SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended June 30, 1997
Commission File Number 1-7107
LOUISIANA-PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 93-0609074
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
111 S. W. Fifth Avenue, Portland, Oregon 97204-3699
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (503) 221-0800
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X . No .
Indicate the number of shares outstanding of each of the issuer's classes
of common stock: 109,291,169 shares of Common Stock, $1 par value,
outstanding as of August 1, 1997.
FORWARD LOOKING STATEMENTS
Statements in this report, to the extent they are not based on historical
events, constitute forward looking statements. Forward looking statements
include, without limitation, statements regarding the outlook for future
operations, forecasts of future costs and expenditures, evaluation of market
conditions, the outcome of legal proceedings, the adequacy of reserves, or plans
for product development. Investors are cautioned that forward looking statements
are subject to an inherent risk that actual results may vary materially from
those described herein. Factors that may result in such variance, in addition to
those accompanying the forward looking statements, include changes in interest
rates, commodity prices, and other economic conditions; actions by competitors;
changing weather conditions and other natural phenomena; actions by government
authorities; uncertainties associated with legal proceedings; technological
developments; future decisions by management in response to changing conditions;
and misjudgments in the course of preparing forward looking statements.
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
CONSOLIDATED SUMMARY STATEMENTS OF INCOME
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE) (UNAUDITED)
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- -------------------
1997 1996 1997 1996
------- ------- -------- --------
Net sales $ 633.3 $ 658.3 $1,187.9 $1,242.4
------- ------- -------- --------
Costs and expenses:
Cost of sales 555.1 540.9 1,065.2 1,051.7
Depreciation, amortization
and depletion 46.1 51.9 87.0 95.0
Settlement and other
unusual items, net -- -- (121.9) --
Selling and administrative 40.3 30.5 79.0 65.7
Interest expense 7.0 3.4 15.8 4.3
Interest income (.5) (2.9) (.8) (3.8)
------- ------- -------- --------
Total costs and expenses 648.0 623.8 1,124.3 1,212.9
------- ------- -------- --------
Income (loss) before taxes
and minority interest (14.7) 34.5 63.6 29.5
Provision (benefit) for
income taxes (3.4) 13.0 34.2 11.1
Minority interest in
net income (loss) of
consolidated subsidiaries (1.2) .5 (2.5) 1.0
------- ------- -------- --------
Net income (loss) $ (10.1) $ 21.0 $ 31.9 $ 17.4
======= ======= ======== ========
Net income (loss) per share $ (.10) $ .19 $ .29 $ .16
======= ======= ======== ========
Cash dividends per share $ .14 $ .14 $ .28 $ .28
======= ======= ======== ========
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CONSOLIDATED SUMMARY BALANCE SHEETS
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(DOLLAR AMOUNTS IN MILLIONS) (UNAUDITED)
JUNE 30, 1997 DEC. 31, 1996
------------- -------------
Cash and cash equivalents $ 6.9 $ 27.8
Accounts receivable, net 121.4 102.5
Inventories 249.4 264.3
Prepaid expenses 19.1 12.0
Income tax refunds receivable 13.5 99.5
Deferred income taxes 73.1 73.1
-------- --------
Total current assets 483.4 579.2
-------- --------
Timber and timberlands 663.3 648.6
Property, plant and equipment 2,549.9 2,486.0
Less reserves for depreciation (1,271.5) (1,207.5)
-------- --------
Net property, plant and equipment 1,278.4 1,278.5
Other assets 102.6 82.4
-------- --------
Total assets $2,527.7 $2,588.7
======== ========
Current portion of long-term debt $ 19.7 $ 18.7
Short-term notes payable 22.0 35.4
Accounts payable and accrued liabilities 184.5 190.6
Current portion of contingency reserves 80.0 100.0
-------- --------
Total current liabilities 306.2 344.7
-------- --------
Long-term debt, excluding current portion 469.6 458.6
Deferred income taxes 193.2 163.2
Contingency reserves, net of current portion 78.5 159.8
Other long-term liabilities and minority interest 31.2 34.8
Stockholders' equity:
Common stock 117.0 117.0
Additional paid-in capital 473.3 472.7
Retained earnings 1,141.6 1,140.0
Treasury stock (171.1) (183.3)
Loans to Employee Stock Ownership Trusts (49.7) (61.6)
Other (62.1) (57.2)
-------- --------
Total stockholders' equity 1,449.0 1,427.6
-------- --------
Total liabilities and equity $2,527.7 $2,588.7
======== ========
