Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1 TO ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File Number
December 31, 1998 1-7107
LOUISIANA-PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 93-0609074
(State of Incorporation) (I.R.S. Employer
Identification No.)
111 S.W. Fifth Avenue
Portland, Oregon 97204 Registrant's telephone number
(Address of principal (including area code)
executive offices) 503-221-0800
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Common Stock, $1 par New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
State the aggregate market value of the voting stock held by
nonaffiliates of the registrant: 1,947,161,485 as of March 12, 1999.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock: 107,308,727 of Common Stock, $1 par value, outstanding
as of March 12, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement for 1999 Annual Meeting: Part III
EXCEPT AS OTHERWISE SPECIFIED AND UNLESS THE CONTEXT OTHERWISE REQUIRES,
REFERENCES TO "L-P" REFER TO LOUISIANA-PACIFIC CORPORATION AND ITS
SUBSIDIARIES.
This amendment to Form 10-K is filed in order to amend the following
items: Item 3 -- Legal Proceedings; Item 7 -- Management's Discussion and
Analysis of Financial Condition and Results of Operations; Item 8 -- the
Financial Statements and Supplementary Data; and Item 14 - - Exhibits, Financial
Statement Schedules, and Reports on Form 8-K. This amendment should be read in
conjunction with the reports filed by L-P with the Securities and Exchange
Commission under Section 13(a) of the Securities Exchange Act after March 18,
1999, which contain information that updates certain of the information
contained in this amendment.
ITEM 3. LEGAL PROCEEDINGS
Certain environmental matters and legal proceedings involving L-P are
discussed below.
Environmental Matters
In March 1995, L-P's subsidiary, Ketchikan Pulp Company ("KPC"), entered
into agreements with the federal government to resolve violations of the Clean
Water Act and the Clean Air Act that occurred at KPC's pulp mill during the late
1980's and early 1990's. These agreements were subsequently approved by the U.S.
District Court for the District of Alaska. Pursuant to these agreements, KPC
paid $1.25 million of criminal penalties and $3.1 million of civil penalties,
all of which were paid in 1995. In addition, KPC agreed to undertake certain
remedial and pollution-control projects. These projects included (i) capital
projects for spill containment and water treatment plant upgrades estimated to
cost approximately $13.4 million (of which approximately $7.5 million had been
spent at December 31, 1998) and (ii) non-capital projects relating to the
investigation and remediation of Ward Cove, a body of water adjacent to the mill
site, estimated to cost approximately $6.3 million (of which approximately $1.6
million had been spent at December 31, 1998). As a result of the closure of the
mill in May 1997, KPC's obligations with respect to the capital projects have
been suspended through January 2000, and KPC is in the process of seeking
permanent relief from those obligations. KPC's obligations with respect to the
Ward Cove investigation and remediation have not been affected by the closure of
the mill.
In June, 1997, KPC entered into an agreement with the State of Alaska and
the U.S. Environmental Protection Agency (the "EPA") to investigate and, if
necessary, clean up the former mill site. KPC has completed the investigative
portion of this project and commenced work on the clean-up portion of this
project, which is expected to be completed in the third quarter of 1999. Total
costs associated with this project are estimated to be approximately $2.7
million, of which approximately $2.6 million had been spent at December 31,
1998.
KPC has completed the closure of a landfill near Thorne Bay, Alaska,
pursuant to an agreement with the U.S. Forest Service (the "USFS"). Costs of the
project totaled approximately
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$6.5 million. KPC is also continuing to monitor leachate from the landfill in
order to evaluate whether treatment of the leachate is necessary.
Certain L-P plant sites have, or are suspected of having, substances in
the ground or in the groundwater underlying the sites that are considered
pollutants.
Although L-P's policy is to comply with all applicable environmental laws
and regulations, L-P has, in the past, been required to pay fines for
noncompliance. In some instances, 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. Based on the information
currently available, management believes that any fines, penalties or other
losses resulting from the matters discussed above will not have a material
adverse effect on the consolidated financial position or results of operations
of L-P.
Colorado Criminal Proceedings
In June 1995, a federal grand jury returned an indictment in the U.S.
District Court for the District of Colorado against L-P in connection with
alleged environmental violations, as well as alleged fraud in connection with
the submission of unrepresentative oriented strand board (OSB) product samples
to an industry product certification agency, by L-P's Montrose (Olathe),
Colorado OSB plant. In connection with entering a guilty plea as to certain
criminal violations in May 1998, (i) L-P agreed to pay total penalties of $37
million (including making $500,000 in charitable contributions), of which $12
million was paid in 1998, and was sentenced to five years of probation and (ii)
all remaining charges against L-P were dismissed. Under the terms of the
original agreement, the $25 million balance of the fine assessed against L-P,
which is secured by a statutory lien, was payable in three equal annual
installments, together with accrued interest, beginning July 1, 2000. However,
in April, 1999, the court approved a modification to the agreement, which now
provides for the payment of this balance, without interest, on June 1, 1999.
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. In April 1998, L-P signed a Settlement and Compliance
Agreement with the EPA. This agreement formally lifted the 1995 suspension
imposed on the Montrose facility. The agreement has a term of five years and
obligates L-P to (i) develop and implement certain corporate policies and
programs, including a policy of cooperation with the EPA, an employee disclosure
program and a policy of nonretaliation against employees, (ii) conduct its
business to the best of its ability in accordance with federal laws and
regulations and local and state environmental laws, (iii) report significant
violations of law to the EPA, and (iv) conduct at least two audits of its
compliance with the agreement.
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OSB Siding Matters
L-P has been named as a defendant in numerous class action and nonclass
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 U.S. 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, is
entitled to receive from the settlement fund established under the agreement a
payment equal to the replacement cost (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 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 payable under the settlement agreement and the
amount previously paid. The extent of damage to OSB siding at each claimant's
property is determined by an independent adjuster in accordance with a specified
protocol. Settlement payments are not subject to adjustment 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 may pursue a claim against the contractor/builder to
the extent the award was reduced.
The settlement requires L-P to contribute $275 million to the settlement
fund in seven annual installments payable during the period from 1996 through
2002 in the following amounts: $100 million; $55 million; $40 million; $30
million; $20 million; $15 million; and $15 million. As of December 31, 1998, L-P
had funded the first three installments. L-P also had funded a significant
portion of the last four installments through the Early Payment Program
discussed below. The estimated cumulative total of approved claims under the
settlement, as calculated under the terms of the settlement (without giving
effect, in the case of unpaid claims, to discounted settlements under the Early
Payment Program), exceeded $500 million at December 31, 1998. In these
circumstances, unless L-P makes an additional contribution of $50 million to
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the settlement fund by August 2001, the settlement will terminate as to all
claims in excess of $275 million that remain unpaid. In addition, unless L-P
makes a second additional contribution of $50 million to the settlement fund by
August 2002, the settlement will terminate as to all claims in excess of $325
million that remain unpaid. If L-P makes both of these additional contributions,
the settlement would continue in effect until at least August 2003, at which
time L- P would be required to make an election with respect to all unpaid
claims that were filed prior to December 31, 2002. If, in August 2003, L-P
elects to pay pursuant to the settlement all approved claims that remain unpaid
at that time, 50% of the unpaid claims must be paid by August 2004 and the
remaining 50% must be paid by August 2005. If L-P elects not to pay the unpaid
claims pursuant to the settlement, the settlement will terminate with respect to
such unpaid claims and all unpaid claimants will be free to pursue their
individual remedies from and after August 2003.
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 Inner-Seal siding or damage
to utility grade OSB siding (sold without any express warranty), either of which
could create additional claims. 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. 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, as of December 31, 1998, approximately $5.8
million remained of the $195 million paid into the fund to date (all of which
was dedicated to the payment of expenses or held in reserve).
On October 26, 1998, L-P announced an agreement to offer early payments
to eligible claimants who have submitted valid and approved claims under the
original settlement agreement (the "Early Payment Program") and to establish an
additional $125 million fund to pay all other approved claims that are filed
before December 31, 1999 (the "Second Fund").
The Early Payment Program is available to all claimants who are entitled
to be paid from the $80 million of mandatory contributions to the settlement
fund that remained at December 31, 1998 to be made under the settlement
agreement, and to all claimants who otherwise would be paid from the proceeds of
the two optional $50 million contributions to the settlement fund that L-P may
elect to make under the settlement agreement. The early payments in respect of
the $80 million of mandatory contributions are discounted at a rate of 9% per
annum calculated from their original payment dates (1999-2002) to the date the
early payment offer was made. The early payments in respect of the two $50
million optional contributions are discounted at a rate of 12% per annum
calculated from 2001 and 2002, respectively, to the date the early payment offer
was made. For purposes of determining whether L-P has made any such mandatory or
optional contribution to the settlement fund as of the respective due date
therefor, L-P will receive credit for the undiscounted amount of such
contribution in respect of which discounted amounts have been paid pursuant to
the Early Payment Program. In November, 1998, L-P commenced the implementation
of the Early Payment Program by starting to mail checks reflecting discounted
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early payments to eligible claimants. Such claimants may accept or reject the
discounted early payments in favor of remaining under the original settlement,
but may not arbitrate the amount of their early payments. At December 31, 1998,
approximately $106.7 million in Early Payment Program checks had been mailed and
$60.8 million had been cashed in settlement claims, while approximately $26.6
million in such checks remained to be mailed. Giving effect only to Early
Payment Program checks that had actually been cashed, L-P had effectively
satisfied a cumulative total of approximately $266.5 million of its mandatory
and optional contributions to the settlement fund at December 31, 1998.
The $125 million Second Fund represents an alternative source
of payment for all approved and unpaid claims that are not eligible for the
Early Payment Program and all new claims filed before December 31, 1999. In
early 2000, claimants electing to participate in the Second Fund will
be offered a pro rata share of the fund in complete satisfaction of their
claims, which they may accept or reject in favor of remaining under the original
settlement. Claimants who accept their pro rata share may not file additional
claims under the settlement or arbitrate the amount of their payments. Claimants
who elect not to participate in the Second Fund remain bound by the
terms of the original settlement. If L-P is dissatisfied with the number of
claimants who elect to be paid from the Second Fund, L-P may refuse
to proceed with funding at its sole option. In that event, the Second
Fund will be canceled and all the claimants who had elected to participate in it
will be governed by the original settlement.
A settlement of a related class action in Florida was approved by the
Circuit Court for Lake County, Florida, on October 4, 1995. 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 is $3.40 per square foot for lap
siding and $2.82 per square foot for panel siding, subject to reduction by 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 until
October 4, 2000.
ABT Hardboard Siding Matters
ABT, ABTco, Inc., a wholly owned subsidiary of ABT ("ABTco" and, together
with ABT, the "ABT Entities"), Abitibi-Price Corporation ("Abitibi"), a
predecessor of ABT, and certain affiliates of Abitibi (the "Abitibi Affiliates"
and, together with Abitibi, the "Abitibi Entities") have been named as
defendants in a conditionally certified class action filed in the Circuit Court
of Choctaw County, Alabama, on December 21, 1995 and in six other putative class
action proceedings filed in the following courts on the following dates: the
Court of Common Pleas of Allegheny County, Pennsylvania on August 8, 1995; the
Superior Court of Forsyth County,
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North Carolina on December 27, 1996; the Superior Court of Onslow County, North
Carolina on January 21, 1997; the Court of Common Pleas of Berkeley County,
South Carolina on September 25, 1997; the Circuit Court of Bay County, Florida
on March 11, 1998 (subsequently removed to the U.S. District Court for the
Northern District of Florida); and the Superior Court of Dekalb County, Georgia
on September 25, 1998. These actions were brought on behalf of various persons
or purported classes of persons (including nationwide classes) who own or have
purchased or used hardboard siding manufactured or sold by the ABT Entities or
the Abitibi Entities. In general, the plaintiffs in these actions have alleged
unfair business practices, breach of warranty, fraud, misrepresentation,
negligence, and other theories related to alleged defects, deterioration, or
other failure of such hardboard siding, and seek unspecified compensatory,
punitive, and other damages, attorneys' fees and other relief. In addition,
Abitibi has been named in certain other actions, which may result in liability
to ABT under the allocation agreement between ABT and Abitibi described below.
Except in the case of certain of the putative class actions that have been
stayed, the ABT Entities have filed answers in these proceedings that deny all
material allegations of the plaintiffs and assert affirmative defenses. L-P
intends to cause the ABT Entities to defend these proceedings vigorously.
L-P, the ABT Entities and the Abitibi Entities have also been named as
defendants in a putative class action proceeding filed in the Circuit Court of
Jackson County, Missouri on April 22, 1999 and brought on behalf of a purported
class of persons in Missouri who own or have purchased hardboard siding
manufactured by the defendants. In general, the plaintiffs in this proceeding
have alleged breaches of warranty, fraud, misrepresentation, negligence, strict
liability and other theories related to alleged defects, deterioration or other
failure of such hardboard siding, and seek restitution, punitive damages,
attorneys' fees and other relief. L-P and the ABT Entities intend to defend this
proceeding vigorously.
ABT and Abitibi have agreed to an allocation of liability with respect to
claims relating to (1) siding sold by the ABT Entities after October 22, 1992
("ABT Board"), and (2) siding sold by the Abitibi Entities on or before, or held
as finished goods inventory by the Abitibi Entities on, October 22, 1992
("Abitibi Board"). In general, ABT and Abitibi have agreed that all amounts paid
in settlement or judgment (other than any punitive damages assessed individually
against either the ABT Entities or the Abitibi Entities) following the
completion of any claims process resolving any class action claim (including
consolidated cases involving more than 125 homes owned by named plaintiffs)
shall be paid (a) 100% by ABT insofar as they relate to ABT Board, (b) 65% by
Abitibi and 35% by ABT insofar as they relate to Abitibi Board, and (c) 50% by
ABT and 50% by Abitibi insofar as they cannot be allocated to ABT Board or
Abitibi Board. In general, amounts paid in connection with class action claims
for joint local counsel and other joint expenses, and for plaintiffs' attorneys'
fees and expenses, are to be allocated in a similar manner, except that joint
costs of defending and disposing of class action claims incurred prior to the
final determination of what portion of claims relate to ABT Board and what
portion relate to Abitibi Board are to be paid 50% by ABT and 50% by Abitibi
(subject to adjustment in certain circumstances). ABT and Abitibi have also
agreed to certain allocations (generally on a 50/50 basis) of amounts paid for
settlements, judgments and associated fees and expenses in respect of non-class
action claims relating to Abitibi Board. ABT is solely responsible for such
amounts in respect of claims relating to ABT Board. Based on the information
currently available,
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management believes that the resolution of the foregoing matters will not have a
material adverse effect on the financial position or results of operations of
L-P.
Other Proceedings
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 consolidated financial position or results of
operations of L-P.
For a discussion of financial statement reserves related to environmental
and legal proceedings at December 31, 1998, see Note 8 of the Notes to Financial
Statements included in Item 8 of this report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
L-P earned $2.0 million ($.02 per share), in 1998, which included pre-tax
net unusual charges of $47.8 million ($36.1 million after taxes, or $.33 per
share). L-P's net loss in 1996 primarily resulted from net unusual charges and
to a lesser extent, 1997 results were also impacted by unusual charges. The net
charges in 1997 were $32.5 million pre-tax ($20.6 million after tax, or $.19 per
share) and the 1996 charges were $350.0 million pre-tax ($215.0 million after
tax, or $2.00 per share). These net charges are discussed in further detail in
Note 7 to the financial statements. Prior to the charges, L-P had after-tax
income of $38.1 million ($.35 per share) in 1998, an after-tax loss of $81.2
million in 1997 ($.75 per share) and after-tax income of $14.3 million in 1996
($.13 per share).
Sales in 1998 were $2.30 billion, a 4% decline from 1997 sales of $2.40
billion. Sales in 1997 were 3% lower than 1996 sales of $2.49 billion.
L-P operates in five major business segments: structural products,
exterior products, industrial panel products, specialty and other products, and
pulp. Structural products is the most significant segment, accounting for
approximately 60% of net sales. The results of operations are discussed below
for each of these segments separately. Additional information about the factors
affecting L-P's segments is presented in the "Product Information Summary" on
pages 38 and 39.
