-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B/My58O7T/8a4huKynPBukjeOt5ey4kBpQYm2bwQ/9LOrCRn3ET/FlkadbrcasLa KagpI47REtZH2IB30oaBIA== 0000106535-00-000007.txt : 20000313 0000106535-00-000007.hdr.sgml : 20000313 ACCESSION NUMBER: 0000106535-00-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991226 FILED AS OF DATE: 20000310 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WEYERHAEUSER CO CENTRAL INDEX KEY: 0000106535 STANDARD INDUSTRIAL CLASSIFICATION: LUMBER & WOOD PRODUCTS (NO FURNITURE) [2400] IRS NUMBER: 910470860 STATE OF INCORPORATION: WA FISCAL YEAR END: 1228 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-04825 FILM NUMBER: 566444 BUSINESS ADDRESS: STREET 1: 33663 WEYERHAEUSER WAY SOUTH CITY: FEDERAL WAY STATE: WA ZIP: 98003 BUSINESS PHONE: 2539242345 MAIL ADDRESS: STREET 1: 33663 WEYERHAEUSER WAY SOUTH CITY: FEDERAL WAY STATE: WA ZIP: 98003 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO X SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 26, 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 Exchangeable Shares (no par value) Toronto Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No _____. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]. As of February 25, 2000, 227,658,988 shares of the registrant's common stock ($1.25 par value) were outstanding and the aggregate market value of the registrant's voting shares held by non-affiliates was approximately $11,226,434,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the fiscal year ended December 26, 1999, are incorporated by reference into Parts I, II and IV. Portions of the Notice of 2000 Annual Meeting of Shareholders and Proxy Statement are incorporated by reference into Part III. Weyerhaeuser Company and Subsidiaries TABLE OF CONTENTS - ------------------------------------------------------------------------- PART I Page ---- Item 1. Business 3 Item 2. Properties 7 Item 3. Legal Proceedings 10 Item 4. Submission of Matters to a Vote of Security Holders 11 PART II Item 5. Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters 12 Item 6. Selected Financial Data 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 12 Item 8. Financial Statements and Supplementary Information 12 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 12 PART III Item 10. Directors and Executive Officers of the Registrant 13 Item 11. Executive Compensation 13 Item 12. Security Ownership of Certain Beneficial Owners and Management 13 Item 13. Certain Relationships and Related Transactions 13 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 14 Signatures 15 Report of Independent Public Accountants on Financial Statement Schedules 16 Schedule II Valuation and Qualifying Accounts 17 2 Weyerhaeuser Company and Subsidiaries PART I - ------------------------------------------------------------------------- Item 1. Business - ----------------- Weyerhaeuser Company (the company) was incorporated in the state of Washington in January 1900 as Weyerhaeuser Timber Company. It is principally engaged in the growing and harvesting of timber and the manufacture, distribution and sale of forest products, real estate development and construction, and other real estate related activities. Its business segments are timberlands; wood products; pulp, paper and packaging; and real estate and related assets. Information with respect to the description and general development of the company's business, included on pages 42 through 46, Description of the Business of the Company, contained in the company's 1999 Annual Report to Shareholders, is incorporated herein by reference. Financial information with respect to industry segments and geographical areas, included in Notes 20 and 21 of Notes to Financial Statements contained in the company's 1999 Annual Report to Shareholders, is incorporated herein by reference. Timberlands The company is engaged in the management of 5.9 million acres of company-owned and .5 million acres of leased commercial forestland in the United States and British Columbia, most of it highly productive and located extremely well to serve both domestic and international markets. The standing timber inventory on these lands is approximately 96 million cunits (a cunit is 100 cubic feet of solid wood). The relationship between cubic measurement and the quantity of end products that may be produced from timber varies according to the species, size and quality of timber, and will change through time as the mix of these variables changes. To sustain the timber supply from its fee timberlands, the company is engaged in extensive planting, suppression of nonmerchantable species, precommercial and commercial thinning, fertilization and operational pruning, all of which increase the yield from its fee timberland acreage.
Inventory Thousands of Acres at December 26, 1999 --------- ------------------------------------------ Millions Long- of Fee term License Cunits Ownership Leases Arrangements Total --------- ----------- ------ ------------ --------- Geographic Area United States West 52 1,960 - - 1,960 South 44 3,290 495 - 3,785 --------- ----------- ------ ------------ --------- Total United States 96 5,250 495 - 5,745 --------- ----------- ------ ------------ --------- Canada(1) Alberta 99 - - ,515 7,515 British Columbia 158 663 - 5,749 6,412 New Brunswick 1 - - 177 177 Ontario 52 1 - 6,538 6,539 Saskatchewan 116 - - 12,807 12,807 --------- ----------- ------ ------------ --------- Total Canada 426 664 - 32,786 33,450(2) --------- ----------- ------ ------------ --------- TOTAL 522 5,914 495 32,786 39,195 ========= =========== ====== ============ =========
Millions of Thousands of Acres ------------------------ Thousands of Acres Seedlings Stocking --------------------- Harvested(3) Planted Planted Control Fertilization ------------ ------- ----------- -------- ------------- 1999 Activity United States West 33.7 35.1 18.5 8.5 83.8 South 59.0 54.7 30.8 1.9 399.8 ------------ ------- ----------- -------- ------------- Total United States 92.7 89.8 49.3 10.4 483.6 ------------ ------- ----------- -------- ------------- Canada British Columbia 1.0 - - - 5.0 ------------ ------- ----------- -------- ------------- TOTAL 93.7 89.8 49.3 10.4 488.6 ============ ======= =========== ======== ============= _______________________________ (1) Managed by Canadian operations. (2) Includes approximately 23 million acres of productive forestland. (3) Includes 1.3 thousand acres of right-of-way and other harvest that does not require planting. 3 Weyerhaeuser Company and Subsidiaries PART I - ------------------------------------------------------------------------- Item 1. Business - Continued - -----------------------------
Sales volumes (millions): 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- Raw materials - cubic ft. 287 259 235 254 254
Selected product prices: 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- Export logs (#2 sawlog-bark on) - $/MBF Cascade - Douglas fir $ 829 $ 807 $ 978 $1,330 $1,365 Coastal - Hemlock 532 519 628 611 750 Coastal - Douglas fir 828 808 981 1,246 1,217
Wood Products The company's wood products businesses produce and sell softwood lumber, plywood and veneer; oriented strand board, composite and other panels; hardwood lumber; doors and treated products. These products are sold primarily through the company's own sales organizations. Building materials are sold to wholesalers, retailers and industrial users. The raw materials required to produce these products are purchased from third parties, transferred at market price from the company's timberlands, or obtained from long-term licensing arrangements. Sales volumes by major product are as follows (millions):
1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- Softwood lumber - board ft. 5,734 4,995 4,869 4,745 4,515 Softwood plywood and veneer - sq. ft. (3/8") 1,902 1,842 2,042 2,172 2,324 Composite panels - sq. ft. (3/4") 410 586 551 604 648 Oriented strand board - sq. ft. (3/8") 2,716 2,697 2,462 2,083 1,931 Hardwood lumber - board ft. 397 339 362 349 293 Doors (thousands) 720 789 730 652 648 Raw materials - cubic ft. 305 315 325 304 260
Selected product prices: 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- Lumber (common) - $/MBF 2x4 Douglas fir (kiln dried) $ 408 $ 340 $ 418 $ 422 $ 332 2x4 Douglas fir (green) 384 315 381 386 308 2x4 Southern yellow pine (kiln dried) 413 395 453 422 364 2x4 Spruce-pine-fir (kiln dried) 342 288 354 351 251 Plywood (1/2" CDX) - $/MSF West 369 305 312 307 331 South 320 280 261 256 301 Oriented strand board (7/16"-24/16) North Central price - $/MSF 262 203 142 184 245
4 Weyerhaeuser Company and Subsidiaries PART I - ------------------------------------------------------------------------- Item 1. Business - Continued - ----------------------------- Pulp, Paper and Packaging The company's pulp, paper and packaging businesses include: Pulp, which manufactures chemical wood pulp for world markets; Paper, which manufactures and markets a range of both coated and uncoated fine papers through paper merchants and printers; Containerboard Packaging, which manufactures linerboard and corrugating medium, primarily used in the production of corrugated packaging, and manufactures and markets industrial and agricultural packaging; Paperboard, which manufactures and markets bleached paperboard, used for production of liquid containers, to West Coast and Pacific Rim customers; and Recycling, which operates an extensive wastepaper collection system and markets it to company mills and worldwide customers. Sales volumes by major product are as follows (thousands):
1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- Pulp - air-dry metric tons 2,273 2,012 1,982 1,868 2,060 Paper - tons(1) 1,460 1,181 1,146 1,007 1,006 Paperboard - tons 248 236 243 205 230 Containerboard - tons 576 323 389 346 259 Packaging - MSF 46,483 44,299 44,508 42,323 34,342 Newsprint - metric tons(2) - 62 684 629 663 Recycling - tons 2,785 2,546 2,229 2,011 1,467
Selected product prices (per ton): 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- Pulp - NBKP-air-dry metric-U.S. $ 520 $ 516 $ 566 $ 579 $ 883 Paper - uncoated free sheet-U.S. 646 665 740 745 946 Linerboard - 42 lb.-Eastern U.S. 383 354 326 367 505 Newsprint - metric-West Coast U.S. 512 588 550 636 662 Recycling - old corrugated containers 67 54 76 53 128 Recycling - old newsprint 33 22 15 18 99
_______________________________ (1) Reflects the acquisition of the Dryden, Ontario, fine paper mill in October 1998. (2) Reflects the ownership restructuring of the North Pacific Paper Corporation (NORPAC) newsprint facility from a fully consolidated subsidiary to an equity affiliate in February 1998. 5 Weyerhaeuser Company and Subsidiaries PART I - ------------------------------------------------------------------------- Item 1. Business - Continued - ----------------------------- Real Estate and Related Assets The company's real estate and related assets businesses are principally engaged in real estate development and construction through the company's real estate subsidiary, Weyerhaeuser Real Estate Company, and in other real estate related activities through the company's financial services subsidiary, Weyerhaeuser Financial Services, Inc. Development and construction consists of developing single-family housing and residential lots for sale, including the development of master-planned communities. Volume information:
1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- Units sold: Single-family units(1) 3,561 3,089 2,914 2,773 3,114 Multi-family units(1) - 276 324 234 117 Residential lots(1) 4,297 2,455 1,988 2,522 1,628 Amounts in millions: Loan servicing portfolio(2) $ - $ - $ - $4,354 $10,952 Single-family loan originations(2) $ - $ - $1,168 $3,436 $ 2,196
_______________________________ (1) Includes one-half of joint venture sales. (2) Reflects the sale of the company's wholly-owned subsidiary, Weyerhaeuser Mortgage Company, in the second quarter of 1997. 6 Weyerhaeuser Company and Subsidiaries PART I - ------------------------------------------------------------------------- Item 2. Properties - -------------------- Timberlands Timberlands annual log production (in millions):
1999 1998 1997 1996 1995 ------ ------ ------ ------ ------ Logs - cubic ft. 521 495 476 412 420 Fee harvest - cubic ft. 634 585 541 496 518
Wood Products Production capacities, facilities and annual production, which reflect the sale of the Composite Products business in the second quarter of 1999 and the acquisition of MacMillan Bloedel in November 1999, are summarized by major product as follows (millions):
Production Number of Capacity Facilities 1999 1998 1997 1996 1995 ---------- ---------- ------- ------- ------- ------- ------- Softwood lumber - board ft. 5,452 37 4,532 4,025 3,968 3,701 3,419 Softwood plywood and veneer - sq. ft. (3/8") 1,371 8 1,065 960 1,092 1,243 1,292 Composite panels - sq. ft. (3/4") 228 3 281 510 478 535 583 Oriented strand board - sq. ft. (3/8") 3,365 9 2,452 2,179 2,041 1,687 1,654 Hardwood lumber - board ft. 386 12 376 342 345 333 278 Doors (thousands) 850 1 732 788 740 646 643 Logs - cubic ft. - - 572 526 519 500 494
Principal manufacturing facilities are located as follows: Softwood lumber and plywood Hardwood lumber Alabama, Arkansas, Georgia, Arkansas, Michigan, Louisiana, Mississippi, Oklahoma, Oregon, North Carolina, Oklahoma, Oregon, Pennsylvania, Washington and Washington; Alberta, British Columbia, Wisconsin Ontario and Saskatchewan, Canada ; and Durango, Mexico Doors Wisconsin Oriented strand board Michigan, North Carolina, West Virginia; Alberta, New Brunswick, Ontario and Saskatchewan, Canada Composite panels Wisconsin; British Columbia, Canada; and Durango, Mexico 7 Weyerhaeuser Company and Subsidiaries PART I - ------------------------------------------------------------------------- Item 2. Properties-Continued - ----------------------------- Pulp, Paper and Packaging Production capacities, facilities and annual production, which reflect the acquisition of MacMillan Bloedel in November 1999, are summarized by major product as follows (thousands):
Production Number of Capacity Facilities 1999 1998 1997 1996 1995 ---------- ---------- ------- ------- ------- ------- ------- Pulp - air-dry metric tons 2,285 9 2,219 2,061 1,973 2,004 2,159 Paper - tons(1) 1,595 6 1,511 1,235 1,128 1,034 1,060 Paperboard - tons 230 1 251 237 231 206 229 Containerboard - tons 3,694 7 2,622 2,291 2,381 2,331 2,329 Packaging - MSF 66,000 64 48,758 46,410 46,488 44,471 36,041 Newsprint - metric tons(2) - - - 69 704 631 687 Recycling - tons - 24 4,287 3,833 3,655 3,428 2,754
Principal manufacturing facilities are located as follows: Pulp Packaging Georgia, Mississippi, North Arizona, Arkansas, California, Carolina, Washington and Colorado, Connecticut, Florida, Alberta, British Columbia, Georgia, Hawaii, Illinois, Ontario and Saskatchewan, Canada Indiana, Iowa, Kentucky, Louisiana, Maryland, Michigan, Paper Minnesota, Mississippi, Mississippi, North Carolina, Missouri, Nebraska, New Jersey, Washington, Wisconsin and New York, North Carolina, Ohio, Ontario and Saskatchewan, Canada Oregon, Tennessee, Texas, Virginia, Washington, Wisconsin Paperboard and Guanajuato, Mexico Washington Recycling Containerboard Arizona, California, Colorado, Alabama, Kentucky, North Illinois, Iowa, Kansas, Carolina, Oklahoma, Oregon and Maryland, Minnesota, Nebraska, Ontario, Canada North Carolina, Oklahoma, Oregon, Tennessee, Texas, Utah, Virginia and Washington _______________________________ (1) Reflects the acquisition of the Dryden, Ontario, Canada, fine paper facility in October 1998. (2) Reflects the ownership restructuring of the North Pacific Paper Corporation (NORPAC) newsprint facility from a fully consolidated subsidiary to an equity affiliate in February 1998. 8 Weyerhaeuser Company and Subsidiaries PART I - ------------------------------------------------------------------------- Item 2. Properties-Continued - ----------------------------- Real Estate and Related Assets Single-family housing Commercial development California, Maryland, Nevada, California, Florida, Maryland Texas, Virginia and Washington and Washington Residential land development Real estate investments Arkansas, California, Florida, Arizona, California, Colorado, Georgia, Maryland, Nevada, North Nevada, Oregon and Washington Carolina, Texas, Virginia and Washington Mortgage securities Washington 9 Weyerhaeuser Company and Subsidiaries PART I - ------------------------------------------------------------------------- Item 3. 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 2000. In addition, the company is conducting a review of one pulp and paper facility and two wood products facilities that were recently acquired to evaluate their compliance with PSD and new source review regulations. 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 been unable thus far to obtain a reversal of the certification. 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. In July 1999, the company's motion for summary judgment was granted in this case. The plaintiffs filed a petition for reconsideration which was denied in January 2000. The plaintiffs have appealed this decision. A lawsuit was filed against the company in District Court, Johnson County, Texas, in June 1999. The case purports to be a class action on behalf of persons who own structures in the state of Texas with exterior hardboard siding manufactured by the company. The complaint alleges defective design, misrepresentation, negligence, breach of express warranty and fraudulent concealment. The complaint seeks unspecified compensatory damages. In July 1999, a lawsuit was filed against the company in the Court of Common Pleas, Beaufort County, South Carolina. The suit purports to be filed on behalf of all owners of residential structures or other buildings with hardboard siding manufactured by the company. The complaint alleges breach of express and implied warranties, defective design and manufacture, fraud and violation of South Carolina's unfair trade practices act. The plaintiffs seek compensatory damages, treble damages and attorneys' fees. The company is a defendant in two other cases, one in Iowa and the other in Oregon, that purport to be statewide class actions with similar allegations. The company is a defendant in approximately 25 other hardboard siding cases primarily involving multi-family structures and residential developments. In May 1999, two civil antitrust lawsuits were filed against the company in U.S. District Court, Eastern District of Pennsylvania. Both suits name as defendants several other major containerboard and packaging producers. The complaint in the first case alleges the defendants conspired to fix the price of linerboard and that the alleged conspiracy had the effect of increasing the price of corrugated containers. The suit purports to be a class action on behalf of purchasers of corrugated containers during the period October 1993 through November 1995. The complaint in the second case alleges that the company conspired to manipulate the price of linerboard and thereby the price of corrugated sheets. The suit purports to be a class action on behalf of purchasers of corrugated sheets during the period October 1993 through November 1995. Both suits seek damages, including treble damages, under the antitrust laws. 10 Weyerhaeuser Company and Subsidiaries PART I - ------------------------------------------------------------------------- Item 3. Legal Proceedings-Continued - ------------------------------------ In May 1999, the Equity Committee ("the Committee") in the Paragon Trade Brands, Inc. bankruptcy proceeding filed a motion in U.S. Bankruptcy Court for the Northern District of Georgia for authority to prosecute claims against the company in the name of the debtor's estate. Specifically, the Equity Committee seeks to assert that the company breached certain warranties in agreements entered into between Paragon and the company in connection with Paragon's public offering of common stock in January 1993. The Committee seeks to recover damages sustained by Paragon as a result of two patent infringement cases, one brought by Procter & Gamble and the other by Kimberly- Clark. In September 1999, the court authorized the Committee to commence an adversary proceeding against the company. The Committee commenced this proceeding in October 1999, seeking damages in excess of $420 million against the company. Subsidiaries of the company, formerly known as MacMillan Bloedel Limited and MacMillan Bloedel (USA) Inc., have agreed to settle a class action suit involving claims in the United States (excluding Colorado) alleging the failure of cement fiber roofing products previously manufactured by American Cemwood Corporation, a company owned by MacMillan Bloedel (USA) Inc. The proposed settlement would create a fund of $105 million, consisting of $65 million in cash and $40 million guaranteed recovery by the class from certain insurance carriers. The settlement is subject to court approval in May 2000. The company has established reserves for liabilities and legal defense costs it believes are probable and reasonably estimable with respect to the proposed settlement and pending suits and claims. 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 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 26, 1999. 11 Weyerhaeuser Company and Subsidiaries PART I - ------------------------------------------------------------------------- Item 5. Market Price of and Dividends on the Registrant's Common Equity - ------------------------------------------------------------------------ and Related Stockholder Matters - ------------------------------- Information with respect to market prices, stockholders and dividends included in Notes 22 and 23 of Notes to Financial Statements in the company's 1999 Annual Report to Shareholders, is incorporated herein by reference. Item 6. Selected Financial Data - -------------------------------- Information with respect to selected financial data included in Note 23 of Notes to Financial Statements in the company's 1999 Annual Report to Shareholders, is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition - -------------------------------------------------------------------- and Results of Operations - ------------------------- Information with respect to Management's Discussion and Analysis included on pages 10, 24-31 and 42-54 of the company's 1999 Annual Report to Shareholders, is incorporated herein by reference. Subsequent Event - On February 23, 2000, the company announced that its board of directors has authorized the repurchase of up to 12 million shares, or about five percent, of its outstanding common stock. Item 7A. Quantitative and Qualitative Disclosures About Market Risk - -------------------------------------------------------------------- Information with respect to market risk of financial instruments included on page 52 of the company's 1999 Annual Report to Shareholders, is incorporated herein by reference. Item 8. Financial Statements and Supplementary Information - ----------------------------------------------------------- Financial statements and supplementary information, included in the company's 1999 Annual Report to Shareholders are incorporated herein by reference.
Page(s) in Annual Report to Shareholders ------------- Report of Independent Public Accountants 54 Consolidated Statement of Earnings 55 Consolidated Balance Sheet 56-57 Consolidated Statement of Cash Flows 58-59 Consolidated Statement of Shareholders' Interest 60 Notes to Financial Statements 61-81 Selected Quarterly Financial Information (Unaudited) 79
Item 9. Changes in and Disagreements with Accountants on Accounting - --------------------------------------------------------------------- and Financial Disclosure - ------------------------ Not applicable. 12 Weyerhaeuser Company and Subsidiaries PART III - ------------------------------------------------------------------------- Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------ Information with respect to Directors of the company included on pages 2 through 5 of the Notice of 2000 Annual Meeting of Shareholders and Proxy Statement dated March 6, 2000, is incorporated herein by reference. The executive officers of the company are as follows:
Name Title Age ---- ----- --- William R. Corbin Executive Vice President 58 C. William Gaynor Senior Vice President 59 Richard C. Gozon Executive Vice President 61 Richard E. Hanson Senior Vice President 56 Steven R. Hill Senior Vice President 52 Mack L. Hogans Senior Vice President 51 Steven R. Rogel President 57 William C. Stivers Executive Vice President 61 George H. Weyerhaeuser, Jr. Senior Vice President 46
Item 11. Executive Compensation - -------------------------------- Information with respect to executive compensation included on pages 5 through 15 of the Notice of 2000 Annual Meeting of Shareholders and Proxy Statement dated March 6, 2000, is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------ Information with respect to security ownership of certain beneficial owners and management included on pages 6 and 7 of the Notice of 2000 Annual Meeting of Shareholders and Proxy Statement dated March 6, 2000, is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------- Not applicable. 13 Weyerhaeuser Company and Subsidiaries PART IV - ------------------------------------------------------------------------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form - ------------------------------------------------------------------------- 8-K - --- Financial Statements The consolidated financial statements of the company, together with the report of independent public accountants, included in the company's 1999 Annual Report to Shareholders, are incorporated in Part II, Item 8 of this Form 10-K by reference.
