Document BR2561yamMxJjBp9wDYV9wxLo

I Miking Information M*ter" GEORGIA PACIFIC CORP Filing Type: 10-K Description: N/A Filing Date: 12/30/00 Ticker: GP Cusip: 373298 State: GA Country: US Primary SIC: 2435 Primary Exchange: NYS Billing Cross Reference: Date Printed: 07/13/2001 This document produced using Global Access http://wHw.disclosurc.com/dga 'Ji.U/iU/.l t ,11.;/ /C C.G//W - ; '/`/V Table of Contents Created by Disclosure Filing Sections To jump to section, click on hypertextedpage number Document......................................................................................................................................................................I Base............................................................................................................................................................................. 1 Cover Page................................................................................................................................................................... .1 Table of Contents......................................................................................................................................................... 3 Business....................................................................................................................................................................... 4 Properties................................................................................................................................................................... 13 Legal Proc ./dings...................................................................................................................................................... bt Submission to a Vote................................................................................................................................................. 14 Market for onimon Equity.......................................................................................................................................14 Selected Financial Data................................................. 14 Management Discussion............................................................................................................................................15 Financial Stmnts/Suppl Data.................................................................................................................................... 31 Financial Statements...................................................... 31 Report of Auditors.....................................................................................................................................................33 Income Statement...................................................... 34 Cashflow Statement..................................................... 35 Balance Sheet........................................................ 36 Shareholders Equity...................................................................................................................................................38 Financial Footnotes...................................................... 40 Changes in Accounting............................................................................................................................................115 Directors and Executive Officers.............................................................................................................................115 Executive Compensation.........................................................................................................................................117 Security Ownership.................................................................................................................................................117 Related Tra. factions..................................................... 117 Exhibits and Reports................................................................................................................................................117 Signatures................................................................................................................................................................ 120 Exhibits Exhibits.................................................................................................................................................................... 122 Exhibit Index........................................................................................................................................................... 122 Rights of Security Holders....................................................................................................................................... 131 Material Contracts.................................................... 134 Material Contracts.................................................... 147 Material Contracts..................................................... 156 Material Contracts..................................................... 156 Material Contracts................................................... 162 Material Contracts.................................................... 175 This document produced using Global Access http://www.diselosure.com/dga Material Contracts..................................................... ........................................................................................... 179 Material Contracts.................................................... ............................................................................................. 187 Material Contracts.................................................................................................................................................194 Material Contracts..................................................... ............................................................................................ 208 Material Contracts..................................................... ............................................................................................ 215 Material Contracts.................................................................................................................................................217 Material Contracts................................................................................................................................................. 230 Material Contracts.................................................... .............................................................................................364 Material Contracts.......................... ...................................................................................................................... 484 Material Contracts..................................................... ............................................................................................ 592 Material Contracts................................................... ............................................................................................. 698 Material Contracts..................................................... ............................................................................................793 Material Contracts................................................... ..............................................................................................862 Computation of Ratios.......................................................................................................................................... 892 Subsidiaries........................................................ ................................................................................................... 892 Consents : Experts, < ,'ounsel...................................................................................................................................900 Additional Exhibits ............................................................................................................................................... 901 This document produced using Global Access http://www.diselosure.com/dga ULU/KUlA 1'AUllL LUtil' - IU-K t-Ming Dale: iJ2,2(J,ui UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM. 10-K (Mark One) {X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 30, 2000 OR (_} TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-3506 GEORGIA-PACIFIC CORPORATION (Exact name of registrant as specified in its charter) Georgia (State or other jurisdiction of incorporation or organization) 93-0432081 (I.R.S. Employer Identification Number) 133 Peachtree Street, N.E., Atlanta, Georgia 30303 (Address of Principal Executive Offices) (Zip Code, Registrant's telephone number, including area code: (404) 652-4000 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of uach Exchange on which Registered Georgia-Pacific Corporation--Georgia-Pacific Group Common Stock (S.80 oar value)....................................................... Georgia-Pacific Corporation--Timber Group Common Stock ($.80 par value)......................................................................... Premium Equity Participating Security Units--PEPS Units...................................................................................................................... Georgia-Pacific Group Rights tc Purchase Series B Junior Preferred Stock (no par value)................................ Timber Group Rights tc Purchase Series C Junior Preferred Stock (r.o oar value).................................................. New Tor r Stock Exchange N e w k O r .< 3::ck Exchange New York Stock Exchange New York 31 c c k Exchange New v r > Stock Exchange Disclosure Page I I .iv.;/ i 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 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 >_} of 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. {_} As of the close of business on February 12, 2001, the registrant had 225,743,844 shares of Georgia-Pacific Group Common Stock outstanding and 80,469,329 shares of Timber Group Common Stock outstanding. The aggregate market value of the voting stock held by non-affiliates of the registrant on February 12, 2C01 (assuming, for the sole purpose of this calculation that all executive officers and directors of the registrant are "affiliates") was $6,778,506,705 for Georgia-Pacific Group Common Stock and $2,535,103,107 for Timber Grc ip Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Listed hereunder are the documents any portions of which are incorporated by reference and the Parts of this Form 10-K into which such portions are incorporated: 1. The Corporation's definitive Proxy Statement which the Corporation intends to file on or prior to March 31, 2001, for use in connection with the Annual Meeting of Shareholders to be held on May 1, 2001, portions of which are incorporated by reference into Part III of this Form 10-K. Disclosure Page 2 GEORGIA-PACIFIC CORPORATION ANNUAL REPORT ON FORM 10-K For the Fiscal Year Ended December 30, 2000 TABLE OF CONTENTS PART I Page Item 1. Item 2. Item 3. Item 4. Business.......................................................................................................................................... Properties..................................................................................................................................... Legal Proceedings.................................................................................................................. Submission of Matters to a Vote of Security Holders......................... 1 9 9 9 PART II Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Market for Registrant's Common Equity and Related Stoc colder Matters............................................................................................................................................ 10 Selected Financial Data.................................................................................................. 10 Management's Discussion and Analysis of Financial Ccr.c.:ion and Results of Operations...................................................................................................... 10 Quantitative and Qualitative Disclosures AboutMarket Risk.... 24 Financial Statements and Supplementary Data.............................................. 24 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure............................................................................................... 96 PART III Item 10. Directors and Executive Officers of the Registrant........................... Item 11. Executive Compensation..................................................................................................... 96 98 Security Ownership of Certain Beneficial Owners and Item 12. Management.................................................................................................................................... Item 13. Certain Relationships and Related Transactions...................................... 98 98 PART IV Exhibits, Financial Statement Schedules, and Reports on Form Item 14 . 8-K. . . . i.......................................................................................................................................... 98 Index to Exhibits.................................................................................................................... 102 Disclosure Page 3 PART I Disclosure Page 4 ITEM 1. BUSINESS Georgia-Pacific Corporation was organized in 1927 under the laws of the State of Georgia. On December 16, 1997, shareholders of Georgia-Pacific Corporators. approved the creation of two classes of common stock, Georgia-Pacific Group stock and Timber Group stock, intended to reflect separately the performance of the Corporation's two operating groups, Georgia-Pacific Group ar.c fee Timber Company. In this document, the following terms and definitions are usea: "Corporation" refers to Georgia-Pacific Corporation and its subsidiaries, which includes the businesses of both the Georgia-Pacific Group and The Timber Company. "Georgia-Pacific Group" refers to the Corporation's manufacturing and distribution businesses. "The Timber Company" refers to the Corporation's timber ar.c timberlands business. "Georgia-Pacific Group stock" refers to the Corporation's Georgia-Pacific Group common stock par value $.80. "Timber Group stock" or "The Timber Company Stock" refers to the Corporation's Timber Group common stock, par value $.80. Georgia-Pacific Corporation consists of two separate operating groups, the Georgia-Pacific Group and The Timber Company. The performance of these distinct businesses is reflected separately by two classes of common stock. The Georgia-Pacific Group consists of all of the Corporation's manufacturing mills and plants, its building products distribution business and its paper distribution business. The facilities manufacture and sell a wide variety of pulp, paper and consumer products (including pulp, paper, containerboard, packaging, tissue, and disposable tableware) and manufactured building products (including plywood, oriented strand board and industrial panels, lumber, gypsum products, chemicals and other products). The Timber Company consists of approximately 4.7 million acres of timberlands owned cr leased by the Corporation, together with related facilities and equipment. In 2000, these timberlands supplied approximately 14% of the overall timber requirements of the Corporation's manufacturing facilities which was 61% of The Timber Company's net sales. Additional informa'.ion pertaining to the Corporation's businesses, including operating segments, is set forth under the captions "Georgia-Pacific Corporation and Subsidiaries--Management's Discussion and Analysis" and "Georgia-Pacific Corporation and Subsidiaries--Sales and Operating Profits by Operating Segment presented on page 94, and in Notes 1 and 2 of the Corporation's Consolidated Financial Statements, presented on pages 32 through 44 in each case under Item 8 of this Form 10-K. Georgia-Pacific Group The Georgia-Pacific Group has grown through expansion and acquisitions to become one of the world's leading manufacturers and distributors of building products, pulp and papers, and tissue products. Among North American producers, the Georgia-Pacific Group (the "Group") ranks first in the production of tissue paper products, disposable tableware, industrial panels, wood bonding resins and industrial thermosetting resins; second in the Disclosure Page 5 GEORGIA PACIFIC CORE - 10-K Filing Date: 02/20/01 production of structural wood panels, paper (uncoated free-sheet) and gypsum wallboard; third in lumber products and market pulp; fourth in linerboard and medium; and fifth in corrugated packaging. The Group's building products distribution business leads in supplying wholesale building products in the United States. The Group's paper distribution business, Unisource, is one of the largest distributors of paper and supplies in North America. The Group's chemicals business also supplies paper chemicals and tall oil rased chemicals Most products of the Georgia-Pacific Group are made of solid wood, virgin and recycled wood fiber, or wood by products. Georgia-Pacific Group sources the majority of these readily-available raw materials from private timber owners, independent log merchants and brokers, and recycled fiber brokers. Approximately 14% of the Georgia-Pacific Group's timber needs are supplied by The Timber Company under a long-term contract. 1 Georgia-Pacific Group operates its production facilities in four operating business segments; Building Products, Containerboard and Packaging, Bleached Pulp and Paper, and Consumer Products. Operating segment descriptions follow. Building Products Segment '"he Georgia-Pacific Group i_. a leading manufacturer and dist .tutor of building products in the United States. The building products epment manufactures wood panels (including plywood, oriented strand t.ard ("OSB") and industrial panels), lumber, gypsum products, chemicals and other products. These products are manufactured at 127 facilities in the U.S., 1 plants in Canada, two plants in South America, and through a joint venture in South Africa. These products are sold directly to industrial customers, independent dealers and wholesalers, and large building product retailers or through our building products distribution business. The segment is the largest distributor of building products in North America. The building products business is affected by the level of housing starts; the level of home repairs, remodeling and additions; commercial building activity; the availability and cost of financing; and changes in industry capacity. The demand for building products business tends to be stronger during the second and third quarters when weather conditions favor construction. Exports for the building products segment in 2000 were $220 million (approximately 3% of segment sales), primarily to the Caribbean and Europe. Wood Panels. A leading producer of structural wood panels in the United States, the Georgia-Pacific Group accounts for about 24% of do estic capacity. The segment's 16 softwood plywood plants and seven OSB plants .an produce in excess of 7.8 billion square feet of panels annually. With most of these plants located in the Southeast, the business benefits from an ample supply of timber, favorable weather conditions, regional population growth, national economic growth and other factors. OSB is a structural panel made from wood strands arranged in layers and bonded with resin. OSB serves many of the same uses as unsanded plywood including roof decking, sidewall shea..ting and floor underpayment. Late in 2000, the Georgia-Pacific Group completed construction of a new OSB plant in Calhoun County Arkansas which will produce approximately 410 million square feet (3/8") of OSB annually. This plant will ultimately replace older, less efficient structural panel capacity. Industrial Panel Products. The building products segment leads in production of manufactured board products for industrial and construction applications. Twenty mills manufacture nardboard, particleboard, panelboard, softboard, hardwood plywood, decorative panels and medium-density fiberboard. Applications include furniture, cabinets, housing, retail fixtures, and other industrial products. In 2000, the segment closed its Little Rock, Arkansas Disclosure Page 6 hardboard plant and sold its Lebanon, Oregon hardboard plant. The combined capacity of these facilities was 266 million square feet (1/8" basis) or approximately 21% of annual hardboard capacity as of January 1, 2000. Lumber. The third-largest lumber producer in North America, the GeorgiaPacific Group annually manufactures about 2.7 billion board feet or approximately 5% of domestic lumber production. Most of the Group's 36 lumber mills are located in the U.S. South. Lumber products are manufactured from Southern pine, a variety of Appalachian and Southern hardwoods, redwood, cedar, spruce, hemlock and Douglas fir. In addition, the segment ranks as one of the top producers of pressuretreated lumber in the nation. Operating from 12 facilities, the segment has the capacity to pressure-treat more than one billion board feet of lumber annually. Pressure treated lumber is used primarily in construction of outdoor structures such as decks, fences, bridges and playground equipment. Demand for the building products segment's engineered lumber products has increased in recent years as wood I-joists (made from veneer, CS3 and sawn lumber) appear to have increasingly become the product of 2 choice for : oor joist applications. Laminated veneer lumber "17L"' and wood I-joists are designed to meet the precise structural performance requirements of roofing and flooring systems. The segment produces both LVL and I-joists to precise structural specifications in two facilities. Gypsum Products. The Georgia-Pacific Group operates 19 gypsum board plants throughout the U.S. and Canada and is one of the three largest producers of gypsum wallboard in North America, with an annual capacity of 6.7 billion square feet. Gypsum products include wallboard, Dens specialty panels, firedoor cores, industrial plaster and joint compound. In addition, the business is vertically integrated in both paper and gypsum rock operating four recycled gypsum paperboard mills and nine gypsum quarries/mines. Gypsum reserves are approximately 302 million recoverable tons, an estimated 49-year supply at current production rates. In 2000, the business' older technology, higher-cost gypsum wallboard facility in Grand Rapids, Michigan was closed. This facility had annual capacity of 380 million square feet representing over 5% of the Group's January 1, 2000 gypsum production capacity. Chemicals. The chemical business is the forest products industry's leading supplier of :ood bonding resins, industrial thermosetting resins, paper chemicals, a. d tall oil based chemicals. The business ships more than 6 billion pounds of thermosetting resins, formaldehyde, pulp chemicals, and paper chemicals annually from IS plants to most of the major buyers of these products. In January 2001, the business acquired the balance of its Chilean and Argentinean joint ventures from Masisa S.A. It also operates through a joint venture in South Africa. The segment also produces chemicals and resins for use in a variety of specialty applications in other industries, including roofing, thermal insulation, metalworking, coatings, fertilizer, and transportation. In 2000, the chemicals business was identified as a nonstrategic asset of the Corporation and the Corporation announced the potential sale of this business. Building Products Distribution. The building products distribution business is the leading domestic wholesaler of building products. It sells building products to independent dealers, industrial customers and large home improvement centers from 64 locations throughout the U.S. and one in Canada. The building products distribution business provides a nationwide outlet for a significant portion of the Georgia-Pacific Group's building products. It also Disclosure Page 7 sells building products purchased from third parties, which make up approximately 64% of the business' sales. Building products distribution's geographic coverage and product breadth are unmatched in North America. Containerboard and Packaging Segment The containerboard and packaging segment focuses on providing packaging solutions for a wide variety of industrial customers. Its primary products include containerboard, corrugated containers and packaging. Annual capacity at the Group's four containerboard mills of 3.7 million tons represents about 10% of total U.S. capacity. The segment's 50 corrugated packaging plants consume approximately 70% of the segment's containerboard production; the remainder is sold to independent box converters in the United States, Latin America and Asia. One of the largest domestic producers of containerboard, the containerboard and packaging segment is the second largest supplier of containerboard to independent converters in the U.S. Markets for containerboard and packaging products are affected primarily by changes in industry capacity and the level of industrial activity in the U.S. and export markets. Containerboard exports totaled 332,000 tons during 2000 compared to 1999's level of 460,000 tons. In addition to oandard corrugated containers, the segment's packaging plants manufacture many specialty packaging products. These include displayready corrugated packaging that works interchangeably with our line of returnable plasti containers, double and triple-wall boxes, bul.< bins, wate. resistant packaging, and high-finish and preprinted packaging fer point-ofsale displays. Th' Technology and Development Center in Norcrcss, Georgia, uses state-of-the-art technology to design and test packaging for customers. 3 Bleached Pulp and Paper Segment The bleached pulp and paper segment produces market pulp, paper and other products at 18 facilities in North America. Combined production capacity for pulp and paper is 6.8 million tons. The bleached pulp and paper segment's mills are among the industry's lowest cost producers. An initiative over the past several years has motivated employees throughout the mill system to find ways to continually reduce costs, increase quality, and reduce maintenance spending. Markets for pulp and paper products are affected primarily by changes in industry capacity, the level of economic growth in the U.S. and export markets, and fluctuations in currency exchange rates. Exports from this business segment consist chiefly of market pulp bound for Asia, Europe, and Latin America. In 2000, exports for the bleached pulp and paper segment were $1.5 billion, appi iximately 17% of segment sales. Paper. The Georgia-Pacific Group is the nation's second-largest domestic producer of paper. Also known as uncoated free-sheet, paper is uses in office copy machines and printers, commercial printing, business forms, stationery, tablets, books, envelopes, labels and checks. The bleached pulp and paper segment's eight uncoated free-sheet paper mills have a combined annual capacity of 2.8 million tons, approximately 19% of U.S. capacity. These products are sold through our paper distribution business, other major paper distributors, office product distributors, printing equipment manufacturers, retailers and converters. Products are sold under a variety of brand names including: Microprint, Quantum, Spectrum, EUREKA, Nekoosa Solutions, Valorem, Geocycle, HOTS, St. Croix, Re-Comm and Westminster. In 2000, the paper business continued to focus on its strategy of reducing costs and improving customer service levels. This business completed the introduction of a major systems initiative that management believes will enable the business to continue to optimize paper machine productivity, Disclosure Page 8 decrease order fulfillment time, and reduce transportation and inventory costs. Also in 2000, the business became the exclusive manufacturer of the most recognized brand name in office papers, Xerox(R). Xerox copy paper is preferred by consumers and commands a premium price over manufacturers brands and store brands. Late in 2000, the business permanently closed its Kalamazoo, Michigan mill and a small paper machine in the Nekoosa, Wisconsin mill. Combined, these closures represented 155,000 tons of production or 6% of the segment's uncoated freesheet capacity. Market Pulp. The Georgia-Pacific Group ranks third in the production of market pulp worldwide. The bleached pulp and paper segment includes nine pulp mills with a combined annual capacity of nearly 3.7 million tons, approximately 19% of U.S. capacity. These mills produce primarily Southern softwood and Northern hardwood pulps sold to industrial users for the manufacture of many paper grades. The segment also is a major supplier of fluff pulp and other specialty pulps. Fluff pulp is used primarily in the manufacture of disposable diapers and other sanitary items. In 2000, the market pulp operations at Leaf River, Mississippi; Brunswick, Georgia; and Woodland, Maine were identified for potential divestiture. These facilities have the capaci' y to produce nearly 1.8 million tons of market pulp and represent over 80% of Georgia-Pacific's market pulp capacity. There can be no assurance that those operations will be sold in 2001. Bleached Board. The bleached pulp and paper segment produces bleached paperboard for use in frozen food containers, food service items and other products. Our bleached paperboard products are sold primarily through our joint venture with Gulf States Paper Company under the CartonMate paperboard trademark. Paper Distribution. Unisource Worldwide, Inc. ("Unisource") is a leading distributor of printing and imaging paper, packaging systems, and sanitary maintenance supplies in North America. Unisource operates primarily in the United States, 23 locations in Canada, and 27 locations in Mexico, and is a large distributor for most major paper producers in North America, including the Georgia-Pacific Group's paper and packaging businesses. The segment operates from 15 customer service centers, 171 warehouses, and 69 Paper Plus retail 4 store locations in the United States. The paper distribution segment is affected by the level of economic activity in the United States, Canada and Mexico and the pricing environment of paper and paper products. Unisource sells and distributes high-quality printing, writing and copying papers to printers, publishers, business forms manufacturers ana direct mail firms, as well as to corporate and retail copy centers, in-plant print facilities, government institutions and other paper intensive businesses. Unisource also sells and distributes a broad range of packaging and maintenance supplies, equipment and services (principally to manufacturers, food processors, and retailers); maintenance supplies and equipment such as carton erectors, baggers and filers as well as films, shrink-wrap and cushioning materials; shipping room supplies such as corrugated boxes, cushioning materials, tapes and labeling; and food service supplies such as films and food wraps, food containers and disposable apparel for food service workers. Roughly two thirds of Unisource's revenue is derived from printing and imaging and one third from packaging and supplies. Disclosure Page 9 Consumer Products Segment On November 27, 2000 Georgia-Pacific Group completed the acquisition of Fort James Corporation ("Fort James") for approximately $11 billion. Fort James shareholders received $29.60 cash and 0.2644 shares of Georgia-Pacific Group common stock for each share of Fort James. The acquisition was accounted for using the purchase method. Nearly all the businesses acquired are now included in the Consumer Products segment of Georgia-Pacific Group. The assets acquired in the Fort James transaction, combined with the existing tissue assets of Georgia-Pacific Group, form this new business segment. It is the largest North American producer of tissue products, a leading manufacturer of tissue products in Europe, and the largest and best known producer of disposable tableware in North America. The segment's products include a wide array of branded and private label consumer and commercial tissue products. These include bath tissue, paper towels and napkins, which are made from virgin and recycled fibers, as well as disposable plates, cups and cutlery. Primary production of these products takes place in 29 tissue mills throughout Europe and the United States and 12 disposable tableware plants in the United States. Worldwide tissue capacity is approximately 6 million tons, making this segment the world's largest producer of tissue products. In 2000, jxport and foreign sales accounted for approximately $225 million, or 9% of segment sales. Because the results of the segment include only one month of the results from the acquired Fort James assets, management expects 2C ''l foreign and exports sales to be substantially higher. Markets for tissue products are generally influenced by pcpulation growth, changes in per capita consumption, and levels of economic activity in a geographic market. In connection with the acquisition, Georgia-Pacific agreed to divest 368,000 tons of tissue manufacturing capacity, associated converting facilities, and the sales and marketing functions that support them, under a consent decree with the U.S. Department of Justice. In January 2001, a definitive agreement for the sale of these assets was reached with Svenska Cellulosa Aktiebolaget ("SCA") for approximately $850 million. Finalization of this sale is expected late in the first quarter of 2001. The majority of this business is in the "away from home" tissue business of the Corporation. North American Tissue The consumer products segment is the largest producer of tissue products in North America. The business produces both branded and private label tissue products made from virgin and recycled fibers for the at-home and away-fromhome markets. Thirteen production and converting facilities located throughout the United States--and a single converting facility in Mexico produce finished goods to serve the North American market. In 2000, North American sales accounted for approximately $1,757 million, or 94% of tissue sales. Because the results of the segment include only one month of the results from the acquired assets, management expects sales to be substantially higher going forward while North America's portion of segment sales is expected to decline. Retail Tissue. In the retail (or at-home) channel, which accounted for approximately 55% of domestic tissue sales in 2000, Georgia-Pacific Group produces both branded and private label products. The Company's principal retail brands include Quilted Northern and Angel Soft bath tissue (the number two and three bathroom tissue brands, respectively), 3rawny and Sparkle paper towels (the number two and three paper towel brands, respectively), and six of the seven leading napkin brands including Mardi Gras napkins (the leading paper napkin brand) and Vanity Fair premium dinner napkins (the number one premium napkin brand). Other retail brands include Sparkle paper napkins (the Disclosure Page 10 KJ! I U/. 1 ; /%_ c//w number three paper napkin brand), and Soft'N Gentle bathroom and facial tissue, MD bath tissue, Mardi Gras towels, Coronet towels and napkins, Zee napkins (number one on the West Coast), and Green Forest towels and napkins. Georgia-Pacific also supplies private label or customer brand products to some of the best known retailers in the United States. The Company believes that it is the leading supplier to the U.S. private label towel art tissue market, with an estimated market share between 40% and 45%. Additionally, the Company believes it is the leading supplier of towel, tissue ar.d napkin products to the warehouse club channel, which includes Costco Wholesale Corporation, Sam's Clubs and BJ's Wholesale Club. Away-From-Home Tissue. In 2000, the other 45% of domestic tissie sales came from commercial and industrial markets through our paper distribution business (Unisource), independent paper distributors, food service and janitorial distributors, and directly to national fast food accounts for use in restaurants, offices, factories, hospitals, schools and hotels. 7h Company's principal away-from-home brands include proprietary dispensing systems for the Cormatic, Ultimatic and Guardian brands; Envison, the leading brand of environmentally positioned 100% recycled tissue, towel and napkin products; and Preference Ultra premium. Preference near premium, and Acclaim economy tissue, towel and napkin products. With an estimated market share if approximately 39%, Georgia-Pacific believes it is now the leading producer of towel and tissue products in the U.S. away-from-home channel. European Tissue The European tissue business is a leading supplier of paper-based consumer products in many European countries. Product lines in both the retail and away-from-home markets include bathroom and facial tissue, paper towels and napkins. Retail sales include both branded and private label products. The Company also markets feminine hygiene products and pharmacy supplies in select countries. These products are manufactured across Europe in 11 mills with an annual capacity of over 810 thousand tons. Seven stand-alone converting plants strategically located through our markets supplement converting operations located at the primary production mills. The combined network provides costeffective market reach given the much higher European distribution costs and the resulting decrease in the maximum practical distribution radius from any one mill site. In 2000, European sales accounted for approximately $119 million, or 6% of tissue sales. Because the results of the segment include only one month of results from the Fort James assets, European sales are expected to be substantially higher going forward. Historically, annual European sales of Fort James, as adjusted for reclassifications, have been in the Si.6 to $1.7 billion range. During 2000, tissue-based products accounted for approximately 3"'% of European annual sales with the balance comprised of feminine hygiene products, ancillary products, such as health care and pharmacy items, and unconverted tissue parent rolls. Georgia-Pacific sells its towel and tissue products through both retail and away-from-home distribution channels in Europe. Approximately 78% of European towel and tissue sales were into re.ail distribution channels and 22% were into away-from-home and other channels. Sales into retail channels are supported by both branded and private label product offerings. The Company's principal European brands include Lotus bathroom tissue and handkerchiefs (both hold the number one position in France), Moitonel bathroom tissue (the number two tissue in France), Lotus kitchen towels (the number two kitchen towel in the Netherlands), O'Kay kitchen towels (the number one kitchen towel Disclosure Page 1 I in France), Colhogar kitchen towels and bathroom tissue (both hold number one positions in Spain), KittenSoft towels and bathroom tissue (both hold number one positions in Ireland), EMBO bathroom tissue (the number one tissue in Finland), Tenderly bathroom tissue (the numberthree tissue in Italy), Delica kitchen towels and bathroom tissue (the number one towel and number two bath tissue in Greece), Vania feminine hygiene products (the leader ir. France), Selpak premium tissue products (the leader in Turkey) and Demak'Vp cotton facial pads (the leader in Europe). Georgia-Pacific's largest European operations are in France and me United Kingdom, which combined account for approximately 68% of its European tissue sales. Aggregating retail branded, private label and away-frcm-home production, the Company believes itis the largest producer of tissue products in France, Spain, Finland, Ireland, and Turkey and the second largest producer in the United Kingdom and Greece. Dixie The Dixie business, with one of the best known names in dispcsacle plates, cups and cutlery, provides a full range of products for both retail and foodservice distribution channels. Through a twelve-plant network of focused production fact ities, Dixie manufactures products for its retail and foodservice cus omers. The Company's principal retail tabletop brand is Dixie, which has the 1 rgest U.S. retail market share for disposable cups and plates. The Company bel eves that it is also the leading supplier of tabletop products to the warehous-. club channel. Foodservice customers include distributors, restaurants, hc;els, office buildings, and institutions. The Company believes that it is one of the largest producers of disposable cups, plates and related products for the foodservice industry. Approximately 54% of sales are into retail distribution channels and the remaining 46% are into foodservice distribution channels. Historically, Dixie's annual sales, as adjusted for reclassifications, are approximately $700 million. The Timber Company In July 2000, Plum Creek Timber Company ("Plum Creek") and Georgia-Pacific Corporation signed a definitive agreement to merge Plum Creek and The Timber Company. Completion of the merger is subject to approval by the shareholders of Plum Creek and The Timber Company, and receipt of a ruling from the Internal Revenue Service that the transaction is tax-free to Georgia-Pacific Corporation and the shareholders of The Timber Company and receipt of an opinion of counsel that the merger will qualify as a tax-free reorganization. Following the transaction, Plum Creek will become the second largest private timberland owner in the United States. As of Februar 16, 2001, the Internal Revenue Service had not ruled on the taxable nature ef the transaction. Assuming a positive IRS ruling and subsequent shareholder votes, the transaction is expected to close during the second quarter of 2001. The Timber Company is engaged in the business of growing and marketing timber. The Company is one of the largest timberland owners in the United States, owning :r controlling approximately 4.7 million acres. These timberlands are located in three regions: 3.9 million acres of primarily pine forests in the South; 287,000 acres of primarily Douglas fir forests in Oregon; and 484,000 acres of mixed hardwood forests in the Appalachian and north central regions of the United States. These timberlands are within economic reach of over 1,000 customers and grow various commercial species of trees for industrial wood users. Principal products include softwood sawtimber, softwood pulpwood, hardwood sawtimber and hardwood pulpwood. The Timber Company also operates five world-class nurseries, and plants more than 125 million conifer seedlings each year. It does not own or operate logging equipment or converting facilities. Logging operations are performed Disclosure Page 12 / i K. >/-l\ by independent contractors working for purchasers of the standing timber or, in certain circumstances, for The Timber Company. The Timber Company also engages in certain businesses related to ownership and management of its timberlands, including but not limited to the management of hunting leases and mineral rights and the continuous 7 evaluation and sale of selected properties that have greater value as conservation, commercial or recreational sites. The Timber Company attempts to maximize shareholder value through the implementation of strategies that constantly focus on merchandising timber for maximum return, maximizing timberland productivity, controlling costs, enhancing the quality of its timberlands portfolio and ensuring environmentally sustainable operations. During 2000, The Timber Company negotiated a new timber supply agreement which became effective January 1, 2001 and is subject to an automatic ten year renewal period, unie. 5 either party delivers a timely termination notice. This arms-length agreement provides The Timber Company with a stable, long-term customer for approxircitely one-third of its planned harvest while increasing the amount of its ha: -est which it can market and merchandise