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 thirteen weeks ended March 28, 1999 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 April 30, 1999, was 200,605,977 common shares ($1.25 par value).
Weyerhaeuser Company - -2- <TABLE> <CAPTION> WEYERHAEUSER COMPANY AND SUBSIDIARIES Index to Form 10-Q Filing For the thirteen weeks ended March 28, 1999 Page No. -------- <S> <C> <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 8-17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18-22 Item 3. Quantitative and Qualitative Disclosures About Market Risk 22 Part II. Other Information Item 1. Legal Proceedings 22-23 Item 2. Changes in Securities (not applicable) Item 3. Defaults upon Senior Securities (not applicable) Item 4. Submission of Matters to a Vote of Security Holders (not applicable) 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 27, 1998. 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 thirteen-week period ending March 28, 1999, 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 May 10, 1999
Weyerhaeuser Company - -3- <TABLE> <CAPTION> WEYERHAEUSER COMPANY AND SUBSIDIARIES ____________ CONSOLIDATED EARNINGS For the periods ended March 28, 1999 and March 29, 1998 (Dollar amounts in millions except as noted and per share figures) (Unaudited) Thirteen weeks ended: March 28, March 29, 1999 1998 --------- --------- <S> <C> <C> Net sales and revenues: Weyerhaeuser $ 2,389 $ 2,338 Real estate and related assets 276 265 --------- --------- Total net sales and revenues 2,665 2,603 --------- --------- Costs and expenses: Weyerhaeuser: Costs of products sold 1,838 1,820 Depreciation, amortization and fee stumpage 155 149 Selling, general and administrative expenses 164 163 Research and development expenses 13 14 Taxes other than payroll and income taxes 32 34 Charge for impairment of long-lived assets (Note 13) 91 -- Charge for Year 2000 remediation 17 1 --------- --------- 2,310 2,181 --------- --------- Real estate and related assets: Costs and operating expenses 220 225 Depreciation and amortization 1 1 Selling, general and administrative expenses 15 13 Taxes other than payroll and income taxes 2 2 --------- --------- 238 241 --------- --------- Total costs and expenses 2,548 2,422 --------- --------- Operating income 117 181 Interest expense and other: Weyerhaeuser: Interest expense incurred 67 67 Less interest capitalized 2 1 Equity in income of affiliates (Note 4) 2 6 Other income, net 5 13 Real estate and related assets: Interest expense incurred 20 21 Less interest capitalized 15 15 Equity in income of joint ventures and limited partnerships (Note 4) 2 2 Other income, net 10 5 --------- --------- Earnings before income taxes and cumulative effect of a change in an accounting principle 66 135 Income taxes (Note 5) 24 50 --------- --------- Earnings before cumulative effect of a change in an accounting principle 42 85 Cumulative effect of a change in an accounting principle (Note 1) 90 -- --------- --------- Net earnings (loss) $ (48) $ 85 ========= ========= Basic and diluted net earnings (loss) per share (Note 2): Before cumulative effect of a change in an accounting principle $ 0.21 $ 0.43 Cumulative effect of a change in an accounting principle (0.45) -- --------- --------- $ (0.24) $ 0.43 ========= ========= Weighted average shares outstanding (thousands): Basic 199,160 198,747 Dilutive effect of stock options 675 525 --------- --------- Diluted 199,835 199,272 ========= ========= Dividends paid per share $ .40 $ .40 ========= ========= </TABLE> See Accompanying Notes to Financial Statements
Weyerhaeuser Company - -4- <TABLE> <CAPTION> WEYERHAEUSER COMPANY AND SUBSIDIARIES ____________ CONSOLIDATED BALANCE SHEET March 28, 1999 and December 27, 1998 (Dollar amounts in millions) March 28, Dec. 27, 1999 1998 --------- --------- (Unaudited) Assets - ------ <S> <C> <C> Weyerhaeuser Current assets: Cash and short-term investments (Note 1) $ 31 $ 28 Receivables, less allowances 991 886 Inventories (Note 6) 1,058 962 Prepaid expenses 295 294 --------- --------- Total current assets 2,375 2,170 Property and equipment (Notes 7 and 11) 6,382 6,692 Construction in progress 381 315 Timber and timberlands at cost, less fee stumpage charged to disposals 1,022 1,013 Investments in and advances to equity affiliates (Notes 4 and 11) 475 482 Other assets and deferred charges 260 262 --------- --------- 10,895 10,934 --------- --------- Real estate and related assets Cash and short-term investments 6 7 Receivables, less discounts and allowances 83 81 Mortgage-related financial instruments, less discounts and allowances 108 119 Real estate in process of development and for sale 619 584 Land being processed for development 876 854 Investments in and advances to joint ventures and limited partnerships, less reserves (Note 4) 122 120 Other assets 133 135 --------- --------- 1,947 1,900 --------- --------- Total assets $ 12,842 $ 12,834 ========= ========= </TABLE> See Accompanying Notes to Financial Statements
Weyerhaeuser Company - -5- <TABLE> <CAPTION> March 28, Dec. 27, 1999 1998 --------- --------- (Unaudited) Liabilities and shareholders' interest - -------------------------------------- <S> <C> <C> Weyerhaeuser Current liabilities: Notes payable $ 3 $ 5 Current maturities of long-term debt 94 88 Accounts payable (Note 1) 715 699 Accrued liabilities (Note 8) 654 707 --------- --------- Total current liabilities 1,466 1,499 Long-term debt (Note 10) 3,569 3,397 Deferred income taxes (Note 5) 1,367 1,404 Deferred pension, other postretirement benefits and other liabilities 472 488 Commitments and contingencies (Note 14) --------- --------- 6,874 6,788 --------- --------- Real estate and related assets Notes payable and commercial paper 543 564 Long-term debt (Note 10) 697 701 Other liabilities 273 255 Commitments and contingencies (Note 14) --------- --------- 1,513 1,520 --------- --------- Total liabilities 8,387 8,308 --------- --------- Shareholders' interest (Note 12) Common shares: authorized 400,000,000 shares, issued 206,072,890 shares, $1.25 par value 258 258 Other capital 415 416 Cumulative other comprehensive (expense) (175) (208) Retained earnings 4,245 4,372 Treasury common shares, at cost: 6,508,436 and 7,063,917 (288) (312) --------- --------- Total shareholders' interest 4,455 4,526 --------- --------- Total liabilities and shareholders' interest $ 12,842 $ 12,834 ========= ========= </TABLE>
