SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File
December 31, 1997 Number 1-5313
POTLATCH
Potlatch Corporation
A Delaware Corporation (IRS Employer Identification
Number 82-0156045)
601 West Riverside Ave., Suite 1100
Spokane, Washington 99201
Telephone (509) 835-1500
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, New York Stock Exchange
($1 par value) Pacific Stock Exchange
Chicago Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing require-
ments for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant at January 31, 1998, was approximately $1,174 million.
The number of shares of common stock outstanding as of January 31, 1998:
28,996,062 shares of Common Stock, par value of $1 per share.
Documents Incorporated by Reference
Portions of the definitive proxy statement for the 1998 annual meeting of stock-
holders are incorporated by reference in Part III hereof.
<PAGE>
POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
Index to 1997 Form 10-K
Page
Number
PART I
ITEM 1. Business 2 - 5
ITEM 2. Properties 6
ITEM 3. Legal Proceedings 7
ITEM 4. Submission of Matters to a Vote of Security Holders 7
Executive Officers of the Registrant 8
PART II
ITEM 5. Market for Registrant's Common Equity and
Related Stockholder Matters 9
ITEM 6. Selected Financial Data 9
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
ITEM 8. Financial Statements and Supplementary Data 9
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 10
PART III
ITEM 10. Directors and Executive Officers of the Registrant 10
ITEM 11. Executive Compensation 10
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management 10
ITEM 13. Certain Relationships and Related Transactions 10
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 10
SIGNATURES 11
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES 12
EXHIBIT INDEX 41 - 43
<PAGE>
PART I
ITEM 1. Business
General
Potlatch Corporation (the "company"), incorporated in 1903, is an integrated
forest products company with substantial timber resources. It is engaged
principally in the growing and harvesting of timber and the manufacture and sale
of wood products, printing papers and other pulp-based products. Its timber-
lands and all of its manufacturing facilities are located within the continental
United States.
Information relating to the amounts of revenue, operating profit or loss and
identifiable assets attributable to each of the company's industry segments for
1995-1997 is included in Note 14 to the financial statements on pages 35-36 of
this report.
This report contains, in addition to historical information, forward-looking
statements that involve risks and uncertainties. The company's actual results
could differ materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, changes in the United States and international econ-
omies; changes in worldwide demand for the company's products; changes in world-
wide production and production capacity in the forest products industry;
competitive pricing pressures for the company's products; and changes in raw
material, energy and other costs.
Fiber Resources
The principal source of raw material used in the company's operations is wood
fiber obtained from its own timberlands and purchased on the open market. The
company owns in fee approximately 1.5 million acres of timberland: 500,000
acres in Arkansas, 672,000 acres in Idaho and 343,000 acres in Minnesota. In
addition to its own lands, the company leases approximately 14,000 acres of
timberland in Arkansas. The company also owns and is developing 22,000 acres in
Oregon as a hybrid poplar plantation for pulp fiber.
The amount of timber harvested in any one year from company-owned lands
varies according to the requirements of sound forest management and the supply
of timber available for purchase on the open market. By continually improving
forestry and silviculture techniques and other forest management practices, the
company has been able to increase the volume of wood fiber available from its
timberlands and to provide for a continuous supply of wood fiber in the future.
In most cases, the cost of timber from company land is substantially less than
that of timber obtained on the open market.
The company's fee lands provided approximately 68 percent of its sawlogs and
plywood logs in 1997 and an average of 67 percent over the past five years.
Including the raw materials used for pulp, oriented strand board and particle-
board, the percentages were 46 percent for 1997 and 41 percent for the past five
years.
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Additional logs are obtained under timber cutting contracts with federal,
state and local governments and from private landowners. Such cutting contracts
generally have terms ranging from a few months to several years at prices which
are determined when the contract is signed. The company enters into many such
contracts each year. At December 31, 1997, the company estimated its total
commitment under such contracts was $42.6 million, which was not materially
different from market value.
At the present time, timber from the company's own lands, together with
outside purchases, is adequate to support manufacturing operations. In recent
years the timber supply from federal lands has been increasingly curtailed,
largely due to environmental pressures that are expected to continue for the
foreseeable future. Although this trend has had a favorable effect on earnings
for the company as a whole, it has at times had an adverse effect on wood fiber
costs. The long-term effect of this trend on company earnings cannot be
predicted. However, the company has implemented plans to develop additional
chip fiber supplies, primarily hybrid poplar, for the Lewiston, Idaho, pulp mill
and by the year 2001 expects to be able to provide approximately 70 percent of
chip fiber requirements for this mill from resources it owns, compared with
approximately 36 percent for 1997.
The company assumes substantially all risk of loss from fire and other
hazards on the standing timber it owns, as do most owners of timber tracts in
the United States.
Wood Products
The company manufactures and markets oriented strand board, plywood,
particleboard and lumber. These products are sold through the company's sales
offices primarily to wholesalers for nationwide distribution.
To produce these solid wood products, the company owns and operates several
manufacturing facilities in Arkansas, Idaho and Minnesota. A description of
these facilities is included under Item 2 of this report.
The forest products industry is highly competitive, and the company competes
with substantially larger forest products companies and companies that manu-
facture substitutes for wood and wood fiber products. For lumber, plywood and
particleboard, the company's share of the market is not significant to the total
U.S. market for these products. The company believes it is one of the larger
manufacturers of oriented strand board ("OSB"). However, its sales of OSB are
less than ten percent of the total market for this product, which competes with
plywood. The company's principal methods of competing are product quality,
service and price.
Printing Papers
The company produces coated printing papers at two facilities in Minnesota.
A description of these facilities is included under Item 2 of this report.
Pulp for these paper mills is supplied primarily by the company's bleached
kraft pulp mill in Minnesota and secondarily by purchases of market pulp,
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including recycled pulp. Coated papers are used primarily for annual reports,
showroom catalogs, art reproductions and high-quality advertising.
Printing papers are sold principally to paper merchants for distribution.
Various company sales offices located throughout the United States are utilized
to service customers. Although the company is not one of the larger manufac-
turers of printing papers, it is one of the nation's leading producers of
premium coated papers. The principal methods of competing are product quality,
service and price.
Other Pulp-Based Products
The company produces and markets bleached kraft pulp and paperboard and
tissue products. A description of the facilities used to produce these products
is included under Item 2 of this report.
The company is a major producer of bleached kraft paperboard in the United
States. Bleached kraft paperboard manufactured by the company is used primarily
for the packaging of milk and other foods, pharmaceuticals and toiletries, and
for paper cups and paper plates. The company does not consider itself among the
larger national manufacturers of any of its other pulp-based products.
The company is a leading North American producer of private label household
tissue products. Household tissue products (facial and bathroom tissues, towels
and napkins) are packaged to order for grocery and drug chains and cooperative
buying organizations. These products are sold to consumers under customer brand
names and compete with nationally advertised and other private label brands.
Methods of sale and distribution of the company's other pulp-based products
vary for its several products. The majority of pulp sales are generally made
through brokers. The company, in general, maintains domestic sales offices
through which it sells paperboard to packaging converters. The majority of
international paperboard sales are made through sales representative offices in
Japan and Australia. The balance of such sales are made through brokers and
agents. Tissue products are sold to major retail outlets directly and through
brokers. The company's principal methods of competing are product quality,
service and price.
Environment
Information regarding environmental matters is included under Item 3 - Legal
Proceedings on page 7 and Management's Discussion and Analysis of Financial
Condition and Results of Operations on page 16 of this report.
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Employees
As of December 31, 1997, the company had approximately 6,700 employees.
Labor contracts expiring in 1998 are as follows:
Approximate
Contract Number of
Expiration Hourly
Date Location Union Employees
May 8 Wood Products International Association 220
Southern Division of Machinists &
Warren, Arkansas Aerospace Workers
October 14 Wood Products United Paperworkers 130
Minnesota Division International Union
Grand Rapids, Minnesota
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ITEM 2. Properties
The principal manufacturing facilities of the company, together with their
respective year end 1997 capacities and 1997 production are as follows:
Wood Products Capacity Production
Oriented Strand Board Plants: (A)
Bemidji, Minnesota 500,000 m.sq.ft. 469,000 m.sq.ft.
Cook, Minnesota 240,000 m.sq.ft. 211,000 m.sq.ft.
Grand Rapids, Minnesota 350,000 m.sq.ft. 297,000 m.sq.ft.
Sawmills:
Prescott, Arkansas 135,000 m.bd.ft. 101,000 m.bd.ft.
Warren, Arkansas (B) 170,000 m.bd.ft. 131,000 m.bd.ft.
Lewiston, Idaho 160,000 m.bd.ft. 141,000 m.bd.ft.
St. Maries, Idaho 90,000 m.bd.ft. 86,000 m.bd.ft.
Bemidji, Minnesota 80,000 m.bd.ft. 75,000 m.bd.ft.
Plywood Plants: (A)
Jaype, Idaho 130,000 m.sq.ft. 122,000 m.sq.ft.
St. Maries, Idaho 130,000 m.sq.ft. 132,000 m.sq.ft.
Particleboard Plant: (C)
Post Falls, Idaho 70,000 m.sq.ft. 67,000 m.sq.ft.
Printing Papers
Pulp Mill:
Cloquet, Minnesota 200,000 tons 192,000 tons
Printing Paper Mills:
Brainerd, Minnesota 150,000 tons 150,000 tons
Cloquet, Minnesota 230,000 tons 222,000 tons
Other Pulp-Based Products
Pulp Mills:
Cypress, Bend, Arkansas 250,000 tons 246,000 tons
Lewiston, Idaho 500,000 tons 461,000 tons
Bleached Paperboard Mills:
Cypress Bend, Arkansas 270,000 tons 267,000 tons
Lewiston, Idaho 355,000 tons 347,000 tons
Tissue Mill:
Lewiston, Idaho 155,000 tons 150,000 tons
Tissue Converting Facilities:
Lewiston, Idaho 105,000 tons 99,000 tons
Las Vegas, Nevada 35,000 tons 29,000 tons
(A) 3/8" Basis
(B) There are two sawmills in Warren.
(C) 3/4" Basis
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ITEM 3. Legal Proceedings
In February and November 1997, the company received Notices of Violation
("NOVs") from Region 10 of the U.S. Environmental Protection Agency ("EPA").
Both NOVs allege that the company violated the Prevention of Significant
Deterioration permit requirements and permit requirements of the Idaho State
Implementation Plan by burning tire derived fuel in the company's No. 4 power
boiler in Lewiston, Idaho, in quantities which caused SO2 emissions to exceed
permitted amounts over a five-year period beginning in 1992. Although no
specific relief has been requested by the EPA, the NOVs set forth EPA's
authority to seek, among other things, penalties of up to $25,000 per day for
each violation. The company believes it has defenses to the alleged violations
and has held conferences with the EPA for the purpose of presenting information
bearing on the alleged violations. Following these conferences, representatives
of the EPA have advised that the matter will be referred to the United States
Department of Justice to commence an enforcement action against the company.
As of March 1, 1998, no such action had been filed against the company.
In December 1995, the company filed a complaint against Beloit Corporation
in the District Court of the State of Idaho, Nez Perce County. The complaint
alleged that a pulp washer system supplied by Beloit Corporation and installed
at the company's pulp mill in Lewiston, Idaho, experienced massive defects and
deficiencies and failed to meet contract performance requirements and criteria.
In June 1997, a jury awarded damages of $95 million to the company. Beloit has
appealed the case to the Idaho Supreme Court.
ITEM 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1997.
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<PAGE>
Executive Officers of the Registrant
Information as of March 1, 1998, and for the past five years concerning the
executive officers of the company is as follows:
John M. Richards (age 60), first elected an officer in 1972, has served as
Chairman of the Board and Chief Executive Officer since May 1994. Prior to May
1994 he was President and Chief Operating Officer. He was elected a director of
the company effective January 1991. He is a member of the Finance Committee of
the Board of Directors.
L. Pendleton Siegel (age 55), first elected an officer in 1983, has served as
President and Chief Operating Officer since May 1994. He was elected a director
of the company effective November 1997. From August 1993 to May 1994, he was
Executive Vice President, Pulp-Based Operations. Prior to August 1993, he was
Group Vice President, Pulp and Paperboard.
John E. Hanby (age 56), was elected Vice President, Technology in December
1997. From May 1996 to December 1997, he was an appointed officer serving as
Vice President, Technology. From January 1995 to May 1996, he was Director,
Fiber Research and Development. From May 1994 to January 1995, he was Assistant
Director, Fiber Research and Development. Prior to joining the company in May
1994, he managed manufacturing operations and research and development programs
within the paper industry.
Craig H. Nelson (age 41), first elected an officer in 1996, has served as
Vice President, Consumer Products Division since May 1996. From April 1993
through April 1996, he was an appointed officer serving as Vice President,
Manufacturing, for the Consumer Products Division's Lewiston mill. Prior to
April 1993, he was project manager for the No. 3L tissue machine in the Consumer
Products Division.
Richard L. Paulson (age 56), first elected an officer in 1992, has served as
Vice President, Minnesota Pulp and Paper Division since May 1996. Prior to May
1996, he was Vice President, Consumer Products Division.
George E. Pfautsch (age 62), first elected an officer in 1971, is Senior Vice
President, Finance and Chief Financial Officer. From January 1993 through May
1994, he also served as Treasurer. Mr. Pfautsch will retire in July 1998.
Charles R. Pottenger (age 58), first elected an officer in 1991, has served
as Group Vice President, Pulp and Paperboard since August 1993. Prior to August
1993, he was Vice President, Minnesota Pulp and Paper Division.
Thomas J. Smrekar (age 55), first elected an officer in 1992, is Group Vice
President, Wood Products.
NOTE: The aforementioned officers of the company are elected to hold office
until the next annual meeting of the Board of Directors. Each officer holds
office until the officer's successor has been duly elected and has qualified or
until the earlier of the officer's death, resignation, retirement or removal by
the board.
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<PAGE>
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
The company's common stock is traded on the New York, Chicago and Pacific
Stock Exchanges. Quarterly and yearly price ranges were:
1997 1996
Quarter High Low High Low
1st $45.33 $41.13 $43.88 $38.25
2nd 46.50 39.00 43.88 38.50
3rd 51.94 44.75 39.75 35.13
4th 52.75 40.75 44.88 38.38
Year 52.75 39.00 44.88 35.13
In general, all holders of Potlatch common stock who own shares 48
consecutive calendar months or longer ("long-term holders") are entitled to
exercise four votes per share of stock so held, while stockholders who are not
long-term holders are entitled to one vote per share. All stockholders are
entitled to only one vote per share on matters arising under certain provisions
of the company's charter. There were approximately 3,600 common stockholders of
record at December 31, 1997.
Quarterly dividend payments per common share for the past two years were:
Quarter 1997 1996
1st $ .425 $ .415
2nd .425 .415
3rd .425 .415
4th .435 .425
------ ------
$ 1.71 $ 1.67
====== ======
ITEMS 6, 7 and 8
The information called for by Items 6, 7 and 8, inclusive, of Part II of this
form is contained in the following sections of this Report at the pages
indicated below:
Page
Number
ITEM 6 Selected Financial Data 13
ITEM 7 Management's Discussion
and Analysis of Financial
Condition and Results of
Operations 14 - 19
ITEM 8 Financial Statements and
Supplementary Data 20 - 40
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<PAGE>
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
Information regarding the directors of the company is set forth under the
heading "Election of Directors" on pages 3-5 of the company's definitive proxy
statement, dated March 26, 1998, for the 1998 annual meeting of stockholders
(the "1998 Proxy Statement"), which information is incorporated herein by
reference. Information concerning Executive Officers is included in Part I of
this report following Item 4.
ITEM 11. Executive Compensation
Information set forth under the heading "Compensation of Directors and the
Named Executive Officers" on pages 9-13 of the 1998 Proxy Statement is
incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of management set forth under the
heading "Stock Ownership of Directors and Executive Officers" on pages 7-8 of
the 1998 Proxy Statement is incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions
Information set forth under the heading "Certain Transactions" on page 13 of
the 1998 Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial statement schedules are listed in the Index to Consolidated
Financial Statements and Schedules on page 12 of this Form 10-K.
(b) No reports on Form 8-K were filed for the quarter ended December 31, 1997.
(c) Exhibits are listed in the Exhibit Index on pages 41-43 of this Form 10-K.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
POTLATCH CORPORATION
(Registrant)
Date: March 27, 1998 By /S/ John M. Richards
John M. Richards
Chairman of the Board
and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 27, 1998, by the following persons on
behalf of the company in the capacities indicated.
By /S/ John M. Richards
John M. Richards RICHARD A. CLARKE*
Director and Chairman of Director
the Board and Chief KENNETH T. DERR*
Executive Officer Director
(Principal Executive Officer) ALLEN F. JACOBSON*
Director
By /S/ L. Pendleton Siegel GEORGE F. JEWETT, JR.*
L. Pendleton Siegel Director
Director, President and RICHARD B. MADDEN*
Chief Operating Officer Director
(Principal Operating Officer) RICHARD M. MORROW*
Director
By /S/ George E. Pfautsch VIVIAN W. PIASECKI*
George E. Pfautsch Director
Senior Vice President, TONI REMBE*
Finance and Chief Director
Financial Officer REUBEN F. RICHARDS*
(Principal Financial Officer) Director
RICHARD M. ROSENBERG*
By /S/ Terry L. Carter Director
Terry L. Carter ROBERT G. SCHWARTZ*
Controller Director
(Principal Accounting Officer) CHARLES R. WEAVER*
Director
FREDERICK T. WEYERHAEUSER*
Director
DR. WILLIAM T. WEYERHAEUSER*
Director
*By /S/ Betty R. Fleshman
Betty R. Fleshman
(Attorney-in-fact)
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POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
Index to Consolidated Financial Statements and Schedules
Page
Number
The following documents are filed as part of this Report:
Consolidated Financial Statements:
Selected Financial Data 13
Management's Discussion and Analysis of
Financial Condition and Results of Operations 14 - 19
Statements of Earnings for the years ended December 31,
1997, 1996 and 1995 20
Balance Sheets at December 31, 1997 and 1996 21
Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995 22
Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995 23
Summary of Principal Accounting Policies 24 - 25
Notes to Financial Statements 26 - 38
Independent Auditors' Report 39
Schedules:
II. Valuation and Qualifying Accounts 40
All other schedules are omitted because they are
not required, not applicable or the required
information is given in the consolidated
financial statements.
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<TABLE>
Potlatch Corporation and Consolidated Subsidiaries
Selected Financial Data
(Dollars in thousands - except per-share amounts)
<CAPTION>
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $1,568,870 $1,554,449 $1,605,206 $1,471,258 $1,368,854
Net earnings (loss):
Before accounting changes
and extraordinary item 36,059 61,534 108,546 48,995 38,339
After accounting changes
and extraordinary item 36,059 58,089 108,546 48,995 (11,953)
Net cash provided by
operations, excluding
working capital changes 193,446 228,364 273,418 197,879 170,698
Working capital 106,221 117,966 128,066 142,728 129,138
Current ratio 1.4 to 1 1.5 to 1 1.4 to 1 1.6 to 1 1.7 to 1
Long-term debt
(noncurrent portion) $ 722,080 $ 672,048 $ 616,132 $ 633,473 $ 707,131
Stockholders' equity 951,592 954,195 943,904 901,619 901,076
Debt to stockholders'
equity ratio .76 to 1 .70 to 1 .65 to 1 .70 to 1 .78 to 1
Capital expenditures $ 158,485 $ 239,908 $ 170,654 $ 104,389 $ 201,655
Total assets 2,365,136 2,265,679 2,265,311 2,081,229 2,085,652
Basic net earnings (loss)
per common share:
Before accounting changes
and extraordinary item $1.25 $2.13 $3.72 $1.68 $1.31
After accounting changes
and extraordinary item 1.25 2.01 3.72 1.68 (.41)
Average common shares
outstanding,
(in thousands) 28,930 28,888 29,157 29,217 29,184
Diluted net earnings (loss)
per common share:
Before accounting changes
and extraordinary item $1.24 $2.13 $3.72 $1.68 $1.31
After accounting changes
and extraordinary item 1.24 2.01 3.72 1.68 (.41)
Average common shares
outstanding, assuming
dilution (in thousands) 28,986 28,912 29,187 29,242 29,221
Cash dividends
per common share $1.71 $1.67 $1.615 $1.57 $1.515
=====================================================================================
</TABLE>
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
Liquidity
Liquidity of a company can be measured by several factors. Of major
importance are:
Capability of generating earnings and cash flow
Maintenance of a sound financial structure
Access to capital markets
Maintenance of adequate working capital
In 1997, the company's net cash provided by operations, excluding working
capital changes, as presented in the Statements of Cash Flows on page 22 totaled
$193.4 million, compared with $228.4 million in 1996 and $273.4 million in 1995.
