SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended September 30, 1999
Commission File Number 1-7107
LOUISIANA-PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 93-0609074
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
111 S. W. Fifth Avenue, Portland, Oregon 97204-3699
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (503) 221-0800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock: 106,446,814 shares of Common Stock, $1 par value, outstanding as
of October 29, 1999.
ABOUT FORWARD-LOOKING STATEMENTS
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 provide a "safe harbor" for all
forward-looking statements to encourage companies to provide prospective
information about their businesses and other matters as long as those
statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could
cause actual results to differ materially from those discussed in the
statements. This report contains, and other reports and documents filed by
Louisiana-Pacific Corporation ("L-P") with the Securities and Exchange
Commission may contain, forward-looking statements. These statements are or
will be based upon the beliefs and assumptions of, and on information
available to, the management of L-P.
The following statements are or may constitute forward-looking
statements: (1) statements preceded by, followed by or that include the words
"may," "will," "could," "should," "believe," "expect," "anticipate,"
"intend," "plan," "estimate," "potential," "continue" or "future" or the
negative or other variations thereof and (2) other statements regarding
matters that are not historical facts. These forward-looking statements are
subject to various risks and uncertainties, including the following:
- Risks and uncertainties relating to the possible invalidity of
the underlying beliefs and assumptions;
- Possible changes or developments in social, economic,
business, industry, market, legal and regulatory circumstances
and conditions; and
- Actions taken or omitted to be taken by third parties,
including customers, suppliers, business partners, competitors
and legislative, regulatory, judicial and other governmental
authorities and officials.
In addition to the foregoing and any risks and uncertainties specifically
identified in the text surrounding forward-looking statements, any statements
in the reports and other documents filed by L-P with the Commission that warn
of risks or uncertainties associated with future results, events or
circumstances identify important factors that could cause actual results,
events and circumstances to differ materially from those reflected in the
forward-looking statements.
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE) (UNAUDITED)
QUARTER ENDED NINE MONTHS ENDED
SEPT. 30, SEPT. 30,
------------------------ ----------------------------
1999 1998 1999 1998
---------- ---------- ------------ ------------
Net Sales ........................................ $ 797.4 $ 606.3 $ 2,166.0 $ 1,777.8
---------- ---------- ------------ ------------
Costs and expenses:
Cost of sales .................................... 551.5 428.4 1,550.5 1,430.6
Depreciation, amortization and depletion ......... 52.4 50.0 140.9 139.0
Selling and administrative ....................... 56.6 47.3 157.2 136.8
Unusual (credits) and charges, net ............... 18.7 392.0 13.5 63.7
Interest expense ................................. 11.6 3.4 29.7 23.2
Interest income .................................. (8.9) (4.3) (26.1) (7.9)
---------- ---------- ------------ ------------
Total costs and expenses ......................... 681.9 916.8 1,865.7 1,785.4
---------- ---------- ------------ ------------
Income (loss) before taxes and minority interest . 115.5 (310.5) 300.3 (7.6)
Provision for income taxes ....................... 45.8 (117.0) 119.0 9.3
Minority interest in net income (loss) of
consolidated subsidiaries .................... .4 (0.8) (0.1) (3.0)
---------- ---------- ------------ ------------
Net income (loss) ................................ $ 69.3 $ (192.7) $ 181.4 $ (13.9)
========== ========== ============ ============
Net income (loss) per share-basic and diluted .... $ .65 $ (1.77) $ 1.70 $ (.13)
========== ========== ============ ============
Average shares outstanding (millions)
-- basic ....... 106.7 108.6 106.5 108.9
========== ========== ============ ============
-- diluted ..... 106.9 108.6 106.7 108.9
========== ========== ============ ============
Cash dividends per share ......................... $ .14 $ .14 $ .42 $ .42
========== ========== ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE UNAUDITED FINANCIAL STATEMENTS.
3
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN MILLIONS) (UNAUDITED)
SEPT. 30, 1999 DEC. 31, 1998
-------------- --------------
ASSETS
Cash and cash equivalents ........................... $ 168.1 $ 126.5
Accounts receivable, net ............................ 241.9 134.7
Inventories ......................................... 266.1 205.7
Prepaid expenses .................................... 20.7 8.1
Income tax refunds receivable ....................... -- 43.9
Deferred income taxes ............................... 121.8 93.2
-------- --------
Total current assets .............................. 818.6 612.1
-------- --------
Timber and timberlands .............................. 603.6 499.0
Property, plant and equipment ....................... 2,499.1 2,086.5
Less accumulated depreciation ....................... (1,226.2) (1,173.2)
-------- --------
Net property, plant and equipment ................... 1,272.9 913.3
Notes receivable from asset sales ................... 403.8 403.8
Goodwill, net of amortization ....................... 377.5 60.0
Other assets ........................................ 43.1 30.9
-------- --------
Total assets ....................................... $3,519.5 $2,519.1
======== ========
LIABILITIES AND EQUITY
Current portion of long-term debt ................... $ 53.8 $ 34.1
Accounts payable and accrued liabilities ............ 278.4 192.5
Current portion of contingency reserves ............. 205.0 140.0
Income taxes payable ................................ 52.4 --
-------- --------
Total current liabilities ......................... 589.6 366.6
-------- --------
Long-term debt, excluding current portion:
Limited recourse notes payable ...................... 396.5 396.5
Other long-term debt ................................ 652.7 63.3
-------- --------
Total long-term debt, excluding current portion ... 1,049.2 459.8
-------- --------
Contingency reserves, excluding current portion ..... 107.7 228.0
Deferred income taxes and other ..................... 399.7 241.9
Commitments and contingencies
Stockholders' equity:
Common stock ........................................ 117.0 117.0
Additional paid-in-capital .......................... 464.6 465.4
Retained earnings ................................... 1,055.6 918.8
Treasury stock ...................................... (207.8) (204.0)
Loans to Employee Stock Ownership Trusts ............ (12.4) (28.8)
Accumulated comprehensive income (loss) ............. (43.7) (45.6)
-------- --------
Total stockholders' equity ........................ 1,373.3 1,222.8
-------- --------
Total liabilities and equity ...................... $3,519.5 $2,519.1
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE UNAUDITED FINANCIAL STATEMENTS.
