SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended September 30, 1998
Commission File Number 1-7107
LOUISIANA-PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 93-0609074
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
111 S.W. Fifth Avenue, Portland, Oregon 97204-3699
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (503) 221-0800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
--- --
Indicate the number of shares outstanding of each of the issuer's classes of
common stock: 108,679,756 shares of Common Stock, $1 par value, outstanding as
of October 31, 1998.
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FORWARD LOOKING STATEMENTS
Statements in this report, to the extent they are not based on historical
events, constitute forward looking statements. Forward looking statements
include, without limitation, statements regarding the outlook for future
operations, forecasts of future costs and expenditures, evaluation of market
conditions, the outcome of legal proceedings, the adequacy of reserves, plans
for product development, and assessment of L-P's Year 2000 compliance efforts
and risks. Investors are cautioned that forward looking statements are subject
to an inherent risk that actual results may vary materially from those described
herein. Factors that may result in such variance, in addition to those
accompanying the forward looking statements, include changes in interest rates,
commodity prices, and other economic conditions; actions by competitors;
changing weather conditions and other natural phenomena; actions by government
authorities; uncertainties associated with legal proceedings; technological
developments; future decisions by management in response to changing conditions;
and misjudgments in the course of preparing forward looking statements.
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
---------------------
CONSOLIDATED SUMMARY STATEMENTS OF INCOME
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE) (UNAUDITED)
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -------------------
1998 1997 1998 1997
------- ------- -------- --------
Net sales $ 606.3 $ 619.5 $1,777.8 $1,807.4
------- ------- --------- --------
Costs and expenses:
Cost of sales 428.4 536.7 1,430.6 1,596.2
Depreciation, amortization
and depletion 50.0 49.5 139.0 136.5
Selling and administrative 47.3 47.1 136.8 131.8
Unusual charges and
credits, net 392.0 154.4 63.7 32.5
Interest expense 3.4 8.4 23.2 24.2
Interest income (4.3) (.3) (7.9) (1.1)
------ ------- --------- --------
Total costs and expenses 916.8 795.8 1,785.4 1,920.1
------ ------- --------- --------
Income (loss) before taxes
and minority interest (310.5) (176.3) (7.6) (112.7)
Provision (benefit) for
income taxes (117.0) (62.9) 9.3 (28.7)
Minority interest in
net loss of consolidated
subsidiaries (.8) (1.0) (3.0) (3.5)
------- ------ -------- --------
Net income (loss) $(192.7) $(112.4) $ (13.9) $ (80.5)
======= ======= ======== ========
Net loss per share-
Basic and diluted $ (1.77) $ (1.03) $ (.13) $ (.74)
======== ======= ========= ========
Cash dividends per share $ .14 $ .14 $ .42 $ .42
======== ======= ========= ========
Average shares outstanding (thousands)-
Basic and diluted 108,620 108,330 108,920 108,330
======= ======= ======= =======
See notes to unaudited financial statements.
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CONSOLIDATED SUMMARY BALANCE SHEETS
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(DOLLAR AMOUNTS IN MILLIONS) (UNAUDITED)
SEPT. 30, 1998 DEC. 31, 1997
-------------- --------------
Cash and cash equivalents $ 222.7 $ 31.9
Accounts receivable, net 165.2 146.2
Inventories 221.3 258.8
Prepaid expenses 12.7 8.9
Income tax refunds receivable --- 78.0
Deferred income taxes 137.9 73.0
-------- --------
Total current assets 759.8 596.8
-------- --------
Timber and timberlands 505.5 634.2
Property, plant and equipment 2,124.9 2,433.9
Less accumulated depreciation (1,190.9) (1,242.1)
-------- --------
Net property, plant and equipment 934.0 1,191.8
Timber notes receivable 403.8 49.9
Goodwill and other assets 103.6 105.7
-------- --------
Total assets $2,706.7 $2,578.4
======== ========
Current portion of long-term debt $ 24.0 $ 22.9
Short-term notes payable --- 22.0
Accounts payable and accrued liabilities 259.5 234.4
Current portion of contingency reserves 200.0 40.0
Income taxes payable 13.2 ---
-------- --------
Total current liabilities 496.7 319.3
-------- --------
Long-term debt, excluding current portion 475.3 572.3
Contingency reserves, net of current portion 230.4 184.0
Deferred income taxes and other 251.1 216.6
Stockholders' equity:
Common stock 117.0 117.0
Additional paid-in capital 465.8 472.2
Retained earnings 917.7 977.5
Treasury stock (168.5) (163.4)
Loans to Employee Stock Ownership Trusts (34.8) (37.7)
Accumulated comprehensive income (loss) (44.0) (79.4)
-------- --------
Total stockholders' equity 1,253.2 1,286.2
-------- --------
Total liabilities and equity $2,706.7 $2,578.4
======== ========
See notes to unaudited financial statements.
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CONSOLIDATED SUMMARY STATEMENTS OF CASH FLOWS
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(DOLLAR AMOUNTS IN MILLIONS) (UNAUDITED)
Nine Months Ended September 30,
1998 1997
------- -------
Cash flows from operating activities:
Net income (loss) $ (13.9) $ (80.5)
Depreciation, amortization and depletion 139.0 136.5
Non-cash unusual charges and credits 63.7 216.6
Cash settlements of contingencies (50.8) (128.5)
Other adjustments, net, including adjustment
of litigation reserves and other unusual
non-cash charges .5 (48.4)
Decrease in certain working
capital components and deferred taxes 43.7 61.1
------- -------
Net cash provided by operating activities 182.2 156.8
------- -------
Cash flows from investing activities:
Capital spending, including acquisitions (103.0) (180.6)
Proceeds from sales of assets 330.8 38.7
Other investing activities, net (.1) (2.2)
------- -------
Net cash provided by (used in) investing
activities 227.7 (144.1)
------- -------
Cash flows from financing activities:
New borrowings 348.6 125.0
Repayment of long-term debt, including
net decrease in credit line (470.6) (76.4)
Decrease in short-term notes payable (22.0) (13.4)
Cash dividends (45.9) (45.5)
Purchase of treasury stock (30.8) (2.8)
Other financing activities, net 1.6 4.8
------- -------
Net cash used in financing activities (219.1) (8.3)
------- -------
Net increase in cash
and cash equivalents 190.8 4.4
Cash and cash equivalents at beginning of year 31.9 27.8
------- -------
Cash and cash equivalents at end of period $ 222.7 $ 32.2
======= =======
See notes to unaudited financial statements.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE) (UNAUDITED)
Nine Months Ended
Sept. 30, 1998
--------------------
Shares Amount
----------- -------
Common Stock 116,937,022 $ 117.0
=========== =======
Additional Paid-in-Capital:
Beginning balance $ 472.2
Net transactions (6.4)
-------
Ending balance $ 465.8
=======
Retained Earnings:
Beginning balance $ 977.5
Net income (13.9)
Cash dividends, $.42 per share (45.9)
-------
Ending balance $ 917.7
=======
Treasury stock:
Beginning balance 7,309,360 $ (163.4)
Shares reacquired 1,535,500 (30.8)
Shares reissued for employee stock
plans and acquisition adjustment (1,149,621)$ 25.7
---------- -------
Ending balance 7,695,239 $ (168.5)
========== =======
Loans to Employee Stock Ownership Trusts:
Beginning balance $ (37.7)
Less accrued contribution 17.9
Plus new loans (15.0)
-------
Ending balance $ (34.8)
=======
Accumulated comprehensive income (loss):
Beginning balance $ (79.4)
Currency translation adjustment and
amortization of deferred compensation 35.4
-------
Ending balance $ (44.0)
=======
See notes to unaudited financial statements.
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Notes to Unaudited Financial Statements
Louisiana-Pacific Corporation and Subsidiaries
1. The interim period information included herein reflects all adjustments
which are, in the opinion of the management of L-P, necessary for a fair
statement of the results of the respective interim periods. Such adjustments are
of a normal recurring nature. Results of operations for interim periods are not
necessarily indicative of results to be expected for an entire year. These
summary financial statements should be read in conjunction with the financial
statements and the notes thereto included in L-P's 1997 Annual Financial Report
to Stockholders. Interim financial statements are by necessity somewhat
tentative; judgments are used to estimate quarterly amounts for items that are
normally determinable only on an annual basis.
Certain 1997 expenses in the consolidated summary statement of income have
been reclassified to conform to the 1998 presentation.
2. Basic earnings per share are based on the weighted average number of
shares of common stock outstanding during the periods. Diluted earnings per
share include the effect of potentially dilutive common stock equivalents. The
effect of potentially dilutive common stock equivalents is not included in the
calculation of diluted earnings per share because it was anti-dilutive as a
result of L-P's net losses for the entire year 1997 and first nine months of
1998.
3. The effective income tax rate is based on estimates of annual amounts of
taxable income, foreign sales corporation income and other factors. These
estimates are updated quarterly.
