SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------------------------------
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
November 1, 1999
--------------------------------------------------------------
(Date of earliest event report)
WEYERHAEUSER COMPANY
--------------------------------------------------------------
(Exact name of registrant as specified in charter)
Washington 1-4825 91-0470860
---------------- ------------ --------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification
incorporation or Number)
organization)
Tacoma, Washington 98477
-------------------------------------------------------------
(Address of principal executive offices)
(zip code)
Registrant's telephone number, including area code:
(253) 924-2345
Item 2. Acquisition or Disposition of Assets
On November 1, 1999, Weyerhaeuser Company Limited, a corporation
incorporated under the laws of British Columbia and an indirect
wholly-owned subsidiary of Weyerhaeuser Company ("Weyerhaeuser"),
completed the acquisition of MacMillan Bloedel Limited pursuant
to the terms and conditions of the Merger Agreement dated June
20, 1999 among Weyerhaeuser, Weyerhaeuser Company Limited
(previously named Weyerhaeuser Exchangeco Limited ) and MacMillan
Bloedel Limited.
In the acquisition of MacMillan Bloedel, Weyerhaeuser initially
will acquire the following assets:
. Three containerboard mills with an annual capacity of 1.1
million tons and 19 converting facilities with an annual
production capability of 8.2 billion square feet of packaging.
. Three oriented strand board (OSB) facilities with an annual
capacity of 1.1 billion square feet (3/8 basis). The new
Saskatchewan OSB mill, currently under construction, will add 570
million square feet (3/8 basis). The agreement also includes two
plywood facilities in Eastern Canada and one in Alabama.
. Six lumber mills, many producing high value specialty lumber
from Western Red Cedar and other specialty grades in B.C., two
sawmills in Ontario, one sawmill in Saskatchewan and one in
Alabama.
. 6.9 million acres (2.8 million hectares) of productive
timberlands, of which 427,500 acres (173,000 hectares) are held
in the United States. This includes fee simple ownership of
approximately 741,300 acres (300,000 hectares) of forestland.
. 49 percent ownership of Trus Joist MacMillan (TJM), a
leading manufacturer of engineered wood products.
. 31 distribution centers located through the United States
and Canada.
Pursuant to the Merger Agreement, Weyerhaeuser will provide
MacMillan Bloedel shareholders with 0.28 shares of common stock
in Weyerhaeuser or 0.28 equivalent exchangeable shares in
Weyerhaeuser Company Limited for each MacMillan Bloedel common
share owned.
Item 7. Financial Statements and Exhibits
(a) Financial statements of businesses acquired
Exhibit No. Description
99.1 The Annual Information Form and Management's
Discussion and Analysis for MacMillan Bloedel
for the year ended December 31, 1998 filed with
the Securities and Exchange Commission on April
7, 1999 on Form 40-F;
99.2 The Consolidated Financial Statements of
MacMillan Bloedel for the year ended December
31, 1998 filed with the Securities and Exchange
Commission on September 28, 1999 on Form 40-F/A;
and,
99.3 The Consolidated Financial Statements of
MacMillan Bloedel for the six month period ended
June 30, 1999 filed with the Securities and
Exchange Commission on August 11, 1999 on Form 6-K.
(b) Pro forma financial information
The required pro forma financial information is filed herewith.
(c) Exhibits
Merger Agreement dated June 20, 1999 among Weyerhaeuser
Company and Weyerhaeuser Exchangeco Limited and MacMillan
Bloedel Limited, including the Plan of Arrangement
(incorporated by reference to Weyerhaeuser Company
Registration Statement on Form S-3, Registration No. 333-
84127).
23 - Consent of Public Accountants
# # #
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned hereunto duly authorized.
WEYERHAEUSER COMPANY
By /s/ K. J. Stancato
-----------------------------
K. J. Stancato
Its: Vice President and Controller
Date: January 10, 2000
EXHIBIT INDEX
The following exhibits are filed herewith:
Exhibit No. Description
23 Consent of Independent Public Accountants
99.1 The Annual Information Form and Management's
Discussion and Analysis for MacMillan Bloedel
for the year ended December 31, 1998 filed with
the Securities and Exchange Commission on April
7, 1999 on Form 40-F
99.2 The Consolidated Financial Statements of
MacMillan Bloedel for the year ended December
31, 1998 filed with the Securities and Exchange
Commission on September 28, 1999 on Form 40-F/A
99.3 The Consolidated Financial Statements of
MacMillan Bloedel for the six month period ended
June 30, 1999 filed with the Securities and
Exchange Commission on August 11, 1999 on Form 6-K
4
WEYERHAEUSER AND MACMILLAN BLOEDEL
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Condensed Combined Financial
Statements give effect to the Transaction being accounted for using the
purchase method of accounting, whereby the total cost of the Transaction
was be allocated to the tangible and intangible assets acquired and
liabilities assumed based upon their respective fair values at the
Effective Time. The Unaudited Pro Forma Condensed Combined Financial
Statements were prepared on the basis of assumptions described in the
notes thereto, including assumptions related to the allocation of the total
purchase cost to the assets and liabilities of MB based upon preliminary
estimates of fair value. The actual allocation may differ from those
assumptions after valuations and other procedures are completed.
The Unaudited Pro Forma Condensed Combined Statements of Earnings were
prepared as if the Transaction occurred as of December 29, 1997 (the
beginning of Weyerhaeuser's 1998 fiscal year), and January 1, 1998 for MB.
The Unaudited Pro Forma Condensed Combined Balance Sheet was prepared as if
the Transaction occurred as of June 27, 1999 for Weyerhaeuser and June 30,
1999 for MB. These statements are not necessarily indicative of what the
actual operating results or financial position would have been had the
Transaction occurred on the dates and for the periods indicated and do not
purport to indicate future results of operations. In addition, they do not
reflect any cost savings or other synergies resulting from the Transaction.
The Unaudited Pro Forma Condensed Combined Financial Statements should
be read in conjunction with the historical consolidated financial
statements and related notes of Weyerhaeuser and MB.
5
WEYERHAEUSER AND MACMILLAN BLOEDEL
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 1999
Pro
MacMillan Pro Forma Forma
Weyerhaeuser Bloedel Adjustments Combined
------------ --------- ----------- ---------
(in U.S.$ millions)
ASSETS
Forest products operations
Cash and short term
investments $ 51 $ 280 $ -- $ 331
Accounts receivable 1,087 381 (4) (4) 1,464
Inventories 989 376 (1) (5) 1,364
Prepaid expenses and other 279 13 (18) (9) 274
-------- -------- -------- --------
Total current assets 2,406 1,050 (23) 3,433
Property, plant and equipment,
timber and timberlands, and
investment in equity
affiliates 8,232 1,271 1,030 (9) 10,533
Other assets and deferred
charges 319 80 691 (9) 1,090
-------- -------- -------- --------
10,957 2,401 1,698 15,056
-------- -------- -------- --------
Real estate and related assets 1,913 -- -- 1,913
-------- -------- -------- --------
Total assets $12,870 $ 2,401 $ 1,698 $16,969
======== ======== ======== ========
LIABILITIES
Forest products operations
Short term interest bearing
debt $ 7 $ 162 $ -- $ 169
Accounts payable and accrued
liabilities 1,453 411 41 (4)(9) 1,905
Current portion of long term
debt 57 18 -- 75
-------- -------- -------- --------
Total current liabilities 1,517 591 41 2,149
Long term debt 3,338 614 -- 3,952
Other long term obligations 512 129 25 (9) 666
Deferred income taxes 1,419 23 399 (9)(10) 1,841
-------- -------- -------- --------
6,786 1,357 465 8,608
-------- -------- -------- --------
Real estate and related assets 1,450 -- -- 1,450
-------- -------- -------- --------
Total liabilities 8,236 1,357 465 10,058
-------- -------- -------- --------
SHAREHOLDERS' EQUITY 4,634 1,044 1,233 (5)(9)(10) 6,911
-------- -------- -------- --------
Total liabilities and
shareholders' equity $12,870 $ 2,401 $ 1,698 $16,969
======== ======== ======== ========
6
WEYERHAEUSER AND MACMILLAN BLOEDEL
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1998
Pro
MacMillan Pro Forma Forma
Weyerhaeuser Bloedel Adjustments Combined
------------ --------- ----------- ---------
(in U.S.$ millions except per share data)
Sales
Forest products operations $ 9,574 $ 2,519 $ 171 (3)(8) $12,264
Real estate and related
assets 1,192 -- -- 1,192
-------- -------- -------- --------
10,766 2,519 171 13,456
-------- -------- -------- --------
Costs and expenses
Forest products operations
Costs of products sold 7,468 2,165 239 (3)(5)(6)(8) 9,872
Depreciation, depletion and
amortization 611 99 82 (8)(11) 792
Selling, general and
administrative expenses 706 198 27 (6)(8) 931
Taxes other than payroll
and income taxes 130 -- (130)(6) --
Charge for impairment of
long-lived assets/
restructuring and other
unusual charges 71 59 -- 130
Charge for Year 2000
remediation 42 -- 3 (6) 45
--------- -------- -------- --------
9,028 2,521 221 11,770
--------- -------- -------- --------
Real estate and related
assets
Costs and operating expenses 1,016 -- -- 1,016
Depreciation and
amortization 5 -- -- 5
Selling, general and
administrative expenses 61 -- -- 61
--------- -------- -------- --------
1,082 -- -- 1,082
--------- -------- -------- --------
Total costs and expenses 10,110 2,521 221 12,852
--------- -------- -------- --------
Operating earnings 656 (2) (50) 604
Interest expense and other
Forest products operations
Interest expense (257) (72) (8)(8) (337)
Equity in income of
affiliates 28 60 -- 88
Other income, net 15 88 1 (8) 104
Real estate and related
assets 21 -- -- 21
--------- -------- -------- --------
Earnings before income taxes 463 74 (57) 480
Income taxes (169) (16) (24)(5)(8)(11) (209)
--------- -------- -------- --------
Net earnings from continuing
operations before
extraordinary items $ 294 $ 58 $ (81) $ 271
========= ======== ======== ========
Basic net earnings per share $ 1.48 $ 1.16
========= ========
Diluted net earnings
per share $ 1.47 $ 1.15
========= ========
Weighted average shares
outstanding (thousands)
Basic 198,914 34,740 233,654
Dilutive effect of common
share equivalents 336 1,468 1,804
--------- -------- --------
Diluted weighted average
shares outstanding 199,250 36,208 235,458
========= ======== ========
7
WEYERHAEUSER AND MACMILLAN BLOEDEL
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1999
Pro
MacMillan Pro Forma Forma
Weyerhaeuser Bloedel Adjustments Combined
------------ --------- ----------- --------
(in U.S.$ millions except per share data)
Sales
Forest products operations $ 5,119 $ 1,379 $ (19)(3) $ 6,479
Real estate and related assets 590 -- -- 590
-------- -------- -------- --------
5,709 1,379 (19) 7,069
-------- -------- -------- --------
Costs and expenses
Forest products operations
Costs of products sold 3,897 1,156 15 (3)(5)(6) 5,068
Depreciation, depletion and
amortization 308 52 29 (11) 389
Selling, general and
administrative expenses 384 80 30 (6) 494
Taxes other than payroll
and income taxes 65 -- (65)(6) --
Charge for impairment of
long-lived assets/
restructuring and other
unusual charges 91 -- -- 91
Charge for Year 2000
remediation 27 -- 2 (6) 29
-------- -------- -------- --------
4,772 1,288 11 6,071
-------- -------- -------- --------
Real estate and related assets
Costs and operating expenses 478 -- -- 478
Depreciation and amortization 2 -- -- 2
Selling, general and
administrative expenses 32 -- -- 32
-------- -------- -------- --------
512 -- -- 512
-------- -------- -------- --------
Total costs and expenses 5,284 1,288 11 6,583
-------- -------- -------- --------
Operating earnings 425 91 (30) 486
Interest expense and other
Forest products operations
Interest expense (129) (26) -- (155)
Equity in income of
affiliates 8 28 -- 36
Other income, net 7 38 -- 45
Real estate and related assets 13 -- -- 13
-------- -------- -------- --------
Earnings before income taxes 324 131 (30) 425
Income taxes (118) (51) 8 (11) (161)
-------- -------- -------- --------
Net earnings from continuing
operations before cumulative
effect of accounting change $ 206 $ 80 $ (22) $ 264
======== ======== ======== ========
Basic net earnings per share $ 1.03 $ 1.13
======== ========
Diluted net earnings per share $ 1.02 $ 1.12
======== ========
Weighted average shares
outstanding (thousands)
Basic 199,874 33,876 233,750
Dilutive effect of common
share equivalents 722 1,494 2,216
-------- -------- --------
Diluted weighted average
shares outstanding 200,596 35,370 235,966
======== ======== ========
8
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
1. Basis of Presentation
The Merger Agreement provided for the combination of Weyerhaeuser and MB in
a Transaction in which each holder of MB Common Shares who is a Canadian
Resident was entitled to receive, at its option, 0.28 Weyerhaeuser
Common Shares, or 0.28 Exchangeable Shares for each MB Common Share held,
and each holder of MB Common Shares who is not a Canadian Resident was
entitled to receive 0.28 Weyerhaeuser Common Shares for each MB Common
Share held.
2. Conversion of MB's Historical Financial Statements
The Unaudited Pro Forma Condensed Combined Financial Statements are
presented in U.S. dollars and in accordance with U.S. GAAP. Thus, MB's
statements of operations for the year ended December 31, 1998, and for the
six months ended June 30, 1999, were converted from Cdn$ to U.S.$ using an
average exchange rate for each period (U.S.$0.6743 per Cdn$1 and
U.S.$0.6701 per Cdn$1, respectively). MB's balance sheet was converted from
Cdn$ to U.S.$ using the exchange rate effective on the balance sheet date
for assets and liabilities (U.S.$0.6793 per Cdn$1), except for the
investment in equity affiliates and the equity accounts which were
translated at historical exchange rates. Certain adjustments were necessary
to convert MB's historical financial statements, prepared in accordance
with Canadian GAAP, to U.S. GAAP. The following schedule presents the
conversion of MB's financial information from Canadian dollars and Canadian
GAAP into U.S. dollars and U.S. GAAP.
9
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(Continued)
2. Conversion of MB's Historical Financial Statements (Continued)
BALANCE SHEET
JUNE 30, 1999
Canadian U.S. U.S.
GAAP GAAP GAAP
Cdn.$ Cdn.$ U.S.$
-------- -------- --------
(in $ millions)
ASSETS
Cash and short term investments (A) $ 464 $ 412 $ 280
Accounts receivable (A)(L)(J) 407 561 381
Inventories (A) 603 554 376
Prepaid expenses and other (A) 28 19 13
-------- -------- --------
Total current assets 1,502 1,546 1,050
Property, plant and equipment,
timber and timberlands, and
investment in equity affiliates (A)(G) 1,800 1,852 1,271
Other assets and deferred charges (A)(B)(C)
(G)(H) 94 117 80
-------- -------- --------
Total assets $ 3,396 $ 3,515 $ 2,401
======== ======== ========
LIABILITIES
Short term interest bearing debt (L) $ 20 $ 239 $ 162
Accounts payable and accrued
liabilities (A)(D)(E) 647 605 411
Current portion of long term debt (A) 27 26 18
-------- -------- --------
Total current liabilities 694 870 591
Long term debt (A)(C)(I) 865 903 614
Other long term obligations (D)(E)(K)(M) 114 190 129
Deferred income taxes (A)(B)(C)(D)
(E)(G)(H) 60 35 23
-------- -------- --------
1,733 1,998 1,357
-------- -------- --------
SHAREHOLDERS' EQUITY 1,663 1,517 1,044
-------- -------- --------
Total liabilities and shareholders'
equity $ 3,396 $ 3,515 $ 2,401
======== ======== ========
10
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(Continued)
2. Conversion of MB's Historical Financial Statements (Continued)
STATEMENT OF EARNINGS
Canadian U.S. U.S.
GAAP GAAP GAAP
Cdn.$ Cdn.$ U.S.$
-------- -------- --------
(in $ millions)
For the year ended December 31, 1998
Sales (A) $ 4,183 $ 3,735 $ 2,519
-------- -------- --------
Costs and expenses
Costs of products sold (A)(B)(D)
(E)(J) 3,419 3,211 2,165
Depreciation, depletion and
amortization (A)(H) 192 147 99
Selling, general and administrative
expenses (A)(D)(E) 390 294 198
Restructuring and other unusual charges (M) 78 88 59
-------- -------- --------
4,079 3,740 2,521
-------- -------- --------
Operating earnings 104 (5) (2)
Interest expense and other
Interest expense (A)(C)(I) (108) (106) (72)
Debt retirement costs (F) (42) -- --
Equity in income of affiliates (A) -- 89 60
Other income, net (A)(C)(J)
(K)(N) 138 129 88
-------- -------- --------
Earnings before income taxes and
extraordinary items 92 107 74
Income taxes (H) (19) (23) (16)
-------- -------- --------
Net earnings from continuing operations
before extraordinary items $ 73 $ 84 $ 58
======== ======== ========
For the six months ended June 30, 1999
Sales (A) $ 2,200 $ 2,058 $ 1,379
-------- -------- --------
Costs and expenses
Costs of products sold (A)(B)(D)
(E)(J) 1,753 1,724 1,156
Depreciation, depletion and
amortization (A)(G)(H) 97 78 52
Selling, general and administrative
expenses (A)(D)(E) 160 120 80
-------- -------- --------
2,010 1,922 1,288
-------- -------- --------
Operating earnings 190 136 91
Interest expense and other
Interest expense (A)(C)(I) (39) (39) (26)
Equity in income of affiliates (A)(G) -- 42 28
Other income, net (A)(C)(J) 21 56 38
-------- -------- --------
Earnings before income taxes and
cumulative effect of accounting change 172 195 131
Income taxes (H) (66) (75) (51)
-------- -------- --------
Net earnings from continuing operations
before cumulative effect of accounting
change $ 106 $ 120 $ 80
======== ======== ========
11
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(Continued)
2. Conversion of MB's Historical Financial Statements (Continued)
(A) Under Canadian GAAP, MB's interests in joint ventures are accounted
for using the proportional method of consolidation. Under U.S. GAAP,
these investments are recorded using the equity method.
(B) Under Canadian GAAP, unrealized exchange gains and losses arising
from the translation of long-term debt denominated in foreign
currencies are deferred and amortized over the remaining life of
the related debt. Under U.S. GAAP, such exchange gains and losses
are included in earnings in the period in which they arose.
(C) Canadian GAAP permits the offsetting of debt and related financial
assets under certain circumstances, whereas U.S. GAAP does not.
(D) Under Canadian GAAP, costs of providing life insurance and health
care benefits to substantially all employees after retirement are
recognized as paid. Costs of providing benefits to former or inactive
employees after employment but before retirement are also recognized as
paid under Canadian GAAP. Under U.S. GAAP, these costs are accrued
during the employees' years of active service.
(E) Accounting for pension costs under U.S. GAAP differs from Canadian GAAP
principally with respect to the discount rate used to calculate the
projected benefit obligation and the related effect on pension expense.
(F) Under Canadian GAAP, the cost of early retirement of long-term debt
is included in earnings before taxes. Under U.S. GAAP, it is presented
as an extraordinary item, net of income taxes.
(G) Under Canadian GAAP, certain start-up costs are deferred and
amortized. Under U.S. GAAP, effective with fiscal year 1999, such costs
are included in net earnings as incurred. Additionally, under U.S. GAAP,
the unamortized portion of such deferred costs are expensed as the
cumulative effect of a change in an accounting principle, net of income
taxes in the first quarter of fiscal year 1999.
(H) Under Canadian GAAP, deferred income taxes are accounted for using
the deferral method. Under U.S. GAAP, deferred tax assets and
liabilities are recognized based on differences between the financial
statement and tax bases of assets and liabilities using presently
enacted rates. In addition, under U.S. GAAP, a valuation allowance is
established for deferred tax assets when it is not expected that they
will be realized.
(I) Canadian GAAP requires the separate presentation on the balance
sheet of the liability and equity components of the MB Convertible
Debentures with the interest related to the equity component reflected
as a charge to retained earnings. Under U.S. GAAP, the MB Convertible
Debentures are shown as debt and related interest expense is charged to
income.
(J) Canadian GAAP requires gains and losses on forward exchange
contracts which hedge anticipated future sales to be included in
earnings in the same period the sale is recognized. Under U.S. GAAP,
such gains and losses would have been charged to earnings in the period
in which the exchange rate changes or in the case of settlement in the
period, when the transaction is settled.
(K) Under Canadian GAAP, MB established provisions in 1998 for severance
and other related costs in connection with the planned closure of a
mill. These reserves do not qualify for liability recognition under
U.S. GAAP.
(L) Under Canadian GAAP, a transfer of receivables may be treated as a sale
if significant risks and rewards of ownership are transferred and if
reasonable assurance exists about the measurement of the consideration
derived from the transfer. Under U.S. GAAP, a transfer of receivables
may be treated as a sale only if the transferor has surrendered
control over the transferred receivables. Otherwise, the sales proceeds
are considered to be a debt obligation.
(M) Under Canadian GAAP, future removal and site restoration and
environmental remediation liabilities can be accrued in a rational and
systematic manner over the remaining life of the related capital asset.
Under U.S. GAAP, environmental remediation liabilities must be accrued
when the environmental remediation is considered probable and can
reasonably be determined.
(N) Under Canadian GAAP, when debt is retired, the difference between the
net carrying amount of the debt and the retirement cost may, under
certain circumstances, be recognized as a loss in the period in which
the decision to retire the debt is made. Under U.S. GAAP, the loss is
recognized as an extraordinary item in the period of retirement, net of
related taxes.
12
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(Continued)
3. Intercompany Transactions
To eliminate intercompany transactions between Weyerhaeuser and MB.
4. Intercompany Account Balances
To eliminate intercompany balances between Weyerhaeuser and MB.
5. Intercompany Profit
To eliminate the intercompany profit in inventories on sales/purchases
transactions between Weyerhaeuser and MB, and Weyerhaeuser purchases from
an MB equity affiliate. Multiplying the change in inventory balances on
hand by the average margin on such sales approximated the intercompany
profit elimination by Weyerhaeuser, MB and the equity affiliate. For the
Weyerhaeuser purchases from the MB equity affiliate, the ownership interest
in the affiliate is also factored into the profit elimination.
6. Reclassification
. To reclassify taxes other than payroll and income taxes on the
Weyerhaeuser statement of earnings to costs of product sold and selling,
general and administrative to conform to the format of the Unaudited
Condensed Combined Pro Forma Statement of Earnings.
. To segregate MB's Year 2000 remediation costs previously included in
the selling, general and administrative costs category.
. To reclassify certain of MB's 1999 operating location costs from cost
of sales to the selling, general and administrative costs category to
conform to the methodology adopted by Weyerhaeuser.
7. Common Shares Outstanding
Basic net earnings per common share, before cumulative effect of a change
in an accounting principle in 1999 and an extraordinary item in 1998, have
been calculated based upon the pro forma weighted average shares
outstanding for each period presented. Weyerhaeuser's historical weighted
average shares outstanding was increased in each period by the weighted
average number of MB Common Shares outstanding, multiplied by the Exchange
Ratio of 0.28.
For calculating pro forma diluted net earnings per common share from
continuing operations and before cumulative effect of a change in an
accounting principle in 1999 and an extraordinary item in 1998, the pro
forma weighted average shares outstanding for each period, was further
increased by:
. stock options outstanding at the beginning of or granted during each
period, and
. the assumed conversion of the weighted average number of MB
Convertible Debentures (converted into the equivalent number of
Weyerhaeuser Common Shares) outstanding during each period.
The pro forma basic and diluted earnings per share for each period are
calculated based upon the weighted average common shares outstanding as
follows:
Six Months Year
Ended Ended
June 30, December 31,
1999 1998
---------- ------------
Weighted average shares outstanding (thousands)
Basic 233,750 233,654
Dilutive effect of stock options and assumed
conversion of Convertible Debentures 2,216 1,804
---------- ------------
Diluted 235,966 235,458
========== ============
13
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(Continued)
8. Discontinued Operations
Both Canadian GAAP and U.S. GAAP require that discontinued operations
resulting from the disposal of identifiable segments be disclosed
separately from continuing operations in the financial statements. In
addition, both Canadian and U.S. accounting standards bodies have issued
pronouncements requiring companies to present their segments using a
management approach. Accordingly, when MB approved a plan, in December
1997, to exit the paper business and medium density fibreboard business,
the 1997 and 1998 operating results, financial position and cash flow of
these two businesses were reported as discontinued operations. Since
Weyerhaeuser includes like businesses in continuing operations, the
financial disclosures related to discontinued operations of MB are
reclassified to continuing operations in these Unaudited Pro Forma
Condensed Combined Financial Statements.
In addition, both Canadian GAAP and U.S. GAAP require an accrual for
estimated future operating losses up to the date of disposal of the
discontinued operations. Such accruals are not permitted for continuing
operations and, accordingly have been reversed in these Unaudited Pro Forma
Condensed Combined Financial Statements.
9. Purchase Price Allocation
The Unaudited Pro Forma Condensed Combined Financial Statements reflect the
issuance of 33,529,389 Weyerhaeuser Common Shares or Exchangeable Shares
for all of the outstanding MB Common Shares and MB Warrants as of June 30,
1999, the Exchange Ratio of 0.28 of a Weyerhaeuser Common Share or 0.28
of an Exchangeable Share for each MB Common Share and an average market
price per Weyerhaeuser Common Share of U.S.$67.953 per share. The average
market price per Weyerhaeuser Common Share is based on the average closing
price for a range of trading days (June 17, 1999 through June 22, 1999)
around the announcement date (June 21, 1999) of the Transaction. In
addition, Weyerhaeuser issued Replacement Options in exchange for
outstanding MB Options with the number of shares and the exercise price
appropriately adjusted by the Exchange Ratio. Estimated direct transaction
costs and expenses of U.S.$18 million have been included as a part of the
total estimated purchase cost.
The Unaudited Pro Forma Condensed Combined Financial Statements have been
prepared on the basis of assumptions relating to the allocation of the
total purchase cost to the assets and liabilities of MB based upon
preliminary estimates of their fair value. The actual allocation of the
total purchase cost may differ from those assumptions after valuations and
other procedures are completed.
14
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(Continued)
9. Purchase Price Allocation (Continued)
The purchase price to MB Securityholders of U.S.$2,389 million was
calculated as follows:
. Total MB Common Shares and MB Warrants exchanged 119,753,415
. Multiplied by the Exchange Ratio 0.28
-------------
. Equivalent Weyerhaeuser Common Shares 33,530,956
. Less: Fractional shares (1,567)
-------------
33,529,389
. Multiplied by the average market price U.S.$67.953
-------------
. Value of securities issued (millions) U.S.$2,278
. Value of Replacement Options issued for MB Stock Options 25
-------------
Total Purchase Price $ 2,303
=============
The purchase price to MB Securityholders, plus estimated direct transaction
costs and expenses, and the deferred tax effect of applying purchase
accounting at June 30, 1999, over the historical net assets of MB were
calculated as follows:
In U.S.$ millions
-----------------
. Purchase price to MB Securityholders $ 2,303
. Direct transaction costs and expenses 18
. Additional accrued liabilities 45
. Deferred tax effect of applying purchase accounting 399
. Less: historical net assets (1,044)
---------
$ 1,721
=========
The excess purchase price was allocated as follows:
In U.S.$ millions
-----------------
. Property, plant and equipment, timber and
timberlands, and investment in equity affiliates $ 1,030
. Pension plan assets in excess of pension benefit
obligations 25
. Goodwill 666
---------
$ 1,721
=========
As described in Note 11, the excess purchase price will be
depreciated/amortized over various time periods.
10. Income Tax Adjustments
The increase to deferred income taxes of U.S.$399 million relates to the
tax effect of the increase to fair market value of assets acquired and
liabilities assumed.
11. Depreciation, Amortization and Reduction of Deferred Tax Liability
Additional depreciation and amortization on the increase to fair market
value has been calculated on the straight-line basis over 20 years for
property, plant and equipment and equity affiliates, and 15 to 40 years for
timber and timberlands. Amortization on goodwill has been calculated on a
straight-line basis over 40 years. The pro forma adjustment to depreciation
and amortization was U.S.$58 million in 1998 and U.S.$29 million for the
six months ended June 30, 1999. A deferred tax benefit of U.S.$15 million
for 1998 and U.S.$8 million for the six months ended June 30, 1999
resulted from the additional depreciation and amortization charges.
15
EXHIBIT 23
[PriceWaterhouseCoopers letterhead]
CONSENT OF INDEPENDENT ACCOUNTANTS
To Weyerhaeuser Company
As independent public accountants, we consent to the use of our
Auditors' Report dated February 10, 1999 (except for note 20
which is at September 17, 1999) in the MacMillan Bloedel
Limited Annual Report on Form 40-F/A for the year ended
December 31, 1998 included in this form 8K filed in the United
States.
Chartered Accountants Vancouver, British Columbia
January 10, 2000
EXHIBIT 99.1 - The Annual Information Form and Management's Discussion
and Analysis for MacMillan Bloedel for the year ended
December 31, 1998 as filed on Form 40-F on April 7, 1999
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 40-F
[Check one]
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934.
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 1998 Commission file number 1-7902
----------------- ------
MacMILLAN BLOEDEL LIMITED
- -------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
British Columbia
- ---------------------------------------------------------------------------
(Province or other jurisdiction of incorporation or organization)
93-0463478
- ---------------------------------------------------------------------------
(I.R.S. Employer Identification Number)
925 West Georgia Street, Vancouver, B.C. V6C 3L2 (604) 661-8302
- ---------------------------------------------------------------------------
(Address and telephone number of Registrant's principal executive offices)
R.H. Craig, Esq., MacMillan Bloedel Packaging Inc.,
Suite 300 - 4001 Carmichael Road,
Montgomery, Alabama 36106-3635, (334) 213-6100
- ---------------------------------------------------------------------------
(Name, address (including zip code) and telephone number
including area code for agent for service in the United States)
Securities registered or to be registered pursuant to Section 12(b) of
the Act: None
Securities registered or to be registered pursuant to Section 12(g) of
the Act: Common Shares
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act: Common Shares
For annual reports, indicated by check mark the information filed
with this Form:
[X] Annual Information Form [X] Audited Annual Financial Statements
Number of common shares oustanding at December 31, 1998: 122,580,913
-----------
Indicate by check mark whether the Registrant by filing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934 (the "Exchange Act"). If "Yes" is marked, indicate the file number
assigned to the Registrant in connection with such Rule.
