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 March 31, 1998
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: 109,815,903 shares of Common Stock, $1 par value, outstanding as
of April 30, 1998.
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FORWARD LOOKING STATEMENTS
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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, production capacities, 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.
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998 1997
Net sales $ 548.3 $ 554.6
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Costs and expenses:
Cost of sales 500.3 510.1
Depreciation, amortization and depletion 39.5 40.9
Selling and administrative 39.7 38.7
Settlements, charges and other unusual items, net --- (121.9)
Interest expense 9.7 8.8
Interest income (2.1) (1.3)
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Total costs and expenses 587.1 476.3
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Income (loss) before taxes and minority interest (38.8) 78.3
Provision (benefit) for income taxes (12.5) 37.6
Minority interest in net income (loss)
of consolidated subsidiaries (1.2) (1.3)
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Net income (loss) $ (25.1) $ 42.0
======= =======
Net income (loss) per share - basic and diluted $ (.23) $ .39
======= =======
Cash dividends per share $ .14 $ .14
======= =======
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CONDENSED CONSOLIDATED BALANCE SHEETS
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(DOLLAR AMOUNTS IN MILLIONS) (UNAUDITED)
MAR. 31, 1998 DEC. 31, 1997
Cash and cash equivalents $ 22.3 $ 31.9
Accounts receivable, net 168.8 146.2
Inventories 260.3 258.8
Prepaid expenses 11.6 8.9
Income tax refunds receivable 79.6 78.0
Deferred income taxes 73.0 73.0
-------- --------
Total current assets 615.6 596.8
-------- --------
Timber and timberlands 642.3 634.2
Property, plant and equipment 2,453.0 2,433.9
Less reserves for depreciation (1,276.7) (1,242.1)
-------- --------
Net property, plant and equipment 1,176.3 1,191.8
Goodwill and other assets 152.9 155.6
-------- --------
Total assets $2,587.1 $2,578.4
======== ========
Current portion of long-term debt $ 21.7 $ 22.9
Short-term notes payable 41.5 22.0
Accounts payable and accrued liabilities 225.4 234.4
Current portion of contingency reserves 40.0 40.0
-------- --------
Total current liabilities 328.6 319.3
-------- --------
Long-term debt, excluding current portion 630.8 572.3
Contingency reserves, excluding current portion 168.3 184.0
Deferred income taxes and other 205.8 216.6
Stockholders' equity:
Common Stock 117.0 117.0
Additional paid-in-capital 468.8 472.2
Retained earnings 937.0 977.5
Treasury stock (159.5) (163.4)
Loans to Employee Stock Ownership Trusts (31.7) (37.7)
Accumulated comprehensive income (loss) (78.0) (79.4)
-------- --------
Total stockholders' equity 1,253.6 1,286.2
-------- --------
Total liabilities and equity $2,587.1 $2,578.4
======== ========
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(DOLLAR AMOUNTS IN MILLIONS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998 1997
Cash flows from operating activities:
Net income (loss) $ (25.1) $ 42.0
Depreciation, amortization and depletion 39.5 40.9
Cash settlements of contingencies (15.7) (20.3)
Other adjustments 7.3 11.4
Decrease (increase) in certain working
capital components and deferred taxes (49.4) (118.9)
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Net cash provided by (used in) operating activities (43.4) (44.9)
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Cash flows from investing activities:
Capital spending, including acquisitions (45.4) (81.4)
Other investing activities, net 13.5 5.8
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Net cash used in investing activities (31.9) (75.6)
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Cash flows from financing activities:
New borrowing, including net increase in credit line 77.3 219.5
Repayment of long-term debt (18.5) (100.5)
Increase (decrease) in short-term notes payable 19.5 (4.9)
Cash dividends (15.4) (15.2)
Other financing activities, net 2.8 .9
------- -------
Net cash provided by (used in) financing activities 65.7 99.8
------- -------
Net increase (decrease) in cash and cash equivalents (9.6) (20.7)
Cash and cash equivalents at beginning of year 31.9 27.8
------- -------
Cash and cash equivalents at end of period $ 22.3 $ 7.1
======= =======
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CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE) (UNAUDITED)
THREE MONTHS ENDED
MARCH 31, 1998
SHARES AMOUNT
Common Stock 116,937,022 $ 117.0
=========== ========
Additional Paid-in-Capital:
Beginning balance $ 472.2
Net transactions (3.4)
--------
Ending balance $ 468.8
========
Retained Earnings:
Beginning balance $ 977.5
Net income (25.1)
Cash dividends, $.14 per share (15.4)
--------
Ending balance $ 937.0
========
Treasury stock:
Beginning balance 7,309,360 $ (163.4)
Net shares reissued for employee stock
plans and acquisition (176,390) 3.9
--------- --------
Ending balance 7,132,970 $ (159.5)
========= ========
Loans to ESOTs:
Beginning balance $ (37.7)
Accrued contribution 6.0
--------
Ending balance $ (31.7)
========
Accumulated Comprehensive Income (Loss):
Beginning balance $ (79.4)
Currency translation adjustment and
amortization of deferred compensation 1.4
--------
Ending balance $ (78.0)
========
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
1. The unaudited condensed 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, except as discussed elsewhere in this report, 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 1997 Annual Report on Form
10-K. 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. Basic and diluted earnings per share are based on the weighted average
number of shares of common stock outstanding during the periods (108,990,000 in
1998 and 108,450,000 in 1997). The effect of potentially dilutive common stock
equivalents is not included in the calculation of diluted earnings per share
because it is currently anti-dilutive as a result of L-P's net losses in the
first quarter of 1998 and for the year 1997.
