SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarterly Period Ended June 30, 1997 Commission File Number 1-7107 LOUISIANA-PACIFIC CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 93-0609074 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 111 S. W. Fifth Avenue, Portland, Oregon 97204-3699 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (503) 221-0800 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . Indicate the number of shares outstanding of each of the issuer's classes of common stock: 109,291,169 shares of Common Stock, $1 par value, outstanding as of August 1, 1997.
FORWARD LOOKING STATEMENTS Statements in this report, to the extent they are not based on historical events, constitute forward looking statements. Forward looking statements include, without limitation, statements regarding the outlook for future operations, forecasts of future costs and expenditures, evaluation of market conditions, the outcome of legal proceedings, the adequacy of reserves, or plans for product development. Investors are cautioned that forward looking statements are subject to an inherent risk that actual results may vary materially from those described herein. Factors that may result in such variance, in addition to those accompanying the forward looking statements, include changes in interest rates, commodity prices, and other economic conditions; actions by competitors; changing weather conditions and other natural phenomena; actions by government authorities; uncertainties associated with legal proceedings; technological developments; future decisions by management in response to changing conditions; and misjudgments in the course of preparing forward looking statements.
PART I FINANCIAL INFORMATION Item 1. Financial Statements. CONSOLIDATED SUMMARY STATEMENTS OF INCOME LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES (DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE) (UNAUDITED) QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------- ------------------- 1997 1996 1997 1996 ------- ------- -------- -------- Net sales $ 633.3 $ 658.3 $1,187.9 $1,242.4 ------- ------- -------- -------- Costs and expenses: Cost of sales 555.1 540.9 1,065.2 1,051.7 Depreciation, amortization and depletion 46.1 51.9 87.0 95.0 Settlement and other unusual items, net -- -- (121.9) -- Selling and administrative 40.3 30.5 79.0 65.7 Interest expense 7.0 3.4 15.8 4.3 Interest income (.5) (2.9) (.8) (3.8) ------- ------- -------- -------- Total costs and expenses 648.0 623.8 1,124.3 1,212.9 ------- ------- -------- -------- Income (loss) before taxes and minority interest (14.7) 34.5 63.6 29.5 Provision (benefit) for income taxes (3.4) 13.0 34.2 11.1 Minority interest in net income (loss) of consolidated subsidiaries (1.2) .5 (2.5) 1.0 ------- ------- -------- -------- Net income (loss) $ (10.1) $ 21.0 $ 31.9 $ 17.4 ======= ======= ======== ======== Net income (loss) per share $ (.10) $ .19 $ .29 $ .16 ======= ======= ======== ======== Cash dividends per share $ .14 $ .14 $ .28 $ .28 ======= ======= ======== ======== - 1 -
CONSOLIDATED SUMMARY BALANCE SHEETS LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES (DOLLAR AMOUNTS IN MILLIONS) (UNAUDITED) JUNE 30, 1997 DEC. 31, 1996 ------------- ------------- Cash and cash equivalents $ 6.9 $ 27.8 Accounts receivable, net 121.4 102.5 Inventories 249.4 264.3 Prepaid expenses 19.1 12.0 Income tax refunds receivable 13.5 99.5 Deferred income taxes 73.1 73.1 -------- -------- Total current assets 483.4 579.2 -------- -------- Timber and timberlands 663.3 648.6 Property, plant and equipment 2,549.9 2,486.0 Less reserves for depreciation (1,271.5) (1,207.5) -------- -------- Net property, plant and equipment 1,278.4 1,278.5 Other assets 102.6 82.4 -------- -------- Total assets $2,527.7 $2,588.7 ======== ======== Current portion of long-term debt $ 19.7 $ 18.7 Short-term notes payable 22.0 35.4 Accounts payable and accrued liabilities 184.5 190.6 Current portion of contingency reserves 80.0 100.0 -------- -------- Total current liabilities 306.2 344.7 -------- -------- Long-term debt, excluding current portion 469.6 458.6 Deferred income taxes 193.2 163.2 Contingency reserves, net of current portion 78.5 159.8 Other long-term liabilities and minority interest 31.2 34.8 Stockholders' equity: Common stock 117.0 117.0 Additional paid-in capital 473.3 472.7 Retained earnings 1,141.6 1,140.0 Treasury stock (171.1) (183.3) Loans to Employee Stock Ownership Trusts (49.7) (61.6) Other (62.1) (57.2) -------- -------- Total stockholders' equity 1,449.0 1,427.6 -------- -------- Total liabilities and equity $2,527.7 $2,588.7 ======== ======== - 2 -