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CONSOLIDATED SUMMARY STATEMENTS OF CASH FLOWS
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(DOLLAR AMOUNTS IN MILLIONS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1997 1996
------- -------
Cash flows from operating activities:
Net income $ 31.9 $ 17.4
Depreciation, amortization and depletion 87.0 95.0
Cash settlements of contingencies (105.3) (123.4)
Other adjustments, net 15.6 1.0
Decrease (increase) in certain working
capital components and deferred taxes 111.6 97.7
------- -------
Net cash provided by operating activities 140.8 87.7
------- -------
Cash flows from investing activities:
Capital spending, including acquisitions (137.4) (174.7)
Other investing activities, net 10.2 7.2
------- -------
Net cash used in investing activities (127.2) (167.5)
------- -------
Cash flows from financing activities:
New borrowings 125.0 120.0
Repayment of long-term debt, including
net decrease in credit line (115.3) (26.8)
Increase (decrease) in short-term notes payable (13.4) (10.5)
Cash dividends (30.3) (30.0)
Other financing activities, net (.5) 5.9
------- -------
Net cash provided by (used in) financing activities (34.5) 58.6
------- -------
Net increase (decrease) in cash and cash equivalents (20.9) (21.2)
Cash and cash equivalents at beginning of year 27.8 75.4
------- -------
Cash and cash equivalents at end of period $ 6.9 $ 54.2
======= =======
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE) (UNAUDITED)
SIX MONTHS ENDED
JUNE 30, 1997
--------------------
SHARES AMOUNT
----------- -------
Common Stock 116,937,022 $ 117.0
=========== =======
Additional Paid-in-Capital:
Beginning balance $ 472.7
Net transactions .6
-------
Ending balance $ 473.3
=======
Retained Earnings:
Beginning balance $1,140.0
Net income 31.9
Cash dividends, $.28 per share (30.3)
-------
Ending balance $1,141.6
=======
Treasury stock:
Beginning balance 8,170,799 $(183.3)
Shares reissued for employee stock
plans and acquisition (518,468) 12.2
---------- -------
Ending balance 7,652,331 $(171.1)
========== =======
Loans to Employee Stock Ownership Trusts:
Beginning balance $ (61.6)
Less accrued contribution 11.9
-------
Ending balance $ (49.7)
=======
Other Equity Adjustments:
Beginning balance $ (57.2)
Currency translation adjustment and
amortization of deferred compensation (4.9)
-------
Ending balance $ (62.1)
=======
- 4 -
NOTES TO FINANCIAL STATEMENTS
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
1. The interim period information included herein reflects all adjustments
which are, in the opinion of the management of L-P, necessary for a fair
statement of the results of the respective interim periods. Such adjustments are
of a normal recurring nature. Results of operations for interim periods are not
necessarily indicative of results to be expected for an entire year. It is
suggested that these summary financial statements be read in conjunction with
the financial statements and the notes thereto included in L-P's 1996 Annual
Financial Report to Stockholders. Interim financial statements are by necessity
somewhat tentative; judgments are used to estimate quarterly amounts for items
that are normally determinable only on an annual basis.
2. Earnings per share is based on the weighted average number of shares of
common stock outstanding during the periods (108,250,000 in 1997 and 107,410,000
in 1996). The effect of common stock equivalents is not material.
3. The effective income tax rate is based on estimates of annual amounts
of taxable income, foreign sales corporation income and other factors. These
estimates are updated quarterly.
4. Determination of interim LIFO inventories requires estimates of
year-end inventory quantities and costs. These estimates are revised quarterly
and the estimated annual change in the LIFO inventory reserve is expensed over
the remainder of the year.
5. Reference is made to "Legal Proceedings" for a description of certain
environmental litigation and other litigation and its potential impact on L-P
and for a description of settlements of certain class action proceedings.
6. Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for further discussion and disclosures
regarding items included in the financial statement caption "settlement and
other unusual items, net."
7. In June 1997, the Financial Accounting Standards Board adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130). SFAS 130 will be effective for L-P in 1998. Based on an
initial review of SFAS 130, L-P does not expect that it will have a significant
impact on the Company's financial statements and related disclosures.
