-looking statements after the date of this annual report to conform such statements to actual results or to changes in our expectations. ITEM 1. BUSINESS GENERAL Longview Fibre Company is a publicly held forest, paper and packaging products company engaged in three primary businesses: the ownership and management of timberlands in Oregon and Washington, which principally produce logs for sale; the ownership and operation of a pulp and paper mill, which produces kraft paper and paperboard; and the ownership and operation of converting plants, which produce finished products such as corrugated containers, specialty packaging and merchandise bags. We commenced operations in Longview, Washington in 1927 with a single paperboard machine to produce paper products. Since our inception, we have continued to expand our operations and currently own what we believe is one of the world's largest pulp and paper making complexes, 17 converting plants in 12 states and significant holdings of valuable timberlands in the Pacific Northwest composed of slightly more than 572,000 acres of timberlands. Longview Fibre Company was incorporated in the State of Washington in 1990 as a successor to a company of the same name incorporated in the State of Delaware in 1926. PRODUCTS We are a forest, paper and packaging products company engaged in three primary businesses: timber, paper and paperboard, and converted products. The following table sets forth the relative contribution to net sales of each of our segments (including allocated sales of power).
SEGMENT 2001 2000 1999 ------- ---- ---- ---- Timber............................. 19% 18% 22% Paper and Paperboard............... 26% 30% 29% Converted Products................. 55% 52% 49%
Please see Note 7 of Item 8 of Part II of this Form 10-K for financial information about industry segments and export sales. TIMBER We own and manage approximately 572,000 acres of timberlands in nine tree farms in Oregon and Washington that contain an estimated 4.4 billion board feet of 30-year old and older timber. Approximately 60% of our specie mix is Douglas Fir, which is a premium species of softwood primarily used in residential and commercial construction. During fiscal year 2001, 66.2% of our timber net sales were to domestic customers consisting of approximately 60 independent sawmills and plywood plants, with the balance exported primarily to Japan. We believe we are the third-largest U.S. exporter of logs to the Japanese market. We realize a significant price premium on the logs we sell into that market. Our timber holdings have an appraised market value of approximately $1 billion, based on an October 2001 appraisal we received from Atterbury Consultants, Inc., a nationally recognized appraisal firm specializing in timber inventory and valuations. 3 We also operate a sawmill near Leavenworth, Washington that processes logs into lumber, wood chips and various by-products for domestic and Pacific Rim construction and other markets. This sawmill provides improved log realization at one of our tree farms, and also produces wood chips for use at our pulp and paper mill in Longview, Washington. In addition, we maintain six log chipping operations principally located along the Snake River and Columbia River corridors. We supply these chipping facilities with lower-quality timber, also known as pulpwood, that would command relatively low prices if sold as logs to sawmills, and we also purchase pulpwood from third parties. We process the wood chips for pulp for our Longview mill. Our timber is harvested by independent logging contractors. In addition to the docks on the Columbia River at our Longview complex, we have close access to the Port of Longview on the Columbia River that allows us to conveniently ship our logs, paper and paperboard to our overseas customers. Timberlands. We believe that our timber resources represent significant value and will remain an important contributor to our continued success. Over 90% of our timber is softwood such as Douglas Fir and Hemlock that, because of their long fiber, strength and flexibility, are generally preferred over hardwoods for construction lumber and plywood. Our timberlands have primarily second or third growth timber, a substantial amount of which is easily accessible given the moderate terrain and extensive road systems where our timber is located. Approximately 85% of our timberlands are located west of the Cascade Mountains in Oregon and Washington. The remaining 15% of our timberlands are in eastern Oregon and Washington. We believe our timberlands are well diversified by age and advantageously dispersed geographically throughout the states of Oregon and Washington. The well-balanced age distribution of our timber reduces the likelihood of an interruption in timber supply. Our timberlands span two states on 681 non-contiguous parcels with an average parcel size of approximately 838 acres, the largest of which is approximately 40,000 acres, which reduces our risk of significant loss due to forest fires, disease and other natural disasters. As a matter of policy, we have consistently acquired timberlands to increase our inventory when available at acceptable prices reflecting the site, quality of timber and growing stock. We have purchased 18,426 acres of timberlands over the last five years. As a substantial U.S. timberland owner, we believe we are positioned to benefit from the continuing reduction in the availability of U.S. federal timber for harvesting. The federal government has curtailed the harvesting of timber in response to heightened environmental concerns. This curtailment is pronounced in the Pacific Northwest due to concern over threatened and endangered wildlife species such as the spotted owl, marbled murrelet and salmon. We believe that the shift in governmental forest management emphasis from timber resource production to conservation and habitat preservation has added to the value of our private timberlands. Appraisal. In October 2001, Atterbury Consultants, Inc., a nationally recognized appraisal firm specializing in timber inventory and valuations, appraised our timberlands. Using a 14-year discounted cash flow analysis and estimated terminal value, Atterbury arrived at an overall property value of approximately $1 billion. The future cash flows were estimated assuming: (1) approximately 289 million board feet of logs harvested every year; (2) an average sales price and cost per thousand board feet of $510 and $220, respectively, based on Atterbury's market estimates; (3) an annual 1% real price increase starting after year 4; and (4) a 9.0% discount rate. Average costs include estimates for logging, hauling, road maintenance, administrative expenses, reforesting and harvest tax. Atterbury also considered two comparable transactions in conducting the appraisal. The amount of timber harvested is based on Atterbury's views as to expected harvesting by a buyer of our timberlands as a whole during the 14-year period given our timber inventory, not on our long-term approach of harvesting on a 60-year sustainable yield basis. The harvesting level assumed by Atterbury would result in a long-term decrease in our inventory level. The appraisal is not intended to be, and should not be interpreted as, an estimate of our cash flows from our timber segment for any future period. The information does not include the effect of future changes in prices, costs, tax rates and environmental and regulatory conditions, which past experience indicates are likely to occur. These changes may have a significant impact on our future net cash flows from our timber segment and the value of our timber inventory. Timber Resource Management. We maintain a conservative forest management plan that seeks to enhance timber growth and quality in our timberlands while simultaneously meeting or exceeding environmental requirements. We view our timberland holdings as assets with substantial value apart from our manufacturing facilities and manage the timberlands on a "sustained yield" basis; that is, we harvest levels of timber that can be sustained into perpetuity due to natural growth and our reforestation efforts. We operate our timberlands on a sustained yield basis with rotations, or age of the timber when cut, of 40 years for hardwood and 55 to 70 years for softwood. Our average rotation age has been 60 years. Timber growth rates and existing age class distribution are important variables for a forest products company as they ultimately determine how much timber can be harvested. More accelerated growth rates and 4 proportionally larger acreage of older age classes permit larger annual harvests. Growth rates vary depending on species, location, age and forestry practices. We can harvest approximately 280 million board feet of merchantable timber per year from our timberlands on a sustained yield basis, based on our average 60-year rotation. Under this sustained yield rotation, our inventory of mature, standing timber 30-years old and older would remain at approximately 4.4 billion board feet in perpetuity. Our timber harvest plans are principally based on forecasted demand, price and the availability of timber from external sources. These harvest plans are reviewed several times throughout the year and revised at least annually, and are sufficiently flexible to permit modification in response to fluctuations in the log market. Our timber operations involve forest management, harvesting operations and ongoing reforestation. We employ a professional team of foresters and engineers who lead these activities. Proper management of the forest cycle includes preparing land for reforestation, pre-commercial and commercial thinning, fertilizing and harvesting mature trees. The majority of seedlings planted on our lands are developed through our forest genetics tree-improvement program. Our forestry practices vary by geographic region and depend upon factors such as soil productivity, weather, terrain, tree size, age and density. Forest stands are thinned and fertilized periodically to improve growth and stand quality until they are harvested. We typically reforest within one year of harvest, thereby continuing our balanced distribution of age classes. Any deficiency in a particular age class is managed by maintaining adequate harvestable inventory levels of other age classes and through acquisitions of standing timber within that age class. A balanced distribution of age classes will tend to provide a more regular source of cash flow, as the various timber stands reach their harvestable age. We actively use pre-commercial and commercial thinning, which is the practice of harvesting immature and lower-value trees in order to maximize the long-term value of our timberlands and generate incremental cash flow. In addition to providing another source of wood chips, we believe that thinning improves the overall productivity of our timberlands by enhancing the growth of the remaining trees. Timber harvest timing depends in part on growth cycles and in part on economic conditions. Growth cycles for timber tend to change over time as a result of technological, biological and genetic advances that improve forest management practices. We continue to develop our forest management operations to benefit from such advances to improve timber yields. Sales and Customers. As a steady supplier of timber for over 40 years, we have cultivated and established long-standing relationships with many of our timber customers. The majority of our domestic sales are to independent sawmills and plywood plants within a reasonable hauling distance from our timberlands. Our exports are principally to Japan through sales to U.S. exporters or directly to foreign importers. Sales are generated mostly through long-standing relationships, generally at negotiated market prices. In fiscal year 2001, no net sales were made pursuant to long-term contracts. During fiscal year 2001, our top 5 customers, including exporters, accounted for approximately 36% of our timber net sales, which represented approximately 7% of our total net sales. Our largest customer accounted for approximately 8% of our segment net sales during this period, which represented 1.4% of our total net sales. PAPER AND PAPERBOARD We produce our high-quality kraft paper and paperboard at our Longview, Washington mill, which we believe is one of the world's largest pulp and paper making complexes with an aggregate annual paper and paperboard capacity in excess of 1 million tons. Based on production capacity, we are North America's second-largest unbleached kraft paper manufacturer with a 14.3% share according to Pulp and Paper. Our mill complex is located on 350 acres with deep water frontage on the Columbia River, and has connections with two transcontinental railroads as well as close access to the main north-south interstate on the West Coast. We produce a wide variety of paper and paperboard at our mill, including corrugating medium and linerboard, which are combined to make corrugated containers; kraft paper; and heavier grades of paper for multi-wall shipping sacks used by the agricultural, pet food, chemical and cement industries. We have established a reputation for manufacturing strong, high-quality paper and paperboard using a variety of fibers for superior packaging products. We produce most of our high-quality kraft pulp through the use of what we believe to be two of the world's largest continuous pulp digesters. These high-efficiency Kamyr brand digesters break down wood chips into wood pulp that can then be used to make paper and related products. Purchased bleached pulp and pulp from sawdust and old corrugated containers ("OCC") provide the balance of our pulp. Approximately 22% of the pulp that we used in fiscal year 2001 was from OCC, which makes our paper and paperboard products more attractive to an increasingly environmentally conscious public. 5 Manufacturing. We have continuously upgraded and expanded our paper mill to produce higher-quality paper more quickly and economically. Our mill consists of one pulp mill and twelve paper machines with more than 3,300 tons average daily paper and paperboard production capacity. Our rated annual paper and paperboard production capacity exceeds 1 million tons. Most of the paper mill's pulp is produced by the kraft process, in which raw material fibers from wood chips are cooked under pressure in a chemical mixture in vessels called digesters. The kraft process is widely considered to be the most desirable process for making pulp because it produces paper and paperboard with high structural strength due to the relatively longer fibers in the pulp. Our fully automated digesters can produce large quantities of unbleached pulp and feature an energy- and chemical-efficient pulping process. In addition to digesting our own unbleached pulp, we purchase bleached pulp from third parties and process recycled material into pulp. Pulp is then refined, diluted and subsequently fed into our paper machines to be made into paper. The kraft process is an expensive method of producing pulp and is economically feasible only through energy conservation and efficient recovery and reuse of pulping chemicals. Accordingly, we recycle used chemicals both to produce heat and to be re-fed into the digesters for additional pulp making. We also continue to pursue computer-controlled process automation to improve mill energy conservation, process control and quality. Our continuous Kamyr digesters use only half the energy used by batch digesting, another widely employed pulping process. The design and development efforts of a professional staff of more than 50 engineers and chemists contribute significantly to all phases of pulp and paper making. The flexibility of our paper machines enables us to focus on individual customer needs by developing customized grades for specific product requirements and enable us to rapidly adjust to market conditions. We currently have several swing machines that can produce paper or paperboard. In addition, paper machines of various trim widths and capabilities have been added periodically, while our smaller machines have been utilized to make small lots of specialty paper and paperboard. We also recently engaged a third-party consulting group to assist us with our corporate business process improvements, or BPI, initiative. Our BPI initiative has identified cost savings throughout all of our segments by utilizing system improvements to enhance business processes, implementing new procurement practices, and decreasing working capital by reducing inventories and improving customer service. The new procurement practices should leverage our buying power by consolidating purchases of commodity items and rationalizing the number of vendors and transactions. We have identified improvements that we believe should result in substantial cost savings. Additionally, we will focus on increasing overall efficiency by reducing our workforce, if necessary, possible closure or curtailment of non-competitive facilities, reallocation of production and implementation of a strategy to reduce energy consumption by better utilizing existing capacity. Raw Materials and Suppliers. Our mill's advanced technology combined with our papermaking flexibility enables us to use virtually all species of Pacific Northwest wood, including various firs, pines, cedars, hemlock and hardwoods. Our raw material fibers come primarily from purchased wood chips and sawdust with important contributions from fiber reclaimed from post-consumer and post-industrial waste such as OCC and purchased bleach pulp from a variety of sources. In addition to the wood chips and sawdust that we purchase, we source raw materials from our own sawmill at Leavenworth and our six log chipping facilities. Our chip operations are located principally along the Snake and Columbia River corridors, allowing for low-cost transport by barge. Residual wood chips and sawdust are also supplied by many of our timber customers that generate these residuals from logs purchased from us. During fiscal year 2001, approximately 12% of our fiber requirements were generated from internal operations, and approximately 22% were generated from recycled materials. The remainder of our fiber came from more than 60 chip suppliers composed of sawmills, plywood plants and whole log chipping facilities primarily located in Washington, Oregon, Idaho and Montana within a 1,300-mile radius of our Longview mill. Actual sourcing levels vary with market conditions. We can receive over 30 rail cars, as many as 300 truckloads and a number of barges full of wood chips at the mill daily. In addition, approximately 17% of our fiber is from wood chips that are purchased at market prices from sawmills to which we also sell our logs. We believe our stable historical relationships with these mills result in a dependable supply of wood chips from them. We purchase bleached pulp from various sources and have an arrangement to purchase pressed bleached pulp (which has not been dried) from a nearby mill that has excess capacity. We continue to broaden our raw material supply and reduce fiber costs by increased recovery of wastes and use of OCC, which has been made possible through ongoing plant and machine upgrades. Sales and Customers. We continue to emphasize quality, service, continuity and design of our paper and paperboard products to meet our customer needs. We have been engaged in a long campaign to increase the production of value-added specialty and custom paper grades and broaden our product lines. Our paper products are sold by our sales forces located in Walnut Creek and Los Angeles, California; Longview, Washington; Milwaukee, Wisconsin; and Atlanta, Georgia, or through paper merchants. In fiscal year 2001, our converted products segment obtained approximately 98% of its paper and paperboard requirements from our Longview mill, 6 representing approximately 61% of total mill production. We sell the remaining mill production to a small number of export