The company maintains credit lines with several banks for general corporate
purposes totaling $250.0 million, of which $100.0 million can be used for long-
term debt and the balance can be used for short-term debt. At December 31,
1997, the company had outstanding indebtedness of $50.0 million under the short-
term lines. The remainder of the credit lines was available to back the
company's commercial paper program. Commercial paper outstanding at December
31, 1997, totaled $145.6 million, of which $100.0 million was classified as
long-term debt.
The ratio of long-term debt to stockholders' equity was .76 to 1 at December
31, 1997, compared with .70 to 1 at December 31, 1996 and .65 to 1 at December
31, 1995. The change for 1997 was largely due to the issuance of additional
commercial paper during the year. The aggregate balance of commercial paper
outstanding increased approximately $81.3 million in 1997. Of this amount,
$50.0 million was classified as long-term, bringing the total amount of
commercial paper classified as long-term to $100.0 million. The proceeds from
the issuance of commercial paper were used for general corporate purposes.
One of the company's stated objectives is to maintain a sound financial
structure. In that regard, the company believes that debt ratings within
investment grade categories are important for long-term access to capital
markets. At the end of 1997, the company's senior long-term debt was rated A-
by Standard & Poors and Duff and Phelps, and Baa1 by Moody's. With the
company's ability to generate cash flow and its access to capital markets, the
company believes it is capable of funding capital expenditures, working capital
and other liquidity needs for the foreseeable future.
At December 31, 1997, working capital was $106.2 million, compared with
$118.0 million at December 31, 1996, and $128.1 million at December 31, 1995.
The decline in 1997 was a result of an increase in short-term debt (which
includes current installments on long-term debt and current notes payable) of
$49.9 million. Increases in receivables of $16.1 million and inventories of
$5.4 million, and a decrease in accounts payable and accrued liabilities of
$12.5 million partially offset this amount.
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Capital Resources and Funding
Capital expenditures totaled $158.5 million in 1997, compared with $239.9
million in 1996 and $170.7 million in 1995.
During 1997, the company spent $31.6 million in the wood products segment.
The upgrade of the dry end at the Prescott, Arkansas, sawmill was completed,
which increased production and efficiency. In Minnesota, the company commenced
construction of additional pollution control equipment at its oriented strand
board plants in Cook and Bemidji. The company's Idaho facilities began several
smaller projects designed to improve efficiency and product quality.
Capital spending in the printing papers segment totaled $81.9 million in
1997. The majority of the expenditures related to the modernization and
expansion of the Cloquet, Minnesota, pulp mill, which included the construction
of a new turbine generator and recovery boiler. The turbine generator started
up in late December. Construction of the recovery boiler is expected to be
completed by mid-1998. The Cloquet expansion, like other major projects in the
past, is being constructed in phases over several years. This allows for
commitments to be made in a financially prudent manner. As of December 31,
1997, the company had spent approximately $280 million on the Cloquet project,
which includes $19.4 million of capitalized interest. As various phases are
completed they are placed into service and depreciated over the estimated useful
lives of the assets, even though in some cases the full benefits of the
improvements will not be realized until the entire project has been completed.
Depreciation on the phases already placed in service totaled $16.4 million as of
December 31, 1997. Of this amount, $8.6 million was charged against income in
1997. The company plans to complete the pulp mill project in three years, with
a total cost of approximately $525 million.
Spending in the other pulp-based products segment totaled $44.1 million. The
company is nearing completion of the washer replacement project at the Lewiston,
Idaho, pulp mill. Pulp production continues to improve as a result of this
project. Also at this mill construction of the new green liquor clarifier and
caustic plant upgrade proceeded well during the year. The ongoing development
of the company's hybrid poplar farm in Boardman, Oregon, also accounted for a
large share of the expenditures for the segment. After harvest of these trees
begins in 2001, it is anticipated that the company will be able to supply the
Lewiston pulp mill with approximately 20 percent of its annual chip fiber needs
from this source.
Authorized but unexpended appropriations totaled $408.2 million at December
31, 1997. Of that amount, $200.4 million is budgeted to be expended in 1998.
Such expenditures will include: the continuing modernization and expansion of
the Cloquet pulp mill, where work on the recovery boiler will be completed and
construction of the bleach plant, lime kiln and pulp dryer will begin; the
continued development of the hybrid poplar plantation in Boardman; and the
completion of the washer replacement project, caustic plant upgrade and new
green liquor clarifier at the Lewiston pulp mill. In late 1997, the company
commenced construction of a modernization and expansion project at its oriented
strand board plant in Cook, Minnesota, which will create a state of the art,
low-cost plant with an anticipated 80 percent increase in capacity compared with
the current facility. The 1998 capital program will be funded primarily from
internally generated sources.
-15-
<PAGE>
Historically, the company has spent less on capital expenditures than the
annual amount budgeted. In 1997, the company spent $61.0 million less than the
$219.5 million budgeted. Spending on projects may be delayed due to acquisition
of environmental permits, acquisition of equipment, engineering, weather and
other factors.
The company has in place a stock repurchase program through which it is
authorized to purchase up to 1 million shares of its common stock over several
years. Under the program, the company can purchase shares of common stock from
time to time through open market and privately negotiated transactions at prices
deemed appropriate by management. The company has repurchased 398,800 shares to
date under the program. No shares were repurchased in 1997.
Environment
The company is subject to extensive federal and state environmental control
regulations at its operating facilities. The company endeavors to comply with
all environmental regulations and monitors its activities on a regular basis for
such compliance. Compliance with environmental regulations requires capital
expenditures as well as additional operating costs. Capital expenditures
specifically designated for environmental compliance totaled approximately $18
million during 1997 and are budgeted to be approximately $2 million in 1998. In
addition, the company made expenditures for pollution control facilities as part
of major mill modernizations and expansions currently under way.
In early 1998 the Environmental Protection Agency published the "Cluster
Rule" regulations applicable specifically to the pulp and paper industry. These
extensive regulations govern both air and water emissions. The regulations will
require modifications to process equipment and operating procedures. Based on a
preliminary analysis of the capital costs related to these regulations, the
company estimates that compliance will require additional capital expenditures
in the range of $70 million to $95 million over the next 2 to 8 years. The
company does not expect that such compliance costs will have a material adverse
effect on its competitive position.
Results of Operations
Comparison of 1997 with 1996
Potlatch consolidated net sales of $1.57 billion were slightly higher than
1996 net sales of $1.55 billion. Net earnings for 1997 were $36.1 million,
compared to $58.1 million for 1996. The net earnings amount for 1996 includes a
$3.4 million extraordinary charge for early extinguishment of debt. Net
earnings per common share were $1.25 for 1997, versus $2.01 in 1996 including
the extraordinary charge.
Over-capacity for oriented strand board (OSB) within the industry continued
to negatively affect panel markets throughout 1997 and, combined with less
favorable market conditions for coated papers, resulted in lower earnings for
1997. During the fourth quarter, the company experienced transportation
problems, particularly as a result of railcar shortages and scheduling dif-
ficulties throughout the Western U.S., which also adversely affected results.
-16-
<PAGE>
The wood products segment reported operating income of $47.7 million for
1997, substantially less than the $68.1 million earned in 1996. Decreased
shipments and significantly lower net sales realizations for OSB were primarily
responsible for the decline in earnings. Average net sales realizations for OSB
were down 27 percent compared to 1996's levels. The difficult panel markets
overshadowed improved results for the company's lumber products, where both
shipments and realizations were higher than in 1996.
At the present time, timber from the company's own lands, together with
outside purchases, is adequate to support manufacturing operations. In recent
years the timber supply from federal lands has been increasingly curtailed,
largely due to environmental pressures that are expected to continue for the
foreseeable future. Although this trend has had a favorable effect on earnings
for the company as a whole, it has at times had an adverse effect on wood fiber
costs. The long-term effect of this trend on company earnings cannot be pre-
dicted. However, the company has implemented plans to develop additional chip
fiber supplies, primarily hybrid poplar, for the Lewiston, Idaho, pulp mill and
by the year 2001 expects to be able to provide approximately 70 percent of chip
fiber requirements for this mill from resources it owns, compared with
approximately 36 percent for 1997.
Operating income for the printing papers segment was $33.4 million, compared
to $48.6 million in 1996. Although shipments of coated papers were slightly
higher than in 1996, net sales realizations were approximately 4 percent lower
due to a less favorable mix of products shipped. Also affecting results were
costs associated with the startup of the new pulp mill fiber line in the first
quarter and a slower than expected startup following a maintenance shutdown in
the fourth quarter.
The company's other pulp-based products segment, which includes the Pulp and
Paperboard Group and the Consumer Products Division, reported operating income
of $51.0 million, versus income of $40.9 million for 1996. Higher shipments for
paperboard more than offset lower net sales realizations. Production improve-
ments at the company's Lewiston, Idaho, pulp mill as a result of an ongoing pulp
washer replacement project were largely responsible for the ability to increase
production and shipments. The Consumer Products Division showed improved
results compared to 1996 mainly due to lower pulp costs.
In the second quarter of 1997, the company was awarded a $95 million judgment
for damages in its lawsuit regarding a defective pulp washer system that was
installed at the Lewiston pulp mill. The award is being appealed and,
therefore, is not included in the financial statements for 1997. Upon
resolution of the lawsuit, it is anticipated that a portion of the judgment will
be utilized to reimburse costs expended for asset restoration and a smaller
portion will be recorded as income.
Comparison of 1996 with 1995
The company's consolidated net sales of $1.55 billion in 1996 were slightly
below 1995's $1.61 billion. Net earnings in 1996 were $61.5 million, before a
$3.4 million extraordinary charge for early extinguishment of debt. Including
the charge, net earnings were $58.1 million. By comparison, 1995 net earnings
were $108.5 million. Net earnings per common share for 1996 were $2.13 before
-17-
<PAGE>
the extraordinary charge, or $2.01 including the charge, compared to $3.72 per
common share for 1995.
Weaker market conditions in 1996 for the company's paperboard and panel
products, plus weather-related problems during the first quarter, contributed to
lower earnings for the year.
Operating income for the wood products segment was $68.1 million in 1996,
down from the $122.2 million earned in 1995. Lower net sales realizations and
shipments for the company's panel products were the primary reason for the
decline. Oriented strand board was especially affected due to a significant
increase in production capacity within the industry. Downtime taken to shift
the Idaho plywood plants to industrial-grade products and operating problems
caused by flooding in Idaho early in 1996 also negatively affected earnings.
The segment did experience improved shipments and net sales realizations for
lumber over 1995.
The printing papers segment reported 1996 operating income of $48.6 million,
compared with $50.6 million in 1995. Lower net sales realizations, partially
due to a less favorable product mix, offset higher shipments during 1996. The
company's two coated paper facilities operated well during the year, lowering
production costs and having a positive effect on the year's results.
Operating income for the other pulp-based products segment, which includes
the Pulp and Paperboard Group and the Consumer Products Division, was $40.9
million in 1996, versus $70.8 million reported in 1995. A decrease in paper-
board net sales realizations plus weather-related operating problems during the
first quarter of 1996 were largely responsible for the lower results. An
unplanned shutdown at the company's Lewiston, Idaho, pulp mill late in the year
to repair a recovery boiler also negatively affected earnings. The Consumer
Products Division benefited from increased shipments of 8 percent, higher net
sales realizations and lower pulp costs to record significantly improved results
over 1995, partially offsetting the weaker results for paperboard. The 1996
segment operating income includes a one-time $3.0 million actuarial gain on
postretirement benefit programs, which is included in Other income (expense),
net, in the Statements of Earnings.
Income Taxes
The company's effective tax rates for 1997, 1996 (excluding an extraordinary
item) and 1995 were 34.0 percent, 28.7 percent and 36.5 percent, respectively.
Year 2000
The company is conducting an ongoing review of all computer programs used for
various purposes within the company to determine if any potential problems may
exist as a result of the year 2000 issue. The year 2000 problem arises because
of computer programs being written using two digits rather than four to define
the applicable year. The review covers software used for both production and
administration functions. Based upon this review to date, no material problems
have been identified.
Subsequent Event
In February 1998, the Board of Directors of the company approved the
contribution of all of the company's approximately 514,000 acres of timberlands
in Arkansas to a newly formed real estate investment trust, Timberland Growth
-18-
<PAGE>
Corporation (TGC). The Board also approved an agreement pursuant to which TGC
will acquire from Anderson-Tully Company (ATCO) 324,000 acres of primarily
hardwood timberlands concentrated in Mississippi and Arkansas and other real
estate assets through a cash merger for approximately $410 million. The merger
will be funded primarily by a proposed initial public offering of TGC's common
stock. After TGC's initial public offering, the company will own a majority of
the economic interest in TGC and will have voting power equal to its economic
interest.
The company will also acquire directly from ATCO two hardwood sawmills, a
veneer plant and log transportation assets. The company and TGC will enter into
a long-term timber purchase agreement by which the company will purchase and
harvest timber from TGC's initial timberlands at fair market value primarily for
use at the company's converting facilities in Arkansas and the two former ATCO
sawmills and veneer plant in Mississippi.
Consummation of these transactions is subject to certain contingencies,
including regulatory approvals.
-19-
<PAGE>
<TABLE>
Potlatch Corporation and Consolidated Subsidiaries
Statements of Earnings
(Dollars in thousands - except per-share amounts)
<CAPTION>
For the years ended December 31 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $1,568,870 $1,554,449 $1,605,206
Costs and expenses:
Depreciation, amortization and cost of
fee timber harvested 149,785 141,521 137,031
Materials, labor and other operating
expenses 1,219,665 1,186,127 1,158,002
Selling, general and administrative
expenses 106,450 104,114 90,569
- -----------------------------------------------------------------------------
1,475,900 1,431,762 1,385,602
- -----------------------------------------------------------------------------
Earnings from operations 92,970 122,687 219,604
Interest expense, net of capitalized
interest of $6,068 ($10,280 in 1996 and
$4,083 in 1995) (46,124) (43,869) (47,976)
Interest and dividend income 997 2,457 2,019
Other income (expense), net 6,792 5,051 (2,708)
- -----------------------------------------------------------------------------
Earnings before taxes on income and
extraordinary item 54,635 86,326 170,939
Provision for taxes on income (Note 5) 18,576 24,792 62,393
- -----------------------------------------------------------------------------
Net earnings before extraordinary item 36,059 61,534 108,546
Extraordinary item - loss from
early extinguishment of debt,
net of tax (Note 6) - (3,445) -
- -----------------------------------------------------------------------------
Net earnings $ 36,059 $ 58,089 $ 108,546
=============================================================================
Basic net earnings per common share:
Before extraordinary item $1.25 $2.13 $3.72
After extraordinary item 1.25 2.01 3.72
Diluted net earnings per common share:
Before extraordinary item 1.24 2.13 3.72
After extraordinary item 1.24 2.01 3.72
=============================================================================
<FN>
The accompanying notes and summary of principal accounting policies are an
integral part of these financial statements.
</TABLE>
-20-
<PAGE>
<TABLE>
Potlatch Corporation and Consolidated Subsidiaries
Balance Sheets
(Dollars in thousands - except per-share amounts)
<CAPTION>
At December 31 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash (Note 10) $ 9,026 $ 7,740
Short-term investments (Note 10) 6,516 4,576
Receivables, net of allowance for doubtful
accounts of $2,022 ($2,275 in 1996) 179,159 163,075
Inventories (Note 1) 182,303 176,899
Prepaid expenses (Note 5) 26,773 25,821
- ------------------------------------------------------------------------------
Total current assets 403,777 378,111
Land, other than timberlands 9,093 9,088
Plant and equipment, at cost less
accumulated depreciation of $1,293,239
($1,180,023 in 1996) (Note 2) 1,493,417 1,465,682
Timber, timberlands and related logging
facilities, net (Note 3) 342,503 349,466
Other assets (Note 4) 116,346 63,332
- ------------------------------------------------------------------------------
$2,365,136 $2,265,679
==============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (Notes 6 and 10) $ 95,550 $ 14,281
Current installments on long-term debt (Notes 6 and 10) 22 31,379
Accounts payable and accrued liabilities (Note 7) 201,984 214,485
- ------------------------------------------------------------------------------
Total current liabilities 297,556 260,145
- ------------------------------------------------------------------------------
Long-term debt (Notes 6 and 10) 722,080 672,048
- ------------------------------------------------------------------------------
Other long-term obligations (Note 8) 155,336 148,092
- ------------------------------------------------------------------------------
Deferred taxes (Note 5) 236,934 223,441
- ------------------------------------------------------------------------------
Put options (Notes 9 and 10) 1,638 7,758
- ------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock
Authorized 4,000,000 shares - -
Common stock, $1 par value
Authorized 40,000,000 shares, issued 32,721,980 shares 32,722 32,722
Additional paid-in capital 127,554 125,937
Retained earnings 879,264 892,667
Common shares in treasury 3,727,118 (3,855,999 in 1996) (87,948) (97,131)
- ------------------------------------------------------------------------------
Total stockholders' equity 951,592 954,195
- ------------------------------------------------------------------------------
$2,365,136 $2,265,679
==============================================================================
<FN>
The accompanying notes and summary of principal accounting policies are an
integral part of these financial statements.
</TABLE>
-21-
<PAGE>
<TABLE>
Potlatch Corporation and Consolidated Subsidiaries
Statements of Cash Flows
(Dollars in thousands)
<CAPTION>
For the years ended December 31 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATIONS
Net earnings $ 36,059 $ 58,089 $ 108,546
Adjustments to reconcile net earnings
to cash provided by operations:
Depreciation, amortization and cost
of fee timber harvested 149,785 141,521 137,031
Deferred taxes 13,493 24,618 29,153
Other, net (5,891) 4,136 (1,312)
- -----------------------------------------------------------------------------
Cash provided by operations excluding,
working capital changes 193,446 228,364 273,418
- -----------------------------------------------------------------------------
Increase in receivables (16,084) (10,668) (14,989)
Decrease (increase) in inventories (5,404) 14,203 (38,866)
Decrease (increase) in prepaid expenses (952) (2,235) 2,271
Increase (decrease) in accounts payable
and accrued liabilities (16,115) (4,888) 25,721
- -----------------------------------------------------------------------------
Cash used for working capital changes (38,555) (3,588) (25,863)
- -----------------------------------------------------------------------------
Net cash provided by operations 154,891 224,776 247,555
- -----------------------------------------------------------------------------
CASH FLOWS FROM FINANCING
Change in book overdrafts 3,614 (7,792) 4,566
Increase (decrease) in notes payable 81,269 14,281 (12,881)
Proceeds from long-term debt 50,000 197,543 124,785
Repayment of long-term debt (31,325) (232,266) (38,939)
Issuance of treasury stock 2,985 722 193
Purchase of treasury stock - (5,042) (11,285)
Premium on early retirement of debt - (4,088) -
Dividends on common stock (49,462) (48,254) (47,096)
- -----------------------------------------------------------------------------
Net cash provided by (used for) financing 57,081 (84,896) 19,343
- -----------------------------------------------------------------------------
CASH FLOWS FROM INVESTING
Decrease (increase) in short-term investments 3,175 97,411 (100,411)
Additions to investments (13,612) (48,008) (46,418)
Reductions in investments 10,303 69,573 66,717
Increase in note receivable (50,000) - -
Funding of qualified pension plans (5,037) (19,734) (8,918)
Additions to plant and equipment, and to
land other than timberlands (149,332) (231,392) (160,222)
Additions to timber, timberlands and
related logging facilities (9,153) (8,516) (10,432)
Disposition of plant and properties 2,862 5,146 3,293
Other, net 108 (4,191) (11,954)
- -----------------------------------------------------------------------------
Net cash used for investing (210,686) (139,711) (268,345)
- -----------------------------------------------------------------------------
Increase (decrease) in cash 1,286 169 (1,447)
Balance at beginning of year 7,740 7,571 9,018
- -----------------------------------------------------------------------------
Balance at end of year $ 9,026 $ 7,740 $ 7,571
=============================================================================
<FN>
Net interest paid (net of amounts capitalized) in 1997, 1996 and 1995 was $45.7
million, $47.1 million and $47.7 million, respectively. Net income taxes paid
in 1997, 1996 and 1995 were $2.8 million, $18.0 million and $36.0 million,
respectively.