to other customers. Maximize Timberland Productivity Harvest plans and inventory projections reflect The Timber Company's objective of increasing harvest volumes while maintaining its standing timber inventory. Increased harvests will be effected through the use of intensive silvicultural treatments in order to improve growth, and through the replanting of harvested acres with faster-growing, higher-quality trees. Forest productivity initiatives are based on proprietary forest growth systems and processes' applied on a site-by-site basis. The Integrated Forest Management System electronically connects stand-level data collected in the field with sophisticated forest growth models and discounted cash flow analysis to "electronically grow and manage" the forests. This system allows forest management on a site-by-site basis to maximize the present value of productive lands. Growth rates are expected to continue to increase into the future through the development and use of genetically enhanced seedlings, improvements in responses to fertilization, vegetation control, thinning, and selective harvesting. Focus on Cost Control The Timber Company has one of the leanest, most productive workforces in the industry generating revenue of approximately $1 million per salaried employee. During 2000, The Timber Company continued to manage general and administrative ("C&A") costs. Since The Timber Company was created in 1997, G&A expenditures have decreased approximately 11%. While the potential for improvements in administrative expenses are unlikely to be a significant value driver going forward, a continuing focus on cost control is a core operating value embraced throughout The Timber Company as part of its focus on maximizing long-term cash flow and value for its shareholders. Environmental Stewardship The Timber Company is dedicated to environmental stewardship. The Timber Company's 11-point environmental strategy adopts the provisions of the American Forest and Paper Association's Sustainable Forestry Ir.itiativeSM and incorporates its own specific environmental goals. The Timber Company continues to work closely with federal, state, and local authorities on issues Disclosure Page 13 concerning endangered species, clean water, wildlife, flora and fauna diversity, and conservation set asides. Timber Resources The principal raw material used by the Corporation is timber. luring 2000, The Timber Company supplied 14% of the overall timber requirements of GeorgiaPacific Group's facilities. The prices and terms of the transactions between The Timber Company and Georgia-Pacific Group were determined on an arms length basis pursuant to supply contracts put in place in 1997 at the time of the Corporation's recapitalization which created two separate classes of common stock; The Timber Group and Georgia-Pacific Group. The Corporation purchases its remaining timber requirements from third-party land owners m che open market. No single supplier, other than The Timber Company, supplies more than 10% of the Corporation's timber requirements. Additional information pertaining to the Corporation's timber resources is set forth under the caption "Che Timber Company" in this item. Mineral Resources Information pertaining to the Corporation's gypsum resources _s set forth under the captions "Georgia-Pacific Group--Building Products-- ypsum Products" in this item. Environment Information pertaining to environmental issues and the Corporation's expenditures for pollution control facilities and equipment is set forth under the captions "Georgia-Pacific Corporation and Subsidiaries--Management's Discussion and Analysis--Liquidity and Capital Resources--Investinq Activities" and Note 12 of the Corporation's Consolidated Financial Statements, and is presented beginning on pages 14 and 70 under Items 7 and 8 of this Form 10-K. Employees Information pertaining to persons employed by the Corporation is set forth under the captions "Georgia-Pacific Corporation and Subsidiaries--Management's Discussion and Analysis--Liquidity and Capital Resources--Other", and is presented on page"21 under Item 7 of this Form 10-K. Trademarks Dixie, Microprint, Quantum, Spectrum, Eureka, Nekoosa Solutions, Valorem, Geocycle, St. Croix, Re-Comm, Westminster, Quilted Northern, Ar.gei Soft, Brawny, Sparkle, Mardi Gras, Vanity Fair, Soft 'N Gentle, MD, Coronet, Zee, Green Forest, Cormatic, Ultimatic, Guardian, Envision, Preference Gitra, Acclaim, Lotus, Moltonel, O'Kay, Colhogar, KittenSoft, EMBO, 7- nderiy, Delica, Vania, DeMak'Up, and Dens-Glass are registered trademarks of Georgia-Pacific Corporation and its subsidiaries. Disclosure Page 14 ITEM 2.PROPERTIES The geographic location and capacity of the manufacturing facilities by segment is set forth on Exhibit 99.1 hereto which is hereby incorporated herein by this reference. The Corporation's manufacturing and support facilities are assigned Disclosure Page 15 / .1 l Ultlg L/Ul according to the requirements of the products to be manufactured. Therefore, the type of construction varies from facility to facility. Management believes that its manufacturing facilities, taken as a whole, are well maintained and generally adequate for current operations. Utilization of a particular facility varies based upon demand ;:r the product. While it is not possible to measure with any degree of certainty the productive capacity of a facility, we have estimated capacity in Exhibit 99.1 which is incorporated herein by reference thereto. The Corporation generally owns its manufacturing and other facilities, although warehouse and office facilities are often leased. The Corporation examines alternatives for its higher cost facilities, including modernizing, replacing or closing such facilities. The Corporation continually reviews many business opportunities and alternatives, including possible acquisitions or sales of properties. Information concerning the Corporation's timber and mineral resources is presented on pages 8 and 9 under Item 1 of this Form 10-K. Disclosure Page 16 ITEM 3.LEGAL PROCEEDINGS Information pertaining to the Corporation's Legal Proceedings is set forth in Note 12 of the Corporation's Consolidated Financial Statements which are presented on pages 70 through 73 under Item 8 of this Form 10-K and are incorporated herein by reference thereto. Disclosure Page I 7 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 9 PART II Disclosure Page 18 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Georgia-Pacific Group and Timber Group common stock is listed on the New York Stock Exchange and trade under the symbols GP and TGP, respectively. As of the close of business on February 12, 2001, the Georgia-Pacific Group closing stock price was $30.51 and the Timber Group stock price was 331.99, and there were approximately 34,509 record holders of Georgia-Pacific Group stock and 28,712 record holders of the Timber Group stock. Information with respect to the Market for the Corporation's Ctmmcn Equity and Related Stockholder Matters is set forth in a table under the captions "Selected Financial Data--Financial Position, End of Year" on pages 90 through 93 and in Note 14 of the Corporation's Consolidated Financial Statements on page 75 under Item 8 of this Form 10-K which are incorporated herein by reference thereto. The Corporation expects to continue to pay quarterly dividends i the amounts set forth in Note 14 of the Corporation's Consolidated Financial Statements on page 75 under Item 8 of this Form 10-K which dividend information is incorporated herein by reference thereto. Disclosure Page 19 ITEM 6. SELECTED FINANCIAL DATA Information with respect to Selected Financial Data for the Corporation is set forth under the captions "Selected Financial Data--Operations--GeorgiaPacific Corporation and Subsidiaries" and "Selected Financial Data--Financial Disclosure Page 20 uti/KU/a r.-n./1-iL cui\r - m-\ ruing uuic. u^.-unn Position, End of Year," which are presented on pages 87 through 93 under Item 8 of this Form 10-K, and is incorporated herein by reference. Disclosure Page 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion summarizes the significant factors affecting the results of operations and financial condition of the Corporation during the three fiscal years ended December 30, 2000. This discussion should be read in conjunction with the Consolidated Financial Statements, Notes to Consolidated Financial Statements and Supplemental Information set forth in Item 8 of this report. Financial information specifically concerning the Georgia-Pacific Group and The Timber Company can be found in Note 14 and Note 15 beginning on pages 75 and 76, respectively, of the Corporation's Consolidated Financial Statements and in Supplemental Information on pages 87 through 94. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL -CONDITION AND RESULTS OF OPERATIONS GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES Georgia-Pacific Corporation consists of two separate operati: groups, the Georgia-Pacific Group and The Timber Company. The performance c these distinct businesses is reflected separately by two classes of . mm.on stock: Georgia-Pacific Group stock ai. i The Timber Company stock. The C- crgia-Pacific Group consists of all the Corporation's manufacturing mills ant plants, and its distribution businesses. The facilities manufacture and sell a wide variety of pulp and paper products (including pulp, paper, containerboard, packaging, commercial and consumer tissue products (including bath tissue, paper towels and napkins) and disposable tabletop products (including disposable cups, plates and cutlery) and manufactured building products (including plywood, oriented strand board and industrial panels, lumber, gypsum products, chemicals and other products). The Timber Company consists of approximately 4.7 million acres of timberlands owned or leased by the Corporation, together with related facilities and equipment. In 2000, these timberlands supplied approximately 14% of the overall timber requirements of the Corporation's manufacturing facilities which was 61% of The Timber Company's net sales. 2000 Compared with 1999 The Corporation reported consolidated net sales of $22.2 billion and net income of $505 million for 2000, compared with net sales of $18.6 billion and net income of $1,116 million in 1999. Included in 2000 were $528 million of net sales from the recently acquired Fort James operations. The 1999 results included pretax gains of $355 million ($215 million after taxes from the sales of the Corporation's timberlands located in California, Maine and New Brunswick, Canada. The factors contributing to the decrease in 2000 net income are described below. Interest expense was $639 million in 2000, compared with $495 million in 1999. The increase is the result of higher debt levels, primarily related to the acquisition of Fort James, and higher average interest rates. The Corporation reported pretax income of $812 million and an income tax provision of $307 million for the year ended December 30, 2000, compared with pretax income of $1,821 million and an income tax provision of $705 million for the year ended January 1, 2000. The effective tax rate used to calculate the provision for income taxes was 37.8% in 2000 and 38.7% in 1999. The effective tax rate for both years was below the combined statutory federal and Disclosure Page 22 /o' i v lm i </-i\ 1 mug UUIC. </-/-<Jf'Jt state income tax rates due to utilization of state tax credits and foreign sales corporation tax benefits that more than offset nondeductible goodwill amortization expense associated with business combinations. The Corporation expects the effective tax rate for 2001 to be greater than the 2000 effective tax rate because of the increase in nondeductible goodwill amortization expense associated with the Fort James acquisition. 11 The remaining discussion refers to the "Selected Operating Segment Data" table below which should be read in conjunction with the more detailed segment information set forth in Note 2 of the Corporation's Consolidated Financial Statements beginning on page 40 and Sales and Operating Profits by Operating Segment on page 94. SELECTED OPERATING SEGMENT DATA Georgia-Pacific Corporation and Subsidiaries Year Ended December 30, January 1, December 31, 2000 2000 1998 In millions Net sales: Building products............................................................... Timber............................................................................................ Containerboard and packaging.................................. Bleached pulp and paper............................................... Consumer products............................................................... Other*............................................................................................ Total net sales....................................................................... $ 8,703 394 2,734 9,085 2,496 (1,194) $22,218 5 5, 672 526 2, 511 5, 540 1,550 (1,240! $18,599 $ 8, 834 534 2, 221 2, 476 1,442 l(1,517) $13,990 Operating profits: Building products............................................................... Timber............................................................................................ Containerboard and packaging.................................. Bleached pulo and paper............................................... Consumer pre iucts............................................................... Other*............................................................................................ Operating profits................................................................. Interest expense.................................................................... Provision for income taxes.......................................... Income before extraordinary item.......................... Extraordinary item, net of taxes.........................., Net income.................................................................................... $ 377 303 512 468 29 (238) 1,451 639 307 505 $ 505 $ 1,202 726 324 145 170 (251. 2,316 -TJ5 7 05 _____ <3 - $ 1, 116 $ 604 364 89 (59) 160 (224) 934 443 202 289 (15) $ 274 * Includes the elimination of intersegment sales. Building Products The Corporation's building products segment reported net sales of 33.7 Disclosure Page 23 billion and operating profits of $377 million for the year ended December 30, 2000, compared with net sales of $9.7 billion and operating profits of $1,202 million in 1999. Return on sales was 4% in 2000 and 12% in 1999. The primary components of the decrease in 2000 sales and operating profits were 16% lower average plywood prices, 171 lower average softwood lumber prices, 18% lower average OSB prices and a 12% decrease in average gypsum prices coupled with a 23% decrease in gypsum sales volume. Because of weak market conditions in this segment, the Corporation temporarily suspended production at three structural panels and 12 lumber mills during the latter part of 2000. In audition, the Corporation permanently closed the Grand Rapids East, Mich., gypsum, plant in September 2000, and recorded a restructuring charge of approximately S8 million for asset write-off, employee termination and facility closure costs. The Corporation expects continued weakness in both demand and pricing in building products markets and lower levels of housing starts to adversely affect operating results for its building products segment in 2001. Timber The timber segment represents the operations of The Timber Company. For financial information relating to The Timber Company, including statements of income, statements of cash flows, balance sheets, statements of parent's equity and compreh- cisive income, see Note 15 of the Corporation's Consolidate-. Financial Statements 12 on page 76. Net sales for the timber segment were $394 million in 2000 and $526 million in 1999. Results for 1999 include $66 million of timber sales from the California, Maine and New Brunswick operations. Operating profits were $303 million in 2000 and $726 million in 1999. Excluding $35: million of pre-tax gains from the sales of the California, Maine and New Brunswick timberlands and $38 million of operating profits generated by those operations, operating profits in 1999 were $333 million. Results for 2000 included $78 million of gains from tactical land sales, compared with gains of $51 million in 1999. Compared with larger price declines in lumber and wood panel products, sawtimber prices decreased only 6% year-over-year. Harvest volumes uotaled 11.8 million tons in 2000, compared with 14.9 million tons in 1999. While part of the volume decline resulted from the 1999 strategic divestitures, the decline was also attributable to market-related downtime across the forest products industry in 2000, particularly at Georgia-Pacific Group, which elected to defer harvest of approximately 490,000 tons from planned levels until 2001. The timber segment also elected to defer some of its open market timber sales, in ar. effort to keep local supply in balance with demand and preserve the long-t :rm values of its timberlands. Containerboard and Packaging The Corporation's containerboard and packaging segment reported net sales of $2.7 billion and operating profits of $512 million for the year ended December 30, 2000, compared with net sales of $2.5 billion and operating profits of $324 million in 1999. During 2000, the Corporation sold certain containerboard and packaging assets resulting in a pre-tax gain of $25 million. Excluding this gain on asset sales, return on sales increased to 18% from 13c in 1999. Average selling prices increased in 2000 and ended the year above 1599 levels despite softening demand in the fourth quarter. Average selling prices for linerboard and medium increased 21% and 31%, respectively, while average selling prices for packaging increased 12%. The Corporation expects continued softness in demand for containerboard and packaging in 2001, but expects selling prices to remain relatively constant through the year. During 2000 and 1999, the Corporation took market-related paper machine Disclosure Page 24 slowback or downtime at its containerboard mills to avoid excess inventories, resulting in a reduction in containerboard production of approximately 271,000 tons and 30,000 tons, respectively. Bleached Pulp and Paper The Corporation's bleached pulp and paper segment reported net sales of 39.1 billion and operating profits of $468 million for the year ended December 30, 2000. In 1959, the segment reported net sales of $5.5 billion and aperating profits of $145 million. Return on sales increased to 5% compared with 3% for the same period a year ago. The increase in net sales and operating profits was due primarily to an increase in average prices for all of the Corporation's bleached pulp and paper, offset somewhat by higher wood fiber and production costs. Average selling prices for pulp and paper during 2000 were approximately 35% and 10%, respectively, above 1999 prices. During 2000, the Corporation incurred market-related downtime at its bleached pulp and paper mills, resulting in a reduction in pulp production of 17,000 tons and in paper production of 60,000 tons. In December 2100, the Corporation announced tne permanent closure of its Kalamazoo, Mich., paper mill and a permanent closure of a paper machine at its Nekoosa, Wis., operations. In connection w .th the Kalamazoo paper mill closure, the Corporation recorded a fourth quarter 2000 charge of $57 million for employee termination, asset write-down, mill closure and other costs. In 1999, the Corporation incurred market- related downtime at its pulp and paper mills resulting in a reduction in pulp and paper production of 311,000 tens and 17,000 tons, respectively. Selling prices for the Corporation's pulp products increased during 2000 and ended the year at levels higher than 1999. Prices for paper fluctuated during the year and ended the year at levels higher than 1999. The Corporation expects the improving selling price trend to continue through 2001 for paper products. Selling prices for pulp products are expected to decline in 2001. Historically, selling prices for all of the Corporation's pulp and paper products have been volatile and difficult to predict. 13 The segment's paper distribution business, which represents the operating results of Unisource, reported net sales of $6.9 billion and operating profits of $158 million in 2000, compared to net sales and operating profits of $3.3 billion and $78 million, respectively, in 1999. The Corporation acquired Unisource and began consolidating its results of operations at the end of the second quarter of^l999. Consumer Products The Corporation's consumer products segment reported net sales of $2.5 billion and operating profits of $29 million for the year ended December 30, 2000, which included net sales and operating profits of $528 million and $34 million, respectively, from the operations of Fort James that were acquired at the end of November 2000. Fort James' results of operations were consolidated with those of the Corporation beginning in the fiscal month of December 2000. 1999 net sales and operating profits were $1.6 billion and $170 million, respectively. Included in 2000 results was a one-time unusual charge of $204 million for the write-down of assets of the Georgia-Pacific Tissue away-fromhome tissue business that will be sold during the first quarter of 2001. Excluding this one-time charge, 2000 operating profits were $233 million and return on sales decreased to 9% compared with 11% in 1999. The increase in 2000 operating profits was due principally to 7% higher average selling prices and to a full year of the Wisconsin Tissue operations, which were combined with those of the Corporation's commercial tissue business beginning on October 3, 1999, when the Georgia-Pacific Tissue joint venture was formed. Disclosure Page 25 OtUKOIA 1'ALIHL LUHH - ItJ-K tiling Dale: U2/2U/UI These increases were offset somewhat by higher energy and wood fiber costs. The Corporation expects pricing for its consumer tissue products to remain strong through 2001. Other The operating loss for the "Other" nonreportable segment, which includes some miscellaneous businesses, unallocated corporate operating expenses and the elimination of profit on intersegment sales, decreased by $13 million to a loss of $238 million in 2000 from a loss of $251 million in 1999. This decrease was primarily the result of last-in, first-out ("LIFO"! inventory valuation adjustments. Liquidity and Capital Resources Operating Activities The Corporation generated cash from operations of $1,737 million during 2000 and $1,422 million in 1999. The increase in cash provided by operations in 2000 was primarily a result of a significant reduction in working capital levels. Investing Activities During 2000, capital expendi :ures for property, plant and equipment, excluding acquisitions, were $909 million compared with $723 million in 1999. Expenditures in 2000 included $266 million in the building products segment, $3 million in the timber segment, $112 million in the containerboard and packaging segment, $170 million in the bleached pulp and paper segment, $302 million in the consumer products segment, and $56 million of other and general corporate. In 2001, the Corporation expects to make capital expenditures for property, plant and equipment of $1.1 billion. During 2000, the Corporation invested $262 million for pollution control and abatement. The Corporation's 2001 capital expenditure budget currently includes approximately $145 million for environment-related projects. Certain other capital projects that are being undertaken for the primary reason of improving financial returns or safety will also include expenditures for pollution control. On April 15, 1998, the U.S. Environmental Protection Agency promulgated a set of regulations known as the "Cluster Rule" that establishes new requirements for air emissions and wastewater discharges from pulp and paper mills. The Corporation estimates that it will make capital expenditures up to approximately $665 million through April 2006 in order to comply with the Cluster Rule's requirements. Of that total, approximately $480 million was spent through 2000 and an additional $50 million is expected to be spent in 2001. The Cluster Rule requires that pulp and paper mills become elemental chlorine free in the pulp bleaching process. The work performed in 2001 will essentially complete the projects required during the first three years of the Cluster Rule. Remaining expenditures are for air emissions controls under MACT II regulations (to be completed by January 14 2004) and the eight-year requirements of the MACT I regulations (to be completed by April 2006). The MACT regulations represent the air rules of the Cluster Rule. MACT I affects pulping and bleaching and MACT II affects combustion sources. Cash paid to purchase timber and timberlands was $240 million in 2000 compared with $223 million in 1959. Disclosure Page 26 At the end of November 2000, the Corporation completed a tender offer pursuant to which it purchased outstanding share of common stock of Fort James for $29.60 per share in cash and 0.2644 shares of Georgia-Pacific Group common stock. The Corporation is paying cash and issuing Georgia-Pacific Group shares as the untendered Fort James shares are delivered to the Corporation's exchange agent for cancellation. Through December 30, 2000, the 0:operation paid approximately 36,140 million in cash and issued approximately 13.7 million shares of Georgia-Pacific Group common stock valued at 31,133 million for such shares. The fair value of the Georgia-Pacific Group corner, shares was determined based or. the average trading prices of Georgia-Pacific 3roup common stock for the two trading days before and after July 16, 2000 'the announcement of the Fort James acquisition). The Corporation expects to pay an additional $2S million in cash and issue approximately 253,000 shares valued at $7 million for Fort James common stock that had not been tendered as of December 30, 2000. In addition, the Corporation assumed $3.3 bill!at of Fort James debt in the acquisition. Fort James1 results of operations were consolidated with those of the Corporation beginning in the fiscal "-nth of December 2000. In connection with the acquisition of Fort James and pursuant :: a consent decree with the U. S. Department of Justice, the Corporation committed to sell a portion of its away-from-home tissue manufacturing operations. 3 January 2001, the Corporation reached a definitive agreement to sell these assets (Georgia-Pacific Tissue) to Svenska Cellulosa Aktiebolaget SCA for approximately $350 million. The sale is expected to be completed c ring the first quarter of 2001, with estimated after-tax proceeds of approx nately $660 million used to repay debt. Based on these sales proceeds, the Cor oration determined that the carrying value of the related commercial tissue assets was higher than the net realizable value at December 30, 2000. Accordingly, the Corporation recorded a pre tax loss of $204 million in the fourth quarter of 2000 for the write-down of these assets to their net realizable value of $850 million. During 2000, the Corporation sold certain containerboard and packaging assets resulting in a pre-tax gain of $25 million. In December 1999, the Corporation sold approximately 194,000 acres of redwood and Douglas fir timberlands in Northern California for approximately $397 million and recognized a pretax gain of $271 million ($165 million after taxes). This gain is reflected in "Other loss (income)" on the accompanying statements of income. In conjunction with the sale of its California timberlands, the Corporation received notes from the purchaser in the amount of $397 million. These notes are fully secured by a standby letter of credit with an unaffiliated third-party financial institution. In October 2000, the Corporation monetized these notes through the issuance of commercial paper secured by the notes. The net proceeds of $342 million from this m netization were used to reduce debt allocated to The Timber Company. On July 18, 2000, the Corporation signed a definitive agreement to merge The Timber Company with and into Plum Creek. Under the agreement, The limber Company shareholders will receive 1.37 shares of Plum Creek stock for each share of The Timber Company stock. This transaction, which includes the assumption of approximately $640 million of debt allocated to The ~imber Company, is valued at approximately $3.6 billion. Plum Creek will assume a 10year wood supply agreement between Georgia-Pacific Group and The Timber Company. The transaction is subject to approval by the shareholders of both Plum Creek and The Timber Company, receipt of a ruling from the Internal Revenue Service that the transaction will be tax-free to the Corporation and to the shareholders of The Timber Company, and receipt of an opinion from counsel that the merger will qualify as a tax-free reorganization. The transaction is also subject to the satisfaction of customary closing conditions. The Corporation will treat The Timber Company as a discontinued operation once the significant contingencies surrounding the transaction are resolved. Closing is expected by the end of the second quarter or 2001. Disclosure Page 27 uz-c/au/.-i / - i <y-/\ 15 ruing uui At the end of the second quarter of 1999, the Corporation, through its wholly owned subsidiary Atlanta Acquisition Corp., completed a tender offer for all the outstanding shares of common stock of Unisource, the largest independent marketer and distributor of printing and imaging paper and supplies in North America, and acquired 90.7% of the then-outstar.dir.a shares of Unisource. On July 6, 1999, Atlanta Acquisition Corp. was merged with and into Unisource and, by virtue of such merger, shares of Unisource that were not tendered to the Corporation (other than shares held by Unisource and the Corporation and its subsidiaries) were converted into the right to receive $12.00 per Unisource share in cash, subject to dissenters' rights. The Corporation is paying for such untendered shares as they are delivered to the exchange agent for cancellation. Through December 30, 2000, the Corporation has paid approximately $831 million for all Unisource shares, 32 million of which was paid during 2000. In addition, the Corporation assumed 3755 million of Unisource debt in the acquisition. In addition, during 1999, the Corporation completed the acquisition of a packaging plant, four treated lumber facilities, a chemical business and lumber transpor' \tion assets for a total consideration of approximately $74 million in cash. The results of operations of the packaging plant and treated lumber facilitie ; were consolidated with those of the Corporation beginning in the second quart -r of 1999. The operating results of the chemical business and lumber transportation assets were consolidated with those of the Corporation beginning in the third and fourth quarters, respectively, of 1999. The Corporation has accounted for these business combinations using the purchase method to record a new cost basis for assets acquired and liabilities assumed. Effective October 3, 1999, the Corporation and Chesapeake Corp. ("Chesapeake") completed a previously announced agreement to create GeorgiaPacific Tissue, a joint venture in which the two companies have combined certain parts of their tissue businesses. The Corporation contributed substantially all the assets of its away-from-home tissue business to the joint venture'. The Corporation controls and manages the joint venture and owns 95% of its equity. Chesapeake contributed the assets of its Wisconsin Tissue business to the joint venture, in which it has a 5% equity interest after receipt of an initial cash distribution of approximately $755 million. The results of the Wisconsin Tissue operations were combined with the Corporation's commercial tissue business beginning on October 3, 1999, when the Georgia-Pacific Tissue joint venture was formed. During the second quarter of 1999, the Corporation sold approximately 390.000 acres of timberlands in New Brunswick, Canada and approximately 440.000 acres of timberlands in Maine for approximately $92 million and recognized a pre ax gain of $84 million ($50 million after taxes). This gain is reflected in "Other loss (income)" on the accompanying statements of income. In conjunction with the sale of its Maine timberlands, the Corporation received notes from the purchaser in the amount of $51 million. Ir. November 1999, the Corporation monetized these notes through the issuance of notes payable in a private placement. The Corporation will use proceeds from the notes received from the purchaser to fund payments required for tr.e notes payable. Financing Activities The Corporation's total debt, excluding senior deferrable notes, increased by $8,823 million to $15,847 million at December 30, 2000 from $7,024 million at January 1, 2000, primarily due to an increase in borrowings under the Corporation's credit facilities and the assumption of debt in connection with the acquisition of Fort James. At December 30, 2000 and January I, 2000, $15,207 million and $6,054 million, respectively, of such total debt was allocated to the Georgia-Pacific Group and $640 million and $970 million, Disclosure Page 28 respectively, was allocated to The Timber Company. The debt of each of the groups bears interest at a rate equal to the weighted average interest rate of the Corporation's total debt, calculated on a quarterly basis. At December 30, 2000, the weighted average interest rate on the Corporation's total debt, excluding senior deferrable notes, was 7.6% including outstanding interest rate exchange agreements. Each group's debt increases or decreases by the amount of any cash provided by or used for that group's operating activities, investing activities, dividend payments, share repurchases or issuances and other non-debt-related financing activities. See Note 1 of the Corporation's Consolidated Financial Statements for further discussion of financial activities. In October 2000, the Corporation negotiated several new unsecured financing facilities totaling $5,400 million with terms ranging from 6 to 18 months and a permanent unsecured revolving credit facility totaling 16 $3,750 million with a term of 5 years. The proceeds under these unsecured facilities were used to partially finance the Fort James acquisition and for the ongoing working c pital and other general corporate requirements of the Corporation. As of December 30, 2000, $1,448 million of committed credit was available in excess of all borrowings outstanding under or supported by these facilities. The revol"_ng credit agreements contain certain restrictive covenants, including a maximum leverage ratio (funded indebtedness, including senior deferrable notes, to earnings before interest, taxes, depreciation and amortization ("EBITDA")) of 4.5 to 1.0 and a minimum net worth of $4,650 million. The maximum leverage ratio will be reduced to 4.0 to 1.0 on June 30, 2001 and the minimum net worth required will change on a quarterly basis. The Corporation was in compliance with both of these covenants as of December 30, 2000. In connection with the acquisition of Fort James, the Corporation assumed debt totaling $3.3 billion including $909 million of revolving commercial paper and bank overdrafts, $141 million of leases, $197 million of industrial revenue bonds, $1,642 million of notes, $218 million of Euro-dencminated bonds and $156 million of European debt. Shortly after the acquisition, all of the commercial paper was replaced by borrowings issued under the Corporation's new revolving credit facilities. The Corporation subsequently fully and unconditionally guaranteed all of Fort James' publicly held debt issued pursuant to an Indenture with the Bank of New York, as trustee, dated as of November 1, 1991, as amended by a first supplemental Indenture dated as of September 19, 1997 and second supplemental Indenture dated as of February 19, 2001. Also, in connection vith the acquisition of Unisource in 1999, the Corporation assumed former Unisource industrial revenue bonds in the amount of $9 million and capital leases in the amount of $12 million. Additionally, the Corporation assumed other long-term debt in the amount of $447 million and bank overdrafts in the amount of $120 million, and retained accounts receivable secured borrowing programs in the amount of $197 million. These instruments are included in the Corporation's total debt. In November 1999, in connection with the formation of Georgia-Pacific Tissue, the Corporation issued $500 million of 7.75% Debentures Due November 15, 2029. In June 1999, the Corporation renegotiated its accounts receivable secured borrowing program and increased the amount outstanding under the program from $280 million to $750 million. The program expires in October 2001. In connection with the acquisition of Unisource, the Corporation assumed former Unisource programs to pledge up to $150 million of certain qualifying rJ.S. accounts receivable and up to CN$70 million of certain eligible Canadian Disclosure Page 29 accounts receivable. The U.S. program expires in October 2001 and the Canadian program expires in May 2004. At December 30, 2000, approximately $893 million was outstanding under the Corporation's and Unisource's programs in the aggregate. The receivables outstanding under these programs and the corresponding debt are included as "Receivables" and "Commercial paper and other short-term notes," respectively, on the Corporation's consolidated balance sheets. All programs are accounted for as secured borrowings. As collections reduce previously pledged interests, new receivables may be pledged. On July 7, 1999, the Corporation issued 17,250,000 of 7.5% Premium Equity Participating Security Units ("PEPS Units") for $862.5 million. Each PEPS Unit had an issue price of $50 and consists of a contract to purchase shares of Georgia-Pacific Group common stock on or prior to August 16, 2002 and a senior deferrable note of the Georgia-Pacific Group due August 16, 2004. Each purchase contract yields interest of 0.35% per year, paid quarterly, on the $50 stated amount of the PEPS Unit. Each senior deferrable note __elds interest of 7.15% per year, paid quarterly, until August 16, 2002. On August 16, 2002, following a remarketing of the senior deferrable notes, the interest rate will be reset at a rate that will be equal to or greater that. 7.15%. The liability related to the PEPS Units is classified as "Senior deferrable notes" on the Corporation's consolidated balance sheets and is not inc ;ded in the debt amount for purposes of determining the corporate and Georg a-Pacific Group debt targets. The senior deferrable notes and related int rest expense are allocated specifically to the Georgia-Pacific Group. In October 1999, the Corporation entered into a financing arrangement to enhance the return on a deposit made in connection with a 1995 sale-leaseback transaction by issuing $379 million of 5.74% Debentures Due 17 April 5, 2005 that were legally defeased with deposits of an equal amount. Accordingly, the debentures and related deposits are not reflected on the Corporation's consolidated balance sheets. The Corporation's senior management establishes the parameters of the Corporation's financial risk, which have been approved by the Board of Directors (the "Board"). Hedging interest rate exposure through the use of swaps and options and hedging foreign exchange exposure through the use of forward contracts are specifically contemplated to manage risk in keeping with management policy. Derivative instruments, such as swaps, forwards, options or futures, which are based directly or indirectly upon interest rates, currencies, equities and commodities, may be used by the Corporation to manage and reduce the risk inherent in price, currency and interest ra e fluctuations. The Corporation does not utilize derivatives for speculative purposes. Derivatives are transaction-specific so that a specific debt instrument, contract or invoice determines the amount, maturity and other specifics of hedge. Counterparty risk is limited to institutions with long-term debt ratings of A or better. the The following tables present principal (or notional) amounts and related weighted average interest rates by year of expected maturity for the Corporation's debt obligations and interest rate exchange agreements as of December 30, 2000 and January 1, 2000. For obligations with variable interest rates, the tables set forth payout amounts based on current rates and do not attempt to project future interest rates. Disclosure Page 30 i / sitin'- livin' i i>-/v As of December 30, 2000 ruing LJuie. iu.n.un}i 2001 2002 2003 2004 2005 Thereafter Total Fair Value December 30, 2000 In millions Commercial paper and other short-term notes........................................ - --- - Average interest rates..................................... - --- - Credit facilities............. $1,, 400 $4 , 000 - - $1 , 900 Average interest rates..................................... 8.0% 7.9% - - 7.8% Notes and debentures... '$ 193 S 459 $581 $337 - Average interest rates..................................... 8.6% 8.9% 6.7% 6.7% - Euro-denomin. .ed Bonds........................................ _ " $283 Average inte -est _ _ _ 4 .8% _ Revenue bonds...................... $ 7 $ 73 - $ 33 $ 63 Average into rest rates..................................... 4 . 3% 4.3% - 4.8% 7.1% Capital leases.................... $ 5$ 4$3$5$ 6 Average interest rates..................................... 9.5% 9.6% 9.5% 9.9% 10.0% European Debt...................... $ 20 $ 22 $ 24 $ 22 $ 10 Average interest rates..................................... 7.7% 7.4% 7.4% 7.3% 7.0% Other loans........................... $ 7 -- - - Average interest rates..................................... 7.1% - -- Senior deferrable notes........................................ _ $863 " " Average interest rates..................................... - - 7.2% - Notional amount of interest rate exchange agreements (variable to fixed).............................. $ 158 $300 Average interests rate paid (fixec .................... - 6.1% 5.9% - - Average inte est rate received (variable).. Notional amount of " 6.6% 6.8% " " interest rate exchange agreements (fixed to variable).............................. s 300 Average interest rate paid (fixed,.................... 7 . 1% - - - - Average interest rate received (variable) . . 6.2% - - - - Notional amount of interest rate exchange agreements (rate collar)................................... $ 47 Average interest rate cap.......................................... - --- 7.5% Average interest rate floor..................................... - -- - 5.5^ $1,195 $1 , 295 7.0% - $7,, 300 $4,136 7.9% $5, 676 5.: 8.0% - _ $ 656 $ 283 4.8% $ 832 5.7% 5.7% $ 115 $ 138 1J . 3 5 10.2% $ 43 $ 141 6.8% 7.2% -$7 ~ 7 . 1% " $ 863 - 7.2% $ 458 - 6.0% " 6.8% $ 300 - 7.1% - 6.2% $ 47 - 7.5% - 5.5^ $i , 295 7.0% $7,300 7.9% $5, 105 9.4': $ 252 8.6% $ 778 7.3% $ 140 9.6% $ 141 7.9% $7 7.3% $ 871 7.3% $ 6.0% 6.8% $ (1) 7.1% 6.2% $ 7 . 5% C. C Disclosure Page 31 w < UUlg LSUlC, The Corporation has the intent and ability to refinance commercial paper and other short-term notes as they mature. Therefore, maturities of these obligations are reflected as cash flows expected to be made after 2005. 18 As of January 1, 2000 2000 2001 2002 2003 2004 Thereafter Total Fair Value January 1, 2000 In millions Commercial paper and other short-term notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average interest rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes and debentur ;s.. . Average interest rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revenue bonds............................................ Average interest rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital leases....................................... Average interest rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other loans...................................................... Average interest rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Senior deferrable notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average interest rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notional amount of interest rate agreements (variable to fixed)........................................................... Average interest rate paid ( fixed) 7'... ......................... Average interest r ite received (variable)... _ - $ 24 $ (5 4.5% 5.5% $ 2 $ :3 9.8% 9.9% $ 14 8.0% - $177 7.7% 5.9% - --- - $300 $314 - 10.0; $ 73 5.7% " ~ $ 33 4.7% - 5.4% $3$2$2 10.2% 10.4% 10.5% --" " $863 7.2% " - _ ' - $131 $300 6.0% 5.9% 6.0% 5.9% - $2,067 52 , 067 6.5% 6.5% $3,389 $4,003 8.4% 8.3% $ 517 3 653 5.7% 5.5% $ 2 $ 14 10.5% 10.1% $ 14 " 8.0% - 3 863 7.2% $ 608 - 6.4% - 5. 9% * ? - J, 067 6.5% $3,, 966 8.3% $ 564 5. 5% $ 14 7.9% $ 14 6.2% $ 866 7.4% $ (1) 6.4% 5.9% The Corporation has the intent and ability to refinance commercial paper and other short-term notes as they mature. Therefore, maturities of these obligations are reflected as cash flows expected to be made after 2004. At December 30, 2000, the Corporation had interest rate exchange agreements that effectively converted $458 million of floating rate obligations with a weighted average interest rate of 6.8% to fixed rate obligations with an average effective interest rate of approximately 6.0*. These agreements decreased interest expense by $1 million for the year ended December 30, 2000, and increased interest expense by $7 million and $11 million for the years ended January 1, 2000 and December 31, 1998, respectively. In July 2000, $100 million of these interest rate exchange agreements terminated. As of December 30, 2000, these agreements have a weighted-average maturity of approximately 2.4 years. Disclosure Page 32 Wi, W/IUJ. 1 i /1j-r\ ruing uuic. v^>(j/vi At December 30, 2000, the Corporation had interest rate exchange agreements that effectively capped $47 million of floating rate obligations to a maximum weighted average interest rate of 7.5% and a minimum weighted average interest rate of 5.5%. The Corporation's interest expense is unaffected by this agreement when the market interest rate falls within this range. There was no effect on the Corporation's interest expense for 2000 related tc this agreement. In connection with the acquisition of Fort James, $600 million :: swaps were assumed that effectively converted fixed rate obligations with a weighted average interest rate of 6.55% to floating rate obligations with at. average effective interest rate of 7.32%. In December 2000, $300 million of these interest rate exchange agreements were terminated. The remaining 1300 million will terminate in March 2001. At December 30, 2000, the remaining interest rate exchange agreements effectively converted $300 million of floating rate obligations with a weighted average interest rate of 6.2% to fixed rate obligations with an average effective interest rate of 7.1%. These agreements increased interest expense by $0.4 million for the year ended December 30, 2000. As of December 30, 2000, these agreements have a weighted-average maturity of less than one year. As of December 30, 2000, the Cert;ration's total floating rate debt exceeded all related interest rate exchange agreements by $8,936 million. In January 2001, the Corporation entered into several interest rate exchange agreements that effectively converted $1,500 million of floating rate obligations with a weighted average interest rate of 5.6% to fixes rate obligations with an average effective interest rate of approximately 5.9%. These agreements have a weighted-average maturity of approximately 1.3 years. 19 The Corporation's debt portfolio is sensitive to changes in interest rates. Interest rate changes would result in gains or losses in the market value of the Company's debt portfolio due to differences in market interest rates and the rates at inception of the debt agreements. Based on the Corporation's indebtedness at December 30, 2000, a 100 basis point interest rate change would impact the fair value of the debt portfolio by $403 million. The Corporation's international operations create exposure to foreign currency exchange rate risks. To manage these risks, the Corporation utilizes foreign exchange contracts. As of December 30, 2000, the Corporation had outstanding foreign exchange contracts with notional amounts of $22 million to hedge firm and anticipated purchase commitments and firm sales commitments denominated in foreign currencies. At December 30, 2000, the Corporation had outstanding approximately $242 million (net of discount) of Euro-denominated bonds which were designated as a hedge against its net investment in Europe. The use of these derivative financial instruments allows the Corporation to reduce its overall exposure to exchange rate movements, since the gains and losses on these contracts substantially offset losses and gains or. the assets, liabilities and transactions being hedged. As of December 30, 2C00 and January 1, 2000, the Corporation had unrealized gains on foreign currency contracts of $1 million and $0, respectively. A 10% change from the prevailing market rates of these foreign currencies would not have a material effect on the results of operations. The Corporation has entered into commodity futures and swaps, one amounts of which were not material to the consolidated financial position of the Corporation at December 30, 2000. During 2000, the Corporation registered an additional $2.25 billion of debt and equity securities under a shelf registration statement filed with the Securities and Exchange Commission. This registration statement makes $3.0 billion of debt and equity securities available to be issued as of Decemoer Disclosure Page 33 30, 2000. The Board has adopted a policy that earnings and cash flows generated from the businesses of the Georgia-Pacific Group or The Timber Company will be used only for reinvestment in the business of the group generating such earnings and related cash flows, for repayment of its debt, or for payment of dividends on, or the repurchase of shares of, the class of common stock reflecting such group's performance. Funds of one group will not be loaned to or otherwise invested in the business of the other group. During 2000, the Corporation purchased on the open market approximately 1.7 million shares of Georgia-Pacific Group stock at an aggregate price of $62 million ($36.47 average per share). The Corporation also purchased on the open market approximately 3.3 million shares of The Timber Company stock at an aggregate price of $78 million ($23.67 average per share), all of which were held as treasury stock at December 30, 2000. During 1999, the Corporation purchased on the open market approximately 6.2 million shares of Georgia-Pacific Group stock at an aggregate price of $257 million ($41.45 average per share), all of which were held as treasury stock at January i, 2000. The Corporation also purchased on the open market approximately 5.3 million shares of The Timber Company stock at an aggregate price of $131 million ($24.72 average per share). Of these purchased shares, approximately 5,343,000 shares of The Timber Company stock were held as treasury stock. At the end of November 2000, the Corporation acquired Fort James as described above and issued 21.5 million shares of Georgia-Pacific Group treasury stock and 32.2 million newly issued shares of Georgia-Pacific Group Stock as part of that transaction. The Corporation does not hold any GeorgiaPacific Group stock as treasury stock as of December 30, 2000. In the second half of 2000, the Board increased the corporate target debt level under which the Corporation can purchase shares of Georgia-Pacific Group common stock on the open market from $5.8 billion to $9.5 billion. The Timber Company's target debt level remains at $1.0 billion. Depending on operating and financial considerations, debt levels of the Corporation, the GeorgiaPacific Group and The Timber Company may from time to time be above or below these thresholds. Pursuant to the Plum Creek merger agreement, the Corporation is prohibited from purchasing shares of The Timber Company common stock. 20 During 2000, the Corporation paid dividends totaling $85 million and $81 million, for Georgia-Pacific Group and The Timber Company, respectively. During 1999, the Corporation paid dividends totaling $86 million and $84 million for Georgia-Pacific Group and The Timber Company, respectively. In 2001, the Corporation expects its cash flow from operations, together with proceeds from any sales of assets and available financing sources, to be sufficient to fund planned capital investments, pay dividends and make scheduled debt repayments. Other The Corporation employs approximately 80,000 people, approximately 33,000 of whom are members of unions. The Corporation considers its relationship with its employees to be good. Seventy-four union contracts are subject to negotiation and renewal in 2001, including 14 at large facilities. On January 1, 1999, eleven of the fifteen members of the European Union (the "Participating Countries") established fixed conversion rates between their existing sovereign currencies (the "Legacy Currencies") and a single new Disclosure Page 34 currency (the "Euro")- For a three-year transition period, transactions can be conducted in both the Euro and the Legacy Currencies but all corporate transactions and records must legally be maintained in Euros effective January 1, 2002. The adoption of the Euro will affect a multitude of financial systems and business applications. The Corporation has operations in seven of the Participating Countries, including Greece, which adopted the Euro effective January 2001, and has product sales in ten of the Participating Countries. The Corporation's European businesses affected by the Euro conversion have established plans to address the information system issues and the potential business implications of converting to a common currency. As of Tecember 30, 2000, the Corporation's financial information technology systems were capable of processing Euro-denominated transactions but the Euro is not yet the reporting or functional currency for any part of our business. The Torporation believes it will be able to modify the remaining financial systems and business activities to complete the process of conversion and transition to the Euro as our functional business currency prior to year-end 2C11 for the countries concerned. The Corporation is unable to determine the financial effect of the conversion on its operations, if any, since such effect depends on the competitive conditions which exist in the various regional markets in which the Corporation operates and potential actions which may cr may not be taken by the Corporation's competitors, customers and suppliers. SFAS No. 133, "Accounting for Derivative Instruments and Hedging -.ctivities" ("SFAS No. 133"), as amended, issued by the Financial Accounting Standards Board ("FASB") establishes accounting ari reporting standards for -rivative instrument and for hedging activities. It requires that an entity : cognize all derivatives as either assets or liabilities on its balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. The Corporation will be required to adopt SFAS No. 133 in 2001. Management has evaluated the effect of this statement on the Corporation's derivative instruments, which are primarily interest rate swaps, foreign currency forward contracts, and commodity futures. The cumulative effect of such change in accounting for derivative instruments to fair value is expected to result in a gain, net of taxes of approximately S9 million in the first quarter of 2001. In December 1999, the Securities and Exchange Commission ("SEC"; released Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101") which provides the SEC's views on applying generally accepted accounting principles to selected revenue recognition issues. The Corporation implemented SAB 101 during 2000. The effect of implementing SAB 101 was not material to the Corporation's results of operations for any period. In September 2000, the Emerging Issues Task Force ("EITF") reached a final consensus on Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs" ("EITF 00-10"). EITF 00-10 is also effective in the fourth quarter of 2000 and addresses the income statement classification of amounts charged to customers for shipping and handling, as well as costs incurred related to shipping and handling. The EITF concluded that amounts billed to a customer in a sale transaction related to shipping and handling should be classified as 21 revenue. The EITF also concluded that if costs incurred relatec to shipping and handling are significant and not included in cost of sales, an entity should disclose both the amount of such costs and the line item on the income statement that includes them. Costs incurred related to shipping and handling included in revenues were required to be reclassified to cost of sales. The Corporation implemented EITF 00-10 in the fourth quarter of 2000 and prior period information was reclassified to conform to the provisions of EITF 00-10 (see Note i of the Corporation's Consolidated Financial Statements beginning Disclosure Page 35 on page 32). In November 2000, the EITF deferred implementation of Issue No. 00-14, "Accounting for Certain Sales Incentives" ("EITF 00-14") until the second quarter of 2001. EITF 00-14 addresses the recognition, measurement and income statement classification for sales incentives offered to customers. It requires that an entity recognize the cost of the sales incentive at the latter of the date at which the related revenue is recorded or me fate at which the sales incentive is offered. EITF G0-I4 also requires mat the reduction in or refund of the selling price of the product resulting from any sales incentive be classified as a reduction of revenue. Certain sis closures are required in the 2000 fourth quarter (see Note 1 of the Corporation's Consolidated Financial Statements beginning on page 32). Also in September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities--a Replacement of FASB Statement No. 125" ("SFAS No. 140"). SFAS No. 140 revises tne standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. SFAS No. 140 is effective for recognition and reclassification of collateral and for disclosures rela ing to securitization transactions and collateral for fiscal years ending aft-- r December 15, 2000. This statement affects disclosures related to the C rporation's accounts receivable secured borrowing program (see Note 4 of t. e Corporation's Consolidated Financial Statements or. page 50). For a discussion of commitments and contingencies, see Note 12 of the Corporation's Consolidated Financial Statements beginning on page ~0. 1999 Compared with 1998 The Corporation reported consolidated net sales of $18.6 billion and net income of $1,116 million for 1999, compared with net sales of $14.3 billion and net income of $274 million in 1998. Included in 1999 are $3.4 billion and $104 million of net sales, respectively, from the Unisource and Wisconsin Tissue operations acquired during 1999. In addition, the 1999 results included pretax gains of $355 million ($215 million after taxes) from the sales of the Corporation's timberlands located in California, Maine and New Brunswick, Canada. The 1998 results included an extraordinary, after-tax loss of $15 million for the early retirement of debt. Interest expense was $495 million in 1999, compared with $443 million in 1998. The increase' is the result of higher debt levels and the issuance of senior deferrabl notes, more fully described in Note 6 of the Notes to Consolidated Fin.ncial Statements, slightly offset by a decrease in average interest rates. The Corporation reported pretax income of $1,821 million and ar. income tax provision of $705 million for the year ended January 1, 2000, compared with pretax income of $491 million and an income tax provision of $202 million for the year ended December 31, 1998. The effective tax rate used fc calculate the provision for income taxes was 38.7% in 1999 and 41.1% in 1998. Tr.e reduction in the 1999 effective tax rate resulted principally from higher pretax income and an increased utilization of foreign sales corporation tax benefits, which more than offset nondeductible goodwill amortization expense associated with business acquisitions. Building Products The Corporation's building products segment reported net sales of $9.7 billion and operating profits of $1,202 million for the year ended January 1, 2000, compared with net sales of $8.8 billion and operating profits of $604 Disclosure Page 36 K.ut\r - /iy-A million in 1998. Return on sales was 12% in 1999 and 7% in 1998. The 1998 results included one-time gains, principally on sales of assets, of approximately $20 million. The primary components of the increase in 22 ruing uutt. u-s-ij,vi 1999 sales and operating profits were 26% higher average orientec strand board prices; 22% higher average gypsum prices; 16% higher average plywssc prices; and higher average selling prices for lumber and particleboard. These increases were offset slightly by lower chemical prices and siigr.tly lower volume for plywood and lumber. Timber Net sales and operating profits for the timber segment were $32c million and $726 million, respectively, in 1999 and $534 million and $364 million, respectively, in 1998. Excluding the 1999 pretax gains of $355 million from the sales of timberlands located in California, Maine and New 3rutswick, Canada, and the 1998 pretax gain of $24 million from the sale of terrain timberlands located in West Virginia, the timber segment's operating profits increased by $31 mill: in to $371 million in 1999 compared with $ 34 0 million in 1998. This increase re ;ulted primarily from a $34 million increase in gains on miscellaneous land salts. Overall, 2% higher total harvest volumes partially offset the year over _ -ar 3% decline in average sales ^rice. Containerboard and Packaging The Corporation's containerboard and packaging segment reported net sales of $2.5 billion and operating profits of $324 million for the year ended January 1, 2000, compared with net sales of $2.2 billion and operating profits of $89 million in 1998. Return on sales increased to 13% from 4% in 1998. Average selling prices increased steadily throughout 1999 and ended the year above 1998 levels. Average selling prices for containerboard products increased 8% while average selling prices for packaging increased 2%. Cost decreases for wood fiber and energy as well as higher sales volume also contributed to the increased profit margins. Bleached Pulp and Paper The Corporation's bleached pulp and paper segment reported net sales of $5.5 billion and operating profits of $145 million for the year ended January 1, 2000, compared with net sales of $2.5 billion and an operating loss of $59 million in 1998. Operating profits in 1998 included a one-time, $12 million charge primarily for the closure of a hardwood market pulp operation. The increase in profitabil '.ty in 1999 was due primarily to a 5% improvement in average pulp selling p 'ices and lower overall wood fiber costs. Average selling prices in 1999 for paper were approximately 2% below average selling prices in 1998. Consumer Products Net sales and operating profits for the consumer products segment were $1.6 billion and $170 million, respectively, in 1999 and $1.4 billion and $160 million, respectively, in 1998. Included in the 1999 results were net sales of $104 million and operation profits of $15 million from the Wisconsin Tissue operations. The Wisconsin Tissue operations were combined with the Corporation's away-from-home tissue business beginning on October 3, 1999, when the Georgia-Pacific Tissue joint venture was formed. Excluding the results of the Wisconsin Tissue operations in 1999, operating profits decreased by $5 million related primarily to 5% lower average selling prices, despite a 7% increase in sales volumes. Other Disclosure Page 37 u/^onu/.-i /vic/r/L cui\r - tu-l\ ruing uaie. The operating loss for the "Other" nonreportable segment, which includes some miscellaneous businesses, certain goodwill amortization, unallocated corporate operating expenses and the elimination of profit on intersegment sales, increased by $27 million to a loss of $251 million in 1999 from a loss of $224 million in 1998. This increase was primarily a result of higher employee benefit and incentive costs. 23 CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The statements under "Management's Discussion and Analysis" and other statements contained herein that are not historical facts are forward-looking statements (as such term is defined under the Private Securities ' itigation Reform Act of 1995) based on current expectations. The accuracy or such statements is subject to a number of risks, uncertainties and assumptions. In addition to the risks, uncertainties and assumptions discussed elsewhere herein, factors that could cause or contribute to actual results differing materially from such forward-looking statements include the foil wing: the industry's production capacity continuing to exceed demand for : s pulp and paper products, necessitating continued market-related downtime; changes in the productive capacity and production levels of other building roducts and pulp and paper producers; the effect on the Corporation of char.c s in environmental and pollution cor.crol laws and regulations; the ge era! level of economic activity in U.S. and export markets; further decreases in the level of housing starts or lessened home remodeling in the U.S.; fluctuations in interest rates and currency exchange rates; the effect of general global economic conditions on the demand for forest products; the effect of any material changes in the available supply and cost of timber and wood fiber, including the levels of harvests from public lands, and the effect of government, legislative and environmental restrictions on the harvesting of private timberlands; the ability of the Corporation to successfully integrate its newly acquired consumer product businesses and to complete planned asset divestitures;' general economic conditions and competition in foreign markets for the Corporation's newly acquired consumer products businesses, especially in Western Europe, and foreign currency fluctuations and risks associated with conducting manufacturing and sales operations in foreign markets; she ability to complete the merger of The Timber Company with Plum Creek; and other risks, uncertainties and assumptions discussed in the Corporation's filings with the Securities and Exchange Commission, including the Corporation's Form 8-K dated October 17, 1996, which is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET P'SK The Quantitative and Qualitative Disclosure about Market Risk information for the Corporation required by this Item set forth under the caption "Georgia-Pacific Corporation and Subsidiaries--Management's Discassion and Analysis--Liquidity and Capital Resources--Financing Activities" on pages 17 through 20 under Item 7 of this Form 10-K is incorporated herein by reference thereto. Disclosure Page 38 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Financial Statements Disclosure Page 39 Page Financial Statements Report on Management's Responsibilities...................................................................................... Report of Independent Public Accountants................................................................................... Consolidated Statements of Income...................................................................................................... Consolidated Statements of Cash Flows........................................................................................... Consolidated Balance Sheets...................................................................................................................... Consolidated Statements of Shareholders' Equity................................................................. Consolidated Statements of Comprehensive Income................................................................. Notes to Consolidated Financial Statements.............................................................................. Supplemental Information: Selected Financial Data-Operations, Georgia-Pacific Corporation and Subsidiaries........................................................................................................................................................ Selected Financial Data-Operations, Georgia-Pacific Group.................................... Selected Financial Data Operations, The Timber Company............................................ Selected Financia' Data-Financial Position, End of Year, Georgia-Pacific Corporation and cbsidiaries.............................................................................................................. Selected Financial Data-Financial Position, End of Year, Georgia-Pacific Group.......................................................................................................................................................................... Selected Financi-. Data-Financial Position, End of Year, The Timber Company..................................................................................................................................................................... Sales and Operating Profits by Operating Segment, Georgia-Pacific Corporation and Subsidiaries.............................................................................................................. Schedule II - Valuation and Qualifying Accounts.................................................................... 25 26 27 28 29 30 31 32 87 88 89 90 91 92 94 95 24 REPORT ON MANAGEMENT'S RESPONSIBILITIES Georgia-Pacific Corporation and Subsidiaries Management of Georgia-Pacific Corporation is responsible for the preparation, integrity and fair presentation of the consolidated financial statements and the estimates and judgments upon which certain amounts in the financial statements are based. Management is also responsible for preparing the other financial information included in the annual report on Form 10-K. In our opinion, the accompanying financial statements have been prepared in conformity with generally accepted accounting principles, and the ether financial informatic n in the annual report on Form 10-K is consistent with the financial statements. Management is also responsible for establishing and maintaining a system of internal control over financial reporting, which encompasses policies, procedures and controls directly related to, and designed to provide reasonable assurance as to, the reliability of the published financial statements. An independent assessment of the system is performed by the Corporation's internal audit staff in order to confirm that the system is adequate and operating effectively. The Corporation's independent public accountants also consider certain elements of the internal control system in order to determine their auditing procedures for the purpose of expressing an opinion on the financial statements. Management has considered any significant recommendations regarding the internal control system that have been brought to its attention by the internal audit staff or independent public accountants and has taken steps it deems appropriate to maintain a cost-effective internal control system. The Audit Committee of the Board of Directors, consisting of independent directors, provides oversight to the financial reporting process. The Corporation's internal auditors and independent public accountants meet Disclosure Page 40 i . I V_ tw. lvM. "`6 regularly with the Audit Committee to discuss financial reporting and internal control issues and have full and free access to the Audit Committee. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Furthermore, the effectiveness cf an internal control system can vary over time due to changes in conditions. Management believes that as of December 30, 2000, the internal control system over financial reporting is adequate and effective in all material respects. James E. Terrell Vice President and Controller Danny W. Huff Executive Vice Presider.t--Finance and Chief Financial Officer A.D. Correll Chairman, Chief Executive Officer and President January 26, 2001 25 Disclosure Page 41 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Georgia-Pacific Corporation: We have audited the accompanying consolidated balance sheets of GeorgiaPacific Corporation (a Georgia corporation) and subsidiaries as of December 30, 2000 and January 1, 2000 and the related consolidated statements of income, shareholders' equity, comprehensive income, and cash flows for each of the three years in the period ended December 30, 2000. These financial statements are the responsibility of the Corporation's management. Cur responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of GeorgiaPacific Corporation and subsidiaries as of December 30, 2000 and January 1, 2000 and the results of their operations and their cash flows for each of the three years in the period ended December 30, 2000 in conformity with accounting principles generally accepted in the United States. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index of the financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic Disclosure Page 42 1 i/-A financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen 1LP Arthur .Andersen 11? Atlanta, Georgia January 26, 2001 26 Disclosure Paee 43 W/- Ul .`1 / .1 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME / ;i m it i-zi Year Ended December 30, January 1, _ecember 31, 2000 2000 1998 In millions, except per share amounts Net sales.................................................................................... $22,218 $18,599 $13,990 Costs and expenses: Cost of sales, excluding depreciation, depletion, amortization and cost of timber harvested shown below............................. Selling and distribution.......................................... Depreciation, d oletion, amortization and cost of timber harvested....................................... General and administrative..................................... Interest.................................................................................... Other loss (incc ne)....................................................... 16,896 1, 574 1, 104 989 639 204 13,959 782 1, 013 884 495 (355; 10,879 556 997 648 443 (24) Total costs and expenses............................................. 21,406 16,778 13,499 Income before income taxes and extraordinary item.......................................................... Provision for income taxes....................................... 812 1,821 307 705 491 202 Income before extraordinary item........................ Extraordinary item--loss from early retirement of debt, net of taxes..................... 505 1,116 -- 289 (15) Net income................................................................................. $ 505 $ 1, 116 $ 274 Georgia-Pacific Group Income before extraordinary item........................ $ 343 Extraordinary item, net of taxes........................ " $ 716 " $ 111 (13) Net income................................................................................. $ 343 $ 716 $ 98 Basic per share: Income before e: traordinary item..................... Extraordinary item, net of taxes..................... $ 1.95 - $ 4 . 17 - $ 0.62 (0.07) Disclosure Page 44 i .n.n - i'/-i\ I'lttng uui Net income.................................................................................. $ 1.95 Diluted per share: Income before extraordinary item..................... Extraordinary item, net of taxes..................... $ 1.94 Net income.................................................................................. S 1.94 Average number of shares outstanding: Basic............................................................................................ Diluted....................................................................................... The Timber Company Income before extraordinary item..................... Extraordinary item, net of taxes..................... 175.8 176.9 $ 162 Net income................................................................................. $ 162 Basic per share: Income before extraordinary item..................... Extraordinary item, net of taxes..................... $ 2.01 Net income................................................................................. $ 2.01 Diluted per share: Income before extracr .inary item..................... Extraordinary item, net of taxes..................... $ 2.00 Net income................................................................................. $ 2.00 Average number of shares outstanding: Basic............................................................................................ Diluted...................................................................................... 80.7 81.1 $ 4.17 $ 4.07 S 4 . 0~ 171.5 175.9 $ 400 $ 400 $ 4.75 $ 4.75 $ 4.73 $ 4.7 3 84.1 84.6 S 0.55 $ 0.61 (0.07) S 0.54 179.8 181.1 3 178 (2) 3 176 3 1.97 (0.02) $ 1.95 3 1.96 (0.02) 3 1.94 90.3 90.8 The accompanying notes are an integral part of these consolidated financial statements. 27 Disclosure Page 45 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS In millions Cash flows from operating activities: Net income......................................................................... Adjustments to reconcile net income to cash provided by operations, excluding the effects of acquisitions: Depreciation and depletion............................. Cost of timber harvested.................................. Deferred income taxes.......................................... Amortization of goodwill.................................. Year Ended December 30, January 1, December 31, 2000 2000 19SS 505 S 1,116 S 274 841 788 788 167 15 6 147 82 7 r 38 96 65 62 Disclosure Page 46 Other loss (income)..................................................... Gain on disposal of assets, net..................... Decrease (increase) in receivables............. (Increase) decrease in inventories............. Increase (decrease) in accounts payable and accrued liabilities........................................ Change in other working capital..................... (Decrease) increase in taxes payable.... Change in other assets and other long- term liabilities.......................................................... Cash provided by operations..................................... Cash flows from investing activities: Property, plant and equipment investments.......................................................................... Timber and timoerland purchases........................ Acquisitions......................................................................... Proceeds from sales of assets............................. Other............................................................................................ Cash used for nvesting activities.................. Cash flows frc . financing activities: Repayments of long-term debt............................... Additions to long-term debt.................................. Fees paid to issue debt............................................ Increase (decrease) in bank overdrafts... (Decrease) increase in commercial paper and other short-term notes.................................. Senior deferrable notes............................................ Common stock repurchased.......................................... Proceeds from option plan exercises............. Cash dividends paid....................................................... Cash provided by (used for) financing activities............................................................................... Increase (decrease) in cash..................................... Balance at beginning of year.................................. Balance at end of year.................................................. 204 (88) 183 (20) 38 (13) (178) (80) 1,737 (909) (240) (6,142) 422 (63) (6,932) (123) 5, 937 (38) 14 (300) - (140) 26 (166) 5,210 15 25 <r> K> LT> (355) (48) (206) (244) ' 4; ; 35' 2 212 1,422 (24! (36! 140 93 (146) 11 135 66 1, 548 rO (723 ' (228) (1,658) 104 23 (2,4-6, ' c "7 " < 624 (35) (18) 661 863 (388) 116 (170) 20 5 (638) (201) (112) 131 20 (800) (874) 582 (5) (33) 308 - (557) 9 (181) (751) (3) 8 $5 11 </> II II II II II > II O II II II II II II II The accompan -ing notes are an integral part of these consolidated financial statements. 28 Disclosure Page 47 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS In millions, except shares and per share amounts ASSETS December 0, January 1, 2 0 Cl 2000 Disclosure Page 48 UtUKUlA HALlhit LUKH - i()-K Current assets: Receivables, less allowances of $34 and $25, respectively.............................................................................................................. 2,115 Inventories Raw materials........................................................................................................... Finished coeds......................................................................................................... Supplies......................................................................................................................... LIFO reserve.............................................................................................................. 55 5 ', :c: 551 1"- Total inventories................................................................................................. 2,395 Deferred income tax assets............................................................................ Other current assets............................................................................................ 1^6 4"2 Total current assets......................................................................................... 6,2-2 Timber and timberlands......................................................................................... 1,24 2 Property, plant and equipment Land and improvements......................................................................................... Buildings........................................................................................................................ Machinery anc equipment................................................................................... Construction in progress................................................................................. 615 2,531 11, 3 5_ 624 Property, plant and equipment, at cost............................................ Accumulated depreciation................................................................................. 21,223 (9,4211 Total property, plant and equipment, net..................................... 11,802 Goodwill, net................................................................................................................ 8,935 Other assets................................................................................................................... 2,514 Total assets.............................................................................................................. $30,332 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Bank overdrafts, net............................................................................................ Commercial paper and other short-term notes................................ Current portion of long-term debt........................................................ Accounts payable....................................................................................................... Accrued compensation............................................................................................ Other current liabilities............................................................................... $ 293 2,695 232 1,520 436 906 Total current liabilities............................................................................ 6,032 Long-term debt, excluding current portion....................................... 12,62"' Senior deferrable notes...................................................................................... 562 Other long-term liabilities............................................................................ 3, Cl- Deferred income tax liabilities.................................................................. 2,561 Commitments and contingencies Shareholders' equity: Common stock................................................................................................................. Georgia-Pacific Group, par value $0.80; 400,000,000 shares authorized; 224,344,000 and 191,983,000 shares issued at December 30, 2000 and January 1, 2000, 152 tiling Dale: 02/20/01 $ 25 2, 158 453 1, 367 344 (154) 2,010 139 227 4,559 1, 189 498 1, 634 13,343 403 15,878 (8,799) 7,079 2, 697 1,373 $16,897 $ 297 2, 067 39 891 334 563 4,191 4, 621 863 1,811 1, 536 155 Disclosure Page 49 ULUKUIA I'ALU-1L LUHJJ - IIJ-K t-umguaie: u^/ju/ui respectively The Timber Company, par value $0.80; 250,000,000 shares authorized; 94,571,000 and 93,904,000 shares issued at December 30, 2000 and January 1, 2000, respectively Treasury stock, at cost.................................................................................... 19,776,000 shares of Georgia-Pacific Group common stock at January 1, 2000 and 14,387,000 and 11,053,000 shares of The Timber Company common stock at December 30, 2000 and January 1, 2000, respectively Additional paid-in capital............................................................................ Retained earnings.................................................................................................... Long-term incentive plan deferred compensation........................ Accumulated other comprehensive loss.................................................. (330) 2,12"' 3,4 63 .4) (16) Total shareholders' equity.......................................................................... 5,722 Total liabilities and shareholders' equity............................. $30,932 (880) 1, 510 3, 124 (2) (32) 3,875 $16,897 The accompanying notes are an integral part of these consolidated financial statements. 29 Disclosure Page 50 ULUKUJA /'.-JLJ/-/L LUtir - lU-h GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY filing Date: iuuu/ui Year reded December 30, Jcinua ry _ , December 31, 2000 2033 1998 In millions, except shares in thousands and per share amounts Common stock: Beginning balance............................................................... Common stock issued: Stock option plans and directors plan........... Employee stock purchase plans............................... . Common stock issued for acquisitions............. $ 155 1 26 $ If* 3 - $ 148 2 Ending balance.................................................................... 182 1: 150 Treasury stock: Beginning balance............................................................... Common stock repurchased............................................. Treasury stock issued for acquisition........... (880) (140) 690 (49 (35 : i (492) Ending balance.................................................................... (330) (880) (492) Additional paid-in capital: Beginning balance.................................................. Common stock issued: Stock option plans and directors plan Employee stock purchase plans.................. Long-term incentive plan............................... Common stock repurchased................................ 1, 510 153 1, 331 15 5 53 1,275 20 (1) (56) Disclosure Page 5 1 Common stock issued for acquisitions................ Stock issuance costs.......................................................... Ending balance....................................................................... Retained earnings: Beginning balance.................................................................. Net income.................................................................................... Cash dividends declared (Georgia-Pacific Group, $0.50, per common share for each of the three years presented; The Timber Company, $1.00 per common share for each of the three years presented)................................ Ending balance....................................................................... Long-term incentive plan deferred compensation: Beginning balance. .................................................. Common stock issued under long-term incentive plan, net.......................................................... Ending balanc......................................................................... Accumulated oth-` r comprehensive loss: Beginning balar ;e................................................................. Activity, net cf taxes.................................................... Ending balance....................................................................... Total shareholders' equity....................................... Georgia-Pacific Group common stock shares issued and outstanding: Beginning balance, common stock issued........... Common stock issued: Stock ootion plans and directors plan............. Employee stock purchase plans.................................. Long-term incentive plan............................................... Common stock issued for acquisitions................ Common stock repurchased and retired................... Balance, common stock issued........................................ Common stock repurchased and held in treasury.................. t................................................................... Treasury stock issued for acquisition................ Balance, common stock outstanding..................... The Timber Company common stock shares issued and outstanding: Beginning balance, common stock issued........... Common stock issued: Stock option plans and directors plan............. Employee stock purchase plans.................................. Long-term incentive plan............................................... Balance, common stock issued........................................ Common stock repurchased and held in treasury................................................................................................................................................... Balance, common stock outstandina..................... 764 - 2, 427 3, 124 505 (166) 3,463 (2) (2) (4) (32; 16 (16) $ 5,722 191,983 570 - 92 32,199 - 224,844 (21,501) 21,501 224,844 93,904 667 " 54,571 (14,337) 30,134 - (29) 1,510 1,11-: 93 1, 331 2,085 274 t \ ~ r]' 3, 154 (181) 2,178 ! 2) 4; 11 '32; $ 3, Si15 (5) 5 - (33) (10) (43) $ 3,124 186,564 3, 932 1, 397 - - 191,983 (19,776) 184,498 278 18 338 3,280 (1,848) 186,564 (13,524) 172,2 07 173,040 92, " - 5 4 21 <5 9 p 93,904 r* ^ 9-2 32,831 92,607 174 8 (4) 92,785 (5, 704 ) 37,031 Disclosure Page 52 VJi-t/MWi.-J / - / I/-A ruing uuil'. u.j.U'Ut The accompanying notes are an integral part of these consolidated financial statements. 30 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended December 30, January 1, December 31, 2000 2000 1998 In millions Net income............................................................................... Other comprehensive i:come (loss), before taxes......................................................................................... Foreign currency tra-station adjustments....................................................................... Minimum pensionliability adjustment.... Income tax (expense) benefit related to items of other comprehensive income........... $505 24 2 (10) $i,lie id 7 $274 (14) (3) 7 Comprehensive income..................................................... $521 $ 1,12" $264 The accompanying notes are an integral part of these consolidated financial statements. 31 Disclosure Page 53 UL.UKUIA /'.(C///L LOW' - KJ-A ruing uaie: u.,rv,vi GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of GecrgiaPacific Corporation and subsidiaries. All significant intercompany oaiances and transactions are eliminated in consolidation. Basis of Presentation The Corporation, a Georgia corporation, is broadly engaged in five business operations: the manufacture and distribution of building products including plywood, oriented strand board, various industrial wood products, and softwood and hardwood lumber as well as certain nonwood products including gypsum board, chemicals and other products); the manufacture of containerbcard and packaging (including linerboard, medium, kraft and corrugated packaging); the manufacture of bleached pulp and paper (including paper, market : Ip, and bleached board) and the distribution of paper products and suppl. s Disclosure Page 54 ULUKUIA 1JALI11L LUKH - IU-K filing Dale: u/uwut manufactured by the Corporation or purchased from others; the manufacture of tissue products (including bath tissue, paper towels, and napkins) and disposable tabletop products (including disposable cups, plates and cutlery); and the growing of timber on the approximately 4.7 million acres of timberlands that the Corporation owns or leases. In 2000, these timberlands supplied approximately 14s of the overall timber requirements of the Corporation's manufacturing facilities. On December 16, 1557, shareholders of the Corporation approved the creation of two classes of common stock intended to reflect separately the performance of the Corporation's manufacturing and timber businesses (the "letter Stock Recapitalization"). The Corporation's Articles of Incorporation were amended and restated to (i) create a new class of stock designated as Georgia-Pacific Corporation--Timber Group common stock, $0.80 par value per share ("The Timber Company stock"), consisting of 250 million authorized shares; (ii) redesignate each authorized 'hare of the Corporation's common stock, $0.80 par value per share (the Existing Common Stock) as, and convert each share into, one share of Georgia-Pacific Corporation--Georgia-Pacific Group common stock (now two shares of Georgia-Pacific Group common stock after giving effect to the May 14, 1599 two-for-one stock split), $0.80 par value per share ("Georgia-Pacific Group stock"); iii) increase the number of shares of Georgia-Pacific Group stock authorize i for issuance from 150 million shares to 400 million shares; and (iv) authorize the distribution of one share of The Timber Company stock for each outst- .ding share of Georgia-Pacific Group stock. The Corporat:on's manufacturing and timber businesses are referred to hereinafter as the "Georgia-Pacific Group" and "The Timber Company," respectively, or collectively as the "groups." The Georgia-Pacific Group is a manufacturer and distributor of building products and pulp and paper products. The Georgia-Pacific Group includes a procurement function that is responsible for purchasing timber and wood fiber for all the Georgia-Pacific Group's manufacturing facilities. The Timber Company is engaged primarily in the growing and selling of timber. The Corporation has presented financial information of the groups at substantially the same level of detail as that of the Corporation to allow investors to properly evaluate the financial condition and results of operations of each business (see Note 15 of the Notes to the Consolidated Financial Statements). It is the Corporation's expectation that investors will use the groups' combined financial information in conjunction with the Corporation's consolidated financial statements to assist them in making informed financial decisions relative to the acquisition or disposition of shares of each class of stock. The financial information of the groups comprise all of the accounts included in the corresponding consolidated financial statements of the Corporation. The financial information of the Georgia-Pacific Group and The Timber Company has been prepared on a basis that management believes to be reasonable and appropriate 32 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued; and include (i) the historical balance sheets, results of operations and cash flows for each of the groups, with all significant intragroup transactions and balances eliminated; (ii) in the case of The Timber Company's financial information, assets and liabilities of the Corporation and related transactions identified with The Timber Company, including allocated portions of the Corporation's debt and G&A; and (iii) in the case of the Georgia- Disclosure Page 55 VJi-W/lU/.l l .n_i/ /\_ / ly-/\ m/i /^UiC. ty-/-iA Pacific Group's financial information, all other assets and liabilities and related transactions of the Corporation, including allocated portions of the Corporation's debt and G&A. Intergroup timber sales between the GeorgiaPacific Group and The Timber Company have not been eliminated in either group's financial information. Notwithstanding the allocation of assets and liabilities (inducing contingent liabilities) and parent's equity between the Georgia-?=siric Group and The Timber Company for the purpose of preparing the respective financial information of each group, holders of Georgia-Pacific Group stoc< sr.d The Timber Company stock are shareholders of the Corporation and will ctr.tinue to be subject to all the risks associated with an investment in the iorporation and all of its businesses, assets and liabilities. The allocation or assets and liabilities and change in the equity structure of the Corporation resulting from the Letter Stock Recapitalization did not result ir. a transfer or spin-off of any assets or liabilities of the Corporation, or otr.erwise affect ownership of any assets or responsibility for the liabilities of the Corporation or any of its subsidiaries. As a result, the Letter Stock Recapitalization does not affect the rights of holders of the Corporation's or any of its subsidiaries' debt. Holders of Georgia-Pacific Group stock and The Timber Company stock have only the rights customarily held by common shareholders of the Corporation and do not have any righ 3 related to their corresponding group except as set forth in provisions : slating to dividend and liquidation rights sr.d requirements for a mandatory dividend, recemption or conversion upon the disposition of assets of their corresponding group, or have any right to vote on matters as a separate voting group other than in limited circumstances as provided under Georgia law or by stock exchange rules. The relative voting power of Georgia-Pacific Group stock and The Timber Company stock will fluctuate from time to time, with each share of Georgia-Pacific Grcup stock having one vote and each share of The Timber Company stock having a number of votes based upon the ratio, over a specified period prior to any shareholder vote, of the time-weighted average market values of one share of The Timber Company stock and of one share of Georgia-Pacific Group stock. This formula is intended to give each class of common stock a number of votes proportionate to its aggregate market capitalization at the time of any vote. Accordingly, changes in the market value of Georgia-Pacific Group stock and The Timber Company stock will affect their relative voting rights. As of Decencer 30, 2000, the holders of Georgia-Pacific Group stock had a substantial majority of the voting power of the Corporation. Financial effects arising from either group that affect the Corporation's results of operations or financial condition could, if significant, affect the results of operation: or financial condition of the other group ana the market price of the common stock relating to the other group. Any net losses of the Georgia-Pacific Group or The Timber Company and dividends or distributions on, or repurchases of, Georgia-Pacific Group stock or The Timber Company stock will reduce the assets of the Corporation legally available for payment of dividends on both Georgia-Pacific Group stock and The Timber Company stock. The Board may, in its sole discretion, determine to convert shares of the class of common stock related to one group into the class of conm.cn stock related to the other group at any time at a 15% premium, or at a 13% premium in the case of certain dispositions of all or substantially all of the properties or assets of the group whose stock is being converted. Any conversion at any premium would dilute the interests in the Corporation of the holders of the class of common stock being issued in the conversion. In addition, any such conversion of a class of common stock into another class of common stock would preclude holders of both classes of common stc-cx from retaining their investment in a security that is intended to reflect separately the performance of the relevant group. 33 Disclosure Page 56 UAUKijiA t'ALU-IL LUKA- HJ-A GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) t-iling Dale: UJ/2V/UI The management and accounting policies applicable to the preparation of the financial statements of the Georgia-Pacific Group and The Timber Company may be modified or rescinded, or additional policies may be adopted, at the sole discretion of the Board at any time without approval of the shareholders. The groups' combined financial information reflects the application of the management and allocation policies adopted by the Board to various corporate activities, as described below. Financial Activities At June 30, 1997, $1.0 billion of the Corporation's total debt was allocated to The Timber Company for financial information purposes, and the balance of the Corporation's total debt was allocated to the Georgia-Pacific Croup. The Corporation's debt was allocated between the groups based upon 3 number of factors including expected fu;ure cash flows, volatility of earnings, and the ability to pay debt service and dividends. In addition, the Corporation considered certain measures of creditworthiness, such as coverage ratios and various tests of liquidity, a~ a means of ensuring that each group could continue to pay debt service curing a business downcycle. Management believes that such allocation is equitable and reasonable. At December 30, 2000, $640 million of the Corporation's debt was allocated to The Timber Company and $15,207 million was allocated to the Georgia-Pacific Group. The senior deferrable notes and related interest expense are allocated specifically to the Georgia-Pacific Group (see Note 6 of the Notes to the Consolidated Financial Statements). The Corporation has not allocated any other debt securities or instruments to either group. The debt of each group bears interest at a rate equal to the weighted average interest rate of all the Corporation's debt calculated on a quarterly basis. This weighted average interest rate excludes the interest on the senior deferrable notes. Management believes that this method of allocation of the cost of debt is equitable and provides a reasonable estimate of the cost attributable to the groups. Each group's debt increases or decreases by the amount of any net cash generated by, or required to fund, the group's operating activities, investing activities, dividend payments, share repurchases and other financing activities. Interest is charged to each group in proportion to the respective amount of each group's debt. Changes in the cost of the Corporation's debt are reflected in adjustments to the weighted average interest cost of such debt. Dividend costs with respect to any preferred stock issued by the Corporation are charged in a similar manner. Allocation of Shared Services A portion of the Corporation's shared G&A (such as executive management, human resources, legal, accounting and auditing, tax, treasury, srrategic planning and information systems support) has been allocated to earn group based upon identification of such services specifically used by each group. Where determinations based on specific usage alone have been impracticable, other methods and criteria were used that management believes are equitable and provide a reasonable estimate of the cost attributable to each group. These methods consisted of allocating costs based on (i) number of employees of each group, (ii) percentage of office space of each group and (iii) estimated percentage of staff time allocable to each group. The total of these allocations was $280 million, $251 million and $282 million in 2000, 1999 and 1998, respectively. It is not practicable to provide a detailed estimate of the expenses that would be recognized if either group were a separate legal entity. Disclosure Page 57 UCVKUI.H rAK-in^ L UK1J - nt-h. ruing uiue: itn-umi Allocation of Employee Benefits A portion of the Corporation's employee benefit costs, including pension and postretirement health care and life insurance benefits, has been allocated to each group. The pension cost related to their participation in the Corporation's noncontributory defined benefit pension plan, and other employee benefit costs related to their 34 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) participation in the Corporation's postretirement health care and life insurance benefit plans, are actuarially determined based on the number of their employees and an allocable share of the plan assets and are calculated in accordance with SFAS No. 87, "Employers' Accounting for Pensions," and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," respectively. Manager ant believes such method of allocation is equitable and provides a reasonable estimate of the costs attributable to each group. Since plan assets are not segregated into separate accounts or restricted to providing benefits to employees of either group, assets of the Corporation's employee benefit plans may be used to provide benefits to employees of both the Georgia-Pacific Group and The Timber Company. Plan assets have been allocated to the groups based on the percentage of their projected benefit obligations to the plans' total projected benefit obligations. Allocation of Federal and State Income Taxes The federal income taxes of the Corporation and the subsidiaries that own assets allocated between the groups are determined on a consolidated basis. Consolidated federal income tax provisions and related tax payments or refunds are allocated between the groups based principally on the taxable income and tax credits directly attributable to each group. Such allocations reflect each group's contribution (positive or negative) to the Corporation's consolidated federal taxable income and the consolidated federal tax liability and tax credit position. Tax benefits that cannot be used by the group generating those benefits, but can be used on a consolidated basis, are credited to the group that generated such benefits. Had the groups filed separate tax returns, the provision for income taxes and net income for each group would not have significantly differed from the amounts reported on the groups' statements of income for the years ended December 30, 2000, January 1, 2000 and December 31, 1998. However, the amounts of current and deferred taxes and taxes payable or refundable allocated to each group on the historical financial statements may differ from those that would have been allocated had the groups filed separate income tax returns. Depending on the tax laws of the respective jurisdictions, state and local income taxes are calculated on either a consolidated or combined basis or on a separate corporation basis. State income tax provisions and related tax payments or refunds determined on a consolidated or combined basis are allocated between the groups based on their respective contributions to such consolidated or combined state taxable incomes. State and local income tax provisions and related tax payments that are determined on a separate corporation basis are allocated between the groups in a manner designed to reflect the respective contributions of the groups to the Corporation's separate state or local taxable income. Dividends Disclosure Page 58 r.iL.// /<- /nr - i <y-/\ ruing uuic. For purposes of the historical financial statements of the Georgia-Pacific Group and The Timber Company, for periods prior to 1998, all dividends declared and paid by the Corporation were evenly allocated between the groups. Management believes that such method of allocation is equitable and provides a reasonable estimate of the dividends that would have been declared and paid in respect of each class of common stock. The amount of earnings available for payment of dividends on Georgia-Pacific Group stock and on The Timber Company stock (i.e., the available dividend amounts) on any date is the amount in excess of the minimum amount necessary for the particular group t: be able to pay its debts as they become due in the usual course of business. Future dividends will not bear a direct relationship to earnings and retained earnings as expressed on each group's combined financial statements in accordance with generally accepted accounting principles. Accordingly, a mathematical calculation of the available dividend amount for either group cannot be made. Stock Split On May 4, 1999, the Board declared a two-for-one split of the letrgiaPacific Group's stock in the form of a special dividend to sharer.;1uers of record on May 14, 1999. The special dividend was paid as one share of 35 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continues, Georgia-Pacific Group stock for each such share outstanding on June 3, 1999. A total of 95,126,911 additional shares were issued in conjunction with the stock split. The Georgia-Pacific Group's par value of $0.80 remained unchanged. As a result, $76 million of shareholders' equity was reclassified from "Additional paid-in capital" to "Common stock." All historical share and per share amounts have been restated to reflect retroactively the stock split. Revenue Recognition The Corporation recognizes revenue when the following criteria are met: persuasive evidence of an agreement exists, delivery has occurred or services have been rendered, the Corporation's price to the buyer is fixed and determinable, and collectibility is reasonably assured. Foreign Currency Translation The functional currency for most of the international subsidiar:;s is the local currency for the country in which the subsidiaries own their primary assets. The translation of the applicable currencies into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period. Any related translation adjustments are recorded directly in other comprehensive income. Transactions gains (losses) are reflected in the Consolidated Statements of Income. Income Per Share Basic earnings per share are computed based on net income and the weighted average number of common shares outstanding. Diluted earnings per share reflect the assumed issuance of common shares under long-term incentive, stock option and stock purchase plans, and pursuant to the terms of the PEPS Units. The computation of diluted earnings per share does not assume conversion or exercise of securities that would have an antidilutive effect on earnings per share. Amounts are computed for each class cf common stock basea on the separate earnings attributed to each of the respective businesses. Disclosure Page 59 KJ l-.'.Sl \ v_//. / >/-I\ 36 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued Earnings Per Share Disclosure Page 60 Year Ended December 30, 200C vanuary 1, :oco 2000 2-ecrgiaPacific Troup The Timber Company GeorgiaPacific Creep The Timcer Company In millions, except shares and per scare amounts Basic and dilutee income ava11 ao-e to shareholders (numerator): Income before extraordinary item and accounting cna.nge............ Extraordinary item, net of taxes.................................... $ 343 S 162 S 1 16 5 40C Net income............................... 3 343 S 162 3 `'Ic 3 402 Shares 'denominator:: Average snares outstanding............................ Dilutive securities: Options......................................... Employee stock purchase plans............................................ 1 5,835,279 80, 705,17 1 171,807,884 84, 138,673 372,380* 408, 905 3, 677,295** 426,423* 191,54 5 1,936 438,630 40,508 Total assuming conversion............................. 1 `6, 899, 604 81,116,012 175,923,809 84,605, 604 Per share amounts: Basic Income before extraorainary item and accounting change............. Extraordinary item, net of taxes.................................... Net income............................... 5 3 1.55 S 2.01 $ 1.95 S 2.01 S 4.17 $ 4.75 4.17 $ 4.75 Diluted Income before extraordinary item and accounting change............ Extraordinary item, net of taxes.................................... 3 1.54 S 2.00 S 4.07 $ 4.73 Net income............................... $ 1.94 S 2.00 $ 4.07 $ 4.73 Decenoer 31, 15?! 1 993 GecruiiPacific Greet 2nt Timber 2 cn.pany $ 1.. $ 173 ;2) d6 179,765,1 90,313,022 1,249,4304 ... 452,549## _ _ j. * " ` ' 181,086,02: 50,813,146 =========== ========== $ o.o: $ 1.97 (0.02) $ 3.32 $ 1.95 $ :. i $ 1.96 ! 0. ." (0.02) $ 0.54 $ 1.94 Options to purchase 5,474,096 shares of Georgia-Pacific Group stock at prices ranging from.5" to $91.58 per share were outstanding during 2000, as were PEPS Units ~o purchase Georgia-Pacific Group stock. However, these were not included i the computation of diluted earnings per share because the options' exer ise price and the PEPS Unit purchase contract price were greater than the average market price of the common shares. Options tc purchase 176,490 shares of Georgia-Pacific Group stock at prices ranging from 543.56 to $51.58 per share were outstanding during 1959, as were PEPS Units to purchase Georgia-Pacific Group stock. However, these were not included m the computation of diluted earnings per snare because tr.e options' exercise price and the PEPS Unit purchase contract price were greater than tne average market price of the common shares. Options to purmsse 1, 3 24, 200 shares of The Timcer Company stock at $25.13 per snare were cut scsuoin- jssir.g 1559 cut were not included in tne computation of diluted earnings per share because the options' exercise price was greater than the average market price cf the common snares. # Options to purenase 23,556 shares of Georgia-Pacific Group stock at S30.25 per snare were outstanding during 1953 but were not included m the computation of o.luted earnings per share cecause the options' exercise price was greater than the average market price of the common snares. ## Options to purchase 1,551,130 shares of The Timber Company stock at prices ranging from $22.21 to $25.13 per share were outstanding during 1593 but were not induced m the computation of dilutee earnings per share because the options' exercise price was greater than the average market price of the common snares. Disclosure Page 61 utunuM r.ic/r/c LU/t/- /v-a ruing uair. v.-u<ui GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Inventory Valuation Inventories are valued at the lower of year-to-date average cost ;r market and include the costs of materials, labor and manufacturing overhead. The LIFO dollar value pool method was used to determine the cost of approximately 64% and 65% of inventories at December 30, 2000 and January 1, 2000, respectively. Timber and Timberlands The Corporation capitalizes timber and timberland purchases and reforestation costs. The cost of timber harvested is based on the volume of timber harvested, the capitalized cost and the total timber vclumt .stimatcd to be available over the growth cycle. Timber carrying costs are expensed as incurred. Gains or losses on sales of timberlands are reflected as a reduioion of "Cost of sales" on the accompanying statements of income, with ti exception of major divestitures (where gains are generally greater than $2\ million for a single transaction), which are reflected as "Other loss (income ." Property, Plant and Equipment Property, plant and equipment are recorded at cost. Lease obligations for which the Corporation assumes or retains substantially all the property rights and risks of ownership are capitalized. Replacements of major units of property are capitalized, and the replaced properties are retired. Replacements of minor components of property, and repair and maintenance costs, are charged to expense as incurred. Planned shutdown maintenance costs are charged to earnings ratably during the year. There are no reserves for planned shutdown costs at the end of any fiscal year. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Useful lives are 25 years for land improvements, 20 to 45 years for buildings, and 3 to 20 years for machinery and equipment. Upon retirement or disposition of assets, cost and accumulated depreciation are removed from the related accounts and any gain or loss is included in income. The Corporation capitalizes incremental costs that are directly associated with the development of software for internal use. Amounts are amortized over five years beginning when the assets are placed in service. Capit lized costs were $48 million at December 30, 2000 and $66 million at January _, 2000. Amounts are included as property, plant and equipment on the accompanying balance sheets. The Corporation capitalizes interest on projects when construction takes considerable time and entails major expenditures. Such interest is charged to the property, plant and equipment accounts and amortized over the approximate lives of the related assets. Interest capitalized, expensed and pain was as follows: Disclosure Page 62 t i *_ rinngLJutir. v-t-Utvi Year Ended December 30, January 1, December 31, 2000 2000 1998 In millions Total interest costs............................. .......................... Interest capitalized............................. .......................... $650 (11) $501 $452 (9) Interest expense........................................ .......................... $639 $495 $443 Interest paid............................................... .......................... $628 $4-3 $468 38 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NO: IS TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Landfills and Lagoons The Corporation accrues for landfill closure costs over the periods that benefit from the use of the landfill and accrues for lagoon clean-out costs over the useful period between clean-outs. Goodwill The Corporation amortizes costs in excess of fair value of net assets of businesses acquired using the straight-line method over a period not to exceed 40 years. The Corporation reviews the recorded value of its goodwill annually, or sooner if events or changes in circumstances indicate that the carrying amount may exceed fair value. Recoverability is then determined by comparing the undiscounted net cash flows of the assets to which the goodwill applies to the net book value, including goodwill, of those assets. Amortization expense was $96 million, $69 million and $62 million in 2000, 1999, and 1998, respectively. Accumulated amortization at December 30, 2000 and January 1, 000 was $915 million and $615 million, respectively. Environmental Matters The Corporation recognizes a liability for environmental remediation costs when it believes it is probable a liability has been incurred and the amount can be reasonably estimated. The liabilities are developed based on currently available information and reflect the participation of other potentially responsible parties, depending on the parties' financial condition and probable contribution. The accruals are recorded at undiscounted amounts and are reflected as other liabilities on the accompanying balance sheets. Environmental costs are generally capitalized when the costs improve the condition of the property or the costs prevent or mitigate future contamination. All other costs are expensed. Use of Estimates The preparation of financial statements in conformity with generally Disclosure Page 63 yjc.ut\ui.-i i .ii-Ji /i. conr - /o-A ruing uate. muiiAn accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Accounting Standards Change SFAS No. 133, as amended, issued by the FASB establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities on its balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. The Corporation will be required to a'Apt SFAS No. 133 in 2001. Management has evaluated the effect of this statement on the Corporation's derivative instruments, which are primarily interest rate swaps, foreign currency forward contracts, and commodity futures. The cumulative effect of such change in accounting for derivative instruments to fair value is expected to result in a gam, net of taxes of approximate / $9 million in the first quarter of 2001. In September 2000, the EITF reached a final consensus on Issue No. 00-10, "Accounting for Ship; ing and Handling Fees and Costs". EITF 00-10 is effective in the fourth quarter of 2000 and addresses the income statement classification of amounts charged to customers for shipping and handling, as well as costs incurred 39 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) related to shipping and handling. The EITF concluded that amounts billed to a customer in a sale transaction related to shipping and handling should be classified as revenue. The EITF also concluded that if costs incurred related to shipping and handling are significant and not included in cost of sales, an entity should disclose both the amount of such costs and the line item on the income statement that includes them. Costs incurred related to shipping and handling included in revenues were required to be reclassified to cost of sales. The Corporation implemented EITF 00-10 in the fourth quarter of 2000. Prior to implementing EITF 00-10, the Corporation classified shipping and handling amounts "bill Bd to a customer as revenue. However, costs incurred related to shipping a -d handling were classified as a reduction of revenue or as a selling and distribution expense. Shipping and handling costs that were reclassified from revenue to cost of sales totaled $632 million, $622 million, and $648 million in 2000, 1999, and 1998, respectively. Shipping and handling costs included in selling and distribution expenses were $481 million, $357 million, and $233 million in 2000, 1999, and 1998, respectively. In November 2000, the EITF deferred implementation of Issue No. 10-14, "Accounting for Certain Sales Incentives" until the second quarter of 2001. EITF 00-14 addresses the recognition, measurement and income statement classification for sales incentives offered to customers. It requires that an entity recognize the cost of the sales incentive at the latter of the date at which the related revenue is recorded or the date at which the sales incentive is offered. EITF 00-14 also requires that the reduction in or refund of the selling price of the product resulting from any sales incentive be classified as a reduction of revenue. The Corporation participates in various sales incentives programs, the majority of which are classified as a reduction of revenue. Sales incentives that are currently classified as selling and distribution expenses are coupons, off-invoice pricing, rebates and free Disclosure Page 64 1 /'.iW/'/L. Ll/Ar - /`/-A rZ/Z/Zg UdtZ. V-itd/Vl products. These sales incentives are offered by the Corporation's retail tissue business within the consumer products segment and paper business within the bleached pulp and paper segment. All other businesses record sales incentives as a reduction of revenue. Sales incentives classified as selling and distribution expenses were $8 million, $5 million, and $6 million in 2000, 1999, and 1998, respectively. The implementation of EITF 00-14 will result in a reduction in revenue of these amounts and a corresponding reduction of selling and distribution expenses. There will be no impact on results of operations. Change in Fiscal Year In April 1595, the Corporation determined to change its fiscal year from December 31 to end on the Saturday closest to December 31. Additionally, the Corporation reports its quarterly periods on a 13-week basis ending on a Saturday. The impact of one additional day on the year ended January 1, 2000 was not material. There was no transition period on which to report. Reclassifications Certain 1999 and 1998 amoun s have been reclassified to conform with the 2000 presentation. In connection with the acquisition of Fort James, the Corporation revised its segment reporting to include the following reportable business segments: building products, timber, containerboard and packaging, bleached pulp and paper, and consumer products. NOTE 2. OPERATING SEGMENT INFORMATION The Corporation has five reportable operating segments: building products, timber, containerboard and packaging, bleached pulp and paper, and consumer products. Manufactured products in the building products segment consist primarily of wood panels (plywood, oriented strand board, hardboard and particleboard), lumber, gypsum products and chemicals. The distribution business of the building products segment sells a wide range cf building products 40 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES_TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) manufactured by the Corporation or purchased from others. This segment of the business is primarily affected by the level of housing starts; the level of repairs, remodeiing and additions; industrial markets; commercial building activity; the availability and cost of financing; and changes in industry capacity. The timber segment consists of The Timber Company and is engaged primarily in the growing and selling of timber. In addition, the timber segment is engaged in certain businesses related to ownership and management of timberlands, including managing the sale of hunting leases, the sale of minerals and mineral rights, and the sale of easements. The operations of the timber segment are affected by a number of factors, including prices for timber generally, selling prices for manufactured wood products, supplies of timber from other wood sources in the United States and competition for these raw materials, as well as seasonal factors such as weather. The containerboard and packaging segment produces and sells iir.erfccard, Disclosure Page 65 ''-s KJL*KSI\Wi/1 . /V_ V_ L/A.T / </-A / m/ig L>U<e . medium, kraft and corrugated packaging. The bleached pulp and paper segment produces paper, market pulp, and bleached board. The distribution division of the bleached pulp and paper segment sells and distributes high-quality printing, writing and copying papers and a bread range of packaging and maintenance supplies, equipment and services. The consumer products segment produces and sells retail ar.d away-fromhome tissue and the Dixie line. Markets for these segments are affected primarily by changes ir. industry capacity, the level of economic growth in U.S. and export markets, and fluctuations in currency exchange rates. The accounting policies of the segments are primarily the same as those described in the summary of significant accounting policies. The Corporation evaluates performance based on profit or loss from operations before interest and income taxes (i.e., operating profit or loss). The Corporation accounts for i: tersegment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices. The Corporation's reportable segments are strategic business units that offer different products and services. They are managed separately because each business has different customers and requires different production processes. The "Other" nonreportable segment includes some miscellaneous businesses, unallocated corporate operating expenses, and the elimination of intersegment sales and related profits. 41 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued; The Corporation has a large and diverse customer base, which includes some customers located in foreign countries. No single unaffiliated customer accounted for more than 10% of total sales in any year during the three years ended December 30, 2000. Sales to foreign markets in 2000, 1999 and 1998 were 10%, 7% and 8%, respectively. These sales were primarily to customers in Canada, Europe, Asia and Latin America. Information on operations in U.S. and foreign markets is as follows: Revenues* iea December 3C, January 1, December 31, 2000 2000 1993 In millions United States.......................................................................... Foreign countries................................................................ 320,105 2,113 SID,242 1,35" 312,921 1,059 Disclosure Page 66 UtL/KOM /'HC///L LUKf - 1U-K t-iting uaie: v/i/U/Ui Long lived assets located in the United States and abroad were valued at $10.4 billion and $1.4 billion, respectively as of December 30, 2000. Prior to the acquisition of Fort James, a substantial portion of the Corporation's foreign revenues was derived from the sale of U.S. - produced products abroad. Therefore, assets located outside the United States as of January 1, 2000 and December 31, 1998 were not material. 42 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued The following summarizes certain financial information by segment: Disclosure Page 67 ULl/AU/.d L U/W' - /u-t\ tiling uaie: u~/tu,ut Containerboaro Bleached Building and ? jit and Zzr.s ime r All *\ Freeicts Timber ?ac<acinc Paper Products Other 1 r.sclidai 1000 omerr.................. secment sales iO'iaj. net sa*es............. Operating profit (loss >.................................... Depreciation, deplete: amortization, and cos of timber harvester: Property, plant ar.c eau i pmer. t i r.ve s zmer. t s Timber ar.c ti.mcer_ar.o purchases............................ Acquisitions....................... Assets...................................... 1599 Net sales to una ffiliated customers............................ Intersegment sales. .. Total net sales. Operating profit (lossi......................................... Depreciation, depletion, amortization, ana cost of timber harvested.. . . Property, plant and equipment investments.. Timber ana timberlar.a purchases................................. Acquisitions............................ Assets........................................... 1998 Net sales to ur.af filiated customers................................. Intersegment sales............. Total net sales.................. Operating profit (loss;.................................... Depreciation, depletion, amortization, and :st of timber harveste........... Property, plant ar.c equipment investments. . Timber and timber-ar.c purchases................................. Acquis it icr.s............................ Assets........................................... 3 15 5 "4-i -> " C, n.'OS S 354 S 3-7 S 303 1~9 166 191 - 3, 477 -> ^ 3 59 1, 615 $9, >19 3 15 5 "53 327 $9,672 S 526 31,302 3 726 363 131 150 51 3, 599 42 2 73 - 1,521 37,852 $ 125 982 409 38,834 3 534 S 604 S 364 366 198 142 13 3,445 44 6 E9 - 1, l'?4 69 $2,"34 3 512 172 112 - 2, 421 32,446 65 32,511 $ 224 157 92 _ 23 1, 955 32,161 60 32,221 3 89 148 84 _ in -' ^ . 5 11' 61 ' 1, 1 - 1 1 35, 395 3 2,456 3 2, "13 S 4 68 3 25 $ ; 2 3 9 ' 3 1,451 229 n0 - 2 6, 313 179 302 - 6,140 15 " '>1 - ., :-r 1, 104 5 39 140 6,142 .0,882 35,501 5 1,55G 3 .r. 39 40 (1,224 $5,540 $ 1,590 3 (1, 24 : 1(9,599 - 318,599 5 145 $ 170 $ (251 '' 3 2,316 288 169 _ 829 5, 233 89 138 - 755 1,858 "4 41 - 2 7 31 1,013 723 228 0, 656 16,897 $2,448 3 1,414 S 11' 28 28 (1,507 ) -- S2,476 3 1,442 3(1,517: 313,990 - 313,990 S (59) S 160 $ (224 '* 3 934 285 140 _ - 3, 378 65 165 _ - 7 30 95 - 2, 252 997 638 201 112 12,700 r- fz - 2 3nor. or h unting 1 ease mctrr.e renewed . r- " ,es for tr.e cincer seomer.t anc refl ected as a reduction to cost o: sai.es ori a consolidated basis. In addition, these amounts include net sales frcrn miscellaneous cosinesses. Elimination of intersegment sales. Includes seme miscellaneous businesses, unallocated corporate operating expenses and the elimination of profit on intersegment sales. GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES Disclosure Page 68 KjL.(Jl\UlA r,HL//'/L LUKr NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Reconciliation of Segment Operating Profits to Consolidated Net Income tiling Dace: U2/JU/0J Year Er.dea December 30, January 1, December 31, 2000 200C 1998 In millions Total operating profits..................................... ........... Interest expense....................................................... ........... Provision for income " ixes............................. .......... $1,451 639 307 $2,316 49: 705 $934 44 3 202 Income before extraordinary item............. ........... 