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 twenty-six weeks ended June 28, 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 July 31, 1998 was 198,992,921 common shares ($1.25 par
value).
<PAGE>
Weyerhaeuser Company
- -2-
WEYERHAEUSER COMPANY AND SUBSIDIARIES
Index to Form 10-Q Filing
For the twenty-six weeks ended June 28, 1998
<TABLE>
<CAPTION>
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 Condition and Results of
Operations 17-22
Part II. Other Information
Item 1. Legal Proceedings 22-23
Item 2. Changes in Securities (not applicable)
Item 3. Defaults upon Senior Securities (not applicable)
Item 4. Submission of Matters to a Vote of
Security Holders 23
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 twenty-six
week period ending June 28, 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
August 7, 1998
<PAGE>
Weyerhaeuser Company
- -3-
<TABLE>
<CAPTION>
WEYERHAEUSER COMPANY AND SUBSIDIARIES
------------
CONSOLIDATED EARNINGS
For the periods ended
June 28, 1998 and June 29, 1997
(Dollar amounts in millions except per share figures)
(Unaudited)
Thirteen weeks Twenty-six weeks
ended ended
------------------- ------------------
June 28, June 29, June 28, June 29,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales and revenues:
Weyerhaeuser $ 2,429 $ 2,680 $ 4,767 $ 5,074
Real estate and related assets 247 229 512 443
-------- -------- -------- --------
Total net sales and revenues 2,676 2,909 5,279 5,517
-------- -------- -------- --------
Costs and expenses:
Weyerhaeuser:
Costs of products sold 1,939 2,061 3,753 3,949
Depreciation, amortization
and fee stumpage 142 155 290 316
Selling, general and
administrative expenses 154 195 318 347
Research and development
expenses 15 15 29 28
Taxes other than payroll and
income taxes 32 38 66 75
Charge for closure or
disposition of facilities -- 15 -- 64
-------- -------- -------- --------
2,282 2,479 4,456 4,779
-------- -------- -------- --------
Real estate and related assets:
Costs and operating expenses 214 187 439 340
Depreciation and amortization 2 4 3 8
Selling, general and
administrative expenses 14 25 27 70
Taxes other than payroll and
income taxes 3 2 5 4
-------- -------- -------- --------
233 218 474 422
-------- -------- -------- --------
Total costs and expenses 2,515 2,697 4,930 5,201
-------- -------- -------- --------
Operating income 161 212 349 316
Interest expense and other:
Weyerhaeuser:
Interest expense incurred 65 69 132 138
Less interest capitalized 1 4 2 8
Other income (expense), net 7 (14) 19 (16)
Real estate and related assets:
Interest expense incurred 17 28 38 61
Less interest capitalized 15 17 30 35
Other income, net 7 50 14 61
-------- -------- -------- --------
Earnings before income taxes 109 172 244 205
Income taxes (Note 4) 40 63 90 75
-------- -------- -------- --------
Net earnings $ 69 $ 109 $ 154 $ 130
======== ======== ======== ========
Basic net earnings per share $ 0.34 $ 0.56 $ 0.77 $ 0.66
Diluted net earnings per share $ 0.34 $ 0.55 $ 0.77 $ 0.65
Average shares
outstanding (thousands) 198,832 198,459 198,832 198,459
Dilutive effect of stock options 695 518 584 471
-------- -------- -------- --------
Average shares outstanding
assuming dilution 199,527 198,977 199,416 198,930
======== ======== ======== ========
Dividends paid per share $ .40 $ .40 $ .80 $ .80
======== ======== ======== ========
</TABLE>
See Accompanying Notes to Financial Statements
<PAGE>
Weyerhaeuser Company
- -4-
<TABLE>
<CAPTION>
WEYERHAEUSER COMPANY AND SUBSIDIARIES
------------
CONSOLIDATED BALANCE SHEET
June 28, 1998 and December 28, 1997
(Dollar amounts in millions)
June 28, Dec. 28,
1998 1997
---------- ---------
(Unaudited)
<S> <C> <C>
Assets
- ------
Weyerhaeuser
Current assets:
Cash and short-term investments (Note 1) $ 35 $ 100
Receivables, less allowances 946 913