4
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN MILLIONS) (UNAUDITED)
NINE MONTHS ENDED SEPT. 30,
---------------------------
1999 1998
------------ ------------
Cash flows from operating activities:
Net income (loss) ......................................... $ 181.4 $ (13.9)
Depreciation, amortization and depletion .................. 140.9 139.0
Unusual (credits) and charges, net ........................ 13.5 63.7
Cash settlements of contingencies ......................... (93.3) (50.8)
Other adjustments, net .................................... 16.9 .5
Decrease (increase) in certain working capital components
and deferred taxes .................................... 89.4 43.7
------- -------
Net cash provided by operating activities ............ 348.8 182.2
------- -------
Cash flows from investing activities:
Capital spending .......................................... (86.7) (103.0)
Asset sales proceeds ...................................... 21.4 330.8
ABT acquisition, including replacement of debt ............ (213.0) --
Forex acquisition, including replacement of debt .......... (399.1) --
Other investing activities, net ........................... (11.4) (.1)
------- -------
Net cash provided by (used in) investing activities ... (688.8) 227.7
------- -------
Cash flows from financing activities:
New borrowings, including net changes in revolving
Borrowings ............................................ 535.3 328.0
Repayment of long-term debt ............................... (104.1) (450.0)
Increase (decrease) in short-term notes payable ........... -- (22.0)
Cash dividends ............................................ (44.6) (45.9)
Purchase of treasury stock ................................ (9.0) (30.8)
Other financing activities, net ........................... 4.0 1.6
------- -------
Net cash provided by (used in) financing activities ... 381.6 (219.1)
------- -------
Net increase in cash and cash equivalents .................... 41.6 190.8
Cash and cash equivalents at beginning of period .............. 126.5 31.9
------- -------
Cash and cash equivalents at end of period .................... $ 168.1 $ 222.7
======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE UNAUDITED FINANCIAL STATEMENTS.
5
NOTES TO UNAUDITED CONSOLIDATED SUMMARY FINANCIAL STATEMENTS
1. These consolidated summary financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
included in L-P's Annual Report on Form 10-K for the year ended December 31,
1998 (as the same may be amended, the "1998 Form 10-K").
These consolidated summary financial statements reflect all
adjustments (consisting only of normal recurring adjustments) which are, in
the opinion of the management of L-P, necessary to present fairly, in all
material respects, the consolidated financial position and results of
operations of L-P and its subsidiaries. Certain amounts have been
reclassified to conform to the current period presentation.
Results of operations for interim periods are not necessarily
indicative of results to be expected for an entire year.
2. Basic earnings per share are based on the weighted average number
of shares of common stock outstanding during the applicable period. Diluted
earnings per share include the effects of potentially dilutive common stock
equivalents.
3. The preparation of interim financial statements requires the
estimation of L-P's effective income tax rate based on estimated annual
amounts of taxable income and expenses. These estimates are updated quarterly.
4. The preparation of interim financial statements requires the
estimation of L-P's year-end inventory quantities and costs for purposes of
determining last in, first out ("LIFO") inventory adjustments. These
estimates are revised quarterly and the estimated incremental change in the
LIFO inventory reserve is expensed over the remainder of the year.
5. Components of comprehensive income include net income (loss),
currency translation adjustments and other income (loss). Comprehensive
income (loss) was $70.2 million in the third quarter of 1999, $(158.4)
million for the third quarter of 1998, $183.3 million for the first nine
months of 1999 and $21.5 million for the same period in 1998.
6. 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, 2001. L-P is assessing the impact this
statement will have on its financial statements and related disclosures.
7. On February 23, 1999, L-P acquired the capital stock of ABT
Building Products Co. ("ABT") for approximately $164 million in cash.
Concurrent with the acquisition, L-P also paid off approximately $49 million
of ABT debt. In connection with the acquisition of ABT, L-P borrowed $100
million under a new uncommitted bank credit facility ($50 million of which
was repaid in September 1999 and $50 million of which was repaid in October
1999) and increased its net revolving borrowings under its existing credit
facility by $65 million (which was fully repaid in September 1999). The
acquisition was accounted for as a purchase and ABT's results of operations
for the period subsequent to the acquisition have been included in L-P's
Condensed Consolidated Statements of Income for the period ended September
30, 1999. The purchase price has been preliminarily allocated to the assets
and liabilities of ABT based on their estimated fair values in L-P's
Condensed Consolidated Balance Sheet at September 30, 1999. Based on current
estimates, L-P has recorded purchase price in excess of net assets acquired
("goodwill") of $71 million in its Condensed Consolidated Balance Sheet at
September 30, 1999, which is being amortized using the straight-line method
over 15 years. However, L-P is still in the process of obtaining information
to be used in the determination of the fair value of certain assets and
liabilities, which could affect both the amount of purchase price allocated
to those assets and liabilities and the amount of goodwill recorded and
amortized in future periods.