4. Determination of interim LIFO inventories requires estimates of year-end
inventory quantities and costs. These estimates are revised quarterly and the
estimated incremental change in the LIFO inventory reserve is expensed over the
remainder of the year.
5. Effective January 1, 1998, L-P adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," which requires items
previously reported as a component of stockholders' equity to be more
prominently reported as a component of comprehensive income. Components of
comprehensive income include net income (loss), currency translation adjustments
and deferred compensation. Comprehensive income (loss) was ($158.4) million in
the third quarter of 1998 compared to ($117.0) million in the third quarter of
1997 and $21.5 million for the first nine months of 1998 compared to ($90.0)
million for the same period in 1997.
The Financial Accounting Standards Board has adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). The new statement will require recognition of all
financial instruments as either assets or liabilities on the balance sheet at
fair value; changes to fair value will impact earnings either as gains or
losses. SFAS 133 will be effective for L-P in 2000. Based on an initial review
of SFAS 133, L-P does not expect that it will have a significant impact on the
Company's financial statements and related disclosures.
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6. Unusual Charges and Credits, Net.
--------------------------------
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------- ----------------------
1998 1997 1998 1997
(Dollar amounts in millions)
KPC settlement $ --- $ --- $ --- $135.0
Impairment charges (162.5) (35.0) (182.2) (48.1)
Adjustment to litigation
reserves and other (251.7) (175.0) (262.8) (175.0)
Gain or sale of assets 22.2 55.6 381.3 55.6
------- ------- ------- -------
Total $(392.0) $(154.4) $ (63.7) $ (32.5)
======= ====== ======= =======
In the third quarter of 1998, L-P recorded a net charge of $392.0 million
($241.0 million after taxes, or $2.21 per share) resulting from impairment
charges and related reserve adjustments, adjustments to litigation reserves and
other charges. These were netted with gains of $22.2 million from various asset
sales. An impairment charge of $136.1 million resulted from management's
decision to liquidate its pulp mill in British Columbia and includes a $50.9
million cumulative translation adjustment which has previously been included
within the equity section of the balance sheet. The new basis of the pulp mill
reflects the net estimated realizable value of the assets, less selling costs,
which is based on an internal estimate of fair value. The estimate of fair value
was based largely on the values received for assets sold at similar facilities.
Other impairment charges of $26.4 million relate to various facilities and
include an amount to adjust closure related reserves. An additional charge to
legal reserves of $245.2 million was recorded primarily to accrue estimated
additional costs including additional claims and administration costs, legal
fees and inspection fees resulting from the recent agreements related to the
national class-action settlement (see discussion under "Legal Proceedings").
In the second quarter of 1998, L-P recorded a net gain of $328.3 million ($195.2
million after taxes, or $1.79 per share) primarily resulting from gains on the
sales of timberland, sawmill and distribution assets in California and the
Weather-Seal window and door business (see further discussion below under the
heading "ASSET SALES"). Charges relating to the settlement of legal issues in
Montrose, Colorado of $14.0 million after taxes (or $.13 per share) and other
charges were netted against the asset sales gains.
In the third quarter of 1997, L-P recorded unusual charges and credits, net of
unusual gains, of $154.4 million ($94.3 million after taxes, or $.87 per share).
It includes a $210.0 million charge to reflect the write-down of certain
properties which L-P had put up for sale, to adjust reserves for litigation
settlements and to accrue for severance and other costs. Also included were
gains on the sale of 79,000 acres of Northern California timberland of $55.6
million.
In the first quarter of 1997, L-P's Ketchikan Pulp Company subsidiary recorded a
net gain of $121.9 million ($73.7 million after taxes, or $.68 per share) to
reflect the initial amount of $135 million received under a settlement agreement
with the U.S. Government over claims related to the long-term timber supply
contract in Alaska. Adjustments to pulp mill closure-related accruals were
netted against this gain.
7. Reference is made to "Legal Proceedings" for a description of certain
environmental litigation and other litigation and its potential impact on L-P
and for a description of settlements of certain class action proceedings.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
------------------------------------------------------------------------
of Operations.
- -------------
RESULTS OF OPERATIONS
- ---------------------
General
- -------
L-P earned $48.3 million ($.44 per share) before unusual items in the third
quarter of 1998 compared to a loss before unusual items of $18 million ($.16 per
share) in the third quarter of 1997. L-P earned $31.9 million ($.29 per share)
before unusual items for the first nine months of 1998 compared to a loss before
unusual items in 1997 of $59.9 million ($.55 per share). Total sales declined by
five percent in the first nine months of the year and eight percent in the third
quarter compared to 1997. A significant factor in the sales decrease was the
sale of the California operations and the Weather-Seal assets discussed below. A
strong oriented strand board (OSB) market was the most important factor in the
significantly improved results in 1998 over 1997. Unusual items are discussed
under the "Unusual credits and charges, net" section below.
L-P operates in two segments: building products and pulp. Building products is
the most significant segment, accounting for approximately 97 percent of sales
in both the first nine months of 1998 and 1997. The results of operations are
discussed separately for each segment below. Key segment information, production
volumes and industry product price trends are presented in the tables following
this discussion labeled "Sales and Profit by Major Product Group," "Operating
Volumes" and "Industry Product Price Trends."
Building Products Segment
- -------------------------
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------- ----------------------
1998 1997 % Chg. 1998 1997 % Chg.
------ ------ ------ ------ ------- ------
(Dollar amounts in millions)
Sales:
Structural panels $312.2 $222.4 +40% $ 779.2 $ 628.9 +24%
Lumber 103.6 169.5 -39% 399.5 512.4 -22%
Industrial panel products 44.0 43.9 --- 133.3 134.5 -1%
Other building products 129.4 153.1 -15% 407.0 423.7 -4%
------ ------ ------ -------
Total building products $589.2 $588.9 --- $1,719.0 $1,699.5 +1%
====== ====== ======== =======
Building products profit $117.5 $ 11.4 +931% $ 167.5 $ 28.2 +494%
====== ====== ======== ========
The increase in building products segment sales for the nine months ended
September 30, 1998 was primarily attributable to a 24 percent increase in
structural panel products (OSB and plywood) sales over the prior year (third
quarter 1998 increased 40 percent over third quarter 1997). The increase in
structural panel products sales in 1998 primarily resulted from a 59 percent
increase in OSB average prices (a 101 percent increase in the third quarter of
1998 over the same quarter in 1997), while plywood prices increased modestly
over the prior year. OSB sales volume increased six percent due to strong demand
and additional capacity, while plywood sales volume decreased 18 percent
primarily due
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to permanent plant closures. Lumber sales volume dropped 16 percent due
primarily to mill sales and closures within the company. Average lumber prices
dropped approximately 14 percent due to weak markets over the prior year
(average prices dropped approximately 10 percent over the prior year's third
quarter). Industrial panel products sales remained level. A decrease in average
selling prices was offset by a small increase in sales volume (third quarter
prices increased slightly offset by lower sales volume). The sales decrease in
the other building products category was primarily attributable to the sale of
the Weather-Seal window and door manufacturing business in June 1998.
Building products segment operating profits increased to $167.5 million for the
first nine months of 1998 from $28.2 million for the first nine months of 1997
(third quarter profits were $117.5 million compared to $11.4 million for the
third quarter in 1997) primarily due to the increased average OSB prices
discussed above. Lower profits in industrial panels and lumber and higher log
costs, especially in the South, partially offset the OSB improvement.
L-P's building products are primarily sold as commodities and therefore sales
prices fluctuate based on market factors over which L-P has no control. L-P
cannot predict whether prices of its building products will remain at current
levels, or will increase or decrease in the future because supply and demand are
influenced by many factors, only one of which is the cost and availability of
raw materials. Therefore, L-P is not able to determine to what extent, if any,
it will be able to pass any future increases in the price of raw materials on to
customers through product price increases.
Pulp Segment
- ------------
Quarter Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
1998 1997 % Chg. 1998 1997 % Chg.
------ ------ ----- ------- ------ -----
(Dollar amounts in millions)
Pulp sales $ 17.1 $ 30.6 -44% $ 58.8 $107.9 -46%
====== ====== ====== ======
Pulp profit (loss) $(10.8) $ (2.8) -285% $(26.3) $(20.4) -29%
====== ====== ====== ======
The increase in pulp segment losses was primarily the result of a decrease in
average pulp selling prices of approximately 14 percent and a decrease in volume
of approximately 31 percent for the first nine months of 1998 compared to 1997.
Pulp sales were negatively impacted by the Asian economic crisis which affected
both prices and volume significantly. The pulp mill owned by L-P's Ketchikan
Pulp Company subsidiary generated sales of $28.3 million in 1997. This mill was
permanently closed in the first quarter of 1997 and, thus, did not generate any
sales in 1998. L-P recorded an asset impairment charge in the third quarter of
1998 related to its Chetwynd, B.C., pulp mill. This charge is discussed further
under the heading "Unusual Charges and Credits."