Weyerhaeuser Company - -6- <TABLE> <CAPTION> WEYERHAEUSER COMPANY AND SUBSIDIARIES ____________ CONSOLIDATED STATEMENT OF CASH FLOWS For the thirteen-week periods ended March 28, 1999 and March 29, 1998 (Dollar amounts in millions) (Unaudited) Consolidated -------------------- March 28, March 29, 1999 1998 --------- --------- <S> <C> <C> Cash provided by (used for) operations: Net earnings (loss) $ (48) $ 85 Noncash charges (credits) to income: Depreciation, amortization and fee stumpage 156 150 Deferred income taxes, net 16 28 Pension and other postretirement benefits (17) 5 Equity in (income) of affiliates, joint ventures and limited partnerships (4) (8) Effect of a change in an accounting principle (Note 1) 142 -- Effect of a change in an accounting principle - deferred taxes (Note 1) (52) -- Charge for impairment of long-lived assets (Note 13) 91 -- Decrease (increase) in working capital: Receivables (104) (48) Inventories, real estate and land (143) (84) Prepaid expenses (1) (39) Mortgage-related financial instruments 7 (16) Accounts payable and accrued liabilities (21) (53) (Gain) loss on disposition of assets -- (8) Other (16) (12) --------- --------- Net cash provided by (used for) operations 6 -- --------- --------- Cash provided by (used for) investing activities: Property and equipment (90) (78) Timber and timberlands (16) (12) Investments in and advances to equity affiliates 5 19 Proceeds from sale of: Property and equipment 4 19 Mortgage-related financial instruments 6 18 Restructuring the ownership of a subsidiary (Note 11) -- 218 Intercompany advances -- -- --------- --------- Net cash provided by (used for) investing activities (91) 184 --------- --------- Cash provided by (used for) financing activities: Issuances of debt 22 7 Sale of industrial revenue bonds -- 48 Notes and commercial paper borrowings, net 168 54 Cash dividends (79) (80) Payments on debt (39) (255) Purchase of treasury common shares -- (42) Exercise of stock options 23 5 Other (8) (11) --------- --------- Net cash provided by (used for) financing activities 87 (274) --------- --------- Net increase (decrease) in cash and short-term investments 2 (90) Cash and short-term investments at beginning of year 35 122 --------- --------- Cash and short-term investments at end of period $ 37 $ 32 ========= ========= Cash paid (received) during the period for: Interest, net of amount capitalized $ 106 $ 112 ========= ========= Income taxes $ (6) $ 38 ========= ========= </TABLE> See Accompanying Notes to Financial Statements
Weyerhaeuser Company - -7- <TABLE> <CAPTION> Real Estate and Weyerhaeuser Related Assets -------------------- -------------------- March 28, March 29, March 28, March 29, 1999 1998 1999 1998 --------- --------- --------- --------- <C> <C> <C> <C> $ (77) $ 69 $ 29 $ 16 155 149 1 1 12 24 4 4 (17) 5 -- -- (2) (6) (2) (2) 142 -- -- -- (52) -- -- -- 91 -- -- -- (105) (42) 1 (6) (96) (101) (47) 17 (1) (39) -- -- -- -- 7 (16) (37) (5) 16 (48) -- -- -- (8) 4 (13) (20) 1 --------- --------- --------- --------- 17 41 (11) (41) --------- --------- --------- --------- (90) (77) -- (1) (16) (12) -- -- -- 8 5 11 4 4 -- 15 -- -- 6 18 -- 218 -- -- (24) (121) 24 121 --------- --------- --------- --------- (126) 20 35 164 --------- --------- --------- --------- 22 3 -- 4 -- 48 -- -- 189 18 (21) 36 (79) (80) -- -- (35) (72) (4) (183) -- (42) -- -- 23 5 -- -- (8) (11) -- -- --------- --------- --------- --------- 112 (131) (25) (143) --------- --------- --------- --------- 3 (70) (1) (20) 28 100 7 22 --------- --------- --------- --------- $ 31 $ 30 $ 6 $ 2 ========= ========= ========= ========= $ 101 $ 106 $ 5 $ 6 ========= ========= ========= ========= $ (6) $ (1) $ -- $ 39 ========= ========= ========= ========= </TABLE>
Weyerhaeuser Company - -8- WEYERHAEUSER COMPANY AND SUBSIDIARIES ____________ NOTES TO FINANCIAL STATEMENTS For the thirteen-week periods ended March 28, 1999 and March 29, 1998 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, which is engaged in the management of 5.1 million acres of company-owned and .2 million acres of leased commercial forestland in the United States (3.3 million acres in the South and 2.0 million acres in the Pacific Northwest). . Wood products, which produces 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. It is also engaged in the management of 27 million acres of forestland in Canada under long-term licensing arrangements (of which 18.9 million acres are considered to be productive forestland). . Pulp, paper and packaging, which manufactures and sells pulp, paper, paperboard and containerboard in North American, Pacific Rim and European markets and packaging products for the domestic markets, and which operates an extensive wastepaper recycling system that serves company mills and worldwide markets. Accounting Pronouncements Implemented In the first quarter, the company implemented the following Statements of Position (SOP) issued by the American Institute of Certified Public Accountants Accounting Standards Executive Committee: . SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, which provides guidelines on the accounting for internally developed computer software. The adoption of this SOP did not have a significant impact on the company's results of operations or financial position. . SOP 98-5, Reporting on the Costs of Start-up Activities, which requires that the costs of start-up activities be expensed as incurred. In addition, this pronouncement required that all unamortized start-up costs on the balance sheet at the implementation date be written off as a cumulative effect of a change in an accounting principle. The company recorded an after- tax charge of $90 million, or 45 cents per common share, in the current quarter to reflect this write-off. This charge included $9 million for the company's interest in the write-off of unamortized start-up costs in three of its 50 percent-owned equity affiliates.
