SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the thirty-nine weeks ended September 27, 1998 or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 1-4825
WEYERHAEUSER COMPANY
A Washington Corporation (IRS Employer Identification
No. 91-0470860)
Tacoma, Washington 98477
Telephone (253) 924-2345
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
- ------------------------------- --------------------------
Common Shares ($1.25 par value) Chicago Stock Exchange
New York Stock Exchange
Pacific 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 ___.
The number of shares outstanding of the registrant's class of common
stock, as of October 30, 1998 was 198,995,821 common shares ($1.25 par
value).
<PAGE>
Weyerhaeuser Company
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<TABLE>
<CAPTION>
WEYERHAEUSER COMPANY AND SUBSIDIARIES
Index to Form 10-Q Filing
For the thirty-nine weeks ended September 27, 1998
Page No.
--------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statement of Earnings 3
Consolidated Balance Sheet 4-5
Consolidated Statement of Cash Flows 6-7
Notes to Financial Statements 9-16
Item 2. Management's Discussion and Analysis of Financial 17-23
Condition and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings 23
Item 2. Changes in Securities (not applicable)
Item 3. Defaults upon Senior Securities (not applicable)
Item 4. Submission of Matters to a Vote of (not applicable)
Security Holders
Item 5. Other Information (not applicable)
Item 6. Exhibits and Reports on Form 8-K 23
</TABLE>
The financial information included in this report has been prepared in
conformity with accounting practices and methods reflected in the
financial statements included in the annual report (Form 10-K) filed with
the Securities and Exchange Commission for the year ended December
28, 1997. Though not examined by independent public
accountants, the financial information reflects, in the opinion of
management, all adjustments necessary to present a fair statement of
results for the interim periods indicated. The results of operations for
the thirty-nine week period ending September 27, 1998 should not be
regarded as necessarily indicative of the results that may be expected
for the full year.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
WEYERHAEUSER COMPANY
By /s/ K. J. Stancato
-------------------
K. J. Stancato
Duly Authorized Officer and
Principal Accounting Officer
November 6, 1998
<PAGE>
Weyerhaeuser Company
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<TABLE>
<CAPTION>
WEYERHAEUSER COMPANY AND SUBSIDIARIES
-------------
CONSOLIDATED EARNINGS
For the periods ended
September 27, 1998 and September 28, 1997
(Dollar amounts in millions except as noted and per share figures)
(Unaudited)
Thirteen weeks Thirty-nine
ended weeks ended
------------------- -------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales and revenues:
Weyerhaeuser $ 2,439 $ 2,582 $ 7,206 $ 7,656
Real estate and related assets 297 241 809 684
--------- --------- --------- ---------
Total net sales and revenues 2,736 2,823 8,015 8,340
--------- --------- --------- ---------
Costs and expenses:
Weyerhaeuser:
Costs of products sold 1,875 2,018 5,628 5,967
Depreciation, amortization and
fee stumpage 145 144 435 460
Selling, general and
administrative expenses 181 152 499 499
Research and development expenses 12 13 41 41
Taxes other than payroll and
income taxes 33 34 99 109
Charge for closure or disposition
of facilities -- 10 -- 74
--------- --------- --------- ---------
2,246 2,371 6,702 7,150
--------- --------- --------- ---------
Real estate and related assets:
Costs and operating expenses 249 202 688 542
Depreciation and amortization 1 2 4 10
Selling, general and
administrative expenses 13 13 40 83
Taxes other than payroll and
income taxes 2 2 7 6
--------- --------- --------- ---------
265 219 739 641
--------- --------- --------- ---------
Total costs and expenses 2,511 2,590 7,441 7,791
--------- --------- --------- ---------
Operating income 225 233 574 549
Interest expense and other:
Weyerhaeuser:
Interest expense incurred 66 66 198 204
Less interest capitalized 3 4 5 12
Other income (expense), net 3 6 22 (10)
Real estate and related assets:
Interest expense incurred 18 25 56 86
Less interest capitalized 16 18 46 53
Other income, net 12 10 26 71
--------- --------- --------- ---------
Earnings before income taxes 175 180 419 385
Income taxes (Note 4) 65 66 155 141
--------- --------- --------- ---------
Net earnings $ 110 $ 114 $ 264 $ 244
========= ========= ========= =========
Basic net earnings per share $ 0.56 $ 0.57 $ 1.33 $ 1.23
Diluted net earnings per share $ 0.55 $ 0.57 $ 1.32 $ 1.23
Average shares outstanding
(thousands) 198,886 198,756 198,886 198,756
Dilutive effect of stock options
assuming dilution 101 960 359 577
--------- --------- --------- ---------
Average shares outstanding 198,987 199,716 199,245 199,333
========= ========= ========= =========
Dividends paid per share $ .40 $ .40 $ 1.20 $ 1.20
========= ========= ========= =========
</TABLE>
See Accompanying Notes to Financial Statements
<PAGE>
Weyerhaeuser Company
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<TABLE>
<CAPTION>
WEYERHAEUSER COMPANY AND SUBSIDIARIES
------------
CONSOLIDATED BALANCE SHEET
September 27, 1998 and December 28, 1997
(Dollar amounts in millions)
Sept. 27, Dec. 28,
1998 1997
----------- ---------
(Unaudited)
Assets
- ------
<S> <C> <C>
Weyerhaeuser
Current assets:
Cash and short-term investments (Note 1) $ 328 $ 100
Receivables, less allowances 908 913
Inventories (Note 5) 923 983
Prepaid expenses 279 298
----------- ---------
Total current assets 2,438 2,294
Property and equipment (Notes 6 and 10) 6,174 6,974
Construction in progress 301 313
Timber and timberlands at cost, less fee stumpage
charged to disposals 1,022 996
Investments in and advances to equity affiliates
(Notes 3 and 10) 437 249
Other assets and deferred charges 326 245
----------- ---------
10,698 11,071
----------- ---------
Real estate and related assets
Cash and short-term investments, including
restricted deposits 4 22
Receivables, less discounts and allowances 82 62
Mortgage-related financial instruments, less
discounts and allowances 149 173
Real estate in process of development and for sale 594 593
Land being processed for development 891 845
Investments in and advances to joint ventures and
limited partnerships, less reserves (Note 3) 108 116
Other assets 146 193
----------- ---------
1,974 2,004
----------- ---------
Total assets $ 12,672 $ 13,075
=========== =========
</TABLE>
See Accompanying Notes to Financial Statements
<PAGE>
Weyerhaeuser Company
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<TABLE>
<CAPTION>
Sept. 27, Dec. 28,
1998 1997
----------- ---------
(Unaudited)
Liabilities and shareholders' interest
- --------------------------------------
<S> <C> <C>
Weyerhaeuser
Current liabilities:
Notes payable $ 7 $ 25
Current maturities of long-term debt 90 17
Accounts payable (Note 1) 635 694