CONSOLIDATED SUMMARY STATEMENTS OF CASH FLOWS LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES (DOLLAR AMOUNTS IN MILLIONS) (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1997 1996 ------- ------- Cash flows from operating activities: Net income $ 31.9 $ 17.4 Depreciation, amortization and depletion 87.0 95.0 Cash settlements of contingencies (105.3) (123.4) Other adjustments, net 15.6 1.0 Decrease (increase) in certain working capital components and deferred taxes 111.6 97.7 ------- ------- Net cash provided by operating activities 140.8 87.7 ------- ------- Cash flows from investing activities: Capital spending, including acquisitions (137.4) (174.7) Other investing activities, net 10.2 7.2 ------- ------- Net cash used in investing activities (127.2) (167.5) ------- ------- Cash flows from financing activities: New borrowings 125.0 120.0 Repayment of long-term debt, including net decrease in credit line (115.3) (26.8) Increase (decrease) in short-term notes payable (13.4) (10.5) Cash dividends (30.3) (30.0) Other financing activities, net (.5) 5.9 ------- ------- Net cash provided by (used in) financing activities (34.5) 58.6 ------- ------- Net increase (decrease) in cash and cash equivalents (20.9) (21.2) Cash and cash equivalents at beginning of year 27.8 75.4 ------- ------- Cash and cash equivalents at end of period $ 6.9 $ 54.2 ======= ======= - 3 -
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES (DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE) (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1997 -------------------- SHARES AMOUNT ----------- ------- Common Stock 116,937,022 $ 117.0 =========== ======= Additional Paid-in-Capital: Beginning balance $ 472.7 Net transactions .6 ------- Ending balance $ 473.3 ======= Retained Earnings: Beginning balance $1,140.0 Net income 31.9 Cash dividends, $.28 per share (30.3) ------- Ending balance $1,141.6 ======= Treasury stock: Beginning balance 8,170,799 $(183.3) Shares reissued for employee stock plans and acquisition (518,468) 12.2 ---------- ------- Ending balance 7,652,331 $(171.1) ========== ======= Loans to Employee Stock Ownership Trusts: Beginning balance $ (61.6) Less accrued contribution 11.9 ------- Ending balance $ (49.7) ======= Other Equity Adjustments: Beginning balance $ (57.2) Currency translation adjustment and amortization of deferred compensation (4.9) ------- Ending balance $ (62.1) ======= - 4 -
NOTES TO FINANCIAL STATEMENTS LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES 1. The interim period information included herein reflects all adjustments which are, in the opinion of the management of L-P, necessary for a fair statement of the results of the respective interim periods. Such adjustments are of a normal recurring nature. Results of operations for interim periods are not necessarily indicative of results to be expected for an entire year. It is suggested that these summary financial statements be read in conjunction with the financial statements and the notes thereto included in L-P's 1996 Annual Financial Report to Stockholders. Interim financial statements are by necessity somewhat tentative; judgments are used to estimate quarterly amounts for items that are normally determinable only on an annual basis. 2. Earnings per share is based on the weighted average number of shares of common stock outstanding during the periods (108,250,000 in 1997 and 107,410,000 in 1996). The effect of common stock equivalents is not material. 3. The effective income tax rate is based on estimates of annual amounts of taxable income, foreign sales corporation income and other factors. These estimates are updated quarterly. 4. Determination of interim LIFO inventories requires estimates of year-end inventory quantities and costs. These estimates are revised quarterly and the estimated annual change in the LIFO inventory reserve is expensed over the remainder of the year. 5. Reference is made to "Legal Proceedings" for a description of certain environmental litigation and other litigation and its potential impact on L-P and for a description of settlements of certain class action proceedings. 6. Reference is made to "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further discussion and disclosures regarding items included in the financial statement caption "settlement and other unusual items, net." 7. In June 1997, the Financial Accounting Standards Board adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 will be effective for L-P in 1998. Based on an initial review of SFAS 130, L-P does not expect that it will have a significant impact on the Company's financial statements and related disclosures. - 5 -
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS General Continued oversupply in oriented strand board (OSB) markets which has resulted in depressed sales prices throughout the first six months of 1997 is the primary cause of lower sales and lower earnings before unusual items compared to 1996. Overall net income before unusual items fell to a net loss of $42 million ($.39 per share) for the first six months of 1997 from net income of $17 million ($.16 per share) in 1996. L-P lost $10 million ($.10 per share) in the second quarter of 1997 compared to net income of $21 million ($.19 per share) in 1996. Sales declined approximately 4 percent for the second quarter and six month periods as compared with the prior year's periods. During the first quarter of 1997, the Company recorded a net gain of $122 million ($74 million after taxes, or $.68 per share) relating to a $135 million settlement