- 5 -
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
General
Continued oversupply in oriented strand board (OSB) markets which has
resulted in depressed sales prices throughout the first six months of 1997 is
the primary cause of lower sales and lower earnings before unusual items
compared to 1996. Overall net income before unusual items fell to a net loss of
$42 million ($.39 per share) for the first six months of 1997 from net income of
$17 million ($.16 per share) in 1996. L-P lost $10 million ($.10 per share) in
the second quarter of 1997 compared to net income of $21 million ($.19 per
share) in 1996. Sales declined approximately 4 percent for the second quarter
and six month periods as compared with the prior year's periods. During the
first quarter of 1997, the Company recorded a net gain of $122 million ($74
million after taxes, or $.68 per share) relating to a $135 million settlement
received in April from the U.S. Government of claims related to the long-term
timber supply contract in Alaska, net of adjustments to Ketchikan Pulp Company
pulp mill closure-related accruals.
L-P operates in two segments: building products and pulp. Building
products is the most significant segment, accounting for more than 90 percent of
sales in the first six months of 1997 and 1996. The results of operations are
discussed separately for each segment below. Key segment information, production
volumes and industry product price trends are presented in the following tables
labeled "Sales and Operating Profit by Major Product Group", "Summary of
Production Volumes" and "Industry Product Price Trends."
Building Products Segment
Quarter Ended Six Months Ended
June 30 June 30
--------------------- -------------------------
1997 1996 % Chg 1997 1996 % Chg
------ ------ ----- -------- ------- -----
(Dollar amounts in millions)
Sales:
Structural panels $215.9 $280.2 -23% $ 406.5 $ 514.2 -21%
Lumber 187.6 164.2 +14% 342.9 302.6 +13%
Industrial panel products 46.5 51.3 -9% 90.6 97.9 -7%
Other building products 148.5 121.7 +22% 270.6 236.3 +15%
------ ------ -------- --------
Total building products $598.5 $617.4 -3% $1,110.6 $1,151.0 -4%
====== ====== ======== ========
Operating profit $ 18.9 $ 72.3 -74% $ 16.8 $ 102.3 -84%
====== ====== ======== ========
The decrease in structural panel (OSB and plywood) sales in 1997 has been
primarily attributable to a 19 percent decline in average selling prices in the
first six months of 1997 compared to 1996 (18 percent decline in the second
quarter). While plywood prices have increased slightly in 1997, OSB prices
continue to suffer from industry-wide excess production capacity, and have
fallen 34 percent from 1996 levels. Structural panel volumes decreased by 5
percent for the six month period (decreased 8 percent for the second quarter)
due to weather-related production outages, unsteady raw material supply and
permanent closures of one plywood facility and four small capacity OSB
facilities. Increased production at new OSB plants helped to offset the volume
decreases.
Average lumber sales prices have increased approximately 10 percent for
the second quarter and first six months of 1997. Volume for the first six months
of
- 6 -
1997 increased 6 percent while second quarter volumes did not change
significantly. Lumber markets have been strong throughout 1997, benefiting from
a strong U.S. economy, relatively low interest rates and strong housing starts.
Industrial panel products, which consist of particleboard, medium-density
fiberboard (MDF) and hardboard have experienced average selling price decreases
of slightly more than 5 percent in 1997. The price decrease has been primarily
caused by particleboard due to increased industry capacity relative to demand.
The volume of industrial panel products sold has declined slightly more than 2
percent in 1997.
The increase in other building products sales is primarily due to the
acquisition of Associated Chemists, Inc. (coatings and chemicals), GreenStone
Industries, Inc. (cellulose insulation) and the assets of Tecton Laminates
(engineered I-Joists and LVL) subsequent to the first six months of 1996.
The decrease in building products segment operating profits for the
quarter and six month periods in 1997 compared to 1996 is primarily attributable
to the decrease in OSB prices and structural panel volumes. Industrial panel
profits have also decreased due to lower particleboard prices. Partially
offsetting these decreases, the profitability of L-P's lumber operations
improved for both the second quarter and first six months of 1997 over 1996 due
to higher selling prices and increased volume (six months only). The performance
in engineered I-Joists and LVL also improved significantly for the second
quarter and six month periods. Overall, log costs did not change significantly
in 1997 compared to 1996.
L-P's building products are primarily sold as commodities and therefore
sales prices fluctuate based on market factors over which L-P has no control.
L-P cannot predict whether prices of its building products will remain at
current levels, or will increase or decrease in the future because supply and
demand are influenced by many factors, only one of which is the cost and
availability of raw materials. Therefore, L-P is not able to determine to what
extent, if any, it will be able to pass any future increases in the price of raw
materials on to customers through product price increases. Subsequent to the end
of the second quarter, prices for OSB have increased modestly (see following
table labeled "Industry Product Price Trends"). While this increase may continue
through the rest of the building season, continued capacity additions may add to
the current excess of industry capacity and cause prices to drop back to lower
levels until demand increases or additional structural panel capacity is
permanently shut down.
