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Washington, D.C. 20549
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended Commission File Number
December 31, 1997 1-7107
LOUISIANA-PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 93-0609074
(State of Incorporation) (I.R.S. Employer
Identification No.)
111 S.W. Fifth Avenue Registrant's telephone number
Portland, Oregon 97204 (including area code)
(Address of principal 503-221-0800
executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ----------------
Common Stock, $1 par value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant: $2,513,964,661 as of March 12, 1998.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock: 109,780,858 shares of Common Stock, $1 par value, outstanding as
of March 12, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement for 1998 Annual Meeting: Part III
PART I
ITEM 1. Business
General
- -------
Louisiana-Pacific Corporation, a Delaware corporation since 1973, is a
major forest products firm headquartered in Portland, Oregon. It manufactures
lumber, pulp, structural and other panel products, hardwood veneers, and
cellulose insulation. It operates approximately 100 facilities throughout the
United States, Canada, and Ireland. It has approximately 12,000 employees. It
distributes its products primarily through distributors and home centers, and to
a minor extent through its own distribution centers.
The business of Louisiana-Pacific Corporation and its wholly owned
subsidiaries (except when the context otherwise requires, hereinafter referred
to collectively as "the registrant" or "L-P") is generally divided into two
industry segments: building products and pulp. For 1997, building products
accounted for approximately 95 percent of the registrant's sales revenues,
compared to approximately 5 percent for pulp.
Building Products
- -----------------
Panel Products. The registrant manufactures plywood and a variety of
reconstituted panel products, including oriented strand board ("OSB") and other
panel products such as industrial particleboard, medium density fiberboard
("MDF"), and hardboard. Panel products accounted for 44 percent of L-P's sales
in 1997.
The largest consumption of panel products is for structural uses in
building and remodeling such as subfloors, walls, and roofs. The total
structural panel market in North America (plywood, OSB and other waferboards) is
approximately 37 billion square feet annually, of which plywood currently
constitutes about 20 billion square feet. In recent years, environmental
pressure on timber harvesting, especially in the West, has resulted in reduced
supplies and higher costs, causing many plywood mills to close permanently. The
lost volume from those closed mills has been replaced by reconstituted
structural panel products.
The registrant is the largest North American producer of OSB through 16
OSB plants with an aggregate annual capacity of approximately 4.5 billion square
feet, including its three plants which manufacture OSB exterior siding. The
registrant also has an OSB plant in Ireland. The registrant operates five
plywood plants in the South with a combined annual capacity of 1.3 billion
square feet.
The registrant's other reconstituted panel products--industrial
particleboard, MDF, and hardboard--produced at a total of seven plants, are used
primarily in the manufacture of furniture and cabinets.
Lumber. The registrant is a large producer of lumber. The registrant
has 14 Western (whitewood and redwood) sawmills with an annual production
capacity of 1.1 billion board feet ("BBF"), while its 15 Southern sawmills have
an annual production capacity of .5 BBF. Lumber represented 28 percent of the
registrant's sales revenue in 1997. The registrant's sawmills produce a variety
of standard U.S. dimension lumber as well as specialty grades and sizes,
primarily for the North American home building market. A sawmill in Ketchikan,
Alaska, produces lumber for export in the traditional sizes used in the Japanese
building industry, but has the capability of switching to standard U.S.
dimensions. The registrant also operates a fingerjoint plant which produces
dimension lumber from low grade and short pieces of lumber. In
- 2 -
October 1997, the registrant announced its intention to sell its remaining
California redwood timberlands and related lumber and certain distribution
businesses.
Other Building Products. The registrant produces various hardwood
veneers at a plant in Wisconsin with both rotary and sliced manufacturing
processes. These veneers are sold to customers who overlay the veneers on other
materials for use in paneling, furniture and cabinets.
The registrant has four engineered I-joist plants located in
California, Nevada, North Carolina, and Oregon. OSB is cut into sections and
used as the web for the I-joists. The registrant also produces laminated veneer
lumber ("LVL") in Nevada, North Carolina and Oregon. LVL is a high-grade
structural product used where extra strength is required. It is also used as the
flange material in I-joists. In March 1997, the registrant acquired the assets
of Tecton Laminates Corp. ("Tecton"), which significantly increased the
registrant's LVL and I-joist capacity.
Nine plants produce cellulose residential insulation from recycled
newspaper. This insulation has a higher R-value than comparable thicknesses of
conventional fiberglass insulation. Other facilities operated by the registrant
include two wood chip mills, two coatings and chemical plants, seven
wood-treating plants, and six building materials distribution centers.
The registrant currently owns seven plants in Ohio which manufacture
windows and doors and their component parts. In February 1998, L-P announced it
had reached an agreement in principle to sell these facilities. L-P expects the
transaction to close during the second quarter of 1998.
In October 1997, the registrant also announced plans to sell certain
other facilities that it considers non-strategic to its core businesses,
including its Creative Point, Inc., subsidiary, its cement fiber roof shake
plant and the fiber gypsum plant in Nova Scotia. The Nova Scotia plant was sold
prior to year end.
Pulp
- ----
The registrant has two pulp mills located in Samoa, California, and
Chetwynd, British Columbia, Canada. The Chetwynd mill utilizes a
state-of-the-art mechanical pulping process and a zero effluent discharge system
to produce 100 percent aspen pulp and has an annual capacity of approximately
185 thousand short tons. The Samoa mill produces bleached and unbleached kraft
pulp by a chlorine-free process, thereby eliminating dioxins. In October 1997,
the registrant announced its intention to sell the Samoa pulp mill. A third mill
in Ketchikan, Alaska, which produced a high-grade dissolving pulp, was
permanently closed in March 1997. (See Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations.)
Competition
- -----------
The registrant competes internationally with several thousand forest
products firms, ranging from very large, fully integrated firms to smaller firms
that may manufacture only one or a few items. The registrant estimates that
approximately 25 forest products firms comprise its major competition. The
registrant also competes less directly with firms that manufacture substitutes
for wood building products. A majority of the products manufactured by the
registrant, including lumber, structural panels, and pulp, are commodity
products sold primarily on the basis of price in competition with numerous other
forest products companies.
The registrant has introduced a number of value-enhanced products to
complement its traditional lumber and panel products, such as the OSB
- 3 -
SmartStart(TM) system of siding and exterior products and flooring, and a
radiant barrier product known as TechShield(TM). The registrant's Cocoon(TM)
cellulosic insulation products utilize wood fiber from waste paper and are
believed to have better insulating and sound-deadening properties than
fiberglass insulation.
Environmental Compliance
- ------------------------
The registrant is subject to federal, state and local pollution control
laws and regulations in all areas in which it has operating facilities. The
registrant maintains an accounting reserve for environmental loss contingencies.
From time to time, the registrant undertakes construction projects for
environmental control facilities or incurs other environmental costs that extend
an asset's useful life, improve efficiency, or improve the marketability of
certain properties.
The registrant's policy is to comply fully with all applicable
environmental laws and regulations. In recent years, the registrant has devoted
increasing financial and management resources to achieving this goal. As part of
its efforts to ensure environmental compliance, the registrant conducts regular
internal environmental assessments. From time to time, the registrant becomes
aware of violations of applicable laws or regulations. In those instances, the
registrant's policy is to bring its operations promptly into full compliance
with applicable environmental laws and regulations. The registrant is not aware
of any instances in which its current operations are not in compliance with
applicable environmental laws and regulations that would be expected to have a
material adverse effect on the registrant.
Additional information concerning environmental compliance is set forth
under Item 3, Legal Proceedings and the Notes to Financial Statements in Item 8.
Additional Statistical Information
- ----------------------------------
Additional information regarding the business of the registrant,
including segment information, production volumes, and industry product price
trends, is presented in the following tables labeled "Sales and Operating Profit
by Major Product Group," "Summary of Production Volumes," "Industry Product
Price Trends," and "Logs by Source." Additional financial information about
industry segments is presented in Note 10 of the Notes to Financial Statements
in Item 8.
Reference is made to Item 2 for additional information as to sources
and availability of raw materials and the locations of the registrant's
manufacturing facilities.
- 4 -
Louisiana-Pacific Corporation and Subsidiaries
PRODUCT INFORMATION SUMMARY
SEE ADDITIONAL INFORMATION REGARDING INDUSTRY SEGMENTS IN NOTES TO FINANCIAL
STATEMENTS.