Page Financial Statement Schedules Number(s) in Form 10-K --------- Report of Independent Public Accountants on Financial Statement Schedules 16 Schedule II - Valuation and Qualifying Accounts 17
All other financial statement schedules have been omitted because they are not applicable or the required information is included in the consolidated financial statements, or the notes thereto, in the company's 1999 Annual Report to Shareholders and incorporated herein by reference. Exhibits: 3 - (i) Articles of Incorporation (ii) Bylaws (incorporated by reference to 1998 Form 10-K filed with the Securities and Exchange Commission on March 12, 1999 - Commission File Number 1-4825) 10 - Material Contracts (a) Agreement with W. R. Corbin (incorporated by reference to 1998 Form 10-K filed with the Securities and Exchange Commission on March 12, 1999 - Commission File Number 1-4825) (b) Agreement with R. C. Gozon (incorporated by reference to 1995 Form 10-K filed with the Securities and Exchange Commission on March 15, 1996 - Commission File Number 1-4825) (c) Agreement with S. R. Rogel (incorporated by reference to 1997 Form 10-K filed with the Securities and Exchange Commission on March 13,1998 - Commission File Number 1-4825) (d) Merger Agreement dated June 20, 1999, among Weyerhaeuser Company and Weyerhaeuser Exchangeco Limited and MacMillan Bloedel Limited, including the Plan of Arrangement (incorporated by reference to the Weyerhaeuser Company Registration Statement No. 333-84127) (e) Form of Executive Severance Agreement 11 - Statement Re: Computation of Per Share Earnings (incorporated by reference to Note 2 of the company's 1999 Annual Report to Shareholders) 13 - Portions of the company's 1999 Annual Report to Shareholders specifically incorporated by reference herein 22 - Subsidiaries of the Registrant 23 - Consent of Independent Public Accountants 27 - Financial Data Schedules Reports on Form 8-K The registrant filed reports on Form 8-K dated January 7, January 21, April 14, June 22, July 16, September 21, and October 15, 1999, and January 24, 2000, reporting information under Item 5, Other Events. The registrant filed a report on Form 8-K dated November 9, 1999, which was subsequently amended on January 10, 2000, reporting information under Item 2, Acquisition or Disposition of Assets, and Item 7, Financial Statements and Exhibits. 14 Weyerhaeuser Company and Subsidiaries SIGNATURES - ------------------------------------------------------------------------- Pursuant to the requirements of Section 13 or 15(d) 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 on March 10, 2000. Weyerhaeuser Company /s/ Steven R. Rogel ----------------------- Steven R. Rogel Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on March 10, 2000. /s/ Steven R. Rogel /s/ John Kieckhefer - ------------------------------------- --------------------------- Steven R. Rogel John I. Kieckhefer President, Principal Executive Director Officer, Director and Chairman of the Board /s/ William C. Stivers /s/ Arnold G. Langbo - ------------------------------------- --------------------------- William C. Stivers Arnold G. Langbo Principal Financial Officer Director /s/ Kenneth J. Stancato /s/ Donald F. Mazankowski - ------------------------------------- --------------------------- Kenneth J. Stancato Donald F. Mazankowski Principal Accounting Officer Director /s/ W. John Driscoll /s/ William D. Ruckelshaus - ------------------------------------- --------------------------- W. John Driscoll William D. Ruckelshaus Director Director /s/ R. F. Haskayne /s/ Richard H. Sinkfield - ------------------------------------- --------------------------- Richard F. Haskayne Richard H. Sinkfield Director Director /s/ Robert J. Herbold /s/ James N. Sullivan - ------------------------------------- --------------------------- Robert J. Herbold James N. Sullivan Director Director /s/ Martha R. Ingram /s/ George H. Weyerhaeuser - ------------------------------------- --------------------------- Martha R. Ingram George H. Weyerhaeuser Director Director /s/ Clayton K. Yeutter --------------------------- Clayton K. Yeutter Director 15 Weyerhaeuser Company and Subsidiaries FINANCIAL STATEMENT SCHEDULES - ------------------------------------------------------------------------- Report of Independent Public Accountants on Financial Statement Schedules To Weyerhaeuser Company: We have audited in accordance with generally accepted auditing standards, the financial statements included in Weyerhaeuser Company's annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 9, 2000. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule shown on page 17 is the responsibility of the company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Seattle, Washington, February 9, 2000 16 Weyerhaeuser Company and Subsidiaries FINANCIAL STATEMENT SCHEDULES - -------------------------------------------------------------------------
Schedule II - Valuation and Qualifying Accounts For the three years ended December 26, 1999 Dollar amounts in millions Deductions Balance from/ Balance at Charged (Additions at Beginning to to) End of Description of Period Income Reserve Period - ----------- --------- ------- ----------- ------- Weyerhaeuser Reserve deducted from related asset accounts: Doubtful accounts - Accounts receivable 1999 $ 5 $ 6 $ 1(1) $ 10 ======== ======= =========== ======= 1998 $ 6 $ 4 $ 5 $ 5 ======== ======= =========== ======= 1997 $ 7 $ 5 $ 6 $ 6 ======== ======= =========== ======= Real Estate and Related Assets Reserves and allowances deducted from related asset accounts: Receivables 1999 $ 6 $ 2 $ 1(2) $ 7 ======== ======= =========== ======= 1998 $ 6 $ 1 $ 1 $ 6 ======== ======= =========== ======= 1997 $ 9 $ - $ 3 $ 6 ======== ======= =========== ======= Mortgage-related financial Instruments 1999 $ 9 $ - $ 6 $ 3 ======== ======= =========== ======= 1998 $ 27 $ - $ 18(3) $ 9 ======== ======= =========== ======= 1997 $ 7 $ 13 $ (7)(4) $ 27 ======== ======= =========== ======= Investments in and advances to joint ventures and limited partnerships 1999 $ 4 $ - $ 1(5) $ 3 ======== ======= =========== ======= 1998 $ 6 $ 3 $ 5 $ 4 ======== ======= =========== ======= 1997 $ 27 $ - $ 21 $ 6 ======== ======= =========== =======
_______________________________ (1) Includes additional allowances of $4 million in the MacMillan Bloedel acquisition. (2) Includes allowances transferred from partnership investments. (3) Includes allowances transferred to other assets. (4) Includes allowances transferred in from other liabilities. (5) Includes the net of allowances transferred to receivables and from other assets. 17 Weyerhaeuser Company and Subsidiaries EXHIBITS INDEX - ------------------------------------------------------------------------- Exhibits: 3 - (i) Articles of Incorporation (ii) Bylaws (incorporated by reference to 1998 Form 10-K filed with the Securities and Exchange Commission on March 12, 1999 - Commission File Number 1-4825) 10 - Material Contracts (a) Agreement with W. R. Corbin (incorporated by reference to 1998 Form 10-K filed with the Securities and Exchange Commission on March 12, 1999 - Commission File Number 1-4825) (b) Agreement with R. C. Gozon (incorporated by reference to 1995 Form 10-K filed with the Securities and Exchange Commission on March 15, 1996 - Commission File Number 1-4825) (c) Agreement with S. R. Rogel (incorporated by reference to 1997 Form 10-K filed with the Securities and Exchange Commission on March 13,1998 - Commission File Number 1-4825) (d) Merger Agreement dated June 20, 1999, among Weyerhaeuser Company and Weyerhaeuser Exchangeco Limited and MacMillan Bloedel Limited, including the Plan of Arrangement (incorporated by reference to the Weyerhaeuser Company Registration Statement No. 333-84127) (e) Form of Executive Severance Agreement 11 - Statement Re: Computation of Per Share Earnings (incorporated by reference to Note 2 of the company's 1999 Annual Report to Shareholders) 13 - Portions of the company's 1999 Annual Report to Shareholders specifically incorporated by reference herein 22 - Subsidiaries of the Registrant 23 - Consent of Independent Public Accountants 27 - Financial Data Schedules 18 Weyerhaeuser Company and Subsidiaries Exhibit 22 Subsidiaries of the Registrant - -------------------------------------------------------------------------
Percentage State or Ownership of Country of Immediate Name Incorporation Parent ---- ------------- ------------ Columbia & Cowlitz Railway Company Washington 100% DeQueen & Eastern Railroad Company Arkansas 100 Dynetherm, Inc. Alabama 100 Fisher Lumber Company California 100 Golden Triangle Railroad Mississippi 100 Green Arrow Motor Express Company Delaware 100 Gryphon Asset Management, Inc. Delaware 100 Mississippi & Skuna Valley Railroad Company Mississippi 100 Mountain Tree Farm Company Washington 50 North Pacific Paper Corporation Delaware 50 Norpac Sales Corporation Guam 100 Norpac Resources Inc. Delaware 100 Pacific Veneer, Ltd. Washington 100 SCA Weyerhaeuser Packaging Holding Company British Asia Limited Virgin Islands 50 Texas, Oklahoma & Eastern Railroad Company Oklahoma 100 TJ International, Inc. Delaware 100 Norco Windows, Inc. Wisconsin 100 TJI Global, Inc. Barbados 100 Trus Joist MacMillan Limited Partnership Delaware 51 Trus Joist MacMillan Limited British 100 Columbia TJM Australia Pty. Limited Australia 100 TJM Europe Limited United Kingdom 100 TJM Europe SPRL Belgium 100 TJM Facilities Corporation Delaware 100 Trus Joint MacMillan Ltd., YK Japan 100 Trus Joist Corporation Delaware 100 Trus Joist (Western) Ltd. New Brunswick 100 Trus Joist Japan Co., Ltd. Japan 100 United Structures, Inc. California 100 Westwood Shipping Lines, Inc. Washington 100 Weycomp Claims Management Services, Inc. Texas 100 Weyerhaeuser Company of Nevada Nevada 100 Weyerhaeuser Construction Company Washington 100 Weyerhaeuser de Mexico, S.A. de C.V. Mexico 100 Weyerhaeuser del Bajio, S.A. de C.V. Mexico 100 Weyerhaeuser Financial Services, Inc. Delaware 100 CMO Finance Corp. Nevada 100 MJ Finance Corporation California 100 Mortgage Securities III Corporation Nevada 100 R4 Participant Corporation Nevada 100 ver Bes' Insurance Company Vermont 100 de Bes' Insurance Ltd. Bermuda 100
19 Weyerhaeuser Company and Subsidiaries Exhibit 22 Subsidiaries of the Registrant - -------------------------------------------------------------------------
Percentage State or Ownership of Country of Immediate Name Incorporation Parent ---- ------------- ------------ Weyerhaeuser Financial Investments, Inc. Nevada 100% Abfall Finance Corp. California 100 Brookview, Inc. Nevada 100 The Giddings Mortgage Investment Company California 100 Pass-Through Finance Corp. California 100 RFS Finance Corp. California 100 Trimark Development Company California 100 Trimark Realty Advisors, Inc. California 100 WFI Servicing Company Nevada 100 Woodland Hills Properties-W, Inc. Nevada 100 Weyerhaeuser Venture Company Nevada 100 Las Positas Land Co. California 100 WAMCO, Inc. Nevada 100 Weyerhaeuser Forestlands International, Inc. Washington 100 Weyerhaeuser International, Inc. Washington 100 The Capricorn Corporation Philippines 100 Weyerhaeuser Canada Ltd. Canada 100 Princeton Co-Generation (VCC) Corp. Canada 90 Wapawekka Lumber Ltd. Canada 51 Weyerhaeuser (Barbados) SRL Barbados 100 Marlborough Capital Corp. SRL Barbados 100 Weyerhaeuser (BVI) Ltd. British Virgin Islands 100 Weyerhaeuser New Zealand Holdings Inc. New Zealand 100 Nelson Forest Products Company New Zealand 100 Weyerhaeuser New Zealand Inc. New Zealand 100 Weyerhaeuser Saskatchewan Ltd. Canada 100 Weyerhaeuser Holdings Limited British Columbia 100 Weyerhaeuser Company Limited Canada 100 486286 British Columbia Ltd. British Columbia 50 Altair Property and Casualty Corporation British Columbia 100 Canadian Maas River Investment N.V. Curacao 100 Weyerhaeuser (Ireland) Ireland 100 Chatham Forest Products Ltd. New Brunswick 100 Eagle Forest Products Limited Partnership New Brunswick 100 Forest Industries Flying Tankers Limited British Columbia 58 Green Forest Lumber Limited Ontario 100 Monterra Lumber Mills Limited Ontario 83 Weyerhaeuser (Bridgetown) Limited Barbados 100 Weyerhaeuser (UK) Limited England 100 MacMillan Bloedel K.K. Japan 100
20 Weyerhaeuser Company and Subsidiaries Exhibit 22 Subsidiaries of the Registrant - -------------------------------------------------------------------------
Percentage State or Ownership of Country of Immediate Name Incorporation Parent ---- ------------- ------------ MacMillan Bloedel Pembroke Limited Partnership Ontario 100% MacMillan Guadiana, S.A. de C.V. Mexico 100 Marine Leasings Limited British Columbia 27 Mid-Island Reman Inc. British Columbia 49 Saskfor Holdings Inc. Saskatchewan 50 Saskfor MacMillan Limited British Columbia 100 Sturgeon Falls Repulping Limited Ontario 50 Sturgeon Falls Limited Partnership Ontario 100 Weyerhaeuser (Carlisle) Ltd. Barbados 100 Camarin Limited Barbados 100 Weyerhaeuser (Ewen) Limited British Columbia 100 Weyerhaeuser (Australia) Pty. Ltd. Australia 100 Weyerhaeuser (Nanaimo) Ltd. British Columbia 100 Weyerhaeuser (Northumberland) Limited New Brunswick 100 Weyerhaeuser (North Superior) Limited Ontario 100 Weyerhaeuser (Ottawa) Limited Canada 100 Weyerhaeuser Wawa OSB Limited Partnership Ontario 100 Weyerhaeuser China, Ltd. Washington 100 Weyerhaeuser GMBH Germany 100 Weyerhaeuser (Asia) Limited Hong Kong 100 Weyerhaeuser Japan Ltd. Japan 100 Weyerhaeuser Japan Ltd. Delaware 100 Weyerhaeuser Korea Ltd. Korea 100 Weyerhaeuser, S.A. Panama 100 Weyerhaeuser Taiwan Ltd. Delaware 100 Weyerhaeuser International Sales Corp. Guam 100 Weyerhaeuser (Mexico) Inc. Washington 100 Weyerhaeuser Midwest, Inc. Washington 100 Weyerhaeuser Overseas Finance Co. Delaware 100 Weyerhaeuser International Finance Company Delaware 100 Weyerhaeuser Company Nova Scotia Nova Scotia 100 Weyerhaeuser Raw Materials, Inc. Delaware 100 Weyerhaeuser Real Estate Company Washington 100 Centennial Homes, Inc. Texas 100 Midway Properties, Inc. North Carolina 100 Pardee Construction Company California 100 Marmont Realty Company California 100 Pardee Construction Company of Nevada Nevada 100 Pardee Investment Company California 100 Parvada, Inc. Nevada 100
21 Weyerhaeuser Company and Subsidiaries Exhibit 22 Subsidiaries of the Registrant - -------------------------------------------------------------------------
Percentage State or Ownership of Country of Immediate Name Incorporation Parent ---- ------------- ------------ The Quadrant Corporation Washington 100% Quadrant Real Estate Services, Inc. Washington 100 South Jersey Assets, Inc. New Jersey 100 Scarborough Constructors, Inc. Florida 100 Silverthorn Country Club, Inc. Florida 100 TMI, Inc. Texas 100 Weyerhaeuser Real Estate Company of Nevada Nevada 100 Weyerhaeuser Realty Investors, Inc. Washington 100 Winchester Homes, Inc. Delaware 100 SC - WHI, Inc. Delaware 100 Weyerhaeuser Sales Company Nevada 100 Weyerhaeuser Servicios, S.A. de C.V. Mexico 100 Weyerhaeuser (U.S.A.) Inc. Delaware 100 American Cemwood Corporation Oregon 100 MacMillan Bloedel Paper Sales Inc. Delaware 100 MB Administrative Services Inc. Delaware 100 Weyerhaeuser (Alabama) Inc. Alabama 100 Weyerhaeuser (Delaware) Inc. Delaware 100 Weyerhaeuser Distribution Inc. Alabama 100 Weyerhaeuser Clarion Limited Partnership Pennsylvania 100 Trus Joist MacMillan Limited Partnership Delaware 49 Weyerhaeuser Packaging Inc. Alabama 100 MacMillan Bloedel FSC Ltd. Barbados 100 Weyerhaeuser Timberlands Inc. Alabama 100 Weyerhaeuser (Pennsylvania) Inc. Delaware 100 The Wray Company Arizona 100
22 Weyerhaeuser Company and Subsidiaries Exhibit 23 Consent of Independent Public Accountants - ------------------------------------------------------------------------- As independent public accountants, we hereby consent to the incorporation of our reports included and incorporated by reference in this Form 10-K, into Weyerhaeuser Company's previously filed Registration Statement Nos. 333-36753 and 333-84127 on Form S-3 and Nos. 33-60527, 333-10165, 333-01565, 333-56673, 333-74311 and 333- 89925 on Form S-8. ARTHUR ANDERSEN LLP Seattle, Washington, March 10, 2000 EX-3 2 RESTATED ARTICLES OF INCORPORATION OF WEYERHAEUSER COMPANY ARTICLE I The name of this corporation shall be "Weyerhaeuser Company." ARTICLE II The purposes for which this corporation is organized are: 1. To engage in any form of mining, manufacturing, mercantile, financial, transportation, real estate, recreation or service enterprise not contrary to law. 2. Without limiting the generality of the foregoing, to engage in: (a) The construction, maintenance and operation of logging roads, chutes, flumes, and artificial watercourses or waterways and other ways for the transportation of logs and other timber products; (b) Catching, booming, sorting, rafting and holding logs, lumber or other timber products; (c) Clearing out and improvement of rivers and streams and driving, sorting, holding and delivering logs and other timber products; (d) Constructing, operating or maintaining telegraph, telephone and other communication or electronic facilities; and (e) Building, equipping and operating railway, road or bridge, canal, airport or other forms of land, water and air transportation facilities. ARTICLE III 1. The aggregate number of shares which this corporation is authorized to issue shall be 447,000,000, consisting of 7,000,000 preferred shares having a par value of $1.00 per share, 40,000,000 preference shares having a par value of $1.00 per share, and 400,000,000 common shares having a par value of $1.25 per share. Shares redeemed, purchased or otherwise reacquired, or surrendered to the corporation on conversion, shall have the status of authorized and unissued shares of the class of which they were a part when initially issued and may be reissued as part of the same or a different series of the same class of which they were a part when initially issued; unless, as part of the action of the Board of Directors taken to create any series, the Board of Directors restricts the right of reissuance, in which case such restricted right will be operative. Each two common shares having a par value of $1.875 per share heretofore authorized and issued is hereby changed into three common shares having a par value of $1.25 per share. 2. The Board of Directors is expressly vested with authority to divide the preferred shares and the preference shares into series, each of which shall be so designated as to distinguish the shares thereof from the shares of all other series and classes. All preferred shares shall be identical and 1 all preference shares shall be identical, except in each case as to the following relative rights and preferences, as to which the Board of Directors may fix and determine variations among the different series of each class: (a) The rate of dividend; (b) Whether shares may be redeemed and, if so, the redemption price and the terms and conditions of redemption; (c) The amount payable upon shares in the event of voluntary and involuntary liquidation, provided that the aggregate amount so payable with respect to all series of preferred shares shall not exceed $350,000,000; (d) Sinking fund provisions, if any, for the redemption or purchase of shares; (e) The terms and conditions, if any, on which shares may be converted; (f) If permitted by the laws of the State of Washington, voting rights, if any. 3. The preferences, limitations and relative rights of the preferred shares of each series, the preference shares of each series and the common shares are as follows: (a) Out of the funds of the corporation legally available for payment of dividends, the holders of the preferred shares of each series and the preference shares of each series shall be entitled to receive, when and as declared by the Board of Directors, cumulative dividends at the rate determined by the Board of Directors for such series, and no more. Dividends on the preferred shares and the preference shares shall accrue on a daily basis from such date as may be fixed by the Board of Directors for any series. Unless dividends at the rate prescribed for each series of preferred shares shall have been declared and paid or set apart for payment in full on all outstanding preferred shares for all past dividend periods and the current dividend period, no dividends shall be declared or paid upon any class of shares ranking as to dividends subordinate to the preferred shares, and no sum or sums shall be set aside for the redemption of preferred shares of any series (including any sinking fund payment therefor) or for the purchase, redemption (including any sinking fund payment therefor) or other acquisition for value of any class or series of shares ranking as to dividends or assets on a parity with or subordinate to any such series of preferred shares. Unless dividends at the rate prescribed for each series of preference shares shall have been declared and paid or set apart for payment in full on all outstanding preference shares for all past dividend periods and the current dividend period, no dividends shall be declared or paid upon any class of shares ranking as to dividends subordinate to the preference shares, and no sum or sums shall be set aside for the redemption of preference shares of any series (including any sinking fund payment therefor) or for the purchase, redemption (including any sinking fund payment therefor) or other acquisition for value of any class or series of shares ranking as to dividends or assets on a parity with or subordinate to any such series of preference shares. Accrued and unpaid dividends on the preferred shares and on the preference shares shall not bear interest. (b) Out of any funds of the corporation legally available for dividends and remaining after full cumulative dividends upon all series of preferred shares and preference shares then outstanding shall have been paid or set apart for payment for all past dividend periods and the current dividend period, then, and not otherwise, the Board of Directors may declare and pay or set apart for payment dividends on the common shares, and the holders of preferred shares and preference shares shall not be entitled to share therein. 2 (c) In the event of voluntary or involuntary liquidation of the corporation, before any distribution of the assets shall be made to the holders of any class of shares ranking as to assets subordinate to the preferred shares, the holders of the preferred shares of each series shall be entitled to receive out of the assets of the corporation available for distribution to its shareholders the sum of (i) the amount per share determined by the Board of Directors as provided in paragraph 2(c) of this Article III, and (ii) the amount per share equal to all accrued and unpaid dividends thereon, such sum constituting the "preferential amount" for the preferred shares. If, in the event of such liquidation, the assets of the corporation available for distribution to its shareholders shall be insufficient to permit full payment to the holders of the preferred shares of each series of their respective preferential amounts, then such assets shall be distributed ratably among such holders in proportion to their respective preferential amounts. In the event of such liquidation, subject to such right of the holders of the preferred shares of each series, but before any distribution of the assets shall be made to the holders of any class of shares ranking as to assets subordinate to the preference shares, the holders of the preference shares of each series shall be entitled to receive out of the assets of the corporation available for distribution to its shareholders the sum of (i) the amount per share determined by the Board of Direc tors as provided in paragraph 2(c) of this Article III, and (ii) the amount per share equal to all accrued and unpaid dividends thereon, such sum constituting the "preferential amount" for the preference shares. If, in the event of such liquidation, after full payment of the preferential amounts of the preferred shares of each series, the assets of the corporation available for distribution to its shareholders shall be insufficient to permit full payment to the holders of the preference shares of each series of their respective preferential amounts, then such assets shall be distributed ratably among such holders in proportion to their respective preferential amounts. If, in the event of such liquidation, the holders of the preferred shares of each series and the preference shares of each series shall have received full payment of their respective preferential amounts, the holders of the common shares shall be entitled, to the exclusion of the holders of the preferred shares of each series and the preference shares of each series, to share ratably in all remaining assets of the corporation available for distribution to shareholders. Neither the consolidation nor merger of the corporation with or into any other corporation or corporations, the sale or lease of all or substantially all of the assets of the corporation, nor the merger or consolidation of any other corporation into and with the corporation, shall be deemed to be a voluntary or involuntary liquidation. (d) Each outstanding preferred share shall be entitled to one vote, not as a class, on each matter submitted to a vote at a meeting of shareholders, and the holders of preference shares shall have no voting rights except as provided in this Article III, provided, however, that if the Board of Directors is permitted by law to vary voting rights as between series of a class, and does in fact do so, then the voting rights of any series of either class shall be those determined by the Board of Directors under paragraph 2(f) of this Article III. Notwithstanding the foregoing: (i) as long as any preferred shares shall be outstanding, the corporation will not, without the affirmative vote or consent in writing of at least two-thirds of the outstanding preferred shares, amend these Articles of Incorporation for the purpose of, or take any other action to, (A) increase the aggregate number of preferred shares or shares of any other class ranking as to dividends or assets on a parity with or prior to the preferred shares, (B) change the designations, preferences, limitations, voting or other relative rights of the preferred shares or of any outstanding series of preferred shares, (C) effect an exchange, reclassification or cancellation of all or part of the preferred shares, (D) change the preferred shares into the same or a different number of shares, with or without par value of the same or any other class, or (E) cancel or otherwise affect dividends on the shares of any series of preferred shares which have accrued but have not been declared, and (ii) as long as any preference shares shall be outstanding, the corporation will not, without the affirmative vote or consent in writing of at least two-thirds of the outstanding preference shares, amend these Articles of Incor poration for the purpose of, or take any other action to, (A) increase the aggregate number of preferred or preference shares or shares of any other class ranking as to dividends or assets on a parity with or prior to the preference shares, (B) change the 3 designations, preferences, limitations, voting or other relevant rights of the preference shares or of any outstanding series of preference shares, (C) effect an exchange, reclassification or cancellation of all or part of the preference shares, (D) change the preference shares into the same or a different number of shares, with or without par value, of the same or another class, or (E) cancel or otherwise affect dividends on the shares of any series of preference shares which have accrued but have not been declared. (e) Whenever dividends on the preferred shares shall be in arrears in an aggregate amount equal to at least six quarterly dividends thereon, whether or not consecutive, then the holders of the preferred shares, voting as a class, shall be exclusively entitled to elect two additional directors beyond the number specified in the bylaws to be elected from time to time by all shareholders and beyond the number specified in this paragraph (e) to be elected by holders of the preference shares. Whenever dividends on the preference shares shall be in arrears in an aggregate amount equal to at least six quarterly dividends thereon, whether or not consecutive, then the holders of the preference shares, voting as a class, shall be exclusively entitled to elect two additional directors beyond the number specified in the bylaws to be elected from time to time by all shareholders and beyond the number specified in this paragraph (e) to be elected by holders of the preferred shares. (f) At any time when the holders of a class of shares become entitled as a class to elect additional directors pursuant to paragraph 3(e) of this Article III (the "special voting rights"), the maximum authorized number of members of the Board of Directors shall automatically be increased by the number of such directors specified in such paragraph 3(e) and the vacancies so created shall be filled only by vote of the holders of such class as hereinafter set forth. Whenever the special voting rights of a class shall have vested, such rights may be exercised initially either at a special meeting of the holders of such class called as hereinafter provided or at any annual meeting of shareholders held for the purpose of electing directors, and thereafter at such annual meetings. If, at the time of the vesting of the special voting rights of a class, the date fixed for the next annual meeting of shareholders is not within 90 days of such time, the president of the corporation shall call a special meeting of the holders of such class. Such special meeting shall be held at the earliest practicable date upon the notice required and at the place designated for annual meetings of shareholders. If such special meeting shall not be called by the president within 20 days after the special voting rights of such class shall have vested, holders of not less than one-tenth of the shares of such class entitled to vote at such special meeting may call such special meeting at the expense of the corporation. Any holder of shares of a class, the special voting rights for which shall have vested, shall have access to the appropriate share ledger of the corporation for the purpose of causing such special meeting to be so called. At any annual meeting of shareholders or at any special meeting at which the holders of a class of shares shall have special voting rights, 20% of the shares of such class entitled to special voting rights, represented in person or by proxy, shall constitute a quorum for such class. At any such meeting or adjournment thereof, (i) the absence of a quorum of a class of shares having special voting rights shall not prevent the election of directors, if any, to be elected pursuant to other special voting rights or pursuant to other than special voting rights, and the absence of a quorum of shares for the election of directors pursuant to other than special voting rights shall not prevent the election of directors pursuant to special voting rights, and (ii) in the absence of one or more of such quorums, a majority of the holders, represented in person or by proxy, of each class of shares which lacks a quorum shall have power to adjourn the meeting for the election of directors which they are entitled to elect, from time to time, without notice other than announcement at the meeting, until a quorum shall be present. If the office of any director elected pursuant to the special voting rights of a class becomes vacant by reason of death, resignation, retirement, disqualification, removal from office, or otherwise, the remaining director or directors elected pursuant to the special voting rights of such class shall choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. The special voting rights of a class shall continue until all arrears in payment of quarterly dividends on such class shall have been paid and the dividends thereon for the 4 current quarter shall have been declared and paid or set apart for payment. Upon any termination of the special voting rights of a class, the term of office of the directors then in office elected pursuant thereto shall terminate immediately and the maximum authorized number of members of the Board of Directors shall automatically be reduced accordingly. (g) Subject to any applicable provision of law or this Article III, the corporation shall have the right to purchase, or otherwise reacquire, at public or private sale or otherwise any shares of any class, except that no preferred shares shall be purchased unless dividends on all preferred shares have been declared and paid or set apart for payment in full for all past dividend periods and no preference shares shall be purchased unless dividends on all preference shares have been declared and paid or set apart for payment in full for all past dividend periods. 4. The Board of Directors may from time to time authorize the issuance of shares of this corporation, whether now or hereafter authorized, without first offering such shares to the shareholders of this corporation. 5. The initial series of preferred shares shall be designated $2.80 Convertible Cumulative Preferred Shares, First Series ("First Series Preferred Shares") and shall initially consist of 4,000,000 shares. The relative rights and preferences of First Series Preferred Shares shall be as follows: (a) The dividend rate for the First Series Preferred Shares shall be $2.80 per share per annum. Subject to the provisions of Section 3 of this Article III, the first dividend on the First Series Preferred Shares shall be paid on March 15, 1976 in respect of the period from the date of issuance to March 15, 1976, and thereafter dividends on First Series Preferred Shares shall be paid quarterly on June 15, September 15, December 15, and March 15 in each instance to holders of record of First Series Preferred Shares on such dates as may be fixed by the Board of Directors from time to time. The dividend payment on each payment date except the aforementioned first payment date shall be in respect of the quarterly period ending with such payment date. Dividends on the first issued First Series Preferred Shares shall accrue on a daily basis from and after the date of issuance thereof. Dividends on any reissued First Series Preferred Shares shall accrue on a daily basis from and after the payment date therefor to which dividends have been paid in full next preceding the date of reissuance of such shares, provided, however, that dividends on any subsequently reissued First Series Preferred Shares reissued after the record date fixed for the payment of a current dividend on such shares but before the date of payment of such dividend, shall accrue on a daily basis from and after such payment date or, if such dividend shall not be paid in full on such payment date then from and after the next preceding payment date on which dividends on such shares have been paid in full. Dividends on First Series Preferred Shares reissued on any dividend payment date for such shares shall accrue on a daily basis from and after such payment date. (b) (1) Pursuant to resolution of the Board of Directors and subject to the provisions of paragraph 3(a) of this Article III, the corporation may redeem the whole or from time to time any part of the First Series Preferred Shares at any time on or after December 15, 1978, at the following redemption prices per share for the respective periods indicated: 5