Weyerhaeuser Company - -9- Prospective Accounting Pronouncements In 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, which 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, the company believes that the future adoption of this statement will not have a material impact on its results of operations or financial position. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Derivatives The company has only limited involvement with derivative financial instruments and does not use them for trading purposes. They are used to manage well-defined interest rate and foreign exchange risks. These include: . Foreign exchange contracts, which are hedges for foreign denominated accounts receivable and accounts payable. These contracts generate gains or losses that are recognized at the contracts' respective settlement dates. . 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 its counterparties to fail to meet their obligations. The company deals only with highly rated counterparties. The notional amounts of these derivative financial instruments are $104 million and $102 million at March 28, 1999, and December 27, 1998, respectively. These notional amounts do not represent amounts exchanged by the parties and, thus, are not a measure of exposure to the company through its use of derivatives. The exposure in a derivative contract is the net difference between what each party is required to pay based on the contractual terms against the notional amount of the contract, such as interest rates or exchange rates. The use of derivatives does not have a significant effect on the company's results of operations or its financial position. Cash and Short-Term Investments For purposes of cash flow and fair value reporting, short-term investments with original maturities of 90 days or less are considered as cash equivalents. Short-term investments are stated at cost, which approximates market. Inventories Inventories are stated at the lower of cost or market. Cost includes labor, materials and production overhead. The last-in, first-out (LIFO) method is used to cost the majority of domestic raw materials, in process and finished goods inventories. LIFO inventories were $288 million and $253 million at March 28, 1999, and December 27, 1998, 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 $227 million and $228 million greater at March 28, 1999, and December 27, 1998, respectively.
Weyerhaeuser Company - -10- 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 for payment. Accordingly, there were negative book cash balances of $131 million and $139 million at March 28, 1999, and December 27, 1998, 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. 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.
Weyerhaeuser Company - -11- Real Estate and Related Assets Real estate held for sale is stated at the lower of cost or fair value less costs to sell. 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-related financial instruments include mortgage loans receivable, mortgage-backed certificates and other financial instruments. Note 2: 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 576,732 shares at $56.78 per share were outstanding during the thirteen weeks ending March 28, 1999. Options to purchase 1,371,080 shares at $51.09 per share, 604,011 shares at $56.78 per share and 150,000 shares at $53.06 per share were outstanding during the thirteen weeks ending March 29, 1998. These options were not included in the computation of diluted earnings per share for the respective periods because the option exercise prices were greater than the average market prices of common shares during those periods. Note 3: Comprehensive Income (Expense) The company's comprehensive income (expense) is as follows: <TABLE> <CAPTION> Thirteen weeks ended -------------------- March 28, March 29, Dollar amounts in millions 1999 1998 --------- --------- <S> <C> <C> Net earnings (loss) $ (48) $ 85 Other comprehensive income (expense): Foreign currency translation adjustments 39 5 Income tax (expense) on foreign currency translation adjustments (6) (2) --------- --------- $ (15) $ 88 ========= ========= </TABLE> Note 4: Equity Affiliates Weyerhaeuser The company's investments in affiliated companies that are not majority owned or controlled are accounted for using the equity method. Investments carried at equity are: . Cedar River Paper Company - A 50 percent owned joint venture in Cedar Rapids, Iowa, that manufactures liner and medium containerboard from recycled fiber. . Nelson Forests Joint Venture - An investment in which the company owns a 51 percent financial interest and has a 50 percent voting interest, which holds Crown Forest License cutting rights and freehold land on the South Island of New Zealand. . SCA Weyerhaeuser Packaging Holding Company Asia Ltd. - A 50 percent owned joint venture formed to build or buy containerboard packaging facilities to serve manufacturers of consumer and industrial products in Asia. Currently, one facility is in operation and another is under construction in China. . RII Weyerhaeuser World Timberfund, L.P. - A 50 percent owned joint venture with institutional investors to make investments in timberlands and related assets outside the United States. The primary focus of this partnership is in pine forests in the Southern Hemisphere.