On September 14, 1999, L-P acquired the capital stock of Le Groupe
Forex Inc. ("Forex") for a total purchase price of approximately $521.1
million. As of September 30, 1999, approximately $366.2 million of this
6
amount had been paid in cash, approximately $134.0 million of this amount had
been paid through the issuance of promissory notes and approximately $20.9
million of this amount remained to be paid in cash, promissory notes or a
combination of cash and promissory notes. Concurrent with the acquisition,
L-P also paid off approximately $101.5 million of Forex debt. In connection
with the acquisition of Forex, L-P borrowed $426 million under new
uncommitted bank credit facilities. The acquisition was accounted for as a
purchase and Forex 's results of operations for the period subsequent to the
acquisition have been included in L-P's Condensed Consolidated Statements of
Income for the period ended September 30, 1999. The purchase price has been
preliminarily allocated to the assets and liabilities of Forex based on their
estimated fair values in L-P's Condensed Consolidated Balance Sheet at
September 30, 1999. Based on current estimates, L-P has recorded goodwill of
$253.8 million in its Condensed Consolidated Balance Sheet at September 30,
1999, which is being amortized using the straight-line method over 15 years.
However, L-P is still in the process of obtaining information to be used in
the determination of the fair value of certain assets and liabilities, which
could affect both the amount of purchase price allocated to those assets and
liabilities and the amount of goodwill recorded and amortized in future
periods.
The following unaudited pro forma financial information gives effect
to the acquisitions of ABT and Forex as if they had been consummated at the
beginning of each period presented.
NINE MONTHS ENDED SEPT. 30,
-----------------------------
1999 1998
-------------- --------------
(DOLLAR AMOUNTS IN MILLIONS
EXCEPT PER SHARE)
Net Sales.................................................... $ 2,397.9 $ 2,124.9
Net Income (Loss) ........................................... 200.3 (28.4)
Net income per share -- basic 1.88 (.26)
-- diluted 1.88 (.26)
The principal pro forma adjustments reflected in the foregoing pro
forma information are adjustments to record interest expense on indebtedness
incurred in connection with the acquisitions, increased depreciation expense
resulting from the recordation of acquired fixed assets at their estimated
fair value, increased depletion expense resulting from the recordation of
acquired timber contracts at their estimated fair value and the amortization
of goodwill. The foregoing pro forma information is provided for illustrative
purposes only and does not purport to be indicative of results that actually
would have been achieved had the acquisitions been consummated at the
beginning of the periods presented or of future results.
7
8. The following table sets forth selected segment data for the
periods ended September 30, 1999 and 1998:
QUARTER ENDED NINE MONTHS ENDED
SEPT. 30, SEPT. 30,
--------------------------------------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Sales:
Structural products............................ $ 449.1 $ 399.6 $ 1,224.2 $ 1,039.0
Exterior products.............................. 78.6 31.1 195.5 82.8
Industrial panel products...................... 70.2 43.9 197.1 132.4
Other products................................. 168.8 114.6 468.7 464.8
Pulp........................................... 30.7 17.1 80.5 58.8
------------- ------------- ------------- -------------
Total sales.................................... $ 797.4 $ 606.3 $ 2,166.0 $ 1,777.8
============= ============= ============ =============
Profit (loss):
Structural products............................ $ 149.9 $ 107.8 $ 372.2 $ 155.9
Exterior products.............................. 17.4 7.9 41.4 17.5
Industrial panel products...................... 2.5 1.2 8.3 3.9
Other products................................. (3.9) .6 (13.6) (9.8)
Pulp........................................... (3.8) (10.8) (14.5) (26.3)
Unusual credits and charges, net............... (18.7) (392.0) (13.5) (63.7)
General corporate and other expense, net....... (25.2) (26.1) (76.4) (69.8)
Interest income (expense), net................. (2.7) .9 (3.6) (15.3)
------------- ------------- ------------- -------------
Income before taxes and minority interest...... $ 115.5 $ (310.5) $ 300.3 $ (7.6)
============= ============= ============ =============
9. The description of certain legal and environmental matters
involving L-P set forth in Part II of this report under the caption "Legal
Proceedings" is incorporated herein by reference. The increase in the current
portion of contingency reserves reflects the expected payment of the $125
million second fund relating to L-P's nationwide class action litigation
settlement in the first half of 2000.
10. The description of a potential acquisition set forth below under
the caption "Acquisition" in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" is incorporated herein by
reference.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Net income for the third quarter of 1999 was $69.3 million, or $.65
per diluted share, on sales of $797.4 million, compared to a third quarter
1998 net loss of $192.7 million, or $1.77 per diluted share, on sales of
$606.3 million. Excluding unusual items, net income for the third quarter of
1999 was $80.8 million, or $.76 per diluted share, compared to third quarter
1998 income excluding unusual items of $48.3 million, or $.44 per share. The
unusual items are discussed below under the heading "Unusual Credits and
Charges, Net."
Net income for the first nine months of 1999 was $181.4 million, or
$1.70 per diluted share, on sales of $2.17 billion, compared to a net loss
for the first nine months of 1998 of $13.9 million, or $.13 per diluted
share, on sales of $1.78 billion. Excluding unusual items, net income for the
first nine months of 1999 was $189.7 million, or $1.78 per diluted share,
compared to net income for the first nine months of 1998 of $31.9 million, or
$.29 per diluted share. The unusual items are discussed below under the
heading "Unusual Credits and Charges, Net."