Pulp Segment
Quarter Ended Six Months Ended
June 30 June 30
--------------------- ----------------------
1997 1996 % Chg 1997 1996 % Chg
------ ------ ----- ------ ------ -----
(Dollar amounts in millions)
Pulp sales $ 34.8 $ 40.9 -15% $ 77.3 $ 91.4 -15%
====== ====== ====== ======
Operating profit $ (6.0) $(30.5) +80% $(17.6) $(52.4) +66%
====== ====== ====== ======
During the second quarter, pulp sales fell 17 percent from 1997 compared
to 1996, while prices increased slightly. The volume decrease is due to the
permanent shut-down of the Ketchikan Pulp Company mill at the end of the first
quarter of 1997 and decreased sales from the Samoa, California facility due to
inventory liquidations in 1996. For the six month period, volume was up 9
percent in 1997 while prices were down 22 percent. Pulp prices were high during
the first quarter of 1996 and fell later in the year. The Chetwynd B.C. mill was
- 7 -
temporarily shut down for part of the first quarter in 1996. Decreased pulp
sales have caused export sales to decrease as L-P sells the substantial majority
of pulp to export customers.
Pulp segment losses have moderated in 1997 despite flat to lower pricing
due to cost cutting measures implemented at the Samoa and Chetwynd facilities
and prior inventory write-downs at the Ketchikan facility. Raw material cost
decreases of 10 percent to 25 percent have also contributed to reduced operating
losses.
L-P's pulp products are primarily sold as commodities and therefore sales
prices fluctuate based on market factors over which L-P has no control. L-P
cannot predict whether the prices of its pulp products will remain at current
levels, or will increase or decrease in the future because supply and demand are
influenced by many factors, only one of which is the cost and availability of
raw materials. Therefore, L-P is not able to determine to what extent, if any,
it will be able to pass any future increases in the price of raw materials on to
customers through product price increases.
Settlement Payment and Other Unusual Items
In the first quarter of 1997, L-P's Ketchikan Pulp Company subsidiary
recorded a net gain of $122 million ($74 million after taxes, or $.68 per share)
to reflect the initial proceeds received under a settlement agreement with the
U.S. Government over claims related to the long-term timber supply contract in
Alaska of $135 million. The amount was paid to L-P in April of 1997 prior to the
release of first quarter financial information and therefore the gain was
recorded in the first quarter and reflected as a receivable in the March 31,
1997 balance sheet. Adjustments to pulp mill closure-related accruals were
netted against this gain.
General Corporate Expense, Net
The increase in general corporate expense is primarily due to asset sale
gains and other credits offsetting 1996 six month expenses of nearly $19 million
(approximately $10 million for the second quarter). The remaining increase is
primarily due to increased training costs, increased costs associated with
non-operating facilities, and a general increase in overhead costs.
Net Interest Income (Expense)
Interest expense has increased significantly in 1997 due to higher
borrowing levels and higher interest rates on variable rate debt. Higher
borrowing levels were attributable to losses sustained in late 1996 and the
first six months of 1997 as well as high capital expenditures in the latter part
of 1996. Interest cost capitalized has decreased in 1997 due to lower average
balances of construction in progress.
Legal and Environmental Matters
Refer to the "Legal Proceedings" section of this Form 10-Q for a
discussion of certain environmental litigation and other litigation and its
potential impact on L-P.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations has increased in 1997 due to the $135 million
settlement received from the U.S. Government (see discussion above under
"Settlement Payment and Other Unusual Items"), income tax refunds received, and
lower cash settlements of contingencies. Excluding the settlement and refunds,
operating cash flow decreased significantly in 1997 over 1996 primarily due to
the increased net loss (prior to unusual items ). Cash used for investing
activities has decreased in 1997 as many major construction projects underway in
the first half of 1996 were completed prior to 1997. L-P is budgeting non-
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acquisition capital expenditures, including timber and logging road additions,
for the full year 1997 of approximately $180 million. Financing activities
resulted in a net use of cash in 1997 and a source of cash in 1996. The primary
difference was debt repayments, net of borrowings, which were approximately $4
million in 1997. In 1996, borrowings, net of repayments, were approximately $83
million.