Date Fixed for Redemption Within Price Per The Period (Inclusive) Share ---------------------- --------- December 15, 1978 - December 14, 1980 $52.00 December 15, 1980 - December 14, 1982 51.00 December 15, 1982 - December 14, 1984 50.50 December 15, 1984 and thereafter 50.00
plus, in each case, an amount equal to all accrued and unpaid dividends on the shares being redeemed to and including the date fixed for such redemption. (2) Notice of redemption shall be mailed by the corporation, not less than 30 or more than 60 days before the date fixed for redemption, to each transfer agent for the shares to be redeemed and to each holder of record of such shares addressed to such holder at his address appearing on the books of the corporation. Such notice of redemption shall set forth the date fixed for redemption, the redemption price and the place or places (including a place in the Borough of Manhattan, the City of New York) at which the shareholders may obtain payment of the redemption price plus accrued dividends upon the surrender of the certificates representing their shares, and shall set forth in respect to such shares the then current conversion rate and date on which conversion rights expire, all as determined in accordance with paragraph 5(e) of this Article III. (3) On or after the date fixed for redemption and stated in such notice, each holder of shares that are called for redemption shall, upon surrender of the certificates representing such shares to the corporation at the place or places designated in such notice, be entitled to receive payment of the redemption price of such shares, plus an amount equal to all accrued and unpaid dividends thereon to and including the date fixed for redemption. In case less than all of the shares represented by any such surrendered certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (4) If less than all the outstanding shares are to be redeemed, the number of shares of First Series Preferred Shares to be redeemed and the method of effecting such redemption, whether by lot or pro rata, shall be as determined by the Board of Directors. (5) At any time after a notice of redemption has been given in the manner prescribed herein and prior to the date fixed for redemption, the corporation may deposit in trust, with a bank or trust company having capital, surplus and undistributed profits aggregating at least $50,000,000, an aggregate amount of funds sufficient for such redemption, for immediate payment in the appropriate amounts upon surrender of certificates for such shares. Upon the deposit of such funds or, if no such deposit is made, upon the date fixed for redemption (unless the corporation shall default in making payment of the appropriate amount), whether or not certificates for shares so called for redemption have been surrendered for cancellation, the shares to be redeemed shall be deemed to be no longer outstanding and the holders thereof shall cease to be shareholders with respect to such shares and shall have no rights with respect thereto, except for the right to receive the amount payable upon redemption, but without interest, and, up to the close of business on the date fixed for such redemption, the right to convert such shares as set forth in paragraph 5(e) of this Article III. Such deposit in trust shall be irrevocable except that any funds deposited by the corporation which shall not be required for the redemption for which they were deposited because of the exercise of rights of conversion subsequent to the date of deposit shall be returned to the corporation forthwith, and any funds deposited by the corporation which are unclaimed at the end of one year from the date fixed for such redemption shall be paid over to the corporation upon its request, and upon such repayment the holders 6 of the shares so called for redemption shall look only to the corporation for payment of the appropriate amount. Any such unclaimed amounts paid over to the corporation shall, for a period of six years after the date fixed for such redemption, be set apart and held by the corporation in trust for the benefit of the holders of such shares, but no such holder shall be entitled to receive interest thereon. At the expiration of such six-year period, all right, title, interest and claim of such holders in or to such unclaimed amounts shall be extinguished, terminated and discharged, and such unclaimed amounts shall become part of the general funds of the corporation free of any claim of such holders. (c) The amount referred to in paragraph 2(c) of this Article III as payable in the event of voluntary or involuntary liquidation of the corporation shall be $50 per First Series Preferred Share. (d) The First Series Preferred Shares shall not be entitled to the benefit of any sinking fund for the redemption or purchase of such shares. (e) (1) Subject to the provisions for adjustment set forth in subparagraph (2) below, each First Series Preferred Share shall be convertible at any time at the election of the holder thereof into 1.2121 common shares (such rate, as adjusted from time to time, is referred to as the "conversion rate"). Certificates representing shares that a holder thereof has elected to convert shall be surrendered to any transfer agent of such shares duly endorsed to the corporation or in blank, or accompanied by proper instruments of transfer, together with written notice of the election to convert setting forth the denominations of common share certificates desired and the names in which such certificates shall be issued. As soon as practicable after such surrender of such certificates and the receipt of such notice, the corporation shall issue and deliver at the office of such transfer agent to the person who surrendered such certificates a certificate or certificates for the number of common shares issuable upon the conversion of such shares, and a check or cash in respect of any fraction of a share. Such conversion shall be deemed to have been effected on the date on which such notice and such certificates shall have been received, and each person in whose name any certificate for common shares shall be issuable upon such conversion shall be deemed to have become on such date the holder of record of the common shares represented thereby. The right to convert shares called for redemption shall terminate at the close of business on the date fixed for such redemption, unless the corporation shall default in making payment of the amount payable upon such redemption. The corporation shall make no payment or allowance for unpaid dividends, whether or not in arrears, on converted shares or for dividends on the common shares issued upon such conversion. (2) The conversion rate for First Series Preferred Shares shall be subject to adjustment from time to time only as follows: (i) If the corporation shall (A) pay to holders of common shares a dividend in shares of its capital stock (including common shares), or (B) combine into a smaller number or subdivide its common shares, or issue by reclassification of its common shares any shares of the corporation, the conversion rate for First Series Preferred Shares in effect immediately prior thereto shall be adjusted so that the holder of a First Series Preferred Share surrendered for conversion after the record date fixing shareholders to be affected by such event shall be entitled to receive the number of shares of the corporation which he would have owned or have been entitled to receive after the happening of any of the events described above, had such share been converted immediately prior to such record date. Such adjustment shall be made whenever any such events shall happen, but shall also be effective retroactively as to any such share converted between such record date and the date of the happening of any such events. 7 (ii) If the corporation shall issue rights or warrants to holders of common shares entitling them to subscribe for or purchase common shares at a price per share less than the current market price per common share (as defined in part (iv) of this subparagraph (2)) as of the record date specified below, the number of common shares into which each First Series Preferred Share shall thereafter be convertible shall be determined by multiplying the number of common shares into which such share was theretofore convertible by a fraction, the numerator of which shall be the number of common shares outstanding on the date of issuance of such rights or warrants plus the number of additional common shares offered for subscription or purchase, and the denominator of which shall be the number of common shares outstanding on the date of issuance of such rights or warrants plus the number of common shares which the aggregate offering price of the total number of common shares so offered would purchase at such current market price. Such adjustment shall be made whenever such rights or warrants are issued, but shall also be effective retroactively as to any share converted between the record date for the determination of shareholders entitled to receive such rights or warrants and the date such rights or warrants are issued. (iii) If the corporation shall distribute to holders of common shares evidences of its indebtedness or assets (excluding cash or cash distributions) or rights or warrants to subscribe other than as set forth in part (ii) above, the number of common shares into which each First Series Preferred Share shall thereafter be convertible shall be determined by multiplying the number of common shares into which such share was theretofore convertible by a fraction, the numerator of which shall be the current market price per common share (as defined in part (iv) of this subparagraph (2)) as of the date of such distribution, and the denominator of which shall be such current market price per common share less the then fair market value (as determined by the Board of Directors, whose determination shall be conclusive) of the portion of the assets or evidences of indebtedness so distributed or such subscription rights or warrants applicable to one common share. Such adjustment shall be made whenever any such distribution is made, but shall also be effective retroactively as to any share converted between the record date for the determination of shareholders entitled to receive such distribution and the date such distribution is made. (iv) For the purpose of any computation under parts (ii) and (iii) of this subparagraph (2), the current market price per common share as of any date shall be deemed to be the average of the daily closing prices for the thirty consecutive business days commencing on the forty-fifth business day before the date in question. The closing price for each business day shall be the last reported sales price regular way or, if no such sale takes place on such business day, the average of the reported closing bid and asked prices regular way, in either case on the New York Stock Exchange or, if the common shares are not listed or admitted to trading on such exchange, the average of the closing bid and asked prices as furnished by any member of the New York Stock Exchange selected by the Board of Directors for that purpose. (v) The conversion rate for First Series Preferred Shares shall always be calculated to the nearest one one-hundredth of a share. No adjustment in the conversion rate for First Series Preferred Shares shall be made unless the conversion rate for such shares after such adjustment would differ from the conversion rate prior to such adjustment by one one-hundredth of a common share or more, provided that any adjustments for First Series Preferred Shares not made by reason of this part (v) of subparagraph (2) shall be carried forward and taken into account in calculating subsequent adjustments. 8 (vi) Whenever any adjustment in the conversion rate for First Series Preferred Shares is made, the corporation shall forthwith (A) file with each transfer agent for such shares a statement describing the adjustment and the method of calculation used, together with an opinion rendered by an independent firm of public accountants of recognized standing, who may be the corporation's regularly engaged auditors, that such adjustment was properly calculated in accordance with the provisions of this subparagraph (2), and (B) cause a copy of such statement to be published in a daily newspaper of general circulation in the Borough of Manhattan, the City of New York, and to be mailed to the holders of record of such shares. (3) If the corporation shall consolidate with or merge into another corporation, or if the corporation shall sell, lease or transfer to any other person or persons all or substantially all of the assets of the corporation, holders of First Series Preferred Shares shall have the right after such event to convert each share held into the kind and amount of shares of stock, other securities, cash and property receivable upon such event by a holder of the number of common shares into which such shares might have been converted immediately prior to such event. In any such event, effective provisions shall be made in the certificate or articles of incorporation of the resulting or surviving corporation, in any contract of sale, conveyance, lease or transfer, or otherwise so that the provisions set forth herein for the protection of the conversion rights of First Series Preferred Shares shall thereafter continue to be applicable; and any such resulting or surviving corporation shall expressly assume the obligation to deliver, upon conversion, such shares of stock, other securities, cash and property. The provisions of this subparagraph (3) shall similarly apply to successive consolidations, mergers, sales, leases or transfers. (f) The holders of First Series Preferred Shares shall not be entitled to vote except as provided by Washington statutes or by this Article III. 6. The initial series of preference shares shall be designated Convertible Cumulative Preference Shares, First Series ("First Series Preference Shares") and shall initially consist of 272,159 shares. The relative rights and preferences of First Series Preference Shares shall be as follows: (a) Dividends on the First Series Preference Shares shall be payable in cash at the rate per share which from time to time shall be the greater of (i) one cent per annum and (ii) the per share amount of cash dividends paid or set apart for payment on the common shares for the same annual period in respect to which dividends on the First Series Preference Shares are to be paid, and no more. Subject to the provisions of paragraph 3 of this Article III, the first dividend on the First Series Preference Shares shall be paid on the payment date for dividends payable on the common shares (the "common shares dividend payment date") next following the date of initial issuance of First Series Preference Shares in respect of the period from the date of issuance to such common shares dividend payment date, and thereafter dividends on First Series Preference Shares shall be paid quarterly on the corresponding quarterly common shares dividend payment dates, in each instance to holders of record of First Series Preference Shares on such record dates as may be fixed by the Board of Directors from time to time. The dividend payment on each payment date, except the aforementioned first payment date, shall be in respect of the quarterly period ending with such payment date. Dividends on the first issued First Series Preference Shares shall accrue at the rate of one cent per share per annum on a daily basis from and after the date of issuance thereof. Dividends on any reissued First Series Preference Shares shall accrue at the rate of one cent per share per annum on a daily basis from and after the payment date therefor to which dividends have been paid in full next preceding the date of reissuance of such shares, provided, however, that dividends on any subsequently reissued First Series Preference Shares reissued after the record date fixed for the payment of a current dividend on such shares but before the date of payment of such dividend, shall accrue at the one cent per share per annum rate on a daily basis from and after such payment date or, if such dividend shall not be paid in full on such payment date then 9 from and after the next preceding payment date on which dividends on such shares have been paid in full. Dividends on First Series Preference Shares reissued on any dividend payment date for such shares shall accrue at the one cent per share per annum rate on a daily basis from and after such payment date. (b) (1) Pursuant to resolution of the Board of Directors and subject to the provisions of paragraph 3(a) of this Article III, the corporation may redeem the whole or from time to time any part of the First Series Preference Shares at any time on or after September 1, 1984, at the redemption price per share which is the greater of (X) the closing price per common share (as defined below in the second sentence of (iv) of paragraph 6(e)(2) of this Article III) on the third business day immediately preceding the date on which the notice of redemption is mailed pursuant to subparagraph (2) below, and (Y) $25, plus an amount equal to all accrued and unpaid dividends on the shares being redeemed to and including the date fixed for redemption. (2) Notice of redemption shall be mailed by the corporation, not less than 30 or more than 60 days before the date fixed for redemption, to each holder of record of the shares to be redeemed addressed to such holder at his address appearing on the books of the corporation. Such notice of redemption shall set forth the date fixed for redemption, the redemption price and the place at which the shareholders may obtain payment of the redemption price plus accrued dividends upon the surrender of the certificates representing their shares, and shall set forth in respect to such shares the then current conversion rate and date on which conversion rights expire, all as determined in accordance with paragraph 6(e) of this Article III. (3) On or after the date fixed for redemption and stated in such notice, each holder of shares that are called for redemption shall, upon surrender of the certificates representing such shares to the corporation at the place or places designated in such notice, be entitled to receive payment of the redemption price of such shares, plus an amount equal to all accrued and unpaid dividends thereon to and including the date fixed for redemption. In case less than all of the shares represented by any such surrendered certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (4) If less than all of the outstanding shares are to be redeemed, the number of shares of First Series Preference Shares to be redeemed and the method of effecting such redemption, whether by lot or pro rata, shall be as determined by the Board of Directors. (5) At any time after a notice of redemption has been given in the manner prescribed herein and prior to the date fixed for redemption, the corporation may deposit in trust, with a bank, trust company, or other financial institution an aggregate amount of funds sufficient for such redemption, for immediate payment in the appropriate amounts upon surrender of certificates for such shares. Upon the deposit of such funds or, if no such deposit is made, upon the date fixed for redemption (unless the corporation shall default in making payment of the appropriate amount), whether or not certificates for shares so called for redemption have been surrendered for cancellation, the shares to be redeemed shall be deemed to be no longer outstanding and the holders thereof shall cease to be shareholders with respect to such shares and shall have no rights with respect thereto, except for the right to receive the amount payable upon redemption, but without interest, and, up to the close of business on the date fixed for such redemption, the right to convert such shares as set forth in paragraph 6(e) of this Article III. Such deposit in trust shall be irrevocable except that any funds deposited by the corporation which shall not be required for the redemption for which they were deposited because of the exercise of rights of conversion subsequent to the date of deposit shall be returned to the corporation forthwith; and any funds deposited by the corporation which are unclaimed at the end of one year from the date fixed for such redemption shall be paid 10 over to the corporation upon its request, and upon such repayment the holders of the shares so called for redemption shall look only to the corporation for payment of the appropriate amount. Any such unclaimed amounts paid over the to corporation shall, for a period of six years after the date fixed for such redemption, be set apart and held by the corporation in trust for the benefit of the holders of such shares, but no such holder shall be entitled to receive interest thereon. At the expiration of such six-year period, all right, title, interest and claim of such holders in or to such unclaimed amounts shall be extinguished, terminated and discharged, and such unclaimed amounts shall become part of the general funds of the corporation free of any claim of such holders. (c) The amount referred to in paragraph 2(c) of this Article III as payable in the event of voluntary or involuntary liquidation of the corporation shall be $25 per First Series Preference Share. (d) The First Series Preference Shares shall not be entitled to the benefit of any sinking fund for the redemption or purchase of such shares. (e) (1) Subject to the provisions for adjustment set forth in subparagraph (2) below, each First Series Preference Share shall be convertible at any time at the election of the holder thereof into one common share (such rate, as adjusted from time to time, is referred to as the "conversion rate"). Certificates representing shares that a holder therof has elected to convert shall be surrendered to the corporation duly endorsed to the corporation or in blank, or accompanied by proper instruments of transfer, together with written notice of the election to convert setting forth the denominations of common share certificates desired and the names in which such certificates shall be issued. As soon as practicable after such surrender of such certificates and the receipt of such notice, the corporation shall issue and deliver at the place designated in the notice referred to in paragraph 6(b)(2) of this Article III to the person who surrendered such certificates a certificate or certificates for the number of common shares issuable upon the conversion of such shares, and a check or cash in respect of any fraction of a share. Such conversion shall be deemed to have been effected on the date on which such notice and such certificates shall have been received, and each person in whose name any certificate for common shares shall be issuable upon such conversion shall be deemed to have become on such date the holder of record of the common shares represented thereby. The right to convert shares called for redemption shall terminate at the close of business on the date fixed for such redemption, unless the corporation shall default in making payment of the amount payable upon such redemption. The corporation shall make no payment or allowance for unpaid dividends, whether or not in arrears, on converted shares or for dividends on the common shares issued upon such conversion. (2) The conversion rate for First Series Preference Shares shall be subject to adjustment from time to time only as follows: (i) If the corporation (A) pay to holders of common shares a dividend in shares of its capital stock (including common shares), and not pay to holders of First Series Preference Shares an equivalent share dividend or (B) combine into a smaller number or subdivide its common shares, or issue by reclassification of its common shares any shares of the corporation, the conversion rate for First Series Preference Shares in effect immediately prior thereto shall be adjusted so that the holder of a First Series Preference Share surrendered for conversion after the record date fixing shareholders to be affected by such event shall be entitled to receive the number of shares of the corporation which he would have owned or have been entitled to receive after the happening of any of the events described above, had such share been converted immediately prior to such record date. Such adjustment shall be made whenever any of such events shall happen, but shall also be 11 effective retroactively as to any such share converted between such record date and the date of the happening of any such events. (ii) If the corporation shall issue rights or warrants to holders of common shares entitling them to subscribe for or purchase common shares at a price per share less than the current market price per common share (as defined in part (iv) of this subparagraph (2)) as of the record date specified below, the number of common shares into which each First Series Preference Share shall thereafter be convertible shall be determined by multiplying the number of common shares into which such share was theretofore convertible by a fraction, the numerator of which shall be the number of common shares outstanding on the date of issuance of such rights or warrants plus the number of additional common shares offered for subscription or purchase, and the denominator of which shall be the number of common shares outstanding on the date of issuance of such rights or warrants plus the number of common shares which the aggregate offering price of the total number of common shares so offered would purchase at such current market price. Such adjustment shall be made whenever such rights or warrants are issued, but shall also be effective retroactively as to any share converted between the record date for the determination of shareholders entitled to receive such rights or warrants and the date such rights or warrants are issued. (iii) If the corporation shall distribute to holders of common shares evidences of its indebtedness or assets (excluding cash dividends or cash distributions) or rights or warrants to subscribe other than as set forth in part (ii) above, the number of common shares into which each First Series Preference Share shall thereafter be convertible shall be determined by multiplying the number of common shares into which such share was theretofore convertible by a fraction, the numerator of which shall be the current market price per common share (as defined in part (iv) of this subparagraph (2)) as of the date of such distribution, and the denominator of which shall be such current market price per common share less the then fair market value (as determined by the Board of Directors, whose determination shall be conclusive) of the portion of the assets or evidences of indebtedness so distributed or such subscription rights or warrants applicable to one common share. Such adjustment shall be made whenever any such distribution is made, but shall also be effective retroactively as to any share converted between the record date for the determination of shareholders entitled to receive such distribution and the date such distribution is made. (iv) For the purpose of any computation under parts (ii) and (iii) of this subparagraph (2), the current market price per common share as of any date shall be deemed to be the average of the daily closing prices for the thirty consecutive business days commencing on the forty-fifth business day before the date in question. The closing price per common share for each business day shall be the last sales price regular way or, if no such sale takes place on such business day, the average of the reported closing bid and asked prices regular way, in either case as reported in a composite list that includes stocks traded on the New York Stock Exchange or, if the common shares are not listed or admitted to trading on such exchange, the average of the closing bid and asked prices as furnished by any member of the New York Stock Exchange selected by the Board of Directors for that purpose. (v) The conversion rate for First Series Preference Shares shall always be calculated to the nearest one one-hundredth of a share. No adjustment in the conversion rate for First Series Preference Shares shall be made unless the conversion rate for such shares after such adjustment would differ from the conversion rate prior to 12 such adjustment by one one-hundredth of a common share or more, provided that any adjustments for First Series Preference Shares not made by reason of this part (v) of subparagraph (2) shall be carried forward and taken into account in calculating subsequent adjustments. (vi) Whenever any adjustment in the conversion rate for First Series Preference Shares is made, the corporation shall make available to any holder of First Series Preference Shares at the holder's request a statement describing the adjustment and the method of calculation used, together with an opinion rendered by an independent firm of public accountants of recognized standing, who may be the corporation's regularly engaged auditors, that such adjustment was properly calculated in accordance with the provisions of this subparagraph (2). (3) If the corporation shall consolidate with or merge into another corporation, or if the corporation shall sell, lease or transfer to any other person or persons all or substantially all of the assets of the corporation, holders of First Series Preference Shares shall have the right after such event to convert each share held into the kind and amount of shares of stock, other securities, cash and property receivable upon such event by a holder of the number of common shares into which such shares might have been converted immediately prior to such event. In any such event, effective provisions shall be made in the certificate or articles of incorporation of the resulting or surviving corporation, in any contract of sale, conveyance, lease or transfer, or otherwise so that the provisions set forth herein for the protection of the conversion rights of First Series Preference Shares shall thereafter continue to be applicable; and any such resulting or surviving corporation shall expressly assume the obligation to deliver, upon conversion, such shares of stock, other securities, cash and property. The provisions of this subparagraph (3) shall similarly apply to successive consolidations, mergers, sales, leases or transfers. (f) The holders of First Series Preference Shares shall not be entitled to vote except as provided by Washington statutes or by this Article III. 7. The second series of preference shares shall be designated $4.50 Convertible Cumulative Preference Shares, Series A ("Series A Preference Shares") and shall initially consist of 3,300,000 shares. The relative rights and preferences of Series A Preference Shares shall be as follows: (a) The dividend rate for the Series A Preference Shares shall be $4.50 per share per annum. Subject to the provisions of Section 3 of this Article III, the first dividend on the Series A Preference Shares shall be paid on June 15, 1981 in respect of the period from the date of issuance to June 15, 1981, and thereafter dividends on Series A Preference Shares shall be paid quarterly on September 15, December 15, March 15 and June 15 in each instance to holders of record of Series A Preference Shares on such dates as may be fixed by the Board of Directors from time to time. The dividend payment on each payment date except the aforementioned first payment date shall be in respect of the quarterly period ending with such payment date. Dividends on the first issued Series A Preference Shares shall accrue on a daily basis from and after the date of issuance thereof. Dividends on any reissued Series A Preference Shares shall accrue on a daily basis from and after the payment date therefor to which dividends have been paid in full next preceding the date of reissuance of such shares, provided, however, that dividends on any subsequently reissued Series A Preference Shares reissued after the record date fixed for the payment of a current dividend on such shares but before the date of payment of such dividend, shall accrue on a daily basis from and after such payment date or, if such dividend shall not be paid in full on such payment date then from and after the next preceding payment date on which dividends on such shares have been paid in full. Dividends on Series A Preference Shares reissued on any dividend payment date for such shares shall accrue on a daily basis from and after such payment date. 13 (b) (1) Pursuant to resolution of the Board of Directors and subject to the provisions of paragraph 3(a) of this Article III, the corporation may redeem the whole or from time to time any part of the Series A Preference Shares at any time on or after March 15, 1984, at the following redemption prices per share for the respective periods indicated:
Date Fixed for Redemption Within Price Per The Period (Inclusive) Share ---------------------- --------- March 15, 1984 - March 14, 1985 $53.00 March 15, 1985 - March 14, 1986 52.50 March 15, 1986 - March 14, 1987 52.00 March 15, 1987 - March 14, 1988 51.50 March 15, 1988 - March 14, 1989 51.00 March 15, 1989 - March 14, 1990 50.50 March 15, 1990 and thereafter 50.00
plus, in each case, an amount equal to all accrued and unpaid dividends on the shares being redeemed to and including the date fixed for such redemption. (2) Notice of redemption shall be mailed by the corporation, not less than 30 or more than 60 days before the date fixed for redemption, to each transfer agent for the shares to be redeemed and to each holder of record of such shares addressed to such holder at his address appearing on the books of the corporation. Such notice of redemption shall set forth the date fixed for redemption, the redemption price and the place or places (including a place in the Borough of Manhattan, the City of New York) at which the shareholders may obtain payment of the redemption price plus accrued dividends upon the surrender of the certificates representing their shares, and shall set forth in respect to such shares the then current conversion rate and date on which conversion rights expire, all as determined in accordance with paragraph 7(e) of this Article III. (3) On or after the date fixed for redemption and stated in such notice, each holder of shares that are called for redemption shall, upon surrender of the certificates representing such shares to the corporation at the place or places designated in such notice, be entitled to receive payment of the redemption price of such shares, plus an amount equal to all accrued and unpaid dividends thereon to and including the date fixed for redemption. In case less than all of the shares represented by any such surrendered certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (4) If less than all the outstanding shares are to be redeemed, the number of shares of Series A Preference Shares to be redeemed and the method of effecting such redemption, whether by lot or pro rata, shall be as determined by the Board of Directors. (5) At any time after a notice of redemption has been given in the manner prescribed herein and prior to the date fixed for redemption, the corporation may deposit in trust, with a bank or trust company having capital, surplus and undistributed profits aggregating at least $50,000,000, an aggregate amount of funds sufficient for such redemption, for immediate payment in the appropriate amounts upon surrender of certificates for such shares. Upon the deposit of such funds or, if no such deposit is made, upon the date fixed for redemption (unless the corporation shall default in making payment of the appropriate amount), whether or not certificates for shares so called for redemption 14 have been surrendered for cancellation, the shares to be redeemed shall be deemed to be no longer outstanding and the holders thereof shall cease to be shareholders with respect to such shares and shall have no rights with respect thereto, except for the right to receive the amount payable upon redemption, but without interest, and, up to the close of business on the date fixed for such redemption, the right to convert such shares as set forth in paragraph 7(e) of this Article III. Such deposit in trust shall be irrevocable except that any funds deposited by the corporation which shall not be required for the redemption for which they were deposited because of the exercise of rights of conversion subsequent to the date of deposit shall be returned to the corporation forthwith, and any funds deposited by the corporation which are unclaimed at the end of one year from the date fixed for such redemption shall be paid over to the corporation upon its request, and upon such repayment the holders of the shares so called for redemption shall look only to the corporation for payment of the appropriate amount. Any such unclaimed amounts paid over to the corporation shall, for a period of six years after the date fixed for such redemption, be set apart and held by the corporation in trust for the benefit of the holders of such shares, but no such holder shall be entitled to receive interest thereon. At the expiration of such six- year period, all right, title, interest and claim of such holders in or to such unclaimed amounts shall be extinguished, terminated and discharged, and such unclaimed amounts shall become part of the general funds of the corporation free of any claim of such holders. (c) The amount referred to in paragraph 2(c) of this Article III as payable in the event of voluntary or involuntary liquidation of the corporation shall be $50 per Series A Preference Share. (d) The Series A Preference Shares shall not be entitled to the benefit of any sinking fund for the redemption or purchase of such shares. (e) (1) Subject to the provisions for adjustment set forth in subparagraph (2) below, each Series A Preference Share shall be convertible at any time at the election of the holder thereof into 1.1111 common shares (such rate, as adjusted from time to time, is referred to as the "conversion rate"). Certificates representing shares that a holder thereof has elected to convert shall be surrendered to any transfer agent of such shares duly endorsed to the corporation or in blank, or accompanied by proper instruments of transfer, together with written notice of the election to convert setting forth the denominations of common share certificates desired and the names in which such certificates shall be issued. As soon as practicable after such surrender of such certificates and the receipt of such notice, the corporation shall issue and deliver at the office of such transfer agent to the person who surrendered such certificates a certificate or certificates for the number of common shares issuable upon the conversion of such shares, and a check or cash in respect of any fraction of a share. Such conversion shall be deemed to have been effected on the date on which such notice and such certificates shall have been received, and each person in whose name any certificate for common shares shall be issuable upon such conversion shall be deemed to have become on such date the holder of record of the common shares represented thereby. The right to convert shares called for redemption shall terminate at the close of business on the date fixed for such redemption, unless the corporation shall default in making payment of the amount payable upon such redemption. The corporation shall make no payment or allowance for unpaid dividends, whether or not in arrears, on converted shares or for dividends on the common shares issued upon such conversion. (2) The conversion rate for Series A Preference Shares shall be subject to adjustment from time to time only as follows: (i) If the corporation shall (A) pay to holders of common shares a dividend in shares of its capital stock (including common shares), or (B) combine into a smaller number or subdivide its common shares, or issue by reclassification of its common shares any shares of the corporation, the conversion rate for Series A Preference 15 Shares in effect immediately prior thereto shall be adjusted so that the holder of a Series A Preference Share surrendered for conversion after the record date fixing shareholders to be affected by such event shall be entitled to receive the number of shares of the corporation which he would have owned or have been entitled to receive after the happening of any of the events described above, had such share been converted immediately prior to such record date. Such adjustment shall be made whenever any such events shall happen, but shall also be effective retroactively as to any such share converted between such record date and the date of the happening of any such events. (ii) If the corporation shall issue rights or warrants to holders of common shares entitling them to subscribe for or purchase common shares at a price per share less than the current market price per common share (as defined in part (iv) of this subparagraph (2)) as of the record date specified below, the number of common shares into which each Series A Preference Share shall thereafter be convertible shall be determined by multiplying the number of common shares into which such share was theretofore convertible by a fraction, the numerator of which shall be the number of common shares outstanding on the date of issuance of such rights or warrants plus the number of additional common shares offered for subscription or purchase, and the denominator of which shall be the number of common shares outstanding on the date of issuance of such rights or warrants plus the number of common shares which the aggregate offering price of the total number of common shares so offered would purchase at such current market price. Such adjustment shall be made whenever such rights or warrants are issued, but shall also be effective retroactively as to any share converted between the record date for the determination of shareholders entitled to receive such rights or warrants and the date such rights or warrants are issued. (iii) If the corporation shall distribute to holders of common shares evidences of its indebtedness or assets (excluding cash dividends or cash distributions) or rights or warrants to subscribe other than as set forth in part (ii) above, the number of common shares into which each Series A Preference Share shall therafter be convertible shall be determined by multiplying the number of common shares into which such share was thertofore convertible by a fraction, the numerator of which shall be the current market price per common share (as defined in part (iv) of this subparagraph (2)) as of the date of such distribution, and the denominator of which shall be such current market price per common share less the then fair market value (as determined by the Board of Directors, whose determination shall be conclusive) of the portion of the assets or evidences of indebtedness so distributed or such subscription rights or warrants applicable to one common share. Such adjustment shall be made whenever any such distribution is made, but shall also be effective retroactively as to any share converted between the record date for the determination of shareholders entitled to receive such distribution and the date such distribution is made. (iv) For the purpose of any computation under parts (ii) and (iii) of this subparagraph (2), the current market price per common share as of any date shall be deemed to be the average of the daily closing prices for the thirty consecutive business days commencing on the forty-fifth business day before the date in question. The closing price for each business day shall be the last reported sales price regular way or, if no such sale takes place on such business day, the average of the reported closing bid and asked prices regular way, in either case on the New York Stock Exchange or, if the common shares are not listed or admitted to trading on such exchange, the average of the closing bid and asked prices as furnished by any member of the New York Stock Exchange selected by the Board or Directors for that purpose. 16 (v) The conversion rate for Series A Preference Shares shall always be calculated to the nearest one one-hundredth of a share. No adjustment in the conversion rate for Series A Preference Shares shall be made unless the conversion rate for such shares after such adjustment would differ from the conversion rate prior to such adjustment by one one-hundredth of a common share or more, provided that any adjustments for Series A Preference Shares not made by reason of this part (v) of subparagraph (2) shall be carried forward and taken into account in calculating subsequent adjustments. (vi) Whenever any adjustment in the conversion rate for Series A Preference Shares is made, the corporation shall forthwith (A) file with each transfer agent for such shares a statement describing the adjustment and the method of calculation used, together with an opinion rendered by an independent firm of public accountants of recognized standing, who may be the corporation's regularly engaged auditors, that such adjustment was properly calculated in accordance with the provisions of this subparagraph (2), and (B) cause a copy of such statement to be published in a daily newspaper of general circulation in the Borough of Manhattan, the City of New York, and to be mailed to the holders of record of such shares. (3) If the corporation shall consolidate with or merge into another corporation, or if the corporation shall sell, lease or transfer to any other person or persons all or substantially all of the assets of the corporation, holders of Series A Preference Shares shall have the right after such event to convert each share held into the kind and amount of shares of stock, other securities, cash and property receivable upon such event by a holder of the number of common shares into which such shares might have been converted immediately prior to such event. In any such event, effective provisions shall be made in the certificate or articles of incorporation of the resulting or surviving corporation, in any contract of sale, conveyance, lease or transfer, or otherwise so that the provisions set forth herein for the protection of the conversion rights of Series A Preference Shares shall thereafter continue to be applicable; and any such resulting or surviving corporation shall expressly assume the obligation to deliver, upon conversion, such shares of stock, other securities, cash and property. The provisions of this subparagraph (3) shall similarly apply to successive consolidations, mergers, sales, leases or transfers. (f) The holders of Series A Preference Shares shall not be entitled to vote except as provided by Washington statutes or by this Article III. 8. An additional series of preference shares shall be designated Convertible Cumulative Preference Shares, Second Series ("Second Series Preference Shares") and shall initially consist of 32,000 shares. The relative rights and preferences of Second Series Preference Shares shall be as follows: (a) The dividend rate for the Second Series Preference Shares shall be $2.80 per share per annum. Subject to the provisions of paragraph 3 of this Article III, the first dividend on the Second Series Preference Shares shall be paid on March 15, 1981 in respect of the period from the date of issuance to March 15, 1981, and thereafter dividends on Second Series Preference Shares shall be paid quarterly on June 15, September 15, December 15 and March 15 in each instance to holders of record of Second Series Preference Shares on such dates as may be fixed by the Board of Directors from time to time. The dividend payment on each payment date except the aforementioned first payment date shall be in respect of the quarterly period ending with such payment date. Dividends on the first issued Second Series Preference Shares shall accrue on a daily basis from and after the date of issuance thereof. Dividends on any reissued Second Series Preference Shares shall accrue on a daily basis from and after the payment date therefor to which dividends have been paid in full next preceding the date of reissuance of such shares, provided, however, that dividends on any subsequently reissued Second Series Preference Shares reissued after the record date 17 fixed for the payment of a current dividend on such shares but before the date of payment of such dividend, shall accrue on a daily basis from and after such payment date or, if such dividend shall not be paid in full on such payment date, then from and after the next preceding payment date on which dividends on such shares have been paid in full. Dividends on Second Series Preference Shares reissued on any dividend payment date for such shares shall accrue on a daily basis from and after such payment date. (b) (1) Pursuant to resolution of the Board of Directors and subject to the provisions of paragraph 3(a) of this Article III, the corporation may redeem the whole or from time to time any part of the Second Series Preference Shares at any time at the following redemption prices per share for the respective periods indicated:
Date Fixed for Redemption Within Price Per The Period (Inclusive) Share ---------------------- --------- Date of first issue - December 14, 1980 $52.00 December 15, 1980 - December 14, 1982 51.00 December 15, 1982 - December 14, 1984 50.50 December 15, 1984 and thereafter 50.00
plus, in each case, an amount equal to all accrued and unpaid dividends on the shares being redeemed to and including the date fixed for such redemption. (2) Notice of redemption shall be mailed by the corporation, not less than 30 or more than 60 days before the date fixed for redemption, to each transfer agent for the shares to be redeemed and to each holder of record of such shares addressed to such holder at his address appearing on the books of the corporation. Such notice of redemption shall set forth the date fixed for redemption, the redemption price and the place or places at which the shareholders may obtain payment of the redemption price plus accrued dividends upon the surrender of the certificates representing their shares, and shall set forth in respect to such shares the then current conversion rate and date on which conversion rights expire, all as determined in accordance with paragraph 8(e) of this Article III. (3) On or after the date fixed for redemption and stated in such notice, each holder of shares that are called for redemption shall, upon surrender of the certificates representing such shares to the corporation at the place or places designated in such notice, be entitled to receive payment of the redemption price of such shares, plus an amount equal to all accrued and unpaid dividends thereon to and including the date fixed for redemption. In case less than all of the shares represented by any such surrendered certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (4) If less than all the outstanding shares are to be redeemed, the number of shares of Second Series Preference Shares to be redeemed and the method of effecting such redemption, whether by lot or pro rata, shall be as determined by the Board of Directors. (5) At any time after a notice of redemption has been given in the manner prescribed herein and prior to the date fixed for redemption, the corporation may deposit in trust, with a bank, trust company or other financial institution an aggregate amount of funds sufficient for such redemption, for immediate payment in the appropriate amounts upon surrender of certificates for such shares. Upon the deposit of such funds, or if no such deposit is made, upon the date fixed for redemption (unless the corporation shall default in making payment of the appropriate 18 amount), whether or not certificates for shares so called for redemption have been surrendered for cancellation, the shares to be redeemed shall be deemed to be no longer outstanding and the holders thereof shall cease to be shareholders with respect to such shares and shall have no rights with respect thereto, except for the right to receive the amount payable upon redemption, but without interest, and, up to the close of business on the date fixed for such redemption, the right to convert such shares as set forth in paragraph 8(e) of this Article III. Such deposit in trust shall be irrevocable except that any funds deposited by the corporation which shall not be required for the redemption for which they were deposited because of the exercise of rights of conversion subsequent to the date of deposit shall be returned to the corporation forthwith; and any funds deposited by the corporation which are unclaimed at the end of one year from the date fixed for such redemption shall be paid over to the corporation upon its request, and upon such repayment the holders of the shares so called for redemption shall look only to the corporation for payment of the appropriate amount. Any such unclaimed amounts paid over to the corporation shall, for a period of six years after the date fixed for such redemption, be set apart and held by the corporation in trust for the benefit of the holders of such shares, but no such holder shall be entitled to receive interest thereon. At the expiration of such six-year period, all right, title, interest and claim of such holders in or to such unclaimed amounts shall be extinguished, terminated and discharged, and such unclaimed amounts shall become part of the general funds of the corporation free of any claim of such holders. (c) The amount referred to in paragraph 2(c) of this Article III as payable in the event of voluntary or involuntary liquidation of the corporation shall be $50 per Second Series Preference Share. (d) The Second Series Preference Shares shall not be entitled to the benefit of any sinking fund for the redemption or purchase of such shares. (e) (1) Subject to the provisions for adjustment set forth in subparagraph (2) below, each Second Series Preference Share shall be convertible at any time at the election of the holder thereof into 1.2121 common shares (such rate, as adjusted from time to time, is referred to as the "conversion rate"). Certificates representing shares that a holder thereof has elected to convert shall be surrendered to any transfer agent of such shares duly endorsed to the corporation or in blank, or accompanied by proper instruments of transfer, together with written notice of the election to convert setting forth the denominations of common share certificates desired and the names in which such certificates shall be issued. As soon as practicable after such surrender of such certificates and the receipt of such notice, the corporation shall issue and deliver at the office of such transfer agent to the person who surrendered such certificates a certificate or certificates for the number of common shares issuable upon the conversion of such shares, and a check or cash in respect of any fraction of a share. Such conversion shall be deemed to have been effected on the date on which such notice and such certificates shall have been received, and each person in whose name any certificate for common shares shall be issuable upon such conversion shall be deemed to have become on such date the holder of record of the common shares represented thereby. The right to convert shares called for redemption shall terminate at the close of business on the date fixed for such redemption, unless the corporation shall default in making payment of the amount payable upon such redemption. The corporation shall make no payment or allowance for unpaid dividends, whether or not in arrears, on converted shares or for dividends on the common shares issued upon such conversion. (2) The conversion rate for Second Series Preference Shares shall be subject to adjustment from time to time only as follows: (i) If the corporation shall (A) pay to holders of common shares a dividend in shares of its capital stock (including common shares), or (B) combine into a 19 smaller number or subdivide its common shares, or issue by reclassification of its common shares any shares of the corporation, the conversion rate for Second Series Preference Shares in effect immediately prior thereto shall be adjusted so that the holder of a Second Series Preference Share surrendered for conversion after the record date fixing shareholders to be affected by such event shall be entitled to receive the number of shares of the corporation which he would have owned or have been entitled to receive after the happening of any of the events described above, had such share been converted immediately prior to such record date. Such adjustment shall be made whenever any of such events shall happen, but shall also be effective retroactively as to any such share converted between such record date and the date of the happening of any such events. (ii) If the corporation shall issue rights or warrants to holders of common shares entitling them to subscribe for or purchase common shares at a price per share less than the current market price per common share (as defined in part (iv) of this subparagraph (2)) as of the record date specified below, the number of common shares into which each Second Series Preference Share shall thereafter be convertible shall be determined by multiplying the number of common shares into which such share was theretofore convertible by a fraction, the numerator of which shall be the number of common shares outstanding on the date of issuance of such rights or warrants plus the number of additional common shares offered for subscription or purchase, and the denominator of which shall be the number of common shares outstanding on the date of issuance of such rights or warrants plus the number of common shares which the aggregate offering price of the total number of common shares so offered would purchase at such current market price. Such adjustment shall be made whenever such rights or warrants are issued, but shall also be effective retroactively as to any share converted between the record date for the determination of shareholders entitled to receive such rights or warrants and the date such rights or warrants are issued. (iii) If the corporation shall distribute to holders of common shares evidences of its indebtedness or assets (excluding cash dividends or cash distributions) or rights or warrants to subscribe other than as set forth in part (ii) above, the number of common shares into which each Second Series Preference Share shall thereafter be convertible shall be determined by multiplying the number of common shares into which such share was theretofore convertible by a fraction, the numerator of which shall be the current market price per common share (as defined in part (iv) of this subparagraph (2)) as of the date of such distribution, and the denominator of which shall be such current market price per common share less the then fair market value (as determined by the Board of Directors, whose determination shall be conclusive) of the portion of the assets or evidences of indebtedness so distributed or such subscription rights or warrants applicable to one common share. Such adjustment shall be made whenever any such distribution is made, but shall also be effective retroactively as to any share converted between the record date for the determination of shareholders entitled to receive such distribution and the date such distribution is made. (iv) For the purpose of any computation under parts (ii) and (iii) of this subparagraph (2), the current market price per common share as of any date shall be deemed to be the average of the daily closing prices for the thirty consecutive business days commencing on the forty-fifth business day before the date in question. The closing price for each business day shall be the last reported sales price regular way or, if no such sale takes place on such business day, the average of the reported closing bid and asked prices regular way, in either case on the New York Stock Exchange or, if the common shares are not listed or admitted 20 to trading on such exchange, the average of the closing bid and asked prices as furnished by any member of the New York Stock Exchange selected by the Board of Directors for that purpose. (v) The conversion rate for Second Series Preference Shares shall always be calculated to the nearest one one-hundredth of a share. No adjustment in the conversion rate for Second Series Preference Shares shall be made unless the conversion rate for such shares after such adjustment would differ from the conversion rate prior to such adjustment by one one-hundredth of a common share or more, provided that any adjustments for Second Series Preference Shares not made by reason of this part (v) of subparagraph (2) shall be carried forward and taken into account in calculating subsequent adjustments. (vi) Whenever any adjustment in the conversion rate for Second Series Preference Shares is made, the corporation shall cause to mailed to each holder of Second Series Preference Shares a statement describing the adjustment and the method of calculation used and, at the holder's request, shall furnish a copy of an opinion rendered by an independent firm of public accountants of recognized standing, who may be the corporation's regularly engaged auditors, that such adjustment was properly calculated in accordance with the provisions of this subparagraph (2). (3) If the corporation shall consolidate with or merge into another corporation, or if the corporation shall sell, lease or transfer to any other person or persons all or substantially all of the assets of the corporation, holders of Second Series Preference Shares shall have the right after such event to convert each share held into the kind and amount of shares of stock, other securities, cash and property receivable upon such event by a holder of the number of common shares into which such shares might have been converted immediately prior to such event. In any such event, effective provisions shall be made in the certificate or articles of incorporation of the resulting or surviving corporation, in any contract of sale, conveyance, lease or transfer, or otherwise so that the provisions set forth herein for the protection of the conversion rights of Second Series Preference Shares shall thereafter continue to be applicable; and any such resulting or surviving corporation shall expressly assume the obligation to deliver, upon conversion, such shares of stock, other securities, cash and property. The provisions of this subparagraph (3) shall similarly apply to successive consolidations, mergers, sales, leases or transfers. (f) Each outstanding share of Second Series Preference Shares shall be entitled to one vote, not as a class, on each matter submitted to a vote at a meeting of shareholders. 9. The third series of preference shares shall be designated "$11.00 Cumulative Preference Shares, Third Series" (the "Third Series Preference Shares"), and the number of shares constituting such series shall be 147,000. The relative rights and preferences of the Third Series Preference Shares shall be as follows: (a) The holders of Third Series Preference Shares shall be entitled to receive, when and as declared by the Board of Directors, out of any funds lawfully available therefor, cash dividends thereon at the annual rate of $11.00 per share, and no more, payable quarterly, from the date of issuance thereof, upon the 15th day of March, June, September and December in each year. Dividends on the Third Series Preference Shares shall commence to accrue from the date of issuance thereof and shall be cumulative. (b) The amount referred to in paragraph 2(c) of this Article III as payable in the event of voluntary or involuntary liquidation of the corporation shall be $100 per share. Accordingly, in the event of the voluntary or involuntary liquidation of the corporation the "preferential amount" which 21 the holders of the Third Series Preference Shares shall be entitled to receive out of the assets of the corporation pursuant to paragraph 3(c) of this Article III is $100 per share plus all accrued and unpaid dividends thereon. (c) (1) The corporation shall redeem 29,400 Third Series Preference Shares on December 15, 1988 and on each December 15 thereafter until the Third Series Preference Shares originally issued shall have been fully redeemed. Third Series Preference Shares redeemed pursuant to the provisions of this subparagraph (1) shall be redeemed in the manner, upon the notice and with the effect set forth in subparagraph (4) of this paragraph (c) and at a redemption price equal to $100 per share plus all dividends accrued and unpaid thereon to the date of redemption. (2) In addition to the redemption of Third Series Preference Shares required to be made pursuant to the foregoing subparagraph (1) of this paragraph (c), the corporation may concurrently with any such mandatory redemption, redeem a number of Third Series Preference Shares (in units of 1,000 shares or integral multiples of 1,000 in excess thereof) not exceeding the number of Third Series Preference Shares being redeemed on such date pursuant to the foregoing subparagraph (1) hereof. Third Series Preference Shares to be redeemed pursuant to the provisions of this subparagraph (2) shall be redeemed in the manner, upon the notice and with the effect provided in subparagraph (4) of this paragraph (c) and at a redemption price equal to $100 per share plus the amount of all dividends accrued and unpaid thereon to the date of redemption. The right of the corporation to redeem Third Series Preference Shares pursuant to this subparagraph (2) is subject to the following limitations: (i) such right shall be noncumulative and the failure of the corporation to exercise such right on any date shall not increase the number of Third Series Preference Shares which it may redeem under this subparagraph (2) on any other date; (ii) Third Series Preference Shares redeemed pursuant to the provisions of this subparagraph (2) shall be credited, pro tanto, against the obligation of the corporation to redeem Third Series Preference Shares pursuant to the provisions of the foregoing subparagraph (1) hereof in the inverse order of the dates on which such redemptions are required to be made; and (iii) the number of Third Series Preference Shares redeemed by the corporation from time to time pursuant to the provisions of this subparagraph (2) shall not exceed a cumulative total of 44,100 shares. (3) In addition to redemption of Third Series Preference Shares required to be made pursuant to the foregoing subparagraph (1) of this paragraph (c) and permitted to be made pursuant to the foregoing subparagraph (2) of this paragraph (c), the Third Series Preference Shares shall be subject to redemption at any time or from time to time on or after but not before December 15, 1987, in whole or in part (but if in part then in units of 1,000 shares or integral multiples of 1,000 shares in excess thereof) at the option of the corporation upon payment of a redemption price of $100 per share together with all dividends accrued and unpaid thereon to the date of redemption and together with a premium per share determined in accordance with the applicable provisions of the following table:
Date Fixed for Redemption Within Price Per The Period (Inclusive) Share ---------------------- --------- December 15, 1987 - December 14, 1988 $5.00 December 15, 1988 - December 14, 1989 3.00 December 15, 1989 - December 14, 1990 1.00 December 15, 1990 and thereafter None
22 Third Series Preference Shares redeemed pursuant to the provisions of this subparagraph (3) shall be credited pro tanto, against the obligation of the corporation to --------- redeem Third Series Preference Shares pursuant to the provisions of the foregoing subparagraph (1) hereof, in the inverse order of the dates on which such redemptions are required to be made. (4) (i) Notice of every redemption pursuant to this paragraph (c) shall be mailed at least 30 but not more than 90 days prior to the date fixed for redemption to the holders of record of Third Series Preference Shares so to be redeemed at their respective addresses as the same shall appear on the books of the corporation. Each such notice of redemption shall set forth the redemption price applicable to the Third Series Preference Shares being redeemed, and that the redemption is pursuant to subparagraph (1), (2) or (3) of this paragraph (c). In case of the redemption of less than all of the outstanding Third Series Preference Shares, the number of shares to be redeemed shall in the case of each holder of record on the date of such selection of at least 100 Third Series Preference Shares be as nearly as practicable in the same proportion as the number of such shares held by such holder bears to the total number of such shares then outstanding (except as above provided in this paragraph (c)) and in the case of any other holder shall be determined in such manner as the Board of Directors of the corporation deems appropriate and fair. (ii) If, on the redemption date specified in the notice of redemption, the funds necessary for such redemption shall have been set aside by the corporation separate and apart from its other funds in trust for the pro rata benefit of the holders of the shares so called for redemption, then (unless the corporation shall default in making payment of the appropriate amount), notwithstanding that any certificates for Third Series Preference Shares so called for redemption shall not have been surrendered for cancellation, the shares represented thereby which are to be redeemed shall no longer be deemed outstanding, the right to receive dividends thereon shall cease to accrue from and after the date of redemption so specified and all rights of holders of Third Series Preference Shares so called for redemption shall forthwith, after such redemption date, cease and terminate excepting only the right of the holders thereof to receive the redemption price therefor (but without interest) and any other rights of the holders thereof which by the express terms of the agreement or instrument creating such rights survive the redemption of any or all of the Third Series Preference Shares. At the expiration of six years from the date fixed for redemption, all right, title, interest and claim of the holders of the Third Series Preference Shares called for redemption in or to unclaimed moneys so set aside by the corporation shall be extinguished, terminated and discharged, and such unclaimed moneys shall become part of the general funds of the corporation free of any claim of such holders. (iii) At any time after notice of redemption has been given in the manner prescribed herein and prior to the date fixed for redemption, the corporation may deposit in trust, with a bank or trust company having capital, surplus and undistributed profits aggregating at least $50,000,000, an aggregate amount of funds sufficient for such redemption, for immediate payment in the appropriate amounts upon surrender of certificates for the Third Series Preference Shares so called for redemption. Upon the deposit of such funds or, if no such deposit is made, upon the date fixed for redemption (unless the corporation shall default in making payment of the appropriate amount), whether or not certificates for Third Series Preference Shares so called for redemption have been surrendered for cancellation, the Third Series Preference Shares to be redeemed shall be deemed to be no longer outstanding and the holders thereof shall cease to be shareholders with respect to such Third Series Preference Shares and shall have no rights with respect thereto, except for the right to receive the amount payable upon redemption (but without interest) and any other rights of the holders thereof which by the express terms of the agreement or 23 instrument creating such rights survive the redemption of any or all of the Third Series Preference Shares. Any funds deposited by the corporation which are unclaimed at the end of one year from the date fixed for such redemption shall be paid over to the corporation upon its request, and upon such repayment the holders of the Third Series Preference Shares so called for redemption shall look only to the corporation for payment of the appropriate amount. Any such unclaimed amounts paid over to the corporation shall, for a period of six years after the date fixed for such redemption, be set apart and held by the corporation in trust for the benefit of the holders of such Third Series Preference Shares, but no such holder shall be entitled to receive interest thereon. At the expiration of such six-year period, all right, title, interest and claim of such holders in or to such unclaimed amounts shall be extinguished, terminated and discharged, and such unclaimed amounts shall become part of the general funds of the corporation free of any claim of such holders. (iv) All Third Series Preference Shares which shall have been redeemed, purchased or otherwise acquired by or surrendered to the corporation shall have the status specified in paragraph 1 of this Article III and may be reissued as specified in such paragraph 1 except that such shares shall not be reissued as Third Series Preference Shares. (v) The corporation shall not declare or pay any dividends upon, or set aside any sum or sums for the purchase, redemption (including any sinking fund payment therefor) or other acquisition for value of, any class or series of shares ranking on a parity with or subordinate to the Third Series Preference Shares with respect to either the payment of dividends or rights upon dissolution, liquidation or winding up of the affairs of the corporation unless all redemptions of the Third Series Preference Shares required to be made pursuant to subparagraph (1) of this paragraph (c) shall have been made. (d) (1) The holders of Third Series Preference Shares shall have no voting rights except as provided by Washington statutes or by this Article III. (2) So long as any Third Series Preference Shares shall be outstanding, and in addition to any other approvals or consents required by law, without the consent of the holders of 66-2/3% of all preference shares outstanding as of a record date fixed by the Board of Directors, given either by their affirmative vote at a special meeting called for that purpose, or, if permitted by law, in writing without a meeting: (i) The corporation shall not sell, transfer or lease all or substantially all the properties and assets of the corporation provided, however, that nothing herein shall require the consent of the holders of preference shares for or in respect of the creation of any mortgage, pledge, or other lien upon all or any part of the assets of the corporation. (ii) The corporation shall not effect a merger or consolidation with any other corporation or corporations unless as a result of such merger or consolidation and after giving effect thereto (1) either (A) the corporation shall be the surviving corporation or (B) if the corporation is not the surviving corporation, the successor corporation shall be a corporation duly organized and existing under the laws of any state of the United States of America or the District of Columbia, and all obligations of the corporation with respect to the Third Series Preference Shares shall be assumed by such successor corporation, (2) the Third Series Preference Shares then outstanding shall continue to be outstanding, and (3) there shall be no alteration or change in the designation or the preferences, relative rights or limitations applicable to outstanding Third Series Preference Shares prejudicial to the holders thereof. 24 (iii) The corporation shall not amend, alter or repeal any of the provisions of its Articles of Incorporation in any manner which adversely affects the relative rights, preferences or limitations of the Third Series Preference Shares or the holders thereof; provided, however, that the corporation shall not amend, alter or repeal the provisions of paragraph (a), (b) or (c) of this paragraph 9 of this Article III or the provisions of this clause (iii), without the consent of the holders of all preference shares outstanding as of a record date fixed by the Board of Directors, given either by the affirmative vote of such holders at a special meeting called for that purpose or, if permitted by law, in writing without a meeting. 10.(A) The second series of preferred shares shall be designated "Market Auction Preferred Shares, Series A" (hereinafter referred to as "Series A MAPS"), and the number of authorized shares constituting Series A MAPS is 750. The relative rights and preferences of Series A MAPS shall be as follows: (a) The Holders (as defined in subparagraph (d) of this paragraph 10(A)) shall be entitled to receive, when and as declared by the Board of Directors out of funds legally available therefor, cash dividends thereon at the Applicable Rate (as defined in subparagraph (2)(i) of this paragraph 10(A)(a)) and no more, determined as set forth below, payable on the respective dates set forth below. (1) (i) Dividends on Series A MAPS, at the Applicable Rate, shall accrue from the Date of Original Issue (as defined in subparagraph (d) of this paragraph 10(A)). The first and second dividend payment dates on the Series A MAPS will be December 31, 1985 and February 20, 1986, respectively. Following such second dividend payment date, dividends will be payable on each day thereafter which is the seventh Thursday after Thursday, February 20, 1986 (each such date being herein referred to as the "Normal Dividend Payment Date") except that (A) if such Normal Dividend Payment Date is not a Business Day, then the Dividend Payment Date (as hereinafter defined) shall be the preceding Tuesday if both such Tuesday and the following Wednesday are Business Days; (B) or if the Friday following such Normal Dividend Payment Date is not a Business Day, then the Dividend Payment Date shall be the Wednesday preceding such Normal Dividend Payment Date if both such Wednesday and such Normal Dividend Payment Date are Business days; or (C) if such Normal Dividend Payment Date and either such preceding Tuesday or Wednesday are not Business Days or if such Friday and such Wednesday are not Business Days, then the Dividend Payment Date shall be the first Business Day preceding the Normal Dividend Payment Date that is next succeeded by a day that is also a Business Day. Although any particular Dividend Payment Date shall not occur on the originally scheduled Normal Dividend Payment Date because of the exceptions discussed above, the next succeeding Dividend Payment Date shall be, subject to such exceptions, the seventh Thursday following the originally designated Normal Dividend Payment Date for the prior Dividend Period (as defined in subparagraph (2)(i) of this paragraph 10(A)); provided that the Board of Directors, in the event of a change in law lengthening the minimum holding period (currently found in Section 246(c) of the Code (as defined in subparagraph (d) of this paragraph 10(A)) required for taxpayers to be entitled to the dividends received deduction on preferred stock held by non-affiliated corporations (currently found in Section 243(a) of the Code), shall adjust the period of time between Dividend Payment Dates so as, subject to clauses (A) through (C) of this subparagraph (a)(1)(i), to adjust uniformly the number of days (such number of days without giving effect to such clauses (A) through (C) being hereinafter referred to as "dividend period days") in Dividend Periods commencing after the date of such change in law to equal or exceed the then current minimum holding period; provided that the number of dividend period days shall not exceed by more than nine days the 25 length of such then current minimum holding period and shall be evenly divisible by seven, and the maximum number of dividend period days in no event shall exceed 98 days (each date of payment of dividends being herein referred to as a "Dividend Payment Date" and the first Dividend Payment Date being herein referred to as the "Initial Dividend Payment Date"). Upon any such change in the number of dividend period days as a result of a change in law, the corporation shall publish notice of such change in a newspaper of general circulation in The City of New York, New York, which carries financial news and shall mail notice of such change by first class mail, postage prepaid, to each Holder at such Holder's address as the same appears on the stock transfer books of the corporation. (ii) As long as the Applicable Rate is based on the results of an Auction (as defined in subparagraph (d) of this paragraph 10(A), the corporation shall pay to the Auction Agent (as defined in subparagraph (d) of this paragraph 10(A)) not later than 12:00 Noon, New York City time, on the Business Day next preceding each Dividend Payment Date, an aggregate amount of funds available on the next Business Day in The City of New York, New York, equal to the dividends to be paid to all Holders on such Dividend Payment Date. All such moneys shall be held in trust for the payment of dividends on shares of Series A MAPS for the benefit of the Holders by the Auction Agent and paid as set forth in subparagraph (1)(iii) of this paragraph 10(A)(a). (iii) For purposes of determining to whom dividends shall be paid, each dividend shall be payable to the Holders as their names appear on the stock transfer books of the corporation on the Business Day next preceding the Dividend Payment Date thereof. Dividends in arrears for any past Dividend Period may be declared and paid at any time, without reference to any regular Dividend Payment Date, to the Holders as their names appear on the stock transfer books of this corporation on such date, not exceeding 15 days preceding the payment date thereof, as may be fixed by the Board of Directors. (2) (i) The dividend rate on Series A MAPS shall be 5.625% per annum during the period from and after the Date of Original Issue to and including the Initial Dividend Payment Date (the "Initial Dividend Period"). Commencing on the Initial Dividend Payment Date, the dividend rate on Series A MAPS for each subsequent dividend period (herein referred to as a "Subsequent Dividend Period" and collectively as "Subsequent Dividend Periods"; and the Initial Dividend Period or any Subsequent Dividend Period being herein referred to as a "Dividend Period" and collectively as "Dividend Periods") thereafter, which subsequent Dividend Periods shall commence on the day that is the last day of the preceding Dividend Period and shall end on and include the next succeeding Dividend Payment Date, shall be equal to the rate per annum that results from implementation of the Auction Procedures (as defined in subparagraph (d) of this paragraph 10(A)); provided that if an Auction Termination Event (as defined in subparagraph (d) of this paragraph 10(A)) shall have occurred prior to the first day of such Subsequent Dividend Period, the dividend rate for each Subsequent Dividend Period shall be a rate per annum (the "Alternate Rate") equal to 150% of the "AA" Composite Commercial Paper Rate (as defined in subparagraph (d) of this paragraph 10(A)) on the first day of such Subsequent Dividend Period. The rate per annum at which dividends are payable on shares of Series A MAPS for any Dividend Period is herein referred to as the "Applicable Rate". (ii) The amount of dividends per share payable on Series A MAPS for any Dividend Period or part thereof shall be computed by multiplying the Applicable Rate for such Dividend Period by a fraction the numerator of which shall be the number of days in such Dividend Period or 26 part thereof (calculated by counting the first day thereof but excluding the last day thereof) such share was outstanding and the denominator of which shall be 360 and applying the rate obtained against $100,000 per share of Series A MAPS. For purposes of this subparagraph (2)(ii), shares of Series A MAPS shall be treated as outstanding from the Date of Original Issue. (iii) The Applicable Rate for each Subsequent Dividend Period shall be published not later than the fifth Business Day next succeeding the first day of such Subsequent Dividend Period in a newspaper of general circulation in The City of New York, New York, which carries financial news. (b) (1) (i) (A) Series A MAPS may be redeemed, at the option of the corporation, as a whole or from time to time in part, on the second Business Day preceding any Dividend Payment Date at a redemption price of: (I) $101,500 per share if redeemed during the twelve months ending November 14, 1986; (II) $101,000 per share if redeemed during the twelve months ending November 14, 1987; (III) $100,500 per share if redeemed during the twelve months ending November 14, 1988; and (IV) $100,000 per share if redeemed thereafter; plus, in each case, an amount equal to accrued and unpaid dividends thereon (whether or not earned or declared) to the date fixed for redemption. (B) If fewer than all of the outstanding Series A MAPS are to be redeemed pursuant to this subparagraph (b)(1)(i), the number of shares to be redeemed shall be determined by the Board of Directors, and such shares shall be redeemed pro rata from the Holders in proportion to the number of such shares held by such Holders (with adjustments to avoid redemption of fractional shares). (ii) Series A MAPS may be redeemed, at the option of the corporation, as a whole but not in part, on any Dividend Payment Date at a redemption price of $100,000 per share, plus an amount equal to accrued and unpaid dividends thereon (whether or not earned or declared) to the date fixed for redemption, if the Applicable Rate fixed for the Dividend Period ending on such Dividend Payment Date shall equal or exceed the "AA" Composite Commercial Paper Rate on the date of determination of such Applicable Rate. (2) If the corporation shall redeem Series A MAPS pursuant to this paragraph 10(A)(b), notice of such redemption shall be mailed by first class mail, postage prepaid, to each Holder of the shares to be redeemed, at such Holder's address as the same appears on the stock transfer books of the corporation. Such notice shall be so mailed not less than 30 or more than 45 days prior to the date fixed for redemption. Each such notice shall state: (v) the redemption date, (w) the number of shares of Series A MAPS to be redeemed, (x) the redemption price, (y) the place or places where certificates for such shares of Series A MAPS are to be surrendered for payment of the redemption price and (z) that dividends on the shares to be redeemed will cease to accrue on such redemption date. If fewer than all shares held by 27 any Holder are to be redeemed, the notice mailed to such Holder shall also specify the number of shares to be redeemed from such Holder. (3) If notice of redemption has been given under subparagraph (2) of this paragraph 10(A)(b), from and after the redemption date for the shares of Series A MAPS called for redemption (unless default shall be made by the corporation in providing money for the payment of the redemption price of the shares so called for redemption) dividends on Series A MAPS so called for redemption shall cease to accrue and said shares shall no longer be deemed to be outstanding, and all rights of the Holders thereof as shareholders of the corporation (except the right to receive the redemption price) shall cease. Upon surrender in accordance with said notice of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Board of Directors shall so require and the notice shall so state), the redemption price set forth above shall be payable by the Auction Agent to the Holders of shares of Series A MAPS subject to redemption on the redemption date. In case fewer than all of the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares without cost to the Holder thereof. (4) On the Business Day next preceding a redemption date, the corporation shall irrevocably deposit with the Auction Agent for each share of Series A MAPS to be redeemed on such date an amount equal to the applicable redemption price plus an amount equal to accrued and unpaid dividends (whether or not earned or declared) on such share to the date fixed for redemption, in funds available on the redemption date in The City of New York, New York. All such moneys shall be irrevocably deposited for the payment of the redemption price of shares of Series A MAPS to be so redeemed and shall be held in trust for the benefit of the Holders whose shares are to be redeemed by the Auction Agent and applied as set forth herein. (5) Any monies held in trust for payment of the appropriate redemption price to be paid to Holders of shares of Series A MAPS subject to redemption on any redemption date remaining unclaimed at the end of three years from such redemption date shall be repaid to the corporation upon the written request of the corporation, after which the Holders of shares of Series A MAPS so called for redemption but for which moneys remain unclaimed shall look only to the corporation for the payment thereof. (6) Shares of Series A MAPS redeemed, purchased or otherwise reacquired, or surrendered to the corporation shall be retired and not reissued as Series A MAPS, but shall have the status of authorized and unissued preferred shares of the corporation that may be reissued as part of a new or different series of preferred shares. (c) (1) The amount referred to in paragraph 2(c) of this Article III as payable in the event of voluntary or involuntary liquidation of the corporation shall be $100,000 per share of Series A MAPS. Accordingly, in the event of the voluntary or involuntary liquidation of the corporation the "preferential amount" which the Holders of Series A MAPS shall be entitled to receive out of the assets of the corporation pursuant to paragraph 3(c) of this Article III is $100,000 per share plus all accrued and unpaid dividends thereon. (2) The Holders of Series A MAPS shall have no voting rights except as provided by Washington statutes or by this Article III. (3) For so long as any shares of Series A MAPS are outstanding, the Auction Agent, duly appointed by the corporation to so act, shall be in each case a commercial bank, 28 trust company or other financial institution independent of the corporation and its affiliates (which, however, may engage or have engaged in business transactions with the corporation or its affiliates) and at no time shall the corporation or its affiliates act as the Auction Agent in connection with the Auction Procedures. If the Auction Agent resigns or for any reason its appointment is terminated during any period that any shares of Series A MAPS are outstanding, the Board of Directors of the corporation shall promptly thereafter appoint another qualified commercial bank, trust company or financial institution to act as the Auction Agent. (d) As used in this paragraph 10(A) of Article III, the following terms shall have the following meanings (with terms defined in the singular having comparable meanings when used in the plural and vice versa), unless the context otherwise requires: (1) "`AA' Composite Commercial Paper Rate", on any date, shall mean (i) the interest equivalent of the 60-day rate on commercial paper placed on behalf of issuers whose corporate bonds are rated "AA" by Standard & Poor's Corporation or its successor, or the equivalent of such rating by another rating agency, as made available on a discount basis or otherwise by the Federal Reserve Bank of New York for the immediately preceding Business Day prior to such date; or (ii) in the event that the Federal Reserve Bank of New York does not make available such a rate, then the arithmetic average of the interest equivalent of the 60-day rate on commercial paper placed on behalf of such issuers, as quoted on a discount basis or otherwise by the Commercial Paper Dealers to the Auction Agent for the close of business of the immediately preceding Business Day prior to such date. If any Commercial Paper Dealer does not quote a rate required to determine the "AA" Composite Commercial Paper Rate, the "AA" Composite Commercial Paper Rate shall be determined on the basis of the quotation or quotations furnished by the remaining Commercial Paper Dealer and any Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers selected by the corporation to provide such rate or rates not being supplied by any Commercial Paper Dealer or, if the corporation does not select any such Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers, by the remaining Commercial Paper Dealer. If the Board of Directors shall make the adjustment referred to in the proviso of the first sentence of subparagraph (1)(i) of paragraph 10(A)(a), then (i) if the dividend period days shall be 70 or more days but fewer than 85 days, such rate shall be the arithmetic average of the interest equivalent of the 60-day and 90-day rates on such commercial paper, and (ii) if the dividend period days shall be 85 or more days but 98 or fewer days, such rate shall be the interest equivalent of the 90-day rate on such commercial paper. For purposes of this definition, the "interest equivalent" of a rate stated on a discount basis (a "discount rate") for commercial paper of a given days' maturity shall be equal to the quotient (rounded upwards to the next higher one-thousandth (.001) of 1%) of (A) the discount rate divided by (B) the difference between (x) 1.00 and (y) a fraction the numerator of which shall be the product of the discount rate times the number of days in which such commercial paper matures and the denominator of which shall be 360. (2) "Alternate Rate" shall have the meaning specified in subparagraph (a)(2)(i) of this paragraph 10(A). (3) "Applicable Rate" shall have the meaning specified in subparagraph (a)(2)(i) of this paragraph 10(A). (4) "Auction" shall mean each periodic operation of the Auction Procedures. (5) "Auction Agent" shall mean a bank or trust company appointed as such by the corporation. 29 (6) "Auction Procedures" shall mean the procedures for conducting Auctions set forth in paragraph 10(B) hereof. (7) "Auction Termination Event" shall mean the first failure by the corporation to pay to the Auction Agent, not later than 12:00 Noon, New York City time, (A) on the Business Day next preceding any Dividend Payment Date, in funds available on such Dividend Payment Date in The City of New York, New York, the full amount of any dividend (whether or not earned or declared) to be paid on such Dividend Payment Date on any Series A MAPS or (B) on the Business Day next preceding any redemption date in the case of a redemption pursuant to subparagraph (b) of this paragraph 10(A), in funds available on such redemption date in The City of New York, New York, the redemption price to be paid on such redemption date of any Series A MAPS after notice of redemption is given pursuant to subparagraph (b) of this paragraph 10(A). (8) "Business Day" shall mean a day on which the New York Stock Exchange is open for trading and which is neither a Saturday, Sunday or other day on which banks in The City of New York, New York are authorized or required by law to close. (9) "Code" shall mean the Internal Revenue Code of 1954, as amended. (10) "Commercial Paper Dealers" shall mean Goldman, Sachs & Co. and Morgan Stanley & Co. Incorporated, or, in lieu of any thereof, their respective affiliates or successors. (11) "Date of Original Issue" shall mean the date on which the corporation initially issues the Series A MAPS. (12) "Dividend Payment Date" shall have the meaning specified in subparagraph (a)(1)(i) of this paragraph 10(A). (13) "Dividend Period" and "Dividend Periods" shall have the respective meanings specified in subparagraph (a)(2)(i) of this paragraph 10(A). (14) "Holder" shall mean the holder of shares of Series A MAPS as the same appears on the stock transfer books of the corporation. (15) "Initial Dividend Payment Date" shall have the meaning specified in subparagraph (a)(1)(i) of this paragraph 10(A). (16) "Initial Dividend Period" shall have the meaning specified in subparagraph (a)(2)(i) of this paragraph 10(A). (17) "Normal Dividend Payment Date" shall have the meaning specified in subparagraph (a)(1)(i) of this paragraph 10(A). (18) "Series A MAPS" shall mean the series of the Preferred Shares, liquidation preference $100,000 per share, of the corporation designated as its "Market Auction Preferred Shares, Series A." (19) "Subsequent Dividend Period" and "Subsequent Dividend Periods" shall have the respective meanings specified in subparagraph (a)(2)(i) of this paragraph 10(A). 30 (20) "Substitute Commercial Paper Dealer" shall mean any commercial paper dealer that is a leading dealer in the commercial paper market provided that neither such dealer nor any of its affiliates shall be a Commercial Paper Dealer. (B) (a) Certain Definitions. Capitalized terms not defined in this subparagraph (a) shall have the respective meanings specified in paragraph 10(A) of this Article III. As used in this paragraph 10(B), the following terms shall have the following meanings, unless the context otherwise requires: (1) "`AA' Rate Multiple", on any Auction Date, shall mean the percentage determined as set forth below based on the prevailing rating of Series A MAPS in effect at the close of business on the Business Day immediately preceding such Auction Date:
Prevailing Rating Percentage ----------------- ---------- AA/aa or above 110% A/a 120% BBB/baa 130% Below BBB/baa (includes no rating) 150%
For purposes of this definition, the "prevailing rating" of Series A MAPS shall be (i) AA/aa or Above, if Series A MAPS then have a rating of AA or better by Standard & Poor's Corporation or its successor ("S&P") or aa3 or better by Moody's Investors Service, Inc. or its successor ("Moody's"), or the equivalent of either or both of such ratings by such agencies or a substitute rating agency or substitute rating agencies selected as provided below, (ii) if not AA/aa or Above, then A/a if Series A MAPS then have a rating of A or better and lower than AA by S&P or a3 or better and lower than aa3 by Moody's or the equivalent of either or both of such ratings by such agencies or a substitute rating agency or substitute rating agencies selected as provided below, (iii) if not AA/aa or Above or A/a, then BBB/baa if Series A MAPS then have a rating of BBB or better and lower than A by S&P or baa3 or better and lower than a3 by Moody's or the equivalent of either or both of such ratings by such agencies or a substitute rating agency or substitute rating agencies selected as provided below, and (iv) if not AA/aa or Above, A/a or BBB/baa, then Below BBB/baa. The corporation shall take all reasonable action necessary to enable S&P and Moody's to provide a rating for Series A MAPS. If either or both S&P or Moody's shall not make such a rating available, Morgan Stanley & Co. Incorporated or its successor shall select a nationally recognized statistical rating organization or two nationally recognized statistical rating organizations (as that term is used in the rules and regulations of the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended) to act as substitute rating agency or substitute rating agencies, as the case may be. (2) "Affiliate" shall mean any Person known to the Auction Agent to be controlled by, in control of or under common control with the corporation. (3) "Agent Member" shall mean the member of the Securities Depository that will act on behalf of a Bidder and is identified as such in such Bidder's Purchaser's Letter. (4) "Auction" shall mean the periodic operation of the procedures set forth in this paragraph 10(B). 31 (5) "Auction Date" shall mean the Business Day next preceding a Dividend Payment Date. (6) "Available Series A MAPS" shall have the meaning specified in subparagraph (d)(1) of this paragraph 10(B). (7) "Bid" and "Bids" shall have the respective meanings specified in subparagraph (b)(1) of this paragraph 10(B). (8) "Bidder" and "Bidders" shall have the respective meanings specified in subparagraph (b)(1) of this paragraph 10(B). (9) "Broker-Dealer" shall mean any broker-dealer, or other entity permitted by law to perform the functions required of a Broker-Dealer in this paragraph 10(B), that is a member of, or a participant in, the Securities Depository, has been selected by the corporation and has entered into a Broker- Dealer Agreement with the Auction Agent that remains effective. (10) "Broker-Dealer Agreement" shall mean an agreement between the Auction Agent and a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the procedures specified in this paragraph 10(B). (11) "Existing Holder", when used with respect to Series A MAPS, shall mean a Person who has signed a Purchaser's Letter and is listed as the beneficial owner of such Series A MAPS in the records of the Auction Agent. (12) "Hold Order" and "Hold Orders" shall have the respective meanings specified in subparagraph (b)(1) of this paragraph 10(B). (13) "Maximum Rate", on any Auction Date, shall mean the product of the "AA" Composite Commercial Paper Rate and the "AA" Rate Multiple. (14) "Order" and "Orders" shall have the respective meanings specified in subparagraph (b)(1) of this paragraph 10(B). (15) "Outstanding" shall mean, as of any date, Series A MAPS theretofore issued by the corporation except, without duplication, (i) any Series A MAPS theretofore cancelled or delivered to the Auction Agent for cancellation or redeemed by the corporation or as to which a notice of redemption shall have been given by the corporation, (ii) any Series A MAPS as to which the corporation or any Affiliate thereof shall be an Existing Holder and (iii) any Series A MAPS represented by any certificate in lieu of which a new certificate has been executed and delivered by the corporation. (16) "Person" shall mean and include an individual, a partnership, a corporation, a trust, an unincorporated association, a joint venture or other entity or a government or any agency or political subdivision thereof. (17) "Potential Holder" shall mean any Person, including any Existing Holder, (i) who shall have executed a Purchaser's Letter and (ii) who may be interested in acquiring shares of Series A MAPS (or, in the case of an Existing Holder, additional shares of Series A MAPS). 32 (18) "Purchaser's Letter" shall mean a letter addressed to the corporation, the Auction Agent, a Broker-Dealer and an Agent Member in which a Person agrees, among other things, to offer to purchase, purchase, offer to sell and/or sell shares of Series A MAPS as set forth in this paragraph 10(B). (19) "Securities Depository" shall mean The Depository Trust Company and its successors and assigns or any other securities depository selected by the corporation which agrees to follow the procedures required to be followed by such securities depository in connection with Series A MAPS. (20) "Sell Order" and "Sell Orders" shall have the respective meanings specified in subparagraph (b)(1) of this paragraph 10(B). (21) "Submission Deadline" shall mean 12:30 P.M., New York City time, on any Auction Date or such other time on any Auction Date by which Broker-Dealers are required to submit Orders to the Auction Agent as specified by the Auction Agent from time to time. (22) "Submitted Bid" shall have the meaning specified in subparagraph (d)(1) of this paragraph 10(B). (23) "Submitted Hold Order" shall have the meaning specified in subparagraph (d)(1) of this paragraph 10(B). (24) "Submitted Order" shall have the meaning specified in subparagraph (d)(1) of this paragraph 10(B). (25) "Submitted Sell Order" shall have the meaning specified in subparagraph (d)(1) of this paragraph 10(B). (26) "Sufficient Clearing Bids" shall have the meaning specified in subparagraph (d)(1) of this paragraph 10(B). (27) "Winning Bid Rate" shall have the meaning specified in subparagraph (d)(1) of this paragraph 10(B). (b) Orders by Existing Holders and Potential Holders. (1) On or prior to the Submission Deadline on each Auction Date: (i) each Existing Holder may submit to a Broker- Dealer information as to: (A) the number of Outstanding Series A MAPS, if any, held by such Existing Holder which such Existing Holder desires to continue to hold without regard to the Applicable Rate for the next succeeding Dividend Period; (B) the number of Outstanding Series A MAPS, if any, that such Existing Holder desires to continue to hold if the Applicable Rate for the next succeeding Dividend Period shall not be less than the rate per annum specified by such Existing Holder; and/or 33 (C) the number of Outstanding Series A MAPS, if any, held by such Existing Holder which such Existing Holder offers to sell without regard to the Applicable Rate for the next succeeding Dividend Period; and (ii) one or more Broker-Dealers, using lists of Potential Holders, shall in good faith for the purpose of conducting a competitive Auction in a commercially reasonable manner, contact Potential Holders, including Persons that are not Existing Holders, on such lists to determine the number of shares, if any, of Series A MAPS which each such Potential Holder offers to purchase if the Applicable Rate for the next succeeding Dividend Period shall not be less than the rate per annum specified by such Potential Holder. For the purposes hereof, the communication to a Broker-Dealer of information referred to in clause (i)(A), (i)(B), (i)(C) or (ii) of this subparagraph (1) is hereinafter referred to as an "Order" and collectively as "Orders" and each Existing Holder and each Potential Holder placing an Order is hereinafter referred to as a "Bidder" and collectively as "Bidders"; an Order containing the information referred to in clause (i)(A) of this subparagraph (1) is hereinafter referred to as a "Hold Order" and collectively as "Hold Orders"; an Order containing the information referred to in clause (i)(B) or (ii) of this subparagraph (1) is hereinafter referred to as a "Bid" and collectively as "Bids"; and an Order containing the information referred to in clause (i)(C) of this subparagraph (1) is hereinafter referred to as a "Sell Order" and collectively as "Sell Orders". (2) (i) A Bid by an Existing Holder shall constitute an irrevocable offer to sell: (A) the number of Outstanding Series A MAPS specified in such Bid if the Applicable Rate determined on such Auction Date shall be less than the rate specified therein; or (B) such number or a lesser number of Outstanding Series A MAPS to be determined as set forth in clause (iv) of subparagraph (e)(l) of this paragraph 10(B) if the Applicable Rate determined on such Auction Date shall be equal to the rate specified therein; or (C) a lesser number of Outstanding Series A MAPS to be determined as set forth in clause (iii) of subparagraph (e)(2) of this paragraph 10(B) if the rate specified therein shall be higher than the Maximum Rate and Sufficient Clearing Bids do not exist. (ii) a Sell Order by an Existing Holder shall constitute an irrevocable offer to sell: (A) the number of Outstanding Series A MAPS specified in such Sell Order; or (B) such number or a lesser number of Outstanding Series A MAPS as set forth in clause (iii) of subparagraph (2)(e) of this paragraph 10(B) if Sufficient Clearing Bids do not exist. (iii) A Bid by a Potential Holder shall constitute an irrevocable offer to purchase: 34 (A) the number of Outstanding Series A MAPS specified in such Bid if the Applicable Rate determined on such Auction Date shall be higher than the rate specified therein; or (B) such number or a lesser number of Outstanding Series A MAPS as set forth in clause (v) of subparagraph (e)(1) of this paragraph 10(B) if the Applicable Rate determined on such Auction Date shall be equal to the rate specified therein. (c) Submission of Orders by Broker-Dealers to Auction Agent. (1) Each Broker-Dealer shall submit in writing to the Auction Agent prior to the Submission Deadline on each Auction Date all Orders obtained by such Broker-Dealer and specifying with respect to each Order: (i) the name of the Bidder placing such Order; (ii) the aggregate number of shares of Series A MAPS that are the subject of such Order; (iii) to the extent that such Bidder is an Existing Holder: (A) the number of shares, if any, of Series A MAPS subject to any Hold Order placed by such Existing Holder; (B) the number of shares, if any, of Series A MAPS subject to any Bid placed by such Existing Holder and the rate specified in such Bid; and (C) the number of shares, if any, of Series A MAPS subject to any Sell Order placed by such Existing Holder; and (iv) to the extent such Bidder is a Potential Holder, the rate and number of shares specified in such Potential Holder's Bid. (2) If any rate specified in any Bid contains more than three figures to the right of the decimal point, the Auction Agent shall round such rate up to the next highest one thousandth (.001) of 1%. (3) If an Order or Orders covering all of the Outstanding Series A MAPS held by an Existing Holder is not submitted to the Auction Agent prior to the Submission Deadline, the Auction Agent shall deem a Hold Order to have been submitted on behalf of such Existing Holder covering the number of Outstanding Series A MAPS held by such Existing Holder and not subject to Orders submitted to the Auction Agent. (4) If one or more Orders covering in the aggregate more than the number of Outstanding Series A MAPS held by an Existing Holder are submitted to the Auction Agent, such Orders shall be considered valid as follows and in the following order of priority: (i) all Hold Orders shall be considered valid, but only up to and including in the aggregate the number of Outstanding Series A MAPS held by such Existing Holder, and, solely for purposes of allocating compensation among the Broker-Dealers submitting Hold Orders, if the 35 number of Series A MAPS subject to such Hold Orders exceeds the number of Outstanding Series A MAPS held by such Existing Holder, the number of shares subject to each such Hold Order shall be reduced pro rata to cover the number of Outstanding Series A MAPS held by such Existing Holder; (ii) (A) any Bid shall be considered valid up to and including the excess of the number of Outstanding Series A MAPS held by such Existing Holder over the number of Series A MAPS subject to any Hold Orders referred to in clause (i) above; (B) subject to subclause (A), if more than one Bid with the same rate is submitted on behalf of such Existing Holder and the number of Outstanding Series A MAPS subject to such Bids is greater than such excess, such Bids shall be considered valid up to and including the amount of such excess, and, solely for purposes of allocating compensation among the Broker-Dealers submitting Bids with the same rate, the number of Series A MAPS subject to each Bid with the same rate shall be reduced pro rata to cover the number of Series A MAPS equal to such excess; (C) subject to subclause (A), if more than one Bid with different rates is submitted on behalf of such Existing Holder, such Bids shall be considered valid in the ascending order of their respective rates up to the amount of such excess; and (D) in any such event the number, if any, of such Outstanding Series A MAPS subject to Bids not valid under this clause (ii) shall be treated as the subject of a Bid by a Potential Holder at the rate specified therein; and (iii) all Sell Orders shall be considered valid up to and including the excess of the number of Outstanding Series A MAPS held by such Existing Holder over the sum of the shares of Series A MAPS subject to Hold Orders referred to in clause (i) above and valid Bids by such Existing Holder referred to in clause (ii) above. (5) If more than one Bid is submitted on behalf of any Potential Holder, each Bid submitted shall be a separate Bid with the rate and number of shares therein specified. (d) Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate. (1) Not earlier than the Submission Deadline on each Auction Date, the Auction Agent shall assemble all Orders submitted or deemed submitted to it by the Broker-Dealers (each such Order as submitted or deemed submitted by a Broker-Dealer being hereinafter referred to as a "Submitted Hold Order", a "Submitted Bid" or a "Submitted Sell Order", as the case may be, or as a "Submitted Order") and shall determine: (i) the excess of the total number of Outstanding Series A MAPS over the number of Outstanding Series A MAPS that are the subject of Submitted Hold Orders (such excess being hereinafter referred to as the "Available Series A MAPS"); (ii) from the Submitted Orders whether: (A) the number of Outstanding Series A MAPS that are the subject of Submitted Bids by Potential Holders specifying one or more rates equal to or lower than the Maximum Rate; 36 exceeds or is equal to the sum of: (B) the number of Outstanding Series A MAPS that are the subject of Submitted Bids by Existing Holders specifying one or more rates higher than the Maximum Rate, and (C) the number of Outstanding Series A MAPS that are subject to Submitted Sell Orders (in the event of such excess or such equality (other than because the number of Series A MAPS in subclauses (B) and (C) above is zero because all of the Outstanding Series A MAPS are the subject of Submitted Hold Orders), such Submitted Bids in clause (A) above being hereinafter referred to collectively as "Sufficient Clearing Bids"); and (iii) if Sufficient Clearing Bids exist, the lowest rate specified in the Submitted Bids (the "Winning Bid Rate") which if: (A) (I) each Submitted Bid from Existing Holders specifying such lowest rate and (II) all other Submitted Bids from Existing Holders specifying lower rates were rejected, thus entitling such Existing Holders to continue to hold the shares of Series A MAPS that are the subject of such Submitted Bids; and (B) (I) each Submitted Bid from Potential Holders specifying such lowest rate and (II) all other Submitted Bids from Potential Holders specifying lower rates were accepted, would result in such Existing Holders continuing to hold an aggregate number of Outstanding Series A MAPS which, when added to the number of Outstanding Series A MAPS to be purchased by such Potential Holders, would equal not less than the Available Series A MAPS. (2) Promptly after the Auction Agent has made the determinations pursuant to subparagraph (1) of this paragraph 10(B)(d), the Auction Agent shall advise the corporation of the "AA" Composite Commercial Paper Rate and the Maximum Rate on the Auction Date and, based on such determinations, the Applicable Rate for the next succeeding Dividend Period as follows: (i) if Sufficient Clearing Bids exist, that the Applicable Rate for the next succeeding Dividend Period shall be equal to the Winning Bid Rate so determined; (ii) if Sufficient Clearing Bids do not exist (other than because all of the Outstanding Series A MAPS are the subject of Submitted Hold Orders), that the Applicable Rate for the next succeeding Dividend Period shall be equal to the Maximum Rate; or (iii) if all of the Outstanding Series A MAPS are the subject of Submitted Hold Orders, that the Applicable Rate for the next succeeding Dividend Period therefor shall be equal to 59% of the "AA" Composite Commercial Paper Rate. 37 (e) Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and Allocation of Shares. Existing Holders shall continue to hold Series A MAPS that are the subject of Submitted Hold Orders, and, based on the determinations made pursuant to subparagraph (d)(1) of this paragraph 10(B), the Submitted Bids and Submitted Sell Orders shall be accepted or rejected and the Auction Agent shall take such other action as set forth below: (1) If Sufficient Clearing Bids have been made, all Submitted Sell Orders shall be accepted and, subject to the provisions of subparagraphs (4) and (5) of this paragraph 10(B)(e), Submitted Bids shall be accepted or rejected as follows in the following order of priority and all other Submitted Bids shall be rejected: (i) Existing Holders' Submitted Bids specifying any rate that is higher than the Winning Bid Rate shall be accepted, thus requiring each such Existing Holder to sell the Series A MAPS that are the subject of such Submitted Bids; (ii) Existing Holders' Submitted Bids specifying any rate that is lower than the Winning Bid Rate shall be rejected, thus entitling each such Existing Holder to continue to hold the shares of Series A MAPS that are the subject of such Submitted Bids; (iii) Potential Holders' Submitted Bids specifying any rate that is lower than the Winning Bid Rate shall be accepted; (iv) Each Existing Holder's Submitted Bid specifying a rate that is equal to the Winning Bid Rate shall be rejected, thus entitling such Existing Holder to continue to hold the Series A MAPS that are the subject of such Submitted Bid, unless the number of Outstanding Series A MAPS subject to all such Submitted Bids shall be greater than the number of Series A MAPS ("remaining shares") equal to the excess of the Available Series A MAPS over the number of Series A MAPS subject to Submitted Bids described in clauses (ii) and (iii) of this subparagraph (1), in which event the Submitted Bid of such Existing Holder shall be accepted in part, and such Existing Holder shall be required to sell Series A MAPS subject to such Submitted Bid, but only in an amount equal to the difference between (A) the number of Outstanding Series A MAPS then held by such Existing Holder subject to such Submitted Bid and (B) the number of Series A MAPS obtained by multiplying the number of remaining shares by a fraction the numerator of which shall be the number of Outstanding Series A MAPS held by such Existing Holder subject to such Submitted Bids and the denominator of which shall be the aggregate number of Outstanding Series A MAPS subject to such Submitted Bids made by all such Existing Holders that specified a rate equal to the Winning Bid Rate; and (v) Each Potential Holder's Submitted Bid specifying a rate that is equal to the Winning Bid Rate shall be accepted but only in an amount equal to the number of Series A MAPS obtained by multiplying the difference between the Available Series A MAPS and the number of Series A MAPS subject to Submitted Bids described in clauses (ii), (iii) and (iv) of this subparagraph (1) by a fraction the numerator of which shall be the number of Outstanding Series A MAPS subject to such Submitted Bid and the denominator of which shall be the sum of the number of Outstanding Series A MAPS subject to such Submitted Bids made by all such Potential Holders that specified rates equal to the Winning Bid Rate. 38 (2) If Sufficient Clearing Bids have not been made (other than because all of the Outstanding Series A MAPS are the subject of Submitted Hold Orders), subject to the provisions of subparagraphs (4) and (5) of this paragraph 10(B)(e), Submitted Orders shall be accepted or rejected as follows in the following order of priority and all other Submitted Bids shall be rejected: (i) Existing Holders' Submitted Bids specifying any rate that is equal to or lower than the Maximum Rate shall be rejected, thus entitling such Existing Holder to continue to hold the Series A MAPS that are the subject of such Submitted Bids; (ii) Potential Holders' Submitted Bids specifying any rate that is equal to or lower than the Maximum Rate shall be accepted; and (iii) Each Existing Holder's Submitted Bid specifying any rate that is higher than the Maximum Rate and the Submitted Sell Order of each Existing Holder shall be accepted, but in both cases only in an amount equal to the difference between (A) the number of Outstanding Series A MAPS then held by such Existing Holder subject to such Submitted Bid or Submitted Sell Order and (B) the number of Series A MAPS obtained by multiplying the difference between the Available Series A MAPS and the aggregate number of Series A MAPS subject to Submitted Bids described in clauses (i) and (ii) of this subparagraph (2) by a fraction the numerator of which shall be the number of Outstanding Series A MAPS held by such Existing Holder subject to such Submitted Bid or Submitted Sell Order and the denominator of which shall be the number of Outstanding Series A MAPS subject to all such Submitted Bids and Submitted Sell Orders. (3) If all of the Outstanding Series A MAPS are the subject of Submitted Hold Orders, all Submitted Bids shall be rejected. (4) If, as a result of the procedures described in subparagraph (1) or (2) of this paragraph 10(B)(e), any Existing Holder would be entitled or required to sell, or any Potential Holder would be entitled or required to purchase, a fraction of a Series A MAPS on any Auction Date, the Auction Agent shall, in such manner as, in its sole discretion, it shall determine, round up or down the number of Series A MAPS to be purchased or sold by any Existing Holder or Potential Holder on such Auction Date so that the number of shares purchased or sold by each Existing Holder or Potential Holder on such Auction Date shall be whole shares of Series A MAPS. (5) If, as a result of the procedures described in subparagraph (1) of this paragraph 10(B)(e), any Potential Holder would be entitled or required to purchase less than a whole share of Series A MAPS on any Auction Date, the Auction Agent shall, in such manner as, in its sole discretion, it shall determine, allocate shares for purchase among Potential Holders so that only whole shares of Series A MAPS are purchased on such Auction Date by any Potential Holder, even if such allocation results in one or more of such Potential Holders not purchasing shares of Series A MAPS on such Auction Date. (6) Based on the results of each Auction, the Auction Agent shall determine the aggregate number of Series A MAPS to be purchased and the aggregate number of Series A MAPS to be sold by Potential Holders and Existing Holders on whose behalf each Broker-Dealer submitted Bids or Sell Orders and, with respect to each Broker-Dealer, to the extent that such aggregate number of shares to be purchased and such aggregate number of shares to be sold differ, determine to which other Broker-Dealer or Broker-Dealers acting for one or more purchasers such Broker- Dealer shall deliver, or from which other Broker-Dealer or Broker- Dealers acting for one or more sellers such Broker-Dealer shall receive, as the case may be, shares of Series A MAPS. 39 (f) Miscellaneous. (1) The Board of Directors may interpret the provisions of this paragraph 10(B) to resolve any inconsistency or ambiguity which may arise or be revealed in connection with the Auction Procedures provided for herein. (2) During the Initial Dividend Period and so long as the Applicable Rate is based on the results of an Auction, an Existing Holder (i) may sell, transfer or otherwise dispose of shares of Series A MAPS only pursuant to a Bid or Sell Order in accordance with the procedures described in this paragraph 10(B) or to or through a Broker-Dealer (who shall only sell Series A MAPS to a Person that has delivered a signed copy of a Purchaser's Letter to the Auction Agent) or to a Person that has delivered a signed copy of a Purchaser's Letter to the Auction Agent, provided that in the case of all transfers other than pursuant to Auctions such Existing Holder or its Broker- Dealer advises the Auction Agent of such transfer, and (ii) shall have the ownership of the Series A MAPS held by it maintained in book entry form by the Securities Depository in the account of its Agent Member, which in turn will maintain records of such Existing Holder's beneficial ownership. (3) Neither the corporation nor any affiliate thereof may submit an Order in any Auction except as set forth in the next sentence. Any Broker-Dealer that is an affiliate of the corporation may submit Orders in Auctions but only if such Orders are not for its own account, except that if such affiliated Broker- Dealer holds Series A MAPS for its own account, it must submit a Sell Order in the next Auction with respect to such shares. (4) Commencing with the first day of the first Dividend Period after an Auction Termination Event has occurred, the corporation, at its option, may perform any of the functions to be performed by the Auction Agent set forth in paragraph 10(A) of this Article III. 11.(A) The third series of preferred shares shall be designated "Market Auction Preferred Shares, Series B" (hereinafter referred to as "Series B MAPS"), and the number of authorized shares constituting Series B MAPS is 750. The relative rights and preferences of Series B MAPS shall be as follows: (a) The Holders (as defined in subparagraph (d) of this paragraph 11(A)) shall be entitled to receive, when and as declared by the Board of Directors out of funds legally available therefor, cash dividends thereon at the Applicable Rate (as defined in subparagraph (2)(i) of this paragraph 11(A)(a)) per annum and no more, determined as set forth below, payable on the respective dates set forth below. (1) (i) Dividends on Series B MAPS, at the Applicable Rate, shall accrue from the Date of Original Issue (as defined in subparagraph (d) of this paragraph 11(A)), and shall be payable commencing on Thursday, January 9, 1986 and on each day thereafter which is the seventh Thursday after Thursday, January 9, 1986 (each such date being herein referred to as the "Normal Dividend Payment Date") except that (A) if such Normal Dividend Payment Date is not a Business Day, then the Dividend Payment Date (as hereinafter defined) shall be the preceding Tuesday if both such Tuesday and the following Wednesday are Business Days; (B) or if the Friday following such Normal Dividend Payment Date is not a Business Day, then the Dividend Payment Date shall be the Wednesday preceding such Normal Dividend Payment Date if both such Wednesday and such Normal Dividend Payment Date are Business days; or (C) if such Normal Dividend Payment Date and either such preceding Tuesday or Wednesday are not Business Days or if such Friday and such Wednesday are not Business Days, then the Dividend Payment 40 Date shall be the first Business Day preceding the Normal Dividend Payment Date that is next succeeded by a day that is also a Business Day. Although any particular Dividend Payment Date shall not occur on the originally scheduled Normal Dividend Payment Date because of the exceptions discussed above, the next succeeding Dividend Payment Date shall be, subject to such exceptions, the seventh Thursday following the originally designated Normal Dividend Payment Date for the prior Dividend Period (as defined in subparagraph (2)(i) of this paragraph 11(A)); provided that the Board of Directors, in the event of a change in law lengthening the minimum holding period (currently found in Section 246(c) of the Code (as defined in subparagraph (d) of this paragraph 11(A)) required for taxpayers to be entitled to the dividends received deduction on preferred stock held by non-affiliated corporations (currently found in Section 243(a) of the Code), shall adjust the period of time between Dividend Payment Dates so as, subject to clauses (A) through (C) of this subparagraph (a)(1)(i), to adjust uniformly the number of days (such number of days without giving effect to such clauses (A) through (C) being hereinafter referred to as "dividend period days") in Dividend Periods commencing after the date of such change in law to equal or exceed the then current minimum holding period; provided that the number of dividend period days shall not exceed by more than nine days the length of such then current minimum holding period and shall be evenly divisible by seven, and the maximum number of dividend period days in no event shall exceed 98 days (each date of payment of dividends being herein referred to as a "Dividend Payment Date" and the first Dividend Payment Date being herein referred to as the "Initial Dividend Payment Date"). Upon any such change in the number of dividend period days as a result of a change in law, the corporation shall publish notice of such change in a newspaper of general circulation in The City of New York, New York, which carries financial news and shall mail notice of such change by first class mail, postage prepaid, to each Holder at such Holder's address as the same appears on the stock transfer books of the corporation. (ii) As long as the Applicable Rate is based on the results of an Auction (as defined in subparagraph (d) of this paragraph 11(A), the corporation shall pay to the Auction Agent (as defined in subparagraph (d) of this paragraph 11(A)) not later than 12:00 Noon, New York City time, on the Business Day next preceding each Dividend Payment Date, an aggregate amount of funds available on the next Business Day in The City of New York, New York, equal to the dividends to be paid to all Holders on such Dividend Payment Date. All such moneys shall be held in trust for the payment of dividends on shares of Series B MAPS for the benefit of the Holders by the Auction Agent and paid as set forth in subparagraph (1)(iii) of this paragraph 11(A)(a). (iii) For purposes of determining to whom dividends shall be paid, each dividend shall be payable to the Holders as their names appear on the stock transfer books of the corporation on the Business Day next preceding the Dividend Payment Date thereof. Dividends in arrears for any past Dividend Period may be declared and paid at any time, without reference to any regular Dividend Payment Date, to the Holders as their names appear on the stock transfer books of this corporation on such date, not exceeding 15 days preceding the payment date thereof, as may be fixed by the Board of Directors. (2) (i) The dividend rate on Series B MAPS shall be 5.625% per annum during the period from and after the Date of Original Issue to and including the Initial Dividend Payment Date (the "Initial Dividend Period"). Commencing on the Initial Dividend Payment Date, the dividend rate on Series B MAPS for each subsequent dividend period (herein referred to as a "Subsequent Dividend Period" and collectively as "Subsequent Dividend Periods"; and the Initial Dividend Period or any Subsequent Dividend Period being herein referred to as a "Dividend Period" and 41 collectively as "Dividend Periods") thereafter, which subsequent Dividend Periods shall commence on the day that is the last day of the preceding Dividend Period and shall end on and include the next succeeding Dividend Payment Date, shall be equal to the rate per annum that results from implementation of the Auction Procedures (as defined in subparagraph (d) of this paragraph 11(A)); provided that if an Auction Termination Event (as defined in subparagraph (d) of this paragraph 11(A)) shall have occurred prior to the first day of each Subsequent Dividend Period, the dividend rate for each Subsequent Dividend Period shall be a rate per annum (the "Alternate Rate") equal to 150% of the "AA" Composite Commercial Paper Rate (as defined in subparagraph (d) of this paragraph 11(A)) on the first day of such Subsequent Dividend Period. The rate per annum at which dividends are payable on shares of Series B MAPS for any Dividend Period is herein referred to as the "Applicable Rate". (ii) The amount of dividends per share payable on Series B MAPS for any Dividend Period or part thereof shall be computed by multiplying the Applicable Rate for such Dividend Period by a fraction the numerator of which shall be the number of days in such Dividend Period or part thereof (calculated by counting the first day thereof but excluding the last day thereof) such share was outstanding and the denominator of which shall be 360 and applying the rate obtained against $100,000 per share of Series B MAPS. For purposes of this subparagraph (2)(ii), shares of Series B MAPS shall be treated as outstanding from the Date of Original Issue. (iii) The Applicable Rate for each Subsequent Dividend Period shall be published not later than the fifth Business Day next succeeding the first day of such Subsequent Dividend Period in a newspaper of general circulation in The City of New York, New York, which carries financial news. (b) (1) (i) (A) Series B MAPS may be redeemed, at the option of the corporation, as a whole or from time to time in part, on the second Business Day preceding any Dividend Payment Date at a redemption price of: (I) $101,500 per share if redeemed during the twelve months ending November 14, 1986; (II) $101,000 per share if redeemed during the twelve months ending November 14, 1987; (III) $100,500 per share if redeemed during the twelve months ending November 14, 1988; and (IV) $100,000 per share if redeemed thereafter; plus, in each case, an amount equal to accrued and unpaid dividends thereon (whether or not earned or declared) to the date fixed for redemption. (B) If fewer than all of the outstanding Series B MAPS are to be redeemed pursuant to this subparagraph (b)(1)(i), the number of shares to be redeemed shall be determined by the Board of Directors, and such shares shall be redeemed pro rata from the Holders in proportion to the number of such shares held by such Holders (with adjustments to avoid redemption of fractional shares). 