Inventories (Note 5) 947 983
Prepaid expenses 336 298
---------- ---------
Total current assets 2,264 2,294
Property and equipment (Notes 6 and 10) 6,256 6,974
Construction in progress 282 313
Timber and timberlands at cost, less fee stumpage
charged to disposals 1,020 996
Investments in and advances to equity affiliates
(Notes 3 and 10) 429 249
Other assets and deferred charges 293 245
---------- ---------
10,544 11,071
---------- ---------
Real estate and related assets
Cash and short-term investments, including
restricted deposits 6 22
Receivables, less discounts and allowances 58 62
Mortgage-related financial instruments, less
discounts and allowances 168 173
Real estate in process of development and for sale 589 593
Land being processed for development 869 845
Investments in and advances to joint ventures and
limited partnerships, less reserves (Note 3) 112 116
Other assets 151 193
---------- ---------
1,953 2,004
---------- ---------
Total assets $ 12,497 $ 13,075
========= ==========
</TABLE>
See Accompanying Notes to Financial Statements
<PAGE>
Weyerhaeuser Company
- -5-
<TABLE>
<CAPTION>
June 28, Dec. 28,
1998 1997
---------- ---------
(Unaudited)
<S> <C> <C>
Liabilities and shareholders' interest
- --------------------------------------
Weyerhaeuser
Current liabilities:
Notes payable $ 9 $ 25
Current maturities of long-term debt 82 17
Accounts payable (Note 1) 671 694
Accrued liabilities (Note 7) 635 648
---------- ---------
Total current liabilities 1,397 1,384
Long-term debt (Note 9) 3,456 3,483
Deferred income taxes (Note 10) 1,321 1,418
Deferred pension and other liabilities 475 498
Minority interest in subsidiaries (Note 10) -- 121
Commitments and contingencies (Note 12)
---------- ---------
6,649 6,904
---------- ---------
Real estate and related assets
Notes payable and commercial paper 340 228
Long-term debt (Note 9) 698 1,032
Other liabilities 216 262
Commitments and contingencies (Note 12)
---------- ---------
1,254 1,522
---------- ---------
Total liabilities 7,903 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 4,391 4,397
Cumulative other comprehensive (expense) (Note 2):
Foreign currency translation adjustment (148) (123)
Treasury common shares, at cost: 7,080,594 and
6,586,939 (313) (290)
---------- ---------
Total shareholders' interest 4,594 4,649
---------- ---------
Total liabilities and shareholders' interest $ 12,497 $ 13,075
========== =========
</TABLE>
<PAGE>
Weyerhaeuser Company
- -6-
<TABLE>
<CAPTION>
WEYERHAEUSER COMPANY AND SUBSIDIARIES
------------
CONSOLIDATED STATEMENT OF CASH FLOWS
For the twenty-six week periods ended June 28, 1998 and June 29, 1997
(Dollar amounts in millions)
(Unaudited)
Consolidated
------------------
June 28, June 29,
1998 1997
-------- --------
<S> <C> <C>
Cash provided by (used for) operations:
Net earnings $ 154 $ 130
Non-cash charges (credits) to income:
Depreciation, amortization and fee stumpage 293 324
Deferred income taxes, net 63 42
Pension credits (21) --
Charge for closure or disposition of facilities -- 64
Decrease (increase) in working capital:
Accounts receivable (72) (100)
Inventories, real estate and land (9) (59)
Prepaid expenses (37) (12)
Mortgage-related financial instruments 2 (74)
Accounts payable and accrued liabilities (46) (108)
(Gain) loss on disposition of assets 1 10
(Gain) loss on disposition of a business -- (37)
Other (49) 15
-------- --------
Net cash provided by (used for) operations 279 195
-------- --------
Cash provided by (used for) investing activities:
Property and equipment (214) (252)
Timber and timberlands (41) (52)
Investments in and advances to equity affiliates 16 14
Proceeds from sale of:
Property and equipment 28 15
Businesses -- 204
Mortgage-related financial instruments 34 15
Restructuring the ownership of a subsidiary (Note 10) 218 --