Most of L-P's products are sold as commodities and therefore sales prices
fluctuate based on market factors over which L-P has little or no control. L-P
cannot predict whether the prices of its products will remain at current levels,
or will increase or decrease in the future because supply and demand are
influenced by many factors, only two of which are the cost and availability of
raw materials. 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.
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Demand for the majority of L-P's products is subject to cyclical
fluctuations over which L-P has no control. Demand for L-P's building products
is heavily influenced by the level of residential construction activity, which
is subject to fluctuations due to changes in economic conditions, interest
rates, population growth and other factors. These cyclical fluctuations in
demand are unpredictable and may have a substantial influence on L-P's results
of operations.
SELECTED SEGMENT DATA
DOLLAR AMOUNTS IN MILLIONS
INCREASE (DECREASE)
- ---------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1998 1997 1996 98-97 97-96
- ---------------------------------------------------------------------------------------------------------------------------
Sales:
Structural products $ 1,374 $ 1,294 $ 1,408 6% (8%)
Exterior products 107 103 99 4% 4%
Industrial panel products 175 181 195 (3%) (7%)
Specialty and other products 566 695 607 (19%) 14%
Pulp 75 130 177 (42%) (27%)
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Total sales $ 2,297 $ 2,403 $ 2,486 (4%) (3%)
============== ============== ==============
Profit (loss):
Structural products $ 199 $ 22 $ 135 805% (84%)
Exterior products 22 9 17 144% (47%)
Industrial panel products 6 13 31 (54%) (58%)
Specialty and other products (20) (24) (9) 17% (167%)
Pulp (38) (29) (91) (31%) 68%
-------------- -------------- --------------
Total profit (loss) $ 169 $ (9) $ 83 1,978% (111%)
============== ============== ==============
STRUCTURAL PRODUCTS
Structural products consist of oriented strand board (OSB), plywood, lumber
and engineered wood products (EWP). The slight decline in sales in the
structural products segment in 1998 was primarily the result of sales and
closures of less efficient and non-strategic manufacturing facilities, partially
offset by increased sales of OSB and plywood. In 1997, OSB and plywood sales
suffered from industry wide over-capacity which negatively impacted average
selling prices. Increased lumber and EWP sales partially offset the OSB and
plywood declines in 1997.
OSB average selling prices increased 47% in 1998 compared to 1997, while
prices decreased 24% from 1996 to 1997. The OSB market recovery in 1998, due to
strong demand, was sharply contrasted to the industry-wide over-capacity of
prior years that led to significant price declines in those years. OSB sales
volume increased 11% in 1998 compared to 1997 due primarily to a net capacity
increase as well as increased operating efficiencies. Sales volume remained
level in 1997 compared to 1996.
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Plywood average selling prices increased modestly in each of the last two
years as L-P has shifted to higher-value products and demand has remained
strong. Plywood sales volume decreased 25% in 1998 and 19% in 1997, largely due
to the closure of two plywood plants during the last two years.
Lumber sales decreased in 1998 due to an 11% decline in prices and a volume
decline of 13%. The volume decline primarily resulted from the sale or shutdown
of non-strategic mills in 1998. A sharp drop in demand for lumber in Asia has
caused a decrease in exports of lumber from North America. This in turn has
created an oversupply of lumber in North American markets which negatively
impacted prices throughout 1998 and the latter part of 1997. Lumber sales
increased in 1997 due to a 7% increase in average sales prices offset by a 5%
decrease in volume sold. Lumber markets experienced strong demand through the
first three quarters of 1997, benefitting from a robust U.S. economy, relatively
low interest rates and strong housing starts.
Engineered wood products (EWP) include engineered I-Joists, laminated
veneer lumber (LVL) and veneer. Product prices did not change significantly in
1998 or 1997. The increase in sales in 1998 was primarily due to a fast-growing
market for these products and due to a marketing agreement to sell the products
of an independent producer. The sales increase in 1997 was largely due to the
acquisition of the assets of Tecton Laminates, Inc. as well as general market
growth.
In 1998, the profitability of the structural products segment increased
significantly, largely the result of price improvements for OSB and improvement
in the efficiency of production facilities. Decreases in lumber pricing
partially offset the improved OSB performance. Overall, log costs did not change
significantly in 1998. The primary factor in the decrease in profitability in
the structural products segment in 1997 was the erosion of OSB selling prices,
although increased selling prices for lumber helped to moderate this effect.
Higher log costs in the southern region of the country caused a significant
reduction in plywood earnings in 1997. LIFO (last-in first-out) inventory income
(expense) adjustments of $14 million in 1998, $(4) million in 1997 and $5
million in 1996 are included in the structural products segment.
EXTERIOR PRODUCTS
The exterior products segment consists of siding and related products such
as soffit, facia and trim. These products are currently made primarily using an
OSB substrate. In future years, this segment will include products from the 1999
purchase of ABT Building Products Corporation (ABT), including hardboard siding,
vinyl siding and other exterior products. Average selling prices were relatively
flat in 1998 and 1997. Sales volume increased in 1998 and 1997 as market
acceptance of the product increased. The manufacturing facilities took
significant downtime in 1997 to reduce inventory levels, which contributed to
higher per unit cost of sales and thus, lower earnings. In 1998, the
manufacturing facilities produced and sold a moderate volume of commodity OSB
product, which made a positive contribution to earnings.
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INDUSTRIAL PANEL PRODUCTS
The industrial panel products segment consists of particleboard, medium
density fiberboard (MDF) and hardboard. Market over-capacity in industrial
panels has contributed to reductions in both sales and profits during the
reported years. Average selling prices decreased by 3% in 1998 and 7% in 1997
due to downward market pressure. Sales volumes did not change significantly. In
future years, this segment will also include hardboard products from the
purchase of ABT.
SPECIALTY AND OTHER PRODUCTS
The specialty and other products segment includes coatings and chemicals,
cellulose insulation, Ireland operations, Alaska lumber and logging operations
and other products. In 1998, sales for this segment decreased principally due to
the sale of the Weather-Seal windows and doors division and Creative Point Inc.
(which sold consumer electronic media storage devices) and two California
distribution centers. The increase in other building products sales in 1997 was
primarily due to the acquisitions of Associated Chemists, Inc. (coatings and
chemicals) in mid-1996 and GreenStone Industries, Inc. (cellulose insulation) in
early 1997 as well as increased sales from distribution facilities.
Losses in the specialty and other products segment were primarily
influenced by the KPC lumber and logging operations, which lost approximately $3
million in 1998, $17 million in 1997 and $10 million in 1996. Additional losses
were incurred in 1997 and 1998 as a result of market development efforts in the
cellulose insulation business. Several non-strategic product lines in this
segment were divested during 1998.
PULP
Pulp segment operations in 1998 continued to be impacted by the world-wide
over-capacity in the pulp industry and the Asian economic crisis. Asian markets
historically comprised a significant market for pulp and the crisis caused
demand, and thus pulp prices, to decline late in 1997, which continued into
1998. Average sales prices decreased 21% which contributed to the increased
losses in 1998. Pulp sales volume decreased 27% as L-P's pulp mills took
intermittent downtime during 1998 because of the weak markets. The single
largest factor in the decline in pulp sales in 1997 was the closure in March
1997 of the pulp mill owned by L-P's Ketchikan Pulp Company (KPC) subsidiary. In
1997, pulp sales volumes decreased approximately 10%, and average selling prices
dropped approximately 19%. Excluding KPC, L-P's remaining pulp business showed
an increase of 11% in sales volume and a price decrease of approximately 6%.
Pulp segment losses improved significantly in 1997 compared to 1996 due in large
part to the shut-down of the KPC mill which had been suffering losses due to
market conditions and changes in the timber supply contract. At the two
remaining mills, L-P successfully cut its operating costs through a concentrated
cost reduction effort, both from more efficient operations and a central
purchasing program.
-11-
L-P pulp products represent the majority of L-P's export sales. Therefore,
the decline in pulp sales was the primary reason for L-P's decreased export
sales in 1998 and 1997, both in amount and as a percent of total sales.
Information regarding L-P's geographic segments and export sales are provided in
Note 10 to the financial statements.
GENERAL CORPORATE EXPENSE, NET
Net general corporate expense was $94 million in 1998, compared to $80
million in 1997 and $52 million in 1996. Credits resulting from gains on the
sales of miscellaneous assets of approximately $6 million in 1997 and $17
million in 1996 were netted into this expense. The remaining increase in each
year is primarily attributable to increased sales and marketing personnel as L-P
has focused on its customers, the addition of key personnel to implement
management's strategies and a revision of allocation methods of certain
administrative costs to product lines due to changes in the organization of L-P.
UNUSUAL CREDITS AND CHARGES, NET
For a discussion of unusual credits and charges, net, refer to Note 7 to
the financial statements.
INTEREST, NET
In 1998, net interest expense of $13 million was down 55% from the 1997
expense of $29 million. Cash from asset sales was used to reduce debt levels and
thus, net interest expense in 1998. Net interest expense rose significantly in
1997 as L-P borrowed funds to cover its settlement obligations and fund capital
expenditures. Additionally, interest capitalized has decreased in 1998 and 1997
as construction projects have been completed.
ENVIRONMENTAL MATTERS
For a discussion of environmental matters involving L-P and the past and
potential future impact on L-P, refer to Notes 7 and 8 to the financial
statements.
LEGAL MATTERS
Refer to Notes 7 and 8 to the financial statements for a discussion of the
background of certain legal matters involving L-P as well as the past and
potential future impact on L-P. In addition, a more detailed discussion of the
significant past charges recorded by L-P related to OSB siding litigation and
the current status of the settlements and related enhancements follows.
BACKGROUND OF OSB SIDING LITIGATION. Prior to 1995, L-P primarily dealt
with claims regarding the quality and performance of its oriented strand board
house siding (OSB siding) through the product warranty process. In 1994 and
early 1995, L-P was served with numerous lawsuits alleging monetary damages as a
result of OSB siding manufactured by L-P. In 1995,
-12-
L-P discontinued payment of warranty claims (except under certain circumstances
such as emergency claims) due to the pending litigation. In 1995 and 1996, L-P
settled the majority of these lawsuits through one of the following three
mechanisms:
- A class action settlement in Florida for owners of homes or
other structures with L-P siding in that state only (the
"Florida Settlement"),
- A class action settlement for owners of homes or other
structures in the remaining states in the U.S. (the "National
Settlement"), and,
- Individual settlements with claimants who opted not to
participate in either of the above two settlements.
These settlements significantly increased the cost of an average claim
compared to the historical payments under L-P's limited warranties. This is
primarily because, under the limited warranty, L-P only reimbursed the homeowner
for the cost of replacement siding whereas under the settlements L-P also pays
for the labor costs to remove old siding and to install and paint the new siding
and pays for certain other consequential costs incurred in the replacement of
the siding.
The settlements afforded a remedy to homeowners that is typically available
for consumer type claims -- repair and/or replacement of the damaged product.
Under the settlements, L-P conditionally waived defenses it could have asserted
such as improper installation by the builder, improper maintenance by the
homeowner, and numerous technical legal defenses (these defenses can be
reinstated under certain conditions). In exchange, the settlements provided a
more aggressive deduction based on the age of the product than was available
under the limited warranty. The settlements also brought an end to highly
contentious litigation that consumed inordinate amounts of Company time and
resources and that potentially could have degenerated into tens of thousands of
individual claims litigated in different courts throughout the country. The
costs of defending such litigation would likely have substantially exceeded the
amounts paid as damage awards.
Finally, prompt settlement on economic terms allowed management to devote
all of its energies to reorganizing and reviving L-P's business, to rebuilding
its damaged relations with the builders and consumers who purchase its products
and to preserving the market for its improved siding product that was introduced
in 1996.
The National Settlement also afforded L-P the opportunity to control both
the amount and timing of payments in order to better manage liquidity and
capital resources. (See more complete discussion of the settlements in Notes 7
and 8). It also gave L-P a degree of control over the total liability for siding
through the mechanism of optional funding payments for claims in excess of the
mandatory base payments of $275 million. These optional payments provide L-P the
ability to prevent future legal claims by class members as long as L-P continues
to exercise the additional funding options provided for under the National
Settlement. L-P also has
-13-
the ability to allow the settlement to expire if management determines that the
settlement is no longer in the best interest of L-P and its shareholders.
CLAIMS PROCESS. L-P has entered into a contract with a court-approved
independent administrator through which all National Settlement claims are
processed (L-P processes all Florida Settlement claims). Potential claimants who
have not opted out of the National and Florida Settlements are eligible to
participate and claims are processed as follows:
- A request for a claim form is received and the potential
claimant is entered into the system
- A claim form and related instructions and information are
mailed to the potential claimant
- Upon receipt of a completed claim, it is reviewed for
completeness. Incomplete claims packages are referred back to
the claimant for additional information
- Each complete claim package is forwarded to a court-approved
third party inspection firm that is responsible for inspecting
the structure and determining the footage of damaged siding,
as defined under the appropriate settlement and, in the case
of the Florida Settlement, determining whether any
contributing factors exist such as improper installation or
maintenance
- The independent administrator calculates the monetary damages
based on the footage of damaged siding, the age of the siding,
the average cost of siding replacement in the appropriate
geographic region and, in the case of the Florida Settlement,
contributing factors such as improper installation or
maintenance
- The claim processing is completed and the claim is either paid
(immediately in the case of the Florida class action
settlement and when money is available in the National
Settlement fund) or placed in the payment queue for the
National Settlement
As of December 31, 1998, approximately 215,000 requests had been received
for claim forms for the National Settlement and the Florida Settlement.
Approximately 138,000 completed claim forms had been received. The average
amount for settled claims has been approximately $5,100. The total number of
completed claim forms pending (not settled) as of December 31, 1998 was
approximately 56,000, with approximately 61,000 claims settled and approximately
21,000 claims dismissed through December 31, 1998. Dismissal of claims is
typically the result of claims for product not produced by L-P or claims that
lack sufficient information or documentation after repeated efforts to correct
those deficiencies. The average amount of claims settled after December 31, 1998
may be significantly impacted by the Early Payment Program and Second Fund, both
of which are discussed further below.
-14-
AMOUNT AND TIMING OF ACCRUALS. The amount and timing of the accruals
related to the siding matters are discussed below.
The accruals for OSB siding claims relating to both the National Settlement
and the Florida Settlement, including related legal costs, settlement
administration costs, claims of persons who opted-out of the settlements and
residual warranty claims, have been analyzed and accounted for collectively. The
activity in the combined accruals is as follows:
- -------------------------------------------------------------------------------------------------------
dollar amounts in millions
- -------------------------------------------------------------------------------------------------------
Year ended December 31 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
Beginning balance $164.7 $184.9 $360.9
Accruals made during the year 247.5 161.9 38.1
Payments made (100.8) (182.1) (214.1)
Insurance recovery 12.5 --- ---
- -------------------------------------------------------------------------------------------------------
Ending balance $323.9 $164.7 $184.9
=======================================================================================================
During the third quarter of 1995, the final settlement was reached in
the Florida Settlement (approved by the court in October 1995), and L-P
reached an agreement in principle with class counsel in the National
Settlement with a specified base funding schedule of $275 million. Management
believed that these two events made the liabilities probable and estimable at
that point in time. Based on a statistical analysis of historical claims data
and information collected by its litigation counsel, management believed that
the National Settlement liability, inclusive of notice, administration, and
inspection costs, would not exceed $275 million. Because claims of persons
who opted out of the settlement would theoretically reduce the amount
required to be paid under the settlement, L-P believed that no separate
accrual for opt outs was required. In later years, as noted below, management
recorded additional accruals for opt-out claims due to evidence indicating
that claims paid under the settlement would likely amount to at least $275
million and therefore opt-out claims would be incremental to the National
Settlement. The Florida Settlement liability was estimated at $50 million by
attorneys working on the settlement. Estimated legal, professional and other
costs were also accrued at that time.