customers and a large number of geographically dispersed domestic customers. Less than 5% of our fiscal year 2001 net sales were made pursuant to long-term contracts. Where possible, we develop products in conjunction with our customers and enter into long-term relationships. Within our paper and paperboard segment, approximately 17% of our segment net sales during fiscal year 2001 were from our specialty TEA-Kraft(TM) paper, a highly rupture-resistant multi-wall bag used in the agriculture, pet food, chemical and cement industries. Excluding sales to our converting plants, during fiscal year 2001, our top 5 domestic customers and top 5 export customers accounted for approximately 32% and 29%, respectively, of our paper and paperboard net sales. The domestic customers represented approximately 7% of our total net sales and the export customers represented approximately 6% of our total net sales. Our largest customer, an exporter who resells our products to a number of smaller customers, accounted for approximately 19% of our total segment net sales during this period, which represented approximately 4% of our total net sales. There were no other customers accounting for more than 10% of segment net sales. CONVERTED PRODUCTS We own and operate 17 converting plants located in 12 states that produce value-added corrugated containers, specialty packaging, creative point-of-purchase displays, handle shopping bags and merchandise bags. We are capable of producing containers in virtually any size, type, color and design, and we believe that we have established a reputation for high-quality products and services. With our advanced technologies, we are able to produce products with high-quality six color graphics printed directly on corrugated material using our computerized ink-blending expertise. We also produce complex structural designs. Our corrugated containers are typically used for packaging of items such as fresh and frozen fruits and vegetables, juice, wine, beer, appliances, furniture, toys and electronics. Virtually all of our products in this segment are sold to domestic customers. In addition to manufacturing standard corrugated shipping containers, our container products include solid-fiber boxes, containers with specialty folding-gluing characteristics and a full line of jumbo boxes in a variety of sizes. We also produce Liquiplex(R), a family of bulk-liquid disposable bins available in sizes up to 330-gallons, as well as a number of different types of consumer bags including handle shopping bags, merchandise bags and other specialty bags. Similar to boxes, bags are produced according to customer specifications in a variety of colors, sizes and shapes, complete with exacting printing of designs or promotional messages. Manufacturing. Our commitment to automation and improvements in plant and equipment is evidenced by our recent investments to modernize our facilities and equipment. Investments in newer technology have produced a variety of capabilities including high-speed corrugating, high-quality graphics printing and other precise box finishing. As a result, we believe our converting facilities are some of the best-equipped in the United States, capable of producing corrugated containers and merchandise bags in virtually any size, shape and design based on customer needs. We recently implemented a process standardization initiative for order entry, production scheduling, shipping and inventory control at our converting plants which involves taking "best practices" from each of our plants and applying them to our other plants. This initiative is expected to result in a number of improvements, including more efficient production, inventory management and on-time order fulfillment. We also expect that the BPI initiative will result in cost savings and efficiencies in our converted products operations similar to those in our paper and paperboard segment. Of our 17 converting plants: 3 are sheet plants that fashion corrugated sheets obtained from our corrugator plants into finished products; 12 are corrugator plants that, in addition to converting corrugated sheets into finished products, can also produce corrugated sheets from corrugating medium and linerboard; and 2 are bag plants. We do not operate any sheet-feeder plants. See "Properties" for the locations of our converting plants. Raw Material Sources and Supply. The principal raw material used by our converting plants is paper and paperboard. Our converting plants receive approximately 98% of their paper and paperboard from our Longview mill either directly or through barter arrangements, whereby one of our converting plants acquires paper and paperboard from a third party's paper mill that is geographically closer to it than our Longview mill. In return, our mill supplies paper and paperboard to such third party's converting plant. Sales and Customers. Sales of converted products are made directly to end users, as well as through jobbers. Each plant has its own sales force that reports to a full-time sales manager for that location. Both sales managers and plant managers in turn report to regional divisional managers. We have approximately 90 full-time direct sales employees in our converted products segment. 7 We sell our converted products to over 3,500 customers nationwide. We maintain long-standing relationships with many of our customers, some of whom have purchased from us for over 50 years. Although we have large account customers with whom we have established relationships, we seek to focus on market-niche business opportunities where we add value through service, customized design, and specialty product capabilities. We believe we often encounter less competition in pursuing those opportunities as many of our larger competitors do not find such specialty niches to have the volume of production that would make this business attractive to them. Our vertical integration with, and the process flexibility of, our Longview mill allow us to quickly and efficiently respond to our customers' changing needs. During fiscal year 2001, our top 5 customers accounted for approximately 26% of our converted products net sales, with no customer accounting for more than 8% of segment net sales. The top 5 customers represented approximately 13% of our total net sales and our largest customer represented approximately 4% of our total net sales. Approximately 12% of our net sales were made pursuant to long-term contracts. ENERGY Our Longview mill contains six steam-driven turbine generators and one natural gas-fired co-generation facility, all of which are capable of producing electric power. The steam-driven generators generally have a combined capacity to produce 40 megawatts of power and the co-generation facility generally has a capacity to produce 60 megawatts of power. The primary contracts pursuant to which we purchased and sold power in the past have expired. Under new terms, we have agreed to use all of our steam-driven generator capacity for internal use and, except under limited circumstances, sell all of our power produced from our co-generation facility into the market. Our future decisions regarding electric power generation, including the extent to which we operate our co-generation facility into the market, will change from period to period based on market conditions and our own power requirements. We do not expect sales of power to meaningfully contribute to our results in the coming year. COMPETITION We compete to varying degrees with a number of U.S. and foreign forest, paper and packaging products companies in different product lines and in different quality segments within each product line. Each segment in which we compete is highly competitive. We compete on the basis of price and reputation, which we support through our product consistency, modern facilities, highly trained workforce, manufacturing and delivery flexibility and experienced field sales force. There are numerous large timber suppliers in the United States for the domestic and export markets and these suppliers compete on the basis of price and quality. Ranked on the basis of annual board feet, Weyerhaeuser Company was the largest domestic producer and exporter of timber in 2000. Longview Fibre Company and Willamette Industries were other significant exporters in 2000. Our paper and paperboard segment primarily competes in the highly-concentrated U.S. unbleached kraft paper market. The 10 largest U.S. producers of kraft paper comprised approximately 84% of industry capacity. International Paper was the largest producer in 2000, based on industry capacity, and we were the second largest. Abroad, we compete with many domestic producers as well as with foreign competitors such as Eurocan, New Zealand Paper and Canadian Forest Products. Competition in the unbleached kraft paper market is primarily based on price, service and quality. In the world paperboard market we compete with many of the same foreign and domestic paper producers. Many foreign companies also compete with us in the domestic linerboard market. We believe Smurfit-Stone Container was the largest producer in 2000 based on industry capacity. The paperboard market competes primarily in the same manner as does the paper market. There are many competitors in the markets for our converted packaging products, including other large, vertically-integrated companies and numerous smaller companies. Although no single company is dominant in any particular market, we have significant competitors in this market, including Smurfit-Stone Container who is our largest competitor. The packaging industry competes on price as well as design, quality and service, with varying emphasis on these factors depending on the product line. Due to the high cost of transporting corrugated containers, competition from foreign manufacturers does not have a significant impact on the corrugated container market in the United States. 8 We have listed below our principal competitors.
SEGMENTS PRINCIPAL COMPETITORS Timber.............................. Weyerhaeuser Corporation Plum Creek Murray Pacific Paper and Paperboard Paper....................... International Paper Eurocan Segezha Canadian Forest Products Georgia-Pacific Tolko Paperboard.................. Smurfit-Stone Georgia Pacific Weyerhaeuser Corporation International Paper Temple-Inland Converted Products.................. Smurfit-Stone Georgia-Pacific Weyerhaeuser Corporation International Paper PCA Temple-Inland
REGULATION The forest, paper and packaging products industries are highly regulated in the United States, subject to a variety of federal, state and local environmental, pollution control and other laws and regulations. Our forestry and manufacturing operations are subject to federal, state and local environmental laws and regulations relating to the protection of the environment, including laws relating to water quality, air quality, waste management and hazardous substances. We believe that we are in substantial compliance with all relevant local, state and federal regulations. All of our facilities meet current regulatory standards in all material respects, and we believe we are operating in an environmentally responsible manner. We maintain environmental and industrial safety and health compliance programs and periodically conduct internal regulatory audits of our operations to monitor compliance with relevant laws and regulations. We continually review all known environmental exposures, including the costs of remediation. At the present time, we are not aware of any environmental liabilities that would have a material impact on our results of operations. Environmental impacts at some of our facilities resulting from current and historic operations, and at certain third-party sites to which we sent hazardous substances for disposal or storage, require expenditures for remediation. Liability arising out of prior ownership or past operations is sometimes imposed without regard to causation or prior knowledge of contamination. Violations of environmental laws and regulations can subject us, and in certain cases have subjected us, to additional costs and expenses, including defense costs and expenses and civil penalties. Violations of environmental laws and regulations can also subject us to criminal penalties. In addition, the operations of our manufacturing facilities and timberlands are subject to the requirements of the federal Occupational Safety and Health Act and comparable state statutes relating to the health and safety of employees. We conduct internal safety audits to identify potential violations of law or unsafe conditions, and we believe that we are in material compliance with all applicable safety and health laws and regulations. In fiscal year 2002, we expect to spend approximately $3.6 million on capital expenditures associated with achieving or maintaining compliance with environmental laws and regulations, and approximately $7 million on operating and other non-qualified expenditures relating to environmental matters. 9 Timberlands. Operations on timberlands are subject to specialized statutes and regulations in the states of Oregon and Washington. These include Forest Practices Acts that address many timber growing, harvesting and processing activities and require us to establish "no-cut" zones in environmentally sensitive areas. Other state laws and regulations control timber slash burning operations during fire hazard periods to protect air quality. Regulations also control road construction and maintenance activities, and logging activities affecting water quality or in proximity to certain ocean and inland shorelines or wetlands. Water Quality and Wastewater. The federal Clean Water Act and comparable state statutes regulate discharges of process wastewater, and require National Pollutant Discharge Elimination System ("NPDES") permits for discharge of industrial wastewater and stormwater runoff into regulated public waters. Our manufacturing facilities are generally in compliance with NPDES wastewater and stormwater requirements. Air Quality. The Clean Air Act regulates emissions into the air, and requires air permits that set limits on such air emissions. We anticipate making capital expenditures of approximately $4 to 7 million over the next three years for air pollution control additions and modifications to ensure compliance with air emissions standards and to accommodate facility production capacity increases. The Environmental Protection Agency is developing "Maximum Achievable Technology," or MACT, standards for reducing hazardous air pollutants from specified categories of industrial processes with major emissions. These categories include boilers, paper coating and lime manufacturing, some or all of which we participate in. While the EPA has not yet set the MACT standards and we do not expect compliance to be required until 2006, we expect that the final standards could eventually have an impact on our operations and require material expenditures. Cluster Rule. The Environmental Protection Agency issued a final air and water quality rule for the pulp and paper industry, referred to as the "Cluster Rule," in 1998. This Cluster Rule is an integrated, multimedia regulation enacted to control the release of pollutants to two media from one industry. Pulp and paper mills must meet standards for air emissions from several mill processes, including the cooking, washing and bleaching stages of pulp manufacturing. The EPA also set effluent limits for wastewater discharged during the pulp bleaching process and in the final discharge from mills. The limits set for the bleaching process are significant to the pulp and paper industry as a whole, but should not affect our operations since we do not bleach pulp and have no plans to bleach pulp in the future. The most significant impacts to us result from Cluster Rule air emissions requirements. The Cluster Rule contains significant compliance milestones for air emissions in 2004, and for pulp and bleaching process in 2006. We estimate that over the next five years, capital expenditures required to comply with this regulatory program will range from $15.0 million to $20.0 million. The majority of these expenses will be facility changes and additions for air pollution control, the most significant of which will be replacing washer lines used to remove spent cooking chemicals from pulp after the digesting process at the Longview mill. The estimated cost of this replacement project is $8.0 million. We do not expect the costs associated with other individual Cluster Rule compliance projects to be material, but taken as a whole we estimate the cost at $7.0 to $12.0 million. Endangered Species. The Federal Endangered Species Act and counterpart state legislation protect species threatened with possible extinction. Protection of endangered species habitat includes restrictions on timber harvesting and related activities. A number of species indigenous to the Pacific Northwest have already been protected under the Endangered Species Act, including the northern spotted owl, marbled murrelet, mountain caribou, grizzly bear, goshawk, bald eagle and various anadromous fish species. Some of these species, including the northern spotted owl, marbled murrelet and goshawk, are found in some of our timberlands, requiring us to refrain from harvesting some of our timberland resources. There can be no assurance that additional species within our timberlands will not subsequently receive protected status under the Endangered Species Act or that more members of species currently protected will not be discovered within our timberlands, requiring us to refrain from harvesting timber on additional acres. Timber Exports. Federal law prohibits the export of unprocessed timber acquired from federal lands in the Western United States, or the substitution of unprocessed federal timber from the Western United States for unprocessed private timber that is exported. Persons owning timber-processing facilities may seek authorization from the U.S. Department of Agriculture for a "sourcing area" within which the person may purchase federal timber while exporting unprocessed private timber originating from outside the sourcing area. We have one such sourcing area. Energy. Although we generally are not regulated as a public utility, we must comply with federal and state utility regulations in order to sell the electricity that we produce into the market. Relevant regulations provide that an industrial producer of electrical 10 power such as Longview Fibre may sell power into the wholesale market without being regulated as a public utility, by obtaining certification as a Qualified Facility from the Federal Energy Regulatory Commission. We currently have such certification and are not regulated as a public utility. EMPLOYEES As of October 31, 2001, we employed approximately 3,700 employees, of which approximately 2,330 employees are parties to collective bargaining agreements between us and one of five unions. We have 11 collective bargaining agreements, which expire at various dates through the year 2006, including agreements covering approximately 332 employees that will expire in 2002. We believe that our relationship with our employees is good and we have recently signed a new collective bargaining agreement with our 1,400 Longview mill employees that extends through 2006. ITEM 2. PROPERTIES As of October 31, 2001, we owned in fee 572,418 acres of tree farms located in various counties of Washington and Oregon. As a matter of policy we have consistently acquired and intend to continue to acquire more timberlands whenever available at acceptable prices, dependent on the location and quality of the site involved and the species and quality of the merchantable timber and growing stock thereon. Our production facilities are listed below:
APPROX. APPROX. LEASED/ PRODUCTION FACILITIES ACRES BUILDING SQ. FT. OWNED --------------------- ------- ---------------- ------- PULP, PAPER AND PAPERBOARD PRODUCTION FACILITY Longview, Washington(a)........................................ 358 3,115,080 Owned CONVERTED PRODUCTS PRODUCTION FACILITIES Amsterdam, New York (Corrugated Containers).................... 11 219,840 Owned Bowling Green, Kentucky (Corrugated Containers)................ 20 306,486 Owned Cedar City, Utah (Corrugated Containers)(b).................... 22 143,000 Owned Cedar Rapids, Iowa (Corrugated Containers)..................... 21 388,000 Owned Fridley, Minnesota (Corrugated Containers)..................... 17 291,000 Owned Grand Forks, North Dakota (Corrugated Containers)(b)........... 27 85,000 Owned Longview, Washington (Corrugated and Solid Fibre Containers)... (a) (a) Owned Milwaukee, Wisconsin (Corrugated and Solid Fibre Containers)... 15 493,700 Owned Oakland, California (Corrugated Containers).................... 7 215,500 Owned Seattle, Washington (Corrugated Containers).................... 3 132,300 Owned Seward, Nebraska (Corrugated Containers)(b).................... 18 85,000 Owned Spanish Fork, Utah (Corrugated Containers)(c).................. 25 519,000 Owned Spanish Fork, Utah (Merchandise and Specialty Bags)(c)......... (c) (c) Owned Twin Falls, Idaho (Corrugated Containers)...................... 12 446,000 Owned Waltham, Massachusetts (Merchandise and Specialty Bags)........ 3 94,600 Owned West Springfield, Massachusetts (Corrugated Containers)........ 11 230,460 Owned Yakima, Washington (Corrugated Containers)..................... 18 419,000 Owned WOOD CHIP PRODUCTION FACILITIES Bullfrog, Washington........................................... 74 (d) Owned Clarkston, Washington.......................................... 19 (d) Leased Clatskanie, Oregon (also log sorting).......................... 23 (d) Owned Kalama, Washington............................................. 12 (d) Leased Lewiston, Idaho................................................ 13 (d) Leased The Dalles, Oregon............................................. 54 (d) Leased SAWMILL Leavenworth, Washington (also log sorting)..................... 69 125,000 Owned
- ---------- (a) Our Longview facility is used for pulp, paper and paperboard production, converted products production and as our corporate headquarters. 11 (b) Corrugated sheet plants. (c) Our Spanish Fork facilities are located in the same complex. These are considered separate facilities but share a common warehouse and other structures. (d) Chip production facilities do not have significant covered building space. Buildings consist of office and shop buildings and special purpose structures over chipping equipment. In addition to the facilities listed above, we have twelve strategically located corrugated container storage facilities that are used primarily as warehouse space. We also have one chip reload facility. ITEM 3. LEGAL PROCEEDINGS We have recently agreed to participate in the arbitration of two disputes concerning our electric power generation. The first dispute involves approximately $2 million that we believe the Bonneville Power Administration, or BPA, owes us for power we indirectly sold to BPA through our local public utility district pursuant to a now expired contract. The second dispute involves approximately $5 million that BPA claims is owed by our public utility district in connection with power we sold over the last several years. We have agreed with the public utility district that it may pass through to us as a cost under our contract the amount of such claim, if any, that is awarded to BPA in the arbitration. We do not believe that the results of these disputes will have a material financial impact on us. In early 2002, we were named a defendant in 95 asbestos related actions in Madison County, Illinois and 6 asbestos related actions St. Louis, Missouri along with numerous other defendants. In each case, the plaintiffs allege asbestos related injuries from exposure to asbestos products, the origins of which are unclear, as well as exposure to asbestos while working on the defendants' premises. The claims are not specific as to what contacts the plaintiffs had with us, our manufacturing plants or our products. None of these claims specifies damages sought from us individually, but each Illinois case seeks damages from all defendants collectively of at least $100,000, and each Missouri case seeks damages from all defendants collectively of at least $75,000. Given the recent nature of the claims, we have had little opportunity to complete a factual investigation of them, but we currently believe that these claims will not result in our having material liability, if any, for damages. In addition, we were named a defendant in an asbestos action in King County, Washington which is, we believe, unrelated to the Illinois and Missouri cases. In the King County case, unspecified damages are being sought by an employee of a former independent contractor who claims injuries resulted from alleged exposure to asbestos while working as a contractor's employee at our Longview mill site. It is not possible to predict with certainty the outcome of this matter or the matters discussed above. Predictions as to the outcome of pending litigation are inherently subject to substantial uncertainties with respect to, among other things, factual and judicial determinations. We currently believe all these claims are covered by our insurance, subject to applicable deductibles, however our insurer has reserved its right to dispute the coverage. Our general liability insurer is defending the actions. On a regular basis, we conduct internal reviews of our compliance with environmental laws. As a result of an internal review completed in 2001, we discovered several instances where new construction or modifications to our Longview facilities may have been made without air emissions analysis and permits that are required by the federal Clean Air Act and its regulations and counterpart state laws and regulations (the "Clean Air Act"). The Clean Air Act also requires that a company undertaking certain new construction and modifications use the best available technology in controlling emissions. We have voluntarily disclosed potential violations of the Clean Air Act to the appropriate state and federal regulatory authorities. Our future capital expenditure estimates include amounts that we may expend to comply with the Clean Air Act. See "-- Regulation" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Although we have no preliminary indications as the amount of sanctions, if any, that may be assessed against us for these potential violations, we do not expect that any sanctions will be material to us. From time to time we have been, and continue to be, subject to other legal proceedings and claims in the ordinary course of our business. These include various proceedings relating to environmental regulation, including the cleanup of hazardous waste under the federal Comprehensive Environmental Response Compensation and Liability Act, and similar state laws. These claims, even when lacking merit, can result in the expenditure of significant financial and managerial resources as we defend ourselves. Although the final outcome of any legal proceeding cannot be predicted with any degree of certainty, we presently believe that any ultimate liability resulting from any of the legal proceedings, or all of them combined, would not have a material effect on our financial position or results of operation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12 Nothing was submitted to a vote of the shareholders during the fourth quarter of the fiscal year. EXECUTIVE OFFICERS OF THE COMPANY The executive officers of the Company as of November 30, 2001, and certain biographical information about each of these individuals, are set forth below:
EXECUTIVE OFFICER NAME AGE OFFICE SINCE ---- --- ------ --------- R. P. Wollenberg......... 86 Chairman of the Board and Chief Executive Officer 1953 R. H. Wollenberg......... 48 President and Chief Operating Officer 1996 R. J. Parker............. 53 Senior Vice President -- Production and Mill Manager 1994 D. L. Bowden............. 66 Senior Vice President -- Timber 1989 K. D. Gettman............ 53 Senior Vice President -- Container Group 2001 L. J. Holbrook........... 46 Senior Vice President -- Finance, Secretary and 1989 Treasurer R. B. Arkell............. 70 Vice President -- Industrial Relations and General 1986 Counsel
RICHARD P. WOLLENBERG was elected Chairman of the Board in 1985, and has been a Director since 1946. He has served as Chief Executive Officer since 1978 and as President from 1969 to September 2001. He is a member of the Executive Committee of the Board. Mr. Wollenberg has been active at Longview Fibre since 1939. Mr. Wollenberg received a bachelor of science degree in mechanical engineering from the University of California at Berkeley and a master's degree in business administration from Harvard University. Richard P. Wollenberg is the father of Richard H. Wollenberg and David A. Wollenberg. RICHARD H. WOLLENBERG was elected Executive Vice President in January 2001 and the President and Chief Operating Officer in September 2001, effective October 1, 2001, and has been a Director since 1995. Mr. Wollenberg previously served as our Senior Vice President -- Production, Western Container Division from 1995 to 2000 and has been with Longview Fibre since 1988. Mr. Wollenberg received a juris doctorate from Willamette University and a bachelor of philosophy degree from Reed College. RICHARD J. PARKER was elected Senior Vice President -- Production and Mill Manager in 1994 and has been a Director since 1997. He previously served as Vice President and Assistant to the President, and Pulp Mill Superintendent and has been with Longview Fibre since 1972. Mr. Parker received a bachelor of science degree in chemical engineering from Washington State University, and is a graduate of the Harvard Business School's Program for Management Development. KEN D. GETTMAN was elected Senior Vice President -- Container Group in September 2001, effective October 1, 2001. He previously served as Vice President -- Sales, Western Container Division from January 1998 to September 2001 and Sales Manager from 1994 to 1997. Mr. Gettman has been with Longview Fibre since 1967. DAVID L. BOWDEN was elected Senior Vice President -- Timber in 1992, and has been a Director since 1990. He previously served as Vice President -- Timber. He serves on the Executive Committee of the Board. Mr. Bowden has been with Longview Fibre since 1960. Mr. Bowden received a bachelor of science degree in forest engineering from Oregon State University. LISA J. HOLBROOK was elected Senior Vice President -- Finance, Secretary and Treasurer in 1992 and has been a Director since 1992. Ms. Holbrook previously served as Vice President -- Finance, Secretary and Treasurer and has been with Longview Fibre since 1977. Ms. Holbrook received a bachelor of arts degree in business administration from Washington State University, and is a graduate of the Harvard Business School's Program for Management Development. ROBERT B. ARKELL was elected Vice President -- Industrial Relations and General Counsel in 1979 and has been a Director since 1986. Mr. Arkell previously served as Judge, Superior Court for Cowlitz County, Washington. Mr. Arkell received a juris doctorate from the University of California, Hastings College of Law, and a bachelor of business administration degree from the University of Washington. Each of our officers are elected to their positions at the board of directors' annual meeting in January of each year. The officers serve until the next annual meeting or until their resignation, removal or appointment of a successor. PART II 13 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's common stock trades on the New York Stock Exchange under the symbol "LFB". The following table sets forth, for the periods indicated, the range of high and low market prices for the Company's common stock as reported by the New York Stock Exchange.
MARKET PRICE PER SHARE -------------------------------- 2001 2000 --------------- --------------- FISCAL QUARTER LOW HIGH LOW HIGH -------------- ------ ------ ------ ------ 1st........................ $12.50 $14.25 $11.19 $17.75 2nd........................ 11.30 14.12 12.25 14.88 3rd........................ 11.70 13.98 10.63 13.38 4th........................ 8.30 13.10 10.56 14.19
The Company estimates that there are approximately 10,000 beneficial owners of the Company's common stock. Dividends per share paid in fiscal 2001, 2000 and 1999:
MONTH PAID 2001 2000 1999 ---------- ----- ----- ----- January.................. $0.12 $0.12 $0.02 April.................... 0.12 0.12 0.02 July..................... 0.12 0.12 0.08 October.................. 0.12 0.12 0.16 ---- ---- ---- $0.48 $0.48 $0.28 ===== ===== =====
The Company's Board of Directors declared a regular dividend of $0.03 per share to be paid on January 10, 2002 to shareholders of record on December 24, 2001. The Company's financing arrangements outstanding from time to time include covenants that restrict the payment of dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial information concerning the Company and should be read in conjunction with the audited financial statements and notes included in "Financial Statements and Supplementary Data."
YEAR ENDED OCTOBER 31 ------------------------------------------------------------ (DOLLARS IN THOUSANDS EXCEPT PER SHARE AND OTHER DATA) 2001 2000 1999 1998 1997 - ------------------------------------------------------ -------- -------- -------- -------- -------- STATEMENT OF INCOME Net sales............................................ $875,955 $876,298 $774,349 $753,244 $772,845 Timber............................................ 161,129 161,586 170,992 166,037 186,814 Paper and paperboard.............................. 195,765 255,025 226,330 193,154 196,192 Converted products................................ 441,975 451,195 377,027 394,053 389,839 Power............................................. 77,086 8,492 -- -- -- Cost of products sold, including outward freight..... 725,313 710,235 644,071 666,960 661,684 Gross profit......................................... 150,642 166,063 130,278 86,284 111,161 Selling, administrative and general expenses......... 74,895 69,098 62,670 64,693 63,760 Operating profit..................................... 75,747 96,965 67,608 21,591 47,401 Timber............................................ 65,238 69,438 83,207 74,470 101,740 Paper and paperboard(a)........................... 2,173 6,472 (4,114) (13,009) (5,143) Converted products(a)............................. 8,336 21,055 (11,485) (39,870) (49,196) Interest expensed.................................... (39,626) (40,115) (38,703) (39,935) (31,613) Other income......................................... 1,546 2,097 2,579 4,192 3,706 Income (loss) before income taxes.................... 37,667 58,947 31,484 (14,152) 19,494 Provision for income taxes........................... 13,000 21,300 11,500 (7,500) 6,800 Net income (loss).................................... 24,667 37,647 19,984 (6,652) 12,694 PER SHARE Net income (loss).................................... $0.48 $0.73 $0.39 $(0.13) $0.25 Dividends............................................ 0.48 0.48 0.28 0.54 0.64
14 Earnings reinvested in the business............... -- 0.25 0.11 (0.67) (0.39) Shareholders' equity at year-end.................. 8.33 8.38 8.14 8.03 8.70 Average shares outstanding (thousands)............ 51,152 51,677 51,677 51,677 51,691 Shares outstanding at year-end (thousands)........ 51,077 51,577 51,677 51,677 51,677 BALANCE SHEET DATA Total assets...................................... $1,324,448 $1,276,690 $1,212,753 $1,263,343 $1,260,903 Working capital................................... 38,059 42,378 68,001 55,318 40,381 Capital assets.................................... 1,025,833 981,937 947,359 1,004,837 1,013,361 Deferred tax liabilities -- net................... 184,947 171,518 153,945 142,827 141,623 Long-term debt.................................... 540,400 490,900 495,900 547,018 498,137 Shareholders' equity.............................. 425,395 432,042 420,463 414,949 449,506
- ---------- (a) Includes allocated results from power sales.
YEAR ENDED OCTOBER 31 ---------------------------------------------------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AND OTHER DATA) 2001 2000 1999 1998 1997 - ------------------------------------------------------- -------- ------- ------- ------- -------- OTHER DATA Sales: Logs, thousands of board feet................... 235,000 209,000 230,000 235,000 218,000 Lumber, thousands of board feet................. 100,000 93,000 85,000 76,000 65,000 Paper, tons..................................... 252,000 298,000 241,000 221,000 202,000 Paperboard, tons................................ 106,000 183,000 240,000 140,000 177,000 Converted products, tons........................ 535,000 550,000 500,000 524,000 548,000 Logs, $/thousand board feet..................... $548 $613 $605 $598 $724 Lumber, $/thousand board feet................... 323 357 378 336 443 Paper, $/ton FOB mill equivalent................ 590 580 565 610 638 Paperboard, $/ton FOB mill equivalent........... 348 384 333 353 332 Converted products, $/ton....................... 826 820 754 752 711 Primary production, tons........................... 954,000 1,048,000 1,016,000 903,000 958,000 Employees.......................................... 3,700 3,750 3,650 3,700 3,900 Funds: Used for plant and equipment................ $115,530 $99,642 $29,237 $73,054 $139,727 Used for timber and timberlands............. 4,101 6,532 3,541 15,622 15,716