YEAR ENDED DECEMBER 31 (DOLLAR AMOUNTS IN MILLIONS)
1997 1996 1995 1994 1993
------------ ------------ ------------- ------------ ------------
SALES AND PROFIT BY MAJOR PRODUCT GROUP
- ---------------------------------------
SALES: Structural panel products $ 864 36% $ 1,006 40% $ 1,127 39% $ 1,208 40% $ 1,005 40%
===== Lumber 665 28 614 25 644 23 867 28 816 33
Industrial panel products 181 8 195 8 215 8 240 8 194 8
Other building products 563 23 494 20 523 18 505 17 411 16
-------- --- ------- --- -------- --- --------- --- --------- ---
Building products 2,273 95 2,309 93 2,509 88 2,820 93 2,426 97
Pulp 130 5 177 7 334 12 220 7 85 3
-------- --- -------- --- -------- --- --------- --- --------- ---
Total sales $ 2,403 100% $ 2,486 100% $ 2,843 100% $ 3,040 100% $ 2,511 100%
======== === ======== === ======== === ========= === ========= ===
Export sales (included
above) $ 240 10% $ 268 11% $ 457 16% $ 371 12% $ 252 10%
======== === ======== === ======== === ======== === ========= ==
PROFIT: Building products $ 20 $ 174 $ 346 $ 636 $ 562
Pulp (29) (91) 44 (5) (59)
Settlements, charges and other
unusual items, net (32) (350) (367) --- ---
General corporate and other
expense, net (80) (52) (121) (72) (70)
Interest, net (29) (8) 3 1 (5)
-------- -------- -------- -------- --------
Income (loss) before taxes,
minority interest and
accounting changes (1) $ (150) $ (327) $ (95) $ 560 $ 428
========= ========= ======== ========= ==========
SUMMARY OF PRODUCTION VOLUMES
- -----------------------------
OSB, million square feet 3/8" basis 4,000 4,008 3,445 3,404 3,100
Softwood plywood, million
square feet 3/8" basis 1,221 1,613 1,466 1,604 1,507
Lumber, million board feet 1,240 1,201 1,359 1,986 1,796
Industrial panel products
(particleboard, medium density
fiberboard and hardboard),
million square feet 3/4" basis 589 580 582 641 597
Engineered I-Joists,
million lineal feet 73 55
Laminated veneer lumber,
thousand cubic feet 5,800 3,900
Pulp, thousand short tons 377 439 486 441 224
- 5 -
1997 1996 1995 1994 1993
------------ ------------ ------------- ------------ ------------
INDUSTRY PRODUCT PRICE TRENDS (2)
- ---------------------------------
OSB, MSF, 7/16" -- 24/16 span
rating (North Central price) $ 143 $ 184 $ 245 $ 265 $ 236
Southern pine plywood,
MSF, 1/2" CDX (3 ply) 26 258 303 302 282
Framing lumber, composite
prices, MBF 417 398 337 405 394
Industrial particleboard,
3/4" basis, MSF 262 276 290 295 258
LOGS BY SOURCE (3)
- ------------------
Fee owned lands 19% 16% 13% 11% 12%
Private cutting contracts 14 14 12 14 15
Government contracts 7 6 9 8 10
Purchased logs 60 64 66 67 63
Total log volume -
million board feet 2,398 2,432 2,818 3,138 2,940
- --------------------------
(1) Does not include cumulative effects of accounting changes in 1993.
(2) Prices represent yearly averages stated in dollars per thousand board feet
(MBF), thousand square feet (MSF) or short ton. Source: Random Lengths.
(3) Stated as a percent of total log volume.
SEE ADDITIONAL INFORMATION REGARDING INDUSTRY SEGMENTS IN THE NOTES TO FINANCIAL
STATEMENTS IN ITEM 8.
- 6 -
ITEM 2. Properties
The following tables list the principal facilities of the registrant
and its subsidiaries. Information on production capacities reflects normal
operating rates and normal production mixes under current market conditions,
taking into account known constraints such as log supply. Unless otherwise
noted, capacities are in millions of units.
MANUFACTURING FACILITIES
------------------------
SAWMILLS METRIC 1) NORMAL 2)
(BOARD FEET, 2 SHIFTS, 5 DAYS; *1 SHIFT, 5 DAYS) CAPACITIES CAPACITIES
WESTERN LUMBER (14 plants)
Annette, AK 110 70
Belgrade, MT 150 90
Big Lagoon, CA 35 20*
Chilco, ID 205 125
Deer Lodge, MT (3 shifts) 155 95
Deer Lodge, MT (fingerjoint) 130 80
Fort Bragg, CA 115 70
Ketchikan, AK 100 60
Moyie Springs, ID (3 shifts) 220 135
Samoa, CA 165 100
Sandpoint, ID (remanufacturing) --- ---
Saratoga, WY 80 50
Tacoma, WA 100 60
Ukiah, CA 165 100
SOUTHERN LUMBER (15 plants)
Bernice, LA 65 40*
Bon Wier, TX 40 25*
Cleveland, TX 65 40*
Eatonton, GA 60 35*
Evergreen, AL 70 45*
Hattiesburg, MS 65 40*
Henderson, NC 65 40*
Jasper, TX 90 55*
Kountze, TX 25 15*
Lockhart, AL 35 20*
Marianna, FL 50 30*
New Waverly, TX 25 15*
Philadelphia, MS 65 40*
Statesboro, GA 50 30*
West Bay, FL 60 35*
----- ----
Total Lumber Capacity (29 plants) 2,560 1,560
===== =====
- 7 -
MANUFACTURING FACILITIES
PANEL PRODUCTS PLANTS
SOFTWOOD PLYWOOD PLANTS METRIC 1) METRIC 2)
(3/8-INCH BASIS, SQUARE FEET, 2 SHIFTS, 5 DAYS) CAPACITIES CAPACITIES
Bon Wier, TX 230 260
Cleveland, TX 250 280
Logansport, LA 195 220
New Waverly, TX 230 260
Urania, LA 220 250
----- -----
Total Softwood Plywood Capacity (5 plants) 1,125 1,270
===== =====
ORIENTED STRAND BOARD PANEL PLANTS
(3/8-INCH BASIS, SQUARE FEET, 3 SHIFTS,7 DAYS)
Athens, GA 295 335
Carthage, TX (under construction) 355 400
Corrigan, TX 135 150
Dawson Creek, B.C. Canada 335 375
Hanceville, AL 310 350
Hayward, WI (2 plants) 445 500
Houlton, ME 230 260
Jasper, TX 355 400
Montrose, CO 130 145
Roxboro, NC 335 375
Sagola, MI 310 350
Silsbee, TX 310 350
Swan Valley, MB, Canada 400 450
Waterford, Ireland 355 400
----- -----
Total OSB Capacity (15 plants) 4,300 4,840
===== =====
ORIENTED STRAND BOARD SIDING PLANTS
(3/8-INCH BASIS, SQUARE FEET, 3 SHIFTS, 7 DAYS)
Newberry, MI 115 130
Tomahawk, WI 135 150
Two Harbors, MN 125 140
----- -----
Total OSB Siding Capacity (3 plants) 375 420
===== =====
MEDIUM DENSITY FIBERBOARD PLANTS
(3/4-INCH BASIS, SQUARE FEET, 3 SHIFTS, 7 DAYS)
Eufaula, AL 230 130
Oroville, CA 90 50
Urania, LA 90 50
----- -----
Total MDF Capacity (3 plants) 410 230
===== =====
PARTICLEBOARD PLANTS
(3/4-INCH BASIS, SQUARE FEET, 3 SHIFTS, 7 DAYS)
Arcata, CA 220 125
Missoula, MT 275 155
Silsbee, TX 140 80
----- -----
Total Particleboard Capacity (3 plants) 635 360
===== =====
HARDBOARD PLANT
(1/8-INCH BASIS, SQUARE FEET, 3 SHIFTS, 7 DAYS)
Oroville, CA 62 210
===== =====
- 8 -
MANUFACTURING FACILITIES
------------------------
OTHER BUILDING PRODUCTS
HARDWOOD VENEER PLANTS NORMAL 2)
(SURFACE MEASURE, SQUARE FEET, 2 SHIFTS, 5 DAYS) CAPACITIES
Mellen, WI (2 plants) 250
======
I-JOIST PLANTS
(LINEAL FEET; 1 SHIFT, 5 DAYS)
Fernley, NV 21
Hines, OR 21
Red Bluff, CA 25
Wilmington, NC 20
-----
Total I-Joist Capacity (4 plants) 87
=====
LAMINATED VENEER LUMBER PLANTS
(THOUSAND CUBIC FEET; 2 SHIFTS, 7 DAYS)
Fernley, NV 1,600
Hines, OR 2,700
Wilmington, NC 1,600
-----
Total LVL Capacity (3 plants) 5,900
=====
PULP MILLS METRIC 1) NORMAL 2)
(THOUSAND SHORT TONS, 3 SHIFTS, 7 DAYS) CAPACITIES CAPACITIES
Samoa, CA 195 220
Chetwynd, B.C. Canada 170 185
----- -----
Total Pulp Capacity (2 plants) 365 405
===== =====
- 9 -
MANUFACTURING FACILITIES
OTHER MANUFACTURING FACILITIES (23 PLANTS)
Cellulose insulation plants: Phoenix, AZ, Vancouver, B.C.;
Sacramento, CA; Atlanta, GA; Fort
Wayne, IN; Norfolk, NE; Bucyrus, OH;
Portland, OR; Elkwood, VA
Cement fiber shake: Red Bluff, CA
Chip mills: Cleveland and Moscow, TX
Coatings and chemicals: Portland, OR; Orangeburg, SC
Consumer electronics storage: Oswego, IL
Softwood veneer plant: Rogue River, OR
Wood treating plants: Evergreen and Lockhart, AL;
Marianna, FL; Statesboro, GA; New
Waverly and Silsbee, TX; Ukiah, CA
DISTRIBUTION CENTERS (6 LOCATIONS)
Calpella, CA Riverside, CA
Rocklin, CA Dodge City, KS
Salina, KS Conroe, TX
TOTAL FACILITIES: 99
Note: The capacities above are based on normal operating rates and
normal production mixes. Market conditions, the availability
of logs, and the nature of current orders can cause actual
production rates to vary considerably from normal rates.
TIMBERLAND HOLDINGS
HECTARES ACRES
California: Whitewoods, Fir, Pine, Redwood 158,900 392,500
Idaho: Fir, Pine 16,700 41,200
Louisiana: Pine, Hardwoods 78,700 194,500
Minnesota: Hardwoods 11,400 28,200
North Carolina: Pine, Hardwoods 900 2,100
Texas: Pine, Hardwoods 283,800 701,100
Virginia: Pine, Hardwoods 2,300 5,700
Wisconsin: Hardwoods 600 1,500
Wyoming: Whitewoods 600 1,600
------- ---------
Total Fee 553,900 1,368,400
======= =========
1) Metric capacities in thousand cubic meters.
2) Normal capacities in millions of units unless otherwise noted.
Note: See Note 7 of the Notes to Financial Statements in Item 8 for
a discussion of an asset sale program involving certain of
these timberland holdings and manufacturing facilities. The
list does not include window and door manufacturing facilities
subject to sale under a letter of intent.