Sustained demand for building products and the continued strength in
housing markets have factored positively into both third quarter and
year-to-date earnings. This demand resulted in improved market pricing for
structural panels (oriented strand board ("OSB") and plywood) and lumber,
which was the primary factor for increased sales and earnings. Earnings from
the acquisition of ABT in February 1999 have also contributed significantly
to increased sales and earnings.
L-P operates in five segments: structural products; exterior
products; industrial panel products; other products; and pulp. Structural
products is the most significant segment, accounting for more than 56% of
sales during the first nine months of both 1999 and 1998. L-P's results of
operations are discussed separately for each segment below. Production
volumes and industry product price trends are presented below in the tables
captioned "Summary of Production Volumes" and "Industry Product Price Trends."
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 increase in the price of raw
materials on to customers through product price increases.
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.
9
SELECTED SEGMENT DATA
QUARTER ENDED NINE MONTHS ENDED
SEPT. 30, SEPT. 30,
-------------------------------- --------------------------------
1999 1998 % CHG 1999 1998 % CHG
--------- --------- -------- --------- --------- ------
Sales:
Structural products.............. $ 449.1 $ 399.6 +12% $ 1,224.2 $ 1,039.0 +18%
Exterior products................ 78.6 31.1 +153% 195.5 82.8 +136%
Industrial panel products........ 70.2 43.9 +60% 197.1 132.4 +49%
Other products................... 168.8 114.6 +47% 468.7 464.8 +1%
Pulp............................. 30.7 17.1 +80% 80.5 58.8 +37%
--------- --------- --------- ---------
Total sales...................... $ 797.4 $ 606.3 +32% $ 2,166.0 $ 1,777.8 +22%
========= ========= ========= =========
Profit (loss):
Structural products.............. $ 149.9 $ 107.8 +39% $ 372.2 $ 155.9 +139%
Exterior products................ 17.4 7.9 +120% 41.4 17.5 +137%
Industrial panel products........ 2.5 1.2 +108% 8.3 3.9 +113%
Other products................... (3.9) .6 -750% (13.6) (9.8) -39%
Pulp............................. (3.8) (10.8) +65% (14.5) (26.3) +45%
Unusual credits and charges, net. (18.7) (392.0) +95% (13.5) (63.7) +79%
General corporate and other
expense, net..................... (25.2) (26.1) +3% (76.4) (69.8) -9%
Interest income (expense), net... (2.7) .9 -400% (3.6) (15.3) +76%
--------- --------- --------- ---------
Income (loss) before taxes and $ 115.5 $ (310.5) +137% $ 300.3 $ (7.6) +4,051%
minority interest................ ========= ========= ========= ========
STRUCTURAL PRODUCTS
The structural products segment consists of OSB, plywood, lumber and
engineered wood products ("EWP"). The significant growth in sales in the
structural products segment in 1999 was primarily due to increases in OSB,
plywood and non-redwood lumber prices. OSB, lumber and EWP volume increases
were partially offset by a volume decline in plywood.
OSB market prices and sales trends continued upward through the
first nine months of 1999. OSB average selling prices increased 13% for the
third quarter of 1999 compared to the third quarter of 1998 and 28% for the
first nine months of 1999 compared to the first nine months of 1998. Robust
U.S. housing markets have created strong demand for OSB and other building
products. OSB sales volume, excluding sales from the Forex plants acquired in
September 1999, decreased approximately 2% for the third quarter of 1999
compared to the third quarter of 1998 primarily due to down time at the
Athens, Georgia facility resulting from a fire. OSB sales volume, excluding
the Forex facilities, increased 4% for the first nine months of 1999 compared
to the first nine months of 1998 due primarily to a new mill brought on line
in April of 1998 that provided a net capacity increase.
Plywood average selling prices increased 30% for the third quarter
of 1999 compared to the third quarter of 1998, offset by an approximate 22%
decline in volume. Plywood average selling prices for the first nine months
of 1999 increased 25% over the same period in 1998, offset by an approximate
25% decline in volume. The price increases reflect the strong demand factors
discussed above. The volume decreases are primarily the result of a temporary
shut-down of plywood manufacturing facilities and the allocation of
additional veneer to laminated veneer lumber (LVL) production rather than to
plywood production.
10
Lumber sales increased for the third quarter of 1999 compared to the
third quarter of 1998 due to a shift to a higher percentage of outside sales and
a lower percentage of sales to the distribution business within L-P (part of
Other Products segment). Average selling prices increased approximately 13% for
the third quarter of 1999 compared to the third quarter of 1998, and volumes
increased approximately 11% over the same period in 1998. For the first nine
months of 1999, excluding redwood lumber operations that were sold in 1998,
average selling prices increased 5% and volume increased 14% compared to the
same period in 1998. The average selling price for redwood lumber is generally
significantly higher than for other species of lumber.
Engineered wood products include engineered I-Joists, LVL and
hardwood veneer. Sales of EWP products increased slightly, primarily as a
result of a marketing agreement to sell the products of an independent
producer. Sales volumes also increased in this segment due to strong
residential and commercial construction markets. The average selling prices
of EWP products did not change significantly. The price for the basic raw
materials used in EWP production (OSB used in the web stock for I-Joists,
veneer used in LVL and lumber used for flange material in I-Joists) increased
significantly in 1999, which led to lower profitability.
In the third quarter of 1999 and in the first nine months of 1999,
profitability of the structural products segment increased significantly,
largely as a result of price improvements for OSB, plywood and non-redwood
lumber and improvements in the efficiency of L-P's production facilities.