15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Our business is organized into three segments: timber, paper and paperboard and converted products. We benefit from significant integration between our business segments. During fiscal year 2001, our paper and paperboard segment obtained approximately 10% of its wood chips from logs that were harvested from our timberlands and chipped by our chipping operations. In the same period, our converted products segment obtained approximately 98% of its paper and paperboard requirements from our Longview mill, representing approximately 61% of total mill production. In addition, our business segments share centralized corporate management, accounting, human resources and information systems support. Our fiscal year ends on October 31. Net sales for individual segments are reported net of intercompany transfers. Segment operating profits reflect selling, general and administrative expenses directly attributable to each segment and allocations of unattributable selling, general and administrative expenses on the basis of units of production, projected resource utilization for each segment and the relative cost to produce products in each segment. In the case of intercompany transfers of products between segments, cost of products sold is based upon transfer pricing policies that we believe assist us in managing and optimizing the consolidated financial performance of our business as a whole. For example, when our paper and paperboard segment obtains logs from our timber segment for whole log chipping at our chipping facilities, we assign a transfer price to those logs based upon the historical cost and hauling expenses of the logs, regardless of the market price of those logs or wood chips at the time of transfer. For paperboard acquired from our paper mill and used in our converting operations, we assign a transfer price equal to the paper mill's cost. Depending on market conditions, our transfer pricing practices may understate or overstate the actual price at which we could have sold those products into the open market or the actual price in the open market at which we could have purchased the raw materials used to produce those products. As a consequence, these allocations and transfer pricing policies sometimes result in individual segment results that do not reflect the financial performance that would have resulted for a segment operating as a stand-alone business. Our timber segment owns and operates timberlands in Oregon and Washington and produces logs for sale in the domestic and export markets. During fiscal year 2001, our domestic customers consisted of approximately 60 independent sawmills and plywood plants. Results of operations for our timber segment also include our sawmill. Net sales of our timber segment are primarily affected by housing starts and other construction activity in the domestic and Japanese markets. Construction activity is influenced by mortgage interest rates and general economic conditions in those markets. Net sales in this segment are also affected by supply-side factors such as government regulation restricting the harvest of timber from public and certain private lands and competition from logs supplied by foreign producers, especially Canadian producers. The strength of the Japanese export market can significantly influence the results of our timber segment since our sales into that market tend to be at higher prices than sales into the domestic market. Because all of our sales are U.S. dollar denominated, our export sales are also significantly influenced by the relative strength of the U.S. dollar. Cost of products sold in the timber segment primarily include contract logging expense, the cost of operating our sawmill and depletion, which is based on the historical cost of timber that is harvested. Our paper and paperboard segment produces a wide variety of paper and paperboard at our Longview mill. We sell our paper and paperboard products to a number of domestic and export customers. In fiscal year 2001, our converted products segment used approximately 61% of our paper and paperboard output. Net sales in the paper and paperboard segment are primarily affected by general economic activity in the United States and Southeast Asia and the relative strength of the U.S. dollar. Average prices in this segment have also been favorably affected by industry capacity rationalization over the last several years. The demand for certain specialty products manufactured by our paper and paperboard segment tends to be less dependent on the economic cycles affecting the commodity paper market. The major component of cost of products sold for the paper and paperboard segment is fiber, which consists primarily of wood chips, but also includes sawdust and recycled materials. We have recently invested in processes that allow us to use an increased amount of less expensive sawdust and recycled materials in making our paper and paperboard products. Cost of products sold also includes labor, energy and chemicals used in processing. Our converted products segment produces corrugated containers, solid fiber boxes, creative point-of-purchase displays, handle shopping bags and merchandise bags. Nearly all of our converted products are sold domestically for end uses that include packaging for consumables such as fresh and frozen produce and beverages, as well as for toys, furniture and electronics. Net sales in the converted products segment are primarily affected by general economic activity in the United States. The primary constituent materials for converted products are paper and paperboard. Our converted products segment obtains approximately 98% of its paper and paperboard requirements from our Longview mill at mill cost. Cost of products sold also includes energy, labor, ink and glue. 16 Our Longview mill contains six steam-driven generators and one natural gas-fired co-generation facility, all of which are capable of producing electric power. During fiscal year 2001, we elected, based on the relationship between rates we could obtain for third-party sales of electricity and the cost to us of purchasing electricity and natural gas, to sell a significant percentage of the electricity that we generated into the market. As a result, we realized $77.1 million from net sales of electric power during the period. The operating profit from power sales allocated to our paper and paperboard segment was $15.6 million in fiscal year 2001, compared with $1.3 million in fiscal year 2000. The operating profit allocated to our converted products segment was $19.4 million in fiscal year 2001, compared with $1.2 million in fiscal year 2000. We made allocations between those segments based on the relative cost to produce products in each segment. The operating profit of those segments for fiscal year 2001, net of the contribution from power sales, does not reflect the results that we would have obtained for those segments in the absence of our decision to sell power externally. These sales had the effect of significantly increasing our energy costs for operation as well as increasing our requirements for natural gas used to fuel the co-generation facility. Our power sales decreased during the third and fourth quarters of fiscal year 2001 primarily due to decreased prices available to us in the electric power market. Our future decisions concerning electric power generation, including the extent to which we operate our co-generation facility for sales into the market, will change from period to period based on market conditions. However, the primary contracts pursuant to which we purchased and sold power in the past have expired and, under new terms, we have significantly less flexibility in selling and using power generated by our facilities. We do not expect sales of power to meaningfully contribute to our results in the coming year. We can curtail the operation of certain of our equipment and facilities from time to time to provide us with flexibility in managing our operations and cost structure. Under certain market conditions, we may fully or partially curtail the operation of one or more of the paper machines at our Longview mill. When we curtail a machine, we typically switch production from the curtailed machine to maximize the efficient use of other machines that we would not otherwise fully utilize. In addition, we may curtail the operation of certain of our converting facilities if we believe it is advantageous to do so. RESULTS OF OPERATIONS The following table highlights our net sales and profits for the periods indicated:
AUDITED YEAR ENDED OCTOBER 31, ------------------------------------ (THOUSANDS) 2001 2000 1999 ----------- --------- --------- --------- Net sales ..................................... $ 875,955 $ 876,298 $ 774,349 Timber ...................................... 161,129 161,586 170,992 Paper and paperboard ........................ 195,765 255,025 226,330 Converted products .......................... 441,975 451,195 377,027 Power ....................................... 77,086 8,492 -- Cost of products sold, including outward freight...................................... 725,313 710,235 644,071 Selling, administrative and general expenses .. 74,895 69,098 62,670 Operating profit .............................. 75,747 96,965 67,608 Timber ...................................... 65,238 69,438 83,207 Paper and paperboard(1) ..................... 2,173 6,472 (4,114) Converted products(1) ....................... 8,336 21,055 (11,485) Interest expensed ............................. (39,626) (40,115) (38,703) Net income .................................... 24,667 37,647 19,984 --------- --------- ---------
- ---------- (1) Includes allocated power profits for fiscal years 2001 and 2000. FISCAL YEAR 2001 COMPARED TO FISCAL YEAR 2000 CONSOLIDATED RESULTS Net sales. Fiscal year 2001 net sales were $876.0 million, compared with $876.3 million for fiscal year 2000. Net sales remained relatively unchanged as a result of an incremental $68.6 million of opportunistic net sales of internally generated power to third parties on economically favorable terms, offset by a decrease in net sales in our paper and paperboard segments of $59.3 million, or 23.2%, and in our converted products segment of $9.2 million, or 2.0%. See "Selected Segment Results" below. 17 Cost of products sold. Fiscal year 2001 cost of products sold was $725.3 million, or 82.8% of net sales, compared with $710.2 million, or 81.0% of net sales, for fiscal year 2000. This increase as a percentage of net sales was primarily due to a 5% increase in average wood chip costs and a 59% increase in average natural gas costs at the Longview mill, which were partially due to increased power sales discussed above. These were partially offset by an approximately 29% decrease in average OCC costs and high margins on power sales. Our cost of products sold includes depreciation, depletion and amortization costs. Depreciation, depletion and amortization consist primarily of depreciation of our plant and equipment, the cost of timber harvested and, to a lesser degree, amortization of logging roads. This expense was $71.6 million for fiscal year 2001, compared with $67.4 million for fiscal year 2000. Selling, general and administrative expenses. Fiscal year 2001 selling, general and administrative expenses were $74.9 million, or 8.6% of net sales, compared with $69.1 million, or 7.9% of net sales, for fiscal year 2000. This increase as a percentage of net sales was primarily attributable to salary increases including market adjustments, the opening of our new Bowling Green, Kentucky converting plant and costs associated with our business process improvement plan. Operating profit. Fiscal year 2001 operating profit was $75.7 million, or 8.6% of net sales, compared with $97.0 million, or 11.1% of net sales, for the fiscal year 2000. See "Selected Segment Results" below. Provision for taxes on income. Fiscal year 2001 provision for income taxes was $13.0 million, reflecting a tax rate of 34.5%. Fiscal year 2000 provision for income taxes was $21.3 million, reflecting a tax rate of 36.1%. The decrease was primarily the result of a decrease in net income. Net income. For the reasons noted above, net income decreased to $24.7 million from $37.6 million in fiscal year 2000, representing a 34.5% decrease. SELECTED SEGMENT RESULTS Timber
YEAR ENDED OCTOBER 31, PERCENTAGE ------------------- ------------------- 2001 2000 INCREASE/(DECREASE) -------- -------- ------------------- Timber net sales, $ millions ...... $ 161.1 $ 161.6 (0.3)% Timber operating profit, $ millions 65.2 69.4 (6.0)% Logs, thousands of board feet ..... 235,000 209,000 12.4% Lumber, thousands of board feet ... 100,000 93,000 7.5% Logs, $/thousand board feet ....... $ 548 $ 613 (10.6)% Lumber, $/thousand board feet ..... 323 357 (9.5)%
Fiscal year 2001 timber net sales were $161.1 million, compared with $161.6 million for fiscal year 2000. The fiscal year 2001 results were impacted by a decrease in log prices of 10.6% and a decrease in lumber prices of 9.5%, offset by an increase in log volume of 12.4% and an increase in lumber volume of 7.5%. The price decline was in part due to a soft Japanese housing market and adverse U.S. dollar to Japanese yen exchange rates. Weak export market prices significantly influence our average prices as export prices tend to be significantly higher than domestic prices. The volume increases were largely due to relatively strong demand in the domestic market, where prices, although lower overall in fiscal year 2001, improved from levels in the first half of the year, as well as to greater timber harvesting in 2001 as a result of improved logging conditions over those experienced in 2000. Fiscal year 2001 export sales in the timber segment were $54.5 million, or 33.8%, of timber net sales compared with $66.4 million, or 41.1%, for fiscal year 2000. This decrease was a result of export price and volume declines. Fiscal year 2001 timber operating profit was $65.2 million, compared with $69.4 million for fiscal year 2000. The primary reason for this 6.0% decline was a decrease in average log and lumber prices, partially offset by an increase in log and lumber volume due to relatively strong demand in the domestic market and less curtailment of harvesting in fiscal year 2001, which resulted in some shifting of export sales to domestic sales. 18 Paper and Paperboard
YEAR ENDED OCTOBER 31, PERCENTAGE ------------------- ------------------- 2001 2000 INCREASE/(DECREASE) -------- -------- ------------------- Paper and paperboard net sales, $ millions $ 195.8 $ 255.0 (23.2)% Paper and paperboard operating profit, $ millions ............................. 2.2 6.5 (66.4)% Paper, tons .............................. 252,000 298,000 (15.4)% Paperboard, tons ......................... 106,000 183,000 (42.1)% Paper, $/ton FOB mill equivalent ......... $ 590 $ 580 1.7% Paperboard, $/ton FOB mill equivalent .... 348 384 (9.4)%
Fiscal year 2001 paper and paperboard net sales were $195.8 million, compared with $255.0 million for fiscal year 2000. This 23.2% decrease is primarily due to a 25.6% decrease in paper and paperboard volume, along with a decrease in paperboard pricing, partially offset by an increase in paper pricing. Paperboard volume decreased by 42.1% primarily as a result of our decision not to sell into the Asian market at prices that were depressed due to a general worsening of business conditions in Asia and the strength of the U.S. dollar. In addition, Chinese and other Asian producers added Kraft top recycled linerboard capacity that tended to reduce export Kraft linerboard prices. As a result of our decision, we have fully curtailed our least efficient paperboard machine in addition to curtailing two other machines to match production with incoming orders. Fiscal year 2001 export sales in the paper and paperboard segment were $60.2 million, or 30.7%, of paper and paperboard net sales, compared with $95.8 million, or 37.6%, for fiscal year 2000. Paper volume decreased as a result of a general economic slowdown in the U.S. market and increased competition from European producers in the export market due to, among other things, strength in the U.S. dollar. However, paper prices increased due to a change in our product mix as we continued to increase sales of TEA-Kraft(TM) paper in the domestic market and other value-added products. Fiscal year 2001 paper and paperboard operating profit was $2.2 million, compared with $6.5 million for fiscal year 2000. Operating profits were negatively impacted by a 5% increase in the average cost of wood chips. In fiscal year 2001, residual wood chip costs increased and we used a greater proportion of more expensive wood chips from whole log chipping operations. We have since reduced our use of whole log chips and are taking advantage of lower-cost residual chips. Operating profits were also negatively affected by increased costs caused by low machine utilization rates in the first half of fiscal year 2001 and higher energy prices. Operating profits were favorably impacted by the profits from the sale of electrical power allocated to the paper and paperboard segment. We allocated $15.6 million to the segment operating profit as a result of power sales in fiscal year 2001, compared with $1.3 million in fiscal year 2000. The basis for this allocation was consistent with the method used to allocate identifiable assets and other costs between segments. These sales had the effect of significantly increasing our energy costs for operation of the paper and paperboard segment as well as increasing our requirements for natural gas used to fuel the co-generation facility. Due to the increased sale of power in fiscal year 2001, plus the increased cost of natural gas, energy costs increased from 8% to 14% of paper and paperboard and converted products net sales (including allocated power sales) in fiscal years 2000 and 2001, respectively. However, energy prices have decreased in the fourth quarter of fiscal year 2001 and we expect decreased sales of energy into the market in fiscal year 2002. The Longview mill operated at 80% of capacity during fiscal year 2001 compared with 88% during fiscal year 2000. Converted Products
YEAR ENDED OCTOBER 31, PERCENTAGE ------------------------- ------------------- 2001 2000 INCREASE/(DECREASE) ------------ ------------ ------------------- Converted products sales, $ millions $ 442.0 $ 451.2 (2.0)% Converted products operating profit, $ millions ....................... 8.3 21.1 (60.4)% Converted products, tons ........... 535,000 550,000 (2.7)% Converted products, $/ton .......... $ 826 $ 820 0.7%
Fiscal year 2001 converted products net sales were $442.0 million, compared with $451.2 million for fiscal year 2000. Converted products volume decreased 2.7% due to general softening of the economy. Converted product pricing was favorably impacted by increased sales of value-added products such as point-of-purchase displays and higher-quality print orders. Our specialty products, which we identify as print jobs with four colors or more, jobs with a high percentage of die-cuts and other enumerated converted products, represented 26.7% of our converted products net sales for fiscal year 2001, compared with 26.3% for fiscal year 2000. Fiscal year 2001 converted products operating profit was $8.3 million, compared with $21.1 million for the fiscal year 2000. Operating profits were negatively impacted by the increased cost of paper and paperboard supplied to us by the Longview mill and increased converting costs, including labor and converting supplies, offset by the favorable impact of the profits from the sale of electrical power 19 allocated to the converted products segment. The increase in paper and paperboard cost was due to the Longview mill's increased cost of wood chips and natural gas and power related costs described above and the increased costs due to a lower operating rate at the mill. The average mill cost of paper and paperboard supplied to our converting plants increased by 4.7% for fiscal year 2001, as compared to fiscal year 2000. The increased cost was also partially attributable to the increased use of high-quality paperboard used in manufacturing value-added products. We allocated $19.4 million to the segment operating profit as a result of power sales in fiscal year 2001, compared with $1.2 million in fiscal year 2000. FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999 CONSOLIDATED RESULTS Net sales. Fiscal year 2000 net sales were $876.3 million, compared with $774.3 million for fiscal year 1999. This 13.2% increase was attributable to an increase in paper and paperboard net sales of $28.7 million, or 12.7%, converted products net sales of $74.2 million, or 19.7%, and new power sales of $8.5 million, offset by a decrease in net sales in our timber segment of $9.4 million, or 5.5%. Cost of products sold. Fiscal year 2000 cost of products sold was $710.2 million, or 81.0% of net sales, compared with $644.1 million, or 83.2% of net sales, for fiscal year 1999. The decrease as a percentage of net sales was primarily due to improved margins resulting from an increase in prices in most of our segments and a decrease in depreciation, depletion and amortization costs. Expense for depreciation, depletion and amortization amounted to $67.4 million for fiscal year 2000, compared with $84.2 million for fiscal year 1999. This change resulted primarily from the extension of the depreciable lives of our major equipment following a study we conducted to assess the average useful life of certain of our capital assets and to approximate industry standards. Selling, general and administrative expenses. Fiscal year 2000 selling, general and administrative expenses were $69.1 million, or 7.9% of net sales, compared with $62.7 million, or 8.1% of net sales, for fiscal year 1999. The decrease as a percentage of net sales was partially due to an increase in net sales due to pricing increases in most of our segments. This decrease was offset by an increase in our converted products sales force and other staff, in conjunction with the expansion of our converting plants in 2000 and our focus on marketing specialty, value-added converted products, coupled with salary increases and increased training costs. Operating profit. Fiscal year 2000 operating profit was $97.0 million, or 11.1% of net sales, compared with $67.6 million, or 8.7% of net sales, for fiscal year 1999. This increase was attributable to a $10.6 million increase in paper and paperboard operating profit, and $32.5 million increase in converted products operating profit, offset by a $13.8 million decrease in timber operating profit. Provision for taxes on income. Fiscal year 2000 provision for income taxes was $21.3 million, reflecting a tax rate of 36.1%. Fiscal year 1999 provision for income taxes was $11.5 million, reflecting a tax rate of 36.5%. This increase was primarily due to an increase in net income resulting from increased operating profit. Net income. For the reasons noted above, fiscal year 2000 net income increased to $37.6 million from $20.0 million in fiscal year 1999. SELECTED SEGMENT RESULTS Timber
