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Washington, D.C. 20549
FORM 10-K
[x] 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, 1997 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 Registrant's telephone number
Portland, Oregon 97204 (including area code)
(Address of principal 503-221-0800
executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ----------------
Common Stock, $1 par value 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: $2,513,964,661 as of March 12, 1998.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock: 109,780,858 shares of Common Stock, $1 par value, outstanding as
of March 12, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement for 1998 Annual Meeting: Part III
PART I
ITEM 1. Business
General
- -------
Louisiana-Pacific Corporation, a Delaware corporation since 1973, is a
major forest products firm headquartered in Portland, Oregon. It manufactures
lumber, pulp, structural and other panel products, hardwood veneers, and
cellulose insulation. It operates approximately 100 facilities throughout the
United States, Canada, and Ireland. It has approximately 12,000 employees. It
distributes its products primarily through distributors and home centers, and to
a minor extent through its own distribution centers.
The business of Louisiana-Pacific Corporation and its wholly owned
subsidiaries (except when the context otherwise requires, hereinafter referred
to collectively as "the registrant" or "L-P") is generally divided into two
industry segments: building products and pulp. For 1997, building products
accounted for approximately 95 percent of the registrant's sales revenues,
compared to approximately 5 percent for pulp.
Building Products
- -----------------
Panel Products. The registrant manufactures plywood and a variety of
reconstituted panel products, including oriented strand board ("OSB") and other
panel products such as industrial particleboard, medium density fiberboard
("MDF"), and hardboard. Panel products accounted for 44 percent of L-P's sales
in 1997.
The largest consumption of panel products is for structural uses in
building and remodeling such as subfloors, walls, and roofs. The total
structural panel market in North America (plywood, OSB and other waferboards) is
approximately 37 billion square feet annually, of which plywood currently
constitutes about 20 billion square feet. In recent years, environmental
pressure on timber harvesting, especially in the West, has resulted in reduced
supplies and higher costs, causing many plywood mills to close permanently. The
lost volume from those closed mills has been replaced by reconstituted
structural panel products.
The registrant is the largest North American producer of OSB through 16
OSB plants with an aggregate annual capacity of approximately 4.5 billion square
feet, including its three plants which manufacture OSB exterior siding. The
registrant also has an OSB plant in Ireland. The registrant operates five
plywood plants in the South with a combined annual capacity of 1.3 billion
square feet.
The registrant's other reconstituted panel products--industrial
particleboard, MDF, and hardboard--produced at a total of seven plants, are used
primarily in the manufacture of furniture and cabinets.
Lumber. The registrant is a large producer of lumber. The registrant
has 14 Western (whitewood and redwood) sawmills with an annual production
capacity of 1.1 billion board feet ("BBF"), while its 15 Southern sawmills have
an annual production capacity of .5 BBF. Lumber represented 28 percent of the
registrant's sales revenue in 1997. The registrant's sawmills produce a variety
of standard U.S. dimension lumber as well as specialty grades and sizes,
primarily for the North American home building market. A sawmill in Ketchikan,
Alaska, produces lumber for export in the traditional sizes used in the Japanese
building industry, but has the capability of switching to standard U.S.
dimensions. The registrant also operates a fingerjoint plant which produces
dimension lumber from low grade and short pieces of lumber. In
- 2 -
October 1997, the registrant announced its intention to sell its remaining
California redwood timberlands and related lumber and certain distribution
businesses.
Other Building Products. The registrant produces various hardwood
veneers at a plant in Wisconsin with both rotary and sliced manufacturing
processes. These veneers are sold to customers who overlay the veneers on other
materials for use in paneling, furniture and cabinets.
The registrant has four engineered I-joist plants located in
California, Nevada, North Carolina, and Oregon. OSB is cut into sections and
used as the web for the I-joists. The registrant also produces laminated veneer
lumber ("LVL") in Nevada, North Carolina and Oregon. LVL is a high-grade
structural product used where extra strength is required. It is also used as the
flange material in I-joists. In March 1997, the registrant acquired the assets
of Tecton Laminates Corp. ("Tecton"), which significantly increased the
registrant's LVL and I-joist capacity.
Nine plants produce cellulose residential insulation from recycled
newspaper. This insulation has a higher R-value than comparable thicknesses of
conventional fiberglass insulation. Other facilities operated by the registrant
include two wood chip mills, two coatings and chemical plants, seven
wood-treating plants, and six building materials distribution centers.
The registrant currently owns seven plants in Ohio which manufacture
windows and doors and their component parts. In February 1998, L-P announced it
had reached an agreement in principle to sell these facilities. L-P expects the
transaction to close during the second quarter of 1998.
In October 1997, the registrant also announced plans to sell certain
other facilities that it considers non-strategic to its core businesses,
including its Creative Point, Inc., subsidiary, its cement fiber roof shake
plant and the fiber gypsum plant in Nova Scotia. The Nova Scotia plant was sold
prior to year end.
Pulp
- ----
The registrant has two pulp mills located in Samoa, California, and
Chetwynd, British Columbia, Canada. The Chetwynd mill utilizes a
state-of-the-art mechanical pulping process and a zero effluent discharge system
to produce 100 percent aspen pulp and has an annual capacity of approximately
185 thousand short tons. The Samoa mill produces bleached and unbleached kraft
pulp by a chlorine-free process, thereby eliminating dioxins. In October 1997,
the registrant announced its intention to sell the Samoa pulp mill. A third mill
in Ketchikan, Alaska, which produced a high-grade dissolving pulp, was
permanently closed in March 1997. (See Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations.)
Competition
- -----------
The registrant competes internationally with several thousand forest
products firms, ranging from very large, fully integrated firms to smaller firms
that may manufacture only one or a few items. The registrant estimates that
approximately 25 forest products firms comprise its major competition. The
registrant also competes less directly with firms that manufacture substitutes
for wood building products. A majority of the products manufactured by the
registrant, including lumber, structural panels, and pulp, are commodity
products sold primarily on the basis of price in competition with numerous other
forest products companies.
The registrant has introduced a number of value-enhanced products to
complement its traditional lumber and panel products, such as the OSB
- 3 -
SmartStart(TM) system of siding and exterior products and flooring, and a
radiant barrier product known as TechShield(TM). The registrant's Cocoon(TM)
cellulosic insulation products utilize wood fiber from waste paper and are
believed to have better insulating and sound-deadening properties than
fiberglass insulation.
Environmental Compliance
- ------------------------
The registrant is subject to federal, state and local pollution control
laws and regulations in all areas in which it has operating facilities. The
registrant maintains an accounting reserve for environmental loss contingencies.
From time to time, the registrant undertakes construction projects for
environmental control facilities or incurs other environmental costs that extend
an asset's useful life, improve efficiency, or improve the marketability of
certain properties.
The registrant's policy is to comply fully with all applicable
environmental laws and regulations. In recent years, the registrant has devoted
increasing financial and management resources to achieving this goal. As part of
its efforts to ensure environmental compliance, the registrant conducts regular
internal environmental assessments. From time to time, the registrant becomes
aware of violations of applicable laws or regulations. In those instances, the
registrant's policy is to bring its operations promptly into full compliance
with applicable environmental laws and regulations. The registrant is not aware
of any instances in which its current operations are not in compliance with
applicable environmental laws and regulations that would be expected to have a
material adverse effect on the registrant.
Additional information concerning environmental compliance is set forth
under Item 3, Legal Proceedings and the Notes to Financial Statements in Item 8.
Additional Statistical Information
- ----------------------------------
Additional information regarding the business of the registrant,
including segment information, production volumes, and industry product price
trends, is presented in the following tables labeled "Sales and Operating Profit
by Major Product Group," "Summary of Production Volumes," "Industry Product
Price Trends," and "Logs by Source." Additional financial information about
industry segments is presented in Note 10 of the Notes to Financial Statements
in Item 8.
Reference is made to Item 2 for additional information as to sources
and availability of raw materials and the locations of the registrant's
manufacturing facilities.
- 4 -
Louisiana-Pacific Corporation and Subsidiaries
PRODUCT INFORMATION SUMMARY
SEE ADDITIONAL INFORMATION REGARDING INDUSTRY SEGMENTS IN NOTES TO FINANCIAL
STATEMENTS.
YEAR ENDED DECEMBER 31 (DOLLAR AMOUNTS IN MILLIONS)
1997 1996 1995 1994 1993
------------ ------------ ------------- ------------ ------------
SALES AND PROFIT BY MAJOR PRODUCT GROUP
- ---------------------------------------
SALES: Structural panel products $ 864 36% $ 1,006 40% $ 1,127 39% $ 1,208 40% $ 1,005 40%
===== Lumber 665 28 614 25 644 23 867 28 816 33
Industrial panel products 181 8 195 8 215 8 240 8 194 8
Other building products 563 23 494 20 523 18 505 17 411 16
-------- --- ------- --- -------- --- --------- --- --------- ---
Building products 2,273 95 2,309 93 2,509 88 2,820 93 2,426 97
Pulp 130 5 177 7 334 12 220 7 85 3
-------- --- -------- --- -------- --- --------- --- --------- ---
Total sales $ 2,403 100% $ 2,486 100% $ 2,843 100% $ 3,040 100% $ 2,511 100%
======== === ======== === ======== === ========= === ========= ===
Export sales (included
above) $ 240 10% $ 268 11% $ 457 16% $ 371 12% $ 252 10%
======== === ======== === ======== === ======== === ========= ==
PROFIT: Building products $ 20 $ 174 $ 346 $ 636 $ 562
Pulp (29) (91) 44 (5) (59)
Settlements, charges and other
unusual items, net (32) (350) (367) --- ---
General corporate and other
expense, net (80) (52) (121) (72) (70)
Interest, net (29) (8) 3 1 (5)
-------- -------- -------- -------- --------
Income (loss) before taxes,
minority interest and
accounting changes (1) $ (150) $ (327) $ (95) $ 560 $ 428
========= ========= ======== ========= ==========
SUMMARY OF PRODUCTION VOLUMES
- -----------------------------
OSB, million square feet 3/8" basis 4,000 4,008 3,445 3,404 3,100
Softwood plywood, million
square feet 3/8" basis 1,221 1,613 1,466 1,604 1,507
Lumber, million board feet 1,240 1,201 1,359 1,986 1,796
Industrial panel products
(particleboard, medium density
fiberboard and hardboard),
million square feet 3/4" basis 589 580 582 641 597
Engineered I-Joists,
million lineal feet 73 55
Laminated veneer lumber,
thousand cubic feet 5,800 3,900
Pulp, thousand short tons 377 439 486 441 224
- 5 -
1997 1996 1995 1994 1993
------------ ------------ ------------- ------------ ------------
INDUSTRY PRODUCT PRICE TRENDS (2)
- ---------------------------------
OSB, MSF, 7/16" -- 24/16 span
rating (North Central price) $ 143 $ 184 $ 245 $ 265 $ 236
Southern pine plywood,
MSF, 1/2" CDX (3 ply) 26 258 303 302 282
Framing lumber, composite
prices, MBF 417 398 337 405 394
Industrial particleboard,
3/4" basis, MSF 262 276 290 295 258
LOGS BY SOURCE (3)
- ------------------
Fee owned lands 19% 16% 13% 11% 12%
Private cutting contracts 14 14 12 14 15
Government contracts 7 6 9 8 10
Purchased logs 60 64 66 67 63
Total log volume -
million board feet 2,398 2,432 2,818 3,138 2,940
- --------------------------
(1) Does not include cumulative effects of accounting changes in 1993.
(2) Prices represent yearly averages stated in dollars per thousand board feet
(MBF), thousand square feet (MSF) or short ton. Source: Random Lengths.
(3) Stated as a percent of total log volume.
SEE ADDITIONAL INFORMATION REGARDING INDUSTRY SEGMENTS IN THE NOTES TO FINANCIAL
STATEMENTS IN ITEM 8.
- 6 -
ITEM 2. Properties
The following tables list the principal facilities of the registrant
and its subsidiaries. Information on production capacities reflects normal
operating rates and normal production mixes under current market conditions,
taking into account known constraints such as log supply. Unless otherwise
noted, capacities are in millions of units.
