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 June 30, 1996 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: 108,639,650 shares of Common Stock, $1 par value, outstanding as of June 30, 1996.
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, 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 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.
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 Six Months Ended June 30, June 30, ----------------- ------------------- 1996 1995 1996 1995 ------- ------- -------- -------- Net sales $ 658.3 $ 709.3 $1,242.4 $1,396.1 ------- ------- -------- -------- Costs and expenses: Cost of sales 540.9 593.2 1,051.7 1,118.8 Depreciation, amortization and depletion 51.9 47.9 95.0 92.9 Selling and administrative 30.5 26.6 65.7 56.3 Interest expense 3.4 1.7 4.3 4.0 Interest income (2.9) (2.0) (3.8) (5.1) ------- ------- -------- -------- Total costs and expenses 623.8 667.4 1,212.9 1,266.9 ------- ------- -------- -------- Income before taxes and minority interest 34.5 41.9 29.5 129.2 Provision for income taxes 13.0 14.9 11.1 47.0 Minority interest in net income (loss) of consolidated subsidiaries .5 .7 1.0 1.6 ------- ------- -------- -------- Net income $ 21.0 $ 26.3 $ 17.4 $ 80.6 ======= ======= ======== ======== Net income per share $ .19 $ .25 $ .16 $ .75 ======= ======= ======== ======== Cash dividends per share $ .14 $ .14 $ .28 $ .265 ======= ======= ======== ========
Consolidated Summary Balance Sheets Louisiana-Pacific Corporation and Subsidiaries (Dollar amounts in millions) (Unaudited) June 30, 1996 Dec. 31, 1995 ------------- ------------ - - Cash and cash equivalents $ 54.2 $ 75.4 Accounts receivable, net 190.9 128.7 Inventories 252.5 317.7 Prepaid expenses 8.5 14.3 Deferred income taxes 82.4 82.4 -------- ------- - - Total current assets 588.5 618.5 -------- ------- - - Timber and timberlands 665.9 689.6 Property, plant and equipment 2,672.2 2,592.5 Less reserves for depreciation (1,178.6) (1,140.2) -------- ------- - - Net property, plant and equipment 1,493.6 1,452.3 Other assets 73.5 45.0 -------- ------- - - Total assets $2,821.5 $2,805.4 ======== ======== Current portion of long-term debt $ 40.6 $ 38.6 Short-term notes payable 37.8 98.3 Accounts payable and accrued liabilities 196.6 161.6 Current portion of contingency reserves 100.0 150.0 Income taxes payable 10.2 -- - - -------- ------- - - Total current liabilities 385.2 448.5 -------- ------- - - Long-term debt, excluding current portion 347.5 201.3 Deferred income taxes 205.8 207.5 Contingency reserves, net of current portion 177.1 250.5 Other long-term liabilities and minority interest 47.6 41.6 Stockholders' equity: Common stock 117.0 117.0 Additional paid-in capital 472.9 472.4 Retained earnings 1,388.2 1,400.8 Treasury stock (186.2) (192.7) Loans to Employee Stock Ownership Trusts (73.6) (85.5) Other equity adjustments (60.0) (56.0) -------- ------- - - Total stockholders' equity 1,658.3 1,656.0 -------- ------- - - Total liabilities and equity $2,821.5 $2,805.4 ======== ========
Consolidated Summary Statements of Cash Flows Louisiana-Pacific Corporation and Subsidiaries (Dollar amounts in millions) (Unaudited) Six Months Ended June 30, 1996 1995 ------- ------ - - Cash flows from operating activities: Net income $ 17.4 $ 80.6 Depreciation, amortization and depletion 95.0 92.9 Payments of settlement liabilities (123.4) -- - - Other adjustments, net 1.0 17.2 Decrease (increase) in certain working capital components 99.4 (9.4) Increase (decrease) in deferred income taxes (1.7) (.1) ------- ------ - - Net cash provided by operating activities 87.7 181.2 ------- ------ - - Cash flows from investing activities: Capital spending, including acquisitions (174.7) (197.7) Other investing activities, net 7.2 3.8 ------- ------ - - Net cash used in investing activities (167.5) (193.9) ------- ------ - - Cash flows from financing activities: New borrowing 120.0 -- - - Repayment of long-term debt (26.8) (61.7) Increase (decrease) in short-term notes payable (10.5) (.3) Cash dividends (30.0) (28.5) Purchase of treasury stock --- (120.2) Other financing activities, net 5.9 (3.3) ------- ------ - - Net cash provided by (used in) financing activities 58.6 (214.0) ------- ------ - - Net increase (decrease) in cash and cash equivalents (21.2) (226.7) Cash and cash equivalents at beginning of year 75.4 315.9 ------- ------ - - Cash and cash equivalents at end of period $ 54.2 $ 89.2 ======= =======
Consolidated Statements of Stockholders' Equity Louisiana-Pacific Corporation and Subsidiaries (Dollar amounts in millions except per share) (Unaudited) Six Months Ended June 30, 1996 -------------------- Shares Amount ----------- ------- Common Stock 116,937,022 $ 117.0 =========== ======= Additional Paid-in-Capital: Beginning balance $ 472.4 Net transactions .5 ------- Ending balance $ 472.9 ======= Retained Earnings: Beginning balance $1,400.8 Net income 17.4 Cash dividends, $.28 per share (30.0) ------- Ending balance $1,388.2 ======= Treasury stock: Beginning balance 8,588,427 $(192.7) Shares reissued under employee stock plans and other purposes (291,055) 6.5 ---------- ------- Ending balance 8,297,372 $(186.2) ========== ======= Loans to Employee Stock Ownership Trusts: Beginning balance $ (85.5) Less accrued contribution 11.9 ------- Ending balance $ (73.6) ======= Other Equity Adjustments: Beginning balance $ (56.0) Currency translation adjustment and amortization of deferred compensation (4.0) ------- Ending balance $ (60.0) =======