Accrued liabilities (Note 7) 592 648
----------- ---------
Total current liabilities 1,324 1,384
Long-term debt (Note 9) 3,329 3,483
Deferred income taxes (Note 10) 1,369 1,418
Deferred pension and other liabilities 455 498
Minority interest in subsidiaries (Note 10) -- 121
Commitments and contingencies (Note 12)
----------- ---------
6,477 6,904
----------- ---------
Real estate and related assets
Notes payable and commercial paper 558 228
Long-term debt (Note 9) 767 1,032
Other liabilities 265 262
Commitments and contingencies (Note 12)
----------- ---------
1,590 1,522
----------- ---------
Total liabilities 8,067 8,426
----------- ---------
Shareholders' interest (Note 11)
Common shares: authorized 400,000,000 shares,
issued 206,072,890 shares, $1.25 par value 258 258
Other capital 406 407
Retained earnings 4,422 4,397
Cumulative other comprehensive (expense) (Note 2):
Foreign currency translation adjustment (168) (123)
Treasury common shares, at cost: 7,079,969 and
6,586,939 (313) (290)
----------- ---------
Total shareholders' interest 4,605 4,649
----------- ---------
Total liabilities and shareholders' interest $ 12,672 $ 13,075
=========== =========
</TABLE>
<PAGE>
Weyerhaeuser Company
- -6-
<TABLE>
<CAPTION>
WEYERHAEUSER COMPANY AND SUBSIDIARIES
------------
CONSOLIDATED STATEMENT OF CASH FLOWS
For the thirty-nine week periods ended
September 27, 1998 and September 28, 1997
(Dollar amounts in millions)
(Unaudited)
Consolidated
--------------------
Sept. 27, Sept. 28,
1998 1997
--------- ---------
<S> <C> <C>
Cash provided by (used for) operations:
Net earnings $ 264 $ 244
Non-cash charges (credits) to income:
Depreciation, amortization and fee stumpage 439 470
Deferred income taxes, net 120 70
Pension credits (43) --
Charge for closure or disposition of facilities -- 74
Decrease (increase) in working capital:
Accounts receivable (58) (72)
Inventories, real estate and land (12) (96)
Prepaid expenses 18 6
Mortgage-related financial instruments 24 (67)
Accounts payable and accrued liabilities (71) (89)
(Gain) loss on disposition of assets 5 7
(Gain) on disposition of a business -- (58)
Other (77) 54
--------- ---------
Net cash provided by (used for) operations 609 543
--------- ---------
Cash provided by (used for) investing activities:
Property and equipment (348) (417)
Timber and timberlands (48) (34)
Investments in and advances to equity affiliates 20 (173)
Proceeds from sale of:
Property and equipment 33 33
Businesses -- 269
Mortgage-related financial instruments 48 29
Restructuring the ownership of a subsidiary (Note 10) 218 --
Intercompany advances -- --
Other (6) (4)
--------- ---------
Net cash provided by (used for) investing activities (83) (297)
--------- ---------
Cash provided by (used for) financing activities:
Issuances of debt 158 508
Sale of industrial revenue bonds 48 38
Notes and commercial paper borrowings, net 254 (384)
Cash dividends (239) (238)
Intercompany cash dividends -- --
Payments on debt (511) (240)
Purchase of treasury common shares (42) (16)
Exercise of stock options 18 61
Other (2) (3)
--------- ---------
Net cash provided by (used for) financing activities (316) (274)
--------- ---------
Net increase (decrease) in cash and short-term
investments 210 (28)
Cash and short-term investments at beginning of year 122 71
--------- ---------
Cash and short-term investments at end of period $ 332 $ 43
========= =========
Cash paid (received) during the period for:
Interest, net of amount capitalized $ 247 $ 259
========= =========
Income taxes $ 65 $ 30
========= =========
</TABLE>
See Accompanying Notes to Financial Statements
<PAGE>
Weyerhaeuser Company
- -7-
<TABLE>
<CAPTION>
Real Estate and
Weyerhaeuser Related Assets
- -------------------- --------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1998 1997 1998 1997
- --------- --------- --------- ---------
<C> <C> <C> <C>
$ 213 $ 192 $ 51 $ 52
435 460 4 10
106 51 14 19
(42) -- (1) --
-- 74 -- --
(26) (77) (32) 5
30 57 (42) (153)
18 6 -- --
-- -- 24 (67)
(90) (135) 19 46
14 13 (9) (6)
-- (13) -- (45)
(44) 58 (33) (4)
- --------- --------- --------- ---------
614 686 (5) (143)
- --------- --------- --------- ---------
(346) (415) (2) (2)
(48) (34) -- --
(6) (190) 26 17
14 19 19 14
-- 77 -- 192
-- -- 48 29
218 -- -- --
(39) 198 39 (198)
(5) (2) (1) (2)
- --------- --------- --------- ---------
(212) (347) 129 50
- --------- --------- --------- ---------
4 495 154 13
48 38 -- --
(69) (605) 323 221
(239) (238) -- --
190 -- (190) --
(82) (81) (429) (159)
(42) (16) -- --
18 61 -- --
(2) (3) -- --
- --------- --------- --------- ---------
(174) (349) (142) 75
- --------- --------- --------- ---------
228 (10) (18) (18)
100 33 22 38
- --------- --------- --------- ---------
$ 328 $ 23 $ 4 $ 20
========= ========= ========= =========
$ 230 $ 225 $ 17 $ 34
========= ========= ========= =========
$ 26 $ 68 $ 39 $ (38)
========= ========= ========= =========
</TABLE>
<PAGE>
Weyerhaeuser Company
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This page intentionally left blank.
<PAGE>
Weyerhaeuser Company
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WEYERHAEUSER COMPANY AND SUBSIDIARIES
------------
NOTES TO FINANCIAL STATEMENTS
For the thirty-nine week periods ended September 27, 1998 and
September 28, 1997
Note 1: Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of Weyerhaeuser
Company and all of its majority-owned domestic and foreign subsidiaries.
Investments in and advances to equity affiliates which are not majority
owned or controlled are accounted for using the equity method with taxes
provided on undistributed earnings. Significant intercompany transactions
and accounts are eliminated.
Certain of the consolidated financial statements and notes to financial
statements are presented in two groupings: (1) Weyerhaeuser (the company),
principally engaged in the growing and harvesting of timber and the
manufacture, distribution and sale of forest products, and (2) Real estate
and related assets, principally engaged in real estate development and
construction and other real estate related activities.
Nature of Operations
The company's principal business segments, which account for the majority
of sales, earnings and the asset base, are:
. Timberlands and wood products, which is engaged in the management of
5.3 million acres of company-owned and .2 million acres of leased
forestland in the United States and 23.7 million acres of forestland in
Canada under long-term licensing arrangements and the production of a
full line of solid wood products that are sold primarily through the
company's own sales organizations to wholesalers, retailers and
industrial users in North America, the Pacific Rim and Europe.
. Pulp, paper and packaging, which manufactures and sells pulp, paper,
paperboard and containerboard in North American, Pacific Rim and
European markets, and packaging products for the domestic markets, and
which operates an extensive wastepaper recycling system that serves
company mills and worldwide markets.