Because the court approval process related to the National Settlement was
not finalized until June of 1996, and the Florida Settlement process was just
getting started. Management believed the existing accrual remained adequate for
the two class action settlements. However, the amounts paid to resolve opt out
claims subsequent to the approval of the National Settlement combined with
evidence that claims under the National Settlement would likely amount to at
least $275 million caused L-P to believe that the previous accruals would be not
be sufficient to cover these amounts. Accordingly, in the third quarter of 1996,
L-P accrued an additional $36 million based on known claims that L-P's
management and litigation counsel believed were probable and estimable. Opt-out
claims in the amount of approximately $32 million were settled and paid in 1996.
An additional $2.1 million was added to the reserve in the fourth quarter of
1996 for increased legal costs.
-15-
During the first half of 1997, the independent administrators and
third-party claims inspectors for the National Settlement began to reduce a
backlog of unprocessed claims that had arisen during the months after final
court approval of the National Settlement. At that time, management continued to
believe the estimate of the total liability was adequate. L-P engaged an outside
statistician who developed a model to assist management in estimating the
liabilities by projecting the monetary amount of claims in the system at any
point in time based upon the total number of claims forms requested to date.
This projection method is based on factors and ratios that must be estimated
from actual claims experience and trends in claim form requests. Additionally,
trends in claim form requests themselves (which drive the projections over the
longer term) have remained very erratic and difficult to forecast. Factors such
as weather, publicity about siding matters, revisions in the National
Settlement, and other factors have affected the pattern of claim form requests
which has made it difficult for the statistician to extract any meaningful
underlying trend. The statistician's model is affected by the above and is
therefore designed to be used as only a part of management's estimation of the
future liability.
By the end of the third quarter of 1997, management concluded that an
additional accrual of $50 million was required for the National Settlement
claims. Also, $111.9 million was accrued to cover additional estimates for the
Florida Settlement claims, National Settlement administration costs, additional
opt out settlements and additional legal fees. These updated estimates were
based partially on the application of the model and updated estimates provided
by attorneys and others familiar with the settlement, all of which experienced
unanticipated increases compared to L-P's earlier estimates. The principal
factors that led to a higher estimated accrual in the third quarter of 1997 were
as follows:
- An increase in the average cost per settled claim (under the
National Settlement only) from approximately $5,400 at the end of
1996 to approximately $6,100 by the end of the third quarter of
1997.
- A steady to increasing rate of claims forms requested and returned
where L-P originally estimated those figures to decrease over
time. For example, completed claims forms received by the National
Settlement claims administrator increased from approximately
33,000 at the end of 1996 to approximately 61,000 at the end of
the third quarter of 1997.
The principal factors leading to an increase in the accrual for the Florida
Settlement are similar to those above for the National Settlement.
In subsequent quarters of 1997 and 1998, L-P continued to monitor the
claims figures in order to evaluate the need for adjustments to the liability.
During the third quarter of 1998 management evaluated available options under
the National Settlement because of continuing changes occurring with the
underlying data. The National Settlement claims administrator had received
approximately 10,000 claims forms per quarter from the fourth quarter of 1997
through the third quarter of 1998, bringing the total to approximately 101,000
claims forms received through September 1998. This represents an increase of
approximately 65% in one year. The average cost per settled claim did not change
significantly during this period. The options under
-16-
consideration included (i) allowing the settlement to terminate under the
National Settlement terms and conditions; (ii) continuing the settlement without
modification by electing to fund the optional payments as they became due; or
(iii) attempting to resolve remaining claims through an alternative method.
In July 1998, L-P formally proposed to class counsel enhancements to the
National Settlement: (i) the concept of prepaying the balance of the mandatory
and two discretionary $50 million contributions to the National Settlement fund
on a discounted basis (the "Early Payment Program"); and (ii) the concept of
creating a second, supplemental settlement fund (the "Second Fund"). After
numerous negotiating sessions, L-P and class counsel were able to finalize an
agreement on the terms of these programs, which were agreed to by the parties in
the third quarter of 1998 and subsequently approved by the court in October
1998. Consistent with this agreement, L-P accrued the estimated costs of these
programs. The incremental costs of these programs was estimated to be
approximately $22.3 million (netting the effect of prior accruals and the effect
of discounts of payments allowed under this program) for the Early Payment
Program and $125.0 million for the Second Fund. These amounts were accrued
during the third quarter of 1998 as were additional amounts totaling $113.2
million for the legal and administrative costs of these programs, claims of
claimants who may opt out of the Second Fund, additional Florida Settlement
claims based on statistical estimates, warranty claims subsequent to the
expiration of the National and Florida Settlements and other costs.
Throughout the period the National and Florida Settlements have been in
effect, L-P has recorded accruals which represent management's best estimates of
amounts to be paid based on available information. The unusual nature of the
National and Florida Settlements and the various remedies available to L-P makes
the process of estimating these accruals difficult. The liability recorded at
December 31, 1998 represents management's best estimate of the future liability
related to siding claims based on the most current information available. There
can be no assurance that the ultimate liability will not significantly exceed
the recorded liability. Numerous factors affect the total amount of the future
liability. These factors are discussed below.
EARLY PAYMENT PROGRAM AND SECOND FUND. L-P entered into these programs in
1998 after careful consideration of the potential monetary and non-monetary
impacts of all of its alternatives and based on management's belief that they
will help to keep the average cost per claim from increasing. Despite the
increased costs of entering into these programs, L-P's management deemed them to
be in the best interests of L-P and its shareholders. This decision was based on
several very important considerations and assumptions.
First, as a result of executing these programs, L-P is protected from any
further legal action by class members until at least June of 2003. Second, L-P's
management believed that the Early Payment Program would be attractive to
claimants who wished to repair or replace their exterior siding in a timely
manner as the discounts proposed were relatively modest. In addition, management
believes that the Second Fund will encourage claimants to timely submit new
claims during 1999 and accept a discounted payment in 2000, thereby removing
these claimants from any future action. With these two programs, management
believes the likelihood of any
-17-
residual claimants initiating successful legal action after 2003 is
significantly diminished. Third, management believes the effects of negative
publicity regarding L-P's siding products would be reduced under these programs.
Negative publicity could severely limit the growth of L-P's new siding products.
Finally, management believes these programs are a lower risk approach to
extinguishing remaining claims at an acceptable cost. Payment of claims under
the Second Fund is at the discretion of L-P. Once the deadline of December 31,
1999 for submission of all claims has passed, several steps must take place
including the verification and calculation of individual claim amounts and the
opportunity for each claimant to opt out of the Second Fund after they have been
informed of their pro rata settlement amount. After those steps are completed,
L-P has the final decision whether or not to proceed with the funding. L-P's
management will not be able to make this decision until all claims eligible for
this program have been received and inspected and it is known how many claimants
have decided to remain in the Second Fund (along with the dollar value of their
claims). Management believes this will not occur until some time in the second
or third quarter of 2000. Based on this, management will decide whether to
proceed with the Second Fund or to pursue alternative resolutions. To the extent
the programs do not result in the desired consequences, estimates of costs of
additional claims could change in the future.
FUTURE COSTS. Other factors potentially influencing future costs include:
- The costs of administering the settlements or any alternative
approach of resolving claims including the actual claims costs,
notice costs, inspection costs, third party administrator costs
and attorney's fees
- The possibility of claimants bringing a second class action
lawsuit (L-P believes plaintiffs would be legally barred from this
action provided that all mandatory payments under the settlement
have been made)
- Unforeseen changes in the level of claims in the Florida
Settlement
- Litigation related to other impacts of using L-P's siding, not
specifically related to product performance
Changes in the above factors have caused the estimated accrual amounts to
change in the past. However, L-P does not currently anticipate that these
factors will cause a significant change in the remaining accruals for the
reasons stated herein.
INSURANCE RECOVERIES. As of December 31, 1998, L-P had recorded
approximately $28.4 million in insurance recoveries. L-P is in the process of
pursuing additional claims against various insurance carriers, however, it is
not presently determinable what additional amounts, if any, will be recovered.
The resolution of these matters could ultimately effect the net amounts paid by
L-P.
-18-
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations increased to $123 million in 1998 from $88
million in 1997, and $23 million in 1996. In 1998, the increase in cash provided
by operations resulted primarily from improved operating results. The 1997
increase was primarily due to a settlement from the U.S. Government of $135
million for claims related to the KPC long-term timber supply contract. L-P paid
out $113 million in 1998, $205 million in 1997 and $263 million in 1996 related
to litigation settlements.
Net cash provided by investing activities was $246 million in 1998 compared
to net cash used in investing activities of $140 million in 1997 and $213
million in 1996. In 1998, L-P received proceeds of $368 million from the sale of
assets, primarily timber and sawmill assets in California, the Weather-Seal
division and Creative Point, Inc. In 1997 and 1996, L-P received $64 million and
$62 million of cash for assets sold. In 1997 and 1996, L-P made significant
investments in new OSB facilities. L-P has also spent significant amounts on
environmental projects (such as pollution control equipment), upgrades of
existing production facilities, timber to supply its operations and logging
roads. Capital expenditures decreased in 1998 compared to the prior two years as
L-P did not begin construction of any new mills.
In 1998, L-P used a net $275 million of cash in financing activities. A
total of $496 million was used to repay term and revolving loans and $67 million
was used for treasury stock purchases. L-P borrowed $348 million in 1998, by
issuing senior secured notes backed by notes receivable received in a separate
asset sale transaction. L-P increased its net borrowings by $114 million in 1997
and $196 million in 1996. The borrowings financed the payments of settlement
obligations and capital expenditures.
L-P's liquidity improved in 1998 primarily as a result of the proceeds of
the asset sales. Cash and cash equivalents totaled $127 million at the end of
1998 compared to $32 million at the end of 1997. L-P has a revolving credit
facility of $300 million with no borrowings outstanding at year-end 1998 which
is available until 2002. In early 1999, L-P used a portion of this credit
facility and an additional $100 million bridge loan to fund the purchase of ABT.
Subsequent to year-end, L-P filed a shelf registration statement for the
placement of up to $500 million of debt securities.
Inventories in L-P's balance sheet decreased $53 million, net property,
plant and equipment decreased by $279 million and timber and timberlands
decreased by $135 million. These changes were primarily related to the sale of
assets discussed previously. L-P also wrote down the book value of its Chetwynd,
B.C. pulp mill as further discussed in Note 7 to the financial statements.
Contingency reserves, which represent an estimate of future cash needs for
various contingencies (principally, payments for siding litigation settlements),
totaled $368 million at December 31, 1998, of which $140 million is estimated to
be payable within one year. As with all accounting estimates, there is inherent
uncertainty concerning the reliability and precision of
-19-
such estimates. As described in Note 8 to the financial statements, the amounts
ultimately paid in resolving these contingencies could exceed the current
reserves by a material amount. Contingency reserves increased in 1998 as L-P
revised its estimate of its liability for legal and environmental matters.
L-P continues to be in a strong financial condition with a relatively low
ratio of long-term debt as a percent of total capitalization. Management
believes, with respect to its current operations, that year-end cash and cash
equivalents balances combined with the available lines of credit, borrowings in
the capital markets, and cash to be generated from operations will be sufficient
to meet projected cash needs including the payments related to the siding
litigation settlement referred to above.
Pursuant to its business strategy, L-P selectively targets acquisitions
that complement its core competencies and have strong growth prospects.
Accordingly, L-P intends from time to time to consider possible acquisitions of
other companies, businesses and assets. Acquisition transactions, if any, are
expected to be financed through a combination of cash on hand and from
operations and the possible issuance from time to time of long-term debt or
other securities. Depending upon conditions in the capital markets and other
factors, L-P will from time to time consider the issuance of debt or other
securities, or other possible capital markets transactions, the proceeds of
which could be used to refinance current indebtedness or for other corporate
purposes.
STOCK REPURCHASE PROGRAM
On July 27, 1998, L-P announced a program to repurchase up to 20 million
common shares from time to time in the open market. As of December 31, 1998, L-P
had reacquired approximately 3.5 million shares for $66.5 million. L-P had
approximately 107 million shares outstanding at year-end.
YEAR 2000 COMPLIANCE
The Year 2000 problem refers to a worldwide issue relating to a flaw in
many computer programs and computer applications embedded in equipment and other
devices. In many existing software and hardware applications, two digits were
used to represent the year, such as "99" for "1999." If not corrected, these
applications may interpret "00" to be the year 1900 rather than 2000, producing
erroneous data or, at worst, failing altogether. L-P recognizes the Year 2000
problem as a serious issue. Accordingly, L-P now considers the potential impact
of the Year 2000 in connection with all in-house application development and
purchases of third-party software. In the fall of 1997, L-P undertook a formal
project to address its Year 2000 exposure and readiness. As discussed separately
under the caption "ABT" below, ABT undertook a similar project prior to being
acquired by L-P.
All of L-P's business groups, operations and corporate functions are
covered by the Year 2000 project. The project team is staffed by full-time
employees, contractors and consultants as
-20-
appropriate. The project is continuously monitored by a management steering
committee and L-P's internal auditors to ensure that proper methodology is being
followed, that adequate controls are in place and that appropriate steps are
being taken to limit risk. In addition, periodic reports are made to senior
management, the finance and audit committee and the board of directors.
The project is divided into three primary areas: (1) information systems;
(2) manufacturing systems/building infrastructure; and (3) business partners
(including suppliers and customers).
INFORMATION SYSTEMS. L-P's information systems include such common business
applications as payroll, human resources, sales order entry, inventory
management, finance and accounting. L-P's Year 2000 project phases for
information systems include: inventorying and prioritizing all information
systems; assessing the Year 2000 readiness of such systems; remediating such
systems (through conversion, upgrades, replacement or risk-managed acceptance of
non-compliant items); testing; and developing and implementing contingency
plans, to the extent determined to be appropriate, for each mission critical
system. The inventory and assessment phases for L-P's information systems have
been completed. L-P has replaced its basic payroll, human resources and most
accounting applications with off-the-shelf packages, the initial implementation
of which was completed as of January, 1999. Approximately 23% of L-P's other
business critical information systems require further remediation through system
upgrades and/or replacements. The remediation of most of these systems is
expected to be completed by June 30, 1999, and the remediation of all of these
systems is scheduled for completion by September 30, 1999. Testing and
contingency planning are underway and are scheduled to be completed by November
30, 1999.
MANUFACTURING SYSTEMS/BUILDING INFRASTRUCTURE. With respect to L-P's
manufacturing systems and building infrastructure, the Year 2000 project is
focused on surveying and, where necessary, remediating all computer-controlled
and/or embedded devices used in L-P's manufacturing processes or in building
infrastructure (such as the heating and air conditioning systems, security
access and alarm systems, telephones, and office equipment used in L-P's offices
and plants). The Year 2000 project phases for manufacturing systems and building
infrastructure include: inventorying items that are exposed to Year 2000 issues;
assessing the Year 2000 readiness of such items; remediating such items (through
conversion, upgrades, replacement, or risk-managed acceptance of non-compliant
items), testing; and developing and implementing contingency plans, to the
extent determined to be appropriate, for each business group and facility
location. The inventory phase for L-P's manufacturing systems and building
infrastructure has been completed. More than 96% of the inventoried systems have
been assessed for Year 2000 readiness, with completion of this phase scheduled
for May 1999. Approximately 5% of L-P's manufacturing systems and building
infrastructure assessed to date have been determined to require remediation.
Most of the required remediation is expected to be completed by June 30, 1999
and all required remediation is scheduled to be completed by September 30, 1999.
Testing and contingency planning are underway and are scheduled to be completed
by November 30, 1999.
-21-
BUSINESS PARTNERS. L-P also faces the risk of business disruption from
outside business partners, which may have information systems, manufacturing
systems or infrastructure that are not Year 2000 compliant. In this regard,
L-P's Year 2000 project includes identifying and prioritizing L-P's major
business partners (primarily suppliers of raw materials and essential services
such as utilities and transportation and significant customers), assessing their
Year 2000 readiness and developing contingency plans where appropriate. The
identification and prioritization phases have been completed and L-P has
requested that all of its major business partners respond to a survey eliciting
information as to their Year 2000 readiness. Of the approximately 40% of the
business partners that have responded to the survey, none have disclosed
significant readiness issues. L-P plans to reiterate its request for information
from all critical business partners that have not responded to the survey by
July 31, 1999 and to monitor the Year 2000 readiness of its most critical
business partners throughout 1999. If L-P's efforts in this regard cause it to
believe that significant risk is present, L-P will seek to identify alternate
business partners and to develop contingency plans to address potential business
disruptions prior to December 1999.