received in April from the U.S. Government of claims related to the long-term timber supply contract in Alaska, net of adjustments to Ketchikan Pulp Company pulp mill closure-related accruals. L-P operates in two segments: building products and pulp. Building products is the most significant segment, accounting for more than 90 percent of sales in the first six months of 1997 and 1996. The results of operations are discussed separately for each segment below. Key segment information, production volumes and industry product price trends are presented in the following tables labeled "Sales and Operating Profit by Major Product Group", "Summary of Production Volumes" and "Industry Product Price Trends." Building Products Segment Quarter Ended Six Months Ended June 30 June 30 --------------------- ------------------------- 1997 1996 % Chg 1997 1996 % Chg ------ ------ ----- -------- ------- ----- (Dollar amounts in millions) Sales: Structural panels $215.9 $280.2 -23% $ 406.5 $ 514.2 -21% Lumber 187.6 164.2 +14% 342.9 302.6 +13% Industrial panel products 46.5 51.3 -9% 90.6 97.9 -7% Other building products 148.5 121.7 +22% 270.6 236.3 +15% ------ ------ -------- -------- Total building products $598.5 $617.4 -3% $1,110.6 $1,151.0 -4% ====== ====== ======== ======== Operating profit $ 18.9 $ 72.3 -74% $ 16.8 $ 102.3 -84% ====== ====== ======== ======== The decrease in structural panel (OSB and plywood) sales in 1997 has been primarily attributable to a 19 percent decline in average selling prices in the first six months of 1997 compared to 1996 (18 percent decline in the second quarter). While plywood prices have increased slightly in 1997, OSB prices continue to suffer from industry-wide excess production capacity, and have fallen 34 percent from 1996 levels. Structural panel volumes decreased by 5 percent for the six month period (decreased 8 percent for the second quarter) due to weather-related production outages, unsteady raw material supply and permanent closures of one plywood facility and four small capacity OSB facilities. Increased production at new OSB plants helped to offset the volume decreases. Average lumber sales prices have increased approximately 10 percent for the second quarter and first six months of 1997. Volume for the first six months of - 6 -
1997 increased 6 percent while second quarter volumes did not change significantly. Lumber markets have been strong throughout 1997, benefiting from a strong U.S. economy, relatively low interest rates and strong housing starts. Industrial panel products, which consist of particleboard, medium-density fiberboard (MDF) and hardboard have experienced average selling price decreases of slightly more than 5 percent in 1997. The price decrease has been primarily caused by particleboard due to increased industry capacity relative to demand. The volume of industrial panel products sold has declined slightly more than 2 percent in 1997. The increase in other building products sales is primarily due to the acquisition of Associated Chemists, Inc. (coatings and chemicals), GreenStone Industries, Inc. (cellulose insulation) and the assets of Tecton Laminates (engineered I-Joists and LVL) subsequent to the first six months of 1996. The decrease in building products segment operating profits for the quarter and six month periods in 1997 compared to 1996 is primarily attributable to the decrease in OSB prices and structural panel volumes. Industrial panel profits have also decreased due to lower particleboard prices. Partially offsetting these decreases, the profitability of L-P's lumber operations improved for both the second quarter and first six months of 1997 over 1996 due to higher selling prices and increased volume (six months only). The performance in engineered I-Joists and LVL also improved significantly for the second quarter and six month periods. Overall, log costs did not change significantly in 1997 compared to 1996. L-P's building products are primarily sold as commodities and therefore sales prices fluctuate based on market factors over which L-P has no control. L-P cannot predict whether prices of its building products will remain at current levels, or will increase or decrease in the future because supply and demand are influenced by many factors, only one of which is the cost and availability of raw materials. Therefore, L-P is not able to determine to what extent, if any, it will be able to pass any future increases in the price of raw materials on to customers through product price increases. Subsequent to the end of the second quarter, prices for OSB have increased modestly (see following table labeled "Industry Product Price Trends"). While this increase may continue through the rest of the building season, continued capacity additions may add to the current excess of industry capacity and cause prices to drop back to lower levels until demand increases or additional structural panel capacity is permanently shut down. Pulp Segment Quarter Ended Six Months Ended June 30 June 30 --------------------- ---------------------- 1997 1996 % Chg 1997 1996 % Chg ------ ------ ----- ------ ------ ----- (Dollar amounts in millions) Pulp sales $ 34.8 $ 40.9 -15% $ 77.3 $ 91.4 -15% ====== ====== ====== ====== Operating profit $ (6.0) $(30.5) +80% $(17.6) $(52.4) +66% ====== ====== ====== ====== During the second quarter, pulp sales fell 17 percent from 1997 compared to 1996, while prices increased slightly. The volume decrease is due to the permanent shut-down of the Ketchikan Pulp Company mill at the end of the first quarter of 1997 and decreased sales from the Samoa, California facility due to inventory liquidations in 1996. For the six month period, volume was up 9 percent in 1997 while prices were down 22 percent. Pulp prices were high during the first quarter of 1996 and fell later in the year. The Chetwynd B.C. mill was - 7 -