505 1,116 Extraordinary item, net of taxes............. ........ - 289 (15) Net income.................................................................. ........... $ 505 $1,116 $274 NOTE 3. ACQUISITIONS, DIVESTITURES AND UNUSUAL ITEMS At the end of November 2000, the Corporation completed a tender offer pursuant to which it purchased each outstanding share of common stock of Fort James for $25.60 per share in cash and 0.2644 shares of Georgia-Pacific Group common stock. The Corporation is paying cash and issuing GeorgiaPacific Group shares as the untendered Fort James shares are delivered to the Corporation's exchange agent for cancellation. Through December 30, 2000, the Corporation paid approximately $6,140 million in cash and issued approximately 53.7 million shares of Georgia-Pacific Group common stock valued at $1,480 million for such shares. The fair value of the GeorgiaPacific Group common shares was determined based on the average trading prices of Georgia-Pacific Group common stock for the two trading days before and after July 16, 2000 (the announcement of the Fort James acquisition). The Corporation expects to pay an additional $29 million in cash and issue approximately 253,000 shares valued at $7 million for Fort James common stock that had not been tendered as of December 30, 2000. In addition, the Corporation assumed $3.3 billion of Fort James debt in the acquisition. Fort James' results of operations were consolidated with those of the Corporation beginning in the fiscal month of December 2000. The Corporation has accounted for his business combination using the purchase method to record a new cost basis for assets acquired and liabilities assumed. The allocation of the purchase price and acquisition costs to the assets acquired and liabilities assumed is preliminary as of December 20, 2000, and is subject to change pending finalization of studies of fair value and the finalization of management's plans to restructure certain operations. The difference between the purchase price and the fair value of the assets acquired and liabilities assumed was recorded as goodwill and is being amortized over 40 years. The preliminary allocation of net cash paid for the Fort James acquisition as of December 30, 2000 is summarized as follows: Disclosure Page 69 In millions 'N Current assets.......................................................................................................................................... $ 1,746 Property, plant and equipment................................................................................................... 4,630 Other noncurrent assets................................................................................................................... 899 Goodwill.......................................................................................................................................................... 6, 609 Liabilities.................................................................................................................................................. '6,144) Common stock issued and value of stock options converted............................. (1,600) Net cash paid for Fort James...................................................................................................... S 6,140 44 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continuec In connection with the acquisition of Fort James, the Corporate c recorded liabilities totaling approximately $30 million for employee te: tination costs relating to approximately 429 hourly and salaried employees. During 2000, no employees were terminated and none of this reserve was used. The Corporation has not finalized its plans for manufacturing and distribution activities. Finalization of these plans may result in additional liabilities recorded as part of the purchase price or charges to earnings. The following unaudited pro forma financial data has been prepared assuming that the acquisition of Fort James and related financings were consummated on January 1, 1999. This pro forma financial data is presented for informational purposes and is not indicative of the operating results that would have occurred had the acquisition been consummated on January 1,1999, nor does it include adjustments for expected synergies, cost savings or consistent application of accounting methods. Accordingly, this pro forma data is not necessarily indicative of future operations. In millions, except per share amounts Georgia-Pacific Corporation: Net sales................................................................................... Income from continuing operations................ Net income............................................................................. Georgia-Pacific Group data: Net sales................................................................................... Income from continuing operations................ Net income............................................................................. Basic income per share from continuing operations........................................................................... Diluted income per share from continuing operations........................................................................... Basic earnings per share........................................ Diluted earnings per share................................... Year Ended December 30, Januar, 1, 2000 20c: $28,430 310 310 $28,288 148 148 0.65 0.64 0.65 0.64 $25,039 310 2.71 2.66 3.4 5 3.35 Disclosure Page 70 .1 IK, L//W - /'/-/\ nung uaic. u^, + u/vi The Timber Company's results of operations are not impacted by the Fort James transaction. The 2000 pro forma financial data includes nonrecurring restructuring and acquisition-related charges of $225 million incurred by Fort James. The 1999 pro forma financial data includes a $40 million after-tax extraordinary loss on early extinguishment of debt, a $235 million after tax extraordinary gain on sale of discontinued operations ar.d a $22 million after-tax loss for the cumulative effect of a change in accounting principle. Effective October 3, 1999, the Corporation and Chesapeake completed a previously announced agreement to create Georgia-Pacific Tissue, a joint venture in which the two companies have combined certain parts of their tissue businesses. The Corporation contributed substantially all the assets of its away-f .m-home tissue business to the joint venture. The Corporation controls and manages the joint venture and owns 95% of its equity. Chesapeake contributed the assets of its Wisconsin Tissue business to the joint venture, in which it has a 5% equity interest after receipt of an initial cash distribution of approximately $755 million. The results - : the Wisconsin Tissue operations were combined with the Corporation1; commercial tissue business beginning on October 3, 1999, when the Georgia- .cific Tissue joint venture was formed. The Corporation accounted fo; this transacti in using the purchase method to record a new cost basis f'r assets acquired by the joint venture and liabilities assumed by the joint venture. The difference between the 45 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) allocated values and the fair market value of the assets acquired and liabilities assumed by the joint venture was recorded as goodwill and being amortized over 40 years. The allocation of the values of the Wisconsin Tissue assets acquired by the joint venture is as follows: is In millions Current asset:................................................................................................................................................ $ Property, plant and equipment............................................................................................................. Goodwill.................................................................................................................................................................... Liabilities and value of stock options converted.......................................................... 102 638 284 (269) Net cash distribution to Wisconsin Tissue......................................................................... $ 755 The Corporation completed an organizational restructuring of the sales, marketing, administrative and manufacturing support activities for its tissue business, which resulted in the elimination of approximately 300 salaried and hourly positions. The Corporation reserved approximately $5 million for termination and relocation costs of Wisconsin Tissue employees. This $5 million liability was included as part of the purchase price of the Wisconsin Tissue assets. In addition, the Corporation recorded provisions totaling approximately $2 million for the termination and relocation of employees of the Corporation, which were charged to earnings in 1999. As a result of these programs, approximately 80 employees were terminated and Disclosure Page 71 U1.L//IU/.I l / <S1\1 '/-A. t uillg UUi approximately $2 million of the termination and relocation reserve was used in 1999. During 2000, the remaining employees were terminated or relocated and all the related reserve was used. In connection with the acquisition of Fort James and pursuant tc a consent decree with the U. S. Department of Justice, the Corporation crmr.irted to sell a portion of its away-from-home tissue manufacturing operations. In January 2001, the Corporation reached a definitive agreement t: sell these assets (Georgia-Pacific Tissue) to Svenska Cellulosa Aktiebolaget SCA for approximately $850 million. The sale is expected to be completed during the first quarter of 2001, with after-tax proceeds of approximately $cc0 million used to repay debt. Based on these sales proceeds, the Corporation determined that the carrying value of the related commercial tissue assets was higher than the net realizable value at December 30, 2000. Accordingly, the Corporation recorded a pre tax loss of $204 million in the fourth quarter of 2000 for the write-down of these assets to their net realizable value of $850 million. This loss is included in other loss in me consumer products segment. During 2000, 1999 and 1998, these assets generated income (loss) from operations of approximately $31 million, $7 million and $(2) million, respectively. During the third q.arter of 2000, the Corporation also announced the potential sale of certain commodity and non-strategic businesses, including the market pulp op rations at Brunswick, Ga., New Augusta, Miss., and Woodland, Maine, an well as the chemical business. 46 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) During 2000, the Corporation announced the closure of the Grand Rapids East, Mich., gypsum plant and the Kalamazoo, Mich., paper mill. In connection with these closures, the Corporation recorded a charge to earnings totaling $7 million for the termination of approximately 325 salaried and hourly positions, $25 million for the write-off :f assets and $12 million for facility closing costs. During 2000, approximately 284 employees were terminated. The following table provides information related to these charges: Type of Cost In millions Liability Additions During 2000 Usage Liability Balance at December ) 2000 Write-off of assets................................ ............................................... Employee separation................................................................................. Facility closing costs......................................................................... $25 $ '23 7- 12 ; 21 $2 7 10 Total............................................................... ................................................. $44 $ (25) $19 During 2000, the Corporation sold certain containerboard and pac kaging assets resulting in a :ax gain of $25 million. Disclosure Page 72 , mug On July 18, 2000, the Corporation signed a definitive agreement to merge The Timber Company with and into Plum Creek. Under the agreement, The Timber Company shareholders will receive 1.37 shares of Plum Creek stock for each share of The Timber Company stock. This transaction, which includes the assumption of approximately $640 million of debt allocated to The Timber Company, is valued at approximately $3.6 billion. Plum Creek will assume a 10-year wood supply agreement between Georgia-Pacific Group and The Timber Company. The transaction is subject to approval by the shareholders of bcth Plum Creek and The Timber Company, receipt ;f a ruling from the Internal Revenue Service that the transaction will be tax-free to the Corporation and to the shareholders of The Timber Company, and receipt of an opinion from counsel that the merger will qualify as a tax-free reorganization. The transaction is also subject to the satisfaction of customary closing conditions. The Corporation will treat The Timber Company as a discontinued operation once the significant contingencies surrounding the transaction are resolved. Closing is expected by the end of the second quarter of 2001. At the end of the second quarter of 1999, the Corporation, through its wholly owned subsidiary Atlanta Acquisition Corp., completed a tender offer for all the outstanding sha :es of common stock of Unisource, the largest independent marketer and distributor of printing and imaging paper and supplies in North America, and acquired 90.7% of the then outstanding shares of Unisource. On Jul'' 6, 1999, Atlanta Acquisition Corp. was merged with and into Unisource and, by virtue of such merger, shares of Unisource that were not tendered to the Corporation (other than shares held by Unisource and the Corporation and its subsidiaries) were converted into the right to receive $12.00 per Unisource share in cash, subject to dissenters' rights. The Corporation is paying for such untendered shares as they are delivered to the exchange agent for cancellation. Through December 30, 2000, the Corporation has paid approximately $831 million for ail Unisource shares, $2 million of which was paid during 2000. In addition, the Corporation assumed $785 million of Unisource debt in the acquisition. Unisource's results of operations were consolidated with those of the Corporation beginning July 4, 1999. The Corporation has accounted for this transaction using the purchase method to record a new cost basis for assets acquired and liabilities assumed. The difference between the purchase price and the fair market 47 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) value of the assets acquired and liabilities assumed was recorded as goodwill and is being amortized over 40 years. The allocation of the purchase price of the acquisition is summarized as follows: In millions Current assets............................................................................................................................................. S 1,207 Property, plant and equipment............................................................................................................ 219 Other noncurrent assets..................................................................................................................... 27 Goodwill.................................................................................................................................................................... 753 Liabilities and value of stock options converted................................................... 1,375) Net cash paid for Unisource.......................................................................................................... $ 331 Disclosure Page 73 1unwnuist r.-t^irtr COJU' - v-x ruing uate. u^/rutui The following unaudited pro forma financial data has been prepared assuming that the acquisition of Unisource and related financings were consummated on January 1, 1999. This pro forma financial data is presented for informational purposes and is not necessarily indicative of the operating results that would have occurred had the acquisition been consummated on January 1, 1999, ncr does it include adjustments for expected synergies or cost savings. Accordingly, this pro forma data is not necessarily indicative of future operations. Year Ended January 1, 2000 In millions, except per share amounts Georgia-Pacific Corporation: Net sales................................................................................................................................ Income before extraordinary item.................................................................... Net income.............................................................................................................................. Georgia-Pacific Group data: Net sales................................................................................................................................ Income before extraordinary _tem.................................................................... Net income.............................................................................................................................. Basic income before extraordinary item per share.......................... Diluted income before extraordinary item per share..................... Basic earnings per share......................................................................................... Diluted earnings per share.................................................................................... $21,615 1,109 1,109 $21,434 709 709 4.12 4.03 4.12 4.03 The Timber Company's results of operations are not impacted by the Unisource transaction. 48 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In connection with the acquisition of Unisource, the Corporation recorded liabilities totaling approximately $50 million for employee termination (relating to approximately 1,170 hourly and salaried employees) and relocation costs, and $22 million for closing costs of 48 facilities. The balance of these restructuring reserves at December 30, 2000 was $8 million. During 2000, approximately 386 employees were terminated and nine facilities were closed as part of this program. In conjunction with the finalization of management's plans to consolidate or close distribution centers, $28 million of reserves established in 1999 as part of the preliminary allocation of Unisource purchase price were reversed in the second quarter of 2000, with a corresponding reduction made to goodwill. The following table provides a rollforward of the reserve for restructuring from January 1, 2000 through December 30, 2000: Disclosure Page 74 VJ KJIKKJI. 1 / . J 1 'y-A mug uuic. Type of Cost In millions Balance January 1, 2000 Additions Usage Reversal Balance of December : Reserves 2000 Employee separation.................. ------Facility closing costs........... . . . . $43 14 $ 1 $ (14) 5 (13) $ 2" '! $3 5 Total.................................................. . . . . $57 $6 $ (27) $ 21 $8 . In addition, during 1999, the Corporation completed the acquis'~ion of a packaging plant, four treated lumber facilities, a chemical business and lumber transportation assets for a total consideration of apprcxrmately $74 million in cash. The results of operations of the packaging plane and treated lumber facilities were consolidated with those of the Icrporation beginning in the second quarter of 1999. The operating result of the chemical business and lumber transportation assets were consc.-dated with those of the Corporation beginning in the third and fourth quitters, respectively, of 1599. The Corporation nas accounted for thes cosiness combinations using the purchase method to record a new cost b.: .-is for assets acquired and liabilities assumed. On June 30, 1998, the Corporation completed its acquisition of CeCorr, a leading independent producer of corrugated sheets in the Unitea States. On June 30, 1998, the Corporation paid approximately $93 million in cash (net of $2 million of cash acquired) and issued approximately 3.2 million shares of Georgia-Pacific Group stock valued at approximately $28.94 per share for all the outstanding shares of CeCorr. In addition, the Corporation assumed approximately $92 million of CeCorr's debt, of which $34 million was owed to the Corporation ($58 million net debt assumed). On July 2, 1998, a former owner of CeCorr exercised his right to resell to the Corporation approximately 2.2 million shares of Georgia-Pacific Group stock issued in the transaction. CeCorr's results of operations were consolidated with those of the Corporation beginning July 1, 1998. The Corporation accounted for the CeCorr acquisition using the purchase method to record a new cost basis for assets acquired and liabilities assumed. During the second quarter of 1999, the Corporation sold approximately 390.000 acres of timberlands in New Brunswick, Canada and approximately 440.000 acres of timberlands in Maine for approximately $92 m.Llion and recognized a pretax gain of $84 million ($50 million after taxjs). This gain is reflected in "Other loss (income)" on the accompanying statements of income. In conjunction with the sale of its Maine timberlands, the Corporation received notes from the purchaser in the amount of $51 million. In November 1999, the Corporation monetized these notes through the issuance of notes payable in a private placement. The Corporation will use proceeds from the notes received from the purchaser to fund p-: resents required for the notes payable. The notes receivable are classified as "Other assets" and the notes payable are classified as "Other Icr.g-term liabilities" on the accompanying balance sheets. 49 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued, Disclosure Page 75 In December 1999, the Corporation sold approximately 194,000 acres of redwood and Douglas fir timberlands in Northern California for approximately $397 million and recognized a pretax gain of $271 million ($165 million after taxes). This gain is reflected in "Other loss (income)" on the accompanying statements of income. In conjunction with the sale of its California timberlands, the Corporation received notes from one purchaser $397 million. These notes are fully secured by a standby letter of credit with an unaffiliated third-party financial institution. In October 2000, the Corporation monetized these notes through the issuance of commercial paper secured by the notes. The net proceeds of $342 million from this monetization were used to reduce debt allocated to The Timber Company. The notes receivable are classified as "Other assets" and the commercial paper is classified as "Other long-term liabilities" an the accompanying balance sheets. In March 1998, the Corporation sold its real estate development properties located in S-uth Carolina and Florida for $18 million in cash, resulting in a pretax gain of approximately $1 million. In December 1998, the Corporation completed the sale of approximately 61,000 acres of timberlands located in West Virginia. This sale resulted in a pretax ga n of $24 million ($14 million after taxes). These amounts are reflected i "Other loss (income)" on the accompanying statements of income. NOTE 4. RECEIV BLES The Corporation has a large, diversified customer base, which includes some customers located in foreign countries. The Corporation closely monitors extensions of credit and has not experienced significant losses related to its receivables. In addition, a portion of the receivables from foreign sales is covered by confirmed letters of credit to help ensure collectibility. In June 1999, the Corporation renegotiated its accounts receivable secured borrowing program and increased the amount outstanding under the program from $280 million to $750 million. The Corporation has extended the program through October 2001. In connection with the acquisition of Unisource, the Corporation assumed former Unisource programs to pledge up to $150 million of certain qualifying U.S. accounts receivable and up to CN$70 million of certain eligible Canadian accounts receivable. The U.S. program expires in October 2001 and the Canadian program expires in May 2004. At December 30, 2000, approximately $893 million was outstanding under the Corporation's and Unisource's programs in the aggregate. The receivables outstanding under these programs and the corresponding debt are included as "Receivables" and "Commercial paper~and other short-term notes," respectively, on the Corporation's -onsolidated balance sheets. All programs are accounted for as secured borrow.ngs. As collections reduce previously pledged interests, new receivables may be pledged. The $893 million and $948 million of receivables outstanding under these programs at December 30, 2000 and January 1, 2000, respectively, ana the corresponding debt are included as both "Receivables" and "Commercial paper and other short-term notes" on the accompanying balance sheets. A portion of the cost of the accounts receivable secured borrowing programs is cased on the creditors' level of investment and borrowing costs. The Corporation pays fees based on its senior debt ratings. The total cost of the programs, which was $63 million in 2000, $36 million in 1999 and $17 million in 1998, is included in interest expense on the accompanying statements of income. Under the accounts receivable secured borrowing programs, the maximum amount of the creditors' investment is subject to change based on the level of eligible receivables and restrictions on concentrations of receivables. Disclosure Page 76 ULUKU/A I'ALlflL L UM' - 10-h 50 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued NOTE 5. INDEBTEDNESS The Corporation's indebtedness includes the following: tiling Date: U^/JU/UI December 30, January 1, 2000 2000 In millions Debentures, 8.6% average rate, payable through 2029... $ Notes, 7.0% average rate, payable through 2023.................. Credit facilities, " 9% average rate, payable through 2005.............................................................................................................................. Euro-denominatea bonis, 4.8% average rate, payable through 2004 .................................................................................................................. Revenue bonds, 5.7% average rate, payable through 2029......................................................................................................................................... Other loans, 7.1% average rate, payable through 2001.. European Debt, 7.2% average rate, payable through 2029......................................................................................................................................... Capital leases, 10.2% average rate, payable through 2016......................................................................................................................................... Less: unamortized net discount....................................................................... 3,582 2,094 5, 900 283 832 7 141 138 (118) $3,589 414 653 14 14 (24) Less: long-term portion of debt.......................................................... 12,859 12,627 4, 660 4, 621 Current portion of long-termdebt....................................................... Commercial paper and other short-term notes, 7.0% average rate......................................................................................................... Credit facilities, 8.0% averagerate................................................. Bank overdrafts, net...................................................................................... 232 1,295 1,400 293 39 2,. 067 297 Total short-term debt.................................................................................... 3,220 2, 403 Total debt................................................................................................................. $15,847 $7, 024 Georgia-Pacific Group's portion of Corporation debt: Short-term debt................................................................................................. Long-term debt, excluding current portion............................. $ 2,852 12,355 $2,, 071 3,. 983 Georgia-Pacific Group's total debt.................................................. $15,207 $6,. 054 The Timber Company's portion of Corporation debt: Short-term debt................................................................................................. Long-term debt, excluding current portion............................. $ 368 272 $ 332 638 The Timber Company's total debt.......................................................... $ 640 $ 970 Weighted average interest rate on Corporation debt at year end.................................................................................................................... 7.6% 7.2% For additional information regarding financial instruments, see Notes c and 7 Disclosure Page 77 t Ul llg LJU of the Notes to Consolidated Financial Statements. The scheduled maturities of the Corporation's long-term debt for the next five years are as follows: $232 million in 2001, $4,558 million in 2002, $608 million in 2003, $680 million in 2004 and $1,979 million in 2005. Notes and Debentures In connection with the acquisition of Fort James in November 2 Oil, the Corporation assumed $1,642 million of notes, $26 million of which matured in December 2000. The Corporation subsequently fully and unconditionally guaranteed all of Fort James' publicly held debt issued pursuant to an Indenture with the Bank of New York, as trustee, dated as of November 1, 1991, as amended by a first supplemental Indenture dated as of September 19, 1997 and second supplemental Indenture dated as of February 19, 2001. During 1999, in connection with the formation of Georgia-Pacific Tissue, the Cor; ration issued $500 million of 7.75% Debentures Due November 15, 2029. 51 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued Euro-Denominated Bonds and European Debt During 2000, in connection with the acquisition of Fort James, the Corporation assumed $218 million (net of discount) of Euro-denominated bonds and $156 million of European debt. Revenue Bonds During 2000, in connection with the acquisition of Fort James, the Corporation assumed $197 million in revenue bonds. At December 30, 2000, the Corporation had outstanding borrowings of approximately $832 million under certain industrial revenue bonds, including revenue bonds assumed in the acquisition. During 2000, approximately $10 million of floating rate bonds were replaced by fixed rate instruments and $12 million of fixed rate revenue bonds matured. During 1999, in connection with the acquisition of Unisource, the Corporation assumed former Unisource industrial revenue bonds in the amount of $9 million. Capital Leases and Other Loans During 2000, in connection with the acquisition of Fort James, the Corporation assumed $141 million (including premium) of capital leases. During 1999, in connection with the acquisition of Unisource, the Corporation assumed capital leases in the amount of $12 million. Revolving Credit Facilities In October 2000, the Corporation negotiated, with Bank of America National Trust and Savings and 20 other domestic and international banks, several new unsecured financing facilities totaling $5,400 million with terms ranging from 6 to 18 months and a permanent unsecured revolving credit facility totaling $3,750 million with a term of 5 years. The proceeds under these unsecured facilities were used to partially finance the Fort James acquisition and for the ongoing working capital and other general corporate requirements of the Corporation. As of December 30, 20C0, $1,448 million of committed credit was available in excess of all borrowings outstanding under or supported by these facilities. Disclosure Page 78 WLIVAL//.-1 /'.1L// /L CL/lit' - I U-l\ ruing uaie. uzuwui Borrowings under the agreements bear interest at competitive market rates. These interest rates may be adjusted according to a rate grid based on the Corporation's long-term debt ratings. Fees associated with these revolving credit facilities include a facility fee of 0.20% per annum on the aggregate commitments of the lenders as well as upfront fees totaling 334 million, which are being amortized over the term of the agreements. Fees and margins may also be adjusted according to a pricing grid based on the Corporation's long-term debt ratings. At December 30, 2000, $7,700 million was borrowed under the credit agreements at a weighted-average interest rate of 7.3%. Amounts outstanding under the revolving credit facilities are included m "Commercial paper and other short-term notes" and "Long-term debt, excluding current portion" on the accompanying balance sheets. The revolving credit agreements contain certain restrictive covenants, including a maximum leverage ratio (funded indebtedness, including senior deferrable notes, _o earnings before interest, taxes, depreciation and amortization ("EBITDA")) of 4.5 to 1.0 and a minimum net worth of $4,650 million. The maximum leverage ratio will be reduced to 4.0 to 1.1 on June 30, 2001 and the minimum net worth required will change on a quarterly basis. As of December 30, 2000, the Corporation was in compliance with these covenants. Commercial Pape, and Other Shcrt-Term Notes These borrowin 5 are classified as current liabilities, although all cr a portion of them r.ay be refinanced on a long-term basis in 2001. In connection with the acquisi'ion of Fort James, the Corporation assumed $92" million of revolving commercial paper, all of which was refinanced by commercial paper issued by the Corporation in the fourth quarter 2000. 52 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Other At December 30, 2000, the amount of long-term debt secured by property, plant and equipment and by timber and timberlands was not material. During 1999, in connection with the acquisition of Unisource, the Corporation assumed other long-term debt in the amount of $447 million and bank overdrafts ; h the amount of $120 million, and retained accounts receivable secure! borrowing programs in the amount of $197 million. These instruments are included in the Corporation's total debt. Prior to 1996, the Corporation sold certain assets for $354 million and has agreed to lease the assets back from the purchaser over a period of 30 years. Under the agreement with the purchaser, the Corporation agreed to maintain a deposit (initially in the amount of $322 million) that, together with interest earned thereon, was expected to be sufficient to fund the Corporation's lease obligation, including the repurchase of assets at the end of the term. This transaction was accounted for as a financing arrangement. At the inception of the agreement, the Corporation recorded on its balance sheet an asset for the deposit from the sale of $305 million and a liability for the lease obligation of $302 million. At December 30, 2000, the deposit and lease obligation balances were both $339 million. Of these amounts, approximately $15 million was recorded as a current asset and $19 million was recorded as a current liability. The long term portions of these amounts are recorded in "Other assets" and "Other long term liabilities" on the accompanying balance sheets. Disclosure Page 79 1 '/-A ruing uatr. va/.u.-ui In October 1999, the Corporation entered into a financing arrangement to enhance the return on a deposit made in connection with a 1995 sale-leaseback transaction by issuing S379 million of 5.74% Debentures Due April 5, 2005 that were legally defeased with deposits of an equal amount. Accordingly, the debentures and related deposits are not reflected on the Corporation's consolidated balance sheets. In conjunction with the sale of 194,000 acres of the Corporation's California timberlands in December 1999, the Corporation received notes from the purchaser of $397 million. These notes were monetized on October 25, 2000, through the issuance of commercial paper secured by the notes. Net proceeds of $342 million from this monetization were used to reduce debt allocated to The Timber Company. Proceeds from the notes received from the purchaser will be used to fund payments required for the notes payable. In conjunction with the sale of 440,000 acres of the Corporation's Maine timberlands in June 1999, the Corporation received nc ,es from the purchaser in the amount of $51 million. In November 1999, the Corporation monetized these notes through the issuance of notes payable in a private placement. Proceeds from the notes received from the purchaser will be used to fund payments required for the notes payable. The notes receivable and notes payable are reflected in "Other assets" and "Other long-term liabi ities," respectively, on the accompanying balance sheets. In the second half c 2000, the Board increased the corporate target debt level under which the corporation can purchase shares of Georgia-Pacific Group common stock on the open market from $5.3 billion to $9.5 billion. The Timber Company's target debt level remains at $1.0 billion. Depending on operating and financial considerations, debt levels of the Corporation, the GeorgiaPacific Group and The Timber Company may from time to time be above or below these thresholds. Pursuant to the Plum Creek merger agreement, the Corporation is prohibited from purchasing shares of The Timber Company common stock. During 2000, the Corporation registered an additional $2.25 billion of debt and equity securities under a shelf registration statement filed with the Securities and Exchange Commission. This registration statement makes $3.0 billion of debt and equity securities available to be issued as of December 30, 2000. 53 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES^TO C NSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 6. SENIOR DEFERRABLE NOTES On July 7, 1999, the Corporation issued 17,250,000 of 7.5% PEPS Units for $862.5 million. Each PEPS Unit had an issue price of $50 and consists of a contract to purchase shares of Georgia-Pacific Group stock on or prior to August 16, 2002 and a senior deferrable note of the Georgia-Pacific Group due August 16, 2004. Each purchase contract yields interest of 0.35% per year, paid quarterly, on the $50 stated amount of the PEPS Unit. Each senior deferrable note yields interest of 7.15% per year, paid quarterly, until August 16, 2002. On August 16, 2002, following a remarketing of the senior deferrable notes, the interest rate will be reset at a rate that will be equal to or greater than 7.15%. The liability related to the PEPS Units is classified as "Senior deferrable notes" on the accompanying balance sheets and is not included in the debt amount for purposes of determining the corporate and Georgia-Pacific Group debt targets. The senior deferrable notes and related interest expense are allocated specifically to the Georgia-Pacific Group. Disclosure Page 80 t .(L/I7L J\1 l !/-/\ rtang uaie. iuhwui NOTE 7. FINANCIAL INSTRUMENTS The carrying amount (net of discounts and premiums) and estimated fair value of the Corporation's financial instruments are as follows: December 30, 2000 January 1, 2000 Carrying Fair Carrying Fair Amount Value Amount Value In millions Commercial paper, credit facilities and short-t^rm notes (Note 3 and 5)............................. Notes and debentures (Note 5)..................................... Euro denominated bonds (Note 5)............................... Revenue bonds (Note 5)....................................................... Capital leases (Note 5)..................................................... European debt (Note 5)....................................................... Other loans (Note 5)............................................................ Senior deferrable notes (Note 6,............................. Investments in marketable securities.................. Interest rate exchange agreements (floating to fixed)....................................................................................... Interest rate exchange agreements (fixed to floating)...................................................................................... Interest rate exchange agreements (rate collar)............................................................................................ Notes receivable from sale of timberlands... Notes payable from monetizations............................. $8,595 5, 593 242 824 152 141 7 863 44 $8,595 5, 105 252 778 140 141 7 871 43 *_ * (1) _ 673 651 659 645 $2, I 4 , 303 -333 14 14 9 63 - $2,067 3, 966 564 14 ~ 14 866 - * (i: __ __ 671 649 310 296 * The Corporation's balance sheets at December 30, 2000 and January 1, 2000 included accrued interest of $0.3 million and $1 million, respectively, related to these interest rate exchange agreements. Commercial Paper, Credit Facilities and Short-Term Notes The carrying amounts approximate fair value because of the short maturity of these instruments. Notes and Debentures The fair value of notes and debentures was estimated primarily by calculating the present value of anticipated cash flows. The discount rate used was an estimated borrowing rate for similar debt instruments with like maturities. 