L-P's pulp products are primarily sold as commodities and therefore sales prices
fluctuate based on market factors over which L-P has no control. L-P cannot
predict whether the prices of its pulp products will remain at current levels or
will increase or decrease in the future, because supply and demand are
influenced by many factors, only one of which is the cost and availability of
raw materials. Therefore, L-P is not able to determine to what extent, if any,
it will be able to pass any future increases in the price of raw materials on to
customers through product price increases.
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<PAGE>
Unusual Charges and Credits, Net
- --------------------------------
Quarter Ended Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
------ ------ ------ ------
(Dollar amounts in millions)
KPC settlement $ --- $ --- $ --- $135.0
Impairment charges (162.5) (35.0) (182.2) (48.1)
Adjustment to litigation
reserves and other (251.7) (175.0) (262.8) (175.0)
Gain on sale of assets 22.2 55.6 381.3 55.6
------ ------ ----- -----
$(392.0) $(154.4) $(63.7) $(32.5)
====== ====== ===== =====
In the third quarter of 1998, L-P recorded a net charge of $392.0 million
($241.0 million after taxes, or $2.21 per share) resulting from impairment
charges and related reserve adjustments, adjustments to litigation reserves and
other charges. These were netted with gains of $22.2 million from various asset
sales. An impairment charge of $136.1 million resulted from management's
decision to liquidate its pulp mill in British Columbia and includes a $50.9
million cumulative translation adjustment which has previously been included
within the equity section of the balance sheet. The new basis of the pulp mill
reflects the net estimated realizable value of the assets, less selling costs,
which is based on an internal estimate of fair value. The estimate of fair value
was based largely on the values received for assets sold at similar facilities.
Other impairment charges of $26.4 million relate to various facilities and
include an amount to adjust closure related reserves. An additional charge to
legal reserves of $245.2 million was recorded primarily to accrue estimated
additional costs including additional claims and administration costs, legal
fees and inspection fees resulting from the recent agreements related to the
national class-action settlement (see discussion under "Legal Proceedings").
In the second quarter of 1998, L-P recorded a net gain of $328.3 million ($195.2
million after taxes, or $1.79 per share) primarily resulting from gains on the
sales of timberland, sawmill and distribution assets in California and the
Weather-Seal window and door business (see further discussion below under the
heading "ASSET SALES"). Charges relating to the settlement of legal issues in
Montrose, Colorado of $14.0 million after taxes (or $.13 per share) and other
charges were netted against the asset sales gains.
In the third quarter of 1997, L-P recorded unusual charges and credits, net of
unusual gains, of $154.4 million ($94.3 million after taxes, or $.87 per share).
It includes a $210.0 million charge to reflect the write-down of certain
properties which L-P had put up for sale, to adjust reserves for litigation
settlements and to accrue for severance and other costs. Also included were
gains on the sale of 79,000 acres of Northern California timberland of $55.6
million.
In the first quarter of 1997, L-P's Ketchikan Pulp Company subsidiary recorded a
net gain of $121.9 million ($73.7 million after taxes, or $.68 per share) to
reflect the initial amount of $135 million received under a settlement agreement
with the U.S. Government over claims related to the long-term timber supply
contract in Alaska. Adjustments to pulp mill closure-related accruals were
netted against this gain.
General Corporate and Other Expense
- -----------------------------------
General corporate and other expense increased four percent over the prior year.
The variations were due to numerous factors, none of which were individually
significant.
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Interest Income (Expense)
- -------------------------
L-P's interest expense (net of interest income and capitalized interest) has
decreased in 1998 primarily as a result of decreased net borrowing levels. Asset
sale proceeds have been used in part to reduce borrowings.
Legal and Environmental Matters
- -------------------------------
Refer to the "Legal Proceedings" item of this Form 10-Q for a discussion of
certain environmental and other litigation and its potential impact on L-P.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------------------------
Net cash provided by operations increased 16 percent in 1998 over 1997. The
increase is primarily due to the $135.0 million settlement payment from the U.S.
Government received in 1997. In 1998, improved operating results (without
unusual items) and lower payments of settlement liabilities. This increase was
offset by the $135.0 million settlement payment from the U.S. Government
received in 1997. Cash flows provided by investing activities also increased
mainly from asset sale proceeds of $330.8 million and a decrease in capital
expenditures. Cash used in financing activities increased $210.8 million due to
repayment of $450.0 million in revolving and term loans with asset sale proceeds
and repurchase of $30.8 million of L-P's common stock under its stock repurchase
plan. The issuance of $348.6 million of senior debt partially offset these uses.
L-P's inventories decreased $37.5 million, net property, plant and equipment
decreased $257.8 million and contingencies increased $206.4 million primarily as
a result of the asset sales and unusual charges.
L-P's liquidity has improved over the 1997 year-end primarily as a result of the
proceeds of the asset sales. Cash and cash equivalents totaled $222.7 million at
September 30, 1998, compared to $31.9 million at December 31, 1997. Management
believes the current cash balances combined with unused credit facilities will
provide sufficient liquidity for L-P to meet its projected cash needs, including
obligations related to litigation settlements.
ASSET SALES
- -----------
In the third quarter of 1998, L-P completed the sale of additional California
assets for approximately $29.2 million in cash. The book value of the assets
sold was approximately $6.5 million.
On June 30, 1998 L-P completed the sale of its California redwood timberlands
and associated sawmill and manufacturing and distribution operations in Northern
California in two separate transactions to Simpson Timber Company ("Simpson"), a
subsidiary of Simpson Investment Company, and Sansome Forest Partners, L.P., and
its subsidiaries ("Sansome"). The sales included more than 300,000 acres of
timberlands, three operating sawmills, and two distribution facilities, among
other operations. The sales prices for the divested assets totaled approximately
$610.2 million and were determined by arm's length negotiations between the
parties. Sansome and its subsidiaries paid $240.0 million in cash, subject to
post-closing adjustments for changes in working capital and other items. Simpson
paid $16.3 million in cash and delivered promissory notes in the aggregate
principal amount of $353.9 million (the "Simpson Notes"), subject to
post-closing adjustments for changes in working capital and other items. The
Simpson Notes mature in varying amounts between June 30, 2006 and June 30, 2018.
The weighted average interest rate of the notes
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<PAGE>
is 7 percent. The net book value of the assets sold, excluding working capital,
was $192.7 million.
Subsequently, in a separate transaction, L-P issued $348.6 million of senior
debt at a weighted average interest rate of 7 percent maturing in varying
amounts between 2006 and 2018 in a private placement to institutional investors.
The Simpson Notes were pledged as security for this senior debt.
On June 16, 1998, L-P completed the sale of its Weather-Seal windows and doors
operations to American Architectural Products Corporation of Youngstown, Ohio
for approximately $39.9 million. The Weather-Seal business consisted of seven
manufacturing facilities, related engineering, research and development,
customer services, sales group and trucking operations in Ohio.
During the third quarter of 1998, L-P announced efforts to sell seven lumber
facilities in Idaho, Georgia, Mississippi and Texas. In October 1998, L-P
completed the sale of its Creative Point subsidiary to Mead Corporation of
Dayton, Ohio. Other potential asset sales include the sale of L-P's pulp mill in
Samoa and the sale or closure of its pulp mill in British Columbia.
The proceeds realized in the asset sales completed since October 1997 have
initially been used to fund operations, reduce or eliminate outstanding
borrowings on L-P's revolving credit and term loan facilities, and implement its
stock repurchase plan. Management continues to study additional uses of the
proceeds to maximize long-term value to L-P and its stockholders, which may
include internal investments in L-P's core businesses in the building products
market and strategic acquisitions.
Year 2000 Compliance
- --------------------
The Year 2000 problem refers to a worldwide issue relating to a flaw in many
computer programs and computer applications embedded in equipment and other
devices. In many existing software and hardware applications, two digits were
used to represent the year, such as "99" for "1999." If not corrected, these
applications may interpret "00" to be the year 1900 rather than 2000, producing
erroneous data or, at worst, failing altogether.
L-P recognized the Year 2000 problem as a serious issue in the early 1990s. As a
result, subsequent in-house applications development and purchases of
third-party software contemplated the potential impact of the Year 2000. In the
fall of 1997, L-P began a more formal evaluation process related to Year 2000
exposure and readiness. Elements of this process include creation of a
corporate-wide project team, oversight by a management steering committee, and
regular reports on progress to senior management and the Board of Directors.
All of L-P's business groups, facility locations, operations and corporate
functions are covered by the Year 2000 project. The project team is staffed by
full-time employees, subcontractors, and outside consultants as appropriate.
Management is monitoring the progress of the project to ensure that proper
methodology is being followed, that
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adequate controls are in place, and that appropriate steps are being taken to
limit risk.
The project is divided into three primary areas: (1) information systems; (2)
manufacturing systems/building infrastructure; and (3) the evaluation of outside
business partners (including major suppliers and customers). The general project
tasks for each of the first two areas of emphasis include inventorying items
that are exposed to Year 2000 issues, assessing the Year 2000 compliance of such
items, remediation (through conversion, upgrade or replacement of noncompliant
items), testing, and developing and implementing contingency plans for each
business group and facility location. With respect to outside business partners,
project phases include ascertaining L-P's major business partners, assessing
their Year 2000 readiness, monitoring their progress, and developing contingency
plans.