Accounting Pronouncements Implemented
In the first quarter of 1998, the company implemented Statement of
Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive
Income, that establishes standards for reporting and display of
comprehensive income and its components in a full set of financial
statements. See Note 2.
Prospective Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has issued the following
pronouncements:
. SFAS No. 131, Disclosure about Segments of an Enterprise and Related
Information, that will require companies to determine segments based on
how management makes decisions about allocating resources to segments
and measuring their performance. Disclosures for each segment are
similar to those required under current standards, with the addition of
certain quarterly requirements. This statement will also require entity-
wide disclosure about products and services, the countries in which the
company holds material assets and reports material revenues, and its
significant customers. This statement is effective for fiscal years
beginning after December 15, 1997, with reclassification of prior
periods' comparative financial statements required; however, no interim
reporting is required in the initial year. Management is evaluating the
effect of this statement on reported segment information.
<PAGE>
Weyerhaeuser Company
-10-
. SFAS No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits, an amendment of FASB Statements No. 87, 88 and
106, that revises employers' disclosures about pensions and other
postretirement benefit plans. It does not change the measurement or
recognition of those plans. It standardizes the disclosure
requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in
benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are no
longer as useful as they were when the original pronouncements were
issued. This statement is effective for fiscal years beginning after
December 15, 1997.
. SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, that establishes accounting and reporting standards for
derivative instruments, including certain derivatives embedded in other
contracts, and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. This statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999, which for the company is the
fiscal year 2000. Assuming that the company's current minimal
involvement in derivatives and hedging activities continues after the
implementation date of this statement, there will be no material impact
on its results of operations or statement of financial position.
The American Institute of Certified Public Accountants (AICPA) Accounting
Standards Executive Committee has issued the following Statements of
Position (SOP):
. SOP 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use, that provides guidelines on the accounting
for internally developed computer software. This SOP is effective for
fiscal years beginning after December 15, 1998. The company believes
that the future adoption of this SOP will not have a significant
impact on its results of operations or financial position.
. SOP 98-5, Reporting on the Costs of Start-up Activities, that requires
the costs of start-up activities be expensed as incurred. This SOP
must be adopted in fiscal years beginning after December 15, 1998.
When this SOP is adopted, the company must record a cumulative effect
of a change in accounting principle to write off any unamortized start-
up costs that remain on the balance sheet at the date the new SOP is
adopted. The company estimates that the pre-tax impact of this
pronouncement, when implemented in the first quarter of 1999, will be
from $155 million to $160 million.
Net Earnings Per Common Share
Basic net earnings per common share are based on the weighted average
number of common shares outstanding during the period. Diluted net
earnings per common share are based on the weighted average number of
common shares outstanding and stock options outstanding at the beginning of
or granted during the period.
Options to purchase 595,094 shares at $56.78 per share, 1,347,730 shares at
$51.09 per share, and 150,000 shares at $53.06 per share were outstanding
during the thirty-nine weeks ending September 27, 1998. These options were
not included in the computation of diluted earnings per share for the
period because the option exercise prices were greater than the average
market price of common shares during the period.
Estimates
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.
Derivatives
The company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to
manage well-defined interest rate and foreign exchange risks.
These include:
. Foreign exchange contracts, which are hedges for foreign-denominated
acquisitions, accounts receivable, accounts payable and short-term
debt, that have gains or losses recognized at settlement date.
<PAGE>
Weyerhaeuser Company
- -11-
. Interest rate swaps entered into with major banks or financial
institutions in which the company pays a fixed rate and receives a
floating rate with the interest payments being calculated on a notional
amount. The premiums received by the company on the sale of these
swaps are treated as deferred income and amortized against interest
expense over the term of the agreements.
The company is exposed to credit-related gains or losses in the event of
nonperformance by counterparties to financial instruments but does not
expect any counterparties to fail to meet their obligations. The company
deals only with highly rated counterparties.
The notional amounts of these derivative financial instruments are $627
million and $492 million at September 27, 1998, and December 28, 1997,
respectively. These notional amounts do not represent amounts exchanged by
the parties and, thus, are not a measure of exposure to the company through
its use of derivatives. The exposure in a derivative contract is the net
difference between what each party is required to pay based on the
contractual terms against the notional amount of the contract, such as
interest rates or exchange rates. The use of derivatives does not have a
significant effect on the company's results of operations or its financial
position.
Cash and Short-Term Investments
For purposes of cash flow and fair value reporting, short-term investments
with original maturities of 90 days or less are considered as cash
equivalents. Short-term investments are stated at cost, which approximates
market.
Inventories
Inventories are stated at the lower of cost or market. Cost includes
labor, materials and production overhead. The last-in, first-out (LIFO)
method is used to cost approximately half of domestic raw materials, in
process and finished goods inventories. LIFO inventories were $270 million
and $246 million at September 27, 1998, and December 28, 1997,
respectively. The balance of domestic raw material and product
inventories, all materials and supplies inventories, and all foreign
inventories is costed at either the first-in, first-out (FIFO) or moving
average cost methods. Had the FIFO method been used to cost all
inventories, the amounts at which product inventories are stated would have
been $235 million and $237 million greater at September 27, 1998, and
December 28, 1997, respectively.
Property and Equipment
The company's property accounts are maintained on an individual asset
basis. Betterments and replacements of major units are capitalized.
Maintenance, repairs and minor replacements are expensed. Depreciation is
provided generally on the straight-line or unit-of production method at
rates based on estimated service lives. Amortization of logging railroads
and truck roads is provided generally as timber is harvested and is based
upon rates determined with reference to the volume of timber estimated to
be removed over such facilities.
The cost and related depreciation of property sold or retired is removed
from the property and allowance for depreciation accounts and the gain or
loss is included in earnings.
Timber and Timberlands
Timber and timberlands are carried at cost less fee stumpage charged to
disposals. Fee stumpage is the cost of standing timber and is charged to
fee timber disposals as fee timber is harvested, lost as the result of
casualty or sold. Depletion rates used to relieve timber inventory are
determined with reference to the net carrying value of timber and the
related volume of timber estimated to be available over the growth cycle.
Timber carrying costs are expensed as incurred. The cost of timber
harvested is included in the carrying values of raw material and product
inventories, and in the costs of products sold as these inventories are
disposed of.
Accounts Payable
The company's banking system provides for the daily replenishment of major
bank accounts as checks are presented. Accordingly, there were negative
book cash balances of $121 million and $185 million at September 27, 1998,
and December 28, 1997, respectively. Such balances result from outstanding
checks that had not yet been paid by the bank and are reflected in accounts
payable in the consolidated balance sheets.
<PAGE>
Weyerhaeuser Company
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Income Taxes
Deferred income taxes are provided to reflect temporary differences between
the financial and tax bases of assets and liabilities using presently
enacted tax rates and laws.
Pension Plans
The company has pension plans covering most of its employees. The U.S.
plan covering salaried employees provides pension benefits based on the
employee's highest monthly earnings for five consecutive years during the
final ten years before retirement. Plans covering hourly employees
generally provide benefits of stated amounts for each year of service.