Yes 82- No. X
------ ------ ---------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No.
----------- -----------
UNDERTAKING
The Registrant undertakes to make available, in person or by
telephone, representatives to respond to inquiries made by the
Commission staff, and to furnish promptly, when requested to do
so by the Commission staff, information relating to: the
securities registered pursuant to Form 40-F; the securities in
relation to which the obligation to file an annual report on Form
40-F arises; or transactions in said securities.
SIGNATURE
Pursuant to the requirements of the Securities Act, the
Registrant certifies that it meets all of the requirements for
filing on Form 40-F and has duly caused the registration
statement annual report to be signed on its behalf by the
undersigned, thereto duly authorized.
MacMILLAN BLOEDEL LIMITED
(Registrant)
Date: April 7, 1999 By: /s/ G.E. Mynett
--------------------------
(G.E. Mynett, Corporate Secretary and
Associate General Counsel)
MacMillan Bloedel Limited
Form 40-F
For Year Ended December 31, 1998
List of Exhibits
Pages in
Exhibit No. Description Annual Report
- ----------- ----------- -------------
1 MacMillan Bloedel Limited Annual Information
Form dated March 26, 1999
2 * MacMillan Bloedel Limited Annual Report 1998
a) Management's Discussion & Analysis 12-41
b) Audited Annual Financial Statements
(i) Audit Report 43
(ii) Consolidated Financial Statements 44-63
(iii) Reconciliation with United States
Generally Accepted Accounting Principles 60-61
Note 20 to Consolidated Financial
Statements -
Significant Differences Between
Canadian and United States Generally
Accounting Principles
3 * Consent of Independent Accountants
* The documents described in Exhibits 2(b) and 3 were subsequently amended
and filed on Form 40-F/A, dated September 28, 1999.
EXHIBIT 1
MacMillan Bloedel Limited
________________
Annual Information Form
________________
March 26, 1999
MacMillan Bloedel Limited
ANNUAL INFORMATION FORM
1998
CONTENTS
Page
Item:
1. The Company 3
Corporate profile 3
Incorporation of MB's Annual Report by reference 3
Incorporation and principal subsidiaries 3
2. General Developments of MacMillan Bloedel over
Preceding Five Years 4
Capital expenditure program 5
3. Business of MacMillan Bloedel 6
Continuing Operations: 8
Solid Wood 8
Engineered Lumber 12
Distribution 12
Packaging 13
All Other Businesses: 14
Panelboards 14
Green Forest Lumber 15
Cement-fibre roofing 16
Transportation 16
Discontinued Operations: 16
Paper 16
Medium Density Fibreboard 16
General Business Information: 17
Principal products and customers 17
Foreign exchange 17
Investments 17
Research and technology 17
Human resources 18
Environment 18
Energy 19
4. Selected Consolidated Financial Information: 19
Five year financial review 19
Selected quarterly information 19
Dividends 20
5. Management's Discussion & Analysis (reference is
made to MB's 1998 Annual Report and update) 20
6. Market for Securities 20
7. Directors and Officers 20
8. Additional Information 24
Glossary of Terms: 25
Products 26
Measurements 26
Corporate Abbreviations 27
THE COMPANY
Corporate profile
- -----------------
MacMillan Bloedel Limited, as a corporation, ("the Company")
together with its subsidiaries ("MacMillan Bloedel" or "MB") is
one of the largest forest products companies in Canada and has
integrated operations in Canada, the United States and Mexico. MB
also has marketing facilities in North America and Japan and a
significant joint venture in North America. MB currently has five
primary business segments in continuing operations: Solid Wood,
Panelboards, Engineered Lumber, Distribution and Packaging, with
Panelboards reported in the All Other businesses segment through
1998. In 1998 MB sold its Paper operations and its Medium Density
Fibreboard (MDF) mills, which since 1997 have been reported as
discontinued operations.
MB manages almost 2.0 million hectares of productive
timberlands, which supply most of its fibre requirements. Of
these timberlands, 1.1 million hectares are in British Columbia
(BC) where MB's Corporate head office and most of its Solid Wood
business are located. MB has commitments to sell wood fibre to
formerly owned pulp and paper mills also located in BC. The
products of MB's continuing operations include logs, lumber,
chips, oriented strandboard (OSB) and other panelboards,
engineered lumber, containerboard, corrugated containers and
SpaceKraft(r). Lumber and containerboard are sold throughout the
world.
Incorporation of MB's 1998 Annual Report by reference
- ------------------------------------------------------
To a significant degree, MB's business, including segments and
issues affecting it are described in MB's 1998 Annual Report
(Annual Report) in the Management's, Discussion & Analysis (MD&A)
on pages 12 to 41 and Consolidated Financial Statements and Notes
to Consolidated Financial Statements (Financial Statements) on
pages 44 to 63. To avoid repeating information, pages 12 to 63 of
the Annual Report are incorporated by reference in this Annual
Information Form (AIF) for two items -- Business of MacMillan
Bloedel and MD&A. Information in the AIF includes developments to
March 26, 1999 and two significant events subsequent to March 1,
1999, the date of the MD&A. For a summary of those events see
page 20 of this AIF under the heading MD&A.
With respect to describing MB's overall business, pages 12 to 17
and 31 to 32 of the Annual Report discuss major changes that
affected MB's earnings in 1998, 1997 and 1996 and include
information on sales, exports, exchange and price sensitivities.
Pages 33 and 34 of the Annual Report discuss MB's capital
resources and page 63 provides geographic information.
With respect to MB's business segments, pages 18 to 31, 56 to 57
and 61 to 63 of the Annual Report include information about MB's
continuing and discontinued operations.
Pages 35 to 41 of the Annual Report discuss the known trends,
issues and uncertainties that could have a significant impact on
MB and its businesses.
Incorporation and principal subsidiaries
- ----------------------------------------
After approval by common shareholders at the Annual General
Meeting (AGM) held April 23, 1998, the Company on April 27, 1998
became a federal company incorporated under the Canada Business
Corporations Act (the "CBCA"). Prior to that date, the Company
was a BC corporation incorporated under the British Columbia
Company Act resulting from the amalgamation of the Company and
certain of its wholly-owned subsidiaries. The principal
predecessor company was incorporated by Memorandum of Association
registered July 13, 1911.
As a result of the Company's incorporation under the CBCA, the
Company adopted new bylaws which had previously been approved by
the common shareholders at the AGM held April 23, 1998 and are
described in the information circular in connection with that AGM.
The following is a list of the Company's principal subsidiary
companies as at December 31, 1998:
Subsidiary (100% owned) Jurisdiction of incorporation
----------------------- -----------------------------
MacMillan Bloedel (U.S.A.) Inc. Delaware
MacMillan Bloedel of America Inc. Alabama
MacMillan Bloedel Packaging Inc. Alabama
Canadian Maas River Investment N.V. Netherland Antilles
-3-
GENERAL DEVELOPMENTS OF MacMILLAN BLOEDEL OVER PRECEDING FIVE YEARS
During the last five years MB's results varied from net earnings
of $280 million in 1995 to a net loss of $368 million in 1997.
Net earnings in 1998 of $42 million were adversely affected by the
very weak Japanese lumber market as well as a $41 million after
tax provision for funding a subsidiary company's roofing product
claims. The magnitude of the net loss in 1997 was largely
attributable to a $340 million after tax charge resulting from a
comprehensive strategic evaluation of each of MB's businesses in
late 1997.
In 1994 MB embarked on a corporate strategy to improve operating
earnings, focusing on controllable cost reduction, higher margin-
added products and growth through greenfield capital investment
and acquisition. The capital spending was largely completed by
the end of 1996. However, results in 1996 proved disappointing
and continued so in 1997. Contributing to those results were
significantly higher BC logging costs due to the Government's
introduction in 1995 of the BC Forest Practices Code (FPC) and
substantially higher stumpage and royalty fees. During 1996
markets became more competitive for most of MB's products,
particularly for paper and packaging, which experienced unexpected
price declines.
A new chief executive officer (CEO), W.T. Stephens, was hired in
September 1997 and an extensive 90 day strategic review of the
Company's business segments was conducted (Strategy Review), the
results of which were announced in January 1998. The Strategy
Review resulted in a restructuring of MB's operations and a
related $340 million charge against 1997 results, with Paper and
MDF segregated as discontinued operations. Following the Strategy
Review many significant changes were made in 1998:
* Costs were reduced through the elimination of 14% of
MB's workforce
* Costs were also reduced in Solid Wood in BC through the
co-design/co-management process, a joint collaboration of
union and management employees, and greater utilization of
private timberlands
* MB's North American Distribution business was restructured to
improve profitability with an emphasis on higher margin
products
* Paper business was sold effective May 1, 1998
* MDF operations were sold on September 30, 1998
* Substantial debt was repaid with the proceeds from the sale
of assets
Management's decision to sell Paper was based on the view that
shareholder value would be enhanced by exiting this business.
With respect to MDF, that market has excess capacity, a situation
which was not expected to change over the next few years.
Management decided to sell MB's MDF mills rather than wait for
supply and demand to come into better balance.
In addition to the Strategy Review, the following major
developments occurred during the past five years:
MB sold several operations to concentrate on its core business
segments. Divestitures included Harmac pulp operations in 1994
and the 17% investment in NV Koninklijke KNP BT in 1996. In 1997
MB sold Canadian Transport ("CTCo"), its shipping transportation
subsidiary, and Kingcome Navigation, its BC log towing and barging
division. On August 31, 1998 MB sold its 50% interest in
MacMillan Bathurst, one of the largest corrugated container
manufacturers in Canada.
The following paragraphs summarize developments in each of MB's
businesses:
The most significant development in Solid Wood during the
period, other than escalating logging costs, was the collapse in
1997 of the Japanese lumber market which resulted in the temporary
closure and subsequent restructuring of two of the Company's
whitewood mills. In June 1998 the Company announced a major
initiative to increase conservation of old growth forest by
phasing out clearcutting over a five year period. This change is
expected to enable the Company to be certified under systems
currently emerging for forest certification.
Through joint ventures, MB made significant investments in two
OSB and two MDF mills, all four of which were operating at the
beginning of 1997. MB increased its investment to 100% in both
MDF mills before their sale in 1998. In 1996 MB increased its
investment in one OSB mill from 18% to 100% and in late 1998,
increased its interest in the other from 51% to 70% and in early
1999 to 90%. During 1998 OSB prices soared as demand exceeded
supply.
Since its inception in 1991, Trus Joist MacMillan ("TJM"), a
joint venture in which MB has a 49% interest, has been the
dominant engineered lumber producer in North America. TJM
products continue to gain acceptance in the residential
construction market. In 1995 TJM started up two engineered lumber
plants in the eastern US and in late 1998 added a third in
Alabama.
For most of the period, MB's North American building materials
distribution business grew significantly with sales of non-MB
products increasing through 1996. During 1995 the business was
restructured in order to improve profitability and was further
restructured in 1998 to focus on higher margin MB and TJM produced
products.
In 1995 MB purchased Green Forest Lumber Corporation ("GFL"), an
Ontario based lumber and distribution company.
-4-
During 1994 containerboard markets became much stronger and MB
started construction of a 100% recycled linerboard mill in
Kentucky which was completed in December 1995. In late 1995 and
1996, however, significant new capacity came on stream during a
period of modest economic growth and the containerboard market
quickly deteriorated. In 1997 prices began to improve as demand
became more in balance with supply, but by mid-1998 prices had
declined as a result of the Asian crisis. Throughout the five
years, MB's Packaging business has expanded its converting
operations in the US.
In its Paper business, the Company had concentrated on cost
reduction and value added grade mix. In 1995 the lightweight
coated paper project at Port Alberni was completed.
Looking forward, MB's strong balance sheet gives it the
financial capacity and flexibility to grow the value of its core
building materials business in three areas: durable wood products
(Western Red Cedar and similar species), appearance grade lumber
(hemlock and Douglas fir) and total building solutions (OSB and
engineered lumber). Management continues to explore alternatives
to exit the Packaging business and needs to see significant
improvement in US market access, the industry's cost structure and
Japanese demand before further investment in the BC coastal
forestry will be considered.
Capital expenditure program
- ---------------------------
Over the past five years capital expenditures for continuing and
discontinued operations, including MB's proportionate share of
joint ventures, were almost $2 billion, with over $250 million
spent on environmental projects and over $900 million on
discretionary expansion and modernization projects. In 1995,
environmental focus shifted to forestry practices with the
introduction of the BC Forest Practices Code (FPC) which became
fully effective by mid-1997. The FPC has increased operating
costs rather than capital expenditures. In 1995 and 1996 several
major expansionary projects were substantially completed. By
contrast, most capital expenditures in the other years were
related to the environment and maintenance and replacement of
existing capacity. During 1998 capital expenditures (excluding
business acquisitions) on continuing operations amounted to $159
million, which was low when compared to the period from 1994 to
1996, but up from $90 million in 1997 when expenditures were kept
to a minimum to conserve cash.
-5-
BUSINESS OF MacMILLAN BLOEDEL
The following table summarizes total revenue, operating earnings
(loss) and capital expenditures for MB and each of its business
segments during the last five years. A description of operations
included in each business or line item follows on the next page.
($ millions) 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Continuing operations
- ---------------------
Sales --
Solid Wood $ 1,030 $ 1,329 $ 1,281 $ 1,592 $ 1,360
Engineered Lumber 565 479 386 325 332
Distribution 1,459 1,718 1,520 1,229 1,350
Packaging 1,095 1,009 992 1,135 939
All Other 620 635 614 623 311
Inter-segment (586) (649) (526) (577) (511)
-------- -------- -------- -------- --------
$ 4,183 $ 4,521 $ 4,267 $ 4,327 $ 3,781
======== ======== ======== ======== ========
Operating earnings (loss) --
Solid Wood $ 14 $ 108 $ 56 $ 271 $ 297
Engineered Lumber 62 52 32 27 36
Distribution 9 9 6 (14) 9
Packaging 71 22 40 182 67
All Other 80 5 25 31 54
Corporate (58) (70) (39) (80) (60)
Inter-segment 4 (28) 10 13 5
-------- -------- -------- -------- --------
182 98 130 430 408
Restructuring and other
unusual charges (78) (201) (42) -- --
-------- -------- -------- -------- --------
$ 104 $ (103) $ 88 $ 430 $ 408
======== ======== ======== ======== ========
Capital expenditures --
Solid Wood $ 16 $ 15 $ 40 $ 58 $ 41
Engineered Lumber 34 27 13 69 98
Distribution 18 6 11 14 9
Packaging 74 31 110 204 66
All Other 6 10 41 151 5
Corporate 11 1 5 7 13
-------- -------- -------- -------- --------
$ 159 $ 90 $ 220 $ 503 $ 232
======== ======== ======== ======== ========
Discontinued operations
- -----------------------
Sales --
Paper $ 272 $ 743 $ 696 $ 906 $ 605
MDF 40 30 -- -- --
-------- -------- -------- -------- --------
$ 312 $ 773 $ 696 $ 906 $ 605
======== ======== ======== ======== ========
Net earnings (loss) --
Paper $ (26) $ (86) $ (28) $ (3) $ (51)
MDF (5) (161) (2) -- --
-------- -------- -------- -------- --------
$ (31) $ (247) $ (30) $ (3) $ (51)
======== ======== ======== ======== ========
Capital expenditures --
Paper $ 6 $ 138 $ 84 $ 197 $ 56
MDF 3 29 193 58 --
-------- -------- -------- -------- --------
$ 9 $ 167 $ 277 $ 255 $ 56
======== ======== ======== ======== ========
-6-
MB's BUSINESS SEGMENTS
At the end of 1997 MB adopted, on a retroactive basis, the new
Canadian accounting requirements related to segment disclosures
using the management approach. Under the management approach
segments are reported on the basis that management organizes the
business for making operating decisions and assessing performance.
Description of each business segment (at December 31, 1998)
Continuing operations
- ---------------------
Solid Wood -- Includes logs harvested in BC which are converted
into lumber or sold, and includes the Japanese marketing
subsidiary, MacMillan Bloedel K.K. ("MBKK"), which sells a
significant portion of the Company's BC produced whitewood lumber.
Engineered Lumber -- Comprises MB's 49% ownership interest in Trus
Joist MacMillan ("TJM"), the largest marketer and manufacturer of
engineered lumber in North America.
Distribution -- Consists of marketing and distribution of building
materials and related products throughout North America. A
significant portion of its lumber and panelboards sales are MB
produced and virtually all of its engineered lumber sales are
supplied by TJM.
Packaging -- Consists of the manufacture of containerboard in
Alabama, Kentucky and Ontario and related marketing operations.
These containerboard mills are integrated with MB's US converting
packaging plants. Also includes logging operations and two wood
product mills in Alabama. The 50% ownership interest in MacMillan
Bathurst was sold effective August 31, 1998.
All Other -- Includes MB's Canadian panelboards manufacturing
operations and MacMillan Guadiana ("MG") which operates lumber and
particleboard mills in Mexico. Also includes Green Forest Lumber
("GFL") which comprises logging and sawmill operations in Ontario
and marketing of that lumber together with lumber and OSB produced
by other suppliers. This segment also included American Cemwood
Corporation ("ACC"), a cement-fibre roofing subsidiary in Oregon
until its permanent closure in April 1998, as well as the
Company's transportation operations until they were sold in 1997.
Corporate -- Includes unallocated expenses and other items not
considered relevant in measuring the performance of the business
units.
Inter-segment -Relates to the elimination of profit recorded by
one business segment on sales to another which the purchasing
segment has not yet sold to customers external to MB and
elimination of sales between business segments. Inter-segment
sales are transacted at market values.
Segment reorganization in 1999
- ------------------------------
This AIF (to be consistent with the Financial Statements and the
MD&A) describes each business segment as at December 31, 1998.
However, effective January 1, 1999, management reorganized its
Solid Wood, Distribution and All Other segments and added a new
segment, Panelboards. The new Panelboards segment is comprised of
MB's Canadian panelboards manufacturing operations formerly in the
All Other segment. While OSB is the main product of this new
segment, plywood and lumber mills adjacent to the OSB joint
venture mill in Hudson Bay, Saskatchewan are also included, as are
the particleboard and specialty board plant in Vancouver, BC and
the plywood mill in Nipigon, Ontario. The panelboards sales
office in Mississauga, Ontario, formerly in the All Other segment,
becomes part of Distribution. GFL, also formerly in the All Other
segment, has been split between two existing segments, with its
manufacturing operations included in Solid Wood and its trading
and marketing activities in Distribution. After these re-
alignments, only MG remains in the All Other segment, which for
prior years also included ACC and transportation services.
Discontinued operations
- -----------------------
Paper -- Includes two BC groundwood printing paper mills and their
related marketing organization which were sold effective April 30,
1998.
MDF -- Includes two MDF plants which were sold effective September
30, 1998.
-7-
CONTINUING OPERATIONS
Solid Wood
----------
Solid Wood is comprised of the Company's forestry, logging and
sawmill operations in BC and MacMillan Bloedel K.K. ("MBKK"), its
lumber marketing subsidiary in Japan where a major portion of the
Company's high value whitewood lumber manufactured in BC is sold.
In addition to logs, chips and lumber sold to unaffiliated
customers, Solid Wood sales include logs and chips sold to MB's
pulp and paper mills (until their sale on May 1, 1998) and lumber
sales to Distribution.
In late 1997 Solid Wood's raw material services log towing and
log barging division, Kingcome Navigation, was sold.
Forest lands
The total area of commercial forest lands in BC under MB's
control at December 31, 1998 was:
Hectares
Area operated on a sustained yield basis --
Tree farm licences (TFLs)
Crown lands (1) 697,000
Timber licences (2) 112,000
Owned lands (3) 78,000
-------
887,000
Managed forest lands (owned lands) (3) 143,000 1,030,000
-------
Other tenures --
Timber licences 34,000
Owned lands 2,000 36,000
------- ---------
1,066,000
=========
Notes:
(1) These are contained within MB's two TFLs on the West Coast
of BC (TFL No. 39 & 44). These TFLs were renewed for 25 year
terms in 1995 and are replaceable after five years for a
further 25 year term, subject to satisfactory performance by MB
of its cutting and reforestation obligation as determined by
the Ministry of Forests.
(2) The Company owns exclusive rights to harvest timber on the
land held under timber licences. Until 1995 a royalty was
payable upon harvesting the timber. Since then a stumpage
charge has been payable on the timber. After the timber is
harvested on these lands, the Company has the responsibility to
reforest them. They then revert to the Crown but will be
retained within TFLs as "Crown lands". Approximately 28,000
hectares of these lands have been logged but have not reverted.
(3) Certain Company owned lands have been put into tree farms
("managed forest units") to obtain an incentive property tax
rate. Those managed forest lands outside TFLs are not subject
to the FPC.
British Columbia forest land use
The Province of BC (the "Government" or the "Province") owns
approximately 95% of all forest lands in the Province. Under the
Forest Act, the Government is empowered to grant TFLs to a
licensee who undertakes to manage an area of Crown forest land,
often in conjunction with forest land owned by the licensee, to
yield an annual crop on a sustained yield basis (i.e. in
perpetuity). The Government determines the allowable annual cut
(AAC) on TFLs held by the Company which, as at January 1, 1999,
aggregated 5.5 million m3. This figure anticipates a 66,000 m3
reduction on the expected transfer of 51% of MB's harvesting
rights in Clayoquot Sound to Iisaak Forest Resources Ltd., a new
joint venture company with a First Nations economic development
corporation, the details of which are described on page 35 of the
Annual Report.
During 1998, due to the high cost of logging from Crown lands
and low lumber prices, the Company increased its harvest from
unregulated private timberlands to 1.5 million m3 and is shifting
towards an economic rotation harvesting plan. The Company
continues to take steps to protect the flexibility and increase
the value of its timber assets on its large private land holdings
in BC.
Page 19 of the Annual Report provides a table showing the
Company's AAC, logs harvested from Crown and private lands and
consumed by Company sawmills, and logs and chips (fibre) purchased
and sold in 1998, 1997 and 1996. The AAC together with the MB's
harvest from private land is sufficient to provide the majority of
fibre required to operate its sawmills and to meet fibre supply
commitments to the Company's former pulp and paper mills in BC.
Logs harvested, which are not suitable for MB mills, and chips
produced are traded on the open market to meet the rest of MB's BC
fibre requirements and commitments in BC.
-8-
Other developments and uncertainties surrounding BC's forest
land use are discussed on pages 35 to 38 of the Annual Report,
including timber tenure, the Government's potential initiatives to
reduce costs and improve industry competitiveness, European gypsy
moth and aboriginal land claims.
Page 35 of the Annual Report in the timber tenure section makes
reference to ongoing negotiations with the Government in respect
to MB's petition before the courts which seeks compensation
payable for tenure expropriated during the creation of parks under
the Carmanah Pacific Park Act, 1990, the Park Amendment Act, 1995
and 1996 Orders in Council. Subsequent to the publication of the
Annual Report, on March 16, 1999 the Government announced it had
reached an agreement with MB to resolve the Company's loss of
harvesting rights due to the creation of new parks on Vancouver
Island in the mid-1990s. MB will receive resource rights and land
from the Province worth $84 million as at January 1, 1999, the
negotiated value of MB's foregone cutting rights covering about
six million m3 of timber. The specific lands to be transferred
have yet to be identified but may include release of MB's private
land from TFLs 39 and 44 and/or transfer of Crown parcels to the
Company as private property. The agreement also defines the
process to select and appraise the lands to be transferred to MB.
The Province will consult with First Nations and other
stakeholders before selecting lands suitable for transfer. These
lands will be independently appraised to determine their worth.
The Company has a contract commitment to supply Harmac Pacific
Inc.'s ("HPI") pulp mill, a former MB operation, with wood fibre
until 2019. During 1998 the Company's supply commitment was 85%
of the mill's capacity. This commitment declines in 1999 to 80%
of the mill's fibre requirement, at which level it remains until
2019. At full capacity, the mill consumes 2.1 million m3 of wood
fibre annually. As part of the sale of MB's Paper business, the
Company entered into a contractual commitment with Pacifica Papers
Inc. ("Pacifica"), the company which acquired effective
May 1, 1998 MB's former paper mills at Powell River and Port
Alberni, to supply wood fibre indefinitely to those mills. The
volume of the fibre to be supplied to Pacifica is linked to MB's
forest tenures and is based on a formula related to MB's sawlog
harvest. For the last eight months of 1998, the Company sold
1.3 million m3 of chips and pulp logs to Pacifica.
Reforestation
MB continues to maintain an active reforestation program in BC
as in the past, planting between eight and ten million seedlings
annually on MB controlled forest lands. As part of the Strategy
Review, the Company's nursery at Nanaimo was closed in 1998. The
4.5 million seedlings, which previously were grown from seed at
the nursery, are now being supplied by other coastal nurseries.
Solid Wood logging operations
Log harvesting operations on the West Coast of BC are the
predominant supply of fibre required by the Company owned or
operated sawmills. Logs are harvested and sorted according to
species, size and quality and directed to the appropriate
converting mill to maximize value. To balance supply and demand
of grade and species, logs are traded in the open market. Most
sawlogs are used in the manufacture of Solid Wood's lumber. Chips
from converting sawmill operations and lower grade logs are sold
to HPI and Pacifica pulp and paper mills (formerly MB mills).
Operations to a certain extent are seasonal, with weather
related curtailments in winter due to snow and summer due to fire
risk. Snow conditions in the winter of 1999 are expected to
impact sawmill operations in the spring of 1999 due to log
shortages.
The BC Forest Practices Code (FPC) was introduced in 1995 and
became fully effective on Crown forest lands in mid-1997. The FPC
governs every facet of forest management activities from planning
through harvesting and forest renewal and has resulted in
significantly higher logging costs. The Company has a policy to
comply 100% with the FPC.
Although Company owned timberlands are not regulated by the FPC,
at the beginning of 1999 private forest landowners and the
Government signed a Memorandum of Understanding (MOU) to protect
the environment and improve the investment climate for BC's
private forest lands. The MOU is the result of the Government and
the Private Forest Landowners Association working together for
several years to develop an innovative regulatory model for BC's
private forest lands. It requires forest landowners to protect
water quality, fish habitat, soil conservation and, where
applicable, wild life habitat. This regulatory regime is based on
a results oriented approach, allowing private landowners to use
innovation and local knowledge to protect these key public
environmental values.
During 1998 the Government became concerned about the economic
health of the forest industry and started a two staged policy
review focusing on cost reduction and examination of structural
issues. Page 36 of the Annual Report provides a discussion of the
Government's potential initiatives to reduce costs and improve
industry competitiveness.
In June 1998, the Company announced a major initiative (the
Forest Project) to increase conservation of old growth forest and
replace clearcutting (over a five year period) on both its Crown
and private timberlands with a more ecologically driven approach
through the adoption of a system of stewardship zones, and the
introduction of variable retention harvesting and silviculture
systems. Page 20 of the Annual Report provides a discussion of
the Forest Project.
-9-
BC stumpage and royalty payments
MB must pay stumpage, which is assessed at a prescribed rate, to
the Province to harvest timber from Crown lands. On May 1, 1994,
the Province increased average stumpage rates on timber harvested
from Crown lands in the coastal region of BC by 63% from $17.20
per m3 to $28.03 per m3. On April 1, 1995, the Province required
stumpage to be paid for timber harvested from timber licences, in
lieu of royalties which were previously payable. Stumpage for
timber licences was specified to be a percentage of full stumpage
rates starting at 60% on April 1, 1995 and increasing to 100% on
April 1, 2001 and thereafter. No stumpage is payable in respect
of timber harvested from Company owned land.
As a result of legislation passed by the Government in 1995,
increasing royalty rates to match stumpage rates by April 1, 2001,
the Company has filed a claim against the Government seeking $200
million in compensation for expropriation of MB's property
interests and breach of contractual obligations and fiduciary
duty. The pleadings in the case have now been closed, and the
trial is presently scheduled for the summer of 1999. Its outcome
cannot be determined at this time. In response to the higher
than expected FPC implementation costs, in June 1998 the
Government reduced average stumpage on the BC coast by $8.10 per
m3.
Solid Wood manufacturing facilities
Page 22 of the Annual Report shows Solid Wood's annual
productive capacities at December 31, 1998 and sawmill production
and sales volumes in 1998, 1997 and 1996. The Company's BC mills
operated at 79% of capacity in 1998 compared to 82% in 1997.
High value durable Western Red Cedar (WRC) products are
manufactured at the Company's New Westminster, Canadian White Pine
and Somass mills with most of the sales to the US market. In 1998
the New Westminster mill increased its level of non-WRC products
to 41% of production.
The Company's whitewood sawmills, Alberni Pacific ("APD"),
Chemainus and Island Phoenix ("IPD"), direct their output of high
value appearance grade lumber to export markets, primarily Japan.
The sharp decline of the Japanese market in the fall of 1997
together with the high cost of production in BC, caused the APD
and IPD mills to shut down in early October 1997. In February
1998 these two mills started up on a one shift basis after new
manning levels and cost targets were developed in conjunction with
employees at the mills (the co-design/co-management process).
After the one shift target levels were achieved at these mills in
April 1998, a second shift was added. Since mid-December 1998 IPD
has been shut down due to the high cost of logs harvested on Crown
lands. It is expected to start up in April 1999 once the cost
issues have been addressed. The Chemainus mill, which cuts larger
logs for very high grade lumber, has continued to run three
shifts.
MB's 30% interest in a sawmill at Courtenay, BC, which cuts
primarily for the Japanese market, was sold in September 1998.
Solid Wood remanufacturing
Five of Solid Wood's six sawmills in BC have the capability to
process lumber beyond the primary stage with three having their
own dry kiln remanufacturing facilities. The Company utilizes a
number of custom facilities to further process lumber to meet the
specifications of overseas customers, mainly in Europe and Japan.
In recent years MB has been expanding its involvement in
remanufacturing. At the beginning of 1995 MB purchased Plenk's
Wood Centre ("PWC") in Chemainus, BC. This remanufacturing
operation has an annual kiln-dry capacity of 20 MMfbm. During
1995 Mid-Island Reman ("MIR"), a remanufacturing window and door
component plant in which MB has a 49% interest, was built near
Nanaimo, BC. Capacity of MIR is similar to PWC and production
commenced in early 1996. In 1998 MB shipped approximately 76
MMfbm of BC remanufactured whitewood lumber, including kiln-dried
products, down from 91 MMfbm in 1997, which was close to capacity
and reflected a much stronger Japanese market.
-10-
Solid Wood capital expenditures
Solid Wood's capital expenditures amounted to $16 million in
1998, $15 million in 1997 and $40 million in 1996. A significant
portion of these capital expenditures each year is non-
discretionary and relates to maintenance or replacement of
existing capacity. There has been no single major capital
expenditure during the past three years.
