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Georgia-Pacific Corporation PLAINTIFF'S EXHIBIT GP-948 Sixty Years of Growth 1986 Annual Report SGP 0032736 ., 1986 SourcesofCash ! l!`Vi Vr't ('* ?f ^ i ; a j * S. Ir'J;. 'Vj'.'is'l* 1986 Uses ofCash " -V ' . t^r^x*i.;r,,Y V / jy. iijf. Contents .! (.ii^,fV^ L^.l~ '' 7 ' ;v-:"*--'*y /, : t?.lfiV(oX^!iCri.iif . - . '<: -y-'^ ?vt,ri'1'*'*V .-- '; < -'V'' Jrh'criYyctrriiUNijy^yyvy'i,- ' * . . ,'... 7\- r ' y.'Xyi] /AV^k^vs? ^ `.1 o'If*Iff Jjrif30Tf{fS*:'j|j'\I;*'*XS}1i;i t-T:tecj *y''-- ? y v / jl-uTK^rrofliY' - *\` ' . Hs'iy'/s'y.Nf I^iTi! *'^3ir*jrt*rritij " ./ I 6:ii>J ; "ycy iyy ci^yvsj'CyX1)1^^i:yyryvr^?f^yy' ^s:i i^yy. -* a vyyy :y .. = ; :yv- ,-. ' .y>'} yyYtiyyyiyyy^ ' 7 ;y', J ;. Yy1 / y' . ' '; ' ' yy, ".- ' v'oYjVrc{fel\.-;/.y'-?; y.-; `;y *Y -;. .''. ' -V ,->r. '>. '.yVs'! 'ytl vjfay v ypv Wi SGP 0032737 Highlights Georgia-Pacific Corporation and Subsidiaries (Dollar amounts, except per share, and .'hares ate nr millions) Net sales Income from continuing operations before extraordinary item Net income Per common share -- fully diluted Income from continuing operations before extraordinary item Net income Depreciation and depletion Cash provided by continuing operations Cash dividends paid Total assets at year end Return on capital employed1 Return on common equity1 Total debt-to-capital1 Cash dividends declared per share of common stock Shares of common stock outstanding at year end Number of common shareholders of record Number of employees 1 The method ofcalculating these amounts is described in the Financial Glossary presented (> page 20. 1986 $7,223 296 296 198.5 $6,716 207 187 2.64 2.64 339 575 97 5,114 10.4% 13.8% 26.3% $ .85 107 66,000 39,000 1.80 1.61 310 771 94 4,866 8.7% 10.2% 32.0% $ .80 103 74.000 39.000 Percent Change 8 43 58 47 64 9 (25) 3 5 6 4 (H) Net Sales (Billions ofdollars) 7.2 Income from Continuing Operations Before Extraordinary Item (Millions ofdollars) 296 SGP 0032738 Letter to Shareholders Georgia-Pacific Corporation and Subsidiaries Nineteen eighty-six was a year ofsolid performance for Georgia-Pacific. We invested to improve productivity and upgrade our product mix, to add value and reduce costs. We have improved profitability, and our financial position is strong. Most important, the wealth of our shareholders increased. Your shares appreciated, and your Board of Directors increased the quarterly dividend to 25 cents per share in the fourth quarter. Our net income rose to $296 million in 1986, 58 percent higher than in 1985. Sales reached $7.2 billion, compared with $6.7 billion in 1985. We capitalized on available resources, and improved profitability in an economic environment of low inflation and moderate growth. We also added value to our products and improved manufacturing efficiencies with investments in existing plants and mills. We think these investments will have higher rates of return than would investments in large acqui sitions or in building new facilities. We see ample opportunities ahead for growth in building products sales and profits. We expert single-family residential construction and the remodeling, repair and additions market to remain strong in 1987, but anticipate some decline in multi-family starts, partly because of tax reform. Weak pricing likely will continue to challenge the building products industry during 1987 because of overcapacity in lumber and plywood production. The 15 percent tax on Canadian softwood lumber exported to the United States will give Canadian producers a new cost base that will be helpful to U.S. producers. We will continue to achieve growth in our building products sector through internal investments and acquisitions that represent good pro duction and marketing fits for Georgia-Pacific. We will maintain our strategy ofintegrating backward from distribution, as we have in roofing and moulding products, for example. Pricing improved for most of our pulp and paper products during 1986 as a result ofdecreased inventories worldwide and the lower-valued U.S. dollar. Demand is strong for commodities such as market pulp and linerboard, as well as for higher-margin printing and writing papers. In the tissue sector, demand has improved slightly, but markets remain highly competitive. We expect continued strength in our major markets in 1987, with additional price improvements for pulp, linerboard and other grades. In pulp and paper we plan to concentrate on containerboard and packaging, printing and writing paper, and tissue -- areas where we think we can be a major factor in the market. As we maintain our ability to meet the needs of our external pulp markets, we also plan to upgrade the value of our pulp by integrating forward into new paper capacity. We anticipate continued growth during 1987 through both internal investments and acquisitions. Our capital investments in 1986 were $482 million. In 1987 we expect to invest approximately $600 million, excluding possible acqui sitions. We expect that we will be able to fund this capital program and pay our dividends without increasing debt. While there will be opportunities to expand our markets in the future, formidable challenges also will affect the way we do business. Not only are we operating in highly competitive businesses, but the fiscal and economic environment in the U.S. and abroad also presents challenges. In the past 10 years, there have been eight major tax code revisions and many other changes in law and regulation. American business needs a stable tax environment to plan for the kinds of investments our industry must make to be competitive in world markets. With enactment of the new tax law, American industry lost investment tax credits and accelerated depreciation rates, in exchange for the promise of lower taxes in the future. If this promise is not kept, the effect on business confidence and business investment will be dramatic and adverse. These challenges, however, do not dampen our optimism about G-P's ability to compete effectively. Our return on equity has risen from 1 percent in 1982 to almost 34 percent in 1986, providing good momentum for continued improvement. Our management structure and profit improvement programs are focused on achieving continued growth in returns to our shareholders. We are optimistic about our prospects for achieving the goal of consistent and superior returns on our shareholders' equity. Your Board recently announced the appointment of Ronald P. Hogan as executive vice president-operations. He has contributed substantially to the growth of our nationwide Distribution Division, and he will work directly with Robert A. Schumacher in managing Georgia-Pacific's operations. We know you join us in thanking all Georgia-Pacific employees for their fine contributions to our improved performance in 1986. T. Marshall Halm,Jr. Chairman and Chief Executive Officer Eebruaiy 13, 1987 SGP 0032740 Georgia-Pacific Corporation and Subsidiaries At Monticello, Mississippi, Georgia-Pacific recently rebuilt a linerboard machine, bringingproduction at the mill to 2,200 tons per day of strong, high-quality containerboardfor the corrugated box industry. (Left to right) Danny Martinez, senior vice president-pulp and paper manufactur ing; Ken Forehand, general manager and Karen Hanzlik, midwestern sales representative-containerboard, are three ofthe key employees making this mill one ofthe industry'sfinest. c "S5 *-5~ SGP 0032741 Georgia Harduvod Lum ber Company, a wholesaler o f lumber, isfounded by O u'cn R. Cheatham in Augusta, Georgia. 1927 * Pulp and Paper [mprosid prillin'1l,t* markets mntributid to recovery in CJuiigu-Puitir's pulp and paper sector in 1986, produi - ing sharply higher earnings and record salts of $2 i billion In 1984 United States industry was plagued-both at home and ahroad- b> inttnSL lompLtition hum lowcr-pruid foreign products In 1986, . howeser, most markets improved; demand bee ame stronger for com- inodttu s suih is market pulp and linirbo ird is will as tor bightr-margin printing and wnting papers. I owir t'tli tngc ntis t< r tin U S dollar wire 1 major Fumr in inpnwed m irkct minimum, but we llso iilmved important manufac turing iffu itw ns bi upgrading iml modernising nulls and equipment. \\i nduttJ production i osts h> mu. him tomirsiou, md iquipnitnt upgnJis, i ip1tallying on our is ail lblewsoun <*s to improve pur product mis witli more prplitableproducts. ', l.nuriuutJ ami (lontamen llibuildimt ont ot the bmrbmrd math ,nes at our Monticcllo, Missis sippi. limrhoard null, t nablid us to take advantage of 1986's excellent limrbmrd export market and improve product quality. When we ac quired tin null in 1984 it w ls producing ibout 1,600 tons a day Today itpnsdncis ibout 2 200 tons i da\ of Ingh-qinlity lintrboiri and 13 o ii of tin k w st prt'dut tuvi-t ost nulls in tht uiuntn Last year we btgan ingnieeiiiig studies to rebuild the other liner-' board mat him ar Monucello, w hw h would add another 400 tonspiT-d.iy oft aparity and enhatiee product quality. Wt h.-c lu m sutiissful during our quirtir-cintiiry in the. cor rugated om King businss, and w< know tin importanii ofour < oritaintr Division to tutun protitibility ^ proqrim ofmhnology irnpmsun nt. lor tins division will tnabk us to desilop mw sptcidn prodmts mil i iprosi produitisi^ Wt pLm to insist approxmntih Sa2 iriillu >i during 1987 to luv cr proiliution rosis turtlitr md to ComulSdnixitaet EiiAti%Mbil Pulp tmi Paper . fji- Our research and devel ipnicnc tu.hnu.al tenter near Atlanta,. Georgia, plays an importani ml in th^ goal of producing high-quality container products This center \ aluatcs pi rtormance* criteria of raw materials and new packaging cksiais ind allows us to enhance performance characterisucs ofpackatemu /ViMii'l' Jtu It ntiuf Pjptt- /i'i (IniM'di Out new p iptr iiiaihiue at l'ort Hudson, Louisiana, which began opiritionin April 19KC\ u now prodiuing top-qudity paper at due nti nr M ifi r< ms j>i r das 1 ht start-up ut this machine was one ofthe smoothest ivi r inJ we expect to increast our operating rate to 650 tons per d i\ h\ the end of l`H7 (.corgi i-Paulu now is established as a ma|or produu i ot printing and writing piptr, a position we plan to scnnurhui in the fiuiin I he profit improvement programs at Crussert, Arkansas, and Pilatka Unndi cko have low tad costs dr cm me alls ind greatly upgrade dom product mix. Valui ofthisi products lias risen from$350 per tun til appniMmanlv $900 ptr ton on the two C rosstit machines dter i a lit is 11\ nuv list expenditure ol npuil Qualify 1 ii/nt, Supitiiir PntJiiili I hough di matid \\ as up slighth the nssuc six tor ninamcd highly eompctili e luring I%(i a trend we expect to eeintiiiue into 19S"7 Our < 'W i \1r Hi# \ UP', ind othi r consumer branded produets remained competitive, ind. we plan to improve performance in this marktt as 'sell is in thi eommereial tissue sector which suppliis restluruits liospitils ind either iw is-from-homt eiistomirs 4n^i/ s ifi" the lust new piemium line of hath tissue in be intro duced in tlie L'liited States in more than a deeadu will improve* our position ri tissui markets '1 his product will m> orpor ite all thi qualitu s inc hiding si .(mess, needed tor pamium bath tissue We- haw nude- a commitment to softness and cjualitv to e-nsure* broad acceptance ot our produi t / Soff bich 'issue will lu manutaituns! it Bellingh cm, Washington ( rossett, Arkansis. I'alatha, Flonch, and IMittsburgh ^---- SGP 0032743 Georgia-Pacific Corporation and Subsidiaries At Port Hudson, Louisiana, one of the world's largest andfastest uncoated free-sheet paper machines started up in April 1986. Instrumental team members making this project a success are (left to right): Dave Dimling, vice president-printing paper division; Jerry Kincaid, production managerfine paper and Ron Benge, crew leader. 'O'fs- Os SGP 0032744 1939 Georgia-Pacific Corporation and Subsidiaries Bellingham, Washington, is one offour Georgia-Pacific mills that will produce ANGEL SOFT, the new premium bath tissue product that represents our commitment to softness and quality. Key Georgia-Pacific people in the ANGEL SOFT bath tissue intro duction are (left to right): Leroy Carlson-warehouse lead; Howard McDowell, manager-paper operations and Mike Wilson, vice presidentsales and marketing consumer and commercialpaper products. i -a ^ 5i QS' t" ul |8 s J t C?5 "Ia S "^o' * . I $ v5 .2 . 3 SGP 0032745 $: ,&gk$ We will replace the No 5 tissue machine at I'alatka with a t :ew twinwire in lrlunt, Lontinuiiig our piogram to modernize the null uul innm itsi fhiiin \ Tin. "licli 11c *\lmh a ill hi wider uul tistir linn the older equipment, is exptit, d to i otue on-stri un in tin. tall ot 1987. Anled in 1980 hy improved U S dollat exchange rates relative to key luropi m .lid \si in turntitles t .l orgi i-Pi. ificisporti d approximately 450/100 u ns ol m irkit pulp last ye ir This is (.corgia-I'anfie's largest export biisuii ss mil it n pi .. stnts ihout tw o-tlurds of (i-P s tot ll in uket (ieorgi i 1'nitic ilso is developing its export pot ntul for lintrboard, kntt p ip.r it il printing ltid w nluig grades Wirh lontinumg fivor ihle i nrrency exchange ratts. the outlook for pulp and paper exports Con Reductions Continue We h ist reduced sigmfie mtl> our freight ind tr importation costs. 