Contributions to U.S. plans are based on funding standards established by
the Employee Retirement Income Security Act of 1974 (ERISA).
Postretirement Benefits Other Than Pensions
In addition to providing pension benefits, the company provides certain
health care and life insurance benefits for some retired employees and
accrues the expected future cost of these benefits for its current eligible
retirees and some employees. All of the company's salaried employees and
some hourly employees may become eligible for these benefits when they
retire.
Reclassifications
Certain reclassifications have been made to conform prior years' data to
the current format.
Real Estate and Related Assets
With the sale of the mortgage banking business in 1997, the financial
services segment is no longer material to the results of the company.
Therefore, the remaining activities in financial services that are
principally real estate related have been combined with real estate into
one segment entitled real estate and related assets.
Real estate held for sale is stated at the lower of cost or fair value. The
determination of fair value is based on appraisals and market pricing of
comparable assets, when available, or the discounted value of estimated
future cash flows from these assets. Real estate held for development is
stated at cost to the extent it does not exceed the estimated undiscounted
future net cash flows, in which case, it is carried at fair value.
Mortgage-backed certificates are carried at par value, adjusted for any
unamortized discount or premium. These certificates and other financial
instruments are pledged as collateral for the collateralized mortgage
obligation (CMO) bonds and are held by banks as trustees. Principal and
interest collections are used to meet the interest payments and reduce the
outstanding principal balance of the bonds. Related CMO bonds are the
obligation of the issuer, and neither the company nor any affiliated
company has guaranteed or is otherwise obligated with respect to the bonds.
Note 2: Comprehensive Income
Consolidated comprehensive income is as follows:
<TABLE>
<CAPTION>
Thirteen weeks Thirty-nine
ended weeks ended
------------------- -------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
Dollar amounts in millions 1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $ 110 $ 114 $ 264 $ 244
Other comprehensive (expense)
Foreign currency translation (33) (5) (72) (18)
Income tax benefit 13 2 27 7
Other comprehensive (expense),
net of income tax (20) (3) (45) (11)
--------- --------- --------- ---------
Comprehensive income $ 90 $ 111 $ 219 $ 233
========= ========= ========= =========
</TABLE>
<PAGE>
Weyerhaeuser Company
- -13-
Note 3: Equity Affiliates
Weyerhaeuser
The company's investments in affiliated companies that are not majority
owned or controlled are accounted for using the equity method with taxes
provided on undistributed earnings. Investments carried at equity and the
percentage interest owned consist of Cedar River Paper Company (50%), SCA
Weyerhaeuser Packaging Holding Company Asia Limited (50%), RII Weyerhaeuser
World Timberfund, L. P. (50%), Nelson Forests Joint Venture (51%) and North
Pacific Paper Corporation (50%).
Unconsolidated financial information for affiliated companies which are
accounted for by the equity method is as follows:
<TABLE>
<CAPTION>
Sept. 27, Dec. 28,
Dollar amounts in millions 1998 1997
--------- --------
<S> <C> <C>
Current assets $ 169 $ 94
Non-current assets 1,307 678
Current liabilities 57 56
Non-current liabilities 730 420
</TABLE>
<TABLE>
<CAPTION>
Thirty-nine
weeks ended
--------------------
Sept. 27, Sept. 28,
1998 1997
--------- ---------
<S> <C> <C>
Net sales and revenues $ 516 $ 147
Operating income 80 2
Net income (loss) 38 (19)
</TABLE>
The company provides goods and services to these affiliates, which vary by
entity, in the form of raw materials, management and marketing fees,
support services, shipping services and payroll. Additionally, the company
purchases finished product from certain of these entities. The aggregate
total of these transactions is not material to the results of operations of
the company.
Real Estate and Related Assets
Investments in and advances to joint ventures and limited partnerships that
are not majority owned or controlled are accounted for using the equity
method with taxes provided on undistributed earnings.
Unconsolidated financial information for joint ventures and limited
partnerships which are accounted for by the equity method is as follows:
<TABLE>
<CAPTION>
Sept. 27, Dec. 28,
Dollar amounts in millions 1998 1997
--------- --------
<S> <C> <C>
Current assets $ 1,725 $ 1,689
Non-current assets 236 284
Current liabilities 1,300 1,306
Non-current liabilities 124 145
</TABLE>
<TABLE>
<CAPTION>
Thirty-nine
weeks ended
--------------------
Sept. 27, Sept. 28,
1998 1997
--------- ---------
<S> <C> <C>
Net sales and revenues $ 148 $ 144
Operating income 67 70
Net income 45 42
</TABLE>
<PAGE>
Weyerhaeuser Company
- -14-
The company may charge management and/or development fees to the joint
ventures or limited partnerships. The aggregate total of these
transactions is not material to the results of operations of the
company.
Note 4: Income Taxes
<TABLE>
<CAPTION>
Provisions for income taxes include the following: Thirty-nine
weeks ended
--------------------
Sept. 27, Sept. 28,
Dollar amounts in millions 1998 1997
--------- ---------
<S> <C> <C>
Federal:
Current $ 26 $ 39
Deferred 95 71
--------- ---------
121 110
--------- ---------
State:
Current 6 3
Deferred 4 3
--------- ---------
10 6
--------- ---------
Foreign:
Current 3 29
Deferred 21 (4)
--------- ---------
24 25
--------- ---------
Total $ 155 $ 141
========= =========
</TABLE>
Income tax provisions for interim periods are based on the current best
estimate of the effective tax rate expected to be applicable for the full
year. The effective tax rate reflects anticipated tax credits, foreign
taxes and other tax planning alternatives.
For the periods ended September 27, 1998, and September 28, 1997, the
company's provision for income taxes as a percent of earnings before income
taxes is greater than the 35% federal statutory rate due principally to the
effect of state income taxes. The effective tax rates for the thirty-nine
week periods ended September 27, 1998, and September 28, 1997, were 37% and
36.5%, respectively.
Deferred taxes are provided for the temporary differences between the
financial and tax bases of assets and liabilities, applying presently
enacted tax rates and laws. The major sources of these temporary
differences include depreciable and depletable assets, real estate, and
pension and retiree health care liabilities.