The accompanying notes and summary of principal accounting policies are an
integral part of these financial statements.
</TABLE>
-22-
<PAGE>
<TABLE>
Potlatch Corporation and Consolidated Subsidiaries
Statements of Stockholders' Equity
(Dollars in thousands - except per-share amounts)
<CAPTION>
Additional Total
Common Stock Issued Paid-In Retained Treasury Stock Stockholders'
Shares Amount Capital Earnings Shares Amount Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 32,721,980 $32,722 $125,564 $818,040 3,497,499 $74,707 $901,619
Exercise of stock options
and stock awards - - 86 - (8,975) (193) 279
Shares purchased at cost - - - - 271,600 11,285 (11,285)
Put options - - - - - 12,247 (12,247)
Premium on issuance
of put options - - - - - (746) 746
Net earnings - - - 108,546 - - 108,546
Common dividends,
$1.615 per share - - - (47,096) - - (47,096)
Minimum pension
liability adjustment - - - 3,342 - - 3,342
- ------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 32,721,980 $32,722 $125,650 $882,832 3,760,124 $97,300 $943,904
Exercise of stock options
and stock awards - - 287 - (31,325) (722) 1,009
Shares purchased at cost - - - - 127,200 5,239 (5,239)
Put options - - - - - (4,489) 4,489
Premium on issuance
of put options - - - - - (197) 197
Net earnings - - - 58,089 - - 58,089
Common dividends,
$1.67 per share - - - (48,254) - - (48,254)
- ------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 32,721,980 $32,722 $125,937 $892,667 3,855,999 $97,131 $954,195
Exercise of stock options
and stock awards - - 1,617 - (128,881) (2,985) 4,602
Put options - - - - - (6,120) 6,120
Premium on issuance
of put options - - - - - (78) 78
Net earnings - - - 36,059 - - 36,059
Common dividends,
$1.71 per share - - - (49,462) - - (49,462)
- ------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 32,721,980 $32,722 $127,554 $879,264 3,727,118 $87,948 $951,592
======================================================================================================
<FN>
The accompanying notes and summary of principal accounting policies are an
integral part of these financial statements.
</TABLE>
-23-
<PAGE>
Potlatch Corporation and Consolidated Subsidiaries
Summary of Principal Accounting Policies
Consolidation
The financial statements include the accounts of Potlatch Corporation and its
subsidiaries after elimination of significant intercompany transactions and
accounts. There are no significant unconsolidated subsidiaries.
Potlatch Corporation is an integrated forest products company with
substantial timber resources. It is engaged principally in the growing and
harvesting of timber and the manufacture and sale of wood products, printing
papers and other pulp-based products. Its timberlands and all of its manu-
facturing facilities are located within the continental United States. The
primary market for the company's products is the United States, although it
sells a significant amount of paperboard to countries in the Pacific Rim.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates and assumptions.
Inventories
Inventories are stated at the lower of cost or market. The last-in, first-
out method is used to determine cost of logs, lumber, plywood, particleboard and
chips. The average cost method is used to determine cost of all other
inventories.
Earnings Per Common Share
In December 1997, the company adopted the Financial Accounting Standards
Board Statement No. 128, "Earnings Per Share," which establishes rules for the
calculation and presentation of basic and diluted earnings per share. The
following table reconciles the number of common shares used in the basic and
diluted earnings per share calculations:
1997 1996 1995
- -----------------------------------------------------------------------------
Basic average common shares outstanding 28,929,734 28,887,962 29,156,681
Incremental shares due
to common stock options 55,768 23,633 30,538
- -----------------------------------------------------------------------------
Diluted average common shares outstanding 28,985,502 28,911,595 29,187,219
=============================================================================
Options to purchase shares of common stock of 293,563, 472,421 and 142,825
for 1997, 1996 and 1995 respectively were not included in the computation of
diluted earnings per share because the options' exercise price was greater than
the average market price of common shares.
-24-
<PAGE>
Properties
Property, plant and equipment are valued at cost less accumulated
depreciation. Depreciation of buildings, equipment and other depreciable assets
is determined by using the straight-line method on estimated useful lives.
Estimated useful lives of plant and equipment range from 2 to 40 years.
Timber, timberlands and related logging facilities are valued at cost net of
the cost of fee timber harvested and depreciation or amortization. Logging
roads and related facilities are amortized over their useful lives or as related
timber is removed. Cost of fee timber harvested is determined annually based on
the estimated volumes of recoverable timber and related cost.
Major improvements and replacements of property are capitalized. Maint-
enance, repairs, and minor improvements and replacements are expensed. Upon
retirement or other disposition of property, applicable cost and accumulated
depreciation or amortization are removed from the accounts. Any gains or losses
are included in earnings.
Income Taxes
The provision for taxes on income is based on earnings reported in the
financial statements. Deferred income taxes are recorded for the temporary
differences between reported earnings and taxable income using current tax laws
and rates.
Preoperating and Startup Costs
Preoperating costs are expensed as incurred except for charges relating to
major new facilities. Deferred preoperating costs are amortized over a 60-month
period. Startup costs are expensed as incurred.
Environment
As part of its corporate policy, the company has an ongoing process to
monitor, report on and comply with environmental requirements. Based on this
ongoing process, reserves for environmental liabilities are established in
accordance with Statement of Financial Accounting Standards No. 5.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," and
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information." The Statements, which are effective
for 1998, require presentation of certain additional information in the
financial statements and accompanying footnotes. The effect of implementing the
new standards in future financial statements may require immaterial changes in
the format of some information the company currently presents.
-25-
<PAGE>
Potlatch Corporation and Consolidated Subsidiaries
Notes to Financial Statements
Note 1. Inventories
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
- --------------------------------------------------------------------
<S> <C> <C>
Logs, pulpwood, chips and sawdust $ 24,958 $ 23,271
Lumber and other manufactured wood products 9,828 9,459
Pulp, paper and converted paper products 90,854 82,783
Materials and supplies 56,663 61,386
- --------------------------------------------------------------------
$182,303 $176,899
====================================================================
Valued at lower of cost or market:
Last-in, first-out basis $ 31,766 $ 29,467
Average cost basis 150,537 147,432
- --------------------------------------------------------------------
$182,303 $176,899
====================================================================
</TABLE>
If the last-in, first-out inventory had been priced at lower of current
average cost or market, the values would have been approximately $25.3 million
higher at December 31, 1997, and $25.5 million higher at December 31, 1996.
Note 2. Plant and Equipment
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
- --------------------------------------------------------------------
<S> <C> <C>
Land improvements $ 57,796 $ 56,062
Buildings and structures 406,133 373,000
Machinery and equipment 1,993,776 1,955,581
Other 94,174 93,920
Construction in progress 234,777 167,142
- --------------------------------------------------------------------
$2,786,656 $2,645,705
====================================================================
</TABLE>
Depreciation charged against income amounted to $125.5 million in 1997
($118.7 million in 1996 and $116.9 million in 1995).
Authorized but unexpended appropriations for capital projects totaled $408.2
million at December 31, 1997. Of that amount, $200.4 million is budgeted to be
expended in 1998.
Note 3. Timber, Timberlands and Related Logging Facilities
<TABLE>
CAPTION>
(Dollars in thousands) 1997 1996
- --------------------------------------------------------------------
<S> <C> <C>
Timber and timberlands $304,566 $314,032
Related logging facilities 37,937 35,434
- --------------------------------------------------------------------
$342,503 $349,466
====================================================================
</TABLE>
Timber, timberlands and related logging facilities are stated at cost less
cost of fee timber harvested and amortization. Cost of fee timber harvested
amounted to $19.8 million in 1997 ($18.9 million in 1996 and $16.2 million in
1995). Amortization of logging roads and related facilities amounted to $.7
million in 1997 ($1.3 million in 1996 and $1.3 million in 1995).
-26-
<PAGE>
The company obtains logs under timber cutting contracts with federal, state
and local governments and from private landowners. Such cutting contracts
generally have terms ranging from a few months to several years, at prices which
are determined when the contract is signed. The company enters into many such
contracts each year. At December 31, 1997, the company estimated its total
commitment under such contracts was $42.6 million, which was not materially
different from market value.
Note 4. Other Assets
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
- --------------------------------------------------------------------
<S> <C> <C>
Pension assets $ 51,810 $46,810
Note receivable 50,000 -
Other 14,536 16,522
- --------------------------------------------------------------------
$116,346 $63,332
====================================================================
</TABLE>
Note 5. Taxes on Income
Provision for taxes on income, excluding an extraordinary item, is comprised
of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 1995
- --------------------------------------------------------------------
<S> <C> <C> <C>
Current $ 5,357 $ 9,063 $32,772
Deferred 13,219 15,729 29,621
- --------------------------------------------------------------------
Provision for taxes on income $18,576 $24,792 $62,393
====================================================================
</TABLE>
The provision for taxes on income differs from the amount computed by
applying the statutory federal income tax rate of 35 percent to earnings before
taxes on income due to the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 1995
- --------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected" tax expense $19,122 $30,214 $59,829
State and local taxes, net of federal
income tax benefits 2,131 2,936 6,101
Tax credits and other benefits (2,005) (8,059) (2,121)
Foreign sales corporation (1,141) (1,187) (1,712)
All other items 469 888 296
- --------------------------------------------------------------------
Provision for taxes on income $18,576 $24,792 $62,393
Effective tax rate 34.0% 28.7% 36.5%
====================================================================
-27-
<PAGE>
Principal current and noncurrent deferred tax assets and liabilities at
December 31 were:
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C>
Current deferred tax assets:
Employee benefits $ 18,702 $ 19,589
Inventories 1,521 1,529
Other 1,454 284
- ------------------------------------------------------------------------
Total current asset(1) 21,677 21,402
- ------------------------------------------------------------------------
Noncurrent deferred tax assets (liabilities):
Postretirement benefits 49,977 47,414
Alternative minimum tax 50,254 36,398
Plant and equipment (305,910) (279,807)
Timber, timberlands and related logging facilities (22,459) (20,984)
Pensions (13,720) (13,009)
Other, net 4,924 6,547
- ------------------------------------------------------------------------
Total net noncurrent liability (236,934) (223,441)
- ------------------------------------------------------------------------
Net deferred tax liability $(215,257) $(202,039)
========================================================================
<FN>
(1) Included in Prepaid expenses in the Balance Sheets.
</TABLE>
The company's federal income tax returns have been examined and settlements
have been reached for all years through 1988, except for a petition which has
been filed with the U.S. Tax Court regarding the deductibility of certain
expenses on the company's 1985 federal income tax return. The company believes
that adequate provision has been made for possible assessments of additional
taxes.
Note 6. Debt
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
- ----------------------------------------------------------------------
<S> <C> <C>
Revenue bonds fixed rate 5.8% to 9% due 1997
through 2026 $137,253 $138,223
Revenue bonds variable rate due 2007 through 2030 99,839 99,826
Debentures 6.95% due 2015 99,808 99,797
Credit sensitive debentures 9.125% due 2009 100,000 100,000
Sinking fund debentures 9.625% due 2016 - 15,000
Medium-term notes fixed rate 7.55% to 9.46%
due 1997 through 2022 185,000 200,000
Commercial paper 6.05% to 6.3% 100,000 50,000
Other notes 202 581
722,102 703,427
Less current installments on long-term debt 22 31,379
- ----------------------------------------------------------------------
Long-term debt $722,080 $672,048
======================================================================
</TABLE>
In October 1996, the company refinanced several fixed rate revenue bond
issues totaling $108.3 million by issuing similar revenue bonds and using the
proceeds to retire the original debt. The refinancing lowered the weighted
average effective interest rate associated with the bonds to approximately 6.0
percent from approximately 6.8 percent. At the time of refinancing the new
bonds had a maturity of approximately 29 years, versus an average remaining life
of approximately 10 years for the old bonds. The refinancing resulted in an
extraordinary charge of $.5 million, net of taxes.
-28-
<PAGE>
The interest rate payable on the 9.125 percent credit sensitive debentures is
subject to adjustment if certain changes in the debt rating of the debentures
occur. No such change in the interest rate payable has occurred.
The company redeemed $85.0 million of its 9.625 percent sinking fund
debentures in April 1996, resulting in an extraordinary charge of $2.9 million,
net of taxes. The company redeemed the remaining $15.0 million in April 1997.
The commercial paper is backed by the company's credit agreements, which
enable it to classify up to $100.0 million of these short-term borrowings to a
long-term basis should the company choose to do so. Because of this capability
and the likelihood that $100.0 million of the commercial paper will be outstand-
ing for more than a year, that amount has been classified as long-term debt.
The balance of commercial paper outstanding at December 31, 1997, is classified
as a portion of current notes payable in the Balance Sheets. At December 31,
1997, the weighted average interest rate payable on all commercial paper was 6.2
percent.
Certain credit agreements have restrictive covenants. At December 31, 1997,
the company was in compliance with such covenants. The company does not
currently have any covenants in any of its loan agreements which limit the
payment of dividends. No significant assets of the company have been pledged,
mortgaged or otherwise subjected to liens.
Payments due on long-term debt during each of the five years subsequent to
December 31, 1997:
<TABLE>
<CAPTION>
(Dollars in thousands)
- --------------------------------------------------------------------
<S> <C>
1998 $ 22
- --------------------------------------------------------------------
1999 10,021
- --------------------------------------------------------------------
2000 10,323
- --------------------------------------------------------------------
2001 325
- --------------------------------------------------------------------
2002 30,606
- --------------------------------------------------------------------
</TABLE>
At December 31, 1997, the company had credit lines totaling $250.0 million
for general corporate purposes. Of that amount, $150.0 million was in short-
term credit agreements and $100.0 million was in a revolving credit agreement.
The short-term credit agreements are effective for approximately one year and
are subject to renewal annually. The long-term credit agreement will expire on
August 30, 2001. At December 31, 1997, the company had outstanding indebtedness
under the short-term credit lines of $50.0 million, which is classified as a
portion of current notes payable in the Balance Sheets. At December 31, 1997,
the weighted average interest rate payable was 6.1 percent.
Note 7. Accounts Payable and Accrued Liabilities
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
- --------------------------------------------------------------------
<S> <C> <C>
Trade accounts payable $ 51,339 $ 63,714
Accrued wages, salaries and employee benefits 55,196 63,293
Accrued taxes other than taxes on income 17,046 17,372
Accrued interest 9,865 10,673
Accrued taxes on income 14,351 11,765
Book overdrafts 24,583 20,969
Other 29,604 26,699
- --------------------------------------------------------------------
$201,984 $214,485
====================================================================
</TABLE>
-29-
<PAGE>
Note 8. Other Long-Term Obligations
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
- --------------------------------------------------------------------
<S> <C> <C>
Postretirement benefits $128,147 $121,574
Pension and related liabilities 15,042 16,683
Other 12,147 9,835
- --------------------------------------------------------------------
$155,336 $148,092
====================================================================
</TABLE>
Note 9. Put Options
The company has in place a stock repurchase program through which it is
authorized to purchase up to 1 million shares of its common stock over several
years. Under the program, the company can purchase shares of common stock from
time to time through open market and privately negotiated transactions at prices
deemed appropriate by management.
In conjunction with the repurchase program, the company has issued put
options which gave the purchaser the right to sell shares of Potlatch stock to
the company at prices ranging from $37.20 to $41.987 per share on specific dates
in 1996, 1997 and 1998. Activity during 1997 and 1996 is summarized as follows:
<TABLE>
<CAPTION>
Put Options Outstanding
Number of Potential
(Dollars in thousands) Options Obligation
- --------------------------------------------------------------------
<S> <C> <C>
December 31, 1995 300,000 $12,247
Sales 100,000 3,720
Repurchases (100,000) (4,150)
Expirations (100,000) (4,059)
- --------------------------------------------------------------------
December 31, 1996 200,000 7,758
Sales 39,000 1,638
Expirations (200,000) (7,758)
- --------------------------------------------------------------------
December 31, 1997 39,000 $ 1,638
====================================================================
</TABLE>
The company's potential obligations of $1.6 million and $7.8 million at
December 31, 1997 and 1996, respectively, are classified as Put options in the
Balance Sheets and the related offset is recorded in Common shares in treasury
under Stockholders' equity.
Note 10. Disclosures about Fair Value of Financial Instruments
Estimated fair values of the company's financial instruments:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------
Carrying Fair Carrying Fair
(Dollars in thousands) Amount Value Amount Value
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and short-term investments $ 15,542 $ 15,542 $ 12,316 $ 12,316
Current notes payable 95,550 95,550 14,281 14,281
Long-term debt 722,102 788,360 703,427 738,521
Put options 1,638 1,638 7,758 7,758
===========================================================================
</TABLE>
-30-
<PAGE>
For short-term investments, current notes payable and put options, the
carrying amount approximates fair value. The fair value of the company's long-
term debt is estimated based upon the quoted market prices for the same or
similar debt issues. The amount of long-term debt for which there is no quoted
market price is immaterial and the carrying amount approximates fair value.
Note 11. Retirement and Savings Plans
Substantially all employees of the company are eligible to participate in
401(k) savings plans and are covered by noncontributory defined benefit pension
plans. These include both company-sponsored and multi-employer plans. Total
pension expense was $4.9 million in 1997, $3.8 million in 1996 and $6.3 million
in 1995.
The salaried plan provides benefits based on the participants' final average
pay and years of service. Plans covering hourly employees generally provide
benefits of stated amounts for each year of service.
Pension cost for company-sponsored plans:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during year $ 10,315 $ 9,773 $ 8,312
Interest cost on projected benefit obligation 29,316 28,029 27,366
Actual return on assets (138,320) (77,600) (94,103)
Net amortization and deferral 99,998 40,452 62,013
- ----------------------------------------------------------------------------
Net periodic pension cost $ 1,309 $ 654 $ 3,588
============================================================================
</TABLE>
Funded status and related balance sheet amounts for company-sponsored pension
plans at December 31:
<TABLE>
<CAPTION>
Plans Where Plans Where
Assets Exceed Accumulated
Accumulated Benefits
Benefits Exceed Assets Total
(Dollars in thousands) 1997 1996 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefit obligation $ 373,708 $ 350,697 $ 10,887 $ 9,942 $ 384,595 $ 360,639
Accumulated benefit obligation 394,242 371,038 10,947 9,944 405,189 380,982
Projected benefit obligation 422,821 391,903 12,940 12,262 435,761 404,165
=================================================================================================
Plan assets at fair value,
primarily publicly traded
equity and fixed income
securities $ 601,737 $ 485,349 $ - $ - $ 601,737 $ 485,349
Projected benefit obligation (422,821) (391,903) (12,940) (12,262) (435,761) (404,165)
- -------------------------------------------------------------------------------------------------
Plan assets above (below)
projected benefit obligation 178,916 93,446 (12,940) (12,262) 165,976 81,184
Unrecognized prior service cost 16,104 16,301 1,781 3,585 17,885 19,886
Unrecognized net gain (141,918) (61,020) (2,403) (4,376) (144,321) (65,396)
Unrecognized net transition asset (1,292) (1,917) - - (1,292) (1,917)
- -------------------------------------------------------------------------------------------------
Prepaid (accrued) pension cost $ 51,810 $ 46,810 $(13,562) $(13,053) $ 38,248 $ 33,757
=================================================================================================
</TABLE>
The projected benefit obligation for the company's unfunded, nonqualified
plan at December 31, 1997 and 1996, was $12.9 million and $12.3 million,
respectively. These amounts are included in the total for Plans Where
Accumulated Benefits Exceed Assets.
-31-
<PAGE>
The projected benefit obligation at December 31, 1997, 1996 and 1995, was
determined using an assumed discount rate of 7.25 percent, 7.50 percent and 7.50
percent, respectively, and an assumed long-term rate of salaried compensation
increase of 5 percent for each year. The assumed rate of return on plan assets
was 9.5 percent for 1997, 1996 and 1995. The actual annual return on plan
assets has averaged approximately 13.8 percent over the past 20 years.
Funding of company-sponsored plans is based on accepted actuarial methods in
accordance with applicable governmental regulations and is determined separately
from the net periodic cost presented above.
Hourly employees at two of the company's manufacturing facilities participate
in a multi-employer defined benefit pension plan, the Paper Industry Union-
Management Pension Fund. Company contributions were $3.6 million for 1997, $3.1
million for 1996 and $2.7 million for 1995 and equaled the amounts charged to
pension expense.