Weyerhaeuser Company - -12- . North Pacific Paper Corporation - A 50 percent owned joint venture that has a newsprint manufacturing facility in Longview, Washington. This venture was formed in February 1998 through a restructuring of the company's 80 percent ownership, which was fully consolidated, to 50-50 ownership with Nippon Paper Industries Co., Ltd. . Wilton Connor LLC - A 50 percent owned joint venture in Charlotte, North Carolina, formed in October 1998. This venture supplies full-service, value-added turnkey packaging solutions that assist product manufacturers in the areas of retail marketing and distribution. Unconsolidated financial information for affiliated companies, which are accounted for by the equity method, is as follows: <TABLE> <CAPTION> March 28, Dec. 27, 1999 1998 Dollar amounts in millions --------- --------- <S> <C> <C> Current assets $ 161 $ 165 Noncurrent assets 1,295 1,325 Current liabilities 68 77 Noncurrent liabilities 683 702 </TABLE> <TABLE> <CAPTION> Thirteen weeks ended -------------------- March 28, March 29, 1999 1998 --------- --------- <S> <C> <C> Net sales and revenues $ 164 $ 173 Operating income 20 28 Net income (loss) (4) 14 </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 and shipping services. 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 as appropriate. Unconsolidated financial information for joint ventures and limited partnerships, which are accounted for by the equity method, is as follows: <TABLE> <CAPTION> March 28, Dec. 27, 1999 1998 Dollar amounts in millions --------- --------- <S> <C> <C> Current assets $ 2,624 $ 1,755 Noncurrent assets 172 230 Current liabilities 2,063 1,241 Noncurrent liabilities 117 136 </TABLE> <TABLE> <CAPTION> Thirteen weeks ended -------------------- March 28, March 29, 1999 1998 --------- --------- <S> <C> <C> Net sales and revenues $ 69 $ 57 Operating income 47 34 Net income 40 27 </TABLE> 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.
Weyerhaeuser Company - -13- Note 5: Income Taxes <TABLE> <CAPTION> Provisions for income taxes include the following: Thirteen weeks ended -------------------- March 28, March 29, Dollar amounts in millions 1999 1998 --------- --------- <S> <C> <C> Federal: Current $ 3 $ 16 Deferred 13 26 --------- --------- 16 42 --------- --------- State: Current 1 3 Deferred -- 1 --------- --------- 1 4 --------- --------- Foreign: Current 4 3 Deferred 3 1 --------- --------- 7 4 --------- --------- Income taxes before cumulative effect of a change in an accounting principle 24 50 Deferred taxes applicable to the cumulative effect of a change in an accounting principle (52) -- --------- --------- $ (28) $ 50 ========= ========= </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 March 28, 1999, and March 29, 1998, the company's provision for income taxes as a percent of earnings before income taxes and cumulative effect of a change in an accounting principle is greater than the 35% federal statutory rate due principally to the effect of state income taxes. The effective tax rates for the thirteen-week periods ended March 28, 1999, and March 28, 1998, were 36.5% and 37%, 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 6: Inventories <TABLE> <CAPTION> March 28, Dec. 27, 1999 1998 Dollar amounts in millions --------- --------- <S> <C> <C> Logs and chips $ 139 $ 108 Lumber, plywood and panels 196 143 Pulp and paper 191 190 Containerboard, paperboard and packaging 101 96 Other products 156 150 Materials and supplies 275 275 --------- --------- $ 1,058 $ 962 ========= ========= </TABLE>
Weyerhaeuser Company - -14- Note 7: Property and Equipment <TABLE> <CAPTION> March 28, Dec. 27, Dollar amounts in millions 1999 1998 --------- --------- <S> <C> <C> Property and equipment, at cost: Land $ 157 $ 157 Buildings and improvements 1,706 1,667 Machinery and equipment 9,557 9,732 Rail and truck roads 556 555 Other 109 111 --------- --------- 12,085 12,222 Less allowance for depreciation and amortization 5,703 5,530 --------- --------- $ 6,382 $ 6,692 ========= ========= </TABLE> Note 8: Accrued Liabilities <TABLE> <CAPTION> March 28, Dec. 27, Dollar amounts in millions 1999 1998 --------- --------- <S> <C> <C> Payroll - wages and salaries, incentive awards, retirement and vacation pay $ 262 $ 305 Taxes - social security and real and personal property 56 46 Interest 51 87 Income taxes 22 16 Other 263 253 --------- --------- $ 654 $ 707 ========= ========= </TABLE> Note 9: Short-Term Debt Lines of Credit The company has short-term bank credit lines that provide for borrowings of up to the total amount of $650 million, all of which could be availed of by the company and Weyerhaeuser Real Estate Company (WRECO) at March 28, 1999, and December 27, 1998. No portion of these lines has been availed of by the company or WRECO at March 28, 1999, or December 27, 1998. Neither of the entities referred to herein is a guarantor of the borrowings of the other. Note 10: 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, has a set of term credit facility agreements with a group of banks that provide for borrowings of up to $175 million. $100 million was outstanding under these agreements at March 28, 1999, and December 27, 1998. 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 $382 million and $192 million as of March 28, 1999, and December 27, 1998, respectively. No portion of these lines has been availed of by the company, WRECO or WFS at March 28, 1999, and December 27, 1998, except as noted. The company's compensating balance agreements were not significant.