Note 5: Inventories
<TABLE>
<CAPTION>
Sept. 27, Dec. 28,
Dollar amounts in millions 1998 1997
--------- --------
<S> <C> <C>
Logs and chips $ 86 $ 103
Lumber, plywood and panels 159 154
Pulp, newsprint and paper 154 185
Containerboard, paperboard and packaging 109 107
Other products 151 152
Materials and supplies 264 282
--------- --------
$ 923 $ 983
========= ========
</TABLE>
<PAGE>
Weyerhaeuser Company
- -15-
Note 6: Property and Equipment
<TABLE>
<CAPTION>
Sept. 27, Dec. 28,
Dollar amounts in millions 1998 1997
--------- --------
<S> <C> <C>
Property and equipment, at cost:
Land $ 156 $ 158
Buildings and improvements 1,611 1,721
Machinery and equipment 9,273 9,954
Rail and truck roads and other 598 599
--------- --------
11,638 12,432
Less allowance for depreciation
and amortization 5,464 5,458
--------- --------
$ 6,174 $ 6,974
========= ========
</TABLE>
Note 7: Accrued Liabilities
<TABLE>
<CAPTION>
Sept. 27, Dec. 28,
Dollar amounts in millions 1998 1997
--------- --------
<S> <C> <C>
Payroll -- wages and salaries, incentive awards,
retirement and vacation pay $ 254 $ 268
Taxes -- social security and real and personal
property 55 53
Interest 54 91
Income taxes 27 42
Other 202 194
--------- --------
$ 592 $ 648
========= ========
</TABLE>
Note 8: Short-Term Debt
Lines of Credit
The company has short-term bank credit lines that can be availed of by the
company and Weyerhaeuser Real Estate Company (WRECO). The credit lines
provide for borrowings of up to $500 million as of September 27, 1998 and
$425 million as of December 28, 1997. No portion of these lines has been
availed of by the company or WRECO at September 27, 1998, or December 28,
1997. Neither of the entities referred to herein is a guarantor of the
borrowings of the other.
Note 9: Long-Term Debt
Lines of Credit
The company's lines of credit include a five-year revolving credit facility
agreement entered into in 1997 with a group of banks that provides for
borrowings of up to the total amount of $400 million, all of which is
available to the company. Borrowings are at LIBOR plus a spread or other
such interest rates mutually agreed to between the borrower and lending
banks.
Weyerhaeuser Financial Services, Inc. (WFS), a wholly owned subsidiary,
paid down a revolving credit facility agreement effective June 1998. $75
million was outstanding under this facility at December 28, 1997. WFS has
negotiated a new set of term credit facility agreements with a group of
banks that provide for borrowings of up to $150 million. At September 27,
1998, $150 million had been drawn and is outstanding.
To the extent that these credit commitments expire more than one year after
the balance sheet date and are unused, an equal amount of commercial paper
is classifiable as long-term debt. Weyerhaeuser reclassified $125 million
and $194 million as of September 27, 1998, and December 28, 1997,
respectively.
<PAGE>
Weyerhaeuser Company
- -16-
No portion of these lines has been availed of by the company, WRECO or WFS
at September 27, 1998, and December 28, 1997, except as noted.
The company's compensating balance agreements were not significant.
Note 10: Restructuring the Ownership of a Subsidiary
In the 1998 first quarter, the company and Nippon Paper Industries Co.,
Ltd. (NPI) completed the restructuring of their North Pacific Paper
Corporation (NORPAC) joint venture. Through this restructuring, the
ownership of NORPAC changed from 80% company ownership and 20% NPI
ownership to 50% for each shareholder. This transaction changed the
reporting status of NORPAC from a fully consolidated subsidiary, with
minority elimination, to a joint venture accounted for on the equity method
of accounting. The change in accounting for this venture resulted in the
following significant non-cash changes in the company's consolidated
balance sheet: decreases of $621 million in property and equipment, $151
million in deferred taxes, and $121 million in minority interest in
subsidiaries; and an increase of $168 million in investments in and
advances to equity affiliates. The company received net funds of $218
million and recognized a gain of $5 million on this transaction.
Note 11: Shareholders' Interest
Common shares reserved for stock option plans were 7,287,000 shares at
September 27, 1998, and 5,848,000 shares at December 28, 1997.
Note 12: Commitments and Contingencies
The company's capital expenditures, excluding acquisitions, were $396
million year-to-date in 1998 and $656 million for the year 1997. They are
expected to be approximately $600 million in 1998; however, that
expenditure level could be increased or decreased as a consequence of
future economic conditions.
The company is a party to legal proceedings and environmental matters
generally incidental to its business. Although the final outcome of any
legal proceeding or environmental matter is subject to a great many
variables and cannot be predicted with any degree of certainty, the company
presently believes that the ultimate outcome resulting from these
proceedings and matters would not have a material effect on the company's
current financial position, liquidity or results of operations; however, in
any given future reporting period, such proceedings or matters could have a
material effect on results of operations.
<PAGE>
Weyerhaeuser Company
- -17-
WEYERHAEUSER COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Net sales and revenues and earnings before interest expense and income
taxes by segment are:
<TABLE>
<CAPTION>
Thirteen weeks Thirty-nine
ended weeks ended
------------------- -------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
Dollar amounts in millions 1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales and revenues:
Timberlands and wood products $ 1,333 $ 1,389 $ 3,827 $ 4,145
Pulp, paper and packaging 1,068 1,160 3,269 3,410
Real estate and related assets 297 241 809 684
Corporate and other 38 33 110 101
--------- --------- --------- ---------
$ 2,736 $ 2,823 $ 8,015 $ 8,340
========= ========= ========= =========
Earnings before interest expense
and income taxes:
Timberlands and wood products(1) $ 191 $ 172 $ 536 $ 554
Pulp, paper and packaging(2) 67 97 158 76
Real estate and related
assets(3) (4) 38 24 79 80
Corporate and other(5) (58) (52) (161) (134)
--------- --------- --------- ---------
$ 238 $ 241 $ 612 $ 576
========= ========= ========= =========
</TABLE>
(1) 1997 third quarter and year-to-date results include charges of $10
million and $25 million, respectively, associated with the closures of
the Philadelphia, Mississippi, and Plymouth, North Carolina, plywood
facilities.
(2) 1997 year-to-date results include special items of $28 million which
is the net of a $49 million charge for the consolidation, closure or
disposition of certain recycling facilities and the closure of the
Longview, Washington, corrugated medium machine in prior quarters and a
gain of $21 million on the sale of Saskatoon Chemicals, Ltd. during the
1997 third quarter.
(3) 1997 year-to-date results include a gain of $45 million from the sale
of the company's wholly owned subsidiary, Weyerhaeuser Mortgage
Company.
(4) Includes net interest expense of $5 million and $7 million for
thirteen weeks and $16 million and $33 million for thirty-nine weeks
related to the financial services businesses.
(5) 1997 year-to-date results include pretax income of $10 million from the
net effect of interest income from a favorable federal income tax
decision and the loss incurred in the sale of Shemin Nurseries.
Consolidated Results
Consolidated net earnings for the third quarter were $110 million, or 56
cents basic and 55 cents diluted earnings per common share, compared with
1997 third quarter earnings of $114 million, or 57 cents basic and diluted
earnings per common share. The 1997 quarterly results include a net after-
tax gain of $7 million, or 4 cents per common share from the sale of the
company's chemical business in Saskatoon, SK, Canada, offset by the closure
of the Philadelphia, MS plywood facility.
Consolidated net sales and revenues for the quarter were $2.7 billion,
which is 3% lower than the $2.8 billion reported for the same quarter last
year. Increased competition in domestic markets and weak Asian market
demand resulted in lower quarterly sales.