Intercompany advances -- --
Other (3) 3
-------- --------
Net cash provided by (used for) investing activities 38 (53)
-------- --------
Cash provided by (used for) financing activities:
Issuances of debt 8 14
Sale of industrial revenue bonds 48 38
Notes and commercial paper borrowings, net 153 105
Cash dividends (160) (158)
Payments on debt (416) (187)
Purchase of treasury common shares (42) (16)
Exercise of stock options 18 31
Other (7) (1)
-------- --------
Net cash provided by (used for) financing activities (398) (174)
-------- --------
Net increase (decrease) in cash and short-term
investments (81) (32)
Cash and short-term investments at beginning of year 122 71
-------- --------
Cash and short-term investments at end of period $ 41 $ 39
======== ========
Cash paid (received) during the period for:
Interest, net of amount capitalized $ 148 $ 162
======== ========
Income taxes $ 61 $ 14
======== ========
</TABLE>
See Accompanying Notes to Financial Statements
<PAGE>
Weyerhaeuser Company
- -7-
<TABLE>
<CAPTION>
Real Estate and
Weyerhaeuser Related Assets
- ------------------ -----------------
June 28, June 29, June 28, June 29,
1998 1997 1998 1997
- -------- -------- -------- -------
<C> <C> <C> <C>
$ 128 $ 94 $ 26 $ 36
290 316 3 8
55 28 8 14
(20) -- (1) --
-- 64 -- --
(64) (101) (8) 1
6 50 (15) (109)
(37) (12) -- --
-- -- 2 (74)
(11) (124) (35) 16
10 10 (9) --
-- 8 -- (45)
(34) (15) (15) 30
- -------- -------- -------- --------
323 318 (44) (123)
- -------- -------- -------- --------
(213) (251) (1) (1)
(41) (52) -- --
-- -- 16 14
9 14 19 1
-- 12 -- 192
-- -- 34 15
218 -- -- --
(190) 200 190 (200)
(2) 5 (1) (2)
- -------- -------- -------- --------
(219) (72) 257 19
- -------- -------- -------- --------
4 5 4 9
48 38 -- --
48 (83) 105 188
(160) (158) -- --
(78) (77) (338) (110)
(42) (16) -- --
18 31 -- --
(7) (1) -- --
- -------- -------- -------- --------
(169) (261) (229) 87
- -------- -------- -------- --------
(65) (15) (16) (17)
100 33 22 38
- -------- -------- -------- --------
$ 35 $ 18 $ 6 $ 21
======== ======== ======== ========
$ 136 $ 134 $ 12 $ 28
======== ======== ======== ========
$ 22 $ 52 $ 39 $ (38)
======== ======== ======== ========
</TABLE>
<PAGE>
Weyerhaeuser Company
- -8-
This page intentionally left blank.
<PAGE>
Weyerhaeuser Company
- -9-
WEYERHAEUSER COMPANY AND SUBSIDIARIES
----------------
NOTES TO FINANCIAL STATEMENTS
For the twenty-six week periods ended June 28, 1998 and June 29, 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
5.1 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, the company has 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. Comprehensive income
describes the total of all components of comprehensive income, including
net income. Other comprehensive income refers to revenues, expenses, gains
and losses that under generally accepted accounting principles are included
in comprehensive income, but excluded from net income. 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
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 believes that the future adoption of this SOP
will have a significant impact on its results of operations in the
period in which it is implemented; however, it cannot quantify the
impact at this time.
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 604,011 shares at $56.78 per share, 2,000 shares at
$60.44 per share, and 150,000 shares at $53.06 per share were outstanding
during the twenty-six weeks ending June 28, 1998. Options to purchase
1,087,811 shares at $48.13 per share were outstanding during the twenty-six
weeks ending June 29, 1997. These options were not included in the
computation of diluted earnings per share for the respective periods
because the option exercise prices were greater than the average market
prices of common shares during those periods.