Weyerhaeuser Company - -15- Note 11: Restructuring the Ownership of a Subsidiary In the first quarter of 1998, 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 percent company ownership and 20 percent NPI ownership to 50 percent 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 noncash 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 12: Shareholders' Interest Common Shares Common shares reserved for stock option plans were 8,177,000 shares at March 28, 1999, and 7,222,000 shares at December 27, 1998. Cumulative Other Comprehensive (Expense) The company's cumulative other comprehensive (expense) includes: <TABLE> <CAPTION> March 28, Dec. 27, Dollar amounts in millions 1999 1998 --------- --------- <S> <C> <C> Foreign currency translation adjustments $ (167) $ (200) Minimum pension liability adjustment (8) (8) --------- --------- $ (175) $ (208) ========= ========= </TABLE> Note 13: Impairment of Long-Lived Assets During the 1999 first quarter, the company recorded a pretax charge of $91 million for the impairment of long-lived assets. This charge is related to the company's decision to sell its composite products business and ply-veneer facility and close a chip export facility. These facilities, with a net book value of $160 million, are located in Springfield, Oregon; Moncure, North Carolina; Adel, Georgia; and Coos Bay, Oregon. The decision to sell the composite products business was an option explored in a strategic review of this business. In 1996, the size and scale of the company's position in the composite products business was significantly reduced with the sale of two composite products plants as part of a facility disposition. The sale of the composite products business and ply-veneer facility is expected to occur in the second quarter of 1999. The closure of the Coos Bay chip export dock is a result of the continuing decline in the supply of wood chips in the Pacific Northwest due largely to a significant decrease in federal timber sales and related mill closures over the last decade. The sale or closure of these facilities will not have a material impact on the company's results of operations or financial position. Note 14: Commitments and Contingencies The company's capital expenditures, excluding acquisitions, were $615 million in 1998, and are expected to be approximately $785 million in 1999; 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 - -16- Note 15: Subsequent Events During April 1999, the following events occurred: . The company signed an agreement to sell its composite products facilities and ply-veneer plant to SierraPine Limited. These facilities are located in Springfield, Oregon; Moncure, North Carolina; and Adel, Georgia. The transaction is expected to close in the second quarter. See related Note 13: Impairment of Long- Lived Assets in Notes to Financial Statements of this Form 10-Q. . RII Weyerhaeuser World Timberfund (the Timberfund), a joint venture in which the company has a 50 percent interest, reached an agreement to acquire all the plantations and solid wood manufacturing facilities held by CSR Ltd. of Australia in Victoria and South Australia. Assets include 62,500 acres of radiata pine plantations, two softwood lumber mills with a capacity of 115 million board feet, a lumber treating operation, a pine molding remanufacturing plant, a chip export business and a 30 percent interest in CSR's sales and distribution business. Approximately 500 people currently work in these operations. Weyerhaeuser Company, through a subsidiary, will assume the responsibility for all management and marketing activities of the acquisition. The Timberfund will pay approximately US $142 million for these assets and expects to complete the purchase before the end of the second quarter, subject to Australian government regulatory approval. Note 16: Business Segments The company is principally engaged in the growing and harvesting of timber and the manufacture, distribution and sale of forest products. The company's principal business segments are timberlands (including logs, chips and timber); wood products (including softwood lumber, plywood and veneer; composite panels; oriented strand board; hardwood lumber; treated products; doors; raw materials; and building materials distribution); pulp, paper and packaging (including pulp, paper, containerboard, packaging, paperboard and recycling); and real estate and related assets. The timber-based businesses involve a high degree of integration among timber operations; building materials conversion facilities; and pulp, paper, containerboard and paperboard primary manufacturing and secondary conversion facilities. This integration includes extensive transfers of raw materials, semi- finished materials and end products between and among these groups. The company's accounting policies for segments are the same as those described in Note 1: Summary of Significant Accounting Policies. Management evaluates segment performance based on the contributions to earnings of the respective segments. Accounting for segment profitability in integrated manufacturing sites involves allocation of joint conversion and common facility costs based upon the extent of usage by the respective product lines at that facility. Transfer of products between segments is accounted for at current market values.