In addition to its fee-owned timberlands, the registrant has timber
cutting rights in the United States, under long-term contracts (five years and
over) on approximately 5,600 acres and under contracts for shorter periods on
approximately 240,800 acres, on government and privately owned timberlands in
the vicinities of certain of its manufacturing facilities. L-P's Canadian
subsidiary is a party to long-term timber license arrangements in Canada.
Information regarding the sources of the registrant's log requirements is
located under the table labeled "Logs by Source" in Item 1.
- 10 -
ITEM 3. Legal Proceedings
For a discussion of legal and environmental matters involving L-P and
the potential effect on L-P, refer to Note 8 of the Notes to Financial
Statements under the heading "Contingencies" in Item 8, which is incorporated
herein by reference.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the registrant's security holders
during the fourth quarter of 1997.
Executive Officers of the Registrant
- ------------------------------------
The following sets forth the name of each executive officer of the
registrant (including certain executives whose duties may cause them to be
classified as executive officers under applicable SEC rules), the age of the
officer, and all positions and offices held with the registrant as of March 20,
1998:
Mark A. Suwyn, age 55, has served as Chairman and Chief Executive
Officer of L-P since January 1996. Before joining L-P, Mr. Suwyn was Executive
Vice President of International Paper Company from 1992 through 1995.
Previously, Mr. Suwyn was Senior Vice President of E.I. du Pont de Nemours & Co.
Mr. Suwyn is also a director of the registrant.
Michael D. Hanna, age 45, joined L-P in June 1996 as Executive
Vice President after serving as President of Associated Chemists, Inc., for more
than five years previous.
Warren C. Easley, age 56, joined L-P as Vice President, Technology
and Quality in May 1996 after serving as Technical Manager--Nylon Division,
North America for E.I. du Pont de Nemours & Co. for more than five years
previous.
Richard W. Frost, age 46, joined L-P in May 1996 as Vice
President, Timberlands and Fiber Procurement. Mr. Frost worked for S.D. Warren
Company as Director of Timberlands prior to April 1992, as Vice President and
Manager, Westbrook Mill, from April 1992 to September 1995, and as Vice
President and General Manager, Somerset Operations for S.D. Warren Company from
September 1995 to 1996.
H. Ward Hubbell, age 37, joined L-P as Director, Corporate Affairs
in September 1997. Previously, Mr. Hubbell was employed by International Paper
Company beginning in October 1992, first as Communications Director and then as
Federal Affairs Manager. Before that, he was vice president of a Washington,
D.C., public relations firm.
Karen D. Lundquist, age 42, was named Vice President,
Manufacturing in January 1997. Before joining L-P, Ms. Lundquist was an
executive officer and director of Rapid Change Technologies, Inc. (formerly
known as Creative Breakthroughs, Inc.), from the fall of 1993 to January 1997,
and served as its chief executive officer from mid-1995 to 1997. From September
1991 to October 1993, Ms. Lundquist was a plant manager with E.I. du Pont de
Nemours & Co.
J. Keith Matheney, age 49, joined the registrant in March 1970 and
has served as Vice President, Sales and Marketing since January 26, 1997. Mr.
Matheney was General Manager--Western Division from February 1996 to January
1997 after serving as General Manager--Weather-Seal Division of the registrant
from May 1994 to February 1996, and as Director of Sales and Marketing for more
than five years previous.
- 11 -
Elizabeth T. Smith, age 53, became Director, Environmental Affairs of
the registrant in March 1993. Ms. Smith has been employed by L-P in various
positions relating to environmental management since 1987.
Curtis M. Stevens, age 45, was appointed as Vice President, Chief
Financial Officer and Treasurer of L-P in September 1997. He previously spent 13
years as the senior financial executive of Planar Systems, Inc., a leading
manufacturer and supplier of electroluminescent flat panel displays, where he
was named Executive Vice President and General Manager in 1996.
Michael J. Tull, age 52, became Vice President, Human Resources of the
registrant in May 1996. Mr. Tull was previously employed by Sharp HealthCare, a
regional system of hospitals and related facilities in San Diego, California,
for more than 10 years, most recently as Corporate Vice President of Employee
Quality and Development beginning in 1991.
Gary C. Wilkerson, age 51, joined L-P as Vice President and General
Counsel in September 1997. Beginning in early 1997, Mr. Wilkerson served as
(acting) Senior Vice President, General Counsel and Secretary for the consumer
products division of IVAX Pharmaceuticals. For the previous seven years, he was
Senior Vice President, General Counsel and Secretary of Maybelline Co., a
cosmetics manufacturer.
All executive officers serve at the pleasure of the board of directors
of L-P. Unless earlier removed by the board of directors, the officers' terms of
office run until the next annual meeting of the board of directors.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The common stock is listed on the New York Stock Exchange, the
Dow-Jones newspaper quotations symbol is "LaPac," and the ticker symbol is
"LPX." Information regarding market prices for the registrant's common stock is
included in the table in Item 6 headed "High and Low Stock Prices." Holders of
the registrant's common stock may automatically reinvest dividends toward
purchase of additional shares of the registrant's common stock. At March 12,
1998, L-P had approximately 21,000 stockholders of record. Information regarding
cash dividends paid during 1996 and 1997 is included in the table in Item 6 with
respect to quarterly data.
- 12 -
ITEM 6. Selected Financial Data
DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE 1996 1997
- ------------------------------------------- ---- ----
ANNUAL DATA
Net sales $ 2,486.0 $ 2,402.5
Net income (loss) (200.7) (101.8)
Net income (loss) per share-basic and diluted (1.87) (.94)
Net cash provided by operating activities 22.8 88.2
Capital expenditures -- plants, logging
roads and timber (includes cash portion
of acquisitions) 266.0 204.5
Working capital 234.5 277.5
Ratio of current assets to
current liabilities 1.68 to 1 1.87 to 1
Total assets 2,622.4 2,578.4
Long-term debt, excluding current portion 458.6 572.3
Long-term debt as a percent of
total capitalization 24.3% 30.8%
Stockholders' equity 1,427.6 1,286.2
Per ending share of common stock 13.13 11.73
Number of employees 12,500 12,000
Number of stockholders of record 23,900 22,000
1ST QTR 2ND QTR 3RD QTR 4TH QTR YEAR
1997 QUARTERLY DATA
Net sales $ 554.6 $ 633.3 $ 619.5 $ 595.1 $ 2,402.5
Gross profit (loss) (1) (35.1) (8.2) (13.8) (31.4) (88.5)
Income (loss) before taxes
and minority interest 78.3(2) (14.7) (176.3)(2) (37.3) (150.0)
Net income (loss) 42.0(2) (10.1) (112.4)(2) (21.3) (101.8)
Net income (loss) per share-
basic and diluted .39(2) (.10) (1.03)(2) (.20) (.94)
Cash dividends per share .14 .14 .14 .14 .56
1996 QUARTERLY DATA
Net sales $ 584.1 $ 658.3 $ 676.3 $ 567.3 $2,486.0
Gross profit (loss) (1) (5.0) 35.0 21.9 (20.9) 31.0
Income (loss) before taxes
and minority interest (5.0) 34.5 (332.0)(2) (24.3) (326.8)
Net income (loss) (3.6) 21.0 (203.4)(2) (14.7) (200.7)
Net income (loss) per share-
basic and diluted (.03) .19 (1.89)(2) (.14) (1.87)
Cash dividends per share .14 .14 .14 .14 .56
HIGH AND LOW STOCK PRICES
1997 High $ 22.00 $ 21.56 $ 25.56 $ 25.88 $ 25.88
Low 19.88 17.00 20.50 17.54 17.00
1996 High $ 26.25 $ 28.13 $ 23.75 $ 23.00 $ 28.13
Low 23.00 22.13 19.63 20.63 19.63
- --------------------------
(1) Gross profit is income before settlements, charges and other unusual
items, taxes, minority interest and interest.
(2) Includes settlements, charges and other unusual items. See the Notes to
Financial Statements in Item 8 for explanation of these amounts.
- 13 -
FORWARD LOOKING STATEMENTS
- --------------------------
Statements herein to the extent they are not based on historical
events, constitute forward-looking statements. Forward-looking statements
include, without limitation, statements regarding the outlook for future
operations, forecasts of future costs and expenditures, evaluation of market
conditions, the outcome of legal proceedings, the adequacy of reserves, or plans
for product development. Investors are cautioned that forward-looking statements
are subject to an inherent risk that actual results may vary materially from
those described herein. Factors that may result in such variance, in addition to
those set forth under the above captions, include changes in interest rates,
commodity prices, and other economic conditions; actions by competitors;
changing weather conditions and other natural phenomena; actions by government
authorities; uncertainties associated with legal proceedings; technological
developments; future decisions by management in response to changing conditions;
and misjudgments in the course of preparing forward-looking statements.