Structural products profits also benefited in 1999 from the sale of
unprofitable California operations in mid-1998. Log costs increased
approximately 15% in the third quarter of 1999 compared to the third quarter
of 1998. The increase was primarily the result of cutting timber under more
expensive cutting contracts and deeds. For the first nine months of 1999
compared to the first nine months of 1998, southern log costs increased
slightly, while log costs in northern regions and Canada increased
approximately 6%.
EXTERIOR PRODUCTS
The exterior products segment consists of siding and related
products such as soffit, fascia and trim. In 1999, this segment includes
products added from the purchase of ABT, including hardboard siding, vinyl
siding and other products. Average sales prices of OSB-based exterior
products decreased 4% for the third quarter of 1999 compared to the same
period in 1998, while volumes increased about 11%. Average sales prices of
OSB-based exterior products decreased slightly for the nine months ended
September 30, 1999 compared to the nine months ended September 30, 1998,
while volumes increased about 12%. Increased volumes were primarily due to an
increase in the number of distributors in the southeastern distribution
network. Total profits increased in 1999 primarily due to the increased sales
volume, the acquisition of ABT and more efficient use of production capacity.
INDUSTRIAL PANEL PRODUCTS
The industrial panels segment consists of particleboard, medium
density fiberboard (MDF) and hardboard and, in 1999, the laminated industrial
panels products of ABT. Increased demand for particleboard and MDF
contributed to modestly higher pricing. The addition of the ABT products in
1999 is the primary reason for the increase in sales and profits of this
segment for the third quarter and the first nine months of 1999 compared to
the same periods in 1998.
OTHER PRODUCTS
The other products segment includes distribution facilities, wood
chips, coatings and chemicals, cellulose insulation, Ireland operations,
Alaska operations, moldings and other operations. In the third quarter of
1999, sales for this segment increased compared to the third quarter of 1998,
primarily due to increased sales in the distribution centers and the addition
of ABT products in 1999. Losses in the other products segment increased for
the third quarter of 1999 compared to the third quarter of 1998 primarily due
to an inventory write down and expenses related to closed operations. The
slight increase in sales for the first nine months of 1999 compared to the
first nine months of 1998 was primarily due to the addition of ABT products
in 1999 offset by reduced sales due to the disposition of the Weather-Seal
windows and doors division, Creative Point, Inc. and two California
distribution facilities in 1998. Increased losses for the first nine months
of 1999 compared to the first nine months of 1998 are primarily due to
increased losses in Alaskan operations, asset write downs and expenses
related to closed operations offset by increased profitability in Ireland
operations and in cellulose insulation products.
11
PULP
Pulp segment operations continued to improve in the third quarter of
1999 as the Asian economy improves. Pulp segment losses decreased for the
third quarter of 1999 compared to the third quarter of 1998 due primarily to
an increase in average sales prices of 10% and an increase in volumes of 63%.
For the first nine months of 1999 compared to the first nine months of 1998
average selling prices increased 4% and volumes increased by approximately
32%. Other factors contributing to the improved results were a partial
recovery of inventory market write-downs taken in prior periods and lower
unit costs due to higher volumes.
UNUSUAL CREDITS AND CHARGES, NET
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- ------------------------------------------
1999 1998 1999 1998
------------- ------------ ------------ -------------
Gain on sale of assets.............................. $ --- $ 22.2 $ 5.2 $ 381.3
Impairment charges.................................. (7.6) (162.5) (7.6) (182.2)
Adjustment for litigation reserves and other........ (11.1) (251.7) (11.1) (262.8)
----------- ----------- --------- ---------
$ (18.7) $ (392.0) $ (13.5) $ (63.7)
=========== =========== ========= =========
In the second quarter of 1999, L-P recorded a net gain of $5.2
million ($3.2 million after taxes, or $.03 per diluted share) from the sale
of timber and timberlands in Texas.
In the third quarter of 1999, L-P's Ketchikan Pulp Company ("KPC")
subsidiary recorded a net charge of $18.7 million ($11.5 million after taxes,
or $.11 per diluted share) primarily as a result of reducing the carrying
value of fixed assets to be sold to the fair value and to record an increase
in estimated environmental remediation and monitoring liabilities. Gains of
$7 million primarily related to the previously announced settlement with the
US Forest Service were netted against these charges. The gains were recorded
in the third quarter of 1999 primarily based on satisfaction of the
requirements of agreements with governmental agencies. The increased
environmental liability estimates resulted from further studies of certain
properties in connection with the impending sale transaction and changing
environmental regulations regarding certain sites. The sale of the KPC assets
for approximately $10.5 million in cash and promissory notes was completed in
November 1999.
In the second quarter of 1998, L-P recorded a net gain of $328.3
million ($195.2 million after taxes, or $1.79 per diluted share) primarily
resulting from gains on the sales of timberland, sawmill and distribution
assets in California and the Weather-Seal window and door business. Charges
relating to the settlement of legal issues in Montrose, Colorado of $14.0
million after taxes (or $.13 per diluted share) and other charges were netted
against the asset sales gains.
In the third quarter of 1998, L-P recorded a net loss of $392
million ($241 million after taxes, or $2.21 per share) resulting from a
charge to adjust siding-related reserves to reflect revisions to the national
class-action settlement, the write-down of an operating facility, and other
items. Gains on insurance recoveries and the sale of surplus properties were
netted against this charge.
GENERAL CORPORATE AND OTHER EXPENSE
General corporate expense increased for 1999 compared to 1998
primarily due to the addition of sales and marketing personnel as L-P has
increased its focus on customers and additional costs for administrative
infrastructure, including the conversion to new accounting and human resource
systems.
