<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
(x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ............ to ............
COMMISSION FILE NUMBER 1-6780
RAYONIER INC.
Incorporated in the State of North Carolina
I.R.S. Employer Identification No. 13-2607329
1177 SUMMER STREET, STAMFORD, CT 06905-5529
(Principal Executive Office)
Telephone Number: (203) 348-7000
Securities registered pursuant to Section 12(b) of
the Act, all of which are registered on the New York
Stock Exchange:
Common Shares
7.5% Notes, due October 15, 2002
Medium-Term Notes, due 1999 - 2001
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
YES (x) NO ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. (X)
The aggregate market value of the Common Shares of the registrant held by
non-affiliates of the Registrant on March 2, 1999, was approximately
$1,107,000,000.
As of March 2, 1999, there were outstanding 27,821,413 Common Shares of the
Registrant.
The registrant's definitive proxy statement filed or to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A involving the
election of directors at the annual meeting of the shareholders of the
registrant scheduled to be held on May 21, 1999, is incorporated by reference in
Part III of the Form 10-K.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
PART 1
<S> <C>
1. Business 1
2. Properties 6
3. Legal Proceedings 6
4. Submission of Matters to a Vote of Security Holders 7
* Executive Officers of Rayonier 7
PART II
5. Market for the Registrant's Common Equity and
Related Stockholder Matters 8
6. Selected Financial Data 9
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
8. Financial Statements and Supplementary Data 19
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 19
PART III
10. Directors and Executive Officers of the Registrant 19
11. Executive Compensation 19
12. Security Ownership of Certain Beneficial Owners and Management 19
13. Certain Relationships and Related Transactions 19
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 19
</TABLE>
* Included pursuant to Instruction 3 to Item 401 (b) of Regulation S-K
i
<PAGE> 3
INDEX TO FINANCIAL STATEMENTS
Report of Management F-1
Report of Independent Public Accountants F-1
Statements of Consolidated Income for the
Three Years Ended December 31, 1998 F-2
Consolidated Balance Sheets as of
December 31, 1998 and 1997 F-3 to F-4
Statements of Consolidated Cash Flows for the
Three Years Ended December 31, 1998 F-5
Notes to Consolidated Financial Statements F-6 to F-18
INDEX TO FINANCIAL STATEMENT SCHEDULES
Financial statement schedules have been omitted because they are
not applicable, the required matter is not present, the amounts
are insignificant or immaterial, or the information has been
otherwise supplied in the financial statements or the notes
thereto.
Signatures A
Exhibit Index B to E
ii
<PAGE> 4
PART I
ITEM 1. BUSINESS
GENERAL
Rayonier Inc. (Rayonier or the Company), including its subsidiaries, is a
leading international forest products company primarily engaged in the trading,
merchandising and manufacturing of logs, timber and wood products, and in the
production and sale of high-value-added specialty pulps. Rayonier owns, leases,
manages or controls approximately 1.5 million acres of timberland in the United
States and New Zealand. In addition, the Company operates two pulp mills and two
lumber manufacturing facilities in the United States and a medium-density
fiberboard plant in New Zealand.
Rayonier traces its origins to the Rainier Pulp & Paper Company founded in
Shelton, WA, in 1926. In 1937 it became "Rayonier Incorporated," a public
company traded on the New York Stock Exchange (NYSE), until 1968, when it became
a wholly owned subsidiary of ITT Corporation, now known as ITT Industries, Inc.
(ITT). On February 28, 1994, Rayonier again became an independent public company
when ITT distributed all of Rayonier's Common Shares to ITT stockholders.
Rayonier shares are publicly traded on the NYSE under the symbol RYN.
Rayonier is a North Carolina corporation with its executive offices at 1177
Summer Street, Stamford, CT 06905-5529. Its telephone number is (203) 348-7000.
Rayonier operates in two major business segments, Timber and Wood Products and
Specialty Pulp Products. The Timber and Wood Products segment includes two
reportable business units under Statement of Financial Accounting Standards
(SFAS) No. 131, "Disclosures About Segments of an Enterprise and Related
Information," Forest Resources and Trading, and Wood Products. Chemical
Cellulose, and Fluff and Specialty Paper Pulps, are product lines within the
Specialty Pulp Products segment.
SALES
Rayonier's sales for the last three years were as follows in millions:
<TABLE>
<CAPTION>
Sales Revenue
--------------------------------------------------------------------------------
1998 % 1997 % 1996 %
---- - ---- - ---- -
Timber and Wood Products:
<S> <C> <C> <C> <C> <C> <C>
Forest Resources and Trading $ 402 40 $ 420 38 $ 482 41
Wood Products 121 12 133 12 104 9
------- ------- ------- ------- ------- -------
523 52 553 50 586 50
Specialty Pulp Products:
Chemical Cellulose 309 30 338 31 328 28
Fluff and Specialty Paper Pulps 179 18 182 16 186 16
------- ------- ------- ------- ------- -------
488 48 520 47 514 44
Dispositions -- -- 34 3 88 7
Intersegment eliminations (2) -- (3) -- (10) (1)
------- ------- ------- ------- ------- -------
Total $ 1,009 100 $ 1,104 100 $ 1,178 100
======= ======= ======= ======= ======= =======
</TABLE>
With customers in 60 countries, 42 percent of Rayonier's 1998 sales of $1,009
million were made to customers outside of the United States. For further
information on sales, operating income and identifiable assets by segment, see
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations and Note 3 of the Notes to Consolidated Financial Statements -
Segment and Geographical Information.
- 1 -
<PAGE> 5
TIMBER AND WOOD PRODUCTS
FOREST RESOURCES AND TRADING
The Company manages timberlands, sells standing timber to third parties,
purchases and harvests timber on timberlands owned by it and by third parties,
sells logs, and purchases lumber and wood panel products for resale.
Rayonier manages approximately 1.5 million acres of timberlands as of December
31, 1998 as follows in thousands:
<TABLE>
<CAPTION>
Fee Long-Term
Region Total Acres % Owned Acres Leased Acres
------ ----------- - ----------- ------------
<S> <C> <C> <C> <C>
Southeast U.S. 846 59 741 105
Northwest U.S. 379 26 379 -
New Zealand 222 15 6 216
----- ------ ----- ---
Total 1,447 100 1,126 321
===== ====== ===== ===
</TABLE>
Southeastern U.S. timberlands are located primarily in Georgia and Florida.
Their proximity to pulp, paper and lumber mills results in significant
competition for the purchase of Rayonier's timber. Approximately 58 percent of
the timber harvest is pulpwood, which is destined for pulp and paper mills, with
the remaining 42 percent representing higher value timber sold primarily to
plywood and lumber mills. Through advanced silvicultural practices, the Company
has been able to increase the amount of timber volume per acre available for
harvest from its southeastern timberlands by approximately 2 to 3 percent per
year and expects this trend to continue.
Northwestern U.S. timberlands are located primarily on the Olympic Peninsula in
Washington state, are all owned in fee and consist almost entirely of
second-growth trees. These timberlands include softwood stands, of which
approximately 71 percent is hemlock and 29 percent is Douglas fir, Western red
cedar and spruce, and hardwood timber stands, consisting principally of alder
and maple.
New Zealand forest assets consist primarily of Crown Forest Licenses providing
the right to utilize approximately 219,000 acres of New Zealand plantation
forests for a minimum period of 35 years. Approximately 90 percent of these
timberlands consist of radiata pine, well suited for high quality lumber and
panel products. The remaining 10 percent is Douglas fir and other species.
Rayonier grows New Zealand timber for both domestic New Zealand uses and for
export primarily to the Pacific Rim markets. In addition, Rayonier New Zealand
manages timberlands for others, principally joint ventures in which Rayonier
holds a minority interest.
Rayonier manages timberlands, endeavoring to scientifically develop forests to
their economic peak for specific markets. The average rotation age for timber
from the Southeastern U.S. (primarily Southern pine) is 25 years for timber sold
to sawmills and 20 years for pulpwood destined for pulp and paper mills. The
average rotation age for timber destined for domestic and export markets from
the Northwestern U.S. (primarily hemlock and Douglas fir) is 45 to 50 years. The
average rotation age for timber grown in New Zealand (primarily radiata pine) is
25 to 28 years.
In the United States, Rayonier manages almost all of its timberlands and sells
standing timber directly through Rayonier Timberlands, L.P. (RTLP), a limited
partnership. Until January 1998, Rayonier owned 74.7 percent of the Class A
Limited Partnership Units of RTLP and the remaining 25.3 percent were publicly
traded. Effective January 1998, Rayonier acquired the publicly held units of
RTLP in accordance with the terms of the RTLP Partnership Agreement.
Rayonier is organized to regularly sell timber through auction processes
predominately to third parties. By requiring the Company's other operating units
to competitively bid for their timber and wood requirements, the Company
believes it can maximize the true economic return on its investments. In 1998,
approximately 90 percent of the Company's standing timber sales were made
directly to third parties.
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<PAGE> 6
The Company manages its timberlands on a sustainable yield basis in conformity
with best forest industry practices. A key to success is the extensive
application of Rayonier's silvicultural expertise to species selection for
plantations, soil preparation, thinning of timber stands, pruning of selected
species, fertilization and careful timing of the harvest, all designed to
maximize value, while responding to environmental needs. The following table
sets forth timberland acres by region and by timber classification in thousands:
<TABLE>
<CAPTION>
Softwood Hardwood
Region Plantation Lands Non-Forest Total
- ------ ---------- ----- ---------- -----
<S> <C> <C> <C> <C>
Southeast U.S. 554 288 4 846
Northwest U.S. 323 18 38 379
New Zealand (1) 217 5 -- 222
----- ----- ----- -----
Total 1,094 311 42 1,447
===== ===== ===== =====
</TABLE>
(1) Excludes 43 thousand acres managed by Rayonier under joint ventures and
approximately 65 thousand acres of native bush estate that is not
harvestable.
Merchantable timber inventory is an estimate of the amount of standing timber at
the earliest age that it could be harvested under varying economic conditions.
Estimates are based on a continuing inventory system, which involves periodic
statistical sampling of the timberlands, with adjustments made on the basis of
growth estimates, harvest information and market conditions. The following table
sets forth the estimated volumes of merchantable timber by location and type, as
of December 31, 1998.
<TABLE>
<CAPTION>
Equivalent total,
in thousands
Region Softwood Hardwood Total of cubic meters %
- ------ -------- -------- ----- --------------- -
<S> <C> <C> <C> <C> <C>
Southeast U.S., in thousands of short green tons 9,352 6,857 16,209 11,090 27
Northwest U.S., in millions of board feet 2,104 217 2,321 14,034 34
New Zealand, in thousands of cubic meters 15,889 208 16,097 16,097 39
------ ------
41,221 100
====== ======
</TABLE>
Rayonier is also a leading exporter and trader of softwood logs, lumber and wood
panel products. Rayonier purchases and harvests timber and purchases lumber and
wood panel products for sale in domestic and export markets. In 1998,
approximately 45 percent of New Zealand log sales volume was sourced from
Company timberlands. In North America, approximately 7 percent of log sales
volume was sourced directly from Rayonier's timberlands; however, logs were also
purchased from independent local dealers who had, in some cases, purchased
cutting rights to Company timberlands. Approximately 95 percent of log, lumber
and wood panel product sales are made directly by Rayonier sales personnel. In
certain of the Company's export locations, sales are made through independent
sales agents.
WOOD PRODUCTS
The Company manufactures wood products at two lumber mills in the Southeast U.S.
and a medium-density fiberboard facility in New Zealand.
Rayonier's lumber mills located at Baxley and Swainsboro, GA, convert Southern
pine timber into dimension and specialty lumber products for residential
construction and industrial uses. The two mills have a combined annual capacity
of approximately 265 million board feet of lumber, while also producing
approximately 537,000 tons of wood chips for pulping. The mills sell their
lumber output primarily in southeastern United States and Caribbean markets.
Lumber is sold primarily by Rayonier sales personnel, although sales to certain
export locations are made through independent sales agents. Substantially all of
the wood chip production is sold (at market prices) to Rayonier's Jesup, GA,
pulp facility accounting for approximately 18 percent of Jesup's 1998 total wood
consumption. In July 1998, fire damaged a third lumber manufacturing facility,
with annual capacity of 85 million board feet, at Plummer, ID. Rayonier has
permanently closed the Plummer mill and plans to sell the remaining assets.
- 3 -
<PAGE> 7
During 1997, the Company completed construction and, in the fourth quarter,
began operations at a medium-density-fiberboard (MDF) facility in New Zealand
with an annual capacity of 140,000 cubic meters and utilities infrastructure
capacity for an additional 140,000 cubic meters. The Company's MDF is marketed
by Rayonier personnel, independent sales agents and a domestic distributor.
SPECIALTY PULP PRODUCTS
Rayonier is a leading specialty pulp manufacturer. The Company owns and operates
pulp mills at Jesup, GA, and Fernandina Beach, FL, with a combined annual
capacity of approximately 700,000 metric tons. These facilities are able to
manufacture more than 25 different grades of pulp to meet customers' needs. The
Jesup facility produces approximately 550,000 metric tons of wood pulp, or 79
percent of Rayonier's total capacity. The Fernandina Beach facility produces
approximately 150,000 metric tons of wood pulp, or 21 percent of Rayonier's
total capacity.
Rayonier concentrates on the production of specialty pulps to customers'
specifications, sold to industrial companies producing a wide variety of
products. Over half of Rayonier's pulp sales are to export customers, primarily
in Europe, Asia and Latin America. Over 90 percent of specialty pulp sales are
made directly by Rayonier sales personnel. In certain of the Company's export
locations, sales are made through independent sales agents.
CHEMICAL CELLULOSE
Rayonier is one of the world's leading producers of chemical cellulose, also
called dissolving pulp, which is a highly purified form of pulp. Chemical
cellulose is used in a wide variety of products such as textile fibers, rigid
packaging, photographic film, impact-resistant plastics, high-tenacity rayon
yarn for tires and industrial hoses, pharmaceuticals, cosmetics, detergents,
sausage casings, food products, thickeners for oil well drilling muds, cigarette
filters, lacquers, paints, printing inks and explosives. Within the chemical
cellulose industry, Rayonier concentrates on the most highly valued,
technologically demanding end uses, such as cellulose acetate and high-purity
cellulose ethers, of which it is a leading supplier.
FLUFF AND SPECIALTY PAPER PULPS
Rayonier is a leading supplier of fluff pulp, used as an absorbent medium in
products such as disposable baby diapers, personal sanitary napkins,
incontinence pads, convalescent bed pads, industrial towels and wipes and
non-woven fabrics.
Rayonier is also a major producer of specialty paper pulps and produces only a
small volume of regular paper pulp. Customers use Rayonier's specialty paper
pulps to manufacture paper for decorative laminates for counter tops, air and
oil filters, shoe innersoles, battery separators, circuit boards and filter
media for the food industry. Paper pulp, representing approximately 2 percent of
total Company pulp sales, is used in the manufacture of bond, book and printing
paper.
PULP PRICING
Pulp prices are cyclical. Since Rayonier is a non-integrated specialty pulp
producer for non-papermaking end uses, pricing of its high-value product mix
tends to lag (on both the upturn and downturn) commodity paper pulp prices.
DISPOSITIONS AND DISCONTINUED OPERATIONS
Dispositions and discontinued operations include Rayonier's Port Angeles, WA,
pulp mill, which was closed on February 28, 1997, its interest in the Grays
Harbor, WA, pulp and paper complex, which was closed in 1992, its wholly owned
subsidiary, Southern Wood Piedmont Company (SWP), which ceased operations in
1986, Rayonier's Eastern Research Division, which ceased operations in 1981, and
other miscellaneous assets held for disposition.
See Note 11 of the Notes to Consolidated Financial Statements - Dispositions and
Discontinued Operations.
- 4 -
<PAGE> 8
FOREIGN SALES AND OPERATIONS
Rayonier's sales for the last three years by geographical destination market are
as follows in millions:
<TABLE>
<CAPTION>
Sales by Destination Markets
-----------------------------------------------------------------------
1998 % 1997 % 1996 %
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
United States $ 587 58 $ 568 51 $ 527 45
Europe 121 12 127 12 135 11
Japan 107 11 173 16 234 20
South Korea 17 2 52 5 49 4
China 36 4 36 3 54 5
Other Asia 56 5 66 6 89 7
Latin America 54 5 59 5 57 5
Canada 21 2 16 1 20 2
All other 10 1 7 1 13 1
------ ------ ------ ------ ------ ------
Total $1,009 100 $1,104 100 $1,178 100
====== ====== ====== ====== ====== ======
</TABLE>
Overseas assets, primarily in New Zealand, were approximately 22 percent of
total assets at the end of 1998 and Rayonier's sales from non-U.S. operations
were approximately 8 percent of total sales.
See Note 3 of the Notes to Consolidated Financial Statements - Segment and
Geographical Information.
PATENTS
Rayonier has a large number of patents, which relate primarily to its products
and processes. It also has pending a number of patent applications. Although
Rayonier's patents are of significant importance to the operation of each of its
individual businesses, Rayonier does not consider any of its patents or group of
patents relating to a particular product or process to be of material importance
from the standpoint of Rayonier overall.