Solid Wood marketing
Solid Wood's lumber, log and chip sales are coordinated in
Vancouver through MB's head office. Overseas, MB has a lumber
distribution company in Japan, MBKK, and a sales office in
Australia. Established independent sales agents are primarily
used in Europe and Asia.
Construction and remodelling activity in the US and Japan are
key to the performance of this segment. Page 22 of the Annual
Report shows housing starts and softwood consumption levels in
these markets for the past five years. Page 17 of the Annual
Report includes a table showing the geographic distribution of
1998, 1997 and 1996 sales of MB's BC produced lumber to third
party customers on a consolidated basis. On the supply side, the
availability of quality timber at reasonable prices, the demand
for chips by pulp and paper producers and the expected level of
prices are major factors in the volume of lumber produced.
Page 18 of the Annual Report provides a chart showing
representative Solid Wood lumber prices during the last five
years, followed on pages 20 and 21 by a discussion of whitewood
and WRC prices.
The strength of US and Japanese lumber markets also impacts
sawlog values, which were negatively impacted in late 1997 and
1998 by the weak Japanese economy. The very strong US
construction market in 1998 alleviated the situation somewhat, but
caused a significant re-direction of lumber from other markets,
resulting in an oversupply of most grades of lumber and low
prices. Page 19 of the Annual Report includes a chart showing
representative BC log prices during the last five years.
The selling price of pulp logs and chips is highly dependent
upon the strength of pulp and paper markets. Since late 1995 pulp
and paper markets have been weak while demand in North America for
lumber has remained very strong, as was demand in Japan through
mid-1997. This situation has resulted in an oversupply of chips,
a byproduct from sawmills, and an oversupply of pulp logs, which
are usually required to be harvested along with sawlogs. This
oversupply caused very low pulp and chip prices during 1996 and
most of 1997. During 1997 and 1998 the price of pulp logs
increased as the paper industry improved. However, a nine month
strike at a major paper producer in BC (which was settled in April
1998) together with mill shutdowns, kept the demand for chips
lower than the supply.
Since May 1, 1998, all shipments of pulp logs and chips to MB's
former Paper operations are recorded as external sales.
During 1998 approximately 6% of the Company's total log harvest
was exported to Japan, all of which was harvested from MB's
private lands. Government regulations prohibit log exports of
Crown timber. To meet 1998 fibre supply commitments, Solid Wood
imported almost 200,000 m3 of pulp logs.
MBKK also sells newsprint, SpaceKraft(r), engineered lumber and
industrial wood products, although in 1998 sales of non-MB
produced products were significantly reduced.
Softwood lumber quota
The five year Canada/US Softwood Lumber Agreement (the
Agreement) expires March 31, 2001. Page 36 of the Annual Report
provides a discussion of the Agreement and its impact on the
Company's shipments to the US. Subsequent to the publication of
the Annual Report, US Customs announced that it proposes to
reclassify several products imported from Canada which were
previously exempted from quota restrictions and include them in
the quota. One of these products is rougher headed lumber, which
if restricted by quota, would have a significant effect on the
Company, and could result in a loss of 25% of its BC produced
lumber which can be shipped duty-free to the US market. The
Company and the forest industry are vigorously fighting this
change. US Customs have initiated a 30 day public comment process
that ends April 9, 1999.
-11-
Engineered Lumber
-----------------
TJM is a limited partnership owned 51% by TJ International, Inc.
and 49% by MB. The partnership is the largest engineered lumber
manufacturer in North America. Its corporate head office is in
Boise, Idaho. In 1998, 1997 and 1996 annual sales were US$778
million, US$706 million and US$577 million respectively.
Engineered Lumber manufacturing
TJM has sixteen manufacturing plants. The two plants in Canada
are located in BC and Alberta and of the fourteen plants in the
US, four are located in Oregon, two in Georgia and one each in
Washington, California, Minnesota, Ohio, Kentucky, West Virginia,
Louisiana and Alabama. They manufacture high quality engineered
structural lumber products. Their main products are Microllam(r)
laminated veneer lumber (LVL), Parallam(r) parallel strand lumber
(PSL), TimberStrand(r) laminated strand lumber (LSL) and TJI(r)-
joists. These products are made into floor joists, roof rafters,
headers, beams, columns, posts, door components and structural rim
boards. In addition to these residential building products, TJM
also manufactures open web trusses for light commercial
construction.
OSB is a major raw material in the production of certain types
of engineered lumber products. In 1996 and 1997 the oversupply of
OSB reduced production costs while in 1998 high demand
significantly increased costs.
Engineered Lumber marketing
TJM has an extensive marketing network with sixteen divisional
and regional sales offices in North America, three in Canada and
thirteen in the US. Most of TJM's sales are in North America with
a significant portion of them through MB's building materials
distribution centres in North America. Overseas markets are
serviced by TJM offices in Brussels and Tokyo.
Demand for engineered lumber products continues to grow with its
increased acceptance as a substitute for commodity solid-sawn
lumber. In recent years engineered lumber products have increased
penetration in the key residential construction market. When
commodity lumber prices are low it is more difficult to convert
builders to use these products. Builders who have used TJM
products over the years continue to do so because of the high
structural stability and better value that these products provide.
TJM capital expenditures
MB's 49% share of TJM's capital expenditures was $34 million in
1998, $27 million in 1997 and $13 million in 1996. In 1997
construction started on a US$45 million LVL and TJI(r)-joist plant
in Alabama which commenced production in the fourth quarter 1998.
Distribution
------------
The Distribution segment consists of MB's North American
building materials distribution business (MBBM) which markets
lumber and panelboards produced by MB, engineered lumber
manufactured by TJM and building materials and related products
made by other suppliers.
At December 31, 1998 MBBM operated 30 distribution centres
(DCs), eighteen in the US and twelve in Canada. During 1998 seven
distribution centres (two in Canada and five in the US) and three
other branch locations were closed. Recently, MBBM has
concentrated on distributing MB's cedar and TJM's engineered
lumber, resulting in a significant decrease in non-MB and non-TJM
produced sales in 1998. In 1997 one small Canadian centre was
closed.
In 1998 Distribution's capital expenditures of $18 million were
significantly higher than in recent years and reflected the
construction and completion of a new distribution centre in the
Toronto, Ontario area.
Page 24 of the Annual Report provides information on
Distribution and shows the portion of Distribution's lumber and
panelboards sales produced by MB. Virtually all of its engineered
lumber sales are TJM products. Most of the MB produced lumber
sold by MBBM is WRC sold in the US. Some of the lumber and
plywood produced by MB's Packaging operations in Alabama is sold
by Distribution.
DC sales in Canada and the northern US are somewhat seasonal
with larger volumes sold during the second and third quarters when
weather permits greater outdoor construction activity. In 1998
all sales by Distribution, except $4 million ($35 million - 1997),
were in the US and Canada. In both 1998 and 1997, 70% of the
segment's sales were in the US.
-12-
Packaging
---------
MB manufactures containerboard (linerboard and corrugating
medium) at Pine Hill, Alabama, linerboard at Henderson, Kentucky
and corrugating medium at Sturgeon Falls, Ontario and has
integrated converting packaging operations, including two
SpaceKraft(r) plants, at nineteen locations in the US. Included in
Packaging are Alabama's logging operations, sawmill and plywood
mill and MB's 50% partnership interest in MacMillan Bathurst
("MacBath"), one of the largest corrugated container manufacturers
in Canada, until its sale on August 31, 1998 to Stone Container
(Canada) Inc. ("Stone"). All of MB's US packaging operations are
separated into a wholly-owned subsidiary of MB, MacMillan Bloedel
Packaging Inc. ("MBPI").
Packaging manufacturing
Page 27 of the Annual Report shows Packaging's annual productive
capacities at December 31, 1998 together with containerboard,
corrugated container, lumber and plywood production and sales
volumes in 1998, 1997 and 1996. Containerboard capacity
utilization was 98% in both 1998 and 1997. The converting
facilities capacity utilization was 71% in 1998 compared to 68% in
1997, the latter rate having been restated from the 85% previously
reported, when some converting facility capacities were based on
two shifts rather than three.
The US corrugated container group consists of plants in
Arkansas, Florida, Illinois, Kentucky, Louisiana, Mississippi, New
Jersey, New York, Ohio, Tennessee and Texas. Nine are corrugated
container converting plants and eight are sheet plants or sheet
feeder plants. MB also has two SpaceKraft(r) plants, one in Indiana
and one in Georgia. A small SpaceKraft(r) plant is being
constructed in Portland, Oregon. SpaceKraft(r) is a bulk bin
container concept developed by MB for shipment and storage of
large, heavy quantities of liquids or solids.
MB's containerboard operations utilize approximately 415,000
tonnes of recycled fibre annually - 180,000 tonnes at Pine Hill,
140,000 tonnes at Henderson and 95,000 tonnes at Sturgeon Falls.
Both the Sturgeon Falls and Henderson mills use 100% recycled
materials, specifically old corrugated containers (OCC), and the
Pine Hill mill uses approximately 20% OCC. In 1998 the price of
OCC was low, benefiting production costs, reflecting weaker demand
due to the Asian crisis and US containerboard producer downtime.
MB's Pine Hill and Henderson mills are among the lowest cost
producers in North America.
Packaging wood products, logging and forestry
MB harvests southern pine in Alabama and Mississippi on its own
timberlands (comprising 71,000 hectares) and on other lands
(comprising 102,000 hectares) on which it has long term cutting
rights, sending the higher value sawlogs to its dimension lumber
sawmill or plywood mill adjacent to its Pine Hill containerboard
mill. MB harvested 1.0 million m3 of logs in 1998, up from
978,000 m3 in 1997 and 680,000 m3 in 1996. Pulp logs are chipped
to supply approximately one half of the fibre requirements of the
containerboard mill. Other sources of raw material for the
containerboard mills are economically available. Some lumber and
plywood is sold to Distribution. Plywood sales are focused on the
value added furniture business.
MB maintains an active reforestation program in Alabama and
Mississippi and produces an annual crop of approximately 30
million seedlings at its Robert Mitchell nursery in Alabama.
These seedlings are planted on MB controlled forest lands with
approximately 80% of Alabama's crop sold.
Packaging capital expenditures
Packaging's capital expenditures amounted to $74 million in
1998, $31 million in 1997 and $110 million in 1996. In mid-1998
construction began on a US$43 million modernization of the Pine
Hill sawmill in order to process logs more efficiently, using the
latest proven equipment to improve yield and increase product
value. The project is expected to be completed over a three year
period without disrupting operation of the sawmill. During 1998
various capital expenditures were made to enhance the value of the
Packaging business keeping it a high quality, low cost operation.
Capital expenditures during 1997 and 1996 included a US$13
million sheet feeder plant in Arkansas which started up in mid-
1996 and a US$12 million project to rebuild a recovery boiler at
Pine Hill which was completed in late 1996. The significant
capital expenditures in 1996 reflected the US$105 million 100%
recycled linerboard mill at Henderson which started up in late
1995 with costs carried over into 1996. In addition to capital
expenditures, in mid-1996 MB acquired Traub Containers Inc., an
Ohio corrugated container plant.
-13-
Packaging marketing
Containerboard
- --------------
MB's containerboard is sold throughout the world with most sales
in North America. Export sales are made primarily to Latin
America and Europe. Sales are coordinated through MBPI's head
office in Montgomery, Alabama. European sales are serviced by
MB's UK subsidiary, MacMillan Bloedel Pulp and Paper Sales
Limited. Page 17 of the Annual Report includes a table showing
the geographical distribution of containerboard sales for 1998,
1997 and 1996.
In 1998 approximately 55% of the linerboard and corrugating
medium sold by the Alabama and Kentucky mills was utilized by MB's
Packaging operations in the US and virtually all the corrugating
medium sold by the Sturgeon Falls mill was used by MacBath. The
supply agreement between Sturgeon Falls and MacBath continues for
a five year period until 2003, whereby Stone is committed to
purchase annually 70,000 tonnes of corrugating medium from
Sturgeon Falls and 36,000 tonnes of containerboard from Pine Hill.
Page 25 of the Annual Report includes a chart showing linerboard
and corrugating medium prices in the US during the past five
years, followed by a discussion of significant price changes in
recent years.
Corrugated containers
- ---------------------
Virtually all of MB's US produced corrugated containers are sold
in the US and MacBath's production is sold in Canada.
The manufacture and marketing of corrugated containers is a
specialized regional business and is highly competitive as to
price, quality, service and product innovation. Demand is tied to
the economy and consumer confidence. Corrugated shipping
containers are almost universally used throughout industry to
carry manufactured products safely.
As a rule corrugated container prices closely follow changes in
containerboard prices.
All Other Businesses
--------------------
The All Other segment includes MB's Canadian and Mexican
panelboards manufacturing operations (Panelboards) and Green
Forest Lumber ("GFL"). This segment also included American
Cemwood Corporation ("ACC"), a cement-fibre roofing subsidiary in
Oregon, until its permanent closure in April 1998 and Canadian
Transport Company Limited ("CTCo"), MB's transportation services
subsidiary which was sold during 1997. Effective January 1, 1999,
most operations in All Other segment will be transferred to
Panelboards, Solid Wood or Distribution. Page 7 of this AIF
describes the reorganization of business segments in 1999.
Panelboards
- -----------
Included in Panelboards are MB's structural panelboards
manufacturing operations (plywood, particleboard and OSB) in
Canada and MG's building materials operations in Mexico. Also
included is MB's proportionate share of two partly-owned Canadian
panelboards operations. The two MDF mills, sold in 1998, are
reported as discontinued operations. Page 29 of the Annual Report
shows annual productive capacities for Panelboards at December 31,
1998 and OSB, particleboard, plywood and lumber production and
sales volumes in 1998, 1997 and 1996.
Panelboards manufacturing facilities
MB's panelboards mills, on a proportionate basis, operated at
95% capacity in 1998 and 88% in 1997.
OSB, which accounts for most of MB's Panelboards sales, is
produced at three operations: Hudson Bay, Saskatchewan; Miramichi,
New Brunswick; and Wawa, Ontario. All three are low cost
producers. The mills in Ontario and New Brunswick are relatively
new, having been built in 1995 and 1996. Residential construction
and remodelling are the primary end uses for OSB, which is rapidly
replacing plywood in the structural panel market due to lower cost
and improved technology.
The OSB mill at Hudson Bay is a joint venture owned by Saskfor
MacMillan Limited Partnership ("Saskfor MacMillan") in which MB
and Crown Investment Corporation of Saskatchewan ("CIC") each has
a 50% interest. MB proportionately consolidates Saskfor MacMillan
which also owns a plywood mill in Hudson Bay and a sawmill at
Carrot River, Saskatchewan. MB's management is reviewing
opportunities for increasing its investment in Saskatchewan.
In August 1996, a greenfield OSB mill at Miramichi, New
Brunswick, owned by Eagle Forest Products Limited Partnership
("Eagle"), started up. In September 1997, MB increased its
ownership in Eagle from 50% to 51%, in November 1998 to 61% and in
December 1998 to 70%, and continued to account for it on a
proportionate basis. In January 1999, MB acquired a further 20%
and expects to acquire the remaining 10% by mid-1999. Eagle's
results in 1999 will be fully consolidated.
-14-
In December 1996, MB increased its original investment in the
Jager Strandboard Partnership OSB mill at Wawa, Ontario from 18%
to 100%. In early 1997 the name of the operation was changed to
MacMillan Bloedel North Superior Forest Products Limited
Partnership ("North Superior"). North Superior is a modern OSB
facility, designed for low cost operation.
Specialty panelboards products are manufactured at three other
operations: hardwood plywood at Nipigon, Ontario; particleboard at
Durango, Mexico; and particleboard and specialty board at
Vancouver, BC. MG's Mexican operations also produce laminated
particleboard, lumber and fibre-cement products.
In November 1996 a second particleboard production line started
up at the same plant in Mexico.
Panelboards fibre supply
Prior to forming Saskfor MacMillan in 1995, MB had a forest
licence management agreement covering 309,000 hectares of forest
lands in Saskatchewan and Saskatchewan Forest Products
Corporation, a company owned by CIC, had annual permits renewed
each year. The partnership is negotiating a new forest management
agreement (FMA) with the Province of Saskatchewan. During 1998
the new FMA went through an extensive review process and is
expected to be finalized within the next few months. The FMA
covers an area of almost 1.1 million productive hectares and
includes hardwood and softwood to supply the partnership's mills.
Saskfor MacMillan's current annual fibre requirements are 835,000
m3. While the FMA supplies ample hardwood for OSB production,
some private softwood purchases are required to meet the plywood
mill's and sawmill's annual needs of 450,000 m3 of softwood. To
meet the softwood shortage, further Crown allocations from another
licensee are expected. The FMA term is 20 years with an option to
renew every ten years. Stumpage rate formulas and annual
allowable cut are set for ten years.
About 50% of Eagle's 570,000 m3 annual fibre requirement is met
through agreements with the Province of New Brunswick including a
25 year forest management agreement, renewable every five years
with the next renewal in 2002. Crown wood allocations are for a
five year term, renewable every five years with the next renewal
also in 2002. The remaining 50% is purchased from private
sources.
The North Superior mill's annual fibre requirements are met
through a timber supply agreement with five companies which
harvest timber from Crown and private forest lands. The total
annual commitment from these companies is 680,000 m3, of which
135,000 m3 is from GFL. The agreement expires in 2014 with a 10
year extension option.
Panelboards capital expenditures
Panelboards capital expenditures in both 1998 and 1997 were less
than $10 million while $34 million was spent in 1996, reflecting
the completion of the Eagle mill in New Brunswick which started up
in August 1996 and the second particleboard line at MG.
In addition to capital expenditures, as noted above, MB
increased its investment in Eagle and North Superior. In late
1998 and early 1999 MB incrementally increased its interest in
Eagle to 90% at a total cost of $33 million. In 1996 MB acquired
82% of North Superior, increasing its ownership to 100%. At that
time North Superior's property, plant and equipment was valued at
$102 million.
Panelboards marketing
MB markets its Canadian produced structural panelboards through
its sales office in Mississauga, Ontario with a portion sold to
MBBM. Page 28 of the Annual Report shows a five year OSB and
plywood price chart. Plywood prices usually maintain a premium
over OSB prices and the products compete against each other. The
OSB industry during 1996 and 1997 suffered from oversupply as a
result of new capacity additions, but in 1998 supply could not
keep up to the very strong US construction market and prices
soared. Page 17 of the Annual Report includes a table showing the
geographical distribution of OSB sales for 1998, 1997 and 1996.
Green Forest Lumber
- -------------------
Page 30 of the Annual Report shows GFL's logs harvested, lumber
production and sales revenue and volumes in 1998, 1997 and 1996.
In recent years GFL's capital expenditures have been less than $5
million annually.
GFL manufacturing facilities
GFL has two sawmills at Chapleau, Ontario which have recently
been operating close to their full annual productive capacity,
which at December 31, 1998 was 130 MMfbm, comprising the Chapleau
Forest Products mill's capacity of 95 MMfbm and the A&L LaFreniere
mill's capacity of 35 MMfbm. The 18 MMfbm increase in sawmill
capacity during 1998 reflects operational improvements. GFL is
one of Canada's largest remanufacturers of lumber, operating
several such facilities in Ontario.
-15-
To supply its two sawmills in Ontario, GFL holds a forest
management agreement (FMA) covering 720,000 hectares of forest
lands, with a term of 20 years subject to review every five years.
This agreement gives GFL access to a low cost fibre base. During
1997 the FMA was reviewed and extended to 2017. GFL purchases
logs from other suppliers and has a commitment to sell 135,000 m3
of logs annually to MB's North Superior OSB mill. During 1997 the
Ontario government increased stumpage fees by approximately $2 per
m3 to $15 per m3.
GFL marketing
GFL has three marketing distribution centres (DCs) in Ontario
and two in the US. A third US DC was closed in late 1997. In
addition to selling all of GFL's production, the DCs purchase
lumber and OSB from other suppliers for resale. In 1998 they sold
505 MMfbm of non-GFL produced lumber, 70 MMfbm lower than 1997.
GFL sells most of its lumber to the US. Page 28 of the Annual
Report includes a five year chart showing dimension lumber prices
and page 36 provides a discussion of the Canada/US Softwood Lumber
Agreement.
Cement-fibre roofing
- --------------------
On April 8, 1998, ACC, with an annual capacity of 280,000
squares of manufactured cement-fibre roofing materials, which
simulate the appearance of cedar shakes, was permanently closed.
ACC's board of directors decided to close the plant at Albany,
Oregon, after it became apparent there was no potential for future
earnings. At the end of 1996 MB wrote down its investment in this
facility as it had been incurring increased operating losses and
was no longer viewed as a core asset. At the end of 1997 MB's
remaining investment in ACC was written off. Pages 38 and 39 of
the Annual Report provide a discussion of claims and litigation
against ACC.
Transportation
- --------------
In late March 1997, the Company sold CTCo, a subsidiary which
owned five deep sea ships, for proceeds of $108 million. The sale
agreement included an exclusive contract to transport MB cargoes
to Japan and Europe until 2007. MB is no longer in the
transportation business.
DISCONTINUED OPERATIONS
Reference is made to Note 14 of the Financial Statements on
pages 56 and 57 of the Annual Report which shows the results of
discontinued operations until their sale in 1998, with comparative
full year figures for 1997 and 1996. Page 6 of this AIF shows a
five year summary of sales, net earnings and capital expenditures
for discontinued operations.
Paper
-----
Management's decision to sell Paper was based on the view that
shareholder value would be enhanced by exiting this business. In
April 1998, the paper business was sold for proceeds of $850
million, resulting in an after tax loss of $35 million.
Based in BC, MB's Paper business had six paper machines at two
large mills at Powell River and Port Alberni. They produced a
wide variety of newsprint and other groundwood printing paper
grades for newspapers, telephone directories, mail order
catalogues, advertising flyers and magazines. These products were
marketed throughout the world.
Medium Density Fibreboard
-------------------------
Management's decision to sell MB's two MDF mills was also the
result of the Strategy Review. Effective September 30, 1998, the
MDF business was sold for proceeds of $160 million, resulting in
an after tax loss of $138 million, $133 million of which was
accrued in 1997. Both mills were recently constructed, with one
located at Shippenville, Pennsylvania and the other at Pembroke,
Ontario.
-16-
GENERAL BUSINESS INFORMATION
Principal products and customers
- --------------------------------
Under the management approach for reporting its business
segments, MB's principal products cross several business segments
and the sales reported are not solely to external customers. Page
16 of the Annual Report provides a table showing MB's key product
sales to external customers. Products for which sales to external
customers exceeded 10% of MB's 1998 or 1997 consolidated sales
(continued and discontinued operations) were as follows:
1998 1997
------ ------
Continuing operations: MB produced lumber 19% 21%
Non-MB produced lumber 16% 20%
Corrugated containers 14% 12%
Discontinued operations: Newsprint and other groundwood
printing papers 6% 14%
Sales to any one customer during 1998 and 1997 did not exceed
10% of MB's consolidated sales.
Foreign exchange
- ----------------
A significant portion of MB's export sales are denominated in US
dollars or Japanese yen. Any change in the Canadian dollar
against the US dollar or Japanese yen affects the Canadian dollar
amounts realized. Reference is made to page 15 of the Annual
Report for recent exchange rate trends and effects on earnings and
sales and exchange sensitivities.
Investments
- -----------
MB accounts for its investments in joint ventures which are
included in each business segment using the proportionate
consolidation method.
Research and technology
- -----------------------
($ millions) 1998 1997
------ ------
Gross expenditures $ 5 $12
Less: recovered from Trus Joist MacMillan - 2
------ ------
Net $ 5 $10
====== ======
In 1998, as a result of the Strategy Review, the Company closed
the Burnaby, BC Research and Technology facility, where both wood
products and paper research had been conducted. In recent years
this group worked primarily with engineered lumber products and
paper products. With the disposition of the Paper business, most
of MB's research and technology expenditures are now spent
directly by TJM developing its engineered lumber products. MB's
development work, as necessary, is now undertaken at the
operations level.
-17-
Human resources
- ---------------
At December 31, 1998 MB (excluding joint ventures) employed
approximately 9,140 people. At the end of 1997 MB employed 13,070
people, 10,590 in continuing operations and 2,480 in discontinued
operations. At the end of 1998, 5,440 people were employed in
Canada, 3,100 in the US and 600 elsewhere (1997 -- 8,940; 3,540
and 590). As a result of the Strategy Review and the subsequent
disposal of its Paper and MDF operations and downsizing of its
continuing operations, MB's workforce decreased by 3,930 employees
in 1998. The combined impact of restructuring and downsizing
reduced MB's workforce by 1,450 people in continuing operations
and 2,480 in discontinued operations.
In BC, MB employs 3,370 people in logging and building materials
operations, 3,160 represented by IWA - Canada and 210 by the Pulp,
Paper and Woodworkers of Canada (PPWC). A three year agreement
with IWA Canada which covers MB's logging and sawmill operations
in BC expires June 14, 2000. The IWA agreement provides a 1% wage
increase in the first year and 2% increases in each subsequent
year. In January 1999, the PPWC contract, which expired
April 30, 1997, was renewed without labour interruption. The PPWC
agreement provides for no wage increase in the first year and 2%
increases in the second and third years. It expires April 30,
2000.
In Pine Hill, Alabama, MB employs 900 people. At the beginning
of 1999, the United Paperworkers International Union, the union
which previously represented MB's Pine Hill employees, and another
union merged to form the Paper, Allied-Industrial, Chemical and
Energy Workers Intl. Union (PACE.). A six year contract covering
400 Pulp and Paper employees expires in 2002. PACE also
represents another 330 employees at Pine Hill with a five year
agreement, which for Wood Products employees expires on August 25,
2000 and for Woodlands employees in 2003.
Environment
- -----------
In common with other companies in the forest products industry,
the operations of MB are subject to various environmental
protection laws and regulations.
In 1998 MB spent approximately $10 million on environmental
capital projects (1997 -- $122 million). In 1997 most large
environmental expenditures were related to the Paper business to
meet new air emission standards. In 1998 the Paper business was
sold and consequently environmental expenditures were
substantially reduced. With the disposition of the Paper
business, MB's main environmental focus is in forestry practices
and building materials and packaging manufacturing.
MB is committed to 100% compliance with the BC Forest Practices
Code (FPC) regulations which, as noted in the Solid Wood section,
have increased logging operating costs. The high cost of logging
and ensuing mill closures have recently become a concern to the
Government and a review process has been initiated to reduce
industry costs without undermining environmental protection
objectives.
MB also has a program to remove and destroy any remaining
residual quantities of PCB's as well as contaminated materials
from various properties.
Management believes that all of its continuing operations are
generally conforming with legislated environmental requirements.
In April 1998, the US Environmental Protection Agency published
the final version of the Cluster Rule. This rule, which affects
MB's Packaging operations, effectively tightened effluent
discharge limits as well as air emissions from all US pulp and
paper manufacturing facilities. Based on a Cluster Rule
engineering study, the Pine Hill, Alabama containerboard mill is
projected to require a total US$17 million dollar expenditure from
1999 through 2002 to meet these tighter requirements. The Cluster
Rule also requires the collection of additional non-condensable
gas sources by the year 2006. Additional funds will be needed to
achieve compliance with this portion of the Cluster Rule.
The Strategy Review in late 1997 included an environmental
assessment of each of MB's plants and sites and during 1998, each
area of possible concern was reviewed again. MB is not aware of
any significant near term remedial costs required to clean up
contaminated sites. To ensure that all operations conform with
legislated environmental requirements and MB policy, environmental
compliance audits are regularly conducted. Environmental
performance is also reported to the Health, Safety and Environment
Committee of the Board on a regular basis.
Energy
- ------
A significant portion of MB's energy requirements are self-
generated and the balance is purchased. In all cases MB's mills
are 100% self-sufficient in steam generation. In management's
opinion there is no threat that suitable sources will not be
available in the future.
The Pine Hill, Alabama power plant consists of two power boilers
and a recovery boiler that produce steam needed to drive two steam
turbine generators. Fuels consumed by these three boilers include
coal, hog fuel, heavy fuel oil, natural gas, tire derived fuel and
pulping liquors. The Henderson, Kentucky facility utilizes a
steam generating boiler to supply process steam. Additional
electrical power needs are supplied by purchasing electricity from
Alabama Power Company and from Henderson Municipal Power & Light.
-18-
SELECTED CONSOLIDATED FINANCIAL INFORMATION
Five year financial review
- --------------------------
($ millions except per share) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Sales $ 4,183 $ 4,521 $ 4,267 $ 4,327 $ 3,781
Operating earnings (loss) 104 (103) 88 430 408
Earnings (loss) from continued
operations 73 (121) 81 283 232
Loss from discontinued operations (31) (247) (30) (3) (51)
-------- ------- ------- ------- -------
Net earnings (loss) 42 (368) 51 280 181
Total assets 3,343 4,559 4,830 5,271 4,679
Long term debt (net of current portion) 917 1,053 884 934 1,012
Per common share ($)
Earnings (loss) from continued
operations
Basic .54 (1.00) .60 2.22 1.83
Fully diluted .54 (1.00) .60 2.10 1.77
Net earnings (loss)
Basic .29 (2.99) .36 2.20 1.42
Fully diluted .29 (2.99) .36 2.08 1.36
Cash dividends declared .20 .30 .60 .60 .60
Selected quarterly information
- ------------------------------
($ million except per share)
1998 Quarters 1997 Quarters
------------------------------- ---------------------------------
IV III II I IV III II I
---- ----- ---- --- ---- ----- ---- ---
Sales $ 965 $ 1,146 $ 1,082 $ 990 $ 1,067 $ 1,140 $ 1,219 $ 1,095
Earnings (loss)
from
continuing
operations (4) 77 (9) 9 (146) 11 6 8
Earnings (loss)
from
discontinued
operations 8 -- (46) 7 (205) (13) (11) (18)
Net earnings
(loss) 4 77 (55) 16 (351) (2) (5) (10)
Per common
share ($)
Earnings (loss)
from
continued
operations
Basic (.04) .60 (.08) .06 (1.18) .08 .04 .05
Fully diluted (.04) .56 (.08) .06 (1.18) .08 .04 .05
Net earnings
(loss)
Basic .02 .60 (.45) .12 (2.83) (.02) (.05) (.09)
Fully diluted .02 .56 (.45) .12 (2.83) (.02) (.05) (.09)
Dividends paid .05 .05 .05 .05 .05 .05 .05 .15
-19-
Dividends
During the past two years the Company declared the following dividends:
($ millions) 1998 1997
---- ----
Class B preferred shares
Series 8 1.2 1.0
Series 10 2.6 1.9
Common shares 24.8 37.3
On February 10, 1999 the Board of Directors declared a dividend
of $.05 per common share payable on March 18, 1999 to shareholders
of record on February 25, 1999. The Board of Directors also
declared the stated dividends on the preferred shares.