Year-to-date earnings were $264 million, or $1.33 basic and $1.32 diluted
earnings per common share, in contrast to the $244 million, or $1.23 basic
and diluted earnings per common share reported in 1997. 1997 results
include a net gain of $1 million, or 1 cent per common share, for the
effect of special items year-to-date. In addition to the special items
recognized in the third quarter, the 1997 year-to-date results included
losses from restructuring the recycling business, the permanent closure of
a corrugated medium machine, the closure of another plywood mill and the
sale of the wholesale nursery business. These losses were offset, in part,
by the gain on the sale of the company's mortgage banking business and
interest income from a favorable federal income tax decision.
<PAGE>
Weyerhaeuser Company
- -18-
Net sales and revenues to date are $8 billion, a 4% decrease from 1997
results. Lower market prices due to high industry inventory levels and
increased international competitiveness contributed to the decrease.
Timberlands and Wood Products
Operating earnings for the quarter were $191 million, up from the $172
million reported in 1997. Strong demand for oriented strand board and
plywood, along with good performance from the building materials
distribution business, accounted for higher earnings. Last year's earnings
included a $10 million charge associated with closing the Philadelphia, MS
plywood facility. The company has announced the restructure of its British
Columbia lumber operations. Charges associated with this activity, which
are expected to be finalized in the fourth quarter, may be material to the
company's quarterly results from operations.
Net sales were $1.3 billion for the quarter, equal to 1998 second quarter
sales and slightly lower than third quarter 1997 sales of $1.4 billion.
Increased prices for oriented strand board and panel products, plus strong
demand in the building distribution business, offset lower export prices
and volumes in lumber and logs.
Third party sales and total production volumes for the major products in
this segment are as follows:
<TABLE>
<CAPTION>
Thirteen weeks Thirty-nine
ended weeks ended
------------------- -------------------
Third party sales volumes Sept. 27, Sept. 28, Sept. 27, Sept. 28,
(millions) 1998 1997 1998 1997
- ------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Raw materials--cubic feet 154 148 435 444
Softwood lumber--board feet 1,276 1,249 3,701 3,705
Softwood plywood and
veneer-square feet (3/8") 474 536 1,388 1,581
Composite panels--square feet
(3/4") 146 135 444 426
Oriented strand board--square
feet (3/8") 686 650 2,032 1,844
Hardwood lumber--board feet 80 90 250 277
Engineered wood
products--lineal feet 47 39 123 105
Hardwood doors (thousands) 208 197 611 544
Total production volumes (millions)
- -----------------------------------
Logs--cubic feet 246 241 739 733
Softwood lumber--board feet 987 1,005 3,012 3,023
Softwood plywood and
veneer--square feet (3/8") 243 291 729 858
Composite panels--square feet
(3/4") 128 120 386 369
Oriented strand board--square
feet (3/8") 553 523 1,624 1,519
Hardwood lumber--board feet 84 92 258 267
Hardwood doors (thousands) 201 191 617 555
</TABLE>
Pulp, Paper and Packaging
Third quarter operating earnings of $67 million are lower than 1997 third
quarter earnings of $76 million, before the $21 million gain on the sale of
Saskatoon Chemicals, Ltd. Despite weakening markets, results improved over
the second quarter due to lower costs and improved operating performance.
Segment results are also impacted by the restructure of the North Pacific
Paper Corporation (NORPAC) newsprint facility from a fully consolidated
subsidiary to an equity affiliate in February 1998.
Net sales for the quarter were $1.1 billion, slightly lower in comparison
to 1997 third quarter and on par with 1998 second quarter sales. Weakening
markets due to lower market prices and high industry inventory levels
contributed to the decrease.
<PAGE>
Weyerhaeuser Company
- -19-
Third party sales and total production volumes for the major products in
this segment are as follows:
<TABLE>
<CAPTION>
Thirteen weeks Thirty-nine
ended weeks ended
------------------- -------------------
Third party sales volumes Sept. 27, Sept. 28, Sept. 27, Sept. 28,
(thousands) 1998 1997 1998 1997
- ------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Pulp--air-dry metric tons 481 494 1,499 1,463
Paper--tons 293 291 822 873
Containerboard--tons 76 86 245 289
Packaging--MSF 11,065 11,180 33,511 33,773
Newsprint--metric tons -- 166 62 499
Paperboard--tons 59 62 175 177
Recycling--tons 618 538 1,895 1,668
Total production volumes
(thousands)
- ------------------------
Pulp--air-dry metric tons 513 520 1,421 1,519
Paper--tons 275 283 852 840
Containerboard--tons 580 595 1,771 1,785
Packaging--MSF 11,535 11,666 35,084 35,286
Newsprint--metric tons -- 180 69 526
Paperboard--tons 60 64 175 173
Recycling--tons 942 864 2,868 2,717
</TABLE>
Real Estate and Related Assets
Third quarter operating earnings for this segment were $38 million,
compared to $24 million in third quarter 1997. Strong demand in the U.S.
housing market and increased home sales contributed to the quarter's
results.
Costs and Expenses
Weyerhaeuser's costs of products sold of $1.9 billion are down from 1997
third quarter costs of $2 billion, and are approximately the same as second
quarter 1998. Costs of products sold as a percentage of sales is 77% for
the current quarter, compared to 78% in third quarter 1997 and 80% in the
second quarter of this year. The lower cost of products sold as a
percentage of sales in comparison to 1997 are due to lower sales volumes
and the impact of the restructure of the NORPAC subsidiary. Lower year-to-
date depreciation, amortization and fee stumpage expense also are a result
of the NORPAC restructure. Non-cash charges of $10 million in the third
quarter of 1997 and $74 million year-to-date relate to the closure or
disposition of facilities.
Costs and operating expenses for the real estate and related assets segment
were higher than the 1997 third quarter due to increased sales activity.
Selling, general and administrative expenses for the year are down
significantly from the prior year as a result of the sale of the company's
mortgage banking subsidiary in May 1997.
Other income (expense) is an aggregation of both recurring and occasional
income or expense items and, as a result, fluctuates from period to period.
No single item is significant in relation to operating earnings in 1998.
In 1997, the following income items were significant in relation to
operating earnings:
. The gain of $21 million from the sale of Saskatoon Chemicals, Ltd.,
. The gain of $45 million from the sale of the mortgage banking
subsidiary, and
. Net special items of $l0 million income as a result of a favorable tax
decision and the sale of Shemin Nurseries.
Liquidity and Capital Resources
General
The company is committed to the maintenance of a sound, conservative
capital structure. This commitment is based upon two considerations: the
obligation to protect the underlying interests of its shareholders and
lenders and the desire to have access, at all times, to all major financial
markets.
<PAGE>
Weyerhaeuser Company
- -20-
The important elements of the policy governing the company's capital
structure are as follows:
. To view separately the capital structures of Weyerhaeuser Company,
Weyerhaeuser Real Estate Company and related subsidiaries, given the very
different nature of their assets and business activities. The amount of
debt and equity associated with the capital structure of each will
reflect the basic earnings capacity, real value and unique liquidity
characteristics of the assets dedicated to that business.