L-P's information systems include such common business applications as payroll,
human resources, sales order entry, inventory management, finance, and
accounting. These applications will be addressed by either remediating current
systems or replacement with industry standard, off-the-shelf software certified
by the vendor to be Year 2000 compliant. L-P has decided to replace its basic
payroll, human resources and accounting applications with an off-the-shelf
package. The modules are scheduled to be implemented during the first half of
1999. The project team has identified additional business critical applications.
As of October 31, 1998, approximately 70% of these applications have been
assessed for Year 2000 compliance, with the balance to be evaluated by December
1998. As of October 31, 1998, approximately 30% of the applications assessed
require further remediation through system upgrades and/or replacements. All
remediation of information systems are currently slated for completion by
September 1999.
With respect to L-P's manufacturing operations, the project is focused on
surveying and, if necessary, remediating all computer-controlled and/or embedded
devices used in the manufacturing process in nearly 90 plant facilities.
Building infrastructure includes items such as heating and air conditioning
systems, security access and alarm systems, telephones, and office equipment
used in L-P's offices and plants. The inventory phase of the project with
respect to manufacturing operations and infrastructure is approximately 60
percent complete, with the balance to be completed by December 31, 1998. More
than half of the inventoried systems have been assessed for Year 2000 readiness,
with completion of this phase scheduled for March 1999. Less than 1 percent of
L-P's manufacturing systems and infrastructure assessed to date have been
determined to require remediation. The costs associated with this component are
expected to be immaterial to L-P's business and results of operations and will
be included in normal ongoing maintenance.
L-P also faces the risk of business disruption from outside business partners
which may have information or manufacturing systems or infrastructure that are
not Year 2000 compliant. As part of the Year 2000 project, L-P is evaluating
which business partners are critical to L-P's operations and making inquiries of
those deemed material as to their Year 2000 readiness. The project team will
monitor the progress of major business partners in achieving Year 2000
compliance. Where risk is perceived to be present, L-P will seek to identify
alternate business
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<PAGE>
partners and to develop contingency plans to deal with any significant
disruptions prior to December 1999.
Despite the extensive efforts of L-P's project team, it is likely that
unexpected problems associated with the Year 2000 issue will arise. The project
team is working to identify areas of the greatest risk to L-P, that is, those
areas which are critical to business operations and have limited backup
alternatives. This process will include identifying, analyzing and developing
plans for dealing with the most reasonably likely worst case scenario facing
L-P. Contingency plans will then be developed to minimize the disruptive effect
of potential failures and to take corrective action as soon as possible. To
date, the most progress in this area has been achieved at L-P's data centers,
where disaster recovery plans have been modified to place specific emphasis on
Year 2000 contingencies. L-P's contingency planning process is scheduled to be
completed by mid-1999.
The total expense associated with achieving Year 2000 compliance and developing
contingency plans is presently estimated to be approximately $5 million, of
which approximately $1 million will have been incurred by December 31, 1998.
This does not include expenses and capital costs associated with replacing
systems which L-P would have replaced regardless of Year 2000 issues, including
a new human resources information system and a new core financial system. The
costs and completion dates for the Year 2000 project discussed herein are based
on management's best estimates, which were derived using numerous assumptions
regarding future events, including continued availability of certain resources,
remediation plans of business partners, and other factors. However, there can be
no guarantee that these estimates will be achieved and actual results could
differ from expectations.
L-P presently does not anticipate the occurrence of major interruptions in its
business as a result of Year 2000 issues. However, due to L-P's dependence on
systems outside its control, such as telecommunications, financial services,
transportation, and water and energy suppliers, there can be no assurance that
L-P will not experience disruptions that may have a negative effect on its
operations, business, and financial condition.
STOCK REPURCHASE PLAN
- ---------------------
As of September 30, 1998, L-P had reacquired approximately 1.5 million shares
for $30.8 million under the plan, announced on July 27, 1998, to repurchase up
to 20 million common shares from time to time in the open market. At
quarter-end, L-P had approximately 109 million shares outstanding.
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<PAGE>
SALES AND PROFIT BY MAJOR PRODUCT GROUP
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(DOLLAR AMOUNTS IN MILLIONS) (UNAUDITED)
Quarter Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
------ ------ ------- -------
Sales:
Structural panel products $ 312.2 $ 222.4 $ 779.2 $ 628.9
Lumber 103.6 169.5 399.5 512.4
Industrial panel products 44.0 43.9 133.3 134.5
Other building products 129.4 153.1 407.0 423.7
------- ------- -------- --------
Total building products 589.2 588.9 1,719.0 1,699.5
Pulp 17.1 30.6 58.8 107.9
------- ------- -------- --------
Total sales $ 606.3 $ 619.5 $1,777.8 $1,807.4
======= ======= ======== ========
Export sales $ 24.9 $ 61.5 $ 99.7 $ 189.1
======= ======= ======== ========
Profit (loss):
Building products $ 117.5 $ 11.4 $ 167.5 $ 28.2
Pulp (10.8) (2.8) (26.3) (20.4)
Settlements and other
unusual items, net (392.0) (154.4) (63.7) (32.5)
General corporate expense, net (26.1) (22.4) (69.8) (64.9)
Interest income (expense), net .9 (8.1) (15.3) (23.1)
------- ------- -------- --------
Income (loss) before taxes and
minority interest $(310.5) $ (176.3) $ (7.6) $ (112.7)
======= ======= ======== ========
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<PAGE>
OPERATING VOLUMES
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(VOLUME AMOUNTS STATED IN MILLIONS, UNLESS OTHERWISE NOTED)
Quarter Ended Nine Months Ended
Sept. 30 Sept. 30
--------------- ----------------
1998 1997 1998 1997
----- ----- ----- -----
Oriented strand board
panels and siding,
million square ft 3/8" basis 1,113 1,001 3,214 2,971
Softwood plywood,
million square ft 3/8" basis 255 318 756 911
Lumber, million board feet 278 323 851 943
Industrial panel products
(particleboard, medium density
fiberboard and hardboard),
million square ft 3/4" basis 142 146 436 440
Engineered I-Joists,
million lineal feet 23 21 69 60
Laminated Veneer Lumber,
thousand cubic ft 1,900 1,600 5,600 4,700
Pulp,
thousand short tons 69 93 210 294
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<PAGE>
INDUSTRY PRODUCT PRICE TRENDS
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
OSB PLYWOOD LUMBER PARTICLEBOARD
----------- -------- --------- -------------
N. CENTRAL SOUTHERN
7/16" BASIS PINE 1/2" FRAMING
24/16 BASIS LUMBER INLAND
SPAN CDX COMPOSITE INDUSTRIAL
RATING 3 PLY PRICES 3/4" BASIS
----------- -------- --------- ------------
Annual Average
1992 $ 217 $ 248 $ 287 $ 200
1993 236 282 394 258
1994 265 302 405 295
1995 245 303 337 290
1996 184 258 398 276
1997 143 265 417 262
1997 Third Quarter Average 145 263 414 262
1998 First Quarter Average 158 266 368 253
1998 Second Quarter Average 195 262 346 262
1998 Third Quarter Average 289 308 343 265
Source: Random Lengths
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<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
The following sets forth the current status of certain legal proceedings:
Environmental Proceedings
In October 1998, L-P's subsidiary Ketchikan Pulp Company's ("KPC's") criminal
probation was terminated by the U.S. government. KPC had been placed on 5-year
probation in October 1995, stemming from allegations of criminal violation of
the Clean Water Act.
In March 1995, KPC entered into agreements with the federal government to
resolve the issues related to water and air compliance problems experienced at
KPC's pulp mill during the late 1980s and early 1990s. In addition to civil and
criminal penalties that have been paid, KPC also agreed to undertake up to $20
million in expenditures, which are primarily capital in nature, including
certain remedial and pollution control related measures. While the Environmental
Protection Agency (the "EPA") and KPC have agreed that the closure of the pulp
mill in May 1997 eliminated the need for many of the pollution control related
measures, court approval is required for relief from these requirements.
As part of the agreements, KPC is in the process of studying Ward Cove, the body
of water adjacent to the former mill site, to determine whether cleanup of cove
sediments is necessary. KPC may be required to spend approximately $4 million in
addition to the approximately $2 million already spent on this project, as part
of the $20 million discussed above.
KPC also signed an agreement with the State of Alaska and the EPA to investigate
and, if necessary, clean up the property on which the pulp mill was formerly
located. KPC has completed the investigative portion of this project at a cost
of approximately $1.5 million. Some cleanup has already occurred, with
additional cleanup scheduled to be completed by mid-1999. Anticipated costs of
previous and scheduled cleanup may be up to $1 million. Other areas may need to
be cleaned up; no cost estimates of such additional cleanups have yet been made.