Notes To 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. It is suggested that these summary financial statements be read in conjunction with the financial statements and the notes thereto included in L-P's 1995 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. 2. Earnings per share is based on the weighted average number of shares of common stock outstanding during the periods (107,260,000 in 1996 and 107,040,000 in 1995). The effect of common stock equivalents is not material. 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 annual change in the LIFO inventory reserve is expensed over the remainder of the year. 5. Reference is made to "Legal Proceedings" and to elsewhere in this report for a description of certain contingencies which may have a materially adverse effect on L-P and for a description of settlements of certain class action proceedings.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS General Continued weakness in pulp markets, due largely to high world-wide pulp inventory levels, was the single largest cause of lower sales and profits in the second quarter and first six months of 1996 compared to 1995. An oversupply of structural panel products, particularly in the first quarter of 1996, also contributed to a decline in the six month sales and profits. Overall net income for the second quarter declined 20 percent to $21.0 million ($.19 per share) in 1996 from $26.3 million ($.25 per share) in 1995. Six months net income fell 78 percent to $17.4 million ($.16 per share) in 1996 from $80.6 million ($.75 per share) in 1995. Net sales declined 7 percent in the second quarter of 1996 to $658.3 million from $709.3 million in 1995. For the first six months of 1996, sales fell 11 percent to $1,242.4 million from $1,396.1 million in 1995. L-P operates in two segments: building products and pulp. Building products is the most significant segment, accounting for more than 86 percent of sales and more than 78 percent of operating profit in the first six months of 1996 and 1995. 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 following tables labeled "Sales and Operating Profit by Major Product Group", "Summary of Production Volumes" and "Industry Product Price Trends." Building Products Segment Quarter Ended Six Months Ended June 30 June 30 --------------------- ------------------------ - - 1996 1995 % Chg 1996 1995 % Chg ------ ------ ----- -------- ------- ---- - - (Dollar amounts in millions) Sales: Structural panels $280.2 $264.2 +6% $ 514.2 $ 526.1 - 2% Lumber 164.2 175.2 -6% 302.6 327.2 - 8% Industrial panel products 51.3 53.0 -3% 97.9 111.5 - 12% Other building products 121.7 121.4 0% 236.3 240.1 - 2% ------ ------ -------- -------- Total building products $617.4 $613.8 +1% $1,151.0 $1,204.9 - 5% ====== ====== ======== ======== Operating profit $ 72.3 $ 63.3 +14% $ 102.3 $ 153.7 - 33% ====== ====== ======== ======== Structural panel products (plywood and oriented strand board (OSB)) prices were lower an average of 11% in the second quarter of 1996 compared to 1995 (15% lower for the six month period) due to an oversupply of structural panel products in North America. L-P and its competitors have opened numerous new OSB plants in 1995 and 1996 and more are scheduled to open through late 1997, which has significantly increased the structural panel capacity in North America. L-P structural panel sales volumes increased in the second quarter and first six months largely due to the start-up of new OSB production facilities by L-P in the U.S., Canada and Ireland. Lumber sales have decreased in 1996 from 1995 for both the second quarter and first six month periods because of significantly lower volumes resulting from the permanent closure of approximately 15 unprofitable sawmills (not all of these mills were producing immediately prior to their closure). These lower volumes of lumber produced have been partially offset by an increase in the volume of lumber sold through L-P's wholesale operations. Sales prices averaged a 10% increase in the second quarter of 1996 compared to 1995 (2% higher for the six month period). Lumber markets have generally been stronger in 1996 due to a strong economy, lower U.S. production volumes and lower volumes of lumber imported from Canada. Industrial panel products (particleboard, medium-density fiberboard (MDF) and hardboard) sales decreased slightly in the second quarter of 1996 compared to 1995 due to lower average selling prices of approximately 11%, offset by higher volume of about 10%. The largest change in selling prices was in MDF (approximately 18% lower) which is due to new industry capacity without a significant change in demand. For the six month period, the decrease in sales was caused primarily by approximately 13% lower average selling prices (for the same reason discussed above) with no significant change in volume. Sales in the other building products category have remained virtually unchanged in the second quarter of 1996 compared to 1995. However, the mix of products sold within the category changed