54 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Euro-Denominated Bonds and European Debt The fair value of Euro-denominated bonds and European debt was estimated primarily by obtaining quotes from brokers for these and similar issues. For Disclosure Page 81 Euro-denominated bonds and European debt for which there are no quoted market prices, the fair value was estimated by calculating the present value of anticipated cash flows. The discount rate used was an estimated borrowing rate for similar debt instruments with like maturities. Revenue Bonds, Capital Leases, Senior Deferrable Notes and Otter Loans The fair value of revenue bonds, capital leases, senior deferrable notes and other loans was estimated by calculating the present value of anticipated cash flows. The discount rate used was an estimated borrowing rate for similar debt instruments with like maturities. Investments in Marketable Securities The fair value of investments in marketable securities was based on quoted market prices. Notes Receivable and Notes Payable The fair value of notes receivable and notes payable was estimated by calculating the present value of anticipated cash flows. The discount rate used was an estimated borrowing rate for similar debt instruments with like maturities. Interest Rate and Foreign Currency Exchange Agreements The Corporation has used interest rate swap and foreign currency exchange agreements in the normal course of business to manage and reduce the risk inherent in interest rate and foreign currency fluctuations. The Corporation uses interest rate swap arrangements to manage its exposure to interest rate changes. Such arrangements are considered hedges of specific borrowings, and differences paid and received under the swap arrangements are recognized as adjustments to interest expense. Under these agreements, the Corporation makes payments to counterparties at fixed interest rates and in turn receives' payments at variable rates. The Corporation entered into interest rate exchange agreements in prior years to protect against the increased cost associated with a rise in interest rates. At December 30, 2000, the Corporation had interest rate exchange agreements that effectively converted $458 million of floating rate obligations with a weighted average interest rate of 6.8% to fixed rate obligations with an average effective interest rate of approximately 6.0%. These agreements decreased interest expense by $1 million for the year ended December 30, 2000, and increased interest expense by $7 million and $11 million for the years ended January 1, 2000 and December 31, 1998, respectively. As of December 30, 2000, these agreements have a weighted-average maturity of approximately 2.4 years. At December 30, 2000, the Corporation had interest rate exchange agreements that effectively capped $47 million of floating rate obligations to a maximum weighted average interest rate of 7.5% and a minimum weighted average interest rate of 5.5%. The Corporation's interest expense is unaffected by rhis agreement when the market interest rate falls within this range. There was no effect on the Corporation's interest expense for 2000 related to this agreement. In connection with the acquisition of Fort James, $600 million of swaps were assumed that effectively converted fixed rate obligations with a weighted average interest rate of 6.55% to floating rate obligations with an average effective interest rate of 7.32%. In December 2000, $300 million of these interest rate exchange agreements terminated. The remaining $300 million will terminate in March 2001. At December 30, 2000, the Disclosure Page 82 l M-A. 55 / Uitlg UUi GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued remaining interest rate exchange agreements effectively converted 3130 million of floating rate obligations with a weighted average interest rate of 6.2% to fixed rate obligations with an average effective interest rate of '.1%. These agreements increased interest expense by $0.4 million for the year ended December 30, 2000. As of December 30, 2000, these agreements have a weighted average maturity of less than one year. As of December 30, 2000, the Corporation's total floating rate debt exceeded all related interest rate exchange agreements by $8,936 million. In January 2001, the Corporation entered into several interest ,te exchange agreements that effectively converted $1,500 million of floating rate obligations with a weighted average interest rate of 5.6% to fixes rate obligations with an average effective interest rate of approximately 5.9%. These agreements have a weighted-average maturity of approximately 1.3 years. The estimated fair value of the Corporation's asset under inte est rate exchange agreements at both December 30, 2200 and January 1, 20Cr was $1 million and represented the estimated amount the Corporation ecu have received upon termination of the agreements. The fair value at D- ;ember 30, 2000 and January 1, 2000 was estimated by calculating the preset value of anticipated cash flows. The discount rate used was an estimated borrowing rate for similar debt instruments with like maturities. The Corporation's international operations create exposure to foreign currency exchange rate risks. To manage these risks, the Corporation utilizes foreign exchange contracts. As of December 30, 2000, the Corporation had outstanding foreign exchange contracts with notional amounts of $22 million to hedge firm and anticipated purchase commitments and firm sales commitments denominated in foreign currencies. At December 30, 2000, the Corporation had outstanding approximately $242 million (net of discount) of Eurc-denominated bonds which were designated as a hedge against its net investment in Europe. The use of these derivative financial instruments allows the Corporation to reduce its overall exposure to exchange rate movements, since the gains and losses on these contracts substantially offset losses and gains on the assets, liabilities and transactions being hedged. As of December 30, 2000 and January 1, 2000, the Corporation had unrealized gains on foreign currency contracts of $1 million and $0, respectively. A 10% change from the prevailing market rates of these foreign currencies would not have a material effect on the results of operations. The Corporation also enters into commodity futures and swaps, the amounts of which were not material to the consolidated financial position of the Corporation at December 30, 2000 and January 1, 2000. The Corporation may be exposed to losses in the event of nonperformance of counterparties but does not anticipate such nonperformance. 56 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 8. INCOME TAXES Disclosure Page 83 The provision for income taxes includes income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. The provision (benefit) for income taxes consists of the following: In millions Current income taxes: Federal............................................................... State.................................................................... Foreign............................................................... Deferred income taxes: Federal............................................................... State.................................................................... Foreign............................................................... Provision for ncome taxes................ Income taxes paid, net of refunds Year December 30, January 1, December 31, 2000 2000 1998 $216 24 66 - 1 $307 $425 $515 96 21 62 i* - $705 $620 $127 25 12 37 1 " $202 $ 21 Income taxes paid during 2000 are net of approximately $8 million in state income tax refunds. Income taxes paid during 1999 are net of approximately $8 million in state income tax refunds and $8 million in federal income tax refunds. No provision for income taxes has been made for $492 million of undistributed earnings of certain of the Corporation's foreign subsidiaries and affiliates which have been indefinitely reinvested. It is not practicable to determine the amount of U.S. income tax which would be payable if such undistributed foreign earnings were repatriated because any U.S. taxes payable on such repatriation would be offset, in part, by foreign tax credits. The Internal Revenue Service is currently conducting audits of various federal income tax returns for the years 1995 through 1998. All related payments for completed audits have been made. The federal statutory income tax rate was 35%. The provision for income taxes is reconciled to the federal statutory amounts as follows: December _; a o Year Enaed nary 1, iecen.cer 11, Provision for income taxes computed at the federal statutory tax rate....................... State income taxes, r.et of federal benefit................................................................................. Goodwill amortisation..................................................... Foreign sales corporation...................................... Other......................................................................................... Provision f:r income taxes.................................... Disclosure Page 84 UL.UHUl.-i L Ul\f - / IV-/V 57 filing Dale. GEORGIA-PACIFIC CORPORATION AMD SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued The components of the net deferred income tax liabilities are as follows: Tear Ended December 30, January 1, 2 00C 2000 In millions Deferred income tax assets: Compensation related accruals Other accruals and reserves.. Other............................................................ $ 412 13 50 $ 342 121 Valuation allowance.............................................................................................. 5c1 463 561 463 Deferred income tax liabilities: Property, plant and equipment................................................................. Timber and timberlands.................................................................................... Other................................................................................................................................ (2,441; (404; (101; (1,413) (372) (75) (2,946. (1,860) Deferred income tax liabilities, net.................................................. $(2,353 $(1,397) Included on the balance sheets: Deferred income tax assets*...................................................................... Deferred income tax liabilities**....................................................... $ 176 (2,561) $ 139 (1, 536) Deferred income tax liabilities, net.......................... ................... $(2,385) $(1, 397) * Net of current liabilities of $30 million at December 30, 2000 and $9 million at January 1, 2000. ** Net of long-term assets of $371 million at December 30, 2C00 and $317 million at January 1, 2000. NOTE 9. RETIREMENT PLANS Defined Benefit Pension Plans Most of the Corporation's employees participate in noncontributory defined benefit pension plans. These include plans that are administered solely by the Corporation and union-administered multiemployer plans. The Corporation's funding policy for solely administered plans is based on actuarial calculations and the applicable requirements of federal law. Contributions to multiemployer plans are generally based on negotiated labor contracts. Benefits under the majority of plans for hourly employees (including multiemployer plans) are primarily related to years of service. The Disclosure Page 85 UL.UKU1A 1'ALIflL LUKf - ItJ-K l-mug uaie: u/i/VAh Corporation has separate plans for salaried employees and officers under which benefits are primarily related to compensation and years of service. The officers' plan and certain salaried employee plans are not funded and are nonqualified for federal income tax purposes. Plan assets consist principally of common stocks, bonds, mortgage securities, interests in limited partnerships, cash equivalents and real estate. At December 30, 2000 and January 1, 2000, $531 million and $114 million, respectively, of non-current prepaid pension cost was included in "Other assets" on the accompanying balance sheets. Accrued pension liability of $157 million and $136 million at December 30, 2000 and January 1, 2000, respectively, was included in "Other long-term liabilities" on the accompanying balance sheets. 58 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continuec Pursuant to the provisions of SFAS No. 87, intangible assets of 3 million and $3 million were recorded as of December 30, 2000 and January 1 2000, respectively, in order to recognize the required minimum liability In millions Change in projected benefit obligation: Projected benefit obligation at beginning of year Service cost.............................................................................................. Interest cost............................................................................................ Acquisitions.............................................................................................. Participant contributions............................................................ Plan amendments....................................................................................... Actuarial gains (losses)............................................................... Foreign currency exchange rate changes.......................... Benefits paid............................................................................................ Projected benefit obligation at end of year................ Change in plan assets: Fair value of assets at beginning of year.................. Actual return on plan assets..................................................... Acquisitions............................................................................................... Participant contributions............................................................ Employer contributions.................................................................... Foreign currency exchange rate changes.......................... Benefits paid............................................................................................ Fair value of assets at end of year..................................... December 30, January 1, 2000 2000 $2,014 122 160 1,535 4 3 7 (120' $3,726 $2,613 1 `j L 1, 914 5 !12C; $4,525 $1,799 97 126 264 13 (171 2 (116 $2,014 $2,082 422 216 7 2 (116 $2,613 The funded status and the amounts recognized on the accompanying balance sheets for the solely administered plans are set forth in the following table: Disclosure Page 86 UCUIXUIA tJA L //' / L L U!XlJ - IIJ-lx ruing Dale: utuunu December 30, January 1, 2000 2000 In millions Funded status............................................................................................................ Employer contributions.................................................................................... Unrecognized actuarial gain....................................................................... Unrecognized prior service cost............................................................ Unrecognized net (asset) obligation.................................................. 3 8C2 1 (494) 67 $ 599 (691) 73 Net prepaid (accrued) benefit cost.................................................... $ 376 $ (19) Amounts recognized on the balance sheets consist of: Prepaid pension cost....................................................................................... $ 531 Accrued pension liability......................................................................... (157) Intangible asse"............................................................................................................ Deferred tax 1: .biiity........................................................................................... Accumulated oth r comprehensive income................................................. 2 (2) 2 S 114 (136) 3 (3) 3 Net amount recoc ized...................................................................................... $ 376 1 (19) 59 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for plans with accumulated benefit obligations in excess of plan assets were $348 million, $263 million and $189 million, respectively, as of December 30, 2000 and $291 million, $230 million and $186 million, respectively, as of January 1, 2000. Net periodic pension cost for solely administered and union-administered pension plans included the following: Year Ended December 30, January 1, December 31, 2000 2000 1998 In millions Service cost of benefits earned...................... Interest cost on projected benefit obligation........................................................................... Expected return on plan assets........................ Amortization of gains................................................ Amortization of prior service cost.............. Contributions to multiemployer pension plans........................................................................................ $ 122 160 (262) (34) 9 4 $ 97 126 (208) (11) 9 4 $ 33 114 '134} (13) 8 4 Net periodic oension (benefit) cost........... $ (1! $ 17 $ 1? Disclosure Page 87 utisi\ui.-t r.-ic//'/c i~ui\r - iv-t\ tiling uaie. \ur~u,ui The following assumptions were used for United States and Canadian pension plans: Year meet December 30, January 1, December 31, 2000 2000 1998 Discount rate used to determine the projected benefit obligation............................... Rate of increase in future compensation levels used to determ_..e the projected benefit obligation.......................................................... Expected long-term rate of return on plan assets used to determine net periodic pension cost......................................................................... 7.5% 5.6% 9.5% 7.5* 5.7% 9.5s: 6.5% 5.6% 9.5% The following assumptions were used for the former Fort James Corporation European pension plant Year Ended December 30, 2000 Discount rate used to determine the projected benefit obligation........................................................................................................................................... Rate of increase in future compensation levels used to determine the projected benefit obligation................................................................................. Expected long-term rate of return on plan assets used to determine net periodic pension cost......................................................................... 6.0% 4.2% 7.3% Defined Contribution Plans The Corporation sponsors several defined contribution plans to provide eligible employees" wit i additional income upon retirement. The Corporation's contributions to the p.ans are based on employee contributions and compensation. The Corporation's contributions totaled $65 million in 2000, $62 million in 1999 and $52 million in 1998. Health Care and Life Insurance Benefits The Corporation provides certain health care and life insurance benefits to certain eligible retired employees. Benefits, eligibility ar.d test-sharing provisions for hourly employees vary by location and/or bargaining unit. Generally, the medical plans pay a stated percentage of most medical expenses, reduced for any deductible and payments made by government programs and other group coverage. The plans are funded through trusts 60 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued: Disclosure Page 88 rac/r/c LUrr - iu-i\. ruing uaie: kuuhuh established for the payment of active and retiree benefits. The Corporation contributes to the trust in the amounts necessary to fund current obligations of the plans. In 1991, the Corporation began transferring its share of the cost of post age 65 health care benefits to future salaried retirees. The Corporation reduced the percentage of the cost of post-age 65 benefits that it pays on behalf of salaried employees who retire in each of the years 1955 through 1999 and no longer pays any of the post-age 65 cost for salaried employees who retire after 1999. The Corporation has continued to share the pre-age 65 cost with future retirees. Salaried and non-bargaining hourly employees of the former Fort James Corporation leaving after 1999 are generally eligible for retiree nealth care benefits if they terminate after age 55 with 10 years of service. These retirees pay the full cost of the pre-Medicare and Medicare Supplemental plans. The following tables set forth the change in projected benefit obligation and the amounts recognized on the accompanying balance sheets: December 31, January 1, 2009 2000 In millions Change in projected benefit obligation: Projected benefit obligation at beginning of year........... S Service cost........................................................................................................... Series C Interest cost........................................................................................... Acquisitions.................................................................................................................... Plan changes........................................................................................................... Actuarial losses........................................................................................................... Change in assumptions.............................................................................................. Benefits paid................................................................................................................. 433' 9 32 412 1 (4) 16 (35) $ 432 8 26 15 (16) (28) Projected benefit obligation at end of year............................. $ 868 $ 437 Funded status........................................................................................................... Unrecognized actuarial gain....................................................................... Unrecognized prior service cost............................................................ Unrecognized net Tasset) obligation.................................................. $(868) (67) 11 $(437) (82) 11 Net accrued benefit cost.............................................................................. $( 924) $(508) Amounts recognized on the balance sheets consist of: Prepaid benefit cost...................................................................................... Accrued benefit liability......................................................................... $(924; $(508) Net amount recognized...................................................................................... $'924' $(508) 61 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued> Disclosure Page 89 Net periodic postretirement benefit cost included the following components: In millions Service cost of benefits earned.... Interest cost on accumulated postretirement benefit obligation. Amortization of prior service cost. Amortization of gains.................................. Net periodic postretirement benefit cost............................................................................ Year Ended December 30, January 1., December 31, 2000 20C0 1998 $9 32 (1) $40 $8 26 I (2: $33 $7 26 1 (2) $32 For measuring the expected post retirement benefit obligation for 2000, the Corporation assumed separate annual rates of increase in the per capita claims cost for its pre-age 65 and age 65 and older claims of 7.5% and 10.0%, respectively. An annual rate of increase in per capita claims cost of 7% and 8% was assumed for 1999 and 1998, respectively, for measuring the expected postretirement benefit obligation. The rates were assumed to decrease gradually to 5.5% in 2006 and remain at that level thereafter. For measuring the expected postretirement benefit obligation for the former Fort James Corporation, a 7.5%, 10.0% and 12.0% annual rate of increase in the per capita claims cost was assumed for pre-age 65, age 65 and older medical coverage and age 65 and old prescription drug coverage, respectively. Due to a managed care component, these rates were assumed to decrease gradually to 5.0% in 2006 and remain at that level thereafter. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.0% at December 30, 2000, 7.0% at January 1, 2000 and 6.0% at December 31, 1998. If the annual health care cost trend rate were increased by 1%, the accumulated postretirement benefit obligation would have increased by 10% as of December 30, 2900, 10% as of January 1, 2000 and 10% as of December 31, 1998. The effect of this change on the aggregate of service and interest costs would be an increase of 12% for 2000, 12% for 1999 and 11% for 1998. If the annual health care cost trend rate were decreased by 1%, the accumulated postretirement benefit obligation would have decreased by 8% as of December 30, 2000, 9% as of January 1, 2000 and 9% as of December 31, 1998. The effect of this change on the aggregate of service and interest costs would be a decrease of 10% for 2000, 11% for 1999 and 10% for 1998. NOTE 10. COMMON AND PREFERRED STOCK The Corporation's authorized capital stock consists of (i) 10 million shares of Preferred Stock and 25 million shares of Junior Preferred Stock, of which no shares were issued at December 30, 2000, and (ii) 400 million shares of Georgia-Pacific Group common stock and 250 million shares of The Timber Company common stock. The Georgia-Pacific Group stock has a par value of $0.80 per share, and 224,844,000 and 191,983,000 shares were issued as of December 30, 2000 and January 1, 2000, respectively. The Timber Company stock has a par value of $0.80 per share, and 94,571,000 and 93,904,000 shares were issued as Disclosure Page 90 ucl/aum mcnvc conr - iij-r. of December 30, 2000 and January 1, 2000, respectively. ruing uaie: DlUdah 62 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continue:: At December 30, 2000, the following authorized shares of common stock were reserved for issue: Georgia-Pacific Group 2000 Fort James conversions........................................................................................................... 2000 Employee Stock Purchase Plan........................................................................................... 1999 Unisource conversions.............................................................................................................. 1999 Wisconsin Tissue conversions........................................................................................... 1997 Long-Term Incentive Plan...................................................................................................... 1995 Outside Directors Stock Plan.......................................................................................... 1995 Shareholder Value Incentive Plan................................................................................. 9,946, 223 8,550,000 461,675 92, 282 14, 921,980 324,104 4,945,770 Common stock reserved........................................................................................................................... 39,242,034 The Timber Company 2000 Employee Stock Purchase Plan........................................................................................... 1997 Long-Term Incentive Plan...................................................................................................... 1995 Outside Directors Stock Plan........................................................................................... 1995 Shareholder Value Incentive Plan................................................................................. 1,500, 000 3,788, 650 158,008 3, 285,249 Common stock reserved........................................................................................................................... 8,731,907 1997 Long-Term Incentive Plans The Corporation reserved 16,000,000 shares of Georgia-Pacific Group stock (the "Georgia-Pacific Group Plan") and 3,800,000 shares of The Timber Company stock ("The Timber Company Plan") for issuance under the 1997 Long-Term Incentive Plan. The Georgia-Pacific Group Plan and The Timber Company Plan authorizes grants of stock options, restricted stock and performance awards with respect to each stock, respectively. The Corporation does not currently intend to grant awards under the Georgia-Pacific Group Plan to m.pioyees of The Timber Company. However, certain officers and employees of me Corporation with responsibilities involving both the Georgia-Pacific Group and The Timber Company may be granted options, restricted stock or performance awards under both the Georgia-Pacific Group Plan and The Timber Company Plan in a manner that reflects their responsibilities. Under the Georgia-Pacific Group Plan, options covering 2,939, I ) I shares; 34,000 shares; 27,600 shares; 2,848,060 shares; and 2,412,555 shares were granted on January 29, March 2 and July 29, 1998, January 28, 1539 and January 21, 2000, respectively. These grants have a 10-year term and vest ratably over a three-year period. In addition, performance share awards covering 56,000 shares were granted on January 28, 1999 and awarded on January 21, 2000. At the time performance shares were awarded, the average of the high and low market value of the stock was added to common stock and additional paid-in capital and was deducted from shareholders' equity (long-term incentive plan deferred compensation) in the accompanying financial statements. The long-term incentive plan deferred compensation of $3.5 million is being amortized over the vesting (restriction) period, which is five years. Disclosure Page 91 Under The Timber Company Plan, options covering 1,010,600 shares; 950 shares; and 624,250 shares were granted on December 17, 1997, January 28, 1999 and January 21, 2000, respectively. These grants have a 10-year term and vest ratably over four and three-year periods. Employee Stock Purchase Plan The Corporation reserved 8,550,000 shares of Georgia-Pacific Grruc stock and 1,500,000 shares cf The Timber Company stock for issuance under me 2`00 Employee Stock Purchase Plan (the "2000 Purchase Plan"), 63 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NC-ES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued; which offer employees the right to subscribe for shares of the Ge:rgia-Pacific Group and The Timber Company stock at a subscription price equal, t: 90? of the lower of the Drice per share on the first day or the last day of the purchase period. The j :rchase period for the initial one-year period begins on July 1, 2000 and ends on June 30, 2001. If the 2000 Purchase Plan is extended, the Plan Administ ator will set the next purchase period for the plan years of 2001 and 2002 An employee may terminate his or her subscription st any time before he or ^he pays the full price of the shares subscribed and will receive in cash the fall amount withheld, without interest. 1995 Outside Directors Stock Plan The Corporation reserved 400,000 shares of Georgia-Pacific Group stock and 200,000 shares of The Timber Company stock for issuance under the 1395 Outside Directors Stock Plan (the "Directors Plan"), which provides for the issuance of shares of common stock to nonemployee directors of the Corporation on a restricted basis. Each nonemployee director was issued 647 and 652 restricted shares of Georgia-Pacific Group stock in 2000 and 1999, respectively, and 647 and 346 restricted shares of The Timber Company stock in 2000 anc 1959, respectively. As a result of the Letter Stock Recapitalization, each share of restricted stock held in the Directors Plan was redesignated as Georgia-Pacific Group stock, and an equal number of shares of The Timber Company stock 'subject to the same restrictions as the original restricted shares) were distributed. Each director's annual grant consists of a number of shares of Georgia-Pacific Group stock and of The Timber Company stock determined so that (i; a substantially equal number of shares of Georgia-Pacific Group stock and The Timber Company stock will be granted in each year and (ii) the fetal market value of the shares granted in each year (based on the mean of the high and low prices of each stock on the date of grant) is $40,000 (subject to immaterial rounding differentials). The restrictions on the shares lapse at the time of death, retirement from the Board or disability. Effective May 6, 1997, accrual of additional retirement benefits under the Corporation's retirement program for directors ceased, and the accrued benefits of each of the current nonemployee directors (the present value of which totaled $1,303,889 as of May 6, 1997) were converted into a grant of an equivalent number of shares of restricted stock under the Directors Plan. The total number of shares issued related to this conversion was 15,702. Employee Stock Option Plans The 1995 Shareholder Value Incentive Plan (the "SVIP") provides for the granting of stock options having a term of either 5 1/2 or 10 years to officers and key employees. Under the amended and restated SVIP, no further Disclosure Page 92 UAtVAU/U 1'A^U'I^ LWl/' - /(/-A tiling Dale: uz/m,in grants may be made under the plan. Options having a term of 10 years become exercisable in 9 1/2 years unless certain performance targets tied to the Corporation's common stock performance are met, in which case the holder could exercise such options after 3, 4 or 5 years from the grant date. Options having a term of 5 1/2 years may be exercised only if such performance targets are met in the third, fourth or fifth year after such grant date. At the time options are exercised, the exercise price is payable in cash or by surrender of shares of common stock already owned by the optionee. All shares were vested as of February 2000. Unisource Conversions In connection with the acquisition of Unisource as described in Note 3 of the Notes to Consolidated Financial Statements, the Corporation converted certain stock options awarded under a former Unisource stock option plan ("Unisource stock options") into Georgia-Pacific Group stock opticns. The conversion was inter.red to ensure that the aggregate intrinsic value of the Unisource stock options was preserved and the ratio of the exercise price per Unisource stock option to the market value per share of Georgia-Pacific Group stock was not reduced. Unisource stock options to purchase 2,633,459 shares had original grant dates ranging from November 10, 1994 through May 19, 1999 with a 10-year terr , and vest ratably over three-year and five-year 64 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) periods. These Unisource stock options were converted into options to purchase 629,648 shares of Georgia-Pacific Group stock at prices ranging from $31.88 to $91.58 per share. The vesting provisions and option periods of the original grants remained the same following such conversion. The value of these options at the acquisition date was $9.4 million and was included as part of the purchase price paid for Unisource. No options to purchase The Timber Company stock were issued as part of the conversion. The Corporation also issued 40,152 restricted shares of Georgia-Pacific Group stock under the 1997 Long-Term Incentive Plan to two former Unisource officers who became officers of the Corporation. Each officer was issued 20,076 restricted shares of Georgia-Pacific Group stock. At the time restricted shares were awarded, the average of the high and low market value of the stock was added to common stock and additional paid-in capital and was deducted from shareholders' equity (long-term incentive plan deferred compensation) on the accompanying financial statements. The long-term incentive plan deferred compensation of $2 million is being amortized over the vesting (restriction) periods of one, two and three years. Wisconsin Tissue Conversions In connection with the formation of Georgia-Pacific Tissue as described in Mote 3 of the Notes to Consolidated Financial Statements, the Corporation converted certain outstanding stock options awarded under a Chesapeake stock option plan ("Chesapeake stock options") into Georgia-Pacific Group stock options. The conversion was intended to ensure that the aggregate intrinsic value of the Chesapeake stock options was preserved and the ratio of the exercise price per Chesapeake stock option to the market value per share of Georgia-Pacific Group stock was not reduced. Chesapeake stock options to purchase 172,250 shares had original grant dates ranging from August 11, 1997 through April 16, 1999, with a vesting period of three years and a 10-year term. These Chesapeake stock options were converted into options to purchase Disclosure Page 93 92,960 shares of Georgia-Pacific Group stock at prices ranging from $36.20 to $50.36 per share. The vesting provisions and option periods of the original grants remained the same following such conversion. The stock options' total value of $1.3 million was included in the asset purchase price on the date the Corporation formed Georgia-Pacific Tissue. No options to purchase The Timber Company stock were issued as part of the conversion. Fort James Conversions In connection with the acquisition of Fort James as described :r. Mote 3 of the Notes to Consolidated Financial Statements, the Corporation converted certain stock options awarded under a former Fort James stock option plan ("Fort James stock options") into Georgia-Pacific Group stock options. The conversion was intended to ensure that the aggregate intrinsic value of the Fort James stock options was preserved and the ratio of the exercise price per Fort James stock option to the market value per share of Georgia-Pa _fic Gr^up stock was not reduced. Fort James stock options to purchase 7,399,316 shares had original grant dates ranging from February 11, 1991 through August 15, 2000 with a 10-year term. These Fort James stock options were converted into options to purchase 10,348,501 shares of Georgia-Pacific Group stove at prices ranging from $9.59 to $36.76 per share. The options became fully ' sted as of the acquisition date with tie same option period of the original : ants. The value of these options at the acquisition date was $120 million at was included as part of the purchase price paid for Fort James. No opt ons to purchase The Timber Company stock were issued as part of the co.nve sion. The Corporation also converted 15,000 Fort James stock appreciation rights to receive cash into 20,981 Georgia-Pacific Rights with prices of $17.61 and $28.06. The rights became fully vested as of the acquisition date and maintained their original option dates of February 11, 2000 and January 6, 1999 with a 10 year term. The related compensation expense is being recorded based on changes in the quoted market price of the underlying stock until the rights are exercised or expire. 65 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Additional information relating to the Corporation's existing employee stock options is as follows: Disclosure Page 94 <-l V VJ 1 I I/-A. Year Endec December 30, 2000 2000 Oecrgia- Pad f i c Oroup The Timcer Ctmpar.y Snares Weicnted Average Exercise Price Snares Weighted Average Exercise ?r_ce Options outstanding at January 1, 2000............... .. Options granted/converted.......... .. Options exercised/surrendered. Options cancelled.... 10,788,269 12,740,475 (561,407) (444,992) Options outstanding at December 2C, TOC 2.......... Options available ter grant at Decemcer 3., 2000........................................... .. 'o & ?o 34 5738,385 Total reserved sha. .-s... 30,261,230 Options exercisable December 30, 2000.. ... . Option prices per sr. ;re: Granted/converted. ... Exercised/surrendered. Cancelled.............................. IT1, 650, 283 S9-S42 S9-S50 S26-S92 Options outstanding by exercise price: The Timber Company $20.95-S25.13.................... Average remaining life...................................... Georgia-Pacific Group S9.59-S12.62....................... Average remaining life..................;................. . S12.71-S14.89.................... Average remaining life...................................... S14.91-S16.23.................... Average remaining life...................................... S16.58-S18.29.................... . Average remaining life...................................... S18.52-S18.96.................... Averaae remaininc life...................................... S19.35-S20.ll.................... Average remaining life...................................... S22.03-S24.62 .................... .Average remaininc life...................................... S24.76-S27.10.................... . Average remaining life...................................... S27.23-S3C.73.................... Average remaining life...................................... S3i.57-S41.59.................... . Average remaining 11 ...................................... . 342.53-361.62.................... Average remaining life...................................... S63.73-S91.58.................... Average remaining 1 i fe...................................... 335,675 2.7 years 479,514 . 7 years 44,943 3.8 years 1,473,295 5.0 years 287,120 4.8 years 27,913 4.5 years "88,793 5.5 years ",455,457 .4 years , h 19 , 0 Q 4 6.8 years 5, 309, 498 7.6 years 68,398 5.8 years 234, 145 5.9 vears S29.97 27.39 22.15 39.70 528.53 S26.35 $10.17 314.39 S15.55 S17.62 $18.89 S19.83 S23.73 326.41 $29.36 $36.46 S50.32 S69.43 4,967,650 624,250 (659,601) (22,600) 4,909,699- 2,164,200 7,073,899 4,052,772 S23 S21-S25 $21-525 4,909,699 6.4 years 322.33 22.52 21.5c *1 ~ - - 3 22. 4 c $22.23 S22.46 66 Disclosure Page 95 ruing uuie. iy-- iy. 'y/ 1UC.UKU A rac/c/c LU/xr - iu-h GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) ruing ume: umihui Year Ended January 1, 2000 2000 Georgia- Pacific Group The ?i mber Company Shares Weighted Average Exercise Price Shares Weighted Average Exercise Price Options outstanding at January 1, 1999................ Options granted/converted........... Options exercised/surrenderec Options cancelled............. Options outstanding at January 1, 2000................ Options available for grant at January 1, 2000............................................ Total reserved shares Options exercisable at January 1, 2000................ Option prices per share Granted/converted.... Exercised/surrendered Cancelled............................. ++ Options outstanding $20.95-$25.13..................... Average remaining life..................................... $25.84-531.88..................... Average remaining life..................................... $32.17-544.07..................... Average remaining life..................................... $45.77-$61.63..................... Average remaining life..................................... $63.73-591.58..................... Average remaining life..................................... 11,696,183 3,570,668 {3,974,803) (503,779) 10,788,269++ 3,111,688 13,899,957 2,952,766 $32-$92 $26-$37 $26-$32 exercise price: 7, 427,085 7.3 years 3,014,436 8.1 years 55,997 7.0 years 290,751 6.9 years $27.03 36.09 26.89 28.70 $29.97 $30.20 $27.15 $32.66 $52.78 $69.52 5,553,331 950 (417,150) (170,::: 4,967,650+ 1,288,450 6,256,100 2,972,400 $23 $21-523 $21-$23 4,967,650 7.0 years $22.26 22.56 21.58 21.70 $22.33 $22.32 $22.33 Disclosure Page 96 .1uc.uiwi r.-ic/r/c i^uixr - tu-\ tiling uaie: iuhiuvi Year Ended December 31, 1998 Georgia- Pacific Group 1998 'T'hj amber Company Shares Weighted Average Exercise Price Shares Weighted Average Exercise Price Options outstanding at January 1, 1998 .................. Options granted..................... Options exercised/surrendered.. Options canceled................... 10,051,883 3,000,100 (637,200) (718,600) Options outstanding at December 3 1998 .............. Options ava_ .able for grant at December 31, 1998 ............................................... 11,696,183 5,999,900 Total reserved shares..................................... 17,696,083 Options exercisable at December 31, 1998 ............. Average remaining life of options outstanding............................. Option prices per share: Granted....................................... Exercised/surrendered.. Cancelled.................................. Outstanding............................. 2,222,116 7.1 years $28-$30 $21-$29 $21-$29 $26-$31 $26.66 28.23 27.22 26.71 $27.03 $28.42 6,029,600 (180, 40.' (295,3:0 5,553,350 1, 289,4 0C 6,843,250 1,503,583 6.3 years $- $17-$23 $17-$25 $2l-$2; $22.20 21.52 21 . 50 $22.26 $23.21 67 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES ,'OTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Shareholder Rights Plan On December 16, 1997, shareholders approved an amended and restated Shareholder Rights Plan (the "Rights Agreement"! pursuant tc which preferred stock purchase rights (the "Rights") are issued on each outstanding share of Georgia-Pacific Group stock (a "Georgia-Pacific Group Right"), which will entitle the holders thereof to purchase shares of Series B Junior Preferred Stock under the conditions specified in the Rights Agreement, and or. each outstanding share of The Timber Company stock (a "Timber Company Right"), which will entitle the holders thereof to purchase shares of Series C Junior Preferred Stock under the conditions specified in the Rights Agreement. The Rights will expire on December 31, 2007, unless earlier redeemed by the Corporation or extended. The Rights would be exercisable only if a person or group acquires 15% or more of the total voting rights of all then outstanding Disclosure Page 97 ucl/aui.1 me/r/c eonr - m-a rtung uaie. shares of common stock of the Corporation or commences a tender offer that would result in such person or group beneficially owning 151 or more of the total voting rights of all then outstanding shares of common stock of the Corporation. In such event, each Right would entitle the holder to purchase from the Corporation (i) in the case of a Georgia-Pacific Group Right, one one-hundredth of a share of Series B Junior Preferred Stock ;a "Series B Unit") at a purchase price of $175 (the "Series B Unit Purchase Price"), subject to adjustment, and (ii) in the case of a Timber Company Right, one one-hundredth of a share of Series C Junior Preferred Stock a "Series C Unit") at a purchase price of $100 (the "Series C Unit Purchase Price"), subject to adjustment. Thereafter, in the event one of several specified events (generally involving transactions by an acquirer in the Corporation's common stock or a business combination involving the Corporation) occurs, each Georgia-Pacific Group Right and each Timber Company Right will entitle its holder to purchase, for the Series B U.._t Purchase Price and the Series C Unit Purchase Price, respectively, a number of shares of common stock of such entity ;r purchaser with a market value equal to twice the applicable purchase price. Because of the nature of the dividend, liquidation and voting rights of eacr. class of Junior Preferred Stock related to the Rights, the economic value of one Series B Unit and one Se ies C Unit should approximate the economic value of one share of Georgia-racific Group stock and one share of The Timber Company stock, respective! /. Capital Stock During 2000, the Corporation acquired Fort James as described in Note 3 of the Notes to Consolidated Financial Statements and issued 21.5 million shares of Georgia-Pacific Group treasury stock and 32.2 million newly issued shares of Georgia-Pacific Group stock in exchange for outstanding common stock of Fort James. Of the Treasury Stock issued, approximately 1.7 million shares at an aggregate price of $62 million ($36.47 average per share) were purchased during 2000. The Corporation does not hold any Georgia-Pacific Group stock in Treasury as of December 30, 2000. During 1999, the Corporation purchased on the open market approximately 6.2 million shares of Georgia-Pacific Group stock at an aggregate price of $257 million ($41.45 average per share), all of which were held as treasury stock at January 1, 2000. During 2000, the Corporation purchased on the open market approximately 3.3 million shares of The Timber Company stock at an aggregate price of $78 million ($23.64 average per share), all of which were held as treasury stock at December 30, 2000. During 1999, the Corporation purchased on the open market approximately 5.3 million shares of The Timber Company stock at an aggregate price of $131 million ($24.72 average per share). Of these purchased shares, approximately 5,343,000 shares of The Timber Company stock were held as treasury stock. Other The Corporation has elected to continue to account for its stocK-based compensation plans under APB Opinion No. 25 and disclose pro forma effects of the plans on net income and earnings per share as provided by 68 jt GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued; SFAS No. 123. Accordingly, no compensation cost has been recognised for the Fort James stock options, Unisource stock options, Chesapeake stock options, the SVIP, the Georgia-Pacific Group Plan, The Timber Company Plan or the 2000 Disclosure Page 98 UlLUKljlA tALltlL LUK1' IU-\ tiling Date: UJ/JU/UI Purchase Plan. Had compensation cost for these plans been determined based on the fair value at the grant dates in 2000, 1999 or 1998 under the plan consistent with the method of SFAS No. 123, the pro forma net income and earnings per share would have been as follows: Year Ended December 30, 2000 January 1, 2000 lecember 31, 1998 Net Income Net Income Net Income Income Per Share* Income Per Share* Income Per Share* In millions, except per share amounts Georgia-Pacific Corporation As reported.......................... Pro forma............................... Georgia-Pacific Group As reported.......................... Pro forma............................... The Timber Company As reported.......................... Pro forma............................... ,>505 467 343 308 162 159 $1.95 1.75 2.01 1.97 $1,116 1, 079 716 685 400 394 $4 .17 3.99 4 . 