YEAR ENDED OCTOBER 31, PERCENTAGE ------------------ ------------------- 2000 1999 INCREASE/(DECREASE) -------- -------- ------------------- Timber sales, $ millions .......... $ 161.6 $ 171.0 (5.5)% Timber operating profit, $ millions 69.4 83.2 (16.5)% Logs, thousands of board feet ..... 209,000 230,000 (9.1)% Lumber, thousands of board feet ... 93,000 85,000 9.4% Logs, $/thousand board feet ....... $ 613 $ 605 1.3% Lumber, $/thousand board feet ..... 357 378 (5.6)%
Fiscal year 2000 timber net sales were $161.6 million, compared with $171.0 million for fiscal year 1999. This 5.5% decrease was primarily due to a decrease in log volume of 9.1% and a decrease in lumber prices of 5.6%, partially offset by an increase in log prices and lumber volume. Domestic log volume and prices decreased as a result of the deterioration of domestic demand throughout the 20 year, while export prices increased overall in fiscal year 2000, with export volume remaining stable. Fiscal year 2000 export sales in the timber segment were $66.4 million, or 41.1%, of timber net sales, compared with $63.9 million, or 37.4%, for fiscal year 1999. Prices in the domestic lumber markets declined throughout most of the period primarily due to an increase in Canadian lumber exports. Lumber volume increased despite falling prices due to our decision to maintain certain customer relationships. Fiscal year 2000 timber operating profit was $69.4 million, compared with $83.2 million for fiscal year 1999. The primary reason for this 16.5% decline was a decrease in log volume and lumber prices and, to a lesser extent, higher logging expenses, costs associated with installing a new saw in our sawmill and increased depletion costs related to the mix of timber harvested in 2000. Paper and Paperboard
YEAR ENDED OCTOBER 31, PERCENTAGE ------------------ ------------------- 2000 1999 INCREASE/(DECREASE) -------- -------- ------------------- Paper and paperboard sales, $ millions $ 255.0 $ 226.3 12.7% Paper and paperboard operating profit, $ millions ......................... 6.5 (4.1) N/A Paper, tons .......................... 298,000 241,000 23.7% Paperboard, tons ..................... 183,000 240,000 (23.8)% Paper, $/ton FOB mill equivalent ..... $ 580 $ 565 2.7% Paperboard, $/ton FOB mill equivalent 384 333 15.3%
Fiscal year 2000 paper and paperboard net sales were $255.0 million, compared with $226.3 million for fiscal year 1999. This 12.7% increase was primarily due to increases in average paper and paperboard prices of 2.7% and 15.3%, respectively. The price increases were primarily due to lower domestic inventories resulting from the rationalization of paper machines following industry consolidation in 1999 and the curtailment of paper machines by a number of manufacturers. Additionally, we continued to increase our domestic sales of specialty, value-added products such as TEA-Kraft(TM) paper through a targeted marketing effort. Paper volume increased by 23.7% primarily due to sales of TEA-Kraft(TM) paper and sales to new Canadian customers that we established during fiscal year 2000. The paper volume increase was offset by a 23.8% decrease in paperboard volume. We significantly increased export sales of corrugated medium and linerboard in fiscal year 1999 following improved demand and constrained supply. As a result of deteriorating margins on these products due to strong competition and weak prices, we significantly reduced export paperboard volume in fiscal year 2000. Fiscal year 2000 export sales in the paper and paperboard segment were $95.8 million, or 37.6%, of paper and paperboard net sales compared with $95.1 million, or 42.0%, in fiscal year 1999. Fiscal year 2000 paper and paperboard operating profit was $6.5 million, compared with an operating loss of $4.1 million for fiscal year 1999. Operating profits were favorably impacted by higher prices, increased domestic sales of value-added products such as TEA-Kraft(TM) paper and significantly reduced export sales of low margin corrugated medium and linerboard. This favorable impact to operating profits was partially offset by increased wood chip and energy costs. Average wood chip costs were about 4% higher in fiscal year 2000 than in the prior fiscal year. The average cost of OCC, a significant source of this segment's raw materials, was 27% higher in fiscal year 2000 compared with fiscal year 1999 due to increased prices resulting from unusually high demand for OCC. For fiscal year 2000, these two raw materials combined represented approximately 38% of our total segment cost of products produced, not including shipping, warehousing and outward freight, compared with approximately 37% for fiscal year 1999. The average cost of electricity and natural gas increased approximately 5% and 21%, respectively, for fiscal year 2000 compared with fiscal year 1999. The Longview mill operated at approximately 88% of capacity during fiscal year 2000 compared with approximately 85% during fiscal year 1999. Converted Products
YEAR ENDED OCTOBER 31, PERCENTAGE -------------------- ------------------- 2000 1999 INCREASE/(DECREASE) -------- -------- ------------------- Converted products sales, $ millions $ 451.2 $ 377.0 19.7% Converted products operating profit, $ millions ....................... 21.1 (11.5) N/A Converted products, tons ........... 550,000 500,000 10.0% Converted products, $/ton .......... $ 820 $ 754 8.8%
Fiscal year 2000 converted products net sales were $451.2 million, compared with $377.0 million for fiscal year 1999. This 19.7% increase was primarily due to increases in volume of 10.0% and an increase in price of 8.8%. Although general corrugated container demand was relatively flat for fiscal year 2000, we believe our volume improved due in large part to our efforts to expand specialty, value-added product sales through an increased focus on marketing specialty products and increased value placed by customers on the 21 quality and service we provide. In the middle of fiscal year 2000, we were also successful in implementing price increases for most of our converted products. In fiscal year 2000, our specialty products represented 26.3% of net average sales, compared with 24.6% for fiscal year 1999. Fiscal year 2000 converted products operating profit was $21.1 million, compared with an operating loss of $11.5 million for fiscal year 1999. The primary reasons for the improvement were the price and volume increases, partially offset by increases in the cost of producing paperboard supplied from the Longview mill as described above, and increases in wages and the hiring of additional sales representatives at our converting plants. LIQUIDITY AND CAPITAL RESOURCES At October 31, 2001, our financial position included long-term debt of $585.4 million, including current installments of long-term debt of $45.0 million. Additionally, short-term borrowings at October 31, 2001 were $8.0 million. Net cash provided by operations was $110.5 million in fiscal year 2001, $112.4 million in fiscal year 2000 and $117.1 million in fiscal year 1999. The decrease in fiscal year 2001 was primarily due to a decrease in operating profits. The decrease in fiscal year 2000 was largely the result of increased pension and other noncurrent assets. For the remainder of fiscal year 2002, we do not expect power sales to meaningfully contribute to cash provided by operations. In fiscal year 2001, $35.0 million of operating profit was attributable to power sales. Net cash used for investing was $118.5 million in fiscal year 2001, $104.9 million in fiscal year 2000 and $27.6 million in fiscal year 1999. Our capital expenditures, including timberland acquisitions, were $119.6 million in fiscal year 2001, $106.2 million in fiscal year 2000 and $32.8 million in fiscal year 1999. In fiscal year 2000, we started a capital program to enable us to increase our domestic converted products business in an effort to reduce our reliance on the competitive export paperboard market. That program has been substantially completed. Significant capital expenditures in 2001 included the construction of our new Bowling Green, Kentucky converting plant; purchasing of flexo folder gluers, expansion of the material handling system and other equipment upgrades at our Spanish Fork, Utah converting plant; upgrading our Amsterdam, New York converting facility by expanding the building, increasing the corrugator's capacity and purchasing a flexo folder gluer; and the completion of the replacement of the press section of a paper machine which began in 2000. That program has been substantially completed. Significant capital expenditures in fiscal year 2000 included the purchase of a corrugator for our Spanish Fork converting plant; the construction of our Seward, Nebraska converting plant; the rebuilding of a paper machine; and the commencement of work to replace the press section on a paper machine. In fiscal year 1999, we made lower capital expenditures as a result of lower operating profits and our ability to curtail investing based on prior year's expenditures. As a result of substantial capital investments in recent years and debt service requirements, we expect to substantially reduce our capital expenditures for the next several years. Capital expenditures are expected to total approximately $43 million for each of fiscal years 2002 and 2003, including expenditures for timber purchases, plant and equipment maintenance and improvements and environmental compliance. Net cash provided by financing was $8.0 million in fiscal year 2001, while the net cash used for financing was $7.6 million in fiscal year 2000 and $89.5 million in fiscal year 1999. The change in fiscal year 2001 primarily reflects a $39.4 million increase in borrowings during fiscal year 2001 to fund capital expenditures such as the construction of our Bowling Green, Kentucky converting plant and the purchase of founders' stock for $6.8 million. Debt increased by $10.0 million in fiscal year 2000 and decreased by $73.6 million in fiscal year 1999. The reduction in our debt in 1999 was due to a reduced level of capital expenditures from previous years, and an increase in operating profit and a decrease in interest expense over the same period, which allowed more of our cash to be used to repay our debt. During fiscal years 2001 and 2000, we purchased an aggregate of 500,000 and 100,000 shares of our stock, respectively, for approximately $6.8 million and $1.3 million, respectively. During fiscal year 1999 we did not purchase shares of our stock. Each quarter we determine the amount of our dividend based on operating results, current market conditions and debt levels. Cash dividends of $0.03 per share were declared and paid in the first fiscal quarter of 2002 in the aggregate amount of $1.5 million. During the first fiscal quarter of 2001, we declared and paid $0.12 per share in the aggregate amount of $6.2 million. The reduction in the first fiscal quarter of 2002 was based on fourth quarter earnings and current economic conditions that were negatively affecting our business. During fiscal year 2001, we declared and paid total dividends of $0.48 per share, for an aggregate amount of $24.6 million. Dividends of $0.48 and $0.28 per share were paid in fiscal year 2000 and fiscal year 1999, respectively, for aggregate amounts of $24.8 million and $14.5 million, respectively. 22 On March 14, 2002, we announced that the board of directors suspended the dividend for the second fiscal quarter of 2002. The suspension of the dividend was due primarily to the $6 million net loss incurred in the first fiscal quarter of 2002. On June 14, 2002, we announced that the board of directors suspended the dividend for the third fiscal quarter of 2002. The suspension of the dividend was due primarily to the net loss incurred in the first six months of 2002. At October 31, 2001, we had bank lines of credit totaling $370 million. Of this amount, $320 million was provided by a group of banks under a credit agreement expiring in February 2003. At October 31, 2001, we had $282.0 million outstanding under this agreement. In addition, at October 31, 2001, we had an outstanding balance of $35.0 million under the remaining $50.0 million of our lines of credit. Also outstanding at October 31, 2001, were various senior notes totaling $249.5 million principal amount, which includes a $72.5 million principal amount senior note offering that closed during the third quarter 2001, and revenue bonds of $26.9 million principal amount. Our financing arrangements require us to be in compliance with certain financial covenants, including minimum net worth, short- and long-term borrowing ratio, current ratio and fixed charge coverage ratio requirements and restrict our payment of dividends. At January 31, 2002, we had long-term debt of $602.1 million, including current installments of long-term debt of $32.4 million. In addition, short-term borrowings at January 31, 2002 were $41.0 million. At October 31, 2001, our financial position included long-term debt of $585.4 million, including current installments of long-term debt of $45.0 million. Additionally, short-term borrowings at October 31, 2001 were $8.0 million. In December 2001, we decided to refinance our $320 million and $35 million lines of credit and $45.0 million of our senior notes. In January 2002, we entered into a new $250 million senior unsecured revolving credit facility and privately placed $215 million of senior subordinated notes with institutional investors. Our outstanding debt exceeds historical levels due to borrowings made in connection with substantial expenditures related to the capital improvement program that we have engaged in since fiscal year 2000 and our recent timberland acquisitions, as well as the payment of dividends and stock repurchases and decreased operating profit in fiscal year 2001 compared to fiscal year 2000. In addition, our financial statements reflect $20 million of debt related to our 6.76% Senior Notes due August 15, 2002; however, we have irrevocably placed funds into an escrow account to repay those notes at maturity. We have substantially completed the capital investment program initiated in 2000. We expect to reduce debt to more moderate levels by substantially reducing capital expenditures over the next several years and improving operating results by reducing our raw material costs, lowering our cost of procurement and balancing our staffing levels consistent with current orders. In addition, we have suspended our dividend until operating profits and cash flow return to more acceptable levels. As of March 31, 2002, our aggregate annual debt principal repayments are as follows: PRINCIPAL FISCAL YEAR AMOUNT ----------- ------------ 2002(a)....... $ 30,000,000 2003 62,400,000 2004 -- 2005(b) 194,000,000 2006 85,500,000 2007 -- 2008 24,000,000 2009 215,000,000 2010-2018 29,500,000 (a) Includes $20.0 million that will be repaid with the proceeds from funds we have irrevocably placed in escrow and $10 million drawn on one of our credit facilities. (b) Includes $164 million drawn on our $250 million revolving credit facility. For the quarter ended April 30, 2001, we obtained amendments from the holders of certain senior notes with respect to compliance with covenants that require us to maintain a specified current ratio. The amendments affected the quarters ended April 30, 2001 and July 31, 2001. As of June 2001, when we closed a senior note offering, we were in full compliance with all financial covenants of the 23 original note agreements without regard to the amendments. As a result of amendments to certain senior notes obtained in 1999, we continue to pay an additional 0.75% per annum over the original note coupon rates until an investment grade credit rating is obtained for our unsecured debt. OTHER During the year ended October 31, 1999, we adjusted the estimated useful lives of some capital assets. As a result of an updated comparison of the estimated useful lives for various asset categories of certain companies in the industry and further study of our own asset base, we adjusted the estimated useful lives of our machinery and equipment for fiscal year 2000. The estimated useful lives now range from 20 to 40 years for buildings and principally from 15 to 20 years for machinery and equipment. These changes increased fiscal 2000 and fiscal 1999 net income by approximately $10.2 million and $5.8 million, respectively. We continually review any known environmental exposures including the cost of remediation. At the present time, we are not aware of any environmental liabilities that would have a material impact on the consolidated financial statements. Although we believe that we are in substantial compliance with federal, state and local laws regarding environmental quality, the Environmental Protection Agency (EPA) has issued a final air and water quality rule referred to as the "Cluster Rule." We estimate that over the next 5 years required pollution control capital expenditures could range from $15.0 million to $20.0 million. We have included these estimated expenditures in our capital expenditure budget discussed above. Although future pollution control expenditures cannot be predicted with any certainty and could continue to escalate because of continuing changes in laws and regulations and uncertainty as to how they will be interpreted and applied, we believe that compliance with these regulations will not have a material impact on our capital expenditures, earnings or competitive position. As part of an industry-supported effort, forestry regulations have been developed in Oregon and Washington to protect salmon. These regulations restrict the harvest of timber near streams and other environmentally sensitive areas, thereby reducing the timber that can be harvested and increasing costs. Our exposure to market risks on our financial instruments is limited to interest rate changes on variable rate debt, including debt under our revolving credit facilities. The interest rates applied to our variable rate borrowings are adjusted often and therefore react quickly to any movement in the general trend of market interest rates. Interest expense incurred annually related to our variable rate debt is dependent upon the amount outstanding during the year and the extent to which interest rates rise and fall. In the past we did not engage in commodity, currency or interest rate hedging arrangements or engage in transactions involving derivatives. On April 2, 2002, we entered into two interest rate swaps, whereby we replaced an aggregate of $70.0 million of 10% fixed rate debt with variable rate debt, which bore interest at approximately 6.6% as of April 2, 2002. The swaps expire on January 15, 2009. If the weighted average interest rate on our variable rate debt increased by 1.0% per annum, our annual interest expense would increase by $2.8 million based on our outstanding debt as of March 31, 2002, assuming we had entered the swaps on March 31, 2002. FACTORS THAT MAY AFFECT OUR FUTURE OPERATING RESULTS You should carefully consider the risks and uncertainties described below and the other information in this report. They are not the only ones we face. Additional risks and uncertainties that we are not aware of or that we currently