COMPETITION AND CUSTOMERS
The Company's U.S. timberlands are located in two major timber growing regions
(the Southeast and the Northwest), where timber markets are fragmented and very
competitive. In the Northwest U.S., John Hancock Mutual Life Insurance Co. and
Washington state (Department of Natural Resources) are significant competitors.
In both the Northwest U.S. and Southeast U.S., smaller forest products companies
and private landowners compete with the Company. Price is the principal method
of competition.
Export log markets are highly competitive, with logs available from several
countries and numerous suppliers. In New Zealand, major competitors include
Carter Holt Harvey and Fletcher Challenge. In North America, Weyerhaeuser,
International Paper and Willamette are principal competitors. Price and customer
relationships are important methods of competition.
Rayonier's lumber and MDF wood products compete with the products of numerous
companies, some of which are larger and have greater resources than Rayonier.
Both lumber and MDF compete with alternative construction materials. The MDF
facility is experiencing significant operating losses ($16 million in 1998)
mainly associated with weak demand from Asian markets for forest products and
worldwide overcapacity of MDF production. Losses are expected to continue into
the near future, before an anticipated market recovery emerges, which is highly
dependent upon the recovery of Asian economies. In most of Rayonier's markets,
competition is primarily through price, quality, customer relationships and
technical service.
Specialty pulp products are marketed worldwide against strong competition from
domestic and foreign producers. Rayonier's major competitors include
International Paper, Weyerhaeuser, Georgia-Pacific, Buckeye Technologies and
Stora Kopparberg. However, several foreign, low-cost manufacturers are currently
attempting to produce high-grade acetate pulps. Supply of these pulp grades may
increase in the future, in comparison to demand growth that has been fairly
modest. Pressure on chemical cellulose margins at both Jesup and Fernandina will
most probably intensify. On the other hand, the Company is developing new, and
improving existing, products and processes that could add additional value to
the specialty pulp business. In addition to pricing, product performance and
technical service are principal methods of competition.
- 5 -
<PAGE> 9
ENVIRONMENTAL MATTERS
See "Environmental Regulation" in Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of Operations and Note 16 of the Notes to
Consolidated Financial Statements - Contingencies.
RAW MATERIALS
Regional timber availability continues to be restricted by legislation,
litigation and pressure from various preservationist groups and is also subject
to cyclical swings in lumber and pulp and paper markets. While the Forest
Resources and Trading business unit has benefited from a significant increase in
timber prices over the last decade, this increase adversely impacted fiber costs
at Rayonier's Specialty Pulp Products and Wood Products manufacturing facilities
in the Southeast U.S.
Rayonier has pursued, and is continuing to pursue, reductions in usage and costs
of key raw materials, supplies and contract services at its pulp and lumber
mills. Management foresees no significant constraints from pricing or
availability of its key raw materials.
RESEARCH AND DEVELOPMENT
Rayonier believes it maintains one of the preeminent specialty pulp research
facilities and staff in the forest products industry. Research and development
efforts are directed primarily at the development of new and improved pulp
grades, improved manufacturing efficiency, reduction of energy needs, product
quality and development of improved environmental controls. The research center
is adjacent to the pulp mill in Jesup, GA.
Research activities related to timberland operations include genetic tree
improvement programs as well as applied silviculture programs to identify
management practices that improve returns from timberland assets.
Research and development expenditures were $11 million, $10 million, and $11
million in 1998, 1997 and 1996, respectively.
EMPLOYEE RELATIONS
Rayonier currently employs approximately 2,300 people. Of this number,
approximately 2,100 are employees in the United States, of whom 46 percent are
covered by labor contracts. Most hourly employees are represented by one of
several labor unions. Labor relations are maintained in a normal and
satisfactory manner.
Jesup's labor agreements, covering approximately 700 employees, expire in June
2002. Fernandina's labor contracts, covering approximately 300 employees, expire
in May 2001.
Rayonier has in effect various benefit plans for its employees and retirees,
providing certain group medical, dental and life insurance coverage, pension and
other benefits. The cost of the plans is borne primarily by Rayonier.
ITEM 2. PROPERTIES
Rayonier owns, leases or controls approximately 1.2 million acres of timberlands
in the United States. Rayonier manages these properties and sells timber to
other Company operating units, as well as unaffiliated parties. Rayonier's New
Zealand subsidiary owns or manages the forest assets on approximately 222,000
acres of plantation forests in New Zealand. Rayonier and its wholly owned
subsidiaries own or lease various other properties used in their operations,
which include two pulp mills, three lumber manufacturing facilities (including a
mill in Plummer, ID which was damaged by fire in July 1998 - see page 3), an MDF
plant, a research facility and Rayonier's corporate headquarters. These
facilities (except for the corporate headquarters in Stamford, CT) are located
in the northwestern and southeastern portions of the United States and in New
Zealand.
ITEM 3. LEGAL PROCEEDINGS
Rayonier is one of two defendants in an action by Powell-Duffryn Terminals
instituted in the U.S. District Court for the Southern District of Georgia on
April 10, 1997, seeking indemnity for $57 million in damages incurred as the
result of a fire and explosion at a marine terminal and storage facility where
crude sulfate turpentine produced by Rayonier and others was stored. Plaintiff
has sued to recover sums paid to third-party claimants, expenses incurred to
remediate the property and adjoining lands and other damages. On April 20, 1998,
the U.S. District Court for the Southern District of Georgia granted
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<PAGE> 10
summary judgment in favor of Rayonier, and this decision was affirmed by the
U.S. Court of Appeals for the Eleventh Circuit on March 10, 1999.
Rayonier is also engaged in environmental proceedings that are discussed more
fully in Note 16 of the Notes to Consolidated Financial Statements -
Contingencies (Legal Proceedings).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of Rayonier during the
fourth quarter of 1998.
EXECUTIVE OFFICERS OF RAYONIER
W. LEE NUTTER, 55, Chairman, President and Chief Executive Officer, Rayonier -
He joined Rayonier in 1967 in the Northwest Forest Operations and was named Vice
President, Timber and Wood in 1984, Vice President, Forest Products in 1985,
Senior Vice President, Operations, in 1986 and Executive Vice President in 1987.
He was elected President and Chief Operating Officer and a director of Rayonier
on July 19, 1996 and was elected to his present position effective January 1,
1999. Mr. Nutter is a member of the Board of Governors of the National Council
for Air and Stream Improvement. He was graduated from the University of
Washington and the Harvard University Graduate School of Business Administration
Advanced Management Program.
WILLIAM S. BERRY, 57, Executive Vice President, Forest Resources and Wood
Products - He has held his current position since August 1, 1998. He was elected
Executive Vice President, Forest Resources and Corporate Development in October
1996. He was Senior Vice President, Forest Resources and Corporate Development,
of Rayonier from January 1994 until October 1996, Senior Vice President, Land
and Forest Resources, from January 1986 to January 1994 and Vice President and
Director of Forest Products Management from October 1981 to January 1986. Mr.
Berry joined Rayonier in 1980 as Director of Wood Products Management. He serves
on the External Advisory Board of the Warnell School of Forest Resources,
University of Georgia. He holds a B.S. in Forestry from the University of
California at Berkeley and an M.S. in Forestry from the University of Michigan.
GERALD J. POLLACK, 57, Senior Vice President and Chief Financial Officer - He
was elected Senior Vice President and Chief Financial Officer of Rayonier in May
1992. From July 1986 to May 1992, he was Vice President and Chief Financial
Officer. Mr. Pollack joined Rayonier in June 1982 as Vice President and
Controller. He is a member of the New York Advisory Board of The Allendale
Insurance Co., the financial management committee of AF&PA, and the Financial
Executive Institute. Mr. Pollack has a B.S. degree in Physics from Rensselaer
Polytechnic Institute and an MBA in Accounting and Finance from the Amos Tuck
School at Dartmouth.
JOHN P. O'GRADY, 53, Senior Vice President, Administration - He was elected
Senior Vice President, Human Resources, of Rayonier in January 1994 and Senior
Vice President, Administration, effective January 1996. He was Vice President,
Administration, of Rayonier from July 1991 to January 1994. From December 1975
to July 1991, he held a number of human resources positions at ITT Corporation
and its subsidiaries. Mr. O'Grady serves on the American Forest & Paper
Association's employee and labor relations committee, is on the business
advisory board of the University of Oklahoma School of Business and is a
Management Trustee for the Paper, Allied-Industrial, Chemical & Energy Workers
International Union Health and Welfare Trust. From 1994 to 1997, he served on
the board of advisors of the Business and Industry Council of the College of New
Jersey (formerly Trenton State College). He holds a B.S. degree in Labor
Economics from the University of Akron, an M.S. degree in Industrial Relations
from Rutgers University and a Ph.D. in Management from California Western
University.
WILLIAM A. KINDLER, 56, Senior Vice President, Specialty Pulp - He joined
Rayonier in August 1996, was elected Vice President. Specialty Pulp, in October
1996 and was elected to his present position effective March 1, 1998. Prior to
coming to Rayonier, Mr. Kindler was with James River Corporation for 26 years
where he held a number of senior management positions, most recently as Vice
President, General Manager, Printing Papers (November 1988 until March 1994) and
as Vice President, Product Supply, Consumer Products (March 1994 until August
1996). He holds a B.A. in Chemistry from Western Washington University and an
M.S. and Ph.D. in Pulp and Paper Technology from the Institute of Paper
Chemistry.
- 7 -
<PAGE> 11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The table below reflects the range of market prices of Rayonier Common Shares as
reported in the consolidated transaction reporting system of the New York Stock
Exchange, the only exchange on which this security is listed, under the trading
symbol RYN.
RAYONIER COMMON SHARES - MARKET PRICES, VOLUME AND DIVIDENDS (UNAUDITED)
<TABLE>
<CAPTION>
Composite
High Low Volume Dividend
---- --- ------ --------
1998
----
<S> <C> <C> <C> <C>
Fourth Quarter $46.25 $ 37.25 3,789,600 $.31
Third Quarter 48.00 36.63 3,890,600 .31
Second Quarter 52.50 43.13 5,635,000 .31
First Quarter 48.50 40.25 5,247,400 .31
1997
----
Fourth Quarter $51.13 $ 40.25 3,655,100 $.30
Third Quarter 53.00 42.00 3,657,700 .30
Second Quarter 44.38 36.88 3,391,800 .30
First Quarter 39.25 35.25 3,611,800 .30
</TABLE>
On February 19, 1999, Rayonier announced a first quarter dividend of 31 cents
per share payable March 31, 1999 to shareholders of record March 10, 1999.
There were approximately 22,915 shareholders of record of Rayonier Common Shares
on February 26, 1999.
- 8 -
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA
The following summary of historical financial data for each of the five years
ended December 31, 1998 is derived from the consolidated financial statements of
the Company. The data should be read in conjunction with the consolidated
financial statements (dollar amounts in millions, except per share data).
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------------------
1998 1997 1996 1995 1994
----- ---- ---- ---- ----
OPERATIONS:
<S> <C> <C> <C> <C> <C>
Sales $ 1,009 $ 1,104 $ 1,178 $1,260 $1,069
Operating income before provision for
dispositions 124 166 159 234 169
Provision for dispositions - - (125) (1) - -
Operating income 124 166 34 234 169
Income (loss) from continuing operations 64 87 ( - ) 142 70
Provision for discontinued operations - - (98) (2) - -
Net income (loss) 64 87 (98) 142 70
PER COMMON SHARE:
Income (loss) from continuing operations $ 2.22 $ 2.97 $ ( - ) $ 4.75 $ 2.36
Provision for discontinued operations - - (3.28) - -
Net income (loss) - Diluted 2.22 2.97 (3.28) 4.75 2.36
- Basic 2.26 3.03 (3.28) 4.81 2.37
Dividends paid 1.24 1.20 1.16 1.00 .72
Book value 23.01 22.37 21.29 25.95 22.15
FINANCIAL CONDITION:
Total assets $ 1,601 $ 1,596 $ 1,598 $1,648 $1,524
Total debt 490 426 433 450 483
Book value 639 633 623 769 655
CASH FLOW:
Cash flow from operating activities $ 157 $ 253 $ 236 $ 213 $ 190
Custodial capital spending (3) 58 72 83 72 67
Total capital expenditures 95 137 187 143 101
Depreciation, depletion and amortization 101 99 97 96 90
EBITDA (4) 226 237 236 303 229
EBIT (5) 125 138 139 207 139
Free cash flow (6) 66 122 119 107 90
Dividends paid 35 35 34 30 21
PERFORMANCE RATIOS (%):
Operating income to sales (7) 12 15 13 19 16
Return on equity (8) 10 14 - 20 11
Return on assets (8) 4 5 - 9 5
Debt to capital 43 40 41 37 43
OTHER:
Number of employees 2,300 2,500 2,700 2,900 2,700
Timberlands - in thousands of acres 1,447 1,452 1,462 1,473 1,501
</TABLE>
- 9 -
<PAGE> 13
<TABLE>
<CAPTION>
SELECTED OPERATING DATA (UNAUDITED): Year Ended December 31
-----------------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Timber and Wood Products
Log trading volume
North America - in millions of board feet 173 224 284 351 306
New Zealand - in thousands of cubic meters 851 1,113 1,414 1,682 1,623
Other - in thousands of cubic meters 206 277 97 103 54
Standing timber sales volume
Northwest U.S. - in millions of board feet 212 190 193 175 194
Southeast U.S. - in thousands of short green tons 2,360(9) 2,421 2,281 2,218 2,184
New Zealand - in thousands of cubic meters(10) 1,003 1,111 1,097 -- --
Lumber sales volume - in millions of board feet(11) 310 325 280 213 197
Medium-density fiberboard sales volume -
in thousands of cubic meters 91 16 -- -- --
Intercompany sales volume
Logs - in millions of board feet -- 1 12 22 13
Northwest U.S. timber - in millions of board feet 12 14 23 32 36
Southeast U.S. timber - in thousands of short green tons 70 92 158 292 199
New Zealand timber - in thousands of cubic meters(10) 385 589 840 -- --
Specialty Pulp Products
Pulp sales volume
Chemical cellulose - in thousands of metric tons(12) 344 381 349 342 311
Fluff and specialty paper pulp - in thousands of
metric tons(13) 349 344 332 308 350
Production as a percent of capacity 97% 100% 101% 99% 96%
SELECTED SUPPLEMENTAL FINANCIAL DATA
Financial Results Excluding Impact of Special Items(14)
Sales $ 1,015 $ 1,104 $ 1,178 $ 1,260 $ 1,069
Operating income 134 166 159 234 169
Net income 70 82 79 118 70
Net income per diluted Common Share 2.44 2.78 2.63 3.95 2.36
EBITDA(4) 235 229 236 303 229
Return on equity(%) 11 13 10 17 11
Geographical Data(Non-U.S.)
Sales
New Zealand $ 64 $ 90 $ 96 $ 106 $ 98
Other 17 22 23 28 26
------- ------- ------- ------- -------
Total $ 81 $ 112 $ 119 $ 134 $ 124
======= ======= ======= ======= =======
Operating Income
New Zealand $ (14) $ 8 $ 5 $ 13 $ 12
Other (3) (5) (3) (1) (3)
------- ------- ------- ------- -------
Total $ (17) $ 3 $ 2 $ 12 $ 9
======= ======= ======= ======= =======
</TABLE>
- 10 -
<PAGE> 14
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
Forest Resources
Sales
<S> <C> <C> <C> <C> <C>
Northwest U.S. $ 81 $ 81 $ 92 $ 96 $ 115
Southeast U.S. 77(9) 70 67 72 58
New Zealand(10) 24 33 37 -- --
------- ------- ------- ------- -------
Total $ 182 $ 184 $ 196 $ 168 $ 173
======= ======= ======= ======= =======
Operating Income
Northwest U.S. $ 59 $ 58 $ 67 $ 72 $ 94
Southeast U.S. 54 51 48 54 41
New Zealand(10) 8 8 15 -- --
------- ------- ------- ------- -------
Total $ 121 $ 117 $ 130 $ 126 $ 135
======= ======= ======= ======= =======
EBITDA per share
Northwest U.S. $ 2.22 $ 2.03 $ 2.29 $ 2.46 $ 3.22
Southeast U.S. 2.25 2.03 1.87 2.08 1.64
New Zealand(10) 0.64 0.69 0.85 -- --
------- ------- ------- ------- -------
Total $ 5.11 $ 4.75 $ 5.01 $ 4.54 $ 4.86
======= ======= ======= ======= =======
</TABLE>
(1) Includes a charge of $125 million ($79 million after-tax) related to
the closure of the Port Angeles pulp mill and write-off of other
non-strategic assets
(2) Includes an after-tax charge to implement AICPA Statement of Position
96-1 related to future environmental monitoring costs
(3) Custodial capital spending is defined as capital expenditures to
maintain current earnings level over the cycle and to keep facilities
and equipment in safe and reliable condition, and in compliance with
regulatory requirements.
(4) EBITDA is defined as earnings from continuing operations before
significant non-recurring items, provision for dispositions, interest
expense, income taxes and depreciation, depletion and amortization.
(5) EBIT is defined as earnings from continuing operations before
significant non-recurring items, provision for dispositions, interest
expense and income taxes.