with significantly lower chip sales (due to lower sawmill production and lower chip prices) offset by increases in engineered wood products and other products. For the six month periods, the decrease in chip sales was not completely offset by increases in sales for other products. The increase in building products operating profit in the second quarter of 1996 over 1995 is primarily due to lumber. Higher sales prices (discussed above) combined with lower log costs turned lumber profits from a loss in 1995 to a profit in 1996. Lower margins, due to lower per unit sales prices (discussed above) in structural panel products, industrial panel products and other building products partially offset the higher margins in lumber. For the first six months, the decrease in building products operating profit was caused by the lower sales prices (discussed above) for nearly all products, particularly in the first three months of the year. Raw material prices have generally been lower in 1996 than in 1995, helping to offset the decrease in selling prices. The demand for wood chips has decreased in 1996, which has reduced by-product income particularly at L-P's sawmills. 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 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. Subsequent to the end of the second quarter, prices for structural panel have decreased (see following table labeled "Industry Product Price Trends"). L-P expects that prices will either remain depressed or experience significant volatility through at least the remainder of 1996 due to the excess production capacity discussed above. Pulp Segment Quarter Ended Six Months Ended June 30 June 30 --------------------- ---------------------- 1996 1995 % Chg 1996 1995 % Chg ------ ------ ----- ------ ------ ----- (Dollar amounts in millions) Pulp sales $ 40.9 $ 95.5 -57% $ 91.4 $191.2 -52% ====== ====== ====== ====== Operating profit $(30.5) $ 23.2 $(52.4) $ 42.0 ====== ====== ====== ====== Pulp segment sales fell dramatically in both the second quarter and first six months of 1996 compared to 1995. Prices decreased 56 percent in the second quarter and 38 percent for the first six months from the comparable periods a year ago. Sales volumes decreased approximately 4 percent during the second quarter and 23 percent during the first six months of 1996 compared to 1995. Large world-wide pulp inventories at the end of 1995 have carried through the first six months of 1996, creating very weak pulp markets. Decreased volumes were the result of lower production due to the weak markets and unscheduled maintenance shut-downs. Pulp segment operating profits were severely impacted by the decreased sales prices, resulting in operating losses in 1996 compared to operating profit in 1995. Inventory market write-downs have also contributed to the operating losses in 1996. Raw material costs in 1996 (purchased chips and/or raw logs for chipping) for the Samoa, California and Chetwynd, British Columbia mills have been comparable to or lower than 1995. However, the mill operated by L-P's Ketchikan Pulp Company subsidiary has experienced very high raw material costs in 1996. The US Forest Service has not released adequate volume from the long-term timber supply contract which has forced KPC to obtain logs from higher-priced outside sources. More than half of the pulp operating loss in the second quarter of 1996 was attributable to KPC. See "Ketchikan Pulp Company Update" below. 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. The excess inventory situation in the world-wide pulp markets appeared to be much less severe by the end of the second quarter, and L-P expects that prices for certain of its pulp products will increase slightly to moderately over the remainder of the year. Unallocated Expense Unallocated expense decreased in the second quarter of 1996 to $6.8 million from $44.9 million in 1995. The largest factor in the decrease was that second quarter 1995 unallocated expenses included a $25 million charge for an increase in litigation-related reserves. In the second quarter of 1996, non-recurring credits of $10.0 million were taken against the unallocated expense, primarily a gain on the sale of a sawmill and related timberland in Pilot Rock, Oregon. Lower advertising expenditures and lower unreserved litigation-related expenses also contributed to the decrease. For the six month period, unallocated expenses decreased to $19.9 million from $67.6 million. This decrease was primarily related to the second quarter decrease, as well as lower stock compensation expenses. Also netted against first quarter 1996 unallocated expenses was a recovery by KPC of $5 million, plus interest, from the US Forest Service for damages sustained as a result of changes in the long-term timber supply contract. Net Interest Income (Expense) L-P's interest expense (net of capitalized interest and interest income) has increased in 1996 primarily resulting from increased borrowings and lower levels of cash and cash equivalents on which L-P earns interest income. Legal and Environmental Matters Refer to the "Legal Proceedings" section of this Form 10-Q for a discussion of certain environmental litigation and other litigation and its potential impact on L-P. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Cash provided by operations decreased to $87.7 million in the first six months of 1996 from $181.2 million in the first six months of 1995. The decrease was primarily caused by lower net income ($17.4 million in 1996 and $80.6 million in 1995) and by $123.4 million cash paid against accrued settlement liabilities. These cash uses were partially offset by a reduction in inventories and an increase in accounts payable and accrued liabilities. Cash used in investing activities decreased to $167.5 million from $193.9 million in 1995, primarily due to decreased capital expenditures. The largest portion of these capital expenditures were for new production facilities and the acquisition of Associated Chemists, Inc. Significant amounts have also been spent on environmental projects (such as pollution control equipment) and upgrades of existing production facilities. L-P is budgeting capital expenditures, including timber and logging road additions, for all of 1996 of approximately $300 million. Cash provided by financing activities for the first six months of 1996 was $58.6 million compared to cash used by financing activities in the same period in 1995 of $214.0 million. In 1996, L-P had net new borrowings of $82.7 million compared with net repayments in 1995 of $62.0 million. In 1996, L-P has not purchased any treasury shares compared to $120.2 million of purchases in 1995. Contingency reserves, which represent an estimate of future cash needs for various contingencies (principally payments for siding litigations costs), total $277.1 million at June 30, 1996, of which $100 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. L-P has been named as a defendant in other litigation for which reserves have not been established. See "Legal Proceedings" for a description of certain pending legal proceedings. L-P continues to be in a strong financial condition with $54.2 million of cash and cash equivalents and a low ratio of long-term debt as a percent of total capitalization. Although cash and cash equivalents decreased, existing amounts, combined with borrowings available under L-P's $300 million revolving credit facility and cash to be generated from operations are expected to be sufficient to meet projected cash needs including the payments related to the siding litigation costs 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. Ketchikan Pulp Company Update Ketchikan Pulp Company (KPC) is a wholly-owned subsidiary of the registrant. KPC operates a dissolving pulp mill and two sawmills in Southeast Alaska and has a long-term timber cutting contract with the U.S. Forest Service (USFS) on the Tongass National Forest which is intended to supply approximately 75 percent of the wood fiber requirements of the manufacturing facilities. The contract is a 50-year contract expiring in 2004. In November, 1990, Congress passed the Tongass Timber Reform Act (TTRA) which made a number of unilateral modifications to the long-term contract and which required the USFS to incorporate those modifications in a revised contract document (the Unilateral Terms). TTRA and the Unilateral Terms have caused KPC to incur substantial additional costs and have disrupted the continuity of operations by, among other things, leading to a failure on the part of the USFS to provide the timber volumes specified in the contract. These issues are currently the subject of three claims filed against the USFS in the United States Court of Federal Claims which seek in excess of $200 million. In addition, KPC has been prosecuting two additional claims against the USFS in the same court which deal with contract issues predating TTRA and the Unilateral Terms. One of these two claims was recently concluded with KPC receiving a total payment of $6.1 million. The other claim seeks in excess of $30 million. None of the claims currently in litigation have been recorded for financial reporting purposes. Following a concerted effort by KPC, citizens of Southeast Alaska, the Governor, and legislators of Alaska, legislation has been introduced in Congress which would extend the contract term 15 years beyond the current expiration date and revise the contract language to provide relief from a number of the problems and hardships caused by TTRA and the Unilateral Terms. KPC's pulp mill has been the subject of certain water and air compliance issues during the late 1980's and early 1990's. In 1995, KPC entered into a civil consent decree, which is further described under the Legal Proceedings section of this report, requiring KPC to complete certain capital projects at the pulp mill. In addition, management plans numerous other capital projects in the next several years to modernize and improve the efficiency of the mill. These projects could total up to $200 million. Management cannot assess the probability of enactment of the legislation, but without such resolution, the future operations of KPC are in doubt. If KPC is forced to close its facilities permanently, it would be required to record a charge currently estimated at $125 to $150 million for the write-down of the net book value of its facilities and other shutdown costs. Management also cannot assess the probability of success in resolving current and any future claims for damages against the USFS.