temporarily shut down for part of the first quarter in 1996. Decreased pulp sales have caused export sales to decrease as L-P sells the substantial majority of pulp to export customers. Pulp segment losses have moderated in 1997 despite flat to lower pricing due to cost cutting measures implemented at the Samoa and Chetwynd facilities and prior inventory write-downs at the Ketchikan facility. Raw material cost decreases of 10 percent to 25 percent have also contributed to reduced operating losses. L-P's pulp products are primarily sold as commodities and therefore sales prices fluctuate based on market factors over which L-P has no control. L-P cannot predict whether the prices of its pulp products will remain at current levels, or will increase or decrease in the future because supply and demand are influenced by many factors, only one of which is the cost and availability of raw materials. Therefore, L-P is not able to determine to what extent, if any, it will be able to pass any future increases in the price of raw materials on to customers through product price increases. Settlement Payment and Other Unusual Items In the first quarter of 1997, L-P's Ketchikan Pulp Company subsidiary recorded a net gain of $122 million ($74 million after taxes, or $.68 per share) to reflect the initial proceeds received under a settlement agreement with the U.S. Government over claims related to the long-term timber supply contract in Alaska of $135 million. The amount was paid to L-P in April of 1997 prior to the release of first quarter financial information and therefore the gain was recorded in the first quarter and reflected as a receivable in the March 31, 1997 balance sheet. Adjustments to pulp mill closure-related accruals were netted against this gain. General Corporate Expense, Net The increase in general corporate expense is primarily due to asset sale gains and other credits offsetting 1996 six month expenses of nearly $19 million (approximately $10 million for the second quarter). The remaining increase is primarily due to increased training costs, increased costs associated with non-operating facilities, and a general increase in overhead costs. Net Interest Income (Expense) Interest expense has increased significantly in 1997 due to higher borrowing levels and higher interest rates on variable rate debt. Higher borrowing levels were attributable to losses sustained in late 1996 and the first six months of 1997 as well as high capital expenditures in the latter part of 1996. Interest cost capitalized has decreased in 1997 due to lower average balances of construction in progress. Legal and Environmental Matters Refer to the "Legal Proceedings" section of this Form 10-Q for a discussion of certain environmental litigation and other litigation and its potential impact on L-P. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Cash provided by operations has increased in 1997 due to the $135 million settlement received from the U.S. Government (see discussion above under "Settlement Payment and Other Unusual Items"), income tax refunds received, and lower cash settlements of contingencies. Excluding the settlement and refunds, operating cash flow decreased significantly in 1997 over 1996 primarily due to the increased net loss (prior to unusual items ). Cash used for investing activities has decreased in 1997 as many major construction projects underway in the first half of 1996 were completed prior to 1997. L-P is budgeting non- - 8 -
acquisition capital expenditures, including timber and logging road additions, for the full year 1997 of approximately $180 million. Financing activities resulted in a net use of cash in 1997 and a source of cash in 1996. The primary difference was debt repayments, net of borrowings, which were approximately $4 million in 1997. In 1996, borrowings, net of repayments, were approximately $83 million. L-P's cash levels have decreased and borrowings have increased slightly as discussed above. The ratio of long-term debt to total capital is 25 percent (excluding contingency reserves) at June 30, 1997. L-P has $40 million available on its revolving credit facility at June 30, 1997 and expects to receive $50 million during the third quarter from a sale of timberland. The company also believes that because of its conservative financial structure and policies, it has substantial financial flexibility to generate additional funds should the need arise. - 9 -