Weyerhaeuser Company - -17- An analysis and reconciliation of the company's business segment information to the respective information in the consolidated financial statements is as follows: <TABLE> <CAPTION> Thirteen weeks ended -------------------- March 28, March 29, Dollar amounts in millions 1999 1998 --------- --------- <S> <C> <C> Sales to and revenues from unaffiliated customers: Timberlands $ 153 $ 163 Wood products 1,116 1,018 Pulp, paper and packaging 1,082 1,120 Real estate and related assets 276 265 Corporate and other 38 37 --------- --------- 2,665 2,603 --------- --------- Intersegment sales: Timberlands 125 139 Wood products 48 50 Pulp, paper and packaging 32 25 Corporate and other 2 5 --------- --------- 207 219 --------- --------- Total sales and revenues 2,872 2,822 Intersegment eliminations (207) (219) --------- --------- $ 2,665 $ 2,603 ========= ========= Approximate contribution (charge) to earnings (1): Timberlands $ 119 $ 147 Wood products (14) 26 Pulp, paper and packaging 42 52 Real estate and related assets (1) 46 25 Corporate and other (62) (49) --------- --------- 131 201 Interest expense (67) (67) Less capitalized interest 2 1 --------- --------- Earnings before income taxes and the cumulative effect of a change in an accounting principle 66 135 Income taxes (24) (50) --------- --------- Earnings before the cumulative effect of a change in an accounting principle 42 85 Cumulative effect of a change in an accounting principle (90) -- --------- --------- $ (48) $ 85 ========= ========= </TABLE> There were no material changes from year-end 1998 in total assets, basis of segmentation or basis for measuring segment profit or loss. Certain reclassifications have been made to conform prior year's data to the current format. (1) Interest expense of $5 million and $6 million in the thirteen weeks ended March 28, 1999, and March 29, 1998, respectively, is included in the determination of approximate contributions to earnings and excluded from interest expense for financial services businesses.
Weyerhaeuser Company - -18- WEYERHAEUSER COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Consolidated Results The company reported a net loss of $48 million, or 24 cents, basic and diluted, per common share in the first quarter compared to a $85 million profit, or 43 cents basic and diluted earnings per common share in the same quarter last year. The current quarter results were impacted by two material nonrecurring charges: . An after-tax charge of $90 million, or 45 cents per common share, from the cumulative effect of a change in an accounting policy which required the company to write off the unamortized balance of capitalized start-up costs at year-end 1998. This charge included $9 million for the company's interest in the write- off of unamortized start-up costs in three of its 50 percent-owned equity affiliates. . An after-tax charge of $60 million, or 30 cents per common share, associated with the recognition of impairment of long-lived assets in four of the company's composite products facilities, a ply-veneer facility and a chip export dock. The composite products and ply-veneer facilities are expected to be sold in the second quarter while the chip export dock is expected to be closed before the end of the year. Earnings for the quarter before these charges were $102 million, or 51 cents per common share, an increase of 19 percent over the 1998 first quarter. Consolidated net sales and revenues were $2.7 billion in the quarter, up 2 percent from the $2.6 billion the prior year. This increase was principally in the wood products segment as lumber prices strengthened in the quarter. Timberlands First quarter operating earnings were $119 million in 1999, a decline of 19 percent from the $147 million earned in 1998. Sales to unaffiliated customers were $153 million compared to $163 million a year ago. Intersegment sales were $125 million for the quarter, down from $139 million reported a year ago. Volume in both the domestic and foreign log markets was generally stable throughout the quarter and showed some improvement late in the period. Domestic prices remain well below last year's first quarter levels while export prices remain unchanged from the same period a year ago. Log production for this segment was 129 million cubic feet in the quarter compared to 127 million cubic feet in the 1998 first quarter. Raw material sales for this segment were 68 million cubic feet, up from last year's volume of 54 million cubic feet. Wood Products Operating earnings, before a $94 million charge for impairment of long-lived assets ($91 million) and related exit costs ($3 million), were $80 million compared to $26 million in the same period last year. Including the charge, the segment had a loss of $14 million for the quarter. Sales were $1.1 billion, up 10 percent from the 1998 first quarter. The strong earnings before the charge are the result of demand for lumber and panel products due to the continued strong domestic housing market. Lumber and oriented strand board volumes were up compared to the same period last year along with stronger prices for plywood and oriented strand board.