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. Effective January 1, 1998, L-P adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," which requires
items previously reported as a component of stockholders' equity to be more
prominently reported in a separate financial statement as a component of
comprehensive income. Components of comprehensive income include net income
(loss), currency translation adjustments and deferred compensation.
Comprehensive income (loss) was ($23.7) million in the 1998 first quarter and
$36.5 million in the first quarter of 1997.
7. 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
"Settlements, Charges and Other Unusual Items, Net" and for a discussion of
anticipated significant asset sales.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
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General
- -------
Lower lumber prices and lower pulp sales were the primary factors for
lower sales and lower earnings in the first quarter of 1998. L-P lost $25.1
million ($.23 per share) in the first quarter of 1998 compared to net income in
1997 of $42 million ($.39 per share). Adjusting for the unusual gain in 1997,
the comparable loss in the first quarter of 1997 was $32 million or $.29 per
share. Sales fell approximately 1 percent to $548.3 million in the first quarter
of 1998 from $554.6 million in the first quarter of 1997. The Company recorded a
net gain of $122 million ($74 million after taxes, or $.68 per share) in the
first quarter of 1997 relating to a $135 million settlement with the U.S.
Government over 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 92 percent of
sales during the first quarter of 1998 and 1997. 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
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Building products segment sales in the first quarter of 1998 were $527.4
million, a three percent increase from first quarter 1997 sales of $512.1
million. The increase was primarily attributable to a 12 percent growth in
structural panel products (OSB and plywood) sales to $213.4 in 1998 compared to
$190.6 million in 1997. Structural panel products sales growth was the result of
an 18 percent increase in OSB prices and level plywood prices over the prior
year. Structural panel sales volumes increased seven percent for OSB due to
stronger demand and decreased 11 percent for plywood due to weather-related
production outages in 1998 and mill closures subsequent to the 1997 first
quarter. Total lumber sales decreased about 12 percent to $136.7 million in 1998
from $155.3 million in 1997. Lumber sales volume dropped approximately 8 percent
primarily due to poor weather and mill closures. Lumber prices decreased an
average of 3 percent due to weak markets. Industrial panel products sales
declined approximately one percent to $43.5 million in 1998 from $44.1 million
in 1997 due to increased sales volume offset by a larger decrease in average
selling prices. The sales increase in the other building products category to
$133.8 million from $122.1 million was primarily attributable to the purchase of
the assets of Tecton Laminates (engineered wood products) late in the first
quarter of 1997.
Building products segment operating profits increased to $4.0 million in
1998 from a loss of $2.1 million in 1997. This increase is primarily
attributable to the increase in OSB prices discussed above. Lower profits in
industrial panels and lumber partially offset the OSB gains. Higher log costs in
the South along with lower average selling prices caused the decrease in lumber
profits, while the industrial panel profit decrease was primarily due to lower
sales averages.
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 the prices of its building products will remain at
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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.
Pulp Segment
- ------------
Pulp sales dropped nearly 51 percent in the first quarter of 1998 to
$20.9 million from $42.5 million in the first quarter of 1997. For L-P's two
remaining pulp mills, prices decreased approximately seven percent on average
and volume decreased approximately 13 percent. Pulp sales were negatively
impacted by the Asian economic crisis which affected both prices and volume. The
pulp mill owned by L-P's Ketchikan Pulp Company subsidiary generated sales of
$16.8 million in the first quarter of 1997. This mill was permanently closed in
1997 and, thus, did not generate any sales in 1998.