deem immaterial also may impair our business. If any of the following risks actually occur, our business, financial condition and operating results could be materially adversely affected and the trading price of our common stock could decline. CYCLICAL INDUSTRY CONDITIONS AND COMMODITY PRICING HAVE ADVERSELY AFFECTED AND MAY CONTINUE TO ADVERSELY AFFECT OUR EARNINGS. Our operating results reflect the general cyclical pattern of the forest, paper and packaging products industries. Most of our products are commodity products and are subject to competition from other timber companies and paper and paperboard products manufacturers worldwide. Historically, prices for our products have been volatile, and we, like other participants in the forest, paper and packaging products industries, have limited influence over the timing and extent of price changes for our products. Product pricing is significantly affected by the relationship between supply and demand in the forest, paper and packaging products industries. Product supply is influenced primarily by fluctuations in available manufacturing capacity. Demand is affected by the state of the economy in general and a variety of other factors. The demand for our timber is primarily affected by the level of new residential construction activity and home repair and remodeling activity. Demand for our paper and packaging products is primarily affected by the state of the global economy in general and the economies in North America and East Asia in particular. Due to generally weak 24 worldwide economic conditions, especially in our main export market, Asia, global demand for our paper and paperboard products has generally declined. For instance, the average price per thousand board feet we realized from the sale of logs declined to $548 in fiscal year 2001 from $613 in fiscal year 2000, and the average price per ton we realized from the sale of paperboard declined to $348 from $384 over the same period. See "Management's Discussions and Analysis of Financial Condition and Results of Operations," and "Industry Overview" for discussions on our average prices and price fluctuations within the industry. A prolonged and severe weakness in the markets for one or more of our principal products could seriously harm our ability to have positive earnings and our ability to satisfy our cash requirements, including the payment of interest and principal on our debt. OUR INDUSTRIES ARE HIGHLY COMPETITIVE AND SUBJECT TO WIDE PRICE FLUCTUATIONS THAT LEAD TO SUBSTANTIAL PRICE COMPETITION AND VOLATILITY. The forest, paper and packaging products industries are highly competitive globally, and no single company is dominant. These industries have suffered, and continue to suffer, from excess capacity. During fiscal year 2001, our Longview mill operated at 80% of capacity. These industries are also capital intensive, which leads to high fixed costs and generally results in continued production as long as prices are sufficient to cover marginal costs. Our competitors include large, vertically integrated forest, paper and packaging products companies and numerous smaller companies. Larger companies that compete with us in each of our markets may be better able to withstand the adverse nature of the business cycle because they may have greater financial resources than we do. In the past year, we have seen significant competition in the Japanese timber market as European competitors have benefited from the strength of the U.S. dollar relative to the Euro. These conditions have contributed to substantial price competition and volatility within our industry, especially during periods of reduced demand. Future decreases in prices for our products would adversely affect our cash flow and net income. These factors, coupled with our substantial leveraged position, may harm our ability to respond to competition and other market conditions. PRICE FLUCTUATIONS IN RAW MATERIALS COULD ADVERSELY AFFECT OUR ABILITY TO OBTAIN THE MATERIALS NEEDED TO MANUFACTURE OUR PRODUCTS. The most significant raw material used in our operations is fiber, including wood, recycled and other fiber, which during fiscal year 2001 accounted for 43.0% of our costs of products produced in our paper and paperboard segment, not including shipping, warehousing and outward freight. We obtained approximately 90% of our wood fiber requirements at open market prices during fiscal year 2001. We also obtained almost all of our recycled fiber on the open market. Wood and recycled fiber are both subject to commodity pricing, which fluctuates on the basis of market factors over which we have no control. In addition, the cost of fiber that we purchase in the market has at times fluctuated greatly because of economic or industry conditions, particularly the conditions in the Pacific Northwest, where we purchase most of our fiber. Further, our access to wood fiber could be adversely affected by consolidation of sawmills in the Pacific Northwest that supply wood fiber to our Longview mill, as well as more stringent environmental or other regulations affecting the supply or cost of timber to those sawmills. We may not be able to pass any future raw material cost increases through to our customers through product price increases. Our inability to pass increased costs through to our customers could decrease our net income and cash flow. OUR OPERATIONS REQUIRE SUBSTANTIAL CAPITAL AND OUR CAPITAL RESOURCES MAY NOT BE ADEQUATE TO PROVIDE FOR ALL OF OUR CASH REQUIREMENTS. Our operations require substantial capital. Capital requirements for expansion, replacement and maintenance of existing facilities or equipment or to comply with existing and future changes in environmental laws and regulations may be substantial. Although we maintain our equipment with regular periodic and scheduled maintenance, key pieces of equipment may need to be repaired or replaced or we may incur significant additional costs associated with environmental compliance. The costs of repairing or replacing equipment and the associated downtime of an affected production line could harm our cash flow. If our future capital resources are inadequate to provide for our operating needs, capital expenditures and other cash requirements on economic terms, we may have difficulty continuing our operations. WE ARE SUBJECT TO SIGNIFICANT ENVIRONMENTAL REGULATION AND ENVIRONMENTAL COMPLIANCE EXPENDITURES AND LIABILITIES. Our businesses are subject to many federal, state and local environmental, health and safety laws and regulations, particularly with respect to the restoration and reforestation of timberlands, harvesting timber near waterways, discharges of pollutants and emissions, and the management, disposal and remediation of hazardous substances or other contaminants. Compliance with these laws and regulations is a significant factor in our business and we have incurred, and expect to continue to incur, significant expenditures to remain in compliance. We expect that the environmental laws and regulations to which we are subject will become more stringent and more stringently enforced in the future. Our failure to comply with applicable environmental laws and regulations and permit 25 requirements could result in civil or criminal fines or penalties or enforcement actions, including regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures, installation of pollution control equipment or remedial actions. Some environmental laws and regulations impose liability and responsibility on present and former owners, operators or users of facilities and sites for contamination at such facilities and sites without regard to causation or knowledge of contamination. Investigations may lead to discoveries of contamination that must be remediated, and closures of facilities may trigger compliance requirements that are not applicable to operating facilities. Consequently, existing or future circumstances or developments with respect to contamination, including unanticipated discovery of contamination or discharges of hazardous substances, may require significant expenditures by us and internally generated funds or other sources of liquidity and capital may not be sufficient to fund unforeseen environmental liabilities or expenditures. Some environmental laws permit individuals, citizens groups and other third parties to file claims against us based upon alleged violations of laws or damages to property stemming from contamination, or upon alleged injury to persons stemming from exposure to hazardous substances used or otherwise controlled by us. We may be required to expend significant sums to defend and/or settle existing or future claims. NATURAL DISASTERS OR OTHER EVENTS MAY CAUSE LOSSES TO OUR TIMBER HOLDINGS OR LIMIT OUR ABILITY TO HARVEST OUR TIMBER. The volume and value of timber that we can harvest from our lands may be limited by natural disasters and other events such as fire, insect infestation, disease, ice storms, wind storms, flooding, other weather conditions and other causes. Further, as is typical in the industry, we do not maintain insurance for any loss of our standing timber from natural disasters or other causes. In addition, fire and other natural disasters in adjacent or nearby timberlands may limit our access to, or impede our ability to harvest, our timber. In periods of poor logging conditions, we may harvest less timber than expected, thus impacting our net sales of timber during such periods. HIGH ENERGY COSTS COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS. Our average cost of electrical energy increased from $31.19 per mkwh, or thousand kilowatt hours, to $40.47 per mkwh from fiscal year 2000 to fiscal year 2001, and our average cost of natural gas increased from $3.76 per mmbtu, or million British thermal units, to $5.99 per mmbtu during the same periods. Those rapid and substantial price increases in part caused our energy costs to increase from 8.9% of manufacturing costs in fiscal year 2000 to 13.8% of manufacturing costs in fiscal year 2001. We have not been able, and in the future may not be able, to pass all increased energy costs through to our customers. In addition, the primary contracts pursuant to which we advantageously purchased and sold power in the past have expired and, under new terms, we have significantly less flexibility to mitigate the costs of energy used by our facilities. CHANGES IN THE VALUE OF THE U.S. DOLLAR RELATIVE TO OTHER CURRENCIES COULD RESULT IN FLUCTUATIONS IN DEMAND FOR OUR PRODUCTS. While all of our revenues are earned in U.S. dollars, a large portion of our sales are made to customers operating in markets that use currencies other than U.S. dollars. For the fiscal year 2001, exports accounted for over 13.1% of our total sales. Of this amount, 6.2% of our total sales came from timber export sales, primarily to Japan, and 6.9% of our total sales came from export sales of paper and paperboard, primarily to Hong Kong, Canada and Southeast Asia. Strength in the value of the U.S. dollar relative to the currencies of these countries could make it more expensive for our customers operating in foreign markets to purchase our products, could make our products less price competitive with our foreign competitors, and could consequently reduce the demand for our products. The value of the U.S. dollar relative to the Japanese yen has steadily increased from JPcentsD104.78 per U.S. dollar on April 14, 2000 to JPcentsD132.15 per U.S. dollar on April 15, 2002, an increase in the value of the U.S. dollar relative to the yen of approximately 26%. A reduction in demand for our products could harm our ability to sell our products at acceptable prices. In addition, adverse currency valuations could make paper and paperboard from foreign competitors more price competitive in the U.S. market. This situation has caused, and from time to time in the future may cause, excess supply of paper and paperboard in the United States, which, in turn, will likely result in a decrease in U.S. paper and paperboard prices. OUR ABILITY TO PRODUCE AND SELL OUR PRODUCTS MAY BE HARMED BY FUTURE LABOR DISRUPTIONS. Approximately 2,330 of our employees, or over 60% of our workforce, are parties to collective bargaining agreements. As a result, there is a risk of work stoppage due to strikes or walkouts. We have 11 collective bargaining agreements expiring at various times through calendar year 2006, including three agreements covering approximately 332 employees that will expire during calendar year 26 2002. Any significant work stoppage as a result of the failure to successfully negotiate new collective bargaining agreements could adversely affect our ability to produce and sell our product. OUR PULP AND PAPER MILL AND ALL OF OUR PAPER MACHINES ARE LOCATED AT A SINGLE COMPLEX IN LONGVIEW, WASHINGTON. Our pulp and paper mill and all of our paper machines are located at a single 350 acre complex in Longview, Washington. Since we do not have pulp and paper production elsewhere, a material disruption at our mill could result in a material disruption of our paper making operations. Such disruptions could be caused by: - prolonged power failures; - a breakdown of our continuous pulp digesters; - chemical spill or release; - disruptions in the transportation infrastructure including railroad tracks, bridges, tunnels and roads; or - fires, floods, earthquakes or other disasters. Although we currently have certain business insurance and replacement value insurance, we may not be adequately insured to cover the total amount of any losses caused by any of the above events. In addition, we are not insured against any losses due to interruptions in our business due to damage to or destruction of our Longview pulp and paper making complex caused by earthquakes or to major transportation infrastructure disruptions or other events that do not occur on our premises. A disruption in our pulp and paper operations would also adversely affect our converting plants, which in fiscal year 2001 obtained approximately 98% of their paper and paperboard requirements from our mill. ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Our exposure to market risks on our financial instruments is limited to interest rate changes on variable rate debt, including debt under our revolving credit facilities. The interest rates applied to our variable rate borrowings are adjusted often and therefore react quickly to any movement in the general trend of market interest rates. Interest expense incurred annually related to our variable rate debt is dependent upon the amount outstanding during the year and the extent to which interest rates rise and fall. In the past we did not engage in commodity, currency or interest rate hedging arrangements or engage in transactions involving market risk sensitive instruments. On April 2, 2002, we entered into two interest rate swaps, whereby we replaced an aggregate of $70.0 million of 10% fixed rate debt with variable rate debt, which bore interest at approximately 6.6% as of April 2, 2002. The swaps expire on January 15, 2009. If the weighted average interest rate on our variable rate debt increased by 1.0% per annum, our annual interest expense would increase by $2.8 million based on our outstanding debt as of March 31, 2002, assuming we had entered the swaps on March 31, 2002. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE - ------------------------------------------ ---- Audited Consolidated Financial Statements: Report of Independent Accountants..................................................................... 31 Consolidated Statement of Income for the three years ended October 31, 2001........................... 32 Consolidated Statement of Shareholders' Equity for the three years ended October 31, 2001............. 32 Consolidated Balance Sheet at October 31, 2001, 2000 and 1999......................................... 33 Consolidated Statement of Cash Flows for the three years ended October 31, 2001....................... 34 Notes to Consolidated Financial Statements............................................................ 35 FINANCIAL STATEMENT SCHEDULES Schedule II -- Valuation and Qualifying Accounts...................................................... 42
27 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Longview Fibre Company In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Longview Fibre Company and its subsidiaries at October 31, 2001, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2001 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion. PRICEWATERHOUSECOOPERS LLP - -------------------------- PRICEWATERHOUSECOOPERS LLP Portland, Oregon December 7, 2001 28 LONGVIEW FIBRE COMPANY CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED OCTOBER 31 ----------------------------------- (THOUSANDS EXCEPT PER SHARE) 2001 2000 1999 - ---------------------------- --------- --------- --------- NET SALES .............................................. $ 875,955 $ 876,298 $ 774,349 Timber ............................................... 161,129 161,586 170,992 Paper and paperboard ................................. 195,765 255,025 226,330 Converted products ................................... 441,975 451,195 377,027 Power ................................................ 77,086 8,492 -- Cost of products sold, including outward freight ....... 725,313 710,235 644,071 --------- --------- --------- GROSS PROFIT ........................................... 150,642 166,063 130,278 Selling, administrative and general expenses ........... 74,895 69,098 62,670 --------- --------- --------- OPERATING PROFIT ....................................... 75,747 96,965 67,608 Timber ............................................... 65,238 69,438 83,207 Paper and paperboard (including allocated power profits) ........................................... 2,173 6,472 (4,114) Converted products (including allocated power profits) 8,336 21,055 (11,485) Interest income ........................................ 480 455 481 Interest expensed ...................................... (39,626) (40,115) (38,703) Miscellaneous .......................................... 1,066 1,642 2,098 --------- --------- --------- INCOME BEFORE INCOME TAXES ............................. 37,667 58,947 31,484 --------- --------- --------- PROVISION FOR TAXES ON INCOME (SEE NOTE 8) Current .............................................. (1,161) 3,783 190 Deferred ............................................. 14,161 17,517 11,310 --------- --------- --------- 13,000 21,300 11,500 --------- --------- --------- NET INCOME ............................................. $ 24,667 $ 37,647 $ 19,984 ========= ========= ========= Per share ............................................ $ 0.48 $ 0.73 $ 0.39 ========= ========= =========
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(THOUSANDS) 2001 2000 1999 - ------------ --------- --------- --------- COMMON STOCK: Balance at beginning of year .......................... $ 77,365 $ 77,515 $ 77,515 Less ascribed value of stock purchased ................ (750) (150) -- --------- --------- --------- Balance at end of year ................................ $ 76,615 $ 77,365 $ 77,515 ========= ========= ========= ADDITIONAL PAID-IN CAPITAL: Balance at beginning of year .......................... $ 3,306 $ 3,306 $ 3,306 --------- --------- --------- Balance at end of year ................................ $ 3,306 $ 3,306 $ 3,306 ========= ========= ========= RETAINED EARNINGS: Balance at beginning of year .......................... $ 351,371 $ 339,642 $ 334,128 Net income ............................................ 24,667 37,647 19,984 Less cash dividends on common stock ($0.48, $0.48 and $0.28 per share, respectively) ...................... (24,553) (24,805) (14,470) Less purchases of common stock ........................ (6,011) (1,113) -- --------- --------- --------- Balance at end of year ................................ $ 345,474 $ 351,371 $ 339,642 ========= ========= ========= COMMON SHARES: Balance at beginning of year .......................... 51,577 51,677 51,677 Less purchases ........................................ (500) (100) -- --------- --------- --------- Balance at end of year ................................ 51,077 51,577 51,677 ========= ========= =========