SALES AND OPERATING PROFIT BY MAJOR PRODUCT GROUP LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES (DOLLAR AMOUNTS IN MILLIONS) (UNAUDITED) QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ------------------ 1997 1996 1997 1996 ------- ------- -------- ------- Sales: Structural panel products $ 215.9 $ 280.2 $ 406.5 $ 514.2 Lumber 187.6 164.2 342.9 302.6 Industrial panel products 46.5 51.3 90.6 97.9 Other building products 148.5 121.7 270.6 236.3 ------- ------- -------- -------- Total building products 598.5 617.4 1,110.6 1,151.0 Pulp 34.8 40.9 77.3 91.4 ------- ------- -------- -------- Total sales $ 633.3 $ 658.3 $1,187.9 $1,242.4 ======= ======= ======== ======== Export sales $ 54.4 $ 58.3 $ 127.6 $ 137.8 ======= ======= ======== ======== Profit (loss): Building products $ 18.9 $ 72.3 $ 16.8 $ 102.3 Pulp (6.0) (30.5) (17.6) (52.4) Settlement payment and other unusual items, net -- -- 121.9 -- General corporate expense, net (21.1) (6.8) (42.5) (19.9) Interest income (expense), net (6.5) (.5) (15.0) (.5) ------- ------- -------- -------- Income (loss) before taxes and minority interest $ (14.7) $ 34.5 $ 63.6 $ 29.5 ======= ======= ======== ======== - 10 -
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES SUMMARY OF PRODUCTION VOLUMES <TABLE> <CAPTION> QUARTER ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ---------------- ---------------- 1997 1996 1997 1996 ----- ----- ----- ----- <S> <C> <C> <C> <C> Oriented strand board panels, million square ft 3/8" basis 965 931 1,821 1,666 Oriented strand board siding, million square ft 3/8" basis 75 102 150 196 Softwood plywood, million square ft 3/8" basis 312 423 593 832 Lumber, million board feet 319 326 621 609 Medium density fiberboard, million square ft 3/4" basis 55 55 105 102 Particleboard, million square ft 3/4" basis 89 89 169 170 Hardboard, million square ft 1/8" basis 57 57 111 111 Engineered I-Joists, million lineal feet 22 13 38 23 Laminated Veneer Lumber, thousand cubic ft 1,800 1,000 3,100 1,900 Pulp, thousand short tons* 88 121 201 208 </TABLE> * Includes production of the Ketchikan Pulp Company mill in 1996 and first quarter 1997. - 11 -
INDUSTRY PRODUCT PRICE TRENDS LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES OSB PLYWOOD LUMBER PARTICLEBOARD ----------- -------- --------- ------------- N. CENTRAL SOUTHERN 7/16" BASIS PINE 2" FRAMING 24/16 BASIS LUMBER INLAND SPAN CDX COMPOSITE INDUSTRIAL RATING 3 PLY PRICES 3/4" BASIS ----------- -------- --------- ------------- Annual Average 1992 217 248 287 200 1993 236 282 394 258 1994 265 302 405 295 1995 245 303 337 290 1996 184 258 398 276 1996 Second Quarter Average 203 246 393 277 1997 First Quarter Average 134 266 438 265 1997 Second Quarter Average 126 256 443 265 Weekly Average July 3 123 257 433 265 July 11 130 255 431 265 July 18 135 258 430 265 - 12 -
PART II OTHER INFORMATION Item 1. Legal Proceedings. The following sets forth the current status of certain legal proceedings: Environmental Proceedings In March 1995, L-P's subsidiary Ketchikan Pulp Company (KPC) entered into agreements with the federal government to resolve the issues related to water and air compliance problems experienced at KPC's pulp mill during the late 1980s and early 1990s. In addition to civil and criminal penalties that have been paid, KPC also agreed to undertake further expenditures, which are primarily capital in nature, including certain remedial and pollution control related measures, with an estimated cost of up to approximately $20 million. With the recent closure of the pulp mill, KPC is currently seeking the EPA's and court's guidance regarding the necessity of these expenditures. KPC has also agreed to undertake a study of whether a clean-up of Ward Cove, the body of water adjacent to the pulp mill, is needed. If the study determines that such clean-up is needed, KPC may be required to spend up to $6 million on the clean-up, including the cost of the study, as part of the overall $20 million of expenditures. At this time, the company cannot estimate what portion, if any, of the clean-up expenditures will be required. KPC is also negotiating with the state and EPA to conduct investigative and clean-up activities at the pulp mill following shut-down. The USFS has named KPC as a potentially responsible party for costs related to the capping of a landfill near Thorne Bay, Alaska, and KPC has agreed to a consent order obligating it to cap the landfill, the total costs of which may range up to $8 million. Total anticipated costs for these activities are unknown at this time, but KPC has recorded its initial estimated amount. The State of Texas has issued a notice of violation to L-P seeking a penalty of up to $135,000 relating to alleged failure to timely conduct required air emissions testing at L-P's Silsbee, Texas, plant. L-P has been negotiating with the California North Coast Air Management Board concerning a possible resolution of alleged violations relating to air quality at L-P's Samoa, California, pulp mill. Although no formal enforcement action has been