Note 12. Postretirement Benefits Other Than Pensions
The company provides many of its retired employees with health care and life
insurance benefits. Benefits are provided under company-sponsored defined
benefit retiree health care and life insurance plans which cover most salaried
and certain hourly employees. Employees become eligible for these benefits as
they retire from active employment. Most of the retiree health care plans
require retiree contributions and contain other cost sharing features such as
deductibles and coinsurance. The retiree life insurance plans are primarily
noncontributory. The retiree health care plans are partially funded. The
retiree life insurance plans are unfunded.
Net periodic postretirement benefit cost:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 1995
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during year $ 2,394 $ 3,034 $ 3,437
Interest cost on accumulated
postretirement benefit obligation 10,490 10,632 12,370
Actual return on assets (8,181) (4,793) (7,063)
Net amortization and deferral 4,881 2,112 5,674
- -----------------------------------------------------------------------
Net periodic postretirement benefit cost $ 9,584 $10,985 $14,418
=======================================================================
</TABLE>
The 1996 postretirement benefit cost presented above excludes a $3.0 million
actuarial gain, while the 1995 postretirement benefit cost excludes actuarial
charges of $.5 million for early retirement programs. These amounts are
included in Other income (expense), net in the Statements of Earnings.
-32-
<PAGE>
Funded status and related balance sheet amounts for postretirement health
care and life insurance plans at December 31:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ (85,873) $ (78,958)
Fully eligible active plan participants (20,969) (20,646)
Other active plan participants (46,798) (42,756)
- ---------------------------------------------------------------------------
Total accumulated postretirement benefit obligation (153,640) (142,360)
Plan assets at fair value, primarily publicly
traded equity and fixed income securities 38,150 34,718
- ---------------------------------------------------------------------------
Accumulated postretirement benefit obligation
in excess of plan assets (115,490) (107,642)
Unrecognized prior service cost (5,909) (6,329)
Unrecognized net gain (6,748) (7,603)
- ---------------------------------------------------------------------------
Accrued postretirement benefit cost $(128,147) $(121,574)
===========================================================================
</TABLE>
The discount rate used in determining the accumulated postretirement benefit
obligation at December 31, 1997, 1996 and 1995, was 7.25 percent, 7.50 percent
and 7.50 percent, respectively. The expected long-term rate of return on plan
assets for 1997, 1996 and 1995 was 9.0 percent.
The health care cost trend rate assumption used in determining the accumu-
lated postretirement benefit obligation at December 31, 1997, 1996 and 1995 is
based on an initial rate of 10 percent, decreasing incrementally to 5 percent
over an 8-year period and remaining at that level thereafter. This assumption
has a significant effect on the amounts reported. For example, a 1 percent
increase in the health care cost trend rates would have increased the accumu-
lated postretirement benefit obligation at December 31, 1997, to $178.2 million
and increased the net periodic cost for 1997 to $12.2 million from the $9.6
million actually recorded.
Funding of postretirement health care plans is based on accepted actuarial
methods in accordance with applicable governmental regulations and is determined
separately from the net periodic cost presented above.
Beginning in 1997, the company made contributions to a trust fund established
to provide retiree medical benefits for hourly employees at two of the company's
manufacturing facilities. The trust fund is managed by the United Paperworkers
International Union and contributions by the company totaled $1.2 million in
1997, which amount was charged to expense and is not included in the postret-
irement benefit cost presented above.
Note 13. Stock Compensation Plans
The company currently has three fixed stock option plans under which options
are outstanding. Under these plans, options for shares of the company's stock
have been issued to certain key personnel. Beginning in 1995, options for
shares have been issued to nonemployee directors under the 1995 Stock Incentive
Plan. Options are granted at market value and prior to 1995 may have included a
stock appreciation right. Options may also be issued in the form of restricted
stock and other share-based awards, none of which were outstanding at December
31, 1997. Options are fully exercisable after two years and expire not later
than 10 years from the date of grant. The company was originally authorized to
issue up to 1.2 million, 1.5
-33-
<PAGE>
million and 1.7 million shares under its 1983 Stock Option Plan, 1989 Stock
Incentive Plan and 1995 Stock Incentive Plan, respectively. At December 31,
1997, remaining shares authorized for future use under the Plans totaled 1.0
million.
The company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plans. Accordingly, no compensation cost has
been recognized when options are granted under the plans. Recorded compensation
(income) expense of $(.5) million in 1997 and $1.3 million for 1996 and 1995,
respectively, relate to existing stock appreciation rights. Had compensation
costs for the plans been determined based on the fair value at the grant dates
for option awards under those plans as prescribed by FASB Statement No. 123, the
company's net earnings and earnings per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
(Dollars in thousands - except per-share amounts)
For the years ended December 31 1997 1996 1995
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings as reported $36,059 $58,089 $108,546
pro forma 34,387 57,317 108,487
Basic earnings per share as reported $1.25 $2.01 $3.72
pro forma 1.19 1.98 3.72
</TABLE>
The pro forma information presented above includes only the effects of
applying the provisions of FASB Statement No. 123 to options granted in 1995 and
later years. Because options generally vest over a two year period and
additional awards are made each year, the pro forma 1996 and 1995 figures are
not representative of the effect FASB Statement No. 123 would have had on net
earnings and earnings per share had it been applied to years earlier than 1995.
A summary of the status of the company's stock option plans as of December
31, 1997, 1996 and 1995 and changes during those years is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Weighted Avg. Weighted Avg. Weighted Avg.
Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 1,705,900 $40.61 1,446,450 $39.11 1,164,800 $38.35
Granted 337,950 48.25 370,750 44.38 323,000* 41.25
Shares exercised (116,550) 34.95 (31,325) 32.20 (8,975) 31.18
SARs exercised (135,600) 34.86 (62,275) 32.52 (20,050) 31.52
Canceled or expired (32,975) 45.46 (17,700) 39.56 (12,325) 41.93
--------- --------- ---------
Outstanding at December 31 1,758,725 42.81 1,705,900 40.61 1,446,450 39.11
Options exercisable 1,239,000 41.10 1,177,850 39.34 986,600 38.76
Options outstanding which include
a stock appreciation right 240,450 668,025 717,600
Shares reserved for future grants 983,050 1,288,025 1,641,075*
Fair value of options granted
during the year $9.72 $8.65 $7.20
<FN>
*Includes options for shares under a plan approved by the board of directors in 1995 and stockholders in 1996.
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used for
grants in 1997, 1996 and 1995, respectively: dividend yield of 3.61, 3.83 and
4.02 percent; stock volatility of .1597, .1602 and .1604; risk free rate of
return of 6.00, 6.13 and 5.75 percent; and expected term of 10 years for all
grants.
-34-
<PAGE>
The following table summarizes information about stock options outstanding at
December 31, 1997.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ ----------------------------
Number Weighted Avg. Number
Range of Outstanding Remaining Weighted Avg. Exercisable Weighted Avg.
Exercise Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
<S> <C> <C> <C> <C>
$29.50 to $30.25 58,500 2.4 years $29.73 58,500 $29.73
$32.625 to $36.50 322,475 5.8 years 35.68 322,475 35.68
$41.25 to $48.25 1,377,750 8.1 years 45.03 858,025 43.91
$29.50 to $48.25 1,758,725 7.5 years $42.81 1,239,000 $41.10
</TABLE>
Note 14. Segment Information
Following is a tabulation of business segment information for each of the
past three years:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Sales to Unaffiliated Customers:(1)
Wood products:
Oriented strand board $ 106,772 $ 150,438 $ 204,250
Lumber 247,226 201,018 173,424
Plywood 64,509 57,462 73,954
Particleboard 12,875 12,087 15,564
Other 58,829 54,202 39,055
- ---------------------------------------------------------------------------
490,211 475,207 506,247
- ---------------------------------------------------------------------------
Printing papers 429,182 440,758 442,412
- ---------------------------------------------------------------------------
Other pulp-based products:
Pulp 11,183 12,346 21,797
Paperboard 420,032 404,011 438,196
Tissue 218,262 222,127 196,554
- ---------------------------------------------------------------------------
649,477 638,484 656,547
- ---------------------------------------------------------------------------
Total $1,568,870 $1,554,449 $1,605,206
===========================================================================
Intersegment Sales or Transfers:(2)
Wood products $ 60,649 $ 57,033 $ 76,130
Printing papers 35 279 160
Other pulp-based products 70 167 146
- ---------------------------------------------------------------------------
Total $ 60,754 $ 57,479 $ 76,436
===========================================================================
Operating Income:
Wood products $ 47,674 $ 68,056 $ 122,231
Printing papers 33,358 48,570 50,618
Other pulp-based products 51,043 40,867 70,776
- ---------------------------------------------------------------------------
132,075 157,493 243,625
Corporate Items:
Administration expense (31,385) (30,752) (26,875)
Interest expense (46,124) (43,869) (47,976)
Interest and dividend income 997 2,457 2,019
Other, net (928) 997 146
- ---------------------------------------------------------------------------
Earnings before taxes on income and
extraordinary item $ 54,635 $ 86,326 $ 170,939
===========================================================================
</TABLE>
-35-
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Identifiable Assets:
Wood products $ 690,468 $ 698,151 $ 696,175
Printing papers 644,457 592,228 531,272
Other pulp-based products 842,337 850,612 835,378
Corporate 187,874 124,688 202,486
- ---------------------------------------------------------------------------
Total $2,365,136 $2,265,679 $2,265,311
===========================================================================
Depreciation, Amortization and
Cost of Fee Timber Harvested:
Wood products $ 50,586 $ 49,072 $ 47,305
Printing papers 39,436 35,318 32,587
Other pulp-based products 58,689 56,092 55,870
Corporate 1,074 1,039 1,269
- ---------------------------------------------------------------------------
Total $ 149,785 $ 141,521 $ 137,031
===========================================================================
Capital Expenditures:
Wood products $ 31,578 $ 43,992 $ 41,802
Printing papers 81,913 103,574 90,610
Other pulp-based products 44,054 92,083 38,036
Corporate 940 259 206
- ---------------------------------------------------------------------------
Total $ 158,485 $ 239,908 $ 170,654
===========================================================================
<FN>
(1) Total export sales, including those made through brokers and agents,
amounted to $186.2 million, $196.6 million and $204.1 million in 1997,
1996 and 1995, respectively. Export paperboard sales for these years
(a majority of which were shipped to Japan, Australia and China) amounted
to 80 percent, 86 percent and 88 percent, respectively, of total export
sales.
(2) Intersegment sales for 1995-1997, the majority of which were based on
prevailing market prices, consisted primarily of chips, pulp logs and
other fiber sales to the pulp and papermaking facilities. The company's
timber, timberlands and related logging facilities have been assigned to
the wood products segment.
</TABLE>
-36-
<PAGE>
Note 15. Financial Results by Quarter (Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands - except per-share amounts) Three Months Ended
- ----------------------------------------------------------------------------------------------------------------
March 31 June 30 September 30 December 31
1997 1996 1997 1996 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $399,445 $388,621 $394,223 $386,068 $395,447 $398,227 $379,755 $381,533
Costs and expenses:
Depreciation, amortization
and cost of fee timber
harvested 38,134 35,064 36,741 33,244 38,991 37,377 35,919 35,836
Materials, labor and other
operating expenses 317,970 308,549 306,245 290,451 299,184 299,230 296,266 287,897
Selling, general and
administrative expenses 25,290 24,631 26,111 23,624 27,229 25,857 27,820 30,002
- ----------------------------------------------------------------------------------------------------------------
381,394 368,244 369,097 347,319 365,404 362,464 360,005 353,735
- ----------------------------------------------------------------------------------------------------------------
Earnings from operations $ 18,051 $ 20,377 $ 25,126 $ 38,749 $ 30,043 $ 35,763 $ 19,750 $ 27,798
================================================================================================================
Net earnings $ 6,365 $ 4,963 $ 9,882 $ 15,200 $ 14,107 $ 19,541 $ 5,705 $ 18,385
================================================================================================================
Basic net earnings per common share:
Before extraordinary item $.22 $.17 $.34 $.63 $.49 $.68 $.20 $.65
After extraordinary item .22 .17 .34 .53 .49 .68 .20 .63
Diluted net earnings per common share:
Before extraordinary item .22 .17 .34 .63 .48 .68 .20 .65
After extraordinary item .22 .17 .34 .53 .48 .68 .20 .63
================================================================================================================
</TABLE>
-37-
<PAGE>
Note 16. Subsequent Event
In February 1998, the Board of Directors of the company approved the
contribution of all of the company's approximately 514,000 acres of timberlands
in Arkansas to a newly formed real estate investment trust, Timberland Growth
Corporation (TGC). The Board also approved an agreement pursuant to which TGC
will acquire from Anderson-Tully Company (ATCO) 324,000 acres of primarily
hardwood timberlands concentrated in Mississippi and Arkansas and other real
estate assets through a cash merger for approximately $410 million. The merger
will be funded primarily by a proposed initial public offering of TGC's common
stock. After TGC's initial public offering, the company will own a majority of
the economic interest in TGC and will have voting power equal to its economic
interest.
The company will also acquire directly from ATCO two hardwood sawmills, a
veneer plant and log transportation assets. The company and TGC will enter into
a long-term timber purchase agreement by which the company will purchase and
harvest timber from TGC's initial timberlands at fair market value primarily for
use at the company's converting facilities in Arkansas and the two former ATCO
sawmills and veneer plant in Mississippi.
Consummation of these transactions is subject to certain contingencies,
including regulatory approvals.
The company initially will consolidate TGC's financial statements and will
reflect ATCO's assets acquired by TGC based on fair values as follows:
Assets acquired: (Dollars in millions)
Timber and timberlands $366
Commercial real estate
and farmland 43
Related equipment 1
----
$410
====
This acquisition will be funded primarily from the net proceeds of TGC's
proposed initial public offering, which will be shown in the consolidated
financial statements as a minority interest. Additional long-term debt will be
incurred or assumed by TGC to finance the balance of the acquisition. The
acquisition by the company of the two hardwood sawmills, veneer plant and log
transportation assets will also be accounted for under the purchase method of
accounting.
-38-
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors:
We have audited the accompanying balance sheets of Potlatch Corporation and
consolidated subsidiaries as of December 31, 1997 and 1996 and the related
statements of earnings, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1997. In connection with our
audits of the financial statements, we also have audited the financial statement
schedule on page 40. These financial statements and financial statement
schedule are the responsibility of the company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly, in
all material respects, the financial position of Potlatch Corporation and
consolidated subsidiaries at December 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Portland, Oregon
January 21, 1998, except as to Note 16, which is as of February 9, 1998.
-39-
<PAGE>
<TABLE>
Schedule II
POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
Valuation and Qualifying Accounts
For the Years Ended December 31, 1997, 1996 and 1995
(Dollars in thousands)
<CAPTION>
Amounts
charged
Balance at (credited)
beginning to costs Balance at
Description of year and expenses Deductions end of year
<S> <C> <C> <C> <C>
Reserve deducted from
related assets:
Doubtful accounts -
Accounts receivable
1
Year ended December 31, 1997 $2,275 $(102) $(151) $2,022
=============================================
1
Year ended December 31, 1996 $2,365 $ 12 $(102) $2,275
=============================================
1
Year ended December 31, 1995 $2,625 $ 109 $(369) $2,365
=============================================
<FN>
1 - Accounts written off - net of recoveries.
</TABLE>
-40-
<PAGE>
POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
Exhibit Index
Exhibit
(3)(a) Restated Certificate of Incorporation, restated and filed with
the state of Delaware on May 1, 1987.
*(3)(c) By-laws, as amended through March 1, 1996, filed as Exhibit (3)(c)
to the Annual Report on Form 10-K for the fiscal year ended
December 31, 1995 ("1995 Form 10-K").
(4) See Exhibits (3)(a) and (3)(c). Registrant also undertakes to
file with the Securities and Exchange Commission, upon request,
any instrument with respect to long-term debt.
*(4)(a) Form of Indenture, dated as of November 27, 1990, filed as Exhibit
(4)(a) to the 1995 Form 10-K.
*(4)(a)(i) Officers' Certificate, dated January 24, 1991, filed as Exhibit
(4)(a)(i) to the 1995 Form 10-K.
*(4)(a)(ii) Officers' Certificate, dated December 12, 1991, filed as Exhibit
(4)(a)(ii) to the Annual Report on Form 10-K for the fiscal year
ended December 31, 1996 ("1996 Form 10-K").
1
*(10)(a) Potlatch Corporation Management Performance Award Plan, as amended
effective March 1, 1996, filed as Exhibit (10)(a) to the 1995
Form 10-K.
1
*(10)(b) Potlatch Corporation Severance Program for Executive Employees, as
amended and restated as of February 24, 1989, filed as Exhibit
(10)(b)(iv) to the Annual Report on Form 10-K for the fiscal year
ended December 31, 1993 ("1993 Form 10-K").
2
*(10)(c) Letter agreement, dated May 21, 1979, between Potlatch Corporation
and George F. Jewett, Jr., regarding consulting services and
amendment thereto dated February 19, 1986, filed as Exhibit(10)(c)
to the 1995 Form 10-K.
1
*(10)(d) Potlatch Corporation Salaried Employees' Supplemental Benefit Plan
(As Amended and Restated Effective January 1, 1988), filed as
Exhibit (10)(d)(i) to the 1993 Form 10-K.
1
(10)(d)(i) Amendment, effective as of December 31, 1992, to Plan described in
Exhibit (10)(d).
*Incorporated by reference.
1 Management compensatory plan or arrangement.
2 Management contract.
-41-
<PAGE>
1
(10)(e) Supplemental Retirement Benefit and Life Insurance Agreement,
dated February 19, 1988, together with Amendment to Agreement
thereto, dated as of January 1, 1992, between Potlatch Corporation
and Richard B. Madden.
1
*(10)(f) Potlatch Corporation 1983 Stock Option Plan (effective September
24, 1983), together with amendments thereto, dated December 14,
1984, February 24, 1989 and February 22, 1990, filed as Exhibit
(10)(r) to the 1993 Form 10-K.
1
*(10)(f)(i) Form of Stock Option Agreement for the Potlatch Corporation 1983
Stock Option Plan together with the Addendum thereto as used for
options granted on December 14, 1989, filed as Exhibit (10)(g)(i)
to the Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 ("1994 Form 10-K").
1
*(10)(f)(ii) Form of Amendment to Stock Option Agreement together with the
Addendum thereto to add stock appreciation rights to stock option
agreements issued under the Potlatch Corporation 1983 Stock Option
Plan, filed as Exhibit (10)(g)(ii) to the 1994 Form 10-K.
1
*(10)(f)(iii) Form of Stock Option Agreement for the Potlatch Corporation 1983
Stock Option Plan together with the Addendum thereto as used for
options granted in each December of 1990-1992, filed as Exhibit
(10)(f)(iii) to the 1995 Form 10-K.
1
*(10)(g) Potlatch Corporation Deferred Compensation Plan for Directors, as
amended and restated as of May 1991, filed as Exhibit (10)(h) to
the 1994 Form 10-K.
1
*(10)(g)(i) Appendix A to the Plan set forth in Exhibit (10)(g) which became
effective December 31, 1996, filed as Exhibit (10)(g)(i) to the
1996 Form 10-K.
1
*(10)(i) Compensation of Directors, dated May 18, 1995, filed as Exhibit
(10)(i) to the 1995 Form 10-K.
2
*(10)(j) Form of Indemnification Agreement with each director of Potlatch
Corporation, as set forth on Schedule A, filed as Exhibit (10)(j)
to the 1996 Form 10-K.
2
(10)(j)(i) Amendment No. 1 to Schedule A to Exhibit (10)(j).
2
*(10)(k) Form of Indemnification Agreement with certain officers of
Potlatch Corporation as set forth on Schedule A, filed as Exhibit
(10)(k) to the 1996 Form 10-K.
2
(10)(k)(i) Amendment No. 1 to Schedule A to Exhibit (10)(k).
* Incorporated by reference.
1 Management compensatory plan or arrangement.
2 Management contract.
-42-
<PAGE>
1
*(10)(1) Potlatch Corporation 1989 Stock Incentive Plan adopted December 8,
1988, and as amended and restated February 24, 1989, filed as
Exhibit (10)(z) to the 1993 Form 10-K.
1
*(10)(1)(i) Form of Stock Option Agreement for the Potlatch Corporation 1989
Stock Incentive Plan together with the Addendum thereto as used
for options granted on December 14, 1989, filed as Exhibit
(10)(m)(i) to the 1994 Form 10-K.
1
*(10)(1)(ii) Form of Stock Option Agreement for the Potlatch Corporation 1989
Stock Incentive Plan together with the Addendum thereto as used
for options granted in each December of 1990-1997, filed as
Exhibit (10)(1)(ii) to the 1995 Form 10-K.