42 (ii) Series B MAPS may be redeemed, at the option of the corporation, as a whole but not in part, on any Dividend Payment Date at a redemption price of $100,000 per share, plus an amount equal to accrued and unpaid dividends thereon (whether or not earned or declared) to the date fixed for redemption, if the Applicable Rate fixed for the Dividend Period ending on such Dividend Payment Date shall equal or exceed the "AA" Composite Commercial Paper Rate on the date of determination of such Applicable Rate. (2) If the corporation shall redeem Series B MAPS pursuant to this paragraph 11(A)(b), notice of such redemption shall be mailed by first class mail, postage prepaid, to each Holder of the shares to be redeemed, at such Holder's address as the same appears on the stock transfer books of the corporation. Such notice shall be so mailed not less than 30 or more than 45 days prior to the date fixed for redemption. Each such notice shall state: (v) the redemption date, (w) the number of shares of Series B MAPS to be redeemed, (x) the redemption price, (y) the place or places where certificates for such shares of Series B MAPS are to be surrendered for payment of the redemption price and (z) that dividends on the shares to be redeemed will cease to accrue on such redemption date. If fewer than all shares held by any Holder are to be redeemed, the notice mailed to such Holder shall also specify the number of shares to be redeemed from such Holder. (3) If notice of redemption has been given under subparagraph (2) of this paragraph 11(A)(b), from and after the redemption date for the shares of Series B MAPS called for redemption (unless default shall be made by the corporation in providing money for the payment of the redemption price of the shares so called for redemption) dividends on Series B MAPS so called for redemption shall cease to accrue and said shares shall no longer be deemed to be outstanding, and all rights of the Holders thereof as shareholders of the corporation (except the right to receive the redemption price) shall cease. Upon surrender in accordance with said notice of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Board of Directors shall so require and the notice shall so state), the redemption price set forth above shall be payable by the Auction Agent to the Holders of shares of Series B MAPS subject to redemption on the redemption date. In case fewer than all of the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares without cost to the Holder thereof. (4) On the Business Day next preceding a redemption date, the corporation shall irrevocably deposit with the Auction Agent for each share of Series B MAPS to be redeemed on such date an amount equal to the applicable redemption price plus an amount equal to accrued and unpaid dividends (whether or not earned or declared) on such share to the date fixed for redemption, in funds available on the redemption date in The City of New York, New York. All such moneys shall be irrevocably deposited for the payment of the redemption price of shares of Series B MAPS to be so redeemed and shall be held in trust for the benefit of the Holders whose shares are to be redeemed by the Auction Agent and applied as set forth herein. (5) Any moneys held in trust for payment of the appropriate redemption price to be paid to Holders of shares of Series B MAPS subject to redemption on any redemption date remaining unclaimed at the end of three years from such redemption date shall be repaid to the corporation upon the written request of the corporation, after which the Holders of shares of Series B MAPS so called for redemption but for which moneys remain unclaimed shall look only to the corporation for the payment thereof. (6) Shares of Series B MAPS redeemed, purchased or otherwise reacquired, or surrendered to the corporation shall be retired and not reissued as Series B MAPS, but shall have the 43 status of authorized and unissued preferred shares of the corporation that may be reissued as part of a new or different series of preferred shares. (c) (1) The amount referred to in paragraph 2(c) of this Article III as payable in the event of voluntary or involuntary liquidation of the corporation shall be $100,000 per share of Series B MAPS. Accordingly, in the event of the voluntary or involuntary liquidation of the corporation the "preferential amount" which the Holders of Series B MAPS shall be entitled to receive out of the assets of the corporation pursuant to paragraph 3(c) of this Article III is $100,000 per share plus all accrued and unpaid dividends thereon. (2) The Holders of Series B MAPS shall have no voting rights except as provided by Washington statutes or by this Article III. (3) For so long as any shares of Series B MAPS are outstanding, the Auction Agent, duly appointed by the corporation to so act, shall be in each case a commercial bank, trust company or other financial institution independent of the corporation and its affiliates (which, however, may engage or have engaged in business transactions with the corporation or its affiliates) and at no time shall the corporation or its affiliates act as the Auction Agent in connection with the Auction Procedures. If the Auction Agent resigns or for any reason its appointment is terminated during any period that any shares of Series B MAPS are outstanding, the Board of Directors of the corporation shall promptly thereafter appoint another qualified commercial bank, trust company or financial institution to act as the Auction Agent. (d) As used in this paragraph 11(A) of Article III, the following terms shall have the following meanings (with terms defined in the singular having comparable meanings when used in the plural and vice versa), unless the context otherwise requires: (1) "`AA' Composite Commercial Paper Rate", on any date, shall mean (i) the interest equivalent of the 60-day rate on commercial paper placed on behalf of issuers whose corporate bonds are rated "AA" by Standard & Poor's Corporation or its successor, or the equivalent of such rating by another rating agency, as made available on a discount basis or otherwise by the Federal Reserve Bank of New York for the immediately preceding Business Day prior to such date; or (ii) in the event that the Federal Reserve Bank of New York does not make available such a rate, then the arithmetic average of the interest equivalent of the 60-day rate on commercial paper placed on behalf of such issuers, as quoted on a discount basis or otherwise by the Commercial Paper Dealers to the Auction Agent for the close of business of the immediately preceding Business Day prior to such date. If any Commercial Paper Dealer does not quote a rate required to determine the "AA" Composite Commercial Paper Rate, the "AA" Composite Commercial Paper Rate shall be determined on the basis of the quotation or quotations furnished by the remaining Commercial Paper Dealer and any Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers selected by the corporation to provide such rate or rates not being supplied by any Commercial Paper Dealer or, if the corporation does not select any such Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers, by the remaining Commercial Paper Dealer. If the Board of Directors shall make the adjustment referred to in the proviso of the first sentence of subparagraph (1)(i) of paragraph 11(A)(a), then (i) if the dividend period days shall be 70 or more days but fewer than 85 days, such rate shall be the arithmetic average of the interest equivalent of the 60-day and 90-day rates on such commercial paper, and (ii) if the dividend period days shall be 85 or more days but 98 or fewer days, such rate shall be the interest equivalent of the 90-day rate on such commercial paper. For purposes of this definition, the "interest equivalent" of a rate stated on a discount basis (a "discount rate") for commercial paper of a given days' maturity shall be equal to the quotient (rounded upwards to the next higher one-thousandth (.001) of 1%) of (A) the discount rate divided by (B) the difference between 44 (x) 1.00 and (y) a fraction the numerator of which shall be the product of the discount rate times the number of days in which such commercial paper matures and the denominator of which shall be 360. (2) "Alternate Rate" shall have the meaning specified in subparagraph (a)(2)(i) of this paragraph 11(A). (3) "Applicable Rate" shall have the meaning specified in subparagraph (a)(2)(i) of this paragraph 11(A). (4) "Auction" shall mean each periodic operation of the Auction Procedures. (5) "Auction Agent" shall mean a bank or trust company appointed as such by the corporation. (6) "Auction Procedures" shall mean the procedures for conducting Auctions set forth in paragraph 11(B) hereof. (7) "Auction Termination Event" shall mean the first failure by the corporation to pay to the Auction Agent, not later than 12:00 Noon, New York City time, (A) on the Business Day next preceding any Dividend Payment Date, in funds available on such Dividend Payment Date in The City of New York, New York, the full amount of any dividend (whether or not earned or declared) to be paid on such Dividend Payment Date on any Series B MAPS or (B) on the Business Day next preceding any redemption date in the case of a redemption pursuant to subparagraph (b) of this paragraph 10(A), in funds available on such redemption date in The City of New York, New York, the redemption price to be paid on such redemption date of any Series B MAPS after notice of redemption is given pursuant to subparagraph (b) of this paragraph 11(A). (8) "Business Day" shall mean a day on which the New York Stock Exchange is open for trading and which is neither a Saturday, Sunday or other day on which banks in The City of New York, New York are authorized or required by law to close. (9) "Code" shall mean the Internal Revenue Code of 1954, as amended. (10) "Commercial Paper Dealers" shall mean Goldman, Sachs & Co. and Morgan Stanley & Co. Incorporated, or, in lieu of any thereof, their respective affiliates or successors. (11) "Date of Original Issue" shall mean the date on which the corporation initially issues the Series B MAPS. (12) "Dividend Payment Date" shall have the meaning specified in subparagraph (a)(1)(i) of this paragraph 11(A). (13) "Dividend Period" and "Dividend Periods" shall have the respective meanings specified in subparagraph (a)(2)(i) of this paragraph 11(A). (14) "Holder" shall mean the holder of shares of Series B MAPS as the same appears on the stock transfer books of the corporation. 45 (15) "Initial Dividend Payment Date" shall have the meaning specified in subparagraph (a)(1)(i) of this paragraph 11(A). (16) "Initial Dividend Period" shall have the meaning specified in subparagraph (a)(2)(i) of this paragraph 11(A). (17) "Normal Dividend Payment Date" shall have the meaning specified in subparagraph (a)(1)(i) of this paragraph 11(A). (18) "Series B MAPS" shall mean the series of the Preferred Shares, liquidation preference $100,000 per share, of the corporation designated as its "Market Auction Preferred Shares, Series B." (19) "Subsequent Dividend Period" and "Subsequent Dividend Periods" shall have the respective meanings specified in subparagraph (a)(2)(i) of this paragraph 11(A). (20) "Substitute Commercial Paper Dealer" shall mean any commercial paper dealer that is a leading dealer in the commercial paper market; provided that neither such dealer nor any of its affiliates shall be a Commercial Paper Dealer. (B) (a) Certain Definitions. Capitalized terms not defined in this subparagraph (a) shall have the respective meanings specified in paragraph 11(A) of this Article III. As used in this paragraph 11(B), the following terms shall have the following meanings, unless the context otherwise requires: (1) "Rate Multiple", on any Auction Date, shall mean the percentage determined as set forth below based on the prevailing rating of Series B MAPS in effect at the close of business on the Business Day immediately preceding such Auction Date:
Prevailing Rating Percentage ----------------- ---------- AA/aa or Above 110% A/a 120% BBB/baa 130% Below BBB/baa (includes no rating) 150%
For purposes of this definition, the "prevailing rating" of Series B MAPS shall be (i) AA/aa or Above, if Series B MAPS then have a rating of AA or better by Standard & Poor's Corporation or its successor ("S&P") or aa3 or better by Moody's Investors Service, Inc. or its successor ("Moody's"), or the equivalent of either or both of such ratings by such agencies or a substitute rating agency or substitute rating agencies selected as provided below, (ii) if not AA/aa or Above, then A/a if Series B MAPS then have a rating of A or better and lower than AA-by S&P or a3 or better and lower than aa3 by Moody's or the equivalent of either or both of such ratings by such agencies or a substitute rating agency or substitute rating agencies selected as provided below, (iii) if not AA/aa or Above or A/a, then BBB/baa if Series B MAPS then have a rating of BBB or better and lower than A- by S&P or baa3 or better and lower than a3 by Moody's or the equivalent of either or both of such ratings by such agencies or a substitute rating agency or substitute rating agencies selected as provided below, and (iv) if not AA/aa or Above, A/a or BBB/baa, then Below BBB/baa. The corporation shall take all reasonable action necessary to enable S&P and Moody's to provide a rating for Series B MAPS. If either or both S&P or Moody's shall not make such a rating available, Morgan Stanley & Co. Incorporated or its successor shall select a nationally 46 recognized statistical rating organization or two nationally recognized statistical rating organizations (as that term is used in the rules and regulations of the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended) to act as substitute rating agency or substitute rating agencies, as the case may be. (2) "Affiliate" shall mean any Person known to the Auction Agent to be controlled by, in control of or under common control with the corporation. (3) "Agent Member" shall mean the member of the Securities Depository that will act on behalf of a Bidder and is identified as such in such Bidder's Purchaser's Letter. (4) "Auction" shall mean the periodic operation of the procedures set forth in this paragraph 11(B). (5) "Auction Date" shall mean the Business Day next preceding a Dividend Payment Date. (6) "Available Series B MAPS" shall have the meaning specified in subparagraph (d)(1) of this paragraph 11(B). (7) "Bid" and "Bids" shall have the respective meanings specified in subparagraph (b)(1) of this paragraph 11(B). (8) "Bidder" and "Bidders" shall have the respective meanings specified in subparagraph (b)(1) of this paragraph 11(B). (9) "Broker-Dealer" shall mean any broker-dealer, or other entity permitted by law to perform the functions required of a Broker-Dealer in this paragraph 11(B), that is a member of, or a participant in, the Securities Depository, has been selected by the corporation and has entered into a Broker- Dealer Agreement with the Auction Agent that remains effective. (10) "Broker-Dealer Agreement" shall mean an agreement between the Auction Agent and a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the procedures specified in this paragraph 11(B). (11) "Existing Holder", when used with respect to Series B MAPS, shall mean a Person who has signed a Purchaser's Letter and is listed as the beneficial owner of such Series B MAPS in the records of the Auction Agent. (12) "Hold Order" and "Hold Orders" shall have the respective meanings specified in subparagraph (b)(1) of this paragraph 11(B). (13) "Maximum Rate", on any Auction Date, shall mean the product of the "AA" Composite Commercial Paper Rate and the "AA" Rate Multiple. (14) "Order" and "Orders" shall have the respective meanings specified in subparagraph (b)(1) of this paragraph 11(B). (15) "Outstanding" shall mean, as of any date, Series B MAPS theretofore issued by the corporation except, without duplication, (i) any Series B MAPS theretofore cancelled 47 or delivered to the Auction Agent for cancellation or redeemed by the corporation or as to which a notice of redemption shall have been given by the corporation, (ii) any Series B MAPS as to which the corporation or any Affiliate thereof shall be an Existing Holder and (iii) any Series B MAPS represented by any certificate in lieu of which a new certificate has been executed and delivered by the corporation. (16) "Person" shall mean and include an individual, a partnership, a corporation, a trust, an unincorporated association, a joint venture or other entity or a government or any agency or political subdivision thereof. (17) "Potential Holder" shall mean any Person, including any Existing Holder, (i) who shall have executed a Purchaser's Letter and (ii) who may be interested in acquiring shares of Series B MAPS (or, in the case of an Existing Holder, additional shares of Series B MAPS). (18) "Purchaser's Letter" shall mean a letter addressed to the corporation, the Auction Agent, a Broker-Dealer and an Agent Member in which a Person agrees, among other things, to offer to purchase, purchase, offer to sell and/or sell shares of Series B MAPS as set forth in this paragraph 11(B). (19) "Securities Depository" shall mean The Depository Trust Company and its successors and assigns or any other securities depository selected by the corporation which agrees to follow the procedures required to be followed by such securities depository in connection with Series B MAPS. (20) "Sell Order" and "Sell Orders" shall have the respective meanings specified in subparagraph (b)(1) of this paragraph 11(B). (21) "Submission Deadline" shall mean 12:30 P.M., New York City time, on any Auction Date or such other time on any Auction Date by which Broker-Dealers are required to submit Orders to the Auction Agent as specified by the Auction Agent from time to time. (22) "Submitted Bid" shall have the meaning specified in subparagraph (d)(1) of this paragraph 11(B). (23) "Submitted Hold Order" shall have the meaning specified in subparagraph (d)(1) of this paragraph 11(B). (24) "Submitted Order" shall have the meaning specified in subparagraph (d)(1) of this paragraph 11(B). (25) "Submitted Sell Order" shall have the meaning specified in subparagraph (d)(1) of this paragraph 11(B). (26) "Sufficient Clearing Bids" shall have the meaning specified in subparagraph (d)(1) of this paragraph 11(B). (27) "Winning Bid Rate" shall have the meaning specified in subparagraph (d)(1) of this paragraph 11(B). (b) Orders by Existing Holders and Potential Holders. (1) On or prior to the Submission Deadline on each Auction Date: 48 (i) each Existing Holder may submit to a Broker-Dealer information as to: (A) the number of Outstanding Series B MAPS, if any, held by such Existing Holder which such Existing Holder desires to continue to hold without regard to the Applicable Rate for the next succeeding Dividend Period; (B) the number of Outstanding Series B MAPS, if any, that such Existing Holder desires to continue to hold if the Applicable Rate for the next succeeding Dividend Period shall not be less than the rate per annum specified by such Existing Holder; and/or (C) the number of Outstanding Series B MAPS, if any, held by such Existing Holder which such Existing Holder offers to sell without regard to the Applicable Rate for the next succeeding Dividend Period; and (ii) one or more Broker-Dealers, using lists of Potential Holders, shall in good faith for the purpose of conducting a competitive Auction in a commercially reasonable manner, contact Potential Holders, including Persons that are not Existing Holders, on such lists to determine the number of shares, if any, of Series B MAPS which each such Potential Holder offers to purchase if the Applicable Rate for the next succeeding Dividend Period shall not be less than the rate per annum specified by such Potential Holder. For the purposes hereof, the communication to a Broker- Dealer of information referred to in clause (i)(A), (i)(B), (i)(C) or (ii) of this subparagraph (1) is hereinafter referred to as an "Order" and collectively as "Orders" and each Existing Holder and each Potential Holder placing an Order is hereinafter referred to as a "Bidder" and collectively as "Bidders"; an Order containing the information referred to in clause (i)(A) of this subparagraph (1) is hereinafter referred to as a "Hold Order" and collectively as "Hold Orders"; an Order containing the information referred to in clause (i)(B) or (ii) of this subparagraph (1) is hereinafter referred to as a "Bid" and collectively as "Bids"; and an Order containing the information referred to in clause (i)(C) of this subparagraph (1) is hereinafter referred to as a "Sell Order" and collectively as "Sell Orders". (2) (i) A Bid by an Existing Holder shall constitute an irrevocable offer to sell: (A) the number of Outstanding Series B MAPS specified in such Bid if the Applicable Rate determined on such Auction Date shall be less than the rate specified therein; or (B) such number or a lesser number of Outstanding Series B MAPS to be determined as set forth in clause (iv) of subparagraph (e)(1) of this paragraph 11(B) if the Applicable Rate determined on such Auction Date shall be equal to the rate specified therein; or (C) a lesser number of Outstanding Series B MAPS to be determined as set forth in clause (iii) of subparagraph (e)(2) of this paragraph 11(B) if the rate specified therein shall be higher than the Maximum Rate and Sufficient Clearing Bids do not exist. 49 (ii) a Sell Order by an Existing Holder shall constitute an irrevocable offer to sell: (A) the number of Outstanding Series B MAPS specified in such Sell Order; or (B) such number or a lesser number of Outstanding Series B MAPS as set forth in clause (iii) of subparagraph (e)(2) of paragraph (e) of this paragraph 11(B) if Sufficient Clearing Bids do not exist. (iii) A Bid by a Potential Holder shall constitute an irrevocable offer to purchase: (A) the number of Outstanding Series B MAPS specified in such Bid if the Applicable Rate determined on such Auction Date shall be higher than the rate specified therein; or (B) such number or a lesser number of Outstanding Series B MAPS as set forth in clause (v) of subparagraph (e)(1) of this paragraph 11(B) if the Applicable Rate determined on such Auction Date shall be equal to the rate specified therein. (c) Submission of Orders by Broker-Dealers to Auction Agent. (1) Each Broker-Dealer shall submit in writing to the Auction Agent prior to the Submission Deadline on each Auction Date all Orders obtained by such Broker-Dealer and specifying with respect to each Order: (i) the name of the Bidder placing such Order; (ii) the aggregate number of shares of Series B MAPS that are the subject of such Order; (iii) to the extent that such Bidder is an Existing Holder: (A) the number of shares, if any, of Series B MAPS subject to any Hold Order placed by such Existing Holder; (B) the number of shares, if any, of Series B MAPS subject to any Bid placed by such Existing Holder and the rate specified in such Bid; and (C) the number of shares, if any, of Series B MAPS subject to any Sell Order placed by such Existing Holder; and (iv) to the extent such Bidder is a Potential Holder, the rate and number of shares specified in such Potential Holder's Bid. (2) If any rate specified in any Bid contains more than three figures to the right of the decimal point, the Auction Agent shall round such rate up to the next highest one thousandth (.001) of 1%. 50 (3) If an Order or Orders covering all of the Outstanding Series B MAPS held by an Existing Holder is not submitted to the Auction Agent prior to the Submission Deadline, the Auction Agent shall deem a Hold Order to have been submitted on behalf of such Existing Holder covering the number of Outstanding Series B MAPS held by such Existing Holder and not subject to Orders submitted to the Auction Agent. (4) If one or more Orders covering in the aggregate more than the number of Outstanding Series B MAPS held by an Existing Holder are submitted to the Auction Agent, such Orders shall be considered valid as follows and in the following order of priority: (i) all Hold Orders shall be considered valid, but only up to and including in the aggregate the number of Outstanding Series B MAPS held by such Existing Holder, and, solely for purposes of allocating compensation among the Broker-Dealers submitting Hold Orders, if the number of Series B MAPS subject to such Hold Orders exceeds the number of Outstanding Series B MAPS held by such Existing Holder, the number of shares subject to each such Hold Order shall be reduced pro rata to cover the number of Outstanding Series B MAPS held by such Existing Holder; (ii) (A) any Bid shall be considered valid up to and including the excess of the number of Outstanding Series B MAPS held by such Existing Holder over the number of Series B MAPS subject to any Hold Orders referred to in clause (i) above; (B) subject to subclause (A), if more than one Bid with the same rate is submitted on behalf of such Existing Holder and the number of Outstanding Series B MAPS subject to such Bids is greater than such excess, such Bids shall be considered valid up to and including the amount of such excess, and, solely for purposes of allocating compensation among the Broker-Dealers submitting Bids with the same rate, the number of Series B MAPS subject to each Bid with the same rate shall be reduced pro rata to cover the number of Series B MAPS equal to such excess; (C) subject to subclause (A), if more than one Bid with different rates is submitted on behalf of such Existing Holder, such Bids shall be considered valid in the ascending order of their respective rates up to the amount of such excess; and (D) in any such event the number, if any, of such Outstanding Series B MAPS subject to Bids not valid under this clause (ii) shall be treated as the subject of a Bid by a Potential Holder at the rate specified therein; and (iii) all Sell Orders shall be considered valid up to and including the excess of the number of Outstanding Series B MAPS held by such Existing Holder over the sum of the shares of Series B MAPS subject to Hold Orders referred to in clause (i) above and valid Bids by such Existing Holder referred to in clause (ii) above. (5) If more than one Bid is submitted on behalf of any Potential Holder, each Bid submitted shall be a separate Bid with the rate and number of shares therein specified. (d) Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate. (1) Not earlier than the Submission Deadline on each Auction Date, the Auction Agent shall assemble all Orders submitted or deemed submitted to it by the Broker-Dealers (each such Order as submitted or deemed submitted 51 by a Broker-Dealer being hereinafter referred to as a "Submitted Hold Order", a "Submitted Bid" or a "Submitted Sell Order", as the case may be, or as a "Submitted Order") and shall determine: (i) the excess of the total number of Outstanding Series B MAPS over the number of Outstanding Series B MAPS that are the subject of Submitted Hold Orders (such excess being hereinafter referred to as the "Available Series B MAPS"); (ii) from the Submitted Orders whether: (A) the number of Outstanding Series B MAPS that are the subject of Submitted Bids by Potential Holders specifying one or more rates equal to or lower than the Maximum Rate; exceeds or is equal to the sum of: (B) the number of Outstanding Series B MAPS that are the subject of Submitted Bids by Existing Holders specifying one or more rates higher than the Maximum Rate, and (C) the number of Outstanding Series B MAPS that are subject to Submitted Sell Orders (in the event of such excess or such equality (other than because the number of Series B MAPS in subclauses (B) and (C) above is zero because all of the Outstanding Series B MAPS are the subject of Submitted Hold Orders), such Submitted Bids in clause (A) above being hereinafter referred to collectively as "Sufficient Clearing Bids"); and (iii) if Sufficient Clearing Bids exist, the lowest rate specified in the Submitted Bids (the "Winning Bid Rate") which if: (A) (I) each Submitted Bid from Existing Holders specifying such lowest rate and (II) all other Submitted Bids from Existing Holders specifying lower rates were rejected, thus entitling such Existing Holders to continue to hold the shares of Series B MAPS that are the subject of such Submitted Bids; and (B) (I) each Submitted Bid from Potential Holders specifying such lowest rate and (II) all other Submitted Bids from Potential Holders specifying lower rates were accepted, would result in such Existing Holders continuing to hold an aggregate number of Outstanding Series B MAPS which, when added to the number of Outstanding Series B MAPS to be purchased by such Potential Holders, would equal not less than the Available Series B MAPS. (2) Promptly after the Auction Agent has made the determinations pursuant to subparagraph (i) of this paragraph 11(B)(d), the Auction Agent shall advise