commenced, the parties are discussing a resolution involving payment of a penalty, plus certain capital expenditures. Certain of L-P's plant sites have or are suspected of having substances in the ground or in the groundwater that are considered pollutants. Appropriate corrective action or plans for corrective action are underway. Where the pollutants were caused by previous owners of the property, L-P is vigorously pursuing those parties through legal channels and is vigorously pursuing insurance coverage under all applicable policies. Although L-P's policy is to comply with all applicable environmental laws and regulations, the company has in the past been required to pay fines for non-compliance and sometimes litigation has resulted from contested environmental actions. Also, L-P is involved in other environmental actions and proceedings which could result in fines or penalties. Management believes that any fines, penalties or other losses resulting from the matters discussed above in excess of the reserve for environmental loss contingencies will not have a material adverse effect on the business, financial position or results of operations of L-P. See "Colorado Criminal Proceedings" for further discussion of an environmental action against the company. - 13 -
Colorado Criminal Proceedings L-P began an internal investigation at L-P's Montrose (Olathe), Colorado, oriented strand board (OSB) plant of various matters, including certain environmental matters, in the summer of 1992 and reported its initial finding of irregularities to governmental authorities in September 1992. Shortly thereafter, a federal grand jury commenced an investigation of L-P concerning alleged environmental violations at that plant, which was subsequently expanded to include the taking of evidence and testimony relating to alleged fraud in connection with the submission of unrepresentative OSB Inner-Seal(R) product samples to the APA-The Engineered Wood Association (APA), an industry product certification agency, by L-P's Montrose plant and certain of its other OSB plants. L-P then commenced an independent investigation, which was concluded in 1995, under the direction of former federal judge Charles B. Renfrew concerning irregularities in sampling and quality assurance in its OSB operations. In June 1995, the grand jury returned an indictment in the U.S. District Court in Denver, Colorado, against L-P, a former manager of the Montrose mill, and a former superintendent at the mill. L-P is now facing 23 felony counts related to environmental matters at the Montrose mill, including alleged conspiracy, tampering with opacity monitoring equipment, and making false statements under the Clean Air Act. The indictment also charges L-P with 25 felony counts of fraud relating to alleged use of the APA trademark on OSB Inner-Seal structural panel products produced by the Montrose mill as a result of L-P's allegedly improper sampling practices in connection with the APA quality assurance program. In December 1995, L-P received a notice of suspension from the EPA stating that, because of criminal proceedings pending against L-P in Colorado, agencies of the federal government would be prohibited from purchasing from L-P's Northern Division. L-P is negotiating to have the EPA suspension lifted or modified based on positive environmental programs actively underway. While negotiations are continuing, the EPA has approved a preliminary agreement limiting the prohibition to L-P's Montrose, Colorado, facility for an interim period in recognition of L-P's environmental compliance efforts. Under recently revised regulations of the United States Department of Agriculture, the EPA suspension will also have the effect of prohibiting L-P's Montrose facility from purchasing timber directly, but not indirectly, from the United States Forest Service. L-P maintains a reserve for its estimate of the cost of the Montrose criminal proceedings, although as with any estimate, there is uncertainty concerning the actual costs to be incurred. At the present time, L-P cannot predict whether or to what extent the circumstances described above will result in further civil litigation or investigation by government authorities, or the potential financial impact of any such current or future proceedings, in which case the resolution of the above matters could have a materially adverse impact on L-P. OSB Inner-Seal(R) Siding Matters L-P has been named as a defendant in numerous class action and non-class action proceedings, brought on behalf of various persons or purported classes of persons (including nationwide classes in the United States and Canada) who own or have purchased or used OSB siding manufactured by L-P, because of alleged unfair business practices, breach of warranty, misrepresentation, conspiracy to defraud, and other theories related to alleged defects, deterioration, or failure of OSB Inner-Seal siding products. The United States District Court for the District of Oregon has given final approval to a settlement between L-P and a nationwide class composed of all persons who own, who have owned, or who subsequently acquire property on which L-P's OSB siding was installed prior to January 1, 1996, excluding persons who timely opted out of the settlement and persons who are members of the settlement class in the Florida litigation described below. Under the settlement agreement, an eligible claimant whose claim is filed prior to January 1, 2003 (or earlier in certain cases), and is approved by an independent claims administrator will - 14 -