The Company has a dividend reinvestment plan. For more
information on the plan please contact Montreal Trust Company of
Canada at 1-800-660-5552.
The terms of issue of the Company's preferred shares prohibit
the declaration or payment of any dividends, other than stock
dividends in common shares, unless all accrued dividends on such
preferred shares have been paid or set apart for payment.
Dividends paid to US shareholders are subject to a 15% Canadian
non-resident withholding tax.
MANAGEMENT'S DISCUSSION & ANALYSIS
The MD&A is included in MB's 1998 Annual Report on pages 12 to
41. Since March 1, 1999, the date of the publication of the MD&A
in the Annual Report, and March 26, 1999, the date of this AIF,
the following events have occurred:
An agreement was reached between the BC Government and the
Company related to tenure expropriated for parks. The agreement
is discussed on page 9 of this AIF under the section British
Columbia forest land use.
US Customs has proposed to reclassify products previously
exempted from quota limitations. This development is discussed on
page 11 of this AIF under the section softwood lumber quota.
MARKET FOR SECURITIES
Montreal Trust Company of Canada (Vancouver, Calgary, Regina,
Winnipeg, Toronto, Montreal) and Bank of Nova Scotia Trust Company
of New York are the Company's transfer agents and registrars.
The Company's shares are listed on the following exchanges:
Common shares listed: Toronto, Montreal and Vancouver stock exchanges.
Common shares quoted: NASDAQ.
Class B preferred shares series 8 and 10 listings: Toronto,
Montreal and Vancouver stock exchanges.
Ticker symbols: Canadian stock exchanges -- MB; NASDAQ -- MMBLF
DIRECTORS AND OFFICERS
Excluding the common shares voting control of which is held by
TMI-FW, Inc., of which T.M. Taylor is President and sole
shareholder, the directors and officers of the Company as a group
beneficially owned 186,632 common shares on March 8, 1999. This
number, which includes qualifying shares of directors, represents
less than 1% of the principal amount of all common shares
outstanding. TMI-FW, Inc. has voting control over 12,612,223
common shares representing 10.44% of the number of issued and
outstanding common shares.
-20-
Directors
- ---------
On March 8, 1999 the name and municipality of residence of each
director of the Company, the date when each became a director and
the principal occupation of each during the past five years were
as follows:
Director Positions held
Name Address Since during past five years
- ---- ------- -------- ------------------------
J.T. Arnold West Vancouver, BC 1992 Senior Vice-President of
Tilbury Cement Limited
(cement and construction
materials).
D.C. Davenport West Vancouver, BC 1981 Vice-Chairman of the Board;
Partner of Davis & Company
(barristers and solicitors).
I.W. Delaney Toronto, Ontario 1996 Chairman of Sherritt
International Corporation
(nickel and oil producer).
R.F. Haskayne, O.C. Calgary, Alberta 1994 Chairman of the Board since
1996. Chairman of the Board
TransCanada PipeLines Limited
(pipelines and energy
services) since July 1998;
prior to which he was
Chairman of Nova Corporation
(pipelines and
petrochemicals).
D.L. Marshall Green Valley, 1996 Corporate director since
California 1998; prior to which he was
Vice-Chairman of The Pittston
Company (natural resources
and specialized
transportation services).
W.C. Minnick Boise, Idaho 1997 Chairman and Chief Executive
Officer of SummerWinds Garden
Centers, Inc. (retail garden
nurseries) since March 1998;
prior to which he was a
private investor and
President and Chief Executive
Officer of TJ International,
Inc. (engineered lumber
products); Director of the
Company 1993 to April 1996.
C.E. Ritchie, O.C. Don Mills, Ontario 1994 Corporate Director since
1995; prior to which he was
Chairman of the Board of
Directors of The Bank of Nova
Scotia (banking and financial
services).
J.St.C. Ross West Vancouver, BC 1990 Corporate Director.
W.T. Stephens Vancouver, BC 1997 President and Chief Executive
Officer since September 1997;
prior to which he was
President of Manville
Corporation.
D.W. Strangway, O.C. Vancouver, BC 1986 President and Chief
Executive Officer
of the Canada Foundation for
Innovation since April 1998;
prior to which he was
President of The University
of British Columbia
(educational institution).
-21-
Director Positions held
Name Address Since during past five years
- ---- ------- -------- -----------------------------
Directors (continued)
- ---------------------
T.M. Taylor Fort Worth, Texas 1997 President of Thomas M. Taylor
& Co. and TMI-FW, Inc.
(investment consulting).
J.S. Walton Victoria, BC 1988 Chairman and former
President of Endeavour
Financial Corporation
(corporate and financial
advisory services).
The term of each director expires on April 21, 1999, the date of
the Company's Annual General Meeting, when new directors will be
elected for the ensuing year. From among its members, the Board
appoints a number of committees with specific duties. The members
of the Audit Committee are D.L. Marshall (Chairman), J.T. Arnold,
C.E. Ritchie and J.S. Walton. There is no executive committee.
Officers
- --------
On March 8, 1999 the name and municipality of residence of each
officer of the Company and the principal occupation of each during
the past five years were as follows:
Positions held
Name Address during past five years
- ---- ------- ----------------------------
Executive Officers
- ------------------
W.T. Stephens Vancouver, BC President and Chief Executive
Officer since 1997; prior to
which he was President of
Manville Corporation.
R.K. Purchase West Vancouver, B.C. Executive Vice-President and
Chief Operating Officer since
November 1998; prior to which
he was President and Chief
Executive Officer of TimberWest
Trust (forest land holdings
trust).
R. Anderson Blaine, Washington Senior Vice-President,
Environment and Technology
since January 1998;
prior to which he was Senior
Vice-President, Science and
Technology, of Manville
Corporation.
F.V. Ernst Montgomery, Alabama Senior Vice-President,
Packaging Group and President,
MacMillan Bloedel Packaging Inc.
A.D. Laberge Vancouver, BC Senior Vice-President, Finance
since January 1998; prior to
which she was Vice-President,
Treasurer.
C.D. Neeser North Vancouver, BC Senior Vice-President, Solid
Wood Group.
C.G. Quintin West Vancouver, BC Senior Vice-President,
Distribution since 1996; prior
to which he was Vice-President,
Operations, Distribution Group
since 1995; prior to which he
was Vice-President and General
Manager, Western Canada of IBM
(information handling equipment,
services and systems).
Officers
- --------
T.L. Barber Prattville, Alabama Vice-President, Converting,
Packaging Group since 1997;
prior to which he was Vice-
President of Island Container
Inc. (containerboard and
packaging).
-22-
Positions held
Name Address during past five years
- ---- ------- -----------------------------
Officers (continued):
- --------
J.M. Beaman Toronto, Ontario Vice-President, Eastern
Operations, Solid Wood Group
since September 1998; prior to
which he was General Manager,
Alberni Specialties, Paper
Group.
W.N. Cafferata West Vancouver, BC Vice-President, Chief Forester.
Y.L. Coady Vancouver, BC Vice-President Environmental
Enterprise since January 1999;
prior to which she was
Vice-President, Environmental
Affairs.
J.F. Connor Nanaimo, BC Vice-President, Re-engineering,
Solid Wood Group since March
1999; prior to which he was
Vice-President, Woodlands.
J.W. Emerson Camden, Alabama Vice-President, Primary
Manufacturing, Packaging Group
since 1996; prior to which he
was Vice-President, Primary
Manufacturing, MacMillan
Bloedel Packaging Inc.
R.G. Ford North Vancouver, BC Vice-President, Business
Transformation - Finance since
January 1999; prior to which he
was Vice-President, Controller.
T.R. Holmes Nanaimo, BC Vice-President, Woodlands,
Solid Wood Group since March
1999; prior to which he was
General Manager, Woodlands.
G.H. Johncox Burnaby, BC Vice-President, Human Resources.
C.G. Kennedy North Vancouver, BC Vice-President, Tax and
Controller since January 1999;
prior to which he was Vice-
President, Taxation and Risk
Management since 1997; prior to
which he was Vice-President,
Taxation since 1995; prior to
which he was Director, Taxation.
C.J. Kimball North Vancouver, B.C. Vice-President, Information
Technology since October 1998;
prior to which she was self-
employed - Kimball Consulting
Group on contract to the
Company to work on Y2K and
information technology projects
since 1996; prior to which she
was Project Manager/Consultant
at Anderson Consulting
(consulting); prior to which
she was Project Manager at Epic
Data (high tech data
collection).
N.B. Kulla Vancouver, BC Vice-President and General
Counsel since 1995;
prior to which he was
Vice-President and General
Counsel of CBR Cement
Corporation (cement and
construction materials
manufacturer).
G.E. Mynett Vancouver, BC Corporate Secretary and
Associate General Counsel
since 1997; prior to
which he was Corporate
Secretary.
K.R. Young North Vancouver, BC Vice-President, Lumber
Manufacturing and Marketing
since 1997; prior to which he
was Vice-President, Cedar
Lumber.
-23-
ADDITIONAL INFORMATION
Reference is made to the section of the Company's 1998 Annual
Report entitled "Management's Discussion & Analysis" (MD&A) which
is incorporated herein by reference.
(1) The Company will provide to any Person, upon request to the
Corporate Secretary and Associate General Counsel of the Company:
(a) when securities of the Company are in the course
of a distribution pursuant to a short form prospectus or a
preliminary short form prospectus has been filed in
respect of a distribution of its securities,
(i) one copy of the AIF of the Company, together
with one copy of any document, or the pertinent pages of
any document, incorporated by reference in the AIF,
(ii) one copy of the comparative financial
statements of the Company for its most recently
completed financial year together with the accompanying
report of the auditor and one copy of any interim
financial statements of the Company subsequent to the
financial statements for the Company's most recently
completed financial year,
(iii) one copy of the management proxy circular
(or information circular) of the Company in respect of
its most recent annual meeting of shareholders that
involved the election of directors or one copy of any
annual filing prepared in lieu of that proxy/information
circular, as appropriate, and
(iv) one copy of any other documents that are
incorporated by reference into the preliminary short
form prospectus or the short form prospectus and are not
required to be provided under (i) to (iii) above; or
(b) at any other time, one copy of any other
documents referred to in (1) (a) (i), (ii) and (iii)
above, provided the Company may require the payment of a
reasonable charge if the request is made by a Person who
is not a security holder of the Company.
(2) Additional information including directors' and
officers' remuneration and indebtedness, principal holders of
the Company's securities, options to purchase securities and
interests of insiders in material transactions, where
applicable, is contained in the Company's management proxy
circular (information circular) for its most recent annual
meeting of shareholders that involved the election of
directors, and that additional financial information is
provided in the Company's comparative financial statements
for its most recently completed financial year.
Copies of the above documents will be provided to security
holders of the Company upon request to the Corporate Secretary and
Associate General Counsel at the Company's head office: 2nd
Floor, 925 West Georgia Street, Vancouver, British Columbia, V6C
3L2. Telephone numbers: (604) 661-8310 or (604) 661-8302; fax
number: (604) 687-2314.
-24-
GLOSSARY OF TERMS
PRODUCTS
Solid Wood
High value/quality cedar -- numerous grades of specialty products
lumber products including bevel siding, channel siding,
tongue and groove products (suitable for
panelling) and patio grades for decking
High value/quality whitewood -- high value lumber extracted from hemlock,
lumber products balsam, spruce and fir logs to achieve the
maximum value for specific customers and
export markets. A significant volume of this
lumber is remanufactured locally for further
reprocessing into higher value products
such as window and door components
Custom cut lumber -- high value lumber manufactured in non-
traditional methods at non MB mills
Dimension lumber -- lumber cut and planed to standard sizes and
lengths nominally 2 X 4 inches through
2 X 12 inches in cross section by 8 to 24
feet in length
Panelboards
Panelboards -- plywood, OSB and particleboard
Oriented strandboard (OSB) -- a structural panelboard made by bonding
under heat and pressure, large thin wafers
of wood which are "oriented" in
perpendicular layers. The result is a
strong, water-resistant panel ideal for
wall and roof sheathing, sub-flooring and
underlayment
Particleboard -- a product made by bonding clean sawdust and
planer shavings with wax and resin to
produce a panel with surface consistency
ideal for overlaying and subsequent
manufacturing into shelving and cabinet
components, furniture and other industrial
components and underlayments
Specialty board -- a product using particleboard with either
melamine, vinyl or paper overlays
Engineered lumber
Engineered lumber -- a high quality substitute for the
structural lumber traditionally obtained
from large diameter trees, including
structural framing and industrial products.
Specific products manufactured by Trus
Joist MacMillan are Parallam(r),
TimberStrand(r), Microllam(r) and
TJI(r)-joists
Microllam(r) -- laminated veneer lumber made from
sheets of veneer peeled from second-growth
trees and used for headers, beams and high
quality flanges for TJI(r)-beam joists
Parallam(r) -- parallel strand lumber headers, beams,
columns and posts made from 8 foot
(3 metre) veneer strands taken from small-
diameter, second-growth trees which are
bonded through a patented microwave
pressing process into a variety of large
sizes suitable for heavy load bearing
applications
TimberStrand(r) -- laminated strand lumber manufactured from 12
inch (300 mm) strands of wood to create
create strong, stable lumber for both
industrial and structural use. It uses fibre
from formerly non-commercial species such as
as aspen and poplar
TJI(r)-joists -- Wooden members made of two pieces of
laminated veneer lumber held together with
a web of oriented strandboard (OSB), used
as a support for a ceiling or floor. Used
as a substitute for wide dimensional lumber
-25-
GLOSSARY OF TERMS
PRODUCTS (continued)
Packaging
Containerboard -- linerboard and corrugating medium (medium)
used to produce corrugated containers
Corrugated containers -- boxes made with medium corrugated (fluted)
between sheets of linerboard
Sheet plants -- plants that purchase sheets from corrugator
plants to manufacture corrugated containers
Sheet feeder plants -- corrugator plants that exclusively
manufacture containerboard for supplying
sheets to corrugated container plants
SpaceKraft(r) -- a recyclable intermediate bulk container
for transporting and storing liquid foods
and non-hazardous chemicals. It is a
continuously wrapped, eight-ply corrugated
sleeve which has no manufacturer's joint,
no wood or metal components, and can
withstand more than 40,000 pounds of
compression
Discontinued operations
Medium density fibreboard -- a panel product made from a combination
(MDF) of resin, wood chips and sawdust/shavings.
MDF has a very fine surface and can be
edge machined, moulded, shaped, painted or
glued, and is well suited for furniture
manufacturing and millwork
Newsprint -- paper produced principally from mechanical
pulp or chemi-thermomechanical pulp for use
in newspapers
Groundwood printing paper -- paper with mechanical pulp as its major
component including newsprint as well as
other grades with higher brightness and
smooth surface characteristics
MEASUREMENTS
Units
fbm -- foot board measure (board foot) -- one
square foot of lumber one inch thick
hectare -- 2.471 acres
m3 -- cubic metre or 35.315 cubic feet
k m3 -- thousand cubic metres
Mfbm (MMfbm) -- thousand (million) foot board measure
mm -- millimetre
Msq.ft. 3/8" (MMsq.ft. 3/8") -- thousand (million) square feet, 3/8 inch thick
tonne -- metric ton -- 1,000 kilograms or 2,204 pounds
k tonnes -- thousand tonnes
Capacities
allowable annual cut (AAC) -- the average volume of timber which the holder
of a tree farm licence, forest licence or
timber sales licence from the Province of BC
may harvest annually under the licence in a
five year cut control period
available annual cut -- the volume of timber available to harvest
annually from government regulated forests
plus the planned harvests from MB owned
forests
annual productive capacity -- the number of units which can be produced in
a year based on operations over a long term
period with the normal number of shifts and
maintenance interruptions
capacity utilization or -- production divided by the annual capacity
operating rate averaged over the production period
-26-
CORPORATE ABBREVIATIONS
The Company -- MacMillan Bloedel Limited as a corporation
(parent company, and includes BC Solid Wood
operations)
MB or MacMillan Bloedel -- MacMillan Bloedel Limited and its
subsidiaries and proportionate share of
joint ventures (when MB is used it may
refer to the Company, any subsidiary or
combination thereof)
ACC -- American Cemwood Corporation (closed April 8, 1998)
(cement-fibre roofing operation in Oregon)
CTCo -- Canadian Transport Company Limited (MB sold in
1997)
(worldwide deep sea shipping/transportation)
Eagle -- Eagle Forest Products Limited Partnership (MB
owns 70%, 90% in January 1999)
(OSB mill in New Brunswick)
GFL -- Green Forest Lumber Limited (on January 1,
1999 Green Forest Lumber Corporation and its
subsidiaries were amalgamated into Green Forest
Lumber Limited)(Ontario lumber producer and
eastern North American lumber/OSB marketer)
MacBath -- MacMillan Bathurst Limited Partnership (MB
owned 50% until sold in August 1998)(Canadian
corrguated container manufacturer)
MBBM -- MacMillan Bloedel Building Materials
(North American building material
distribution centres)
MG -- MacMillan Guadiana, S.A. de C.V. (MB owns 95%)
(Mexican building materials manufacturer)
MBPI -- MacMillan Bloedel Packaging Inc.
(US packaging operations)
MBKK -- MacMillan Bloedel K.K.
(Japanese marketing subsidiary; mainly sells
MB produced lumber)
North Superior -- MacMillan Bloedel North Superior Forest
Products Limited Partnership
(MB owns 100%) (formerly Jager Strandboard
Limited Partnership)
(OSB mill in Ontario)
Saskfor MacMillan -- Saskfor MacMillan Limited Partnership (MB owns
50%)
(OSB, plywood and lumber mills in
Saskatchewan)
TJM -- Trus Joist MacMillan, a Limited Partnership
(MB owns 49%)
(engineered lumber manufacturer and
marketer)
-27-
EXHIBIT 2 (a)
- -----------------------------------------------
Management's Discussion & Analysis
Financial Summary
---------------- ------------- ------- -------------
Change Change
($ millions) 1998 1997 1998 vs. 1997 1996 1997 vs. 1996
- -------------------------------------------------------------------------------
Sales $4,183 $4,521 $(338) $4,267 $ 254
- -------------------------------------------------------------------------------
Operating earnings
restructing and other
unusual charges 182 98 84 130 (32)
Restructuring and
other unusual charges (78) (201) 123 (42) (159)
- -------------------------------------------------------------------------------
Operating earnings (loss) 104 (103) 207 88 (191)
Other income 138 63 75 104 (41)
Debt retirement costs (42) -- (42) -- --
Interest expense (108) (98) (10) (102) 4
- -------------------------------------------------------------------------------
92 (138) 230 90 (228)
Income tax (expense)
recovery (19) 17 (36) (15) 32
After tax earnings of
affiliates -- -- -- 6 (6)
- -------------------------------------------------------------------------------
Earnings (loss) from
continuing operations 3 (121) 194 81 (202)
Loss from discontinued
operations (31) (247) 216 (30) (217)
- -------------------------------------------------------------------------------
Net earnings (loss) $ 42 $ (368) $ 410 $ 51 $ (419)
- -------------------------------------------------------------------------------
The Management's Discussion and Analysis (MD&A) should be read in
conjunction with the consolidated financial statements and accompanying
notes. Reference is particularly made to the Consolidated Statement of
Earnings on page 45 and Note 21 which report financial information
about MB's earnings, business and geographic segments for 1998, 1997
and 1996. As in the notes, "MacMillan Bloedel" or "MB" means MacMillan
Bloedel Limited and its subsidiaries and proportionate share of joint
ventures and "Company" means MacMillan Bloedel Limited as a
corporation.
In the fourth quarter of 1997 an intensive business review and
assessment (Strategy Review) took place following the appointment of
the Company's new President and Chief Executive Officer. This Strategy
Review resulted in several actions being taken during 1998: MB's
workforce was considerably reduced, costs were lowered, the Paper and
Medium Density Fibreboard (MDF) businesses were sold, and continuing
operations were restructured with a focus on improved profitability.
The costs associated with these actions were largely provided for in
1997.
As a result of the divestiture plans announced at the beginning of
1998, MB's financial statements were divided into two distinct
components: continuing operations and discontinued operations.
Continuing operations include Solid Wood, Engineered Lumber,
Distribution, Packaging, Green Forest Lumber ("GFL") and Panelboards
(including oriented strandboard (OSB)). Discontinued operations include
Paper and MDF. For a description of each continuing business segment
see Note 21 to the financial statements on page 61.
12 MacMillan Bloedel Limited 1998 Annual Report
- -----------------------------------------------
Management's Discussion & Analysis
1998 Consolidated Results Compared with 1997
NET EARNINGS OVERVIEW
MB reported net earnings of $42 million ($.29 per share) for 1998
compared with a net loss of $368 million ($2.99 per share) for 1997. As
a result of the Strategy Review significant unusual charges were
recorded in 1997 relating to the disposition of discontinued operations
in 1998 as well as for restructuring and other unusual items. The $84
million improvement in operating earnings before restructuring and
other unusual charges resulted from much higher OSB prices and improved
containerboard prices which more than offset lower Solid Wood results.
Earnings from Solid Wood were adversely affected by the economic crisis
in Japan, where historically the Company has sold approximately half of
its whitewood lumber. Overall, changes in key foreign currencies
favourably impacted 1998 earnings. (See exchange on page 15.)
The $78 million pre-tax charge for restructuring and other unusual
items recorded against 1998 earnings is comprised of a $63 million
provision for funding a subsidiary company's estimated working capital
requirements associated with the administration and resolution of
roofing product claims and a $15 million restructuring charge for
employee severance and other costs associated with cost reduction
initiatives under way in the Solid Wood divisions and administrative
functions. This restructuring is expected to be completed by mid-1999.
The $201 million pre-tax charge against 1997 results from continuing
operations comprised $145 million for restructuring costs and $56
million for other unusual charges. The restructuring costs, a
consequence of the Strategy Review in late 1997, included $69 million
related to severance costs for approximately 1,400 employees and $60
million for the write-down of specific investments and capital assets
to their estimated realizable value. These assets included various
sawmill, panelboard and forestry operations, research and development
facilities and MB's remaining investment in American Cemwood ("ACC"), a
cement-fibre roofing operation. The other unusual charges against
operating earnings were primarily related to a provision for funding
ACC's working capital requirements, including its product claims.
Other income increased $75 million in 1998 reflecting the $98 million
($67 million after tax) gain on the sale of the Company's 50%
partnership interest in MacMillan Bathurst ("MacBath") which exceeded,
by approximately $54 million, the pre-tax gain realized on the sale of
MB's transportation, log towing and barging operations in 1997. During
1998 investment income also increased reflecting the cash proceeds from
dispositions.
One of the goals for 1998 was to use the proceeds from the sale of non-
core businesses to pay down debt. During 1998, $906 million of debt was
repaid, including $566 million of long term debt retired prior to
maturity and $237 million specifically related to the discontinued MDF
operations. The $42 million cost of the early debt retirement program
will be recouped through reduced future interest payments. With the
majority of the debt repaid in late 1998 and a significant portion of
debt being allocated to discontinued operations throughout 1997, the
reported interest expense relating to continuing operations for 1998
was not reduced. However, when comparing total interest cost for both
continuing and discontinued operations, interest expense decreased $18
million.
Page 30 of this MD&A includes a discussion of the discontinued
operations comparing the net loss of $31 million in 1998 with the net
loss of $247 million in 1997.
MacMillan Bloedel Limited 1998 Annual Report 13
- -----------------------------------------------
Management's Discussion & Analysis
OPERATING EARNINGS OVERVIEW
----------------------------
($ millions) 1998 1997 Change
- -----------------------------------------------------------------------
Solid Wood $ 14 $ 108 $ (94)
Engineered Lumber 62 52 10
Distribution 9 9 --
Packaging 71 22 49
All Other (includes OSB, GFL and other
panelboard operations) 80 5 75
- -----------------------------------------------------------------------
Total business segments 236 196 40
Corporate (58) (70) 12
Inter-segment 4 (28) 32
- -----------------------------------------------------------------------
Operating earnings before restructuring
and other unusual charges $ 182 $ 98 $ 84
- -----------------------------------------------------------------------
Solid Wood
Earnings decreased $94 million reflecting significantly lower whitewood
lumber prices and shipments resulting from the severe downturn in the
Japanese market. Logging operations' results were lower but they
remained profitable. A significant reduction in operating costs
mitigated the negative variance.
Engineered Lumber
Earnings rose $10 million and included a favourable exchange
translation. Trus Joist MacMillan ("TJM") continued to make a
significant contribution bolstered by the strong housing construction
market in 1998.
Distribution
Earnings in 1998 remained unchanged at $9 million despite a 15%
reduction in sales. During 1998 there was a significant strategic shift
away from low margin non-MB produced commodity building material
products.
Packaging
Earnings increased $49 million reflecting higher containerboard prices
as well as the impact of lower costs for recycled corrugated containers
and a favourable foreign exchange translation.
All Other
Earnings from MB's other businesses increased $75 million due to higher
OSB prices. GFL earnings in 1998 were similar to 1997, with lower
lumber prices offset by reduced costs.
Corporate and inter-segment
Lower corporate costs increased operating earnings by $12 million.
Corporate overhead savings would have been even greater with the
significant reduction in workforce had there not been consulting costs
related to the Company's restructuring program. Results in 1997 were
negatively impacted by the write-off of unutilized investment tax
credits. Both years included a foreign exchange loss, with 1998
marginally greater than 1997. (See exchange on the opposite page.)
The $32 million favourable effect on earnings reported for inter-
segment was primarily the result of a significant write-down in 1997 of
pulp logs harvested by Solid Wood and sold to Paper.
14 MacMillan Bloedel Limited 1998 Annual Report
- -----------------------------------------------
Management's Discussion & Analysis
Exchange
Overall, exchange had a favourable impact on earnings in 1998.
Comparing average 1998 exchange rates to 1997, the Canadian dollar was
approximately 7% weaker than the US dollar and 1% stronger than the
Japanese yen. It is estimated that MB's 1998 operating earnings
increased approximately $25 million due to changes in key foreign
currencies, after taking into account foreign exchange currency
hedging, which is reported in Corporate operating earnings.
In 1998 MB's sales by US operations in Packaging, Distribution and
Engineered Lumber when translated into weaker Canadian dollars
increased $143 million. However, from an earnings perspective, most of
that increase was offset by the translation of cost of sales into
Canadian dollars. Overall, exchange translations increased MB's
consolidated 1998 sales by $175 million.
Comparative line chart of Exchange Rates, US$/Cdn$ and JPN Yen/US$, for
1994 - 1998
Earnings sensitivities
MB's earnings are sensitive to fluctuations in product prices and
currency exchange rates. Based on 1998 production and annual productive
capacity at December 31, 1998, changes in prices and exchange rates
affect after tax earnings as follows:
--------------------------
Approximate annual
effect on net earnings
--------------------------
at 1998 at full
production capacity
- -----------------------------------------------------------------------------
Price sensitivity ($ millions)
Lumber - $10 change per Mfbm (excludes Custom Cut) 5 6
Logs and chips (1) - $10 change per cubic metre 22 N/A
Oriented strandboard (2) - $10 change
per Msq. ft. 3 /8" 4 5
Containerboard - $10 change per tonne 6 6
- -----------------------------------------------------------------------------
---------------------------------
Based on 1998 sales levels for
continuing operations
- --------------------------------------------------------------------------------
Exchange sensitivity (3)
Canadian dollar/US dollar - change of Cdn $.01 2
Canadian dollar/Japanese yen - change of one Japanese yen 2
- --------------------------------------------------------------------------------
(1) This sensitivity shows the effect had all MB produced pulp log and
chip sales in 1998 been external to MB even though until April 30, 1998
logs and chips were sold to MB's discontinued Paper business, which was
effectively sold at that time. GFL sawmill produced chips are also sold
to third parties.
(2) Includes proportionate share of joint ventures.
(3) Assumes no forward exchange contracts used to hedge the exposure to
rate changes. These sensitivities only relate to net inflow of foreign
currencies into Canada and are not related to the translation of
profits from foreign operations into Canadian dollars
MacMillan Bloedel Limited 1998 Annual Report 15
- -----------------------------------------------
Management's Discussion & Analysis
SALES OVERVIEW
While operating earnings in 1998, before unusual charges and corporate
and inter-segment items, increased $40 million, the sales generating
those earnings declined $338 million. This reduction reflects the
decrease of non-MB produced building materials, notably commodity
lumber and panelboard products on which profit margins are considerably
lower. The decrease in sales would have been much more dramatic had
there not been the favourable effect from the translation of US dollar
sales into Canadian dollars. Prices (before exchange) for all MB
produced products, except for lumber and logs, were higher. Sales
volumes of MB produced lumber and corrugated containers were lower.
Lumber was affected by the poor Japanese market and corrugated
container volumes by the sale of MacBath.
------------------ ----------------------------------------
Sales Change attributable to:
($ millions) 1998 1997 Change Price(1) Volume(2) Other(3) Exchange(4)
- -------------------------------------------------------------------------------
Sales by business
segment
Solid Wood $1,030 $1,329 $ (299) $ (134) $ (175) $ (6) $ 16
Engineered Lumber 565 479 86 48 38
Distribution 1,459 1,718 (259) 22 (361) 11 69
Packaging 1,095 1,009 86 77 (54) 3 60
All Other(5) 620 635 (15) (2) (17) (23) 27
Inter-segment(6) (586) (649) 63 13 110 (25) (35)
- -------------------------------------------------------------------------------
$4,183 $4,521 $ (338) $ (24) $ (497) $ 8 $ 175
- -------------------------------------------------------------------------------
Key product sales external to MB
Lumber - MB
produced $ 853 $1,079 $ (226) $ (119) $ (135) $ $ 28
Logs and chips(6) 284 199 85 (16) 101 --
Engineered lumber
- TJM produced 601 496 105 68 37
Panelboards - MB
produced 314 228 86 45 26 15
Non-MB produced
building
materials 1,080 1,489 (409) (12) (409) (30) 42
Containerboard 321 255 66 43 3 20
Corrugated
containers 627 623 4 33 (60) 31
Other 103 152 (49) 2 (23) (30) 2
- -------------------------------------------------------------------------------
$4,183 $4,521 $ (338) $ (24) $ (497) $ 8 $ 175
- -------------------------------------------------------------------------------
(1) Price (removing foreign exchange component) - Lumber prices for
almost all grades were significantly lower reflecting the Asian crisis
and oversupply in North America. OSB prices soared in 1998 from their
depressed levels in 1997. Average 1998 prices for containerboard and
corrugated boxes were higher than 1997 reflecting price increases in
the last half of 1997 and early 1998. The effect on earnings of product
price changes is summarized in the earnings sensitivities section on
the previous page.