L-P's cash levels have decreased and borrowings have increased slightly as
discussed above. The ratio of long-term debt to total capital is 25 percent
(excluding contingency reserves) at June 30, 1997. L-P has $40 million available
on its revolving credit facility at June 30, 1997 and expects to receive $50
million during the third quarter from a sale of timberland. The company also
believes that because of its conservative financial structure and policies, it
has substantial financial flexibility to generate additional funds should the
need arise.
- 9 -
SALES AND OPERATING PROFIT BY MAJOR PRODUCT GROUP
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(DOLLAR AMOUNTS IN MILLIONS) (UNAUDITED)
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1997 1996 1997 1996
------- ------- -------- -------
Sales:
Structural panel products $ 215.9 $ 280.2 $ 406.5 $ 514.2
Lumber 187.6 164.2 342.9 302.6
Industrial panel products 46.5 51.3 90.6 97.9
Other building products 148.5 121.7 270.6 236.3
------- ------- -------- --------
Total building products 598.5 617.4 1,110.6 1,151.0
Pulp 34.8 40.9 77.3 91.4
------- ------- -------- --------
Total sales $ 633.3 $ 658.3 $1,187.9 $1,242.4
======= ======= ======== ========
Export sales $ 54.4 $ 58.3 $ 127.6 $ 137.8
======= ======= ======== ========
Profit (loss):
Building products $ 18.9 $ 72.3 $ 16.8 $ 102.3
Pulp (6.0) (30.5) (17.6) (52.4)
Settlement payment and other
unusual items, net -- -- 121.9 --
General corporate expense, net (21.1) (6.8) (42.5) (19.9)
Interest income (expense), net (6.5) (.5) (15.0) (.5)
------- ------- -------- --------
Income (loss) before taxes and
minority interest $ (14.7) $ 34.5 $ 63.6 $ 29.5
======= ======= ======== ========
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LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
SUMMARY OF PRODUCTION VOLUMES
QUARTER ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------- ----------------
1997 1996 1997 1996
----- ----- ----- -----
Oriented strand board panels,
million square ft 3/8" basis 965 931 1,821 1,666
Oriented strand board siding,
million square ft 3/8" basis 75 102 150 196
Softwood plywood,
million square ft 3/8" basis 312 423 593 832
Lumber, million board feet 319 326 621 609
Medium density fiberboard,
million square ft 3/4" basis 55 55 105 102
Particleboard,
million square ft 3/4" basis 89 89 169 170
Hardboard,
million square ft 1/8" basis 57 57 111 111
Engineered I-Joists,
million lineal feet 22 13 38 23
Laminated Veneer Lumber,
thousand cubic ft 1,800 1,000 3,100 1,900
Pulp,
thousand short tons* 88 121 201 208
* Includes production of the Ketchikan Pulp Company mill in 1996 and first
quarter 1997.
- 11 -
INDUSTRY PRODUCT PRICE TRENDS
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
OSB PLYWOOD LUMBER PARTICLEBOARD
----------- -------- --------- -------------
N. CENTRAL SOUTHERN
7/16" BASIS PINE 2" FRAMING
24/16 BASIS LUMBER INLAND
SPAN CDX COMPOSITE INDUSTRIAL
RATING 3 PLY PRICES 3/4" BASIS
----------- -------- --------- -------------
Annual Average
1992 217 248 287 200
1993 236 282 394 258
1994 265 302 405 295
1995 245 303 337 290
1996 184 258 398 276
1996 Second Quarter Average
203 246 393 277
1997 First Quarter Average
134 266 438 265
1997 Second Quarter Average
126 256 443 265
Weekly Average
July 3 123 257 433 265
July 11 130 255 431 265
July 18 135 258 430 265
- 12 -
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
The following sets forth the current status of certain legal proceedings:
Environmental Proceedings
In March 1995, L-P's subsidiary Ketchikan Pulp Company (KPC) entered into
agreements with the federal government to resolve the issues related to water
and air compliance problems experienced at KPC's pulp mill during the late 1980s
and early 1990s. In addition to civil and criminal penalties that have been
paid, KPC also agreed to undertake further expenditures, which are primarily
capital in nature, including certain remedial and pollution control related
measures, with an estimated cost of up to approximately $20 million. With the
recent closure of the pulp mill, KPC is currently seeking the EPA's and court's
guidance regarding the necessity of these expenditures. KPC has also agreed to
undertake a study of whether a clean-up of Ward Cove, the body of water adjacent
to the pulp mill, is needed. If the study determines that such clean-up is
needed, KPC may be required to spend up to $6 million on the clean-up, including
the cost of the study, as part of the overall $20 million of expenditures. At
this time, the company cannot estimate what portion, if any, of the clean-up
expenditures will be required. KPC is also negotiating with the state and EPA to
conduct investigative and clean-up activities at the pulp mill following
shut-down. The USFS has named KPC as a potentially responsible party for costs
related to the capping of a landfill near Thorne Bay, Alaska, and KPC has agreed
to a consent order obligating it to cap the landfill, the total costs of which
may range up to $8 million. Total anticipated costs for these activities are
unknown at this time, but KPC has recorded its initial estimated amount.