1
*(10)(m) Form of Amendments to Stock Options and Stock Incentive Plans,
dated March 30, 1990, filed as Exhibit (10)(m) to the 1995 Form
10-K.
1
*(10)(n) Potlatch Corporation 1995 Stock Incentive Plan adopted December 7,
1995, filed as Exhibit (10)(n) to the 1995 Form 10-K.
1
*(10)(n)(i) Form of Stock Option Agreement used for employees for the Potlatch
Corporation 1995 Stock Incentive Plan together with the Addendum
thereto as used for options granted in December, 1995, filed as
Exhibit (10)(n)(i) to the 1995 Form 10-K.
1
*(10)(n)(ii) Form of Addendum used in connection with the Stock Option
Agreement set forth in Exhibit (10)(n)(i) for options granted in
each December, 1996 and 1997, filed as Exhibit (10)(n)(ii) to the
1996 Form 10-K.
1
*(10)(n)(iii) Form of Stock Option Agreement used for outside directors for the
Potlatch Corporation 1995 Stock Incentive Plan together with the
Form of Addendum used for options granted in December 1995 and the
Form of Addendum used for options granted in each December 1996
and 1997, filed as Exhibit (10)(n)(iii) to the 1996 Form 10-K.
(22) Potlatch Corporation Subsidiaries.
(23) Consent of Independent Auditors.
(24) Powers of Attorney
*Incorporated by reference.
1 Management compensatory plan or arrangement.
2 Management contract.
-43-
State of Delaware
Office of the Secretary of State
I, MICHAEL HARKINS, SECRETARY OF STATE OF THE STATE OF
DELAWARE DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT
COPY OF THE CERTIFICATE OF RESTATED CERTIFICATE OF INCORPORATION
OF POTLATCH CORPORATION FILED IN THIS OFFICE ON THE FIRST DAY OF
MAY, A.D. 1987, AT 3:01 O'CLOCK P.M.
/s/ Michael Harkins
Michael Harkins, Secretary of State
:12219711
AUTHENTICATION:
DATE: O5/04/1987
Exhibit (3)(a)
<PAGE>
RESTATED CERTIFICATE OF INCORPORATION
OF
POTLATCH CORPORATION
Under Section 245
of the
Delaware General Corporation Law
POTLATCH CORPORATION, a corporation organized and
existing under the laws of the State of Delaware, hereby certifies
as follows:
First: The name of this corporation is Potlatch
Corporation. It was originally incorporated under the name
Potlatch Company.
Second: The original Certificate of Incorporation of
this corporation was filed with the Secretary of State, Dover,
Delaware, on the 10th day of August, 1955.
Third: This Restated Certificate of Incorporation
restates and integrates, without further amendment in any respect,
the Restated Certificate of Incorporation of this corporation as
heretofore amended or supplemented.
Fourth: This Restated Certificate of Incorporation was
duly adopted by the Board of Directors of this corporation
pursuant to Section 245 of the Delaware General Corporation Law.
Fifth: The text of the Restated Certificate of
Incorporation of said Potlatch Corporation as amended and
supplemented is hereby restated and integrated to read as herein
set forth in full:
<PAGE>
RESTATED CERTIFICATE OF INCORPORATION
OF
POTLATCH CORPORATION
First: The name of the corporation is POTLATCH
CORPORATION.
Second: The registered office of the corporation in the
State of Delaware is located at Corporation Trust Center, 1209
Orange Street, City of Wilmington, County of New Castle. Its
registered agent at such address is The Corporation Trust Company.
Third: The nature of the business, or objects or
purposes to be transacted, promoted or carried on are:
To engage in, do and transact a lumber, plywood,
building materials, pulp, paper and forest products business in
any and all its branches; to buy, or otherwise acquire and sell or
otherwise dispose of, and in any manner deal in, with, and process
trees, logs, lumber, timber, wood, wood fibers, pulps, paper, bark
and products of the forests, of any and all kinds, and the
chemical components thereof in any and all states, in any form or
condition, whether felled, standing or growing, and in any and all
worked, built, manufactured or made shapes, articles or
structures, and to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of
Delaware.
Fourth: The total number of shares of stock which the
corporation shall have authority to issue is forty-four million
(44,000,000). Of said shares, forty million
(40,000,000) shall be common stock with a par value of one dollar
($1) per share and four million (4,000,000) shares shall be
preferred stock without par value.
I. AUTHORIZATION OF BOARD OF DIRECTORS
TO ESTABLISH SERIES OF PREFERRED
STOCK AND FIX CONSIDERATION THEREFOR.
The Board of Directors is hereby expressly authorized,
within the limitations and restrictions stated herein from time to
time, by resolution:
(a) to divide the preferred stock into series;
-1-
<PAGE>
(b) to fix the consideration for which such preferred
stock shall be issued;
(c) to determine the voting powers of each such
series;
(d) to determine and fix the number of shares which
will constitute any such series and the distinctive
designation of each series;
(e) to make any such series of stock subject to
redemption at such time or times and at such price or
prices as shall be stated and expressed in such
resolution;
(f) to determine whether or not the shares of such
series shall be subject to the operation of a retirement
or sinking fund, and, if so subject, the extent to and the
manner in which it shall be applied to the purchase or
redemption of the shares of such series, and the terms and
provisions relative to the operation thereof;
(g) to fix the rights of the holders of stock of each
series of preferred stock to receive dividends at such
rates, on such conditions and at such times as shall be
stated and expressed in the resolution and whether payable
in preference to, or in relation to, the dividends payable
on any other class or classes of stock or other series of
the same class and whether cumulative or noncumulative as
shall be so stated and expressed;
(h) to fix the rights of the holders of the stock of
each series upon the dissolution of, or upon any
distribution of the assets of, the corporation;
(i) to make any series of preferred stock convertible
or automatically converted into or exchangeable for,
shares of any other class or classes or of any other
series of the same or any other class or classes of the
stock of the corporation at such price or prices or at
such rates of exchange and with such adjustments as shall
be stated and expressed in such resolution;
(j) to determine whether or not the shares of any
series shall be subject or entitled to any other
preferences, and relative, participating, optional or
other special rights and qualifications, limitations or
restrictions which shall be
-2-
<PAGE>
stated and expressed in such resolution and which shall
not be inconsistent with the terms and provisions of this
Section Fourth.
II. RANK.
Each series of preferred stock shall have such
preferences as to dividends and assets and amounts
distributable on liquidation, dissolution or winding up or
otherwise as shall be declared by such resolution or
resolutions establishing such series.
III. DIVIDENDS.
(a) The holders of preferred stock shall be
entitled to receive cash dividends when and as declared by
the Board of Directors at such rate per share per annum,
cumulatively if so provided, and with such preferences, as
shall have been fixed by the Board of Directors, and not
more, before any dividends shall be declared or paid upon
or set apart for, the common stock or any other class of
stock ranking junior thereto and such dividends on each
series of preferred stock shall cumulate, if at all, from
and after the dates fixed by the Board of Directors with
respect to such cumulation. Unpaid cumulated dividends
shall bear no interest.
(b) If dividends on any shares of preferred
stock are not declared in full, then such dividends as are
declared shall be declared ratably on all shares of stock
of each series of equal preference in proportion to the
respective unpaid cumulative dividends, if any, to the end
of the then current dividend period. No ratable
distribution shall be made with respect to any series
until cumulative dividends in full have been declared and
paid on any series standing senior in preference.
(c) Unless dividends on all outstanding shares
of preferred stock having cumulative dividend rights shall
have been fully paid for all past quarterly dividend
periods, and the full dividends thereon for the quarterly
dividend period current at the time shall have been paid
or declared and funds set apart therefor, and unless all
required sinking fund payments, if any, shall have been
made or provided for, no dividend (except a dividend
payable in common stock) shall be paid upon or declared or
set apart for the common stock.
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<PAGE>
(d) Subject to the foregoing provisions, the
Board of Directors may declare and pay dividends on the
common stock, to the extent permitted by law.
IV. LIQUIDATION OR DISSOLUTION.
(a) In the event of any liquidation or
dissolution or winding up of the corporation (hereafter
referred to as "liquidation") the holders of preferred
stock shall be entitled to receive in cash, out of the
assets of the corporation, full payment of the applicable
liquidation preference fixed for each series pursuant to
Section I above, together with unpaid cumulative dividends
thereon to the date of liquidation, and no more.
(b) If upon liquidation the assets of the
corporation available for distribution to stockholders
shall be insufficient to permit the payment in full of the
preferential amounts payable to the holders of preferred
stock, then all such assets shall be distributed ratably
among the holders of all shares of stock of each series of
equal preference in proportion to the respective amounts
that would be payable per share if such assets were
sufficient to permit payment in full. No ratable
distribution shall be made with respect to any series
until distributions in full have been paid to the holders
of all series standing senior in preference.
(c) After satisfaction of the preferential
requirements of the preferred stock upon any liquidation
of the corporation, the holders of common stock shall be
entitled to share ratably in the distribution of all
remaining assets of the corporation available for
distribution.
(d) A consolidation or merger of the corporation
with or into any other corporation or corporations or the
sale or conveyance (whether for cash, securities or other
property) of all or substantially all of the assets of the
corporation as an entirety, shall not be deemed or
construed to be a liquidation of the corporation for the
purpose of the foregoing provisions of this Section IV.
V. VOTING RIGHTS.
(a) A holder of the common stock shall, except
as otherwise provided in paragraphs (b), (e) or (f)
hereof, be entitled to one (1) vote on each matter
submitted to a vote at a meeting of stockholders for each
share of the common stock held of record by such holder as
of the record date for such meeting.
-4-
<PAGE>
(b) A holder of the common stock shall be
entitled to four (4) votes on each matter submitted to a
vote at a meeting of stockholders for each share of the
common stock held of record by such holder as of the
record date for such meeting which meets one or both of
the following criteria:
(1) such share of the common stock has had the same
beneficial owner or owners since December 12, 1985; or
(2) such share of the common stock has had the same
beneficial owner or owners for at least 48 consecutive
calendar months (dating from the first day of the first
full month on or after the date the holder acquired
beneficial ownership of such share) prior to the record
date for such meeting;
subject, in the case of holders referred to in paragraph
(d) hereof, to the requirements set forth in such
paragraph.
(c) For purposes of this Section V, no change in
beneficial ownership shall be deemed to have occurred with
respect to any share of common stock upon the occurrence
of any of the following events (each such event being
hereinafter referred to as an "Exempt Transfer"):
(i) Upon the transfer of such share by gift; by
devise, bequest or otherwise through the laws of
inheritance or descent; or by a trustee to a trust
beneficiary or beneficiaries under the terms of the trust;
or
(ii) Upon the appointment of a successor trustee,
guardian or custodian with respect to such share; or
(iii) Upon the addition, witharawa1 or demise of a
beneficiary or beneficiaries of a trust under the terms of
the trust and by reason of the birth, death, marriage or
divorce of any natural person; the adoption of any natural
person; the passage of a given period of time; the
attainment by any natural person of a specific age; or the
creation or termination of any guardianship or custodial
arrangement; or
(iv) Upon the transfer of record or the transfer of a
beneficial interest or interests in such share where the
circumstances surrounding
-5-
<PAGE>
such transfer clearly demonstrate that no material change
in beneficial ownership has occurred;
provided, in each such case, that (A) the transferee or
the transferor shall have provided to the corporation, in
accordance with such procedures as shall be established by
the corporation as provided in paragraph (g) hereof,
satisfactory evidence that such change in beneficial
ownership qualifies as an Exempt Transfer and (B) such
change was not undertaken in order to circumvent the
provisions or purposes of this Section V.
(d) Any share of the common stock held of record
on any record date for determining the holders entitled to
vote on any matter submitted to a vote by the stockholders
(a "Record Date") shall be presumed to be owned
beneficially by the record holder and for the period shown
by the stockholder records of the corporation.
Notwithstanding the preceding sentence of this paragraph
(d), any share of the common stock held of record on a
Record Date in "street" or "nominee" name or by a broker,
clearing agency, voting trustee, bank, trust company or
other nominee shall be presumed to have been acquired by
the beneficial owner subsequent to December 12, 1985 and
to have had the same beneficial owner for a period of less
than 48 consecutive calendar months prior to such Record
Date. These presumptions shall be rebuttable by
presentation to the corporation, in accordance with such
procedures as shall be established by the corporation as
provided in paragraph (g) hereof, of satisfactory
evidence.
(e) Any share of the common atock acquired by
the beneficial owner as a direct result of a stock split,
stock dividend, reclassification or other distribution of
shares by the corporation with respect to existing shares
("dividend shares") will be deemed to have been acquired
and held continuously by such holder from the date on
which the original shares, with respect to which the
dividend shares were issued, were acquired.
(f) A holder of any share of the common stock
acquired pursuant to the terms of certain plans of the
corporation as specified below, whether issued before or
after December 12, 1985, shall be entitled to four (4)
votes on each matter submitted to a vote at a meeting of
stockholders, provided such holder meets one of the
following requirements:
(i) Such holder is an employee who holds such share
of the common stock beneficially by reason of
participation in any tax-qualified savings, thrift, stock
bonus, employee stock
-6-
<PAGE>
ownership, pension or other similar individual account employee
benefit plan or arrangement adopted by the corporation or such
holder is a trustee under any such plan; or
(ii) Such holder is an employee or a former employee or a
beneficiary of either of them who holds such share of the common
stock beneficially by reason of a distribution from any plan
referred to in paragraph (f)(i) hereof; or
(iii) Such holder has acquired and beneficially owns such
share of the common stock by reason of participation in a dividend
reinvestment plan approved by the corporation.
(g) For purposes of this Section V, all determinations
concerning changes in beneficial ownership, or the absence of any
such change, shall be made by the Board of Directors or a transfer
agent acting on behalf of the Board of Directors and any such
determination shall be conclusive. Written procedures designed to
facilitate such determinations shall be established by the Board
of Directors from time to time. Such procedures shall provide,
among other things, the manner of proof of facts that will be
accepted and the frequency with which such proof may be required
to be renewed. The Board of Directors and any transfer agent shall
be entitled to rely on information concerning beneficial ownership
of the common stock coming to their attention from any source and
in any manner reasonably deemed by them to be reliable, but
neither the Board of Directors nor any transfer agent shall be
charged with any other information concerning the beneficial
ownership of the common stock. The powers conferred upon the Board
of Directors by this paragraph (g) are granted solely to enable
the Board of Directors to adopt procedures for the purpose of
making determinations of beneficial ownership under this Section V.
(h) For purposes of this Section V, the terms
"beneficial owner" and "beneficially owned" shall be defined in
accordance with Rule 13d-3 promulgated by the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as
amended (or any subsequent provisions replacing such act or rule)
except as provided otherwise in this Section V. Notwithstanding
Rule 13d-3, shares of common stock acquired upon the exercise of a
stock option which was granted under an employee stock option plan
adopted by the corporation shall, with respect to the person who
exercises such option, be deemed to be beneficially owned
commencing from the date the option was exercised.
-7-
<PAGE>
(i) Notwithstanding paragraphs (b), (e) and (f) hereof,
for purposes of any vote on a proposal submitted to the
stockholders solely under Articles Sixth, Eighth or Twelfth of
this Restated Certificate of Incorporation and for purposes of any
vote on a proposal to amend, alter or repeal such Article Twelfth,
a holder of common stock shall be entitled to one (1) vote for
each share of the common stock held of record by such holder as of
the record date for determining stockholders entitled to vote on
such proposal.
(j) The holders of each series of preferred stock shall
have such voting rights, if any, as shall be provided for in the
resolution or resolutions of the Board of Directors establishing
such class or series.
VI. DESIGNATION, PREFERENCES AND RIGHTS
OF THE $3.75 SERIES B CONVERTIBLE
EXCHANGEABLE PREFERRED STOCK (as
adopted by the Board of Directors).
(i) Designation. The designation of said series of the
preferred stock shall be "$3.75 Series B Convertible Exchangeable
Preferred Stock, without par value" (the "Series B"). The number
of shares of Series B shall be 1,000,000. The liquidation value of
Series B shall be $50 per share.
(ii) Dividends. Holders of shares of Series B will be
entitled to receive, when and as declared by the Board of
Directors out of funds legally available therefor, dividends from
the date of issue thereof at the annual rate of $3.75 per share,
payable quarterly, in arrears, on January 15, April 15, July 15
and October 15 (a "Dividend Payment Date") in each year,
commencing on July 15, 1986. Such dividends shall be cumulative
with respect to each share from the date of original issuance,
whether or not earned or declared. The holders of Series B will
not be entitled to any dividends other than the cash dividends
described in this Clause (ii).
If at any time the Corporation has failed to pay accrued
dividends on any shares of Series B or any other class of
preferred stock ranking on a parity with the Series B as to
dividends and upon liquidation at the time such dividends are
payable ("Parity Stock"), the Corporation will not (a) declare or
pay any dividend on the common stock, $1.00 par value (the "Common
Stock"), of the Corporation or on any other class of stock ranking
junior to the Series B as to dividends and upon liquidation (the
Common Stock and any such junior class being the "Junior
-8-
<PAGE>
Stock") or make any payment on account of, or set apart money for,
a sinking or other analogous fund for, the purchase, redemption or
other retirement of, any Junior Stock or make any distribution in
respect thereof, either directly or indirectly and whether in cash
or property or in obligations or shares of the Corporation (other
than in shares of Junior Stock), (b) purchase any shares of Series
B or Parity Stock (except for a consideration payable in Junior
Stock) or redeem fewer than all of the Series B and Parity Stock
then outstanding, or (c) permit any corporation or other entity
directly or indirectly controlled by the Corporation to purchase
any shares of Junior Stock, Series B or Parity Stock, unless all
accrued and payable but unpaid dividends on Series B and any
Parity Stock have been or contemporaneously are declared and paid
in full or declared and a sum sufficient for payment of such
dividends has been set aside. Unless and until all dividends
accrued and payable but unpaid on the Series B and any Parity
Stock at the time outstanding have been paid in full, all
dividends declared by the Corporation upon such Series B or Parity
Stock shall be declared pro rata with respect to all Series B and
Parity Stock then outstanding, so that the amounts of any
dividends declared on the Series B and such Parity Stock shall in
all cases bear to each other the same ratio that, at the time of
such declaration, all accrued and payable but unpaid dividends on
the Series B and such other Parity Stock, respectively, bear to
each other.
(iii) Optional Redemptions for Cash. Shares of Series B
shall be redeemable at the option of the Corporation at any time
on or after April 15, 1989 at the following redemption prices per
share, if redeemed during the 12-month period beginning April 15
in each of the following years:
Redemption Redemption
Year Price Year Price
1989 $52.625 1993 $51.125
1990 52.250 1994 50.750
1991 51.875 1995 50.175
1992 51.500
and on or after April 15, 1996 at $50 per share, plus, in each
case, any accrued and unpaid dividends to the redemption date. The
Corporation may not purchase or redeem less than all the Series B
and Parity Stock then outstanding if, as of such time, the
Corporation has failed to pay all accrued and unpaid dividends
thereon, whether or not earned or declared. The Series B is not
redeemable prior to April 15, 1989.
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<PAGE>
The Corporation will mail notice of redemption to
each holder of record of Series B to be redeemed no less
than 30 nor more than 60 days prior to the redemption
date. Such notice shall specify the time and place of such
redemption and the number of shares to be redeemed and
shall be given by first class mail, postage prepaid, to
the holders of record of the shares of Series B to be
redeemed at their respective addresses as the same shall
appear on the books of the Corporation, but neither
failure to mail such notice, nor any defect therein or in
the mailing thereof, to any particular holder shall affect
the sufficiency of the notice or the validity of the
proceedings for redemption with respect to the other
holders. Any notice which was mailed in the manner herein
provided shall be conclusively presumed to have been duly
given whether or not the holder receives the notice.
If fewer than all of the shares of Series B are
to be redeemed, the shares to be redeemed shall be
selected by lot or pro rata or in some other equitable
manner determined by the Corporation.
If a notice of redemption has been given pursuant
to this Clause (iii) and if, on or before the date fixed
for redemption, the funds necessary for such redemption
shall have been set aside by the Corporation, separate and
apart from its other funds, in trust for the pro rata
benefit of the holders of the shares so called for
redemption, then on and after the redemption date,
notwithstanding that any certificates for such shares have
not been surrendered for cancellation, dividends shall
cease to accrue on the shares of Series B to be redeemed,
such shares shall no longer be deemed to be outstanding
and all rights of the holders of such shares as
stockholders of the Corporation shall cease except the
right to receive the moneys payable upon such redemption,
without interest, upon surrender of the certificates
evidencing such shares. Subject to applicable escheat
laws, any moneys so set aside by the Corporation and
unclaimed at the end of six years from the redemption date
shall revert to the general funds of the Corporation after
which reversion the holders of such shares so called for
redemption shall look only to the general funds of the
Corporation for the payment of the redemption price. Any
interest accrued on funds so deposited shall be paid to
the Corporation from time to time.