MANUFACTURING FACILITIES
------------------------
SAWMILLS METRIC 1) NORMAL 2)
(BOARD FEET, 2 SHIFTS, 5 DAYS; *1 SHIFT, 5 DAYS) CAPACITIES CAPACITIES
WESTERN LUMBER (14 plants)
Annette, AK 110 70
Belgrade, MT 150 90
Big Lagoon, CA 35 20*
Chilco, ID 205 125
Deer Lodge, MT (3 shifts) 155 95
Deer Lodge, MT (fingerjoint) 130 80
Fort Bragg, CA 115 70
Ketchikan, AK 100 60
Moyie Springs, ID (3 shifts) 220 135
Samoa, CA 165 100
Sandpoint, ID (remanufacturing) --- ---
Saratoga, WY 80 50
Tacoma, WA 100 60
Ukiah, CA 165 100
SOUTHERN LUMBER (15 plants)
Bernice, LA 65 40*
Bon Wier, TX 40 25*
Cleveland, TX 65 40*
Eatonton, GA 60 35*
Evergreen, AL 70 45*
Hattiesburg, MS 65 40*
Henderson, NC 65 40*
Jasper, TX 90 55*
Kountze, TX 25 15*
Lockhart, AL 35 20*
Marianna, FL 50 30*
New Waverly, TX 25 15*
Philadelphia, MS 65 40*
Statesboro, GA 50 30*
West Bay, FL 60 35*
----- ----
Total Lumber Capacity (29 plants) 2,560 1,560
===== =====
- 7 -
MANUFACTURING FACILITIES
PANEL PRODUCTS PLANTS
SOFTWOOD PLYWOOD PLANTS METRIC 1) METRIC 2)
(3/8-INCH BASIS, SQUARE FEET, 2 SHIFTS, 5 DAYS) CAPACITIES CAPACITIES
Bon Wier, TX 230 260
Cleveland, TX 250 280
Logansport, LA 195 220
New Waverly, TX 230 260
Urania, LA 220 250
----- -----
Total Softwood Plywood Capacity (5 plants) 1,125 1,270
===== =====
ORIENTED STRAND BOARD PANEL PLANTS
(3/8-INCH BASIS, SQUARE FEET, 3 SHIFTS,7 DAYS)
Athens, GA 295 335
Carthage, TX (under construction) 355 400
Corrigan, TX 135 150
Dawson Creek, B.C. Canada 335 375
Hanceville, AL 310 350
Hayward, WI (2 plants) 445 500
Houlton, ME 230 260
Jasper, TX 355 400
Montrose, CO 130 145
Roxboro, NC 335 375
Sagola, MI 310 350
Silsbee, TX 310 350
Swan Valley, MB, Canada 400 450
Waterford, Ireland 355 400
----- -----
Total OSB Capacity (15 plants) 4,300 4,840
===== =====
ORIENTED STRAND BOARD SIDING PLANTS
(3/8-INCH BASIS, SQUARE FEET, 3 SHIFTS, 7 DAYS)
Newberry, MI 115 130
Tomahawk, WI 135 150
Two Harbors, MN 125 140
----- -----
Total OSB Siding Capacity (3 plants) 375 420
===== =====
MEDIUM DENSITY FIBERBOARD PLANTS
(3/4-INCH BASIS, SQUARE FEET, 3 SHIFTS, 7 DAYS)
Eufaula, AL 230 130
Oroville, CA 90 50
Urania, LA 90 50
----- -----
Total MDF Capacity (3 plants) 410 230
===== =====
PARTICLEBOARD PLANTS
(3/4-INCH BASIS, SQUARE FEET, 3 SHIFTS, 7 DAYS)
Arcata, CA 220 125
Missoula, MT 275 155
Silsbee, TX 140 80
----- -----
Total Particleboard Capacity (3 plants) 635 360
===== =====
HARDBOARD PLANT
(1/8-INCH BASIS, SQUARE FEET, 3 SHIFTS, 7 DAYS)
Oroville, CA 62 210
===== =====
- 8 -
MANUFACTURING FACILITIES
------------------------
OTHER BUILDING PRODUCTS
HARDWOOD VENEER PLANTS NORMAL 2)
(SURFACE MEASURE, SQUARE FEET, 2 SHIFTS, 5 DAYS) CAPACITIES
Mellen, WI (2 plants) 250
======
I-JOIST PLANTS
(LINEAL FEET; 1 SHIFT, 5 DAYS)
Fernley, NV 21
Hines, OR 21
Red Bluff, CA 25
Wilmington, NC 20
-----
Total I-Joist Capacity (4 plants) 87
=====
LAMINATED VENEER LUMBER PLANTS
(THOUSAND CUBIC FEET; 2 SHIFTS, 7 DAYS)
Fernley, NV 1,600
Hines, OR 2,700
Wilmington, NC 1,600
-----
Total LVL Capacity (3 plants) 5,900
=====
PULP MILLS METRIC 1) NORMAL 2)
(THOUSAND SHORT TONS, 3 SHIFTS, 7 DAYS) CAPACITIES CAPACITIES
Samoa, CA 195 220
Chetwynd, B.C. Canada 170 185
----- -----
Total Pulp Capacity (2 plants) 365 405
===== =====
- 9 -
MANUFACTURING FACILITIES
OTHER MANUFACTURING FACILITIES (23 PLANTS)
Cellulose insulation plants: Phoenix, AZ, Vancouver, B.C.;
Sacramento, CA; Atlanta, GA; Fort
Wayne, IN; Norfolk, NE; Bucyrus, OH;
Portland, OR; Elkwood, VA
Cement fiber shake: Red Bluff, CA
Chip mills: Cleveland and Moscow, TX
Coatings and chemicals: Portland, OR; Orangeburg, SC
Consumer electronics storage: Oswego, IL
Softwood veneer plant: Rogue River, OR
Wood treating plants: Evergreen and Lockhart, AL;
Marianna, FL; Statesboro, GA; New
Waverly and Silsbee, TX; Ukiah, CA
DISTRIBUTION CENTERS (6 LOCATIONS)
Calpella, CA Riverside, CA
Rocklin, CA Dodge City, KS
Salina, KS Conroe, TX
TOTAL FACILITIES: 99
Note: The capacities above are based on normal operating rates and
normal production mixes. Market conditions, the availability
of logs, and the nature of current orders can cause actual
production rates to vary considerably from normal rates.
TIMBERLAND HOLDINGS
HECTARES ACRES
California: Whitewoods, Fir, Pine, Redwood 158,900 392,500
Idaho: Fir, Pine 16,700 41,200
Louisiana: Pine, Hardwoods 78,700 194,500
Minnesota: Hardwoods 11,400 28,200
North Carolina: Pine, Hardwoods 900 2,100
Texas: Pine, Hardwoods 283,800 701,100
Virginia: Pine, Hardwoods 2,300 5,700
Wisconsin: Hardwoods 600 1,500
Wyoming: Whitewoods 600 1,600
------- ---------
Total Fee 553,900 1,368,400
======= =========
1) Metric capacities in thousand cubic meters.
2) Normal capacities in millions of units unless otherwise noted.
Note: See Note 7 of the Notes to Financial Statements in Item 8 for
a discussion of an asset sale program involving certain of
these timberland holdings and manufacturing facilities. The
list does not include window and door manufacturing facilities
subject to sale under a letter of intent.
In addition to its fee-owned timberlands, the registrant has timber
cutting rights in the United States, under long-term contracts (five years and
over) on approximately 5,600 acres and under contracts for shorter periods on
approximately 240,800 acres, on government and privately owned timberlands in
the vicinities of certain of its manufacturing facilities. L-P's Canadian
subsidiary is a party to long-term timber license arrangements in Canada.
Information regarding the sources of the registrant's log requirements is
located under the table labeled "Logs by Source" in Item 1.
- 10 -
ITEM 3. Legal Proceedings
For a discussion of legal and environmental matters involving L-P and
the potential effect on L-P, refer to Note 8 of the Notes to Financial
Statements under the heading "Contingencies" in Item 8, which is incorporated
herein by reference.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the registrant's security holders
during the fourth quarter of 1997.
Executive Officers of the Registrant
- ------------------------------------
The following sets forth the name of each executive officer of the
registrant (including certain executives whose duties may cause them to be
classified as executive officers under applicable SEC rules), the age of the
officer, and all positions and offices held with the registrant as of March 20,
1998:
Mark A. Suwyn, age 55, has served as Chairman and Chief Executive
Officer of L-P since January 1996. Before joining L-P, Mr. Suwyn was Executive
Vice President of International Paper Company from 1992 through 1995.
Previously, Mr. Suwyn was Senior Vice President of E.I. du Pont de Nemours & Co.
Mr. Suwyn is also a director of the registrant.
Michael D. Hanna, age 45, joined L-P in June 1996 as Executive
Vice President after serving as President of Associated Chemists, Inc., for more
than five years previous.
Warren C. Easley, age 56, joined L-P as Vice President, Technology
and Quality in May 1996 after serving as Technical Manager--Nylon Division,
North America for E.I. du Pont de Nemours & Co. for more than five years
previous.
Richard W. Frost, age 46, joined L-P in May 1996 as Vice
President, Timberlands and Fiber Procurement. Mr. Frost worked for S.D. Warren
Company as Director of Timberlands prior to April 1992, as Vice President and
Manager, Westbrook Mill, from April 1992 to September 1995, and as Vice
President and General Manager, Somerset Operations for S.D. Warren Company from
September 1995 to 1996.
H. Ward Hubbell, age 37, joined L-P as Director, Corporate Affairs
in September 1997. Previously, Mr. Hubbell was employed by International Paper
Company beginning in October 1992, first as Communications Director and then as
Federal Affairs Manager. Before that, he was vice president of a Washington,
D.C., public relations firm.
Karen D. Lundquist, age 42, was named Vice President,
Manufacturing in January 1997. Before joining L-P, Ms. Lundquist was an
executive officer and director of Rapid Change Technologies, Inc. (formerly
known as Creative Breakthroughs, Inc.), from the fall of 1993 to January 1997,
and served as its chief executive officer from mid-1995 to 1997. From September
1991 to October 1993, Ms. Lundquist was a plant manager with E.I. du Pont de
Nemours & Co.
J. Keith Matheney, age 49, joined the registrant in March 1970 and
has served as Vice President, Sales and Marketing since January 26, 1997. Mr.
Matheney was General Manager--Western Division from February 1996 to January
1997 after serving as General Manager--Weather-Seal Division of the registrant
from May 1994 to February 1996, and as Director of Sales and Marketing for more
than five years previous.
- 11 -
Elizabeth T. Smith, age 53, became Director, Environmental Affairs of
the registrant in March 1993. Ms. Smith has been employed by L-P in various
positions relating to environmental management since 1987.
Curtis M. Stevens, age 45, was appointed as Vice President, Chief
Financial Officer and Treasurer of L-P in September 1997. He previously spent 13
years as the senior financial executive of Planar Systems, Inc., a leading
manufacturer and supplier of electroluminescent flat panel displays, where he
was named Executive Vice President and General Manager in 1996.
Michael J. Tull, age 52, became Vice President, Human Resources of the
registrant in May 1996. Mr. Tull was previously employed by Sharp HealthCare, a
regional system of hospitals and related facilities in San Diego, California,
for more than 10 years, most recently as Corporate Vice President of Employee
Quality and Development beginning in 1991.
Gary C. Wilkerson, age 51, joined L-P as Vice President and General
Counsel in September 1997. Beginning in early 1997, Mr. Wilkerson served as
(acting) Senior Vice President, General Counsel and Secretary for the consumer
products division of IVAX Pharmaceuticals. For the previous seven years, he was
Senior Vice President, General Counsel and Secretary of Maybelline Co., a
cosmetics manufacturer.
All executive officers serve at the pleasure of the board of directors
of L-P. Unless earlier removed by the board of directors, the officers' terms of
office run until the next annual meeting of the board of directors.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The common stock is listed on the New York Stock Exchange, the
Dow-Jones newspaper quotations symbol is "LaPac," and the ticker symbol is
"LPX." Information regarding market prices for the registrant's common stock is
included in the table in Item 6 headed "High and Low Stock Prices." Holders of
the registrant's common stock may automatically reinvest dividends toward
purchase of additional shares of the registrant's common stock. At March 12,
1998, L-P had approximately 21,000 stockholders of record. Information regarding
cash dividends paid during 1996 and 1997 is included in the table in Item 6 with
respect to quarterly data.
- 12 -
ITEM 6. Selected Financial Data
DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE 1996 1997
- ------------------------------------------- ---- ----
ANNUAL DATA
Net sales $ 2,486.0 $ 2,402.5
Net income (loss) (200.7) (101.8)
Net income (loss) per share-basic and diluted (1.87) (.94)
Net cash provided by operating activities 22.8 88.2
Capital expenditures -- plants, logging
roads and timber (includes cash portion
of acquisitions) 266.0 204.5
Working capital 234.5 277.5
Ratio of current assets to
current liabilities 1.68 to 1 1.87 to 1
Total assets 2,622.4 2,578.4
Long-term debt, excluding current portion 458.6 572.3
Long-term debt as a percent of
total capitalization 24.3% 30.8%
Stockholders' equity 1,427.6 1,286.2
Per ending share of common stock 13.13 11.73
Number of employees 12,500 12,000
Number of stockholders of record 23,900 22,000
1ST QTR 2ND QTR 3RD QTR 4TH QTR YEAR
1997 QUARTERLY DATA
Net sales $ 554.6 $ 633.3 $ 619.5 $ 595.1 $ 2,402.5
Gross profit (loss) (1) (35.1) (8.2) (13.8) (31.4) (88.5)
Income (loss) before taxes
and minority interest 78.3(2) (14.7) (176.3)(2) (37.3) (150.0)
Net income (loss) 42.0(2) (10.1) (112.4)(2) (21.3) (101.8)
Net income (loss) per share-
basic and diluted .39(2) (.10) (1.03)(2) (.20) (.94)
Cash dividends per share .14 .14 .14 .14 .56
1996 QUARTERLY DATA
Net sales $ 584.1 $ 658.3 $ 676.3 $ 567.3 $2,486.0
Gross profit (loss) (1) (5.0) 35.0 21.9 (20.9) 31.0
Income (loss) before taxes
and minority interest (5.0) 34.5 (332.0)(2) (24.3) (326.8)
Net income (loss) (3.6) 21.0 (203.4)(2) (14.7) (200.7)
Net income (loss) per share-
basic and diluted (.03) .19 (1.89)(2) (.14) (1.87)
Cash dividends per share .14 .14 .14 .14 .56
HIGH AND LOW STOCK PRICES
1997 High $ 22.00 $ 21.56 $ 25.56 $ 25.88 $ 25.88
Low 19.88 17.00 20.50 17.54 17.00
1996 High $ 26.25 $ 28.13 $ 23.75 $ 23.00 $ 28.13
Low 23.00 22.13 19.63 20.63 19.63
- --------------------------
(1) Gross profit is income before settlements, charges and other unusual
items, taxes, minority interest and interest.
(2) Includes settlements, charges and other unusual items. See the Notes to
Financial Statements in Item 8 for explanation of these amounts.