(6) Free cash flow is defined as income from continuing operations plus
depreciation, depletion and amortization, deferred income taxes and
changes in working capital, less custodial capital spending and
prior-year dividend levels.
(7) Based on operating income before provision for dispositions
(8) Based on income (loss) from continuing operations, including charges
for pulp mill disposition
(9) Includes salvage timber sales of $2.3 million on volume of 279
resulting from the Southeast U.S. forest fires
(10) Forest Resources results for New Zealand began in 1996 when Rayonier
reorganized its New Zealand operations into separate log trading and
timberlands management organizations. Standing timber harvested by
Rayonier and sold as logs was 1,133 in 1995 and 1,155 in 1994.
(11) Includes sales by the Plummer lumber mill, which closed in July 1998
after fire damaged the facility, of 51, 77, 79 and 23 for the years
1998-1995, respectively
(12) Excludes sales by the Port Angeles pulp mill, which ceased operations
on February 28, 1997, of 35, 94, 98 and 117 for the years 1997-1994,
respectively
(13) Excludes sales by the Port Angeles pulp mill of 7, 18, 36 and 12 for
the years 1997-1994, respectively
(14) Special items include the Southeast U.S. forest fires in 1998, the
gains from sale of timber assets in New Zealand in 1997 and 1995 and
the charges discussed in (1) and (2) above in 1996.
- 11 -
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SEGMENT INFORMATION
Rayonier operates in two major business segments, Timber and Wood Products and
Specialty Pulp Products. The Timber and Wood Products segment includes two
reportable business units: Forest Resources and Trading, and Wood Products.
Chemical Cellulose, and Fluff and Specialty Paper Pulps are product lines within
the Specialty Pulp Products segment.
The amounts and relative contributions to sales and operating income
attributable to each of Rayonier's reportable business units, for each of the
three years ended December 31, 1998 were as follows in millions:
<TABLE>
<CAPTION>
Year Ended December 31
SALES 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Timber and Wood Products
Forest Resources and Trading $ 402 $ 420 $ 482
Wood Products 121 133 104
------- ------- -------
Total Timber and Wood Products 523 553 586
Specialty Pulp Products:
Chemical Cellulose 309 338 328
Fluff and Specialty Paper Pulps 179 182 186
------- ------- -------
Total Specialty Pulp Products 488 520 514
Intersegment eliminations (2) (3) (10)
------- ------- -------
Total before dispositions 1,009 1070 1090
Dispositions -- 34 88
------- ------- -------
Total sales $ 1,009 $ 1,104 $ 1,178
======= ======= =======
OPERATING INCOME (LOSS)
Timber and Wood Products
Forest Resources and Trading $ 118 $ 118 $ 124
Wood Products (16) 6 3
------- ------- -------
Total Timber and Wood Products 102 124 127
Specialty Pulp Products 34 56 57
Corporate and other (12) (17) (16)
------- ------- -------
Total before dispositions 124 163 168
Dispositions -- 3 (134)
------- ------- -------
Total operating income $ 124 $ 166 $ 34
======= ======= =======
</TABLE>
BUSINESS CONDITIONS
Rayonier's net income in 1998 was $64 million, or $2.22 per share compared to
$87 million, or $2.97 per share in 1997. Excluding special items in both years
(please refer to pages 11 and 12) 1998 net income was $70 million, or $2.44 per
share, compared to $82 million, or $2.78 per share. Special items in 1998
primarily refer to reduced realizations on fire-damaged timber as a result of
forest fires in the Southeast U.S., and in 1997 refer to a gain on selling a 75
percent joint venture interest in a small portion of the Company's New Zealand
timber base.
In 1998, 42 percent of Rayonier sales were made to customers outside the U.S.,
compared to 49 percent in 1997, reflecting weaker offshore markets and stronger
domestic U.S. housing-related activity. During the last half of 1997 and
throughout 1998, weakness in Asian and Latin American markets placed additional
price pressure on worldwide pulp markets, as well as timber and log markets in
New Zealand and the Northwest U.S. Partially offsetting these effects were lower
costs for many of the Company's raw materials as well as energy and freight. The
Company also redirected its marketing efforts toward stronger economies in North
America and Europe.
- 12 -
<PAGE> 16
In Timber and Wood Products, the Forest Resources and Trading business unit was
adversely affected by weak Asian markets and a strong U.S. dollar, although
domestic U.S. demand for timber was strong, reflecting a favorable housing
market. The Wood Products business unit performance included $16 million in
operating losses at the Company's New Zealand MDF plant which faced, and
continues to face, weak markets and industry overcapacity.
Specialty Pulp segment performance in 1998 was constrained by high customer
inventories and slow end-use markets. Prices for fluff pulps continued to
decline from year earlier levels, and by year-end, chemical cellulose prices,
which tend to lag commodity grades, came under similar pressure.
In January 1998, the Company acquired the outstanding publicly traded minority
interest in Rayonier Timberlands, L.P. (RTLP or the Partnership), a master
limited partnership that owns and operates most of its U.S. timberlands
business. As a result of the acquisition, Rayonier recognized approximately 42
cents per share of incremental net income in 1998 for timber harvested from the
Partnership's timberlands.
Rayonier's capital spending in 1998 and 1997 was focused on cost reduction,
quality and productivity improvements in Specialty Pulp Products and Wood
Products, investment in timberlands and development of New Zealand operations.
These investments are expected to help moderate the cyclical effects of the pulp
market cycle, improve bottom-of-the-cycle earnings and add value to existing
assets. See Liquidity and Capital Resources.
Soft Asian markets and intense global competition in specialty pulps continue to
affect Company results. Although prices for the Company's fluff pulps appear to
have bottomed, chemical cellulose prices declined in the first quarter of 1999.
With timber and wood markets mixed and lower chemical cellulose prices, the
Company anticipates that it will be difficult in the first quarter of 1999 to
maintain fourth quarter 1998 reported earnings.
RESULTS OF OPERATIONS, 1998 VS. 1997
Sales and Operating Income
Sales declined 9 percent to $1,009 million in 1998, reflecting lower
sales in each of the Company's major business segments and the absence
of sales from the Company's Port Angeles pulp mill, permanently closed
in February 1997. Operating income for the year was $124 million, down
from $166 million in 1997, due to Wood Products losses at the New
Zealand MDF facility and lower pricing within Specialty Pulp. Forest
fires in the Southeast U.S. in early July resulted in losses of $10
million from damage to pre-merchantable timber, reduced timber sales
revenue for fire-damaged timber and other related costs. In addition,
the unusually wet weather conditions in the first half of the year
disrupted production schedules and raised the cost of wood fiber at the
Company's pulp and sawmills in the Southeast U.S.
Timber and Wood Products
Sales and operating income were lower than prior year by $30 million and $22
million, respectively.
Forest Resources and Trading
Forest Resources and Trading sales of $402 million in 1998 decreased
from $420 million in 1997 while operating income of $118 million was
similar to 1997.
Standing timber and log trading sales decreased from 1997 due to lower
prices in the Northwest U.S. and lower prices and volumes in New
Zealand partly offset by sales from a newly established wood products
trading business and stronger domestic log trading volume. Operating
income levels were maintained in 1998 due to a strong Southeast U.S.
timber market in the first half of the year, when unusually wet weather
conditions led to restricted supply, and stronger Southeast U.S. land
sales. These positive factors offset the $10 million adverse impact
associated with the Southeast U.S. forest fires in the second half of
the year, and lower Northwest U.S. and New Zealand selling prices due
to weak Asian demand.
Wood Products
Wood Products sales of $121 million in 1998 decreased from $133 million
in 1997 due to weaker U.S. lumber prices and sales volume partially
offset by a full year of product sales from the New Zealand MDF
facility, which began operations in the fourth quarter of 1997. Wood
Products incurred an operating loss of $16 million in 1998 compared to
operating income of $6 million in 1997. A full year of MDF operating
losses, weaker lumber selling prices and volume and higher log costs in
the Southeast U.S. affected 1998 results. The MDF facility, which
contributed most of the operating losses, was affected by weak demand
for forest products from Asian markets and worldwide overcapacity in
MDF.
- 13 -
<PAGE> 17
Specialty Pulp Products
Pulp sales of $488 million for the Company's Jesup and Fernandina pulp mills
were $32 million below the prior year level principally due to reduced customer
demand for chemical cellulose. Operating income of $34 million was $22 million
below 1997 as a result of lower chemical cellulose volume and higher wood fiber
costs during the first half of the year. Pulp production costs increased to $638
per ton in 1998 from $612 in 1997, primarily resulting from higher wood costs
(weather related) in the first half and a market related shutdown at Fernandina
in the fourth quarter.
Corporate and Other
Corporate and other costs for 1998 were favorable to 1997, reflecting lower
administrative and general expenses.
Dispositions
Dispositions results include the Company's Port Angeles pulp mill, permanently
closed in February 1997. Sales and operating income in 1997 were $34 million and
$3 million, respectively. There were no sales in 1998.
Other Income/Expense
Interest expense for 1998 increased $9 million to $35 million reflecting higher
average debt levels associated with the $66 million purchase in January of the
outstanding publicly traded Class A Units in RTLP. In addition, there was
insignificant capitalized interest in 1998 compared to $5 million in 1997,
primarily relating to the Company's New Zealand MDF facility.
Rayonier purchases foreign currency forward contracts to offset the impact of
New Zealand/U.S. dollar exchange fluctuations on operating results. The
mark-to-market loss on these contracts included in "Interest and miscellaneous
income (expense), net," was $1 million in 1998, as compared to a mark-to-market
loss of $3 million in 1997. In contrast, the 1998 movement of the New
Zealand/U.S. dollar exchange rate from 0.58 on January 1, 1998, to 0.52 on
December 31, 1998, had a favorable effect of $3 million on the Company's New
Zealand operating income.
From time to time the Company opportunistically sells non-strategic assets to
maximize value from its asset mix. During 1997, the Company sold a 75 percent
interest in two New Zealand forests to a timber investment fund. The transaction
resulted in a pretax gain of $8.4 million, $5.6 million after-tax, or 19 cents
per share. No similar transactions occurred during 1998.
Acquisition of Minority Interest in RTLP
In January 1998, Rayonier exercised its right to acquire all of the 5,060,000
publicly traded Class A Units of RTLP for a cash purchase price of $13.00 per
unit, or $66 million in total, in accordance with the terms of the RTLP
Partnership Agreement. The effect of that purchase was to eliminate the minority
interest in the Partnership earnings, which was $26 million in 1997. The
positive impact was partially offset by higher interest and depletion costs in
1998. The acquisition was accounted for under the purchase method and was
financed by the utilization of existing credit facilities.
Income Taxes
The effective tax rate for 1998 was 29 percent compared to 28 percent in 1997.
The effective tax rates are below U.S. statutory rates, primarily resulting from
the lower rates in effect for foreign subsidiaries and research and investment
tax credits.
RESULTS OF OPERATIONS, 1997 VS. 1996
Sales and Operating Income
Sales declined 6 percent to $1.1 billion in 1997, reflecting the closure of the
Port Angeles pulp mill on February 28, 1997, lower North American log trading
volume and export prices, lower New Zealand log volume and lower Northwest U.S.
timber selling prices, partially offset by higher lumber selling prices and
volume. Operating income for the year was $166 million, rising from $34 million
in 1996, due to the absence of the disposition charge of $125 million and
operating losses associated with the Port Angeles pulp mill, and higher lumber
selling prices and volume.
- 14 -
<PAGE> 18
Timber and Wood Products
Sales and operating income declined from prior year by $33 million and $3
million, respectively.
Forest Resources and Trading
Forest Resources and Trading sales decreased 13 percent to $420 million
in 1997 while operating income declined $6 million to $118 million in
1997. Standing timber sales and operating income decreased from 1996
primarily due to weaker Northwest U.S. timber prices and New Zealand
timber volume. Southeast U.S. timber volume improved due to a strong
pulpwood market. Log trading sales declined in 1997 primarily due to
weakness in Asian wood markets, resulting in lower log prices and
volume.
Wood Products
Wood Products sales increased 28 percent to $133 million in 1997 due to
stronger U.S. lumber sales volume and prices and start-up of the
medium-density fiberboard (MDF) business in New Zealand. Wood Products
operating income of $6 million improved $3 million from 1996 due to
higher lumber prices and volumes and lower conversion costs. The
significant improvements in lumber were partially offset by operating
losses incurred in connection with the start-up of the New Zealand MDF
business.
Specialty Pulp Products
Sales of $520 million for the Company's Jesup and Fernandina pulp mills were
slightly above the prior year level with lower selling prices more than offset
by higher volume. Operating income of $56 million was $1 million below 1996 as
lower average selling prices for both chemical cellulose and fluff pulp were
mostly offset by higher pulp shipments and lower manufacturing costs. Pulp
production costs declined to $612 per ton in 1997 from $639 in 1996.
Dispositions
Dispositions results include the Company's Port Angeles pulp mill, permanently
closed in February 1997, with product sales arising from inventory. Improved
results over 1996 primarily reflect the absence of operating losses following
the mill's closure. Sales were $34 million in 1997 compared to $88 million in
1996, and operating income in 1997 was $3 million compared to an operating loss
in 1996 of $10 million, excluding closure charges.
During the fourth quarter of 1996, Rayonier recorded a disposition charge of $79
million after-tax, or $2.63 per share, primarily related to the planned closure
of the Port Angeles pulp mill on February 28, 1997. The pretax charge of $125
million included a $77 million loss on disposal of mill assets with a net book
value of $84 million, accruals of $40 million for severance, relocation,
demolition, environmental cleanup and other items associated with the
disposition, and $8 million for loss on disposal of other non-strategic assets.
The liquidation of working capital and tax benefits associated with the closure
offset cash closure costs. Dismantling began in 1997 and is expected to be
completed in 1999.
Other Income/Expense
Interest expense for 1997 decreased $2 million to $26 million reflecting lower
average debt levels primarily due to reduced investment in working capital.
Capitalized interest relating to the Company's New Zealand MDF facility was $4.6
million in 1997 compared to $2.3 million in 1996.
Rayonier purchases foreign currency forward contracts to offset the impact of
New Zealand/U.S. dollar exchange fluctuations on operating results. The
mark-to-market loss on these contracts included in "Interest and miscellaneous
income (expense), net," was $3 million in 1997, as compared to a mark-to-market
gain of $6 million in 1996. In contrast, the 1997 movement of the New
Zealand/U.S. dollar exchange rate from 0.71 on January 1, 1997, to 0.58 on
December 31, 1997, had a favorable effect of $4 million on the Company's New
Zealand operating income.
From time to time, the Company opportunistically sells non-strategic assets to
maximize value from its asset mix. During the fourth quarter of 1997, the
Company sold a 75 percent interest in two New Zealand forests (12,100 acres) to
a timber investment fund and purchased a 25 percent stake in two other New
Zealand forests (3,700 acres) from the same fund in a transaction that resulted
in net cash proceeds to the Company of $11.7 million. As a result, a pretax gain
of $8.4 million, $5.6 million after-tax, or 19 cents per share, was realized.
Rayonier has management and marketing responsibilities for the joint venture,
which involves 15,800 acres of timber on New Zealand's North Island.
Minority interest in the earnings of Rayonier Timberlands, L.P. decreased $2
million to $26 million in 1997 due to lower Partnership earnings, primarily
reflecting lower Northwest U.S. timber prices.
- 15 -
<PAGE> 19
Income Taxes
The effective tax rate for 1997 was 28 percent compared to 29 percent in 1996,
excluding the tax benefits for two significant non-cash charges (see
Dispositions and Discontinued Operations), which were recorded at statutory
rates. These effective tax rates are below the U.S. statutory rates, primarily
resulting from the lower rates in effect for foreign subsidiaries. Additionally,
1997 reflects both research and investment tax credits and foreign exchange
translation gains while the prior year includes certain tax benefits recognized
in 1996 that pertained to prior years.
Discontinued Operations
In the fourth quarter of 1996, the Company adopted Statement of Position 96-1
"Environmental Remediation Liabilities" issued by the American Institute of
Certified Public Accountants. Adoption resulted in a cash neutral pretax charge
of $155 million ($98 million after-tax, or $3.28 per share). The Company's
annual cash flow was not impacted.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operating activities in 1998 of $157 million, or approximately $5
per share, decreased $96 million from 1997 as a result of lower net income,
non-recurring 1997 asset sales and liquidation of Port Angeles working capital
in 1997. This cash flow financed capital expenditures of $95 million, dividends
of $35 million and the repurchase of Common Shares of $27 million.
Cash from operating activities in 1997 increased $17 million over the 1996 level
to $253 million. Cash from operating activities helped finance capital
expenditures of $137 million, dividends of $35 million and the repurchase of
Common Shares of $48 million.
The Company's cash tax payments were reduced in 1996 and 1997 as a result of
transactions undertaken by the Company to control environmental remediation and
monitoring costs, and certain benefits relating to the Port Angeles pulp mill
closure.
In 1996, the Company began a Common Share repurchase program to minimize the
dilutive effect on earnings per share of its employee incentive stock plans.
This program limits the number of shares that may be repurchased each year to
the greater of 1.5 percent of the Company's outstanding shares or the number of
incentive shares actually issued to employees during the year. In 1996, 437,800
shares were repurchased at an average cost of $37.74 for $17 million. In
February 1997, the Company announced an increase in the share repurchase
program. The Company repurchased 1,123,500 shares in 1997 at an average cost of
$43.08 for $48 million.