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
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 $102
million and $492 million at June 28, 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 the majority of domestic raw materials, in process
and finished goods inventories. LIFO inventories were $268 million and
$246 million at June 28, 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 $230 million and $234 million greater
at June 28, 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 $108 million and $185 million at June 28, 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
- -12-
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
The company's comprehensive income is as follows:
<TABLE>
<CAPTION>
Thirteen weeks Twenty-six
ended weeks ended
------------------ ------------------
June 28, June 29, June 28, June 29,
Dollar amounts in millions 1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 69 $ 109 $ 154 $ 130
-------- -------- -------- --------
Other comprehensive (expense)
Foreign currency translation (44) -- (39) (13)
Income tax benefit 16 -- 14 5
-------- -------- -------- --------
Other comprehensive (expense),
net of income tax (28) -- (25) (8)
-------- -------- -------- --------
Comprehensive income $ 41 $ 109 $ 129 $ 122
======== ======== ======== ========
</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>
June 28, Dec. 28,
Dollar amounts in millions 1998 1997
-------- --------
<S> <C> <C>
Current assets $ 164 $ 94
Non-current assets 1,311 678
Current liabilities 66 56
Non-current liabilities 736 420
</TABLE>
<TABLE>
<CAPTION>
Twenty-six weeks
ended
------------------
June 28, June 29,
1998 1997
-------- --------
<S> <C> <C>
Net sales and revenues $ 353 $ 92
Operating income 60 3
Net income (loss) 31 (11)
</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>
June 28, Dec. 28,
Dollar amounts in millions 1998 1997
-------- --------
<S> <C> <C>
Current assets $ 1,757 $ 1,689
Non-current assets 254 284
Current liabilities 1,359 1,306
Non-current liabilities 124 145
</TABLE>
<TABLE>
<CAPTION>
Twenty-six weeks
ended
------------------
June 28, June 29,
1998 1997
-------- --------
<S> <C> <C>
Net sales and revenues $ 94 $ 89
Operating income 45 44
Net income 29 27
</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: Twenty-six weeks
ended
------------------
June 28, June 29,
Dollar amounts in millions 1998 1997
-------- --------
<S> <C> <C>
Federal:
Current $ 19 $ 17
Deferred 58 39
-------- --------
77 56
-------- --------
State:
Current 4 2
Deferred 2 2
-------- --------
6 4
-------- --------
Foreign:
Current 4 14
Deferred 3 1
-------- --------
7 15
-------- --------
Total $ 90 $ 75
======== ========
</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 June 28, 1998, and June 29, 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 twenty-six week
periods ended June 28, 1998, and June 29, 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>
June 28, Dec. 28,
Dollar amounts in millions 1998 1997
-------- --------
<S> <C> <C>
Logs and chips $ 96 $ 103
Lumber, plywood and panels 169 154
Pulp, newsprint and paper 149 185
Containerboard, paperboard and packaging 117 107
Other products 151 152
Materials and supplies 265 282
-------- --------
$ 947 $ 983
======== ========
</TABLE>
<PAGE>
Weyerhaeuser Company
- -15-
Note 6: Property and Equipment
<TABLE>
<CAPTION>
June 28, Dec. 28,
Dollar amounts in millions 1998 1997
-------- --------
<S> <C> <C>
Property and equipment, at cost:
Land $ 158 $ 158
Buildings and improvements 1,613 1,721
Machinery and equipment 9,270 9,954
Rail and truck roads and other 595 599
-------- --------
11,636 12,432
Less allowance for depreciation
and amortization 5,380 5,458
-------- --------
$ 6,256 $ 6,974
======== ========
</TABLE>
Note 7: Accrued Liabilities
<TABLE>
<CAPTION>
June 28, Dec. 28,
Dollar amounts in millions 1998 1997
-------- --------
<S> <C> <C>
Payroll - wages and salaries, incentive awards,
retirement and vacation pay $ 255 $ 268
Taxes - social security and real and personal property 57 53
Interest 85 91
Income taxes 38 42
Other 200 194
-------- --------
$ 635 $ 648
======== ========
</TABLE>
Note 8: Short-Term Debt
Lines of Credit
The company has short-term bank credit lines that provide for borrowings of
up to the total amount of $425 million, all of which could be availed of by
the company and Weyerhaeuser Real Estate Company (WRECO) at June 28, 1998,
and December 28, 1997. No portion of these lines has been availed of by
the company or WRECO at June 28, 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/term credit facility agreement effective June 1998.
$75 million was outstanding under this facility at December 28, 1997.
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 $242 million
and $194 million as of June 28, 1998, and December 28, 1997, respectively.
No portion of these lines has been availed of by the company, WRECO or WFS
at June 28, 1998, and December 28, 1997, except as noted.