(iv) Optional Redemption Through Debenture
Exchange.
(A) Shares of Series B ~hall be redeemable at
the option of the Corporation, in whole but not in part,
on any
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Dividend Payment Date beginning April 15, 1989, to and including
April 15, 2011, through the issuance of the Corporation's 7-1/2%
Convertible Subordinated Debentures due April 15, 2011
(hereinafter referred to as the "Debentures") described in
Amendment No. 1 to the Corporation's Registration Statement on
Form S-3 (Registration No. 33-4526), in redemption of and in
exchange for the shares of Series B, in the manner provided in
this Clause (iv).
(B) Holders of Series B will be entitled to receive $50
principal amount of the Debentures for each share of Series B held
by them on the Exchange Date (as hereinafter defined).
(C) The Corporation will mail notice of its intention
to redeem through such an exchange to each holder of record of the
shares of Series B no less than 30 nor more than 60 days prior to
the redemption date. Such notice shall be given by first class
mail, postage prepaid to the holders of record of shares of Series
B at their respective addresses as the same shall appear on the
books of the Corporation, specifying the effective date of the
exchange (the "Exchange Date") and the place where certificates
for shares of Series B are to be surrendered for Debentures and
stating that dividends on shares of Series B will cease to accrue
on the Exchange Date, but neither failure to mail such notice, nor
any defect therein or in the mailing thereof, to any particular
holder shall affect the sufficiency of the notice or the validity
of the proceedings for redemption and exchange with respect to the
other holders. Any notice which was mailed in the manner herein
provided shall be conclusively presumed to have been duly given
whether or not the holder receives the notice.
If notice of redemption and exchange has been given
pursuant to this Clause (iv) then on or after the Exchange Date
(unless the Corporation shall default in issuing Debentures in
redemption of and in exchange for shares of Series B) and
notwithstanding that any certificates for shares of this series
have not been surrendered for exchange, the rights of the holders
of the Series B as stockholders of the Corporation shall cease
(except the right to receive accrued and unpaid dividends to the
date of redemption, whether or not earned or declared), and the
person or persons entitled to receive the Debentures issuable upon
such redemption and exchange shall be treated for all purposes as
the registered holder or holders of such Debentures. Upon the
surrender (and endorsement, if required by the Corporation) in
accordance with such notice of the certificates for shares of
Series B, such certificates shall be exchanged for Debentures and
such accrued dividends in accordance with this Clause (iv).
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(D) Prior to issuance of the Debentures, the
Corporation will use reasonable efforts to list the
Debentures for trading on the New York Stock Exchange or,
if they cannot be so listed, the Corporation will use
reasonable efforts to list the Debentures on another
principal national securities exchange or include them on
a national quotations system.
(v) Liquidation.
(A) In case of the voluntary or involuntary
liquidation, dissolution or winding-up of the Corporation,
the holders of any shares of Series B are entitled to
receive the liquidation price of $50 per share, plus an
amount equal to the dividends accrued and unpaid thereon
to the payment date, before any distribution is made to
the holders of Junior Stock.
(B) The holders of shares of Series B and all
Parity Stock shall share ratably, in accordance with the
respective amounts payable thereon, in any such
distribution which is not sufficient to pay in full the
aggregate of the amounts payable thereon. After payment in
full of the liquidation price to which the holders of
shares of Series B are entitled the holders of shares of
Series B will not be entitled to any further participation
in any distribution of assets by the Corporation.
(C) Neither a consolidation or merger of the
Corporation with or into any other corporation, nor a
merger of any other corporation with or into the
Corporation, nor a sale or transfer of all or
substantially all of the Corporation's assets for cash or
securities shall be considered a liquidation, dissolution
or winding-up of the Corporation within the meaning of
this Clause (v).
(vi) Conversion.
(A) Subject to the provisions for adjustment
hereinafter set forth, each share of Series B shall be
convertible at the option of the holder thereof, in the
manner hereinafter set forth, into fully paid and
nonassessable shares of Common Stock at the conversion
price, determined as hereinafter provided, in effect on
the date of conversion, provided that if any of the Series
B is called for redemption (whether for cash or
Debentures), the conversion rights pertaining thereto will
terminate at the close of business on the tenth business
day preceding the redemption date. The price at which
shares of Common Stock shall be delivered upon conversion
(hereinafter referred to as the "Conversion Price") shall
be initially $53 per share of Common Stock. The Conversion
Price shall be adjusted in
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certain instances as provided in subclause (B) of this
Clause (vi).
Any holder of shares of Series B desiring to
convert the same into shares of Common Stock shall
surrender the certificate or certificates for the shares
of Series B being converted, duly endorsed or assigned to
the Corporation or in blank, at the principal office of
the Corporation or at a bank or trust company appointed by
the Corporation for that purpose, accompanied by a written
notice of conversion specifying the number (in whole
shares) of shares of Series B to be converted and the name
or names in which such holder wishes the certificate or
certificates for shares of Common Stock to be issued; in
case such notice shall specify a name or names other than
that of such holder, such notice shall be accompanied by
payment of all transfer taxes payable upon the issue of
shares of Common Stock in such name or names. In case less
than all of the shares of Series B represented by a
certificate are to be converted by a holder, upon such
conversion the Corporation shall issue and deliver, or
cause to be issued and delivered, to the holder a
certificate or certificates for the shares of Series B not
so converted. The holders of shares of Series B at the
close of business on a dividend payment record date shall
be entitled to receive the dividend payable on such shares
(except shares called for redemption on a redemption date
between such record date and the dividend payment date) on
the corresponding dividend payment date notwithstanding
the conversion thereof or the Corporation's default on
payment of the dividend due on such dividend payment date.
However, shares of Series B surrendered for conversion
during the period from the close of business on any
dividend payment record date for the Series B to the
opening of business on the corresponding Dividend Payment
Date (except shares called for redemption on a redemption
date during such period) must be accompanied by payment of
an amount equal to the dividend payable on such shares on
such Dividend Payment Date. A holder of shares of Series B
on a dividend payment record date who (or whose
transferee) converts shares of Series B on a dividend
payment date will receive the dividend payable on such
shares by the Corporation on such date, and the converting
holder need not include payment in the amount of such
dividend upon surrender of shares of Series B for
conversion. Except as provided above, no payment or
adjustment will be made on account of accrued or unpaid
dividends upon the conversion of shares of Series B.
(B) The Conversion Price shall be adjusted from
time to time as follows:
(1) In case the Corporation shall pay or
make a dividend or other distribution on any class
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of capital stock of the Corporation in shares of Common
Stock, the Conversion Price in effect at the opening of
business on the day following the date fixed for the
determination of stockholders entitled to receive such
dividend or other distribution shall be reduced by
multiplying such Conversion Price by a fraction of which
the numerator shall be the number of shares of Common
Stock outstanding at the close of business on the date
fixed for such determination and the denominator shall be
the sum of such number of shares and the total number of
shares constituting such dividend or other distribution,
such reduction to become effective immediately after the
opening of business on the day following the date fixed
for such determination.
(2) In case the Corporation shall issue rights or
warrants to all holders of its shares of Common Stock
entitling them to subscribe for or purchase Common Stock
at a price per share less than the current market price
per share (determined as provided in subclause (C) of the
Common Stock on the date fixed for the determination of
stockholders entitled to receive such rights or warrants,
the Conversion Price in effect at the opening of business
on the day following the date fixed for such determination
shall be reduced by multiplying such Conversion Price by a
fraction of which the numerator shall be the number of
shares of Common Stock outstanding at the close of
business on the date fixed for such determination plus the
number of shares of Common Stock which the aggregate of
the offering price of the total number of shares of Common
Stock so offered for subscription or purchase would
purchase at such current market price and the denominator
shall be the number of shares of Common Stock outstanding
at the close of business on the date fixed for such
determination plus the number of shares of Common Stock so
offered for subscription or purchase, such reduction to
become effective immediately after the opening of business
on the day following the date fixed for such
determination.
(3) In case the outstanding shares of Common Stock
shall be subdivided into a greater number of shares, the
Conversion Price in effect at the opening of business on
the day following the day upon which such subdivision
becomes effective shall be proportionately reduced, and,
conversely, in case outstanding shares of Common Stock shall
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each be combined into a smaller number of shares, the
Conversion Price in effect at the opening of business on
the day following the day upon which such combination
becomes effective shall be proportionately increased, such
reduction or increase, as the case may be, to become
effective immediately after the opening of business on the
day following the day upon which such subdivision or
combination becomes effective.
(4) In case the Corporation shall, by dividend or
otherwise, distribute to all holders of shares of Common
Stock evidences of indebtedness or assets (including
securities, but excluding any rights or warrants referred
to in subclause (B)(2), any dividend or distribution paid
in cash out of the retained earnings of the Corporation
and any dividend or distribution referred to in subclause
(B)(1)), the Conversion Price shall be adjusted so that
the same shall equal the price determined by multiplying
the Conversion Price in effect immediately prior to the
close of business on the date fixed for the determination
of stockholders entitled to receive such distribution by a
fraction of which the numerator shall be the current
market price per share (determined as provided in subclause
(C)) of the Common Stock on the date fixed for such
determination less the then fair market value (as
determined by the Board of Directors, whose determination
shall be conclusive) of the portion of the assets or
evidences of indebtedness so distributed allocable to one
share of Common Stock and the denominator shall be such
current market price per share of the Common Stock, such
adjustment to become effective immediately prior to the
opening of business on the day following the date fixed
for the determination of stockholders entitled to receive
such distribution.
(5) In case the Common Stock issuable upon the
conversion of the Series B shall be changed into the same
or a different number of shares of any class or classes of
stock, whether by capital reorganization,reclassification,
or otherwise (other than a subdivision or combination of
shares or a stock dividend provided for in subclauses
(B)(l) or (B)(3), or a reorganization, merger,
consolidation or sale of assets provided for in subclause
(F)), then and in each such event the holders of shares of
Series B shall have the right thereafter to convert such
shares into the kind
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<PAGE>
and amount of shares of stock and other securities and
property receivable upon such reorganization,
reclassification or other change, by holders of the number
of shares of Common Stock into which such shares of Series
B might have been converted immediately prior to such
reorganization, reclassification or change.
(C) For the purpose of any computation under
this Clause (vi), the current market price per share of
Common Stock on any date shall be deemed to be the average
of the daily Closing Prices for 15 consecutive Business
Days selected by the Board of Directors commencing not
more than 30 and not less than 20 Business Days before the
date in question. The term "Closing Price" on any day
shall mean (i) the last reported sales price per share of
Common Stock on such day on the New York Stock Exchange,
or (ii) if the Common Stock is not listed or admitted to
trading on the New York Stock Exchange, the last reported
sales price on the principal national securities exchange
on which the Common Stock is admitted for trading, or
(iii) if the Common Stock is not listed or admitted for
trading on any national securities exchange, the last
reported sales or transaction price or the average of the
closing bid and asked quotations, as the case may be, with
respect to the Common Stock on the National Association of
Securities Dealers, Inc. Automated Quotation System, or
any similar system then in use, or (iv) if no such
quotations are available, the fair market value on the
date in question of a share of Common Stock as determined
in good faith by the Board of Directors; and the term
"Business Day" shall mean each Monday, Tuesday, Wednesday,
Thursday and Friday which is not a day on which banking
institutions in The City of New York are authorized or
obligated by law or executive order to close.
(D) Notwithstanding the provisions of
subclause (B) above, no adjustment in the Conversion Price
shall be required unless such adjustment (plus any adjust-
ments not previously made by reason of this subalause (D))
would require an increase or decrease of at least 1% in
such price; provided, however, that any adjustments which by
reason of this subclause (D) are not required to be made
shall be carried forward and taken into account in any sub-
sequent adjustment. All calculations under this Clause (vi)
shall be made to the nearest cent.
(E) The Corporation may make such reductions in
the Conversion Price, in addition to those required by
this Clause (vi), as it considers to be advisable in order
to avoid or diminish any income tax to any holder of
shares of Common Stock resulting from any dividend or
distribution of stock or issuance of rights or warrants to
purchase or
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<PAGE>
subscribe for stock or from any event treated as such for income
tax purposes or for any other reasons. The Corporation shall have
the power to resolve any ambiguity or correct any error in this
Clause (vi) and its actions in so doing shall be final and
conclusive.
(F) In case the Corporation shall effect any capital
reorganization of the Common Stock (other than a subdivision,
combination, capital reorganization or reclassification provided
for in subclauses (B)(3) or (5)) or shall consolidate or merge
with or into any other corporation (other than a consolidation or
merger in which the Corporation is the surviving corporation and
each share of Common Stock outstanding immediately prior to such
consolidation or merger is to remain outstanding immediately after
such consolidation or merger) or shall sell or transfer all or
substantially all its assets to any other corporation, lawful
provision shall be made as a part of the terms of such transaction
whereby the holders of shares of Series B shall receive upon
conversion thereof, in lieu of each share of Common Stock which
would have been issuable upon conversion of such shares if
converted immediately prior to the consummation of such
transaction, the same kind and amount of stock (or other
securities, cash or property, if any) as may be issuable or
distributable in connection with such transaction with respect to
each share of Common Stock outstanding at the effective time of
such transaction, subject to subsequent adjustments for subsequent
stock dividends and distributions, subdivisions or combinations of
shares, capital reorganizations, reclassifications, consolidations
or mergers as nearly equivalent as possible to the adjustments
provided for in this Clause (vi).
(G) Whenever the Conversion Price is adjusted as herein
provided:
(1) the Corporation shall compute the adjusted Conversion
Price and shall cause to be prepared a certificate signed by an
authorized officer of the Corporation setting forth the adjusted
Conversion Price and showing in reasonable detail the facts upon
which such adjustment is based and the computation thereof and
such certificate shall forthwith be filed with each transfer agent
for the shares of Series B; and
(2) a notice stating that the Conversion Price has been
adjusted and setting forth the adjusted Conversion Price shall,
as soon as practicable, be mailed to the holders of record of
outstanding shares of Series B.
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<PAGE>
(H) In case:
(1) the Corporation shall declare a dividend or other
distribution on its shares of Common Stock otherwise than
in cash out of its earned surplus;
(2) the Corporation shall authorize the granting to
the holders of its shares of Common Stock of rights or
warrants entitling them to subscribe for or purchase any
shares of capital stock of any class or of any other
rights;
(3) of any reclassification of the shares of Common
Stock (other than a subdivision or combination of its
outstanding shares of Common Stock), or of any
consolidation or merger to which the Corporation is a
party and for which approval of any stockholders of the
Corporation is required, or of the sale or transfer of all
or substantially all the assets of the Corporation; or
(4) of the voluntary or involuntary liquidation,
dissolution or winding-up of the Corporation;
then the Corporation shall cause to be mailed to each
transfer agent for the shares of Series B and to the
holders of record of the outstanding shares of Series B,
at least 20 days (or 10 days in any case specified in
subclauses (1) or (2) above) prior to the applicable
record or effective date hereinafter specified, a notice
stating (x) the date as of which the holders of record of
shares of Common Stock to be entitled to such dividend,
distribution, rights or warrants are to be determined, or
(y) the date on which such reclassification,
consolidation, merger, sale, transfer, liquidation,
dissolution or winding-up is expected to become effective
and the date as of which it is expected that holders of
record of shares of Common Stock shall be entitled to
exchange their shares for securities or other property, if
any, deliverable upon such reclassification,
consolidation, merger, sale, transfer, liquidation,
dissolution or winding-up. Such notice shall also state
whether such transaction will result in any adjustment in
the Conversion Price applicable to the shares of Series B
and, if so, shall state what the adjusted Conversion Price
will be and when it will become effective. Neither the
failure to give the notice required by this subclause (H),
nor any defect therein, to any particular holder shall
affect the sufficiency of the notice or the legality or
validity of any such dividend, distribution, right,
warrant, reclassification, consolidation, merger, sale,
transfer, liquidation,
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<PAGE>
dissolution or winding-up, or the vote on any action
authorizing such with respect to the other holders.
(I) The Corporation shall at all times reserve
and keep available out of its authorized shares of Common
Stock, for the purpose of delivery upon conversion of
shares of Series B, the full number of shares of Common
Stock then deliverable upon the conversion of all shares
of Series B then outstanding and shall take all action
necessary so that shares of Common Stock so issued will be
validly issued, fully paid and nonassessable.
(J) The Corporation will pay any and all stamp
or similar taxes that may be payable in respect of the
issuance or delivery of shares of Common Stock on
conversion of shares of Series B. The Corporation shall
not, however, be required to pay any tax which may be
payable in respect of any transfer involved in the
issuance and delivery of shares of Common Stock in a name
other than that in which the shares of Series B so
converted were registered, and no such issuance or
delivery shall be made unless and until the person
requesting such issuance has paid to the Corporation the
amount of any such tax or has established to the
satisfaction of the Corporation that such tax has been
paid.
(K) No fractional shares or scrip representing
fractional shares shall be issued upon the conversion of
shares of Series B. If any such conversion would otherwise
require the issuance of a fractional share an amount equal
to such fraction multiplied by the Closing Price per share
of Common Stock (determined as provided in subclause (C)
above) on the day of conversion shall be paid to the
holder in cash by the Corporation.
(L) The certificate of any independent firm of
public accountants of recognized standing selected by the
Board of Directors shall be presumptive evidence of the
correctness of any computation made under this Clause
(vi).
(vii) Voting Rights. Except as otherwise required
by law, holders of shares of Series B shall have no voting
rights; provided, however, that:
(A) Dividend Defaults.
(1) If at any time accrued dividends on the shares of
Series B or any Parity Stock shall not have been paid in
an aggregate amount equal to or greater than six quarterly
dividends on the shares of Series B or such Parity Stock
at the time outstanding, then, and in any such event, the
number of Directors then constituting the entire Board of
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Directors of the Corporation shall automatically be
increased by two Directors and the holders of shares of
Series B and the holders of shares of Parity Stock, voting
together as a single class, shall be entitled to fill such
newly created directorships. Such right to vote as a
single class to elect two Directors shall, when vested,
continue until all dividends in default on the shares of
Series B and such Parity Stock, as the case may be, shall
have been paid in full and, when so paid, such right to
elect two Directors separately as a class shall cease,
subject, always, to the same provisions for the vesting of
such right to elect two Directors separately as a class in
the case of future dividend defaults. At any time when
such right to elect two Directors separately as a class
shall have so vested the Corporation may, and upon the
written request of the holders of record of not less than
20% of the total number of shares of Series B and such
Parity Stock then outstanding shall, call a special
meeting of the holders of such shares to fill such newly
created directorships for the election of Directors. In
the case of such a written request, such special meeting
shall be held within 90 days after the delivery of such
request and in either case, at the place and upon the
notice provided by law and in the By-laws of the
Corporation, provided that the Corporation shall not be
required to call such a special meeting if such request is
received less than 120 days before the date fixed for the
next ensuing annual meeting of stockholders of the
Corporation, at which meeting such newly-created
directorships shall be filled by the holders of such
shares of Series B and such Parity Stock.
(2) So long as any shares of Series B are outstanding
the By-laws of the Corporation shall contain provisions
ensuring that the number of Directors of the Corporation
shall at all times be such that the exercise, by the
holders of shares of Series B and the holders of shares of
Parity Stock, of the right to elect Directors under the
circumstances provided in paragraph (1) of this subclause
(A) will not contravene any provisions of the Charter.
(3) Directors elected pursuant to paragraph (1) of
this subclause (A) shall serve until the earlier of (x)
the next annual meeting of the stockholders of the
Corporation and the election
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(by the holders of shares of Series B and Parity Stock)
and qualification of their respective successors or (y)
the next annual meeting of the stockholders of the
Corporation following the date upon which all dividends in
default on the shares of Series B and such Parity Stock
shall have been paid in full. If, prior to the end of the
term of any Director elected as aforesaid, a vacancy in
the office of such Director shall occur during the
continuance of a default in dividends on the shares of
Series B or such Parity Stock by reason of death,
resignation or disability, such vacancy shall be filled
for the unexpired term by the appointment by the remaining
Director elected as aforesaid of a new Director for the
unexpired term of such former Director.