INTEREST INCOME (EXPENSE)
Cash from asset sales was used to repay loans and lines of credit in
late 1998, reducing debt levels and net interest expense for 1999 compared to
1998. Interest expense levels will increase in the future primarily due to
indebtedness incurred in connection with the Forex acquisition in September
1999.
12
LEGAL AND ENVIRONMENTAL MATTERS
Refer to the "Legal Proceedings" section of this Form 10-Q for a
discussion of certain legal and environmental matters and the potential
impact of these matters on L-P.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations was $349 million for the first nine
months of 1999 compared to $182 million in the first nine months of 1998. The
increase in cash provided by operations resulted primarily from improved
operating results (excluding unusual items). Partially offsetting this
increase, L-P made $93 million in litigation-related payments, largely due to
the early payment program relating to L-P's nationwide class action
litigation settlement, during the first nine months of 1999 compared to $51
million in the first nine months of 1998.
Cash used in investing activities was $689 million in the first nine
months of 1999 compared to cash provided by investing activities of $228
million in the first nine months of 1998. L-P used $213 million of cash in
connection with the acquisition of ABT in February 1999 and $399 million of
cash in connection with the acquisition of Forex in September 1999. L-P
received approximately $331 million of cash proceeds from asset sales in
1998. Capital expenditures for property, plant, equipment and timber
decreased in 1999 compared to 1998, primarily because L-P did not have any
new mills under construction. L-P has announced plans to build several
wood-processing facilities in Canada, including an OSB plant, and is building
an OSB plant in Chile.
In the first nine months of 1999, L-P borrowed $535 million
primarily to finance the acquisitions of ABT and Forex. In the first nine
months of 1998, L-P repaid $471 million in revolving and term loans with the
proceeds from $349 million in new borrowings related to the monetization of
notes receivable from asset sales.
L-P expects to be able to meet its cash requirements through cash
from operations, existing cash balances, existing credit facilities and
access to the capital markets. Cash and cash equivalents totaled $168 million
at September 30, 1999 compared to $127 million at December 31, 1998. L-P has
a $300 million revolving credit facility available through January 2002. L-P
had no borrowings outstanding under this facility at September 30, 1999. L-P
also has a $300 million facility available through March 2000 under which L-P
had $177 million of borrowings outstanding at September 30, 1999. L-P has
filed a shelf registration statement for the sale of up to $500 million of
debt securities to be offered from time to time in one or more series. 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 connection with the acquisitions of ABT and
Forex), and for the acquisition of Evans discussed below.
Changes in L-P's balance sheet from December 31, 1998 to September
30, 1999 include increases of $107 million in accounts receivable, $60
million in inventories, $360 million in net property, plant and equipment,
and $318 million in goodwill resulting primarily from the consolidation of
ABT and Forex for financial reporting purposes. The increase of $223 million
in current liabilities resulted primarily from the consolidation of ABT and
Forex for financial reporting purposes and an increase in the current portion
of contingency reserves to reflect the expected payment, in the first quarter
of 2000, of the second fund relating to L-P's nationwide class action siding
litigation settlement.
Contingency reserves, which represent an estimate of future cash
needs for various contingencies (primarily payments for siding litigation
settlements), totaled $313 million at September 30, 1999, of which $205
million is estimated to be payable within one year. As with all accounting
estimates, there is inherent uncertainty concerning the reliability and
precision of these estimates. The amounts ultimately paid in resolving these
contingencies could exceed the current reserves by a material amount.
Contingency reserves decreased in 1999 due to the continued implementation of
the early payment program relating to L-P's nationwide class action siding
litigation settlement. Litigation-related payments totaled $93 million for
the first nine months of 1999.
13
STOCK REPURCHASE PLAN
As of September 30, 1999, L-P had reacquired approximately 4.0
million shares for $75.5 million under an authorization to reacquire up to 20
million shares from time to time in the open market. L-P reacquired 475,000
shares for $8 million in the third quarter of 1999. L-P had approximately 107
million shares outstanding at quarter end.
ACQUISITION
On August 24, 1999 L-P announced that it has signed a definitive
agreement to purchase Evans Forest Products, Ltd. ("Evans"), a leading
Canadian producer of engineered wood and lumber products.
The total transaction value is approximately $90 million, subject to
adjustment on the basis of Evans' working capital level at the time of
closing. The sale is subject to approval by regulatory agencies in the United
States and Canada, the successful transfer of Evan's forest licenses and
other customary closing conditions. The acquisition is expected to close
during the fourth quarter of 1999.
Evans is a private company based in southeastern British Columbia
whose assets include a new "LVL" mill, a plywood facility, and a sawmill that
specializes in producing a wide range of Western Red Cedar products. Included
in the transaction are two forest licenses and a tree farm license that will
provide access to approximately 610,000 cubic meters of wood per year.
ASSETS HELD FOR SALE
L-P is seeking to sell its Chetwynd, British Columbia pulp mill,
which is presently managed by an unrelated party pursuant to a management
agreement having a term of 24 months that expires in April 2001. In addition,
L-P is exploring the possible sale of the Samoa, California pulp mill. While
L-P currently believes it has adequate support for the carrying value of the
affected assets, there can be no assurance that the proceeds ultimately
received in any sale transaction would not fall short of the applicable
carrying value, resulting in a loss on such sale.
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, possibly, 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 problem 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.
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 appropriate. The project is
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 system. The inventory, assessment and remediation phases for L-P's
14
information systems were substantially completed on September 30, 1999 as
scheduled. Testing of information systems and related 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 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, assessment and
remediation phases for L-P's manufacturing systems and building
infrastructure were substantially completed on September 30, 1999 as
scheduled. Testing of manufacturing systems and building infrastructure and
related contingency planning are underway and are scheduled to be completed
by November 30, 1999.