KPC has completed the closure of a landfill near Thorne Bay, Alaska, pursuant to
an agreement with the U.S. Forest Service (the "USFS"). Costs of the project
totaled approximately $6 million. KPC is also monitoring leachate from the
landfill in order to evaluate whether treatment of the leachate is necessary.
The EPA and the Department of Justice have indicated their intent to seek
penalties for alleged civil violations of the Clean Water Act at the KPC
facility. The maximum penalty associated with such an action could be as much as
$975,000. KPC is also defending an appeal of an earlier court decision
dismissing a citizens' suit by plaintiff Alaska Clean Water Alliance alleging
Clean Water Act violations. KPC is actively pursuing resolution of both of these
actions.
L-P's Missoula, Montana, particleboard facility is the subject of an
investigation by the EPA for alleged improper management of sander dust at the
facility. L-P is also conducting its own investigation. L-P's
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<PAGE>
potential liability, if any, is unknown at this time, but is not anticipated to
have a material adverse effect on L-P's business, financial position, results of
operations or liquidity.
In June 1998, L-P disclosed to the EPA and the State of Florida that it had
discovered the potential improper disposal of ash and waste wood onto the ground
and into potential wetland areas at L-P's West Bay, Florida, facility. L-P's
wetland expert, the U.S. Corps of Engineers and the Florida Department of
Environmental Management all now agree that the West Bay facility did not
disturb any wetlands.
Certain L-P plant sites have, or are suspected of having, substances in the
ground or in the groundwater underlying the sites that are considered
pollutants. Appropriate corrective action or plans for corrective action are
underway. Where the pollutants were caused by previous owners of the property,
L-P is vigorously pursuing those parties through legal channels and is
vigorously pursuing insurance coverage under all applicable policies.
L-P maintains a reserve for estimated environmental loss contingencies. As with
all accounting estimates, significant uncertainty exists in the reliability and
precision of the estimates because the facts and circumstances surrounding each
contingency vary significantly from case to case. L-P continually monitors its
estimated exposure for environmental liabilities and adjusts its accrual
accordingly. As additional information about the environmental contingencies
becomes known, L-P's estimate of its liability for environmental loss
contingencies may change significantly, although no estimate of the range of any
potential adjustment of the liability can be made at this time. L-P cannot
estimate the time frame over which these accrued amounts are likely to be paid
out. A portion of L-P's environmental reserve is related to liabilities for
cleanup of properties which are currently owned or have been owned in the past
by L-P. Certain of these sites are subject to cost sharing arrangements with
other parties who were also involved in the site. L-P does not believe that any
of these cost sharing arrangements will result in additional material liability
to L-P due to non-performance by the other party. L-P has not reduced its
reserves for any anticipated insurance recoveries.
Although L-P's policy is to comply with all applicable environmental laws and
regulations, the company has, in the past, been required to pay fines for
non-compliance and sometimes litigation has resulted from contested
environmental actions. Also, L-P is involved in other environmental actions and
proceedings which could result in fines or penalties. Based on the information
currently available, management believes that any fines, penalties or other
losses resulting from the matters discussed above in excess of the reserve for
environmental loss contingencies will not have a material adverse effect on the
business, financial position, results of operations or liquidity of L-P.
Colorado Criminal Proceedings
In June 1995, a federal grand jury returned an indictment in the U.S. District
Court in Denver, Colorado, against L-P in connection with alleged environmental
violations, as well as alleged fraud in connection with the submission of
unrepresentative oriented strand board (OSB) product samples to an industry
product certification agency, by L-P's Montrose (Olathe), Colorado OSB plant. A
former superintendent and former plant manager at the
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<PAGE>
mill were also indicted and each pled guilty to one environmental count and were
sentenced by the court. On May 27, 1998, L-P pleaded guilty to 18 felony counts
relating to the Montrose plant, including 13 counts involving violations of the
Clean Air Act and five counts of making false statements in a matter within the
jurisdiction of an agency or department of the United States. L-P agreed to pay
total penalties of $37 million (including making $500,000 in charitable
contributions), of which $12 million has been paid, and was sentenced to five
years of probation. The $25 million balance of the fine will be paid over the
next five years and has been recorded as a note payable in L-P's financial
statements. All remaining charges against L-P were dismissed.
In December 1995, L-P received a notice of suspension from the EPA stating that,
because of the criminal proceedings pending against L-P in Colorado, the
Montrose facility would be prohibited from purchasing timber directly from the
USFS. In April 1998, L-P signed a Settlement and Compliance Agreement with the
EPA. This agreement formally lifted the 1995 suspension imposed on the Montrose
facility. The agreement has a term of five years and obligates L-P to develop
and implement certain corporate policies and programs, including such measures
as a policy of cooperation with the EPA, an employee disclosure program and a
policy of nonretaliation against employees, to conduct its business to the best
of its ability in accordance with federal laws and regulations and local and
state environmental laws, to report significant violations of law to the EPA,
and to conduct at least two audits of its compliance with the agreement. A
number of the compliance requirements have been completed.
OSB Siding Matters
L-P has been named as a defendant in numerous class action and non-class action
proceedings, brought on behalf of various persons or purported classes of
persons (including nationwide classes in the United States and Canada) who own
or have purchased or used OSB siding manufactured by L-P, because of alleged
unfair business practices, breach of warranty, misrepresentation, conspiracy to
defraud, and other theories related to alleged defects, deterioration, or
failure of OSB siding products.
The United States District Court for the District of Oregon has given final
approval to a settlement between L-P and a nationwide class composed of all
persons who own, have owned, or subsequently acquire property on which L-P's OSB
siding was installed prior to January 1, 1996, excluding persons who timely
opted out of the settlement and persons who are members of the settlement class
in the Florida litigation described below. Under the settlement agreement, an
eligible claimant whose claim is filed prior to January 1, 2003 (or earlier in
certain cases), and is approved by an independent claims administrator will be
entitled to receive from the settlement fund established under the agreement a
payment equal to the replacement cost (to be determined by a third-party
construction cost estimator and currently estimated to be in the range of $2.20
to $6.40 per square foot depending on the type of product and geographic
location) of damaged siding, reduced by a specific adjustment (of up to 65
percent) based on the age of the siding. Class members who have previously
submitted or resolved claims under any other warranty or claims program of L-P
may be entitled to receive the difference between the amount which would be
payable under the settlement agreement and the amount previously paid.
Independent adjusters will determine the extent of damage to OSB siding at each
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<PAGE>
claimant's property in accordance with a specified protocol. There will be no
adjustment to settlement payments for improper maintenance or installation.
A claimant who is dissatisfied with the amount to be paid under the settlement
may elect to pursue claims against L-P in a binding arbitration seeking
compensatory damages without regard to the amount of payment calculated under
the settlement protocol. A claimant who elects to pursue an arbitration claim
must prove his entitlement to damages under any available legal theory, and L-P
may assert any available defense, including defenses that otherwise had been
waived under the settlement agreement. If the arbitrator reduces the damage
award otherwise payable to the claimant because of a finding of improper
installation, the claimant will be entitled to pursue a claim against the
contractor/builder to the extent the award was reduced.
L-P is required to pay $275 million into the settlement fund in seven annual
installments beginning in mid-1996: $100 million, $55 million, $40 million, $30
million, $20 million, $15 million, and $15 million. As of June 30, 1998, L-P had
funded the first three installments. If at any time after the fourth year of the
settlement period the amount of approved claims (paid and pending) equals or
exceeds $275 million, then the settlement agreement will terminate as to all
claims in excess of $275 million unless L-P timely elects to provide additional
funding within 12 months equal to the lesser of (i) the excess of unfunded
claims over $275 million or (ii) $50 million and, if necessary to satisfy
unfunded claims, a second payment within 24 months equal to the lesser of (i)
the remaining unfunded amount or (ii) $50 million. If the total payments to the
settlement fund are insufficient to satisfy in full all approved claims filed
prior to January 1, 2003, then L-P may elect to satisfy the unfunded claims by
making additional payments into the settlement fund at the end of each of the
next two 12-month periods or until all claims are paid in full, with each
additional payment being in an amount equal to the greater of (i) 50 percent of
the aggregate sum of all remaining unfunded approved claims or (ii) 100 percent
of the aggregate amount of unfunded approved claims, up to a maximum of $50
million. If L-P fails to make any such additional payment, all class members
whose claims remain unsatisfied from the settlement fund may pursue any
available legal remedies against L-P without regard to the release of claims
provided in the settlement agreement.
If L-P makes all payments required under the settlement agreement, including all
additional payments as specified above, class members will be deemed to have
released L-P from all claims for damaged OSB siding, except for claims arising
under their existing 25-year limited warranty after termination of the
settlement agreement. The settlement agreement does not cover consequential
damages resulting from damage to OSB Inner-Seal siding or damage to utility
grade OSB siding (sold without any express warranty), either of which could
create additional claims. In addition to payments to the settlement fund, L-P
was required to pay fees of class counsel in the amount of $26.25 million, as
well as expenses of administering the settlement fund and inspecting properties
for damage and certain other costs. After accruing interest on undisbursed funds
and deducting class notification costs, prior claims costs (including payments
advanced to homeowners in urgent circumstances) and payment of claims under the
settlement, as of September 30, 1998, approximately $8.6 million remained of the
$195 million paid into the fund to date.