- 14 -
FIVE-YEAR SUMMARY
YEAR ENDED DECEMBER 31 (DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE)
SUMMARY INCOME STATEMENT DATA (2) 1997(4) 1996(4) 1995(4) 1994 1993
- --------------------------------- ------------ ------------ -------------- ------------- ---------------
Net sales $ 2,402.5 $ 2,486.0 $ 2,843.2 $ 3,039.5 $ 2,511.3
Gross profit (loss) (1) (88.5) 31.0 268.9 558.6 423.6
Interest, net (29.0) (7.8) 2.9 1.0 5.0
Provision (benefit) for income taxes (43.6) (125.6) (45.8) 209.8 173.2
Income (loss) (3) (101.8) (200.7) (51.7) 346.9 254.4
Income (loss) per share (3) - basic (.94) (1.87) (.48) 3.15 2.32
Income (loss) per share (3) - diluted (.94) (1.87) (.48) 3.13 2.29
Cash dividends per share .56 .56 .545 .485 .43
Average shares of common stock
outstanding (thousands)-
Basic 108,450 107,410 107,040 110,140 109,670
Diluted 108,450 107,410 107,040 110,800 110,880
SUMMARY BALANCE SHEETS
Current assets $ 596.8 $ 612.9 $ 618.5 $ 721.9 $ 614.1
Timber and timberlands, at cost
less cost of timber harvested 634.2 648.6 689.6 693.5 673.5
Property, plant and equipment, net 1,191.8 1,278.5 1,452.3 1,273.2 1,145.9
Goodwill and other assets 155.6 82.4 45.0 55.1 32.8
------------ ----------- ------------- ------------ -------------
Total assets $ 2,578.4 $ 2,622.4 $ 2,805.4 $ 2,743.7 $ 2,466.3
============ =========== ============= ============= =============
Current liabilities 319.3 $ 378.4 $ 448.5 $ 344.8 $ 317.2
Long-term debt, excluding
current portion 572.3 458.6 201.3 209.8 288.6
Deferred income taxes and other 400.6 357.8 499.6 339.7 289.1
Stockholders' equity 1,286.2 1,427.6 1,656.0 1,849.4 1,571.4
------------ ----------- ------------- ------------- -----------
Total liabilities and
stockholders' equity $ 2,578.4 $ 2,622.4 $ 2,805.4 $ 2,743.7 $ 2,466.3
============ =========== ============= ============= =============
- 15 -
KEY FINANCIAL TRENDS 1997(4) 1996(4) 1995 1994 1993
- -------------------- -------------- ----------- -------------- ------------- -------------
Working capital $ 277.5 $ 234.5 $ 170.0 $ 377.1 $ 296.9
============== =========== ============== ============= =============
Plant and logging road additions (5) $ 154.8 $ 244.0 $ 362.9 $ 286.0 $ 208.4
Timber additions, net 49.7 22.0 49.7 66.0 81.5
-------------- ----------- -------------- ------------- -------------
Total capital additions $ 204.5 $ 266.0 $ 412.6 $ 352.0 $ 289.9
============== =========== ============== ============= =============
Long-term debt as a percent
of total capitalization 31% 24% 11% 10% 16%
Income as a percent of average
equity (3) -8% -13% -3% 20% 17%
- --------------------------
(1) Gross profit is income before settlements, charges and unusual items,
income taxes, minority interest, and interest.
(2) All per share amounts and number of shares have been retroactively
adjusted for a two-for-one stock split in 1993 and a three-for-two
stock split in 1992.
(3) Does not include cumulative effects of accounting changes in 1993.
(4) Includes settlements, charges and other unusual items, net. See the
Notes to Financial Statements in Item 8 for explanation of these
amounts.
(5) Includes cash paid in acquisitions.
- 16 -
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
GENERAL
L-P incurred a net loss in 1997 of $101.8 million ($.94 per share), which
included a pre-tax net charge of $32.5 million ($20.6 million after taxes, or
$.19 per share). L-P's net losses in 1996 and 1995 primarily resulted from
charges taken in the third quarter of each year. The charge in 1996 was $350.0
million pre-tax ($215.0 million after tax, or $2.00 per share) and the 1995
charge was $366.6 million pre-tax ($221.8 million after tax, or $2.07 per
share). These charges are discussed in further detail in Note Seven to the
financial statements. Prior to the settlements, charges and other unusual items,
L-P had an after-tax loss of $81.2 million ($.75 per share) in 1997, after-tax
income of $14.3 million in 1996 ($.13 per share) and after-tax income of $170.1
million in 1995 ($1.59 per share).
Sales in 1997 were $2.40 billion, a 3% decline from 1996 sales of $2.49
billion. Sales in 1996 were 13% lower than 1995 sales of $2.84 billion.
L-P operates in two major business segments: building products and pulp.
Building products is the most significant segment, accounting for more than 88
percent of net sales in each of the past three years. The results of operations
are discussed below for each of these segments separately. Additional
information about the factors affecting L-P's segments is presented in the
"Selected Financial Data" in Item 6 and the "Product Information Summary" in
Item 1.
In 1997, the building products segment had a decline in sales and
profitability, largely the result of an industry-wide oversupply of structural
panel products in North America. In 1997, the pulp segment lost money, but
improved from the large losses suffered in 1996. However, the economic crisis in
Asia negatively impacted pulp segment results late in the year. Both the
building products and pulp segments declined in sales and profitability in 1996
compared to 1995. The weakness in building products was primarily due to the
structural panel oversupply, while pulp markets remained very weak throughout
1996 due to high world-wide inventories. The Ketchikan Pulp Company contract
issue (discussed further below) also negatively impacted pulp segment results in
1996.
BUILDING PRODUCTS
INCREASE
YEAR ENDED DEC. 31, (DECREASE)
---------------------------------------------
1997 1996 1995 97-96 96-95
- --------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN MILLIONS)
Sales:
Structural panel products $ 864 $1,006 $1,127 -14% -11%
Lumber 665 614 644 +8% -5%
Industrial panel products 181 195 215 -7% -9%
Other building products 563 494 523 +14% -6%
------ ------ ------
Total building products $2,273 $2,309 $2,509 -2% -8%
====== ====== ======
Profit $ 20 $ 174 $ 346 -89% -50%
====== ====== ======
Sales of structural panel products (plywood and oriented strand board
(OSB)) suffered in both 1997 and 1996 from industry wide over-capacity. The
over-capacity is the result of new OSB plants built by the industry throughout
North America at a rate greater than the growth in demand. Average selling
prices in 1997 fell approximately 13% compared to 1996, while 1996 average
prices were approximately 20% lower than 1995. During the latter part of 1997,
L-P's net sales realization was also negatively impacted by increased shipping
costs caused by interrupted rail service. Structural panel sales volumes in 1997
decreased 3% from 1996 levels as a result of the permanent closure of two
- 17 -
plywood plants and four OSB plants in 1997 and late 1996. Sales volumes in 1996
increased approximately 14% compared to 1995 due to new OSB plants started-up in
that year, despite temporary market-related shut-downs at some of L-P's OSB
plants.
Lumber sales increased in 1997 due to a 6% increase in average sales
prices and a slight increase in volume sold. Lumber markets experienced strong
demand through the first three quarters of 1997, benefiting from a robust U.S.
economy, relatively low interest rates and strong housing starts. Late in the
year, weakening currencies in Asia limited shipments from North America to those
markets which put supply pressure on domestic markets, causing lumber prices to
decline. This trend will likely continue into 1998. Lumber sales were lower in
1996 than 1995 as a result of sales volume, which decreased approximately 12%.
L-P permanently closed a number of unprofitable sawmills around the country in
1995 and 1996. Average selling prices rose about 9% in 1996 due to a strong U.S.
economy, lower production volumes industry wide and lower volumes of lumber
imported from Canada.
Industrial panels consist of particleboard, medium density fiberboard
(MDF) and hardboard. These sales decreased in 1997 compared to 1996 primarily
because of lower sales prices of approximately 6%. The price decline was due
primarily to increased industry production relative to demand. Industrial panel
sales volumes in 1997 decreased slightly after a slight increase in 1996
compared to 1995. Prices fell approximately 11% in 1996. This price decline was
also due to excess industry production.
The increase in other building products sales in 1997 was primarily due to
the acquisition of Associated Chemists, Inc. (coatings and chemicals) in
mid-1996, GreenStone Industries, Inc. (cellulose insulation) in early 1997 and
the assets of Tecton Laminates (engineered I-Joists and LVL) in early 1997.
Other building products sales decreased in 1996 due to lower wood chip sales.
L-P was producing fewer wood chips due to lower sawmill and plywood production,
and wood chip prices weakened significantly, particularly on the West Coast.
The primary factor in the decrease in building products profits in 1997
was further erosion of OSB sales prices. Also, higher log costs in the southern
region of the country caused plywood earnings to be significantly reduced.
Industrial panel profits also declined in 1997 as a result of lower sales
prices. Lumber profits increased in 1997 due to higher average sales prices,
which helped offset the profitability declines in structural and industrial
panels. Building products profits decreased in 1996 from 1995 due to the lower
prices discussed above for structural panel products and industrial panel
products. Raw material costs were generally lower in 1996 than in 1995, but did
not fully offset the lower sales prices.
L-P's building products are primarily sold as commodities and therefore
sales prices fluctuate based on market factors over which L-P has no control.
L-P cannot predict whether the prices of its building products will remain at
current levels, or will increase or decrease in the future because supply and
demand are influenced by many factors, only two of which are the cost and
availability of raw materials. L-P is not able to determine to what extent, if
any, it will be able to pass any future increases in the price of raw materials
on to customers through product price increases.
- 18 -
PULP
INCREASE
YEAR ENDED DEC. 31, (DECREASE)
-------------------------------------------------------
1997 1996 1995 97-96 96-95
- --------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN MILLIONS)
Pulp sales $130 $177 $334 -27% -47%
==== ==== ====
Profit (loss) $(29) $(91) $ 44 +68% -207%
==== ==== ====
The single largest factor in the decline in pulp sales in 1997 was the
closure in March 1997 of the pulp mill owned by L-P's Ketchikan Pulp Company
(KPC) subsidiary. Pulp sales volumes decreased approximately 10%, while average
prices dropped approximately 19%. However, KPC pulp had a higher sales average
than L-P's two remaining pulp mills. Excluding KPC, L-P's remaining pulp
business showed an increase of 11% in sales volume and a price decrease of
approximately 6%. The Asian economic crisis caused pulp prices to decline late
in 1997, which will likely continue into 1998. Pulp sales plummeted in 1996 as
sales prices fell an average of 44% while volumes decreased about 5%. Large pulp
inventories around the world created very weak pulp markets throughout 1996. L-P
took intermittent downtime at the pulp mills during the year, which caused the
volume decrease.