1 luring 1`>S6 we reduced divisional transportation costs hy 5 percent,1 s rung ihnost ^4 million throngli i uimbination ot reduced freight ch trges md tin 1985 consulidauon of our oxcr-iln -rosi truck fleet. During 1`Hi> we sold tin Clu inn al Pack igmq Division, which produced sw miming pool chemicals and household and industrial ik ining supplies I hi silt, w is pirt of in ongoing Mriugv to focus on our eon forest products businesses Georgia-l'aufic is well-positioned to he a world Ie ider in pulp, paper ami pjpeiboaid marki ts Our stntcg\ is simple Wi will continue to suk supiiioi h'gli-n turn imistiumts -both mti rnilly-gtneritid jnd by lequisition--in the key pulp and paper groups. ' ' We are ctnouiagid by the positive directum ofour businesses in 19Mi ind i\pi it thesi positive trends to i ontiniie throughout 1987 I ml I mi n t-v II ll L rPit'iA'd r*. ? ll SGP 0032746 Building Products Georgia-Panfic's building products business continued to le.id the industry in 1986, posang record operating prefits of$500 million and sales of S4.9 billion These results, achieved m a period of low prices, attest to the strengdi of Georgia-Pacifii s posinon in building products markets, and we are optimistic about opportunities for continued I hi s'ri noth ol dt ui.md ior pro.lints u-t d m In me ni.pruvt i.kh.s r girul . tit ci onoirin i uii.Utior.s . onnuiics to ledui t our 1 p. intern nniuvs h.iumi,g \ki hiln-vt thii' v .11 b. linn iscd oppurrumtns tor mvv prod. tdcvt lopincnt lo'ih honu u rmrimduin tin u irs di id \\i ('ll udidiln stritigv nt integrating b nkvvard trenn our strong distribution netvvorl b\ punh ismg fiv. Midwisnrn hirdhordp] mis llusi pi uws tir with our eMstinjbusin. sms unite more- nunomm mu in to the iiidust-i d hardb nrd market Ilicv vv ill <i mill i mrc nroJiii is loi spm ills industral A| pin inons as well is toi gar mi dooi f amis mm (s, A ,[] pun ling m j |i1Ilmun ll)mj ] imiiruit, pn dint'ni it Lin i onvvav North t .irnliiii phut Oirpui Insi in l'Jhtujithru n.mil ling pi uu int a'llornuriikus . onrinu ir mi of our str mgs to immii nmrc luglnr-margm pro liu ts torvvh ih mi nistiibimonDivsinn'dititihisiniirKii Ui vvillnsuln rn.irkit'ng ivpirtise of the Distribution Division to ixpand this spe I'Jtv p-ndint lint thnuigliimci.nl growdi uni idditioml n ipiiMtion, Vii nid d v due to lutvei-gridi lu.nl (t atom 1 lollv H.ll Soutli t. irolini n.illK Hidinguimp.in'it to .lnmifntun htli.f puu J, [hist pinus iu popuhr with hull. Jirs md hi.iiiu.vvri. is tor i tan.tv othonu 'inptovi .] nt proje. rs is .veil i, vv th h,,iukrs tor u,, in n vv housing I in t inssC itv, I lurid i saw null lug it. in inut i. tnr'iig 8 s (. tern mg p inds from pond . v press in ibundam but uinLnitdn, d p,m, otourl kind i i nkr'usi flic in a prodtnt ik. populir link do t-v oursJt in .rkit is virtu dlv u ip. rvi.vis to aitn k h\ msens oil disiiMs it is n Lsonablv liglitvv. ighr audit is is iruanm isudu Humid L. Airmjtltni llxxcutnv Vm Pnudeni Pmdua SGP 0032747 Georgia-Pacific Corporation and Subsidiaries The Distribution Center at Atlanta, Georgia, is one of 141 centers, which have enabled Georgia-Pacific to estab lish a strong position in remodeling/ repair markets-- including the rapidly growing do-it-yourself(D1Y) segment. (Left to right) Ron Hogan, executive vice president-operations (formerly senior vice president-distribution), and Mike Parramore, branch manager, help make the Distribution Division a unique asset in Georgia-Pacific's building products group. 9 r- to SGP 0032748 1955 Georgia-Pacific Corporation and Subsidiaries Georgia-Pacificfurther strengthened its position in the structural panel industry with an oriented strand board plant at Grenada, Mississippi. The facility uses the industry's latest technology, and has a capacity of250 million squarefeet annually. Part of the Georgia-Pacific team that makes itgo are (left to right): Dave Mortensen, senior vice president-wood products manufacturing; SteveJackson, vice president-distribution division mar keting and advertising andJim Vanderhoof plant manager. 'I3IsJ | c ^ ^ aJC 5~ 5 "5E ig It jiff | 6. . o> . .s' S..5 I S Blip 11 .re 1 I i! I * p ss4 s (5 g .1* I t|itSk U^g ^-SS ^| *"9i .Sefc I :l r5_ c. * gE. ; . *IIS "g so &p SGP 0032749 ^jj We i onlinin d to ibuis on unpros mg produi tu/ity ind mi teasing jielJ Ironin' ' uui.ils Ii i lniol(><1 mno. Honshu n iMtd us to lti< reasi die r<eotr\ ot plvsood mietrhs is ninth as H ptnent within thepist dnadt I hi retou r\ mdstntei production it our lb Southern pm ph wood pi infs h Hi int ri os. 1 more m the p ist hsi .i m thm in \\i (ouuiiti^ to idd v lliu to sinii tuia pai.il prodiiiiton through miprmi.il teihn iloip ind tiling ni irk urn; support tcir existing slritll'll j]k llH lied lll'llt' s Wll\ f OtU-tllldl t ClLOr^ll-I'lLlt iStlltll pkwotid solium in 1irs wis higli-ntirgin spmilts products In 19sfi mi- in mut.ii mu d oiit^.md-a-hall runts as miii'h plywood, with spuiiliii's npns* i ntu' mails 5S jlimit ol prndii 'ion I his n i it is in sf emit i s l > o' onl\ pmhnbli hut it iko i vipli minis our piodmtioii ot oncntid slrmd bo.ird fOSll- .mil wain-hoard ( ustomer ie ^plani t ot this nonst-nitr pin. Is i Miunues to gro \ md our totil shni ot thi striutiinl puiil mi k.t is men Mrur We in in i in mg our consul ribh p< in m n ilit iighr-ti ot sjd lg pantl busm. ss bv luaiiufiCliirmg spa ultv iiini- .ind ten-toot pk wood sidmg panels. W't began producing this lungei sidmg at Russi Uviile, South <. . l >ii u n 19SS md * I'kd pro hitti m u t r isstrt \rl ins is n 1`iSh (i.urn -l'aiti now produ < sinon thiiihillotalUiitSou'luni piiK pmJst r h L n.tid Suits md we in tht on i urod leiruf t1 longer k'lgih pirn uoduet Wt li isi mm istd pmduLtu n it highi r ''rad j ilic lthoird to ilia i nil ri asi d demand in the mdustn il market C hit t Used prim inly in tilt iuhi i i msiiition d ind n inuta.tund hous-ng markets most orrhepuulu u l Ins n om I ouisvill i id Ia\ Inis' JV Mississippi pi mis is nos i mooth-lai i mdiistml },i ii" usi d h\ ill turmture mdusrrs I hnv plant. siippL-im.nl production ot'furrutiiie-gridi pirtiik ii r 1 it \ ii ini (jenrgii mlKiiss lkille South C iiolun 9 lo continue development of markets tor our prefinished panel products, wc created a Paneling Product Division, which will have responsibility for manufacturing, marketing and sales Tins new division will provide greater focus on the paneling business and better service to our customers. Emphasis on Export Markets In addition to being a leading U.S plywood exporter in 1986, we expanded efforts in export markets by shifting to production of premium-grade specialty lumber products at our El Dorado. Arkansas, mill. High-grade lumber made from soft-textured, old-growth Arkansas pine is now exported to European markets. The El Dorado null also makes products such as decorative beaded ceiling boards and tongue and groove flooring from Southern yellow pine Dnst pindiicts wen. mjiiut.uruud at th it mill 31* vtuis igo and ire regaining popul int\ among huildc i s sn king a tr iditional look 11k mill still in ikis i ommodirv products, but huaust of the uniqui n sources ic ,il ihli to it. 111 )orado is k, 11 sumd toi production of thev high-qu ilus high-return products t lur .\port poti null ini re isi d and wi khiiM d significant pmetr i- tinninbu I asteni mukcts whiri(koigit-Panhi aujiurid i Manon, North Carolina, fanlits when dried hardwood lunihtt piodmt piohtablc top-grade kiln- Gypsum Growth In thi 11imparts s (ispxiim Disi'inn. i onsiiiu non is iiu>Lr was on i niw 180 million-w]iiari.-toor mniid npaiitv ss illboard plant it Lis Vegas, Nes'ada. whi> h w ill sirvc Sourlii rn California mat kets 1 xpecti d to begin ptodii cion m late 1987, this phm will ruriasi our out ill gypsum market share to about 14 peri mi Our niwiM g*psum pioduit Dtin-C/riu " is now mamilacturcd it all nun w illboard plants, and sales are increasing This fitiLiglasscovered gypsum panel is superior to paper-faced panels because of its resistanci to run hen inJ wind Tlvkis to Dcth-Gb^ gvpsum Givrgia-Pacific Corporation and Subsidiaries Georgia-Pacific's gypsum plant at Brunswick, Georgia, produces wallboard andjoint compound along with our highly successful new product, DENS-GLASSm gypsum board. Part ofthe Georgia-Pacific gypsum team effort are (left to right): Horace Batts-warehouse diagrammer; Oscar Covington, plant manager and Glenn Wilson, senior vice president-- gypsum and roofing division. ~C3 S -38 -3 1 - Sfl : t^ s <3 ^11 SGP 0032752 S1.4 billion. Hudson. Sales reach expansion at Port G -P announces capacity9 1971 Georgia-Pacific Corporation and Subsidiaries Georgia-Pacific's roofing plant at Hampton, Georgia, near Atlanta, manufactures shingles atni rolled roofingfor the rapidly growing Southeast. Georgia-Pacific added roofing produc tion after establishitig these pwducts in its distribution system. (Left to right) John Klikus, plant manager; Ric Durand, general sales manager and Don Glass, vice president-roofing division, are some of the kq> people making this marketing-to-manufacturing transition a success. S -- 5 r\j -c |3. 3| a, ; 3J <0 1 <= ^ S S & 5. S 'Sc :S o i iMJ s=5 ll 1 5c Si 5 Its * 3 .h -c _S` JC~ a. 5 <0 -3 g -j a. C -H SGP 0032753 board* performance is a unique combination ofa gypsun i core, with a fiberglass mat on front and back to protect against the elements and m iiiitun struourd integrity f>nn f */n gypsum bo ini also is used fur appht uions not usually associated with gvpsum, such as commercial roofing ind stucco wall systems. We continued to uicrcasc our emphasis on fiberglass roofing, . which now represents about 60 percent ofGc.orgia-T^tific's roofing production Recently we introduced Summit*1 md KumnafUI, ntwsty lc l lmui ited m lute c tur d shingle s th it ireunside red the manufaLtuK'd-shingle- industry's answer to cedar ami wood shingles / iistnbutum -- t 'npatulleled Franchise G-P's leadership position in building products t ontiiiues to be supp orted by its lialiunwich Distribution Division, with 141 centers throughout die United States T hat division is a ready market for our manufacturing operarioris,.and enables ii&to tun plants and mills at or near capacity. This system dso is a powerful vehicle for establishingmarkets for new products that promise both high profitability and growth potential. One of the divisions strongest markets continues to be remodeling/ n pair- mi hiding die do-it-yourself (1 MY) scginc nt In late 1985 we for< He'd a Nitional Ac counts Sales Group, which markets our products to major home centers serving the IMY market Sales to this market men ased iimrc th in 20 percent ui 1986 and we expect sales to t on ^ hi die second qu irter of 1987we will begin a pilot program in Southern ( aliform i for distributing sp_c laity products, such as unfinished moulding ind millvorh metal and woud entrance doors uid gangc clours \Xc expect to open thrte such distribution centers next vear. liauJling products that our existing system docs not c'airy or products tint im\ require spetul luudiiug We uc furdicr reinforcing the position of our Distribution Divisioa as die industry's most eonsisu nc uid rch ibL source ofbiuldiiig products bv instilling i mulnmillion dollar < cimputer ne rwork 1 h's pro*;i un is expected to be completed in the 1987 third quartci, and will ensure fist, ir cur ite order processing md exci llcnt ciistomi r scrviec I lu system will pros 'tie improt.ctlcn.dit uid lnscntory control is well as ......................................... 1 I I . SGP 0032754 Forest Products Chemicals/Industrial Resins and Adhesives During 1986 Georgia-Pacific's Chemical Division strengthened its position as a leading supplier of resins, adhesives and chemicals, to the building products and pulp and paper industries. Hie division supplies products and technical services to many large users ofindustrial resins and major panel product manufacturers, in addition to meeting G-PV internal requirements. Last year, Georgia-Pacific's thermosetting resin group introduced a revolutionary plywood adhesive, for which a patent is pending. The new resin allows for increased moisture content in softwood plywood, reducing drying time, thereby improving productivity, and also ' resulting in a more stable panel. Production began at the company's 15th thermosetting resin facility ; at Beaver Creek, Michigan, at the end of 1986. That new facility, inT corporating the most sophisticated technology available, is the most advanced plaint ofits kind in the industry. - The paper chemicals business brought several new products to ' the marketplace during 1986. New products include ink-component resins used in printing designs on tissue and toweling, improved wet strength resins, and a product that reduces foaming during the papermaking process. Product development and long-range planning are undertaken at the division's technical center at Decatur, Georgia, which is undergoing a major expansion during 1987. To serve its markets better, the division also incorporates statistical process control within every business area. Outlook Positive We are enthusiastic about the performance of the building products segment during 1986, and are optimistic that our progress will con tinue in 1987. HmtdLAimgm Executive Wee President HudcnmtPmliuts ! Georgia-Pacific Corporation and Subsidiaries Georgia-Pacific's new Beaver Creek resin plant near Grayling, Michigan, began operation at the etui of 1986. The plant will manufacture adhesive and wet strength resins, strengthening the Chemical Division's position as a leading supplier to the building products and paper industries in the Midwest. Three key Chentical Division employees involved with this plant are (left to tight):Joe Newman, plant manager; Steve Setcra, sales matiagerGreat Lakes Region andJim Taylor, vice president-chemical division. SGP 0032756 Financial Contents Georgia-Pacific Corjuraiion and Subsidiaries Financial Glossary Financial Glossary Financial Review Management's Discussion and Analysis Responsibility for Financial Statements Independent Auditors' Report Statements of Income 20 Book valueper common share--common shareholders' 21 equity minus the unamortized discount on redeem 24 able preferred stock, divided by the number of 29 common shares outstanding (as of the end of 29 the year). 30 20 Statements of Changes in Financial Position 31 Current ratio -- total current assets divided by total Balance Sheets 32 current liabilities (as of the end of the year). Statements of Common Shareholders' Equity 33 Notes to Financial Statements Summary of Significant Accounting Policies Unusual Items Discontinued Operations 34 36 36 Effective income tax rate--provision for income taxes divided by income from continuing operations before income taxes. Extraordinary Item Retirement Plans Industry Segment Information Indebtedness Redeemable Preferred Stock Common Stock Commitments and Contingencies Income Taxes 36 Return on capital employed-- income from continuing 37 operations plus interest expense (net of taxes) and 38 deferred income tax expense, divided by capital 40 employed as of the beginning of the year. Capital 42 employed is calculated as total assets, excluding 43 net assets of discontinued operations, minus 44 noninterest-bearing current liabilities. 44 Acquisition 45 Litigation 45 Unaudited Selected Quarterly Financial Data 45 Five-year Selected Financial Data 46 Return on common equity--income from continuing operations divided by common shareholders' equity as of the beginning of the year. Sales and Operating Profits by Industry Segment Operating Statistics Return on sales (industry segments) -- segment operating 47 profits divided by sales to unaffiliated customers. 48 Total debt-to-capital-- total debt divided by the sum oftotal debt, deferred income taxes, other long-term liabilities, redeemable preferred stock and common shareholders' equity (as of the end of the year). SGP 0032757 Financial Review Georgia-Pacific Corporation and Subsidiaries Georgia-Pacific recognizes as its primary economic Return on Capital Employed . ' responsibility the need to improve the return to its . Return on capital employed is our most important shareholders. Our framework for establishing finan- measure of performance. Return as used here means cial goals, measuring operating performance, making .: profits after actual taxes paid but before financing ' . investment decisions and compensating manage- ` charges. It is calculated by adjusting income from - . . ment has been designed to make us more efficient - : continuing operations to exclude interest expense 21 ; . at allocating and managing capital. Shareholder value (net oftaxes) and deferred income tax expense. Total ' . is enhanced only when the return generated on the : capital employed, measured as of the beginning of r capital we employ is greater than our cost of capital. . the year, is defined as total assets, occluding net assets While this principle represents our primary financial - ofdiscontinued- operations, minus noninterest- goal, we remain more concerned about long-term - bearing current liabilities.'