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<PAGE>
The claims submitted to the claims administrator to date substantially exceed
the $275 million of payments that L-P is required to make under the settlement
agreement. As calculated under the terms of the settlement, as of September 30,
1998, claims submitted and inspected exceeded $457 million. There are
insufficient data to project the future volume of claims or the total dollar
value of additional claims that may be made against the settlement fund. L-P has
not decided whether it will provide the optional funding discussed above in
excess of the required $275 million after the fourth year of the settlement, to
the extent that it still remains an issue following implementation of the Early
Payment Program and Second Settlement Fund discussed below. Under the terms of
the settlement, L-P must make a decision regarding the optional payments by
August 2000. As an alternative to making additional payments, L-P could elect to
pursue other options, including allowing the settlement agreement to terminate,
thereby entitling claimants with unsatisfied claims to pursue available legal
remedies against L-P.
On October 26, 1998, L-P announced an agreement to offer early payments to
eligible claimants who have submitted valid and approved claims under the
original settlement agreement (the "Early Payment Program") and to establish an
additional $125 million fund to pay all other approved claims that are filed
before December 31, 1999 (the "Second Settlement Fund").
The Early Payment Program will be offered to all claimants who are entitled to
be paid from the $80 million of mandatory payments that remain to be paid under
the settlement and to all claimants who otherwise would be paid from the
proceeds of the two optional $50 million payments that L-P may elect to make
under the settlement. The early payments from the $80 million will be discounted
at a rate of 9% per annum calculated from their original payment dates
(1999-2002) to the date the early payment offer is made. The early payments from
the two $50 million optional contributions will be discounted at a rate of 12%
per annum calculated from 2001 and 2002. Claimants may accept or reject the
discounted early payments in favor of remaining under the original settlement,
but may not arbitrate the amount of their early payments.
The $125 million Second Settlement Fund represents an alternative source of
payment for all approved claims not eligible for the Early Payment Program and
all new claims filed before December 31, 1999. In early 2000, claimants electing
to participate in the Second Settlement Fund will be offered a pro rata share of
the fund in complete satisfaction of their claims, which they may accept or
reject in favor of remaining under the original settlement. Claimants who accept
their pro rata share may not file additional claims under the settlement or
arbitrate the amount of their payments. Claimants who elect not to participate
in the Second Settlement Fund remain bound by the terms of the original
settlement. If L-P is dissatisfied with the number of claimants who elect to be
paid from the Second Settlement Fund, at its sole option, it may refuse to
proceed with funding. In that event, the Second Settlement Fund will be canceled
and all the claimants who had elected to participate in it will be remitted to
their rights under the original settlement.
A settlement of the Florida class action was approved by the Circuit Court for
Lake County, Florida, on October 4, 1995. Under the settlement, L-P has
established a claims procedure pursuant to which members of the settlement
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<PAGE>
class may report problems with L-P's OSB siding and have their properties
inspected by an independent adjuster, who will measure the amount of damage and
also determine the extent to which improper design, construction, installation,
finishing, painting, and maintenance may have contributed to any damage. The
maximum payment for damaged siding is $3.40 per square foot for lap siding and
$2.82 per square foot for panel siding, subject to reduction of up to 75 percent
for damage resulting from improper design, construction, installation,
finishing, painting, or maintenance, and also subject to reduction for age of
siding more than three years old. L-P has agreed that the deduction from the
payment to a member of the Florida class will be not greater than the deduction
computed for a similar claimant under the national settlement agreement
described above. Class members will be entitled to make claims until October 4,
2000.
L-P maintains reserves for the estimated costs of these siding settlements,
although, as with any estimate, there is uncertainty concerning the actual costs
to be incurred. The discussion herein notes some of the factors, in addition to
the inherent uncertainty of predicting the outcome of claims and litigation,
that could cause actual costs to vary materially from current estimates. Due to
the various uncertainties, L-P cannot predict to what degree actual payments
under the settlement agreements, or any alternative strategies adopted by L-P,
will materially exceed the recorded liability related to these matters, although
it is possible that, in the near term, total estimated payments will
significantly exceed the recorded liabilities.
Other OSB Matters
Three separate purported class actions on behalf of owners and purchasers of
properties in which L-P's OSB panels are used for flooring, sheathing, or
underlayment have been consolidated in the United States District Court for the
Northern District of California under the caption Agius v. Louisiana-Pacific
Corporation. The actions seek damages and equitable relief for alleged fraud,
misrepresentation, breach of warranty, negligence, and improper trade practices
related to alleged improprieties in testing, product certification, and
marketing of OSB structural panels, and alleged premature deterioration of such
panels. A separate state court action entitled Carney v. Louisiana-Pacific
Corporation is pending in the Superior Court of the State of California for the
City and County of San Francisco, seeking relief under California consumer
protection statutes based on similar allegations. On February 27, 1998, the
United States District Court for the Northern District of California entered an
order approving a settlement that would resolve the above actions. A final order
approving the settlement is expected pending resolution of an appeal by a single
claimant.
The settlement class, other than persons who opted out, is generally composed of
all persons who purchased L-P OSB sheathing or acquired real property or
structures in the United States containing L-P OSB sheathing between January 1,
1984, and October 22, 1997, but only if they have retained ownership of the
product. Under the settlement agreement, an eligible claimant who files a claim
prior to October 22, 2017, upon review of the claim by the claims administrator,
will be entitled to recover the reasonable cost of repair or replacement of any
L-P OSB sheathing determined to have failed to perform its essential function as
warranted and not occasioned by misuse, negligent or intentional misconduct of a
third party or an event over which L-P had no control. The settlement agreement
also
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<PAGE>
provides for payment of a $1.5 million grant to the University of California
Forest Products Laboratory and reasonable attorney fees of class counsel.
In accordance with the terms of the settlement, L-P exercised its right to go
forward with the claims process prior to the resolution of the appeal and began
sending claim form packages on August 19, 1998. As of October 31, 1998, 3,976
notice packages had been mailed, 2,206 claim form packages had been mailed, 25
claim forms had been received, and 3 claims had been verified as valid and
forwarded for inspection.
L-P maintains a reserve for its estimate of the cost of these other OSB matters,
including the sheathing settlement, although as with any estimate, there is
uncertainty concerning the actual costs to be incurred. Based on a review of its
claims records to date, L-P believes that known reports of damage to installed
L-P OSB sheathing have been immaterial in number and amount.
Other
L-P and its subsidiaries are parties to other legal proceedings. Management
believes that the outcome of such proceedings will not have a material adverse
effect on the business, financial position, results of operations or liquidity
of L-P.
Contingency Reserves
L-P maintains contingency reserves in addition to the environmental and other
reserves discussed above. As L-P receives additional information regarding
actual claim rates and average claim amounts, L-P monitors its estimated
exposure and adjusts its accrual accordingly. The amounts ultimately paid for
these contingencies could differ materially from the amount currently recorded,
although no estimate of the timing or range of any potential adjustment can be
made at this time.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibit 10.1: Amendment to Settlement Agreement dated October 26, 1998,
between the registrant and attorneys representing plaintiffs in siding
class action litigation.
Exhibit 27: Financial Data Schedule.
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<PAGE>
SIGNATURES
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 thereunto duly authorized.
LOUISIANA-PACIFIC CORPORATION
By ---------------------------
Curtis M. Stevens
Vice President, Chief Financial
Officer and Treasurer
(Principal Financial Officer)
DATED: November 10, 1998
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF OREGON
IN RE LOUISIANA-PACIFIC INNER-SEAL Civil No. CV-95-879-JO-LEAD
SIDING LITIGATION
SUPPLEMENTAL FUNDING AGREEMENT
This SUPPLEMENTAL FUNDING AGREEMENT ("Supplemental Agreement") is dated
and effective as of October 26, 1998, by and between the Plaintiffs in the above
litigation, for themselves and on behalf of the Settlement Class as that term is
defined in the October 18, 1995 Settlement Agreement ("Class Members") and
defendant Louisiana-Pacific Corporation ("L-P"), collectively, the "Parties."
BACKGROUND
The Parties entered into a Settlement Agreement on October 18, 1995 and
an Amendment to Settlement Agreement dated April 26, 1996, both of which were
approved by the Court in the above matter by its Order, Final Judgment, and
Decree, dated April 26, 1996 (the "Settlement Agreement"). The Settlement
Agreement creates a mechanism for the receipt, inspection, and
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payment of claims filed by a Class Member with the Claims Administrator. The
Parties have negotiated this Supplemental Agreement in order to offer to Class
Members an alternative to the relief provided by the Settlement Agreement.