In July 1998, the Company's Board of Directors increased the authorized number
of common shares to be repurchased by 200,000 and in October 1998, the Board
authorized the repurchase of an additional one million shares through December
31, 2000. These share repurchases were authorized in addition to the 1.5 percent
of outstanding shares normally repurchased each year to offset the dilutive
effect of incentive stock programs on earnings per share. The Company
repurchased 628,479 shares in 1998 at an average cost of $42.24 for a total of
$27 million.
In 1998, EBITDA (defined as earnings from continuing operations before
significant non-recurring items, provision for dispositions, interest expense,
income taxes and depreciation, depletion and amortization) was $226 million, or
$7.90 per share, down $11 million from 1997. In 1997, EBITDA was $237 million,
or $8.07 per share, compared to $236 million, or $7.86 per share, in 1996. Free
cash flow (defined as income from continuing operations plus depreciation,
depletion and amortization, deferred income taxes and changes in working
capital, less custodial capital spending and prior-year dividend levels)
decreased $56 million to $66 million in 1998 primarily as a result of working
capital changes and lower net income.
Debt increased $64 million in 1998 to $490 million, primarily due to the
acquisition of the minority interest in RTLP for $66 million. The year-end
debt-to-capital ratio of 43 percent is 3 percentage points above prior year-end.
At December 31, 1996, debt was $433 million, or 41 percent of capital. The
percentage of debt with fixed interest rates was 44 percent as of December 31,
1998, and 50 percent as of December 31, 1997 and 1996.
The most restrictive long-term debt covenant in effect at December 31, 1998,
provided that the ratio of total debt to EBITDA not exceed 4 to 1. As of
December 31, 1998, the ratio was 2.3 to 1. In addition, $389 million of retained
earnings was unrestricted as to the payment of dividends.
Capital spending of $95 million in 1998 included $8 million to upgrade control
systems at the Jesup pulp mill complex and $3 million to upgrade the Company's
Swainsboro sawmill. This lumber mill modernization project will continue into
1999 and includes drying and finishing facilities as well as enhanced process
control technology. Rayonier expects to invest $180-$220 million in capital
projects during the two-year period 1999-2000. Capital projects include profit
improvement, custodial
- 16 -
<PAGE> 20
capital, sawmill modernization, timberlands reforestation and various projects
to comply with new environmental laws and requirements. As new environmental
regulations are promulgated, additional capital spending may be required to
ensure continued compliance with environmental standards. See Environmental
Regulation.
The Company has unsecured credit facilities totaling $300 million, which were
used as support for $109 million of outstanding commercial paper. As of December
31, 1998, Rayonier had $191 million available under its revolving credit
facilities. In addition, the Company has on file with the Securities and
Exchange Commission shelf registration statements to offer $200 million of new
public debt securities. The Company believes that internally generated funds,
combined with available external financing, will enable Rayonier to fund capital
expenditures, share repurchases, working capital and other liquidity needs for
the foreseeable future.
ENVIRONMENTAL REGULATION
Rayonier is subject to stringent environmental laws and regulations concerning
air emissions, water discharges and waste disposal that, in the opinion of
management, will require substantial expenditures over the next 10 years. During
1998, 1997 and 1996, Rayonier spent approximately $3 million, $4 million and $6
million, respectively, for capital projects related to environmental compliance
for ongoing operations. During the two-year period 1999-2000, Rayonier expects
to spend approximately $30 million on such capital projects.
During 1997, the Environmental Protection Agency (EPA) finalized its Cluster
Rules governing air emissions but, due to the specialty nature of Rayonier's
products and operations, postponed finalizing water discharge rules governing
the Company's pulp mills. The Company continues to work with the EPA to
establish appropriate water discharge rules for the pulp mills, but the timing
and costs associated with such rulemaking are uncertain. In the opinion of
management, capital costs to be incurred over the next three to five years
associated with environmental regulations will not exceed $30 million at the
Fernandina pulp mill and $50 million at the Jesup pulp mill.
Over the past several years, the harvest of timber from private lands in the
state of Washington has been restricted as a result of the listing of the
northern spotted owl and the marbled murrelet as threatened species under the
Endangered Species Act. These restrictions have caused Rayonier to restructure
and reschedule some of its harvest plans. In addition, at least one run of
salmon has been listed as threatened and several additional runs of salmon are
expected to be listed as threatened or endangered in 1999, and rules implemented
to protect them. Rayonier and other members of the forest products industry in
Washington state are currently engaged in negotiations with regulatory agencies
to obtain a predictable plan to protect fish and water. Such efforts are ongoing
and, in the opinion of management, will not have a material impact on the
Company's consolidated financial position or results of operations.
Dispositions and discontinued operations include Rayonier's Port Angeles, WA,
pulp mill which was closed on February 28, 1997; its interest in the Grays
Harbor, WA, pulp and paper complex which was closed in 1992; its wholly owned
subsidiary, Southern Wood Piedmont Company, which ceased operations in 1986;
Rayonier's Eastern Research Division, which ceased operations in 1981; and other
miscellaneous assets held for disposition. Rayonier currently estimates that
expenditures during 1999-2000 for environmental remediation and monitoring costs
for all dispositions and discontinued operations will total approximately $27
million. Such costs will be charged against Rayonier's reserves for estimated
environmental obligations (including monitoring and remediation costs) that the
Company believes are sufficient for costs expected to be incurred over the next
25-30 years with respect to dispositions and discontinued operations. At
December 31, 1998, these reserves totaled approximately $181 million. The amount
of actual future environmental costs is dependent on the outcome of negotiations
with federal and state agencies and may also be affected by new laws,
regulations and administrative interpretations, and changes in environmental
remediation technology. Based on information currently available, the Company
does not believe that any future changes in estimates, if necessary, would
materially affect its consolidated financial condition or results of operations.
YEAR 2000 COMPLIANCE
Rayonier began its company-wide Year 2000 Project in 1996 and expects all phases
to be completed by the end of the third quarter of 1999. The Project is designed
to identify Year 2000 problems and take corrective action covering business and
process control systems, networking communications, personal computer
applications, embedded microprocessors and third-party supplier and customer
risks. The Company has engaged outside consultants to advise on, assist in and
monitor compliance. The project team reports directly to the Company's senior
executive officers and regularly provides program updates to the Audit Committee
of the Board of Directors.
- 17 -
<PAGE> 21
The estimated total amount expended on the Year 2000 Project through the end of
1998 was under $1 million and the Company estimates that future costs could
range up to $3 million. Many of the Company's systems were upgraded or replaced
in the ordinary course of business during the last five years, and costs related
to those upgrades and replacements are not included in the Year 2000 Project
expenses.
The Company believes that with the completion of its Year 2000 Project as
scheduled, the risks will be minimized and the possibility of significant
interruptions of operations reduced. However, if the Company and its third party
suppliers and customers do not complete in a timely manner their assessment,
remediation and testing for Year 2000 compliance, there can be no assurance that
Year 2000 problems will not materially adversely affect the Company's results of
operations or its relationships with its suppliers and customers. The Company
has not yet been able to clearly identify the most reasonably likely worst case
scenarios and the appropriate contingency plans for such scenarios. As the
Company completes all phases of its Year 2000 Project, it will prepare
contingency plans to deal with any areas where it determines that risks of
non-compliance are significant.
MARKET RISK
The Company is exposed to various market risks, including changes in commodity
prices, interest rates and foreign currency exchange rates. The Company's
objective is to minimize the impact of these market risks on its earnings, cash
flow and equity. Derivatives are used, as noted below, in accordance with
policies and procedures approved by the Board of Directors and are managed by a
senior executive committee whose responsibilities include initiating, managing
and monitoring resulting exposures. The Company does not enter into financial
instruments for trading purposes.
Most of the Company's revenues and expenses are U.S.-dollar denominated.
However, the Company does have some risk within its New Zealand operations
related to foreign currency pricing and costs. The Company enters into foreign
currency forward contracts periodically to manage the risks of foreign currency
fluctuations as they relate to the cash flow and earnings of that business unit.
The Company also periodically enters into commodity forward contracts to fix
certain energy costs. On December 31, 1998, there were no foreign currency or
commodity forward contracts outstanding.
The Company periodically enters into interest rate swap agreements to manage its
exposure to interest rate changes, or in back to back arrangements at the time
debt is issued in order to cost effectively place that debt. These swaps involve
the exchange of fixed and variable interest rate payments without exchanging
notional principal amounts. At December 31, 1998, the Company had one interest
rate swap agreement in existence with a notional amount of $5 million that
matures in 2001 that swapped a fixed 6 percent interest rate for a three-month
LIBOR rate plus 30 basis points. The swap agreement was initiated at the time a
fixed rate medium-term note with similar maturity was placed. The fair value of
the interest rate swap, at year-end, was a gain of $0.1 million. Market risk
resulting from a hypothetical 1 percent increase in the three-month LIBOR rate
(100 basis points) was not material.
The fair market value of long-term fixed interest rate debt is subject to
interest rate risk, however, the Company intends to hold most of its debt until
maturity. Occasionally, callable bonds will be refinanced at the Company's
option if favorable economic conditions exist. Generally, the fair market value
of fixed interest rate debt will increase as interest rates fall and decrease as
interest rates rise. The estimated fair value of the Company's fixed rate debt
at December 31, 1998 was $224 million compared to $215 million carrying value. A
1 percent decrease in prevailing interest rates at December 31, 1998 would
result in an increase in the fair value of the Company's fixed rate debt of
approximately $7 million.
SAFE HARBOR
Comments about market trends, anticipated earnings and activities in 1999 and
beyond, including disclosures about the Company's Year 2000 project and
environmental spending are forward-looking and are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Changes in factors referred to in such comments and disclosures and changes in
the following additional important factors, among others, could cause actual
results to differ materially from those expressed in the forward-looking
statements: adverse weather conditions in the Company's operating areas;
competitive products and pricing; fluctuations in demand, particularly for
specialty fluff pulps, export and domestic logs, and wood products; the impact
of such market factors on the Company's timber sales in the U.S. and New
Zealand; the impact of global market conditions on prices and volumes;
production costs for wood products and for specialty pulps, particularly for raw
materials such as wood and chemicals; governmental policies and regulations
affecting the environment, import and export controls and taxes; and interest
rate and currency movements.
- 18 -
<PAGE> 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements on page ii.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by Item 10 with respect to directors is incorporated
herein by reference to the definitive proxy statement involving the election of
directors filed or to be filed by Rayonier with the Securities and Exchange
Commission pursuant to Regulation 14A within 120 days after the end of the
fiscal year covered by this Form 10-K.
The information called for by Item 10 with respect to executive officers is set
forth above in Part I under the caption Executive Officers of Rayonier.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated herein by reference to the
definitive proxy statement referred to above in Item 10.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 is incorporated herein by reference to the
definitive proxy statement referred to above in Item 10.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report:
1. See Index to Financial Statements on page ii for a list of the
financial statements filed as part of this report.
2. See Index to Financial Statement Schedules on page ii for a
list of the financial statement schedules filed as a part of
this report.
3. See Exhibit Index on pages B, C, D and E for a list of the
exhibits filed or incorporated herein as part of this report.
(b) Reports on Form 8-K:
1. The Company did not file any reports on Form 8-K during the
last quarter of the period covered by this report.
- 19 -
<PAGE> 23
REPORT OF MANAGEMENT
To Our Shareholders
Rayonier management is responsible for the preparation and integrity of the
information contained in the accompanying financial statements. The statements
were prepared in accordance with generally accepted accounting principles and,
where necessary, include amounts that are based on management's best judgments.
Rayonier's system of internal controls includes accounting controls and an
internal audit program. This system is designed to provide reasonable assurance
that Rayonier's assets are safeguarded, transactions are properly recorded and
executed in accordance with management's authorization, and fraudulent financial
reporting is prevented or detected.
Rayonier's internal controls provide for the careful selection and training of
personnel and for appropriate divisions of responsibility. The controls are
documented in policies, procedures and a written code of conduct that are
communicated to Rayonier's employees. Management continually monitors the system
of internal controls for compliance. Rayonier's independent public accountants,
Arthur Andersen LLP, evaluate and test internal controls as part of their annual
audit and make recommendations for improving internal controls. Management takes
appropriate action in response to each recommendation. The Board of Directors
and the officers of Rayonier monitor the administration of Rayonier's policies
and procedures and the preparation of financial reports.
W. LEE NUTTER
Chairman, President and
Chief Executive Officer
GERALD J. POLLACK
Senior Vice President and
Chief Financial Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Rayonier Inc.
We have audited the accompanying consolidated financial statements of Rayonier
Inc. (a North Carolina corporation) and subsidiaries as of December 31, 1998 and
1997, and for each of the three years in the period ended December 31, 1998, as
described in the Index to Financial Statements. These financial statements are
the responsibility of Rayonier's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rayonier Inc. and subsidiaries
as of December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
January 20, 1999
F-1
<PAGE> 24
RAYONIER INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
For the Year Ended December 31,
(Thousands of dollars, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
SALES $ 1,008,566 $ 1,104,228 $ 1,178,040
----------- ----------- -----------
Costs and expenses
Cost of sales 852,483 902,734 981,337
Selling and general expenses 35,467 42,410 39,409
Other operating (income) expense, net (3,507) (7,046) (1,210)
Provision for dispositions -- -- 124,587
----------- ----------- -----------
884,443 938,098 1,144,123
----------- ----------- -----------
OPERATING INCOME 124,123 166,130 33,917
Interest expense (34,712) (25,868) (27,662)
Interest and miscellaneous income (expense), net 743 (2,490) 7,762
Gains from sale of assets -- 8,395 --
Minority interest -- (25,520) (27,474)
----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 90,154 120,647 (13,457)
Income tax (expense) benefit (26,519) (33,328) 13,297
----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS 63,635 87,319 (160)
Provision for discontinued operations, net -- -- (98,239)
----------- ----------- -----------
NET INCOME (LOSS) $ 63,635 $ 87,319 $ (98,399)
=========== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE
BASIC EPS
Continuing operations $ 2.26 $ 3.03 $ ( -- )
Discontinued operations -- -- (3.28)
----------- ----------- -----------
Net income (loss) $ 2.26 $ 3.03 $ (3.28)
=========== =========== ===========
DILUTED EPS
Continuing operations $ 2.22 $ 2.97 $ ( -- )
Discontinued operations -- -- (3.28)
----------- ----------- -----------
Net income (loss) $ 2.22 $ 2.97 $ (3.28)
=========== =========== ===========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated statements.
F-2
<PAGE> 25
RAYONIER INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31,
(Thousands of dollars)
ASSETS
<TABLE>
<CAPTION>
1998 1997
---------- ----------
CURRENT ASSETS
<S> <C> <C>
Cash and short-term investments $ 6,635 $ 10,661
Accounts receivable, less allowance for doubtful
accounts of $4,843 and $4,481 118,762 115,704
Inventories 98,910 114,148
Timber purchase agreements 35,776 31,758
Other current assets 13,192 13,955
Deferred income taxes 8,559 24,288
---------- ----------
Total current assets 281,834 310,514
OTHER ASSETS 65,988 55,791
TIMBER PURCHASE AGREEMENTS 20,922 28,248
TIMBER, TIMBERLANDS AND LOGGING ROADS,
NET OF DEPLETION AND AMORTIZATION 544,190 497,110
PROPERTY, PLANT AND EQUIPMENT
Land, buildings, machinery and equipment 1,304,188 1,266,431
Less - accumulated depreciation 616,266 562,536
---------- ----------
687,922 703,895
---------- ----------
$1,600,856 $1,595,558
========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated statements.
F-3
<PAGE> 26
RAYONIER INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31,
(Thousands of dollars)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1998 1997
---------- ----------
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable $ 65,844 $ 74,269
Bank loans and current maturities 4,094 4,194
Accrued taxes 8,728 10,973
Accrued payroll and benefits 21,460 18,694
Accrued interest 6,182 6,076
Other current liabilities 44,279 66,085
Current reserves for dispositions and discontinued operations 22,167 26,247
---------- ----------
Total current liabilities 172,754 206,538
DEFERRED INCOME TAXES 115,405 113,442
LONG-TERM DEBT 485,850 421,325
NON-CURRENT RESERVES FOR DISPOSITIONS AND
DISCONTINUED OPERATIONS 159,198 172,615
OTHER NON-CURRENT LIABILITIES 28,690 31,997
MINORITY INTEREST -- 16,959
SHAREHOLDERS' EQUITY
Common Shares, 60,000,000 shares authorized,
27,767,309 and 28,283,634 shares issued
and outstanding 79,561 102,175
Retained earnings 559,398 530,507
---------- ----------
638,959 632,682
---------- ----------
$1,600,856 $1,595,558
========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated statements.
