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