- . performance than performance in any single year. Our long-term objective in focusing on this ... - . ratio is to generate returns in excess of our cost of 'r Environment. - . "capital and' thereby add to the wealth ofour share- 'Jf' . Operatirigjresults.improved in,19.86 for^^.*^-i^&holderSi.GedreiavPacificfs incentive compensation ~ Georgia-Paane and many orner forest products , programbases awards onretum on capital employed, v - -j. v. companies. Pulp and paper'markets improved from '* --wh1Li-c-ht; acts to align qurmariagers' ec~o--no--m'i-c interests " theirtiepfessed levels of 1985 as the U.S. dollar .with those of oiir shareholders. . - I ' ,i '. ' -, (lowered in value relative to foreign currencies and * i.; ' * worldwide inventories declined. Lower interest;?;vyist 11.7% ."j; rates resulted in increased housing construction arid Return on Capita] Employed *v' 10.4% " conditions. Further improyeriients are expected;-! in 1987.: : . .. ; Georgia-Pacific's common stock price increased * to $37.00 per share at the end of1986 from $26.50 at i 8.7% 1986; which could discourage near-term acquisition ':! be opportunities to acquire attractive properties; - ' , ' For Georgia-Pacific, the question will continue . \ to be whether or not the properties can be acquired . : Y -t-,:*' , - - >. " . ' "V'1 Y', 4.2%. ' 2S% . ' - paid for properties require that the purchaser add considerable value if returns commensurate with risks are to be earned for the shareholder. ` .. ; ' 'f :. . ... 82 83 84 85 86 SGP 0032758 Georgia-Pacific Corporation and Subsidiaries During the last five years we have gained on this long-term objective. Georgia-Pacific's return on capital employed was 10.4 percent in 1986, still below our cost of capital but significantly improved from : 1982 when our return on capital employed was only j 2.5 percent: Over this period of time, we completed . a majorprogram ofdivestin'g underperforming assets as well as assets unrelated to core forest products - businesses. The cash generated from these divesti tures enabled us to reduce debt as well as make sub stantial capital investments to reduce manufacturing costs and upgrade product mix. Georgia-Pacific's. This cash-generating capacity was used to finance a substantial portion of Georgia-Pacific's growth. From 1982 through 1986, cash provided by opera tions accounted for 79.1 percent of Georgia-Pacific's total cash sources. During that same period, oper ating cash flows were supplemented with $643 million of cash proceeds from asset sales and liqui dation ofinvestments, including the divestitures of the company's Chemical Packaging Division in 1986, its oil and gas subsidiary in 1985 and its commodity chemicals subsidiary in 1984. improved returns are also attributable to external : andpwpfand paper markets:* Five-year Sources and Uses , ` ofCash/1982-86 (Millions) '; Gash Flow:i ", - Vrr-.^ i Performaiice objectives for; operating nianagersi<j 75%.; / .working capital more efficiently; These incentives;/ ./reward improvements in oish'flpyK^ftpm operatiofe.-js'iy.?' / enabling us to make needecfcapital in^i3neht^;'!t%-^l->^* \ Sources ofCash Continuing " Operations / . Discontinued / Operations Prior to Sale Total from Operations $2,682 139 2,821 : >r Georgia-Pacific^ continuing operations Asset Sales and Liquidation of Investments Other 643 100 Cash^Provided by Continuing Operations vs. Income from . Continuing Operations (Millions ofdollars)_ Cash Provided by .f Continuing.Operations Income from Continuing ' 1 Operations/ ...... .....vX../. Q. 7?K ,// 509- .. - v."1 460' 575- v% s%>/ 20% . S3,564 Uses ofCash . Capital Expenditures $2,229 Net Repayments of Debt and Preferred Stock 702 Dividend Payments 472 Litigation Settlement and Other 111 Cash on Hand 50 S3,564 367 296 253 207 75 20 82 83 84 85 ' 86 SGP 0032759 ly V.*. 4,' V ''"A" V A* .-.' -'i` vj.;" -..' : ,,: '' Georgia-Pacific Corporation and Subsidiaries .-' Capital Investments V" : ;' /H-'j:.'.' Capital expenditures of approximately $600 ... V From 1982 through 1986, Geoi^a-^cificspratK^/.iVai-n^pn-'^prpjecfed f6r.i98.7fabsent'any major! .% y **' '; -V:; more than $2.2 billion on capital projects! including. ;>;, acq'uisirionsLWe expect to finance this program with -A r ' ; -'"'more than $1.9 billion for property,'plant and equip- . int^M^rgm^tedlfimdsr.dphsistent^wiAthe " ; ' merit and! $319 million fortirnber and tirnberiands:! ' , ' patterrf offecefit'years; die majority;of that amount.-- , _ - Recent investments in property, plant arid equipment .> is^dxpectedtd, Bei invested in pulp, and paper. ;AA; 23 havebeieri concentrated in upgrading arid modern-- ' '~'r. K- " ' " * ' - lzirig qiir'prilp arid paper segment 1 Capital Structure - v ; !? Capi^etpenditures are categorized as defensive, % We^elievet^al managing Georgia-Panfic's capital V .' those Georgia-Pacific must make to stay in business,''j s^c&ttq'vW^jiffs^^ff^-^^^ent'range'oftotal v ' - j A- and as high return, those that arejustified on the bisis " delSftolrapii^^^^tS^^'compaifyXcpst of.!' i '. . v''oftheifjeturn. Although some defensive expend!- capifid'cqmpeBtivqw^b'eiuuring'access to most > t tures have positive returns, they, are not undertaken -..;,, i;; miorVapi^maurketegTBis access will provide the v :-v;i i 4primarily;for that reason. Our ability, to make highly needed"flexibility.'to fake advaritaWofinternal and*-- >e-sy A \ . f return investments will determine to a great extent +i,cj,ve,x~tre,rnal1 i:nsvS*eaJsWtme'!*n*t*opp&ortunities as they.arise; We: > %W5~-: :- %a f^_cA^Aig*mi^aJp? UiaaAfitit^AP^'bnkm< <j^hr^tAmimprnormvwe rr/e>tfiu1 mrn oamn \ O >J ^ ca*alac<uilIaa t*-ea taoi-ayI-'/dJ neitb't^?^ 1 Ui tAtn I Hdoebbtt/- IS?-. : 4/,' "few-.- M'-. A/! i*Ss.'y', /-ba -S% -ST;;jf/ >S S r.';, f_ i, * * ^.t % , !' fy i - S-J s-/f; .S ls,_ .Property; / Equipment ' ... 28%'' r, Building Products J 618- ]' 165;'ttu - . *... .. :..' .5;.. ,v,3. .*. -r ,--.s .' ' ' . ,Corporate,;:'; .' . v .. '- &Otherl! '' ' ; /; .:. ` - 1,910; r t\ Timbcrand:;.:2.''8-:yy- S TimbcrUrKls ' .;i :b,319. 3fJ-;$2,229 i. Because ofits central importance toSur per^fqrmance,iwe try to be rigorous in die discipline.! > 37 4%`lVv * 357% ' V : 263% i'y/? ri-V!:' generated'over the life ofthe investment We define f>7;5 free.cash flow as operating profits after taxes paid,' : :>S : ' .y-:v. plus noncash charges such as depredation, minus ' . jS any new investment required. Our.definition of >-j\J? ' -.-.*r- - -b - ;.-S;,riew investment includes working capital require- '= - i.-;-. as capital expenditures! The process: ; - ; S:;. V. :-S;';'is desigried.to ensure that projects presented as. v;;!;.-2.._' , * . , S'.defensive are necessary and that internal discounted-. ;. .- -/ ,!;,'t-'; 82 . 83 84 85 ` A ' iA' y dash flow returns reflect reasonable expectations;: ;*> '..'-'v--:: ' Post-completion audits are performed on all major v!.,. fotal debt-fo-capital has been reducecftb 26.3 ' . ; - - . ' ;high return projects, both internal projects and . . . ' percent from 42.1 percent since the end of 1982. ' y - ac<luisit`ons> to substantiate the achievement of . During that tjme, total debt has been reduced to ^ . ;. .* targeted rates of return. '4 y. ' ; SL2 billion from $1.9 billion. 86 SGP 0032760 Management's Discussion and Analysis Georgia-Pacific Corporation and Subsidiaries Dividends We recognize the importance ofdividends in addition to stock performance as part of the total return to Georgia-Pacific's shareholders. As reflected in the chart, quarterly dividends were reduced to 15 cents per share late in 1982 in response to depressed earn ings levels over several years. Consistent with pur . guideline of paying approximately one-third of -. sustainable earnings, the quarterly dividend rate was increased to 20 cents per share in mid-1984 and again to 25 cents per share in late 1986 as Georgia-Pacific's profitability improved.; ' . '-I., .''I'?.* Dividends Declared ' per Common Share r r (Amounts in dollars) v. .85.80 10- ' .60.. m-: : . The amount of future dividends will be determined by capital needs and other cash requirements and by , the prospective returns oh incremental capital retained in the business. Our objective is to maximize ) total returns to shareholders over the long term: i Liquidity and Capital Resources Cash provided by continuing operations amounted to $575 million in 1986 and $771 million in 1985. The 1985 amount includes $150 million of cash generated through successful efforts in reducing inventories and receivables in response to depressed business conditions. A normal build-up ofinven tories and receivables occurred as conditions improved in 1986, requiring the use of $121 million of cash. Cash flow from continuing operations, supplemented with $92 million proceeds from liquidation of investments and $79 million proceeds from sales of assets, was sufficient to fund $482 ' million ofcapital expenditures, reduce outstanding debt and preferred stock by a net $160 million and pay $97 million in dividends. Effective in the 1986 fpurth quarter, the Board of Directors voted to increase the quarterly dividend on common stock "to 25 cents (from 20 cents) per share." ; ' ; Considerable progress was made in reducing and restructuring outstanding debt and preferred stock during 1986: ' -- $150`million of 9'/*% sinking fund debentures due:March 15; 2016 were issued at par, . --$24 million of 12% notes due at various dates begirirung in 2006 were retired,-.' - -- $5 O milhon ofredeemable preferred stock was purchased, V ' -- $65 million of 145/s% notes due April 15,1987 were retired,- -- $100 million of 12V*% sinking fund debentures due March 1, 2013 were called for redemption or purchased in open market transactions, -- $150 million of 10.10% notes due June 15,1990 were redeemed, - . ? -- $14 million ofzero coupon debentures duejune 15, 1986 were retired, and -- $87 million of 5%% convertible subordinated de bentures due April 1,1996 were called for redemp tion. By the redemption date, 2,790,000 shares of common stock had been issued upon conversion of $86 million of debentures at $30.87 per share, and $1 million cash had been paid for debentures that were redeemed. SGP 0032761 Georgia-Pacific Corporation and Subsidiaries At the end of 1986, Georgia-Pacific's total debt-to-capital had been reduced to 26.3 percent from its 1985 year-end level of32.0 percent. The Corporation has been authorized by its Board of Directors to purchase common stock in the open market or in privately negotiated transactions in order to maintain total debt-to-capital within a target range, currently 30 to 35 percent. This target range should provide flexibility for both internal and external investment opportunities as they arise. At December 31,1986, the Corporation had $250 million ofdebt securities registered for sale with the Securities and Exchange Commission under a shelfregistration statement. This financing source will enable the Corporation to react quickly to acquisition opportunities and to favorable market conditions for restructuring existing debt. The Corporation's existing bank lines of credit totaled $700 million at December 31,1986, ofwhich approximately $275 million was being used to support commercial paper borrowings and other short-term instruments. These agreements establish unsecured lines ofcredit of$385 million until May 1, 1989 and $315 million until May 1,1988. These committed lines of credit, together with other available financing sources and Georgia-Pacific's capacity to generate funds from operations, are adequate to finance growth and to meet operating and liquidity needs for the foreseeable future. - Working capital amounted to $583 million and $660 million, respectively, at December 31,1986 and December 31,1985. The current ratio, defined as total current assets divided by total current liabil ities, was 1.7 to 1 at December 31,1986 and 2.0 to 1 at December 31,1985. Georgia-Pacific's capital expenditures totaled $482 million in 1986 and $642 million in 1985. The 1986 figure includes investments in property, plant and equipment of $426 million ($390 million at existing facilities plus $36 million of acquisitions) and $56 million of timber and timberlands acquisi tions. Capital expenditures of approximately $600 million are projected for 1987. Approximately 44 percent of total capital expenditures in 1986 were in the pulp and paper segment. A major project to upgrade production from market pulp to white paper at our Port Hudson, Louisiana facility was completed in April. Major projects are now underway to rebuild a tissue machine at our Palatka, Florida facility and to expand and modernize four disposable diaper facilities acquired in 1985. Both projects should be completed in late 1987. The building products segment accounted for approximately 40 percent of total capital expendi tures in 1986. This includes the acquisition of a hardboard manufacturing company with five oper ating facilities located in Minnesota, Wisconsin and Arkansas, and the acquisitions of three moulding manufacturing plants located in California. In June, a major expansion was completed at our Crossett, Arkansas plywood facility. Construction of a new thermosetting resins plant in Beaver Creek, Michi gan was completed in December. Construction of a new gypsum wallboard plant near LasVegas, Nevada is expected to be completed in late 1987. In the 1986 fourth quarter, the Corporation received cash proceeds of $92 million from liquida tion of portions of its investment in Georgia Gulf Corporation, purchaser of the Corporation's com modity chemicals subsidiary in 1984. A $33 million pre-tax gain was recorded from this liquidation, including $17 million from the sale ofapproximately 969,000 warrants. The Corporation retained a $16 million investment in preferred stock and warrants exercisable for approximately 1,831,000 shares of common stock. SGP 0032762 GangM-Am/ir CorponKibn <tnrf .SwfaKfotrier. . j'*-, . ^V- 26, : .:'- InJuly 1986, the Corporation completed the sales ofits Chemical Packaging Division assets to two unrelated parties in separate transactions. These sales generated cash proceeds of approximately.: ., . $43 million. \ ;\'.7'TT.-yy 7 - of a condemnation proceeding with the Federal - . .. government, the Corporation received approxi-; -- mately $14 million in cash. A $10 million extraor dinary gain, net ofrelated income taxes of$4 million, had been recorded upon entry of the judgment . in 1985. ' i In February 1986, the Corporation sold its-i ;.. i!7/^.Geor^^Pacific'P'lMH^Ii|^u^Sni^^^Me'.'