F-4
<PAGE> 27
RAYONIER INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
For the Year Ended December 31,
(Thousands of dollars)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) $ 63,635 $ 87,319 $ (98,399)
Non-cash items included in income
Depreciation, depletion and amortization 101,083 99,309 96,910
Deferred income taxes 11,659 14,045 (80,235)
Write-off of property, plant and equipment 5,730 2,100 94,164
Reserve for dispositions and discontinued operations -- -- 192,623
Disposition of New Zealand timber assets -- 4,634 --
(Decrease) increase in other non-current liabilities (3,307) 1,468 5,325
Change in accounts receivable, inventories and accounts payable 3,755 35,157 2,678
(Increase) decrease in current timber purchase agreements (4,018) (342) 16,025
Decrease (increase) in other current assets 763 (732) 2,189
(Decrease) increase in accrued liabilities (21,179) 10,861 9,261
Reduction in reserves for dispositions (1,050) (900) (5,000)
--------- --------- ---------
CASH FROM OPERATING ACTIVITIES 157,071 252,919 235,541
--------- --------- ---------
INVESTING ACTIVITIES
Capital expenditures, net of sales and retirements
of $5,613, $4,691 and $11,544 (89,099) (132,272) (175,200)
Acquisition of Rayonier Timberlands, L.P. Class A Units (48,821) -- --
Expenditures for dispositions and discontinued operations,
net of tax benefits of $6,033, $8,793 and $1,185 (10,414) (15,423) (2,049)
Change in timber purchase agreements and other assets (2,871) (10,672) (1,433)
--------- --------- ---------
CASH USED FOR INVESTING ACTIVITIES (151,205) (158,367) (178,682)
--------- --------- ---------
FINANCING ACTIVITIES
Issuance of debt 282,905 342,226 40,472
Repayments of debt (218,480) (349,617) (57,298)
Dividends paid (34,744) (34,523) (34,229)
Repurchase of Common Shares (26,548) (48,396) (16,522)
Issuance of Common Shares 3,934 4,892 3,169
Buyout of minority interest (16,959) (1,905) 49
--------- --------- ---------
CASH USED FOR FINANCING ACTIVITIES (9,892) (87,323) (64,359)
--------- --------- ---------
CASH AND SHORT-TERM INVESTMENTS
(Decrease) increase in cash and short-term investments (4,026) 7,229 (7,500)
Balance, beginning of year 10,661 3,432 10,932
--------- --------- ---------
Balance, end of year $ 6,635 $ 10,661 $ 3,432
========= ========= =========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 34,868 $ 29,951 $ 30,440
========= ========= =========
Income taxes $ 11,673 $ 8,671 $ 7,462
========= ========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated statements.
F-5
<PAGE> 28
RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless otherwise stated)
1. NATURE OF BUSINESS OPERATIONS
Rayonier operates in two major business segments, Timber and Wood Products, and
Specialty Pulp Products.
TIMBER AND WOOD PRODUCTS
The Timber and Wood Products segment includes two reportable business units:
Forest Resources and Trading, and Wood Products.
FOREST RESOURCES AND TRADING - Rayonier owns, leases or controls
approximately 1.5 million acres of timberlands in the U.S. and New
Zealand. Rayonier is also a leading exporter and trader of softwood
logs, lumber and wood panel products.
WOOD PRODUCTS - Rayonier operates two lumber manufacturing facilities
in the U.S. that produce dimension and custom lumber products for
residential construction and industrial uses, and a
medium-density-fiberboard (MDF) facility in New Zealand that produces
premium-grade MDF sold into world markets. The MDF facility began
commercial operation in October 1997.
SPECIALTY PULP PRODUCTS
Rayonier is a leading specialty manufacturer of high-grade chemical cellulose,
often called dissolving pulp, from which customers produce a wide variety of
products, including textiles, industrial and filtration fibers, plastics and
other chemical intermediate products. Rayonier also manufactures fluff pulps
that customers use to produce diapers and other sanitary products, and specialty
paper pulps used in the manufacture of products such as filters and decorative
laminates. With the closure of the Port Angeles, WA, pulp mill on February 28,
1997, the Company now operates two pulp mills in the U.S. at Jesup, GA, and
Fernandina Beach, FL, with an aggregate annual capacity of 700,000 metric tons.
Over half of Rayonier's pulp production is sold to export customers, primarily
in Europe and Asia.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Rayonier and its
subsidiaries. All significant intercompany balances and transactions are
eliminated. Minority interest through December 31, 1997, represented public
unitholders' proportionate share of the partners' capital of Rayonier's
consolidated subsidiary, Rayonier Timberlands, L.P. (RTLP). During 1998, all
outstanding public units were acquired by Rayonier.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of certain estimates by management (e.g.,
useful economic lives of assets) in determining the reported amount of assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reported period. Actual results could differ
from those estimates.
CASH AND SHORT-TERM INVESTMENTS
Cash and short-term investments include cash, time deposits and readily
marketable debt securities with maturities at date of acquisition of three
months or less.
INVENTORIES
Inventories are valued at the lower of cost or market. The cost of manufactured
pulp and MDF products is determined on the first-in, first-out (FIFO) basis.
Other products are generally valued on an average cost basis. Inventory costs
include material, labor and manufacturing overhead. Physical counts of
inventories are made at least annually. Potential losses from obsolete, excess
or slow-moving inventories are provided currently.
F-6
<PAGE> 29
TIMBER PURCHASE AGREEMENTS AND TIMBER-CUTTING CONTRACTS
Rayonier purchases timber for use in its log trading, pulp and wood products
businesses. The purchases are classified as current for timber expected to be
harvested within one year of the balance sheet date. The remainder is classified
as a non-current asset.
Rayonier evaluates the realizability of timber purchases and timber-cutting
contracts based on the estimated aggregate cost of such harvests and the sales
values to be realized. Losses are recorded in the period that a determination is
made that the aggregate harvest costs in a major operating area will not be
fully recoverable.
DEFERRED SOFTWARE
Software costs have been capitalized and are being amortized over their useful
life, generally a period not exceeding 60 months. Deferred software costs
included in "Other assets," net of accumulated amortization, totaled $16,727 and
$14,913 as of December 31, 1998 and 1997, respectively. Amortization expense
amounted to $3,028, $2,918 and $1,577 in 1998, 1997 and 1996, respectively.
TIMBER AND TIMBERLANDS
The acquisition cost of land, timber, real estate taxes, lease payments, site
preparation and other costs relating to the planting and growing of timber are
capitalized. Such accumulated costs attributed to merchantable timber are
charged against revenue at the time the timber is harvested based on the
relationship of harvested timber to the estimated volume of currently
merchantable timber. Timber and timberlands are stated at the lower of original
cost, net of timber cost depletion, or market value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment additions are recorded at cost, which includes
applicable freight, taxes, interest, construction and installation costs.
Interest capitalized in connection with major construction projects, primarily
the New Zealand MDF facility, amounted to $262, $5,005, and $2,664 during 1998,
1997 and 1996, respectively. Upon ordinary retirement or sale of property,
accumulated depreciation is charged with the cost of the property removed and
credited with the proceeds of salvage value, with no gain or loss recognized.
Gains and losses with respect to any significant and unusual retirements of
assets are included in operating income.
DEPRECIATION
Pulp and MDF manufacturing facilities are generally depreciated using the units
of production method. Depreciation on buildings and other equipment is provided
on a straight-line basis over the useful economic lives of the assets involved.
Rayonier normally claims the maximum depreciation deduction allowable for tax
purposes.
RESEARCH AND DEVELOPMENT
Significant costs are incurred for research and development programs expected to
contribute to the profitability of future operations. Such costs are expensed as
incurred. Research and development expenditures amounted to $10,720, $9,656, and
$11,000 in 1998, 1997 and 1996, respectively.
FOREIGN CURRENCY TRANSLATION
For significant foreign operations, including Rayonier's New Zealand-based
operations, the U.S. dollar is the functional currency. Monetary assets and
liabilities of foreign subsidiaries are translated into U.S. dollars at current
exchange rates. Non-monetary assets such as inventories, timber and property,
plant and equipment are translated at historical exchange rates. Income and
expense items are translated at average exchange rates prevailing during the
year, except that inventories, depletion and depreciation charged to operations
are translated at historical rates. Exchange gains and losses arising from
translation are recognized currently in "Other operating (income) expense, net."
INCOME TAXES
Income taxes on foreign operations are provided based upon the statutory tax
rates of the applicable foreign country. Additional U.S. income taxes have not
been provided on approximately $74 million of undistributed foreign earnings as
the Company intends to permanently reinvest such earnings in expanding foreign
operations.
F-7
<PAGE> 30
3. SEGMENT AND GEOGRAPHICAL INFORMATION
Rayonier adopted Statement of Financial Accounting Standards (SFAS) No. 131,
"Disclosures About Segments of an Enterprise and Related Information" in 1998
which changed the way the Company reports information about its operating
segments. The accounting policies of the operating segments are the same as
those described in the summary of significant accounting policies. Sales between
operating segments and reportable business units are made based on a fair market
value and intercompany profit or loss is eliminated in consolidation. The
Company evaluates financial performance based on the operating income of the
reportable business units.
Rayonier operates in two major business segments, Timber and Wood Products, and
Specialty Pulp Products. The Timber and Wood Products segment includes two
reportable business units under SFAS No. 131: Forest Resources and Trading, and
Wood Products. Forest Resources and Trading manages timberlands and sells
standing timber, purchases and harvests timber to sell logs, and purchases
lumber and wood panel products for resale. Wood Products manufactures and sells
dimension and specialty lumber and medium-density-fiberboard products. Specialty
Pulp Products produces and sells chemical cellulose, fluff and specialty pulps.
Dispositions includes activities of former operating units, including the
Company's Port Angeles mill, which was permanently closed in 1997.
Please refer to Note 1, which describes the Company's business segments in
further detail. Segment information for the three years ended December 31
follows (millions of dollars):
<TABLE>
<CAPTION>
Sales Operating Income
------------------------------------- -------------------------------------
1998 1997 1996 1998 1997 1996
------- ------- ------- ------- ------- -------
TIMBER AND WOOD PRODUCTS
<S> <C> <C> <C> <C> <C> <C>
Forest Resources and Trading $ 402 $ 420 $ 482 $ 118 $ 118 $ 124
Wood Products 121 133 104 (16) 6 3
------- ------- ------- ------- ------- -------
523 553 586 102 124 127
Specialty Pulp Products 488 520 514 34 56 57
Corporate and other (2) (3) (10) (12) (17) (16)
Dispositions -- 34 88 -- 3 (134)
------- ------- ------- ------- ------- -------
Total $ 1,009 $ 1,104 $ 1,178 $ 124 $ 166 $ 34
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DEPRECIATION,
GROSS PLANT ADDITIONS DEPLETION AND AMORTIZATION IDENTIFIABLE ASSETS
1998 1997 1996 1998 1997 1996 1998 1997 1996
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TIMBER AND WOOD PRODUCTS
Forest Resources and Trading $ 28 $ 37 $ 37 $ 26 $ 23 $ 22 $ 691 $ 666 $ 673
Wood Products 7 38 72 10 8 6 164 162 124
------ ------ ------ ------ ------ ------ ------ ------ ------
35 75 109 36 31 28 855 828 797
Specialty Pulp Products 59 61 71 65 66 60 690 691 703
Corporate and other 1 1 1 -- 1 -- 33 46 49
Dispositions -- -- 6 -- 1 9 23 31 49
------ ------ ------ ------ ------ ------ ------ ------ ------
Total $ 95 $ 137 $ 187 $ 101 $ 99 $ 97 $1,601 $1,596 $1,598
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Custodial capital spending was $58 million, $72 million, and $83 million in
1998, 1997 and 1996, respectively. Custodial capital spending is defined as
capital expenditures to maintain current earnings level over the cycle and to
keep facilities and equipment in safe and reliable condition, and in compliance
with regulatory requirements.
Corporate and other segment sales represent intersegment sales eliminations.
Corporate and other segment operating income (loss) represent unallocated
corporate expenses.
F-8
<PAGE> 31
GEOGRAPHICAL OPERATING INFORMATION
Information by geographical operating area for the three years ended December 31
follows (millions of dollars):
<TABLE>
<CAPTION>
OPERATING LOCATION SALES OPERATING INCOME IDENTIFIABLE ASSETS
1998 1997 1996 1998 1997 1996 1998 1997 1996
------ ------ ------ ----- ----- ---- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States $ 928 $ 992 $1,059 $ 141 $ 163 $ 32 $1,253 $1,222 $1,275
New Zealand 64 90 96 (14) 8 5 336 357 301
All other 17 22 23 (3) (5) (3) 12 17 22
------ ------ ------ ----- ----- ---- ------ ------ ------
Total $1,009 $1,104 $1,178 $ 124 $ 166 $ 34 $1,601 $1,596 $1,598
====== ====== ====== ===== ===== ==== ====== ====== ======
</TABLE>
Rayonier's sales for the last three years by geographical destination are as
follows (millions of dollars):
SALES LOCATION
<TABLE>
<CAPTION>
Sales by Destination
--------------------------------------------------------------
1998 % 1997 % 1996 %
------ --- ------ --- ------ ---
<S> <C> <C> <C> <C> <C> <C>
United States $ 587 58 $ 568 51 $ 527 45
Japan 107 11 173 16 234 20
Other Asia 109 11 154 14 192 16
Europe 121 12 127 12 135 11
Latin America 54 5 59 5 57 5
All other 31 3 23 2 33 3
------ --- ------ --- ------ ---
Total $1,009 100 $1,104 100 $1,178 100
====== === ====== === ====== ===
</TABLE>
4. FINANCIAL INSTRUMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards requiring that derivative
instruments be recorded on the balance sheet as either an asset or liability
measured at fair value. SFAS No. 133 requires that changes in the derivative's
fair value be recognized currently in earnings unless specific hedge accounting
criteria are met. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999, but may be adopted as of the beginning of any fiscal quarter
after issuance. Upon adoption, SFAS No. 133 is not expected to have a material
impact on the Company's consolidated financial position or results of
operations.
INTEREST RATE SWAPS
Rayonier uses interest rate swap agreements to manage exposure to interest rate
fluctuations. The outstanding agreement involves the exchange of fixed rate
interest payments for floating rate interest payments over the life of the
agreement without the exchange of any underlying principal amounts. Rayonier's
credit exposure is limited to the fair value of the agreements, and the Company
only enters into agreements with highly rated counterparties. The Company does
not enter into interest rate swap agreements for trading or speculative purposes
and matches the terms and contract notional amounts to existing debt or debt
expected to be refinanced. The net amounts paid or received under interest rate
swap agreements are recognized as an adjustment to interest expense.
At December 31, 1998, the Company had an interest rate swap agreement with a
total notional value of $5 million, expiring February 23, 2001. The agreement
effectively converts a fixed rate obligation at 6 percent to a floating rate of
three-month LIBOR plus 30 basis points. If the Company were to terminate its
existing interest rate swap agreement, any resulting gain or loss would be
deferred and recognized over the remaining life of the related debt.
FOREIGN CURRENCY FORWARD CONTRACTS
Rayonier's New Zealand operations generate approximately 6 percent of the
Company's sales. A significant portion of the revenue from Rayonier's New
Zealand operations is in U.S. dollars or significantly affected by the New
Zealand dollar/U.S. dollar exchange rate. However, most of its cash operating
costs are incurred in New Zealand dollars with New Zealand dollar expenses
exceeding New Zealand dollar revenues. The Company believes that it has been
able to mitigate most of the effect of exchange rate fluctuations of the New
Zealand dollar through risk management activities involving foreign currency
forward contracts, thereby normalizing the contribution of its New Zealand
operations toward what it would have been
F-9
<PAGE> 32
without exchange rate movements. The Company plans to continue this program but
will continue to limit its mark-to-market exposure so as not to have a material
effect on EPS if exchange rates move rapidly.
The following summarizes the contribution to Rayonier's earnings from New
Zealand operations after consideration of foreign exchange effects (millions of
dollars):
<TABLE>
<CAPTION>
1998 1997 1996
---- --- ---
<S> <C> <C> <C>
Operating income (loss) on a 1996 exchange rate basis $(21) $ 4 $ 5
Effect of exchange rate changes 7 4 --
---- --- ---
Operating income (loss) as reported (14) 8 5
Gain (loss) from foreign currency forward contracts (1) (3) 6
---- --- ---
Contribution from New Zealand operations $(15) $ 5 $11
==== === ===
</TABLE>
Rayonier's forward contracts are intended to cover anticipated operating needs
and therefore do not "hedge" firm contracts or commitments in accordance with
SFAS No. 52, "Foreign Currency Translation." As a result, the gains and losses
on these contracts are included in "Interest and miscellaneous income (expense),
net" based on mark-to-market values at reporting dates. In 1998, the maximum
foreign currency forward contracts outstanding at any point in time totaled
$23,605. At December 31, 1998, there were no foreign currency forward contracts
outstanding.
COMMODITY FORWARDS
The Company periodically enters into commodity forwards to fix certain energy
costs. This practice effectively eliminates the risk of a change in product
margins resulting from an increase or decrease in fuel oil costs. The Company
does not enter into commodity forwards for trading or speculative purposes. The
net amounts paid or received under the agreements are recognized as an
adjustment to fuel oil expense. There were no contracts outstanding at December
31, 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1998 and 1997, the estimated fair values of Rayonier's financial
instruments were as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------- --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
ASSET (LIABILITY)
Cash and short-term investments $ 6,635 $ 6,635 $ 10,661 $ 10,661
Debt (489,944) (499,252) (425,519) (438,310)
Foreign currency forward contracts -- -- (2,365) (2,365)
Interest rate swap agreements -- 121 -- (287)
</TABLE>
Rayonier uses the following methods and assumptions in estimating the fair value
of its financial instruments:
Cash and Short-Term Investments - The carrying amount is equal to fair market
value.