(2) Volume - During 1998 MB's strategy was to reduce the volume of low
margin non-MB produced lumber and panelboard commodity products sold by
Distribution. Solid Wood's BC lumber shipments to Japan were
significantly lower than 1997. Containerboard volumes were higher than
1997 due to moderately shorter market closures in 1998. Corrugated
container sales were lower in 1998, reflecting only eight months sales
for MacBath which was sold August 31, 1998. Higher MB produced
panelboard shipments reflected the strong OSB market. Log and chip
sales external to MB were higher reflecting the sale of MB's
discontinued Paper operations (see note 6 on the opposite page) and
increased export log sales.
16 MacMillan Bloedel Limited 1998 Annual Report
- -----------------------------------------------
Management's Discussion & Analysis
(3) Other - Items which have not been analyzed as to price and volume
changes include sales of engineered lumber produced by TJM and sold by
Distribution and MBKK, revenue from transportation operations (sold
during 1997) and sales of allied products by Distribution.
(4) Exchange - Represents 1998 sales denominated in foreign currencies
multiplied by the difference between the average 1998 and 1997 exchange
rates.
(5) All Other - OSB, GFL and other panelboard operations.
(6) Inter-segment and log and chip sales - Inter-segment sales are
transacted at market values. Inter-segment sales eliminated logs and
chips sold by Solid Wood to MB's discontinued Paper operations through
April 30, 1998 which amounted to $24 million in 1998 and $109 million
in 1997. Since May 1, 1998 these transactions have been reported as
sales to external parties. Other inter-segment eliminations include
sales of MB produced lumber and panelboards and TJM engineered lumber
to Distribution. TJM engineered lumber and MB produced panelboards sold
to Distribution increased while Solid Wood lumber sales to Distribution
decreased in 1998.
Export sales
In 1998 MB's export sales from continuing Canadian operations were
approximately $1 billion, or 25% of total consolidated sales, down
approximately $200 million from 1997, with 56% going to the US and 30%
to Japan, and the balance spread over numerous markets worldwide. In
1997 50% went to the US and 33% to Japan. Exports from US operations in
both years were approximately US$100 million, most of which were to
Latin America, Europe and Canada.
------------------------------------------
Total Canada US Japan Other
- -----------------------------------------------------------------------------
MB produced sales to third parties
BC lumber 1998 656 21% 30% 35% 14%
(MMfbm)(1) 1997 781 17% 30% 37% 16%
1996 791 18% 25% 42% 15%
Oriented strandboard (OSB) 1998 726 11% 89% -- --
(MMsq.ft. 3 /8")(1,2) 1997 657 14% 85% -- 1%
1996 209 21% 78% 1% --
Containerboard 1998 635 10% 64% -- 26%
(k tonnes)(3) 1997 629 15% 60% -- 25%
1996 589 19% 56% -- 25%
Other(4)
- -----------------------------------------------------------------------------
(1) These consolidated sales differ from sales by business segments which
include inter-segment sales.
(2) Includes MB's proportionate share of joint ventures.
(3) Excludes sales to MB's US packaging plants and 50% of the sales to
MacBath's Canadian packaging plants until its sale on August 31, 1998.
(4) Sales of all other MB manufactured products by continuing operations
and sold to customers not in Canada and the US, not included in this
table, increased to approximately $105 million from $51 million in
1997. They mainly comprised logs exported to Japan and particleboard
sold in Latin America.
Sales by producer
During 1998 sales of products manufactured by MB's continuing
operations accounted for 53% of MB's consolidated sales, up from 49% in
1997. Products, mainly building materials, purchased from other
suppliers for resale accounted for 26% of consolidated sales, which was
considerably lower than previous years. MB's proportionate share of
sales made by joint ventures increased to 21%.
MacMillan Bloedel Limited 1998 Annual Report 17
- -----------------------------------------------
Management's Discussion & Analysis
RESULTS BY BUSINESS SEGMENT
Solid Wood
Bar chart showing Solid Wood Operating Earnings 1994 - 1999
Line chart showing Industry Lumber Prices (US$/Mfbm) 1994 -1998
(Source: Random Lengths)
The severe economic downturn in Japan was the main reason for the $94
million decrease in Solid Wood's earnings which dropped to $14 million.
Earnings were also affected by lower logging profits. Sales decreased
$299 million to $1,030 million reflecting a significant drop in
whitewood prices and shipments to Japan. Sales also declined due to
lower non-MB produced sales by MBKK, the Company's Japanese marketing
subsidiary, and lower chip sales volumes reflecting reduced sawmill
production.
-------------------- -----------------------------
Sales Change attributable to:
($ millions) 1998 1997 Change Price Volume Other Exchange
- -------------------------------------------------------------------------------
MB BC produced
- - Lumber $ 669 $ 912 $ (243) $(119) $ (140) $ $ 16
- - Logs(1) 225 185 40 (19) 59 --
- - Chips(1) 32 30 2 2 -- --
Other(2) 104 202 (98) 2 (94) (6) --
- -------------------------------------------------------------------------------
$1,030 $1,329 $ (299) $(134) $ (175) $ (6) $ 16
- -------------------------------------------------------------------------------
(1) Includes sales to MB's discontinued Paper operations. (See note 6 on
page 17.)
(2) Mainly non-MB produced industrial wood products sold by MBKK in Japan
as well as non-MB produced logs, chips and lumber sold in BC. (See note
2 on the opposite page.)
18 MacMillan Bloedel Limited 1998 Annual Report
- -----------------------------------------------
Management's Discussion & Analysis
Woodlands
Earnings from BC logging operations were 31% lower in 1998 than 1997
despite substantial cost reductions through co-design/co-management, a
process which involves both union and non-union employees working
together to develop a new approach to work practices. Although pulp log
prices moderately improved and prices for sawlogs sold to third parties
were similar in both years, the price of high grade whitewood logs sold
to Solid Wood's sawmills decreased. The weak Japanese lumber market
impacted both log values and volumes.
Logging costs in 1998 decreased approximately $17 per cubic metre
following a cumulative per cubic metre increase of $23 since 1994. That
increase was largely due to the implementation of the BC Forest
Practices Code (FPC) and increased stumpage and royalty rates. Of the
$17 decrease, $5 resulted from the BC Government's $8.10 reduction in
stumpage rates effective June 1, 1998. There was also a significant
decline in road expense, resulting from fewer kilometres of road built
and improved cost per kilometre. The co-design/co-management process
resulted in improved productivity and lower direct logging costs.
Overhead costs were also reduced.
Line chart showing Industry Log Prices - BC Coast ($ per cubic metre)
Prices charted: Western Red Cedar sawlog; Hemlock sawlog; Hembal
pulp log
Source: Revenue Branch Ministry of Forests
Costs were further decreased since a greater percentage of the harvest
in 1998 came from Company owned lands. In 1998 logs harvested from
these private lands increased 409,000 m 3 from 1997. During early 1998,
winter logging was curtailed due to sawmill shutdowns. In addition
August and September 1998 were particularly difficult months for
logging due to extreme fire hazard conditions.
In 1998 the Company exported 6% of its log harvest to Japan, favourably
impacting sales by $56 million, as log exports were minimal in 1997.
Also in 1998 Solid Wood imported almost 200,000 m3 (the equivalent of
4% of its harvest) of pulp logs to meet fibre commitments to pulp and
paper companies.
Following are MB's allowable annual cut in BC, the Company's logs
harvested and consumed and logs and chips (fibre) purchased and sold in
1998, 1997 and 1996:
----------------------
Thousand cubic metres (k m3) 1998 1997 1996
- -------------------------------------------------------------------------------
Allowable annual cut (AAC)(1) 5,600 5,900 6,000
Logs harvested - Crown lands 3,612 4,203 4,763
- private lands 1,454 1,045 953
Logs consumed in Company sawmills (includes Custom Cut) 2,847 2,875 3,379
Logs purchased(2) 1,095 1,393 760
Logs sold(2) 3,455 2,859 2,984
Chips purchased(2) 651 986 1,106
Chips sold (including produced from Company sawmills
and logs chipped)(2) 1,634 2,165 2,345
- -------------------------------------------------------------------------------
(1) AAC is the volume of timber MB is allowed to harvest annually from
government regulated forests. MB controls 843,000 hectares of such
commercial Crown forest lands in BC. The Company also owns 223,000
hectares of commercial private forest lands in BC.
(2) The Company purchases and sells fibre to supply the best grade and
species mix for MB's sawmills and to meet supply commitments to pulp
and paper companies. MB's BC produced log and chip sales were 3,873
k m3 in 1998 and 3,711 k m3 in 1997.
MacMillan Bloedel Limited 1998 Annual Report 19
- -----------------------------------------------
Management's Discussion & Analysis
VARIABLE RETENTION LOGGING (FOREST PROJECT) In June 1998, the Company
announced a major initiative (the Forest Project) to increase
conservation of old growth forest and replace clearcutting over a five
year period with a more ecologically driven approach through the
adoption of a system of stewardship zones, and the introduction of
variable retention harvesting and silviculture systems. This change is
to be implemented in ways that will enable the Company to be certified
under any of the private systems currently emerging for forest
certification, alleviating the pressure by environmentalists,
particularly in Europe, of possible international boycotts aimed at
ending the use of products made from BC's old growth forests. The
Forest Project analysis concluded that MB could increase the overall
conservation of old growth with a neutral impact on employment and
costs by pursuing a strategy that focuses on conservation and retention
of old growth in more contiguous, undeveloped areas, while
concentrating commercial operations in second growth and already
significantly logged old growth areas in a manner that emphasizes value
over volume. MB's new harvest strategy stresses economic margin rather
than harvest volume. The Company's experience thus far indicates that
MB will be able to offset additional costs with technological
innovation and improved performance.
Lumber
WHITEWOOD Total whitewood (hemlock and fir) lumber shipments in 1998
from the Company's mills on the West Coast of BC were 367 MMfbm, 47
MMfbm lower than 1997. This decrease was due to the economic crisis in
Asia. Shipments to Japan, Solid Wood's largest market, were down 56
MMfbm or 21%. The sharply lower demand for lumber in Japan and South
East Asia resulted in producers redirecting shipments to the robust US
building materials market which was benefiting from low mortgage rates
and a healthy economy. US housing starts were the highest in more than
ten years. For MB's whitewood mills, significant redirection to the US
market was not possible due to quota limitations under the Canada/US
Softwood Lumber Agreement. Quotas were based on historical company
sales into the US market, and the quota for MB's whitewood mills was
limited, as was the case for most BC coastal mills, since their
products had been primarily directed to Japan.
As a result of the weak market in Japan and limited access to the US,
the Alberni Pacific ("APD") and Island Phoenix ("IPD") whitewood mills
took market shutdowns in early October 1997 and were completely shut
down from late November 1997 until mid-February 1998. They then started
up on a one shift basis after new manning levels and cost targets had
been developed by the employees involved in the co-design/co-management
process. In April 1998 after the first shifts reached their targets, a
second shift was added at each of these mills. In October 1998, IPD
took a three week market shut due to a log shortage and US softwood
lumber quota restrictions. Since mid-December 1998 IPD has been shut
down due to the high cost of logs harvested on Crown lands. It is
expected to start up in April 1999 once the cost issues have been
addressed. Production during the first half of 1997 was also curtailed
as the two whitewood mills took a combined ten weeks market downtime to
control inventory levels. Throughout 1998, as in 1997, the Chemainus
mill, which cuts much larger logs for very high grade lumber, continued
to run three shifts.
20 MacMillan Bloedel Limited 1998 Annual Report
- -----------------------------------------------
Management's Discussion & Analysis
Compared to 1997, 1998 average whitewood lumber prices were down
approximately 23% in Canadian dollars. In early 1997 lumber prices in
Japan reached their highest level in several years. In the spring of
1997 the Japanese market became oversupplied and this situation,
together with a volatile yen, caused pricing instability. Following a
consumption tax increase in April 1997, the Japanese market experienced
a significant slowdown. Consequently whitewood lumber prices began to
slide and until mid-1998 dropped sharply as the economic situation in
Japan further deteriorated. Since then, prices have bottomed as
inventories became balanced and the yen strengthened.
MB's whitewood sales strategy in Japan has been to develop more
specialized products and build brand loyalty with a growing customer
base. As a result of the current Japanese downturn and the expectation
that the Japanese economy will take two or three years to recover,
Solid Wood has undertaken major restructuring efforts to lower costs
and increase value. Other initiatives include accessing new markets,
strongly lobbying the BC Government to lower the very high cost of
logging and proposing tenure system reforms to implement a market
driven basis for harvesting timber from Crown lands.
In 1998 the Company shipped approximately 76 MMfbm of BC remanufactured
whitewood, including kiln dried products, compared to 91 MMfbm in 1997.
WESTERN RED CEDAR (WRC) The 1998 WRC sales volume of 214 MMfbm from
MB's three BC mills was down 55 MMfbm from 1997. WRC markets,
particularly in the US where the Company sells most of its WRC
products, remained strong. Average prices in Canadian dollars increased
approximately 7%, but were slightly lower in US dollars. While
availability of premium timber is diminishing, the demand for high
value WRC clear and appearance products continues to be strong.
However, in 1998 the general oversupply in the US market for all lumber
products also affected WRC prices as the price premium over substitute
products widened.
During 1998 the Company's three WRC mills together curtailed operations
for twelve weeks more than in 1997. Early in 1998, reduced logging
activity resulted in a shortage of cedar logs, forcing two of the mills
to shut down for two weeks in April. Later in the year the three mills
took a combined shutdown of ten weeks, for planned maintenance,
vacation and log shortages. During 1998 the New Westminster cedar
sawmill increased its production of non-WRC products to 39 MMfbm or 41%
of production.
MB markets specialty cedar products worldwide. North America is the key
market for quality appearance products such as decking, panelling and
sidings. In 1998 the collapse of the Japanese market caused the Company
to redirect whitewood lumber to the US. This affected WRC shipments due
to lack of quota.
YELLOW CEDAR, SITKA SPRUCE In 1998 the Company sold 54 MMfbm of high
value Yellow Cedar and Sitka Spruce. Prices were significantly lower in
1998 and production declined due to weak Asian markets where the
majority of these products are sold.
MacMillan Bloedel Limited 1998 Annual Report 21
- -----------------------------------------------
Management's Discussion & Analysis
The Company's BC sawmills operated at 79% of capacity in 1998 compared
with 82% in 1997.
- ------------------ -------------------
Annual productive
capacity at Production
December 31, 1998 1998 1997 1996
- ------------------------------------------------------------------------------
(MMfbm) Lumber - BC Sawmills
Whitewood/Western Red Cedar
180 Alberni Pacific, Port Alberni(1) 123 115 161
155 Island Phoenix, Nanaimo(1) 98 90 146
100 Chemainus 100 102 97
76 Somass, Port Alberni 66 75 75
106 New Westminster 96 102 87
122 Canadian White Pine, Vancouver 101 120 118
- ------------------------------------------------------------------------------
739 584 604 684
Custom Cut, Vancouver 73 59 72
- ------------------------------------------------------------------------------
657 663 756
- ------------------------------------------------------------------------------
(km3) Chips - BC sawmills 708 760 893
- ------------------------------------------------------------------------------
Sales
-----------------------
(MMfbm) MB produced lumber - BC(2) 635 749 758
- ------------------------------------------------------------------------------
(1) These mills were closed from early October 1997 to mid-February 1998.
As a result of restructuring and market changes they re-opened in 1998
on a one shift basis, instead of the three shift basis which these
capacities reflect. In April 1998 they added a second shift.
(2) A signficant portion of sales are to Distribution (particularly WRC).
------------------------------
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------
Japanese housing starts (millions of units) 1.20 1.39 1.64 1.47 1.57
Canadian housing starts (thousands of units) 139 148 123 113 154
US housing starts (millions of units) 1.61 1.48 1.47 1.36 1.45
Japanese softwood consumption (MMMfbm) 8.8 10.51 1.31 1.31 1.7
US residential construction (MMMfbm) 21.6 19.4 19.9 18.6 20.1
US repair and remodeling (MMMfbm) 19.1 18.5 17.8 15.6 16.0
US other construction (MMMfbm) 13.2 13.2 12.7 12.7 12.3
- -----------------------------------------------------------------------------
US total softwood lumber demand (MMMfbm) 53.9 51.1 50.4 46.9 48.4
- -----------------------------------------------------------------------------
Source: RISI
Five year price graphs for lumber products are on pages 18 and 28 and
for OSB and plywood on page 28.
22 MacMillan Bloedel Limited 1998 Annual Report
- -----------------------------------------------
Management's Discussion & Analysis
Engineered Lumber
Bar chart showing MB's 49% share of adjusted TJM Operating Earnings
(Cdn $ millions) for 1994 - 1998
Bar chart showing MB's share of TJM Sales (Cdn $millions) for 1994 -
1998
MB has a 49% interest in Trus Joist MacMillan ("TJM"), the world's
largest engineered lumber producer. In 1998 MB's share of TJM's
operating earnings (after adjustments) was $62 million, $10 million
higher than 1997. In US dollars, MB's share of operating earnings
increased $4 million to $42 million. Very strong US residential
construction activity and the demand for high quality resource
efficient products contributed to TJM's sales which increased 10% in US
dollars to US$778 million. This sales increase occurred despite very
low prices for commodity substitutes. Builders who have used TJM
products over the years continued to do so because of the high
structural quality and better value that engineered lumber products
provide. During the year, very attractive prices for commodity lumber
made it difficult to convert builders who had not previously used TJM's
products. Earnings were impacted by the dramatic rise in the cost of
OSB which is used as a raw material in the manufacture of I-joists.
TJM's net earnings after income taxes were US$90 million in 1998
compared to US$81 million in 1997. TJM's sixteen manufacturing plants
(two in Canada and fourteen in the US) produce Microllam(r) laminated
veneer lumber (LVL), Parallam(r) parallel strand lumber (PSL),
Timberstrand(r) laminated strand lumber (LSL) and TJI(r)-joists. TJM's new
US$45 million LVL and TJI(r)-joist plant in Alabama commenced production
in the fourth quarter of 1998.
MacMillan Bloedel Limited 1998 Annual Report 23
- -----------------------------------------------
Management's Discussion & Analysis
Distribution
Bar chart showing Distribution Operating Earnings ($ millions) for 1994
- - 1998
Comparative Bar chart showing Distribution Sales ($ millions) (Total
Sales and MB or TJM Produced Sales) for 1994 - 1998.
MB's North American Distribution business markets lumber and
panelboards produced by MB, engineered lumber manufactured by TJM and
building materials and related products made by other suppliers. Most
of the MB produced lumber sold by Distribution is WRC sold in the US.
Earnings of $9 million in 1998 were unchanged from 1997. Margins
improved during a year when the business undertook a major
restructuring and focused on improved profitability and lower operating
costs. During 1998 seven distribution centres (two in Canada and five
in the US) and three other branch locations were closed and operations
concentrated on distributing MB's cedar and TJM's engineered lumber
products. Customers continue to be served by the remaining 30 centres
(twelve in Canada and eighteen in the US).
Sales decreased $259 million or 15% reflecting increased emphasis on
cedar and engineered lumber and significantly reduced levels of lower
margin commodity products. Had it not been for the favourable exchange
rate used in converting US operation sales to Canadian dollars, sales
would have declined $328 million or 19%.
In 1998 Distribution sold 660 MMfbm of non-MB produced lumber, down 32%
from 975 MMfbm in 1997. In 1998 products made by MB or affiliates
accounted for 22% of Distribution's lumber shipments (17% - 1997), 34%
of its panelboard shipments (26% - 1997) and virtually all of its
engineered lumber sales. Although 1998 prices for WRC were higher in
both US and Canadian dollars, WRC margins decreased in 1998 from levels
achieved in 1997 when prices were sharply rising.
--------------------- -------------------------------
Sales Change attributable to:
($ millions) 1998 1997 Change Price Volume Other Exchange
- -------------------------------------------------------------------------------
Lumber $ 674 $ 898 $(224) $ (1) $ (256) $ $ 33
Engineered lumber 386 318 68 45 23
Panelboards 209 284 (75) 23 (105) 7
Other 190 218 (28) (34) 6
- -------------------------------------------------------------------------------
$1,459 $1,718 $(259) $ 22 $ (361) $ 11 $ 69
- -------------------------------------------------------------------------------
24 MacMillan Bloedel Limited 1998 Annual Report
- -----------------------------------------------
Management's Discussion & Analysis
Packaging
Bar chart showing Packaging Operating Earnings ($ millions) for 1994 -
1998
Comparative line chart of Containerboard Prices US East Coast (US
$/ton), comparing 42 lb. Unbleached Kraftliner to 26 lb. Semichemical
Medium for 1994 - 1998. Source: RISI
Higher average containerboard prices resulted in 1998 earnings
increasing $49 million to $71 million. Earnings from US packaging
operations increased US$31 million, causing operating earnings when
translated into Canadian dollars to increase an additional $15 million.
Sturgeon Falls' corrugating medium operating results also improved due
to higher prices, but operating earnings in Canada were reduced by the
inclusion of only eight months of results for MacMillan Bathurst
("MacBath"), which was sold at the end of August 1998. Sales increased
$86 million despite a $63 million decrease in MB's share of MacBath's
sales. The translation of US dollar sales into weaker Canadian dollars
increased sales by $60 million in 1998 over 1997.
---------------------- ------------------------------
Sales Change attributable to:
($ millions) 1998 1997 Change Price Volume Other Exchange
- -------------------------------------------------------------------------------
Containerboard $ 489 $ 388 $ 101 $ 61 $ 10 $ $ 30
Less sales to corrugated
container plants (168) (133) (35) (18) (7) (10)
- -------------------------------------------------------------------------------
321 255 66 43 3 20
- -------------------------------------------------------------------------------
Corrugated containers 459 392 67 19 17 31
50% of MacMillan
Bathurst(1) 168 231 (63) 14 (77) --
- -------------------------------------------------------------------------------
627 623 4 33 (60) 31
- -------------------------------------------------------------------------------
Wood products (lumber
and plywood) 103 95 8 (2) 3 7
- -------------------------------------------------------------------------------
Other (includes Bulk
Packaging) 44 36 8 3 -- 3 2
- -------------------------------------------------------------------------------
$1,095 $1,009 $ 86 $ 77 $ (54) $ 3 $ 60
- -------------------------------------------------------------------------------
(1) MB's interest in MacBath was sold effective August 31, 1998.
Containerboard
As a result of excess supply, prices for containerboard during 1997
continued to fall until mid-year, reaching their lowest level in over
ten years. The improved supply/demand balance later in 1997 resulted
from good growth in box shipments, a stronger export market and
considerable industry downtime earlier in the year. Consequently
inventory levels were reduced, which together with good demand in the
second half of 1997, set the stage for price increases. Prices for both
corrugating medium and linerboard increased sharply
MacMillan Bloedel Limited 1998 Annual Report 25
- -----------------------------------------------
Management's Discussion & Analysis
during the last half of the year with the linerboard price reaching
US$380 per ton at the end of 1997, where it remained through the first
quarter 1998. Since then, the price has declined steadily settling at
US$310 per ton by the end of 1998 and into 1999. The economic turmoil
in Asia began to significantly affect export and domestic markets
during the summer of 1998 as suppliers shifted their production to
stronger markets.
MB produced containerboard shipments (including sales to its integrated
converting packaging operations) increased 29,000 tonnes in 1998. MB's
1998 export sales from North America were 165,000 tonnes, an increase
of 10,000 tonnes over 1997. During 1998 a total of 12,500 tonnes of
production was lost due to mill shutdowns. A combination of maintenance
downtime at Pine Hill, Alabama and market downtime at Henderson,
Kentucky removed about 10,000 tonnes of production in May 1998. Further
market downtime at Henderson in September 1998 removed about 2,500
tonnes. In 1997 production at these two mills was curtailed by 15,000
tonnes while at Sturgeon Falls, Ontario the curtailment was 5,000
tonnes. MB's containerboard mills ran at 98% capacity in both 1998 and
1997.
In November 1998 Hurricane Mitch destroyed the banana crop in Honduras,
where MB sells a significant amount of its containerboard exports
annually. It is expected to take a year before banana crops can again
be harvested.
Conversion and fibre costs, with the exception of recycled old
corrugated containers (OCC), were similar in 1998 and 1997. High
production and efficiencies achieved in 1997 continued in 1998. Average
OCC prices in US dollars were down approximately 30% in 1998 versus
1997, favourably affecting the Sturgeon Falls and Henderson mills which
use 100% OCC. In 1998 and 1997 the Pine Hill mill used approximately
20% OCC. Lower OCC prices reflected weaker demand from Asia and US
containerboard producer downtime in 1998.
Corrugated containers
MB's containerboard converting facilities reported modest operating
profits in both 1998 and 1997, with 1998 being marginally lower. Higher
containerboard costs in 1998 could not be completely passed on to
corrugated container customers. While box prices increased due to the
August and October 1997 containerboard price increases, they too
deteriorated in the summer and fall of 1998 in response to an
oversupply of containerboard. MB's corrugated container shipment
volumes increased 4% in 1998. The operating rate for converting
facilities was 71% in 1998, up from 68% in 1997. The 1997 rate has been
restated from the 85% previously reported, when some converting
facility capacities were based on two shifts rather than three.
SpaceKraft(r)'s US dollar profits and sales volume were similar in both
years with average prices in US dollars up marginally.
On August 31, 1998, MB sold its 50% interest in MacBath, one of
Canada's largest corrugated container manufacturers, which operated
thirteen packaging plants (twelve corrugated container plants and one
sheet plant). For the first eight months of 1998 MacBath's sales were
$337 million, compared with $462 million for all of 1997. MB's share of
operating earnings for the eight months in 1998 was $4 million lower
than for the full year 1997.
Wood products and logging
MB harvests southern pine in Alabama on its own timberlands (71,000
hectares) and on other lands (102,000 hectares) on which it has long
term cutting rights, sending the higher value sawlogs to its lumber and
plywood mills adjacent to the Pine Hill containerboard mill. Pulp logs
are chipped to supply approximately one half of the fibre requirements
of the containerboard mill. As a result of increased containerboard
production in 1998, MB harvested 1.0 million m3 of logs in 1998, up
from 978,000 m3 in
26 MacMillan Bloedel Limited 1998 Annual Report
- -----------------------------------------------
Management's Discussion & Analysis
1997 and 680,000 m3 in 1996. Lumber and plywood operations contributed
approximately US$3 million less to earnings in 1998 than 1997. The
lumber and plywood mills ran at capacity in both years as demand was
strong, but lumber prices declined in 1998 due to the oversupplied
market. In mid-1998 construction began on a US$43 million modernization
of the Pine Hill sawmill. The modernization is planned to process logs
more efficiently using the latest proven technology to improve yield
and increase product value. The project is expected to be completed
over a three year period without disrupting operation of the sawmill.
- -------------------- ------------------
Annual productive
capacity at Production
December 31, 1998 1998 1997 1996
- ------------------------------------------------------------------------------
(k tonnes) Containerboard
Linerboard
493 Pine Hill, Alabama 485 474 445
134 Henderson, Kentucky(1) 135 128 113
- ------------------------------------------------------------------------------
627 620 602 558
- ------------------------------------------------------------------------------
Corrugating medium
259 Pine Hill, Alabama 248 247 227
90 Sturgeon Falls, Ontario 85 81 86
- ------------------------------------------------------------------------------
349 333 328 313
- ------------------------------------------------------------------------------
976 Total containerboard 953 930 871
- ------------------------------------------------------------------------------
590 Corrugated containers - US plants(2) 419 401 354
(MMfbm) 103 Lumber - Pine Hill, Alabama(3) 103 98 90
(MMsq.ft. 3/8") 153 Plywood - Pine Hill, Alabama 154 152 145
- ------------------------------------------------------------------------------
-----------------
Sales
1998 1997 1996
- ------------------------------------------------------------------------------
(k tonnes) Containerboard
Linerboard 613 595 540
Corrugating medium 340 329 331
- ------------------------------------------------------------------------------
953 924 871
Outside supplied containerboard 39 42 44
- ------------------------------------------------------------------------------
992 966 915
Less sold to MB's controlled
packaging plants (316) (276) (265)
Less 1/2 of sales to MacBath
(50% owned by MB)(4) (41) (61) (61)
- ------------------------------------------------------------------------------
Total containerboard 635 629 589
- ------------------------------------------------------------------------------
Corrugated containers - US plants(2) 419 402 353
(MMfbm) Lumber - Pine Hill, Alabama (3,5) 103 97 90
(MMsq.ft. 3 /8") Plywood - Pine Hill, Alabama(5) 155 151 145
- ------------------------------------------------------------------------------
(1) 1998 and 1996 include some corrugating medium.
(2) 17 US plants: includes sheet and sheet feeder plants; excludes
SpaceKraft(r). Their aggregate annual productive capacity at December 31,
1998 has been increased by 99,000 tonnes to 590,000 tonnes to reflect
three shifts for all converting plants.
(3) Excludes lumber produced from plywood log cores.
(4) MB's interest in MacBath was sold effective August 31, 1998.
(5) Some of the lumber and plywood sales are to MB's Distribution
business in the US.
MacMillan Bloedel Limited 1998 Annual Report 27
- -----------------------------------------------
Management's Discussion & Analysis
All Other Businesses
Bar chart showing All Other Businesses Operating Earnings ($ millions)
for 1994 - 1998
Comparative line chart of OSB, Plywood & Dimension Lumber Prices (US$)
for 1994 - 1998. Prices graphed are:
SPF 2"x4" Lumber Mfbm: (US Great Lakes)
Southern Plywood Msq.ft. 15/32" CD Exterior 3-Ply: (US East)
OSB Msq.ft.7/16": (North Central US)
Source: Random Lengths
The All Other Businesses segment includes MB's Canadian and Mexican
panelboard manufacturing operations (Panelboards) and Green Forest
Lumber ("GFL"). This segment also included American Cemwood ("ACC")
until its permanent closure in April 1998 and the Company's
transportation operations until they were sold in 1997.
Operating earnings in 1998 from All Other Businesses increased $75
million to $80 million due to a significant increase in OSB prices.
Sales, however, decreased $15 million to $620 million. More than
offsetting higher OSB prices were lower GFL lumber prices and shipments
in 1998, the closure of ACC and the sale of transportation services.