- 13 -
FORWARD LOOKING STATEMENTS
- --------------------------
Statements herein to the extent they are not based on historical
events, constitute forward-looking statements. Forward-looking statements
include, without limitation, statements regarding the outlook for future
operations, forecasts of future costs and expenditures, evaluation of market
conditions, the outcome of legal proceedings, the adequacy of reserves, or plans
for product development. Investors are cautioned that forward-looking statements
are subject to an inherent risk that actual results may vary materially from
those described herein. Factors that may result in such variance, in addition to
those set forth under the above captions, include changes in interest rates,
commodity prices, and other economic conditions; actions by competitors;
changing weather conditions and other natural phenomena; actions by government
authorities; uncertainties associated with legal proceedings; technological
developments; future decisions by management in response to changing conditions;
and misjudgments in the course of preparing forward-looking statements.
- 14 -
FIVE-YEAR SUMMARY
YEAR ENDED DECEMBER 31 (DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE)
SUMMARY INCOME STATEMENT DATA (2) 1997(4) 1996(4) 1995(4) 1994 1993
- --------------------------------- ------------ ------------ -------------- ------------- ---------------
Net sales $ 2,402.5 $ 2,486.0 $ 2,843.2 $ 3,039.5 $ 2,511.3
Gross profit (loss) (1) (88.5) 31.0 268.9 558.6 423.6
Interest, net (29.0) (7.8) 2.9 1.0 5.0
Provision (benefit) for income taxes (43.6) (125.6) (45.8) 209.8 173.2
Income (loss) (3) (101.8) (200.7) (51.7) 346.9 254.4
Income (loss) per share (3) - basic (.94) (1.87) (.48) 3.15 2.32
Income (loss) per share (3) - diluted (.94) (1.87) (.48) 3.13 2.29
Cash dividends per share .56 .56 .545 .485 .43
Average shares of common stock
outstanding (thousands)-
Basic 108,450 107,410 107,040 110,140 109,670
Diluted 108,450 107,410 107,040 110,800 110,880
SUMMARY BALANCE SHEETS
Current assets $ 596.8 $ 612.9 $ 618.5 $ 721.9 $ 614.1
Timber and timberlands, at cost
less cost of timber harvested 634.2 648.6 689.6 693.5 673.5
Property, plant and equipment, net 1,191.8 1,278.5 1,452.3 1,273.2 1,145.9
Goodwill and other assets 155.6 82.4 45.0 55.1 32.8
------------ ----------- ------------- ------------ -------------
Total assets $ 2,578.4 $ 2,622.4 $ 2,805.4 $ 2,743.7 $ 2,466.3
============ =========== ============= ============= =============
Current liabilities 319.3 $ 378.4 $ 448.5 $ 344.8 $ 317.2
Long-term debt, excluding
current portion 572.3 458.6 201.3 209.8 288.6
Deferred income taxes and other 400.6 357.8 499.6 339.7 289.1
Stockholders' equity 1,286.2 1,427.6 1,656.0 1,849.4 1,571.4
------------ ----------- ------------- ------------- -----------
Total liabilities and
stockholders' equity $ 2,578.4 $ 2,622.4 $ 2,805.4 $ 2,743.7 $ 2,466.3
============ =========== ============= ============= =============
- 15 -
KEY FINANCIAL TRENDS 1997(4) 1996(4) 1995 1994 1993
- -------------------- -------------- ----------- -------------- ------------- -------------
Working capital $ 277.5 $ 234.5 $ 170.0 $ 377.1 $ 296.9
============== =========== ============== ============= =============
Plant and logging road additions (5) $ 154.8 $ 244.0 $ 362.9 $ 286.0 $ 208.4
Timber additions, net 49.7 22.0 49.7 66.0 81.5
-------------- ----------- -------------- ------------- -------------
Total capital additions $ 204.5 $ 266.0 $ 412.6 $ 352.0 $ 289.9
============== =========== ============== ============= =============
Long-term debt as a percent
of total capitalization 31% 24% 11% 10% 16%
Income as a percent of average
equity (3) -8% -13% -3% 20% 17%
- --------------------------
(1) Gross profit is income before settlements, charges and unusual items,
income taxes, minority interest, and interest.
(2) All per share amounts and number of shares have been retroactively
adjusted for a two-for-one stock split in 1993 and a three-for-two
stock split in 1992.
(3) Does not include cumulative effects of accounting changes in 1993.
(4) Includes settlements, charges and other unusual items, net. See the
Notes to Financial Statements in Item 8 for explanation of these
amounts.
(5) Includes cash paid in acquisitions.
- 16 -
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
GENERAL
L-P incurred a net loss in 1997 of $101.8 million ($.94 per share), which
included a pre-tax net charge of $32.5 million ($20.6 million after taxes, or
$.19 per share). L-P's net losses in 1996 and 1995 primarily resulted from
charges taken in the third quarter of each year. The charge in 1996 was $350.0
million pre-tax ($215.0 million after tax, or $2.00 per share) and the 1995
charge was $366.6 million pre-tax ($221.8 million after tax, or $2.07 per
share). These charges are discussed in further detail in Note Seven to the
financial statements. Prior to the settlements, charges and other unusual items,
L-P had an after-tax loss of $81.2 million ($.75 per share) in 1997, after-tax
income of $14.3 million in 1996 ($.13 per share) and after-tax income of $170.1
million in 1995 ($1.59 per share).
Sales in 1997 were $2.40 billion, a 3% decline from 1996 sales of $2.49
billion. Sales in 1996 were 13% lower than 1995 sales of $2.84 billion.
L-P operates in two major business segments: building products and pulp.
Building products is the most significant segment, accounting for more than 88
percent of net sales in each of the past three years. 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
"Selected Financial Data" in Item 6 and the "Product Information Summary" in
Item 1.
In 1997, the building products segment had a decline in sales and
profitability, largely the result of an industry-wide oversupply of structural
panel products in North America. In 1997, the pulp segment lost money, but
improved from the large losses suffered in 1996. However, the economic crisis in
Asia negatively impacted pulp segment results late in the year. Both the
building products and pulp segments declined in sales and profitability in 1996
compared to 1995. The weakness in building products was primarily due to the
structural panel oversupply, while pulp markets remained very weak throughout
1996 due to high world-wide inventories. The Ketchikan Pulp Company contract
issue (discussed further below) also negatively impacted pulp segment results in
1996.
BUILDING PRODUCTS
INCREASE
YEAR ENDED DEC. 31, (DECREASE)
---------------------------------------------
1997 1996 1995 97-96 96-95
- --------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN MILLIONS)
Sales:
Structural panel products $ 864 $1,006 $1,127 -14% -11%
Lumber 665 614 644 +8% -5%
Industrial panel products 181 195 215 -7% -9%
Other building products 563 494 523 +14% -6%
------ ------ ------
Total building products $2,273 $2,309 $2,509 -2% -8%
====== ====== ======
Profit $ 20 $ 174 $ 346 -89% -50%
====== ====== ======
Sales of structural panel products (plywood and oriented strand board
(OSB)) suffered in both 1997 and 1996 from industry wide over-capacity. The
over-capacity is the result of new OSB plants built by the industry throughout
North America at a rate greater than the growth in demand. Average selling
prices in 1997 fell approximately 13% compared to 1996, while 1996 average
prices were approximately 20% lower than 1995. During the latter part of 1997,
L-P's net sales realization was also negatively impacted by increased shipping
costs caused by interrupted rail service. Structural panel sales volumes in 1997
decreased 3% from 1996 levels as a result of the permanent closure of two
- 17 -
plywood plants and four OSB plants in 1997 and late 1996. Sales volumes in 1996
increased approximately 14% compared to 1995 due to new OSB plants started-up in
that year, despite temporary market-related shut-downs at some of L-P's OSB
plants.
Lumber sales increased in 1997 due to a 6% increase in average sales
prices and a slight increase in volume sold. Lumber markets experienced strong
demand through the first three quarters of 1997, benefiting from a robust U.S.
economy, relatively low interest rates and strong housing starts. Late in the
year, weakening currencies in Asia limited shipments from North America to those
markets which put supply pressure on domestic markets, causing lumber prices to
decline. This trend will likely continue into 1998. Lumber sales were lower in
1996 than 1995 as a result of sales volume, which decreased approximately 12%.
L-P permanently closed a number of unprofitable sawmills around the country in
1995 and 1996. Average selling prices rose about 9% in 1996 due to a strong U.S.
economy, lower production volumes industry wide and lower volumes of lumber
imported from Canada.
Industrial panels consist of particleboard, medium density fiberboard
(MDF) and hardboard. These sales decreased in 1997 compared to 1996 primarily
because of lower sales prices of approximately 6%. The price decline was due
primarily to increased industry production relative to demand. Industrial panel
sales volumes in 1997 decreased slightly after a slight increase in 1996
compared to 1995. Prices fell approximately 11% in 1996. This price decline was
also due to excess industry production.
The increase in other building products sales in 1997 was primarily due to
the acquisition of Associated Chemists, Inc. (coatings and chemicals) in
mid-1996, GreenStone Industries, Inc. (cellulose insulation) in early 1997 and
the assets of Tecton Laminates (engineered I-Joists and LVL) in early 1997.
Other building products sales decreased in 1996 due to lower wood chip sales.
L-P was producing fewer wood chips due to lower sawmill and plywood production,
and wood chip prices weakened significantly, particularly on the West Coast.
The primary factor in the decrease in building products profits in 1997
was further erosion of OSB sales prices. Also, higher log costs in the southern
region of the country caused plywood earnings to be significantly reduced.
Industrial panel profits also declined in 1997 as a result of lower sales
prices. Lumber profits increased in 1997 due to higher average sales prices,
which helped offset the profitability declines in structural and industrial
panels. Building products profits decreased in 1996 from 1995 due to the lower
prices discussed above for structural panel products and industrial panel
products. Raw material costs were generally lower in 1996 than in 1995, but did
not fully offset the lower sales prices.
L-P's building products are primarily sold as commodities and therefore
sales prices fluctuate based on market factors over which L-P has no control.
L-P cannot predict whether the prices of its building products will remain at
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.
- 18 -
PULP
INCREASE
YEAR ENDED DEC. 31, (DECREASE)
-------------------------------------------------------
1997 1996 1995 97-96 96-95
- --------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN MILLIONS)
Pulp sales $130 $177 $334 -27% -47%
==== ==== ====
Profit (loss) $(29) $(91) $ 44 +68% -207%
==== ==== ====
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. Pulp sales volumes decreased approximately 10%, while average
prices dropped approximately 19%. However, KPC pulp had a higher sales average
than L-P's two remaining pulp mills. Excluding KPC, L-P's remaining pulp
business showed an increase of 11% in sales volume and a price decrease of
approximately 6%. The Asian economic crisis caused pulp prices to decline late
in 1997, which will likely continue into 1998. Pulp sales plummeted in 1996 as
sales prices fell an average of 44% while volumes decreased about 5%. Large pulp
inventories around the world created very weak pulp markets throughout 1996. L-P
took intermittent downtime at the pulp mills during the year, which caused the
volume decrease.
Pulp segment profits improved significantly in 1997 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. After making a profit in 1995, the pulp mills returned to losses in
1996 due to the downturn in the markets and problems experienced with the KPC
contract. Raw material costs decreased in 1996 after experiencing an increase in
1995.
L-P's pulp products are primarily sold as commodities and therefore sales
prices fluctuate based on market factors over which L-P has no control. L-P
cannot predict whether the prices of its pulp products will remain at current
levels, or will increase or decrease in the future because supply and demand are
influenced by many factors, only 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. The economic crisis in Asia has continued into
1998, which has negatively impacted pulp markets. A significant portion of L-P's
pulp is sold to countries in that region.
L-P pulp products are sold primarily to export customers and 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 1997 and 1996, both in amount
and as a percent of total sales. Information regarding L-P's geographic segments
and export sales are provided in the notes to financial statements under the
caption "Segment Information."
GENERAL CORPORATE EXPENSE, NET
Net general corporate expense was $80 million in 1997, compared to $52
million in 1996, and an unusually high amount of $121 million in 1995. In 1997
and 1996, the recurring level of general corporate expense has increased largely
due to corporate-wide training programs undertaken by current management and the
addition of key personnel to drive future growth and improvement initiatives. In
1996, $17 million of credits, resulting from a gain on the sale of assets, were
netted into this expense. The most significant factor in the 1995 amount was
higher expenses associated with litigation against the company of approximately
$48 million, including
- 19 -
legal fees and increases in contingency reserves (it did not, however, include
amounts recorded in the line item "Settlements, Charges and Other Unusual Items,
Net" which is discussed in Note Seven to the financial statements).
SETTLEMENTS, CHARGES AND OTHER UNUSUAL ITEMS, NET
- -------------------------------------------------
For a discussion of settlements, charges and other unusual items, net,
refer to Note Seven to the financial statements.
INTEREST, NET
- -------------
Net interest expense rose significantly in 1997 and 1996 as L-P borrowed
funds to cover its settlement obligations and fund capital expenditures.
Additionally, interest capitalized has decreased in 1997 and 1996 as
construction projects have been completed. Also, interest income was lower in
each of the past two years due to lower levels of cash available for investing.
LEGAL AND ENVIRONMENTAL MATTERS
- -------------------------------
For a discussion of legal and environmental matters involving L-P and the
potential effect on the company, refer to Note Eight to the financial
statements.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
- ---------------------------------------------------
Net cash provided by operations increased to $88 million in 1997 from $23
million in 1996, down from $335 million in 1995. These fluctuations primarily
correlate to changes in the company's net loss. In 1997, L-P received a
settlement from the U.S. Government of $135 million for claims related to the
KPC long-term timber supply contract. In 1997 and 1996, L-P paid out $205
million and $263 million for obligations related to litigation settlements.