The company's compensating balance agreements were not significant.
<PAGE>
Weyerhaeuser Company
- -16-
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 7,316,448 shares at June
28, 1998, and 5,848,000 shares at December 28, 1997.
Note 12: Commitments and Contingencies
The company's capital expenditures, excluding acquisitions, were $255
million year-to-date in 1998 and $656 million for the year 1997. They are
expected to be approximately $750 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 Twenty-six weeks
ended ended
----------------- -----------------
June 28, June 29, June 28, June 29,
Dollar amounts in millions 1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales and revenues:
Timberlands and wood products $ 1,313 $ 1,505 $ 2,494 $ 2,756
Pulp, paper and packaging 1,081 1,144 2,201 2,250
Real estate and related assets 247 229 512 443
Corporate and other 35 31 72 68
-------- -------- -------- --------
$ 2,676 $ 2,909 $ 5,279 $ 5,517
======== ======== ======== ========
Earnings before interest expense
and income taxes:
Timberlands and wood products (1) $ 172 $ 211 $ 345 $ 382
Pulp, paper and packaging (2) 39 22 91 (21)
Real estate and related assets (3) (4) 16 50 41 56
Corporate and other (5) (54) (46) (103) (82)
-------- -------- -------- --------
$ 173 $ 237 $ 374 $ 335
======== ======== ======== ========
</TABLE>
(1) 1997 second quarter and year-to-date results include a charge of
$15 million associated with the closure of the Plymouth, North Carolina
plywood facility.
(2) 1997 year-to-date results include a charge of $49 million for the
consolidation, closure or disposition of certain recycling facilities
and the closure of the Longview, Washington corrugated medium machine.
(3) 1997 second quarter and 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 $11 million for thirteen
weeks and $11 million and $26 million for twenty-six 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 second quarter were $69 million, or 34
cents basic and diluted earnings per common share, compared with 1997
second quarter earnings of $109 million, or 56 cents basic and 55 cents
diluted earnings per common share. Second quarter results include 7 cents
per common share income due to a credit from the performance of the
company's pension fund. The 1997 quarterly results include a net after-tax
special income item of $19 million, or 9 cents per common share. This
includes the gain on the sale of the company's mortgage banking subsidiary,
offset by the costs associated with the closure of the Plymouth, NC plywood
mill.
Consolidated net sales and revenues for the quarter were $2.7 billion,
which is 8% lower than the $2.9 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 $154 million, or 77 cents basic and diluted
earnings per common share, in contrast to the $130 million, or 66 cents
basic and 65 cents diluted earnings per common share reported in 1997.
1997 results include a net charge of $6 million, or 3 cents per common
share, for the effect of special items year-to-date. In addition to the
special items recognized in the second quarter, the 1997 year-to-date
results included losses from restructuring the recycling business, the
permanent closure of a corrugated medium machine and the sale of the
wholesale nursery business. These losses were offset, in part, by interest
income from a favorable federal income tax decision.
<PAGE>
Weyerhaeuser Company
- -18-
Net sales and revenues to date are $5.3 billion, a 4% decrease from 1997
results. The weakening of the Asian markets plus increased competition
from exports contributed to the decrease.
Timberlands and Wood Products
Operating earnings for the quarter were $172 million, which is down from
the $211 million reported in 1997. Last year's earnings include a $15
million charge associated with closing the Plymouth, NC plywood mill.