. The combination of maturing short-term debt and the structure of long-
term debt will be managed judiciously to minimize liquidity risk.
Operations
Net cash of $614 million was provided by Weyerhaeuser operations during the
first nine months of 1998 compared to $686 million in the same period a
year ago. In the current year, $682 million was provided by operations
before net changes in working capital, $153 million less than 1997.
Significant items included in 1998 were net earnings of $213 million, along
with depreciation, amortization and fee stumpage of $435 million and
deferred taxes of $106 million offset in part by a $42 million pension
credit. In 1997, net earnings of $192 million, including depreciation,
amortization and fee stumpage of $460 million, deferred taxes of $51
million, and $74 million in non-cash charges for the closure or disposition
of facilities, were the major contributors.
1998 working capital, net of the effects of the NORPAC equity
restructuring, used $68 million compared to a use of $149 million in 1997.
The material differences in the year-to-year reduction were a smaller net
increase in accounts receivable along with a lesser outlay of cash for
accounts payable.
Inventory levels, excluding the effects of inventory reduction from the
NORPAC equity restructuring, were down $30 million from the previous year-
end. The annualized product inventory turnover was 12 turns for the
quarter, a slight improvement from the previous quarter, but down from 12.6
turns in the comparable quarter a year ago.
For the principal business segments, earnings before interest expense and
income taxes plus non-cash charges for the first nine months of 1998 were:
. $710 million for timberlands and wood products compared to $758 million
in the same period a year ago. Operating earnings for this segment were
$18 million lower than last year. In addition, 1997 included a non-cash
charge of $25 million for the closure of two plywood facilities.
. $405 million for the pulp, paper and packaging segment compared to $393
million in 1997. Operating earnings in 1998 were $158 million, double
the 1997 earnings. 1997 non-cash charges included a charge of $49
million for facilities closures. In addition, the 1998 depreciation is
lower than 1997 due to NORPAC being included in the consolidated results
for only one month.
The real estate and related assets segment had a minimal net cash use of $5
million for operations through the end of nine months in the current year
compared to a use of $143 million for the same period of 1997. Net
earnings and other sources of funds provided before changes in working
capital for both periods were comparable. The 1997 net income included a
$45 million gain on the sale of the mortgage banking business. Cash used
for working capital was $31 million, significantly less than the $169
million used for this purpose last year. Reduced cash outflows for land
purchases and development and mortgage loan sales exceeding originations in
1998 were the primary reasons for this change from year to year.
Investing
Consolidated capital expenditures for the first nine months of 1998 were
$396 million compared to 1997 expenditures of $451 million. By segment,
the 1998 expenditures were $186 million for timberlands and wood products,
$192 million for pulp, paper and packaging and $18 million for corporate
and other. The company currently anticipates capital expenditures for the
year, excluding acquisitions, to be approximately $600 million; however,
this expenditure level could increase or decrease as a consequence of
future economic conditions.
The cash needed to meet capital and other Weyerhaeuser needs was generated
from internal cash flow, proceeds from the restructuring of its equity
position in NORPAC and repayment of intercompany advances from
subsidiaries, which are eliminated upon consolidation.
<PAGE>
Weyerhaeuser Company
- -21-
On a consolidated basis, proceeds from the sales of businesses totaled $269
million in 1997, including $65 million in the third quarter from the sale
of the Saskatoon chemical business.
During the 1997 third quarter, the company expended $190 million to acquire
51% of a forestry joint venture in New Zealand.
In the real estate and related assets segment, proceeds of $48 million from
the sale of mortgage-related financial instruments and intercompany
advances of $39 million accounted for most of the cash provided from
investing activities.
Financing
For the nine months ended September 27, 1998, Weyerhaeuser's long-term debt
position was reduced by $99 million. The company's debt to total capital
ratio at the end of September was 38%, comparable to the same date last
year and down slightly from the 40% reported at the end of June 1998.
Cash dividends of $239 million were paid in the first nine months of the
year, comparable to the year ago period.
During the current quarter, Weyerhaeuser received $190 million in dividends
from its real estate and financial services subsidiaries, which were
eliminated upon consolidation.
The company expended $42 million during the first quarter of 1998 to
purchase 924,000 shares of its common stock, which completed the 11 million
share repurchase program that commenced in 1995.
In the real estate and related assets segment, debt issuances of $154
million and an increase of $323 million in commercial paper borrowings were
the primary sources of cash used to pay down other third party debt of $429
million and fund the $190 million intercompany dividend to Weyerhaeuser.
Market Risk of Financial Instruments
The company has exposure to market risk including changes in interest rates
and currency exchange rates. To manage the volatility relating to these
exposures, the company has entered into limited derivative transactions to
manage well-defined interest rate and foreign exchange risks. The company
does not hold or issue derivative financial instruments for trading. The
majority of the company's derivative instruments are "pay fixed, receive
variable" interest rate swaps with highly rated counterparties in which the
interest payments are calculated on a notional amount. The notional
amounts do not represent amounts exchanged by the parties and, thus, are
not a measure of exposure to the company through its use of derivatives.
The company is exposed to credit-related gains or losses in the event of
non-performance by counterparties to these financial instruments; however,
the company does not expect any counterparties to fail to meet their
obligations. Interest rate swaps are described as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Dollar amounts Variable Rate at
in millions Sept. 27, 1998
- --------------------------------------------------------------------------
Notional Maturity Fixed Fair Value
Amount Date Rate % % Based On of Swap(1)
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 27 5/1/99 6.70 7.98 11.95% - Kenny index $ .2
75 12/6/99(2) 6.85 5.38 30 day LIBOR (5.2)
- --------------------------------------------------------------------------
$ 102 $(5.0)
- --------------------------------------------------------------------------
</TABLE>
(1) The amount of the obligation under each swap is based on the assumption
that such swap had terminated at the end of the fiscal period, and
provides for the netting of amounts payable by and to the counterparty.
In each case, the amount of such obligation is the net amount so
determined.
(2) Includes the value of an option, by the counterparty, to extend for two
years at maturity date.
At September 27, 1998, the company had a Canadian dollar forward contract
in the US dollar equivalent amount of $523 million with a contract rate of
1.5104 and an unrealized gain of approximately $1.5 million. This contract
hedged the purchase of the Dryden, Ontario, Canada uncoated freesheet mill
and related assets.
Environmental Matters
Effective May 18, 1998, two populations of steelhead trout were listed as
threatened species under the Endangered Species Act (ESA), one in the Lower
Columbia River and one in the Central Valley of California. On August 3,
1998, the National Marine Fisheries Service announced that Coho salmon that
spawn in Oregon coastal streams would be listed as a threatened species.