Net cash used in investing activities decreased to $140 million from $213
million in 1996 and $387 million in 1995. Capital expenditures peaked in 1995
with the addition of several new OSB plants and other projects. In 1997 and
1996, L-P received $64 million and $62 million of cash for assets sold. L-P has
also spent significant amounts on environmental projects (such as pollution
control equipment), upgrades of existing production facilities, and timber to
supply its operations and logging roads.
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 purchased only $3 million of treasury shares in 1997
and no treasury shares in 1996 after purchasing $120 million of treasury stock
in 1995.
L-P has a revolving credit facility of $300 million, which was fully
borrowed at year-end. Subsequent to year-end, L-P entered into an additional
credit facility with a group of banks for an additional $100 million, which is
available to fund cash needs. This additional credit facility must be repaid
upon the sale of assets described below.
In October 1997, L-P announced that it intends to sell assets that
management considers non-strategic to L-P's core businesses. These assets
include, among others, the remaining California redwood timberlands, related
lumber and certain distribution businesses, the Samoa, California, pulp mill,
the Weather-Seal window and door manufacturing business, the Creative Point,
Inc., subsidiary, the Red Bluff, California, cement fiber roof shake plant and
the fiber gypsum plant in Nova Scotia. As of year-end, L-P was actively
marketing all of these assets and had sold the fiber gypsum plant. L-P presently
estimates the proceeds from these sales at $800 million to
- 20 -
$1 billion. However, there can be no assurance that net proceeds within the
foregoing range will be realized. The proceeds realized will initially be used
to fund operations and reduce or eliminate outstanding borrowings on L-P's
revolving credit facility. Management is currently studying alternative uses of
the proceeds to maximize the long-term value to L-P and its stockholders.
L-P has budgeted capital expenditures, including timber and logging road
additions, for 1998 of approximately $150 million. These expenditures are
primarily to complete an OSB plant currently under construction, continue
environmental improvements to existing plants, upgrade production facilities and
provide timber to operations.
Contingency reserves, which represent an estimate of future cash needs for
various contingencies (principally, payments for siding litigation settlements),
total $224 million, of which $40 million is estimated to be payable within one
year. As with all accounting estimates, there is inherent uncertainty concerning
the reliability and precision of such estimates. As described in the notes to
the financial statements under the heading "Contingencies," the amounts
ultimately paid in settling all of the outstanding litigation could exceed the
current reserves by a material amount.
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 that existing cash and cash equivalents combined with additional
borrowing available on lines of credit, expected income tax refunds, the
significant cash inflow expected from the asset sale program described above 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. The company also believes that because of its conservative
financial structure and policies, it has substantial financial flexibility to
generate additional funds should the need arise.
YEAR 2000 COMPLIANCE
As the year 2000 approaches, an issue impacting most companies has emerged
regarding the ability of computer applications and systems to properly interpret
the year. This is a pervasive and complex issue.
L-P is in the process of identifying significant applications that will
require modification to ensure Year 2000 compliance. Internal and external
resources are being used to make this assessment, the required modifications and
test Year 2000 compliance. L-P plans on completing the assessment of all
significant applications and developing a plan for appropriate action by
September 30, 1998.
In addition, L-P will begin communicating with others with whom it does
significant business to determine their Year 2000 compliance readiness and the
extent to which L-P is vulnerable to any third party Year 2000 issues. However,
there can be no guarantee that the systems of other companies on which L-P's
systems rely will be timely converted, or that a failure to convert by another
company, or a conversion that is incompatible with L-P's systems, would not have
a material adverse effect on L-P.
The total cost to L-P of these Year 2000 compliance activities has not
been and is not anticipated to be material to its financial position or results
of operations in any given year. These costs and the date on which L-P plans to
complete the Year 2000 assessment process are based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third-party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ from those
plans.
- 21 -
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
No disclosure is required under this item.
ITEM 8. Financial Statements and Supplementary Data
The consolidated financial statements and accompanying notes to financial
statements together with the reports of independent public accountants are
located on the following pages. Quarterly data for the registrant's latest two
fiscal years is located in the table labeled "Quarterly Data" in Item 6.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31 (DOLLAR AMOUNTS IN MILLIONS) 1997 1996
- ---------------------------------------- --------- ---------
ASSETS
Current Assets:
Cash and cash equivalents $ 31.9 $ 27.8
Accounts receivable, less reserves of $2.0 and $1.4 146.2 136.2
Inventories 258.8 264.3
Prepaid expenses 8.9 12.0
Income tax refunds receivable 78.0 99.5
Deferred income taxes 73.0 73.1
--------- ---------
Total current assets 596.8 612.9
Timber and Timberlands, at cost
less cost of timber harvested 634.2 648.6
Property, Plant and Equipment, at cost:
Land, land improvements and logging roads,
net of road amortization 185.6 182.5
Buildings 262.5 269.5
Machinery and equipment 1,876.3 1,953.9
Construction in progress 109.5 80.1
--------- ---------
2,433.9 2,486.0
Less accumulated depreciation (1,242.1) (1,207.5)
--------- ---------
Net property, plant and equipment 1,191.8 1,278.5
Goodwill, net of amortization 70.7 45.9
Other Assets 84.9 36.5
--------- ---------
TOTAL ASSETS $ 2,578.4 $ 2,622.4
========= =========
See notes to financial statements.
- 22 -
CONSOLIDATED BALANCE SHEETS
DECEMBER 31 (DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE)
1997 1996
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 22.9 $ 18.7
Short-term notes payable 22.0 35.4
Accounts payable and accrued liabilities 234.4 224.3
Current portion of contingency reserves 40.0 100.0
--------- ---------
Total current liabilities 319.3 378.4
Long-term Debt, excluding current portion 572.3 458.6
Deferred Income Taxes 178.6 163.2
Contingency Reserves, excluding current portion 184.0 159.8
Other Long-term Liabilities and Minority Interest 38.0 34.8
Commitments and Contingencies
STOCKHOLDERS' EQUITY:
Common stock, $1 par value, 200,000,000 shares
authorized, 116,937,022 shares issued 117.0 117.0
--------- ---------
Preferred stock, $1 par value, 15,000,000 shares
authorized, no shares issued
Additional paid-in capital 472.2 472.7
Retained earnings 977.5 1,140.0
Treasury stock, 7,309,360 shares
and 8,170,799 shares, at cost (163.4) (183.3)
Loans to Employee Stock Ownership Trusts (37.7) (61.6)
Other (79.4) (57.2)
--------- ---------
Total stockholders' equity 1,286.2 1,427.6
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,578.4 $ 2,622.4
========= =========
See notes to financial statements.
- 23 -
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31 (DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE)
1997 1996 1995
---- ---- ----
NET SALES $ 2,402.5 $ 2,486.0 $ 2,843.2
--------- --------- ---------
COSTS AND EXPENSES:
Cost of sales 2,138.7 2,123.5 2,250.3
Depreciation and amortization 142.8 150.6 152.0
Cost of timber harvested 41.1 41.2 50.6
Selling and administrative 168.4 139.7 121.4
Settlements, charges and other
unusual items, net 32.5 350.0 366.6
Interest expense, net of
capitalized interest 30.9 14.2 5.3
Interest income (1.9) (6.4) (8.2)
--------- --------- ---------
Total costs and expenses 2,552.5 2,812.8 2,938.0
Income (loss) before taxes and
minority interest (150.0) (326.8) (94.8)
Provision (benefit) for income taxes (43.6) (125.6) (45.8)
Minority interest in net income (loss)
of consolidated subsidiaries (4.6) (.5) 2.7
--------- --------- ---------
NET INCOME (LOSS) $ (101.8) $ (200.7) $ (51.7)
========= ========= =========
NET INCOME (LOSS) PER SHARE - BASIC $ (.94) $ (1.87) $ (.48)
========== ========== ==========
AND DILUTED
CASH DIVIDENDS PER SHARE OF COMMON STOCK $ .56 $ .56 $ .545
========== ========== ===========
AVERAGE SHARES OF COMMON
STOCK (thousands) 108,450 107,410 107,040
========== ========= ===========
See notes to financial statements.
- 24 -
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
(DOLLAR AMOUNTS IN MILLIONS) 1997 1996 1995
- ---------------------------- ------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(101.8) $(200.7) $ (51.7)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation, amortization and
cost of timber harvested 183.9 191.8 202.6
Settlements, charges
and other unusual items, net 216.6 350.0 366.6
Cash settlements of contingencies (204.8) (263.4) (13.6)
Other adjustments (54.5) 3.8 26.9
Decrease (increase) in receivables (4.0) 31.9 28.7
Decrease (increase) in inventories 12.8 31.1 (103.9)
Decrease (increase) in income tax
refunds receivable 21.8 (99.5) ---
Decrease (increase) in prepaid expenses 4.7 1.4 (7.0)
Increase (decrease) in accounts payable
and accrued liabilities (1.8) (1.6) 38.2
Increase (decrease) in income taxes payable --- --- (7.5)
Increase (decrease) in deferred income taxes 15.3 (22.0) (144.7)
------- ------- -------
Net cash provided by operating activities 88.2 22.8 334.6
CASH FLOWS FROM INVESTING ACTIVITIES
Plant, equipment and logging road additions,
including cash used in acquisitions (154.8) (244.0) (362.9)
Timber and timberland additions (49.7) (22.0) (49.7)
Assets sold 63.6 62.4 23.5
Other investing activities, net 1.0 (9.1) 1.8
------- ------- -------
Net cash used in investing activities (139.9) (212.7) (387.3)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in short-term
notes payable (13.4) (12.9) 47.8
Long-term borrowings 228.4 262.7 30.0
Repayment of long-term debt (101.0) (53.4) (82.0)
Cash dividends (60.7) (60.1) (58.2)
Purchase of treasury stock (2.9) --- (120.2)
Other financing activities, net 5.4 6.0 (5.2)
------- ------- -------
Net cash provided by (used in)
financing activities 55.8 142.3 (187.8)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 4.1 (47.6) (240.5)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 27.8 75.4 315.9
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 31.9 $ 27.8 $ 75.4
======= ======= =======
See notes to financial statements.
- 25 -
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ADD'L
DOLLAR AMOUNTS IN MILLIONS COMMON STOCK TREASURY STOCK PAID-IN RETAINED
EXCEPT PER SHARE SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
---------------------- ------------------------- ------- --------
BALANCE
AS OF DECEMBER 31, 1994 116,937,022 $ 117.0 4,944,804 $ (86.3) $ 478.4 $ 1,510.7
Net income (loss) --- --- --- --- --- (51.7)
Cash dividends, $.545 per share --- --- --- --- --- (58.2)
Issuance of shares for employee
stock plans and for
other purposes --- --- (689,744) 13.8 (6.0) ---
Purchase of treasury stock --- --- 4,333,397 (120.2) --- ---
Employee stock ownership
trust contribution --- --- --- --- --- ---
Currency translation adjustment
and pension
liability adjustment, net --- --- --- --- --- ---
--- --- --- --- --- ---
BALANCE
AS OF DECEMBER 31, 1995 116,937,022 $ 117.0 8,588,427 $ (192.7) $ 472.4 $ 1,400.8
Net income (loss) --- --- --- --- --- (200.7)
Cash dividends, $.56 per share --- --- --- --- --- (60.1)
Issuance of shares for employee
stock plans and for
other purposes --- --- (417,628) 9.4 .3 ---
Employee stock ownership
trust contribution --- --- --- --- --- ---
Currency translation adjustment,
pension liability adjustment and
deferred compensation, net --- --- --- --- --- ---
--- --- --- --- --- ---
BALANCE
AS OF DECEMBER 31, 1996 116,937,022 $ 117.0 8,170,799 $ (183.3) $ 472.7 $ 1,140.0
Net income (loss) --- --- --- --- --- (101.8)
Cash dividends, $.56 per share --- --- --- --- --- (60.7)
Issuance of shares for employee
stock plans and for
other purposes --- --- (1,016,534) 22.8 (.5) ---
Purchase of treasury stock --- --- 155,095 (2.9) --- ---
Employee stock ownership
trust contribution --- --- --- --- --- ---
Currency translation adjustment,
pension liability adjustment and
deferred compensation, net --- --- --- --- --- ---
--- --- --- --- --- ---
BALANCE
AS OF DECEMBER 31, 1997 116,937,022 $ 117.0 7,309,360 $ (163.4) $ 472.2 $ 977.5
----------- -------- --------- - -------- -------- ---------
[Table continued on next page of EDGARized text.]
OTHER TOTAL
LOANS EQUITY STOCK-
DOLLAR AMOUNTS IN MILLIONS TO ADJUST- HOLDERS'
EXCEPT PER SHARE ESOTs MENTS EQUITY
-------- ---------- ---------
BALANCE
AS OF DECEMBER 31, 1994 $ (114.0) $ (56.4) $ 1,849.4
Net income (loss) --- --- (51.7)
Cash dividends, $.545 per share --- --- (58.2)
Issuance of shares for employee
stock plans and for
other purposes --- --- 7.8
Purchase of treasury stock --- --- (120.2)
Employee stock ownership
trust contribution 28.5 --- 28.5
Currency translation adjustment
and pension
liability adjustment, net --- .4 .4
-------- ---------- ---------
BALANCE
AS OF DECEMBER 31, 1995 $ (85.5) $ (56.0) $ 1,656.0
Net income (loss) --- --- (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 --- 23.9
Currency translation adjustment,
pension liability adjustment and
deferred compensation, net --- (1.2) (1.2)
-------- ---------- ---------
BALANCE
AS OF DECEMBER 31, 1996 $ (61.6) $ (57.2) $ 1,427.6
Net income (loss) --- --- (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 --- 23.9
Currency translation adjustment,
pension liability adjustment and
deferred compensation, net --- (22.2) (22.2)
-------- ---------- ---------
BALANCE
AS OF DECEMBER 31, 1997 $ (37.7) $ (79.4) $ 1,286.2
-------- ---------- ---------
See notes to financial statements.