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 of this
initiative have been completed. As part of the assessment process, L-P
requested that all of its major business partners respond to a survey
eliciting information as to their Year 2000 readiness. Of the approximately
50% of the business partners that responded to the survey pursuant to an
initial series of requests made through L-P's corporate management personnel,
none disclosed significant readiness issues. However, in light of the
substantial number of parties who failed to respond to L-P's initial series
of requests, L-P decided to pursue responses from these parties more
aggressively through business-unit operating personnel rather than through
corporate management personnel. Business-unit operating personnel first
refined the identification and prioritization of L-P's major business
partners and then concentrated on obtaining responses from those that had not
responded to L-P's initial series of requests. At September 30, 1999,
approximately 85% of the business partners targeted by business-unit
operating personnel had responded to the survey. In those instances in which
a major business partner targeted by business-unit operating personnel either
has not responded to the survey or has furnished a response which L-P has
determined to provide insufficient assurance of Year 2000 readiness, L-P is
developing contingency plans that identify an alternate business partner or
otherwise address the potential business disruption associated with L-P's
dependence on that business partner. This contingency planning is scheduled
to be completed by November 30, 1999.
COSTS. The total expense associated with L-P's Year 2000 project is
presently estimated to be approximately $7.8 million, of which approximately
$6.5 million (including certain costs incurred by ABT and Forex prior to
being acquired by L-P) had been incurred by September 30, 1999. 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 continuing to seek to assess the Year 2000
readiness of its 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.
15
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.
16
LOUISIANA-PACIFIC CORPORATION
SUMMARY OF PRODUCTION VOLUMES
QUARTER ENDED NINE MONTHS ENDED
SEPT. 30, SEPT. 30,
------------------------------ --------------------------
1999 1998 1999 1998
--------------- -------------- --------------- ----------
Oriented strand board panels, million square
ft 3/8" basis..................................... 1,069 1,006 3,164 2,913
Softwood plywood million square ft 3/8" basis........ 255 255 702 756
Lumber, million board feet........................ 264 278 793 851
Oriented strand board siding and specialty products
million square ft 3/8" basis...................... 99 107 291 301
Hardboard siding surface measure million square
ft basis.......................................... 69 --- 167 ---
Engineered I-Joists, million lineal feet............. 19 23 64 69
Laminated Veneer Lumber, thousand cubic ft........... 1,500 1,900 5,000 5,600
Industrial panel products (particle board, medium
density fiberboard and hardboard), million
square ft 3/4" basis.............................. 157 142 482 436
Pulp, thousand short tons............................ 94 69 279 210
17
INDUSTRY PRODUCT PRICE TRENDS
OSB PLYWOOD LUMBER PARTICLEBOARD
----------- --------- --------- -------------
N. CENTRAL SOUTHERN FRAMING
7/16" BASIS PINE 1/2" LUMBER INLAND
24/16 BASIS COMPOSITE INDUSTRIAL
SPAN RATING CDX 3 PLY PRICES 3/4" BASIS
----------- --------- --------- -------------
Annual Average
1993 $ 236 $ 282 $ 394 $ 258
1994 265 302 405 295
1995 245 303 337 290
1996 184 258 398 276
1997 142 265 417 262
1998 205 284 349 259
1998 Third Quarter Average 289 308 343 265
1999 Second Quarter Average 289 343 423 270
1999 Third Quarter Average 301 362 421 288
Source: Random Lengths. The amounts set forth are dollars per 1,000 square
feet or, in the case of lumber, 1,000 board feet.
18
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Certain legal and environmental matters 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. In addition
to civil and criminal penalties that were paid in 1995, 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 October 31, 1999) 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 $6.7 million (of which approximately $1.8 million had been
spent at October 31, 1999). 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 substantially completed
the investigative portion of this project (which was recently expanded) and
commenced work on the clean-up portion of this project, which is expected to
be completed by early 2000. L-P's estimate of the costs associated with this
project was recently increased as a result of both an expansion of the scope
of the investigation and the consideration of new information developed in
the course of conducting clean-up work. Total costs associated with this
project are estimated to be approximately $4.0 million, of which
approximately $3.4 million had been spent at October 31, 1999.
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 currently discussing
with the USFS the scope of water monitoring to be undertaken in connection
with this matter.
KPC has announced that it will close its Annette sawmill. L-P's
preliminary estimate of the cost of the environmental investigation and any
remediation of the mill site, together with the closure of an offsite wood
waste disposal area, is $2.6 million.
On March 10, 1999, a complaint alleging misdemeanor violations of
the Fish and Game Code and the Water Code of California in connection with
the discharge of sawdust and other pollutants into a stream near L-P's
Arcata, California particleboard plant was filed in the Superior Court of
Humboldt County, California. L-P is seeking to enter into a civil settlement
agreement that would resolve the alleged violations.
L-P is also involved in a number of other environmental proceedings
and activities, and may be wholly or partially responsible for known or
unknown contamination existing at a number of other sites at which it has
conducted operations or disposed of wastes.
Based on the information currently available, management believes
that any fines, penalties or other costs or 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.
19
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. Pursuant to a guilty plea to certain criminal
violations entered in May 1998, (i) L-P paid penalties of $37 million (of
which $12 million was paid in 1998 and the balance was paid in the second
quarter of 1999) and was sentenced to five years of probation and (ii) all
remaining charges against L-P were dismissed.