--------------------- ------------------------------
Sales Change attributable to:
($ millions) 1998 1997 Change Price Volume Other Exchange
- --------------------------------------------------------------------------------
Panelboards
Oriented strandboard $ 160 $ 92 $ 68 $ 46 $ 11 $ $ 11
Particleboard &
specialtyboard 46 45 1 (2) 3 --
Plywood 40 38 2 -- 1 1
Lumber 24 24 -- (1) -- 1
Miscellaneous panelboards 16 12 4 4 --
- --------------------------------------------------------------------------------
286 211 75 43 15 4 13
Green Forest Lumber 329 392 (63) (45) (32) -- 14
Other 5 32 (27) -- -- (27) --
- --------------------------------------------------------------------------------
$ 620 $ 635 $ (15) $ (2) $ (17) $(23) $ 27
- --------------------------------------------------------------------------------
Panelboards
The $70 million increase in Panelboard results, from a loss of $1
million in 1997 to a profit of $69 million in 1998, was due to sharply
higher OSB prices in 1998 versus 1997 reflecting very strong demand in
the US housing construction market. Prices peaked in September 1998
with demand far exceeding available supply, as compared to 1997 when
the industry suffered from oversupply as a result of significant new
capacity additions. As expected, due to seasonal factors, prices since
their peak have declined by approximately 40%, but on average were, in
US dollars, 44% higher in 1998 than 1997.
In 1998 Panelboard sales increased $75 million. This increase was
mainly due to increased OSB prices as well as higher OSB shipments and
the favourable US/Canadian exchange rate.
28 MacMillan Bloedel Limited 1998 Annual Report
- -----------------------------------------------
Management's Discussion & Analysis
During 1998 MB's production of OSB (including the proportionate share
of its two joint venture mills) increased 80 MMsq.ft. 3/8" due to the
strong market and optimization of mill operations. In 1998 the combined
operating rate for all of MB's panelboard operations was 95% compared
to 88% in 1997. The New Brunswick mill was shut down in July 1998 for
thirteen days due to a strike which reduced production by 11 MMsq.ft.
3/8".
- --------------------------- -----------------------
Annual productive
capacity at Production
December 31, 1998 1998 1997 1996
- -----------------------------------------------------------------------
(MMsq.ft. 3/8") OSB
105 Hudson Bay, Sask(1) 105 98 105
280 Miramichi, NB(2) 197 187 44
430 Wawa, Ont(3) 430 367 63
- -----------------------------------------------------------------------
815 732 652 212
- -----------------------------------------------------------------------
Particleboard
129 Vancouver, BC 128 128 104
172 Durango, Mexico(4) 134 130 65
- -----------------------------------------------------------------------
301 262 258 169
- -----------------------------------------------------------------------
Plywood
40 Nipigon, Ont 36 35 31
44 Hudson Bay, Sask(1) 43 40 43
- -----------------------------------------------------------------------
84 79 75 74
- -----------------------------------------------------------------------
1,200 Total panelboards 1,073 985 455
- -----------------------------------------------------------------------
(MMfbm) Lumber
32 Carrot River, Sask(1) 32 34 33
30 Durango, Mexico 21 21 17
- -----------------------------------------------------------------------
62 53 55 50
- -----------------------------------------------------------------------
Sales
-----------------------
(MMsq.ft. 3/8") OSB 731 651 208
Particleboard 264 257 168
Plywood 79 74 76
- -----------------------------------------------------------------------
1,074 982 452
(MMfbm) Lumber 49 52 48
- -----------------------------------------------------------------------
(1) Owned by Saskfor MacMillan Limited Partnership ("Saskfor MacMillan")
in which MB has a 50% interest. Amounts are MB's portion.
(2) Owned by Eagle Forest Products Limited Partnership ("Eagle"). Amounts
reflect 50% of Eagle's interest in the Miramichi mill since its startup
in August 1996, 51% since September 1997, 61% since November 1998 and
70% since December 1998. Amounts are MB's portion. In January 1999 MB
acquired a further 20% interest.
(3) Owned by MB North Superior Forest Products Limited Partnership
("North Superior"). Amounts reflect 18% of North Superior's interest in
the Wawa mill since the initial acquisition in March 1996 and 100%
since December 1996. Amounts are MB's portion.
(4) Amounts reflect the addition of a second production line in November
1996.
MacMillan Bloedel Limited 1998 Annual Report 29
- -----------------------------------------------
Management's Discussion & Analysis
Green Forest Lumber
---------------------
1998 1997 1996
- -----------------------------------------------------
Sales ($ millions) 329 392 362
Logs harvested (k m3) 732 738 686
Lumber produced (MMfbm)(1) 120 117 107
Lumber sold (MMfbm) 647 719 689
OSB sold (MMsq.ft. 3/8") 94 91 86
Chips sold (k m3) 379 322 275
- -----------------------------------------------------
(1) The annual productive capacity of the two sawmills at Chapleau,
Ontario at December 31, 1998 was 130 MMfbm.
GFL continued to be profitable in 1998 with operating earnings similar
to 1997. Sales decreased $63 million due to lower lumber prices and
shipments reflecting the oversupplied US market, particularly for
commodity grades. Higher OSB prices partially offset that decrease.
During 1997 and 1998 GFL's two dimension grade (spruce, pine and fir
(SPF)) sawmills at Chapleau, Ontario operated at full capacity. The
increase in sawmill capacity to 130 MMfbm at December 31, 1998 reflects
operational improvements. GFL has three distribution centres (DCs) in
Ontario and two in the US. A third US centre was closed in late 1997.
In addition to selling all of GFL's production, the DCs purchase lumber
and OSB from other suppliers for resale. In 1998 the volume of non-GFL
produced lumber sold through the DCs was 70 MMfbm lower than 1997.
During most of 1997, prices for dimension construction lumber in the
US, where GFL sells most of its lumber, were very high. However, by the
fall of 1997, weak demand for lumber in Japan resulted in the
redirection of lumber to North America, causing prices to drop by late
1997. Despite very high construction activity, prices continued to
slide through the middle of 1998. Although prices were lower, GFL's
costs were also reduced due to fewer purchases of higher cost non-GFL
harvested logs. GFL's 1998 log harvest of 732,000 m 3 was marginally
lower than 1997. Log sales of 192,000 m 3 in 1998, most of which were
to MB's OSB mill at Wawa, Ontario, were lower than 1997. GFL holds a
forest management agreement covering 720,000 hectares of forest lands.
US import quota restrictions lowered shipments in 1998 and are also
expected to curtail shipments in 1999.
Other
Operations at ACC, MB's cement-fibre roofing company in Oregon, were
permanently shut down in April 1998 resulting in lower operating losses
recorded in 1998 than 1997. With respect to unusual charges related to
ACC, reference is made to Note 18 of the consolidated financial
statements on page 59 of the Annual Report and to the significant
claims and litigation section in the Uncertainties part on page 38 of
the MD&A. All Other Businesses also included MB's transportation
operations which were sold during 1997.
Discontinued Operations
Management's decision to exit Paper and MDF required the results of
these businesses to be reported separately as discontinued operations.
The operations comprised two newsprint mills in BC, along with their
related marketing organization, and two MDF plants located in
Pennsylvania and Ontario. The $31 million loss from discontinued
operations ($.25 per share) in 1998 was comprised of a $26 million loss
for Paper and a $5 million loss for MDF. The $247 million loss from
discontinued operations ($1.99 per share) in 1997 was comprised of an
$86 million loss for Paper and a $161 million loss for MDF. In 1997
Paper included unusual charges of $66 million primarily related to
restructuring costs and asset write-downs. The results of MDF for 1997
included a $133 million provision for expected future losses until
disposal and the estimated loss on disposal.
The Paper business was sold as of April 30, 1998 for proceeds of $850
million, resulting in an after tax loss of approximately $35 million.
Before the loss on
30 MacMillan Bloedel Limited 1998 Annual Report
- -----------------------------------------------
Management's Discussion & Analysis
disposal, Paper reported a $9 million after tax profit during the first
four months of 1998, reflecting improved prices for newsprint,
groundwood printing papers and lightweight coated paper as well as a
weak Canadian dollar against the US dollar. Effective September 30,
1998 the MDF business was sold for proceeds of $160 million. An
additional after tax loss of $5 million relating to the sale was
recorded in 1998.
1997 Consolidated Results Compared with 1996
----------------------- ---------------------------
Sales Operating earnings (loss)
($ millions) 1997 1996 Change 1997 1996 Change
- -----------------------------------------------------------------------------
Solid Wood $1,329 $1,281 $ 48 $ 108 $ 56 $ 52
Engineered Lumber 479 386 93 52 32 20
Distribution 1,718 1,520 198 9 6 3
Packaging 1,009 992 17 22 40 (18)
All Other 635 614 21 5 25 (20)
- -----------------------------------------------------------------------------
5,170 4,793 377 196 159 37
- -----------------------------------------------------------------------------
Corporate (70) (39) (31)
Inter-segment (649) (526) (123) (28) 10 (38)
- -----------------------------------------------------------------------------
4,521 4,267 254 98 130 (32)
Restructuring and other
unusual charges (201) (42) (159)
- -----------------------------------------------------------------------------
$4,521 $4,267 $ 254 $(103) $ 88 $(191)
- -----------------------------------------------------------------------------
NET EARNINGS (LOSS)
MB reported a net loss of $368 million ($2.99 per share) for 1997
compared with net earnings of $51 million ($.36 per share) for 1996.
The $419 million decrease in net earnings was largely attributable to
unusual charges in 1997. (See pages 13 and 30.) Unusual charges
impacting 1996 results amounted to $56 million, of which $34 million
($42 million pre-tax) related to continuing operations and $22 million
to discontinued operations.
The decrease in net earnings in 1997 reflected weak markets and lower
prices for containerboard, OSB, newsprint and MDF, coupled with the
startup costs of the MDF mills. Partially offsetting these negative
factors were much higher prices realized by Solid Wood and Distribution
for WRC products and continued growth by Engineered Lumber. The
remaining difference between 1997 and 1996 results was attributable to
the gain in 1996 on the sale of MB's investment in N.V. Koninklijke KNP
BT, which exceeded the after tax gain realized in 1997 on the sale of
transportation, log towing and barging operations by approximately $50
million.
SALES
Sales from continuing operations rose $254 million in 1997 resulting in
a $37 million increase in operating earnings before restructuring costs
and corporate and inter-segment items. Higher average lumber prices and
increased TJM sales accounted for most of the sales
MacMillan Bloedel Limited 1998 Annual Report 31
- -----------------------------------------------
Management's Discussion & Analysis
increase. Sales volumes for all major products, except MB's BC produced
lumber and logs, were also higher.
OPERATING EARNINGS (LOSS)
Operating earnings from continuing operations before restructuring and
other unusual charges decreased $32 million from $130 million in 1996
to $98 million in 1997.
Solid Wood
Earnings increased $52 million reflecting higher average lumber prices
in 1997, particularly for WRC, and increased values for BC logs sold to
Paper and to third parties. Lower whitewood shipments, reflecting the
severe downturn in the Japanese market and the adverse Canadian
dollar/Japanese yen exchange rate, negatively impacted earnings.
Engineered Lumber
Earnings rose $20 million in 1997. TJM continued to show improvement
reflecting increased market share of engineered lumber products in the
residential construction market.
Distribution
Earnings in 1997 increased $3 million from 1996. The impact of improved
prices and margins for WRC lumber and specialty products together with
increased sales volumes of engineered lumber products was partially
offset by weaker panelboard markets and declining prices and margins
for commodity lumber grades.
Packaging
Earnings dropped $18 million from 1996 reflecting substantially lower
containerboard prices. The impact of lower prices was partially offset
by lower costs and increased shipments.
All Other
Earnings from MB's other businesses decreased $20 million in 1997. This
decrease was mainly due to low OSB prices, lower earnings from GFL
reflecting lower dimension lumber prices and higher production costs,
and the sale of transportation operations.
Corporate and inter-segment
Higher corporate items decreased operating earnings by $31 million in
1997. Results were negatively impacted by foreign exchange and the
write-off of unutilized investment tax credits. The $38 million adverse
effect on earnings reported for inter-segment was primarily the result
of a significant write-down of pulp logs in the first quarter 1997.
Discontinued operations
The unusual charges which caused the $247 million loss from
discontinued operations ($1.99 per share) in 1997 are discussed on page
30. Significantly lower newsprint and other groundwood printing paper
prices caused Paper's operating earnings before restructuring and other
unusual charges to drop from $25 million to $2 million in 1997. During
1997 MDF operating losses before restructuring costs and income taxes
amounted to $38 million and reflected costs of ramping up the mills
during a period when MDF prices continued to fall as new capacity came
on stream.
32 MacMillan Bloedel Limited 1998 Annual Report
- -----------------------------------------------
Management's Discussion & Analysis
Liquidity and Capital Resources
FINANCING ACTIVITIES
Three significant asset dispositions during 1998, as described in the
investing activities section which follows, enabled MB to retire $72
million of short term debt and $566 million of long term debt prior to
maturity. Consequently, in 1998 MB recorded a pre-tax charge of $42
million ($26 million after tax) for commissions and premiums. The debt
retired prior to maturity included $100 million of 10.125% senior
debentures maturing in 2002, US$95 million of the 8.5% debentures
maturing in 2004 and US$190 million of a US$200 million 9.2% loan
maturing in late 1999. During 1998 specific debt of $100 million and
US$90 million related to the discontinued MDF business was also
extinguished. The cost of retiring that debt was provided for in 1997
when it was determined the MDF business would be sold. As a result of
retiring this debt prior to maturity, interest payments in 1999 are
expected to be $48 million lower, interest payments for 2000 and 2001
are expected to be $23 million lower per annum and for the period 2002
to early 2004, $26 million lower. Other long term debt of $31 million
was also retired.
The total of the Company's long term lines of credit for continuing
operations was unchanged during 1998, with $575 million long term bank
lines of credit available with major Canadian banks. These lines have
terms ranging from five to seven years. MB also has over $450 million
of short term lines of credit. The short term lines are currently used
to cover any day to day bank overdraft positions.
At December 31, 1998 MB's total interest-bearing debt for continuing
operations (including $146 million non-recourse long term debt of joint
ventures) was $1,001 million, down from $1,837 million at December 31,
1997, which included $630 million of interest-bearing debt for
discontinued operations. During 1998 short term interest-bearing debt
for continuing operations decreased $72 million to $59 million and long
term debt decreased $134 million to $942 million.
Interest-bearing debt, including non-recourse debt, as a ratio to
interest-bearing debt and shareholders' equity, was reduced from 54% at
December 31, 1997 (which included debt of discontinued operations) to
38% at December 31, 1998. The December 31, 1998 ratio does not take
into account the cash position of $586 million.
In August 1998, the Company effected a normal course issuer bid through
the facilities of The Toronto Stock Exchange for up to 11,190,390 of
its common shares. At December 31, 1998, approximately 1.9 million
common shares, or 2% of MB's outstanding shares had been purchased at a
cost of $28 million.
Securitization of accounts receivable in 1998 remained at similar
levels to 1997.
The only significant derivatives utilized by MB are forward contracts
to hedge future foreign currency revenue and cash inflow in excess of
capital expenditures, interest payments and operating cash flow
requirements. Reference is made to Note 16 of the consolidated
financial statements which discusses financial instruments.
INVESTING ACTIVITIES
During 1998 MB received proceeds totalling $1.2 billion from the sale
of several businesses resulting in significant cash balances and short
term investments, which at December 31, 1998, totalled $586 million, up
$421 million from December 31, 1997. The Paper business was sold
effective April 30, 1998 for $850 million, resulting in an after tax
loss of approximately $35 million. The proceeds from the sale of the
discontinued MDF business were $160 million with an additional after
tax loss of $5 million recorded in 1998 related to the sale. The
Company's 50% partnership interest in MacBath was sold for $185 million
and resulted in a $67 million after tax gain.
MacMillan Bloedel Limited 1998 Annual Report 33
- -----------------------------------------------
Management's Discussion & Analysis
In late 1998 MB acquired 19% of Eagle bringing MB's interest to 70% and
in January 1999 MB acquired another 20% interest. These combined
acquisitions cost MB $33 million and the assumption of $9 million of
additional debt. MB is in discussions to purchase the remaining
interests from Eagle Board Trust, which represents eight First Nations
from New Brunswick and Prince Edward Island, to achieve sole ownership
of Eagle.
During 1998 capital expenditures (excluding business acquisitions) on
continuing operations amounted to $159 million, up from $90 million in
1997 when the Company was strictly conserving cash. Other than in
Packaging and Engineered Lumber there were no significant capital
expenditures in 1998 reflecting continued tight spending control.
Of the $159 million of capital expenditures in 1998, approximately $35
million related to discretionary expansion or modernization and $10
million to environmental projects. At the end of 1998, construction of
a new US$45 million engineered lumber manufacturing plant by TJM in
Alabama, was completed. Capital expenditures in 1999 are expected to be
approximately $233 million with the largest amounts relating to the
US$43 million sawmill modernization at Pine Hill in Packaging and
several expansionary projects at TJM.
In recent years major projects included an $80 million OSB mill in New
Brunswick, in which MB had a 50% interest when it started up in mid-
1996, and a US$105 million Kentucky linerboard mill which started up at
the end of 1995. In late 1995 TJM completed construction of two
engineered lumber plants in the US at a cost of US$195 million. While
combined capital expenditures for the discontinued Paper and MDF
businesses were only $9 million in 1998, during the previous four years
they were $755 million.
Looking forward, MB's strong balance sheet gives the Company the
financial capacity and flexibility to grow the value of its core
building materials business. Management continues to explore
alternatives to exit the Packaging business and is not likely to invest
further in the BC coastal forestry industry until the industry's
fundamental structural problems are satisfactorily resolved.
----------------------------------------------------
Capital Expenditures
($ millions) 1998 1997 1996 1995 1994 Five year total
- ------------------------------------------------------------------------------
Solid Wood $ 16 $ 15 $ 40 $ 58 $ 41 $ 170
Engineered Lumber 34 27 13 69 98 241
Distribution 18 6 11 14 9 58
Packaging 74 31 110 204 66 485
Other and corporate 17 11 46 158 18 250
- ------------------------------------------------------------------------------
$ 159 $ 90 $ 220 $ 503 $ 232 $ 1,204
- ------------------------------------------------------------------------------
OPERATING ACTIVITIES
Cash flow from continuing operations before changes in non-cash working
capital was $275 million in 1998, up $64 million from 1997. The
increase was mainly due to improved operating earnings (see page 14 of
MD&A). Significant costs savings were generated as a result of reducing
the number of MB employees (in continuing operations) by 14%. During
1998 management also took steps to reduce non-cash working capital
which was down $173 million at December 31, 1998 from a year earlier.
Lower accounts receivable reflected lower whitewood prices, and
inventory levels were also down due to lower log costs and volumes.
34 MacMillan Bloedel Limited 1998 Annual Report
- -----------------------------------------------
Management's Discussion & Analysis
Uncertainties and Outlook
UNCERTAINTIES
Following is a discussion of known trends or uncertainties that MB
reasonably expects could have a significant impact on continuing
operations.
Timber tenure
In 1999 the Company's allowable annual cut (AAC) on Crown lands in BC
is expected to be similar to the 1998 level of 5.6 million m3,
although down from 6.1 million m3 five years ago. Given the ongoing
evolution of the BC Forest Practices Code (FPC) and MB's announcement
that it will end clearcutting over five years, MB expects further
moderate reductions in its AAC over the next five years. However, the
BC Government continues to look for ways to mitigate further harvest
reductions. As evidenced by the Government's announcement of its Forest
Action Plan which is designed to streamline regulations and reduce
administrative costs.
MB has a petition before the courts which seeks confirmation that
compensation is payable for tenure expropriated during the creation of
parks under the Park Amendment Act of 1995. MB is currently negotiating
with the BC Government in respect to this petition.
Clayoquot/Iisaak Forest Resources Ltd.
Following the release of the Clayoquot Scientific Panel Report in 1995,
new operating standards were introduced in the Clayoquot Sound area of
TFL 44 in 1995. These new standards resulted in very limited and
unprofitable logging in that area in 1996. Given that most of MB's
existing harvesting plans did not meet the new standards, MB announced
at the end of 1996 that it would shut down logging in Clayoquot Sound
for 1997 and part of 1998. The shutdown gave the Company time to revise
its harvesting plans in the Clayoquot Sound and ensure that they
complied with the new standards. Furthermore, as a result of the new
standards, in early 1998 the Government reduced the Company's AAC in
the Clayoquot from 405,000 m3 to 130,000 m3.
Due to social and environmental controversy over logging in Clayoquot
Sound, MB has not been active in the area since 1997 and the Company's
fixed assets have not been providing a return. In 1998 the Company
signed an agreement with a local First Nations economic development
corporation, Ma-Mook Natural Resources Ltd. ("Ma-Mook"), to form a new
company, Iisaak Forest Resources Ltd. ("Iisaak"), to carry out an eco-
forestry business in Clayoquot Sound commencing in 1999. Iisaak's
business objectives are to target premium markets for specialty
products that appeal to environmentally sensitive consumers. Ma-Mook
and MB hold 51% and 49% respectively of the shares of Iisaak. In
exchange for shares, MB is committed to provide up to approximately $2
million in working capital and to transfer approximately $8 million in
assets to Iisaak. Subject to the approval of the BC Government, MB is
also committed to transfer its harvesting rights in the Clayoquot
portion of TFL 44 (and various timber licences) to Iisaak through the
creation of a new timber harvesting licence agreement. If this approval
is not received by June 1, 1999, MB has the right to terminate its
obligations to Iisaak.
Timber royalties and stumpage
The BC Government passed legislation in 1995 increasing royalty rates
to match stumpage rates by April 1, 2001. The Company has filed a claim
against the Government seeking $200 million in compensation for
expropriation of MB's property interests and breach of contractual
obligations and fiduciary duty. The pleadings in this case have now
been closed, and the trial is presently scheduled for the summer of
1999. Its outcome cannot be determined at this time.
In response to higher than expected FPC implementation costs, in June
1998 the Government reduced average stumpage on the BC coast by $8.10
per cubic metre.
MacMillan Bloedel Limited 1998 Annual Report 35
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Management's Discussion & Analysis
Canada/US Softwood Lumber Agreement
The Company has a quota allocation for shipments of commodity softwood
lumber into the US. This quota is a result of a five year Canada/US
Softwood Lumber Agreement (the Agreement) which expires March 31, 2001.
A small portion of MB's quota allocation is subject to an export fee of
US$52 per Mfbm. Any volume that MB exports to the US above its quota
allocation is subject to an export fee of US$104 per Mfbm. These fees
make it difficult for MB to increase shipments into the US when other
export markets such as Japan weaken. During 1998, this situation forced
MB to sell lumber into lower return markets to avoid the US$104 export
fee. There are many initiatives to lessen the burden that the Agreement
has imposed on BC coastal producers since the collapse of the Japanese
market in 1997. The Company is an active participant in most of these
initiatives.
In December 1998, an arbitration panel was formed to decide whether
Canada violated the Agreement when BC reduced its stumpage rates on
June 1, 1998. The US argues that the reduction in BC's stumpage rates
circumvents the Agreement because it offsets the export fees, which is
not allowed under the Agreement. Canada argues that the Agreement does
not prevent provinces from making changes to its forest management
practices or stumpage rates.
As in 1998, the quota restrictions are expected to have a minor
negative impact on GFL's 1999 lumber shipments to the US.
BC Government's potential initiatives to reduce costs and improve
industry competitiveness
The BC Government has become concerned about the economic health of the
provincial forest sector, a major driver of the provincial economy. In
late 1998, the Government started a two staged policy review process to
develop initiatives for stabilizing the Province's faltering forest
economy and resource dependent communities.
The first stage of the process, a 30 day review, focused on reducing
industry costs without undermining environmental protection objectives
or jeopardizing the Canada/US Softwood Lumber Agreement. The first
outcome of this review was the Government's November 1998 announcement
of changes to the market pricing system for its small business timber
sales program. In January 1999, the Government announced further
changes to make its forest policies more market oriented, streamline
administrative requirements and introduce a monthly payment plan option
which will allow companies to spread their stumpage payments over the
course of a year.
The second stage of the process will examine structural issues in BC
that are negatively affecting the competitiveness of the BC forest
industry. This review will consider domestic cost issues and improved
access to world markets, particularly the US. Some of the issues under
consideration will include tenure reform, regulatory burden and BC's
general tax structure. Efforts are currently under way through the
Council of Forest Industries and its member companies to prepare a BC
industry response to this challenge.
European gypsy moth
The Canadian Food Inspection Agency (CFIA) reached an agreement with
the US Department of Agriculture (USDA) to establish two regulated
areas on southern Vancouver Island allowing trade to continue while
preventing further spread of the gypsy moth. Gypsy moth caterpillars
have caused the defoliation of forests across eastern North America.
These regulated areas came into effect on October 28, 1998 covering
approximately 150,000 hectares. Product restrictions affecting MB cover
only raw log exports to the US, which in recent years have been
minimal. The Company has established a quality management system for
the inspection, handling and tracking of "regulated area logs". Trade
in lumber is not affected. MB has approximately 15,000 hectares of
private land within the regulated areas.
36 MacMillan Bloedel Limited 1998 Annual Report
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Management's Discussion & Analysis
Labour relations
The three year agreement with IWA Canada which covers MB's logging and
sawmill operations in BC expires June 14, 2000. The Pulp, Paper and
Wood-workers of Canada (PPWC) contract, which covers a sawmill in BC,
was renewed in January 1999 without labour interruption. The PPWC
agreement provides for no wage increase in the first year and 2%
increases in the second and third years. The six year agreement with
the United Paperworkers International Union (UPIU) which covers the
Pine Hill, Alabama packaging operations expires in 2002.
Aboriginal land claims
BC is a unique jurisdiction in that the majority of its aboriginal
groups historically have not entered into government treaties settling
their rights. In 1993 the Canadian and BC governments established a
process to seek settlement of aboriginal land claims in BC through
treaty negotiations. A BC Treaty Commission was established to oversee
this complex and evolving process. About 70% of BC's aboriginal peoples
are represented by First Nations that are involved in the treaty
negotiation process. To settle aboriginal claims, the governments are
expected, in various combinations to pay cash, transfer land and
resources, grant aboriginals a conditional right to gather food on
public lands and to grant some rights of self-government (which may
ultimately require MB to secure additional approvals to operate).
BC's first modern day treaty, with the Nisga'a people, was recently
finalized. The Nisga'a Treaty will become effective upon ratification
by the Nisga'a people and both the federal and provincial governments.
As of the date of writing, the Nisga'a people have approved the Treaty
and the federal and provincial legislatures are currently expected to
approve the Treaty by the spring of 1999. The Nisga'a Treaty does not
deal with any of MB's forest lands. However, it does illustrate how
forestry operations, in a largely rural area, may be impacted by treaty
settlements. In particular, the Nisga'a Treaty provides for
expropriation of forest tenures from licensees over an area of about
2,000 square kilometres, which represents about 7% of the local
region's timber supply. This is higher than the BC Government's
commitment to limit land allocations to settle treaties to 5% of BC's
Crown land base. Based on this stated objective, the removal of 5% of
MB's Crown lands would mean an AAC loss to MB of about 280,000 m3.
The Nisga'a Treaty grants ownership of this 2,000 square kilometres of
land (the "Nisga'a Lands"), including the forest resources, to the
Nisga'a people. Coincident with the grant of the Nisga'a Lands, the
Treaty provides a nine year transition scheme, during which the fibre
supply commitment to the tree farm licensee, which previously came from
the Nisga'a Lands, will be reduced to zero. At the end of the
transition, the sale of wood from the Nisga'a Lands will be at the sole
discretion of the Nisga'a.
The Treaty does not deal directly with compensation to forest licensees
facing these changes. However, the Government has publicly stated that
it will provide fair and reasonable compensation to affected parties.
As of the date of this MD&A, the principles for compensation have not
yet been made clear.
The forest industry continues to be actively involved in seeking ways
to ensure that the treaty process brings future certainty to forest
development activities. However, until a treaty addressing forest lands
on which MB operates is settled, it is difficult to predict the impact
of this process on MB's operations. The first treaty that is expected
to affect MB is with the Sechelt First Nations for their claims in and
around the Sunshine Coast. At the end of January 1999, the Sechelt and
the provincial and federal governments announced that they had reached
an Agreement in Principle ("AiP"), a key step prior to treaty
finalization. This AiP provides an example of an urban oriented treaty
settlement and is primarily focused on cash rather than land. There is
very little forest land impacted by the AiP and MB does not expect its
MacMillan Bloedel Limited 1998 Annual Report 37
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Management's Discussion & Analysis
operations to be significantly affected by this AiP or the final treaty
settlement.
Simultaneously with the treaty negotiation process, the courts have
developed some legal principles designed to reconcile and protect
aboriginal interests within the context of a modern Canadian economy.
One of the key principles is that governments must consult with
aboriginal groups prior to undertaking development activities that may
impact their interests. MB endeavours to ensure that its activities
meet these consultation requirements. In the interim, until treaties
are settled, guiding case law from the Supreme Court of Canada tends to
perpetuate the uncertainty around the exact nature and scope of
aboriginal land claims as it applies to MB's operations. Future
litigation, and/or settlement of land claims by way of treaty, is
expected to clarify these issues over the next several years.
Environmental issues
MB believes that all of its operations generally conform with
legislated environmental requirements. In April 1998, the US
Environmental Protection Agency published the final version of the
Cluster Rule. This rule effectively tightened effluent discharge limits
as well as air emissions from all US pulp and paper manufacturing
facilities. Based on a Cluster Rule engineering study, the Pine Hill,
Alabama facility projects total spending of US$17 million covering 1999
through 2002 to meet these tighter requirements. Also, the Cluster Rule
requires the collection of additional non-condensable gas sources by
the year 2006. Additional funds will be required to achieve compliance
with this portion of the Cluster Rule. MB is not aware of any
significant near term remedial costs required to clean up contaminated
sites.
Significant claims and litigation
At March 1, 1999, American Cemwood Corporation ("ACC"), a wholly-owned
subsidiary of the Company's subsidiary, MacMillan Bloedel (USA) Inc.,
was defending proposed class action suits, three in California, one in
Washington State and a consolidated multi-case proceeding in Colorado.