The accompanying notes are an integral part of the financial statements. 29 CONSOLIDATED BALANCE SHEET
OCTOBER 31 ------------------------------------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE) 2001 2000 1999 - --------------------------------------- ---------- ---------- ---------- ASSETS Current assets: Accounts and notes receivable ............................. $ 99,419 $ 114,843 $ 106,095 Allowance for doubtful accounts ......................... 1,350 1,350 1,100 Inventories (see Note 11) ................................. 83,218 82,023 79,563 Other ..................................................... 8,595 9,532 8,162 ---------- ---------- ---------- Total current assets ............................ 189,882 205,048 192,720 ---------- ---------- ---------- Capital assets: Buildings, machinery and equipment at cost ................ 1,806,039 1,717,587 1,635,298 Accumulated depreciation ................................ 1,004,620 961,379 912,366 ---------- ---------- ---------- Costs to be depreciated in future years (see Note 5) . 801,419 756,208 722,932 Plant sites at cost ....................................... 3,483 3,444 3,116 ---------- ---------- ---------- 804,902 759,652 726,048 ---------- ---------- ---------- Timber at cost less depletion ............................. 191,530 192,778 192,860 Roads at cost less amortization ........................... 9,285 9,627 9,198 Timberland at cost ........................................ 20,116 19,880 19,253 ---------- ---------- ---------- 220,931 222,285 221,311 ---------- ---------- ---------- Total capital assets ............................ 1,025,833 981,937 947,359 ---------- ---------- ---------- Pension and other assets (see Note 10) .................... 108,733 89,705 72,674 ---------- ---------- ---------- $1,324,448 $1,276,690 $1,212,753 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Payable to bank resulting from checks in transit .......... $ 11,365 $ 9,385 $ 8,892 Accounts payable .......................................... 60,636 61,388 43,701 Short-term borrowings (see Note 2) ........................ 8,000 43,070 18,000 Payrolls payable .......................................... 16,435 16,576 14,321 Federal income taxes payable .............................. 606 2,638 926 Other taxes payable ....................................... 9,781 9,613 8,761 Current installments of long-term debt .................... 45,000 20,000 30,118 ---------- ---------- ---------- Total current liabilities ....................... 151,823 162,670 124,719 ---------- ---------- ---------- Long-term debt (see Note 4) ............................... 540,400 490,900 495,900 ---------- ---------- ---------- Deferred taxes -- net (see Note 8) ........................ 184,947 171,518 153,945 ---------- ---------- ---------- Other liabilities ......................................... 21,883 19,560 17,726 ---------- ---------- ---------- Commitments (see Note 3) .................................. -- -- -- ---------- ---------- ---------- Shareholders' equity: Preferred stock; authorized 2,000,000 shares .............. -- -- -- Common stock, ascribed value $1.50 per share; authorized 150,000,000 shares; issued 51,076,567, 51,576,567 and 51,676,567 shares, respectively (see Notes 6 and 9) ..... 76,615 77,365 77,515 Additional paid-in capital ................................ 3,306 3,306 3,306 Retained earnings ......................................... 345,474 351,371 339,642 ---------- ---------- ---------- Total shareholders' equity ................................ 425,395 432,042 420,463 ---------- ---------- ---------- $1,324,448 $1,276,690 $1,212,753 ========== ========== ==========
The accompanying notes are an integral part of the financial statements. 30 CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31 ----------------------------------------- (THOUSANDS) 2001 2000 1999 - ------------------------------------------------------- --------- --------- --------- CASH PROVIDED BY (USED FOR) OPERATIONS: Net income ............................................ $ 24,667 $ 37,647 $ 19,984 Charges to income not requiring cash: Depreciation ........................................ 66,235 61,971 79,621 Depletion and amortization .......................... 5,331 5,411 4,622 Deferred taxes -- net ............................... 13,429 17,573 11,118 Loss on disposition of capital assets ............... 3,037 2,920 841 Change in: Accounts and notes receivable -- net ................ 15,424 (8,498) (6,272) Taxes on income, refundable ......................... -- -- 7,020 Inventories ......................................... (1,195) (2,460) 4,396 Other ............................................... 937 (1,370) (26) Pension and other noncurrent assets ................. (19,028) (17,031) (12,006) Accounts, payrolls and other taxes payable .......... 1,365 12,735 5,162 Federal income taxes payable ........................ (2,032) 1,712 926 Other noncurrent liabilities ........................ 2,323 1,834 1,697 --------- --------- --------- Cash provided by operations ........................... 110,493 112,444 117,083 --------- --------- --------- CASH PROVIDED BY (USED FOR) INVESTING: Additions to: Plant and equipment ..................... (115,530) (99,642) (29,237) Timber and timberlands .................. (4,101) (6,532) (3,541) Proceeds from sale of capital assets .................. 1,132 1,294 5,172 --------- --------- --------- Cash used for investing ............................... (118,499) (104,880) (27,606) --------- --------- --------- CASH PROVIDED BY (USED FOR) FINANCING: Additions to long-term debt ........................... 94,500 17,000 -- Reduction in long-term debt ........................... (20,000) (32,118) (41,119) Short-term borrowings ................................. (35,070) 25,070 (32,500) Payable to bank resulting from checks in transit ...... 1,980 493 (1,150) Accounts payable for construction ..................... (2,090) 8,059 (238) Cash dividends ........................................ (24,553) (24,805) (14,470) Purchase of common stock .............................. (6,761) (1,263) -- --------- --------- --------- Cash provided by (used for) financing ................. 8,006 (7,564) (89,477) --------- --------- --------- Change in cash position ............................... -- -- -- Cash position, beginning of year ...................... -- -- -- Cash position, end of year ............................ $-- $-- $-- ========= ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest (net of amount capitalized) ................ $ 38,539 $ 40,234 $ 39,169 Capitalized interest ................................ 2,054 1,301 386 Income taxes ........................................ 1,204 1,844 (7,911)
The accompanying notes are an integral part of the financial statements. 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION The financial statements include the accounts of the company and all subsidiaries after elimination of intercompany balances and transactions. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined on a last-in, first-out method except for supplies at current averages. PROPERTY AND DEPRECIATION Buildings, machinery and equipment are recorded at cost and include those additions and improvements that add to production capacity or extend useful life. Cost includes interest capitalized during the construction period on all significant asset acquisitions. Impairment is reviewed annually, or whenever events or circumstances indicate that the carrying value of an asset might not be recovered. Impairment evaluates whether or not the undiscounted future cash flows generated by an asset will exceed its carrying value. If estimated future cash flows indicate the carrying value of an asset may not be recoverable, impairment exists, and the asset's net book value is written down to its estimated realizable value. When properties are sold or otherwise disposed, the cost and the related accumulated depreciation are removed from the respective accounts and the resulting profit or loss is recorded in income. The costs of maintenance and repairs are charged to income when incurred. Depreciation for financial accounting purposes is computed on the straight-line basis over the estimated useful lives of the assets. The estimated useful lives of assets range from 20 to 40 years for buildings and principally from 15 to 20 years for machinery and equipment (see Note 5). TIMBERLANDS, DEPLETION AND AMORTIZATION Timber, timberlands and timber roads are stated at cost, net of accumulated depreciation, depletion and amortization. Timber is tracked on a county-by-county basis whereby capital costs and recoverable timber volumes are accumulated in the county in which the related timber is located. Upon reaching the age of 35 years, timber is considered merchantable and available for harvesting. All timber younger than 35 years of age is classified as premerchantable. Expenditures for reforestation, including costs such as site preparation, tree planting, fertilization and herbicide application within two years after planting, are capitalized and depleted as timber is harvested. After two years of age, seedling reforestation maintenance and tree farm management costs, consisting of recurring items necessary to the ownership and administration of the timber and timberlands are recorded as a current period expense. Provision for depletion of merchantable timber represents a charge per unit of production (depletion rate) applied to actual harvest volumes. Depletion rates are determined on a county-by-county basis and are developed using total capital costs and current recoverable merchantable volumes in the county in which the related timber is located. A computer growth index model is utilized to track the timber volumes through the growth cycle and is based upon actual growth rates from permanent timber growth plots throughout the Northwest. Countywide depletion rates are adjusted every five years for timber maturity, estimated growth, and actual harvest volumes for the prior five-year period. Countywide depletion rates are uniform regardless of the merchantable timber age, species or quality. Direct costs associated with the building of the primary access timber roads are capitalized and amortized on the straight-line basis over estimated useful lives ranging from 3 to 15 years. Costs incurred on timber roads that serve short-term harvest needs are expensed as incurred. Costs for road base construction of mainline roads, such as clearing, grading and ballast, are not amortized and remain a capitalized cost until disposition as they provide permanent value to the timberlands. No gain or loss is recognized on timberland exchanges since the earnings process is not considered complete until timber is harvested and marketed. 32 EARNINGS PER SHARE Net income per common share is computed on the basis of weighted average shares outstanding of 51,151,567, 51,676,567 and 51,676,567 for 2001, 2000 and 1999, respectively. PENSION AND OTHER BENEFIT PLAN COSTS The company's policy is to accrue as cost an amount computed by the actuary and to fund at least the minimum amount required by ERISA. REVENUE RECOGNITION The company recognizes revenues when the sales price is fixed or determinable, title transfers and risk of loss has passed to the customer, which is generally at the time of shipment. Sales allowances are recorded upon revenue recognition. RECLASSIFICATIONS Prior year amounts have been reclassified to conform to current year classifications. These reclassifications have no impact upon net income or shareholders' equity. NOTE 2 -- SHORT-TERM BORROWINGS: At October 31, 2001, the company had bank lines of credit totaling $370 million. Of this amount, $320 million was under a credit agreement with a group of banks expiring February 24, 2003. The agreement provides for borrowings at the Offshore Rate (LIBOR based) plus a spread, currently 1.875%, or the bank's Reference rate, whichever the company selects. Up to $50 million of the credit agreement can be used for letters of credit at a fee that is the same as the Offshore Rate spread. The credit agreement contains certain financial covenants and provides for a commitment fee on the unused portion, currently 0.40% per year. At October 31, 2001, the company had borrowings of $282 million under this credit agreement and $2.3 million of letters of credit secured by this credit agreement. Other lines of credit totaling $50 million were available for additional borrowing needs. Included in this amount was a line of credit of $35 million which expires January 25, 2002. The other $15 million is uncommitted. At October 31, 2001, the company had an outstanding balance of $35 million under these credit lines. Short-term borrowings of $309 million, $287 million and $270 million at October 31, 2001, 2000 and 1999, respectively, under the above agreements, have been reclassified as long-term debt because they are to be renewed and replaced with borrowings due beyond one year and into future periods. Short-term borrowing activity including the amount reclassified as long-term is summarized as follows:
(THOUSANDS) 2001 2000 1999 - ----------------------------------------------------------------- -------- -------- -------- Short-term borrowings October 31 ................................ $317,000 $330,070 $288,000 Interest rate October 31 ........................................ 4.3% 8.4% 6.2% Average daily amount of short-term borrowings outstanding during year ................................................... $328,176 $270,604 $299,762 Average* interest rate during year .............................. 6.7% 7.8% 6.1% Maximum amount of short-term borrowings at any month end ........ $317,000 $330,070 $333,000 -------- -------- --------
- ---------- * Computed by dividing interest incurred by average short-term borrowings outstanding. NOTE 3 -- COMMITMENTS AND CONTINGENCIES: Estimated costs to complete approved capital projects were approximately $35 million, $106 million and $33 million at October 31, 2001, 2000 and 1999, respectively. 33 NOTE 4 -- LONG-TERM DEBT: Long-term debt consists of the following:
OCTOBER 31 ------------------------------------ (THOUSANDS) 2001 2000 1999 - ----------- -------- -------- -------- Senior notes due through 2010 (5.84%-8.84%) -- Note (a) .... $249,500 $197,000 $227,000 Revenue bonds payable through 2018 (floating rates, currently 2.05%-3.25%) -- Note (b) ....................... 26,900 26,900 28,900 Other ...................................................... -- -- 118 Notes payable -- banks -- Note 2 above ..................... 309,000 287,000 270,000 -------- -------- -------- 585,400 510,900 526,018 Less current installments ............................. 45,000 20,000 30,118 -------- -------- -------- Net long-term debt ......................................... $540,400 $490,900 $495,900 ======== ======== ========
SCHEDULED MATURITIES 2003............................ $371,400 2004............................ -- 2005............................ 30,000 2006............................ 85,500 2007-2018....................... 53,500 -------- $540,400
NOTE (a) Covenants of the senior notes include tests of minimum net worth, short-term borrowing, long-term borrowing, current ratio, fixed charge coverage ratios and restrictions on payment of dividends. During fiscal year 1999 the company obtained amendments from the holders of certain senior notes and, in connection with the grant of the amendments, the company agreed to pay 0.75% per annum over the original note coupon rates until it obtains an investment grade credit rating for its long-term unsecured senior debt. At October 31, 2001, approximately $6.5 million of consolidated retained earnings was unrestricted as to the payment of dividends. NOTE (b) Primarily incurred upon the purchase of manufacturing equipment. At October 31, 2001, $26,900,000 was secured by liens on the equipment. NOTE 5 -- BUILDINGS, MACHINERY AND EQUIPMENT: Buildings, machinery and equipment consist of the following:
OCTOBER 31 ------------------------------------ (THOUSANDS) 2001 2000 1999 - ----------- -------- -------- -------- Buildings -- net ....................... $ 89,013 $ 75,468 $ 69,667 Machinery and equipment -- net ......... 712,406 680,740 653,265 -------- -------- -------- $801,419 $756,208 $722,932 ======== ======== ========
The estimated useful lives of some assets were changed for 2000 and 1999, the effect of which increased net income by approximately $10,175,000 or $0.20 per share and $5,845,000 or $0.11 per share, respectively. NOTE 6 -- SHAREHOLDER RIGHTS PLAN: On January 26, 1999, the company's Board of Directors authorized a Shareholder Rights Plan ("Plan"). The Plan provided for a dividend distribution of one right for each share of common stock to shareholders of record at the close of business on March 1, 1999. With certain exceptions, the rights will become exercisable only in the event that an acquiring party accumulates 10% or more of the company's voting stock or a party announces an offer to acquire 10% or more of the voting stock. The rights expire on March 1, 2009, if not previously redeemed or exercised. Each right entitles the holder to purchase one-tenth of one common share at a price of $5.00 ($50 per whole share), subject to adjustment under certain circumstances. In addition, upon the occurrence of certain events, holders of the rights will be entitled to purchase a defined number of shares of an acquiring entity or the company's common shares at half their then current market value. The company will generally be entitled to redeem the rights at $0.01 per right at any time until the tenth business day following the acquisition of 10% or more, or an offer to acquire 10% or more, of the company's voting stock. 34 NOTE 7 -- SEGMENT INFORMATION: The company owns and operates tree farms in Oregon and Washington which produce logs for sale and operates a sawmill in Washington. Its pulp and paper mill at Longview, Washington produces pulp which is manufactured into kraft paper and containerboard. The raw material fibers come primarily from purchased wood chips and sawdust with important contributions from fiber reclaimed from post-consumer and post-industrial waste, purchased bleach pulp, and augmented by log chipping operations owned by the company and others. The company's seventeen converting plants in twelve states produce shipping containers and merchandise bags. The tonnage of our paper and containerboard received at the converting plants equals approximately 61% of the Longview mill production. Included in sales to customers are export sales, principally to Japan, China and Southeast Asia, of $114,629,000, $162,263,000 and $158,957,000 during 2001, 2000 and 1999, respectively, of which sales to Japan were $55,665,000, $67,697,000 and $65,332,000, during those respective years. All sales are made in U.S. dollars. There are no intersegment sales as all manufacturing operations to produce primary or converted products for sale are considered integrated from the purchased wood to the sale of the finished product. Identifiable assets are segregated or allocated to segments as follows: 1. Assets used wholly within a segment are assigned to that segment. 2. Assets used jointly by two segments are allocated to each segment on a percentage determined by dividing total cost of product into cost of product produced for each segment. Paper and paperboard assets of $309,823,000, $264,497,000 and $248,049,000 have been allocated to converted products at October 31, 2001, 2000 and 1999, respectively. Power sales, depreciation, depletion and amortization and additions to capital assets have been segregated and allocated similarly to the method used for identifiable assets.