Sales and Operating Profit by Major Product Group Louisiana-Pacific Corporation and Subsidiaries (Dollar amounts in millions) (Unaudited) Quarter Ended Six Months Ended June 30, June 30, ------------------ ------------------ 1996 1995 1996 1995 ------- ------- -------- ------- Sales: Structural panel products $ 280.2 $ 264.2 $ 514.2 $ 526.1 Lumber 164.2 175.2 302.6 327.2 Industrial panel products 51.3 53.0 97.9 111.5 Other building products 121.7 121.4 236.3 240.1 ------- ------- -------- -------- Total building products 617.4 613.8 1,151.0 1,204.9 Pulp 40.9 95.5 91.4 191.2 ------- ------- -------- -------- Total sales $ 658.3 $ 709.3 $1,242.4 $1,396.1 ======= ======= ======== ======== Export sales $ 58.3 $ 129.1 $ 137.8 $ 256.4 ======= ======= ======== ======== Operating profit: Building products $ 72.3 $ 63.3 $ 102.3 $ 153.7 Pulp (30.5) 23.2 (52.4) 42.0 ------- ------- -------- -------- Total operating profit 41.8 86.5 49.9 195.7 Unallocated expense, net (6.8) (44.9) (19.9) (67.6) Interest income (expense), net (.5) .3 (.5) 1.1 ------- ------- -------- -------- Income before taxes and minority interest $ 34.5 $ 41.9 $ 29.5 $ 129.2 ======= ======= ======== ========
Summary of Production Volumes Louisiana-Pacific Corporation and Subsidiaries (Volume amounts stated in millions unless otherwise noted and as a percent of normal capacity) Quarter Ended Six Months Ended June 30 June 30 ----------------------- ----------------------- 1996 1995 1996 1995 ---------- --------- ---------- ---------- Oriented strand board, sq ft 3/8" basis 1,034 85% 875 96% 1,862 84% 1,690 92% Softwood plywood, sq ft 3/8" basis 423 110 334 82 832 108 658 81 Lumber, board feet 326 79 352 58 608 74 693 57 Medium density fiberboard, sq ft 3/4" basis 55 98 55 97 102 91 108 96 Particleboard, sq ft 3/4" basis 89 99 84 93 170 94 174 97 Hardboard, sq ft 1/8" basis 57 104 56 101 111 101 105 96 Hardwood veneer, sq ft surface measure 56 90 61 98 106 85 134 107 Pulp, thousand short tons 121 84 132 88 208 72 267 89 Chips, thousand BDU's 402 458 824 930
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 1991 148 191 236 198 1992 217 248 287 200 1993 236 282 394 258 1994 265 302 405 295 1995 245 303 337 290 1995 Second Quarter Average 210 303 317 295 1996 First Quarter Average 191 254 341 277 1996 Second Quarter Average 203 246 393 277 Weekly Average July 3 175 230 390 277 July 12 185 238 396 277 July 19 185 240 401 277
PART II OTHER INFORMATION Item 1. Legal Proceedings. The following sets forth the current status of certain legal proceedings: Environmental Proceedings In March 1995, L-P's subsidiary Ketchikan Pulp Company (KPC) entered into agreements with the federal government to resolve the issues related to water and air compliance problems experienced at KPC's pulp mill during the late 1980s and early 1990s. Under the agreements, KPC entered into a civil consent decree and pled guilty to one felony and thirteen misdemeanor violations of the Clean Water Act. The settlement required KPC to pay civil and criminal penalties of $6.0 million, of which $1.75 million was suspended in consideration of KPC's expenditures and ongoing efforts to improve its operations. The penalties were substantially reserved for at December 31, 1994. KPC also agreed to undertake further expenditures, which are primarily capital in nature, including certain remedial and pollution control related measures, with an estimated cost of up to approximately $20 million. KPC has also agreed to undertake a study of whether a clean-up of Ward Cove, the body of water adjacent to the pulp mill, is needed. If the study determines that such clean-up is needed, KPC may be required to spend up to $6 million on the clean-up, including the cost of the study, as part of the overall $20 million of expenditures. At this time, the company cannot estimate what portion, if any, of the clean-up expenditures will be required. KPC has entered into an agreement with the United States Department of Justice settling alleged violations of the Clean Air Act involving a waste wood incinerator at KPC's Annette Island, Alaska, cant mill. Pursuant to the agreement, KPC paid a civil penalty of $359,000. In March 1996, an information was filed in the United States District Court for the Eastern District of Washington charging L-P with two misdemeanor counts related to alleged record-keeping violations in connection with the disposal by an independent contractor of transformers from a mill owned by L-P in 1991. The USFS has named KPC as a potentially responsible party for clean-up costs related to a landfill near Thorne Bay, Alaska. The USFS has indicated clean-up costs may range up to $5 million. Although L-P's policy is to comply with all applicable environmental laws and regulations, the company has in the past been required to pay fines for non-compliance and sometimes litigation has resulted from contested environmental actions. Also, L-P is involved in other environmental actions and