Net sales were $1.3 billion for the quarter, lower than 1997 second quarter
sales of $1.5 billion and slightly higher than first quarter sales of $1.2
billion. Increased prices for oriented strand board and panel products,
plus strong domestic log sales, 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 Twenty-six weeks
ended ended
------------------- ------------------
Third party sales volumes June 28, June 29, June 28, June 29,
(millions) 1998 1997 1998 1997
- ------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Raw materials--cubic feet 143 150 281 296
Softwood lumber--board feet 1,294 1,320 2,425 2,456
Softwood plywood and
veneer--square feet (3/8") 478 556 914 1,045
Composite panels--square feet
(3/4") 153 148 298 291
Oriented strand board--square
feet (3/8") 706 632 1,346 1,194
Hardwood lumber--board feet 84 97 170 187
Engineered wood products--
lineal feet 44 39 76 66
Hardwood doors (thousands) 215 179 403 347
Total production volumes
(millions)
- -------------------------
Logs--cubic feet 218 217 493 492
Softwood lumber--board feet 1,045 1,031 2,025 2,018
Softwood plywood and
veneer--square feet (3/8") 249 288 486 567
Composite panels--square feet
(3/4") 131 126 258 249
Oriented strand board--square
feet (3/8") 538 510 1,071 996
Hardwood lumber--board feet 87 90 174 175
Hardwood doors (thousands) 207 182 416 364
</TABLE>
Pulp, Paper and Packaging
Second quarter operating earnings of $39 million compare favorably to 1997
second quarter earnings of $22 million, but are lower than first quarter's
earnings of $52 million. Unsettled market conditions, weak prices
worldwide in paper and newsprint, and costs associated with maintenance and
market-related downtime contributed to second quarter 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; virtually unchanged in
comparison to 1997 second quarter and 1998 first quarter sales. Lower
paper prices and the impact of the NORPAC restructure were offset by higher
prices and volumes for corrugated boxes and market pulp.
Third party sales and total production volumes for the major products in
this segment are as follows:
<PAGE>
Weyerhaeuser Company
- -19-
<TABLE>
<CAPTION>
Thirteen weeks Twenty-six weeks
ended ended
------------------- ------------------
Third party sales volumes June 28, June 29, June 28, June 29,
(thousands) 1998 1997 1998 1997
- ------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Pulp--air-dry metric tons 498 515 1,018 969
Paper--tons 263 278 529 582
Containerboard--tons 88 104 169 203
Packaging--MSF 11,519 11,640 22,446 22,593
Newsprint--metric tons -- 173 62 333
Paperboard--tons 57 56 116 115
Recycling--tons 661 580 1,277 1,130
Total production volumes
(thousands)
- -------------------------
Pulp--air-dry metric tons 413 479 908 999
Paper--tons 288 273 577 557
Containerboard--tons 579 588 1,191 1,190
Packaging--MSF 12,018 12,155 23,549 23,620
Newsprint--metric tons -- 173 69 346
Paperboard--tons 51 60 115 109
Recycling--tons 972 924 1,926 1,853
</TABLE>
Real Estate and Related Assets
Second quarter operating earnings for this segment were $16 million,
compared to $50 million in second quarter 1997. Last year's earnings
include a $45 million gain on the sale of Weyerhaeuser Mortgage Company.
Strong demand in the U.S. housing market and increased home sales
contributed to the current quarter's results.
Costs and Expenses
Weyerhaeuser's costs of products sold of $1.9 billion is down from 1997
second quarter costs of $2.1 billion, but is higher than first quarter
1998. Costs of products sold as a percentage of sales is 80% for the
current quarter, compared to 77% in second quarter 1997 and 78% in the
first quarter of this year. The increase from quarter to quarter relates
to costs incurred as downtime was taken in some product lines. Lower costs
in comparison to 1997 are due to lower sales volumes and the impact
attributable to the restructure of the NORPAC subsidiary. Decreases in
depreciation, amortization and fee stumpage result from the NORPAC
restructure. Credits received from the performance of the company's
pension fund also reduced 1998 quarterly costs of products sold and
selling, general and administrative expenses. Non-cash charges of $15
million in the second quarter of 1997 relate to the closure of the Plymouth
plywood mill.
Costs and operating expenses for the real estate and related assets segment
were higher than the 1997 second quarter due to increased sales activity.
Selling, general and administrative expenses are down 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 $45 million from the sale of the mortgage banking
subsidiary, and
. Net special items of $10 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
Weyerhaeuser's net cash provided by operations was $323 million in the 1998
first half; comparable to the $318 million provided in the same period of
1997.
Current year's funds, before net changes in working capital, were provided
by net income of $128 million along with $290 million from depreciation,
amortization and fee stumpage, $55 million from deferred income taxes,
offset in part by a pension credit of $20 million. 1998 year-to-date
working capital, net of the effects of the NORPAC equity restructuring,
used funds of $106 million, primarily for increases of $64 million in
accounts receivable and $37 million in prepaid expenses.