YEAR ENDED OCTOBER 31 ----------------------------------------------- (THOUSANDS) 2001 2000 1999 - ----------- ----------- ----------- ----------- SALES TO CUSTOMERS (INCLUDING ALLOCATED POWER SALES): Timber .......................................................... $ 161,129 $ 161,586 $ 170,992 Paper and paperboard ............................................ 230,215 259,404 226,330 Converted products .............................................. 484,611 455,308 377,027 ----------- ----------- ----------- Total ...................................................... 875,955 876,298 774,349 =========== =========== =========== INCOME (LOSS) ON SALES (INCLUDING ALLOCATED POWER PROFITS): Timber .......................................................... 65,238 69,438 83,207 Paper and paperboard ............................................ 2,173 6,472 (4,114) Converted products .............................................. 8,336 21,055 (11,485) Interest expensed and other -- net .............................. (38,080) (38,018) (36,124) ----------- ----------- ----------- Income before income taxes ................................. 37,667 58,947 31,484 =========== =========== =========== IDENTIFIABLE ASSETS AT OCTOBER 31: Timber .......................................................... 271,571 275,401 272,080 Paper and paperboard ............................................ 330,712 363,855 356,246 Converted products .............................................. 722,165 637,434 584,427 ----------- ----------- ----------- Total ...................................................... 1,324,448 1,276,690 1,212,753 =========== =========== =========== DEPRECIATION, DEPLETION AND AMORTIZATION: Timber .......................................................... 9,022 9,008 8,111 Paper and paperboard ............................................ 17,976 19,749 24,700 Converted products .............................................. 44,568 38,625 51,432 ----------- ----------- ----------- Total ...................................................... 71,566 67,382 84,243 =========== =========== =========== ADDITIONS TO CAPITAL ASSETS: Timber .......................................................... 6,665 12,298 6,290 Paper and paperboard ............................................ 23,647 27,184 11,561 Converted products .............................................. 89,319 66,692 14,927 ----------- ----------- ----------- Total ...................................................... $ 119,631 $ 106,174 $ 32,778 =========== =========== ===========
35 NOTE 8 -- INCOME TAXES: Provision for taxes on income is made up of the following components:
YEAR ENDED OCTOBER 31 ----------------------------------- (THOUSANDS) 2001 2000 1999 - ----------- -------- ------- ------- Current: Federal .......... $ (1,072) $ 3,497 $ 121 State ............ (89) 286 69 -------- ------- ------- (1,161) 3,783 190 -------- ------- ------- Deferred: Federal .......... 13,672 16,603 10,618 State ............ 489 914 692 -------- ------- ------- 14,161 17,517 11,310 -------- ------- ------- $ 13,000 $21,300 $11,500 ======== ======= =======
An analysis of the effective income tax rate as compared to the expected federal income tax rate is as follows:
2001 2000 1999 ---- ---- ---- Expected federal income tax rate ...................... 35% 35% 35% Foreign Sales Corporation ............................. -- (1) (1) State income taxes less federal income tax benefit .... 1 1 2 Other ................................................. (1) 1 1 --- --- --- 35% 36% 37% === === ===
The deferred income tax liabilities (assets) recorded in the Consolidated Balance Sheet as of October 31, are as follows:
YEAR ENDED OCTOBER 31 ----------------------------------------- (THOUSANDS) 2001 2000 1999 - ----------- --------- --------- --------- Deferred tax assets: Alternative minimum tax ................... $ (9,426) $ (9,901) $ (17,321) State credits and other assets ............ (6,607) (6,930) (5,793) --------- --------- --------- Total deferred tax assets .............. (16,033) (16,831) (23,114) --------- --------- --------- Deferred tax liabilities: Depreciation/depletable assets ............ 171,124 163,972 158,075 Employee benefit plans .................... 25,678 19,304 14,133 Other liabilities ......................... 290 453 287 --------- --------- --------- Total deferred tax liabilities ......... 197,092 183,729 172,495 --------- --------- --------- Total deferred income taxes ....... $ 181,059 $ 166,898 $ 149,381 ========= ========= ========= Current deferred income tax assets .......... $ (3,888) $ (4,620) $ (4,564) Non-current deferred income tax liability ... $ 184,947 $ 171,518 $ 153,945 ========= ========= =========
NOTE 9 -- SHAREHOLDERS' EQUITY During 2001, the company repurchased 500,000 shares of its common stock from the estate of a shareholder, which held founder stock. The repurchase price of the shares was based upon the market price on the date of repurchase. NOTE 10 -- RETIREMENT AND OTHER POSTRETIREMENT BENEFITS: RETIREMENT PLANS The company has two trusteed defined benefit pension programs which cover a majority of employees who have completed one year of continuous service. The plans provide benefits of a stated amount for each year of service with an option for some employees to receive benefits based on an average earnings formula. The change in benefit obligation is as follows: 36
YEAR ENDED OCTOBER 31 ----------------------------------------- (THOUSANDS) 2001 2000 1999 - ----------- --------- --------- --------- Change in benefit obligation Benefit obligation at beginning of year ... $ 295,619 $ 233,330 $ 234,944 Service cost .............................. 6,942 6,194 6,498 Interest cost ............................. 22,113 18,095 16,130 Amendments ................................ 1,106 51,889 173 Change in assumptions ..................... 19,239 -- (14,691) Actuarial (gain) loss ..................... 4,215 (2,586) 688 Expected benefits paid .................... (12,201) (11,303) (10,412) --------- --------- --------- Benefit obligation at end of year ......... $ 337,033 $ 295,619 $ 233,330 ========= ========= =========
The change in fair value of assets is as follows:
YEAR ENDED OCTOBER 31 ----------------------------------------- (THOUSANDS) 2001 2000 1999 - ----------- --------- --------- --------- Change in plan assets Fair value of plan assets at beginning of year ...... $ 572,887 $ 466,611 382,258 Actual return (loss) on plan assets ................. (121,824) 118,473 95,652 Employee contribution ............................... 5 4 4 Benefits paid ....................................... (17,543) (12,201) (11,303) --------- --------- --------- Fair value of plan assets at end of year ............ $ 433,525 $ 572,887 $ 466,611 ========= ========= =========
The funded status of the plan and pension asset recognized in the balance sheet are summarized as follows:
OCTOBER 31 ---------------------------------------- (THOUSANDS) 2001 2000 1999 - ----------- -------- --------- --------- Funded status ........................................... $ 96,492 $ 277,268 $ 233,281 Unrecognized net actuarial (gain) ....................... (45,749) (249,376) (173,892) Unrecognized prior service cost ......................... 46,975 52,318 5,053 Unrecognized net asset at transition .................... (57) (868) (1,947) -------- --------- --------- Pension asset recognized in the consolidated balance sheet ................................................. $ 97,661 $ 79,342 $ 62,495 ======== ========= =========
Major assumptions used in the calculation are as follows:
YEAR ENDED OCTOBER 31 ----------------------------- (THOUSANDS) 2001 2000 1999 - ----------- ----- ----- ----- Discount rate for funded status ....................... 7.0% 7.5% 7.5% Discount rate for net periodic pension cost ........... 7.5% 7.5% 7.0% Rate of compensation increase ......................... 4.75% 4.75% 4.75% Expected long-term rate of return on plan assets ...... 10.0% 10.0% 10.0% ===== ===== =====
The components of net periodic pension cost are summarized as follows:
YEAR ENDED OCTOBER 31 -------------------------------------- (THOUSANDS) 2001 2000 1999 - ----------- -------- -------- -------- Service cost -- benefits earned during the year ...... $ 6,942 $ 6,194 $ 6,498 Interest cost on benefit obligation .................. 22,113 18,095 16,130 Expected (return) on plan assets ..................... (46,559) (39,803) (34,609) Recognized net actuarial (gain) ...................... (6,453) (4,879) (2,354) Amortization of prior service cost ................... 6,449 4,626 4,356 Amortization of net asset at transition .............. (811) (1,079) (1,370) -------- -------- -------- Net periodic benefit (income) ........................ $(18,319) $(16,846) $(11,349) ======== ======== ========
SAVINGS PLANS Voluntary savings plans are maintained for all employees who have completed one year of continuous service. The plans allow salary deferrals in accordance with IRC section 401(k) provisions. The company contribution as a matching incentive was $2,399,000, $1,689,000 and $1,447,000 during 2001, 2000 and 1999, respectively. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 37 The company provides postretirement health care insurance benefits for all salaried and certain non-salaried employees and their dependents. Individual benefits generally continue until age 65. The company does not pre-fund these benefits, and as such has no plan assets. The change in the benefit obligation is as follows:
YEAR ENDED OCTOBER 31 -------------------------------------- (THOUSANDS) 2001 2000 1999 - ----------- -------- -------- -------- Change in benefit obligation Benefit obligation at beginning of year ........ $ 20,827 $ 18,633 $ 18,239 Service cost ................................... 985 807 741 Interest cost .................................. 1,767 1,434 1,280 Actuarial (gain) loss .......................... 4,187 721 (1,014) Benefits paid .................................. (928) (768) (613) -------- -------- -------- Benefit obligation at end of year .............. $ 26,838 $ 20,827 $ 18,633 ======== ======== ========
The funded status of the plan and postretirement liabilities recognized in the balance sheet are summarized as follows:
OCTOBER 31 -------------------------------------- (THOUSANDS) 2001 2000 1999 - ----------- -------- -------- -------- Funded status .......................... $(26,838) $(20,827) $(18,633) Unrecognized net (gain) ................ (527) (4,714) (5,573) Unrecognized transition obligation ..... 5,482 5,981 6,480 -------- -------- -------- Accrued benefit cost ................... $(21,883) $(19,560) $(17,726) ======== ======== ========
The components of net periodic postretirement cost are summarized as follows:
YEAR ENDED OCTOBER 31 --------------------------------- (THOUSANDS) 2001 2000 1999 - ----------- ------ ------- ------- Service cost -- benefits earned during the year ....... $ 985 $ 807 $ 741 Interest cost on benefit obligation ................... 1,767 1,434 1,280 Amortization of transition obligation ................. 499 499 499 Amortization of net (gain) ............................ -- (138) (210) ------ ------- ------- Net periodic benefit cost ............................. $3,251 $ 2,602 $ 2,310 ====== ======= =======
The net periodic postretirement benefit cost was calculated using a health care cost trend rate of 8% for the indemnity plan and 5.5% for the HMO plan. The accrued postretirement benefit cost at October 31, 2001 was calculated using a health care cost trend rate of 7% for the indemnity plan and 5.5% for the HMO plan. The trend rate declines each year until the ultimate health care cost trend rate, 5.5%, is reached in the year 2004 for the indemnity plan. The ultimate health care cost trend rate of 5.5% was reached in 2000 for the HMO plan. A one percent increase in the health care cost trend rate assumption has a $2,276,000 effect on the accumulated postretirement benefit obligation as of October 31, 2001 and a $336,000 effect on the aggregate of the service and interest cost components of the net periodic postretirement benefit cost. A one percent decrease in the health care cost trend rate assumption has a $(2,011,000) effect on the accumulated postretirement benefit obligation as of October 31, 2001 and a $(290,000) effect on the aggregate of service and interest cost components of the net periodic postretirement benefit cost. The weighted-average discount rate used was 7.0% for 2001 and 7.5% for 2000 and 1999. NOTE 11 -- INVENTORIES: Inventories consist of the following:
OCTOBER 31 ----------------------------------------- (THOUSANDS) 2001 2000 1999 - ----------- --------- --------- --------- Finished goods ............... $ 37,618 $ 37,508 $ 36,248 Goods in process ............. 35,385 33,069 30,768 Raw materials ................ 14,042 14,595 13,200 Supplies (at average cost) ... 42,259 40,949 39,797 --------- --------- --------- 129,304 126,121 120,013 LIFO Reserve ................. (46,086) (44,098) (40,450) --------- --------- --------- $ 83,218 $ 82,023 $ 79,563 ========= ========= =========
38 NOTE 12 -- FAIR VALUE OF FINANCIAL INSTRUMENTS: Accounts receivable, revenue bonds and notes payable to banks approximate fair value as reported in the balance sheet. The fair value of senior notes is estimated using discounted cash flow analysis, based on the company's incremental borrowing rates for similar types of borrowing arrangements. The fair value of the company's long-term debt approximated the stated value at October 31, 2001, 2000 and 1999. QUARTERLY FINANCIAL DATA (UNAUDITED)
FISCAL YEAR QUARTERS TOTAL ---------------------------------------------------- FISCAL (THOUSANDS EXCEPT PER SHARE) 1ST 2ND 3RD 4TH YEAR - ---------------------------- --------- -------- -------- -------- -------- 2001 Net sales ......................... $ 219,559 $214,054 $220,478 $221,864 $875,955 Gross profit ...................... 41,347 34,599 42,382 32,314 150,642 Net income ........................ 8,190 4,354 9,450 2,673 24,667 --------- -------- -------- -------- -------- Net income per share(1) ........... 0.16 0.09 0.18 0.05 0.48 --------- -------- -------- -------- -------- 2000 Net sales ......................... $ 205,446 $216,803 $220,257 $233,792 $876,298 Gross profit ...................... 33,959 46,781 42,653 42,670 166,063 Net income ........................ 5,553 12,156 10,594 9,344 37,647 --------- -------- -------- -------- -------- Net income per share(1) ........... 0.11 0.24 0.21 0.18 0.73 --------- -------- -------- -------- -------- 1999 Net sales ......................... $ 163,324 $186,425 $197,593 $227,007 $774,349 Gross profit ...................... 22,331 32,301 31,120 44,526 130,278 Net income (loss) ................. (1,213) 5,230 3,958 12,009 19,984 --------- -------- -------- -------- -------- Net income (loss) per share(1) .... (0.02) 0.10 0.08 0.23 0.39 --------- -------- -------- -------- --------
- ---------- (1) Per share statistics have been computed on the average of number of shares outstanding in the hands of the public. Per share statistics for the first three quarters may vary slightly from amounts reported on an interim basis due to changes in the number of shares outstanding. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There has been no change of accountants or disagreements on any matter of accounting principles, practices or financial statement disclosures required to be reported under this item. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to the Company's Directors is incorporated herein by reference to our Notice of Annual Meeting of Shareholders and Proxy Statement that was filed pursuant to Regulation 14A within 120 days of October 31, 2001. ITEM 11. EXECUTIVE COMPENSATION Information with respect to Executive Compensation is incorporated herein by reference to our Notice of Annual Meeting of Shareholders and Proxy Statement that was filed pursuant to Regulation 14A within 120 days of October 31, 2001. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to Security Ownership of Certain Beneficial Owners and Management is incorporated herein by reference to our Notice of Annual Meeting of Shareholders and Proxy Statement that was filed pursuant to Regulation 14A within 120 days of October 31, 2001. 39 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to Certain Relationships and Related Transactions is incorporated herein by reference to our Notice of Annual Meeting of Shareholders and Proxy Statement that was filed pursuant to Regulation 14A within 120 days of October 31, 2001. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) THE FOLLOWING FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS ARE FILED AS PART OF THIS FORM 10-K. (1) Financial Statements: See "Item 8. Financial Statements and Supplementary Data." (2) Financial Statement Schedules: REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Shareholders of Longview Fibre Company Our audits of the consolidated financial statements referred to in our report dated December 7, 2001 appearing in Longview Fibre Company's 2001 Annual Report on Form 10-K also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K/A. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Portland, Oregon December 7, 2001 LONGVIEW FIBRE COMPANY SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THREE YEARS ENDED OCTOBER 31, 2001
ADDITIONS ------------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING OF COSTS AND OTHER CLOSE OF DESCRIPTION PERIOD EXPENSES ACCOUNTS (1) DEDUCTIONS (2) PERIOD ------------ ---------- ------------ -------------- ---------- (THOUSANDS OF DOLLARS) Reserve deducted from related asset accounts Doubtful accounts -- Accounts receivable 1999 ............................................. $1,100 481 -- (481) $1,100 ------ --- --- ---- ------ 2000 ............................................. $1,100 724 250 (724) $1,350 ------ --- --- ---- ------ 2001 ............................................. $1,350 453 -- (453) $1,350 ------ --- --- ---- ------
- ------ (1) To adjust the level of the reserve for doubtful accounts based on customer risk analysis. (2) To replenish and maintain the level of the reserve for doubtful accounts (3) Exhibits: 40 See "Index to Exhibits." (b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the last quarter of the period covered by this report. 41 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LONGVIEW FIBRE COMPANY By: /s/ L.J. HOLBROOK Date: June 21, 2002 ---------------------------------------- L.J. HOLBROOK, Senior Vice President- Finance, Secretary and Treasurer 42 INDEX OF EXHIBITS
DOCUMENT NO. - ------------ 3.1 Articles of Incorporation of Longview Fibre Company(a) 3.2 Bylaws of Longview Fibre Company(a) 4.1 Long-term debts that do not exceed 10% of the total assets of the company, details of which will be supplied to the Commission upon request: Senior Notes due through 2010 (5.84%-8.84%) $249,500,000 Revenue Bonds payable through 2018 (floating rates, 2.05% through 3.25% at October 31, 2001) $26,900,000 4.2 Rights Agreement Dated as of March 1, 1999(d) 10.1 Form of Termination Protection Agreement(b)(*) 10.2 Credit Agreement(e) 21.1 Subsidiaries(**) 23.1 Consent of Independent Accountants 99.1 Salary Savings Plan(c)(*) 99.2 Salary Savings Plan -- Amendment No. 1(c)(*) 99.3 Salary Savings Plan -- Amendment No. 2(f)(*) 99.4 Salary Savings Plan -- Trust Agreement(f)(*) 99.5 Hourly Saving Plan(c) 99.6 Hourly Savings Plan -- Amendment No. 1(f) 99.7 Hourly Savings Plan -- Trust Agreement(f) 99.8 Branch Hourly Savings Plan(c) 99.9 Branch Hourly Savings Plan -- Amendment No. 1(c) 99.10 Branch Hourly Savings Plan -- Amendment No. 2(c) 99.11 Branch Hourly Savings Plan -- Amendment No. 3(f) 99.12 Branch Hourly Savings Plan -- Trust Agreement(f)
- ---------- (a) Incorporated by reference to company's Annual Report on Form 10-K for the year ended October 31, 1990. (b) Incorporated by reference to company's Annual Report on Form 10-K for the year ended October 31, 1994. (c) Incorporated by reference to company's Annual Report on Form 10-K for the year ended October 31, 1998. (d) Incorporated by reference to company's Current Report on Form 8-K dated February 18, 1999. (e) Incorporated by reference to company's Quarterly Report on Form 10-Q for the quarter ended January 31, 2000. (f) Incorporated by reference to company's Annual Report on Form 10-K for the year ended October 31, 2000. (*) Indicates management contract or compensatory plan or arrangement. (**) Previously filed as an exhibit to the company's Annual Report on Form 10-K for the year ended October 31, 2001, filed December 19, 2001. 43 EX-23.1 3 v82571a1exv23w1.txt EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-4 (333-83660), the Registration Statement on Form S-8 (No. 33-14358), the Registration Statement on Form S-8 (No. 33-37836) and the Registration Statement on Form S-8 (No. 33-56620) of Longview Fibre Company of our report dated December 7, 2001 relating to the financial statements and of our report dated December 7, 2001 relating to the financial statement schedule, which appear in this Form 10-K/A. PRICEWATERHOUSECOOPERS LLP - -------------------------- PRICEWATERHOUSECOOPERS LLP Portland, Oregon June 20, 2002 -----END PRIVACY-ENHANCED MESSAGE-----