Pulp segment losses remained constant in 1998 despite sales price
decreases due primarily to cost cutting measures. Pulp segment losses were $11.6
million in the first three months of 1998 and 1997.
L-P's pulp products are primarily sold as commodities and therefore sales
prices fluctuate based on world-wide 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.
Settlements, Charges and Other Unusual Items, Net
- -------------------------------------------------
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 amount paid under a settlement agreement with the U.S.
Government over claims related to the long-term timber supply contract in Alaska
of $135 million. Adjustments to pulp mill closure-related accruals were netted
against this gain.
General Corporate and Other Expense
- -----------------------------------
The increase in general corporate and other expenses is due to various
additional costs, none of which are individually significant.
Interest Income (Expense)
- -------------------------
Interest expense increased 10 percent in 1998 due to higher borrowing
levels and higher interest rates on borrowings. Higher borrowing levels were
attributable to losses sustained as well as capital expenditures needed to
improve capital facilities. Interest income increased in 1998 due to notes
receivable related to the sale of timberland late in 1997.
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.
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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------------------------
Cash used in operations decreased slightly in 1998 over 1997. Cash used
in investing activities decreased due to lower capital expenditures. L-P
acquired GreenStone Industries and the assets of Tecton Laminates in the first
quarter of 1997. Financing activities provided nearly $66 million of cash in the
first quarter of 1998 compared to nearly $100 million in 1997. The Company
borrowed on its revolving lines of credit and increased short-term notes to
provide for its financing needs during the first quarter of 1998.
L-P's ratio of long-term debt to total capital was 33.5 percent
(excluding contingency reserves) at March 31, 1998. Despite increased
borrowings, cash balances combined with expected tax refunds, asset sale
proceeds (discussed below) and credit facilities are expected to be sufficient
to meet projected cash needs during 1998, including payments related to the OSB
siding litigation and other litigation.
ASSET SALES
- -----------
In May 1998, L-P announced that it had reached agreement with two parties
to sell its California redwood timberlands and associated sawmills and other
assets for total estimated proceeds of approximately $615 million. The sale,
which includes more than 300,000 acres of timberlands, three operating sawmills
and two distribution facilities, among other operations, is contingent upon
regulatory approvals and other conditions customary in such transactions. The
Samoa pulp mill is not included in the transaction. The transactions are
expected to close in the second quarter of 1998. These transactions are part of
L-P's previously announced plans to sell non-strategic assets for total
estimated proceeds in the range of $800 million to $1 billion. Other previously
announced sales include the Weather-Seal window and door manufacturing business,
the fiber gypsum plant in Canada and certain parcels of timberland in interior
California. There can be no assurance that proceeds within the foregoing range
will be realized. The proceeds realized will initially be used to fund
operations and reduce or eliminate outstanding borrowings on L-P's revolving
credit facilities. Management continues to study alternative uses of the
proceeds to maximize the long-term value to L-P and its stockholders, which may
include internal investments in L-P's core businesses in the building products
market, strategic acquisitions, or implementation of a share repurchase program.
YEAR 2000 COMPLIANCE
- --------------------
As the year 2000 approaches, an issue impacting most companies has emerged
regarding the ability of computer applications and systems to properly interpret
the year. This is a pervasive and complex issue.
L-P is in the process of identifying significant applications that will
require modification to ensure Year 2000 compliance. Internal and external
resources are being used to make this assessment, the required modifications and
test Year 2000 compliance. L-P plans on completing the assessment of all
significant applications and developing a plan for appropriate action by
September 30, 1998.
In addition, L-P will begin communicating with others with whom it does
significant business to determine their Year 2000 compliance
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readiness and the extent to which L-P is vulnerable to any third party Year 2000
issues. However, there can be no guarantee that the systems of other companies
on which L-P's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with L-P's
systems, would not have a material adverse effect on L-P.
The total cost to L-P of these Year 2000 compliance activities has not
been and is not anticipated to be material to its financial position or results
of operations in any given year. These costs and the date on which L-P plans to
complete the Year 2000 assessment process are based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ from those
plans.