- 26 -
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, the Company also maintains manufacturing
facilities in Canada and Ireland. The principal customers for the Company'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 structural panel
products and lumber. Structural panel sales were 36% of total 1997 sales and
lumber sales were 28% of the total.
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," "Settlements, Charges and Other
Unusual Items, 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 have been computed based on the
weighted average number of shares of common stock outstanding during the
periods. The effect of potentially dilutive common stock equivalents is not
included in the calculation of dilutive earnings per share because it is
currently anti-dilutive as a result of L-P's net losses. Shares held by L-P's
Employee Stock Ownership Trusts (ESOTs) which were acquired by the ESOTs on or
after January 1, 1994 and are not allocated to participants' accounts, are not
considered outstanding for purposes of computing earnings per share (763,786
shares at December 31, 1997).
Cash and Cash Equivalents
- -------------------------
L-P considers all highly liquid securities with an original maturity of
three months or less to be cash equivalents. Cash paid during 1997, 1996 and
1995 for interest (net of capitalized interest) was $29.2 million, $13.4 million
and $4.6 million. Net cash paid (received) during 1997, 1996 and 1995 for income
taxes was $(80.7) million, $(4.1) million and $109.0 million.
L-P 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 holds its cash investments until maturity and is
therefore not subject to significant market risk.
- 27 -
NOTES TO FINANCIAL STATEMENTS
Inventory Valuation
- -------------------
Inventories are valued at the lower of cost or market. Inventory costs
include material, labor and operating overhead. The LIFO method is used for most
log and lumber inventories with remaining inventories valued at FIFO 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:
DECEMBER 31 (IN MILLIONS) 1997 1996
------------------------- ---- ----
Logs $ 112.4 $ 106.4
Lumber 37.6 47.4
Panel products 56.6 54.4
Other building products 82.1 70.0
Pulp 15.3 25.4
Other raw materials 25.1 26.3
Supplies 21.3 23.0
LIFO reserve (91.6) (88.6)
------- -------
Total $ 258.8 $ 264.3
======= =======
Timber
- ------
L-P follows an overall policy on fee timber that amortizes timber costs
over the total fiber available during the estimated growth cycle. Timber
carrying costs, such as reforestation and forest management, are generally
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.
Property, Plant, and Equipment
- ------------------------------
L-P uses the units of production method of depreciation for most 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
1997, 1996 and 1995 was $4.8 million, $7.1 million and $10.9 million.
L-P defers start-up costs on major construction projects during the
start-up phase. No start-up costs were deferred in 1997. Start-up costs deferred
during 1996 and 1995 were $3.8 million and $3.1 million.
Asset Impairments
- -----------------
Long-lived assets to be held and used by the Company 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
- 28 -
NOTES TO FINANCIAL STATEMENTS
is written down to its estimated fair value. Assets to be disposed are written
down to their estimated fair value, less sales costs. See Note Seven for a
discussion of charges in 1997, 1996 and 1995 related to impairment of property,
plant and equipment.
Derivative Financial Instruments
- --------------------------------
L-P has only limited involvement with derivative financial instruments. At
December 31, 1997, L-P had no material exposure to derivative financial
instruments.
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.
Goodwill
- --------
Goodwill has resulted from the purchase of subsidiaries and is being
amortized on a straight-line basis over 10 to 25 years. The amortization period
and recoverability of this goodwill are periodically reviewed by the Company.
Notes Receivable
- ----------------
Included in other assets are notes receivable related to a timber and
timberland sale that occurred during 1997. The Company received $47.9 million in
notes from a third party. The notes are due in principal payments of $20 million
in 2008, $20 million in 2009, and $7.9 million in 2012. Interest is to be
received in semi-annual installments with rates varying from 5.62% to 7.5%.
These notes provide collateral for L-P's senior secured notes.
Acquisitions
- ------------
Acquisitions are accounted for under the purchase method of accounting,
whereby the results of acquired companies are included in L-P's consolidated
results from the date of their acquisition.
Reclassifications
- -----------------
Certain prior year amounts have been reclassified to conform to the
current year presentation.
2. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
DECEMBER 31 (IN MILLIONS) 1997 1996
------------------------- ---- ----
Accounts payable $ 153.0 $ 124.0
Salaries and wages payable 27.4 36.6
Taxes other than income taxes 8.7 12.2
Workers' compensation 13.5 12.0
Other accrued liabilities 31.8 39.5
------- -------
$ 234.4 $ 224.3
======= =======
- 29 -
NOTES TO FINANCIAL STATEMENTS
3. INCOME TAXES
Income (loss) before taxes and minority interest for the years ended
December 31, was taxed under the following jurisdictions:
YEAR ENDED DECEMBER 31 (IN MILLIONS) 1997 1996 1995
------------------------------------ ---- ---- ----
Domestic $(87.0) $(255.1) $(123.0)
Foreign (63.0) (71.7) 28.2
------- ------- -------
$(150.0) $(326.8) $ (94.8)
======= ======= =======
Provision (benefit) for income taxes includes the following:
YEAR ENDED DECEMBER 31 (IN MILLIONS) 1997 1996 1995
------------------------------------ ---- ---- ----
Current tax provision (benefit):
U.S. federal $(65.0) $(87.4) $ 74.4
State and local (4.3) (10.0) 14.7
Foreign 3.6 12.2 6.1
------ ------ -------
Total current tax provision
(benefit) $(65.7) $(85.2) $ 95.2
====== ====== =======
Deferred tax provision (benefit):
U.S. federal 32.2 $ 2.6 $(129.2)
State and local 3.4 .3 (16.4)
Foreign (13.5) (43.3) 4.6
------ ------ -------
Total deferred tax provision
(benefit) $ 22.1 $(40.4) $(141.0)
====== ====== =======
The tax effects of significant temporary differences creating deferred tax
(assets) and liabilities at December 31 were as follows:
DECEMBER 31 (IN MILLIONS) 1997 1996
------------------------- ---- ----
Property, plant and equipment $ 134.0 $ 95.3
Timber and timberlands 156.9 143.0
Inventories (4.2) (1.2)
Accrued liabilities (84.1) (33.7)
Contingency reserves (86.7) (100.5)
Benefit of foreign capital loss
and NOL carryover (27.8) (13.6)
Benefit of foreign ITC carryover (62.3) (68.4)
Other 41.6 26.0
Valuation allowance 38.2 43.2
-------- --------
Net deferred tax liability 105.6 90.1
Less net current deferred
tax assets (73.0) (73.1)
-------- --------
Net noncurrent deferred
tax liabilities $ 178.6 $ 163.2
======== ========
The reduction in the valuation allowance reflects the expiration of tax credits
and a change in the foreign currency exchange rate between balance sheet dates.
L-P's Canadian subsidiary, Louisiana-Pacific Canada Ltd. (LPC), has
unrealized foreign investment tax credits (ITC) of approximately C$89 million
(Canadian dollars). These credits can be carried forward to offset future tax
- 30 -
NOTES TO FINANCIAL STATEMENTS
of LPC and reduce LPC's basis in the related property, plant and equipment. The
credits expire C$18 million in 1999, C$6 million in 2000, C$47 million in 2001,
C$4 million in 2003, C$13 million in 2004 and C$1 million in 2005. In addition,
LPC has a capital loss carryover of C$29 million available to offset capital
gains in future years which does not expire.
The following table summarizes the differences between the statutory
U.S. federal and effective income tax rates:
YEAR ENDED DECEMBER 31 1997 1996 1995
---------------------- ---- ---- ----
Federal tax rate (35)% (35)% (35)%
Tax-exempt investment income --- --- 2
State and local income taxes (4) (4) (4)
Exempt foreign sales corporation income --- --- (3)
Foreign losses not benefited 6
Other, net 4 1 (4)
--- --- ---
(29)% (38)% (48)%
=== === ===
4. LONG-TERM DEBT
INTEREST RATE DECEMBER 31,
(IN MILLIONS) AT 12/31/97 1997 1996
- ------------- ------------- ---- ----
Project Bank Financings --
Chetwynd, B.C. pulp mill, repaid in 1997, ---% $ --- $ 51.0
Nova Scotia fiber gypsum plant,
repaid in 1997, --- --- 34.7
Waterford, Ireland, OSB plant, payable
1998-2003, interest rate variable 8.3 32.9 41.4
Project Revenue Bond Financings, payable
1998-2009, interest rates variable 4.4-7.3 26.0 26.1
Employee Stock Ownership Trust (ESOT) Loans --
Hourly ESOT, payable annually through
1999, interest rate variable 8.3 17.0 25.5
Salaried ESOT, payable annually through
1999, interest rate variable 4.9 12.0 18.0
Senior Secured Notes, payable 2008-2112,
interest rates fixed 7.1-7.5 47.9 ---
Bank Credit Facility --
Revolving credit facility, payable in
2002, interest rate variable 6.3 300.0 275.0
Term loan facility, payable in 2002,
interest rate variable 6.3 125.0 ---
Other, including capital lease obligations,
payable in varying amounts through 2010,
interest rates vary 4.0-8.5 34.4 5.6
------- -------
595.2 477.3
Less current portion (22.9) (18.7)
------- -------
$ 572.3 $ 458.6
======= =======
The carrying amounts of L-P's long-term debt approximates fair market value
since the debt is primarily variable rate debt. Project bank financings are
typically secured by the underlying assets of the related project. The senior
secured notes are collateralized by notes receivable related to timber and
timberland sales. Many of L-P'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, 1997.
- 31 -
NOTES TO FINANCIAL STATEMENTS
At December 31, 1997, L-P had a $425 million bank credit facility with
a group of banks which is due in 2002. This facility includes a $300 million
revolving credit facility and a $125 million term loan facility. Interest on
borrowings under the facility is computed on one of numerous variable interest
rate formulas at L-P's option. L-P pays a commitment fee on the unused credit
line. Borrowings in 1997 are classified as long-term debt as amounts are not
expected or required to be repaid during 1998. Additionally, L-P's subsidiary,
L-P Canada Ltd. has a $30 million (Canadian) revolving credit facility which is
classified as short-term notes payable. Subsequent to year-end, L-P entered into
an additional credit facility with a group of banks for an additional $100
million, which must be repaid upon the sale of assets described in Note Seven.
The weighted average interest rate for all debt at December 31, 1997
and 1996 was 6.4 percent and 6.2 percent. Required repayment of principal for
long-term debt is as follows:
YEAR ENDED DECEMBER 31 (IN MILLIONS)
1998 $ 22.9
1999 34.5
2000 6.6
2001 6.4
2002 456.2
2003 and after 68.6
---------
$ 595.2
=========
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 plans.
Approximately 9,800 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 the 1,843,621 shares purchased by
the ESOTs in 1994 is based on the market value of the shares at the time of
allocation. L-P's ESOTs held a total of approximately 11,868,000 shares at
December 31, 1997 of which approximately 9,734,000 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 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 were frozen in 1994. 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.
- 32 -
NOTES TO FINANCIAL STATEMENTS
In 1997, L-P adopted the L-P 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 $1.4 million at December 31, 1997. 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. During 1997,
L-P contributed $4.2 million to the trust. The funds were invested in
corporate-owned life insurance policies. At December 31, 1997, the trust assets
were valued at $3.9 million and 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:
1997 1996
---- ----
Plan with Plan with Plans with Plans with
Assets in Accumulated Assets in Accumulated
Excess of Benefits Excess of Benefits
Accumulated In Excess Accumulated In Excess
Benefits of Assets Benefits of Assets
DECEMBER 31 (IN MILLIONS)
Accumulated benefit obligation
Vested portion $ 11.2 $ 101.1 $ 19.9 $ 89.8
Non-vested portion -- 2.1 .2 2.9
--------- --------- -------- ---------
Total 11.2 103.2 20.1 92.7
Effect of future compensation -- -- -- --
--------- --------- -------- ---------
Projected benefit obligation 11.2 103.2 20.1 92.7
Plan assets 13.2 89.1 39.6 87.3
--------- --------- -------- ---------
Net funded (unfunded)
status 2.0 (14.1) 19.5 (5.4)
Unrecognized asset at
transition (.3) (6.5) (5.1) (8.0)
Unrecognized net loss
and other 3.9 29.3 .2 20.9
Adjustment to recognize
minimum liability -- (22.9) -- (9.7)
--------- --------- -------- ---------
Net prepaid (accrued)
pension expense $ 5.6 $ (14.2) $ 14.6 $ (2.2)
========= ========= ======== =========
The actuarial assumptions used to determine pension expense and the
funded status of the plans for 1997 and 1996 were: a discount rate on benefit
obligations of 7.25 percent and 7.75 percent, and an 8.75 percent expected
long-term rate of return on plan assets.
The assets of the plans at December 31, 1997 and 1996 consist mostly of
government obligations, and minor amounts in equity securities and cash and cash
equivalents.