-t 1986 Compared with 1985 Georgia-Pacific's consolidated net sales of$7.2 billion in 1986 were 7.5 percent higher than the 1985 level of $6.7 billion. Income from continuing operations increased 43.0 percent to $296 million in 1986 ($2.69 per share on a primary basis) from $207 million ($1.83 per share) in 1985. A $30 million loss from discontinued operations, which was partially offset by a $10 million extraordinary gain from settlement of a condemnation suit, lowered 1985 net income to $187 million ($1.64 per share).. Return on common equity, calculated as income ; from continuing operations divided by common ?^fiar^hqlders' equity as of the beginning of the year, '.T> principal asset was an'Spandable polysBi'rehg {slant ; ' .. improved to.13.8 percent in 1986 from 10.2 percent ' : located in Painesville, Ohio. TWs completed our _ ' ..Tin 1985sA`<Ki'V-:-y!.'--.;f.^' - commodity chemicals.and oil and'ga's,f which were ,, 'C .*, discontinued in 1984.: : < ~ Return on Common Equity vjyy.T Under the Tax ReforinAct of 1986 (the Act)/ 7 > ,./* 1---1 > T: the Federal tax rate on ordinary income wiU'dethne ' -, > from.46 percent in .1986 to.40 percent md98| and..- , - i , jy-34'percent in 1988. TTie rate at whicn capital gains'` <** ,** % are; taxed; however; will1increase front28' percent in>~ yTV'^' 7 1986 to 34 percent in 1987. Certain other provisions of the Act repealed ^ei^s^entjaxjqj^di^ ^ien= 12.6% 13.8% 10.2% 31,1985jand, after pecanbinr inventory capitalization'rulesj I^gtKen'depredable lives'arid establish a new altefnative minimum tax^ rule changes are expected to more than offset benefits: 7,'ipwer tax rates on ordinary income:-In the future^-'. ... we anticipate higher effective income taxjates, par-7 ; ticularly in 1987 as the new tax rates are phased in. ' - -. . Although the initial cost of future capital invest- /- ments will increase without the investment tax credit, - T `. lower ordinary tax rates on incomcp generated by . .T * 7 Ti 7 increase. Consequently, we do riot foresee a'sig; ` nificant impact on future capital investments, v * 3.8% 1.0% 82 83 84- 85- 86 SGP 0032763 Georgia-Pacific Corporation and Subsidiaries Effective January 1,1986, the Corporation adopted Statement of Financial Accounting Stan dards No. 87, "Employers' Accounting for Pensions". This change in accounting principle increased income from continuing operations approximately $11 million in 1986. Also effective January 1,1986, a new timber capitalization policy was adopted and applied retroactively, which had the cumulative effect of increasing 1986 income from continuing operations approximately $8 million. Income from continuing operations also in cludes a $33 million pre-tax gain from liquidation of investments in 1986 and a $19 million pre-tax gain on the sale of certain Oregon timberlands in 1985. These gains are classified as "Unusual items" in the accompanying financial statements and excluded from segment operating results. The impact of the new tax law reduced 1986 income from continuing operations approximately $17 million through repealing the investment tax credit, although some credits were allowed in 1986 under transition rules. These lost investment tax credits were recorded in the 1986 fourth quarter and were the primary reason for a 39.0 percent effective income tax rate for the year, compared to 33.0 percent in 1985. Future provisions for taxes currently payable are expected to increase under the new tax law, particularly in 1987 as the higher capital gains tax rate and the full impact of lost investment tax credits are realized. Timing differences arising in future years will result in lower provisions for deferred taxes because of lower statutory tax rates on ordi nary income. Under existing generally accepted accounting principles, deferred taxes provided prior to 1987 will not be adjusted for the new lower tax rates until the related income or expense item enters into taxable income. Given the present accounting rules and our expectation of continued investment in capital assets, it is unlikely that the effect of lower tax rates on existing deferred tax balances will sig nificantly affect future operating results. However, ifthe liability method ofaccounting for income taxes were to be adopted, as is currently proposed by the Financial Accounting Standards Board, existing deferred tax balances would be reduced. The remaining discussion refers to the "Selected Industry Segment Data" table. The building products segment reported sales of $4.9 billion in 1986, up 8.6 percent from $4.5 billion in 1985. Operating profits of $500 million in 1986 included an $11 million pre-tax reduction of expense due to the adoption of a new timber capitalization policy. Excluding this adjustment, operating profits increased to $489 million in 1986 from $391 million in 1985, as the return on sales improved to 10.1 percent from 8.7 percent. Increased volume and reduced manufacturing costs were the major reasons for this segment's improved results. Average prices for plywood and lumber in 1986 were comparable to 1985 levels, while gypsum, roofing and thermosetting resins prices were lower on aver age in 1986 than in 1985. For 1987, we anticipate little change in our building products markets, with continued highly competitive prices for lumber and structural panels. Selected Industry Segment Data Year ended December 3J 19S6 1985 1984 Trade sales Building products Pulp and paper Other operations $4,853 2,281 89 $7,223 $4,470 2,134 112 $6,716 $4,452 2,111 119 $6,682 Operating profits Building products Pulp and paper Other operations Genera] corporate Interest expense Unusual items Income taxes $ 500 146 35 681 (91) (138) 33 (189) $ 391 29 35 455 (33) (132) 19 (102) $ 379 202 20 601 (68) (156) 19 (143) Income from continuing operations $ 296 $ 207- $ 253 Sales in the pulp and paper segment reached $2.3 billion in 1986, 6.9 percent higher than the 1985 level of $2.1 billion. Operating profits rose to $146 million in 1986 from the 1985 level of $29 million, as the return on sales improved to 6.4 percent from 1.4 percent. The improved results in 1986 are due primarily to decreased inventories worldwide and the lower valued U.S. dollar, as well as timely up grading and modernization of mills and equipment. SGP 0032764 Georgia-Pacific Corporation and Subsidiaries Results in the prior year were hampered by lost production time due to labor problems and several major equipment conversion projects. Average prices for pulp, bnerboard, kraft paper and commercial tissue were higher in 1986 than in 1985. Prices for printing papers, corrugated boxes and multiwall packaging also strengthened during 1986, particu larly late in the year, although average prices for the year were lower than in 1985. We expect continued improvement in most ofour pulp and paper markets in 1987, especially commodity grades such as pulp, linerboard and uncoated freesheet paper. General corporate charges increased to $91 million in 1986 from $33 million in 1985. This increase relates primarily to higher compensation expense for stock options due to stock price increases as well as losses from early retirements ofhigh interest rate debt in 1986. Total interest costs decreased to $147 million in 1986 from $162 million in 1985 as a result ofreduced debt levels and lower interest rates. Interest expense of $138 million in 1986 was higher than the 1985 level of $132 million, due to less interest being capitalized on construction projects in 1986. 1985 Compared with 1984 Georgia-Pacific's consolidated net sales were $6.7 billion for both 1985 and 1984. Income from con tinuing operations decreased to $207 million ($1.83 per share on a primary basis) in 1985 from $253 million ($2.28 per share) in 1984. A $30 million loss from discontinued operations, which was par tially offset by a $10 million extraordinary gain from settlement of a condemnation suit, lowered 1985 net income to $187 million ($1.64 per share). A $134 million loss from discontinued operations in 1984 lowered net income in that year to $119 million (97 cents per share). The results of continuing operations include a $ 19 million pre-tax gain on the sale ofcertain Oregon timberlands in 1985 and a $19 million pre-tax gain on the sale of the Corporation's former headquarters building in Portland, Oregon in 1984. These gains are classified as "Unusual items" in the accompany ing financial statements and excluded from segment operating results. The remaining discussion refers to the "Selected Industry Segment Data" table. Sales in the building products segment were $4.5 billion for both 1985 and 1984. Operating profits increased to $391 million in 1985 from $379 million in 1984, as the return on sales improved to 8.7 percent from 8.5 percent. The improved results were achieved despite lower average prices for lumber and plywood sheathing in 1985. Competition from low-cost Canadian lumber imports and excess industry capacity in plywood sheathing markets held prices below levels historically experienced with similar levels of demand. Reductions in Georgia-Pacific's fiber and conversion costs and strong gypsum markets helped offset the effects of these pricing conditions. Gypsum operations were this segment's most profitable in 1985, although average prices for the year were slightly lower than in 1984. The pulp and paper segment reported a 1.1 per cent sales increase to $2.1 billion in 1985, reflecting a full-year contribution from the bnerboard, kraft paper and corrugated container operations obtained through an acquisition in mid-1984. Operating profits declined sharply in 1985 to $29 milhon from $202 milhon in 1984, as the return on sales fell to 1.4 percent from 9.6 percent. A strong U.S. dollar and excess worldwide pulp capacity made U.S. products less competitive overseas and caused an accumulation of domestic inventories, resulting in lower prices for a number of this segment's major products. Average prices for pulp, linerboard, kraft paper and printing papers were all below 1984 average price levels. Tissue was the only major product for which average prices improved in 1985 as compared to 1984. The 1985 pulp and paper results were also affected by lost production time caused by a strike at our Crossett, Arkansas pulp and paper mill during most of the third quarter and by major equipment conversion projects at several mills, particularly in the fourth quarter. A $12 milhon I operating loss was reported in the 1985 fourth ) quarter on sales which were 23 percent below the | fourth quarter of 1984. ; General corporate charges decreased to $33 million from $68 milhon in 1984. Much of this reduction is attributable to interest and dividend income on the debentures and preferred stock obtained from the sale of a commodity chemicals subsidiary in December 1984. Interest expense declined to $132 milhon in 1985 from $156 milhon in 1984. This reduction is primarily attributable to increased capitalization of interest as a result of the large capital expenditures program in 1985. Total interest costs of $162 milhon in 1985 were shghtly lower than the 1984 level of $167 milhon. For a discussion of "Income Taxes", see Note 11 SGP 0032765 Responsibility for Financial Statements Georgia-Pacific Corporation and Subsidiaries Independent Auditors' Report The financial statements on the following pages, To the Shareholders and Board of Directors of which consolidate the accounts of Georgia-Pacific Georgia-Pacific Corporation: Corporation and its subsidiaries, have been prepared in conformity with generally accepted account We have examined the balance sheets of ing principles. Georgia-Pacific Corporation (a Georgia corporation) Management of Georgia-Pacific Corporation and subsidiaries as of December 31,1986 and 1985 19 is responsible for the accurate and objective prep and the related statements of income, common aration of the consolidated financial statements. shareholders' equity and changes in financial posi Accordingly, the Corporation maintains a system of tion for each of the three years in the period ended policies, procedures and controls which is designed December 31,1986. Our examinations were made to provide reasonable assurance that assets are safe in accordance with generally accepted auditing guarded and that accounting records are reliable. standards and, accordingly, included such tests Management believes that the proper internal con of the accounting records and such other auditing trols are in place and that the system is adequate procedures as we considered necessary in the and effective in safeguarding assets and providing circumstances. reliable accounting records. In our opinion, the financial statements referred An independent evaluation of the system is to above present fairly the financial position of performed by the Corporation's qualified internal Georgia-Pacific Corporation and subsidiaries as audit staffin order to confirm that the system is of December 31,1986 and 1985 and the results of adequate and operating effectively. As indicated in their operations and the changes in their financial the Independent Auditors' Report, Arthur Andersen position for each of the three years in the period & Co. performs a separate independent examination ended December 31,1986, in conformity with of the Corporation's consolidated financial state generally accepted accounting principles which, ments for the purpose of determining that the except for the changes (with which we concur) statements are presented fairly in accordance with in the method of accounting for pensions described generally accepted accounting principles applied in Note 5 and the method of accounting for refor on a consistent basis. Arthur Andersen & Co. is estation costs described in Note 1, were applied appointed by the Board of Directors and meets on a consistent basis. regularly with the Audit Committee of the Board. The Audit Committee consists of three outside directors who review the work of the Corporation's @LnXAt*AJ ico. internal auditors and independent public accountants and approve fees paid for audit and non-audit services. Atlanta, Georgia February 13,1987 The independent public accountants and internal audit staffhave full and free access to the Audit Committee. James C Van Meter Executive Vice President and ChiefFinancial Officer T. Marshall Hahn,Jr. Chairman and ChiefExecutive Officer February 13, 1987 SGP 0032766 Statements of Income Georgia-Pacific Corporation and Subsidiaries (Millions, except per share amounts) Net sales Costs and expenses Cost of sales Selling, general and administrative Depreciation and depletion Interest Income from continuing operations before unusual items. income taxes and extraordinary item Unusual items Income from continuing operations before income taxes and extraordinary item Provision for income taxes Income from continuing operations before extraordinary item Discontinued operations: Operating income, net of taxes (Loss) on disposal, net of taxes (Loss) from discontinued operations Income before extraordinary item Settlement of condemnation suit, net of taxes Net income