Debt - The Company's short-term bank loans and floating rate debt approximate
fair value. The fair value of fixed rate long-term debt is based upon quoted
market prices for these or similar issues, or rates currently available to the
Company for debt with similar terms and maturities.
Foreign Currency Forward Contracts - The fair value of foreign currency forward
contracts is based on dealer-quoted market prices of comparable instruments. The
contracts are reported at mark-to-market values if not considered a hedge for
accounting purposes.
Interest Rate Swap Agreements - The fair value of interest rate swap agreements
is based upon the estimated cost to terminate the agreements, taking into
account current interest rates and creditworthiness of the counterparties.
5. GAINS FROM SALE OF ASSETS
From time to time, Rayonier opportunistically sells non-strategic assets to
maximize value from its asset mix. In December 1997, the Company sold a 75
percent interest in approximately 6 percent of its timber holdings in New
Zealand to a timber investment fund as part of a joint venture with the Company.
Rayonier acquired a 25 percent interest in two forests owned by
F-10
<PAGE> 33
the investment fund. Rayonier received net cash proceeds of $11.7 million and
recorded a pretax gain of $8.4 million, $5.6 million after-tax, or 19 cents per
share. Rayonier also has marketing and management responsibilities for the joint
venture.
6. RAYONIER TIMBERLANDS, L.P.
In the United States, Rayonier manages almost all of its timberlands and sells
timber directly through Rayonier Timberlands, L.P. (RTLP), a limited
partnership created in 1985. Until January 1998, Rayonier owned 74.7 percent of
the Class A Limited Partnership Units of RTLP and the remaining 25.3 percent,
or 5.06 million Class A Units, were publicly traded. In January 1998, Rayonier
acquired the publicly held units of RTLP in accordance with the terms of the
RTLP Partnership Agreement for a cash purchase price of $13.00 per unit. The
acquisition was accounted for under the purchase method and was financed by the
utilization of existing credit facilities.
7. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CURRENT
U.S. federal $ 5,534 $ 6,531 $ 5,446
State and local 535 1,292 2,290
Foreign 1,687 1,709 1,596
-------- -------- --------
7,756 9,532 9,332
-------- -------- --------
DEFERRED
U.S. federal 28,815 24,652 (70,108)
State and local 682 540 (6,469)
Foreign (10,734) (1,396) (2,813)
-------- -------- --------
18,763 23,796 (79,390)
-------- -------- --------
$ 26,519 $ 33,328 $(70,058)
======== ======== ========
</TABLE>
Deferred income taxes represent the tax effects related to recording revenues
and expenses in different periods for financial reporting and tax return
purposes. Deferred tax assets (liabilities) at December 31, 1998 and 1997 were
related to the following principal timing differences:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Accelerated depreciation and depletion $(142,974) $(133,521)
Reserves for dispositions and discontinued operations 35,477 39,907
All other, net 651 4,460
--------- ---------
$(106,846) $ (89,154)
========= =========
</TABLE>
A reconciliation of the income tax provision at the U.S. statutory rate to the
reported income tax provision follows:
<TABLE>
<CAPTION>
1998 1997 1996 1996*
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Income tax provision at U.S. statutory rate $ 31,554 $ 42,226 $(58,960) $ 38,896
State and local taxes, net of federal tax benefit 791 1,191 (2,716) 1,806
Foreign operations (2,541) (5,647) (4,988) (4,988)
Foreign sales corporations (1,825) (2,200) (2,391) (2,391)
Research and development tax credits (1,508) (1,675) -- --
All other, net 48 (567) (1,003) (1,003)
-------- -------- -------- --------
Provision for income taxes - reported $ 26,519 $ 33,328 $(70,058) $ 32,320
======== ======== ======== ========
Effective tax rate - % 29.4 27.6 (41.6) 29.1
</TABLE>
*Excludes the tax benefits of $102 million for the two significant
non-cash charges in 1996
F-11
<PAGE> 34
8. EARNINGS (LOSS) PER COMMON SHARE
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share."
The following table provides details of the calculation of basic and diluted EPS
for 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Income (loss) from continuing operations $ 63,635 $ 87,319 $ (160)
=========== =========== ==========
Shares used for determining basic EPS 28,118,402 28,820,115 29,978,012
Dilutive effect of:
Stock options 266,441 389,131 *
Contingent shares 223,708 221,250 *
----------- ----------- ----------
Shares used for determining diluted EPS 28,608,551 29,430,496 29,978,012
=========== =========== ==========
Basic EPS-continuing operations $ 2.26 $ 3.03 $ (-)
=========== =========== ==========
Diluted EPS-continuing operations $ 2.22 $ 2.97 $ (-)
=========== =========== ==========
</TABLE>
*Outstanding stock options and contingent shares would be antidilutive in
1996 and therefore were excluded.
9. INVENTORIES
Rayonier's inventories included the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Finished goods $ 47,109 $ 51,398
Work in process 15,762 17,491
Raw materials 13,212 19,740
Manufacturing and maintenance supplies 22,827 25,519
-------- --------
$ 98,910 $114,148
======== ========
</TABLE>
10. DEBT
Rayonier's debt included the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Short-term bank loans at a weighted average rate of 5.88% $130,119 $123,352
Commercial paper at discount rates of 5.25% to 6.00% 109,000 56,000
Medium-term notes due 2000-2001 at variable interest rates of 5.5% to 5.55% 36,000 33,000
Medium-term notes due 1999-2001 at fixed interest rates of 6.0% to 6.16% 20,000 16,000
7.5% notes due 2002 110,000 110,000
Pollution control and industrial revenue bonds due
1999-2015 at fixed interest rates of 5.4% to 8.0% 84,650 86,830
All other 175 337
-------- --------
Total debt 489,944 425,519
Less:
Short-term bank loans 1,619 1,852
Current maturities 2,475 2,342
-------- --------
Long-term debt $485,850 $421,325
======== ========
</TABLE>
Rayonier has revolving credit agreements with a group of banks that provide the
Company with unsecured credit facilities totaling $300 million and expiring in
2002. The revolving credit facilities are used for direct borrowings and as
credit support for a commercial paper program. As of December 31, 1998, the
Company had $109 million of outstanding commercial paper and $191 million of
available borrowings under its revolving credit facilities. In addition, through
currently effective shelf
F-12
<PAGE> 35
registration statements filed with the Securities and Exchange Commission,
Rayonier may offer up to $200 million of new public debt securities.
Required repayments of debt are as follows:
<TABLE>
<S> <C>
1999 $ 4,094
2000 22,420
2001 23,185
2002 364,810
2003 2,330
2004-2016 73,105
--------
$489,944
========
</TABLE>
Medium-term notes, commercial paper and short-term bank loans totaling $252.5
million are classified as long-term debt because the Company has the ability and
intends to refinance such maturities through continued short-term borrowings,
available committed credit facilities or long-term borrowings. The most
restrictive long-term debt covenant in effect at December 31, 1998, provided
that the ratio of total debt to EBITDA not exceed 4 to 1. As of December 31,
1998, the ratio was 2.3 to 1. In addition, $389 million of retained earnings was
unrestricted as to the payment of dividends.
11. DISPOSITIONS AND DISCONTINUED OPERATIONS
Dispositions and discontinued operations include Rayonier's Port Angeles, WA,
pulp mill, which was closed on February 28, 1997; its interest in the Grays
Harbor, WA, pulp and paper complex which was closed in 1992; its wholly owned
subsidiary, Southern Wood Piedmont Company (SWP), which ceased operations in
1986; Rayonier's Eastern Research Division, which ceased operations in 1981; and
other miscellaneous assets held for disposition.
In the fourth quarter of 1996, Rayonier recorded a disposition charge of $79
million after-tax, or $2.63 per share, primarily related to the closure of the
Port Angeles pulp mill. The Company concluded that the mill was not competitive
in world markets because of long-term high wood costs due to federal
environmental restrictions on Northwest timber harvests, viscose pulp capacity
additions in lower cost regions of the world and anticipated large expenditures
for new environmental regulations. The $125 million pretax charge included a $77
million loss on disposal of mill assets with a net book value of $84 million,
accruals of $40 million for severance, relocation, demolition, environmental
cleanup and other items associated with the disposition, and $8 million for loss
on disposal of other non-strategic assets. Dismantling and demolition of the
mill began in 1997 and is expected to be completed in 1999. During 1997, Port
Angeles pulp product sales contributed $3 million to operating income.
In the fourth quarter of 1996, the Company also adopted Statement of Position
96-1 "Environmental Remediation Liabilities" issued by the American Institute of
Certified Public Accountants. The statement specifically identified future,
long-term monitoring and administration expenditures as remediation liabilities
that need to be accrued on the balance sheet as an existing obligation. Adoption
of the pronouncement resulted in a cash neutral pretax charge of $155 million,
$98 million after-tax, or $3.28 per share. Although the Company had already
accrued for cleanup and closure remediation liabilities associated with its SWP
wood treating business (discontinued in 1986), the cash expenditures for
monitoring and administration activities of approximately $4 million pretax, or
8 cents per share, had been expensed as incurred in 1996. These monitoring costs
are expected to continue on an annual basis, plus inflation, for approximately
25-30 years as mandated by state and federal regulations. The Company's annual
cash flow was not impacted by adoption of the accounting pronouncement.
As of December 31, 1998 and 1997, Rayonier had $11.5 million of receivables from
insurance claims included in "Other assets." Such receivables represent the
Company's claim for reimbursements in connection with property damage
settlements relating to SWP's discontinued wood preserving operations.
Rayonier currently estimates that expenditures during 1999-2000 for
environmental remediation and monitoring costs for all dispositions and
discontinued operations will total approximately $27 million. Such costs will be
charged against Rayonier's reserves for estimated environmental obligations
(including monitoring and remediation costs) that the Company believes are
sufficient for costs expected to be incurred over the next 25-30 years with
respect to dispositions and discontinued operations. At December 31, 1998, these
reserves totaled approximately $181 million. The amount of actual future
environmental costs is dependent on the outcome of negotiations with federal and
state agencies and may also be affected by new laws, regulations and
administrative interpretations, and changes in environmental remediation
technology. Based on information currently available, the Company does not
believe that any future changes in estimates, if necessary, would materially
affect its consolidated financial condition or results of operations.
F-13
<PAGE> 36
Reductions in reserves for dispositions, primarily related to completed projects
associated with the closure of the Grays Harbor facility, that were recognized
in income amounted to $1 million, $1 million and $5 million in 1998, 1997 and
1996, respectively.
12. SHAREHOLDERS' EQUITY
An analysis of activity in shareholders' equity for the three years ended
December 31, 1998 follows:
<TABLE>
<CAPTION>
Total
Common Shares Retained Shareholders'
Shares Amount Earnings Equity
----------- --------- --------- -------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 29,653,278 $ 159,032 $ 610,339 $ 769,371
Net loss -- -- (98,399) (98,399)
Dividends paid -- -- (34,229) (34,229)
Incentive stock plans 66,977 3,169 -- 3,169
Repurchase of Common Shares (437,800) (16,522) -- (16,522)
----------- --------- --------- ---------
BALANCE, DECEMBER 31, 1996 29,282,455 145,679 477,711 623,390
Net income -- -- 87,319 87,319
Dividends paid -- -- (34,523) (34,523)
Incentive stock plans 124,679 4,892 -- 4,892
Repurchase of Common Shares (1,123,500) (48,396) -- (48,396)
----------- --------- --------- ---------
BALANCE, DECEMBER 31, 1997 28,283,634 102,175 530,507 632,682
Net income -- -- 63,635 63,635
Dividends paid -- -- (34,744) (34,744)
Incentive stock plans 112,154 3,934 -- 3,934
Repurchase of Common Shares (628,479) (26,548) -- (26,548)
----------- --------- --------- ---------
BALANCE, DECEMBER 31, 1998 27,767,309 $ 79,561 $ 559,398 $ 638,959
=========== ========= ========= =========
</TABLE>
13. INCENTIVE STOCK PLANS
The 1994 Rayonier Incentive Stock Plan (the 1994 Plan) provides for the grant of
incentive stock options, non-qualified stock options, stock appreciation rights,
performance shares and restricted stock, subject to certain limitations. Under
the 1994 Plan, the Company may grant options to its employees for up to 4.5
million Common Shares. The exercise price of each option equals the market price
of the Company's stock on the date of grant, and an option's maximum term is 10
years. Options vest in one-third increments over a three-year period starting
from the date of grant.
Restricted stock granted under the 1994 Plan vests after three years. During
1997 and 1996, 2,000 and 27,500 restricted shares were granted with grant-date
fair values per share of $38.13 and $33.38 for 1997 and 1996, respectively.
In 1998, 1997 and 1996, 91,500, 93,000 and 48,000 Common Shares, respectively,
were reserved for contingent performance shares. The actual number of
performance shares to be issued is contingent upon the Company's total
shareholder return, compared with a competitive peer group of 12 companies
within the forest products industry over a three-year period. The grant-date
fair values of the 1998, 1997 and 1996 performance shares were $42.63, $38.13
and $33.38, respectively.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" to account for its stock plans. The compensation cost recognized was
$2,837, $3,904 and $3,737 in 1998, 1997 and 1996, respectively. Under SFAS No.
123, "Accounting for Stock Based Compensation," net income (loss) and earnings
(loss) per share would have been reduced (increased) by $1,844 or 6 cents per
share, $1,431 or 5 cents per share and $1,008 or 3 cents per share for 1998,
1997 and 1996, respectively. The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions used for grants in 1998, 1997 and 1996,
respectively: dividend yield of 3.1 percent, 3.0 percent and 3.1 percent;
expected volatility of 24.1 percent for 1998 and 22.5 percent for 1997 and 1996;
risk-free interest rates of 5.8 percent, 6.3 percent and 5.6 percent; and an
expected life of 7.5 years for all years. The weighted average fair value of
options granted during the year was $11.41, $10.46 and $8.39 for 1998, 1997 and
1996, respectively.
F-14
<PAGE> 37
A summary of the status of the Company's stock option plans as of December 31,
1998, 1997 and 1996, and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- -------------------------- -------------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercisable of Exercisable of Exercisable
Shares Price Shares Price Shares Price
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year 1,551,611 $32.05 1,268,288 $29.99 974,614 $28.64
Granted - 1994 Incentive
Stock Plan 371,500 $42.64 370,500 $38.34 355,000 $33.53
Exercised (66,618) $30.12 (80,345) $28.24 (39,477) $27.79
Canceled (12,997) $39.87 (6,832) $36.01 (21,849) $31.38
--------- --------- ---------
Outstanding at end of year 1,843,496 $34.20 1,551,611 $32.05 1,268,288 $29.99
========= ========== ==========
Options exercisable at
year-end 1,130,690 $30.67 857,833 $29.23 596,001 $28.13
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding
-------------------
Range Number Weighted Average Options
of Outstanding Remaining Exercisable Weighted Average
Exercise Prices at 12/31/98 Contractual Life at 12/31/98 Exercise Price
- --------------- ----------- ---------------- ----------- --------------
<S> <C> <C> <C> <C>
$16.57 - $19.72 85,986 1.8 years 85,986 $ 18.52
$28.88 - $31.35 703,211 5.5 years 703,211 $ 29.96
$33.38 - $48.56 1,054,299 8.1 years 341,493 $ 35.19
</TABLE>
14. EMPLOYEE BENEFIT PLANS
Rayonier adopted SFAS No. 132, "Employers' Disclosures About Pensions and Other
Postretirement Benefits" in 1998, which changed the format and required
disclosures concerning benefit plans.
Employee benefit plan liabilities are estimated using actuarial estimates and
management assumptions. These estimates are based on historical information,
along with certain assumptions about future events. Changes in assumptions, as
well as changes in actual experience, could cause these estimates to change.