(B) Miscellaneous. Without the affirmative vote
of the holders of at least two-thirds of the outstanding
shares of Series B and outstanding shares of Parity Stock,
voting as a single class, the Corporation may not:
(1) amend any provision of the Charter or this
Certificate which would adversely affect the voting powers
(except as such voting powers may be affected by the
authorization of any new series of Parity Stock having the
same voting rights as Series B or by the authorization of
any other shares of any class which are not entitled to
vote together with Series B in any class vote) or other
rights or preferences of holders of the shares of Series
B; or
(2) authorize or create any class of stock senior to
the Series B as to dividends and upon liquidation.
Fifth: Election of Directors need not be by
written ballot unless the By-Laws of the corporation shall
so provide.
Sixth: In furtherance and not in limitation of
the powers conferred by statute, the Board of Directors is
expressly authorized to make, alter, amend or repeal the
By-Laws of the corporation, without any action on the part
of the stockholders, by the affirmative vote of at least a
majority of the entire Board of Directors, which shall
include the affirmative vote of at least one director from
each class of the Board of Directors if the Board shall
then be divided into classes. The By-Laws may also be
altered, amended or repealed by the affirmative vote of
the holders of
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shares representing at least eighty percent (80%) of the
shares of the corporation entitled to vote in the election
of directors, voting as one class; provided, however, that
the affirmative vote of the holders of shares representing
only a majority of the shares of the corporation entitled
to vote in the election of directors, voting as one class,
shall be required if such alteration, amendment or repeal
of the By-Laws has been previously approved by the
affirmative vote of at least two thirds (2/3) of the
entire Board of Directors of the corporation.
Seventh: A. A director of the corporation shall
not be liable to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a
director except for liability which, by express provision
of the General Corporation Law of Delaware as in effect
from time to time (hereinafter the "Delaware Law"), cannot
be eliminated.
B. (i) The corporation shall, to the fullest
extent permitted by Delaware Law, indemnify any person
(the "Indemnitee") who is or was involved in any manner
(including, without limitation, as a party or a witness)
in any threatened, pending or completed investigation,
claim, action, suit or proceeding, whether civil,
criminal, administrative or investigative (including
without limitation, any action, suit or proceeding brought
by or in the right of the corporation to procure a
judgment in its favor) (a "Proceeding") by reason of the
fact that Indemnitee is or was a director, officer or
employee of the corporation, or is or was serving another
entity in such capacity at the request of the corporation,
against all expenses and liabilities actually and
reasonably incurred by Indemnitee in connection with such
Proceeding.
(ii) The right to indemnification conferred by
this Article Seventh shall be presumed to have been relied
upon by Indemnitee and shall be enforceable as a contract
right. The corporation may enter into contracts to provide
individual Indemnitees with specific rights of
indemnification to the fullest extent permitted by
Delaware Law and may create trust funds, grant security
interests, obtain letters of credit or use other means to
ensure the payment of such amounts as may be necessary to
effect the rights provided in this Article Seventh or in
any such contract.
(iii) Upon making a request for indemnification,
Indemnitee nhall be presumed to be entitled to
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indemnification under this Article Seventh and the corporation
shall have the burden of proof to overcome that presumption in
reaching any contrary determination. Such indemnification shall
include the right to receive payment in advance of any expenses
incurred by Indemnitee in connection with any Proceeding,
consistent with the provisions of Delaware Law.
C. Any repeal or modification of the foregoing
provisions of this Article Seventh shall not adversely affect any
right or protection of any director or any Indemnitee existing at
the time of such repeal or modification.
D. The amendment or repeal of this Article Seventh
shall require the approval of the holders of shares representing
at least eighty percent (80%) of the shares of the corporation
entitled to vote in the election of directors, voting as one
class.
Eighth: A. The affirmative vote of not less than eighty
percent (80%) of the outstanding shares of the corporation
entitled to vote shall be required, except as otherwise expressly
provided in paragraph B of this Article Eighth, in order for any
of the following actions or transactions to be effected by the
corporation, or approved by the corporation as stockholder of any
subsidiary of the corporation, if, as of the record date for the
determination of the stockholders entitled to vote thereon or
consent thereto, any Prior Holder (as hereinafter defined)
beneficially owns or controls, directly or indirectly, five
percent (5%) or more of the outstanding shares of the corporation
entitled to vote:
(i) any merger or consolidation of the corporation or any of
its subsidiaries with or into such Prior Holder, or
(ii) any sale, lease, exchange or other disposition of all or
any substantial part of the assets of the corporation or any of
its subsidiaries to or with such Prior Holder, or
(iii) the issuance or delivery of any voting securities of the
corporation or any of its subsidiaries to such Prior Holder in
exchange for cash, other assets or securities, or a combination
thereof, or
(iv) any dissolution or liquidation of the corporation.
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B. The vote of stockholders specified in
paragraph A of this Article Eighth shall not apply to any
action or transaction described in such paragraph, if the
Board of Directors of the corporation shall have approved
the action or transaction before direct or indirect
beneficial ownership or control of five percent (5%) or
more of the outstanding shares of stock of the corporation
entitled to vote is acquired by the Prior Holder.
C. For the purpose of this Article Eighth and
guidance to the Board of Directors for the purpose of para-
graph D hereof, (a) "Prior Holder" shall mean any corpora-
tion, person or entity other than the corporation or any
of its subsidiaries; (b) a Prior Holder shall be deemed to
own or control, directly or indirectly, any outstanding shares
of stock of this corporation (i) which it has the right to
acquire pursuant to any agreement, or upon exercise of con-
version rights, warrants or options, or otherwise, or
(ii) which are beneficially owned, directly or indirectly
(including shares deemed owned through application of
clause (i) above), by any other corporation, person or
other entity (x) with which it or its "affiliate" or "associate"
(as defined below) has any agreement, arrangement or under-
standing for the purpose of acquiring, holding, voting or
disposing of stock of the corporation or (y) which is its
"affiliate" or "associate" as those terms were defined on
January 31, 1978 in the General Rules and Regulations
under the Securities Exchange Act of 1934; (c) "outstanding
shares of the corporation entitled to vote" and "voting
securities" shall mean such shares as are entitled to vote
in the election of directors, considered as one class; and (d) "sub-
sidiary" or "subsidiaries" shall mean any corporation of
which the corporation owns, directly or indirectly, fifty
percent (50%) or more of the voting stock.
D. The Board of Directors of the corporation
shall have the power and duty to determine for the
purposes of this Article Eighth, on the basis of
information then known to the Board of Directors, (i) who
shall constitute a Prior Holder, (ii) whether any Prior
Holder beneficially owns or controls, directly or
indirectly, five percent (5%) or more of the outstanding
shares of the corporation entitled to vote, or is an
"affiliate" or an "associate" (as defined above) of
another, and (iii) whether any proposed sale, lease,
exchange or other disposition involves a substantial part
of the assets of the corporation or any of its
subsidiaries. Any such determination by the Board shall be
conclusive and binding for all purposes.
Ninth: A. The business and affairs of the
corporation shall be managed by a Board of Directors
consisting of not less than nine (9) nor more than twenty-
one (21)
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<PAGE>
persons. The exact number of directors within the minimum
and maximum limitations specified in the preceding sentence
shall be fixed from time to time by the Board of Directors
pursuant to a resolution adopted by the affirmative vote of
a majority of the entire Board of Directors. At the 1984
Annual Meeting of Stockholders, the directors shall be
divided into three classes, as nearly equal in number as
possible, with the term of office of the first class to
expire at the 1985 Annual Meeting of Stockholders, the term
of office of the second class to expire at the 1986 Annual
Meeting of Stockholders and the term of office of the third
class to expire at the 1987 Annual Meeting of Stockholders.
At each Annual Meeting of Stockholders following such ini-
tial classification and election, directors elected to suc-
ceed those directors whose terms expire shall be elected for
a term of office to expire at the third succeeding Annual
Meeting of Stockholders after their election.
B. Subject to the rights of the holders of any series
of preferred stock then outstanding, newly created directorships
resulting from any increase in the authorized number of directors
or any vacancies in the Board of Directors resulting from death,
resignation, retirement, disqualification, removal from office or
other cause shall be filled by a majority vote of the directors
then in office, although less than a quorum, or by a sole
remaining director. Directors chosen pursuant to any of the
foregoing provisions shall hold office for a term expiring at the
Annual Meeting of Stockholders at which the term of the class to
which they have been elected expires and until their successors
are duly elected and have qualified or until their earlier
resignation or removal. Additional directorships resulting from an
increase in the number of directors pursuant to paragraph A of
this Article Ninth shall be apportioned among the three classes as
equally as possible. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any
incumbent director.
C. Any director or the entire Board of Directors may
be removed only for cause.
Tenth: No action required or permitted to be taken at
any annual or special meeting of the stockholders of the
corporation may be taken without a meeting and the power of
stockholders to consent in writing, without a meeting, to the
taking of any action is specifically denied.
Eleventh: The Board of Directors of the corporation,
when evaluating any offer of another party to (a) make a tender or
exchange offer for any equity security of the corporation, (b)
merge or consolidate the corporation with
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<PAGE>
another corporation, or (c) purchase or otherwise acquire all or
substantially all of the properties and assets of the corporation,
shall, in connection with the exercise of its judgment in
determining what is in the best interests of the corporation and
its stockholders, give due consideration to (i) all relevant
factors, including without limitation the social, legal,
environmental and economic effects on the employees, customers,
suppliers and other affected persons, firms and corporations and
on the communities and geographical areas in which the corporation
and its subsidiaries operate or are located and on any of the
businesses and properties of the corporation or any of its
subsidiaries, as well as such other factors as the directors deem
relevant, and (ii) not only the consideration being offered, in
relation to the then current market price for the corporation's
outstanding shares of capital stock, but also in relation to the
then current value of the corporation in a freely negotiated
transaction and in relation to the Board of Directors' estimate of
the future value of the corporation (including the unrealized
value of its properties and assets) as an independent going
concern.
Twelfth: The amendment or repeal of Articles
Sixth, Eighth, Ninth, Tenth and Eleventh of this Restated
Certificate of Incorporation shall require the approval of
the holders of shares representing at least eighty percent
(80%) of the shares of the corporation entitled to vote in the
election of directors, voting as one class.
IN WITNESS WHEREOF, said POTLATCH CORPORATION has
caused this certificate to be signed by Richard B. Madden,
its Chairman of the Board of Directors and Chief Executive
Officer, and attested by Sandra T. Powell, its Secretary,
this 1st day of May, 1987.
POTLATCH CORPORATION
By /s/Richard B. Madden
Richard B. Madden
Chairman of the Board of
Directors and Chief
Executive Officer
Attest:
/s/Sandra T. Powell
Sandra T. Powell
Secretary
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RESOLVED, that, effective December 31, Amend Salaried
1992, the first two sentences of Section Employees'
4(a) shall read as follows: Supplemental
Benefit Plan
(a) Retirement Plan Supplemental
Benefit. A Participant's vested Retirement
Plan Supplemental Benefit shall be payable
to the Participant or to any other person
who receives benefits under the Retirement
Plan with respect to the Participant in the
same form and at the same time as the
Participant's Retirement Plan benefit is
paid. However, if the Participant elects
to have the Retirement Plan benefit paid
in an optional form and/or before the
Participant's Normal Retirement Date, the
Chairman of the Executive Compensation and
Personnel Policies Committee of the Board of
Directors of the Company (the "Committee"),
acting on behalf of the Committee, may
determine in his or her sole discretion
that the Retirement Plan Supplemental
Benefit shall be payable in the normal form
and/or at the Normal Retirement Date not-
withstanding the Participant's election.
RESOLVED, that, effective December 31,
1992, the first three paragraphs of Section
4(b) shall read as follows:
(b) SIP Supplemental Benefit. A
Participant may elect to receive distribu-
tion of the Participant's vested SIP
Supplemental Benefit in 15 or fewer annual
installments or in a lump sum beginning the
month following the month in which the
Participant ceases to be an Employee by
filing the prescribed form with the
Committee. Distribution will be made in
accordance with the Participant's election
unless the Chairman, acting on behalf of the
Committee, disapproves the election before
the date distribution is to commence. The
amount of any annual installment shall be
determined by dividing the amount credited
to the Participant's bookkeeping account as
of the last day of the month preceding the
date of distribution of such installment by
the total number of installments elected by
the Participant less the number of install-
ments already paid.
Exhibit (10)(d)(i)
<PAGE>
If the Participant fails to make an election
pursuant to this Section 4(b) or if the Chairman
disapproves the Participant's election, the vested SIP
Supplemental Benefit shall be distributed in 15 annual
installments beginning the month following the month in
which the Participant ceases to be an Employee, unless the
Chairman in his or her sole discretion determines that
distribution shall be made in a single lump sum.
The Chairman in his or her sole discretion may
accelerate the distribution of installments upon the
request of the Participant.
RESOLVED, that, effective December 31, 1992,
Section 4(c) shall read as follows:
(c) Small Benefits. Notwithstanding any contrary
provision of the Plan, if either a Participant's
Retirement Plan Supplemental Benefit or SIP Supplemental
Benefit is less than $3500 when the Participant ceases to
be an Employee, such benefit shall be distributed in a
single lump sum as soon as practicable after the
Participant ceases to be an Employee. If a Participant is
an Employee and the value of the Participant's SIP
Supplemental Benefit is less than $3500 on December 31,
1992, such benefit shall be paid to the Participant in a
single lump sum on or about December 31, 1992. After
December 31, 1992, a minimum allocation of $1000 shall be
required to establish a SIP Supplemental Benefit account,
and amounts that fall below such minimum shall be paid to
the Participant in cash at the time the account otherwise
would have been established.
SUPPLEMENTAL RETIREMENT BENEFIT AND LIFE
INSURANCE AGREEMENT
THIS AGREEMENT, made and entered into this l9th
day of February, 1988, by and between POTLATCH
CORPORATION, a Delaware corporation (hereafter referred to
as "Potlatch") and RICHARD B. MADDEN (hereafter referred to
as "Madden"):
Whereas the parties hereto have heretofore been
parties to an employment agreement that they now desire to
terminate; and
Whereas coincident with the termination of such
agreement Madden will become a participant in the Potlatch
Corporation Severance Program for Executive Employees, which
provides severance benefits upon the occurrence of the same
events that triggered the payment of severance benefits
under the prior employment agreement; and
Whereas the employment agreement contains provi-
sions regarding supplemental retirement benefits and life
insurance that are to continue in effect and the parties
hereto wish to record the terms of such provisions:
N o w, T h e r e f o r e, the parties hereto
agree as follows:
Exhibit (10)(e)
<PAGE>
1. Supplemental Retirement Benefits.
(a) Amount. Upon the termination of Madden's
employment with Potlatch, Potlatch shall pay to Madden, as
supplemental retirement compensation, the amount by which
the retirement benefits payable to Madden under the Potlatch
Corporation Salaried Employees' Retirement Plan (the
"Retirement Plan") are less than the benefits that would be
payable to Madden under the Plan if the Plan provided:
(i) Retirement at or after age 60, without
reduction of benefits;
(ii) Retirement prior to age 60, with a
reduction of benefits equal to five percent multi-
plied by the number of years (and any fraction
thereof) by which Madden is less than age 60 at
the time benefits commence;
(iii) Recognition of any Management Perfor-
mance Award Plan awards payable with respect to
award years 1987 and thereafter that Madden has
elected to defer as if they had been paid cur-
rently and constituted "Earnings" for purposes of
calculating Madden's Basic Benefit under Sec-
tion 4(a) of the Retirement Plan;
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<PAGE>
(iv) Recognition of Madden's prior service
with Mobil Oil Corporation or any of its subsid-
iaries or affiliates as if it were service with
Potlatch;
(v) Recognition of the period, if any, prior
to April 27, 1989, with respect to which Madden
receives benefits under the Potlatch Corporation
Severance Program for Executive Employees as if it
were service with Potlatch; and
(vi) That benefits thereunder are payable
without regard to the benefit limitations imposed
on qualified plans by sections 401(a)(17) and 415
of the Internal Revenue Code of 1986.
The foregoing notwithstanding, the amount payable by Potlatch
to Madden pursuant to this Section 1 shall be reduced by the
amount of retirement benefits payable to Madden pursuant to
the retirement plan of Mobil Oil Corporation (the "Mobil
Benefit"). For this purpose, the Mobil Benefit shall be
converted to the same form and time of payment as the sup-
plemental retirement compensation is payable to Madden
hereunder, using the actuarial assumptions appropriate to
similar conversions under the Retirement Plan.
-3-
<PAGE>
(b) Form and Time of Commencement of Payment.
Madden's supplemental retirement benefits payable under the
Agreement shall be paid in the form of a straight life
annuity commencing on the date his benefits are payable
under the Retirement Plan.
(c) Effect of Madden's Death Following Termina-
tion of Service or While Employed After Normal Retirement
Date. In the event of Madden's death following the termina-
tion of his service with Potlatch or while employed by
Potlatch after his "normal retirement date" (as determined
pursuant to the Retirement Plan), his surviving spouse shall
be entitled to supplemental retirement benefits for life,
provided that she and Madden had been married for a continu-
ous period of at least five years immediately prior to
Madden's death. The supplemental retirement benefits pay-
able to Madden's surviving spouse under this Section l(c)
shall be a monthly benefit equal to 50% of the amount of
monthly supplemental retirement compensation payable to
Madden hereunder at the time of his death plus the differ-
ence between the amount of the Survivor's Pension, if any,
payable to her pursuant to Section 20 of the Retirement Plan
and the amount of the Survivor's Pension that would be
payable to her under the Retirement Plan if: (i) such Plan
recognized all non-deferred awards payable under the
Management Performance Award Plan for award years 1987 and
-4-
<PAGE>
thereafter as "Earnings" for purposes of calculating the
Survivor's Pension and (ii) such Plan permitted such nondeferred
awards to be taken into consideration as "Earnings" for purposes
of calculating both the Basic Benefit under Section 4(a) and the
Survivor's Pension under Section 20 of the Retirement Plan. If
Madden's surviving spouse is more than five years younger than
Madden, the amount of supplemental retirement compensation shall
be reduced to an actuarial equivalent on the basis applicable to
adjustments made pursuant to Section 20(d) of the Retirement Plan.
(d) Effect of Madden's Death While Employed Prior
to Normal Retirement Date. In the event of Madder's death while
employed by Potlatch prior to his "normal retirement date" (as
determined pursuant to the Retirement Plan), his surviving spouse
shall be entitled to supplemental retirement benefits for life.
The supplemental retirement benefit payable to Madden's surviving
spouse under this Section l(d) shall be a monthly benefit equal to
the amount of monthly supplemental retirement benefit that would
be payable to the surviving spouse hereunder if: (i) Madden's
employment had terminated and he had commenced receiving
supplemental compensation hereunder in the form of a straight life
annuity on the day before he died and (ii) Madden and his
surviving spouse had been married for a continuous period of at
least five years immediately prior to Madden's death.
-5-
<PAGE>
2. Supplemental Life Insurance Benefits.
(a) Amount. On or before June 1 of each year until
Madden attains age 75, Potlatch shall pay to Madden an amount
equal to the annual cost of providing an individual annual
renewable term policy issued by Executive Life Insurance Company
(or any other mutually agreed upon insurer) in the face amount of
$250,000. The payments under this Section 2 shall not be deemed to
be part of Madden's base compensation for any purpose and
Potlatch's obligation to make such payments shall terminate upon
the occurrence of any of the events described in (b) below.
(b) Termination of Potlatch's Obligation.
Potlatch's obligation to make the payments described in this
Section 2 shall terminate upon the first to occur of any of the
following events:
(i) Madden's marriage to Joan F. Madden is
terminated by her death or otherwise;
(ii) Before attaining age 62, Madden voluntarily
resigns employment with Potlatch (or any successor
thereto) except under circumstances described in
Section 4(a)(iii) or (iv) of the Potlatch Corporation
Severance Program for
-6-
<PAGE>
Executive Employees and within twelve (12) months following
such resignation assumes or accepts a position as a senior
executive in a corporation that is organized for profit
and has annual sales or revenues in excess of $250 million; or
(iii) Madden engages as an owner or employee in a
business whose principal activities are in competition with
Potlatch or uses skills or information acquired at Potlatch
relating to Potlatch business to assist others to compete
with Potlatch.
3. Recognition of Prior Service for Certain Purposes.
Madden's prior service with Mobil Oil Corporation or any of its
subsidiaries or affiliates shall be recognized as service with
Potlatch for purposes of all of Potlatch's employee benefit plans
and programs other than plans that are qualified under section
401(a) of the Internal Revenue Code of 1986, as amended.