be entitled to receive from the settlement fund established under the agreement a payment equal to the replacement cost (to be determined by a third-party construction cost estimator and currently estimated to be in the range $2.20 to $6.40 per square foot depending on the type of product and geographic location) of damaged siding, reduced by a specific adjustment (of up to 65 percent) based on the age of the siding. Class members who have previously submitted or resolved claims under any other warranty or claims program of L-P may be entitled to receive the difference between the amount which would be payable under the settlement agreement and the amount previously paid. Independent adjusters will determine the extent of damage to OSB siding at each claimant's property in accordance with a specified protocol. There will be no adjustment to settlement payments for improper maintenance or installation. A claimant who is dissatisfied with the amount to be paid under the settlement may elect to pursue claims against L-P in a binding arbitration seeking compensatory damages without regard to the amount of payment calculated under the settlement protocol. A claimant who elects to pursue an arbitration claim must prove his entitlement to damages under any available legal theory, and L-P may assert any available defense, including defenses that otherwise had been waived under the settlement agreement. If the arbitrator reduces the damage award otherwise payable to the claimant because of a finding of improper installation, the claimant will be entitled to pursue a claim against the contractor/builder to the extent the award was reduced. L-P is required to pay $275 million into the settlement fund in seven annual installments beginning in mid-1996: $100 million (paid in June 1996), $55 million, $40 million, $30 million, $20 million, $15 million, and $15 million. If at any time after the fourth year of the settlement period the amount of approved claims (paid and pending) equals or exceeds $275 million, then the settlement agreement will terminate as to all claims in excess of $275 million unless L-P timely elects to provide additional funding within 12 months equal to the lesser of (i) the excess of unfunded claims over $275 million or (ii) $50 million and, if necessary to satisfy unfunded claims, a second payment within 24 months equal to the lesser of (i) the remaining unfunded amount or (ii) $50 million. If the total payments to the settlement fund are insufficient to satisfy in full all approved claims filed prior to January 1, 2003, then L-P may elect to satisfy the unfunded claims by making additional payments into the settlement fund at the end of each of the next two 12-month periods or until all claims are paid in full, with each additional payment being in an amount equal to the greater of (i) 50 percent of the aggregate sum of all remaining unfunded approved claims or (ii) 100 percent of the aggregate amount of unfunded approved claims, up to a maximum of $50 million. If L-P fails to make any such additional payment, all class members whose claims remain unsatisfied from the settlement fund may pursue any available legal remedies against L-P without regard to the release of claims provided in the settlement agreement. If L-P makes all payments required under the settlement agreement, including all additional payments as specified above, class members will be deemed to have released L-P from all claims for damaged OSB siding, except for claims arising under their existing 25-year limited warranty after termination of the settlement agreement. The settlement agreement does not cover consequential damages resulting from damage to OSB siding or damage to utility grade OSB siding (sold without any express warranty), either of which could create additional claims. In the event all claims filed prior to January 1, 2003, that are approved have been paid without exhausting the settlement fund, any amounts remaining in the settlement fund revert to L-P. In addition to payments to the settlement fund, L-P will be required to pay fees of class counsel in the amount of $26.25 million, as well as expenses of administering the settlement fund and inspecting properties for damage and certain other costs. As of August 11, 1997, approximately $40.9 million remained of the $155 million paid into the fund to date, after accruing interest on undisbursed funds and deducting class notification costs, prior claims costs (including payments advanced to homeowners in urgent circumstances) and payment of claims under the settlement. By that date, approximately 109,000 claims forms had been requested and mailed and approximately 53,700 claims had been submitted; approximately - 15 -