This Supplemental Agreement does not in any respect alter or amend the
Settlement Agreement, which remains in full force and effect to the same extent
as if this agreement never had been executed. To the extent Class Members who
have filed claims with the Claims Administrator ("Claimants") individually elect
to accept the early payment proposals ("Early Payment") or to participate in the
Second Settlement Fund contained in this Supplemental Agreement, the provisions
governing such proposals will control the respective rights and obligations of
the electing Claimants and L-P.
AGREEMENT
The Parties agree as follows:
1. DEFINITIONS
All terms used in this Supplemental Agreement shall have the same
meaning as set forth in the Settlement Agreement unless otherwise stated in this
agreement.
2. ADVICE TO CLAIMANTS
As soon as practicable following the execution of this Supplemental
Agreement, the Claims Administrator will notify in writing each Claimant who has
filed an approved claim and whose property has been inspected of: (a) the
current status of his claim; (b) its expected payment date; and (c) the
proposals described in this Supplemental Agreement.
3. OFFER OF EARLY PAYMENT - MANDATORY CONTRIBUTIONS
(a) Under the terms of the Settlement Agreement, L-P is required to
contribute a minimum of $275 million to the Settlement Fund over a seven-year
period (the "Mandatory Contributions"). To date, L-P has contributed $195
million to the Settlement Fund. The remaining $80 million is payable in annual
installments on each June 7 of the next four years, commencing on June 7, 1999
(the "Remaining $80 Million").
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(b) L-P agrees to offer to each Claimant whose claim has been approved
by the Claims Administrator and who otherwise is entitled to be paid from the
Remaining $80 Million an amount equal to the present value of his Damage Award
discounted at the rate of 9% per annum to reflect its early payment. For
example, a Claimant with a Damage Award of $6,000 payable on June 7, 1999 who is
offered an Early Payment on November 1, 1998 would be offered $5,694; a Claimant
with a $6,000 Damage Award payable on June 7, 2000 and offered Early Payment on
November 1, 1998 would be offered an Early Payment of $5,206.
(c) The amount of the discount of the Early Payment will be calculated
from the first day of June of the year in which the Damage Award otherwise would
be payable under the Settlement Agreement to the first day of the month in which
the offer is made -- provided that such offers are mailed to Class Members no
later than the 15th day of such month.
4. OFFER OF EARLY PAYMENT - OPTIONAL CONTRIBUTIONS
(a) In addition to the Mandatory Contributions, under the circumstances
described in the Settlement Agreement, L-P may make two optional $50 Million
contributions to the Settlement Fund (the "$100 Million Optional
Contributions"). If L-P elects to make the two optional contributions, the first
is payable in August, 2001, and the second, in August, 2002.
(b) L-P agrees to offer to pay to each Claimant whose claim has been
approved by the Claims Administrator and who otherwise is entitled to be paid
from the proceeds of the $100 Million Optional Contributions an amount equal to
the present value of his Damage Award discounted at the rate of 12% per annum to
reflect its early payment and the elimination of the uncertainty of payment. For
example, a Claimant with a Damage Award of $6,000 payable on August 7, 2001 who
is offered an Early Payment on November 1, 1998 would be offered $4,321; a
Claimant with a $6,000 claim payable on August 7, 2002 and offered Early Payment
on November 1, 1998 would be offered $3,834.
(c) The amount of the discount of the Early Payment will be calculated
from the first day of June of the year in which the Damage Award otherwise would
be payable under the
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Settlement Agreement to the first day of the month in which the offer is made --
provided that such offers are mailed to Class Members no later than the 15th day
of such month.
5. OFFERS OF EARLY PAYMENT TO BE PROMPTLY MADE
L-P's offers of Early Payment to Claimants who otherwise would be paid
from the proceeds of the Remaining $80 Million and the $100 million Optional
Contributions will be communicated by the Claims Administrator to the relevant
Claimants as soon as practicable following the execution of this Supplemental
Agreement.
6. TRANSMITTAL TO RECIPIENTS OF OFFER OF EARLY PAYMENT
(a) The Claims Administrator shall transmit an offer of Early Payment
to each Claimant entitled to receive one under paragraph 3 or 4, above. The
transmittal will explain the proposal and include a check in the amount of the
Early Payment. In addition, the transmittal will advise each Claimant that he is
under no obligation to accept the payment and that the Early Payment is offered
in complete satisfaction of the Claimant's Damage Award and the claim on which
it is based.
(b) Each Claimant will have sixty (60) days from the date of the
transmittal to cash the check, unless the period is extended by L-P in its sole
discretion. If the Claimant fails to cash the check within such sixty (60) day
period (or if extended by L-P, such extended period), he will be deemed to have
rejected the offer.
(c) A Claimant's failure to cash the check shall not affect his rights
and obligations under the Settlement Agreement, all of which remain in full
force and effect.
7. CREDIT FOR EARLY PAYMENT
To take into account their early payment, all payments made to
Claimants pursuant to paragraphs 3 and 4, above, will be credited against L-P's
mandatory and optional payment obligations under paragraphs 4.3, 4.7, and 4.8 of
the Settlement Agreement. The credit shall be equal to the aggregate face amount
of the claims to which such payments relate. For example, if Claimants who hold
$25 million of claims that otherwise would be paid from the next mandatory
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contribution due June 7, 1999 accept the offer of early payment, the mandatory
contribution due on that date will be $5 million. Similarly, if Claimants who
hold $35 million of claims that otherwise would be paid from the proceeds of the
first optional $50 million contribution accept the offer of early payment, the
optional payment due in 2001 will be $15 million.
8. CREATION OF $125 MILLION SECOND SETTLEMENT FUND
L-P will create a separate account within the existing Settlement Fund
(the "Second Settlement Fund"), which will be capitalized at $125 million. The
cash funding for the Second Settlement Fund will be provided no later than ten
(10) business days following the expiration of the Right of Withdrawal Period
(Paragraph 17, below) with the right not having been exercised. The Second
Settlement Fund will be open to receive claims as soon as practicable following
the execution of this Supplemental Agreement and will remain open until December
31, 1999. The Second Settlement Fund is created as a source of payment for all
approved claims filed prior to December 31, 1999 that are in excess of the first
$375 million of claims.
9. ELIGIBLE CLAIMS
Claims that may be filed with the Second Settlement Fund ("Eligible
Claims") are: (a) claims for subsequent damage or for the benefit of the "65%
Rule;" (b) claims that previously have been approved but remain unpaid (other
than a claim that is the subject of an offer of Early Payment); and (c) approved
claims filed prior to the close of the Second Settlement Fund.
10. ELECTION TO PARTICIPATE
The Claims Administrator will notify in writing each Claimant who has
filed an Eligible Claim of L-P's offer to establish the Second Settlement Fund
and describe its terms. Each such Claimant will have sixty (60) days from the
date of the notice to return to the Claims Administrator an Election to
Participate form evidencing his desire to participate in the Second Settlement
Fund. Only Claimants who timely return the Election to Participate form to the
Claims Administrator will be allowed to participate in the Second Settlement
Fund.
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11. PROMPT INSPECTION; CALCULATION OF DAMAGE AWARD
The claim of each Claimant that is approved by the Claims Administrator
will be promptly inspected by the Independent Adjuster in accordance with the
protocol adopted under the Settlement Agreement. Thereafter, the Claims
Administrator will calculate the applicable damage award, if any, based upon the
results of the inspection of the Independent Adjuster (the "Damage Award").
12. CALCULATION OF PRO RATA SHARE
As soon as practicable following the close of the Second Settlement
Fund, the Claims Administrator will calculate the pro rata share of each
Claimant who has filed an Eligible Claim and who timely files an Election to
Participate form in accordance with the formula S = D($125 million/A), where S
is the Claimant's pro rata share of the Second Settlement Fund; D is the amount
of the Claimant's Damage Award, and A is the aggregate amount of all claims
filed against the Second Settlement Fund (the "Pro Rata Share").
13. ADVICE TO PARTICIPANTS IN SECOND SETTLEMENT FUND
As soon as the Pro Rata Share of the participants in the Second
Settlement Fund has been calculated by the Claims Administrator, each
participant will be advised in writing: (a) of the amount of his damage as shown
in the Calculation Worksheet; (b) of the amount of his Pro Rata Share of the
Second Settlement Fund (not to exceed the amount of his Damage Award); (c) that
the Pro Rata Share is offered to him in complete satisfaction of his claim for
damage as described in the Calculation Worksheet; (d) that recipients of
distributions from the Second Settlement Fund may not file additional damage
claims with the Claims Administrator during the remaining term of the
Settlement; and (e) that there is no right to arbitrate the amount of the pro
rata distribution.
14. BACK END OPT-OUT RIGHT
If the Claimant is dissatisfied with the amount of his Pro Rata Share,
he may reject it by providing written notice to the Claims Administrator
postmarked no later than thirty (30) days from the date of such written
notification (the "Back End Opt-Out Right"). Unless the Claimant
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exercises his Back End Opt-Out Right by providing timely written notice to the
Claims Administrator, he conclusively will be deemed to have accepted his Pro
Rata Share in full and complete satisfaction of the damage claim described in
the Calculation Worksheet.