Weyerhaeuser Company - -19- Third party sales and total production volumes for the major products in this segment for the thirteen weeks ended March 28, 1999, and March 29, 1998, are as follows: <TABLE> <CAPTION> Third Party Sales Total Production ------------------- ------------------- Thirteen weeks Thirteen weeks ended ended ------------------- ------------------- March 28, March 29, March 28, March 29, Products (in millions) 1999 1998 1999 1998 - ---------------------- --------- --------- --------- --------- <S> <C> <C> <C> <C> Softwood lumber-board feet 1,220 1,131 1,019 980 Softwood plywood and veneer-square feet (3/8") 415 436 251 237 Composite panels-square feet (3/4") 152 145 134 127 Oriented strand board-square feet (3/8") 679 640 656 533 Hardwood lumber-board feet 99 86 91 87 Engineered wood products-lineal feet 39 32 -- -- Hardwood doors (thousands) 180 188 178 209 Raw materials-cubic feet 84 77 -- -- Logs-cubic feet -- -- 154 148 </TABLE> Pulp, Paper and Packaging The segment reported operating earnings of $42 million, down 20 percent from the 1998 first quarter results of $52 million, but 21 percent higher than the fourth quarter 1998 results. Sales for the quarter were $1.1 billion, comparable to the same period a year ago. Prices were lower than a year ago and the previous quarter across all product lines, offset in part by higher sales volumes and lower operating costs. Third party sales and total production volumes for the major products in this segment for the thirteen weeks ended March 28, 1999, and March 29, 1998, are as follows: <TABLE> <CAPTION> Third Party Sales Total Production ------------------- ------------------- Thirteen weeks Thirteen weeks ended ended ------------------- ------------------- March 28, March 29, March 28, March 29, Products (in thousands) 1999 1998 1999 1998 - ----------------------- --------- --------- --------- --------- <S> <C> <C> <C> <C> Pulp-air-dry metric tons 583 520 579 495 Paper-tons 371 266 403 289 Paperboard-tons 61 59 61 64 Containerboard-tons 115 81 597 612 Packaging-MSF 11,110 10,927 11,725 11,531 Recycling-tons 671 616 1,027 954 </TABLE> Real Estate and Related Assets First quarter operating earnings were $46 million compared to $25 million in 1998; an increase of 84 percent. Sales and revenues were $276 million, an increase of 4 percent over the prior year. Improved operating performance and the strength of the housing markets in which the company operates - especially California - contributed to the strong performance. Costs and Expenses Excluding the noncash charge of $91 million for impairment of long- lived assets and the $17 million charge for Year 2000 remediation, total costs and expenses incurred in the first quarter of 1999 were virtually unchanged from the same period a year ago. Weyerhaeuser's costs of products sold, as a percentage of sales were 77 percent for the current quarter compared to 78 percent in the 1998 first quarter. Cost reduction efforts, primarily in the pulp, paper and packaging segment, contributed to a decrease in the costs of products sold compared to the 1998 first quarter. Other income (expense) is an aggregation of both recurring and nonrecurring items and, as a result, can fluctuate from year to year. There were no significant individual items in the first quarters of either 1999 or 1998.
Weyerhaeuser Company - -20- 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. 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 Consolidated net cash provided by operations in the first quarter was $6 million. Net cash from operations, before net changes in working capital, of $268 million was offset by an increased use of funds for working capital. Significant noncash charges were depreciation, amortization and fee stumpage of $156 million; the net effect of a change in an accounting principle, i.e., the write- off of unamortized capitalized start-up costs, of $90 million; and the charge of $91 million for the write-down of impaired assets to fair market value. These noncash charges were offset in part by the net loss of $48 million and a noncash credit of $17 million for pension and other postretirement benefits. Working capital cash requirements for Weyerhaeuser included increases of $105 million in accounts receivable and $96 million in inventories along with a decrease of $37 million in accounts payable and accrued liabilities. The increase in receivables reflects the seasonal increase in sales in late first quarter versus late fourth quarter of 1998. The inventory increase was across all product lines with the inventory turnover rate dropping from 11.8 turns in the 1998 fourth quarter to 10.9 turns in the current quarter. Real estate and related assets cash outflows included $47 million for the acquisition and development of land and residential lots for construction. Earnings before interest expense and income taxes plus noncash charges for the principal business segments were: . $131 million for the timberlands segment for the current quarter compared to $160 million in 1998. Operating earnings for this segment were $28 million lower than last year. . $123 million for the wood products segment in 1999 first quarter compared to $73 million in the same period last year. The current quarter includes a noncash charge of $91 million for impairment of long-lived assets. . $134 million for the pulp, paper and packaging segment in the current quarter compared to $136 million in 1998. Investing Capital expenditures for the quarter were $106 million. The capital spending by segment was $22 million for timberlands, $24 million for wood products, $58 million for pulp, paper and packaging and $2 million for corporate and other. The company currently anticipates capital expenditures, excluding acquisitions, to approximate $785 million for the year; however, this expenditure level could increase or decrease as a consequence of future economic conditions. The cash needed to meet capital and other needs during the quarter was generated principally from the sale of commercial paper. Financing During the current quarter, Weyerhaeuser increased its interest bearing debt by $176 million. This was primarily from commercial paper borrowings of $189 million offset in part by debt payments of $35 million. The real estate and related assets segment utilized intercompany borrowings to reduce third party debt by $25 million in the quarter.