Regulatory actions taken by the states of Washington, Oregon and California
to protect habitat for these species
<PAGE>
Weyerhaeuser Company
- -22-
may, in the future, result in restrictions on timber harvests and could
affect forest management practices in such states, including company
timberlands in Southwest Washington and Southwest Oregon. Several additional
species have been proposed to be listed as threatened or endangered under
the ESA, including certain Chinook salmon, steelhead trout, chum salmon and
sockeye salmon in parts of Washington, Oregon and California. A consequence of
such future listings may be reductions in the sale and harvest of timber
from federal lands in the Pacific Northwest and California. Requirements
to protect habitat for threatened and endangered species on non-federal
timberlands have resulted, and may in the future result, in restrictions on
timber harvests on some non-federal timberlands in the Pacific Northwest,
including some timberlands of the company, could affect future harvest and
forest management practices in some of the company's timberlands, could
increase operating costs, and could affect timber supply and prices in some
regions. The company does not believe that such restrictions and effects
will have a significant effect on the company's total harvest of timber in
1998 or 1999, although they may have such an effect in the future.
An initiative on the November 1998 ballot in Oregon that, if approved by
the voters, would have substantially limited harvesting and silvicultural
practices on timberland in Oregon was defeated.
Year 2000
Weyerhaeuser, like all other companies using computers and microprocessors,
is faced with the task of addressing the Year 2000 problem before the end
of 1999. The Year 2000 challenge arises from the nearly universal practice
in the computer industry of using two digits rather than four digits to
designate the calendar year (e.g., DD/MM/YY). This can lead to incorrect
results when computer software performs arithmetic operations, comparisons
or data field sorting involving years later than 1999. The company has
conducted a comprehensive inventory to identify where this problem may
occur in its information technology, manufacturing and facilities systems.
The company is engaged in modifying or replacing its affected systems in a
manner that will minimize any detrimental effects on operations, with a
goal of correcting most of the affected systems that will have a critical
effect on its business operations by the end of 1998 and completing the
testing and verification of these systems during 1999. We expect that some
additional affected components will be corrected after the end of 1998, but
we anticipate that such components will be corrected before the date when
the component's date sensitivity could cause a malfunction.
While it is difficult, at present, to fully quantify the overall cost of
this work, the company estimates that the overall cost of remediation could
approach $100 million over the 1998-1999 time frame. The company presently
believes that it will not have a material effect on the company's current
financial position or liquidity; however, in any given future reporting
period such costs could have a material effect on results of operations.
Through the third quarter of 1998, the company has incurred $22 million of
remediation costs and expects substantial additional costs to be incurred
in the fourth quarter of 1998 and the first quarter of 1999. Depending on
whether suppliers, customers and other entities with which the company does
business are able to successfully address the Year 2000 issue, the
company's results of operations could be materially adversely affected in
any given future reporting period during which such a Year 2000 event
occurred. As a result, the company is communicating with such entities to
determine their state of readiness. The company is also developing
contingency plans to allow primary operations of the company to continue if
the company's significant systems or such entities are disrupted by the
Year 2000 problem. The company currently expects that its contingency
plans will be developed by the end of the second quarter of 1999.
These estimates and conclusions contain forward-looking statements that are
subject to risks and uncertainties that could cause actual results to
differ materially. The company's current estimates of the amount of time
and the costs necessary to address the Year 2000 problem are based on the
facts and circumstances existing at this time. The estimates were derived
using multiple assumptions of future events, including the continued
availability of certain resources, implementation success and other
factors. New developments may occur that could affect the company's
estimates, such as the amount of planning and modification needed to
achieve full resolution of the Year 2000 problem, the availability and cost
of resources, the company's ability to discover and correct all Year 2000
sensitive computer code and equipment and the ability of suppliers,
customers and other entities to bring their systems into compliance.
Subsequent Event
On September 30, 1998, the company completed the purchase of the Dryden,
Ontario, Canada uncoated freesheet mill and related assets from Bowater
Inc. for approximately US$520 million.
<PAGE>
Weyerhaeuser Company
- -23-
The Dryden facility has the capacity to produce 380,000 short tons of fine
paper per year and a small amount of bleached softwood market pulp. Two
lumber mills, with 200 million board feet of capacity, and timber licenses
comprising 1.8 million hectares (4.35 million acres) are also part of the
purchase.
Contingencies
The company is a party to legal proceedings and environmental matters
generally incidental to its business. Although the final outcome of any
legal proceeding or environmental matter is subject to a great many
variables and cannot be predicted with any degree of certainty, the company
presently believes that the ultimate outcome resulting from these
proceedings and matters would not have a material effect on the company's
current financial position, liquidity or results of operations; however, in
any given future reporting period such proceedings or matters could have a
material effect on results of operations.
Part II. Other Information
Item 1. Legal Proceedings
The company conducted a review of its 10 major pulp and paper facilities to
evaluate the facilities' compliance with federal Prevention of Significant
Deterioration (PSD) regulations. The results of the reviews were disclosed
to seven state agencies and the Environmental Protection Agency (EPA)
during 1994 and 1995. A final decision is expected to be made by the Lane
County Oregon Regional Air Pollution Control Authority concerning alleged
PSD and permit violations at the company's Springfield, Oregon,
containerboard manufacturing facility upon issuance of the facility's Title
V permit in 1999.
In June 1998, a lawsuit was filed against the company in Superior Court,
San Francisco County, California, on behalf of a purported class of
individuals and entities that own property in the United States on which
exterior hardboard siding manufactured by the company has been installed
since 1981. The action alleges the company has manufactured and
distributed defective hardboard siding, breached express warranties and
consumer protection statutes and failed to disclose to consumers the
alleged defective nature of its hardboard siding. The action seeks
compensatory and punitive damages, costs and reasonable attorney fees. In
September 1998, a lawsuit was filed against the company in Superior Court,
King County, Washington, on behalf of all persons who own structures with
exterior hardboard siding manufactured by the company. The complaint
alleges the company manufactured defective hardboard siding and engaged in
unfair trade practices. The action seeks compensatory damages, punitive or
treble damages, injunctive relief prohibiting the company from selling
hardboard siding or settling consumer claims under the company's existing
warranty practices, attorney fees and the costs of the suit. The company is
a defendant in approximately twenty-one other hardboard siding cases, one
of which purports to be a state-wide class action on behalf of purchasers
of single or multi-family residences in Iowa that contain the company's
hardboard siding.
The company is also a party to various proceedings relating to the clean-up
of hazardous waste sites under the Comprehensive Environmental Response
Compensation and Liability Act, commonly known as "Superfund," and similar
state laws. The EPA and/or various state agencies have notified the
company that it may be a potentially responsible party with respect to
other hazardous waste sites as to which no proceedings have been instituted
against the company. The company is also a party to other legal
proceedings generally incidental to its business. Although the final
outcome of any legal proceeding or environmental matter is subject to a
great many variables and cannot be predicted with any degree of certainty,
the company presently believes that any ultimate outcome resulting from the
proceedings or matters discussed herein, or all of them combined, would not
have a material effect on the company's current financial position,
liquidity or results of operations; however, in any given future reporting
period, such proceedings or matters could have a material effect on results
of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) None.
(b) The registrant filed reports on Form 8-K dated January 23,
April 16, June 16, July 14, and October 13, 1998, reporting
information under Item 5, Other Events.
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