Retirement plan expense included the following components:
- 33 -
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31 (IN MILLIONS) 1997 1996 1995
------------------------------------ ---- ---- ----
Benefits earned by employees $ .2 $ .5 $ .4
Interest cost on projected
benefit obligation 7.9 8.3 7.9
Return on plan assets (9.0) (10.9) (10.2)
Net amortization and deferral (1.0) (1.7) (2.4)
---------- ---------- ----------
Net periodic pension expense (income) (1.9) (3.8) (4 .3)
Expense related to ESOTs multiemployer,
defined contribution and
non-qualified plans 28.8 29.1 30.1
Loss from settlement of pension plan 7.3 --- ---
---------- ---------- ----------
Net retirement plan expense $ 34.2 $ 25.3 $ 25.8
========== ========== ==========
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 allowed by SFAS 123, L-P has elected to adopt only the
disclosure provisions of the standard and 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 method of SFAS Statement 123, L-P's net income (loss) and
net income (loss) per share would have been reduced to the pro forma amounts
indicated below:
YEAR ENDED DECEMBER 31
(IN MILLIONS, EXCEPT PER SHARE) 1997 1996 1995
------------------------------- ---- ---- ----
Net income (loss)
As reported $ (101.8) $ (200.7) $ (51.7)
Pro forma (108.6) (206.0) (53.6)
Net income (loss) per share
As reported $ (.94) $ (1.87) $ (.48)
Pro forma (1.00) (1.92) (.50)
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 assumptions of a 2.5 percent to 3.2 percent dividend yield, expected
volatility of 29 percent in 1997 and 27 percent in 1996 and 1995, and a risk
free interest rate of 6.6 percent in 1997 and 6.7 percent in 1996 and 1995.
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. The current stock
award plan requires that options be granted at 100 percent of market price. 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. Compensation expense
recognized for stock options was $.7 million in 1997, $.7 million in 1996 and
$1.0 million in 1995. At December 31, 1997, 4.5 million shares were available
under the current stock award plan for future option grants and all other
stock-based awards.
- 34 -
NOTES TO FINANCIAL STATEMENTS
Changes in options outstanding and exercisable were as follows:
NUMBER OF SHARES
YEAR ENDED DECEMBER 31 1997 1996 1995
---------------------- ---- ---- ----
Options outstanding at January 1 1,647,530 1,370,410 2,611,123
Options granted 789,505 605,000 114,000
Options exercised (154,880) (196,530) (1,046,412)
Options canceled (78,300) (131,350) (308,301)
------------- ------------ --------------
Options outstanding at December 31 2,203,855 1,647,530 1,370,410
============= ============ ==============
Options exercisable at December 31 912,144 762,850 668,900
============= ============ ==============
WEIGHTED AVERAGE PRICE PER SHARE
YEAR ENDED DECEMBER 31 1997 1996 1995
---------------------- ---- ---- ----
EXERCISE PRICE
Options granted $ 19.97 $ 22.18 $ 21.57
======== ======== ========
Options exercised $ 13.91 $ 12.13 $ 11.55
======== ======== ========
Options canceled $ 24.21 $ 21.39 $ 12.73
======== ======== ========
Options outstanding $ 21.09 $ 21.14 $ 19.40
======== ======== ========
Options exercisable $ 21.09 $ 19.05 $ 17.05
======== ======== ========
FAIR VALUE AT DATE OF GRANT
Options granted $ 6.05 $ 8.38 $ 8.98
======== ======== ========
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 grant. During 1997, a target of 54,569
performance-contingent awards were granted. 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.
Restricted Stock Plans
- ----------------------
L-P has also granted awards under the Louisiana-Pacific Corporation Key
Employee Restricted Stock Plan. Shares are issued, at no cost to the employee,
only after certain annual performance criteria are met. The expense is recorded
in the year to which the performance criteria relate. L-P did not meet the
performance criteria in 1997, 1996 or 1995 and therefore recognized no
compensation expense for restricted stock awards.
Changes in the Restricted Stock Awards outstanding were as follows:
NUMBER OF SHARES
YEAR ENDED DECEMBER 31 1997 1996 1995
-------------------- --------------------------------------------
Restricted awards outstanding
at January 1 109,458 251,208 664,500
Restricted awards granted 73,000 --- 145,000
Restricted awards exercised --- --- (42,875)
Restricted awards canceled (110,334) (141,750) (515,417)
----------- ------------ ------------
Restricted awards outstanding
at December 31 72,124 109,458 251,208
=========== ============ ============
Fair value at date of grant $ 21.13 $ N/A $ 27.00
=========== ============ ============
- 35 -
NOTES TO FINANCIAL STATEMENTS
L-P has also granted restricted stock in which the shares are issued at
the date of grant. The shares are non-transferable until the time period
specified lapses. There are no other performance criteria. 150,000 of such
shares were granted and issued in 1996. In 1997, 30,000 shares vested and became
transferable. The remaining shares vest 30,000 shares in 1998, 30,000 shares in
1999 and 60,000 shares in 2006. Deferred compensation was recorded in the other
equity line in the balance sheet in the amount of $3.8 million based on the
market value of the stock at the date of issuance. The deferred compensation
balance is amortized to expense over the years during which the certificates
vest. The amount of expense recorded in 1997 and 1996 related to these
restricted shares was $.8 million.
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, 1997, 671,196 shares and 498,185
shares were subscribed at $18.89 and $18.59 per share under the 1997 and 1996
Employee Stock Purchase Plans. During 1997, L-P issued 259,141 shares to
employees at an average price of $22.36 under all Employee Stock Purchase Plans,
including the completion of the purchase period for the 1995 Plan.
7. SETTLEMENTS, CHARGES AND OTHER UNUSUAL ITEMS, NET
The major components of "Settlements, Charges and Other Unusual Items,
Net" in the statements of income for the years ended December 31, were as
follows:
1997 1996 1995
---- ---- ----
KPC settlement $ 135.0 $ --- $ ---
Charges for litigation, property
impairments and other (223.1) (350.0) (374.6)
Gains on asset sales 55.6 --- 8.0
----------- ----------- ------------
$ (32.5) $ (350.0) $ (366.6)
=========== =========== ============
1997
- ----
In the first quarter of 1997, L-P's Ketchikan Pulp Company subsidiary
recorded a net gain of $121.9 million ($73.7 million after taxes, or $.68 per
share) to reflect the initial proceeds of $135 million received under a
settlement agreement with the U.S. Government over KPC's claims related to the
long-term timber supply contract in Alaska. Adjustments to pulp mill closure-
related accruals were netted against this gain. The agreement also provides KPC
with sufficient timber volumes to run its two sawmills through the end of 1999.
In the third quarter of 1997, L-P recorded a $210.0 million charge
($128.3 million after taxes, or $1.18 per share) to reflect the write-down of
certain properties which L-P intends to sell, to adjust reserves for litigation
settlements and to accrue for certain other costs. Gains from the sale of 79,000
acres of timber and timberland in California during the third quarter of 1997 in
the amount of $55.6 million ($34.0 million after taxes, or $.31 per share) were
netted against the charges.
- 36 -
NOTES TO FINANCIAL STATEMENTS
In October 1997, L-P announced that it intends to sell assets that
management considers non-strategic to L-P's business. These assets include,
among others, the remaining California redwood timberlands, related lumber and
certain distribution businesses, the Samoa, California, pulp mill, the
Weather-Seal window and door manufacturing business, the Creative Point, Inc.,
subsidiary, the Red Bluff, California, cement fiber roof shake plant and the
fiber gypsum plant in Nova Scotia. As of year-end, L-P was actively marketing
all of these assets and had sold the fiber gypsum plant. The total third quarter
charge related to property and equipment write-downs, was $35.0 million. The
facilities covered by this charge incurred operating losses of approximately $17
million in 1997, all of which was related to the building products related
assets.
1996
- ----
In the third quarter of 1996, L-P recorded pre-tax charges of $350.0
million ($215.0 million after tax, or $2.00 per share) to reflect expected costs
to be incurred in the shut-down of the pulp mill owned and operated by L-P's
Ketchikan Pulp Company (KPC) subsidiary as well as the settlement of all
outstanding shareholder securities class action claims, a reserve for other
litigation and a reserve for the planned shut-down and other costs related to
certain other non-strategic facilities.
The charge for the shut-down of the Ketchikan pulp mill included the
Company's best estimates of all costs related to the closing of operations
including the write-down of property, plant and equipment to estimated salvage
value, severance costs, inventory write-downs, environmental and general
property clean-up and other costs.
In 1996, as part of the implementation of management's strategic plan,
L-P evaluated the viability of all its current operations and made plans for the
closure or sale of certain other manufacturing facilities including several
sawmills, structural panel products plants and other operations. The facilities
were written down to their estimated salvage or sales value. The total charge
related to property and equipment write-downs, including the KPC facilities, was
$191.1 million. The facilities covered by this charge incurred operating losses
of approximately $64 million in 1996, of which approximately $40 million related
to pulp segment assets and $24 million related to building products related
assets.
L-P reached an agreement on behalf of all defendants to settle all
outstanding shareholder securities class action claims brought in 1995 against
the Company and four former and current officers. The settlement required a
payment of approximately $65 million, of which approximately $20 million was
covered by insurance. L-P also reserved additional amounts related to other
outstanding litigation, including plaintiffs who opted out of the siding class
action settlements.
Detail regarding the industry segments to which this $350.0 million
charge relates is presented in Note Ten entitled "Segment Information." Broken
down by type of expense, $191.1 million related to property and equipment
write-downs, $19.3 million related to inventory write-downs and $139.6 million
related to reserves taken for severance and other shut-down charges as well as
litigation costs.
1995
- ----
In the third quarter of 1995, L-P recorded a pre-tax charge of $366.6
million ($221.8 million after tax, or $2.07 per share). This charge included
$345.0 million for class action settlements related to the Company's siding
- 37 -
NOTES TO FINANCIAL STATEMENTS
product, as well as write-downs on planned disposals by mid-1996 of certain
facilities, principally sawmills. The historical results of these operations
were not significant. A gain on the sale of a non-strategic asset was netted
against this charge.
8. CONTINGENCIES
Environmental Proceedings
- -------------------------
In March 1995, L-P's subsidiary Ketchikan Pulp Company (KPC) entered
into agreements with the federal government to resolve the issues related to
water and air compliance problems experienced at KPC's pulp mill during the late
1980s and early 1990s. In addition to civil and criminal penalties that have
been paid, KPC also agreed to undertake further expenditures, which are
primarily capital in nature, including certain remedial and pollution control
related measures, with an estimated cost of up to approximately $20 million.
With the closure of the pulp mill, KPC is currently seeking the EPA's and
court's guidance regarding the necessity of these expenditures. KPC has also
agreed to undertake a study of whether a clean-up of Ward Cove, the body of
water adjacent to the pulp mill, is needed. It is anticipated that KPC will be
required to spend up to $6 million on the clean-up, including the cost of the
study, as part of the overall $20 million of expenditures. KPC negotiated an
administrative order with the state and EPA to conduct investigative and
clean-up activities at the pulp mill. Total costs for these activities are
unknown at this time, but KPC has recorded its initial estimated amount.
The United States Forest Service (USFS) has named KPC as a potentially
responsible party for costs related to the capping of a landfill near Thorne
Bay, Alaska. Total costs may range up to $8 million.
EPA and the Department of Justice have indicated their intent to seek
penalties for alleged civil violations of the Clean Water Act. The maximum
penalty associated with such an action could total up to $625,000.
Certain of L-P's plant sites have or are suspected of having substances
in the ground or in the groundwater that are considered pollutants. Appropriate
corrective action or plans for corrective action are underway. Where the
pollutants were caused by previous owners of the property, L-P is vigorously
pursuing those parties through legal channels and is vigorously pursuing
insurance coverage under all applicable policies.
L-P maintains a reserve for estimated environmental loss contingencies.
The balance of the reserve was $29.3 million and $49.9 million at December 31,
1997 and 1996. The decrease during 1997 was primarily the result of expenditures
related to the closure of operations at the KPC pulp mill. As with all
accounting estimates, significant uncertainty exists in the reliability and
precision of the estimates because the facts and circumstances surrounding each
contingency vary from case to case. L-P continually monitors its estimated
exposure for environmental liabilities and adjusts its accrual accordingly. As
additional information about the environmental contingencies becomes known,
L-P's estimate of its liability for environmental loss contingencies may change
significantly, although no estimate of the range of any potential adjustment of
the liability can be made at this time. L-P cannot estimate the time frame over
which these accrued amounts are likely to be paid out. A portion of L-P's
environmental reserve is related to liabilities for clean-up of properties which
are currently owned or have been owned in the past by L-P. Certain of these
sites are subject to cost-sharing arrangements with other parties who were also
involved with the site. L-P does not believe that any of these cost-sharing
arrangements will result in additional material liability to L-P due to
non-performance by the other
- 38 -
NOTES TO FINANCIAL STATEMENTS
party. L-P has not reduced its liability for any anticipated insurance
recoveries.
Although L-P's policy is to comply with all applicable environmental
laws and regulations, the company has in the past been required to pay fines for
non-compliance and sometimes litigation has resulted from contested
environmental actions. Also, L-P is involved in other environmental actions and
proceedings which could result in fines or penalties. Management believes that
any fines, penalties or other losses resulting from the matters discussed above
in excess of the reserve for environmental loss contingencies will not have a
material adverse effect on the business, financial position, results of
operations or liquidity of L-P. See "Colorado Criminal Proceedings" for further
discussion of an environmental action against the company.