Pulp segment profits improved significantly in 1997 due in large part to
the shut-down of the KPC mill which had been suffering losses due to market
conditions and changes in the timber supply contract. At the two remaining
mills, L-P successfully cut its operating costs through a concentrated cost
reduction effort, both from more efficient operations and a central purchasing
program. After making a profit in 1995, the pulp mills returned to losses in
1996 due to the downturn in the markets and problems experienced with the KPC
contract. Raw material costs decreased in 1996 after experiencing an increase in
1995.
L-P's pulp products are primarily sold as commodities and therefore sales
prices fluctuate based on market factors over which L-P has no control. L-P
cannot predict whether the prices of its pulp products will remain at current
levels, or will increase or decrease in the future because supply and demand are
influenced by many factors, only two of which are the cost and availability of
raw materials. L-P is not able to determine to what extent, if any, it will be
able to pass any future increases in the price of raw materials on to customers
through product price increases. The economic crisis in Asia has continued into
1998, which has negatively impacted pulp markets. A significant portion of L-P's
pulp is sold to countries in that region.
L-P pulp products are sold primarily to export customers and represent the
majority of L-P's export sales. Therefore, the decline in pulp sales was the
primary reason for L-P's decreased export sales in 1997 and 1996, both in amount
and as a percent of total sales. Information regarding L-P's geographic segments
and export sales are provided in the notes to financial statements under the
caption "Segment Information."
GENERAL CORPORATE EXPENSE, NET
Net general corporate expense was $80 million in 1997, compared to $52
million in 1996, and an unusually high amount of $121 million in 1995. In 1997
and 1996, the recurring level of general corporate expense has increased largely
due to corporate-wide training programs undertaken by current management and the
addition of key personnel to drive future growth and improvement initiatives. In
1996, $17 million of credits, resulting from a gain on the sale of assets, were
netted into this expense. The most significant factor in the 1995 amount was
higher expenses associated with litigation against the company of approximately
$48 million, including
- 19 -
legal fees and increases in contingency reserves (it did not, however, include
amounts recorded in the line item "Settlements, Charges and Other Unusual Items,
Net" which is discussed in Note Seven to the financial statements).
SETTLEMENTS, CHARGES AND OTHER UNUSUAL ITEMS, NET
- -------------------------------------------------
For a discussion of settlements, charges and other unusual items, net,
refer to Note Seven to the financial statements.
INTEREST, NET
- -------------
Net interest expense rose significantly in 1997 and 1996 as L-P borrowed
funds to cover its settlement obligations and fund capital expenditures.
Additionally, interest capitalized has decreased in 1997 and 1996 as
construction projects have been completed. Also, interest income was lower in
each of the past two years due to lower levels of cash available for investing.
LEGAL AND ENVIRONMENTAL MATTERS
- -------------------------------
For a discussion of legal and environmental matters involving L-P and the
potential effect on the company, refer to Note Eight to the financial
statements.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
- ---------------------------------------------------
Net cash provided by operations increased to $88 million in 1997 from $23
million in 1996, down from $335 million in 1995. These fluctuations primarily
correlate to changes in the company's net loss. In 1997, L-P received a
settlement from the U.S. Government of $135 million for claims related to the
KPC long-term timber supply contract. In 1997 and 1996, L-P paid out $205
million and $263 million for obligations related to litigation settlements.
Net cash used in investing activities decreased to $140 million from $213
million in 1996 and $387 million in 1995. Capital expenditures peaked in 1995
with the addition of several new OSB plants and other projects. In 1997 and
1996, L-P received $64 million and $62 million of cash for assets sold. L-P has
also spent significant amounts on environmental projects (such as pollution
control equipment), upgrades of existing production facilities, and timber to
supply its operations and logging roads.
L-P increased its net borrowings by $114 million in 1997 and $196 million
in 1996. The borrowings financed the payments of settlement obligations and
capital expenditures. L-P purchased only $3 million of treasury shares in 1997
and no treasury shares in 1996 after purchasing $120 million of treasury stock
in 1995.
L-P has a revolving credit facility of $300 million, which was fully
borrowed at year-end. Subsequent to year-end, L-P entered into an additional
credit facility with a group of banks for an additional $100 million, which is
available to fund cash needs. This additional credit facility must be repaid
upon the sale of assets described below.
In October 1997, L-P announced that it intends to sell assets that
management considers non-strategic to L-P's core businesses. These assets
include, among others, the remaining California redwood timberlands, related
lumber and certain distribution businesses, the Samoa, California, pulp mill,
the Weather-Seal window and door manufacturing business, the Creative Point,
Inc., subsidiary, the Red Bluff, California, cement fiber roof shake plant and
the fiber gypsum plant in Nova Scotia. As of year-end, L-P was actively
marketing all of these assets and had sold the fiber gypsum plant. L-P presently
estimates the proceeds from these sales at $800 million to
- 20 -
$1 billion. However, there can be no assurance that net proceeds within the
foregoing range will be realized. The proceeds realized will initially be used
to fund operations and reduce or eliminate outstanding borrowings on L-P's
revolving credit facility. Management is currently studying alternative uses of
the proceeds to maximize the long-term value to L-P and its stockholders.
L-P has budgeted capital expenditures, including timber and logging road
additions, for 1998 of approximately $150 million. These expenditures are
primarily to complete an OSB plant currently under construction, continue
environmental improvements to existing plants, upgrade production facilities and
provide timber to operations.
Contingency reserves, which represent an estimate of future cash needs for
various contingencies (principally, payments for siding litigation settlements),
total $224 million, of which $40 million is estimated to be payable within one
year. As with all accounting estimates, there is inherent uncertainty concerning
the reliability and precision of such estimates. As described in the notes to
the financial statements under the heading "Contingencies," the amounts
ultimately paid in settling all of the outstanding litigation could exceed the
current reserves by a material amount.
L-P continues to be in a strong financial condition with a relatively low
ratio of long-term debt as a percent of total capitalization. Management
believes that existing cash and cash equivalents combined with additional
borrowing available on lines of credit, expected income tax refunds, the
significant cash inflow expected from the asset sale program described above and
cash to be generated from operations will be sufficient to meet projected cash
needs including the payments related to the siding litigation settlement
referred to above. The company also believes that because of its conservative
financial structure and policies, it has substantial financial flexibility to
generate additional funds should the need arise.
YEAR 2000 COMPLIANCE
As the year 2000 approaches, an issue impacting most companies has emerged
regarding the ability of computer applications and systems to properly interpret
the year. This is a pervasive and complex issue.
L-P is in the process of identifying significant applications that will
require modification to ensure Year 2000 compliance. Internal and external
resources are being used to make this assessment, the required modifications and
test Year 2000 compliance. L-P plans on completing the assessment of all
significant applications and developing a plan for appropriate action by
September 30, 1998.
In addition, L-P will begin communicating with others with whom it does
significant business to determine their Year 2000 compliance readiness and the
extent to which L-P is vulnerable to any third party Year 2000 issues. However,
there can be no guarantee that the systems of other companies on which L-P's
systems rely will be timely converted, or that a failure to convert by another
company, or a conversion that is incompatible with L-P's systems, would not have
a material adverse effect on L-P.
The total cost to L-P of these Year 2000 compliance activities has not
been and is not anticipated to be material to its financial position or results
of operations in any given year. These costs and the date on which L-P plans to
complete the Year 2000 assessment process are based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third-party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ from those
plans.
- 21 -
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
No disclosure is required under this item.
ITEM 8. Financial Statements and Supplementary Data
The consolidated financial statements and accompanying notes to financial
statements together with the reports of independent public accountants are
located on the following pages. Quarterly data for the registrant's latest two
fiscal years is located in the table labeled "Quarterly Data" in Item 6.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31 (DOLLAR AMOUNTS IN MILLIONS) 1997 1996
- ---------------------------------------- --------- ---------
ASSETS
Current Assets:
Cash and cash equivalents $ 31.9 $ 27.8
Accounts receivable, less reserves of $2.0 and $1.4 146.2 136.2
Inventories 258.8 264.3
Prepaid expenses 8.9 12.0
Income tax refunds receivable 78.0 99.5
Deferred income taxes 73.0 73.1
--------- ---------
Total current assets 596.8 612.9
Timber and Timberlands, at cost
less cost of timber harvested 634.2 648.6
Property, Plant and Equipment, at cost:
Land, land improvements and logging roads,
net of road amortization 185.6 182.5
Buildings 262.5 269.5
Machinery and equipment 1,876.3 1,953.9
Construction in progress 109.5 80.1
--------- ---------
2,433.9 2,486.0
Less accumulated depreciation (1,242.1) (1,207.5)
--------- ---------
Net property, plant and equipment 1,191.8 1,278.5
Goodwill, net of amortization 70.7 45.9
Other Assets 84.9 36.5
--------- ---------
TOTAL ASSETS $ 2,578.4 $ 2,622.4
========= =========
See notes to financial statements.
- 22 -
CONSOLIDATED BALANCE SHEETS
DECEMBER 31 (DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE)
1997 1996
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 22.9 $ 18.7
Short-term notes payable 22.0 35.4
Accounts payable and accrued liabilities 234.4 224.3
Current portion of contingency reserves 40.0 100.0
--------- ---------
Total current liabilities 319.3 378.4
Long-term Debt, excluding current portion 572.3 458.6
Deferred Income Taxes 178.6 163.2
Contingency Reserves, excluding current portion 184.0 159.8
Other Long-term Liabilities and Minority Interest 38.0 34.8
Commitments and Contingencies
STOCKHOLDERS' EQUITY:
Common stock, $1 par value, 200,000,000 shares
authorized, 116,937,022 shares issued 117.0 117.0
--------- ---------
Preferred stock, $1 par value, 15,000,000 shares
authorized, no shares issued
Additional paid-in capital 472.2 472.7
Retained earnings 977.5 1,140.0
Treasury stock, 7,309,360 shares
and 8,170,799 shares, at cost (163.4) (183.3)
Loans to Employee Stock Ownership Trusts (37.7) (61.6)
Other (79.4) (57.2)
--------- ---------
Total stockholders' equity 1,286.2 1,427.6
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,578.4 $ 2,622.4
========= =========
See notes to financial statements.