4. Nonassignability. No right or benefit under this
Agreement shall be subject to anticipation, alienation, sale,
assignment, pledge, encumbrance or charge, and any attempt to
anticipate, alienate, sell, assign, pledge, encumber or charge the
same shall be void.
-7-
<PAGE>
5. Arbitration. It is understood and agreed that any
dispute, controversy, or question arising under this Agreement
shall be referred for decision by arbitration in San Francisco,
California, by an arbitrator selected by the parties hereto. The
proceeding shall be governed by the Rules of the American
Arbitration Association then in effect or such rules last in
effect (in the event such Association is no longer in existence).
If the parties are unable to agree upon such an Arbitrator within
thirty (30) days after either party has given the other party
written notice of its desire to submit the dispute, controversy or
question for decision as aforesaid, then either party may
apply to the American Arbitration Association for the
appointment of an arbitrator or, if such Association is not then
in existence or does not desire to act in the matter, either party
may apply to the Presiding Judge of the Superior Court of the City
and County of San Francisco, State of California, for the
appointment of an arbitrator to hear the parties and settle the
dispute, controversy or question, and such Judge is hereby
authorized to make such appointment. The compensation and expenses
of such Arbitrator shall be borne equally by the parties hereto.
Arbitration shall be the exclusive remedy for the
settlement of disputes arising under this Agreement or for the
breach thereof. The decision of the Arbitrator shall be
-8-
<PAGE>
final, conclusive, and binding on all interested persons and no
action at law or in equity shall be instituted by either party
other than to enforce the award of the Arbitrator.
6. Entire Agreement; Amendments in Writing. This
Agreement contains the entire agreement between Potlatch and
Madden on the subject matter contained herein and supersedes
all prior agreements, understandings or commitments on this
subject, whether oral or written, including, but without
limitation, that certain Employment Agreement between Potlatch
and Madden dated March 29, 1971, as subsequently amended,
that certain Employment Agreement between Potlatch and
Madden dated February 21, 1975, as subsequently amended,
that certain Employment Agreement between Potlatch and
Madden dated February 20, 1976, as subsequently amended, and
that certain Employment Agreement between Potlatch and
Madden dated March 1, 1981, as subsequently amended. No
amendments, modifications, or supplements to this Agreement
may be made except by a writing signed by both Potlatch and
Madden.
7. Governing Law. This Agreement shall be interpreted
under and pursuant to the law of the State of California.
-9-
<PAGE>
8. Binding Effect. This Agreement shall be binding upon
the heirs, executors, and administrators of Madden and the
successors and assigns of Potlatch.
9. Communications. All communications and notices
pertaining to this Agreement shall be in writing and shall be
deemed given if delivered by hand or mailed with postage prepaid
and addressed:
(a) If to Potlatch, to:
Potlatch Corporation
One Maritime Plaza
San Francisco, CA 94111
Attention: Secretary
(b) If to Madden, to:
P. O. Box 1153
Newell Road
Ross, CA 94957
IN WITNESS WHEREOF, the parties hereto have caused this
Employment Agreement to be executed the day and year first above
written, and Mr. F. T. Weyerhaeuser has
-10-
<PAGE>
affixed his signature pursuant to authority granted by the
Board of Directors of Potlatch.
POTLATCH CORPORATION
By /s/F. T. Weyerhaeuser
F. T. Weyerhaeuser, Chairman
Executive Compensation and
Personnel Policies Committee
/s/Richard B. Madden
-11-
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT, entered into as of the first day of
January, 1992, by and between POTLATCH CORPORATION, a
Delaware corporation ("Potlatch") and RICHARD B. MADDEN
("Madden"),
W I T N E S S E T H:
WHEREAS, Potlatch and Madden have entered into an
employment agreement dated as of February 19, 1988 (the
"Agreement"); and
WHEREAS, the Agreement contains provisions regarding
supplemental retirement benefits, and Potlatch and Madden
desire to amend such provisions:
NOW, THEREFORE, Potlatch and Madden agree that subsec-
tions 1(a)(i) through (vi) of the Agreement shall be
replaced by the following:
(i) Recognition of any Management Performance Award
Plan ("MPAP") awards payable with respect to award years
1987 and thereafter that Madden has elected to defer as if
they had been paid currently;
(ii) That the average percentage under the MPAP which
was recognized in Madden's "Average Monthly Earning" had
been 100% of the "Standard Bonus;"
(iii) Recognition of Madden's prior service with Mobil
Oil Corporation or any of its subsidiaries or affiliates
as if it were service with Potlatch; and
(iv) That benefits thereunder are payable without
regard to the benefit limitations imposed on qualified
plans by sections 401(a)(17) and 415 of the Internal
Revenue Code of 1986.
IN WITNESS WHEREOF, the parties hereto have caused
this Amendment to Employment Agreement to be executed as
of the first day of January, 1992.
POTLATCH CORPORATION
By /s/ F. T. WEYERHAEUSER
/s/Richard B Madden
Richard B. Madden
February 2, 1998
Amendment No. 1
to
Schedule A to Exhibit (10)(j)
February 1, 1997
Form of Indemnification Agreement with each Director is
dated as of December 11, 1986, except for the Agreements
with:
(i) Messrs. Charles R. Weaver and Richard B. Madden,
which are dated as of February 20, 1987, and
May 6, 1988, respectively;
(ii) Messrs. Allen F. Jacobson and Richard M. Morrow
and Dr. William T. Weyerhaeuser, which are dated
as of February 22, 1990;
(iii) Mr. John M. Richards, which is dated as of
January 1, 1991;
(iv) Mrs. Vivian W. Piasecki and Mr. Richard M. Rosenberg,
which are dated as of December 10, 1992; and
(v) Mr. Kenneth T. Derr, which is dated as of
January 1, 1994.
(vi) Mr. L. Pendleton Siegel, which is dated as of
November 1, 1997.
Exhibit (10)(j)(i)
February 2, 1998
Amendment No. 1
to
Schedule A to Exhibit (10)(k)
February 1, 1997
Form of Indemnification Agreement dated as of:
(i) December 11, 1986, with the following officers:
John M. Richards, Chairman and Chief Executive
Officer
L. Pendleton Siegel, President and Chief Operating
Officer
Sandra T. Powell, Vice President
(ii) October 1, 1989, with George E. Pfautsch,
Senior Vice President
(iii) April 1, 1990, with Ralph M. Davisson, Vice President
(iv) March 14, 1991, with Charles R. Pottenger,
Group Vice President
(v) March 1, 1992, with Thomas J. Smrekar,
Group Vice President
(vi) January 1, 1993, with Richard L. Paulson,
Vice President
(vii) April 10, 1995, with Gerald L. Zuehlke, Treasurer
(viii) April 10, 1995, with Kenneth L. Clark,
Vice President
(ix) June 14, 1995, with John W. Bacon, Vice President
and Betty R. Fleshman, Secretary
(x) May 29, 1996, with Craig H. Nelson, Vice President
(xi) October 15, 1997, with John E. Hanby, Vice President
Exhibit (10)(k)(i)
POTLATCH CORPORATION
Subsidiaries
The following subsidiaries are included in the company's consolidated
financial statements.
State in Which Percentage of
Voting Securities
Name Organized Owned
Duluth & Northeastern Railroad Co. Minnesota 100
Cloquet, Minn.
Prescott & Northwestern Railroad Co. Arkansas 100
Prescott, Ark.
St. Maries River Railroad Co. Idaho 100
Lewiston, Idaho
Warren & Saline River Railroad Co. Arkansas 100
Warren, Ark.
All unnamed subsidiaries, when considered in the aggregate as a single
subsidiary, would not constitute a significant subsidiary. No separate
financial statements are filed for any subsidiary.
Exhibit (22)
KPMG Peat Marwick LLP
Suite 2000
1211 South West Fifth Avenue
Portland, OR 97204
Consent of Independent Certified Public Accountants
The Board of Directors
Potlatch Corporation:
We consent to incorporation by reference in the registration statements (Nos.
33-00805, 33-28220, 333-17145, 33-30836, 33-54515, 333-12017 and 333-28079) on
Form S-8 of Potlatch Corporation of our report dated January 21, 1998, except
as to Note 16, which is as of February 9, 1998, relating to the balance sheets
of Potlatch Corporation and consolidated subsidiaries as of December 31, 1997
and 1996 and the related statements of earnings, stockholders' equity, and
cash flows and related financial statement schedule for each of the years in
the three-year period ended December 31, 1997 which report appears in the
December 31, 1997 annual report on the Form 10-K of Potlatch Corporation.
KPMG PEAT MARWICK LLP
March 27, 1998
Exhibit (23)
POWER OF ATTORNEY
I, the undersigned, appoint Betty R. Fleshman or, in her
absence or inability to act, John M. Richards or L. Pendleton
Siegel, or any of them, my attorney-in-fact for me and in my
name, place and stead to execute for me on my behalf in each
or any one of my offices and capacities with Potlatch
Corporation, as shown below, the Annual Report on Form 10-K of
Potlatch Corporation for the fiscal year ended December 31,
1997, to be filed with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, and any and all
amendments thereto, hereby ratifying, approving and confirming
all that any such attorney-in-fact may do by virtue of this
Power of Attorney.
IN WITNESS WHEREOF, I have executed this Power of
Attorney as of March 6, 1998.
Richard A. Clarke
(DIRECTOR)
<PAGE>
POWER OF ATTORNEY
I, the undersigned, appoint Betty R. Fleshman or, in her
absence or inability to act, John M. Richards or L. Pendleton
Siegel, or any of them, my attorney-in-fact for me and in my
name, place and stead to execute for me on my behalf in each
or any one of my offices and capacities with Potlatch
Corporation, as shown below, the Annual Report on Form 10-K of
Potlatch Corporation for the fiscal year ended December 31,
1997, to be filed with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, and any and all
amendments thereto, hereby ratifying, approving and confirming
all that any such attorney-in-fact may do by virtue of this
Power of Attorney.
IN WITNESS WHEREOF, I have executed this Power of
Attorney as of March 6, 1998.
Kenneth T. Derr
(DIRECTOR)
<PAGE>
POWER OF ATTORNEY
I, the undersigned, appoint Betty R. Fleshman or, in her
absence or inability to act, John M. Richards or L. Pendleton
Siegel, or any of them, my attorney-in-fact for me and in my
name, place and stead to execute for me on my behalf in each
or any one of my offices and capacities with Potlatch
Corporation, as shown below, the Annual Report on Form 10-K of
Potlatch Corporation for the fiscal year ended December 31,
1997, to be filed with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, and any and all
amendments thereto, hereby ratifying, approving and confirming
all that any such attorney-in-fact may do by virtue of this
Power of Attorney.
IN WITNESS WHEREOF, I have executed this Power of
Attorney as of March 6, 1998.
Allen F. Jacobson
(DIRECTOR)
<PAGE>
POWER OF ATTORNEY
I, the undersigned, appoint Betty R. Fleshman or, in her
absence or inability to act, John M. Richards or L. Pendleton
Siegel, or any of them, my attorney-in-fact for me and in my
name, place and stead to execute for me on my behalf in each
or any one of my offices and capacities with Potlatch
Corporation, as shown below, the Annual Report on Form 10-K of
Potlatch Corporation for the fiscal year ended December 31,
1997, to be filed with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, and any and all
amendments thereto, hereby ratifying, approving and confirming
all that any such attorney-in-fact may do by virtue of this
Power of Attorney.
IN WITNESS WHEREOF, I have executed this Power of
Attorney as of March 6, 1998.
George F. Jewett, Jr.
(DIRECTOR)
<PAGE>
POWER OF ATTORNEY
I, the undersigned, appoint Betty R. Fleshman or, in her
absence or inability to act, John M. Richards or L. Pendleton
Siegel, or any of them, my attorney-in-fact for me and in my
name, place and stead to execute for me on my behalf in each
or any one of my offices and capacities with Potlatch
Corporation, as shown below, the Annual Report on Form 10-K of
Potlatch Corporation for the fiscal year ended December 31,
1997, to be filed with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, and any and all
amendments thereto, hereby ratifying, approving and confirming
all that any such attorney-in-fact may do by virtue of this
Power of Attorney.
IN WITNESS WHEREOF, I have executed this Power of
Attorney as of March 6, 1998.
Richard B. Madden
(DIRECTOR)
<PAGE>
POWER OF ATTORNEY
I, the undersigned, appoint Betty R. Fleshman or, in her
absence or inability to act, John M. Richards or L. Pendleton
Siegel, or any of them, my attorney-in-fact for me and in my
name, place and stead to execute for me on my behalf in each
or any one of my offices and capacities with Potlatch
Corporation, as shown below, the Annual Report on Form 10-K of
Potlatch Corporation for the fiscal year ended December 31,
1997, to be filed with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, and any and all
amendments thereto, hereby ratifying, approving and confirming
all that any such attorney-in-fact may do by virtue of this
Power of Attorney.
IN WITNESS WHEREOF, I have executed this Power of
Attorney as of March 6, 1998.
Richard M. Morrow
(DIRECTOR)
<PAGE>
POWER OF ATTORNEY
I, the undersigned, appoint Betty R. Fleshman or, in her
absence or inability to act, John M. Richards or L. Pendleton
Siegel, or any of them, my attorney-in-fact for me and in my
name, place and stead to execute for me on my behalf in each
or any one of my offices and capacities with Potlatch
Corporation, as shown below, the Annual Report on Form 10-K of
Potlatch Corporation for the fiscal year ended December 31,
1997, to be filed with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, and any and all
amendments thereto, hereby ratifying, approving and confirming
all that any such attorney-in-fact may do by virtue of this
Power of Attorney.
IN WITNESS WHEREOF, I have executed this Power of
Attorney as of March 6, 1998.
Vivian W. Piasecki
(DIRECTOR)
<PAGE>
POWER OF ATTORNEY
I, the undersigned, appoint Betty R. Fleshman or, in her
absence or inability to act, John M. Richards or L. Pendleton
Siegel, or any of them, my attorney-in-fact for me and in my
name, place and stead to execute for me on my behalf in each
or any one of my offices and capacities with Potlatch
Corporation, as shown below, the Annual Report on Form 10-K of
Potlatch Corporation for the fiscal year ended December 31,
1997, to be filed with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, and any and all
amendments thereto, hereby ratifying, approving and confirming
all that any such attorney-in-fact may do by virtue of this
Power of Attorney.
IN WITNESS WHEREOF, I have executed this Power of
Attorney as of March 6, 1998.
Toni Rembe
(DIRECTOR)
<PAGE>
POWER OF ATTORNEY
I, the undersigned, appoint Betty R. Fleshman or, in her
absence or inability to act, John M. Richards or L. Pendleton
Siegel, or any of them, my attorney-in-fact for me and in my
name, place and stead to execute for me on my behalf in each
or any one of my offices and capacities with Potlatch
Corporation, as shown below, the Annual Report on Form 10-K of
Potlatch Corporation for the fiscal year ended December 31,
1997, to be filed with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, and any and all
amendments thereto, hereby ratifying, approving and confirming
all that any such attorney-in-fact may do by virtue of this
Power of Attorney.
IN WITNESS WHEREOF, I have executed this Power of
Attorney as of March 6, 1998.
John M. Richards
Chairman of the Board and
Chief Executive Officer and
Director
<PAGE>
POWER OF ATTORNEY
I, the undersigned, appoint Betty R. Fleshman or, in her
absence or inability to act, John M. Richards or L. Pendleton
Siegel, or any of them, my attorney-in-fact for me and in my
name, place and stead to execute for me on my behalf in each
or any one of my offices and capacities with Potlatch
Corporation, as shown below, the Annual Report on Form 10-K of
Potlatch Corporation for the fiscal year ended December 31,
1997, to be filed with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, and any and all
amendments thereto, hereby ratifying, approving and confirming
all that any such attorney-in-fact may do by virtue of this
Power of Attorney.
IN WITNESS WHEREOF, I have executed this Power of
Attorney as of March 6, 1998.
Reuben F. Richards
(DIRECTOR)
<PAGE>
POWER OF ATTORNEY
I, the undersigned, appoint Betty R. Fleshman or, in her
absence or inability to act, John M. Richards or L. Pendleton
Siegel, or any of them, my attorney-in-fact for me and in my
name, place and stead to execute for me on my behalf in each
or any one of my offices and capacities with Potlatch
Corporation, as shown below, the Annual Report on Form 10-K of
Potlatch Corporation for the fiscal year ended December 31,
1997, to be filed with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, and any and all
amendments thereto, hereby ratifying, approving and confirming
all that any such attorney-in-fact may do by virtue of this
Power of Attorney.
IN WITNESS WHEREOF, I have executed this Power of
Attorney as of March 6, 1998.
Richard M. Rosenberg
(DIRECTOR)
<PAGE>
POWER OF ATTORNEY
I, the undersigned, appoint Betty R. Fleshman or, in her
absence or inability to act, John M. Richards or L. Pendleton
Siegel, or any of them, my attorney-in-fact for me and in my
name, place and stead to execute for me on my behalf in each
or any one of my offices and capacities with Potlatch
Corporation, as shown below, the Annual Report on Form 10-K of
Potlatch Corporation for the fiscal year ended December 31,
1997, to be filed with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, and any and all
amendments thereto, hereby ratifying, approving and confirming
all that any such attorney-in-fact may do by virtue of this
Power of Attorney.
IN WITNESS WHEREOF, I have executed this Power of
Attorney as of March 6, 1998.
Robert G. Schwartz
(DIRECTOR)
<PAGE>
POWER OF ATTORNEY
I, the undersigned, appoint Betty R. Fleshman or, in her
absence or inability to act, John M. Richards or L. Pendleton
Siegel, or any of them, my attorney-in-fact for me and in my
name, place and stead to execute for me on my behalf in each
or any one of my offices and capacities with Potlatch
Corporation, as shown below, the Annual Report on Form 10-K of
Potlatch Corporation for the fiscal year ended December 31,
1997, to be filed with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, and any and all
amendments thereto, hereby ratifying, approving and confirming
all that any such attorney-in-fact may do by virtue of this
Power of Attorney.
IN WITNESS WHEREOF, I have executed this Power of
Attorney as of March 6, 1998.
L. Pendleton Siegel
Director, President and
Chief Operating Officer
<PAGE>
POWER OF ATTORNEY
I, the undersigned, appoint Betty R. Fleshman or, in her
absence or inability to act, John M. Richards or L. Pendleton
Siegel, or any of them, my attorney-in-fact for me and in my
name, place and stead to execute for me on my behalf in each
or any one of my offices and capacities with Potlatch
Corporation, as shown below, the Annual Report on Form 10-K of
Potlatch Corporation for the fiscal year ended December 31,
1997, to be filed with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, and any and all
amendments thereto, hereby ratifying, approving and confirming
all that any such attorney-in-fact may do by virtue of this
Power of Attorney.
IN WITNESS WHEREOF, I have executed this Power of
Attorney as of March 6, 1998.
Charles R. Weaver
(DIRECTOR)
<PAGE>
POWER OF ATTORNEY
I, the undersigned, appoint Betty R. Fleshman or, in her
absence or inability to act, John M. Richards or L. Pendleton
Siegel, or any of them, my attorney-in-fact for me and in my
name, place and stead to execute for me on my behalf in each
or any one of my offices and capacities with Potlatch
Corporation, as shown below, the Annual Report on Form 10-K of
Potlatch Corporation for the fiscal year ended December 31,
1997, to be filed with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, and any and all
amendments thereto, hereby ratifying, approving and confirming
all that any such attorney-in-fact may do by virtue of this
Power of Attorneys.
IN WITNESS WHEREOF, I have executed this Power of
Attorney as of March 6, 1998.
Frederick T. Weyerhaeuser
(DIRECTOR)
<PAGE>
POWER OF ATTORNEY
I, the undersigned, appoint Betty R. Fleshman or, in her
absence or inability to act, John M. Richards or L. Pendleton
Siegel, or any of them, my attorney-in-fact for me and in my
name, place and stead to execute for me on my behalf in each
or any one of my offices and capacities with Potlatch
Corporation, as shown below, the Annual Report on Form 10-K of
Potlatch Corporation for the fiscal year ended December 31,
1997, to be filed with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, and any and all
amendments thereto, hereby ratifying, approving and confirming
all that any such attorney-in-fact may do by virtue of this
Power of Attorney.
IN WITNESS WHEREOF, I have executed this Power of
Attorney as of March 6, 1998.
William T. Weyerhaeuser
(DIRECTOR)
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<FISCAL-YEAR-END> DEC-31-1997
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