Colorado Criminal Proceedings
- -----------------------------
L-P began an internal investigation at L-P's Montrose (Olathe),
Colorado, oriented strand board (OSB) plant of various matters, including
certain environmental matters, in the summer of 1992 and reported its initial
finding of irregularities to governmental authorities in September 1992. Shortly
thereafter, a federal grand jury commenced an investigation of L-P concerning
alleged environmental violations at that plant, which was subsequently expanded
to include the taking of evidence and testimony relating to alleged fraud in
connection with the submission of unrepresentative OSB product samples to the
APA - The Engineered Wood Association (APA), an industry product certification
agency, by L-P's Montrose plant and certain of its other OSB plants. L-P then
commenced an independent investigation, which was concluded in 1995, under the
direction of former federal judge Charles B. Renfrew concerning irregularities
in sampling and quality assurance in its OSB operations. In June 1995, the grand
jury returned an indictment in the U.S. District Court in Denver, Colorado,
against L-P, a former manager of the Montrose mill, and a former superintendent
at the mill. L-P is now facing 23 felony counts related to environmental matters
at the Montrose mill, including alleged conspiracy, tampering with opacity
monitoring equipment, and making false statements under the Clean Air Act. The
indictment also charges L-P with 25 felony counts of fraud relating to alleged
use of the APA trademark on OSB structural panel products produced by the
Montrose mill as a result of L-P's allegedly improper sampling practices in
connection with the APA quality assurance program.
In November 1995, the Court bifurcated the environmental and fraud
felony counts. A trial date of April 13, 1998, had been set in the environmental
case. However, a Notice of Disposition and Joint Motion to Vacate Trial Date was
filed with the Court.
After pleading guilty to one environmental count, on February 18, 1998,
the former superintendent of the mill was sentenced to six months of home
detention, five years probation and a fine of $10,000. The former plant manager
pled guilty to one environmental count and is scheduled to be sentenced in April
1998.
In December 1995, L-P received a notice of suspension from the EPA
stating that, because of criminal proceedings pending against L-P in Colorado,
agencies of the federal government would be prohibited from purchasing from
L-P's Northern Division. L-P is negotiating to have the EPA suspension lifted or
modified based on positive environmental programs actively underway. While
negotiations are continuing, the EPA has approved a preliminary agreement
limiting the prohibition to L-P's Montrose, Colorado, facility for an interim
period in recognition of L-P's environmental compliance efforts. Under recently
revised regulations of the United States Department of Agriculture,
- 39 -
NOTES TO FINANCIAL STATEMENTS
the EPA suspension will also have the effect of prohibiting L-P's Montrose
facility from purchasing timber directly, but not indirectly, from the USFS.
L-P maintains a reserve for its estimate of the cost of the Montrose
criminal proceedings, although as with any estimate, there is uncertainty
concerning the actual costs to be incurred. At the present time, L-P cannot
predict whether or to what extent the circumstances described above will result
in further civil litigation or investigation by government authorities, or the
potential financial impact of any such current or future proceedings, in which
case the resolution of the above matters could have a materially adverse impact
on L-P.
OSB Siding Matters
- ------------------
L-P has been named as a defendant in numerous class action and
non-class action proceedings, brought on behalf of various persons or purported
classes of persons (including nationwide classes in the United States and
Canada) who own or have purchased or used OSB siding manufactured by L-P,
because of alleged unfair business practices, breach of warranty,
misrepresentation, conspiracy to defraud, and other theories related to alleged
defects, deterioration, or failure of OSB siding products.
The United States District Court for the District of Oregon has given
final approval to a settlement between L-P and a nationwide class composed of
all persons who own, have owned, or subsequently acquire property on which L-
P's OSB siding was installed prior to January 1, 1996, excluding persons who
timely opted out of the settlement and persons who are members of the settlement
class in the Florida litigation described below. Under the settlement agreement,
an eligible claimant whose claim is filed prior to January 1, 2003 (or earlier
in certain cases), and is approved by an independent claims administrator will
be entitled to receive from the settlement fund established under the agreement
a payment equal to the replacement cost (to be determined by a third-party
construction cost estimator and currently estimated to be in the range of $2.20
to $6.40 per square foot depending on the type of product and geographic
location) of damaged siding, reduced by a specific adjustment (of up to 65
percent) based on the age of the siding. Class members who have previously
submitted or resolved claims under any other warranty or claims program of L-P
may be entitled to receive the difference between the amount which would be
payable under the settlement agreement and the amount previously paid.
Independent adjusters will determine the extent of damage to OSB siding at each
claimant's property in accordance with a specified protocol. There will be no
adjustment to settlement payments for improper maintenance or installation.
A claimant who is dissatisfied with the amount to be paid under the
settlement may elect to pursue claims against L-P in a binding arbitration
seeking compensatory damages without regard to the amount of payment calculated
under the settlement protocol. A claimant who elects to pursue an arbitration
claim must prove his entitlement to damages under any available legal theory,
and L-P may assert any available defense, including defenses that otherwise had
been waived under the settlement agreement. If the arbitrator reduces the damage
award otherwise payable to the claimant because of a finding of improper
installation, the claimant will be entitled to pursue a claim against the
contractor/builder to the extent the award was reduced.
L-P is required to pay $275 million into the settlement fund in seven
annual installments beginning in mid-1996: $100 million, $55 million, $40
million, $30 million, $20 million, $15 million, and $15 million. As of December
31, 1997, L-P had funded the first three installments. If at any time after the
fourth year of the settlement period the amount of approved
- 40 -
NOTES TO FINANCIAL STATEMENTS
claims (paid and pending) equals or exceeds $275 million, then the settlement
agreement will terminate as to all claims in excess of $275 million unless L-P
timely elects to provide additional funding within 12 months equal to the lesser
of (i) the excess of unfunded claims over $275 million or (ii) $50 million and,
if necessary to satisfy unfunded claims, a second payment within 24 months equal
to the lesser of (i) the remaining unfunded amount or (ii) $50 million. If the
total payments to the settlement fund are insufficient to satisfy in full all
approved claims filed prior to January 1, 2003, then L-P may elect to satisfy
the unfunded claims by making additional payments into the settlement fund at
the end of each of the next two 12-month periods or until all claims are paid in
full, with each additional payment being in an amount equal to the greater of
(i) 50 percent of the aggregate sum of all remaining unfunded approved claims or
(ii) 100 percent of the aggregate amount of unfunded approved claims, up to a
maximum of $50 million. If L-P fails to make any such additional payment, all
class members whose claims remain unsatisfied from the settlement fund may
pursue any available legal remedies against L-P without regard to the release of
claims provided in the settlement agreement.
If L-P makes all payments required under the settlement agreement,
including all additional payments as specified above, class members will be
deemed to have released L-P from all claims for damaged OSB Inner-Seal siding,
except for claims arising under their existing 25-year limited warranty after
termination of the settlement agreement. The settlement agreement does not cover
consequential damages resulting from damage to OSB Inner-Seal siding or damage
to utility grade OSB siding (sold without any express warranty), either of which
could create additional claims. In the event all claims filed prior to January
1, 2003, that are approved have been paid without exhausting the settlement
fund, any amounts remaining in the settlement fund revert to L-P. In addition to
payments to the settlement fund, L-P was required to pay fees of class counsel
in the amount of $26.25 million, as well as expenses of administering the
settlement fund and inspecting properties for damage and certain other costs. As
of December 31, 1997, approximately $40 million remained of the $195 million
paid into the fund to date, after accruing interest on undisbursed funds and
deducting class notification costs, prior claims costs (including payments
advanced to homeowners in urgent circumstances) and payment of claims under the
settlement.
The claims submitted to the claims administrator substantially exceed
the $275 million of payments that L-P is required to make under the settlement
agreement. As calculated under the terms of the settlement, claims submitted and
inspected exceed $325 million. There are insufficient data to project the future
volume of claims or the total dollar value of additional claims that may be made
against the settlement fund. L-P has not decided whether it will provide the
optional funding discussed above in excess of the required $275 million after
the fourth year of the settlement. Alternatively, L-P could elect to pursue
other options, including allowing the settlement agreement to terminate, thereby
entitling claimants with unsatisfied claims to pursue available legal remedies
against L-P.
A settlement of a Florida class action was approved by the Circuit
Court for Lake County, Florida. Under the settlement, L-P has established a
claims procedure pursuant to which members of the settlement class may report
problems with L-P's OSB Inner-Seal siding and have their properties inspected by
an independent adjuster, who will measure the amount of damage and also
determine the extent to which improper design, construction, installation,
finishing, painting, and maintenance may have contributed to any damage. The
maximum payment for damaged siding is $3.40 per square foot for lap siding and
$2.82 per square foot for panel siding, subject to reduction of up to 75 percent
for damage resulting from improper design, construction, installation,
- 41 -
NOTES TO FINANCIAL STATEMENTS
finishing, painting, or lack of maintenance, and also subject to reduction for
age of siding more than three years old. L-P has agreed that the deduction from
the payment to a member of the Florida class will be not greater than the
deduction computed for a similar claimant under the national settlement
agreement described above. Class members will be entitled to make claims for up
to five years after October 4, 1995.
L-P maintains reserves for the estimated costs of these siding
settlements, although, as with any estimate, there is uncertainty concerning the
actual costs to be incurred. The discussion herein notes some of the factors, in
addition to the inherent uncertainty of predicting the outcome of claims and
litigation, that could cause actual costs to vary materially from current
estimates. Due to the various uncertainties, L-P cannot predict to what degree
actual payments under the settlement agreements will exceed the recorded
liability related to these matters, although it is possible that in the near
term, total estimated payments will exceed the recorded liabilities.
Other OSB Matters
- -----------------
Three separate purported class actions on behalf of owners and
purchasers of properties in which L-P's OSB panels are used for flooring,
sheathing, or underlayment have been consolidated in the United States District
Court for the Northern District of California under the caption Agius v.
Louisiana-Pacific Corporation. The actions seek damages and equitable relief for
alleged fraud, misrepresentation, breach of warranty, negligence, and improper
trade practices related to alleged improprieties in testing, APA certification,
and marketing of OSB structural panels, and alleged premature deterioration of
such panels. A separate state court action entitled Carney v. Louisiana-Pacific
Corporation is pending in the Superior Court of the State of California for the
City and County of San Francisco, seeking relief under California consumer
protection statutes based on similar allegations.
On February 27, 1998, the United States District Court for the Northern
District of California entered an order approving a settlement that would
resolve the above actions. The settlement class is composed of all persons who
purchased L-P OSB sheathing or acquired real property or structures in the
United States containing L-P OSB sheathing between January 1, 1984, and October
22, 1997. However, persons who purchased L-P sheathing during the class period,
but who do not retain ownership of the product, are not included in the class.
Under the settlement agreement, an eligible claimant whose claim is filed prior
to October 22, 2017, and is reviewed by the claims administrator will be
entitled to recover the reasonable cost of repair or replacement of any L-P OSB
sheathing determined to have failed to perform its essential function as
warranted and not occasioned by misuse, negligent or intentional misconduct of a
third party or an event over which L-P had no control.
Independent adjusters will determine the extent of damage to the OSB
sheathing at each claimant's property. There will be an adjustment to the
settlement payments for improper installation and maintenance. If a class member
is dissatisfied with the result, he or she may reject the award and request a
second inspection, or elect arbitration or initiate a civil suit for
compensatory damages (but not for multiple or punitive damages). If a class
member rejects the award, elects arbitration and recovers a greater sum than was
found to be owing by the independent adjuster, L-P will pay for the
administrative cost of the arbitration.
An independent, professional ombudsperson will oversee the
implementation of the settlement and receive and consider complaints from class
members with respect to L-P's performance of the settlement.
- 42 -
NOTES TO FINANCIAL STATEMENTS
Additionally, the settlement agreement provides that L-P will pay a
$1.5 million grant to the University of California Forest Products Laboratory,
will pay reasonable attorneys' fees of class counsel, and will consent to an
injunction prohibiting it from failing to comply with product testing protocols
or falsely representing that its products comply with certain testing
requirements.
As with most class action settlements, a number of opt out notices were
received. Those who opted out retain all rights which were available to them
prior to the settlement.
L-P maintains a reserve for its estimate of the cost of these other OSB
matters, including the sheathing settlement, although as with any estimate,
there is uncertainty concerning the actual costs to be incurred. Based on a
review of its claims records to date, L-P believes that known reports of damage
to installed L-P OSB sheathing have been immaterial in number and amount.
Executive Employment Matter
- ---------------------------
On June 19, 1997, the United States District Court for the Southern
District of New York entered a judgment in favor of Mark Suwyn and L-P in the
action entitled International Paper Company v. Mark A. Suwyn and Louisiana-
Pacific Corporation. The complaint had alleged that Mr. Suwyn's employment as
chief executive officer of L-P violated the terms of a previous employment
agreement with the plaintiff and sought an injunction prohibiting Mr. Suwyn from
continuing his employment with L-P for 18 months and other relief.
Other
- -----
L-P and its subsidiaries are parties to other legal proceedings.
Management believes that the outcome of such proceedings will not have a
material adverse effect on the business, financial position, results of
operations or liquidity of L-P.
Contingency Reserves
- --------------------
The balance of contingency reserves, exclusive of the environmental
reserves discussed above, was $194.7 million and $209.9 million at December 31,
1997 and 1996. As L-P receives additional information regarding actual claim
rates and average claim amounts, L-P will monitor its estimated exposure and
adjust its accrual accordingly. The amounts ultimately paid for these
contingencies could differ materially from the amount currently recorded,
although no estimate of the timing or range of any potential adjustment can be
made at this time.
9. COMMITMENTS
L-P is obligated to purchase timber under certain cutting contracts
which extend to 2002. L-P's best estimate of its commitment at current contract
rates under these contracts is approximately $20.2 million for approximately 113
million board feet of timber.
Payments under all operating leases that were charged to expense during
1997, 1996, and 1995 were $17.5 million, $17.0 million and $10.7 million. Future
minimum rental payments under non-cancelable operating leases are not
significant.