These suits seek damages allegedly caused by the failure of cement-
fibre roofing products manufactured by ACC ("ACC shakes"). ACC
discontinued manufacturing in April 1998. Collectively, the suits seek
damages on behalf of all persons in the United States who own homes or
other structures on which ACC shakes were installed. MacMillan Bloedel
Limited and MacMillan Bloedel (USA) Inc. are named as co-defendants in
most of these suits. Plaintiffs in the consolidated action in Colorado
had moved for class certification, but that motion had not been decided
at March 1, 1999. It is not determinable at this time whether a class
will be certified in that case or any of the others or whether the
attempts to include the Company or its other named subsidiaries in
these suits will be successful.
At December 31, 1998, ACC had approximately 800 claims, including a
number of associated lawsuits, pending in respect of ACC shakes.
Approximately 1,750 claims were settled during 1998. ACC has entered
into an Assurance of Voluntary Compliance with the Oregon Department of
Justice pursuant to which it has contributed US$0.4 million to an
Oregon consumer education fund and has established a US$6.2 million
trust to fund resolution of eligible claims concerning ACC shakes.
The ultimate outcome of roofing product claims against ACC and their
impact on MacMillan Bloedel, if any, is not determinable at this time.
MacMillan Bloedel's current policy with respect to ACC is to provide
ACC with sufficient working capital to administer these claims in the
normal course of business. MacMillan Bloedel may change this policy
should it determine it is no longer prudent to continue. ACC and
MacMillan Bloedel have demanded coverage of these claims from their
insurance carriers, but it is unknown at this time the extent to which
coverage will be provided.
38 MacMillan Bloedel Limited 1998 Annual Report
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Management's Discussion & Analysis
At the beginning of 1998, MacMillan Bloedel had a provision of
approximately $51 million for funding ACC's estimated working capital
requirements, including an estimate of amounts required to administer
and satisfy roofing product claims. Approximately $33 million,
including legal and administrative costs, was expended in 1998 in
respect of these claims. The 1998 operating earnings include a $63
million pre-tax increase in this provision. (See Note 13 of the
financial statements.)
As with all accounting estimates, due to the many variables and
uncertainties involved in estimating the cost to administer and satisfy
claims, actual claims experience could differ significantly from the
estimated provision, which could result in future charges.
Year 2000
READINESS - On January 1, 2000 (Y2K), when the year is designated as
"00", many computer systems could either fail partially or completely
or create erroneous data as a result of misinterpretation of the year,
although some effects could possibly be experienced in 1999. MB
commenced its Y2K program in 1996 and has made substantial progress
towards readying MB for the impact of Y2K failures. MB has established
a Y2K centralized services program to evaluate the extent of potential
problems by identifying operating and information systems and equipment
that may require remedial action and to coordinate and monitor the
assessment, conversion or replacement and testing of computer systems
throughout the organization to provide as much assurance as can
reasonably be obtained that key business and process control systems
will function successfully during 1999 and thereafter. The Company has
also established its own in-house testing facility to test software and
hardware in a post Y2K environment. The Vice-President, Information
Technology directs MB's Y2K program and reports on progress to the
Audit Committee of the Board of Directors at each meeting.
MB's Y2K program is directed at achieving Y2K readiness for all
critical business information systems, process control systems, end-
user applications, customers and suppliers by mid-1999, and for early
completion of plans to manage contingencies should Y2K impacts arise in
1999 or 2000.
Based on current knowledge, MB considers that it is substantially on
target for its aim of being Y2K ready and that its business critical
systems will be Y2K ready by mid-year 1999. Remediation of critical
items not yet Y2K ready is either planned, in progress or substantially
complete. MB has a structured plan in place to address those items
still unresolved.
. Business Information Systems - Y2K readiness for business
information systems for MB's Solid Wood, Distribution, Panelboards and
Corporate groups was approximately 93% complete by the end of 1998.
Remaining work, which is planned to be finished in the first quarter
1999, includes replacing two third-party software packages among
Distribution's financial systems. Packaging has also made significant
progress with the majority of its systems ready for Y2K. Following
completion of the program in this area, MB plans to continue with
testing and verification.
. Process Control Systems - System inventories are complete for all
manufacturing operations, as is assessment of all critical inventory
items. Remediation of critical items not yet Y2K ready is planned, in
progress or substantially complete at most operations, and the work is
forecast to be completed by mid-1999.
. Site-Specific Systems - Approximately 98% of all Solid Wood,
Distribution and Corporate group desktop hardware and standard MB
desktop software were determined to be Y2K ready by the end of 1998.
Assessments of miscellaneous third-party software are to be completed
early in 1999 with a target of being Y2K ready in this area by the
summer of 1999. Packaging and Panelboards are also nearing completion
of work to replace hardware not Y2K ready and to upgrade standard
software packages.
MacMillan Bloedel Limited 1998 Annual Report 39
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Management's Discussion & Analysis
. Critical Suppliers and Customers - Panelboards, Solid Wood and
Packaging in 1998 initiated contact with key suppliers and customers,
while Distribution commenced its program in late 1998. Overall,
approximately 22% of suppliers were reportedly Y2K ready at the end of
October 1998, while approximately 63% were reportedly in the process of
establishing compliance and approximately 15% had yet to respond to
inquiries. MB is investigating those areas not answered satisfactorily
by respondents and taking such measures as it can to obtain
verification of Y2K readiness for critical supply items.
COSTS - To date MB has spent approximately $10 million, and it is
currently anticipated that the final cost will not exceed $15 million.
These amounts are direct costs and do not include all the internal
costs of employee time and resources, some of which are difficult to
define with an acceptable degree of reliability. MB does not, however,
anticipate that these internal costs will be substantial. The costs and
completion dates for MB's Y2K program are based on management's best
estimates, which were derived using numerous assumptions regarding
future events, including continued availability of certain resources,
remediation plans of suppliers and customers, and other factors.
However, there can be no guarantee that these estimates will be
achieved and actual results could differ from expectations. All costs
are being expensed as incurred.
Additional resources in terms of staffing and money will be applied to
MB's Y2K program as the need is identified.
RISKS TO THE COMPANY'S BUSINESS - MB's primary businesses are based on
the manufacture and selling of products that do not themselves generate
Y2K problems or liabilities. The risks to MB, therefore, arise mainly
in the possibility of a temporary inability to process orders and a
failure in the supply of services or products to MB which are critical
to the conduct of its business, including information technology and
supply of services dependent on information technology. This includes
the supply of power and other utilities and communications systems. The
most reasonably likely worst case results of a failure by MB, its
customers or suppliers to resolve a Y2K problem would be a temporary
inability to process orders in a timely and efficient manner and a
production facility shutdown, either of which, depending on the
severity of the interruption, could potentially have a material adverse
effect on MB's results of operations, financial condition and cash
flow.
MB has identified critical suppliers of goods and services, who have
been requested for a statement disclosing Y2K readiness status.
Independent testing is being requested of some suppliers. The
vulnerability of MB to the Y2K problem to a large extent depends on the
Y2K readiness of third parties, such as vendors, suppliers, utility
providers, customers, other financial institutions, government
agencies, payment systems, exchanges and depositories worldwide, and
the suppliers of such services to them. Notwithstanding the steps being
taken by MB to achieve Y2K readiness, there is no assurance that
uncertainties surrounding the Y2K problem will not materially and
adversely impact MB's business operations and its customers and
business relationships.
CONTINGENCY PLANS - Business contingency planning is continuing, with a
focus on critical areas of potential business disruption. Plans are
being developed for a case by case assessment of risk and contingency
planning. Part of this planning involves procedures to minimize
disruption if essential infrastructure failures occur. Essential
suppliers are being identified according to impact if supply failures
result and alternate sources of supply are being or will be arranged.
40 MacMillan Bloedel Limited 1998 Annual Report
- -----------------------------------------------
Management's Discussion & Analysis
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Statements in this MD&A, to the extent not based on historical events,
constitute forward-looking statements (as such term is defined under
the United States Private Securities Litigation Reform Act of 1995).
Forward-looking statements include, without limitation, statements
evaluating market and general economic conditions in the succeeding
Market Outlook section and, in the preceding sections (primarily in the
Uncertainties section), statements regarding future-oriented costs,
expenditures, available harvesting levels, export levels due to quota
restrictions and timberland holdings. Investors are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date thereof. These forward-
looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially. Such risks and
uncertainties with respect to MB include the effect of general economic
conditions, fluctuations in supply and demand for MB's products,
changing foreign exchange rates and actions by government authorities,
Y2K, uncertainties associated with legal proceedings and negotiations,
industry production levels, competitive pricing pressures and
misjudgments in the course of preparing forward-looking statements.
There are many forward-looking statements in the previous section about
MB's Y2K status. In addition to the risks, uncertainties and
assumptions discussed there, factors that could cause or contribute to
actual results differing materially from such forward-looking
statements include the ability of suppliers, customers, transportation
providers, the Company and others to address the Y2K problem
efficiently and in a timely way, the continued availability of
suppliers and customers to be Y2K compliant, and the ability to
identify and complete contingency plans for systemic failures not under
Company control.
MARKET OUTLOOK
Two key drivers of demand for MB's building material products are
economic growth and housing starts.
In North America, these measures suggest slower but relatively good
growth for lumber, engineered lumber and OSB. Based on recent consensus
forecasts, the percentage changes in real GDP in 1999 are expected to
be 2.9% for the US compared with 3.9% in 1998 and 2.1% for Canada
compared with 2.9% in 1998. Housing starts in 1999 are projected to be
moderately lower in both the US and Canada. Continued weakness in Asia,
notably Japan, is expected to redirect lumber to North America keeping
lumber prices similar to 1998 levels. The softwood lumber quota will
continue to restrict lumber shipments. Few significant OSB capacity
additions have been announced for the next two years and supply should
be more in balance with demand in 1999 than in 1998.
In Japan, the expectation is for a slower rate of decline in the
economy. Recent consensus has a 0.7% reduction in real GDP in 1999
compared to a reduction of 2.9% in 1998. Housing starts are projected
to decline. However, lumber inventories are very low and will require
replenishing in 1999.
Demand for packaging products is also tied to the economy and consumer
confidence. As a result of current industry production curtailment,
lower inventory levels, an expected 1% to 2% increase in US domestic
demand in 1999 and an increase in the world supply of containerboard of
less than 2% in 1999, containerboard markets have become more balanced
and should remain so during most of the year. Prices for packaging
products are expected to improve during 1999 from their current low
level and producers have announced price increases of US$50 per ton for
linerboard and US$60 per ton for corrugating medium for March 1999.
Containerboard export markets, due to the Asian financial crisis, are
expected to remain weak in 1999.
MacMillan Bloedel Limited 1998 Annual Report 41
EXHIBIT 99.2 - The Consolidated Financial Statements of MacMillan Bloedel
for the year ended December 31, 1998 as filed on Form 40-F/A
on September 28, 1999
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 40-F/A
[Check one]
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934.
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 1998 Commission file number 1-7902
----------------- ------
MacMILLAN BLOEDEL LIMITED
- ----------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Canada
- ----------------------------------------------------------------------------
(Province or other jurisdiction of incorporation or organization)
93-0463478
- ----------------------------------------------------------------------------
(I.R.S. Employer Identification Number)
925 West Georgia Street, Vancouver, B.C. V6C 3L2 (604) 661-8302
- ----------------------------------------------------------------------------
(Address and telephone number of Registrant's principal executive offices)
R.H. Craig, Esq., MacMillan Bloedel Packaging Inc.,
Suite 300 - 4001 Carmichael Road,
Montgomery, Alabama 36106-3635, (334) 213-6100
- ----------------------------------------------------------------------------
(Name, address (including zip code) and telephone number
including area code for agent for service in the United States)
Securities registered or to be registered pursuant to Section
12(b) of the Act: None
Securities registered or to be registered pursuant to Section
12(g) of the Act: Common Shares
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act: Common Shares
For annual reports, indicated by check mark the information filed
with this Form:
[ ] Annual Information Form [X] Audited Annual Financial Statements
Number of common shares oustanding at December 31, 1998: 122,580,913
-----------
Indicate by check mark whether the Registrant by filing the
information contained in this Form is also thereby furnishing the
information to the Commission pursuant to Rule 12g3-2(b) under
the Securities Exchange Act of 1934 (the "Exchange Act"). If
"Yes" is marked, indicate the file number assigned to the
Registrant in connection with such Rule.
Yes 82- No. X
----- -------- ---------
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports) and
(2) has been subject to such filing requirements for the past 90
days.
Yes X No.
---------- ----------
UNDERTAKING
The Registrant undertakes to make available, in person or by
telephone, representatives to respond to inquiries made by the
Commission staff, and to furnish promptly, when requested to do
so by the Commission staff, information relating to: the
securities registered pursuant to Form 40-F; the securities in
relation to which the obligation to file an annual report on Form
40-F arises; or transactions in said securities.
SIGNATURE
Pursuant to the requirements of the Securities Act, the
Registrant certifies that it meets all of the requirements for
filing on Form 40-F and has duly caused the registration
statement annual report to be signed on its behalf by the
undersigned, thereto duly authorized.
MacMILLAN BLOEDEL LIMITED
(Registrant)
Date: September 28, 1999 By: /s/ G.E. Mynett
-------------------------
(G.E. Mynett, Corporate Secretary and
Associate General Counsel)
MacMillan Bloedel Limited
Form 40-F/A
For Year Ended December 31, 1998
AMENDMENT NO. 1 TO ANNUAL REPORT ON FORM 40-F/A
-----------------------------------------------
MacMillan Bloedel Limited (the "Registrant") hereby amends its
Annual Report on Form 40-F for the year ended December 31, 1998
filed with the Securities and Exchange Commission on April 7,
1999 by deleting in its entirety the Audited Annual Financial
Statements of the Registrant included therein as Exhibit 2(b) and
by inserting the revised Audited Annual Financial Statements of
the Registrant included herein as Exhibit 2(b) (the "Revised
Financials"). The Revised Financials reflect a revision to Note
20 to the Registrant's Consolidated Financial Statements and a
revision to PricewaterhouseCooper's LLP's audit report stating
that with respect to Note 20 to the Consolidated Financial
Statements such report is as of September 17, 1999.
List of Exhibits
Exhibit No. Description
1 * MacMillan Bloedel Limited Annual Information Form dated
March 26, 1999
2 * MacMillan Bloedel Limited Annual Report 1998
(a) Management's Discussion & Analysis
(b) Audited Annual Financial Statements
(i) Audit Report
(ii) Consolidated Financial Statements
(iii) Reconciliation with United States Generally
Accepted Accounting Principles
Note 20 to Consolidated Financial Statements -
Significant Differences Between Canadian and United
States Generally Accounting Principles
3 * Consent of Independent Accountants
* Documents describe in Exhibit 1 and 2(a) have been previously
filed with the Registrant's Annual Report on Form 40-F dated
April 7, 1999. Documents described in Exhibit 2(b) and 3 are
filed with this amendment.
EXHIBIT 2 (b)
- ----------------------------------------------------------------------
Management's Responsibility for the Financial Statements
The accompanying consolidated financial statements of MacMillan Bloedel
Limited for the years ended December 31, 1998, 1997 and 1996 have been
prepared by management in accordance with generally accepted accounting
principles in Canada. Management is responsible for the integrity and
objectivity of the consolidated financial statements, which are presented
on the accrual basis of accounting and accordingly include amounts based on
judgment. Other financial information in the annual report is consistent
with that in the consolidated financial statements. The accounting
procedures and related system of internal controls are designed to provide
reasonable assurance that the financial records reflect the transactions of
the consolidated enterprise. The internal accounting process includes
management's communication to employees of policies which govern ethical
business conduct.
The Board of Directors through its Audit Committee, consisting solely of
independent members of the Board, recommend the appointment of the
auditors, monitor the basis of engagement and receive the report of the
external auditors and review the audit program and significant findings of
the internal auditor so as to gain assurance about the adequacy of internal
controls over the financial reporting process, auditing matters and
financial reporting issues. The Company's consolidated financial statements
have been reviewed by the Audit Committee and, together with the other
required information in this Annual Report, have been approved by the Board
of Directors.
PricewaterhouseCoopers LLP, independent auditors, have audited the
consolidated financial statements of the Company for the years ended
December 31, 1998, 1997 and 1996 and their report is included herein. Both
the internal and external auditors met with the Audit Committee to discuss
the results of their audit, and were afforded an opportunity to present
their opinions in the absence of management personnel with respect to the
adequacy of internal controls and the quality of the financial reporting of
the Company.
/s/ W. T. Stephens /s/ A. Laberge
W.T. Stephens A.D. Laberge
President and Chief Executive Officer Senior Vice-President, Finance
February 10, 1999
42 MacMillan Bloedel Limited 1998 Annual Report
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Auditors' Report
To the Shareholders of MacMillan Bloedel Limited:
We have audited the consolidated balance sheets of MacMillan Bloedel
Limited as at December 31, 1998 and 1997 and the consolidated statements of
earnings, retained earnings and changes in financial position for each of
the years in the three year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
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.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December
31, 1998 and 1997 and the results of its operations and the changes in its
financial position for each of the years in the three year period ended
December 31, 1998 in accordance with generally accepted accounting
principles in Canada.
/s/ PriceWaterhouseCoopers LLP
Chartered Accountants
Vancouver, BC
February 10, 1999 except for note 20, which is as at September 17, 1999
MacMillan Bloedel Limited 1998 Annual Report 43
- -------------------------------------------------
Consolidated Financial Statements
Consolidated Balance Sheet
------------------
December 31
($ millions) 1998 1997
ASSETS
- -----------------------------------------------------------------------------
Current assets
Cash and short term investments $ 586 $ 165
Accounts receivable (Note 3) 256 354
Inventories (Note 4) 592 748
Other 20 20
- -----------------------------------------------------------------------------
1,454 1,287
Property, plant and equipment (Note 5) 1,802 1,834
Investments and other assets (Note 6) 87 96
Deferred income taxes -- 12
- -----------------------------------------------------------------------------
3,343 3,229
Assets of discontinued operations (Note 14) -- 1,330
- -----------------------------------------------------------------------------
$ 3,343 $ 4,559
- -----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------
Current liabilities
Bank indebtedness and notes payable $ 59 $ 131
Accounts payable and accrued liabilities 551 570
Current portion of long term debt (Note 7) 25 23
- -----------------------------------------------------------------------------
635 724
Long term debt (Note 7) 917 1,053
Other long term obligations 135 131
Deferred income taxes 18 --
- -----------------------------------------------------------------------------
1,705 1,908
Liabilities and deferred income taxes of discontinued
operations (Note 14) -- 1,055
- -----------------------------------------------------------------------------
1,705 2,963
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Shareholders' equity
Equity component of convertible subordinated
debentures (Note 8) 110 107
- -----------------------------------------------------------------------------
Preferred shares (Note 9) 64 66
- -----------------------------------------------------------------------------
Common shareholders' equity
Common shares (Note 9) 987 1,002
Retained earnings 507 508
Foreign exchange translation adjustment (30) (87)
- -----------------------------------------------------------------------------
1,464 1,423
- -----------------------------------------------------------------------------
1,638 1,596
- -----------------------------------------------------------------------------
Commitments (Note 17)
Contingencies (Note 18)
- -----------------------------------------------------------------------------
$ 3,343 $ 4,559
- -----------------------------------------------------------------------------
Approved by the Board:
/s/ W. T. Stephens /s/ R.F. Haskayne
W.T. Stephens R.F. Haskayne
Director Director
44 MacMillan Bloedel Limited 1998 Annual Report
- -------------------------------------------------
Consolidated Financial Statements
Consolidated Statement of Earnings
-------------------------
Year ended December 31
($ millions except per share amounts) 1998 1997 1996
- ------------------------------------------------------------------------------
Sales $ 4,183 $ 4,521 $ 4,267
- ------------------------------------------------------------------------------
Costs and expenses (Note 10(a))
Materials, labour and other operating expenses 3,419 3,833 3,592
Depreciation, depletion and amortization 192 206 184
Selling, general and administrative 390 384 361
Restructuring and other unusual charges (Note 13) 78 201 42
- ------------------------------------------------------------------------------
4,079 4,624 4,179
- ------------------------------------------------------------------------------
Operating earnings (loss) 104 (103) 88
Other income (Note 10(b)) 138 63 104
Debt retirement costs (Note 7) (42) -- --
Interest expense (Note 10(c)) (108) (98) (102)
- ------------------------------------------------------------------------------
Earnings (loss) from continuing operations before
income taxes 92 (138) 90
Income tax (expense) recovery (Note 10(d)) (19) 17 (15)
- ------------------------------------------------------------------------------
Earnings (loss) from continuing operations before
undernoted item 73 (121) 75
After tax earnings of affiliates -- -- 6
- ------------------------------------------------------------------------------
Earnings (loss) from continuing operations 73 (121) 81
Loss from discontinued operations (Note 14) (31) (247) (30)
- ------------------------------------------------------------------------------
Net earnings (loss) $ 42 $ (368) $ 51
- ------------------------------------------------------------------------------
Earnings (loss) per common share
Earnings (loss) from continuing operations $ 0.54 $ (1.00) $ 0.60
Net earnings (loss) $ 0.29 $ (2.99) $ 0.36
- ------------------------------------------------------------------------------
Consolidated Statement of Retained Earnings
--------------------------
Year ended December 31
($ millions except per share amounts) 1998 1997 1996
- ------------------------------------------------------------------------------
Retained earnings, beginning of year $ 508 $ 917 $ 946
Net earnings (loss) 42 (368) 51
- ------------------------------------------------------------------------------
550 549 997
- ------------------------------------------------------------------------------
Purchase of common shares in excess of average
stated value (Note 9) 13 -- --
Dividends
Interest on equity component of convertible
subordinated debentures 1 1 1
Preferred shares 4 3 4
Common shares 25 37 75
- ------------------------------------------------------------------------------
43 41 80
- ------------------------------------------------------------------------------
Retained earnings, end of year $ 507 $ 508 $ 917
- ------------------------------------------------------------------------------
MacMillan Bloedel Limited 1998 Annual Report 45
- -------------------------------------------------
Consolidated Financial Statements
Consolidated Statement of
Changes in Financial Position
-------------------------
Year ended December 31
($ millions except per share amounts) 1998 1997 1996
- ------------------------------------------------------------------------------
Operating activities
Earnings (loss) from continuing operations $ 73 $ (121) $ 81
Depreciation, depletion and amortization 192 206 184
Restructuring and other unusual charges (Note 13) 78 201 42
Gain on sale of investments (Note 11) (98) (44) (79)
Debt retirement costs 42 -- --
Deferred income taxes (12) (31) 23
After tax earnings of affiliates -- -- (6)
Distributions from affiliates -- -- 8
- ------------------------------------------------------------------------------
275 211 253
Change in non-cash working capital 173 77 95
- ------------------------------------------------------------------------------
Cash provided by operating activities 448 288 348
- ------------------------------------------------------------------------------
Investing activities
Capital expenditures (159) (90) (220)
Businesses acquired (15) -- (105)
Investments and other assets (8) (7) (20)
Proceeds from sale of investments (Note 11) 185 141 549
Disposal of assets and other 12 14 38
- ------------------------------------------------------------------------------
Cash provided by investing activities 15 58 242
- ------------------------------------------------------------------------------
Financing activities
Net debt repaid (669) (49) (361)
Debt retirement costs (Note 7) (42) -- --
Issue (redemption) of shares (29) (3) (12)
Dividends (30) (41) (80)
- ------------------------------------------------------------------------------
Cash used for financing activities (770) (93) (453)
- ------------------------------------------------------------------------------
Cash provided by (used for) continuing operations (307) 253 137
Cash provided by (used for) discontinued
operations (Note 14) 728 (140) (117)
- ------------------------------------------------------------------------------
Increase in cash and short term investments $ 421 $ 113 $ 20
- ------------------------------------------------------------------------------
46 MacMillan Bloedel Limited 1998 Annual Report
- ---------------------------------------------------------------
Notes to Consolidated Financial Statements
In these notes `MacMillan Bloedel' means MacMillan Bloedel Limited and its
consolidated subsidiaries, and `Company' means MacMillan Bloedel
Limited as a corporation. Amounts are stated in millions of Canadian
dollars unless otherwise indicated.
Note 1. Accounting policies:
MacMillan Bloedel follows accounting principles generally accepted in
Canada. Information with respect to generally accepted accounting
principles in the United States is provided in Note 20.
(a) Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries.
The investments in joint ventures are accounted for using the proportionate
consolidation method. Under this method MacMillan Bloedel records its
proportionate share of assets, liabilities, revenues and expenses on a line-
by-line basis.
(b) Foreign currency translations
The assets and liabilities of self-sustaining foreign operations are
translated at current rates of exchange while those of integrated foreign
operations are translated at current rates for items measured at current
prices, and at historical rates for items measured at past prices. Other
assets and liabilities denominated in foreign currencies are translated at
the year-end rate of exchange.
MacMillan Bloedel considers that its foreign currency denominated debt
represents an effective hedge of its investments in foreign subsidiaries
and affiliates. Accordingly, foreign currency translation adjustments
relating to foreign currency debt are included with the foreign exchange
translation adjustment relating to self-sustaining foreign operations as a
separate component of shareholders' equity.
(c) Valuation of inventories
Inventories of operating and maintenance supplies and raw materials are
valued at the lower of average cost and replacement cost or net realizable
value. Inventories of manufactured products are valued at the lower of
average cost and net realizable value.
(d) Property, plant and equipment
Property, plant and equipment are recorded at cost.
MacMillan Bloedel employs the units-of-production basis for depreciation of
manufacturing assets. Non-manufacturing assets are depreciated on a
straight line basis.
The rates of depreciation being applied are intended to fully depreciate
manufacturing assets (at normal production levels) and non-manufacturing
assets over the following periods:
- ---------------------------------------------------------------------------
Buildings 20 or 40 years
Pulp and paper mill machinery and equipment 20 years
Logging machinery and equipment 5 to 7 years
Other manufacturing machinery and equipment 7 to 13 years
- ---------------------------------------------------------------------------
Depletion of timber and amortization of main logging roads are determined
on a basis related to log production.
Interest is capitalized during construction of major capital projects.
(e) Intangibles
The goodwill component of intangibles is being amortized on a straight line
basis over 10 years and the financing component over the life of the
related debt. The carrying value of goodwill is reviewed annually.
MacMillan Bloedel Limited 1998 Annual Report 47
- ---------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 1. Accounting policies (continued):
(f) Silviculture costs
The costs of reforestation are accrued as the timber is harvested. The
portion of this liability representing expenses projected to occur within
the next year is classified as a current liability and the remainder is
included with "Other long term obligations".
(g) Financial instruments
Derivative financial instruments in the form of foreign exchange contracts
and options are utilized to hedge certain transactions denominated in
foreign currencies, primarily export sales and purchases of imported
equipment. These instruments serve to protect the Company from currency
fluctuations between the transaction date and settlement. The Company does
not hold or issue financial instruments for trading purposes.
(h) Use of estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. The more subjective of such estimates
are silviculture liabilities, restructuring costs, and a provision for
funding a subsidiary company's working capital requirements, including its
product claims. Management believes its estimates to be appropriate;
however, actual results could differ from the amounts estimated.
Note 2. Joint ventures:
MacMillan Bloedel has ownership interests in joint ventures which are
accounted for using the proportionate consolidation method.
-----------------
Significant joint ventures 1998 1997 1996
- ---------------------------------------------------------
Trus Joist MacMillan 49% 49% 49%
Saskfor MacMillan 50% 50% 50%
Eagle Forest Products (Note 12) 70% 51% 50%
MacMillan Bathurst (Note 11) -- 0% 50%
- ---------------------------------------------------------
Summarized combined financial information representing MacMillan Bloedel's
pro-rata interest in all its joint ventures is as follows:
--------------
Financial position 1998 1997
- -----------------------------------------------------------------------
Current assets $ 266 $ 258
Property, plant and equipment 394 415
Deferred income taxes and other assets 49 41
Current liabilities (59) (71)
Long term debt (139) (167)
- -----------------------------------------------------------------------
Proportionate share of net assets $ 511 $ 476
- -----------------------------------------------------------------------
-----------------------
Results of operations 1998 1997 1996
- ----------------------------------------------------------------------------
Sales $ 448 $ 461 $ 438
Costs and expenses (308) (348) (339)
Depreciation, depletion and amortization (46) (44) (39)
Interest expense and other (5) (6) (6)
- ----------------------------------------------------------------------------
Proportionate share of earnings before income taxes $ 89 $ 63 $ 54
- ----------------------------------------------------------------------------
-----------------------
Changes in financial position 1998 1997 1996
- ----------------------------------------------------------------------------
Operating activities $ 103 $ 105 $ 58
Investing activities (62) (66) (65)
Financing activities 1 52 6
- ----------------------------------------------------------------------------
Proportionate share of increase (decrease) in cash
and short term investments $ 42 $ 91 $ (1)
- ----------------------------------------------------------------------------
48 MacMillan Bloedel Limited 1998 Annual Report
- ---------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 3. Sale of receivables:
In 1996, MacMillan Bloedel entered into agreements to sell designated pools
of trade receivables to two trusts. At December 31, 1998, the two trusts
held $209 million (1997 - $226 million) of such receivables. The agreements
expire in July 1999.
Note 4. Inventories:
-------------
1998 1997
- -----------------------------------------------------------------------
Logs and wood chips $ 153 $ 217
Lumber, panelboards and other building materials 327 405
Packaging products 64 81
Operating and maintenance supplies 48 45
- -----------------------------------------------------------------------
$ 592 $ 748
- -----------------------------------------------------------------------
Note 5. Property, plant and equipment:
---------------------------------------
1998 1997
Accumulated
Cost depreciation Net Net
- ---------------------------------------------------------------------------
Buildings and equipment
Solid Wood $ 643 $ (434) $ 209 $ 229
Engineered Lumber 526 (206) 320 308
Packaging 1,435 (739) 696 703
Other 400 (106) 294 311
- ---------------------------------------------------------------------------
3,004 (1,485) 1,519 1,551
Timber and land,
net of accumulated depletion 263 262
Logging roads 20 21
- ---------------------------------------------------------------------------
$3,004 $(1,485) $1,802 $1,834
- ---------------------------------------------------------------------------
Note 6. Investments and other assets:
-------------
1998 1997
- -----------------------------------------------------------------------
Other investments and assets $ 32 $ 47
Intangibles less amortization 55 49
- -----------------------------------------------------------------------
$ 87 $ 96
- -----------------------------------------------------------------------
MacMillan Bloedel Limited 1998 Annual Report 49
- ---------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 7. Long term debt:
----------------
1998 1997
- -----------------------------------------------------------------------------
Notes, bonds and debentures
10.125% senior debentures maturing 2002 $ -- $ 100
8.5% debentures maturing 2004 (US$55 million,
1997 - US$150 million) 85 214
6.75% notes maturing 2006 (US$150 million) 230 215
7.75% industrial development revenue and pollution
control bonds maturing 2009 (US$30 million) 46 43
7.75% solid waste disposal facilities revenue bonds
maturing 2019 (US$9 million) 14 13
7.6% debentures maturing 2020 (US$90 million) -- 129
7.0% solid waste disposal revenue bonds maturing 2025
(US$34 million) 52 49
7.7% debentures maturing 2026 (US$150 million) 229 214
Bank loans
Floating rate contractual lines of credit -- 24
2.0% to 5.1% loans maturing from 1998 to 2000
(1997 - Yen 2,300 million) -- 25
9.2% loan maturing 1999 (US$10 million,
1997 - US$200 million) 15 286
Floating rate loan maturing 2000 (US$50 million) 77 72
Floating rate loan maturing 2002 -- 100
Debt component of convertible subordinated
debentures (Note 8) 40 43
Other 8 10
- -----------------------------------------------------------------------------
796 1,537
Non-recourse debt of joint ventures 146 169
- -----------------------------------------------------------------------------
942 1,706
Less: Specific and allocated debt of discontinued operations -- 630
- -----------------------------------------------------------------------------
942 1,076
Less: Payments due within one year 25 23
- -----------------------------------------------------------------------------
$ 917 $ 1,053
- -----------------------------------------------------------------------------
During 1998, MacMillan Bloedel repaid $906 million of debt, $237 million of
which specifically related to the discontinued medium density fibreboard
business. Retirement of debt prior to maturity accounted for $566 million
of this total, resulting in a $42 million charge against earnings.