The State of Texas has issued a notice of violation to L-P seeking a
penalty of up to $135,000 relating to alleged failure to timely conduct required
air emissions testing at L-P's Silsbee, Texas, plant.
L-P has been negotiating with the California North Coast Air Management
Board concerning a possible resolution of alleged violations relating to air
quality at L-P's Samoa, California, pulp mill. Although no formal enforcement
action has been commenced, the parties are discussing a resolution involving
payment of a penalty, plus certain capital expenditures.
Certain of L-P's plant sites have or are suspected of having substances in
the ground or in the groundwater that are considered pollutants. Appropriate
corrective action or plans for corrective action are underway. Where the
pollutants were caused by previous owners of the property, L-P is vigorously
pursuing those parties through legal channels and is vigorously pursuing
insurance coverage under all applicable policies.
Although L-P's policy is to comply with all applicable environmental laws
and regulations, the company has in the past been required to pay fines for
non-compliance and sometimes litigation has resulted from contested
environmental actions. Also, L-P is involved in other environmental actions and
proceedings which could result in fines or penalties. Management believes that
any fines, penalties or other losses resulting from the matters discussed above
in excess of the reserve for environmental loss contingencies will not have a
material adverse effect on the business, financial position or results of
operations of L-P. See "Colorado Criminal Proceedings" for further discussion of
an environmental action against the company.
- 13 -
Colorado Criminal Proceedings
L-P began an internal investigation at L-P's Montrose (Olathe), Colorado,
oriented strand board (OSB) plant of various matters, including certain
environmental matters, in the summer of 1992 and reported its initial finding of
irregularities to governmental authorities in September 1992. Shortly
thereafter, a federal grand jury commenced an investigation of L-P concerning
alleged environmental violations at that plant, which was subsequently expanded
to include the taking of evidence and testimony relating to alleged fraud in
connection with the submission of unrepresentative OSB Inner-Seal(R) product
samples to the APA-The Engineered Wood Association (APA), an industry product
certification agency, by L-P's Montrose plant and certain of its other OSB
plants. L-P then commenced an independent investigation, which was concluded in
1995, under the direction of former federal judge Charles B. Renfrew concerning
irregularities in sampling and quality assurance in its OSB operations. In June
1995, the grand jury returned an indictment in the U.S. District Court in
Denver, Colorado, against L-P, a former manager of the Montrose mill, and a
former superintendent at the mill. L-P is now facing 23 felony counts related to
environmental matters at the Montrose mill, including alleged conspiracy,
tampering with opacity monitoring equipment, and making false statements under
the Clean Air Act. The indictment also charges L-P with 25 felony counts of
fraud relating to alleged use of the APA trademark on OSB Inner-Seal structural
panel products produced by the Montrose mill as a result of L-P's allegedly
improper sampling practices in connection with the APA quality assurance
program.
In December 1995, L-P received a notice of suspension from the EPA stating
that, because of criminal proceedings pending against L-P in Colorado, agencies
of the federal government would be prohibited from purchasing from L-P's
Northern Division. L-P is negotiating to have the EPA suspension lifted or
modified based on positive environmental programs actively underway. While
negotiations are continuing, the EPA has approved a preliminary agreement
limiting the prohibition to L-P's Montrose, Colorado, facility for an interim
period in recognition of L-P's environmental compliance efforts. Under recently
revised regulations of the United States Department of Agriculture, the EPA
suspension will also have the effect of prohibiting L-P's Montrose facility from
purchasing timber directly, but not indirectly, from the United States Forest
Service.
L-P maintains a reserve for its estimate of the cost of the Montrose
criminal proceedings, although as with any estimate, there is uncertainty
concerning the actual costs to be incurred. At the present time, L-P cannot
predict whether or to what extent the circumstances described above will result
in further civil litigation or investigation by government authorities, or the
potential financial impact of any such current or future proceedings, in which
case the resolution of the above matters could have a materially adverse impact
on L-P.