- 23 -
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31 (DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE)
1997 1996 1995
---- ---- ----
NET SALES $ 2,402.5 $ 2,486.0 $ 2,843.2
--------- --------- ---------
COSTS AND EXPENSES:
Cost of sales 2,138.7 2,123.5 2,250.3
Depreciation and amortization 142.8 150.6 152.0
Cost of timber harvested 41.1 41.2 50.6
Selling and administrative 168.4 139.7 121.4
Settlements, charges and other
unusual items, net 32.5 350.0 366.6
Interest expense, net of
capitalized interest 30.9 14.2 5.3
Interest income (1.9) (6.4) (8.2)
--------- --------- ---------
Total costs and expenses 2,552.5 2,812.8 2,938.0
Income (loss) before taxes and
minority interest (150.0) (326.8) (94.8)
Provision (benefit) for income taxes (43.6) (125.6) (45.8)
Minority interest in net income (loss)
of consolidated subsidiaries (4.6) (.5) 2.7
--------- --------- ---------
NET INCOME (LOSS) $ (101.8) $ (200.7) $ (51.7)
========= ========= =========
NET INCOME (LOSS) PER SHARE - BASIC $ (.94) $ (1.87) $ (.48)
========== ========== ==========
AND DILUTED
CASH DIVIDENDS PER SHARE OF COMMON STOCK $ .56 $ .56 $ .545
========== ========== ===========
AVERAGE SHARES OF COMMON
STOCK (thousands) 108,450 107,410 107,040
========== ========= ===========
See notes to financial statements.
- 24 -
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
(DOLLAR AMOUNTS IN MILLIONS) 1997 1996 1995
- ---------------------------- ------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(101.8) $(200.7) $ (51.7)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation, amortization and
cost of timber harvested 183.9 191.8 202.6
Settlements, charges
and other unusual items, net 216.6 350.0 366.6
Cash settlements of contingencies (204.8) (263.4) (13.6)
Other adjustments (54.5) 3.8 26.9
Decrease (increase) in receivables (4.0) 31.9 28.7
Decrease (increase) in inventories 12.8 31.1 (103.9)
Decrease (increase) in income tax
refunds receivable 21.8 (99.5) ---
Decrease (increase) in prepaid expenses 4.7 1.4 (7.0)
Increase (decrease) in accounts payable
and accrued liabilities (1.8) (1.6) 38.2
Increase (decrease) in income taxes payable --- --- (7.5)
Increase (decrease) in deferred income taxes 15.3 (22.0) (144.7)
------- ------- -------
Net cash provided by operating activities 88.2 22.8 334.6
CASH FLOWS FROM INVESTING ACTIVITIES
Plant, equipment and logging road additions,
including cash used in acquisitions (154.8) (244.0) (362.9)
Timber and timberland additions (49.7) (22.0) (49.7)
Assets sold 63.6 62.4 23.5
Other investing activities, net 1.0 (9.1) 1.8
------- ------- -------
Net cash used in investing activities (139.9) (212.7) (387.3)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in short-term
notes payable (13.4) (12.9) 47.8
Long-term borrowings 228.4 262.7 30.0
Repayment of long-term debt (101.0) (53.4) (82.0)
Cash dividends (60.7) (60.1) (58.2)
Purchase of treasury stock (2.9) --- (120.2)
Other financing activities, net 5.4 6.0 (5.2)
------- ------- -------
Net cash provided by (used in)
financing activities 55.8 142.3 (187.8)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 4.1 (47.6) (240.5)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 27.8 75.4 315.9
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 31.9 $ 27.8 $ 75.4
======= ======= =======
See notes to financial statements.
- 25 -
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ADD'L
DOLLAR AMOUNTS IN MILLIONS COMMON STOCK TREASURY STOCK PAID-IN RETAINED
EXCEPT PER SHARE SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
---------------------- ------------------------- ------- --------
BALANCE
AS OF DECEMBER 31, 1994 116,937,022 $ 117.0 4,944,804 $ (86.3) $ 478.4 $ 1,510.7
Net income (loss) --- --- --- --- --- (51.7)
Cash dividends, $.545 per share --- --- --- --- --- (58.2)
Issuance of shares for employee
stock plans and for
other purposes --- --- (689,744) 13.8 (6.0) ---
Purchase of treasury stock --- --- 4,333,397 (120.2) --- ---
Employee stock ownership
trust contribution --- --- --- --- --- ---
Currency translation adjustment
and pension
liability adjustment, net --- --- --- --- --- ---
--- --- --- --- --- ---
BALANCE
AS OF DECEMBER 31, 1995 116,937,022 $ 117.0 8,588,427 $ (192.7) $ 472.4 $ 1,400.8
Net income (loss) --- --- --- --- --- (200.7)
Cash dividends, $.56 per share --- --- --- --- --- (60.1)
Issuance of shares for employee
stock plans and for
other purposes --- --- (417,628) 9.4 .3 ---
Employee stock ownership
trust contribution --- --- --- --- --- ---
Currency translation adjustment,
pension liability adjustment and
deferred compensation, net --- --- --- --- --- ---
--- --- --- --- --- ---
BALANCE
AS OF DECEMBER 31, 1996 116,937,022 $ 117.0 8,170,799 $ (183.3) $ 472.7 $ 1,140.0
Net income (loss) --- --- --- --- --- (101.8)
Cash dividends, $.56 per share --- --- --- --- --- (60.7)
Issuance of shares for employee
stock plans and for
other purposes --- --- (1,016,534) 22.8 (.5) ---
Purchase of treasury stock --- --- 155,095 (2.9) --- ---
Employee stock ownership
trust contribution --- --- --- --- --- ---
Currency translation adjustment,
pension liability adjustment and
deferred compensation, net --- --- --- --- --- ---
--- --- --- --- --- ---
BALANCE
AS OF DECEMBER 31, 1997 116,937,022 $ 117.0 7,309,360 $ (163.4) $ 472.2 $ 977.5
----------- -------- --------- - -------- -------- ---------
[Table continued on next page of EDGARized text.]
OTHER TOTAL
LOANS EQUITY STOCK-
DOLLAR AMOUNTS IN MILLIONS TO ADJUST- HOLDERS'
EXCEPT PER SHARE ESOTs MENTS EQUITY
-------- ---------- ---------
BALANCE
AS OF DECEMBER 31, 1994 $ (114.0) $ (56.4) $ 1,849.4
Net income (loss) --- --- (51.7)
Cash dividends, $.545 per share --- --- (58.2)
Issuance of shares for employee
stock plans and for
other purposes --- --- 7.8
Purchase of treasury stock --- --- (120.2)
Employee stock ownership
trust contribution 28.5 --- 28.5
Currency translation adjustment
and pension
liability adjustment, net --- .4 .4
-------- ---------- ---------
BALANCE
AS OF DECEMBER 31, 1995 $ (85.5) $ (56.0) $ 1,656.0
Net income (loss) --- --- (200.7)
Cash dividends, $.56 per share --- --- (60.1)
Issuance of shares for employee
stock plans and for
other purposes --- --- 9.7
Employee stock ownership
trust contribution 23.9 --- 23.9
Currency translation adjustment,
pension liability adjustment and
deferred compensation, net --- (1.2) (1.2)
-------- ---------- ---------
BALANCE
AS OF DECEMBER 31, 1996 $ (61.6) $ (57.2) $ 1,427.6
Net income (loss) --- --- (101.8)
Cash dividends, $.56 per share --- --- (60.7)
Issuance of shares for employee
stock plans and for
other purposes --- --- 22.3
Purchase of treasury stock --- --- (2.9)
Employee stock ownership
trust contribution 23.9 --- 23.9
Currency translation adjustment,
pension liability adjustment and
deferred compensation, net --- (22.2) (22.2)
-------- ---------- ---------
BALANCE
AS OF DECEMBER 31, 1997 $ (37.7) $ (79.4) $ 1,286.2
-------- ---------- ---------
See notes to financial statements.
- 26 -
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
- --------------------
Louisiana-Pacific Corporation is a U.S.-based company principally engaged
in the manufacture of building products, and to a lesser extent, market pulp.
Through its foreign subsidiaries, the Company also maintains manufacturing
facilities in Canada and Ireland. The principal customers for the Company's
building products are retail home centers, builders, manufactured housing
producers, distributors and wholesalers in North America, with minor sales to
Asia and Europe. The principal customers for its pulp products are brokers in
Asia and Europe, with minor sales in North America.
A significant portion of L-P's sales are derived from structural panel
products and lumber. Structural panel sales were 36% of total 1997 sales and
lumber sales were 28% of the total.
Use of Estimates in the Preparation of Financial Statements
- -----------------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. See
discussion of specific estimates in footnotes entitled "Income Taxes,"
"Retirement Plans," "Stock Options and Plans," "Settlements, Charges and Other
Unusual Items, Net" and "Contingencies."
Principles of Presentation
- --------------------------
The consolidated financial statements include the accounts of
Louisiana-Pacific Corporation and all of its subsidiaries (L-P), after
elimination of intercompany balances and transactions.
Earnings Per Share
- ------------------
Basic and diluted earnings per share have been computed based on the
weighted average number of shares of common stock outstanding during the
periods. The effect of potentially dilutive common stock equivalents is not
included in the calculation of dilutive earnings per share because it is
currently anti-dilutive as a result of L-P's net losses. Shares held by L-P's
Employee Stock Ownership Trusts (ESOTs) which were acquired by the ESOTs on or
after January 1, 1994 and are not allocated to participants' accounts, are not
considered outstanding for purposes of computing earnings per share (763,786
shares at December 31, 1997).