Per common share--primary Income from continuing operations before extraordinary item (Loss) from discontinued operations Income before extraordinary item Settlement of condemnation suit Net income Per common share--fully diluted Income from continuing operations before extraordinary item (Loss) from discontinued operations Income before extraordinary item Settlement of condemnation suit Net income The accompanying notes are an integral part ofthesefinancial statements. Year ended December 31 1986 1985 $7,223 $6,716 5,783 511 339 138 6,771 5,553 431 310 132 6,426 452 290 33 19 485 309 189 102 296 207 -- - -- 296 - $ 296 00 -- (30) (30) 177 10 1 1984 $6,682 5,441 426 282 156 6,305 377 19 396 143 253 26 (160) (134) 119 - $ 119 1 $ 2.69 - 2.69 - $ 2.69 $ 1.83 (.29) 1.54 .10 $ 1.64 $ 2.28 (1.31) .97 - $ .97 $ 2.64 - 2.64 - $ 2.64 $ 1.80 (.28) 1.52 .09 $ 1.61 $ 2.24 (1.27) .97 - $ .97 SGP 0032767 ft j , \ 31 ft |; 1 it i f fx i ,% 1 1 ill f 1 r ft i ir 1 1 i 8 fi Statements of Changes in Financial Position Georgia-Pacific Corporation and Subsidiaries (Millions) Cash provided by (used for) continuing operations Income from continuing operations before extraordinary item Items in income not affecting cash Depreciation Depletion Deferred income taxes Gain on sales of assets Gain on liquidation ofinvestments Other Cash provided by (used for) working capital Receivables Inventories Prepaid expenses Accounts payable and accrued liabilities Cash provided by continuing operations Cash provided by discontinued operations Cash provided by (used for) extraordinary item Settlement of condemnation suit, net of taxes Items in condemnation settlement not affecting cash Cash received from condemnation settlement Cash provided by extraordinary item Cash provided by (used for) financing activities Repayments of long-term debt Additions to long-term debt Net increase in bank overdrafts Net (decrease) in commercial paper and other short-term notes Preferred stock purchase offer Common stock issued from conversion of debentures Debentures converted into common stock Cash (used for) financing activities Cash provided by (used for) investment activities Capital expenditures Property, plant and equipment Timber and timberlands Proceeds from sales of assets Proceeds from liquidation ofinvestments Other Cash (used for) investment activities Cash dividends paid Increase (decrease) in cash Balance at beginning of year Balance at end of year The accompanying notes are an integral part ofthesefinancial statements. Year ended December 31 1986 1985 1984 $296 316 23 87 (30) (33) 7 666 (61) (60) (15) 45 (91) 575 11 -- -- 14 14 (661) 476 79 (4) (50) 86 (86) (160) (426) (56) (482) 79 92 (14) (325) (97) 18 62 $ 80 $207 270 40 84 -- -- 35 636 86 64 (9) (6) 135 771 117 10 (10) -- (481) 358 -- (6) (40) -- (169) (619) (23) (642) 32 -- 11 (599) (94) 26 36 $ 62 $253 247 35 90 -- -- 8 633 (86) (61) 2 21 (124) 509 291 -- -- -- (375) 312 -- -- (32) -- -- (95) (575) (135) (710) 62 -- 22 (626) (86) (?) 43 $ 36 SGP 0032768 Balance Sheets Georgia-Pacific Corporation and Subsidiaries (Millions, except shares and per share amounts) Assets Current assets Cash Receivables, less allowances of $21 and $19 Inventories Prepaid expenses Timber and timberlands, net Property, plant and equipment Land and improvements, buildings, machinery and equipment, at cost Accumulated depreciation Net assets ofdiscontinued operations Other assets 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 Accrued interest Other current liabilities Long-term debt, excluding current portion Deferred income taxes Other long-term liabilities Commitments and contingencies Redeemable preferred stock Adjustable rate convertible preferred stock, without par value; authorized 10,000,000 shares (involuntary liquidating value $39.00 per share) Common shareholders' equity Common stock, par value $.80; authorized 150,000,000 shares; 107,987,000 and 104,368,000 shares issued Additional paid-in capital Retained earnings Less --Common stock held in treasury, at cost; 639,000 and 1,143,000 shares Accumulated translation adjustments The accompanying notes are an integral part ofthesefinancial statements. December 31 1986 1983 $ 80 618 681 41 1,420 844 5,052 (2,361) 2,691 -- 159 $5,114 $ 62 569 634 26 1,291 804 4,741 (2,135) 2,606 11 154 $4,866 $ 79 100 134 295 87 23 119 837 893 695 124 - 113 $104 41 276 73 38 99 631 1,257 606 69 156 86 1,101 1,304 (19) (20) 2,452 $5,114 83 1,004 1,114 (35) (19) 2,147 $4,866 SGP 0032769 Statements of Common Shareholders' Equity Georgia-Pacific Corporation and Subsidiaries (Millions, except shares) Common Stock Common Stock Shares, Issued Shares, Treasury 103,344,000 771,000 104,115,000 253,000 104,368,000 829,000 2,790,000 107,987,000 1,829,000 (240,000) Balance at December 31,1983 Net income Cash dividends declared Common stock Preferred stock Common stock issued Stock option plans Employee stock purchase plan Translation adjustments Other 1,589,000 (446,000) Balance at December 31,1984 Net income Cash dividends declared Common stock Preferred stock Common stock issued Stock option plans Employee stock purchase plan Translation adjustments Other 1,143,000 (504,000) Balance at December 31,1985 Net income Cash dividends declared Common stock Preferred stock Common stock issued Stock option plans Employee stock purchase plan Conversion of debentures Other 639,000 Balance at December 31,1986 The accompanying notes are an integral part ofthesefinancial statements. Total Common Stock Additional Paid-in Capital Retained Earnings $2,013 119 $83 $ 989 $1,001 - -- 119 Treasury Stock Accumulated Translation Adjustments $(57) $ (3) -- (72) -- (13) -- _ (72) -- (13) -- -- -- 6 12 (24) (6) 2,035 187 -- (2) -- 12 8 ------ - - (6) - 83 999 1,029 -- -- 187 (49) -- - (24) - (27) -- (82) (11) 11 5 8 (6) 2,147 296 -- -- (82) -- -- (11) _ _ (3) --5 ----_ - - (6) 83 1,004 1,114 - - 296 -- -- 14 _ (35) -- _ -- - 8 (19) -- (89) (8) 14 14 86 (8) $2,452 -- -- (89) -- -- (8) _-- 1 13 2 84 -- (2) (7) $86 $1,101 $1,304 -- -- 16 $(19) -- -- - (1) $(20) SGP 0032770 Notes to Financial Statements Georgia-Pacific Corporation and Subsidiaries " - Note 1. Summary ofSignificant Accounting Policies Principles of Consolidation..' ....;; The consolidated financial statements include the accounts of Georgia-Pacific Corporation andj ./ The average number of shares used in the income per common share computations for 1986,1985 and 1984, respectively, were 104,782,000; 103,432,000 and 102,293,000 for primary and 107,504,000; 106,550,000 and 105,336,000 for fully diluted. company balances and transactions are eliminated.;' ' in consolidation. V .' v '.O. Income Per Common Share. f-f ' . , Income per common share is computed;based on:, income applicable to common stock (after preferred Inventory Valuation. Inventories are valued at the lower of average cost or market. Inventory costs include costs ofmaterials, labor and plant overhead. The major classes of inventories were as follows: December 31 , weighted.average numberof common shares out-- - ; (Millions},.r; r--- 1986. 1985 ; ; standing:.The computetoonofp per.- 'common share assumes: (l)'cohyersiqri'of the re|.'-; ' r ^: the effect is dilutive; and (2j^issuance'of common;''J' t.........*..._ j. 'f. ' ^ . `.V t, c- 11' 7su ascoc------ Inventories at lower of average . cost of market . . Raw materials .' , Finished goods / ; : { .-- 'v ... Supplies 1 o f*. 00 $186 517,;..;;. $189. ;. 477 - 73' .739 7j,fat the.average market pnc&.Ihaddi'ti6hvjitlcom- __ _ putatjon of fully diluted jnebmepehconuriori.share LIFO reserve /' a .-?s ' ...7 ; . ' 7-.: 7.:- : ' (99) $681 . (105) $634 ' assumes: (1) treasury buyback for dilutive stock' * , c|dfhffirdrsl6ck piirch^liliflif^f^ena^^ **' ' > * TfS-' ` ("*9$doUar value P?l . ^bmarfet price, ifhigher thin the ayeMgemarket pnee, v method ofinventory valuation is utilized for the and (2) conversion of tKe^5 V4% convertible sub-t * ordinated debentures into common shares, when'.' -/the effect is dilutive '2 '-V " .. | M .v-i Fully Diluted Income per Common Share (Amounts in dollars) i Income from continuing. operations before. %< extraordinary items and accounting change -J* , >; kiiimv* r " 'Vj V t --$ " Wrtoness. ' 2.64 V- re"presented'approximately 55% and 52%, respec- W 2 24 C*' b 1986 and 1985. ' ,.r m Effective January 1, 1985, the Corporation - - - s#*? realigned its LIFO inventory pools to correspond iff . to natural business units rather than divisional' J-M' 1.8b product groups. Management believes this pooling change minimizes the impact ofprice level changes > on inventor valuations, thereby achieving a better , matching of costs and revenues. The effect of this 7 was not'material;: iff 54 .02- #. ~ . 82 . 83: 84 85 86 ' SGP 0032771 Georgia-Pacific Corporation and Subsidiaries Property, Plant and Equipment. The Corporation defers net operating costs on new ' Property, plant and equipment are recorded at cost. construction projects during the start-up phase and Lease obligations for which the Corporation assumes . -. amortizes the deferral over five years. The amounts substantially all the property rights and risks of . deferred, which were not material in 1986,1985 ownership are capitalized. Replacements of major . and 1984, are included in the property, plant and units ofproperty are capitalized and the replaced; equipment accounts. <-- 35 . properties retired. Maintenance, repairs and replace- . ' 205 t 186 ments of minor units of property are charged to ' - V "-y-i't'XS expense as incurred.. V interest Capitalized'^.- \>r Be major classes of property, plant and equip- .: .' mcnt were as follows: ' ': -'iV- ':,s (Millions) \ \ . December 3 i 19S6 . , 1985 - -. Interest Expense Capitalized Interest Land and improvements S 123 . 5-: 120- Machinery.'and'equipment, Gonstruction in progress .. av-.-' - .-4,318 62 3,955; - iv r i 155 , * \- ;y U-' i ** v 167 : 162 156 162 157 132 147 138 55,052 . $4,741' t t"* i * i , i jj?*, iUt-S,- A y & ", ,r J., ; f k j t ri .* :f/ - - . .. . .. . V!:,- ,v-j _____ - .'are;; land improvements -- 5% tO;7%; buildings,-- r *4 4 ^ -s^t -v. :3% jo 5%; and machine^and;equipment,-- 5y^j.tO' , i 20%: Effective January 1,1985, certain manufactur- '' ' ' ' ' ' ' ' ' ' -of- ^ `'production method ofdepreciation were'retroactively. " *3 HT* Vf* ^-4 * V ^ '* " with the Corporation's other operations:,The effect;; < v\, y, ` ? 30 19 I 11' of this change on the accompanying financial - 1 , %-x* 'Cbf 82' .. 83 . 84- 85.'-`86 >: statementswas not material.--;. . -f . 1 t Y'rSf- :-y :'.P)h`7 rJ^'y No gain or loss is recognized on normal r ,Timber1 qnd^mberlqnds.'i ' .. property dispositions; property cost is credited to : . the property accounts and charged to, the accumu-JC- lated'depreciation accounts and any proceeds are ;V; ; The Corporation 'depletes its investment in timber over the total fiber that will be available during the '. estimated"growthcycle. Timber carrying costs are - . credited-jlio^the accumulated-depreffltion-accounfsij^a&^'eacbensedrMlihbimdi Effective January 1,1986J the"; ;.;When, there'are abnormal dispositions ofproperty,; V ; Corporation chang;ed its Accounting for timber costs . the cost and related depreciation amounts are ; ; to capitalize;certain reforestation costs previously: removed from the accounts and any gain or loss expensed in order to achieve a better matching ' is reflected in income.. , ` ', ... ' of these costs, with the revenues realized from the The Corporation capitalizes interest on projects ;v . ; eventual harvesting ofthe timber. This capitalization where construction takes considerable time and : i > entails major expenditures. Such interest is' charged . tO '' ' - ' ' '- J . - amortized over the approximate life of the related v assets in order to properly match expenses with . revenues resulting from the facilities. Interest ' ` capitalized and expensed was as follows:-. * i ' , -* pqlicy was applied retroactively and had the cumu- . ; lative effect ofincreasihg.1986 net income approxi- ;,mately $8 millidh; The new capitalization policy' i' i is riot expected, to materiallv affect depletion expense in future periods. - v . Reclassifications:'' ' . fi'r ; (Millions), - . Year ended December 31 . 1986- 1985 1984 Certain amounts have been reclassified in 1985 and - 1984 to conform with the 1986 presentation. , - : `Total interest costs v ; Interest costs capitalized $147'. (9) $162 (30) $167 - (11) ; Interest expense $138 $132 ; $156. SGP 0032772 Georgia-Pacific Corporation and Subsidiaries Note 2. Unusual Items The Corporation realized certain gains during the last three years which are considered to be unusual items: (Millions) Liquidation of investments Sale of timberlands Sale of Portland office building Year ended December 31 1986 $33 -- 1985 $19 1984 $- -- , 19 $33 $19 $19 In the 1986 fourth quarter, the Corporation received cash proceeds of $92 million from liquidation of portions ofits investment in Georgia Gulf Corpo ration, purchaser of the Corporation's commodity chemicals subsidiary in 1984 (Note 3). A $33 million pre-tax gain was recorder from this liquidation, including $17 million from the sale ofapproximately 969,000 warrants. The Corporation retained a $16 million investment in preferred stock and war rants exercisable for approximately 1,831,000 shares of common stock. Neither the preferred stock, the remaining warrants, nor the underlying common stock are registered securities, and therefore may not currently be offered for sale to the public. The Corporation has an agreement with an unrelated third party to sell or exchange approxi mately 134,000 acres of Oregon timberlands from time to time over a three-year period ending April 1, 1988. A pre-tax gain of $19 million was recorded in 1985 from the sale of a portion of the timberlands under this agreement. The Corporation's former headquarters building in Portland, Oregon, owned by GA-MET, ajoint venture in which the Corporation has a 50% owner ship interest, was sold in 1984. The Corporation recorded a pre-tax gain of $19 million from this transaction. Note 3. Discontinued Operations The Corporation has disposed of certain lines of business, including all ofits commodity chemicals and oil and gas operations. These dispositions were completed in the first quarter of 1986 with the sale ofits Georgia-Pacific Plastics, Inc. subsidiary, whose principal asset was an expandable polystyrene plant in Painesville, Ohio, for $13 million in cash. In September 1985, the Corporation sold its Exchange Oil & Gas Corporation subsidiary (Exchange). After adjusting for cash received from Exchange prior to the sale, net cash proceeds were approximately $136 million at closing. Also during 1985, the Corporation sold its Polymer, Inc. sub sidiary, whose principal asset was a color concentrate plant in Farmingdale, New York, for $8 million in cash. In December 1984, the Corporation sold its commodity chemicals subsidiary, Georgia-Pacific Chemicals, Inc., to the executive group managing that business. Under the terms of the agreement, the Corporation received $192 million in cash plus debt, preferred stock and warrants which had an estimated value of $70 million. The Corporation initially estimated a $160 million loss on disposal of discontinued operations, net of related income tax benefits of $137 million, which was recorded in the fourth quarter of 1984. This estimate was revised in the 1985 third quarter, at which time an additional $30 million loss, net of related income tax benefits of $14 million, was recorded. Prior to the decision to dispose of these operations, operating income of $26 million, net ofincome taxes of $14 million, had been recorded in 1984 on net sales of $446 million. Cash provided by discontinued operations consisted of the following: (Millions) Cash provided by (used for): Operating income (loss), net of taxes, noncash items and changes in working capital Capital expenditures prior to sale Proceeds from sale of assets Year ended December 31 1986 1985 1984 $(2) _ 13 $11 $(13) (14) 144 $117 $130 (31) 192 $291 Note 4. Extraordinary Item In November 1986, pursuant to a court-approved settlement of a condemnation proceeding filed in 1975 against the Federal government, the Corpo ration received approximately $14 million in cash. A $10 million extraordinary gain, net of related income taxes of $4 million, had been recorded in 1985 upon entry of the judgment. SGP 0032773 Georgia-Pacific Corporation and Subsidiaries Note 5. Retirement Plans before income taxes in 1986, principally due to Defined Benefit Pension Plans. amortization of the initial excess of plan assets over Most of the Corporation's employees participate in the projected benefit obligation over estimated noncontributory defined benefit pension plans. remaining service periods ranging from 10 to 17 These include plans which are administered solely years. Net income increased approximately $11 by the Corporation, plans which are administered million as a result of this change. 