15. PAYMENT OF PRO RATA SHARE
Payment of the Pro Rata Share of each participant in the Second
Settlement Fund who fails timely to exercise his Back End Opt-Out Right will be
mailed to him as soon as practicable following the expiration of the Right of
Withdrawal Period (Paragraph 17, below) with the right not having been
exercised.
16. WRITTEN NOTICE TO L-P
The Claims Administrator will provide L-P with prompt written notice
(no less often than biweekly) of the number of Claimants with Eligible Claims
who have exercised their Opt-In Rights, of the number who have not, and of the
aggregate amount of their claims. In addition, within ten (10) business days
after the expiration of the period for the exercise of Back End Opt-Out Rights,
the Claims Administrator will advise L-P in writing of the number of Claimants
who timely exercised their Back End Opt-Out Rights and of the aggregate amount
of their claims.
17. L-P'S RIGHT OF WITHDRAWAL
If, in its sole discretion, L-P believes that the number of Claimants
who elect not to participate in the Second Settlement Fund (whether by not
opting-in or by opting out) is excessive, it may withdraw its offer to establish
the Second Settlement fund (the "Right of Withdrawal"). The Right of Withdrawal
must be exercised by providing written notice to the Claims Administrator
postmarked within ten (10) business days following receipt of advice from the
Claims Administrator as to the number of Claimants exercising their Back End
Opt-Out Rights (the "Right of Withdrawal Period"). If L-P timely exercises its
Right of Withdrawal, its offer to establish the Second Settlement Fund is null
and void, and thereafter the rights and obligations of L-P and all Class Members
shall be governed exclusively by the terms of the
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Settlement Agreement, except to the extent those rights and obligations were
modified pursuant to a claimant's acceptance of any offer of Early Payment.
18. REVIVAL OF CLAIMS; MAINTENANCE INSTRUCTIONS
All Claimants also will be advised that pursuant to the terms of the
Settlement Agreement if there are unpaid claims at the end of the settlement
term, L-P must pay them; or, if it does not, each unpaid Claimant will be free
after that date to pursue whatever legal remedies are available, subject to any
legal defenses L-P may have, including the defense that a Claimant has failed
properly to maintain his siding. In this regard, each Claimant will be provided
with a copy of L-P's written maintenance instructions, which would be the basis
for any maintenance defense if not followed.
19. PERSONAL AND PUBLISHED NOTICE
The substance of this Supplemental Agreement will be communicated
personally in a direct mailing to each Claimant who files an Eligible Claim or
who is entitled to receive an offer of Early Payment. In addition, notice of the
offer may be included in the published third year notice that must be provided
under the Settlement Agreement and in such other publications and in such other
manner as the Parties jointly may agree.
20. TAX STATUS OF SECOND SETTLEMENT FUND
The Second Settlement Fund will be established and maintained as a
separate account within the existing Qualified Settlement Fund ("QSF") in
accordance with Section 468B of the Internal Revenue Code of 1986, as amended,
and the regulations promulgated thereunder. The Claims Administrator is
appointed to act as administrator of the fund within the meaning of Treas. Reg.
Sec. 1-468B-2(k)(3). As the Administrator, the Claims Administrator shall comply
with all applicable duties and obligations under IRC sec. 468B and any relevant
implementing regulations.
21. REPRESENTATIONS AND WARRANTIES
L-P represents and warrants that: (a) it has all requisite corporate
power and authority to execute, deliver, and perform this agreement and to
consummate the transactions contemplated
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hereby; (b) the execution, delivery, and performance of this Supplemental
Agreement have been duly authorized by all necessary corporation action; and (c)
this agreement has been validly executed by L-P and constitutes its legal,
valid, and binding obligation.
22. INTEREST ON EARLY PAYMENT FUNDING AND SECOND SETTLEMENT FUND
All interest earned on the funds advanced by L-P to fund the Early
Payment offers and all interest earned on the funds advanced by L-P to fund the
Second Settlement Fund shall be applied as a full credit toward any remaining
mandatory or optional contributions from L-P under the Settlement Agreement.
23. MISCELLANEOUS PROVISIONS
a. No term or provision of this Supplemental Agreement shall alter or
amend any term or provision of the Settlement Agreement, no hearing on the
Supplemental Agreement is required under Rule 23, Fed. R. Civ. P., and all of
terms and provisions of the Settlement Agreement remain in full force and effect
to the same extent as though this Supplemental Agreement had never been
executed.
b. The Court, acting through the Special Master, shall oversee the
implementation, administration, and performance of this Supplemental Agreement
to assure that none of its provisions alter or affect the terms of the
Settlement Agreement. The Special Master also shall resolve any dispute that may
arise under this Supplemental Agreement which bears on any term or condition of
the Settlement Agreement or involves the construction or meaning of any
provision of the Settlement Agreement.
c. This Supplemental Agreement may not be modified or amended except in
a writing signed by all the Parties.
d. This Supplemental Agreement shall be governed and construed in
accordance with the laws of the State of Oregon, applied without regard to its
laws applicable to choice of law.
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e. The headings of the sections of this Supplemental Agreement are
included for convenience only and shall not be deemed to constitute part of this
agreement or to affect its construction.
f. This Supplemental Agreement may be executed in any number of
counterparts, all of which when taken together shall constitute one agreement.
g. Any additional administrative costs incurred by the Claims
Administrator or Independent Adjuster in the performance of the acts
contemplated by this Supplemental Agreement, as well as the cost of providing
published notice of its terms, shall be borne by L-P.
h. Any notice provided in connection with this Supplemental Agreement
or other document to be provided by one Party to the other shall be in writing
and delivered personally or sent by registered or certified mail, postage
prepaid: if to L-P, to the attention of L-P's respective representatives; and to
Plaintiffs' Class Counsel on behalf of Settlement Class members. As of the date
of this Supplemental Agreement, the respective representatives are as set forth
below.
Dated and effective as of October 26, 1998.
LOUISIANA-PACIFIC CORPORATION
By:/s/ Gary C. Wilkerson
------------------------------------------------
Gary C. Wilkerson
Vice President and General Counsel
LOUISIANA-PACIFIC CORPORATION
111 S.W. Fifth Avenue, Suite 4200
Portland, OR 97204
By:/s/ Michael H. Simon
------------------------------------------------
Michael H. Simon
PERKINS COIE LLP
1211 S. W. Fifth Avenue, Suite 1500
Portland, Oregon 97204
Counsel for Louisiana-Pacific Corp.
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<PAGE>
CLASS COUNSEL
By:/s/ Christopher I. Brain
------------------------------------------------
Christopher I. Brain
TOUSLEY BRAIN 700
Fifth Avenue, 56th Floor
AT&T Gateway Tower
Seattle, WA 98104-5056
By:/s/ Clyde Platt
------------------------------------------------
Steve W. Berman
Clyde Platt
HAGENS & BERMAN
1301 Fifth Avenue, Suite 2929
Seattle, WA 98101
By:/s/ Jeremy R. Larson
------------------------------------------------
Charles Nomellini
Jaremy R. Larson
FOSTER PEPPER & SHEFELMAN
1111 Third Avenue, Suite 3400
Seattle, WA 98101
By:/s/ Jonathan D. Selbin
------------------------------------------------
Elizabeth Cabraser
Jonathan D. Selbin
LIEFF, CABRASER, HEIMANN
& BERNSTEIN LLP
Embarcadero Center West
275 Battery Street, 30th Floor
San Francisco, CA 94111-3339
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By:/s/ A. Hoyt Rowell, III
------------------------------------------------
A. Hoyt Rowell, III
NESS, MOTLEY, LOADBOLT,
RICHARDSON & POOLE
174 East Bay Street, Suite 100
Charleston, S.C. 29041
By:/s/ William H. Garvin, III
------------------------------------------------
William H. Garvin, III
WELLER, GREEN, McGOWN & TOUPS
2937 Kerry Forrest Parkway, Suite A-2
Tallahassee, FL 32308
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Consolidated Summary Financial Statements and Notes included in this Form
10-Q and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<PERIOD-START> JAN-01-1998
<CASH> 52,800
<SECURITIES> 169,900
<RECEIVABLES> 165,200
<ALLOWANCES> 0
<INVENTORY> 221,300
<CURRENT-ASSETS> 759,800
<PP&E> 2,124,900
<DEPRECIATION> (1,190,900)
<TOTAL-ASSETS> 2,706,700
<CURRENT-LIABILITIES> 496,700
<BONDS> 475,300
0
0
<COMMON> 117,000
<OTHER-SE> 1,136,200
<TOTAL-LIABILITY-AND-EQUITY> 2,706,700
<SALES> 1,777,800
<TOTAL-REVENUES> 1,777,800
<CGS> 1,430,600
<TOTAL-COSTS> 1,770,100
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,300
<INCOME-PRETAX> (7,600)
<INCOME-TAX> 9,300
<INCOME-CONTINUING> (13,900)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,900)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