Cash and Cash Equivalents
- -------------------------
L-P considers all highly liquid securities with an original maturity of
three months or less to be cash equivalents. Cash paid during 1997, 1996 and
1995 for interest (net of capitalized interest) was $29.2 million, $13.4 million
and $4.6 million. Net cash paid (received) during 1997, 1996 and 1995 for income
taxes was $(80.7) million, $(4.1) million and $109.0 million.
L-P invests its excess cash with high quality financial institutions and,
by policy, limits the amount of credit exposure at any one financial
institution. In addition, L-P holds its cash investments until maturity and is
therefore not subject to significant market risk.
- 27 -
NOTES TO FINANCIAL STATEMENTS
Inventory Valuation
- -------------------
Inventories are valued at the lower of cost or market. Inventory costs
include material, labor and operating overhead. The LIFO method is used for most
log and lumber inventories with remaining inventories valued at FIFO or average
cost. Inventory quantities are determined on the basis of physical inventories,
adjusted where necessary for intervening transactions from the date of the
physical inventory to the end of the year. The major types of inventories are as
follows:
DECEMBER 31 (IN MILLIONS) 1997 1996
------------------------- ---- ----
Logs $ 112.4 $ 106.4
Lumber 37.6 47.4
Panel products 56.6 54.4
Other building products 82.1 70.0
Pulp 15.3 25.4
Other raw materials 25.1 26.3
Supplies 21.3 23.0
LIFO reserve (91.6) (88.6)
------- -------
Total $ 258.8 $ 264.3
======= =======
Timber
- ------
L-P follows an overall policy on fee timber that amortizes timber costs
over the total fiber available during the estimated growth cycle. Timber
carrying costs, such as reforestation and forest management, are generally
expensed as incurred. Cost of timber harvested includes not only the cost of fee
timber but also the amortization of the cost of long-term timber deeds.
Property, Plant, and Equipment
- ------------------------------
L-P uses the units of production method of depreciation for most machinery
and equipment which amortizes the cost of equipment over the estimated units
that will be produced during its useful life. Provisions for depreciation of
buildings and the remaining machinery and equipment have been computed using
straight-line rates based on the estimated service lives. The effective
straight-line rates for the principal classes of property range from
approximately 5 percent to 20 percent.
Logging road construction costs are capitalized and included in land and
land improvements. These costs are amortized as the timber volume adjacent to
the road system is harvested.
L-P capitalizes interest on borrowed funds during construction periods.
Capitalized interest is charged to machinery and equipment accounts and
amortized over the lives of the related assets. Interest capitalized during
1997, 1996 and 1995 was $4.8 million, $7.1 million and $10.9 million.
L-P defers start-up costs on major construction projects during the
start-up phase. No start-up costs were deferred in 1997. Start-up costs deferred
during 1996 and 1995 were $3.8 million and $3.1 million.
Asset Impairments
- -----------------
Long-lived assets to be held and used by the Company are reviewed for
impairment when events and circumstances indicate costs may not be recoverable.
Losses are recognized when the book values exceed expected undiscounted future
cash flows. If impairment exists, the asset's book value
- 28 -
NOTES TO FINANCIAL STATEMENTS
is written down to its estimated fair value. Assets to be disposed are written
down to their estimated fair value, less sales costs. See Note Seven for a
discussion of charges in 1997, 1996 and 1995 related to impairment of property,
plant and equipment.
Derivative Financial Instruments
- --------------------------------
L-P has only limited involvement with derivative financial instruments. At
December 31, 1997, L-P had no material exposure to derivative financial
instruments.
Foreign Currency Translation
- ----------------------------
Assets and liabilities denominated in foreign currencies are translated to
U.S. dollars at the exchange rate on the balance sheet date. Revenues, costs,
and expenses are translated at average rates of exchange prevailing during the
year. Translation adjustments resulting from this process are shown in
stockholders' equity.
Goodwill
- --------
Goodwill has resulted from the purchase of subsidiaries and is being
amortized on a straight-line basis over 10 to 25 years. The amortization period
and recoverability of this goodwill are periodically reviewed by the Company.
Notes Receivable
- ----------------
Included in other assets are notes receivable related to a timber and
timberland sale that occurred during 1997. The Company received $47.9 million in
notes from a third party. The notes are due in principal payments of $20 million
in 2008, $20 million in 2009, and $7.9 million in 2012. Interest is to be
received in semi-annual installments with rates varying from 5.62% to 7.5%.
These notes provide collateral for L-P's senior secured notes.
Acquisitions
- ------------
Acquisitions are accounted for under the purchase method of accounting,
whereby the results of acquired companies are included in L-P's consolidated
results from the date of their acquisition.
Reclassifications
- -----------------
Certain prior year amounts have been reclassified to conform to the
current year presentation.
2. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
DECEMBER 31 (IN MILLIONS) 1997 1996
------------------------- ---- ----
Accounts payable $ 153.0 $ 124.0
Salaries and wages payable 27.4 36.6
Taxes other than income taxes 8.7 12.2
Workers' compensation 13.5 12.0
Other accrued liabilities 31.8 39.5
------- -------
$ 234.4 $ 224.3
======= =======
- 29 -
NOTES TO FINANCIAL STATEMENTS
3. INCOME TAXES
Income (loss) before taxes and minority interest for the years ended
December 31, was taxed under the following jurisdictions:
YEAR ENDED DECEMBER 31 (IN MILLIONS) 1997 1996 1995
------------------------------------ ---- ---- ----
Domestic $(87.0) $(255.1) $(123.0)
Foreign (63.0) (71.7) 28.2
------- ------- -------
$(150.0) $(326.8) $ (94.8)
======= ======= =======
Provision (benefit) for income taxes includes the following:
YEAR ENDED DECEMBER 31 (IN MILLIONS) 1997 1996 1995
------------------------------------ ---- ---- ----
Current tax provision (benefit):
U.S. federal $(65.0) $(87.4) $ 74.4
State and local (4.3) (10.0) 14.7
Foreign 3.6 12.2 6.1
------ ------ -------
Total current tax provision
(benefit) $(65.7) $(85.2) $ 95.2
====== ====== =======
Deferred tax provision (benefit):
U.S. federal 32.2 $ 2.6 $(129.2)
State and local 3.4 .3 (16.4)
Foreign (13.5) (43.3) 4.6
------ ------ -------
Total deferred tax provision
(benefit) $ 22.1 $(40.4) $(141.0)
====== ====== =======
The tax effects of significant temporary differences creating deferred tax
(assets) and liabilities at December 31 were as follows:
DECEMBER 31 (IN MILLIONS) 1997 1996
------------------------- ---- ----
Property, plant and equipment $ 134.0 $ 95.3
Timber and timberlands 156.9 143.0
Inventories (4.2) (1.2)
Accrued liabilities (84.1) (33.7)
Contingency reserves (86.7) (100.5)
Benefit of foreign capital loss
and NOL carryover (27.8) (13.6)
Benefit of foreign ITC carryover (62.3) (68.4)
Other 41.6 26.0
Valuation allowance 38.2 43.2
-------- --------
Net deferred tax liability 105.6 90.1
Less net current deferred
tax assets (73.0) (73.1)
-------- --------
Net noncurrent deferred
tax liabilities $ 178.6 $ 163.2
======== ========
The reduction in the valuation allowance reflects the expiration of tax credits
and a change in the foreign currency exchange rate between balance sheet dates.
L-P's Canadian subsidiary, Louisiana-Pacific Canada Ltd. (LPC), has
unrealized foreign investment tax credits (ITC) of approximately C$89 million
(Canadian dollars). These credits can be carried forward to offset future tax
- 30 -
NOTES TO FINANCIAL STATEMENTS
of LPC and reduce LPC's basis in the related property, plant and equipment. The
credits expire C$18 million in 1999, C$6 million in 2000, C$47 million in 2001,
C$4 million in 2003, C$13 million in 2004 and C$1 million in 2005. In addition,
LPC has a capital loss carryover of C$29 million available to offset capital
gains in future years which does not expire.
The following table summarizes the differences between the statutory
U.S. federal and effective income tax rates:
YEAR ENDED DECEMBER 31 1997 1996 1995
---------------------- ---- ---- ----
Federal tax rate (35)% (35)% (35)%
Tax-exempt investment income --- --- 2
State and local income taxes (4) (4) (4)
Exempt foreign sales corporation income --- --- (3)
Foreign losses not benefited 6
Other, net 4 1 (4)
--- --- ---
(29)% (38)% (48)%
=== === ===
4. LONG-TERM DEBT
INTEREST RATE DECEMBER 31,
(IN MILLIONS) AT 12/31/97 1997 1996
- ------------- ------------- ---- ----
Project Bank Financings --
Chetwynd, B.C. pulp mill, repaid in 1997, ---% $ --- $ 51.0
Nova Scotia fiber gypsum plant,
repaid in 1997, --- --- 34.7
Waterford, Ireland, OSB plant, payable
1998-2003, interest rate variable 8.3 32.9 41.4
Project Revenue Bond Financings, payable
1998-2009, interest rates variable 4.4-7.3 26.0 26.1
Employee Stock Ownership Trust (ESOT) Loans --
Hourly ESOT, payable annually through
1999, interest rate variable 8.3 17.0 25.5
Salaried ESOT, payable annually through
1999, interest rate variable 4.9 12.0 18.0
Senior Secured Notes, payable 2008-2112,
interest rates fixed 7.1-7.5 47.9 ---
Bank Credit Facility --
Revolving credit facility, payable in
2002, interest rate variable 6.3 300.0 275.0
Term loan facility, payable in 2002,
interest rate variable 6.3 125.0 ---
Other, including capital lease obligations,
payable in varying amounts through 2010,
interest rates vary 4.0-8.5 34.4 5.6
------- -------
595.2 477.3
Less current portion (22.9) (18.7)
------- -------
$ 572.3 $ 458.6
======= =======
The carrying amounts of L-P's long-term debt approximates fair market value
since the debt is primarily variable rate debt. Project bank financings are
typically secured by the underlying assets of the related project. The senior
secured notes are collateralized by notes receivable related to timber and
timberland sales. Many of L-P's loan agreements contain lender's standard
covenants and restrictions. L-P was in compliance with all of the covenants and
restrictions of these agreements at December 31, 1997.