37 jointly by the Corporation and other employers or The table below sets forth the funded status of labor unions, and union-administered multiemployer the solely and jointly administered plans and the plans. The Corporation's funding policy for solely amounts recognized in the accompanying Balance administered plans is consistent with the applicable Sheets. The weighted average discount rates and requirements of Federal law. Contributions to rates ofincrease in future compensation levels used jointly administered and multiemployer plans are in determining the projected benefit obligation were generally based on fixed hourly rates as set forth 8.0% and 6.0% at November 30,1986 and 9.0% and in negotiated labor contracts. 6.0% at November 30,1985. The expected long Benefits under the majority of plans for hourly term rate ofreturn on plan assets used in determining employees (including multiemployer plans) are net periodic pension cost in 1986 was 7.5%. primarily related to years ofservice. The Corporation Plan assets consist principally ofcommon stocks, has separate plans for salaried employees and officers bonds, mortgage securities, guaranteed investment under which benefits are primarily related to earn contracts, cash equivalents and real estate. At ings and years of service. The officers' plan is not December 31,1986, $9 million of current prepaid funded since it is nonqualified for Federal income pension cost was included in prepaid expenses, with tax purposes. the remaining $13 million of noncurrent prepaid Effective January 1,1986, the Corporation pension cost included in other assets. The unfunded adopted Statement of Financial Accounting Stan accrued pension costs of $ 11 million and $ 10 million, dards No. 87, "Employers' Accounting for Pensions" respectively, at December 31, 1986 and 1985, were (SFAS 87). This change in accounting principle re included in other long-term liabilities. duced pension expense by approximately $22 million (Millions) Accumulated benefit obligation at November 30 Vested portion Nonvested portion Effect of projected future compensation levels Projected benefit obligation at November 30 Plan assets at fair value at November 30 Plan assets in excess of (less than) projected benefit obligation Contributions made in December Unrecognized net loss Unrecognized prior service cost Unrecognized net (asset) obligation from initial application of SFAS 87 Prepaid (accrued) pension cost at December 31 Year ended December 31,1986 Plans Having Assets in Excess oj Accumulated Benefits Plan Having Accumulated Benefits in Excess ofAssets Year ended December 31, 1985 Plans Having Assets in Excess of Accumulated Benefits Plans Having Accumulated Benefits in Excess ofAssets $303 29 332 40 372 497 125 5 10 2 (120) $ 22 S 13 2 15 3 18 4 (14) -- 2 - 1 $(11) $225 20 245 29 274 402 128 2 - (130) $- $ ii i 12 2 14 3 (11) - 1 $(10) SGP 0032774 Georgia-Pacific Corporation and Subsidiaries Pension expense included the following components currently retired employees and to amortize the in 1986:; ; ' ' actuarially determined cost of active employees' retirement benefits over their estimated remaining (Millions)' ` - ' service period. The Corporation previously ex .Net periodic pension cost for solely and '' jointly administered pension plahs-.-^ ' ... Service cost ofbenefits earned'. * ~; {1 : -' r" Interest cost on projected benefit ' '< obligation ' '. 1 . Actual return on plan assetsV v" ! ? - Net amortization and deferral ;-Vi ` $22 26 (79) 38: pensed these benefits as paid. Management believes this change results in a better matching of the costs ofretiree benefits with the periods benefited from employee service. The effect of the change on the accompanying financial statements was not material. g i Contributions to multiemployer 7- Note 6. Industry Segment Information The Corporation's primary operations are reported ' pension plans 4- in two industry segments: (1) Building products, $1 i'rffi?' i which includes"the manufacture and distribution of -k|| 5, k'.!- structural panels (plywood, particleboard, oriented ".jf}' Ifto solely strand boardj waferboard, etc.), lumber, gypsum, am t~J3l 'f `k.....P...r.i.o. r tcT_^ ............... S,. pohcwwas*to' expense its arihu^pehsio^Mhtribu--' ? ti.onsi The total recognized1 for-defined < > roofing;.formaldehyde and thermosetting resins; itpaper; which includes the manu- s (hherboard', lcraft' paper, corrugated boxes, etc.), k||t benefit pehsibnplans was $35 million injl?85 and f printing arid fine papers, tissue, market pulp and - $26:ihillion in 1984: C'fjfV 3$;V pulpjnill by-product chemicals; Certain industry segment information for the Dejined^&htribution Plan. 1986 is presented on the fol- The Corporation also sponsors a Savings and Capital" '!V lpwirig pagp- The Corporation's sales to foreign -- TM. .it >,% ^marltetsTepresehted less than 10% of total sales '-if e.WA . salaried employees with additional income1 upbn - to unaffihat'ed'customers in each of those years. No .;. JIf rehrementoTne Corporation, makes annual contn-i sihglplmstomer'accdurited for'moire than 10% of $100,000 ofeach participant's'annuaircompensatipn, v irig tHat pendd.' -- . as defined;-The Corporatioh also matches 50% voluntary before-tax contributions up to a'maxir -. V r mum matching contribution of3% ofa participant's;..'- : "compensation. At November 30,1986, appfox4;rk Assets by industry Segment iim^^^^f^OO^employees weredi>^^^aS^^ate^^p/^^^"/^,,^^i'f' in the Savings Plan, which had net assets ofo kf'? - d ; 1 -v;, i k V'' - - approximately $260 million. . V," - j PulP&PaPcr ' ;;>J-rThe cost of the Savings Plan was $15 million. / . ..Other-; in 1986' and $13 million in 1985. In 1984, (he. :- Corporation contributed $5 miliiPn.to its former ; V'V;k; ' : Stock Bonus Plan, which was amended and restated r . ;.;k? . -iif as the Savings Plan effectiveJanuary 1,1985'. v ' v ' Anhual tbhtnbutions to the former StockBpnusl^r ' J;V!'V. Plan were limited based on the availability of thek .. Corporation's profits. ; Ar: a: ;;" j. -' - ' '.`."k :. 5.ilH 4.9 4.8 4.9 1.6 4.7 15 1.6 15 - Af ` 'fi- 2.2.? 1.6 2.0 2.2 1.6- . -.'v'1 ; 5l Retiree Health Care and Life Insurance Benejits.-. y''.- The Corporation also provides certain health care; . . and hfe insurance benefits to eligible retired em-' ployees: EffectiveJanuary 1, 1985, the Corporation' * changed its method of accounting for these benefits. to accrue the full actuarially determined cost for ` ' ... >; ''.`.T k .' 1.71.6: 15 1.2 1.1 SGP 0032775 82 83 84 85 86 Georgia-Pacific Corporation and Subsidiaries (Millions) Year ended December 31,1986 Building products Pulp and paper Other operations Eliminations and adjustments Intersegment sales Timber and timberlands Unusual items (Note 2) General corporate Interest expense Income taxes lotal Sales to Unaffiliated Customers Intersegment Sales $4,853 2,281 89 7,223 -- - - $7,223 $235 77 29 341 (341) - " - $- Total Revenues Operating Profits (Losses) Depreciation and Depletion Capital Expenditures $5,088 2,358 118 7,564 (341) -- -- - $7,223 $500 146 35 681 - -- 33 (91) (138) (189) $296 $153 176 5 334 - -- -- 5 - $339 $192 213 6 411 -- 56 -- 15 -- - $482 Assets $1,694 2,253 60 4,007 844 -- 263 $5,114 Year ended December 31,1985 Building products Pulp and paper Other operations Eliminations and adjustments Intersegment sales Timber and timberlands Unusual items (Note 2) General corporate Interest expense Income taxes Continuing operations Discontinued operations, net Settlement of condemnation suit, net Total $4,470 2,134 112 6,716 -- -- -- - 6,716 - - $6,716 $188 76 28 292 (292) -- - -- - $4,658 2,210 140 7,008 (292) -- -- -- - 6,716 -- - $- - $6,716 $391 29 35 455 -- 19 (33) (132) (102) 207 (30) 10 $187 $145 149 7 301 -- - 9 - 310 -- - $310 $164 435 7 606 - 23 - 13 - 642 ~ - $642 $1,623 2,175 71 3,869 - 803 - 183 - 4,855 11 - $4,866 Year ended December 31,1984 Building products Pulp and paper Other operations $4,452 2,111 119 $189 66 27 $4,641 2,177 146 $379 202 20 $144 123 6 $137 402 7 $1,535 1,982 80 Eliminations and adjustments Intersegment sales Timber and timberlands Unusual items (Note 2) General corporate Interest expense Income taxes 6,682 -- - 282 (420) -- - 6,964 (420) -- -- - 601 - -- 19 (68) (156) (143) 273 -- -- -- 9 -- - 546 3,597 ---- 135 840 -29 190 --- -- Continuing operations 6,682 (138) 6,544 253 282 710 4,627 Discontinued operations, net Total 446 $7,128 138 $- 584 $7,128 (134) $119 79 $361 33 $743 158 $4,785 Intersegment sales are recorded at estimatedfair market values and income on such sales is included in operating profits (losses). Timber and timberlands have not been allocated to industry segments because they are managedjointly to supply raw materials to both the building products and pulp and paper segments. Logs and residualfiber are iticluded at cost in the operating profits ofthe various manufacturingfacilities. SGP 0032776 Georgia-Pacific Corporation and Subsidiaries Note 7. Indebtedness Long-term debt consisted of the following: (Millions) Commercial paper and other short-term notes Notes 10.10% Floating rate, currently 6.00% due 1987 13%% due 1994, redeemable after 1991 14s/a% 15% due 1990, redeemable after 1987 1537% due 1988 Insurance companies 65/a% term loan, payable in annual installments through 1989 9Vs% term loan, payable in annual installments through 1997 10'/2% term loan, payable in semi annual installments through 1996 10%% term loans, payable in semi annual installments through 1996 13.60% senior notes due 1987 Revenue bonds, average interest rate 6.13% with varying annual payments to 2014 Purchase contracts and other, average interest rate 3.68% with varying payments to 2000 Debentures 5Vi % convertible subordinated debentures 9'/4% sinking fund debentures due 2016 12V4% sinking fund debentures Zero coupon debentures, effective interest rates of930% to 1030%, maturing annually 1987 through 1990 Discount term debentures, effective interest rate 1130% due 2015 Less: Current portion Unamortized discount Year ended December 3i 1986 1985 $ 175 $ 153 150 32 32 100 100 -- 65 53 53 76 76 34 77 44 32 35 50 50 153 166 65 96 87 150 -- 100 56 125 1,081 134 54 $ 893 70 125 1,373 41 75 $1,257 The scheduled maturities oflong-term debt are $134 million in 1987, $102 million in 1988, $23 million in 1989, $77 million in 1990 and $28 million in 1991. As ofDecember 31,1986, the Corporation had three bank revolving credit agreements providing for aggregate lines of credit of $700 million. One of these agreements is with nine domestic money center banks and establishes a $385 million unsecured revolving line of credit until May 1,1989, at which time the outstanding balance may be converted to a term loan repayable in eight equal semiannual installments beginning onJune 30,1989. Commitment fees during the revolving loan period are Vi of 1 percent of the daily average unused available credit. The interest rates associated with this agreement are based on either the prime rate, certificate of deposit rate or the offshore rate. A second agreement is with ten banks and establishes an unsecured revolving line of credit totaling $215 million until May 1, 1988. Commit ment fees during the revolving loan period are Vi of 1 percent of the daily average unused available credit. The interest rates associated with this agree ment are based on either the prime rate. Federal funds rate or Eurodollar interbank offered rate. A third agreement is with four banks and establishes a $100 million unsecured revolving line of credit until May 1,1988. Commitment fees during the loan period are Vi of 1 percent of the daily average unused available credit. The interest rates associated with this agreement are based on either the prime rate or certificate of deposit rate. The Corporation uses these three agreements to support commercial paper and other short-term borrowings. At December 31,1986, $175 million of commercial paper and other short-term borrow ings with an average interest rate of 7.11% were classified as long-term debt. Management intends to refinance these borrowings on a long-term basis by either replacing them with long-term obligations or with equity securities or by renewing, extending or replacing them with short-term obligations. On March 4, 1986, the Corporation issued $150 million of 9'/4% sinking fund debentures due March 15, 2016. The debentures require the Corpo ration to make sinking fund payments commencing in 1997 and are redeemable (subject to certain re strictions) at any time at the Corporation's option. In March 1986, $24 million of 12% notes classified as "purchase contracts and other" in the accompanying table were retired. The Corporation also retired $65 million of 145/a% notes in April 1986 and redeemed $150 million of 10.10% notes in June 1986. The Corporation purchased $26 mil lion ofits outstanding 12 Vi% sinking fund deben tures in June and redeemed the remaining $74 million in December 1986. SGP 0032777 J Georgia-Pacific Corporation and Subsidiaries \ Onjune 15,1986, $14 million ofzero coupon \ -s Iri December 1986, the Corporation terminated debentures were retired as scheduled. The remaining ' '5: \ two interest rate exchange agreements which were zero coupon debentures may not be redeemed prior v ; X being used as hedges against anticipated future to maturity: The discount term debentures do hot V, - rollovers of $102 million of"commercial paper bear interest prior to June 15, 1990 but bear interest / T \ borrowings. The Corporation paid $25 million in thereafter at 1130%, require the Corporation to make sinking fund payments commencing in 1996 expense over the'periods from termination until and are redeemable (subject to certain restrictions) at any time on or afterJune 15,1990 at the ' , Corporation's option. ^ In the fourth quarter of 1986, the Corporation ' agreerrierits^^Sy'V At December 31,1986, the Corporation had , registered for saleupTo $250 million of debt secu- called for redemption its outstanding 5J/% con vertible subordinated debentures. By the redemption date, 2,790,000 shares ofcommon stock had been ; Securities and Exchange Commission. . : The floa&g^rtie nol^s^cpnwrtible the issued uponlconversion of $86 million of deberfe-- . 