- 43 -
NOTES TO FINANCIAL STATEMENTS
10. SEGMENT INFORMATION
L-P operates in two major industry segments. The major products
included in each segment are detailed further in the "Product Information
Summary" in Item 1. Intersegment sales are chips transferred from company-owned
building products plants to company-owned pulp mills. All transfers are made at
prevailing market prices. Timber and related assets and capital expenditures for
such assets have not been allocated to the industry segments as these are a
prime source of raw materials for both segments. The cost of logs delivered to
the plants and residual fibers are included in the operating results of the
segments.
Export sales are primarily to customers in Asia and Europe. Information
about L-P's geographic segments is as follows:
YEAR ENDED DECEMBER 31 (IN MILLIONS) 1997 1996 1995
------------------------------------ ---- ---- ----
Total sales -- point of origin
U.S. $ 2,330 $ 2,389 $ 2,703
Canada and other 128 162 191
Intersegment sales to U.S. (55) (65) (51)
--------- --------- ---------
Total sales $ 2,403 $ 2,486 $ 2,843
========= ========= =========
Export sales (included above) $ 240 $ 268 $ 457
========= ========= =========
Profit (loss)
U.S. $ 39 $ 107 $ 353
Canada and other (48) (24) 37
Settlements, charges and other
unusual items, net (32) (350) (367)
General corporate expense and
interest, net (109) (60) (118)
--------- --------- ---------
Income (loss) before taxes and
minority interest $ (150) $ (327) $ (95)
========= ========= =========
Identifiable assets
U.S. $ 2,220 $ 2,195 $ 2,305
Canada 285 308 434
All other 73 86 66
--------- --------- ---------
Total assets $ 2,578 $ 2,589 $ 2,805
========= ========= =========
- 44 -
NOTES TO FINANCIAL STATEMENTS
Information about L-P's industry segments is as follows:
YEAR ENDED DECEMBER 31 (IN MILLIONS) 1997 1996 1995
------------------------------------ ---- ---- ----
Total sales
Building products $ 2,280 $ 2,328 $ 2,535
Pulp 130 177 334
Intersegment sales to pulp (7) (19) (26)
--------- --------- ---------
Total sales $ 2,403 $ 2,486 $ 2,843
========= ========= =========
Profit (loss)
Building products $ 20 $ 174 $ 346
Pulp (29) (91) 44
Settlements, charges and
other unusual items, net (1) (32) (350) (367)
General corporate expense, net (80) (52) (121)
Interest, net (29) (8) 3
--------- --------- ---------
Income (loss) before taxes and
minority interest $ (150) $ (327) $ (95)
========= ========= =========
Identifiable assets
Building products $ 1,420 $ 1,346 $ 1,389
Pulp 294 341 457
Timber, timberlands, logging
equipment and roads 671 682 727
General corporate assets 193 220 232
--------- --------- ---------
Total assets $ 2,578 $ 2,589 $ 2,805
========= ========= =========
Depreciation, amortization and
cost of timber harvested
Building products $ 164 $ 164 $ 158
Pulp 17 25 36
Capital expenditures
Building products 145 203 286
Pulp 4 36 47
Timber, timberlands, logging
equipment and roads 63 38 69
- --------------------------
(1) In 1997, of the net $32 million charge, a $122 million gain relates to
a gain from a settlement received by a subsidiary from the U.S.
Government and is not allocable to a segment, a $56 million gain
relates to timber and timberland sold and a $210 million charge relates
to building products.
In 1996, of the total $350 million charge, $171 million related to the
pulp segment, $134 million related to the building products segment
(including litigation costs related to building products) and $45
million was not allocable to either industry segment.
In 1995, the substantial majority of the $367 million charge related to
class action settlements concerning the Company's siding product and
therefore would be primarily allocated to building products.
- 45 -
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS AND MANAGEMENT
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- ----------------------------------------
The Board of Directors and Stockholders of Louisiana-Pacific Corporation:
We have audited the accompanying consolidated balance sheet of
Louisiana-Pacific Corporation and subsidiaries as of December 31, 1997, and the
related consolidated statements of income, stockholders' equity and cash flows
for the year then ended. These financial statements are the responsibility of
the Company'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 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 audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of Louisiana-Pacific Corporation and
subsidiaries as of December 31, 1997, and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles.
/s/ DELOITTE & TOUCHE LLP
Portland, Oregon
February 6, 1998
- 46 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Stockholders and Board of Directors of Louisiana-Pacific Corporation:
We have audited the accompanying consolidated balance sheets of
Louisiana-Pacific Corporation (a Delaware corporation) and subsidiaries as of
December 31, 1996, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the two years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company'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, the financial statements referred to above present
fairly, in all material respects, the financial position of Louisiana-Pacific
Corporation and subsidiaries as of December 31, 1996, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Portland, Oregon
January 31, 1997
- 47 -
Report of Management
- --------------------
The management of Louisiana-Pacific Corporation has prepared the
consolidated financial statements and related financial data contained in this
Annual Financial Report. The financial statements were prepared in accordance
with generally accepted accounting principles appropriate in the circumstances
and by necessity include some amounts determined using management's best
judgments and estimates with appropriate consideration to materiality.
Management is responsible for the integrity and objectivity of the financial
statements and other financial data included in the report. To meet this
responsibility management maintains a system of internal accounting controls to
provide reasonable assurance that assets are safeguarded and that accounting
records are reliable. Management supports a program of internal audits and
internal accounting control reviews to provide assurance that the system is
operating effectively.
The Board of Directors pursues its responsibility for reported
financial information through its Audit Committee, composed of five outside
directors. The Audit Committee meets periodically with management, the internal
auditors and the independent public accountants to review the activities of
each.
MARK A. SUWYN CURTIS M. STEVENS
Chairman and Chief Executive Officer Vice President, Treasurer and
Chief Financial Officer
February 6, 1998
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ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
--------------------
A change in auditors was reported in the registrant's current report on
Form 8-K dated October 26, 1997.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
Information regarding the directors of the registrant is incorporated
herein by reference to the material included under the caption "Item 1--Election
of Directors" and "General" in the definitive proxy statement filed by the
registrant for its 1998 annual meeting of stockholders (the "1998 Proxy
Statement"). Information regarding the executive officers of the registrant is
located in Part I of this report under the caption "Executive Officers of the
Registrant." Information regarding compliance with Section 16(a) of the
Securities Exchange Act of 1934 is incorporated herein by reference to the
material included under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the 1998 Proxy Statement.
ITEM 11. Executive Compensation
----------------------
Information regarding executive compensation is incorporated herein by
reference to the material under the captions "Compensation Committee--Interlocks
and Insider Participation," "Compensation of Executive Officers," "Retirement
Benefits," "Directors' Compensation," and "Agreements with Executive Officers"
in the 1998 Proxy Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------
Information regarding security ownership of certain beneficial owners
and management is incorporated herein by reference to the material under the
caption "Holders of Common Stock" in the 1998 Proxy Statement.
ITEM 13. Certain Relationships and Related Transactions
----------------------------------------------
Information regarding management transactions is incorporated herein by
reference to the material under the captions "Compensation Committee--Interlocks
and Insider Participation" and "Management Transactions" in the 1998 Proxy
Statement.
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PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
----------------------------------------------------------------
A. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following financial statements are included in this report:
Consolidated Balance Sheets--December 31, 1997, and 1996.
Consolidated Statements of Income--years ended December 31, 1997, 1996, and
1995.
Consolidated Statements of Cash Flows--years ended December 31, 1997, 1996, and
1995.
Consolidated Statements of Stockholders' Equity--years ended December 31, 1997,
1996, and 1995.
Notes to Financial Statements.
Reports of Independent Public Accountants.
No financial statement schedules are required to be filed.
B. REPORTS ON FORM 8-K
The registrant filed a Form 8-K dated October 26, 1997, reporting a
change in auditors.
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: March 27, 1998
LOUISIANA-PACIFIC CORPORATION
(Registrant)
/s/ CURTIS M. STEVENS
Curtis M. Stevens
Vice President, Chief Financial
Officer and Treasurer
----------------------------------------
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 capacities and on the dates indicated.
Date Signature and Title
- ---- -------------------
March 27, 1998 /s/ MARK A. SUWYN
------------------
Mark A. Suwyn
Chairman, Chief Executive Officer
and Director
(Principal Executive Officer)
March 27, 1998 /s/ CURTIS M. STEVENS
----------------------
Curtis M. Stevens
Vice President, Chief Financial
Officer and Treasurer
(Principal Financial Officer)
March 27, 1998 /s/ RUSSELL S. PATTEE
----------------------
Russell S. Pattee
(Principal Accounting Officer)
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Date Signature and Title
- ---- -------------------
March 27, 1998 /s/ WILLIAM C. BROOKS
-----------------------------------
William C. Brooks
Director
March 27, 1998 /s/ ARCHIE W. DUNHAM
-----------------------------------
Archie W. Dunham
Director
March 27, 1998 /s/ PIERRE S. DU PONT IV
-----------------------------------
Pierre S. du Pont IV
Director
March 27, 1998 /s/ WILLIAM E. FLAHERTY
-----------------------------------
William E. Flaherty
Director
March 27, 1998 /s/ BONNIE G. HILL
-----------------------------------
Bonnie G. Hill
Director
March 27, 1998 /s/ DONALD R. KAYSER
-----------------------------------
Donald R. Kayser
Director
March 27, 1998 /s/ LEE C. SIMPSON
-------------------
Lee C. Simpson
Director
March 27, 1998 /s/ CHARLES E. YEAGER
----------------------
Charles E. Yeager
Director
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EXHIBIT INDEX
On written request, the registrant will furnish to any record holder or
beneficial holder of the registrant's common stock any exhibit to this report
upon the payment of a fee equal to the registrant'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 of Exhibit
- ------- ----------------------
3.A Restated Certificate of Incorporation of the registrant as
amended to date. Incorporated by reference to Exhibit 3(a)
to the registrant's Form 10-Q report for the quarter ended
June 30, 1993.
3.B Bylaws of the registrant as amended July 29, 1997.
Incorporated by reference to Exhibit 3 to the registrant's
Form 10-Q report for the quarter ended June 30, 1997.
4.A.1 Rights Agreement as Restated as of February 3, 1991,
between the registrant and First Chicago Trust Company of
New York as Rights Agent, as amended by Amendment No. 1
dated as of July 28, 1995, and Amendment No. 2 dated as of
October 30, 1995. Incorporated by reference to Exhibit
4.A.1 to the registrant's Form 10-K report for 1996.
Pursuant to Item 601 (b)(4)(iii) of Regulation S-K, the
registrant 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 the total
consolidated assets of the registrant at December 31, 1997.
The registrant agrees to furnish a copy of any such
instrument to the Securities and Exchange Commission upon
request.
4.A.2 Credit Agreement dated as of January 31, 1997, among the
registrant, Louisiana-Pacific Canada Ltd., Bank of America
National Trust and Savings Association and the other
financial institutions party thereto. Incorporated by
reference to Exhibit 4.A.2 to the registrant's Form 10-K
report for 1996.
10.A 1984 Employee Stock Option Plan as amended. Incorporated by
reference to Exhibit 10.A to the registrant's Form 10-K
report for 1996.*
10.B 1991 Employee Stock Option Plan. Incorporated by reference
to Exhibit 10.B to the registrant's Form 10-K report for
1996.*
10.C 1992 Non-Employee Director Stock Option Plan and Related
Form of Option Agreement as amended February 1, 1997.*
10.D Non-Employee Directors' Deferred Compensation Plan
effective July 1, 1997.*
10.E(1) The registrant's Key Employee Restricted Stock Plan as
amended. Incorporated by reference to Exhibit 10.E(1) to
the registrant's Form 10-K report for 1996.*
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Exhibit Description of Exhibit
- ------- ----------------------
10.E(2) Form of Restricted Stock Award Agreement under Exhibit
10.E(1). Incorporated by reference to Exhibit 10.H(2) to
the registrant's Form 10-K report for 1992.*
10.F(1) 1997 Incentive Stock Award Plan. Incorporated by reference
to Exhibit 10 to the registrant's Form 10-Q report for the
quarter ended June 30, 1997.*
10.F(2) Form of Award Agreements for Non-Qualified Stock Options
and Performance Shares under the Louisiana-Pacific 1997
Incentive Stock Award Plan. Incorporated by reference to
Exhibit 10.F(2) to the registrant's Form 10-K report for
1996.*
10.G Annual Cash Incentive Award Plan effective March 1, 1997.
Incorporated by reference to Exhibit 10.F(3) to the
registrant's Form 10-K report for 1996.*
10.H The registrant's Supplemental Executive Retirement Plan
effective July 1, 1997.*
10.I Employment Agreement between the registrant and Mark A.
Suwyn dated January 2, 1996. Incorporated by reference to
Exhibit 10.L to the registrant's Form 10-K report for
1995.*
10.J Restricted Stock Award Agreement between the registrant and
Mark A. Suwyn dated January 31, 1996.*
10.K 1997 Cash Incentive Award for Mark A. Suwyn adopted March
11, 1997. Incorporated by reference to Exhibit 10.K to the
registrant's Form 10-K report for 1996.*
10.L 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
the registrant's Form 10-K report for 1996.*
10.M Executive Employment Agreement effective as of January 1,
1997, by and between the registrant and Karen D. Lundquist.
Incorporated by reference to Exhibit 10.M to the
registrant's Form 10-K report for 1996.*
10.N Letter agreement dated August 14, 1997, relating to the
employment of Gary C. Wilkerson with the registrant.*
10.0 Letter agreement dated July 16, 1997, relating to the
employment of Curtis M. Stevens with the registrant.*
10.P Executive Deferred Compensation Plan effective May 1,
1997.*
21 List of subsidiaries of the registrant.
23.A Consent of Arthur Andersen LLP.
23.B Consent of Deloitte & Touche LLP.
27 Financial data schedule.
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