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SALES AND OPERATING PROFIT BY MAJOR PRODUCT GROUP
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(DOLLAR AMOUNTS IN MILLIONS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31 1998 1997
Sales:
Structural panel products $ 213.4 $ 190.6
Lumber 136.7 155.3
Industrial panel products 43.5 44.1
Other building products 133.8 122.1
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Total building products 527.4 512.1
Pulp 20.9 42.5
------- -------
Total sales $ 548.3 $ 554.6
======= =======
Export sales $ 42.0 $ 73.2
======= =======
Profit (loss):
Building products $ 4.0 $ (2.1)
Pulp (11.6) (11.6)
Settlement and other unusual items, net --- 121.9
General corporate expense and other, net (23.6) (21.4)
Interest income (expense), net (7.6) (8.5)
------- -------
Income (loss) before taxes and
minority interest $ (38.8) $ 78.3
======= =======
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LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
SUMMARY OF PRODUCTION VOLUMES
QUARTER ENDED MARCH 31
----------------------
1998 1997
Oriented Strand Board
panels and siding,
million square feet 3/8" basis 1,015 931
Softwood plywood,
million square feet 3/8" basis 231 281
Lumber, million board feet 286 301
Industrial panel products
(particleboard, medium density
fiberboard and hardboard),
million square feet 3/4" basis 144 140
Engineered I-Joists,
million lineal feet 22 17
Laminated Veneer Lumber (LVL),
thousand cubic feet 1,631 1,273
Pulp, thousand short tons 50 116*
*Includes production from the Ketchikan Pulp Company mill in 1997.
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INDUSTRY PRODUCT PRICE TRENDS
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
OSB PLYWOOD LUMBER PARTICLEBOARD
----------- -------- --------- -------------
N. CENTRAL SOUTHERN
7/16" BASIS PINE 1/2" 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
1997 143 265 417 262
1997 First Quarter Average
134 266 438 265
1997 Fourth Quarter Average
161 274 372 255
1998 First Quarter Average
158 266 368 253
Source: Random Lengths
- - 14 -
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
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. It is anticipated that KPC will 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. KPC negotiated an administrative
order with the state and EPA to conduct investigative and clean-up activities at
the pulp mill. Total costs for these activities are unknown at this time, but
KPC has recorded its initial estimated amount.
The United States Forest Service (USFS) has named KPC as a potentially
responsible party for costs related to the capping of a landfill near Thorne
Bay, Alaska. Total costs may range up to $8 million.
EPA and the Department of Justice have indicated their intent to seek
penalties for alleged civil violations of the Clean Water Act. The maximum
penalty associated with such an action could total up to $625,000.
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
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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.
L-P maintains a reserve for estimated environmental loss contingencies. As
with all accounting estimates, significant uncertainty exists in the reliability
and precision of the estimates because the facts and circumstances surrounding
each contingency vary from case to case. L-P continually monitors its estimated
exposure for environmental liabilities and adjusts its accrual accordingly. As
additional information about the environmental contingencies becomes known,
L-P's estimate of its liability for environmental loss contingencies may change
significantly, although no estimate of the range of any potential adjustment of
the liability can be made at this time. L-P cannot estimate the time frame over
which these accrued amounts are likely to be paid out. A portion of L-P's
environmental reserve is related to liabilities for clean-up of properties which
are currently owned or have been owned in the past by L-P. Certain of these
sites are subject to cost sharing arrangements with other parties who were also
involved with the site. L-P does not believe that any of these cost sharing
arrangements will result in additional material liability to L-P due to
non-performance by the other party. L-P has not reduced its reserves for any
anticipated insurance recoveries.
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, results of
operations or liquidity of L-P. See "Colorado Criminal Proceedings" for further
discussion of an environmental action against L-P.
- - 16 -
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 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. The former superintendent and former plant manager have each pled
guilty to one environmental count and have been sentenced by the court. 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 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 November 1995, the Court bifurcated the environmental and fraud felony
counts. A trial date of April 13, 1998, had been set in the environmental case.
However, a Notice of Disposition and Joint Motion to Vacate Trial Date was filed
with the Court and thus no trial date is currently scheduled.
In December 1995, L-P received a notice of suspension from the EPA stating
that, because of the criminal proceedings pending against L-P in Colorado, the
Montrose facility would be prohibited from purchasing timber directly from the
USFS. The EPA suspension was lifted in April 1998,
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based on positive environmental programs actively underway at L-P's facilities
generally. The lifting of the suspension will permit the Montrose facility to
resume purchasing timber directly from the USFS.
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 effect
on L-P.