COSTS. The total expense associated with L-P's Year 2000 project is
presently estimated to be approximately $5.5 million, of which approximately $1
million had been incurred by December 31, 1998. These costs are being expensed
as incurred and are not expected to have a material effect on L-P's financial
position or results of operations. These costs do not include expenses and
capital costs associated with replacing systems which L-P would have replaced
regardless of Year 2000 issues, including a new human resources information
system and a new core financial system.
MOST REASONABLY LIKELY WORST-CASE SCENARIO. The occurrence of unscheduled
downtime at L-P's facilities resulting from internal or third-party system
failures could have an adverse effect on L-P's business, results of operations
and cash flows. In this regard, L-P believes that its dependence on third
parties for critical services such as telecommunications, energy, water and
other utilities, financial services and transportation poses the greatest risk.
L-P is seeking to assess the Year 2000 readiness of all mission critical systems
and business partners and to develop appropriate contingency plans. These plans
may include identifying alternative systems and suppliers and assisting major
customers who may be affected by Year 2000 issues. However, there can be no
assurance that L-P will not experience unscheduled downtime, business
disruptions or other adverse consequences of the Year 2000 problem.
ABT. ABT implemented a project to address its Year 2000 exposure and
readiness prior to its acquisition by L-P. ABT's Year 2000 project is generally
similar in scope and structure to L-P's Year 2000 project. Most of the required
remediation of ABT's systems and building infrastructure is expected to be
completed by June 30, 1999 and all required remediation is scheduled to be
completed by September 30, 1999. L-P has substantially completed the process of
integrating ABT's Year 2000 project into L-P's Year 2000 project. However, the
discussion of L-P's Year 2000 project contained in this report does not address
ABT's information systems, manufacturing systems, building infrastructure,
business partners or Year 2000 project.
-22-
ADDITIONAL CONSIDERATIONS. Despite the extensive efforts of L-P's project
team, it is likely that some unexpected problems associated with the Year 2000
issue will arise. In addition, the costs and completion dates for L-P's Year
2000 project discussed herein are based on management's estimates, which were
derived using numerous assumptions regarding future events, including continued
availability of certain resources, remediation plans of business partners and
other factors. There can be no assurance that these estimates will be achieved
and actual results could differ significantly from L-P's current expectations.
-23-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN MILLIONS)
DECEMBER 31 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 126.5 $ 31.9
Accounts receivable, less reserves of $1.5 and $2.0 134.7 146.2
Inventories 205.7 258.8
Prepaid expenses 8.1 8.9
Income tax refunds receivable 43.9 78.0
Deferred income taxes 93.2 73.0
--------- ---------
Total current assets 612.1 596.8
Timber and timberlands, at cost less cost of timber 499.0 634.2
harvested
Property, plant and equipment, at cost:
Land, land improvements and logging roads, net of road 150.4 185.6
amortization
Buildings 246.6 262.5
Machinery and equipment 1,663.2 1,876.3
Construction in progress 26.3 109.5
--------- ---------
2,086.5 2,433.9
Less accumulated depreciation (1,173.2) (1,242.1)
--------- ---------
Net property, plant and equipment 913.3 1,191.8
Goodwill, net of amortization 60.0 77.6
Notes receivable from asset sales 403.8 49.9
Other assets 30.9 28.1
--------- ---------
Total assets $ 2,519.1 $ 2,578.4
============ ============
See Notes to Financial Statements.
-24-
(DOLLAR AMOUNTS IN MILLIONS,
EXCEPT PER SHARE)
- -----------------------------------------------------------------------------
DECEMBER 31 1998 1997
- -----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 34.1 $ 22.9
Short-term notes payable -- 22.0
Accounts payable and accrued liabilities 192.5 234.4
Current portion of contingency reserves 140.0 40.0
---------- ----------
Total current liabilities 366.6 319.3
Long-term debt, excluding current portion:
Limited recourse notes payable 396.5 47.9
Other debt 63.3 524.4
---------- ----------
Total long-term debt 459.8 572.3
Deferred income taxes 203.6 178.6
Contingency reserves, excluding current portion 228.0 184.0
Other long-term liabilities and minority interest 38.3 38.0
Commitments and contingencies
Stockholders' Equity:
Common stock, $1 par value, 200,000,000 shares
authorized, 116,937,022 shares issued 117.0 177.0
Preferred stock, $1 par value, 15,000,000 shares
authorized, no shares issued -- --
Additional paid-in capital 465.4 472.2
Retained earnings 918.8 977.5
Treasury stock, 9,663,976 shares and 7,309,360
shares, at cost (204.0) (163.4)
Loans to Employee Stock Ownership Trusts (28.8) (37.7)
Accumulated comprehensive income (loss) (45.6) (79.4)
---------- ----------
Total stockholders' equity 1,222.8 1,286.2
---------- ----------
Total liabilities and stockholders' equity $ 2,519.1 $ 2,578.4
========== ==========
See Notes to Financial Statements.
-25-
CONSOLIDATED STATEMENTS OF INCOME
(DOLLAR AMOUNTS IN MILLIONS,
EXCEPT PER SHARE)
- -----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1998 1997 1996
- -----------------------------------------------------------------------------------------------
Net sales $ 2,297.1 $ 2,402.5 $ 2,486.0
- -----------------------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 1,853.8 2,126.7 2,123.5
Depreciation and amortization 143.8 142.8 150.6
Cost of timber harvested 41.6 41.1 41.2
Selling and administrative 183.3 180.4 139.7
Unusual credits and charges, net 47.8 32.5 350.0
Interest expense, net of capitalized interest 37.5 30.9 14.2
Interest income (24.7) (1.9) (6.4)
------------ ------------ ------------
Total costs and expenses 2,283.1 2,552.5 2,812.8
Income (loss) before taxes and minority interest 14.0 (150.0) (326.8)
Provision (benefit) for income taxes 15.8 (43.6) (125.6)
Minority interest in net income
(loss) of consolidated subsidiaries (3.8) (4.6) (.5)
------------ ------------- ------------
Net income (loss) $ 2.0 $ (101.8) $ (200.7)
=========== ============ =============
Net income (loss) per share - basic and diluted $ .02 $ (.94) $ (1.87)
============ ============ =============
Cash dividends per share of common stock $ .56 $ .56 $ .56
============ ============ =============
Average shares of common stock (millions)
Basic 108.4 108.5 107.4
=========== ========== ===========
Diluted 108.6 108.5 107.4
=========== ========== ==========
See Notes to Financial Statements.
-26-
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN MILLIONS)
- ----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 2.0 $ (101.8) $ (200.7)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation, amortization and cost of timber harvested 185.4 183.9 191.8
Unusual credit and charges, net 61.2 216.6 350.0
Cash settlements of contingencies (113.2) (204.8) (263.4)
Other adjustments 11.2 (54.5) 3.8
Decrease (increase) in receivables (3.8) (4.0) 31.9
Decrease (increase) in inventories 7.1 12.8 31.1
Decrease (increase) in income tax refunds receivable 33.7 21.8 (99.5)
Decrease (increase) in prepaid expenses (4.0) 4.7 1.4
Increase (decrease) in accounts payable and
accrued liabilities (64.2) (1.8) (1.6)
Increase (decrease) in deferred income taxes 7.6 15.3 (22.0)
-------- -------- --------
Net cash provided by operating activities 123.0 88.2 22.8
Cash Flows from Investing Activities
Plant, equipment and logging road additions,
including cash used in acquisitions (77.8) (154.8) (244.0)
Timber and timberland additions (44.7) (49.7) (22.0)
Assets sale proceeds 367.6 63.6 62.4
Other investing activities, net 1.3 1.0 (9.1)
-------- -------- --------
Net cash provided by
(used in) investing activities 246.4 (139.9) (212.7)
Cash Flows from Financing Activities
Net decrease in short-term notes payable (22.0) (13.4) (12.9)
Long-term borrowings 348.6 228.4 262.7
Repayment of long-term debt (473.9) (101.0) (53.4)
Cash dividends (60.7) (60.7) (60.1)
Purchase of treasury stock (66.5) (2.9) --
Loans to ESOTs (15.0) --
Treasury stock sold to ESOTs 15.0 -- --
Other financing activities, net (.3) 5.4 6.0
-------- -------- --------
Net cash provided by (used in) financing activities (274.8) 55.8 142.3
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 94.6 4.1 (47.6)
Cash and cash equivalents at beginning of year 31.9 27.8 75.4
-------- -------- --------
Cash and cash equivalents at end of year $ 126.5 $ 31.9 $ 27.8
-------- -------- --------
-------- -------- --------
See Notes to Financial Statements.
-27-
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLAR AND SHARE AMOUNTS IN MILLIONS)
COMMON STOCK TREASURY STOCK
ADDITIONAL
SHARES AMOUNT SHARES AMOUNT PAID-IN RETAINED LOANS TO ESOTS
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 1995 116.9 $ 117.0 8.6 $ (192.7) $ 472.4 $ 1,400.8 $ (85.5)
Net income (loss) -- -- -- -- -- (200.7) --
Cash dividends, $.56 per share -- -- -- -- -- (60.1) --
Issuance of shares for employee stock
plans and for other purposes -- -- (.4) 9.4 3 -- --
Employee Stock Ownership Trust
contribution -- -- -- -- -- -- 23.9
Currency translation adjustment -- -- -- -- -- -- --
Other -- -- -- -- -- -- --
Other comprehensive income (loss) -- -- -- -- -- -- --
Total comprehensive income (loss) -- -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 1996 116.9 $ 117.0 8.2 $ (183.3) $ 472.7 $1,140.00 $ (61.6)
Net income (loss) -- -- -- -- -- (101.8) --
Cash dividends, $.56 per share -- -- -- -- -- (60.7) --
Issuance of shares for employee stock
plans and for other purposes -- -- (1.0) 22.8 (.5) -- --
Purchase of treasury stock -- -- .1 (2.9) -- -- --
Employee Stock Ownership Trust
contribution -- -- -- -- -- -- 23.9
Currency Translation adjustment -- -- -- -- -- -- --
Pension liability adjustment -- -- -- -- -- -- --
Other -- -- -- -- -- -- --
Other comprehensive income (loss) -- -- -- -- -- -- --
Total comprehensive income (loss) -- -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 1997 116.9 $ 117.0 7.3 $ (163.4) $ 472.2 $ 977.5 $ (37.7)
Net income (loss) -- -- -- -- -- 2.0 --
Cash dividends, $.56 per share -- -- -- -- -- (60.7) --
Issuance of shares for employee stock
plans and for other purposes -- -- (1.1) 25.9 (6.8) -- (15.0)
Purchase of treasury stock -- -- 3.5 (66.5) -- -- --
Employee Stock Ownership Trust
contribution -- -- -- -- -- -- 23.9
Currency translation adjustment -- -- -- -- -- -- --
Pension liability adjustment -- -- -- -- -- -- --
Other -- -- -- -- -- -- --
Other comprehensive income (loss) -- -- -- -- -- -- --
Total comprehensive income (loss) -- -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 1998 116.9 $ 117.0 9.7 $ (204.0) $ 465.4 $ 918.8 $ (28.8)
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED TOTAL
COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
INCOME (LOSS) EQUITY INCOME (LOSS)
- ---------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 1995 $ (56.0) $ 1,656.0 --
Net income (loss) -- (200.7) $ (200.7)
Cash dividends, $.56 per share -- (60.1) --
Issuance of shares for employee stock
plans and for other purposes -- 9.7 --
Employee Stock Ownership Trust
contribution -- 23.9 --
Currency translation adjustment -- -- 1.7
Other -- -- (2.9)
Other comprehensive income (loss) (1.2) (1.2) (1.2)
---------
Total comprehensive income (loss) -- -- $ (201.9)
- --------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 1996 $ (57.2) $ 1,427.6 --
Net income (loss) -- (101.8) $ (101.8)
Cash dividends, $.56 per share -- (60.7) --
Issuance of shares for employee stock
plans and for other purposes -- 22.3 --
Purchase of treasury stock -- (2.9) --
Employee Stock Ownership Trust
contribution 23.9 --
Currency Translation adjustment -- -- (15.0)
Pension liability adjustment -- -- (8.2)
Other -- -- 1.0
--------
Other comprehensive income (loss) (22.2) (22.2) (22.2)
--------
Total comprehensive income (loss) -- -- $ (124.0)
- --------------------------------------------------------------------------------------------
$ (79.4) $ 1,286.2 --
Net income (loss) -- 2.0 2.0
Cash dividends, $.56 per share -- (60.7) --
Issuance of shares for employee stock
plans and for other purposes -- 4.1 --
Purchase of treasury stock -- (66.5) --
Employee Stock Ownership Trust
contribution -- 23.9 --
Currency translation adjustment -- -- 37.1
Pension liability adjustment -- -- (4.2)
Other -- -- .9
Other comprehensive income (loss) 33.8 33.8 33.8
------
Total comprehensive income (loss) -- -- $ 35.8
- --------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 1998 $ (45.6) $ 1,222.8 --
- --------------------------------------------------------------------------------------------
See notes to financial statements.
-28-
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
NATURE OF OPERATIONS
Louisiana-Pacific Corporation is a U.S.-based company principally engaged
in the manufacture of building products, and to a lesser extent, market pulp.
Through its foreign subsidiaries, L-P also maintains manufacturing facilities in
Canada and Ireland. The principal customers for L-P's building products are
retail home centers, builders, manufactured housing producers, distributors and
wholesalers in North America, with minor sales to Asia and Europe. The principal
customers for its pulp products are brokers in Asia and Europe, with minor sales
in North America.
A significant portion of L-P's sales are derived from wood-based structural
products, including oriented strand board, plywood, lumber, engineered I-joists
and laminated veneer lumber. See Note 10 to the financial statements for further
information.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. See
discussion of specific estimates in footnotes entitled "Income Taxes,"
"Retirement Plans," "Stock Options and Plans," "Unusual Credits and Charges,
Net" and "Contingencies."
PRINCIPLES OF PRESENTATION
The consolidated financial statements include the accounts of
Louisiana-Pacific Corporation and all of its subsidiaries (L-P), after
elimination of intercompany balances and transactions.
EARNINGS PER SHARE
Basic and diluted earnings per share are based on the weighted average
number of shares of common stock outstanding during the periods. The effect of
potentially dilutive common stock equivalents (employee stock options and
purchase plans) is not included in the calculation of diluted earnings per share
for years in which losses are reported because the effect is anti-dilutive.
Shares held by L-P's Employee Stock Ownership Trusts (ESOTs) which were acquired
by the ESOTs on or after January 1, 1994 and have not been allocated to
participants' accounts, are not considered outstanding for purposes of computing
earnings per share (1,206,671 shares at December 31, 1998, 763,786 shares at
December 31, 1997 and 1,073,251 shares at December 31, 1996).
-29-
CASH AND CASH EQUIVALENTS
L-P considers all highly liquid securities with maturities of three months
or less at the time of purchase to be cash equivalents. Cash paid during 1998,
1997 and 1996 for interest (net of capitalized interest) was $40.5 million,
$29.2 million and $13.4 million. Net cash received during 1998, 1997 and 1996
for income taxes was $25.5 million, $80.7 million and $4.1 million.
LP invests its excess cash with high quality financial institutions and, by
policy, limits the amount of credit exposure at any one financial institution.
In addition, L-P generally holds its cash investments until maturity and is
therefore not subject to significant market risk.