1 holder, priorJoApntT.1987, into 8*A% debentures --ii. ------ 1- L. j. due 2009, and' are.redeema&lcui.whole or in part at. been paid for debentures that were redeemed. the Corp5n^o^p|t?0i|^^.(o,A|i;ii} ??87,.the. Capitalization ? 7* (Billions ofdollars).^^ V- v : . Common Equity.-^;/. * Total Debt;' Deferred Taxes and Other . . _ ;s'll; b Long-term Liabilities Redeemable Preferred Stock ^ J- V - . yr., s < '-y a * .-f.. f. 3- -tS f "V ' '''K-yvp 45 4.6 overr-: ' 2.0, 45;;.4J : .4;i . 23r.the yield-on 307yearTreasunf/sedindes^but not-*,jc\. - - .5. 1 less than 8v2%vThe conversion by the Corporation /-x ... '-s-i'?;v-*"}V'.- Cv -. , is s 1.9, v-'`I inte- <re*yst rate on the notes ls adiustable semiannually>y-i to a rate based upon the six-month Treasury bill rate: s&ta: plus a- specified premum^;^^ At December 31,1986, $63nulli6noflong-term' . X debt was secured,by property and timber with a net '; . book value of $136 millionrincludmg $83 rrdllion.': 1.2- to certain manufacturihgXahd'poUtition control facUt .. revenue bonds issued by'governmental units arid1-: .(X guaranteed by the Corporation. The Corporation X leases such facilities from the goverrimental units'-":'-, .L ...-,,.-1* a .. and pays all costs'incidental to'ownership of X . - the properties. ' Certain insurance company loan agreements place limitations on cash dividends that can be paid. 2 .2 " I- I I The amount ofretained earnings available for cash dividends under the most restrictive covenants of 82 83 84 85 86 - ' these agreements is approximately $872 million. In . addition, the agreements require the Corporation to maintain a minimum of $250 million of consoli- ' on additional borrowings: . SGP 0032778 Georgia-Pacific Corporation and Subsidiaries Note 8. Redeemable Preferred Stock (Millions) Balance at December 31,1983 Shares repurchased Amortization of the excess of involuntary liquidating value over fair value at issue date Balance at December 31,1984 Shares repurchased Amortization of the excess of involuntary liquidating value over fair value at issue date Balance at December 31,1985 Shares repurchased Amortization of the excess of involuntary liquidating value over fair value at issue date Balance at December 31,1986 Adjustable Rate Convertible Preferred Stock Series A Series Series Bc Total $148 $33 $34 $215 (32) ~ -- (32) 31 119 34 (32) (8) 3 37 -- 7 190 (40) 3_ 3 6 90 26 40 156 (32) (7) (11) (50) 31 $ 61 $20 37 $32 $113 The number of shares of adjustable rate convertible preferred stock (preferred stock) issued and out standing were as follows: Series A Series B Series C Total December 31 1986 1,656,000 573,000 1,049,000 3,278,000 1985 2,484,000 765,000 1,318,000 4,567,000 The preferred stock was recorded at fair market value on the date ofissue. The excess ofinvoluntary liquidating value over such fair market value is being amortized over a ten-year period by a charge to retained earnings and a corresponding credit to preferred stock. Subject to adjustment for common stock divi dends and splits, each share of the preferred stock has a conversion price of $39.00 and an involuntary liquidating value of$39.00, and is convertible into one share of common stock and entitled to one vote. In addition, whenever six quarterly dividends on Series A preferred stock are unpaid, the holders of such Series A stock are entitled to elect two directors of the Corporation until all past dividends have been paid. Each share ofpreferred stock is entitled to receive cumulative quarterly cash dividends at the annual rate of$2.24. Such dividend rate is subject to increase up to a maximum of$4.00 per share should the Cor poration fail to make the scheduled purchase offers, as described in the following paragraphs, unless the average of the last reported sales prices for the Cor poration's common stock during a prescribed period of time is at least 108% of the conversion price of the preferred stock during such period. Subject to the price of the Corporation's common stock and the appropriate action by the Board of Directors, the Corporation has the option to make offers to purchase, at a price of $39.00 per share plus accumulated dividends, a specified number ofshares annually. In 1986, the Corporation accepted tenders for the purchase of approximately 828,000 shares of Series A, 192,000 shares of Series B and 269,000 shares of Series C preferred stock at $39.00 per share. Based on the price ofits common stock, the Corporation has elected not to make a purchase offer in 1987. The optional preferred stock purchase offers for the years subsequent to 1987 would be for approximately 1,289,000 shares in 1988, 458,000 shares in 1989 and 242,000 shares in 1990. The preferred stock will be subject to optional redemption (Series A--1987 through 1988, Series B --1987 through 1989 and Series C--1987 through 1990) at $39.00 per share plus accumulated divi dends provided that the average of the last reported sales prices for the Corporation's common stock for a prescribed period of time is at least 125% of the then conversion price of the preferred stock. When these conditional redemption periods expire, the pre ferred stock may be redeemed, without limitation, at $39.00 per share plus accumulated dividends. Subject to certain limitations, the Corporation is required to redeem on an annual basis, as a sink ing fund, approximately 414,000 shares of Series A beginning in 1988, 96,000 shares of Series B beginning in 1989 and 134,000 shares of Series C beginning in 1991, at $39.00 per share plus accumulated dividends. !-f ,4 1 SGP 0032779 Georgia-Pacific Corporation and Subsidiaries Note 9. Common Stock At December 31,1986, the following authorized shares of the Corporation's common stock were . reserved for issue: . ' ... stock options compensation expense of $33 million ' in 1986, $6 million in 1985 and $4 million in 1984. l-?`^:'Mditi<jnal .information relating to options is as follows: 1987 Employee Stock Purchase Plan 1984 Employee Stock Option Plan Conversion of redeemable preferred stock . 2,000,000 . 4.103.000 3.278.000 9.381.000 The Corporation called its 514% convertible sub Options outstanding at January 1 *v ., j Granted ^ ,, . 7 - Exerased/Surrendered , Cancelled:.. Year ended December 31 19SS 1985 1,226,000 , 1,408,000 (1,107,000) (36,000) 1,710,000 (453,000) (31,000) ordinated debentures during 1986, which resulted in the issuance of2,790,000 common shares to . : . Options outstanding : ` Sx. at December 31. : : ; ; ; - ' 1,491,000.; 1,226,000 holders'who elected to convert their debentures"^ ; -.'>%ssg$8g8&4>fc December 31 ^ , 2,612,000 . ; 3,986,000 , per share (Note ." ^ During 1986, the Corporation adopted, subject -1 to shareholder approval, the 1987 Employee Stock ,;. i Purchase Plan (Purchase Plan). In connection with ' ; the.Purchase Plan, 2,000,000 shares ofcotruhonL." , c stpck.Jve're reserved for issue at a subscription price j Total reserved shares 1 - Optipns'exercisable - - at December if'' V 'H r Ophoii prices per share-j*\' 1 Exercised/Surrendered - - 7 , 4,103,000 ; 5,212,000 115,000 1,226,000 - $26.: $21r$25. $21-$26 jj; $21-125 $21r$22 ; f of $39.53 per share. The subscription period begaK. ,; , Januafy.30,1987 and ends on.Mafch 13,1987. Sub- ;,. scribere have the option to receive their payments -* --"va y,t ^-riori Plan and ^ - Kf v - jo-**.* 1 . - are subjea'ld^djustment for certain changes in the ; ' stock. The Purchase Plan expires on March 31,1989! . Vy.-V.: V* ' ,. . The Corporation issued 829,000 shares during- and sfock:dividends;lftfv:.' 1986 under the 1984 Employee Stock Purchase, r \ Plan, which expired on Octobe'r.31,T986l '!vv: -; v;1. V v ,,,' 'I f:? * 41.25 ..yy in connection with the 1984 Employee Stock ..;,;, -: , Common Stock , . , - Option Plan (Option Plan), 4,103,000 shares of ( :%'S? ,'<*t-' - .. " -'A". : (Amounts in dollars)--' f-'1- to ceftaih officers and employees. Holders of stock .7\ 31.88 -* exercise ot an option, ot an amount not to exceed . . . - 100% ofthe amount by which the market value . . - .. ofthe'common stock, as dehned, exceeds the option .... , '. price In addition, holders may be granted rights ; . . ,1 , to surrender all or part of the related stock option : ' . . ^ vv: ^, >V-,.v~ . inexcharige for common stock with a fair market.... - . -T ; 5- value equtd to the amount by which the market;. -1..*.;i :v value of the common stock, as defined," exceeds the-:, r.l M ''ifCi-f- option price '' */.-'T.-.- 7 -T Compensation resulting from stock options and>- ", . 1 cash awards is initially measured at the grant date ' * . " ' ' " - f '. ' based oh the market value ofthe common stock, with , - adjustments made in subsequent periods for market . . . Ct;. -5.. "' price fluctuations. The Corporation recognized ' V 27.25 2238 '2738 24.75 18.00 13.25 . 82 83 84 85 86 SGP 0032780 Georgia-Pacific Corporation and Subsidiaries Note 10. Commitments and Contingencies The Corporation is a 50% partner in a joint venture (GA-MET) with Metropolitan Life Insurance Com pany (Metropolitan). GA-MET owns and operates the Corporation's office headquarters complex in Atlanta, Georgia. The Corporation accounts for its investment in GA-MET under the equity method. During 1986, GA-MET borrowed $170 million from Metropolitan for the primary purpose of retiring debt incurred from the acquisition and construction of the Atlanta headquarters complex. The note bears interest at 9V2% and requires monthly payments of principal and interest with a final in stallment due in 2011. The note is secured by the land and building of the Atlanta headquarters complex. In the event offoreclosure, each partner has severally guaranteed payment of one-half of any shortfall 01 collateral value to the outstanding secured indebtedness. Based on present market conditions and building occupancy, the likelihood of any obli gation to the Corporation with respect to this guarantee is considered remote. During 1986, the Corporation adopted a pro gram to self-insure for general liability claims up to $25 million in amount. These risks were previously insured with a nominal deductible amount. Note 11. Income Taxes The provision for income taxes is based on pretax financial accounting income which differs from taxable income. Differences generally arise because certain items, such as depreciation and capitalized interest, are reflected in different time periods for financial accounting and tax purposes. The Corporation uses the flow-through method of accounting for investment tax credits. Under the flow-through method, investment tax credits are recognized as a reduction ofincome tax expense in the year the qualified investment is made. The provision for income taxes for continuing operations consisted of the following: (Millions) Federal income taxes, net ofinvestment tax credit Current Deferred State income taxes Year ended December 31 1986 1985 1984 $ 79 87 23 $189 $ 13 84 5 $102 $ 40 90 13 $143 The difference between the ordinary Federal in come tax rate and the Corporation's effective income tax rate for continuing operations is summarized as follows: Federal income tax rate Increase (decrease) as a result of Value of timber appreciation taxed at capita] gains rate Investment tax credit State income taxes, net of Federal benefit Other Year ended December 31 1986 46% 1985 46% 1984 46% (8) (10) (3) (10) (6) (4) 3 1 39% 3 4 33% 3 (3) 36% The Tax Reform Act of 1986 increased the effective income tax rate by 4% in 1986 due to the repeal of the investment tax credit, although some credits were allowed under the transition rules. The following is a summary of the components of the deferred tax provision for continuing operations: (Millions) Excess of tax depreciation over financial depreciation Write-down of certain assets Sale of tax benefits Fees paid to terminate interest rate exchange agreements Prepayment of pension expense Deferred start-up costs, net Capitalized interest, net Reinstatement from recog nition ofinvestment tax credits in 1982 Other Year ended December 31 1986 1985 1984 $87 (15) (12) $97 (6) (13) $83 10 (13) 12 11 _ 74 (4) 6 _ (6) (6) 22 1 (4) - $87 $84 $90 SGP 0032781 Georgia-Pacific Corporation and Subsidiaries Note 12. Acquisition Note 13. Litigation InJuly 1984, the Corporation acquired certain The Corporation is a party to various legal proceed assets from St. Regis Corporation for approximately ings generally incidental to its business. Although $360 million in a transaction accounted for as a the ultimate disposition of these proceedings is not purchase. The purchased assets included a linerboard presently determinable, management does not and kraft paper mill, related timberlands and cutting believe that adverse determinations in any or all of 45 contracts in Mississippi, 16 corrugated container such proceedings will have a material adverse effect plants, and certain current assets related to those upon the financial condition of the Corporation. operations. The results ofthese operations have been included in the accompanying Statements ofIncome from the date of acquisition. Had the operations been acquired as of the beginning of 1984, the Corporation's operating results for that year would not have been materially affected. Note 14. Unaudited Selected Quarterly Financial Data 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter (Millions, except per share amounts) 1986 1985 1986 1985 1986 1985 1986 1985 Net sales Gross profit Income from continuing operations before extraordinary item Income before extraordinary item Net income Per common share income from continuing operations before extraordinary item Primary Fully diluted Per common share income before extraordinary item Primary Fully diluted Per common share net income Primary Fully diluted Dividends declared per common share Price range of common stock High Low *1,604 287 *1,580 269 *1,929 374 *1,794 