OSB 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 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, have owned, or 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 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 of $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
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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, $55 million, $40
million, $30 million, $20 million, $15 million, and $15 million. As of March 31,
1998, L-P had funded the first three installments. 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
- - 19 -
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 Inner-Seal 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 Inner-Seal 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 was 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 March 31, 1998, approximately $26 million remained of the $195 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.
The claims submitted to the claims administrator substantially exceed the
$275 million of payments that L-P is required to make under the settlement
agreement. As calculated under the terms of the settlement, as of March 31,
1998, claims submitted and inspected exceed $365 million. There are insufficient
data to project the future volume of claims or the total dollar value of
additional claims that may be made against the settlement fund. L-P has not
decided whether it will provide the optional funding discussed above in excess
of the required $275 million after the fourth year of the settlement.
Alternatively, L-P could elect to pursue other options, including allowing the
settlement agreement to terminate, thereby entitling claimants with unsatisfied
claims to pursue available legal remedies against L-P.
- - 20 -
A settlement of a Florida class action was 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 Inner-Seal 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 is $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 lack of 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.
L-P maintains reserves for the estimated costs of these siding settlements,
although, as with any estimate, there is uncertainty concerning the actual costs
to be incurred. The discussion herein notes some of the factors, in addition to
the inherent uncertainty of predicting the outcome of claims and litigation,
that could cause actual costs to vary materially from current estimates. Due to
the various uncertainties, L-P cannot predict to what degree actual payments
under the settlement agreements, or any alternative strategies adopted by L-P,
will materially exceed the recorded liability related to these matters, although
it is possible that in the near term, total estimated payments will exceed the
recorded liabilities.
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
- - 21 -
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. On
February 27, 1998, the United States District Court for the Northern District of
California entered an order approving a settlement that would resolve the above
actions. A final order approving the settlement is expected pending resolution
of an appeal by a single claimant.
The settlement class, other than persons who opted out, is generally
composed of all persons who purchased L-P OSB sheathing or acquired real
property or structures in the United States containing L-P OSB sheathing between
January 1, 1984, and October 22, 1997, but only if they have retained ownership
of the product. Under the settlement agreement, an eligible claimant who files a
claim prior to October 22, 2017, upon review of the claim by the claims
administrator, will be entitled to recover the reasonable cost of repair or
replacement of any L-P OSB sheathing determined to have failed to perform its
essential function as warranted and not occasioned by misuse, negligent or
intentional misconduct of a third party or an event over which L-P had no
control. The settlement agreement also provides for payment of a $1.5 million
grant to the University of California Forest Products Laboratory and reasonable
attorneys' fees of class counsel.
L-P maintains a reserve for its estimate of the cost of these other OSB
matters, including the sheathing settlement, although as with any estimate,
there is uncertainty concerning the actual costs to be incurred. Based on a
review of its claims records to date, L-P believes that known reports of damage
to installed L-P OSB sheathing have been immaterial in number and amount.
- - 22 -
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 adverse
effect on the business, financial position, results of operations or liquidity
of L-P.
Contingency Reserves
- --------------------
L-P maintains contingency reserves in addition to the environmental
reserves discussed above. As L-P receives additional information regarding
actual claim rates and average claim amounts, L-P monitors its estimated
exposure and adjusts its accrual accordingly. The amounts ultimately paid for
these contingencies could differ materially from the amount currently recorded,
although no estimate of the timing or range of any potential adjustment can be
made at this time.
- - 23 -
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 March 31, 1998.
- - 24 -
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/ CURTIS M. STEVENS
Curtis M. Stevens
Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and
Accounting Officer)
DATED: May 13, 1998
- - 25 -
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
2.1 Purchase Agreement by and between the registrant, LPS Corporation,
L-P Redwood, LLC, Louisiana-Pacific Samoa, Inc., and Simpson
Timber Company and Simpson Investment Company dated as of May 1,
1998.
2.2 Purchase Agreement by and between the registrant, LPS Corporation,
L-P Redwood, LLC, and Sansome Forest Partners, L.P., dated as of
May 1, 1998.
3 Bylaws of the registrant as amended as of May 3, 1998.
10.1 1992 Non-Employee Director Stock Option Plan (restated as of May
3, 1998) and related Form of Option Agreement.
10.2 Form of Change of Control Employment Agreement between the
registrant and each of Warren Easley, Richard W. Frost, Michael D.
Hanna, Karen Lundquist, Keith Matheney, Curt Stevens, Mark A.
Suwyn, Michael J. Tull, and Gary C. Wilkerson.
27 Financial Data Schedule.