Rayonier has pension plans covering substantially all of its employees. Certain
plans are subject to union negotiation. All costs of the plans are paid by
Rayonier. The following tables set forth net periodic benefit cost of Rayonier
plans, and total pension and postretirement benefit expense for the three years
ended December 31:
<TABLE>
<CAPTION>
Pension Postretirement
------------------------------------ ------------------------------------
1998 1997 1996 1998 1997 1996
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefit cost
Service cost $ 5,255 $ 4,871 $ 5,136 $ 400 $ 407 $ 429
Interest cost 7,803 7,461 7,311 1,328 1,305 1,254
Actual return on plan assets (17,807) (21,788) (14,254) -- -- --
Amortization of prior service cost and deferrals 8,862 13,373 6,330 (434) (434) (840)
Amortization of (gains) losses 384 207 342 634 572 551
-------- -------- -------- -------- -------- --------
Net periodic benefit cost of Rayonier plans 4,497 4,124 4,865 1,928 1,850 1,394
Defined contribution plans 2,056 2,437 2,326 -- -- --
Multi-employer plans -- -- -- 550 592 393
-------- -------- -------- -------- -------- --------
Total pension/postretirement benefit expense $ 6,553 $ 6,561 $ 7,191 $ 2,478 $ 2,442 $ 1,787
======== ======== ======== ======== ======== ========
</TABLE>
F-15
<PAGE> 38
The following tables set forth the funded status of the Rayonier pension and
postretirement benefit plans, the amounts recognized in the balance sheets of
the Company at December 31, 1998 and 1997 and the principal weighted-average
assumptions inherent in their determination:
<TABLE>
<CAPTION>
Pension Postretirement
-------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $ 113,407 $ 105,899 $ 20,405 $ 17,915
Service cost 5,255 4,871 400 407
Interest cost 7,803 7,461 1,328 1,305
Curtailment (gain) loss -- 2,952 -- 240
Actuarial (gain) loss 4,925 7,535 (199) 1,668
Benefits paid (7,620) (15,311) (1,388) (1,130)
--------- --------- --------- ---------
Benefit obligation at end of year 123,770 113,407 20,546 20,405
--------- --------- --------- ---------
Change in plan assets
Fair value of plan assets at beginning of year 119,862 110,397 -- --
Actual return on plan assets 17,698 21,788 -- --
Employer contribution 748 3,592 1,388 1,130
Other expense (518) (604) -- --
Benefits paid (7,620) (15,311) (1,388) (1,130)
--------- --------- --------- ---------
Fair value of plan assets at end of year 130,170 119,862 -- --
--------- --------- --------- ---------
Reconciliation of funded status at end of year
Funded status 6,400 6,455 (20,546) (20,405)
Unrecognized prior service cost 10,582 11,618 (3,517) (3,951)
Unrecognized actuarial net (gain) loss (14,837) (8,616) 9,591 10,424
Curtailment effects and termination benefits -- (2,952) -- --
Unrecognized net transition obligation (2,844) (3,505) -- --
--------- --------- --------- ---------
(Accrued) prepaid benefit cost $ (699) $ 3,000 $ (14,472) $ (13,932)
========= ========= ========= =========
Weighted-average assumptions as of December 31
Return on plan assets 9.75% 9.75% -- --
Rate of compensation increase 5.00% 5.00% -- --
Ultimate health care trend rate -- -- 5.00% 5.00%
Discount rate 6.75% 7.00% 6.75% 7.00%
</TABLE>
The table for 1997 reflects the costs of curtailment and special termination
benefits of an hourly Rayonier pension plan as a result of the closure of the
Port Angeles pulp mill. See Note 11. The costs of $2,952 were recorded as part
of the 1996 charge of $125 million primarily related to the Port Angeles pulp
mill closure and were accounted for in accordance with SFAS No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits."
The assumed rate of future increases in the per capita cost of health care (the
health care trend rate) was 7.5 percent for 1998, decreasing ratably to 5
percent in the year 2001. The following table shows the effect of a one percent
change in assumed health care cost trends on:
<TABLE>
<CAPTION>
1 Percent
-------------------
Increase Decrease
-------- --------
<S> <C> <C>
Year end benefit obligation $ 782 $(746)
Total of service and interest
cost components $ 62 $ (59)
</TABLE>
F-16
<PAGE> 39
15. COMMITMENTS
The Company leases certain buildings, machinery and equipment under various
operating leases. As of December 31, 1998, minimum rental commitments under
operating leases were $5,759, $4,857, $9,982, $1,717 and $1,646 for 1999, 2000,
2001, 2002 and 2003, respectively. For the remaining years, such commitments
amount to $2,382, aggregating total minimum lease payments of $26,343. Total
rental expense for operating leases amounted to $7,383, $7,545 and $5,609, in
1998, 1997 and 1996, respectively. Additionally, the Company has indirectly
guaranteed approximately $20.7 million of debt that is secured by equipment used
by its vendors to provide products to the Company.
16. CONTINGENCIES
From time to time, Rayonier may become liable with respect to pending and
threatened litigation and environmental and other matters.
LEGAL PROCEEDINGS
Rayonier has been designated a potentially responsible party, or has had other
claims made against it, under the U.S. Comprehensive Environmental Response,
Compensation and Liability Act and/or comparable state statutes at eight sites,
all of which relate to operations classified under "Dispositions and
Discontinued Operations." Rayonier has entered into settlement agreements with
the U.S. EPA at four of these sites and has negotiated, or is in the process of
negotiating, consent orders with state environmental agencies for environmental
remediation at three of these sites. Rayonier believes that an appropriate
provision for remediation costs at these sites is included in its reserves for
estimated environmental obligations including the reserves for dispositions and
discontinued operations. See Note 11.
In addition, there are various lawsuits pending against or affecting Rayonier
and its subsidiaries, some of which involve claims for substantial sums, but
whose outcomes are not expected to materially impact the Company's consolidated
financial position or results of operations. In particular, Rayonier is one of
two defendants in an action seeking indemnity for $57 million in damages
incurred as the result of a fire and explosion at a storage facility where a
Rayonier pulp manufacturing by-product was stored. In April 1998, summary
judgment in favor of Rayonier was entered. The plaintiffs have appealed the
entry of summary judgment. Rayonier continues to vigorously defend the action,
believes that its defenses are meritorious and based on advice of counsel,
believes that its liability, if any, will not be material and will be covered by
its product liability insurance.
ENVIRONMENTAL MATTERS
Rayonier is subject to stringent environmental laws and regulations concerning
air emissions, water discharges and waste disposal that, in the opinion of
management, will require substantial expenditures over the next 10 years. During
1997, the EPA finalized its Cluster Rules governing air emissions but, due to
the specialty nature of Rayonier's products and operations, postponed finalizing
water discharge rules governing the Company's pulp mills. The Company continues
to work with the EPA to establish appropriate water discharge rules for the pulp
mills, but the timing and costs associated with such rulemaking is uncertain. In
the opinion of management, future capital costs associated with existing
environmental rules will not have a material impact on the Company's
consolidated financial position or results of operations.
Over the past several years, the Company has worked with the state of Washington
to implement protective measures with respect to several endangered species. The
effect has been to restrict harvesting in various habitats on Company land. Such
efforts are ongoing and, in the opinion of management, will not have a material
impact on the Company's consolidated financial position or results of
operations.
F-17
<PAGE> 40
17.QUARTERLY RESULTS FOR 1998 AND 1997 (UNAUDITED)
(thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------- Total
March 31 June 30 Sept. 30 Dec. 31 Year
-------- ------- -------- ------- ----
<S> <C> <C> <C> <C> <C>
1998
Sales $ 225,414 $ 254,011 $ 258,740 $ 270,401 $1,008,566
Operating income 34,157 35,172 25,368 29,426 124,123
Net income 18,196 18,440 12,841 14,158 63,635
Basic EPS .64 .65 .46 .51 2.26
Diluted EPS .63 .64 .45 .50 2.22
1997
Sales $ 260,138 $ 290,073 $ 266,853 $ 287,164 $1,104,228
Operating income 40,473 41,075 41,894 42,688 166,130
Net income 18,396 19,761 23,241 25,921 87,319
Basic EPS .63 .68 .81 .91 3.03
Diluted EPS .62 .67 .79 .89 2.97
</TABLE>
F-18
<PAGE> 41
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
RAYONIER INC.
By GERALD J. POLLACK
----------------------------
Gerald J. Pollack
March 19, 1999 Senior Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman of the
- ---------------------------- Board, President,
W. Lee Nutter Chief Executive
(Principal Executive Officer) Officer and Director
GERALD J. POLLACK Senior Vice President March 19, 1999
- ---------------------------- and Chief Financial
Gerald J. Pollack Officer
(Principal Financial Officer
and Principal Accounting
Officer)
* Director
- ----------------------------
Rand V. Araskog
* Director
- ----------------------------
Donald W. Griffin
* Director
- ----------------------------
Ronald M. Gross
* Director
- ----------------------------
Paul G. Kirk, Jr.
* Director
Katherine D. Ortega
* Director
- ----------------------------
Burnell R. Roberts
* Director
- ----------------------------
Carl S. Sloane
* Director
- ----------------------------
Nicholas L. Trivisonno
* Director
- ----------------------------
Gordon I. Ulmer
*By GERALD J. POLLACK March 19, 1999
------------------------
Attorney-In-Fact
</TABLE>
A
<PAGE> 42
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------- --------
<S> <C> <C>
2.1 Distribution agreement between Incorporated by reference
ITT Corporation and Rayonier to Exhibit 2.1 to the
Inc. Registrant's December 31,
1993 Form 10-K
3.1 Amended and Restated Articles Incorporated by reference
of Incorporation to Exhibit 4(a) to the
Registrant's Registration
Statement on Form S-8
(Registration No. 33-52437)
3.2 By-Laws Incorporated by reference
to Exhibit 3.2 to the
Registrant's December 31,
1995 Form 10-K
4.1 Indenture dated as of September Incorporated by reference
1, 1992 between the Company and to Exhibit 4.1 to the
Bankers Trust Company, as Registrant's December 31,
Trustee, with respect to 1993 Form 10-K
certain debt securities of the
Company
4.2 First Supplemental Indenture Incorporated by reference
dated as of December 13, 1993 to Exhibit 4.2 to the
Registrant's December 31,
1993 Form 10-K
4.3 $100 million 364-day Revolving Incorporated by reference
Credit Agreement dated as of to Exhibit 4.1 to the
April 14, 1995 among Rayonier Registrant's March 31,
Inc. as Borrower and the banks 1995 Form 10-Q
named therein as Banks,
Citibank, N.A. as
Administrative Agent and
Citicorp Securities, Inc. and
the Toronto-Dominion Bank as
Arrangers
4.4 $200 million Revolving Credit Incorporated by reference
Agreement dated as of April 14, to Exhibit 4.2 to the
1995 among Rayonier Inc. as Registrant's March 31,
Borrower and the banks named 1995 Form 10-Q
therein as Banks, Citibank,
N.A. as Administrative Agent
and Citicorp Securities, Inc.
and the Toronto-Dominion Bank
as Arrangers
4.5 Amendment No.1, dated as of Incorporated by reference
June 16, 1995 to the $100 to Exhibit 4.1 to the
million 364-day Revolving Registrant's June 30, 1996
Credit Agreement dated as of Form 10-Q
April 14, 1995 among Rayonier
Inc. as Borrower and the banks
named therein as Banks,
Citibank, N.A. as
Administrative Agent and
Citicorp Securities, Inc. and
the Toronto-Dominion Bank as
Arrangers
4.6 Amendment No. 2, dated as of Incorporated by reference
April 12, 1996 to the $100 to Exhibit 4.2 to the
million 364-day Revolving Registrant's June 30, 1996
Credit Agreement dated as of Form 10-Q
April 14, 1995 among Rayonier
Inc. as Borrower and the banks
named therein as Banks,
Citibank, N.A. as
Administrative Agent and
Citicorp Securities, Inc. and
the Toronto-Dominion Bank as
Arrangers
</TABLE>
B
<PAGE> 43
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------- --------
<S> <C> <C>
4.7 Amendment No. 1, dated as of Incorporated by reference
June 16, 1995 to the $200 to Exhibit 4.3 to the
million Revolving Credit Registrant's June 30, 1996
Agreement dated as of April 14, Form 10-Q
1995 among Rayonier Inc. as
Borrower and the banks named
therein as Banks, Citibank,
N.A. as Administrative Agent
and Citicorp Securities, Inc.
and the Toronto-Dominion Bank
as Arrangers
4.8 Amendment No. 2, dated as of Incorporated by reference
April 12, 1996 to the $200 to Exhibit 4.4 to the
million Revolving Credit Registrant's June 30, 1996
Agreement dated as of April 14, Form 10-Q
1995 among Rayonier Inc. as
Borrower and the banks named
therein as Banks, Citibank,
N.A. as Administrative Agent
and Citicorp Securities, Inc.
and the Toronto-Dominion Bank
as Arrangers
4.9 Amended and Restated Revolving Incorporated by reference
Credit Agreement dated as of to Exhibit 4.1 to the
April 11, 1997, for the $200 Registrant's March 31,
million Revolving Credit 1997 Form 10-Q
Agreement dated as of April 14,
1995 as amended as of June 16,
1995 and as of April 12, 1996
among Rayonier Inc. as Borrower
and the banks named therein as
Banks, Citibank, N.A. as
Administrative Agent and
Citicorp Securities, Inc. and
the Toronto-Dominion Bank as
Arrangers
4.10 Other instruments defining the Not required to be filed.
rights of security holders, The Registrant hereby
including indentures agrees to file with the
Commission a copy of
any other instrument
defining the rights of
holders of the
Registrant's long-term
debt upon request of
the Commission
9 Voting trust agreement None
10.1 Rayonier 1994 Incentive Stock Incorporated by reference
Plan, as amended to Exhibit 10.1 to the
Registrant's September
30, 1998 Form 10-Q.
10.2 Rayonier Supplemental Senior Incorporated by reference
Executive Severance Pay Plan to Exhibit 10.2 to the
Registrant's December
31, 1997 Form 10-K.
10.3 Rayonier Investment and Savings Incorporated by reference
Plan for Salaried Employees to Exhibit 10.3 to the
Registrant's December
31, 1997 Form 10-K.
10.4 Rayonier Salaried Employees Incorporated by reference
Retirement Plan to Exhibit 10.4 to the
Registrant's December
31, 1997 Form 10-K.
</TABLE>
C
<PAGE> 44
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------- --------
<S> <C> <C>
10.5 Form of Indemnification Incorporated by reference
Agreement between Rayonier Inc. to Exhibit 10.9 to the
and its Directors and Officers Registrant's December 31,
1993 Form 10-K
10.6 Rayonier Inc. Excess Benefit Incorporated by reference
Plan to Exhibit 10.10 to the
Registrant's December 31,
1993 Form 10-K
10.7 Amendment to Rayonier Inc. Incorporated by reference
Excess Benefit Plan dated to Exhibit 10.7 to the
August 18, 1997 Registrant's December 31,
1997 Form 10-K
10.8 Rayonier Inc. Excess Savings Incorporated by reference
and Deferred Compensation Plan to Exhibit 10.8 to the
Registrant's December 31,
1997 Form 10-K
10.9 Form of Rayonier Inc. Excess Incorporated by reference
Savings and Deferred to Exhibit 10.13 to the
Compensation Plan Agreements Registrant's December 31,
1995 Form 10-K
10.10 Form of Indemnification Incorporated by reference
Agreement between Registrant to Exhibit 10.1 to the
and directors of Rayonier Registrant's March 31,
Forest Resources Company, its 1994 Form 10-Q
wholly owned subsidiary which
is Managing General Partner of
Rayonier Timberlands, L.P., who
are not also directors of
Registrant
10.11 Description of Rayonier 1994 Incorporated by reference
Incentive Stock Plan Contingent to Exhibit 10.1 to the
Performance Share Awards Registrant's June 30, 1994
Form 10-Q
10.12 Form of Rayonier 1994 Incentive Incorporated by reference
Stock Plan Contingent to Exhibit 10.1 to the
Performance Share Award Registrant's June 30, 1994
Agreement Form 10-Q
10.13 Form of Rayonier 1994 Incentive Incorporated by reference
Stock Plan Restricted Share to Exhibit 10.17 to the
Award Agreement Registrant's December 31,
1995 Form 10-K
10.14 Form of Rayonier 1994 Incentive Incorporated by reference
Stock Non-qualified Stock to Exhibit 10.18 to the
Option Award Agreement Registrant's December 31,
1995 Form 10-K
10.15 Rayonier Substitute Stock Incorporated by reference
Option Plan to Exhibit 4(c) to the
Registrant's Registration
Statement on Form S-8
(File No. 33-52891)
10.16 Form of Rayonier Substitute Incorporated by reference
Stock Option Award Agreements to Exhibit 10.20 to the
Registrant's December 31,
1995 Form 10-K
</TABLE>
D
<PAGE> 45
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------- --------
<S> <C> <C>
10.17 Split-Dollar Life Insurance Incorporated by reference
Agreement dated June 22, 1994 to Exhibit 10.2 to the
between Rayonier Inc. and Registrant's June 30, 1994
Ronald M. Gross Form 10-Q
10.18 Amendment to Split-Dollar Life Incorporated by reference
Insurance Agreement, dated July to Exhibit 10.18 to the
22, 1997 Registrant's December 31,
1997 Form 10-K
10.19 Deferred Compensation/ Incorporated by reference
Supplemental Retirement to Exhibit 10.3 to the
Agreement dated June 28, 1994 Registrant's June 30, 1994
between Rayonier Inc. and Form 10-Q
Ronald M. Gross
10.20 Amendment to Deferred Incorporated by reference
Compensation/Supplemental to Exhibit 10.20 to the
Retirement Agreement, dated Registrant's December 31,
July 22, 1997 1997 Form 10-K
10.21 Consulting Agreement dated Filed herewith
October 19, 1998 between
Rayonier Inc. and Ronald M.