75 4 . 68 - 4 . 43 3. P "4 116 16 9 $0.55 0.41 1.95 1.87 * Represents basic earnings per share. Pro forma diluted income per share i $1.74 and $1.96 in 2000, $3.89 and $4.66 in 1999 and $0.41 ar.d $1.86 in 1998 for the Georgia-Pacific Group and The Timber Company, respectively. The fair-value-based method of accounting for stock-based compensation plans under SFAS No. 123 recognizes the value of options granted as compensation cost over the option's vesting period and has not been applied to options granted prior to January 1, 1995. Accordingly, the resulting pro forma compensation cost is not representative of what compensation cost will be in future years. Following are the weighted average assumptions used in connection with the Black-Scholes option pricing model to estimate the fair value of options granted in 2000, 1999 and 1998: Disclosure Page 99 `S ,'>U;L Year Ended December 30, 2000 uanuary \, December 31 2000 1998 Options ESPP* Options Options Georgia-Pacific Group Risk-free interest rate................ Expected dividend yield................ Expected life.......................................... ............. Expected volatility.......................... Option forfeiture rate.................. The Timber Company Risk-free interest rate................ Expected dividend yield................ Expected life.......................................... ............. Expected v .atility.......................... Option fori :iture rate.................. 6.74 6. 1% 1.2% 1.9% 10 years 1 year 0.42 0.42 3% 7.3% 6.7% 6.1% 4 .4% 4.5% 10 years 1 year 0.38 0.38 3% 8.6% 4 . 9% 1.1% 7 years 0.46 3% 4 . 9% 4.4% 9 years 0.32 3% 5.8% 1.8% 10 years 0.39 3% 5.9% 3.9% 10 years 0.37 3% Employee jtock Purchase Plan 69 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The weighted average grant date fair value per share of Georgia-Pacific Group options granted during the year using the Black-Scholes option pricing model was $23.26, $16.97 and $13.45 for 2000, 1999 and 1998, respectively. The weighted average grant date fair value per share of The Timber Company options granted during the year using the Black-Scholes option pricing model was $7.35 and $7.89 for 2000 and 1999. No options were granted to The Timber Company during 1998. The weighted average grant date fair value per share of shares subscribed under the 2000 Purchase Plan was $6.13 for Georgia-Pacific Group and $4.34 for The Timber Company. NOTE 11. OTHE % COMPREHENSIVE LOSS The Corporation's accumulated other comprehensive loss includes the following: Foreign Currency Items Minimum Pension Liability Adjustment Accumulates o*- r.er Ccmpre r.ensi ve Income ; Loss In millions December 31 , 1998........................... ................ 7fActivit net of taxes............................ January 1 ''QOO.............................. .............. AAc civic net of faxes............................................ Decemoer n , ::>cc........................... ....................... $ '30 1 (29) 15 S 11 $ < 11 4 (3, 1 ~;2; $ ( 43, 11 32: >3 $ : :e: Disclosure Page 100 uc-ukuia rac/r/c Lunr - m-r. ruing Date: uj//wui NOTE 12. COMMITMENTS AND CONTINGENCIES Total rental expense was approximately $167.2 million, $117.4 million and $75.8 million in 2000, 1999 and 1998, respectively. At December 30, 2000, total commitments of the Corporation under long-term, noncancelable contracts, including operating leases, were as follows: In millions 2001 ......................................................................................................................................................................... 2002 ......................................................................................................................................................................... 2003 ......................................................................................................................................................................... 2004 .......................................................................................................................................................................... 2005 ......................................................................................................................................................................... After 2005.......................................................................................................................................................... $ 197 181 149 129 115 379 $1,150 The Corporation . ; a party to various legal proceedings incioe.utai to its business and is subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which it operates. As is the case with other companies in similar industries, the Corporation faces exposure from actual or potential claims and legal proceedings involving environmental matters. Liability insurance in effect during the last several years provides only very limited coverage for environmental matters. The Corporation is involved in environmental remediation activities at approximately 194 sites, both owned by the Corporation and owned by others, where it has been notified that it is or may be a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act or similar state "superfund" laws. Of the known sites in which it is involved, the Corporation estimates that approximately 47% 70 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES"~TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) are being investigated, approximately 28% are being remediated and approximately 25% are being monitored (an activity that occurs after either site investigation or remediation has been completed). The ultimate costs to the Corporation for the investigation, remediation and monitoring of many of these sites cannot be predicted with certainty, due to the often unknown magnitude of the pollution or the necessary cleanup, the varying costs of alternative cleanup methods, the amount of time necessary to accomplish such cleanups, the evolving nature of cleanup technologies and governmental regulations, and the inability to determine the Corporation's share of multiparty cleanups or the extent to which contribution will be available from other parties. The Corporation has established reserves for environmental remediation costs for these sites in amounts that it believes are probable and reasonably estimable. Based on analysis of currently available information and previous experience with respect to the cleanup of hazardous substances, the Corporation believes it is reasonably possible that costs associated with these sites may exceed current reserves by amounts that may prove insignificant or that could range, in the aggregate, up to approximately S157.8 million. This estimate of the range of reasonably possible additional Disclosure Page 101 uruixuiA rac//vc LUKr - n/-/v ruing uaie: v--u.-u< costs is less certain than the estimates upon which reserves are based, and in order to establish the upper limit of such range, assumptions least favorable to the Corporation among the range of reasonably possible outcomes were used. In estimating both its current reserve for environmental remediation and the possible range of additional costs, the Corporation has not assarted it will bear the entire cost of remediation of every site to the exclusion of other known potentially responsible parties who may be jointly and severally liable. The ability of other potentially responsible parties to participate has been taken into account, based generally on the parties' financial rendition and probable contribution on a per site basis. The Corporation is implementing an Administrative Order on Consent entered into with the Michigan Department of Natural Resources and the Environmental Protection Agency regarding an investigation of the Kalamazoo River and two disposal areas which are contaminated with polychlorinated biphenyls. Data regarding the extent of contamination at the two disposal areas has been evaluated. The cost to remediate one of the disposal areas was estimated at $8 million and this site has been essentially closed. It is anticipated that the cost of remediation of the second disposal area will be at least equal to that amount, however, the Corporation is still negotiating a final closing agreement with the State of Michigan. Fort James is not a signatory to the Administrative Order on Consent. A draft Remedial Investigation/ Feasibility Study ("RI/FS"' fer the Kalamazoo River was submitted to the state of Michigan on Cctcter 20, 2000 by the Corporation and other potentially responsible parties ("PRPs";, including Fort James Corporation. The PRPs1 draft RI/FS evaluated five remedial options ranging from no action to total dredging of the river and off - site disposal of the dredged materials. The cost for these remedial options ranges from $0 to $2.5 billion. The PRPs' draft RI/FS recommends a remedy involving stabilization of over twenty miles of .river bank and long term monitoring of the river bed. However, the State of Michigan has asked for additional possible remedies. The total cost for the PRPs' recommended remedy is approximately $73 million. Fort James has been identified as a PRP for contamination of the Lower Fox River and Green Bay system in Wisconsin by hazardous substances. Various state and federal agencies and tribal entities are seeking both sediment restoration and natural resources damages. In February 1999, the Wisconsin Department of Natural Resources ("WDNR") released for public comment a draft remedial investigation/feasibility study of the Fox River. While the draft study did not advocate any specific restoration alternatives, it included estimated total costs ranging from zero for "no action" to approximately $720 million, depending on the alternative or combination of alternatives selected. In June 2000, Fort James voluntarily entered into an agreement with the WDNR and the EPA for the restoration of one sediment area on the Fox River. The project began in August 2000 and was completed on December 15, 2000 at a cost of approximately $8 million. 71 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In October 2000, the CJ.S. Fish and Wildlife Service ("FWS") released for public comment its Restoration and Compensation Determination Plan (the "Plan") for natural resources damages in connection with its Lower Fox River/Green Bay Natural Resource Damage Assessment. According to the Plan, claims for past damages and present and future losses allegedly resulting from contamination of the Fox River by hazardous substances range from $176 million Disclosure Page 102 DtUIXUlA tALltlL LUKt - lU-h tiling Dale: u/iiutui to $333 million, depending on the sediment restoration alternative or combinations of alternatives selected. The actual costs of projects to settle natural resource damage claims could be significantly lower. In November 2000, Fort James entered into a settlement with WDNR that resolves the State's natural resource damages claims against Fort James under CERCLA, the Federal Water Pollution Control Act, and state law. Under the agreement, Fort James has agreed to spend approximately $7 million. The agreement will be effective when entered by the federal court. The final cleanup alternatives and the Corporation's share of the related costs, for both the Fox River and Kalamazoo River matters, are unknown at this time. The Corporation and many other companies are defendants in suits brought in various courts around the nation by plaintiffs who allege that they have suffered personal injury as a result of exposure to asbestos-containing products. These suits allege a variety of lung and other diseases based on alleged exposure to products previously manufactured by the Corporation. In many cases, the plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that any injuries they have incurred in fact resulted from exposure to the Corporation's products. The Corporation is currently defending the claims of approximately 53,000 such plaintiffs as of December 30, 2000, and anticipates that additional claims will be filed against it over the next several years. The number of claims filed against the Corporation, and the average cost of resolving such claims, has increased somewhat over the last three years. The Corporation generally settles asbestos cases for amounts it considers reasonable given the facts and circumstances of each case. Substantially all of the amounts it has paid to date to defend and resolve these cases have been covered by product liability insurance. The Corporation has agreements with its insurers to utilize insurance in amounts which it believes are adequate to cover substantially all of the defense costs and liabilities for currently pending cases, as well as the reasonably foreseeable defense costs and liabilities attributable to claims which may be filed against it over the next several years. The Corporation has additional insurance coverage which it believes will cover a substantial part of the defense costs and liabilities attributable to additional future claims for some period of years, depending on the number of claims filed each year in the future and the average cost of resolving each such claim. However, there can be no assurance that such coverage will be adequate to cover the costs of all future claims, or that the part of such defense costs and liabilities not covered by such insurance will not be material to the Corporation. The Corporation has established reserves with respect to pending cases for the liabilities and defense costs it believes are probable and reasonably estimable, and has also established a receivable for insurance to the extent that the realization of the claim is deemed probable. On May 6, 1998, a lawsuit was filed in state court in Columbus, Ohio, against the Corporation and Georgia-Pacific Resins, Inc. ("C-PR"), a wholly owned subsidiary of the Corporation. The lawsuit was filed by eight plaintiffs who seek to represent a class of individuals who at any time from 1985 to the present lived, worked, resided, owned, frequented or otherwise occupied property located within a three-mile radius of the GPR's resins manufacturing operations in Columbus, Ohio. The lawsuit alleges that the individual plaintiffs and putative class members have suffered personal injuries and/or property damage because of (i) alleged "continuing and long-term releases and threats of releases of noxious fumes, odors and harmful chemicals, including hazardous substances" from GPR's operations and/or {ii) a September 10, 1997 explosion at the Columbus facility and 72 Disclosure Page 103 GEORGIA PACIFIC CORP - 10-K Filing Date: 02/20/0! GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) alleged release of hazardous material resulting from that explosion. Virtually all activity in this case has been stayed pending a decision or. a motion by plaintiffs for reconsideration of a case management order issued by the court. The Corporation has denied the material allegations of this lawsuit. While it is premature to evaluate the claims asserted in this lawsuit, me Corporation believes it has meritorious defenses. Prior to the filing of me lawsuit, the Corporation had received a number of explosion-related claims from nearby residents and businesses. These claims were for property damage, personal injury and business interruption and were being reviewed and resolved on a case-by-case basis. On January 12, 2000, five plaintiffs, including one of the class representatives in the state class action, filed a lawsuit against the Corporation and GPR pursuant to the citizen suit provisions of the federal Clean Air Act and the Community Right-to-Know law. This suit a_-eges violations of these federal laws and certain state laws regarding the form and substance of the defendants reporting of emissions and alleged violations of permitting requirements under certain regulations issued under the Clean Air Act. This suit seeks civil penalties of $25,000 per day, per --iolation, an injunction to force the defendants to comply with these laws r.d regulations and other relief. The defendants have denied the material all rations of the complaint. While it is premature to completely evaluate these ilaims, the Corporation believes it has meritorious defenses. In May 1997, the Corporation and nine other companies, including Wisconsin Tissue Mills, Inc. and Fort James Corporation, were named as defendants in a lawsuit brought by the Attorney General of the State of Florida alleging that the defendants engaged in a conspiracy to fix the prices of sanitary commercial paper products, such as towels and napkins, in violation of various federal and state laws. Shortly after the filing of this suit, approximately 55 similar suits were filed by private plaintiffs in various federal courts, and in various state courts by private plaintiffs and State Attorney Generals. All of these cases have been settled except a case in state court in Tennessee and two cases brought by State Attorney Generals. As part of the formation of the joint venture with Chesapeake described in Note 3 of the Notes to Consolidated Financial Statements, the Corporation and Wisconsin Tissue assigned, and Georgia-Pacific Tissue agreed to assume, the liabilities of both companies in connection with these antitrust cases. In connection with the proposed divestiture of certain assets to SCA described in Note 3 of the Notes to Consolidated Financial Statements, the Corporation has agreed to assume this liability from Georgia-Pacific Tissue. In addition, as a result of its acquisition of Fort James, Fort James' liability in these cases is reflected on the Corporation's consolidated financial statements. The Corporation, Wisconsin Tissue and Fort James have denied that they have en aged in any of the illegal conduct alleged in these cases. None of the amouncs paid to settle these cases is material to the Corporation, and the Corporation does not believe that the remaining cases will result in payment of amounts that would be material. Although the ultimate outcome of these environmental matters and legal proceedings cannot be determined with certainty, based on pre.er.tly available information, management believes that adequate reserves have been established for probable losses with respect thereto. Management further believes that the ultimate outcome of such environmental matters and legal proceedings could be material to operating results in any given quarter or year but will not have a material adverse effect on the long-term results of operations, liquidity or consolidated financial position of the Corporation. NOTE 13. RELATED-PARTY TRANSACTIONS For all periods in which the separate accompanying combined statements of income of the groups are presented, timber has been transferred from the Disclosure Page 104 u^^/iuy/1 r.-ic/r/e conr - i u-/\ / UUIC. v*./u/yj Corporation's timberlands at prices intended to reflect fair market prices based on prices paid by independent purchasers and sellers for similar kinds of timber. During the second quarter of 1998, Georgia-Pacific Group and The Timber Company revised the operating policy, which they had agreed :: in 1997, with respect to sales of timber by The Timber Company to the Georgia-Pacific Group. This revised policy was implemented on July 1, 1999 and remained in effect through 2900. Under the policy, The Timber Company was require! to offer 701 of its projected annual harvest in Southeast Arkansas 73 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES 'DTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) and Mississippi and 80% of its projected annual harvest in most of its Southern forests to the Georgia-Pacific Group, and the Georgia-Pacific Group was required to purchase not less than 50% nor more than 70s if the projected annual har- -sts in Southeast Arkansas and Mississippi, and net less than 60% nor more th ,n 80% of the projected annual harvest in other Southern forest basins. The provisions in the policy were intended to cause prices paid by the Georgia-Pac fic Group for timber sold by The Timber Company to reflect market prices in particular forests, to allow the Georgia-Pacific Group more flexibility in purchasing wood from third parties, and to allow The Timber Company flexibility in the timing of sales of its annual harvest on the open market. In 2000, Georgia-Pacific Group and The Timber Company negotiated a new timber supply agreement which became effective January 1, 2001 and is subject to an automatic ten year renewal period, unless either party delivers a timely termination notice. This agreement covers four key southern timber basins: Southeast Arkansas, Mississippi, Florida, and Southeast Georgia. Under the agreement, The Timber Company must offer to Georgia-Pacific Group specified percentages of its annual harvest, subject to absolute minimum, and maximum limitations in each basin. Georgia-Pacific Group can elect between 36% and 51% of The Timber Company's annual harvest each year in Mississippi, Florida and Southeast Georgia, and between 52% and 65% in Southeast Arkansas. The total annual volume will range from a minimum of 3.3 million tons to a maximum of 4.2 million tons. The prices for such timber will be negotiated at arm's length between The Timber Company and Georgia-Pacific Group every six months, and will be set by third party arbitration if the parties cannot agree. The Timbe Company has also entered into a ten year supply contract to deliver 50 : illion board feet annually of Douglas-fir and Western Hemlock sawtimber to Georgia-Pacific Group's sawmills at Coos Bay and Philomath, Oregon as well as 68 thousand green tons of pulpwood to the Georgia-Pacific Group Toledo pulp mill and Coos Bay sawmill. Prices will be based on prevailing market prices with recourse to arbitration if the parties do not agree that the pricing formula reflects market prices. If The Timber Company's merger with Plum Creek is completed, the timber supply agreement and the supply contract will be replaced with new agreements on substantially the same terms and entered into with certain subsidiaries of Plum Creek. The Corporation is a 50% partner in a joint venture ("GA-MET". with Metropolitan Life Insurance Company ("Metropolitan"). GA-MET owns and operates the Corporation's main office building in Atlanta, Georgia. The Corporation accounts for its investment in GA-MET under the equity method. At December 30, 2000, GA-MET had an outstanding mortgage loan payable to Metropolitan in the amount of $140 million. The note bears interest at 9 1/2%, requires monthly payments of principal and interest through 2011, and is Disclosure Page 105 rlung uuie. u/-u.<vi secured by the land and building owned by the joint venture. In the event of foreclosure, each partner has severally guaranteed payment of one-half of any shortfall of collateral value to the outstanding secured indebtedness. Based on the present market conditions and building occupancy, the likelihood of any obligation to the Corporation with respect to this guarantee is considered remote. 74 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 14. UNAUDITED SELECTED QUARTERLY FINANCIAL DATA First Quarter Second Quarter Third Quarter Fourth Q' rter 2000 1999 2000 1999 2000 1999 2000 1999 In millions, except per share amounts Net sales..................................... Gross profit (net sales minus cost of sales) . . . Net income (loss)................ Georgia-Pacific Group Dividends declared per share.......................................... Basic per share: Net income (loss).... Diluted per share: Net income (loss).... The Timber Company............. Dividends declared per share.......................................... Basic per share: Net income.......................... Diluted per shafe: Net income.......................... Price range of cc imon stock Georgia-Pacific Group High............................................... Low.................................................. The Timber Company High............................................... Low.................................................. $5,564 $3,567 $5,635 $4, 010 $5,470 $5,675 $5,549 1,394 234 900 1,397 1, 095 1,280 I, 327 1,251 146 240 311 162 279 (131) $0,125 $0,125 $0,125 $0. 125 $0,125 $0.125 $0,125 1.13 0.57 1.21 1 .23 0.76 :. 34 (0.98) 1.11 0.56 1.20 1 . 20 0.76 1 . 31 (0.98) 0.25 0.49 0.49 0.25 0.54 0.54 0.25 0.42 0.42 0 .25 1 . 17 1 . 16 0.25 0.40 0.40 0.25 0.59 0.59 0.25 0.70 0.69 $51.94 $41.00 $44.50 $54 . 13 $30.13 352.38 $32.00 31.69 29.34 25.69 38 .75 21.88 3 " . 2 0 19.31 25.63 24.06 25.75 27 . 13 32.00 2 ~ . 19 31.19 20.75 19.88 21. 63 22 . 00 21.56 22 . :o 25.94 $5,347 1, 318 380 $0,125 1.02 1.00 0.25 2.48 2.47 $50.88 35.75 25.31 22.38 75 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Disclosure Page 106 NOTE 15. GROUP FINANCIAL INFORMATION The following combined financial information includes the accounts of Georgia-Pacific Group. All significant intragroup balances and transactions are eliminated in combination. Transactions with The Timber Company are not eliminated. Combined Statements of Income Georgia-Pacific Corporation--Georgia-Pacific Group Year Ended December 30, January 1, December :i, 2000 2000 1336 In millions, except per share amounts Net sales $22,076 $18,418 $13,5" Costs and expenses Cost of sales, excluding depreciation, amortization and cost of timber harvested shown below The Timber Company.................................................... Third parties................................................................ 62 16, 883 95 13,907 10, Total cost of sales....................................................... Selling and distribution.......................................... Depreciation, amortization and cost of timber harvested The Timber Company....................................................... Third parties................................................................... 16, 945 1, 574 177 1,077 14,002 782 232 971 10,866 556 320 953 Total depreciation, amortization and cost of timber harvested.................................................... General and administrative..................................... Interest.................................................................................. Other loss............................................................................. Total costs and expenses.......................................... 1, 254 951 595 204 21, 523 1, 203 841 426 17,254 1, 273 612 37 2 - 13,679 Income before income taxes and extraordinary item....................................................... Provision for income taxes...................................... Income before extraordinary item...................... Extraordinary item-loss from early retirement of debt, net of taxes.................... Net income............................................................................. 553 210 343 - $ 343 1,164 448 716 $ 716 198 87 i: $ c. 3 Basic per share: Income before extraordinary item.................... Extraordinary item, net of taxes.................... Net income............................................................................. $ 1.95 - $ 1. 95 $ 4.17 - S 4.17 3 1.62 i o. J.ZZ Diluted per share: Income before extraordinary item.................... Extraordinary item, net of taxes.................... Net income loss................................................................. $ 1.94 - $ 1.94 $ 4.07 $ 4.07 $ 0.61 j . 1 1 $ 0.54 Average number of shares outstanding: Basic....................................................................................... Diluted.................................................................................. 175.8 176. S 171.6 175.9 179.2 131. 1 Disclosure Page 107 76 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Ccr.ti:'.ued! Combined Statements of Cash Flows Georgia-Pacific Corporation--Georgia-Pacific Gr: uo Year Ended December 30, January 1, December 3, 2000 2000 102: In millions Cash flows f n g activities: Net income............................................................................ Adjustments to reconcile net income to cash provider 0/ operations, excl ding the effects : acquisitions: Depreciation....................................................................... Cost of timber tarvested-third parties... Ccst of timber '.arvesced-The Timbe Company................................................................................. Deferred incom'r taxes................................................ Amortization or goodwill......................................... Other loss............................................................................ (Gain} loss on disposal of assets, net... Decrease (increase) m receivables................ (Increase) decrease in inventories............... Change in other working capital....................... (Decrease/ increase in taxes payable.......... Change in other assets and other long term liabilities.......................................................... Cash orovided by operations.................................... $ 343 814 167 177 52 96 204 (10) 182 (21) 22 (118) (101) 1,747 $ 716 746 156 222 (59) 69 - 3 ! 206) (243) (136) (2) 158 1, 434 3 18 744 14" 2:: -4 t.2 - 1H 14 0 ^3 (14 5' 135 66 1, 68 I Cash flows from investing activities: Property, plant and equipment investments....................................................................... Timber contract purchases from third parties................................................................................. Timber purchases from The Timber Company................................................................................. Acquisitions....................................................................... Proceeds from sales of assets............................ Other......................................................................................... Cash used for investing activities.................. Cash flows from financing activities: Share repurchases.......................................................... Net additions to (repayments of) debt.... Issuance of senior deferrable notes............. Cash dividends paid..................................................... Proceeds from stock option plan exercises............................................................................ Other......................................................................................... (906) ! 161) (183) (6,142) 58 (63) (1,411) (62) 5,820 (85. 12 - (121) : 1 50) (222) (1,658) 31 29 (2,691) (251) 666 863 :&) 1 07 i 16 j (632; (14 2 (333! :ii2: 67 20 ; i - -j - - (4 36, 1 34 - - Cash provided by useo for; financing activities............................................................................ Increase (decrease; in casn.................................... Balance at beginning of year................................. 3,685 15 28 1,21- 20 5 5 5: 2 7 Balance at ena of year. 3 40 77 Disclosure Page 108 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Combined Balance Sheets Georgia-Pacific Corporation--Georgia-Pacific up In millions ASSETS Current assets: Cash....................... Receivables, less allowances cf S34 and $25, respectively............................................................................ Inventories Raw materials.......................................................................... Finished cocas....................................................................... Supplies...................................................................................... LIFO reserve............................................................................ Tctai inventories............................................................. Deferred income tax assets........................................... Other current assets.......................................................... Total current assets..................................................... Property, plant and equipment Land and improvements..................................................... Buildings.................................................................................... Machinery and equipment................................................ Construction in progress.............................................. Property, plant and equipment, at cost.......... Accumulated depreciation.............................................. Total property, plant and equipment, net.. Goodwill, net............................................................................... Other assets.................................................................................. Total assets.......................................................................... LIABILITIES AND PARENTIS EQUITY Current liabilities: Short-term debt....................................................................... Accounts payable..................................................................... Accrued compensation.......................................................... Other current liabilities.............................................. Total current liabilities......................................... Long-term debt, excluding current portion.... Senior deferrable notes..................................................... Other long-term liabilities........................................... Deferred income tax liabilities................................. Commitments ana contingencies Parent's equity.......................................................................... Total liabilities and parent's equity.......... 2000 2CC0 $ 40 $ 25 2,704 2, 15 6 739 1, 977 550 (373) 2,893 176 449 6, 262 4 52 1, 36" 341 (154! 3, CC' 133 20" 4,536 653 2, 532 17,353 624 21,162 {9,378) 11,784 8, 985 2,242 $29,273 476 1,629 13,307 4 04 15,316 (8,756) 7,060 2,69" 1,087 $15,380 $ 2,852 1,515 430 87 9 5,67 6 12,335 663 2, 647 2,155 5,577 $29,273 $ 2,071 886 32" 537 3, r:: 3 IP "2 5 61 1,50: 1, 160 3,7 50 $15, 36-1 78 Disclosure Page 109 Kyi v kji; i u i_ ^yi GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Combined Statements of Parent's Equity Georgia-Pacific Corporation--Georgia-Pacific Group 6i IUH Year Er.aed December 30,, January 1, December 31, 2000 y ~ '* 1998 In millions Parent's equity balance, beginning of year............................................................................................ Net income............................................................................... Cash dividends paid....................................................... Common stock repurchases.......................................... Common stock issued for actaisition............. Other comprehensive income (loss), net of taxes......................................................................................... Other common stock activity.................................. $3,750 343 (85) (62) 1, 480 16 135 $ 3, u 0 9 - (86) f 2 5^ i ' 11 157 $3,519 98 (90) (427) (10) 119 Parent's equity balance, end of year........... $5,577 $ 3,"50 $3,209 Combined Statements of Comprehensive Income Georgia-Pacific Corporation- -Georgia-Pacific Group Year Ended December 30, January 1, December 31, 2000 2000 1998 In millions Net income............................................................................... Other comprehensive income (loss), before taxes: Foreign currency translation adjustments....................................................................... Minimum pension liability adjustment.... Income tax (expense) benefit related to other items of comprehensive income........... Comprehensive income..................................................... S343 24 2 (10) -- $359 S7 1 5 11 -- $98 (14) (3) 7 -- $88 79 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES Disclosure Page 110 / .1 cnnu civnr - n/-t\ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following combined financial information includes the accounts of The Timber Company. All significant intracompany balances and transactions are eliminated in combination. Transactions with Georgia-Pacific Group are not eliminated. Combined Statements of Income Georgia-Pacific Corporation--The Timber Company ruing uutr. wuiy,u, Year Ended December 30, January 1, December 3 2000 2000 1998 In millions, except per share amounts Net sales Timber--Georgia-Pacific Group............... Timber--third parties................................... Delivered.............................................................. Stumpage................................................................ Other.......................................................................... $ 239 38 76 21 3 327 43 .11 25 $ 409 53 52 20 Total net sales........................................................... 394 526 534 Costs and expenses Cost of sales, excluding depreciation and depletion.................................................................................... 26 70 Depreciation and depletion............................................. 27 42 General and administrative............................................. 38 43 Interest......................................................................................... 44 69 Other income............................................................................... - '3551 114 44 36 71 (24) Total costs and expenses..................................... 135 131) 241 Income before income taxes and extraordinary item................................................................................................... Provision for income taxes............................................... 259 97 557 257 293 115 Income before extraordinary item................................ Extraordinary item--loss from early retirement of debt, net of taxes......................................................... 162 - 400 - 178 (2) Net income....................................................................................... $ 162 3 400 $ 176 Basic per share: Income before extraordinary item.............................. Extraordinary item, net of taxes.............................. $2.01 - 54 ."5 - $ 1.97 (0.02) Net income....................................................................................... $2.01 54.75 $ 1.95 Diluted per share: Income before extraordinary item.............................. Extraordinary item, net of taxes.............................. $2.00 - 34 .73 $ 1.96 (0.02) Net income....................................................................................... $2.00 54.73 $ 1.94 Average number of shares outstanding: Basic................................................................................................. Diluted............................................................................................ 80.7 81.1 8 4.1 8 4.6 90.3 90.8 Disclosure Page 111 1 / .1 / ' / I/'A 80 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Combined Statements of Cash Flows Georgia-Pacific Corporation--The Timber Company / mug lsui Year Ended December 30, lanua: 1, December 31, 2000 200 0 1998 In millions Cash flows from operating activities: Net income............................................................................... $ Adjustments to reconcile net income to cash provided by operations: Depreciation.......................................................................... Depletion........................................................................................... Other income.......................................................................... Deferred income taxes............................................................ Gain on disposal ofassets, net.................................... Other...................................................................................................... 162 5 22 30 (78) 32 $- j (355, 132 $ 176 5 39 (24) 4 (17) 18 Cash provided by operations..................................... 173 201 Cash flows from investing activities: Property, plant and equipment investments............................................................................ Timber and timberland investments.................. Proceeds from sales of assets............................. (3) (59) 364 (6) (59) 64 Cash provided by (used for) investing activities............................................................................... 302 44 (1) Cash flows from financing activities: Share repurchases...................................................................... Proceeds from employee stock purchase plan............................................................................................... Proceeds from stock option plan exercises........................................................................................... (Repayments of) additions to debt.................. Cash dividends paid................................................................ (78) 14 (330) (81) (131) (121) 12 (91) Cash used for financing activities.................. (475) (200) Increase (decrease) in cash. Balance at beginning of year Balance at end of year.................................................. $ $- 81 Disclosure Page 112 <jEURGIA pacific CORP - 10-K GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Combined Balance Sheets Georgia-Pacific Corporation--The Timber Company Filing Dale: 02/20/01 In millions ASSETS Timber and timberlands ' Timberlands................................................................................. Fee timber.................................................................................... Reforestation............................................................................ Other................................................................................................. Total timber and timberlands............................. Property, p.ant and equipment Land and -mprovements....................................................... Buildings...................................................................................... Machinery and equipment.................................................. Property, plant and equipment, at cost........... Accumulated depreciation............................................... Total property, plant and equipment, net Note receivable......................................................................... Other assets................................................................................. Total assets....................................................................... LIABILITIES AND PARENT'S EQUITY Debt...................................................................................................... Other liabilities.................................................................... Deferred income tax liabilities............................... Total liabilities.......................................................... Commitments and contingencies Parent's equity.......................................................................... Total liabilities and parent's equity... December 30, January 1, 2000 2000 3 321 5 31 301 64 1, 220 22 5 34 61 (43) 18 352 29 SI,619 $ 640 428 406 1, 474 145 $1,619 $ 318 523 259 27 1,127 22 5 36 63 (44 19 350 25 $1,521 $ 970 50 376 1,396 125 $1,521 82 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Combined Statements of Parent's Equity Georgia-Pacific Corporation--The Timber Company Disclosure Page 113 GtORUlA FAL1FIC CORF - 10-K Filing Date: U2/2U/UI Year Ended December 30, January 1, December 31, 2000 2 hC 0 1998 In millions Parent's equity balance, beginning of year............................................................................................ Net income....................................................................................... Common stock repurchases.......................................... Cash dividends paid....................................................... Stock option plans anddirectors plan.... Employee stock pu";hase plan............................... $125 162 (78) (81) 17 $ (49) 176 (121) (91) Parent's equity balance, end of year.......... $145 $ (85) Comprehensive I; come The Timber Com =.ny's total comprehensive income was $162 million, $4 00 million, and $1/'. million for the years ended December 30, 2000, January 2000 and Decembe 31, 1998, respectively. Other comprehensive income was insignificant for The Timber Company during 2000, 1999 and 1998. 1, 83 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 16. CONDENSED CONSOLIDATING FINANCIAL INFORMATION Fort James is an issuer of certain securities registered under the Securities Act of 1933, thus subjecting it to reporting requirements under Section 15(d) of the Securities Exchange Act of 1934. The following condensed consolidating financial information is presented in lieu of consolidated financial statements for Fort James because the securities are fully and unconditionally guaranteed by the Corporation and certain subsidiaries: Consolidating Statement of Income For the Year Ended December 30, 2000 Disclosure Page I 14 GcUKUIA tALltlL LUKi' - IU-\ tiling Dale: U2/2IJ/UI Georgia-Pacific Corp. other than Fort James and The limber Company Fort James Corp. The Timrer Company i:esc 1 roaring Consolidated Adjustments Amounts In j.ior.s Net sales. $21,557 $528 $394 S (261) $22,218 Costs and expenses Cost of sales, excluding depreciation, depletion, amortization and cost of timber harvested shown below.......................... Selling and distribution.......................... Depreciation, amortization and cost of timber harvested.... General and administrative..................... Interest....................................... Other loss.................................. 16,633 1,484 1,199 923 571 204 321 o 90 _ 1c, r ? 6 _ 1, 574 55 2 7 28 38 24 44 -- a 7 7) _ - 1, 101 989 639 204 CO Total costs and expenses.......................... 21,014 518 135 (261) 21,406 Income before income taxes............................................ Provision for income taxes............................................ Net income.................................. 543 201 $ 342 10 9 $1 259 97 $162 $- 812 307 $ 505 84 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued; Consolidating Statement of Cash Flows For the Year Ended December 30, 2000 Disclosure Page I 15 GEORGIA PALI!-It CURE - 10-K Piling Dale: U2/2U/0I Georgia-Pacific Corp. other than Fort James and The Timber :o r o james me .1 mber Consolidating Consolidated Company Ad j us cmer.ts In millions Cash provided by 'used for) operations.................. $ 1,764 $ (17) $ 1T 3 $(183) 3 1, Cash flows from investing activities: Property, plant and equipment investments.......................... Timber and timberlands purchases............................... Acquisitions.......................... Proceeds from sales of assets........................................ Other............................................. (867 ) (364) (2) 58 (40) (39) _ (6,140) _ (23) 5H - 364 - 1OU 1- C v o, . 4 z ; _ 422 - Cash (used for) provided by investing activities................................ (1,215) (6,202) 302 183 (6,932) Cash flows from financing activities: Net increase (decrease) in debt..................................... 6,762 (942) .'3301 5,4 90 Net change in intercompany payable.. (7,169) 7, 169 - - - Common stock repurchased.......................... (62) _ (78) - (14 0) Proceeds from option plan exercises................... 12 j. H _ cL O Cash dividends paid.... (85) - (81) - 116 6) Cash (used for) provided by financing activities................................ Increase in cash................... Balance at beginning of year................................................ Balance at end of year.. (542) 7 25 $ 32 6, 227 8 $8 (475) - S- _ - - s = 2' 1 !C 23 S 40 85 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--.'Continued, Consolidating Balance Sheet As of December 30, 2000 Disclosure Page I 16 uto'/wji.-i rnc/r/c civ/w' tu-i\ nttrtg uate. Georgia-Pacific Corp. other than Fort James and The Timber Company Fort James Corp. The Timber Company Consolidating Ad;ustments Consolidat Amounts In millions ASSETS Current assets: Cash............................................. Receivables, less allowances........................... Inventories........................... Deferred income tax assets..................................... Other current assets... Total current assets.. Timber and timberlands.. $ 32 2,033 2,003 88 52 4,208 83 33 671 890 88 397 2,054 - $ 1 _ 23 26 1,220 _ - - (10) S 40 2, 705 2 3 ?5 1" c 472 6, 238 1, 293 Total property, plant and eauipment, net.......... Goodwill, net......................... Other assets........................... Total assets...................... 7,095 2,401 1,465 $15,252 4, 689 6, 584 694 $14,021 18 355 $1,619 3 (10) 11,802 8, 985 2,514 $30,882 LIABILITIES AND SHAREHOLDERS' Current liabilities: Short-term debt................. Accounts payable............... Other current liabilities......................... EQUITY $ 2,620 928 791 Total current liabilities...................... 4,339 Long-term debt, excluding current-- portion..................................... 10,234 Senior deferrable notes................................................ 863 Other long-term liabilities........................... 1, 880 Deferred income tax liabilities........................... 1,131 Intercompany........................... (9,450) Shareholders' equity.... 6, 255 Total liabilities and shareholders 1 equity................................... $15,252 $ 232 587 518 1, 337 $ 5 43 48 2,121 767 1,024 3,747 25 640 380 406 703 (558 : $14,021 $1,619 $ 368 (10) 358 (368) " $ (10) $ 3,220 1, 520 1, 342 6, 082 12,627 363 3, 027 2, jc . 5,722 $30,382 Disclosure Page I 17 <uL.UKUlA 1'ALIIIL l.OKI' - y I/-/V 86 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES Selected Financial Sata--Cperatior.s Georcia-Pacific Corooratitn and Subsidiaries :ooc yea January i., 2 00 3 Decemoer 31, 13 92 19 97 1936 share amounts ana rail's Cperat icr.s: Costs anc expenses: lost :: sales............................... Selling arc oistr icut it r.. . Depreciation, depletion, amortisation and cost of timber harvested..................... Gener :1 ana administrative.......................... Interest............................................ Other loss imcomei................ Total costs and expenses....................................... Income before income taxes, extraordinary items ar.c accounting change..................... Provision for income taxes.................................................... Income before extraordinary items and accounting change................................................. Extraordinary items ana accounting change, net of taxes.................................................... Net income......................................... Other statistical data: Georgia-Pacific Corporation: Basic per share: Income before extraordinary items and accounting change.................. Extraordinary items ana accounting change, net of taxes................................................. Net income................ Diluted per share: Income oefore 5 do i c 16,636 1, oh-] 1,114 929 639 204 21,406 812 307 5C5 $ 505 512,59? 513,393 5 13,953 "S3 . , u-0 : 3o . - --677" 642 ;, e: 3 564 4 95 355) 337 64 8 443 (24) 633 4 oo (128) --S6 4 53 -- 16,778 13,493 13,472 13,226 1, 621 ->05 491 235 296 "'02 1 06 13 5 :,: >; 2 3 3 129 1 6 1 51,116 :5 274 S .53: 69 5 ; 13 6 $ l.~3 (0.06) accounting change, net of taxes................................................. Net income....................................... Average number shares outstanding Georgia-Pacific Georgia-Pacific Ea Disclosure Pace 1 18 ruing uuie. 87 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES Selected Financial Data--Operaticns Ceorgia-Paciric Corpcraticn--Gecrgia-Pacifi; Srccc "'`6 `-'L` Disclosure Page I 19 In millions, except per share amounts er.c retits Year Ended -/ecemoer 30, January 30C0 20CC December 31, 1997 199-. Net sales........................................... Costs ana expenses: Cost of sales................................. The Timber ComDarv/.................... Third parties................................. :csr c: sales............... Selling and distribution.... Depreci a t i or., amc r t i z a t icn and cost of tinner harvested: The Timcer Company.................... Third carties................................. Total depreciation, amortization and cost c~ timber harvested.................... General anc admir.istrati"..r.terest................................................ Other loss 'income;.................... Total costs and expenses.. Income (loss) before income taxes, extraordinary items and accountinc change............. Provision (benefit: for income taxes................................... Income (loss) before extracrdinary items and accounting change....................... Extraordinary items and accounting change, net of taxes..................................................... Net income (loss)......................... Basic per share: Income (loss) before extraordinary items and accounting change.................... Extraordinary items and accounting cnange, net cf taxes................................................... Net income ' 'oss:......................... Diluted per share: Income 'loss' cefore extraordinary items and accounring change.................... Extraordinary items sr.a accounting cnange, net z: taxes................................................... Ner income loss;......................... Average number snares outstanding Basic..................................................... Diluted................................................ Earnings to fixed cr.araes... Effective income tax rate... 322,076 62 16,693 16, 3-15 1,574 . 77 i n "i"1 1,264 951 535 204 21,523 553 210 243 _ S 343 $ 1.95 3 1.95 3 1.94 3 I . 94 176.3 1. 5 36.0% SIS,413 95 13,9Q7 14,002 782 99 10,77- :?oe 556 * c-j 10,696 - A"' 607 -. -. . 10,2"? -- " c4 232 97 1 953 363 333 1,203 94 1 4 26 - 17,254 1 273 612 -> -- - 13,679 1,319 646 251 14 ) 1,2 ` 13,710 13,422 1, 164 448 198 (113) 97 (32) 3r 54 716 111 ;86) 24 - 3 716 3 {13} (60) 98 3 ( 14 6) 3 '5 24 3 4.17 3 0.62 3 (0.47) 3 4 . I1 (0.07) (0.33) 3 h 5c s 'C.eo: 3 4.07 3 0.61 5 '0.47/ - -i- - - -n S 4.07 3 0.5 4 3 [ v. r 0; 171.9 17 5.9 7: 39 . 5% 181.1 1.5 42 . 9% 182.9 0.7 27.1% -. 2 61.4% 88 Disclosure Page 120 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES Selected Financial Data--Operations Georgia-Pacific Corporation--The Timber Company `"5 Year Ended December 30, January 1, 2000 2000 December 31, 1999 1997 1996 In millions, except per share amounts and ratios Operations: Net sales.......................................................... S 394 $ 526 5 34 $ 551 $547 Costs and -xpenses: Cost of i ,les............................................... General a :d administrative............. Deprecia'. on and depletion............. Interest............................................................ Other income.................................................. Total costs and expenses........... 26 38 27 44 - 135 70 43 42 69 (355) (131) 114 36 44 (24) 137 43 48 34 (114) 132 45 57 105 - 241 198 339 Income before income taxes, and extraordinary item.................................. Provision for income taxes................ 259 97 657 293 353 208 257 115 138 81 Income before extraordinary item.................. .................................................... Extraordinary item, net of taxes.................................................................... Net income............................................... 162 - $ 162 400 - $ 400 17 8 215 127 (2 j - - $ 176 $ 215 $127 Basic per share: Income before extraordinary item.................................................................... Extraordinary item, net of taxes.................................................................. $2.01 - $4.75 - $ 1 . 97 $2.35 (0.02) - Net income............................................... $2.01 $4.75 $ 1.95 $2 . 35 Diluted per share: Income before extraordinary item.................................................................... Extraordinary item, net of taxes.................................................................. $2.00 - $4 .73 - $ 1. 96 $2 . 33 ' C . J2 ; - Net income............................................... $2.00 $4 .73 $ 1.84 $2.33 Average number shares outstanding: Basic.................................................................... Diluted............................................................... Earnings to fixed charges.................. Effective income tax rate.................. 30.7 81.1 6.6 3 7.57 84 . 1 84 . 6 10.3 39.17 90.3 90.8 5. 1 3 9.25 SI. 4 92.1 5.2 39.17 3.0 38. 9: Disclosure Page 121 Earnings to Fixed Charges Income before income taxes, extraordinary items and accounting change plus total interest cost (interest expense plus capitalized interest) and one-third of rent expense, divided by total interest cost plus one one-third of rent expense. Effective Income Tax Rate Provision (benefit) for income taxes divided by income !:== before income taxes, extraordinary items and accounting change. 89 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES Selected Financial Data--Financial Position, End ;f Tear Georgia-Pacific Corporation and Subsidiaries Disclosure Pago 122 utL/nuu r.-n.tru. i.unr - iv-t\ ruuig uuie. u.-.urjt Year Ended December 31, December 30, January 1, ------------------------------------------------- 2000 2000 19S3 13 1996 In millions, except per share amounts, ratios, and percentages Financial position, end of year: Current assets............................. Timber and timberlands ... . Property, plant and equipment, net.......................... Goodwill, net........................................ Other assets........................................... $ 6,288 1,293 11,802 8,985 2,514 $ 4,559 1, 189 7, 079 2,697 1,373 $ 2,645 5 :, ?: 6 $ 2,615 1, 210 1, 201 1,342 6,249 1, 677 919 c, 297 1, 599 937 6, 560 1,658 643 Total assets..................................... Current liabilities.................. Long-term debt................................ Senior deferrablenotes.... Other long-term liabilities..................................... Deferred income taxes............. $30, 882 $ 6,082 12,627 863 3,027 2,561 $16,897 $ 4,191 4, 621 863 1,811 1, 536 $12,700 $12,950 $12,818 $ 2,64? 4,125 - 5 3, 320 3, 13 - $ 2,490 4,371 1, 572 1,231 1, 548 1,199 1,285 1, 161 Total liabilities........................ $25,160 $13,022 $ 9, 576 $ 9, 480 $ 9,307 Shareholders' equity................ $ 5,722 $ 3,875 $ 3, 124 $ 3, 470 $ 3,511 Other statistical data: Property, plant and equipment investments.... $ 909 $ 723 $ 638 S 717 $ 1,059 Timber and timberland purchases................................................... 240 228 201 175 142 Cash paid for acquisitions................................ 6,142 1, 658 112 - 363 Total debt to capital, book basis..................................................... 56.9% 46.9% 48.6% 47.2% 50.4% Total debt to capital, market basis.................................. _ _ - 47.4% Current ratio............................................. 1.0 1.1 1.0 1.0 1. 1 Per share (through December 16, 1997): Market price: High....................................................... $108.56 $ 81.00 Low.......................................................... $ ":.50 $ 63.00 Period-end....................................... $ 55.13 $ 72.00 Book value.......................................... $ 38.52 Shares of stock outstanding at year-end..................................... 91.4 Dividends declared per share..................................................... S 2.00 $ 2.00 90 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES Disclosure Page 123 ULUAUi/1 r,lL// iL l_ C/A /' - ;iy-A Selected Financial Data--Financial Position, End of Year Georgia-Pacific Corporation--Georgia-Pacific Group Year Ended Decemcer December 30, January 1, ----------------------------------------------- 2000 2000 1998 19S~ 1996 In millions, except per share amounts, ratios, and percentages Financial position, end of yea r: Current assets................................ Timber contracts........................... Property, plant and equipment, net........................... Goodwill, net................................... Other assets..................................... Total assets................................... Current liabilities...................... Long-term debt................................... Senior deferrable notes............ Other long-term liabilities.. Deferred income taxes................. Total liabilities...................... S 6,262 83 11,784 8,985 2,159 $29,273 $ 5, 676 12,355 863 2, 647 2, 155 $23,696 $ 4,536 66 7,060 2,697 1,021 $15,380 $ 3,821 3, 983 863 1,803 1, 160 $11,630 $ 2, 64 0 s 2, -11 $ 2,611 ^3 -- * 58 6, 225 1, 677 918 ' n-- 1, 599 921 6, 535 1, 658 630 $1.1,329 y 1 _ --c. vC 1.1, 492 $ 2, 381 3, 395 1, 566 987 $ 2,698 3,057 1,546 959 $ 2,200 3, 340 1,282 987 $ 8, 329 s 8,260 $ 7,809 Parent's equity................................ $ 5,577 $ 3,750 $ 3, 209 $ 3,519 $ 3, 683 Other statistical data: Property, plant and equipment investments............. Timber contract purchases from third parties.................... Timber purchases from The Timber Company.............................. Cash paid for acquisitions.. Total debt to capital, book basis....................................................... Total debt to capital, market basis....................................................... Current ratio..................................... Per share*:. Market price: High......................................................... Low............................................................ Year-end............................................... Book value............................................. Shares of stock outstanding at year-end........................................ Dividends declared per share....................................................... $ 906 181 183 6, 142 57.9% 68.5% 1.1 $ 51.94 $ 19.31 $ 31 . 13 $ 24.31 224 .8 $ 0.50 $ 721 $ 632 $ 715 $ 1,055 150 142 131 94 222 1,658 333 350 315 112 - 363 44.9% 44.5% 43.1% 4 4.2% 40.9% 1.2 4 7.4% 1. 1 44.0* i.i 1.2 $ 54.13 $ 29.34 $ 50.75 $ 21.78 172.2 $ 0.50 $ 40.50 $ 13.69 $ 29.23 $ 18.55 $ 32.00 $ 29.50 3 3C. 33 $ 19.10 17 3.0 134.5 $ 0.50 * 1997 amounts are for the period from December 17, 1997 through December 31, 1997. 91 Disclosure Page 124 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES Selected Financial Data--Financial Position, End of Year Georgia-Pacific Corporation--The Timber Company Year Ended December 31, December 30, January 1, -------------------------------------------- 2000 2000 1996 1997 1996 In millions, except per share amounts, ratios, and percentages Financial position, end of year: Timber and timberlands................... Property, plant and equipment, net.................................................................. Investment in real estate held for development use........................ Note receivable..................................... Other assets............................................. $1,220 18 352 29 $1,127 19 350 25 $1,144 $1,130 $1,284 24 20 25 - 14 13 -- 67 4 Total assets.......................................... Debt.................................................................... Other liabilities.................................. Deferred income taxes........................ $1,619 $ 640 428 406 $1,521 $ 970 50 376 $1,174 $1,171 $1,326 $ 983 $ 971 $1,316 32 9 3 244 240 174 Total liabilities............................. $1,474 $1,396 $1,259 31,220 $1,498 Parent's equity....................................... $ 145 $ 125 $ (85! 3 (49) $ (172 Other statistical data: Property, plant and equipment investments............................................. Timber and timberland investments....t................................ Total debt to capital, book basis............................................................... Total debt to capital, market basis............................................................... Per share': Market price: High.................................................................. Low.................................................................... Year-end....................................................... Book value.................................................... Shares of stock outstanding at year-end....................................................... Dividends declared per share... $3 59 40.7% 21.0% $32.00 $20.75 $29.94 $1.81 80.2 $ 1.00 $ 2$ 6$ 2$ 4 78 59 44 48 65.6% 85.6 % 3 3.4% 99. 6; 32.2% 32.2% 31.6% - $27.19 $19.88 $24.63 $ 1.51 32 . 9 $ 1.00 $27.25 $17.2c $23.81 $(0.93; 325.38 522.50 322.69 S '0.53) P_ $ 1.00 92.6 * 1997 amounts are for the period from December 17, 1997 through December 31, 1997 . Book Value Per Common Share Disclosure' Page 125 Shareholders'/parent's equity divided by shares of common stock outstanding as of the end of the year. Total Debt to Capital, Book Basis Total debt divided by the sum of total debt, senior deferrable notes, deferred income taxes, net, other long-term liabilities and shareholders'/parent's equity as of the end of the year. Total sect includes bank overdrafts, commercial paper and short-term notes, current portion of long-term debt, (all of which are included "Current liabilities" , long-term debt and accounts receivable pledged. 92 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES Total Debt to Capital, Market Basis Total debt divided by the sum of total debt and the market vsl r of shareholders'/parent's equity as of the end of the year. Total Oitt includes bank overdrafts, commercial paper and short-term notes, current - ortion of long-term debt, (all of which are included in "Current iiabiliti " , long term debt and accounts receivable pledged. The market value :f shareholders1/parent's equity is the market price of common stcc . multiplied by the number of common stock shares outstanding. Current Ratio Current assets divided by current liabilities as of the end of the year. 93 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES Sales and Operating Profits by Operating Segment Georgia-Pacific Corporation and Subsidiaries 2000 1999 In millions, except pe rcentages Net sales !a) : Building products manufacturing Wood panels.......................... . Lumber........................................ Gypsum products................ Chemicals................................ Other.......................................... $ 1,119 1,065 903 461 56 5% $ 1,233 5 1,086 4 1, 189 2 445 102 Total manufacturing... 3,648 .16 4,055 Building products 1596 7% $ 1,095 6 "51 6 3 92 2 455 1 120 22 3, 513 1997 z* $ 6 3 1 981 831 885 482 68 2 5 3, 287 7 6 6 4 1 24 Disclosure Page 126 UL/AU1/1 /ViC,//'iL - /(/-A ruing uaie. u^^utUi distribution: Wood panels....................................................... Lumber.......................................... Other............................................. Total distribution.................... 2,115 1,473 723 -- 4,311 10 7 3 -- 20 2,506 1, 662 696 -- 4, 864 13 9 4 -- 26 2, 127 1,471 741 -- 4,339 15 11 5 -- J J. 1, 919 1, 639 860 -- 4,418 14 12 6 -- 32 2,008 1, 626 937 -- 4,571 15 12 7 -- 34 oroducts........................................................... Timber................................................................................... Containerboard and packaging; Containerboard..................... Packaging.................................. Total containerboard and packaaing..................... 7, 959 155 36 8, 919 199 48 *- 7, 8~ *z 56 1 7,715 126 56 1 7, 557 123 55 1 625 2, 020 3 9 2, 645 12 554 1, 892 3 10 2,446 13 544 1, 61-7 4 11 2, 161 ' c. 569 1,315 4 10 1,884 14 552 \t 479 4 '1 2 031 nu --c Bleached pulp and paper: Market duId............................. Bleached boar i..................... Paper............................................. Other............................................. Total manufacturing.... 981 50 1, 140 3 2, 174 4 - 5 " 9 759 59 1,349 3 2, 170 4 - 8 - 12 747 74 1, 624 3 2,449 1 12 13 886 91 1, 627 3 2, 607 6 12 - 18 776 113 1,639 6 2, 534 6 i 12 - 19 Paper distribution: Fine paper............................... Supply systems..................... Other............................................ 4,200 2,661 - 19 12 1,980 1,329 22 11 7 --- - --- --- Total paper distribution........................ 6, 861 31 3, 331 18 - -- -- Total bleached pulp and paper............................................................................... 9, 035 40 5, 501 30 2,448 18 2,607 18 2,534 19 Consumer products: Tissue............................................................................... Dixie................................................................................... Other................................................................................... Total consumer products................................................................ 1,876 77 482 9 - 2 1,194 - 356 6 - 2 1, 070 - 344 8 - 2 1,018 - 366 8 - 3 1, 005 - 375 7 - 3 2,435 11 1,550 8 1,414 10 1,384 11 1, 384 10 Corporate and other(b)................................................................ (11) (16) (101 - (9) (7) - Total net sales.............................. Operating profits: Building products......................... Timber............................................................................... Containerboard and packaging............................... Bleached pulp ar.d paper.......................................... Consumer products............. Corporate and other(c).................................. $22,218 100% $18,599 100% $13,990 100% $13,707 100% $13,622 100% ___ ___ $ 377 2 6% $ 1,202 52% $ 604 655 $ 319 46% $ j- 4 7 4 6 : 303 21 726 31 C 6 4 i 'i 437 62 -- 43 512 35 324 14 39 9 (23) (3) 110 1: 468 32 29 2 145 6 170 7 (59) 160 (6! -1- 1 3166 24 26 77 19 3 26 (238) (16! (251) (10) (224 ) '24 ) (202) (29) (234 ) '31! Disclosure Page 127 uluauj,-! c conr - /(/-a. rtung uate. Total operating profits.................................. $ 1,451 100% $ 2,316 100% $ 934 100% $ 700 100% $ 755 100% (a) Represents net sales to unaffiliated customers. (b) Represents the elimination of hunting lease income reflected in net sales for the timber segment and reflected as a reduction to ccst of sales on a consolidated basis. In addition, includes net sales from miscellaneous businesses. (c) Includes some miscellaneous businesses, certain goodwill amortization, unallocated corporate operating expenses and the elimination of profit on intersegment sales. 94 GEORGIA-PACIFIC CORPORATION AND SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 30, 2000, January 1, 2000 anc December 31, 1998 Description Balance at Charged to Charged to Beginning Costs and Other of Period Expenses Accounts Balance at End Deductions of Period In Millions Year ended December 30, 2000 Allowance for doubtful accounts..................................... $25 $28 $- $(19)** $34 Restructuring reserves.. 64 43 8**** 58) 57 Year ended January 1, 2000 Allowance for doubtful accounts..................................... $25 $5 $- S (5)** $25 Restructuring reserves.. 2 2 98*** (38) 64 Year ended December 31, 1998 Allowance for doubtful accounts..................................... $19 $17 $ 1* 3(12)** $25 Restructuring reserves.. 70 6?) 2 * Recoveries of accounts previously written off. ** Accounts written off. *** Reserves acquired **** Net amounts charged to goodwill 95 Disclosure Page 128 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III The information called for by Items 10, 11, 12 and 13, if any, will be contained in the Corporation's definitive Notice of 2001 Annual Meeting of Shareholders and Proxy Statement which the Corporation intenos t: file on or about March 31, 2001. Disclosure Page 129 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information with respect to directors and officers required by this Item set forth in the Corporation's Notice of 2001 Annual Meeting of Shareholders and Proxy Statement in the sections entitled "Nominees and Directors" and "Other Matters" are incorporated herein by this reference thereto. Executive Officers of the Registrant The executive officers of the Corporation are as follows: Name Date First Elected as Age an Officer Position cr Office A. D. Correii......................... 59 1988 Patricia A. Barn,. -d.......... 51 James E. Bostic, "r.......... 53 1998 1991 Donald L. Glass.................... 52 1982 Danny W. Huff......................... 50 1993 James F. Kelley.................... 59 Stephen E. Macadam............. 40 Ronald L. Paul...................... 57 1993 1998 1997 John F. Rasor......................... 57 1983 Lee M. Thomas......................... 56 David J. Paterson............... 46 Charles C. Tufanc............... 56 James E. Terrell.................. 51 1993 1994 1998 1989 Chairman, Chief Executive Ifficer, President and a Director Executive Vice President--Human Resources Executive Vice President--Environmental, Government Affairs and Communications Executive Vice President--Timber, President and Chief Executive Officer, The Timber Company Executive Vice President--?inance and Chief Financial Officer Executive Vice President and General Counsel Executive Vice Presider.t--Pulp and Paperboard Executive Vice President-Wood Products and Distribution Executive Vice President-Wood Procurement, Gypsum and Industrial Wood Products Executive Vice President--Consumer Products President--Paper President--Unisource Vice President and Controller Disclosure Page 130 Alston D. Correll has been Chief Executive Officer of Georgia-Pacific since May 1993, Chairman since December 1993 and President since May 1996. He served as Chief Operating Officer of the Corporation from August 1991 until May 1993, and President and Chief Executive Officer from May 1993 until December 1993. Mr. Correll was elected as a Director of the Corporation on May 5, 1992. Patricia A. Barnard has been Executive Vice President--Human Resources since January 2001. Prior to that time she served as Senior Vice ?resident--Human Resources from March 1999 until January 2001 and Vice Presider.r--Sompensation and Benefits from February 1998 until March 1999. Prior to that time, she served as Group Director--Human Resources, Paper & Chemicals from 1997 to 1998 and Group Director--Human Resources, Paper from 1995 until 1997. James E. Bostic, Jr. has been Executive Vice President--Environmental, Government Affairs and Communications since January 2001. Prior to that time, he served as Senior Vice President--Environmental, 96 Government Affairs and Communications from February 1995 until January 2001, Group Vice President--Pa;er from April 1992 until January 1995, Sroup Vice President--Butler Paper and Mail-Well from January 1992 to April 1992, and Vice President--Butler Paper and Mail-Well from January 1991 to January 1992. Donald L. Glass has been Executive Vice President--Timber ana President and Chief Executive Officer of The Timber Company since December 16, 1997. Mr. Glass served as Executive Vice President--Building Products from January 1997 to December 1997 and Senior Vice President--Building Products Manufacturing and Sales from 1991 until December 1996. Danny W. Huff has been Executive Vice President -- Finance and Chief Financial Officer since November 1, 1999. Prior to that time, he served as Vice President and Treasurer from February, 1996 to November, 1999 and Treasurer from October 23, 1993 to February 1, 1996. James F. Kelley has been Executive Vice President and General Counsel since August 2000. Prior to that time, he served as Senior Vice President--Law and General Counsel from December 1993 until August 2000. Stephen E. Macadam has been Executive Vice President--Pulp and Paperboard since December 2000. Prior to that time, he served as Executive Vice President--Containerboard and Packaging/Purchasing from August 2000 until December 2000 and Senior Vice President--Containerboard and Packaging from March 1998 until August 2000. Prior to that time, he worked at McKinsey & Co., Inc. . Ronald L. Paul has been Executive Vice President--Wood Products and Distribution since December 30, 1997. Prior to that time, he served as Executive Vice President--Wood Products from September 1997 until December 1997, Vice President--Structural Panels and Building Products Engineering from May 1996 until September 1997 and Vice President--Engineerir.g ar.d Technology-Building Products from May 1995 until May 1996. John F. Rasor has been Executive Vice President--Wood Procurement, Gypsum and Industrial Wood Products since December 16, 1997. Prior to that time, he served as Executive Vice President--Forest Resources from January 1997 to December 1997, Senior Vice President--Forest Resources from February 1995 until December 1996, Group Vice President--Forest Resources from May 1992 through January 1995, Group Vice ?resident--Timber from January 1992 to May 1992 and Vice President--Forest Resources from 1991 to January 1992. Lee M. Thomas has been Executive Vice President--Consumer Products since November 2000. Prior to that time, he served as Executive Vice President-- Disclosure Page 13 I Paper and Chemicals from December 1997 until November 2000, Executive Vice President--Paper from January 1997 until December 1997, Senior Vice President--Paper from February 1995 until December 1996, Senior Vice President--Environmental, Government Affairs and Communications from February 1994 through January 1995, and Senior Vice President--Environmental and Government Affairs from March 1993 through January 1994. David J. Paterson has been President--Paper since January 2001. Prior to that time, he served as Senior Vice President--Communicatior, Pacers from August 2000 until January 21, 2001 and Vice President-Sales and Marketing Pulp and Bleached Board from May 1994 until August 2000. Charles C. Tufano has been President--Unisource since January 2001. Prior to that time, he served as Senior Vice President-Paper Distribution from July 1999 until January 2001, Vice President--West, Distribution Division from February 1998 until July 1999 and Director-- Printing Papers, Communication Papers Division from 1995 until 1998. James E. Terrell was elected Vice President of the Corporation in January 1991 and has served as Controller since 1989. The Corporation's Board o~ Directors elects officers of the Corporation. The Chief Executive Officer has the authority to appoint one or more Vice Presidents to hold such office until the next annual organizational 97 meeting of the Board. The Chief Executive Officer also has the authority to approve the compensation of officers at the Vice President level. The Compensation Committee of the Board of Directors determines the compensation of all other officers of the Corporation, including officers who are also directors of the Corporation. There are no other arrangements or understandings between the respective officers and any other person pursuant to which such officers are elected. Disclosure Page 132 Ui. O'i l KJt. l /-.iiw/ric v_ (jt\r - hj-i\ ruing uaie. v-'-yjiut ITEM 11. EXECUTIVE COMPENSATION The executive compensation information required by this Item set forth in the Corporation's Notice of 2001 Annual Meeting of Shareholders and Proxy Statement in the sections entitled "Compensation Committee Report," "Summary Compensation Table," "Option and Performance Rights Grants in 1100" and "Agreements with Officers" is incorporated herein by reference mereto. Disclosure Page 133 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The security ownership information required by this Item set forth in the Corporation's Notice of 2001 Annual Meeting and Proxy Statement in the section entitled "Ownership of Common Stock of G-P" is incorporated herein by reference thereto. Disclosure Page 134 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information concerning certain relationships and related transactions required by this Item set forth in the Corporation's Notice of 2001 Annual Meeting and Proxy Statement in the section entitled "Other Matters" is incorporated herein by reference thereto. PART IV Disclosure Page 135 ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)The following documents are filed as a part of this Annual Report for Disclosure Page 136 the Corporation: (1) The Consolidated Financial Statements, Notes to Consolidated Financial Statements and the Report of Independent Public Accountants for Georgia-Pacific Corporation and subsidiaries dated January 26, 2001 are presented under Item 8 of this Form 10-K. (2)Financial Statement Schedules: Valuation and Qualifying Accounts of Georgia-Pacific Gorporation and subsidiaries and Georgia-Pacific Group for the years ended December 30, 2000, January 1, 2000 and December 31, 1998. Schedules other than that listed above are omitted because they are not required, are inapplicable or the information is otherwise shown in the Corporation's Consolidated Financial Statements or notes theroro. (3;Exhibits The Index to Exhibits appearing on pages 102 through 111 of this repc t is hereby incorporated herein by reference. (b)Reports on Form 8-K During the fourth quarter of 2000, the Corporation filed a report on Form 8 -K on October 19, 2000. Item 5. Other Events.--On October 18, 2000, the Georgia-Pacific Corporation (the "Company") issued a press release announcing the financial results of the Georgia--Pacific Group for the third quarter of 2000. 98 Disclosure Page 137 On October 18, 2000, the Company also issued a press release announcing the financial results of The Timber Company for the third quarter of 2000. Also during the fourth quarter of 2000, the Corporation filed a report on Form 3-K on November 15, 2000. Item 5. Regulation FD Disclosure. Also during the fourth quarter of 2000, the Corporation filed a report on Form 8-K on November 20, 2000. Item 5. Other Events.--On November 17, 2000, the Georgia-Pacific Corporation (the "Company") issued a press release confirming that it has executed agreements with a group of banks to finance'the acquisition of Fort James Corp. NYSE: FJ) pursuant to the previously announced merger agreement cetween the two companies. The financing agreements permitted Georgia-Pacific o borrow up to $9.15 billion. ' n November 20, 2000 the Company issued a press release nnouncing that there has been no change in its present or .oreseeable future liabilities from personal-injury claims related to exposure to asbestos-containing products it manufactured. Also during the fourth quarter of 2000, the Corporation filed a report on Form 8-K on November 22, 2000. Item 5. Other Events.--On November 21, 2000, the Georgia-Pacific Corporation (the "Company") issued a press release announcing that it will sell its away-from-home tissue business, including approximately 368,000 tons of tissue manufacturing capacity, associated converting facilities and the sales and marketing functions that support this business. In the same press release, the Company also announced it was extending its exchange offer for all outstanding shares of Fort James Corp. (NYSE: FJ) . Disclosure Page 138 Also during the fourth quarter of 2000, the Corporation filed a report on Form 8-K on November 22, 2000. Item 5. Other Events.--On November 22, 2000, the Georgia-Pacific Corporation (the "Company") issued a press release announcing that a federal court in the District of Columbia had signed an order which allowed Georgia-Pacific to complete its previously announced acquisition of Fort James Corp. In the same press release, the Company also announced that the exchange offer for all outstanding shares of Fort James expired at 6 p.m. Eastern time Wednesday, Nov. 22, 2000. Also during the fourth quarter of 2000, the Corporation filed a report on Form 8-K on November 27, 2000. Item 5. Other Events.--On November 24, 2000, the Georgia-Pacific Corporation (the "Company") issued a press release announcing that it had completed its exchange offer for ail outstanding shares of Fort James Corporation ("Fort James"). On November 27, 2000 th5 Company issued a press release announcing it has completed its acquisition of Fort James. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. 99 Disclosure Page 139 uL.unujst /nc//vc co/vr - iu-i\ r ittng ume. iuiluiui SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GEORGIA-PACIFIC CORPORATION (Registrant) /s/ A. D. Ccrrell By: (A. D. Correll, Chairman, Chief Executive Officer and President) Date: February 14, 2001 Pursuant to the requirements of the Securities Exchange Act if 1934, this report has been signed below by the following persons on behalf :f the registrant and in the capacities and on the dates indicated. Disclosure Page 140 GEORGIA RACIEIC CORP - 10-K Filing Date: 02/20/01 Signature Title Date As Officers or Directors of GEORGIA- PACIFIC CORPORATION /s/ A. D. Correll (A. D. Correll) Director, Chairman, Chief Executive Officer and President (Principal Executive Officer) /s/ Danny W. Huff (Danny W. Huff) Executive Vice PresidentFinance and Chief Financial Officer (Principal Financial Officer) /s/ James E. Terrell (James E. Terrell) Vice President and Controller (Principal Accounting Officer) /s/ James S. Balloun Director (James S. Balloun) /s/ Barbara L. Bowles Director (Barbara L. Bowles) /s/ Robert Carswell Director (Robert Carswell) /s/ Worley H. Clark, Jr. Director (Worley H. Clark, Jr.) /s/ Gary P. Coughlan Director (Gary P. Coughlan) February 14, 2001 February 14, 2001 February 14, 2001 February 15, 2001 February 15, 2001 February 14, 2001 February 14, 2001 February 14, 2001 100 Disclosure Page 141 Signature /s/ Jane Evans (Jane Evans) /s/ Donald V. Fites (Donald V. Fites) /s/ Harvey C. Fruehauf, Jr. (Harvey C. Fruehauf, Jr.) /s/ Richard V. Giordano (Richard V. Giordano) /s/ David R. Goode (David R. Goode) (M. Douglas Ivester) /s/ James P. Kelly (James P. Kelly) /s/ Louis W. Sullivan (Louis W. Sullivan) /s/ James B. Williams (James B. Williams) Title Director Director Director Director Director Director Director Director Director Date February 15, 2001 February io 2001 February 11, 2001 February 11, 2001 February 15, 2001 February , 2001 February 14, 2001 February 14, 2001 February 14, 2001 Disclosure Page 142