OSB Inner-Seal(R) Siding Matters
L-P has been named as a defendant in numerous class action and non-class
action proceedings, brought on behalf of various persons or purported classes of
persons (including nationwide classes in the United States and Canada) who own
or have purchased or used OSB siding manufactured by L-P, because of alleged
unfair business practices, breach of warranty, misrepresentation, conspiracy to
defraud, and other theories related to alleged defects, deterioration, or
failure of OSB Inner-Seal siding products.
The United States District Court for the District of Oregon has given
final approval to a settlement between L-P and a nationwide class composed of
all persons who own, who have owned, or who subsequently acquire property on
which L-P's OSB siding was installed prior to January 1, 1996, excluding persons
who timely opted out of the settlement and persons who are members of the
settlement class in the Florida litigation described below. Under the settlement
agreement, an eligible claimant whose claim is filed prior to January 1, 2003
(or earlier in certain cases), and is approved by an independent claims
administrator will
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be entitled to receive from the settlement fund established under the agreement
a payment equal to the replacement cost (to be determined by a third-party
construction cost estimator and currently estimated to be in the range $2.20 to
$6.40 per square foot depending on the type of product and geographic location)
of damaged siding, reduced by a specific adjustment (of up to 65 percent) based
on the age of the siding. Class members who have previously submitted or
resolved claims under any other warranty or claims program of L-P may be
entitled to receive the difference between the amount which would be payable
under the settlement agreement and the amount previously paid. Independent
adjusters will determine the extent of damage to OSB siding at each claimant's
property in accordance with a specified protocol. There will be no adjustment to
settlement payments for improper maintenance or installation.
A claimant who is dissatisfied with the amount to be paid under the
settlement may elect to pursue claims against L-P in a binding arbitration
seeking compensatory damages without regard to the amount of payment calculated
under the settlement protocol. A claimant who elects to pursue an arbitration
claim must prove his entitlement to damages under any available legal theory,
and L-P may assert any available defense, including defenses that otherwise had
been waived under the settlement agreement. If the arbitrator reduces the damage
award otherwise payable to the claimant because of a finding of improper
installation, the claimant will be entitled to pursue a claim against the
contractor/builder to the extent the award was reduced.
L-P is required to pay $275 million into the settlement fund in seven
annual installments beginning in mid-1996: $100 million (paid in June 1996), $55
million, $40 million, $30 million, $20 million, $15 million, and $15 million. If
at any time after the fourth year of the settlement period the amount of
approved claims (paid and pending) equals or exceeds $275 million, then the
settlement agreement will terminate as to all claims in excess of $275 million
unless L-P timely elects to provide additional funding within 12 months equal to
the lesser of (i) the excess of unfunded claims over $275 million or (ii) $50
million and, if necessary to satisfy unfunded claims, a second payment within 24
months equal to the lesser of (i) the remaining unfunded amount or (ii) $50
million. If the total payments to the settlement fund are insufficient to
satisfy in full all approved claims filed prior to January 1, 2003, then L-P may
elect to satisfy the unfunded claims by making additional payments into the
settlement fund at the end of each of the next two 12-month periods or until all
claims are paid in full, with each additional payment being in an amount equal
to the greater of (i) 50 percent of the aggregate sum of all remaining unfunded
approved claims or (ii) 100 percent of the aggregate amount of unfunded approved
claims, up to a maximum of $50 million. If L-P fails to make any such additional
payment, all class members whose claims remain unsatisfied from the settlement
fund may pursue any available legal remedies against L-P without regard to the
release of claims provided in the settlement agreement.
If L-P makes all payments required under the settlement agreement,
including all additional payments as specified above, class members will be
deemed to have released L-P from all claims for damaged OSB siding, except for
claims arising under their existing 25-year limited warranty after termination
of the settlement agreement. The settlement agreement does not cover
consequential damages resulting from damage to OSB siding or damage to utility
grade OSB siding (sold without any express warranty), either of which could
create additional claims. In the event all claims filed prior to January 1,
2003, that are approved have been paid without exhausting the settlement fund,
any amounts remaining in the settlement fund revert to L-P. In addition to
payments to the settlement fund, L-P will be required to pay fees of class
counsel in the amount of $26.25 million, as well as expenses of administering
the settlement fund and inspecting properties for damage and certain other
costs. As of August 11, 1997, approximately $40.9 million remained of the $155
million paid into the fund to date, after accruing interest on undisbursed funds
and deducting class notification costs, prior claims costs (including payments
advanced to homeowners in urgent circumstances) and payment of claims under the
settlement. By that date, approximately 109,000 claims forms had been requested
and mailed and approximately 53,700 claims had been submitted; approximately
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15,700 class settlement checks had been mailed totaling approximately $98.6
million.