proceedings which could result in fines or penalties. Management believes that any fines, penalties or other losses resulting from the matters discussed above in excess of the reserve for environmental loss contingencies will not have a material adverse effect on the business, financial position or results of operations of L-P. See "Colorado Criminal Proceedings" for further discussion of an environmental action against the company. Colorado Criminal Proceedings L-P began an internal investigation at L-P's Montrose (Olathe), Colorado, oriented strand board (OSB) plant of various matters, including certain environmental matters, in the summer of 1992 and reported its initial finding of irregularities to governmental authorities in September 1992. Shortly thereafter, a federal grand jury commenced an investigation of L-P concerning alleged environmental violations at that plant. In 1995, additional subpoenas were issued requiring the production of evidence and testimony relating to alleged fraud in connection with the submission of unrepresentative OSB product samples to the APA-The Engineered Wood Association (APA), an industry product certification agency, by L-P's Montrose plant and certain of its other OSB plants. L-P then commenced an independent investigation, which was concluded in 1995, under the direction of former federal judge Charles B. Renfrew concerning irregularities in sampling and quality assurance in its OSB operations. In June 1995, the grand jury returned an indictment in the U.S. District Court in Denver, Colorado, against L-P, a former manager of the Montrose mill, and a former superintendent at the mill. L-P is now facing 23 felony counts related to environmental matters at the Montrose mill, including alleged conspiracy, tampering with opacity monitoring equipment, and making false statements under the Clean Air Act. The indictment also charges L-P with 25 felony counts of fraud relating to alleged use of the APA trademark on OSB structural panel products produced by the Montrose mill as a result of L-P's allegedly improper sampling practices in connection with the APA quality assurance program. No trial date has been set. In December 1995, L-P received a notice of suspension from the United States Environmental Protection Agency ("EPA") stating that, because of criminal proceedings pending against L-P in Colorado, agencies of the federal government would be prohibited from purchasing from L-P's Northern Division. L-P is negotiating to have the EPA suspension lifted or modified based on positive environmental programs actively underway. While negotiations are continuing, the EPA has approved a preliminary agreement limiting the prohibition to L-P's Montrose, Colorado, facility for a period of six months in recognition of L-P's environmental compliance efforts. Under recently revised regulations of the United States Department of Agriculture, the EPA suspension will also have the effect of prohibiting L-P's Montrose facility from purchasing timber directly, but not indirectly, from the United States Forest Service. At the present time, L-P cannot predict whether or to what extent these circumstances will result in further civil litigation or investigation by government authorities, or the potential financial impact of any such current or future proceedings. However, the resolution of the above matters could have a materially adverse impact on L-P. OSB Siding Matters L-P has been named as a defendant in at least 12 purported class actions filed in various jurisdictions, as well as numerous 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. A settlement of one of the OSB siding class actions has been approved by the Circuit Court for Lake County, Florida. Under the settlement, L-P has established a claims procedure pursuant to which members of the settlement class may report problems with L-P's OSB 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 will be $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 with attorneys representing the class that if the national class settlement in the federal court in Oregon described below becomes final, then 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. Class members will be entitled to make claims for up to five years after October 4, 1995. As of July 15, 1996, approximately 16,000 claims forms had been requested and mailed; approximately 7,800 completed claims forms had been returned, and approximately 6,700 inspections had been completed; this resulted in approximately 5,000 allowed claims, approximately 4,500 of which had been paid at an aggregate cost of approximately $15 million (including adjustments to deductions to conform to the national settlement). In April 1996, the United States District Court for the District of Oregon approved an amended settlement agreement between L-P and attorneys representing a nationwide class composed of all persons who own, who have owned, or who subsequently acquire property on which L-P's OSB siding was installed prior to January 1, 1996, excluding persons who timely opt out of the settlement and persons who are members of the settlement class in the Florida litigation. 