15,700 class settlement checks had been mailed totaling approximately $98.6 million. Approximately 1,400 opt out notices were timely submitted, including about 1,200 individual property owners (a number of whose claims have subsequently been resolved) and about 200 developers/owners of commercial properties; this has resulted in additional claims being filed by those who opted out, predominantly by owners/developers of commercial properties, most of which have been settled. A settlement of the Florida class action has been approved by the Circuit Court for Lake County, Florida. Under the settlement, L-P has established a claims procedure pursuant to which members of the settlement class may report problems with L-P's OSB siding and have their properties inspected by an independent adjuster, who will measure the amount of damage and also determine the extent to which improper design, construction, installation, finishing, painting, and maintenance may have contributed to any damage. The maximum payment for damaged siding will be $3.40 per square foot for lap siding and $2.82 per square foot for panel siding, subject to reduction of up to 75 percent for damage resulting from improper design, construction, installation, finishing, painting, or maintenance, and also subject to reduction for age of siding more than three years old. L-P has agreed that the deduction from the payment to a member of the Florida class will be not greater than the deduction computed for a similar claimant under the national settlement agreement described above. Class members will be entitled to make claims for up to five years after October 4, 1995. As of August 11, 1997, approximately 29,000 claims forms had been requested, and approximately 17,000 claims had been paid at an aggregate cost of approximately $40.9 million, including adjustments to conform to the national settlement. Other OSB Matters Three separate purported class actions on behalf of owners and purchasers of properties in which L-P's OSB panels are used for flooring, sheathing, or underlayment have been consolidated in the United States District Court for the Northern District of California under the caption Agius v. Louisiana-Pacific Corporation. The actions seek damages and equitable relief for alleged fraud, misrepresentation, breach of warranty, negligence, and improper trade practices related to alleged improprieties in testing, APA certification, and marketing of OSB structural panels, and alleged premature deterioration of such panels. A separate state court action entitled Carney v. Louisiana-Pacific Corporation is pending in the Superior Court of the State of California for the City and County of San Francisco, seeking relief under California consumer protection statutes based on similar allegations. At the present time, L-P cannot predict the potential financial impact of the above actions. However, the resolution of the above matters could have a materially adverse impact on L-P. Executive Employment Matter In January 1996, an action entitled International Paper Company v. Mark A. Suwyn and Louisiana-Pacific Corporation was instituted in the United States District Court for the Southern District of New York claiming that Mr. Suwyn's employment as chief executive officer of L-P violated the terms of a previous employment agreement with the plaintiff. Following trial, the court returned a decision in favor of Mr. Suwyn and L-P. Other L-P and its subsidiaries are parties to other legal proceedings. Management believes that the outcome of such proceedings will not have a material - 16 -
adverse effect on the business, financial position or results of operations of L-P. - 17 -
Item 4. Submission of Matters to a Vote of Security-Holders The Registrant held its annual meeting of stockholders on May 5, 1997. The following summarizes the matters voted upon at the meeting and the results of the voting: Directors elected for a term of office expiring in 2000: Name of Director Shares Voted For Shares Individually Withheld Archie W. Dunham 85,399,107 8,003,137 Bonnie Guiton Hill 85,288,124 8,114,120 Mark A. Suwyn 85,385,241 8,017,003 <TABLE> <CAPTION> Shares Shares Broker Description of Proposal Shares For Against Abstained Non-Votes <S> <C> <C> <C> <C> Approval of 1997 Incentive Stock Award Plan 77,710,657 14,780,342 911,245 0 Approval of Performance Goals for Annual Cash Incentive Awards 81,668,763 10,794,722 938,759 0 </TABLE> - 18 -
Item 6. Exhibits and Reports on Form 8-K. (a) The exhibits filed as part of this report or incorporated by reference herein are listed in the accompanying exhibit index. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended June 30, 1997. - 19 -
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LOUISIANA-PACIFIC CORPORATION By /s/ WILLIAM L. HEBERT William L. Hebert Vice President - Treasurer and Controller (Principal Financial Officer) DATED: August 14, 1997
EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION OF EXHIBIT 3 Bylaws as amended July 29, 1997 10 1997 Incentive Stock Award Plan 27 Financial Data Schedule - 21 -