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.
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. In
general, the plaintiffs in these actions have 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
September 30, 1999, L-P had funded the first four installments. In addition,
L-P had funded a significant portion of the last three installments through
the Early Payment Program discussed below.
20
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 $590 million at September 30, 1999. 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 (a significant portion of which had been funded as of September
30, 1999 through the Early Payment Program discussed below), 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
September 30, 1999, approximately $5.2 million remained of the $225 million
paid into the fund to date (all of which is presently 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 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 and
unpaid claims that are filed before December 31, 1999 (the "Second Settlement
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 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 September 30, 1999,
approximately $131.2 million in Early Payment Program checks had been mailed
and $121.9 million had been cashed in settlement of claims, while
approximately $2.0 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 an estimated cumulative total of approximately
$355.3 million of its mandatory and optional contributions to the settlement
fund at September 30, 1999.
The $125 million Second Settlement Fund represents an alternative
source of payment for all approved and unpaid claims filed before December
31, 1999 that are not eligible for the Early Payment Program. In early 2000,
claimants electing to participate in the Second Settlement 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
21
the amount of their payments. Claimants who elect not to participate in the
Second Settlement 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 Settlement Fund, L-P may refuse to proceed with funding at its
sole option. In that event, the Second Settlement 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, 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; and the Superior Court of Dekalb County, Georgia on September
25, 1998. ABT and Abitibi have also been named as defendants in a putative
class action proceeding filed in the Circuit Court of Jasper County Texas on
October 5, 1999. 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 defendants. 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 L-P, the ABT
Entities and Abitibi have been named as defendants in a putative class action
proceeding filed in the District Court of Johnson County, Kansas on July 14,
1999. These actions were brought on behalf of purported classes of persons in
Missouri and Kansas, respectively, who own or have purchased hardboard siding
manufactured by the defendants. In general, the plaintiffs in these
proceedings 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 these proceedings 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
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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, 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.
FIBREFORM WOOD PRODUCTS, INC. PROCEEDINGS
L-P has been named as a defendant in an action filed by FibreForm
Wood Products, Inc. ("FibreForm") in the Superior Court of Los Angeles
County, California on July 13, 1999. The action was subsequently removed by
L-P and the other named defendants to the United States District Court for
the Central District of California. FibreForm has alleged, in connection with
failed negotiations between FibreForm and L-P regarding a possible joint
venture, that L-P and the other defendants engaged in a fraudulent scheme to
gain control over FibreForm's proprietary manufacturing processes under the
guise of such negotiations. FibreForm has alleged fraudulent
misrepresentation, negligent misrepresentation, misappropriation of trade
secrets, unfair competition, breach of contract and breach of a
confidentiality agreement by L-P and the other defendants. FibreForm seeks
general, special and consequential damages of at least $250 million, punitive
damages, restitution, injunctive and other relief and attorneys' fees. L-P
believes that FibreForm's allegations are without merit and intends to defend
this action vigorously. Based on the information currently available,
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.
CONTINGENCY RESERVES
L-P maintains reserves for the estimated costs of the legal and
environmental matters referred to above. However, as with any estimate,
there is uncertainty concerning the actual costs to be incurred. The
discussion herein notes some of the factors, in addition to the inherent
uncertainty of predicting the outcome of claims and litigation and
environmental investigations and remediation efforts, that could cause actual
costs to vary materially from current estimates. Due to the various
uncertainties, L-P cannot predict to what degree actual payments (including
payments under the OSB siding litigation settlements or any alternative
strategies adopted by L-P with respect to OSB siding claims) will materially
exceed the recorded liabilities related to these matters. However, it is
possible that, in either the near term or the longer term, revised estimates
or actual payments will significantly exceed the recorded liabilities.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
10.1 Amended and Restated Support Agreement, dated August
12, 1999, between L-P and Le Groupe Forex Inc.
(incorporated herein by reference to Exhibit 2.1 to
the Current Report on Form 8-K filed by L-P on August
18, 1999).
10.2 Amended and Restated Lock-Up Agreement, dated August
12, 1999, among L-P and each of the parties
identified in Schedule B thereof (incorporated herein
by reference to Exhibit 2.2 to the Current Report on
Form 8-K filed by L-P on August 18, 1999).
10.3 Letter Agreement, dated September 8, 1999, between
Louisiana-Pacific Acquisition Inc. and Bank of
America, N.A., together with related Guaranty
Agreement by L-P in favor of Bank of America, N.A.
(incorporated herein by reference to Exhibit 99.2 to
the Current Report on Form 8-K filed by L-P on
September 29, 1999).
10.4 Loan Agreement, dated September 10, 1999, between
Louisiana-Pacific Acquisition Inc. and Centric
Capital Corporation, together with related Guaranty
of L-P in favor of Centric Capital Corporation
(incorporated herein by reference to Exhibit 99.3 to
the Current Report on Form 8-K filed by L-P on
September 29, 1999).
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
On August 18, 1999, L-P filed a Current Report on
Form 8-K reporting matters under item 5 thereof.
On September 29, 1999, L-P filed a Current Report on
Form 8-K reporting matters under items 2 and 5 thereof.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
LOUISIANA-PACIFIC CORPORATION
Date: November 15, 1999 By: /s/ Gary C. Wilkerson
-----------------------------------
Gary C. Wilkerson
Vice President and General Counsel
Date: November 15, 1999 By: /s/ Curtis M. Stevens
------------------------------------
Curtis M. Stevens
Vice President, Chief Financial
Officer and Treasurer
(Principal Financial Officer)
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