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 $2.20 to $6.40 per square foot depending on the type of product and geographic location) of damaged siding, reduced by a specific adjustment (of up to 65 percent) based on the age of the siding. Class members who have previously submitted or resolved claims under any other warranty or claims program of L-P may be entitled to receive the difference between the amount which would be payable under the settlement agreement and the amount previously paid. Independent adjusters will determine the extent of damage to OSB siding at each claimant's property in accordance with a specified protocol. There will be no adjustment to settlement payments for improper maintenance or installation. A claimant who is dissatisfied with the amount to be paid under the settlement may elect to pursue claims against L-P in a binding arbitration seeking compensatory damages without regard to the amount of payment calculated under the settlement protocol. A claimant who elects to pursue an arbitration claim must prove his entitlement to damages under any available legal theory, and L-P may assert any available defense, including defenses that otherwise had been waived under the settlement agreement. If the arbitrator reduces the damage award otherwise payable to the claimant because of a finding of improper installation, the claimant will be entitled to pursue a claim against the contractor/builder to the extent the award was reduced. L-P will be 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. 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 siding or damage to utility grade OSB siding (sold without any express warranty), both of which are the subject of additional claims. In the event all claims filed prior to January 1, 2003, that are approved have been paid without exhausting the settlement fund, any amounts remaining in the settlement fund revert to L-P. In addition to payments to the settlement fund, L-P will be 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, any amounts of arbitration awards in excess of the amounts calculated under the settlement protocol, and certain other costs. As of July 15, 1996, approximately $23 million of the first year's $100 million installment had been spent to cover class notification costs and prior claims costs, including interim payments advanced to homeowners in urgent circumstances. By that date, approximately 53,000 claims forms had been requested and mailed; inspections and claims payments were at a very early stage. Potential members of the settlement class were entitled to opt out of the settlement class until May 27, 1996. Approximately 1,400 opt out notices were timely submitted; this has resulted in numerous additional claims being filed by those who opted out, predominantly by owners/developers of commercial properties. An appeal from the court's order approving the settlement has been filed. 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 above 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. Other OSB Matters Three separate purported class actions on behalf of owners and purchasers of properties in which L-P's OSB panels are used for flooring, sheathing, or underlayment have been consolidated in the United States District Court for the Northern District of California under the caption Agius v. Louisiana- Pacific Corporation. The actions seek damages and equitable relief for alleged fraud, misrepresentation, breach of warranty, negligence, and improper trade practices related to alleged improprieties in testing, APA certification, and marketing of OSB structural panels, and alleged premature deterioration of such panels. A separate state court action entitled Carney v. Louisiana-Pacific Corporation is pending in the Superior Court of the State of California for the City and County of San Francisco, seeking relief under California consumer protection statutes based on similar allegations. At the present time, L-P cannot predict the potential financial impact of the above actions. However, the resolution of the above matters could have a materially adverse impact on L-P. Stockholder Actions L-P and certain of its present and former executive officers were named as defendants in numerous actions brought on behalf of various purported classes of purchasers of L-P's common stock. The actions subsequently were consolidated in the United States District Court for the District of Oregon under the caption In Re Louisiana Pacific Corp. Securities Litigation, Civil Action No. 95-707-JO. Plaintiffs seek to recover damages under the securities laws for alleged failures to disclose or improper disclosures generally relating to the various legal proceedings described above and the matters that are the subject of such