INVENTORY VALUATION
Inventories are valued at the lower of cost or market. Inventory costs
include material, labor and operating overhead. The LIFO (last-in, first-out)
method is used for most log and lumber inventories with remaining inventories
valued at FIFO (first-in, first-out) or average cost. Inventory quantities are
determined on the basis of physical inventories, adjusted where necessary for
intervening transactions from the date of the physical inventory to the end of
the year. The major types of inventories are as follows:
(DOLLAR AMOUNTS IN MILLIONS)
DECEMBER 31 1998 1997
- ----------------------------------------------------- ------------------------------ -------------------------------
Logs $ 89.8 $ 112.4
Lumber 16.0 37.6
Panel products 49.4 56.6
Other building products 47.3 82.1
Pulp 14.9 15.3
Other raw materials 23.5 25.1
Supplies 17.4 21.3
LIFO reserve (52.6) (91.6)
-------- --------
Total $ 205.7 $ 258.8
========= =========
A reduction in LIFO inventories in 1998 resulted in a reduction of cost of
sales of $15.8 million.
TIMBER
L-P follows an overall policy on fee timber that amortizes timber costs
over the total fiber available during the estimated growth cycle as volume is
harvested. Timber carrying costs, such as reforestation and forest management,
are expensed as incurred. Cost of timber harvested includes not only the cost of
fee timber, but also the amortization of the cost of long-term timber deeds.
-30-
PROPERTY, PLANT, AND EQUIPMENT
L-P principally uses the units of production method of depreciation for
machinery and equipment which amortizes the cost of equipment over the estimated
units that will be produced during its useful life. Provisions for depreciation
of buildings and the remaining machinery and equipment have been computed using
straight-line rates based on the estimated service lives. The effective
straight-line rates for the principal classes of property range from
approximately 5 percent to 20 percent.
Logging road construction costs are capitalized and included in land and
land improvements. These costs are amortized as the timber volume adjacent to
the road system is harvested.
L-P capitalizes interest on borrowed funds during construction periods.
Capitalized interest is charged to machinery and equipment accounts and
amortized over the lives of the related assets. Interest capitalized during
1998, 1997 and 1996 was $1.6 million, $4.8 million and $7.1 million.
L-P adopted American Institute of Certified Public Accountants Statement of
Position (SOP) 98-5, "Reporting on the Costs of Start-up Activities," in 1998.
SOP 98-5 requires the cost of start-up activities and organization costs to be
expensed as incurred. Start-up costs written off in 1998 were $3.5 million. No
start-up costs were deferred in 1997 and $3.8 million were deferred during 1996.
STOCK-BASED COMPENSATION
Stock options and other stock-based compensation awards are accounted for
using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations.
ASSET IMPAIRMENTS
Long-lived assets to be held and used by L-P and goodwill are reviewed for
impairment when events and circumstances indicate costs may not be recoverable.
Losses are recognized when the book values exceed expected undiscounted future
cash flows. If impairment exists, the asset's book value is written down to its
estimated realizable value. Assets to be disposed of are written down to their
estimated fair value, less sales costs. See Note 7 to the financial statements
for a discussion of charges in 1998, 1997 and 1996 related to impairments of
property, plant and equipment.
DERIVATIVE FINANCIAL INSTRUMENTS
In June 1998, the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). The new statement will require recognition
of all financial instruments as either assets or liabilities on the balance
sheet at fair value; changes to fair value will impact earnings either as gains
or losses. SFAS 133 will be effective for L-P beginning January 1, 2000. L-P is
-31-
currently determining the impact this statement will have on L-P's financial
statements and related disclosures.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated to
U.S. dollars at the exchange rate on the balance sheet date. Revenues, costs,
and expenses are translated at average rates of exchange prevailing during the
year. Translation adjustments resulting from this process are shown in
stockholders' equity under "Accumulated Comprehensive Income (Loss)."
GOODWILL
Goodwill has resulted from acquisitions and is being amortized on a
straight-line basis over 10 to 25 years. The amortization period of goodwill is
periodically reviewed by L-P. Accumulated amortization was $8.6 million and
$11.7 million at December 31, 1998 and 1997.
NOTES RECEIVABLE
Notes receivable from asset sales are related to transactions which
occurred during 1997 and 1998. These notes provide collateral for L-P's limited
recourse notes payable (see Note 4 to the financial statements).
In 1997, L-P received $49.9 million in notes from a third party. The notes
are due in principal payments of $20 million in 2008, $20 million in 2009, and
$9.9 million in 2012. Interest is to be received in semi-annual installments
with rates varying from 5.62% to 7.5%.
In 1998, L-P received $353.9 million in notes from a third party. The notes
are due in principal payments of $70.8 million in 2006, $54.3 million in 2008,
$115.1 million in 2010, $91.4 million in 2013 and $22.3 million in 2018. The
weighted average interest rate of the notes is 7%.
L-P believes the carrying value of these notes approximates fair value at
December 31, 1997 and believes the fair value at December 31, 1998 is
approximately $410 million.
-32-
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
2. Accounts Payable and Accrued Liabilities
- ------------------------------------------------------------------------------------------
dollar amounts in millions
- ------------------------------------------------------------------------------------------
December 31 1998 1997
- ------------------------------------------------------------------------------------------
Accounts payable $ 127.3 $ 153.0
Salaries and wages payable 23.0 27.4
Taxes other than income taxes 5.0 8.7
Workers' compensation 13.1 13.5
Other accrued liabilities 24.1 31.8
- ------------------------------------------------------------------------------------------
$ 192.5 $ 234.4
==========================================================================================
3. Income Taxes
Income (loss) before taxes and minority interest was taxed under the following
jurisdictions:
- ------------------------------------------------------------------------------------------
dollar amounts in millions
- ------------------------------------------------------------------------------------------
year ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------------------
Domestic $ .1 $ (87.0) $ (255.1)
Foreign 13.9 (63.0) (71.7)
- ------------------------------------------------------------------------------------------
$ 14.0 $(150.0) $ (326.8)
===========================================================================================
Provision (benefit) for income taxes includes the following:
- ------------------------------------------------------------------------------------------
dollar amounts in millions
- ------------------------------------------------------------------------------------------
year ended December 31 1998 1997 1996
- -------------------------------------------------------------------------------------------
Current tax provision (benefit):
U.S. federal $ 3.1 $ (65.0) $ (87.4)
State and local .3 (4.3) (10.0)
Foreign (1.3) 3.6 12.2
- -------------------------------------------------------------------------------------------
Total current tax provisions
(benefit) $ 2.1 $ (65.7) $ (85.2)
===========================================================================================
Deferred tax provision (benefit):
U.S. federal $ 59.6 $ 32.2 $ 2.6
State and local 6.3 3.4 .3
Foreign (52.2) (13.5) (43.3)
- -------------------------------------------------------------------------------------------
Total deferred tax provision $ 13.7 $ 22.1 $ (40.4)
(benefit)
===========================================================================================
-33-
The tax effects of significant temporary differences creating deferred tax
(assets) and liabilities at December 31 were as follows:
- ----------------------------------------------------------------------------------------------
dollar amounts in millions
- ----------------------------------------------------------------------------------------------
December 31 1998 1997
- ----------------------------------------------------------------------------------------------
Property, plant and equipment $ 116.6 $ 134.0
Timber and timberlands 148.0 166.2
Inventories (1.3) (4.2)
Accrued liabilities (101.4) (84.1)
Contingency reserves (142.4) (86.7)
Benefit of capital loss and NOL carryovers (28.0) (27.8)
Benefit of foreign ITC carryover (61.0) (62.3)
Benefit of U.S. alternative minimum tax credit (20.0) --
Installment sale gain deferral 147.1 18.5
Other 14.8 13.8
Valuation allowance 38.0 38.2
- ----------------------------------------------------------------------------------------------
Net deferred tax liability 110.4 105.6
Less net current deferred tax assets (93.2) (73.0)
- ----------------------------------------------------------------------------------------------
Net noncurrent deferred tax liabilities $ 203.6 $ 178.6
==============================================================================================
LP's Canadian subsidiary, Louisiana-Pacific Canada Ltd. (LPC), has
unrealized foreign investment tax credits (ITC) of approximately C$93 million
(Canadian dollars). These credits can be carried forward to offset future tax of
LPC and reduce LPC's basis in the related property, plant and equipment. The
credits expire C$16 million in 1999, C$6 million in 2001, C$50 million in 2002,
C$3 million in 2003, C$4 million in 2004, C$13 million in 2005 and C$1 million
in 2006. The $28 million of capital loss and net operating loss (NOL) carryovers
included in the above table consists of $22 million of state NOL carryovers
which will expire in various years through 2013, and $6 million of Canadian
capital loss carryovers which will not expire.
U.S. taxes have not been provided on foreign subsidiaries' earnings of
approximately $31.7 million which are deemed indefinitely reinvested.
Quantification of the deferred tax liability, if any, associated with
indefinitely reinvested earnings is not practical.
-34-
The following table summarizes the differences between the statutory U.S.
federal and effective income tax rates:
- -------------------------------------------------------------------------------------------
year ended December 31 1998 1997 1996
- -------------------------------------------------------------------------------------------
Federal tax rate 35% (35)% (35)%
State and local income taxes 4 (4) -4
Nondeductible fines 51 -- --
Foreign tax credits used (35) -- --
Other foreign tax effects 19 6 --
Nondeductible goodwill 41 (1) --
Other, net (2) 5 1
- -------------------------------------------------------------------------------------------
113% (29)% (38)%
===========================================================================================
4. Long-term Debt
- ---------------------------------------------------------------------------------------------------------------------------
dollar amounts in millions
- ---------------------------------------------------------------------------------------------------------------------------
Interest Rate
at Dec. 31, December 31,
1998 1997
1998
Limited recourse notes payable -
Senior secured notes, payable 2008-2012, interest rates fixed 7.1-7.5% $ 47.9 $ 47.9
Senior secured notes, payable 2006-2018, interest rates fixed 6.8-7.3 348.6 --
Project bank financing -
Waterford, Ireland, OSB plant, payable in Irish pounds
through 2003, interest rate variable 7.3 28.1 32.9
Project revenue bond financings, payable through 2009,
interest rates variable 4.4-7.3 25.6 26.0
Employee Stock Ownership Trust (ESOT) Loans
Hourly ESOT, payable annually through 1999, interest rate fixed 8.3 8.5 17.0
Salaried ESOT, payable annually through 1999, interest rate variable 4.5 6.0 12.0
Bank credit facility
Revolving credit facility, expires in 2002, interest rate variable -- -- 300.0
Term loan facility, repaid in 1998 -- -- 125.0
Montrose penalty liability, payable 2000-2002, interest rate fixed 5.4 25.0 --
Other, including capital lease obligations, payable in varying
amounts through 2010, interest rates vary 4.3-7.0 4.2 34.4
- -----------------------------------------------------------------------------------------------------------------------------
Total 493.9 595.2
Less current portion (34.1) (22.9)
- -----------------------------------------------------------------------------------------------------------------------------
Net long-term debt $ 459.8 $ 572.3
============================================================================================================================
LP believes the carrying amounts of long-term debt approximate fair market
value with the exception of limited recourse notes payable which L-P believes
have a fair value of approximately $402 million at December 31, 1998. Project
bank financings are typically secured by the underlying assets of the related
project. The limited recourse notes payable are collateralized by notes
receivable from asset sales. Many of LP's loan agreements contain lender's
standard covenants and restrictions. L-P was in compliance with all of the
covenants and restrictions of these agreements at December 31, 1998. The
exchange rate for the Irish pound was 1.48 U.S. dollars per pound at December
31, 1998.
-35-
L-P issued $348.6 million of senior debt in June 1998 in a private
placement to institutional investors. The notes mature in principal amounts of
$69.7 million in 2006, $53.5 million in 2008, $113.4 million in 2010, $90.0
million in 2013 and $22.0 million in 2018. The notes are secured by $353.9
million of notes receivable from Simpson Timber Company. In the event of a
default by Simpson, L-P would only be liable to pay 10% of the notes payable.
At December 31, 1998, L-P had a $300 million unsecured facility with a
group of banks which expires in 2002. L-P pays a commitment fee on the unused
portion and there were no outstanding borrowings at year-end. Additionally,
L-P's subsidiary L-P Canada Ltd. has a $30 million (Canadian) revolving credit
facility. L-P Canada Ltd. pays a commitment fee on the unused portion but had no
borrowings outstanding against the line at year-end.
The weighted average interest rate for all debt at December 31, 1998 and
1997 was 6.8 percent and 6.4 percent. Required repayment of principal for
long-term debt is as follows:
- -----------------------------------------------------------------------------------------
dollar amounts in millions
- -----------------------------------------------------------------------------------------
year ended December 31
1999 $ 34.1
2000 14.5
2001 14.5
2002 14.3
2003 4.4
2004 and after 412.1
- -----------------------------------------------------------------------------------------
Total $ 493.9
==========================================================================================
See Note 11 to the financial statements for a discussion of a proposed debt
offering subsequent to year-end.
5. Retirement Plans
L-P maintains tax-qualified Employee Stock Ownership Trusts (ESOTs) for
eligible salaried and hourly employees in the U.S. under which 10 percent of the
eligible employees' annual earnings are contributed to the trusts. Approximately
7,800 L-P employees participate in the ESOTs.
The annual allocation of shares to participant accounts and compensation
expense are generally based on the ESOTs' cost of the shares. However, as
required, compensation expense for shares purchased by the ESOTs after 1993 is
based on the market value of the shares at the time of allocation. L-P's ESOTs
held a total of approximately 10.8 million shares at December 31, 1998 of which
approximately 9.6 million were allocated to participants' accounts. ESOT expense
is included in the retirement plan expense table below.
L-P also maintains other defined contribution pension plans covering
various groups of hourly and salaried employees in the U.S. and other countries.
Contributions to the plans are generally computed by one of three methods: 1)
L-P contribution required based upon a defined formula with no employee
contributions allowed; 2) L-P contribution required based upon a
-36-
defined formula with elective or mandatory employee contributions; and 3)
elective employee contributions only with no L-P contribution allowed.
L-P also has a number of defined benefit pension plans covering its hourly
employees, most of which are frozen. Contributions to these plans are based on
actuarial calculations of amounts to cover current pension and amortization of
prior service costs over periods ranging from 10 to 20 years. Contributions to
multiemployer defined benefit plans are specified in applicable collective
bargaining agreements.
L-P also has a Supplemental Executive Retirement Plan (SERP), a
non-qualified defined benefit plan intended to provide supplemental retirement
benefits to key executives. Benefits are generally based on compensation in the
years prior to retirement. The projected benefit obligation was $2.3 million at
December 31, 1998. Expense for this plan is included in the retirement plan
expense table below. L-P established a grantor trust to informally provide
funding for the benefits payable under the SERP and a deferred compensation
plan. During 1998, L-P contributed $4.4 million to the trust. The funds were
invested in corporate-owned life insurance policies. At December 31, 1998, the
trust assets were valued at $8.6 million and are included in other assets in
L-P's consolidated balance sheet.