- 31 -
NOTES TO FINANCIAL STATEMENTS
At December 31, 1997, L-P had a $425 million bank credit facility with
a group of banks which is due in 2002. This facility includes a $300 million
revolving credit facility and a $125 million term loan facility. Interest on
borrowings under the facility is computed on one of numerous variable interest
rate formulas at L-P's option. L-P pays a commitment fee on the unused credit
line. Borrowings in 1997 are classified as long-term debt as amounts are not
expected or required to be repaid during 1998. Additionally, L-P's subsidiary,
L-P Canada Ltd. has a $30 million (Canadian) revolving credit facility which is
classified as short-term notes payable. Subsequent to year-end, L-P entered into
an additional credit facility with a group of banks for an additional $100
million, which must be repaid upon the sale of assets described in Note Seven.
The weighted average interest rate for all debt at December 31, 1997
and 1996 was 6.4 percent and 6.2 percent. Required repayment of principal for
long-term debt is as follows:
YEAR ENDED DECEMBER 31 (IN MILLIONS)
1998 $ 22.9
1999 34.5
2000 6.6
2001 6.4
2002 456.2
2003 and after 68.6
---------
$ 595.2
=========
5. RETIREMENT PLANS
L-P maintains tax-qualified Employee Stock Ownership Trusts (ESOTs),
for eligible salaried and hourly employees in the U.S. under which 10 percent of
the eligible employees' annual earnings are contributed to the plans.
Approximately 9,800 L-P employees participate in the ESOTs.
The annual allocation of shares to participant accounts and
compensation expense are generally based on the ESOTs' cost of the shares.
However, as required, compensation expense for the 1,843,621 shares purchased by
the ESOTs in 1994 is based on the market value of the shares at the time of
allocation. L-P's ESOTs held a total of approximately 11,868,000 shares at
December 31, 1997 of which approximately 9,734,000 were allocated to
participants' accounts. ESOT expense is included in the retirement plan expense
table below.
L-P also maintains other defined contribution pension plans covering
various groups of hourly and salaried employees in the U.S. and other countries.
Contributions to the plans are generally computed by one of three methods: 1)
L-P contribution required based upon a defined formula with no employee
contributions allowed; 2) L-P contribution required based upon a defined formula
with elective or mandatory employee contributions; and 3) elective employee
contributions only with no L-P contribution allowed.
L-P also has a number of defined benefit pension plans covering its
hourly employees, most of which were frozen in 1994. Contributions to these
plans are based on actuarial calculations of amounts to cover current pension
and amortization of prior service costs over periods ranging from 10 to 20
years. Contributions to multiemployer defined benefit plans are specified in
applicable collective bargaining agreements.
- 32 -
NOTES TO FINANCIAL STATEMENTS
In 1997, L-P adopted the L-P Supplemental Executive Retirement Plan
(SERP), a non-qualified defined benefit plan intended to provide supplemental
retirement benefits to key executives. Benefits are generally based on
compensation in the years prior to retirement. The projected benefit obligation
was $1.4 million at December 31, 1997. Expense for this plan is included in the
retirement plan expense table below. L-P established a grantor trust to
informally provide funding for the benefits payable under the SERP. During 1997,
L-P contributed $4.2 million to the trust. The funds were invested in
corporate-owned life insurance policies. At December 31, 1997, the trust assets
were valued at $3.9 million and included in other assets in L-P's consolidated
balance sheet.
The status of L-P administered qualified defined benefit pension plans
is as follows:
1997 1996
---- ----
Plan with Plan with Plans with Plans with
Assets in Accumulated Assets in Accumulated
Excess of Benefits Excess of Benefits
Accumulated In Excess Accumulated In Excess
Benefits of Assets Benefits of Assets
DECEMBER 31 (IN MILLIONS)
Accumulated benefit obligation
Vested portion $ 11.2 $ 101.1 $ 19.9 $ 89.8
Non-vested portion -- 2.1 .2 2.9
--------- --------- -------- ---------
Total 11.2 103.2 20.1 92.7
Effect of future compensation -- -- -- --
--------- --------- -------- ---------
Projected benefit obligation 11.2 103.2 20.1 92.7
Plan assets 13.2 89.1 39.6 87.3
--------- --------- -------- ---------
Net funded (unfunded)
status 2.0 (14.1) 19.5 (5.4)
Unrecognized asset at
transition (.3) (6.5) (5.1) (8.0)
Unrecognized net loss
and other 3.9 29.3 .2 20.9
Adjustment to recognize
minimum liability -- (22.9) -- (9.7)
--------- --------- -------- ---------
Net prepaid (accrued)
pension expense $ 5.6 $ (14.2) $ 14.6 $ (2.2)
========= ========= ======== =========
The actuarial assumptions used to determine pension expense and the
funded status of the plans for 1997 and 1996 were: a discount rate on benefit
obligations of 7.25 percent and 7.75 percent, and an 8.75 percent expected
long-term rate of return on plan assets.
The assets of the plans at December 31, 1997 and 1996 consist mostly of
government obligations, and minor amounts in equity securities and cash and cash
equivalents.
Retirement plan expense included the following components:
- 33 -
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31 (IN MILLIONS) 1997 1996 1995
------------------------------------ ---- ---- ----
Benefits earned by employees $ .2 $ .5 $ .4
Interest cost on projected
benefit obligation 7.9 8.3 7.9
Return on plan assets (9.0) (10.9) (10.2)
Net amortization and deferral (1.0) (1.7) (2.4)
---------- ---------- ----------
Net periodic pension expense (income) (1.9) (3.8) (4 .3)
Expense related to ESOTs multiemployer,
defined contribution and
non-qualified plans 28.8 29.1 30.1
Loss from settlement of pension plan 7.3 --- ---
---------- ---------- ----------
Net retirement plan expense $ 34.2 $ 25.3 $ 25.8
========== ========== ==========
L-P has several plans which provide minimal postretirement benefits
other than pensions. Net expense related to these plans was not significant. L-P
does not generally provide post-employment benefits.
6. STOCK OPTIONS AND PLANS
The Financial Accounting Standards Board issued SFAS 123, "Accounting
for Stock-Based Compensation" which establishes a fair value approach to
measuring compensation expense related to employee stock plans for grants on or
after January 1, 1995. As allowed by SFAS 123, L-P has elected to adopt only the
disclosure provisions of the standard and therefore recorded no compensation
expense for certain stock option plans and all stock purchase plans. Had
compensation expense for L-P's stock-based compensation plans been determined
based on the fair value at the grant dates for awards under those plans
consistent with the method of SFAS Statement 123, L-P's net income (loss) and
net income (loss) per share would have been reduced to the pro forma amounts
indicated below:
YEAR ENDED DECEMBER 31
(IN MILLIONS, EXCEPT PER SHARE) 1997 1996 1995
------------------------------- ---- ---- ----
Net income (loss)
As reported $ (101.8) $ (200.7) $ (51.7)
Pro forma (108.6) (206.0) (53.6)
Net income (loss) per share
As reported $ (.94) $ (1.87) $ (.48)
Pro forma (1.00) (1.92) (.50)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model using the actual option terms with
the assumptions of a 2.5 percent to 3.2 percent dividend yield, expected
volatility of 29 percent in 1997 and 27 percent in 1996 and 1995, and a risk
free interest rate of 6.6 percent in 1997 and 6.7 percent in 1996 and 1995.
Stock Option Plans
- ------------------
L-P grants options to key employees to purchase L-P common stock. Past
options were granted at 85 to 100 percent of market price. The current stock
award plan requires that options be granted at 100 percent of market price. The
options become exercisable over 3 or 5 years beginning one year after the grant
date and expire 5 or 10 years after the date of grant. Compensation expense
recognized for stock options was $.7 million in 1997, $.7 million in 1996 and
$1.0 million in 1995. At December 31, 1997, 4.5 million shares were available
under the current stock award plan for future option grants and all other
stock-based awards.
- 34 -
NOTES TO FINANCIAL STATEMENTS
Changes in options outstanding and exercisable were as follows:
NUMBER OF SHARES
YEAR ENDED DECEMBER 31 1997 1996 1995
---------------------- ---- ---- ----
Options outstanding at January 1 1,647,530 1,370,410 2,611,123
Options granted 789,505 605,000 114,000
Options exercised (154,880) (196,530) (1,046,412)
Options canceled (78,300) (131,350) (308,301)
------------- ------------ --------------
Options outstanding at December 31 2,203,855 1,647,530 1,370,410
============= ============ ==============
Options exercisable at December 31 912,144 762,850 668,900
============= ============ ==============
WEIGHTED AVERAGE PRICE PER SHARE
YEAR ENDED DECEMBER 31 1997 1996 1995
---------------------- ---- ---- ----
EXERCISE PRICE
Options granted $ 19.97 $ 22.18 $ 21.57
======== ======== ========
Options exercised $ 13.91 $ 12.13 $ 11.55
======== ======== ========
Options canceled $ 24.21 $ 21.39 $ 12.73
======== ======== ========
Options outstanding $ 21.09 $ 21.14 $ 19.40
======== ======== ========
Options exercisable $ 21.09 $ 19.05 $ 17.05
======== ======== ========
FAIR VALUE AT DATE OF GRANT
Options granted $ 6.05 $ 8.38 $ 8.98
======== ======== ========
Performance-Contingent Stock Awards
- -----------------------------------
L-P has granted performance-contingent stock awards to senior
executives as allowed under the current stock award plan. The awards entitle the
participant to receive a number of shares of L-P common stock determin