For the quarter, the inventory turnover rate increased to 11.8 turns as
inventories, principally logs and pulp, decreased by $106 million. The
inventory turnover was down slightly from the 12.5 turns in the second
quarter of 1997; but was an improvement over the 10.7 turns in the 1998
first quarter.
For the same period of 1997, working capital funding requirements were $187
million, principally from increases of $101 million in accounts receivable,
and a reduction of $124 million in accounts payable and accrued
liabilities, offset in part by a decrease of $50 million in inventories.
For the principal segments, earnings before interest expense and income
taxes plus non-cash charges for the 1998 first half were:
. $461 million, for timberlands and wood products compared to $515
million in 1997 as a result of lower operating earnings for this
segment in 1998. The 1997 results included a non-cash charge of $15
million for a facility closure.
. $256 million for pulp, paper and packaging compared to $218 million in
the prior year. This difference is attributable to: (1) an operating
profit of $91 million this year compared to an operating loss of $21
million last year, (2) a non-cash charge of $49 million in 1997 for
facility closures, and (3) reduced depreciation expense in 1998 due to
NORPAC being included in consolidated results for only one month.
The net cash used by operations in the real estate and related assets
segment year to date was $44 million. Cash of $56 million was used for
working capital. An increase in real estate inventories and reductions in
accounts payable and accrued liabilities, were offset in part with net
earnings of $26 million. In the previous year, cash used for operations
was $123 million with working capital requirements of $166 million,
primarily for real estate and land purchases and development and a net
increase in mortgages held for sale as originations exceeded sales.
Investing
Year-to-date consolidated capital expenditures were $255 million, down from
the $304 million expended in the same period of 1997. The 1998 spending by
segment was $127 million for timberlands and wood products, $121 million
for the pulp, paper and packaging segment and $7 million for corporate and
other. The company currently anticipates capital expenditures, excluding
acquisitions, to approximate $750 million for the year. However this
expenditure level could increase or decrease as a consequence of future
economic conditions.
The cash needed to meet these and other company needs is generated from
internal cash flow and short-term borrowing. The company also received
proceeds of $218 million from the restructuring of its equity position in
NORPAC.
<PAGE>
Weyerhaeuser Company
- -21-
Financing
The company's debt position at the end of the second quarter increased by
$22 million from the end of 1997. Cash provided from the sale of
industrial revenue bonds and additional commercial paper borrowings was
essentially offset by payments on existing debt. The company's debt to
total capital ratio was 40.5% at the end of the quarter, up from 38.6% a
year earlier.
The real estate and related assets segment applied cash inflows from
intercompany and commercial paper borrowings to help in the $338 million
long-term debt reduction.
During the first half of 1998, the company paid $160 million in cash
dividends; compared to $158 million paid in the 1997 first half.
The company expended $42 million to purchase 924 thousand shares of its
common stock during the 1998 first quarter to complete the 11 million-share
repurchase program that commenced in 1995.
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>
- -------------------------------------------------------------------------
Variable Rate at
Dollar amount in millions June 28, 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 8.50 11.95% - Kenny index $ .4
75 12/6/99 (2) 6.85 5.66 30 day LIBOR (2.2)
- -------------------------------------------------------------------------
$ 102 $ (1.8)
- -------------------------------------------------------------------------
</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.
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 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. 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 federal timberlands 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.
A ballot initiative has been certified for the November election in Oregon,
that, if approved by the voters, would substantially limit harvesting and
silvicultural practices on timberland in Oregon, including the company's
approximately 600 thousand acres of timberland in that state. If the
initiative passes and is upheld by the courts, it would have a material
adverse affect on the company's Oregon timber operations and could effect
timber product markets throughout the West.
<PAGE>
Weyerhaeuser Company
- -22-
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
embarked on a comprehensive approach to identify where this problem may
occur in its information technology, manufacturing and facilities systems.
The company plans to modify or replace its affected systems in a manner
that will minimize any detrimental effects on operations, with a goal of
correcting affected systems that will have a critical effect on its
business operations by the end of 1998. 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 second quarter of
1998, the company has incurred $9.3 million of remediation costs and
expects substantial additional costs to be incurred in the third and fourth
quarters of 1998.