323 *1,909 411 *1,752 302 *1,781 368 *1,590 269 30 49 30 49 30 49 86 67 86 67 86 67 97 58 97 28 97 28 83 33 83 33 83 43 .25 .43 .25 .42 .79 .61 .77 .60 .90 .52 .88 .51 .75 .27 .74 .27 .25 .25 .25 .25 .20 33.50 24.75 .43 .42 .43 .42 .20 27.38 21.00 .79 .77 .79 .77 .20 34.25 28.00 .61 .60 .61 .60 .20 25.13 20.50 .90 .88 .90 .88 .20 37.38 29.00 .23 .23 .23 .23 .20 25.63 21.13 .75 .74 .75 74 .25 41.25 35.63 .27 .27 .37 .36 .20 26.88 20.63 Incomefrom continuing operations before extraordinary item includes: -- a $12 million pre-tax increase in the 1986first quarterfrom adoption ofa new timber capitalization policy (Note 1); --a $33 million pre-tax gainfrom liquidation ofinvestments in the 1986fourth quarter (Note 2); -- a $17 million increase in income tax expense in the 1986fourth quarter due to the repeal ofthe investment tax credit under the Tax Reform Act of 1986 (Note 11); and -- a $19 million pre-tax gainfrom the sale oftimberlands in thefirst quarter of1985 (Note 2). SGP 0032782 Five-year Selected Financial Data Georgia-Pacific Corporation and Subsidiaries (Millions, except per share amounts) Operations Net sales Costs and expenses Cost of sales Selling, general and administrative Depreciation and depletion Interest Provision for restructuring operations' Income (loss) from continuing operations before unusual items, income taxes and extraordinary items2 Unusual items Provision for income taxes Income from continuing operations before extraordinary items2 Financial position, end ofyear Current assets Timber and timberlands, net Property, plant and equipment, net Net assets of discontinued operations Other assets Total assets Current liabilities Long-term debt Deferred income taxes Other long-term liabilities Redeemable preferred stock Total net assets Working capital Other statistical data Capital expenditures Per common share Income (loss) from continuing operations before extraordinary items--primary2 Income from continuing operations before extraordinary items -- fully diluted2 Dividends declared Market price: High Low Year end Book value3 Shares of common stock outstanding at year end Number of common shareholders of record (thousands) Number of employees (thousands) Effective income tax rate3 Return on capital employed3 Return on common equity3 Total debt-to-capital3 Current ratio3 1 Previously classified as unusual items. 2Before cumulative effect ofaccounting change in 1982. *The method ofcalculating these amounts is described in the Financial Glossary presented on page 20. 1986 Year ended December 31 1985 1984 1983 1982 $7,223 $6,716 $6,682 $6,040 $5,003 5,783 511 339 138 - 6,771 5,553 431 310 132 - 6,426 5,441 426 282 156 - 6,305 4,978 374 289 157 135 5,933 4,206 359 275 186 30 5,056 452 33 189 $ 296 290 19 102 $ 207 377 19 143 $ 253 107 32 $ 75 (53) 79 6 $ 20 $1,420 844 2,691 -- 159 5,114 837 893 695 124 113 $2,452 $ 583 $1,291 804 2,606 11 154 4,866 631 1,257 606 69 156 $2,147 $ 660 $1,406 840 2,270 158 111 4,785 640 1,383 503 34 190 $2,035 $ 766 $1,268 753 1,989 653 69 4,732 612 1,453 413 26 215 $2,013 $ 656 $1,176 748 2,214 651 130 4,919 716 1,618 365 22 209 $1,989 $ 460 $ 482 $ 642 $ 710 $ 188 $ 207 2.69 2.64 .85 41.25 24.75 37.00 22.70 107 66 39 39.0% 10.4% 13.8% 26.3% 1.7 1.83 1.80 .80 27.38 20.50 26.50 20.59 103 74 39 33.0% 8.7% 10.2% 32.0% 2.0 2.28 2.24 .70 25.75 18.00 25.00 19.58 103 79 40 36.1% 11.7% 12.6% 35.7% 2.2 .53- .54 .60 31.88 22.38 24.75 19.48 102 80 39 29.9% 4.2% 3.8% 37.4% 2.1 (.01) .02 1.05 27.25 13.25 26.25 19.22 101 88 44 23.1% 2.5% 1.0% 42.1% 1.6 SGP 0032783 Sales and Operating Profits by Industry Segment Georgia-Pacific Corporation and Subsidiaries . / .. = (Millions) ' 1986 1985 Year ended December} l 1984 1983 1982 - Trade sales S^;S\v,:^; \ Building'products^-cih^^-C-'*- Structural panels;/-. ; $1,864, 26% $1,666 25% $1,637 ; 25% $1,560 . 26% .$1,217..-" 24% ; Eumber.4 ' 44,444--44 4 1,676 23 <-'4 / 1,434 21..- .1,461. . 22 , ' l4l24r' 24 1,003 ' 20 4 / 4 Gypsum//-; .-, 44.4.44. /4: 375 ' 5 ; .. W^377;:;;:6.-/ Roofing - j,, ,t*i/ 230 3 '4 260. 4 ' .'.4 360 ' 5 ' T 268 : 4 269' 4 ;222 . 4 183 >, ,4 . 1971C4 47 .. Thermosetting resins./i'.;.. 155 2 ; 1173 3 Other V.Svr'i.f-,/, 44:5534 8 .4 : 4 560 : 8 ..-186.;: 3 44.540 4- 8 . , , ;162:W.;3 , 136-3.4 3 . ' 1:506V-yv 8' Mi' " 450/4;/?; 9'- Pulp and paper 4';"44 Containers and packaging . . Tissue > ; . Printing'and fine paj - /-. ; Market puip -' O.theivife' > "J3* -4,853 67 - .'-4,470 -: 67.;3).' ;.-4;452''0 67 1 " ' 4,143': ' 69 4"' 3,186/1'64 . ;r - \)*% v-* -. ".m'. %/' 1,029 : ,4 T 1,037 15 ,* - K'1 s 1 " ( ^ ^ - - r-ns } - ' 2-^4' ^ - . 909 13 647 .11 *4 605' 12 % 502 7 7- 514 8 . - , . 507 ' 8 449v|%7 429` ' 8 46i 7 .. . 356: .4.5 . ; : 4'45 4 7 -`'45^.7 ` 43744.9 >A,Yfe221^ 57ig>.f'2hs|//jfe^^j-2255^w 3~. ^1 -4c ,n:,; - 4? 1 25 - -- 191 \ 3 -''314:41 29 4;. 1 :;5:2,28i' " 2,134 31 4 : : 2, i I T. 31' l,768ff;29 ,t ^,, 'll. 1,V6,8-i7v=:>* 434'> Other operations,. 89. 112 4/- 2 .119 2 - % 129l2' Continuing, operations, Operating'profits Building product: - - ^ Pulp and paper4 Other operations/ v $7,223:, 100% - /, ';$6,7i6*100% 1Mr, y , ?-ij 4. '-'. - ?. f?V$!?:500-473% 391%;./ 86% y 4-V.fa.-j ^ -'`'is' (X N** J;?r -- - C4;:,146 - . 22 -4-44-..29 V: 6 < 35, / 5 3 5- - 8 /T <' $6,682-4.100% $ ;;379,; 63% ' i ? 20T " 34' *' 20 a 3 $6,040i;Sl6o% $5,0034100% r r ' > K 7"~" ^ * * b- i 3c-. i ' } * i the-rt>4`4 t $' 277.92% - 4b $5 1-28I|66% 51" 'M3 14 > `1f4.lff;-2T:' '13 **'4! ^ % tejfil34 Continuing operations - -.4*'$*'681'-'100% v /;,$ -^55;'','!.l00.%%J^i$%0jlsSl00% v,V/ $ . 303;. 100% ,$ 194400% Salt'sJigures exclude intercompany saleSj but income on such sales is included in operating ptvjits. ; M%4fS4-/ ..................."..". .T4 'r<`f`" Operating profits are before income taxes, interest andgeneral corporateesfijenses^unusuaiitems^extraorditjary items andcutnulative effect ofaccounting change in 1982. Operating profitsj[0983 : and 1982 have beeit restated to include restructuring charges which were previously classified as unusual itetns./The restatement reduced 1983 operating ptpfits 6y^77 nii/Aoti ^}^'t S58 million inpulp andpaper,and reduced 1982operating profits by $8 million inbuifdingproducts, S3 million in pulp andpaper, $7million in otheroperations and $12 intllionm^g^ierahorporatecharges,^ Additional itfonitatioh regarding industry segments is presented in Note 6'oftheNotes to Finanqal Statements. ~^ r ^^ ^c . - -;v - : Cl, . -?-1 Sales by Industry Segment-f -y. (Billions ofdollars) +* ` '* V* T'-v . ,,r'\; - - Building Products- * Pulp & Paper ' Other Operations 6.7 6.7. 4.5 45 6.0 4.1 , -` ': ... . ., ; ' ; Operating Profits by Industry Segment - ' (Millions ofdollars) - S hi . Building Products ^ ' Pulp & Paper . ' Other Operations. - .'>1' 601: 379 681 500 .455 i - 391 5.0 3.2 2J 2.1 . 2.1 ' 1.8 1.7 ' -t e Hi, -- ri >; f i. . f, ( `'"E ^n'3 /- 303 V / 277 .; 194 128 202 146 .1'-. .1 82 - 83 .1 ' .1 - : ' /.' . .. 84 '85 ' ' 86 : - 41' -,. .29- `3 I 25 : ' 35 35 i; . I I 82 .'83'' 84 85 86 SGP 0032784 'Operating Statistics Georgia-Pacific Corporation and Subsidiaries' As ofDecember 31, 1986 Facilities Capacity \ Production 1986 . hi 1985;- 'a-f 1984 1983 1982 fs': , Building Products Structural panels Softwood plywood (Vs") (m.sq.ft.) 18 ; Hardwood plywood (sm) (m.sq.ft.) 2 W r. i; v ; Particleboard (%") (m.sq.ft.).' ' 4 ;; Softboard (W1) (m'.sq.ft.)v.'.,- -1 f Hardboard (Vs") (m.sq.ft.):, . .7 .'..Fiberboard (%") (m,sq.ft.):;), j . , 1 Panelboard (`/b") (m.sq.ft.)?' ' ' 1 Waferboard (Vs") (m.sq.ft.) fi ;' 1. ' : : Oriented strand board (%") (mfsq.ft.j 3 Lumber (m.bd.ft) -f''"V . 37 Moulding (m.bd.ft.) 3 Gypsum5board (rfi?sq(ft:)'*v^" >*.` ''? ' - *' ' ,9 ' ! Ropkr^pISnglessarfd"rplls (t.squares)-' .v` 5; * " - Formaldehyde (ni.lfef)fjf "*' ` 10. ,, t Thermosetting resins (m.lbs.). 16 > Distribution centers? 't .* ' x- . j-_ v 141 4,760 4,706 373; 335 460 425 250 ' 241 1,183 349 75.-f . 75 . 300 248 155, 139 690 . 525 1,854-, 1,784 . 39 . 8. 2,739,;,; 2,473. 8,096 . 7,361. 11195 , 1,233 2,063 1,805: 4,414 : f 4,443 4,430 311 343 442 410 381. - 400 239 243k; . 241 368; 361 346 ___7A f 69.. 77 290 ' f:' 311' 299 128 112 64 173 96 51 1,684 1,650 1,603 '-- ; _-- 2,495. 2,412. 2,242 . 7,789 - . 7,539. 5,973 1,188 ' 1,169 . 1,081 1,650 1,527 1,451 f;: ; .i.-;.... 3,831 444 303 226 220 63 301 22 -- 1,406 __ 1,681 5,363 966 1,146 ", ; iiAdptand Paper \>':`>fMp^tb'hi).-- A. Paper(ftons) ' ^ ?. Corrugated packaging (m.sq.ft.)-; , _ i ; `f ltTissu'e.prbducts (t.tdns)^^^ ,".r - ~ 5 271. f. 3,955;' ' - 3,699; ' 3,292- V 3(332? ' 3,290.; 2,999 2,824 ' f 2,703 .U; . 30 18^224 14,572 13,703 11,880 , j5314%hi fifh43M7 .' ^ 432 - 422. 2,976 2,375.. 8,427 .. 422 2,648' 2,162; 7,680 393. J Miscellaneous Facihtiesky%;.ff k 1 Other manufacturing operations?;? t, AA.f. 16 ;. Ak: 20- " <T.- f' -. ifk' V-'-. 'i ` -k * Resources (as ofDecember 31),?,.. if North'American timberiands (t.acres)<>, '* V4'f?;k'" Owned in fee ; . Controlled ff'iFf -''"f : 4,700. 530 4,760 480 4,920 480 4,630 4,630 530 510 -sm = surface measure basis' t - thousands m = millions \.?- J. Timber Resource Base v.-v;;r Bast-- North America (acres) - Owned in Fee 4,700,000: ' - > ; Controlled :r 530,000- ` * ^ 5 5,230,000^. ;v:-5 ' SGP 0032785 Directors Georgia-Pacific Corporation and Subsidiaries T. Marshall Hahn, Jr.1 2 * 4 5 Chairman and ChiefExecutive Officer; Atlanta, Georgia Willard S. Boothby, Jr.1 3 Managing Director, Paine Webber Incorporated; Investment Bankers; New York, New York 49 Robert L. Clare, Jr.3 5 Partner, Shearman & Sterling; Attorneys; New York, New York Robert B. Claytor1 3 4 Chairman and ChiefExecutive Officer, Norfolk Southern Corporation; Norfolk, Virginia Harvey C. Fruehauf, Jr.1 4 President, HCF Enterprises, Inc.; Private Investment Company; St. Clair Shores, Michigan Richard V. Giordano3 4 Chairman and ChiefExecutive Officer, The BOC Group; London, England Francis Jungers12 Private Business Consultant; Sunriver, Oregon F. James McDonald3 5 President and ChiefOperating Officer, General Motors Corporation; Detroit, Michigan We are saddened to report that Harold E. Sand, a member ofthe Board of Directors and a retired exec utive officer for Georgia-Pacific, died December 11, 1986, at the age of 69. Mr. Sand joined Georgia-Pacific in 1956 when the company acquired Charles E. Sand Plywood Co., where he was president. The great success and strength of Georgia-Pacific's building products Distribution Division attest to the foresight and wisdom that characterized his leadership. He was elected Executive Vice PresidentBuilding Products in 1970 and elected to the board in 1973. Mr. Sand retired from active management in 1982. Robert E. McNair2 5 Partner, McNair Law Firm, P.A.; Columbia, South Carolina Chauncey J. Medberry2 4 Chairman ofthe Board (retired), Bank ofAmerica N.T. & S.A and Bankamerica Corporation; Los Angeles, California Robert A. Schumacher President and Chief Operating Officer; Darien, Connecticut 1 Executive Committee 2Audit Committee 2Stock Option Plan and Management Compensation Committee 4 Finance Committee 5Nominating Committee SGP 0032786 Officers Georgia-Pacific Corporation and Subsidiaries T. Marshall Hahn, Jr. Chairman and ChiefExecutive Officer Robert A. Schumacher President and Chief Operating Officer Harold L. Airington Executive Vice President-Building Products Ronald P. Hogan Executive Vice President-Operations Conrad Schweitzer Executive Vice President-Pulp and Paper James C. Van Meter Executive Vice President and ChiefFinancial Officer J. Kermit Birchfield, Jr. Senior Vice President-Legal and Governmental Affairs George A. MacConnell Senior Vice President-Distribution Division Daniel A. Martinez Senior Vice President-Pulp and Paper Manufacturing Davis K. Mortensen Senior Vice President-Wood Products Manufacturing Glenn E. Wilson Senior Vice President-Gypsum and Roofing Division Maurice W. Kring Group Vice President-Tissue, Pulp and Paperboard J. Wayne Amy Vice President-Distribution Division, Southwest Region Joseph J. Armetta Vice President-Distribution Division, Midwest Region David S. Dimling Vice President-Printing Paper Division Willie L. Duke Vice President-Eastern Wood Products Manufacturing Division Diane Durgin Vice President-Law and Secretary Donald L. Glass Vice President-Roofing Division Stephen K. Jackson Vice President-Distribution Division Marketing and Advertising Joseph H. Joiner Vice President-Controller and Information Resources John F. McGovern Vice President-Finance Dennis D. Melstrom Vice President-Pulp and Paper Information Resources Thomas F. Mitchell Vice President-Government Affairs Dewey L. Mobley Vice President-Western Wood Products Manufacturing Division Allan J. Nadeau Vice President-Northern Pulp and Paper Division Kelly E. Powell, Jr. Vice President-Distribution Division, Western Region John F. Rasor Vice President-Mid-Continent Wood Products Manufacturing Division David W. Reynolds Vice President-Human Resources Robert A. Starling Vice President-Distribution Division, Southeast Region Marion L. Talmadge Vice President-Executive Affairs James R. Taylor Vice President-Chemical Division Douglas A. Thom Vice President-Packaging Division Carroll T. Tolar Vice President-Engineering Michael A. Vidan Vice President-Wood Products Sales Division Michael B. Wilson Vice President-Sales and Marketing Consumer and Commercial Paper Products Wayne I. Tamblyn Treasurer SGP 0032787 GangkhPiiaJu Corporation ani Subtidlems Grnrgn-Ruihr Cuitxr, 131 Fbathtret StTLCt, N t, Atlanta Georgn 10101 Gcorgia-Ruatu Corporation Common Stock (GP) and Preferred Stock (GP Fr A), (GP Pt 0) and (GP Pr C) arc listed on theNew York StockExchange B ink of America N1 & S A f orporatt Agency Servue (Center, PO Box 37002 San 1 rincisto, California 94117 Registered G-P shareholders are eligible to partici pate in the G-P Dividend and Cash Investment Plan For information cm the. plan, or for share holder information, write, to Corporate Secretary, Georgia-Pacific Corporation, P.O. Box 101605, Atlanta, Georgia 30348; (404) 521-5210 A iops of the t.tonyl-Pictfn 198b Annual Report to thL Sccunln s and Fvclmigt. L nmniission on I orm 10-K will hi supplied without thargi it anv cimi after March 11,1987 Annual Statistic, al Updates arc also av ulable Requests for luiaiu-ial inturuunoii should be duetted to Cindy Chandler, Investor Relations, Crtorgia-Puitie Corporation. P.O. Box 105bl)5, Atlanta, Georgia 10348, (404) 521-4721 An equal opportunity employer is) 1V87 Georgia-Ricifu. Goiporauon. All nghts reserved. `Ariijrf Softy "Omul." "MP." "Mr Big,"and "Siuwmt''arc registered trademarks ofGeorgia-Pacific Corporation. "Dem-Glass" is a trademark of . Geotgia-fticific Corporation. - Printed on Georgia-Pacific papers: Cover--HoffirrBrighc White . TipeinT^Sniooth. 80 lb. cover. Text--HopperBright White Tipeifr)- Smooch, 80 tb. Date, Dude Siomij^VeDum, 70 lb. text and Puraan SunMyVellum, 70 lb. text . :' lithograpM in the Untied States ofAmerica -` SGP 0032788 Georgia-Pacific 33 Pcacf,:'ce 3 GO'-.j C: 3333.3 SGP 0032789