The status of L-P administered qualified defined benefit pension plans is
as follows:
- ------------------------------------------------------------------------------------------------------------------
dollar amounts in millions
- ------------------------------------------------------------------------------------------------------------------
December 31 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Plan with Plan with Plan with Plan with
assets in accumulated assets in accumulated
excess of benefits in excess of benefits in
accumulated excess of accumulated excess of
benefits assets benefits assets
Projected and accumulated benefit obligation $ 11.8 $ 110.6 $ 11.2 $ 103.2
Plan assets 13.9 93.0 13.2 89.1
- --------------------------------------------------------------------------------------------------------------------
Net funded (unfunded) status 2.1 (17.6) 2.0 (14.1)
Unrecognized asset at transition -- (4.9) (.3) (6.5)
Unrecognized net loss and other 3.7 34.8 3.9 29.3
Adjustment to recognize minimum liability -- (29.9) -- (22.9)
- ---------------------------------------------------------------------------------------------------------------------
Net prepaid (accrued) pension expense $ 5.8 $ (17.6) $ 5.6 $ (14.2)
=====================================================================================================================
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Retirement plans changes and components are as follows:
- ----------------------------------------------------------------------------------------
dollar amounts in millions
- ----------------------------------------------------------------------------------------
December 31 1998 1997
- ----------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation - January 1 $ 114 $ 104
Service cost 1 --
Interest cost 8 8
Actual (gain)/loss 5 6
Benefits paid (6) (4)
- ----------------------------------------------------------------------------------------
Benefit obligation - December 31 $ 122 $ 114
========================================================================================
CHANGE IN ASSETS
Fair value of assets - January 1 $ 102 $ 100
Actual return on plan assets 8 6
Employer contribution 3 --
Participation contribution -- --
Benefits paid (6) (4)
- ----------------------------------------------------------------------------------------
Fair value of assets - December 31 $ 107 $ 102
=======================================================================================
RECONCILIATION OF FUNDED STATUS
Funded status $ (15) $ (12)
Unrecognized actuarial (gain)/loss 37 31
Unrecognized prior service cost 1 2
Unrecognized obligation (asset) (5) (7)
- ----------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 18 $ 14
========================================================================================
AMOUNTS RECOGNIZED IN THE
BALANCE SHEET CONSIST OF:
Prepaid benefit cost $ 6 $ 5
Accrued benefit liability (18) (14)
Deferred tax asset 12 9
Accumulated other comprehensive income $ 18 $ 14
- ----------------------------------------------------------------------------------------
Net amount recognized $ 18 $ 14
=======================================================================================
The actuarial assumptions used to determine pension expense and the funded
status of the plans were: a discount rate on benefit obligations of 6.75% in
1998, 7.25% in 1997 and 7.75% in 1996; and an 8.75% expected long-term rate of
return on plan assets for all three years.
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Retirement plan expense included the following components:
- ----------------------------------------------------------------------------------------------------
dollar amounts in millions
- ----------------------------------------------------------------------------------------------------
Year ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
Benefits earned by employees $ 1.1 $ .2 $ .5
Interest cost on projected benefit
obligation 7.9 7.9 8.3
Return on plan assets (9.2) (9.0) (10.9)
Net amortization and deferral (.5) (1.0) (1.7)
- ----------------------------------------------------------------------------------------------------
Net periodic pension expense (income) (.7) (1.9) (3.8)
Expense related to ESOTs,
multiemployer,
defined contribution and non-qualified
plans 26.0 28.8 29.1
Loss from settlement of pension plan -- 7.3 --
- ----------------------------------------------------------------------------------------------------
Net retirement plan expense $ 25.3 $ 34.2 $ 25.3
====================================================================================================
The assets of the plans at December 31, 1998 and 1997 consist of government
obligations, equity securities and cash and cash equivalents.
L-P has several plans which provide minimal postretirement benefits other
than pensions. Net expense related to these plans was not significant. L-P does
not generally provide post-employment benefits.
6. Stock Options and Plans
The Financial Accounting Standards Board issued SFAS 123, "Accounting for
Stock-Based Compensation" which establishes a fair value approach to measuring
compensation expense related to employee stock plans for grants on or after
January 1, 1995. As permitted by SFAS 123, L-P has elected to adopt only the
disclosure provisions of the standard and has therefore recorded no compensation
expense for certain stock option plans and all stock purchase plans. Had
compensation expense for L-P's stock-based compensation plans been determined
based on the fair value at the grant dates for awards under those plans
consistent with the fair value methodology of SFAS 123, L-P's net income (loss)
and net income (loss) per share would have been reduced to the pro forma amounts
indicated below:
-39-
- -----------------------------------------------------------------------------------------------------------------
dollar amounts in millions, except per share
- ------------------------------------------------------------------------------------------------------------------
year ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Net income (loss)
As reported $ 2.0 $ (101.8) $ (200.7)
Pro forma (4.0) (108.6) (206.0)
Net income (loss) per share
As reported $ .02 $ (.94) $ (1.87)
Pro forma (.04) (1.00) (1.92)
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model using the actual option terms with the
following assumptions: a 2.5 percent to 3.2 percent dividend yield; expected
volatility of 39 percent in 1998, 27 percent in 1997 and 27 percent in 1996; and
a risk free interest rate of 5.3 percent in 1998, 6.6 percent in 1997 and 6.7
percent in 1996.
Stock Option Plans
L-P grants options to key employees to purchase L-P common stock. Past
options were granted at 85 to 100 percent of market price at the date of grant.
The current stock award plan requires that options be granted at 100 percent of
market price at the date of grant. The options become exercisable over 3 or 5
years beginning one year after the grant date and expire 5 or 10 years after the
date of grant. At December 31, 1998, 4.9 million shares were available under the
current stock award plan for future option grants and all other stock-based
awards.
Changes in options outstanding and exercisable were as follows:
- ------------------------------------------------------------------------------------------------------
share amounts in thousands Number of Shares
- ------------------------------------------------------------------------------------------------------
year ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
Options outstanding at January 1 2,373 1,678 1,370
Options granted 905 928 635
Options exercised (113) (155) (196)
Options canceled (342) (78) (131)
- ----------------------------------------------------------------------------------------------------
Options outstanding at December 31 2,823 2,373 1,678
====================================================================================================
Options exercisable at December 31 1,170 912 763
====================================================================================================
-40-
Weighted Average Price Per Share
year ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
EXERCISE PRICE
Options granted $ 19.09 $ 19.97 $ 22.18
====================================================================================================
Options exercised $ 14.85 $ 13.91 $ 12.13
====================================================================================================
Options canceled $ 21.08 $ 24.21 $ 21.39
====================================================================================================
Options outstanding $ 18.11 $ 21.09 $ 21.14
====================================================================================================
Options exercisable $ 21.41 $ 21.09 $ 19.05
====================================================================================================
FAIR VALUE AT DATE OF GRANT
Options granted $ 5.73 $ 6.05 $ 8.38
====================================================================================================
PERFORMANCE-CONTINGENT STOCK AWARDS
L-P has granted performance-contingent stock awards to senior executives as
allowed under the current stock award plan. The awards entitle the participant
to receive a number of shares of L-P common stock determined by comparing L-P's
cumulative total stockholder return to the mean total stockholder return of five
other forest products companies for the four-year period beginning in the year
of the award. Awards are granted at a target share level. Depending on L-P's
four-year total stockholder return, the actual number of shares issued at the
end of the four-year period could range from zero to 200 percent of this target.
Changes in performance-contingent stock awards were as follows:
- ------------------------------------------------------------------------------------------
Number of Shares
- ------------------------------------------------------------------------------------------
year ended December 31 1998 1997
- ----------------------------------------------------------------------------------------
Target shares - awards outstanding at
January 1 54,569 --
Target shares - awards granted 64,064 54,569
Target shares - awards canceled (21,263) --
- ----------------------------------------------------------------------------------------
Target shares - awards outstanding at
December 31 97,370 54,569
========================================================================================
STOCK PURCHASE PLANS
L-P offers employee stock purchase plans to most employees. Under each
plan, employees may subscribe to purchase shares of L-P stock over 24 months at
85 percent of the market price. At December 31, 1998, 336,769 shares and 276,761
shares were subscribed at $17.72 and $18.89 per share under the 1998 and 1997
Employee Stock Purchase Plans. During 1998, L-P issued 150,601 shares to
employees at an average price of $18.59 under all Employee Stock Purchase Plans.
-41-
7. Unusual Credits and Charges, Net
The major components of "Unusual Credits and Charges, Net" in the
statements of income for the years ended December 31, were as follows:
- ------------------------------------------------------------------------------------------------------
dollar amounts in millions
- ------------------------------------------------------------------------------------------------------
year ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
Additions to contingency reserves $ (284.5) $ (169.0) $ (100.0)
Long-lived asset impairment charges (162.9) (35.0) (187.7)
Gain on asset sales 381.3 55.6 --
Gain on insurance recoveries 28.4 -- --
Gain on contract settlement -- 135.0 --
- ----------------------------------------------------------------------------------------------------
Severance and other (10.1) (19.1) (62.3)
- ----------------------------------------------------------------------------------------------------
$ (47.8) $ (32.5) $ (350.0)
====================================================================================================
1998
In 1998, L-P increased its reserves for litigation and environmental
liabilities by $284.5 million. Of this total, $257.7 million related to
adjustments to current estimates of liabilities for product-related litigation
and legal costs, including enhancements to the national siding class-action
settlement. Current estimates are based on management's regular monitoring of
changes in the facts and circumstances surrounding the various legal and
environmental matters and related accruals. Additional charges were taken for
the settlement of the Montrose criminal matter and adjustments to current
estimates of environmental liabilities and other litigation. See Note 8 to the
financial statements for a further discussion of significant litigation and
environmental matters.
L-P recorded long-lived asset impairment charges totaling $162.9 million on
its pulp mill in Chetwynd, British Columbia, a roof shake plant in California,
logging roads in Alaska and the assets of the Creative Point, Inc. subsidiary.
In the third quarter of 1998, L-P decided to sell or liquidate the Chetwynd
pulp mill facility. In connection with this decision, management estimated the
fair value of the facility, taking into account relevant factors such as the
continuing Asian economic crisis and the numerous pulp mills being offered for
sale by others. This valuation resulted in a $136.1 million write-down of the
facility, including the cumulative translation adjustment of $50.2 million
previously recorded within stockholders' equity. The operating loss of this
facility in 1998 was approximately $23 million. Although management is
aggressively pursuing disposal or liquidation of the facility, due to market
conditions the timing of such disposal or liquidation is not presently
determinable.
The roof shake plant was part of the portfolio of non-strategic assets
announced for sale in October 1997. As prospective buyers performed their due
diligence reviews, their preliminary non-binding offers were either withdrawn or
reduced to unacceptable levels, resulting in a decision on the part of L-P to
permanently shut down the facility. This decision resulted in an
-42-
additional write-down of $14.8 million. The operating loss of this facility was
approximately $5 million in 1998.
The logging roads in Alaska will cease to be used by L-P following the
expiration of a timber harvesting agreement with the U.S. Forest Service. The
agreement is scheduled to expire in 1999, subject to extension under certain
circumstances. As part of its budgeting process for 1999, L-P determined that
the logging roads were impaired based on the expected operating results of KPC
through the scheduled expiration date of the agreement. Accordingly, L-P
recorded a $10 million write-down on these logging roads in the third quarter of
1998.
The write-down of the Creative Point, Inc. subsidiary assets recorded in
the third quarter of 1998 was $2 million. The asset sale occurred in the fourth
quarter of 1998. During the time period between the buyer's initial offer and
the closing date of the sale, Creative Point's operating results fell short of
expectations, and the buyer reduced its offering price. Consequently, the
transaction, which L-P originally believed would result in a minor gain,
resulted in a loss. The operating loss of this subsidiary was approximately $4
million in 1998.
The net carrying amount of the above assets to be disposed of was
approximately $87 million after the write-downs were recorded.
In 1998, L-P recorded gains on the sale of assets in the amount of $381.3
million. Total proceeds from the sale of assets were $729.0 million, consisting
of $367.6 million of cash and $361.4 million of notes receivable. Assets sold
during the year were primarily those identified for sale in 1997, including
timber and timberlands, sawmills and distribution centers in California, and the
Weather-Seal window and door operations.
L-P recovered $28.4 million, net of certain professional fees, from several
of its insurance carriers for costs incurred in defending and settling the
product class-action lawsuits.
Charges for severance and other costs, primarily at the roof shake plant,
totaled $10.1 million in 1998. The severance charges were $.5 million for
approximately 110 employees of the roof shake facility (as of December 31, 1998
$.3 million had been paid and charged against the liability). Included in the
total are inventory write-downs and other shut-down related costs at the roof
shake plant totaling $6.1 million. Additionally, L-P wrote off $3.5 million of
deferred start-up costs upon adoption of a new accounting standard.
1997
In 1997, L-P increased its reserves for litigation and environmental
liabilities by $169.0 million. Of this total, $165.0 million related to
adjustments to then current estimates of liabilities for product-related
litigation and legal costs (these estimates were subsequently revised in 1998).
Additional charges of $4 million were taken for adjustment of environmental
liabilities in Alaska. See Note 8 to the financial statements for a further
discussion of significant litigation and environmental matters.
-43-
L-P recorded long-lived asset impairment charges totaling $35.0 million on
the assets of its subsidiary in Ireland and the roof shake plant in California
(this estimate was subsequently revised in 1998). L-P began reviewing options
for disposing of the assets in Ireland and determined that an impairment charge
was appropriate. Although management is aggressively pursuing disposal options,
the timing of such disposal is not presently determinable. The total asset
write-down for this facility was $15.0 million. L-P's share of this subsidiary's
loss in 1997 was approximately $5 million. The roof shake plant was part of the
portfolio of California assets announced for sale in October 1997. As discussed
above, this asset was not sold due to market conditions and was permanently
shut-down in 1998. Based on then current estimates, the asset was written-down
$20 million. The operating loss of this facility was approximately $4 million in
1997. The net carrying amount of the above assets to be disposed of was
approximately $64 million after the write-downs were recorded.
In 1997, L-P recorded gains on the sale of assets in the amount of $55.6
million. The gains resulted from the sale of tracts of timber and timberland in
California.
L-P's Ketchikan Pulp Company subsidiary (KPC) recorded a gain of $135.0
million to reflect the initial proceeds received under a settlement agreement
with the U.S. Government over KPC's claims of damages related to its long-term
timber supply contract in Alaska.
Charges for severance and other costs totaled $19.1 million in 1997.
Adjustments to charges for the closure of KPC operations, originally announced
in 1996, amounted to $10.3 million, including a credit adjustment to estimated
severance amounts of $3.5 million. The remaining amount of $8.8 million related
to accruals for other costs incurred.
1996
In 1996, L-P increased its reserves for litigation and environmental
liabilities by $100.0 million. Of this total, $45.0 million related to the net
settlement cost of shareholder class-action litigation. Liabilities for
product-related litigation and legal costs were adjusted to then current
estimates which resulted in charges of $40.0 million (these estimates were
subsequently revised in 1997 and 1998). A charge for environmental costs of
$15.0 million related to the shut-down of KPC operations was also taken in 1996.
L-P recorded long-lived asset impairment charges totaling $187.7 million
related to the KPC operations, nine sawmills in various states, two OSB plants,
two fiber gypsum plants, two plants in Mexico and certain other equipment
throughout L-P's operations. L-P's management determined that these facilities
were non-strategic and therefore would be either sold or liquidated. The
write-downs by class of asset were $125.0 million related to KPC assets, $5.7
million related to sawmills, $15.8 million related to OSB plants, $17.5 million
related to Canadian pulp operations, $15.0 million related to fiber gypsum
plants and $8.7 million related to other plants and equipment. The identifiable
losses related to these impaired assets totaled approximately $64 million in
1996. The net carrying amount of the above assets to be disposed of was
approximately $82 million after the write-downs were recorded.
-44-
Charges for severance and other costs totaled $62.3 million in 1996. Of
this total, $33.2 million related to the announced shut-down of KPC operations,
including $15 million for severance of approximately 830 employees. Of this
charge, $2.0 million, $7.7 million and $.1 million was paid and charged against
the liability in 1998, 1997 and 1996 and $1.7 million remains in the liability
at the end of 1998. As noted above, the liability for severance was revised in
1997. Inventory write-downs totaled $16.7 million, which were also primarily
related to the announced closure of KPC operations. The remaining amount of
$12.4 million related to accruals for other costs incurred.
8. Contingencies
ENVIRONMENTAL PROCEEDINGS
In March 1995, L-P's subsidiary, Ketchikan Pulp Company ("KPC"), entered
into agreements with the federal government to resolve violations of the Clean
Water Act and the Clean Air Act that occurred at KPC's pulp mill during the late
1980's and early 1990's. The U.S. District Court for the District of Alaska
subsequently approved these agreements. Pursuant to these agreements, KPC paid
$1.25 million of criminal penalties and $3.1 million of civil penalties, all of
which were paid in 1995. In addition, KPC agreed to undertake certain remedial
and pollution-control projects. These projects included (i) capital projects for
spill containment and water treatment plant upgrades estimated to cost
approximately $13.4 million (of which approximately $7.5 million had been spent
at December 31, 1998) and (ii) non-capital projects relating to the
investigation and remediation of Ward Cove, a body of water adjacent to the mill
site, estimated to cost approximately $6.3 million (of which approximately $1.6
million had been spent at December 31, 1998). As a result of the closure of the
mill in May 1997, KPC's obligations with respect to the capital projects have
been suspended through January 2000, and KPC is in the process of seeking
permanent relief from those obligations. KPC's obligations with respect to the
Ward Cove investigation and remediation have not been affected by the closure of
the mill.