proceedings. Motions to Dismiss have been denied and the Court has conditionally certified the class as requested by the attorneys appointed to act as lead counsel for the plaintiff class. L-P is defending the consolidated action vigorously, but is unable to make any prediction as to the likely outcome or the financial impact of an adverse decision. However, the resolution of the above matters could have a materially adverse impact on L-P. Five individual directors (Messrs. du Pont, Kayser, and Yeager, Ms. Hill and Mrs. Neff) and three former directors of the registrant have been named as defendants in ten stockholder derivative actions, which also name the registrant as a nominal defendant. Eight of these actions were brought in the Court of Chancery of the State of Delaware in and for New Castle County and have been consolidated under the caption In re Louisiana-Pacific Corporation Derivative Litigation, Civil Action No. 14322 (the "Delaware action"). One action, captioned Silverman, et al. v. Merlo, et al., No. 9505-03630, was brought in the Circuit Court of the State of Oregon for the County of Multnomah (the "Oregon action"). The remaining action, captioned Rand v. Merlo, et al., No. 95-Z-1511, was brought in the United States District Court for the District of Colorado (the "Colorado action"). The actions seek to recover damages from the directors on behalf of the corporation because of alleged mismanagement and breaches of fiduciary duty generally related to the various legal proceedings described above and the matters that are the subject of such legal proceedings. The individual directors, former directors, the registrant, and attorneys representing plaintiffs have entered into a memorandum of understanding concerning a proposed settlement of the derivative actions without payment by the directors or former directors or any admission of liability. The settlement recognizes the recent management changes effected by the registrant and certain other actions taken and to be taken by the registrant with respect to quality control. The proposed settlement is subject to confirmatory discovery by attorneys for plaintiffs and approval by the courts. Executive Employment Matter In January 1996, an action entitled International Paper Company v. Mark A. Suwyn and Louisiana-Pacific Corporation was instituted in the United States District Court for the Southern District of New York claiming that Mr. Suwyn's employment as chief executive officer of L-P violated the terms of a previous employment agreement with the plaintiff. The complaint seeks an injunction prohibiting Mr. Suwyn from continuing his employment with L-P for 18 months and other relief. L-P believes there are meritorious defenses related to this case and does not believe that there is any material liability related to this case. 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 or results of operations of L-P.
Item 4. Submission of Matters to a Vote of Security-Holders The Registrant held its annual meeting of stockholders on May 6, 1996. The following summarizes the matters voted upon at the meeting and the results of the voting: Directors elected for a term of office expiring 1999: Name of Director Withheld Shares Voted For Shares Individually - ---------------- ---------------- ------------------- Pierre S. du Pont 86,198,168 1,238,186 William E. Flaherty 87,352,132 84,222 Donald R. Kayser 86,451,892 984,462 <TABLE> Shares Shares Broker Description of Proposal Shares For Against Abstained Non-Votes - ----------------------- ---------- ------- --------- --------- <S> <C> <C> <C> <C> Approval of performance goals under a performance- based incentive bonus plan 83,317,938 5,843,480 724,575 0 Approval of 1996 Employee Stock Purchase Plan 82,575,452 6,819,786 490,755 0 Approval of Arthur Andersen LLP as auditors for 1996 89,241,266 329,763 490,755 0 Stockholder proposal relating to classification of the board of directors 31,976,109 41,980,052 1,276,161 14,653,671 Stockholder proposal related to personal liability of directors 7,472,026 66,354,455 1,405,841 14,653,671 Stockholder proposal relating to compensation and workplace policies 5,476,713 66,883,181 2,872,428 14,653,671 </TABLE>
Item 6. Exhibits and Reports on Form 8-K. (a) The exhibits filed as part of this report or incorporated by reference herein are listed in the accompanying exhibit index. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended June 30, 1996.
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 /s/ WILLIAM L. HEBERT William L. Hebert Vice President - Treasurer and Controller (Principal Financial Officer) DATED: August 14, 1996
EXHIBIT INDEX Exhibit Number Description of Exhibit - -------------- ---------------------- 3.B Bylaws of the Registrant as amended to date 10.A Performance-Based Incentive Bonus Plan 10.B Performance-Based Incentive Bonus Award 11 Calculation of Net Income Per Share for the Three Months Ended June 30, 1996 27 Financial Data Schedule