Gross
10.22 Other material contracts None
11 Statement re computation of per Not required to be filed
share earnings
12 Statements re computation of Filed herewith
ratios
13 Annual report to security Not applicable
holders, Form 10-Q or quarterly
report to security holders
16 Letter re change in certifying Not applicable
accountant
18 Letter re change in accounting Not applicable
principles
21 Subsidiaries of the Registrant Incorporated by reference
to Exhibit 21 to the
Registrant's December 31,
1993 Form 10-K
22 Published report regarding None
matters submitted to vote of
security holders
23 Consents of experts and counsel Filed herewith
24 Powers of attorney Filed herewith
27 Financial data schedule Filed herewith
28 Information from reports Not applicable
furnished to state insurance
regulatory authorities
99 Additional exhibits None
</TABLE>
E
<PAGE> 1
Exhibit 10.21
CONSULTING AGREEMENT
CONSULTING AGREEMENT (this "Agreement") made as of the 19th day of
October, 1998 by and between Ronald M. Gross, residing at the address indicated
following his signature below (hereinafter referred to as "Mr. Gross") and
Rayonier Inc., a North Carolina corporation having its principal place of
business at 1177 Summer Street, Stamford, Connecticut 06905 (hereinafter
referred to as the "Company").
W I T N E S S E T H:
WHEREAS, Mr. Gross has provided valuable service to the Company and its
shareholders as Chief Executive Officer of the Company since 1981 and as the
Company's Chairman of the Board of Directors since 1984;
WHEREAS, on May 15, 1998, Mr. Gross was reelected a Class I Director of
the Company for a term ending in 2001;
WHEREAS, Mr. Gross intends to retire from his employment with the Company,
and the Company desires to have Mr. Gross continue as a director and to have the
opportunity to consult Mr. Gross following his retirement; and
WHEREAS, Mr. Gross is willing to remain a director of the Company and to
undertake such consulting obligations on the terms and conditions contained
herein.
NOW THEREFORE, in consideration of their mutual promises, and for other
good and valuable consideration, the parties, intending to be legally bound,
agree as follows:
1. Retirement. Mr. Gross will voluntarily retire and thereby
terminate his employment with the Company on December 31, 1998 (his
"Retirement"), and relinquish his role as Chairman of the Board of Directors.
2. Directorship. (a) Nomination. Mr. Gross shall remain a Class I
Director of the Company for the remainder of his term ending in May, 2001, and
the Company hereby agrees to nominate Mr. Gross for election as a Class I
Director at each Annual Meeting at which Class I Directors are elected in 2001
and 2004 and, if reelected, Mr. Gross agrees to continue to serve in such
capacity through the Company's Annual Meeting in 2007. As a director, Mr. Gross
shall be entitled to compensation for such service on the same terms as the
Company's other non-employee members of the Board of Directors in accordance
with the Company's policies as may be in effect from time to time, effective
January 1, 1999 (the "Effective Date"); provided that, within 30 days of the
Effective Date, the Company shall pay to Mr. Gross one-half of the annual
retainer paid to non-employee directors elected on May 15, 1998 in respect of
Mr. Gross's service as a director for the period from the Effective Date though
the date of the Company's Annual Meeting in 1999.
<PAGE> 2
-2-
(b) Consulting Term. In addition to his service as a director of the
Company, Mr. Gross agrees to provide consulting services to the Board of
Directors. The term of this arrangement shall be for the period from the
Effective Date through the date of the Company's Annual Meeting in 2007, or,
absent a change in control (defined below), for such shorter period as he may
remain a director, provided that such consulting term shall in no event end
before October 19, 2005 (the "Consulting Term"). Apart from his compensation as
a director, the Company shall pay Mr. Gross an annual retainer of $50,000, for
each year or part thereof in the term, payable as a lump sum at the same time as
the annual retainer paid to non-employee directors (including Mr. Gross);
provided that, within 30 days of the Effective Date, the Company shall pay to
Mr. Gross $25,000 in respect of Mr. Gross's consulting services hereunder for
the period from the Effective Date through the date of the Company's Annual
Meeting in 1999. During the Consulting Term, Mr. Gross also shall be entitled to
reimbursement of reasonable expenses incurred in his consulting service. Mr.
Gross's consulting services shall include such services as Mr. Gross is
requested to perform from time to time by the Board of Directors, acting through
its Chairman, and that Mr. Gross, in his sole discretion, determines to
undertake during the Consulting Term.
3. Separation Benefits. In addition to, and without limiting, any
and all other benefits otherwise payable to Mr. Gross, from and after the
Effective Date, Mr. Gross shall be entitled to the following:
(a) Insurance Premium Reimbursement/Deferred Compensation. On or
about January 1, 2000, Mr. Gross will be paid a lump sum of $300,000 (the
"Insurance Reimbursement"), together with an amount (the "tax gross up") such
that after payment of all federal and state taxes in respect of such payment(s)
from the Company Mr. Gross shall have received the full after tax value of such
amounts, together with a tax gross up of such amount estimated at $237,000. The
Insurance Reimbursement is intended to correspond to the present day value
estimate of certain amounts payable as premiums in connection with a
participation by Mr. Gross in the AIG Executive Edge sponsored insurance
protection for ITT/Rayonier Executive non-qualified benefit plans ("Executive
Security Coverage") for an extended nine-year period. If Mr. Gross so advises
the Company in writing on or before December 31, 1999, in lieu of the lump sum
payment provided in respect of the Insurance Reimbursement, a deferred
compensation payment of $80,500 instead will be paid each January 15th,
commencing in the year 2000, for nine consecutive years, which annual amount is
intended to correspond to the annual premium for Executive Security Coverage
($45,000) plus tax gross-up ($35,500) in each such year. All of the deferred
compensation amounts payable hereunder shall be payable without regard to
whether or not Mr. Gross elects to continue Executive Security Coverage.
(b) Tax Service/Financial Planning. Continuation of Mr. Gross's
right to receive a Senior Executive Tax Service/Financial Planning ("Tax
Planning Allowance") allowance in the amount of $15,000 per year, plus tax
gross-up, to cover the costs of Mr. Gross's 2000 and 2001 tax filings for
calendar years 1999 and 2000 and related planning, including applicable carry
over provisions, in the same manner as if Mr. Gross remained in his present
capacities and not retired.
<PAGE> 3
-3-
(c) Annual Physical. From and after the Effective Date, the Company
shall pay for the reasonable cost of an annual physical for Mr. Gross through
and including his last year as a director of the Company, in the same manner as
if Mr. Gross remained in his present capacities and not retired.
4. Office. From and after the Effective Date, Mr. Gross shall be
entitled to, and the Company shall provide Mr. Gross with, an off-site office at
a location of Mr. Gross's choosing (the "Office") through the later of (i) the
year 2005 or (ii) the termination of Mr. Gross's Consulting Term. The Company
shall provide Mr. Gross with certain services in connection with the Office,
including, without limitation, secretarial services, utilities, telephone,
facsimile, computer equipment, and Company car/driver service, as available, in
addition to private car service for Mr. Gross' business use (the "Services").
The cost of maintaining the Office and the Services will be determined by market
conditions and shall be subject to cost of living adjustments.
5. Non-Disclosure. (a) General. Mr. Gross acknowledges that his work
as a consultant hereunder will continue to bring him into close contact with the
Confidential Information (defined below) of the Company and of third parties.
Mr. Gross acknowledges that such Confidential Information continues to be
reposed in him in trust. Mr. Gross agrees that he shall, both during and after
his tenure as a consultant hereunder, maintain such Confidential Information in
confidence and neither disclose to others (nor cause to be disclosed) nor use
personally (nor cause to be used) such Confidential Information without the
prior written permission of the Company. Mr. Gross will also take reasonable
precautions to prevent the inadvertent exposure of Confidential Information to
unauthorized persons or entities. Mr. Gross acknowledges that the covenants in
this Agreement are a continuation of those that have existed during the term of
his employment with the Company. These covenants are expressions of his duties,
formerly as an employee, and continuing as a director and now consultant of the
Company not to use the Confidential Information to the detriment of the Company.
In addition, Mr. Gross acknowledges that he shall benefit from entry into this
Agreement in that the Company shall be willing to continue to provide access to
Confidential Information to Mr. Gross. The obligations under this paragraph
shall survive the termination of this Agreement.
(b) Confidential Information. As used herein, "Confidential Information"
means all confidential information and trade secrets of the Company or any of
its Affiliates, whether now existing or hereafter acquired or developed,
including without limitation financial statements, business plans, working
methods, investments, materials, processes, programs, designs, names of and
relationships with current vendors and lenders and other third parties,
contractual arrangements, profit formulas, experimental investigations, studies,
current customer/vendor names and requirements, current professional
associations or contacts, information submitted to the Company or its Affiliates
by third parties on a confidential basis, similar other non-public or otherwise
confidential, sensitive or proprietary information. "Confidential Information"
does not include information that has become generally known within the forest
products industry without breach of any obligation of confidentiality of Mr.
Gross. (As used herein, the term "Affiliate" means any entity controlling,
controlled by or under common control with the Company, now or in the future,
including without limitation, partnerships in which the
<PAGE> 4
-4-
Company or any Affiliate may acquire a controlling interest as a limited or
general partner and limited liability companies in which the Company or any
Affiliate may become a member.)
6. Non-Competition. Because Mr. Gross's consulting services to the Company
are special and because Mr. Gross has access to the Company's confidential
information, Mr. Gross covenants and agrees that during the Consulting Term, and
for six (6) months thereafter, Mr. Gross will not, directly or indirectly,
either on his own behalf or on behalf of any person, partnership, corporation or
otherwise, be employed by or provide consulting services to, or be an investor,
partner, member or more than 2% shareholder of, any company from time to time
identified in the peer group forest product industry companies used for purposes
of measuring total shareholder return for Contingent Performance Share awards
granted to employees of the Company under the 1994 Rayonier Incentive Stock
Plan, without the prior written consent of the Company's Board of Directors. The
parties agree that the time period and scope of the non-competition specified
above are reasonable and necessary in light of the matters contemplated by this
Agreement. If, however, it shall be determined at any time by a court of
competent jurisdiction that either the time period restriction or the
geographical area restriction, or both, are invalid or unenforceable, the
parties agree that any such restriction determined to be invalid or
unenforceable shall be deemed so amended as to make such restriction valid and
enforceable in the determination of said court, and such restriction, as so
amended, shall be enforceable between the parties to the same extent as if such
amendment had been made as of the date of this Agreement. This paragraph shall
survive the termination of this Agreement for the period indicated above.
7. Change in Control. Unless Mr. Gross shall have been notified and
approved thereof prior thereto in writing, in the event of a Change in Control
of the Company, all payments under this Agreement, including, without
limitation, payments under Sections 2(b), 3(a) and 3(b), shall be accelerated to
the effective date of such Change in Control. Payments under Section 2(b) shall
be calculated on the basis of the full Consulting Term to June 1, 2007; provided
that, at Mr. Gross's sole option, Mr. Gross may, by written notice to the
Company, forego payment of amounts due under Section 2(b) and the Consulting
Term shall thereupon lapse. For this purpose, a Change in Control shall have the
meaning specified in the Retirement Plan for Salaried Employees of Rayonier
Inc., as amended effective July 18, 1997, and as the same may be thereafter
amended from time to time prior to the occurrence of a Change in Control.
8. Notices. Any notice permitted or required hereunder shall be
deemed sufficient when hand-delivered or mailed by certified mail, postage
prepaid, and addressed if to the Company, Attn.: Chairman, at the address
indicated above and if to Mr. Gross at the address indicated below (or to such
other address as may be provided by notice).
9. Entire Agreement. This Agreement constitutes the entire agreement
between the parties concerning the subjects hereof and supersedes any and all
prior agreements or understandings.
10. Assignment. This Agreement may not be assigned by Mr. Gross
without the prior written consent of the Company. This Agreement may be assigned
by the Company and shall be binding upon, and inure to the benefit of, the
Company's successors and assigns.
<PAGE> 5
-5-
11. Headings. Headings herein are for convenience of reference only
and shall not define, limit or interpret the contents hereof.
12. Amendment. This Agreement may be amended, modified or
supplemented by the mutual consent of the parties in writing, but no oral
amendment, modification or supplement shall be effective.
13. Specific Performance. The parties acknowledge that the Company
would be irreparably damaged and there would be no adequate remedy at law for
Mr. Gross's breach of Sections 5 and 6 of this Agreement, and accordingly, the
terms thereof shall be specifically enforced. Mr. Gross hereby consents to the
entry of any temporary restraining order or preliminary or ex parte injunction,
in addition to any other remedies available at law or in equity, to enforce the
provisions hereof.
14. Severability. The provisions of this Agreement are severable.
The invalidity of any provision shall not affect the validity of any other
provision.
15. Governing Law. This Agreement shall be construed and regulated
in all respects under the laws of the State of Connecticut.
16. Authorization. Execution of this Agreement by the undersigned on
behalf of the Company has been approved by the Board of Directors of the Company
at a meeting on October 16, 1998, as reflected in the minutes of said meeting.
IN WITNESS WHEREOF, this Agreement is entered into as of the date and year
first above written.
RAYONIER INC.
By _________________________________________
Name: John P. O'Grady
Title: Senior Vice President, Administration
Consultant:
___________________________________________
Name: Ronald M. Gross
Address: 925 Westover Road
Stamford, Connecticut 06902
<PAGE> 1
EXHIBIT 12
RAYONIER INC. AND SUBSIDIARIES
RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited, thousands of dollars)
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Earnings:
Income (loss) from continuing operations $ 63,635 $ 87,319 $ (160) $142,348 $ 70,032
Add (deduct):
Income tax 26,519 33,328 (13,297) 65,711 38,038
Minority interest -- 25,520 27,474 29,897 32,419
Amortization of capitalized interest 2,331 2,067 4,505 1,963 1,644
-------- -------- --------- -------- --------
92,485 148,234 18,522 239,919 142,133
-------- -------- --------- -------- --------
Adjustments to earnings for fixed charges:
Interest and other financial charges 34,712 25,868 27,662 33,615 31,065
Interest factor attributable to rentals 1,750 1,974 2,187 1,444 1,474
-------- -------- --------- -------- --------
36,462 27,842 29,849 35,059 32,539
-------- -------- --------- -------- --------
Earnings as adjusted $128,947 $176,076 $ 48,371 $274,978 $174,672
======== ======== ========= ======== ========
Fixed charges:
Fixed charges above $ 36,462 $ 27,842 $ 29,849 $ 35,059 $ 32,539
Capitalized interest 262 5,005 2,664 1,346 194
-------- -------- --------- -------- --------
Total fixed charges 36,724 32,847 32,513 36,405 32,733
======== ======== ========= ======== ========
Ratio of earnings as adjusted to
total fixed charges 3.51 5.36 1.49 7.55 5.34
======== ======== ========= ======== ========
Effective tax rate 29% 28% (42)% 32% 35%
-------- -------- --------- -------- --------
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Rayonier Inc.:
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statements on Forms S-3 (File Nos. 033-52855 and 333-52857).
ARTHUR ANDERSEN LLP
Stamford, Connecticut
March 23, 1999
<PAGE> 1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below
constitutes and appoints GERALD J. POLLACK, LISA M. PALUMBO and JOHN B. CANNING
his or her true and lawful attorneys-in-fact, with full power in each to act
without the other and with full power of substitution and resubstitution to sign
in the name of such person and in each of his or her offices and capacities in
Rayonier Inc. (the "Company") the Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 of the Company, and to file the same, and any amendments
thereto, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission.
Dated: March 19, 1999
/s/ W.LEE NUTTER
- ------------------------------------
W. Lee Nutter
Chairman of the Board, President,
Chief Executive Officer and Director
/s/ RAND V. ARASKOG
- ------------------------------------
Rand V. Araskog
Director
/s/ DONALD W. GRIFFIN
- ------------------------------------
Donald W. Griffin
Director
/s/ RONALD M. GROSS
- ------------------------------------
Ronald M. Gross
Director
/s/ PAUL G. KIRK, JR
- ------------------------------------
Paul G. Kirk, Jr.
Director
/s/ KATHERINE D. ORTEGA
- ------------------------------------
Katherine D. Ortega
Director
/s/ BURNELL R. ROBERTS
- ------------------------------------
Burnell R. Roberts
Director
/s/ CARL S. SLOANE
- ------------------------------------
Carl S. Sloane
Director
/s/ NICHOLAS L. TRIVISONNO
- ------------------------------------
Nicholas L. Trivisonno
Director
/s/ GORDON I. ULMER
- ------------------------------------
Gordon I. Ulmer
Director
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,635
<SECURITIES> 0
<RECEIVABLES> 123,605
<ALLOWANCES> 4,843
<INVENTORY> 98,910
<CURRENT-ASSETS> 281,834
<PP&E> 1,304,188
<DEPRECIATION> 616,266
<TOTAL-ASSETS> 1,600,856
<CURRENT-LIABILITIES> 172,754
<BONDS> 485,850
0
0
<COMMON> 79,561
<OTHER-SE> 559,398
<TOTAL-LIABILITY-AND-EQUITY> 1,600,856
<SALES> 1,008,566
<TOTAL-REVENUES> 1,008,566
<CGS> 852,483
<TOTAL-COSTS> 852,483
<OTHER-EXPENSES> 31,217
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,712
<INCOME-PRETAX> 90,154
<INCOME-TAX> 26,519
<INCOME-CONTINUING> 63,635
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63,635
<EPS-PRIMARY> 2.26
<EPS-DILUTED> 2.22
</TABLE>