Payments required on long term debt in the next five years are as follows:
- ---------------------
1999 $ 25
2000 87
2001 33
2002 16
2003 --
- ---------------------
50 MacMillan Bloedel Limited 1998 Annual Report
- ---------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 8. Convertible subordinated debentures:
The debentures bear interest at a minimum of 5% which can increase
dependent on the Company's dividend payments. The debentures are
convertible at the holders' option into common shares at a conversion price
of $28.625 per common share. At the Company's option, the debentures can be
redeemed for cash at any time or for common shares upon maturity in 2007.
The debentures have been split into debt and equity components in
accordance with the Canadian accounting requirements for presentation of
financial instruments. The present value of the interest payments on the
convertible subordinated debentures is presented as long term debt with the
remaining portion of the principal amount included in shareholders' equity.
The interest related to the equity component of the convertible
subordinated debentures is reflected as a charge to retained earnings.
Note 9. Share capital:
The Company's authorized capital consists of an unlimited number of common
shares, 3.4 million class A preferred shares and 20 million class B
preferred shares issuable in series, all without par value.
Changes in share capital
-------------------- -------------------- --------
Series 8 Series 10 Total
Class B preferred shares Number Number
Issued and outstanding of shares Amount of shares Amount Amount
- ---------------------------------------------------------------------------
January 1, 1997 1,225,369 $ 31 1,554,200 $ 39 $ 70
Redeemed during 1997 (155,000) (4) -- -- (4)
- ---------------------------------------------------------------------------
December 31, 1997 1,070,369 27 1,554,200 39 66
Redeemed during 1998 (79,000) (2) -- -- (2)
- ---------------------------------------------------------------------------
December 31, 1998 991,369 $ 25 1,554,200 $ 39 $ 64
- ---------------------------------------------------------------------------
The class B preferred shares rank prior to the common shares of the
Company. The Series 8 and Series 10 shares are both redeemable at the
Company's option, at $25.00 per share. The Company is to make all
reasonable efforts to purchase 18,998 Series 8 shares quarterly at a price
not exceeding $25.00 per share. Cumulative preferential dividends for
Series 8 and 10 are payable at rates related to the Canadian prime interest
rate.
Common Share Number
Issued and outstanding of shares Amount
- ---------------------------------------------------------------------------
January 1, 1997 124,376,911 $ 1,001
Outside directors share compensation plan 5,500 --
Dividend reinvestment plan 31,668 1
- ---------------------------------------------------------------------------
December 31, 1997 124,414,079 1,002
Shares purchased and cancelled (1,875,700) (15)
Outside directors share compensation plan 4,500 --
Dividend reinvestment plan 37,860 --
Conversion of convertible subordinated debentures 174 --
- ---------------------------------------------------------------------------
December 31, 1998 122,580,913 $ 987
- ---------------------------------------------------------------------------
MacMillan Bloedel Limited 1998 Annual Report 51
- ---------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 9. Share capital (continued):
During the year, the Company effected a normal course issuer bid through
the facilities of The Toronto Stock Exchange for up to 11,190,390 common
shares. As of December 31, 1998, 1,875,700 shares have been purchased for
$28 million. The $13 million excess of purchase price over the average
stated value of the shares purchased has been charged to retained earnings.
At December 31, 1998, the Company had 5.2 million (1997 - 2.1 million)
outstanding stock options, granted to directors and key employees.
- -------------- ------------------- -------- -----------------
Year of grant Number of shares Price Exercise period
- ---------------------------------------------------------------------
1995 80,000 $16.49 1998 - 2005
1996 302,000 $17.94 1998 - 2006
1996 100,000 $19.07 1998 - 2006
1997 632,000 $17.60 1998 - 2007
1997 1,000,000 $17.39 1998 - 2007
1998 2,510,000 $19.20 1999 - 2005
1998 35,000 $16.15 1999 - 2008
1998 500,000 $15.25 1998 - 2005
- ---------------------------------------------------------------------
5,159,000
- ---------------------------------------------------------------------
The 1998 grant of 2,510,000 shares is exercisable when the price of the
Company's shares achieves certain levels between $23 and $33.
The Company has reserved 14 million common shares for issuance pursuant to
the terms of issue of the convertible subordinated debentures and various
share purchase and option plans.
Note 10. Earnings statement supplementary information:
(a) Costs and expenses
----------------------
1998 1997 1996
- -------------------------------------------------------------------------
Research and development expenses $ 5 $ 10 $ 10
- -------------------------------------------------------------------------
Rental expense $ 30 $ 32 $ 38
- -------------------------------------------------------------------------
(b) Other income
--------------------
1998 1997 1996
- -------------------------------------------------------------------------
Income from investments $ 26 $ 8 $ 10
Gain on disposal of investments (Note 11) 98 44 79
Other 14 11 15
- -------------------------------------------------------------------------
$ 138 $ 63 $ 104
- -------------------------------------------------------------------------
52 MacMillan Bloedel Limited 1998 Annual Report
- ---------------------------------------------------------------
Notes to Consolidated Financial Statements
(c) Interest expense
----------------------
1998 1997 1996
- ---------------------------------------------------------------------------
Long term debt $ 110 $ 123 $ 132
Convertible subordinated debentures 5 5 5
Other 16 21 14
- ---------------------------------------------------------------------------
131 149 151
Less: Allocated to discontinued operations (23) (51) (49)
- ---------------------------------------------------------------------------
$ 108 $ 98 $ 102
- ---------------------------------------------------------------------------
(d) Income tax
----------------------
1998 1997 1996
- ---------------------------------------------------------------------------
Current $ (31) $ (14) $ 8
Deferred 12 31 (23)
- ---------------------------------------------------------------------------
Total income tax (expense) recovery $ (19) $ 17 $ (15)
- ---------------------------------------------------------------------------
----------------------
Income tax rate reconciliation (%) 1998 1997 1996
- ---------------------------------------------------------------------------
Canadian federal income tax rate (38.0) 38.0 (38.0)
Provincial and state taxes and federal surtax (8.4) 3.3 3.6
Large corporation tax (1.8) (1.5) (4.6)
Canadian manufacturing and processing allowance 5.2 (2.0) (2.4)
Capital gains 15.3 1.7 29.7
Foreign tax rates 10.3 (5.7) 10.3
Goodwill amortization (3.5) (6.1) (10.8)
Other items 0.3 (15.4) (4.5)
- ---------------------------------------------------------------------------
Effective income tax rate (20.6) 12.3 (16.7)
- ---------------------------------------------------------------------------
Note 11. Sale of investments:
In 1998, MacMillan Bloedel sold its 50% interest in MacMillan Bathurst for
proceeds of $185 million, resulting in a gain of $98 million ($67 million
after tax). MacMillan Bloedel also sold its paper and medium density
fibreboard businesses in 1998 (Note 14).
During 1997, MacMillan Bloedel sold its transportation business and a log
towing and barging division. The assets of the transportation business were
sold for net proceeds of $108 million, resulting in a pre-tax gain of $13
million. The log towing and barging division was sold for net proceeds of
$33 million, resulting in a pre-tax gain of $31 million.
In 1996, MacMillan Bloedel sold its interest in KNP BT for net proceeds of
$549 million, resulting in a gain of $79 million.
MacMillan Bloedel Limited 1998 Annual Report 53
- ---------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 12. Business acquisitions:
During the fourth quarter of 1998, MacMillan Bloedel acquired an additional
19% interest in Eagle Forest Products Limited Partnership, increasing its
ownership interest to 70%. The joint venture is accounted for using the
proportionate consolidation method.
Acquisition costs were allocated as follows:
- -------------------------------------
Working capital $ 2
Property, plant and equipment 14
Other assets 8
Other long term liabilities (9)
- -------------------------------------
$ 15
- -------------------------------------
During 1996 MacMillan Bloedel acquired an additional 82% interest in
MacMillan Bloedel North Superior Limited Partnership, formerly Jager
Strandboard Limited Partnership, an oriented strandboard mill in Ontario,
to increase its ownership interest to 100%. Prior to this acquisition,
Jager was a joint venture and was accounted for using the proportionate
consolidation method. The 1996 acquisition has been accounted for by the
purchase method with the results of the operation fully consolidated in
these financial statements from the date of acquisition.
Acquisition costs were allocated as follows:
- ---------------------------------------
Working capital $ 1
Property, plant and equipment 83
Other assets 2
Other long term liabilities (2)
- ---------------------------------------
$ 84
- ---------------------------------------
54 MacMillan Bloedel Limited 1998 Annual Report
- ---------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 13. Restructuring and other unusual charges:
--------------------
1998 1997 1996
- -------------------------------------------------------------------------
Restructuring costs and asset write-downs $ 15 $ 145 $ 42
Other unusual charges 63 56 --
- -------------------------------------------------------------------------
$ 78 $ 201 $ 42
- -------------------------------------------------------------------------
Restructuring costs and asset write-downs
The 1998 restructuring charge of $15 million relates primarily to a
provision for employee severance and other costs associated with a number
of cost reduction initiatives under way in Solid Wood divisions and in
administration functions.
In 1997, a comprehensive strategic evaluation of each of the Company's
businesses was undertaken. As a result, a major reorganization and
downsizing of administrative, manufacturing and distribution operations was
initiated. Restructuring costs and asset write-downs recorded in 1997
include $69 million related to severance costs for hourly and salaried
employees, $13 million for closure and lease termination costs and $60
million for the write-down of specific investments and capital assets to
estimated realizable value. Additional restructuring costs and asset write-
downs relate to specific businesses for which a formal plan of disposal was
adopted prior to the 1997 year-end. These costs have been included in the
results from discontinued operations and are referred to in Note 14.
The 1996 organizational restructuring costs include $17 million related to
provisions for employee severance and business relocation costs and $25
million associated with the write-down of a non-core asset.
Other unusual charges
Other unusual charges in 1998 amounting to $63 million relate to a
provision for funding a subsidiary company's estimated working capital
requirements associated with the administration and resolution of roofing
product claims. The majority of the $56 million charge recorded against
1997 results also related to these claims.
MacMillan Bloedel Limited 1998 Annual Report 55
- ---------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 14. Discontinued operations:
In December 1997, MacMillan Bloedel approved a plan to exit its paper
business and sell its medium density fibreboard (MDF) business.
In April 1998, the paper business was sold for proceeds of $850 million,
resulting in an after tax loss of $35 million.
Effective September 30, 1998, the MDF business was sold for proceeds of
$160 million, resulting in an after tax loss of $138 million, $133 million
of which was accrued in 1997.
For reporting purposes, results, financial position and cash flows of
discontinued operations have been disclosed separately from those of
continuing operations for the periods presented.
Summarized financial information of the discontinued operations is as
follows:
-------- -------- --------
Results of discontinued operations Paper MDF Total
- ----------------------------------------------------------------------------
1998
Sales $ 272 $ 40 $ 312
- ----------------------------------------------------------------------------
Earnings before income tax $ 6 $ -- $ 16
Income tax expense (7) -- (7)
- ----------------------------------------------------------------------------
9 -- 9
- ----------------------------------------------------------------------------
Gain (loss) on disposal 34 (8) 26
Income tax (expense) recovery (69) 3 (66)
- ----------------------------------------------------------------------------
(35) (5) (40)
- ----------------------------------------------------------------------------
Loss from discontinued operations $ (26) $ (5) $ (31)
- ----------------------------------------------------------------------------
1997
Sales $ 743 $ 30 $ 773
- ----------------------------------------------------------------------------
Loss before income tax $ (130) $ (43) $ (173)
Income tax recovery 44 15 59
- ----------------------------------------------------------------------------
(86) (28) (114)
- ----------------------------------------------------------------------------
Estimated loss on future operations and
disposal, net of tax of $80 million -- (133) (133)
- ----------------------------------------------------------------------------
Loss from discontinued operations $ (86) $ (161) $ (247)
- ----------------------------------------------------------------------------
1996
Sales $ 696 $ -- $ 696
- ----------------------------------------------------------------------------
Loss before income tax $ (45) $ (2) $ (47)
Income tax recovery 17 -- 17
- ----------------------------------------------------------------------------
Loss from discontinued operations $ (28) $ (2) $ (30)
- ----------------------------------------------------------------------------
The results from discontinued paper operations in 1997 and 1996 include
unusual items pertaining primarily to restructuring costs and asset write-
downs which amount to $66 million and $22 million respectively, on an after
tax basis.
56 MacMillan Bloedel Limited 1998 Annual Report
- ---------------------------------------------------------------
Notes to Consolidated Financial Statements
------- ------- --------
Financial position of discontinued operations Paper MDF Total
- ----------------------------------------------------------------------------
1998
Assets of discontinued operations $ -- $ -- $ --
- ----------------------------------------------------------------------------
Liabilities and deferred income taxes of
discontinued operations $ -- $ -- $ --
- ----------------------------------------------------------------------------
1997
Current assets $ 226 $ 14 $ 240
Property, plant and equipment 928 152 1,080
Other assets 3 7 10
- ----------------------------------------------------------------------------
Assets of discontinued operations $ 1,157 $ 173 $ 1,330
- ----------------------------------------------------------------------------
Current liabilities $ 165 $ 81 $ 246
Long term liabilities 400 227 627
Deferred income taxes 182 -- 182
- ----------------------------------------------------------------------------
Liabilities and deferred income taxes of
discontinued operations $ 747 $ 308 $ 1,055
- ----------------------------------------------------------------------------
--------- ------- --------
Changes in financial position of
discontinued operations Paper MDF Total
- ----------------------------------------------------------------------------
1998
Operating activities $ 21 $ (46) $ (25)
Investing activities 832 157 989
Financing activities -- (236) (236)
- ----------------------------------------------------------------------------
Cash provided by (used for)
discontinued operations $ 853 $ (125) $ 728
- ----------------------------------------------------------------------------
1997
Operating activities $ 40 $ (34) $ 6
Investing activities (141) (50) (191)
Financing activities -- 45 45
- ----------------------------------------------------------------------------
Cash used for discontinued operations $ (101) $ (39) $ (140)
- ----------------------------------------------------------------------------
1996
Operating activities $ 80 $ 13 $ 93
Investing activities (84) (199) (283)
Financing activities (64) 137 73
- ----------------------------------------------------------------------------
Cash used for discontinued operations $ (68) $ (49) $ (117)
- ----------------------------------------------------------------------------
MacMillan Bloedel Limited 1998 Annual Report 57
- ---------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 15. Pension plans:
Prior to June 30, 1996, MacMillan Bloedel's pension plans were defined
benefit plans and covered substantially all salaried employees. Effective
July 1, 1996, existing salaried employees of Canadian plans were given the
choice of joining a defined benefit plan or a defined contribution plan.
New employees are enrolled in the defined contribution plan.
The hourly employees are generally members of negotiated plans that require
contributions specified by collective agreements.
(a) Defined benefit plan
The defined benefit plan provides benefits based on length of service and
average earnings. Contributions to the pension plans are based on actuarial
valuations.
The consolidated summary of MacMillan Bloedel sponsored salaried pension
plans, including those of the joint ventures, is as follows:
--------------
1998 1997
- -----------------------------------------------------------------------
Pension fund assets $ 792 $ 780
Obligations for pension benefits 656 718
- -----------------------------------------------------------------------
Excess of fund assets over obligations 136 62
Provisions 9 20
- -----------------------------------------------------------------------
Excess of provisions and fund assets over obligations $ 145 $ 82
- -----------------------------------------------------------------------
Pension assets and obligations for the employees of the paper business were
included in the sale of discontinued operations and are, therefore,
excluded from the 1998 amounts.
(b) Defined contribution plan
MacMillan Bloedel's contribution to the plan is based on employee
compensation.
Note 16. Financial instruments:
(a) Derivatives
At December 31, 1998 foreign exchange delivery contracts amounted to $699
million, which was $26 million above the fair value. These derivatives, all
of which mature within two years, were comprised of the following: $611
million in US dollars; $87 million in Japanese yen; and $1 million in other
currencies.
(b) Long term debt
The interest rates applicable to long term debt were generally lower than
the interest rates that would have applied had MacMillan Bloedel incurred
such debt as at December 31, 1998. The fair value of long term debt,
excluding non-recourse debt of joint ventures, approximated $765 million at
December 31, 1998 (1997 - $1,640 million). The carrying amounts were $796
million and $1,537 million in 1998 and 1997 respectively. The carrying
amounts of non-recourse debt of joint ventures approximated fair value in
both reporting periods. The fair value of debt instruments was based on
quoted market prices and, where not available, discounted cash flow
analysis.
58 MacMillan Bloedel Limited 1998 Annual Report
- ---------------------------------------------------------------
Notes to Consolidated Financial Statements
(c) Current assets and liabilities
The carrying values reported in the balance sheet for cash and short term
investments, receivables, short term
bank borrowings and accounts payable and accrued liabilities are reasonable
estimates of fair values.
Note 17. Commitments:
The future annual payments under operating leases are as follows:
- -----------------------
1999 $ 22
2000 16
2001 14
2002 12
2003 10
2004 - 2013 54
- -----------------------
Note 18. Contingencies:
American Cemwood Corporation
American Cemwood Corporation ("ACC"), a wholly-owned subsidiary of the
Company's subsidiary, MacMillan Bloedel (USA) Inc., was, at February 10,
1999, defending four proposed class action suits, three in California and a
consolidated multi-case proceeding in Colorado. These suits seek damages
allegedly caused by the failure of cement-fibre roofing products
manufactured by ACC ("ACC shakes"). ACC discontinued manufacturing in April
1998. Collectively, the suits seek damages on behalf of all persons in the
United States who own homes or other structures on which ACC shakes were
installed. MacMillan Bloedel Limited and MacMillan Bloedel (USA) Inc. are
named as co-defendants in most of these suits. Plaintiffs in the
consolidated action in Colorado had moved for class certification, but that
motion had not been decided at February 10, 1999. It is not determinable at
this time whether a class will be certified in that case or any of the
others or whether the attempts to include the Company or its other named
subsidiaries in these suits will be successful. At December 31, 1998, ACC
had approximately 800 claims, including a number of associated lawsuits,
pending in respect of ACC shakes. Approximately 1,750 claims were settled
during 1998. ACC has entered into an Assurance of Voluntary Compliance with
the Oregon Department of Justice pursuant to which it has contributed US
$0.4 million to an Oregon consumer education fund and is establishing a US
$6.2 million trust to fund resolution of eligible claims concerning ACC
shakes.
The ultimate outcome of roofing product claims against ACC and their impact
on MacMillan Bloedel, if any, is not determinable at this time. MacMillan
Bloedel's current policy with respect to ACC is to provide ACC with
sufficient working capital to administer these claims in the normal course
of business. MacMillan Bloedel may change this policy should it determine
it is no longer prudent to continue. ACC and MacMillan Bloedel have
demanded coverage of these claims from their insurance carriers, but it is
unknown at this time the extent to which coverage will be provided. At the
beginning of 1998, MacMillan Bloedel had a provision of approximately $51
million for funding ACC's estimated working capital requirements, including
an estimate of amounts required to administer and satisfy roofing product
claims. Approximately $33 million, including legal
MacMillan Bloedel Limited 1998 Annual Report 59
- ---------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 18. Contingencies (continued):
and administrative costs, was expended in 1998 in respect of these claims.
The 1998 operating earnings include a $63 million pre-tax increase in this
provision (Note 13). As with all accounting estimates, due to the many
variables and uncertainties involved in estimating the cost to administer
and satisfy claims, actual claims experience could differ significantly
from the estimated provision, which could result in future charges.
Timberlands
MacMillan Bloedel has filed claims against the British Columbia Government
seeking compensation for breach of contractual obligations and fiduciary
duty related to increases in royalties on timber licences and expropriation
of property and related interests. The outcome of these proceedings cannot
be determined at this time.
Note 19. Uncertainty due to the year 2000 issue:
The year 2000 issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize
the year 2000 as 1900 or some other date, resulting in errors when
information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. The effects of the year 2000 issue
may be experienced before, on, or after January 1, 2000, and if not
addressed, the impact on operations and financial reporting may range from
minor errors to significant systems failure which could affect an entity's
ability to conduct normal business operations. It is not possible to be
certain that all aspects of the year 2000 issue affecting the entity,
including those related to the efforts of customers, suppliers, or other
third parties, will be fully resolved. MacMillan Bloedel has a
comprehensive year 2000 program which is anticipated to be essentially
complete by mid-1999.
Note 20. Significant differences between Canadian and
US generally accepted accounting principles:
The Company's consolidated financial statements are prepared in accordance
with Canadian generally accepted accounting principles (GAAP), which differ
in some respects from US GAAP.
Canadian GAAP requires proportionate consolidation for investments in joint
ventures that would be accounted for by the equity method pursuant to US
GAAP. Note 2 to the consolidated financial statements provides details of
the impact of proportionate consolidation.
Post-retirement benefits other than pensions are expensed as such costs are
incurred. US GAAP requires accrual accounting for health care and other
post-retirement benefits.
As required under Canadian GAAP, the Company separates the convertible
subordinated debentures into debt and equity components. The interest
related to the equity component is reflected as a charge to retained
earnings. US GAAP requires the convertible subordinated debentures be shown
as debt and related interest expense be charged to income.
Canadian GAAP requires gains and losses on forward exchange contracts which
hedge anticipated future sales to be included in earnings in the same
period the sale is recognized. Under US GAAP such gains and losses would
have been charged to income in the same period in which the exchange rate
changes or in the case of settlement, in
60 MacMillan Bloedel Limited 1998 Annual Report
- ---------------------------------------------------------------
Notes to Consolidated Financial Statements
the period when the transaction is settled. The 1998 US GAAP earnings
information presented below has been restated to reflect an after-tax
difference of $15 million.
Under Canadian GAAP, when debt is retired, the difference between the net
carrying amount of the debt and the cost of retirement may, under certain
circumstances, be recognized as a loss in the period in which the decision
to retire the debt is made. Under US GAAP, the loss is recognized as an
extraordinary item in the period of retirement, net of related taxes. The
1997 and 1998 US GAAP earnings information presented below has been
restated to reflect an after-tax difference in each year of $22 million.
Deferred income taxes are accounted for using the deferral method. Future
income taxes for US GAAP are accounted for using the accrual method in
which all temporary differences between accounting and tax values of assets
and liabilities are recognized. Such differences are revalued each period
using currently enacted tax rates. The 1998 US GAAP earnings information
presented below, previously reported as a credit of $5 million, has been
restated to reflect a further difference of $29 million.
The restatements noted in the three preceding paragraphs have reduced
previously reported US GAAP net earnings for 1998 of $42 million to a US
GAAP loss of $24 million, and decreased the US GAAP loss for 1997 from $368
million to $346 million.
The following reconciles earnings information between Canadian and US GAAP
and compares Canadian and US GAAP balance sheet information where there is
a difference. Amounts include both continuing and discontinued operations.
-----------------------
Earnings information 1998 1997 1996
- ---------------------------------------------------------------------------
Net earnings (loss) per financial statements $ 42 $ (368) $ 51
Post-retirement benefits (net of tax) (4) (4) (3)
Revenue hedges (net of tax) (15)
Deferred income taxes (24) 5 7
Interest on equity component of convertible
subordinated debentures (net of tax) (1) (1) (1)
Debt retirement (net of tax) (22) 22
- ----------------------------------------------------------------------------
Net earnings (loss) - US GAAP (24) (346) 54
Provision for dividends on preferred shares (4) (3) (4)
- ----------------------------------------------------------------------------
Net earnings (loss) attributable to common
shareholders - US GAAP $ (28) $ (349) $ 50
- ----------------------------------------------------------------------------
----------------- -----------------
Canadian GAAP US GAAP
Balance sheet information 1998 1997 1998 1997
- ------------------------------------------------------------------------------
Common shareholders equity
Common shares $ 987 $ 1,002 $ 987 $ 1,002
Retained earnings 507 508 456 522
- ------------------------------------------------------------------------------
1,494 1,510 1,443 1,524
Foreign exchange translation adjustment (30) (87) (30) (87)
- ------------------------------------------------------------------------------
$ 1,464 $ 1,423 $ 1,413 $ 1,437
- ------------------------------------------------------------------------------
Long term debt, including convertible
subordinated debentures $ 917 $ 1,673 $ 888 $ 1,613
- ------------------------------------------------------------------------------
Post-retirement benefits obligations $ -- $ -- $ 85 $ 77
- ------------------------------------------------------------------------------
Deferred income tax asset (liability) $ (18) $ (170) $ 30 $ (101)
- ------------------------------------------------------------------------------
MacMillan Bloedel Limited 1998 Annual Report 61
- ---------------------------------------------------------------
Notes to Consolidated Financial Statements
Note 21. Segmented information:
In 1997, MacMillan Bloedel adopted the Canadian accounting requirements
related to the presentation of segments using a management approach. Under
this approach, segments are based on the way that management organizes the
business for making operating decisions and assessing performance.
The following summary briefly describes the operations included in each of
MacMillan Bloedel's continuing segments:
SOLID WOOD - Includes logs harvested in British Columbia which are
converted into lumber or sold, and includes the Japanese marketing
subsidiary.
ENGINEERED LUMBER - Comprises MacMillan Bloedel's 49% ownership interest in
Trus Joist MacMillan.
DISTRIBUTION - Consists of the marketing and distribution of building
materials and allied products throughout North America.
PACKAGING - Consists of the manufacture and marketing of containerboard in
Alabama, Kentucky and Ontario and is integrated with MacMillan Bloedel's US
converting plants; also includes a logging operation and two wood product
mills in Alabama. The 50% ownership interest in MacMillan Bathurst was sold
in 1998.
ALL OTHER - Includes Green Forest Lumber which comprises logging and
sawmill operations in Ontario and associated marketing organization; also
includes MacMillan Bloedel's Canadian panelboard manufacturing operations,
lumber and particleboard mills in Mexico, as well as a cement-fibre roofing
subsidiary in Oregon, closed in 1998, and transportation services, sold
during 1997.
Inter-segment sales are transacted at market values.
-------- ------------- --------- -------- -------------
Depreciation,
depletion and Operating Capital
Business segments Sales amortization earnings Assets expenditures
- -------------------------------------------------------------------------------
1998
Solid Wood $ 1,030 $ 35 $ 14 $ 596 $ 16
Engineered Lumber 565 41 62 536 34
Distribution 1,459 5 9 222 18
Packaging 1,095 81 71 999 74
All Other 620 22 80 446 6
- -------------------------------------------------------------------------------
4,769 184 236 2,799 148
Corporate 8 (58) 557 11
Inter-segment (586) 4 (13)
Restructuring and
other unusual
charges (78)
- -------------------------------------------------------------------------------
Total continuing
operations $ 4,183 $ 192 $ 104 $ 3,343 $ 159
- -------------------------------------------------------------------------------
1997
Solid Wood $ 1,329 $ 42 $ 108 $ 757 $ 15
Engineered Lumber 479 32 52 523 27
Distribution 1,718 6 9 299 6
Packaging 1,009 74 22 1,073 31
All Other 635 41 5 469 10
- -------------------------------------------------------------------------------
5,170 195 196 3,121 89
Corporate 11 (70) 125 1
Inter-segment (649) (28) (17)
Restructuring and
other unusual
charges (201)
- -------------------------------------------------------------------------------
Total continuing
operations $ 4,521 $ 206 $ (103) $ 3,229 $ 90
- -------------------------------------------------------------------------------
62 MacMillan Bloedel Limited 1998 Annual Report
- ---------------------------------------------------------------
Notes to Consolidated Financial Statements
-------- ------------- --------- -------- -------------
Depreciation,
depletion and Operating Capital
Business segments Sales amortization earnings Assets expenditures
- -------------------------------------------------------------------------------
1996
Solid Wood $ 1,281 $ 57 $ 56 $ 893 $ 40
Engineered Lumber 386 31 32 422 13
Distribution 1,520 5 6 286 11
Packaging 992 59 40 1,081 110
All Other 614 20 25 570 41
- -------------------------------------------------------------------------------
4,793 172 159 3,252 215
Corporate 12 (39) 167 5
Inter-segment (526) 10 16
Restructuring and
other unusual
charges (42)
- -------------------------------------------------------------------------------
Total continuing
operations $ 4,267 $ 184 $ 88 $ 3,435 $ 220
- -------------------------------------------------------------------------------
------------------------ ------------
Sales to unaffiliated Capital
Geographic information customers from assets
- ---------------------------------------------------------------------------
1998
Canada $ 1,748 $ 529
United States 2,105 1,211
Japan 261 1
Other 69 36
Corporate 25
- ---------------------------------------------------------------------------
$ 4,183 $ 1,802
- ---------------------------------------------------------------------------
1997
Canada $ 1,900 $ 623
United States 2,105 1,148
Japan 438 1
Other 78 50
Corporate 12
- ---------------------------------------------------------------------------
$ 4,521 $ 1,834
- ---------------------------------------------------------------------------
1996
Canada $ 1,896 $ 659
United States 1,852 1,161
Japan 470 2
Other 49 150
Corporate 40
- ---------------------------------------------------------------------------
$ 4,267 $ 2,012
- ---------------------------------------------------------------------------
MacMillan Bloedel Limited 1998 Annual Report 63