Subsequent Event
On August 4, 1998, the company announced the signing of a definitive
agreement to purchase the Dryden, Ontario, Canada uncoated freesheet mill
and related assets from Bowater Inc. for approximately US$520 million. The
company expects to complete the purchase on or before November 30, 1998.
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 November 1996, an action was filed against the company in Superior Court
for King County, Washington, on behalf of a purported class of all
individuals and entities that own property in the United States on which
exterior hardboard siding manufactured by the company has been installed
since 1980. The action alleges the company has manufactured and
distributed defective hardboard siding and has breached express warranties
and consumer protection statutes in its sale of hardboard siding. The
action seeks compensatory damages, including prejudgment interest, and
seeks damages for the cost of replacing siding that rots subsequent to the
entry of any judgment. In January 1997, an action was filed, also in
Superior Court for King County, Washington, on behalf of a purported class
of all individuals, proprietorships, partnerships, corporations, and other
business entities in the United States on whose homes, condominiums,
apartment complexes or commercial buildings hardboard siding manufactured
by the company has been installed. The action alleges the company has
breached express and implied warranties in its sale of hardboard siding and
also has violated the Consumer Protection
<PAGE>
Weyerhaeuser Company
- -23-
Part II
- -----------------------------------------------------------------------------
Item 1. Legal Proceedings (continued)
- --------------------------------------
Act of the State of Washington. The action seeks damages, prejudgment
interest, costs and reasonable attorney fees. In December 1997, the two
cases were consolidated for the purpose of discovery and resolution of the
class certification issue. Also, in December 1997, the plaintiffs in the
first of the two cases filed a motion to change the trial date and for
leave to move for class certification. In January 1998, the court denied
this motion. The first case was settled for approximately $11 thousand in
March 1998. The second case was settled for approximately $4 thousand in
April 1998. In June 1998, a lawsuit was filed against the company in San
Francisco County Superior Court 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. The
company is a defendant in approximately eighteen other hardboard siding
cases, two of which purport to be state-wide class actions on behalf of
purchasers of single- or multi-family residences that contain the company's
hardboard siding, one in Iowa and one in Nebraska. Class certification was
denied in the Nebraska case in May 1998.
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 4. Submission of Matters to a Vote of Security Holders
Matters voted upon and votes cast at the annual meeting of shareholders of
Weyerhaeuser Company held on Tuesday, April 21, 1998 were:
. The reelection of William D. Ruckelshaus, Richard H. Sinkfield, and
Philip M. Hawley and the election of Steven R. Rogel and James N.
Sullivan to the board of directors.
<TABLE>
<CAPTION>
For Withheld
----------- ---------
<S> <C> <C>
Hawley 169,867,312 2,063,439
Rogel 169,947,838 1,982,913
Ruckelshaus 169,914,747 2,016,004
Sinkfield 169,920,373 2,010,378
Sullivan 169,942,001 1,988,750
</TABLE>
<TABLE>
<CAPTION>
For Against Abstain
----------- --------- ---------
<S> <C> <C> <C>
. Board of Directors proposal to
approve the 1998 Long-Term 161,117,570 9,735,749 1,077,432
Incentive Compensation Plan
</TABLE>
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, and July 14, 1998, reporting information under Item 5, Other
Events.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-END> JUN-28-1998
<CASH> 41
<SECURITIES> 0
<RECEIVABLES> 1,004<F1>
<ALLOWANCES> 0
<INVENTORY> 947
<CURRENT-ASSETS> 2,264
<PP&E> 6,256<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,497
<CURRENT-LIABILITIES> 1,397
<BONDS> 4,154
0
0
<COMMON> 258
<OTHER-SE> 4,336
<TOTAL-LIABILITY-AND-EQUITY> 12,497
<SALES> 5,279
<TOTAL-REVENUES> 5,279
<CGS> 4,192
<TOTAL-COSTS> 4,192
<OTHER-EXPENSES> 364
<LOSS-PROVISION> 2
<INTEREST-EXPENSE> 138
<INCOME-PRETAX> 244
<INCOME-TAX> 90
<INCOME-CONTINUING> 154
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 154
<EPS-PRIMARY> 0.77
<EPS-DILUTED> 0.77
<FN>
<F1>Receivables are stated net of allowances.
<F2>Property, plant and equipment is stated net of accumulated depreciation.
</FN>
</TABLE>