Weyerhaeuser Company - -21- The company's debt to total capital ratio was 41 percent at the end of the quarter. This is comparable to the 40 percent at the end of 1998 first quarter and 39 percent at the end of 1998. During the first quarter, the company paid $79 million in cash dividends. Environmental Matters During the first quarter of 1999, the National Marine Fisheries Service (NMFS) announced decisions under the Endangered Species Act (ESA) with respect to various species of fish that spawn in the Pacific Northwest (Washington, Oregon, Idaho and northern California). Several populations of chinook, chum and sockeye salmon and steelhead trout were determined to be threatened or endangered. Several other populations were proposed to be listed as threatened or endangered, listing decisions on several other populations were deferred, and designations of critical habitat were proposed for several populations. In April 1999, NMFS proposed listing cutthroat trout in portions of Washington and Oregon and delisting cutthroat trout in Oregon's Umpqua River drainage. The ESA automatically prohibits the "take" of species listed as endangered and gives NMFS authority to prohibit the "take" of species it lists as threatened. NMFS announced that it intends to adopt rules to prohibit "take" of the species it has listed as threatened, except "incidental take" that may result from activities regulated under state or local programs approved by NMFS. State agencies and local governments are reviewing their environmental regulations regarding forestry and other land use activities and are considering adoption of stronger regulations to help protect habitat for such species and obtain such approvals from NMFS. Requirements to protect habitat for threatened and endangered species have resulted in restrictions in timber harvests on nonfederal timberlands, including some timberlands of the company. In the future, such requirements could result in restrictions on timber harvest and other forest management practices on 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 will have a significant effect on the company's total harvest of timber in 1999 or 2000, although they may have such an effect in the future. 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 and has substantially completed its goal of correcting affected systems that would have a critical effect on its business operations. While some significant components remain uncorrected, the company believes that all such systems have been identified and has plans in place to correct such systems by the end of the second quarter of 1999. The company expects to complete the testing and verification of such systems during 1999. While it is difficult at present to fully quantify the overall cost of this work, the company estimates that the overall cost of remediation, including costs to be capitalized, could approach $100 million. The company presently believes that such costs 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 first quarter of 1999, the company has incurred $73 million of remediation costs, of which $54 million was incurred in 1997 and 1998 and $12.5 million has been capitalized for new hardware and software. The company expects substantial additional costs to be incurred in the second and third quarters 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. In addition, the company has initiated a process to develop joint contingency plans with its customers and suppliers. The company currently expects that it will be prepared in the event of systems failures to continue to do business, although such operations may be at a higher cost.
Weyerhaeuser Company - -22- 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. 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. Quantitative and Qualitative Disclosures About Market Risk As part of the company's financing activity, derivative securities are sometimes used to achieve the desired mix of fixed versus floating rate debt and to manage the timing of finance opportunities. The company does not hold or issue derivative financial instruments for trading. The company's derivative instruments, which are matched directly against outstanding borrowings, 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 nonperformance by counterparties to these financial instruments; however, the company does not expect its counterparties to fail to meet their obligations. Interest rate swaps are described as follows: <TABLE> <CAPTION> Dollar amounts in millions Variable Rate at March 28, 1999 ---------------------------- Notional Maturity Fixed Fair Value Amount Date Rate % % Based On of Swap(1) - -------- ---------- ------ ---- -------------------- ---------- <S> <C> <C> <C> <C> <C> $ 27 4/1/99 6.70 8.94 11.95% - Kenny index $ -- 75 11/6/99(2) 6.85 4.94 30 day LIBOR (3.7) - -------- ---------- $ 102 $ (3.7) ======== ========== </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 March 28, 1999, the company had a Canadian dollar contract in the US dollar equivalent amount of $2 million to help meet the funding requirements of its Canadian operations at the end of the quarter. 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. All PSD compliance issues identified in the review have been resolved, except for PSD issues at the company's Springfield, Oregon, containerboard facility. A final decision is expected to be made by the Lane Regional Air Pollution Control Authority (Lane County, Oregon) 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.
Weyerhaeuser Company - -23- 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 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 December 1998, the complaint was amended narrowing the purported class to individuals and entities in the state of California. In February 1999, the court entered an order certifying the class. The company has filed an appeal and the Court of Appeals has issued a stay of the certification decision pending its review. In September 1998, a lawsuit purporting to be a class action involving hardboard siding was filed against the company in Superior Court, King County, Washington. The complaint was amended, in January 1999, to allege a class consisting of individuals and entities that own homes or other structures in the United States on which exterior hardboard siding manufactured by the company at its former Klamath Falls, Oregon, facility has been installed since January 1981. The amended complaint alleges the company manufactured defective hardboard siding, engaged in unfair trade practices and failed to disclose to customers the alleged defective nature of its hardboard siding. The amended complaint seeks compensatory damages, punitive or treble damages, restitution, attorney fees, costs of the suit and such other relief as may be appropriate. The company is a defendant in approximately 25 other hardboard siding cases, two of which purport to be statewide class actions on behalf of owners of property in Iowa and Oregon that contain the company's hardboard siding. In April 1999, the company received a Notice of Violation (NOV) from the Georgia Environmental Protection Department (EPD) for air emission issues at its Adel, Georgia, facility. The NOV addresses the facility's failure to satisfy the percentage of Volatile Organic Compounds (VOC) removal required for the biofilter. The NOV requires the company to submit an application for a permit amendment which contains a monitoring plan for VOC emissions, a proposed VOC mass emission limit, proof of compliance with that limit, and a detailed schedule for the installation of a continuous VOC emission monitor and flow monitor that meets state requirements. The required response to the NOV is being prepared by the company. The company is also a party to various proceedings relating to the cleanup 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 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 any ultimate outcome resulting from these proceedings and matters, 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 Exhibits 27 Financial Data Schedules Reports on Form 8-K The registrant filed reports on Form 8-K dated January 7, January 21 and April 14, 1999, reporting information under Item 5, Other Events.