In June, 1997, KPC entered into an agreement with the State of Alaska and
the U.S. Environmental Protection Agency (the "EPA") to investigate and, if
necessary, clean up the former mill site. KPC has completed the investigative
portion of this project and commenced work on the clean-up portion of this
project, which is expected to be completed in the third quarter of 1999. Total
costs associated with this project are estimated to be approximately $2.7
million, of which approximately $2.6 million had been spent at December 31,
1998.
KPC has completed the closure of a landfill near Thorne Bay, Alaska,
pursuant to an agreement with the U.S. Forest Service (the "USFS"). Costs of the
project totaled approximately $6.5 million. KPC is also continuing to monitor
leachate from the landfill in order to evaluate whether treatment of the
leachate is necessary.
Certain L-P plant sites have, or are suspected of having, substances in the
ground or in the groundwater underlying the sites that are considered
pollutants.
-45-
L-P maintains a reserve for estimated environmental loss contingencies. The
balance of the reserve was $27.9 million and $29.3 million at December 31, 1998
and 1997, respectively, of which $9.1 million and $18.4 million related to the
KPC matters described above and other remedial activities associated with the
closure of KPC's pulp mill. The remainder of these balances were primarily for
estimated future costs of remediation of hazardous or toxic substances at
numerous sites currently or previously owned by L-P and closing and monitoring
landfills. L-P's estimates of its environmental loss contingencies are based on
various assumptions and judgments, the specific nature of which varies in light
of the particular facts and circumstances surrounding each environmental loss
contingency. These estimates typically reflect assumptions and judgments as to
the probable nature, magnitude and timing of required investigation, remediation
and/or monitoring activities and the probable cost of these activities, and in
some cases reflect assumptions and judgments as to the obligation or willingness
and ability of third parties to bear a proportionate or allocated share of the
cost of these activities. Due to the numerous uncertainties and variables
associated with these assumptions and judgments, and the effects of changes in
governmental regulation and environmental technologies, both the precision and
reliability of the resulting estimates of the related contingencies are subject
to substantial uncertainties. L-P regularly monitors its estimated exposure to
environmental loss contingencies and, as additional information becomes known,
may change its estimates significantly. However, no estimate of the range of any
such change can be made at this time. L-P's estimates of its environmental loss
contingencies do not reflect potential future recoveries from insurance carriers
except to the extent that recovery may from time to time be deemed probable as a
result of a carrier's agreement to payment terms. In those instances in which
L-P's estimated exposure reflects actual or anticipated cost-sharing
arrangements with third parties, L-P does not believe that it will be exposed to
additional material liability as a result of non-performance by such third
parties.
The activity in L-P's reserve for estimated environmental loss contingency
reserves for the last three years is summarized in the following table.
- ----------------------------------------------------------------------------------------------------
dollar amounts in millions
- ----------------------------------------------------------------------------------------------------
Year ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
Beginning balance $ 29.3 $ 49.9 $ 13.7
Accrued to expense during the year 17.3 3.4 38.5
Accrued as expense of asset sales 6.9 --- ---
Reclassification of previously recorded
liabilities --- 6.7 ---
Payments made (20.1) (30.7) (2.3)
Reclassification to note payable (5.5) --- ---
- ----------------------------------------------------------------------------------------------------
Ending balance $ 27.9 $ 29.3 $ 49.9
====================================================================================================
In the third quarter of 1996, L-P announced plans to close the KPC pulp
mill. In conjunction with this announcement, L-P accrued $38.5 million for
estimated liabilities for the Ward Cove investigation and remediation, mill site
and landfill investigation and remediation, asbestos abatement and the
demolition and removal of assets from the mill site, all of which were deemed
necessary for environmental compliance purposes.
-46-
In the first quarter of 1997, operations at the pulp mill ceased. Based
upon the information then available to it, L-P refined its original estimate of
the closure-related liabilities and accrued an additional $3.3 million.
In the second quarter of 1998, two environmental accruals were made. In
connection with the sale of certain properties in California, L-P estimated that
retained environmental liabilities were approximately $6.9 million. In addition,
$6.0 million was added to the environmental accrual related to the "Colorado
Criminal Proceedings" discussed below. In the third quarter of 1998, $1.8
million was accrued in connection with newly identified sites and revised
estimates at other sites. Also during the quarter, the accruals for KPC
environmental matters were increased by an additional $7.5 million as a result
of (i) revised cost estimates provided by the contractors performing asset
removal and demolition activities, (ii) additional assets, which had initially
been expected to be sold, becoming unsalable due to deteriorating conditions in
the pulp market and, consequently, being slated for demolition and removal,
(iii) the completion of the EPA's review of the remediation investigation report
relating to upland properties, and (iv) experience indicating that hog fuel
removal costs would be greater than originally estimated. In the fourth quarter,
$2.0 million was accrued in connection with revised estimates at other sites.
Although L-P's policy is to comply with all applicable environmental laws
and regulations, L-P has, in the past, been required to pay fines for
noncompliance. In some instances, 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. Based on the information
currently available, management believes that any fines, penalties or other
losses resulting from the matters discussed above will not have a material
adverse effect on the consolidated financial position or results of operations
of L-P.
COLORADO CRIMINAL PROCEEDINGS
In June 1995, a federal grand jury returned an indictment in the U.S.
District Court for the District of Colorado against L-P in connection with
alleged environmental violations, as well as alleged fraud in connection with
the submission of unrepresentative oriented strand board (OSB) product samples
to an industry product certification agency, by L-P's Montrose (Olathe),
Colorado OSB plant. In connection with entering a guilty plea as to certain
criminal violations in May 1998, (i) L-P agreed to pay total penalties of $37
million (including making $500,000 in charitable contributions), of which $12
million was paid in 1998, and was sentenced to five years of probation and (ii)
all remaining charges against L-P were dismissed. Under the terms of the
original agreement, the $25 million balance of the fine assessed against L-P,
which is secured by a statutory lien, was payable in three equal annual
installments, together with accrued interest, beginning July 1, 2000. However,
in early 1999, the court approved a modification to the agreement, which now
provides for the payment of this balance, without interest, on June 1, 1999.
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. In April 1998, L-P signed a Settlement and Compliance Agreement with the
EPA. This agreement formally lifted the 1995
-47-
suspension imposed on the Montrose facility. The agreement has a term of five
years and obligates L-P to (i) develop and implement certain corporate policies
and programs, including a policy of cooperation with the EPA, an employee
disclosure program and a policy of nonretaliation against employees, (ii)
conduct its business to the best of its ability in accordance with federal laws
and regulations and local and state environmental laws, (iii) report significant
violations of law to the EPA, and (iv) conduct at least two audits of its
compliance with the agreement.
OSB SIDING MATTERS
L-P has been named as a defendant in numerous class action and nonclass
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 U.S. 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, is entitled to
receive from the settlement fund established under the agreement a payment equal
to the replacement cost (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 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 payable under the settlement agreement and the
amount previously paid. The extent of damage to OSB siding at each claimant's
property is determined by an independent adjuster in accordance with a specified
protocol. Settlement payments are not subject to adjustment 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 may pursue a claim against the contractor/builder to
the extent the award was reduced.
The settlement requires L-P to contribute $275 million to the settlement
fund in seven annual installments payable during the period from 1996 through
2002 in the following amounts: $100
-48-
million; $55 million; $40 million; $30 million; $20 million; $15 million; and
$15 million. As of December 31, 1998, L-P had funded the first three
installments. L-P also had funded a significant portion of the last four
installments through the Early Payment Program discussed below. The estimated
cumulative total of approved claims under the settlement, as calculated under
the terms of the settlement (without giving effect, in the case of unpaid
claims, to discounted settlements under the Early Payment Program), exceeded
$500 million at December 31, 1998. In these circumstances, unless L-P makes an
additional contribution of $50 million to the settlement fund by August 2001,
the settlement will terminate as to all claims in excess of $275 million that
remain unpaid. In addition, unless L-P makes a second additional contribution of
$50 million to the settlement fund by August 2002, the settlement will terminate
as to all claims in excess of $325 million that remain unpaid. If L-P makes both
of these additional contributions, the settlement would continue in effect until
at least August 2003, at which time L-P would be required to make an election
with respect to all unpaid claims that were filed prior to December 31, 2002.
If, in August 2003, L-P elects to pay pursuant to the settlement all approved
claims that remain unpaid at that time, 50% of the unpaid claims must be paid by
August 2004 and the remaining 50% must be paid by August 2005. If L-P elects not
to pay the unpaid claims pursuant to the settlement, the settlement will
terminate with respect to such unpaid claims and all unpaid claimants will be
free to pursue their individual remedies from and after August 2003.
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 Inner-Seal siding or damage
to utility grade OSB siding (sold without any express warranty), either of which
could create additional claims. 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. 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, as of December 31, 1998, approximately $5.8
million remained of the $195 million paid into the fund to date (all of which
was dedicated to the payment of expenses or held in reserve).
On October 26, 1998, L-P announced an agreement to offer early payments to
eligible claimants who have submitted valid and approved claims under the
original settlement agreement (the "Early Payment Program") and to establish an
additional $125 million fund to pay all other approved claims that are filed
before December 31, 1999 (the "Second Fund").
The Early Payment Program applies to all claimants who are entitled to be
paid from the $80 million of mandatory contributions to the settlement fund that
remain to be made under the settlement agreement, and to all claimants who
otherwise would be paid from the proceeds of the two optional $50 million
contributions to the settlement fund that L-P may elect to make under the
settlement agreement. The early payments from the $80 million of mandatory
contributions are discounted at a rate of 9% per annum calculated from their
original payment dates (1999-2002) to the date the early payment offer was made.
The early payments from the two $50
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million optional contributions are discounted at a rate of 12% per annum
calculated from 2001 and 2002, respectively, to the date the early payment offer
was made. Claimants may accept or reject the discounted early payments in favor
of remaining under the original settlement, but may not arbitrate the amount of
their early payments. For purposes of determining whether L-P has made any
mandatory or optional contribution to the settlement fund as of the respective
due date therefor, L-P will receive credit for the undiscounted amount of such
contribution to which the discounted amount thereof paid pursuant to the Early
Payment Program is attributable. At December 31, 1998, approximately $106.7
million in Early Payment Program checks had been mailed and $60.8 million had
been cashed in settlement of claims, while approximately $26.6 million in such
checks remained to be mailed. Giving effect only to Early Payment Program checks
that had actually been cashed, L-P had effectively satisfied a cumulative total
of approximately $266.5 million of its mandatory and optional contributions to
the settlement fund at December 31, 1998.
The $125 million Second Fund represents an alternative source of payment
for all approved claims not eligible for the Early Payment Program and all
new claims filed before December 31, 1999. In early 2000, claimants electing
to participate in the Second Fund will be offered a pro rata share of the
fund in complete satisfaction of their claims, which they may accept or
reject in favor of remaining under the original settlement. Claimants who
accept their pro rata share may not file additional claims under the
settlement or arbitrate the amount of their payments. Claimants who elect not
to participate in the Second Fund remain bound by the terms of the original
settlement. If L-P is dissatisfied with the number of claimants who elect to
be paid from the Second Fund, L-P may refuse to proceed with funding at its
sole option. In that event, the Second Fund will be canceled and all the
claimants who had elected to participate in it will be governed by the
original settlement.
A settlement of a related class action in Florida was approved by the
Circuit Court for Lake County, Florida, on October 4, 1995. 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 is $3.40 per square foot for lap
siding and $2.82 per square foot for panel siding, subject to reduction by 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 until
October 4, 2000.
CONTINGENCY RESERVES
L-P maintains loss contingency reserves in addition to the environmental
reserves discussed above. The balance of these reserves, exclusive of the
environmental reserves discussed above, was $340.1 million and $194.7 million at
December 31, 1998 and 1997, respectively (of which $323.9 million and $164.7
million, respectively, related to OSB siding contingencies). L-P's
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estimates of its non-environmental loss contingencies are based on various
assumptions and judgments. In the case of the OSB siding contingency, these
assumptions and judgments relate to, among other things: the timing and
magnitude (in terms of both the number of claims and the square footage of
damaged siding) of additional claims; the replacement cost (as determined in
accordance with the applicable settlement) of the damaged siding; the extent to
which claimants will elect to participate in the Early Payment Program or the
Second Fund; the extent to which claims may be resolved through means
other than those provided for in the applicable settlement; and the costs
associated with the administration of the settlement and the resolution of
disputes and other legal matters. Due to the numerous uncertainties and
variables associated with these assumptions and judgments, both the precision
and reliability of the resulting estimates of the related contingencies are
subject to substantial uncertainties. L-P regularly monitors its estimated
exposure to non-environmental loss contingencies and, as additional information
becomes known, may change its estimates significantly. While no estimate of the
range of any such change can be made at this time, the amount that L-P may
ultimately pay in connection with these matters could materially exceed, in the
near term, the amounts accrued to date. L-P's estimates of its loss
contingencies do not reflect potential future recoveries from insurance carriers
except to the extent that recovery may from time to time be deemed probable as a
result of a carrier's agreement to payment terms.
The activity in the portion of L-P's loss contingency reserves relating to
OSB siding contingencies for the last three years is summarized in the following
table.
- ----------------------------------------------------------------------------------------------------
dollar amounts in millions
- ----------------------------------------------------------------------------------------------------
Year ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
Beginning balance $ 164.7 $184.9 $360.9
Accruals made during the year 247.5 161.9 38.1
Payments made (100.8) (182.1) (214.1)
Insurance recovery 12.5 --- ---
====================================================================================================
Ending balance $323.9 $164.7 $184.9
====================================================================================================
In the third quarter of 1996, L-P accrued an additional $36.0 million
primarily related to larger than expected settlement opt-out claims subsequent
to the approval of the nationwide settlement in June of 1996. In the fourth
quarter of 1996, L-P accrued an additional $2.1 million.
In the third quarter of 1997, management learned that accrued and future
claims under the nationwide settlement would likely exceed the $275 million
originally estimated. Accordingly, L-P accrued an additional $50 million for the
nationwide settlement based on the minimum amount management believed was
probable and estimable at the time. Additionally, management determined that an
additional accrual of $111.9 million was necessary based on updated estimates of
total costs to be incurred for Florida class action claims, administration costs
of the nationwide settlement, additional opt-out settlements and legal fees.
In the third quarter of 1998, following court approval of the Early Payment
Program and the Second Fund, L-P accrued an additional $247.5 million based on
the estimated costs of the Early Payment Program and the Second Fund and
revised estimates of the
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future costs of the Florida class action, warranty costs after the termination
of settlements, legal and administration costs, and estimated payments to
claimants whose claims are not discharged pursuant to the settlement.
OTHER PROCEEDINGS
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 consolidated financial position or results of operations of L-P.
9. Commitments
L-P is obligated to purchase timber under certain cutting contracts which
extend to 2004. L-P's best estimate of its commitment at current contract rates
under these contracts is approximately $14.7 million for approximately 144
million board feet of timber.
Payments under all operating leases that were charged to expense during
1998, 1997, and 1996 were $17.7 million, $17.5 million and $17.0 million. Future
minimum rental payments under noncancellable operating leases are not
significant.
10. Segment Information
L-P, a major supplier of building products, operates through several
business units with their own management teams. The business units have been
aggregated into five reportable segments based on the similarity of economic
characteristics, customers, distribution methods and manufacturing processes.