Approximately 1,400 opt out notices were timely submitted, including about
1,200 individual property owners (a number of whose claims have subsequently
been resolved) and about 200 developers/owners of commercial properties; this
has resulted in additional claims being filed by those who opted out,
predominantly by owners/developers of commercial properties, most of which have
been settled.
A settlement of the Florida class action has been approved by the Circuit
Court for Lake County, Florida. Under the settlement, L-P has established a
claims procedure pursuant to which members of the settlement class may report
problems with L-P's OSB siding and have their properties inspected by an
independent adjuster, who will measure the amount of damage and also determine
the extent to which improper design, construction, installation, finishing,
painting, and maintenance may have contributed to any damage. The maximum
payment for damaged siding will be $3.40 per square foot for lap siding and
$2.82 per square foot for panel siding, subject to reduction of up to 75 percent
for damage resulting from improper design, construction, installation,
finishing, painting, or maintenance, and also subject to reduction for age of
siding more than three years old. L-P has agreed that the deduction from the
payment to a member of the Florida class will be not greater than the deduction
computed for a similar claimant under the national settlement agreement
described above. Class members will be entitled to make claims for up to five
years after October 4, 1995. As of August 11, 1997, approximately 29,000 claims
forms had been requested, and approximately 17,000 claims had been paid at an
aggregate cost of approximately $40.9 million, including adjustments to conform
to the national settlement.
Other OSB Matters
Three separate purported class actions on behalf of owners and purchasers
of properties in which L-P's OSB panels are used for flooring, sheathing, or
underlayment have been consolidated in the United States District Court for the
Northern District of California under the caption Agius v. Louisiana-Pacific
Corporation. The actions seek damages and equitable relief for alleged fraud,
misrepresentation, breach of warranty, negligence, and improper trade practices
related to alleged improprieties in testing, APA certification, and marketing of
OSB structural panels, and alleged premature deterioration of such panels. A
separate state court action entitled Carney v. Louisiana-Pacific Corporation is
pending in the Superior Court of the State of California for the City and County
of San Francisco, seeking relief under California consumer protection statutes
based on similar allegations.
At the present time, L-P cannot predict the potential financial impact of
the above actions. However, the resolution of the above matters could have a
materially adverse impact on L-P.
Executive Employment Matter
In January 1996, an action entitled International Paper Company v. Mark A.
Suwyn and Louisiana-Pacific Corporation was instituted in the United States
District Court for the Southern District of New York claiming that Mr. Suwyn's
employment as chief executive officer of L-P violated the terms of a previous
employment agreement with the plaintiff. Following trial, the court returned a
decision in favor of Mr. Suwyn and L-P.
Other
L-P and its subsidiaries are parties to other legal proceedings.
Management believes that the outcome of such proceedings will not have a
material
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adverse effect on the business, financial position or results of operations of
L-P.
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Item 4. Submission of Matters to a Vote of Security-Holders
The Registrant held its annual meeting of stockholders on May 5, 1997. The
following summarizes the matters voted upon at the meeting and the results of
the voting:
Directors elected for a term of office expiring in 2000:
Name of Director Shares Voted For Shares Individually Withheld
Archie W. Dunham 85,399,107 8,003,137
Bonnie Guiton Hill 85,288,124 8,114,120
Mark A. Suwyn 85,385,241 8,017,003
Shares Shares Broker
Description of Proposal Shares For Against Abstained Non-Votes
Approval of 1997 Incentive
Stock Award Plan 77,710,657 14,780,342 911,245 0
Approval of Performance Goals
for Annual Cash Incentive Awards 81,668,763 10,794,722 938,759 0
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Item 6. Exhibits and Reports on Form 8-K.
(a) The exhibits filed as part of this report or
incorporated by reference herein are listed in the
accompanying exhibit index.
(b) Reports on Form 8-K. No reports on Form 8-K were filed
during the quarter ended June 30, 1997.
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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 thereunto duly authorized.
LOUISIANA-PACIFIC CORPORATION
By /s/ WILLIAM L. HEBERT
William L. Hebert
Vice President - Treasurer
and Controller
(Principal Financial Officer)
DATED: August 14, 1997
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
3 Bylaws as amended July 29, 1997
10 1997 Incentive Stock Award Plan
27 Financial Data Schedule
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