Export sales are primarily to customers in Asia and Europe. Information
about LP's geographic segments is as follows:
- -------------------------------------------------------------------------------------------------------
dollar amounts in millions
- -------------------------------------------------------------------------------------------------------
year ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
TOTAL SALES - POINT OF ORIGIN
U.S. $ 2,212 $ 2,330 $ 2,389
Canada and other 166 128 162
Intersegment sales to U.S. (81) (55) (65)
- -------------------------------------------------------------------------------------------------------
Total sales $ 2,297 $ 2,403 $ 2,486
- -------------------------------------------------------------------------------------------------------
Export sales (included above) $ 128 $ 240 $ 268
=======================================================================================================
PROFIT (LOSS)
U.S. $ 273 $ 39 $ 107
Canada and other (104) (48) (24)
Unusual credits and charges, net1 (48) (32) (350)
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General corporate expense and
interest, net (107) (109) (60)
- -------------------------------------------------------------------------------------------------------
Income (loss) before taxes
and minority interest $ 14 $ (150) $ (327)
=======================================================================================================
IDENTIFIABLE ASSETS
U.S. $ 2,279 $ 2,220 $ 2,228
Canada and other 240 358 394
- -------------------------------------------------------------------------------------------------------
Total assets $ 2,519 $ 2,578 $ 2,622
======================================================================================================
Information about L-P's product segments is as follows:
- -------------------------------------------------------------------------------------------------------
dollar amounts in millions
- -------------------------------------------------------------------------------------------------------
year ended December 31 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
TOTAL SALES
Structural products $ 1,374 $ 1,294 $ 1,408
Exterior products 107 103 99
Industrial panel products 175 181 195
Specialty and products 566 695 607
Pulp 75 130 177
- -------------------------------------------------------------------------------------------------------
Total sales $ 2,297 $ 2,403 $ 2,486
=======================================================================================================
PROFIT (LOSS)
Structural products $ 199 $ 22 $ 135
Exterior products 22 9 17
Industrial panel products 6 13 31
Specialty and other products (20) (24) (9)
Pulp (38) (29) (91)
Unusual credits and charges, net (1) (48) (32) (350)
General corporate and other
expense, net (94) (80) (52)
Interest, net (13) (29) (8)
-------------------------------------------------------------------------------------------------------
Income (loss) before taxes and minority
interest $ 14 $ (150) $ (327)
=========================================================================================================
(1) See Note 7 to the financial statements for an explanation of unusual
credits and charges, net.
- -------------------------------------------------------------------------------------------------------
dollar amounts in millions
- -------------------------------------------------------------------------------------------------------
year ended December 31 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
IDENTIFIABLE ASSETS
Structural products $ 927 $ 1,105 $ 1,079
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Exterior products 46 45 41
Industrial panel products 124 175 179
Specialty and products 255 302 314
Pulp 178 266 166
- -------------------------------------------------------------------------------------------------------
Non-segment related 989 685 843
- -------------------------------------------------------------------------------------------------------
Total assets $ 2,519 $ 2,578 $ 2,622
=======================================================================================================
DEPRECIATION, AMORTIZATION AND
COST OF TIMBER HARVESTED
Structural products $ 105 $ 114 $ 107
Exterior products 7 4 6
Industrial panel products 5 6 6
Specialty and other products 27 26 25
Pulp 12 14 10
Non-segment related 29 20 38
- ----------------------------------------------------------------------------------------------------
Total depreciation,
amortization and cost of
timber harvested $ 185 $ 184 $ 192
====================================================================================================
CAPITAL EXPENDITURES
Structural products $ 87 $ 116 $ 115
Exterior products 1 5 8
Industrial panel products 2 6 9
Specialty and other products 18 52 48
Pulp 7 4 36
Non-segment related 8 22 50
- ----------------------------------------------------------------------------------------------------
Total capital expenditures $ 123 $ 205 $ 266
====================================================================================================
11. Subsequent Events
On January 25, 1999, L-P commenced a tender offer to purchase all
outstanding shares of ABT Building Products Corporation (ABT) for $15 per share.
On February 25, 1999, L-P and ABT merged following the successful completion of
the tender offer. L-P acquired approximately 10.7 million shares of ABT for cash
proceeds of approximately $160 million.
In March 1999, L-P filed a shelf registration statement for $500 million of
debt securities to be offered from time to time in one or more series. The
amount, price and other terms of any such offering will be determined on the
basis of market conditions and other factors existing at the time of such
offering. The proceeds from the sale of such securities are anticipated to be
used by L-P for general corporate purposes, which may include repayment of debt,
including debt incurred in the acquisition of ABT.
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Independent Auditors' Report
To the Board of Directors and Stockholders of Louisiana-Pacific Corporation:
We have audited the accompanying consolidated balance sheets of
Louisiana-Pacific Corporation and subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of income, stockholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of L-P's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Louisiana-Pacific Corporation and
subsidiaries at December 31, 1998 and 1997, and the results of their operations
and their cash flows for the years then ended, in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
Portland, Oregon
January 29, 1999
(February 25, 1999 as to the first paragraph of Note 11)
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Louisiana-Pacific Corporation:
We have audited the accompanying consolidated statements of income,
stockholders' equity and cash flows of Louisiana-Pacific Corporation (a Delaware
corporation) for the year ended December 31, 1996. These financial statements
are the responsibility of L-P's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of income is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the statements of income, stockholders' equity and cash flows
referred to above present fairly, in all material respects, the results of
operations of Louisiana-Pacific Corporation for the year ended December 31,
1996, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Portland, Oregon
January 31, 1997
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following financial statements of LP are included in this report:
Consolidated Balance Sheets December 31, 1998, and 1997.
Consolidated Statements of Income years ended December 31, 1998, 1997, and 1996.
Consolidated Statements of Cash Flows years ended December 31, 1998, 1997, and
1996.
Consolidated Statements of Stockholders' Equity years ended December 31, 1998,
1997, and 1996.
Notes to Financial Statements.
Reports of Independent Public Accountants.
No financial statement schedules are required to be filed.
B. REPORTS ON FORM 8-K
No reports on Form 8-K were filed by L-P during the quarter ended December
31, 1998.
C. EXHIBITS
The exhibits filed as part of this report or incorporated by reference
herein are listed in the accompanying exhibit index. Each management contract or
compensatory plan or arrangement is identified in the index.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Louisiana-Pacific Corporation, a Delaware corporation (the
"registrant"), has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: February 4, 2000 LOUISIANA-PACIFIC CORPORATION
(Registrant)
/S/ CURTIS M. STEVENS
-----------------------------
Curtis M. Stevens
Vice President, Treasurer and
Chief Financial Officer
---------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capabilities and on the dates indicated.
Date Signature and Title
- ---- -------------------
February 4, 2000 /S/ MARK A. SUWYN
------------------
Mark A. Suwyn
Chief Executive Officer, Chairman of the
Board, Director
(Principal Executive Officer)
February 4, 2000 /S/ CURTIS M. STEVENS
----------------------
Curtis M. Stevens
Vice President, Treasurer and Chief
Financial Officer
(Principal Financial & Accounting
Officer)
February , 2000
-------------------
John W. Barter
Director
February 4, 2000 /S/ WILLIAM C. BROOKS
----------------------
William C. Brooks
Director
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February 4, 2000 /S/ ARCHIE W. DUNHAM
---------------------
Archie W. Dunham
Director
February 4, 2000 /S/ PAUL W. HANSEN
-------------------
Paul W. Hansen
Director
February 4, 2000 /S/ DONALD R. KAYSER
---------------------
Donald R. Kayser
Director
February , 2000
------------------------
Brenda Lauderback
Director
February , 2000
------------------------
Patrick F. McCartan
Director
February 4, 2000 /S/ LEE C. SIMPSON
---------------------
Lee C. Simpson
Director
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EXHIBIT INDEX
On written request, Louisiana-Pacific Corporation ("L-P") will furnish to
any record holder or beneficial holder of its common stock any exhibit to this
report upon the payment of a fee equal to L-P's costs of copying such exhibit
plus postage. Any such request should be sent to: Ward Hubbell, Director of
Corporate Affairs, Louisiana-Pacific Corporation, 111 S.W. Fifth Avenue,
Portland, Oregon 97204.
Items identified with an asterisk (*) are management contracts or
compensatory plans or arrangements.
EXHIBIT DESCRIPTION
- ------- -----------
2.1 Purchase Agreement by and between L-P, LPS Corporation,
L-P Redwood, LLC, Louisiana-Pacific Samoa, Inc., and
Simpson Timber Company and Simpson Investment Company
dated as of May 1, 1998. Incorporated by reference to
Exhibit 2.1 to L-P's Form 10-Q report for the quarter
ended March 31, 1998.
2.2 Purchase Agreement by and between LPS Corporation, L-P
Redwood, LLC, and Samsome Forest Partners, L.P., dated
as of May 1, 1998. Incorporated by reference to Exhibit
2.2 to L-P's Form 10-Q report for the quarter ended
March 31, 1998.
2.3 Agreement and Plan of Merger dated as of January 19,
1999, by and among ABT Building Products Corporation, L-P
and Striper Acquisition, Inc. Incorporated by reference
to Exhibit (c)(1) to L-P's Schedule 14D-1 filed
January 25, 1999.
3.1 Restated Certificate of Incorporation of L-P.
Incorporated by reference to Exhibit 3(a) to L-P's
Form 10-Q report for the quarter ended June 30, 1993.
3.2 Bylaws of L-P as amended April 23, 1999. Incorporated
by reference to Exhibit 3.1 to L-P's Form 10-Q report
for the quarter ended March 31, 1999.
4.1 Rights Agreement, dated as of May 26, 1998, between L-P
and First Chicago Trust Company of New York as Rights
Agent, including the form of Right Certificate as
Exhibit A and the Summary of Rights to Purchase
Preferred Shares as Exhibit B. Incorporated by
reference to Exhibit 1 to L-P's Registration Statement
on Form 8-A filed May 26, 1998.
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, L-P
is not filing certain instruments with respect to its
long-term debt because the amount authorized under any
such instrument does not exceed 10 percent of L-P's
total consolidated assets at December 31, 1998. L-P
agrees to furnish a copy of any such instrument to the
Securities and Exchange Commission upon request.
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4.2.1 Credit Agreement dated as of January 31, 1997, among
L-P, Louisiana-Pacific Canada Ltd., Bank of America
National Trust and Savings Association ("Bank of
America") and the other financial institutions that are
parties thereto. Incorporated by reference to Exhibit
4.A.2 to L-P's Form 10-K report for 1996.
4.2.2 Consent and First Amendment to Credit Agreement dated as
of December 31, 1997, among L-P, Louisiana-Pacific
Canada Ltd., Louisiana-Pacific Canada Pulp Co., Bank of
America and other financial institutions that are
parties thereto. Previously filed as Exhibit 4.3 to
L-P's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 as filed on March 18, 1999.
4.3 Loan Agreement, dated February 3, 1999, between L-P and
Centric Capital Corporation and related Promissory
Note. Incorporated by reference to Exhibit 4.1 to L-P's
Form 10-Q report for the quarter ended March 31, 1999.
4.4 Note Purchase Agreement among L-P, L-P SPV2, LLC,
and the Purchasers listed therein dated June 30, 1998.
Incorporated by reference to Exhibit 4 to L-P's Form
10-Q report for the quarter ended June 30, 1998.
10.1 1984 Employee Stock Option Plan as amended.
Incorporated by reference to Exhibit 10.A to L-P's Form
10-K report for 1996.*
10.2 1991 Employee Stock Option Plan. Incorporated by
reference to Exhibit 10.B to L-P's Form 10-K report for
1996.*
10.3 1992 Non-Employee Director Stock Option Plan (restated
as of May 3, 1998) and Related Form of Option
Agreement. Incorporated by reference to Exhibit 10.1 to
L-P's Form 10-Q report for the quarter ended March 31,
1998. *
10.4 Non-Employee Directors' Deferred Compensation Plan
effective July 1, 1997. Incorporated by reference to
Exhibit 10.D to L-P's Form 10-K report for 1997.*
10.5 Executive Deferred Compensation Plan effective May 1,
1997. Incorporated by reference to Exhibit 10.P to
L-P's Form 10-K report for 1997.*
10.6 1997 Incentive Stock Award Plan as restated as of May
3, 1998. Previously filed as Exhibit 10.6 to L-P's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1998 as filed on March 18, 1999.*
10.7 Forms of Award Agreements for Non-Qualified Stock
Options and Performance Shares under the 1997
Incentive Stock Award Plan. Incorporated by reference
to Exhibit 10.F(2) to L-P's Form 10-K report for 1996.*
10.8 Annual Cash Incentive Award Plan effective March 1,
1997. Incorporated by reference to Exhibit 10.F(3) to
L-P's Form 10-K report for 1996.*
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10.9 L-P's Supplemental Executive Retirement Plan effective July 1, 1997.
Incorporated by reference to Exhibit 10.H to L-P's Form 10-K report for
1997.*
10.10 Employment Agreement between L-P and Mark A. Suwyn dated January 2,
1996. Incorporated by reference to Exhibit 10.L to L-P's Form 10-K report
for 1995.*
10.11 Restricted Stock Award Agreement between L-P and Mark A. Suwyn dated
January 31, 1996. Incorporated by reference to Exhibit 10.J to L-P's Form
10-K report for 1997.*
10.12 1997 Cash Incentive Award for Mark A. Suwyn adopted March 11, 1997.
Incorporated by reference to Exhibit 10.K to L-P's Form 10-K report for
1996.*
10.13 Letter agreement dated April 19, 1996, with Michael D. Hanna, with
respect to attached employment agreement dated January 15, 1995, between
Mr. Hanna and Associated Chemists, Inc. Incorporated by reference to
Exhibit 10.L to L-P's Form 10-K report for 1996.*
10.14 Execution Employment Agreement effective as of January 1, 1997, by and
between L-P and Karen D. Lundquist. Incorporated by reference to
Exhibit 10.M to L-P's Form 10-K report for 1996.*
10.15 Letter agreement dated July 16, 1997, relating to the employment of
Gary C. Wilkerson. Incorporated by reference to Exhibit 10.N to L-P's
Form 10-K report for 1997.*
10.16 Letter agreement dated July 16, 1997, relating to the employment of
Curtis M. Stevens. Incorporated by reference to Exhibit 10.0 to L-P's Form
10-K report for 1997.*
10.17 Form of Change of Control Employment Agreement between L-P and each
of J. Ray Barbee, Warren Easley, Richard W. Frost, Keith Matheney, Curt
Stevens, Mark A. Suwyn, Michael J. Tull, and Gary C. Wilkerson.
Incorporated by reference to Exhibit 10.2 to L-P's Form 10-Q report for the
quarter ended March 31, 1998.*
10.18 Separation Agreement between L-P and Michael D. Hanna dated
October 29, 1998. Previously filed as Exhibit 10.18 to L-P's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998 as
filed on March 18, 1999.*
10.19 Separation Agreement between L-P and Karen Lundquist Malkewitz dated
October 28, 1998. Previously filed as Exhibit 10.19 to L-P's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998
as filed on March 18, 1999.*
10.20.1 Settlement Agreement, dated October 18, 1995, between
L-P and counsel for plaintiffs in nationwide siding
class action litigation. Incorporated by reference to
Exhibit 10 to L-P's Form 10-Q report for the quarter
ended September 30, 1995.
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10.20.2 Amendment to Settlement Agreement, dated April 26, 1996,
between L-P and counsel for plaintiffs in nationwide
siding class action litigation. Incorporated by
reference to Exhibit 10.A to L-P's Form 10-Q report for
the quarter ended March 31, 1996.
10.20.3 Supplemental Funding Agreement, dated October 26, 1998,
between L-P and counsel for plaintiffs in nationwide
siding class action litigation. Incorporated by
reference to Exhibit 10.1 to L-P's Form 10-Q report for
the quarter ended September 30, 1998.
10.21 Settlement Agreement, dated October 4, 1995, between L-P and counsel for
plaintiffs in Florida siding class action litigation.
21 List of L-P's subsidiaries.
Previously filed as Exhibit 21 to L-P's Annual Report
on Form 10-K for the fiscal year ended December 31, 1998
as filed on March 18, 1999.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Deloitte & Touche LLP.
27 Financial data schedule. Previously filed as Exhibit 27 to L-P's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998 as filed
on March 18, 1999.
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