the corporation of the 52 "AA" Composite Commercial Paper Rate and the Maximum Rate on the Auction Date and, based on such determinations, the Applicable Rate for the next succeeding Dividend Period as follows: (i) if Sufficient Clearing Bids exist, that the Applicable Rate for the next succeeding Dividend Period shall be equal to the Winning Bid Rate so determined; (ii) if Sufficient Clearing Bids do not exist (other than because all of the Outstanding Series B MAPS are the subject of Submitted Hold Orders), that the Applicable Rate for the next succeeding Dividend Period shall be equal to the Maximum Rate; or (iii) if all of the Outstanding Series B MAPS are the subject of Submitted Hold Orders, that the Applicable Rate for the next succeeding Dividend Period therefor shall be equal to 59% of the "AA" Composite Commercial Paper Rate. (e) Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and Allocation of Shares. Existing Holders shall continue to hold Series B MAPS that are the subject of Submitted Hold Orders, and, based on the determinations made pursuant to subparagraph (d)(1) of this paragraph 11(B), the Submitted Bids and Submitted Sell Orders shall be accepted or rejected and the Auction Agent shall take such other action as set forth below: (1) If Sufficient Clearing Bids have been made, all Submitted Sell Orders shall be accepted and, subject to the provisions of subparagraphs (4) and (5) of this paragraph 11(B)(e), Submitted Bids shall be accepted or rejected as follows in the following order of priority and all other Submitted Bids shall be rejected: (i) Existing Holders' Submitted Bids specifying any rate that is higher than the Winning Bid Rate shall be accepted, thus requiring each such Existing Holder to sell the Series B MAPS that are the subject of such Submitted Bids; (ii) Existing Holders' Submitted Bids specifying any rate that is lower than the Winning Bid Rate shall be rejected, thus entitling each such Existing Holder to continue to hold the shares of Series B MAPS that are the subject of such Submitted Bids; (iii) Potential Holders' Submitted Bids specifying any rate that is lower than the Winning Bid Rate shall be accepted; (iv) Each Existing Holder's Submitted Bid specifying a rate that is equal to the Winning Bid Rate shall be rejected, thus entitling such Existing Holder to continue to hold the Series B MAPS that are the subject of such Submitted Bid, unless the number of Outstanding Series B MAPS subject to all such Submitted Bids shall be greater than the number of Series B MAPS ("remaining shares") equal to the excess of the Available Series B MAPS over the number of Series B MAPS subject to Submitted Bids described in clauses (ii) and (iii) of this subparagraph (1), in which event the Submitted Bid of such Existing Holder shall be accepted in part, and such Existing Holder shall be required to sell Series B MAPS subject to such Submitted Bid, but only in an amount equal to the difference between (A) the number of Outstanding Series B MAPS then held by such Existing Holder subject to such Submitted Bid and (B) the number of Series B MAPS obtained by multiplying the number of remaining shares by a fraction the numerator of which shall be the number of Outstanding Series B MAPS held by such Existing Holder subject to such Submitted Bids and the denominator of which shall be the aggregate number of 53 Outstanding Series B MAPS subject to such Submitted Bids made by all such Existing Holders that specified a rate equal to the Winning Bid Rate; and (v) Each Potential Holder's Submitted Bid specifying a rate that is equal to the Winning Bid Rate shall be accepted but only in an amount equal to the number of Series B MAPS obtained by multiplying the difference between the Available Series B MAPS and the number of Series B MAPS subject to Submitted Bids described in clauses (ii), (iii) and (iv) of this subparagraph (1) by a fraction the numerator of which shall be the number of Outstanding Series B MAPS subject to such Submitted Bid and the denominator of which shall be the sum of the number of Outstanding Series B MAPS subject to such Submitted Bids made by all such Potential Holders that specified rates equal to the Winning Bid Rate. (2) If Sufficient Clearing Bids have not been made (other than because all of the Outstanding Series B MAPS are the subject of Submitted Hold Orders), subject to the provisions of subparagraphs (4) and (5) of this paragraph 11(B)(e), Submitted Orders shall be accepted or rejected as follows in the following order of priority and all other Submitted Bids shall be rejected: (i) Existing Holders' Submitted Bids specifying any rate that is equal to or lower than the Maximum Rate shall be rejected, thus entitling such Existing Holder to continue to hold the Series B MAPS that are the subject of such Submitted Bids; (ii) Potential Holders' Submitted Bids specifying any rate that is equal to or lower than the Maximum Rate shall be accepted; and (iii) Each Existing Holder's Submitted Bid specifying any rate that is higher than the Maximum Rate and the Submitted Sell Order of each Existing Holder shall be accepted, but in both cases only in an amount equal to the difference between (A) the number of Outstanding Series B MAPS then held by such Existing Holder subject to such Submitted Bid or Submitted Sell Order and (B) the number of Series B MAPS obtained by multiplying the difference between the Available Series B MAPS and the aggregate number of Series B MAPS subject to Submitted Bids described in clauses (i) and (ii) of this subparagraph (2) by a fraction the numerator of which shall be the number of Outstanding Series B MAPS held by such Existing Holder subject to such Submitted Bid or Submitted Sell Order and the denominator of which shall be the number of Outstanding Series B MAPS subject to all such Submitted Bids and Submitted Sell Orders. (3) If all of the Outstanding Series B MAPS are the subject of Submitted Hold Orders, all Submitted Bids shall be rejected. (4) If, as a result of the procedures described in subparagraph (1) or (2) of this paragraph 11(B)(e), any Existing Holder would be entitled or required to sell, or any Potential Holder would be entitled or required to purchase, a fraction of a Series B MAPS on any Auction Date, the Auction Agent shall, in such manner as, in its sole discretion, it shall determine, round up or down the number of Series B MAPS to be purchased or sold by any Existing Holder or Potential Holder on such Auction Date so that the number of shares purchased or sold by each Existing Holder or Potential Holder on such Auction Date shall be whole shares of Series B MAPS. (5) If, as a result of the procedures described in subparagraph (1) of this paragraph 11(B)(e), any Potential Holder would be entitled or required to purchase less than a whole share of Series B MAPS on any Auction Date, the Auction Agent shall, in such manner as, in its sole discretion, it shall 54 determine, allocate shares for purchase among Potential Holders so that only whole shares of Series B MAPS are purchased on such Auction Date by any Potential Holder, even if such allocation results in one or more of such Potential Holders not purchasing shares of Series B MAPS on such Auction Date. (6) Based on the results of each Auction, the Auction Agent shall determine the aggregate number of Series B MAPS to be purchased and the aggregate number of Series B MAPS to be sold by Potential Holders and Existing Holders on whose behalf each Broker-Dealer submitted Bids or Sell Orders and, with respect to each Broker-Dealer, to the extent that such aggregate number of shares to be purchased and such aggregate number of shares to be sold differ, determine to which other Broker-Dealer or Broker-Dealers acting for one or more purchasers such Broker- Dealer shall deliver, or from which other Broker-Dealer or Broker- Dealers acting for one or more sellers such Broker-Dealer shall receive, as the case may be, shares of Series B MAPS. (f) Miscellaneous. (1) The Board of Directors may interpret the provisions of this paragraph 11(B) to resolve any inconsistency or ambiguity which may arise or be revealed in connection with the Auction Procedures provided for herein. (2) During the Initial Dividend Period and so long as the Applicable Rate is based on the results of an Auction, an Existing Holder (i) may sell, transfer or otherwise dispose of shares of Series B MAPS only pursuant to a Bid or Sell Order in accordance with the procedures described in this paragraph 11(B) or to or through a Broker-Dealer (who shall only sell Series B MAPS to a Person that has delivered a signed copy of a Purchaser's Letter to the Auction Agent) or to a Person that has delivered a signed copy of a Purchaser's Letter to the Auction Agent, provided that in the case of all transfers other than pursuant to Auctions such Existing Holder or its Broker- Dealer advises the Auction Agent of such transfer, and (ii) shall have the ownership of the Series B MAPS held by it maintained in book entry form by the Securities Depository in the account of its Agent Member, which in turn will maintain records of such Existing Holder's beneficial ownership. (3) Neither the corporation nor any affiliate thereof may submit an Order in any Auction except as set forth in the next sentence. Any Broker-Dealer that is an affiliate of the corporation may submit Orders in Auctions but only if such Orders are not for its own account, except that if such affiliated Broker-Dealer holds Series B MAPS for its own account, it must submit a Sell Order in the next Auction with respect to such shares. (4) Commencing with the first day of the first Dividend Period after an Auction Termination Event has occurred, the corporation, at its option, may perform any of the functions to be performed by the Auction Agent set forth in paragraph 11(A) of this Article III. 12. A series of preference shares shall be designated Cumulative Preference Shares, Fourth Series ("Fourth Series Preference Shares") and shall initially consist of 2,000,000 shares. The relative rights and preferences of the Fourth Series Preference Shares shall be as follows: (a) (1) Dividends on the Fourth Series Preference Shares shall be payable quarterly in cash on the 15th day of March, June, September and December (each date being referred to herein as a "Quarterly Dividend Payment Date"), to holders of record of Fourth Series Preference Shares on such record dates as may be fixed by the Board of Directors from time to time, in an amount per share (rounded to the nearest cent) equal to the greater of (i) ten dollars and (ii) subject to the provision for 55 adjustment hereinafter set forth, one hundred times the aggregate per share amount of all cash dividends, and one hundred times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in Common Shares or a subdivision of the outstanding Common Shares (by reclassification or otherwise), declared on the Common Shares, $1.875 par value, of this corporation (the "Common Shares") since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of Fourth Series Preference Shares, and no more. Subject to the provisions of paragraph 3 of this Article III, the first dividend on the Fourth Series Preference Shares shall be paid on the Quarterly Dividend Payment Date next following the date of initial issuance of Fourth Series Preference Shares in respect of the period from the date of issuance to such Quarterly Dividend Payment Date, and thereafter dividends on Fourth Series Preference Shares shall be paid on each succeeding Quarterly Dividend Payment Date. The dividend payment on each Quarterly Dividend Payment Date, except the aforementioned first Quarterly Dividend Payment Date, shall be in respect of the quarterly period ending with such payment date. In the event this corporation shall at any time after December 9, 1986 (the "Rights Declaration Date") (A) declare any dividend on Common Shares payable in Common Shares, (B) subdivide the outstanding Common Shares, or (C) combine the outstanding Common Shares into a smaller number of shares, then in each case the amount to which holders of Fourth Series Preference Shares were entitled immediately prior to such event under clauses (i) and (ii) of the preceding first sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event. This corporation shall declare a dividend or distribution on the Fourth Series Preference Shares, as provided above, immediately after it declares a dividend or distribution on Common Shares (other than a dividend payable in Common Shares); provided that, in the event no dividend or distribution shall have been declared on the Common Shares during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $10.00 per share on the Fourth Series Preference Shares shall nevertheless be payable on such Quarterly Dividend Date. Dividends on the first issued Fourth Series Preference Shares shall accrue and be cumulative on a daily basis from and after the date of issuance thereof. Dividends on any reissued Fourth Series Preference Shares shall accrue on a daily basis from and after the Quarterly Dividend Payment Date to which dividends have been paid in full next preceding the date of reissuance of such shares, provided, however, that dividends on any subsequently reissued Fourth Series Preference Shares reissued after the record date fixed for the payment of a current dividend on such shares but before the date of payment of such dividend, shall accrue and be cumulative on a daily basis from and after such payment date or if such dividend shall not be paid in full on such payment date then from and after the next preceding payment date on which dividends on such shares have been paid in full. Dividends on Fourth Series Preference Shares reissued on any dividend payment date for such shares shall accrue and be cumulative on a daily basis from and after such payment date. (b) (1) Pursuant to resolution of the Board of Directors and subject to the provisions of paragraph 3(a) of this Article III, this corporation may redeem the whole or from time to time any part of the Fourth Series Preference Shares at any time when Fourth Series Preference Shares are outstanding, at the redemption price per share of one hundred times $105, plus an amount equal to all accrued and unpaid dividends on the shares being redeemed to and including the date fixed for redemption. (2) Notice of redemption shall be mailed by the corporation, not less than 30 or more than 60 days before the date fixed for redemption, to each holder of record of the shares to be redeemed addressed to such holder at his address appearing on the books of the corporation. Such notice of redemption shall set forth the date fixed for redemption, the redemption price and the place at which the shareholders may obtain payment of the redemption price plus accrued dividends upon the surrender of the certificates representing their shares. 56 (3) On or after the date fixed for redemption and stated in such notice, each holder of shares that are called for redemption shall, upon surrender of the certificates representing such shares to the corporation at the place or places designated in such notice, be entitled to receive payment of the redemption price of such shares, plus an amount equal to all accrued and unpaid dividends thereon to and including the date fixed for redemption. In case less than all of the shares represented by any such surrendered certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (4) If less than all of the outstanding shares are to be redeemed, the number of shares of Fourth Series Preference Shares to be redeemed and the method of effecting such redemption, whether by lot or pro rata, shall be as determined by the Board of Directors. (5) At any time after a notice of redemption has been given in the manner prescribed herein and prior to the date fixed for redemption, the corporation may deposit in trust, with a bank, trust company, or other financial institution an aggregate amount of funds sufficient for such redemption, for immediate payment in the appropriate amounts upon surrender of certificates for such shares. Upon the deposit of such funds or, if no such deposit is made, upon the date fixed for redemption (unless the corporation shall default in making payment of the appropriate amount), whether or not certificates for shares so called for redemption have been surrendered for cancellation, the shares to be redeemed shall be deemed to be no longer outstanding and the holders thereof shall cease to be shareholders with respect to such shares and shall have no rights with respect thereto, except for the right to receive the amount payable upon redemption, but without interest. Such deposit in trust shall be irrevocable except that any funds deposited by the corporation which shall not be required for the redemption for which they were deposited subsequent to the date of deposit shall be returned to the corporation forthwith; and any funds deposited by the corporation which are unclaimed at the end of one year from the date fixed for such redemption shall be paid over to the corporation upon its request, and upon such repayment the holders of the shares so called for redemption shall look only to the corporation for payment of the appropriate amount. Any such unclaimed amounts paid over to the corporation shall, for a period of six years after the date fixed for such redemption, be set apart and held by the corporation in trust for the benefit of the holders of such shares, but no such holder shall be entitled to receive interest thereon. At the expiration of such six-year period, all right, title, interest and claim of such holders in or to such unclaimed amounts shall be extinguished, terminated and discharged, and such unclaimed amounts shall become part of the general funds of the corporation free of any claim of such holders. (c) The amount referred to in paragraph 2(c) of this Article III as payable in the event of voluntary or involuntary liquidation of the corporation shall be one hundred times $105 per Fourth Series Preference Share. (d) In case this corporation shall enter into any consolidation, merger, combination or other transaction in which Common Shares are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Fourth Series Preference Shares shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each Common Share is changed or exchanged. In the event the corporation shall at any time declare or pay any dividend on Common Shares payable in Common Shares, or effect a subdivision or combination or consolidation of the outstanding Common Shares (by reclassification or otherwise) into a greater or lesser number of Common Shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Fourth Series Preference Shares shall be adjusted by multiplying such amount by 57 a fraction, the numerator of which is the number of Common Shares outstanding immediately after such event, and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event. (e) This corporation may issue fractions and certificates representing fractions of a share of Fourth Series Preference Shares in integral multiples of 1/100th of a share of Fourth Series Preference Shares, or in lieu thereof, at the election of the Board of Directors of this corporation at the time of the first issue of any Fourth Series Preference Shares, evidence such fractions by depositary receipts pursuant to an appropriate agreement between the corporation and a depositary selected by it, provided that such agreement shall provide that the holders of such depositary receipts shall have all rights, privileges and preferences to which they would be entitled as beneficial owners of Fourth Series Preference Shares. In the event that fractional shares of Fourth Series Preference Shares are issued, the holders thereof shall have all the rights provided herein for holders of full shares of Fourth Series Preference Shares in the proportion which such fraction bears to a full share. (f) The holders of Fourth Series Preference Shares shall not be entitled to vote except as provided by Washington statutes or by this Article III. 13. The fifth series of preference shares shall be designated $2.625 Convertible Exchangeable Preference Shares ("$2.625 Convertible Exchangeable Preference Shares"), and shall initially consist of 5,000,000 shares. The relative rights and preferences of the $2.625 Convertible Exchangeable Preference Shares shall be as follows: (a) The dividend rate for the $2.625 Convertible Exchangeable Preference Shares shall be $2.625 per share per annum. Subject to the provisions of Section 3 of this Article III, the first dividend on the $2.625 Convertible Exchangeable Preference Shares shall be paid on June 15, 1987 in respect of the period from the date of issuance to June 15, 1987, and thereafter dividends on $2.625 Convertible Exchangeable Preference Shares shall be paid quarterly on September 15, December 15, March 15 and June 15 in each instance to holders of record of $2.625 Convertible Exchangeable Preference Shares on such dates as may be fixed by the Board of Directors from time to time. The dividend payment on each payment date except the aforementioned first payment date shall be in respect of the quarterly period ending with such payment date. Dividends on the first issued $2.625 Convertible Exchangeable Preference Shares shall accrue on a daily basis from and after the date of issuance thereof. (b) (1) Pursuant to resolution of the Board of Directors and subject to the provisions of paragraph 3(a) of this Article III, the corporation may at any time redeem the whole or from time to time any part of the $2.625 Convertible Exchangeable Preference Shares at the following redemption prices per share for the respective periods indicated:
Date Fixed for Redemption Within Price Per The Period (Inclusive) Share ---------------------- --------- Date of issuance - June 14, 1988 $52.6250 June 15, 1988 - June 14, 1989 $52.3625 June 15, 1989 - June 14, 1990 $52.1000 June 15, 1990 - June 14, 1991 $51.8375 June 15, 1991 - June 14, 1992 $51.5750 June 15, 1992 - June 14, 1993 $51.3125 June 15, 1993 - June 14, 1994 $51.0500 June 15, 1994 - June 14, 1995 $50.7875 June 15, 1995 - June 14, 1996 $50.5250 June 15, 1996 - June 14, 1997 $50.2625 June 15, 1997 and thereafter $50.0000
58 plus, in each case, an amount equal to all accrued and unpaid dividends on the shares being redeemed to and including the date fixed for such redemption provided, however, that $2.625 Convertible Exchangeable Preference Shares may not be redeemed on or prior to June 15, 1989 unless the Closing Price (which term shall mean with respect to the common shares of the corporation on any day, (i) the closing price as reported on the New York Stock Exchange Composite Tape, or (ii) if the common shares are not listed or admitted for trading on such Exchange, the last reported sales price regular way, or in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices regular way, on the principal national securities exchange on which the common shares are listed or admitted for trading, or (iii) if clauses (i) and (ii) above are not applicable, the last reported sales price on the National Market System of the National Association of Securities Dealers, Inc., Automated Quotation System, or any similar system of automated dissemination of quotations of securities prices then in common use, if so quoted, or (iv) if the common shares are not listed or admitted for trading on any national securities exchange or any such system, the average of the closing bid and asked prices as furnished by any New York Stock Exchange member firm selected from time to time by the corporation for that purpose) of the common shares has equaled or exceeded 150 percent of the then effective conversion price (determined as set forth in subparagraph (e)(1)) per common share for at least 20 trading days within 30 consecutive trading days ending not more than five trading days prior to notice of redemption. For the purposes of this subparagraph, the term "trading days" shall mean trading days on such exchanges or systems as will determine the Closing Price as defined above. (2) Notice of redemption shall be mailed by the corporation, not less than 30 or more than 60 days before the date fixed for redemption, to each transfer agent for the shares to be redeemed and to each holder of record of such shares addressed to such holder at his address appearing on the books of the corporation. Such notice of redemption shall set forth the date fixed for redemption, the redemption price and the place or places (including a place in the Borough of Manhattan, the City of New York) at which the shareholders may obtain payment of the redemption price plus accrued dividends upon the surrender of the certificates representing their shares, and shall set forth in respect to such shares the then current conversion rate and date on which conversion rights expire, all as determined in accordance with paragraph 13(e) of this Article III. (3) On or after the date fixed for redemption and stated in such notice, each holder of shares that are called for redemption shall, upon surrender of the certificates representing such shares to the corporation at the place or places designated in such notice, be entitled to receive payment of the redemption price of such shares, plus an amount equal to all accrued and unpaid dividends thereon to and including the date fixed for redemption. In case less than all of the shares represented by any such surrendered certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (4) If less than all the outstanding shares are to be redeemed, the number of shares of $2.625 Convertible Exchangeable Preference Shares to be redeemed and the method of effecting such redemption, whether by lot or pro rata, shall be as determined by the Board of Directors. (5) At any time after a notice of redemption has been given in the manner prescribed herein and prior to the date fixed for redemption, the corporation may deposit in trust, with 59 a bank or trust company having capital, surplus and undistributed profits aggregating at least $50,000,000 an aggregate amount of funds sufficient for such redemption, for immediate payment in the appropriate amounts upon surrender of certificates for such shares. Upon the deposit of such funds or, if no such deposit is made, upon the date fixed for redemption (unless the corporation shall default in making payment of the appropriate amount), whether or not certificates for shares so called for redemption have been surrendered for cancellation, the shares to be redeemed shall be deemed to be no longer outstanding and the holders thereof shall cease to be shareholders with respect to such shares and shall have no rights with respect thereto, except for the right to receive the amount payable upon redemption, but without interest, and, up to the close of business on the date fixed for such redemption, the right to convert such shares as set forth in paragraph 13(e) of this Article III. Such deposit in trust shall be irrevocable except that any funds deposited by the corporation which shall not be required for the redemption for which they were deposited because of the exercise of rights of conversion shall be returned to the corporation forthwith, and any funds deposited by the corporation which are unclaimed at the end of one year from the date fixed for such redemption shall be paid over to the corporation upon its request, and upon such repayment the holders of the shares so called for redemption shall look only to the corporation for payment of the appropriate amount. Any such unclaimed amounts paid over to the corporation shall, for a period of six years after the date fixed for such redemption, be set apart and held by the corporation in trust for the benefit of the holders of such shares, but no such holder shall be entitled to receive interest thereon. At the expiration of such six-year period, all right, title, interest and claim of such holders in or to such unclaimed amounts shall be extinguished, terminated and discharged, and such unclaimed amounts shall become part of the general funds of the corporation free of any claim of such holders. (6) (A) Pursuant to resolution of the Board of Directors and subject to the provisions of paragraph 3 of this Article III, the corporation may also redeem the $2.625 Convertible Exchangeable Preference Shares, as a whole but not in part, on any March 15, June 15, September 15 or December 15 commencing June 15, 1990 to and including March 15, 2017, through the issuance, in redemption of and in exchange for the $2.625 Convertible Exchangeable Preference Shares, of the corporation's 5 1/4% Convertible Subordinated Debentures due 2017 (hereinafter referred to as the "Debentures") described in the Company's Registration Statement on Form S-3 (Registration No. 33-12744), as amended, in the manner provided in this subparagraph (b)(6) at the rate of $50.00 principal amount of Debentures for each $2.625 Convertible Exchangeable Preference Share outstanding on the Exchange Date (as defined below) plus an amount equal to all accrued and unpaid dividends to and including the Exchange Date. (B) Notice of redemption shall be mailed by the corporation, not less than 30 nor more than 60 days before the date fixed for the issue of Debentures in redemption of and in exchange for $2.625 Convertible Exchangeable Preference Shares to each transfer agent for the $2.625 Convertible Exchangeable Preference Shares and to each holder of record of such shares addressed to such holder at his address appearing on the books of the corporation. Such notice of redemption shall set forth the effective date of the exchange (the "Exchange Date") and the place or places (including a place in the Borough of Manhattan, the City of New York) at which certificates for $2.625 Convertible Exchangeable Preference Shares are to be surrendered for Debentures and stating that dividends on $2.625 Convertible Exchangeable Preference Shares will cease to accrue on the Exchange Date. On and after the Exchange Date, each holder of shares to be redeemed and exchanged shall, upon surrender of the certificates representing such shares to the corporation at the place or places designated in such notice, be entitled to receive (i) Debentures at the rate of $50 principal amount of Debentures for each Preference Share, provided that the Debentures will be issuable only in denominations of $1,000 and integral multiples thereof, and an amount in cash will be paid equal to any excess principal amount otherwise issuable, and (ii) 60 an amount in cash equal to all accrued and unpaid dividends to and including the Exchange Date. Upon the Exchange Date (unless the corporation shall default in issuing the Debentures in redemption of and in exchange for the $2.625 Convertible Exchangeable Preference Shares or shall fail to pay such accrued and unpaid dividends on such shares), whether or not certificates for shares so called for redemption have been surrendered for cancellation, the shares to be redeemed and exchanged shall be deemed to be no longer outstanding and the holders thereof shall cease to be shareholders with respect to such shares and shall have no rights with respect thereto, except for the right to receive Debentures and accrued and unpaid dividends in exchange therefor, but without interest. Notwithstanding the foregoing, if notice of redemption and exchange has been given pursuant to this subparagraph (b)(6) and any holder of $2.625 Convertible Exchangeable Preference Shares shall, prior to the close of business on the Exchange Date, give written notice to the corporation pursuant to paragraph 13(e) below of the conversion of any or all of the shares to be redeemed and exchanged held by such holder (accompanied by a certificate or certificates for such shares, duly endorsed or assigned to the corporation), then such redemption and exchange shall not become effective as to such shares to be converted and such conversion shall become effective as provided in paragraph 13(e) below. (c) The amount referred to in paragraph 2(c) of this Article III as payable in the event of voluntary or involuntary liquidation of the corporation shall be $50 per $2.625 Convertible Exchangeable Preference Share. (d) The $2.625 Convertible Exchangeable Preference Shares shall not be entitled to the benefit of any sinking fund for the redemption or purchase of such shares. (e) (1) Subject to the provisions for adjustment set forth in subparagraph (2)(A) below, each $2.625 Convertible Exchangeable Preference Share shall be convertible at any time at the election of the holder thereof into .6944 common shares (such rate, as adjusted from time to time, is referred to as the "conversion rate"). (The "conversion price" is equal to the result of dividing liquidation value by the conversion rate.) Certificates representing shares that a holder thereof has elected to convert shall be surrendered to any transfer agent of such shares duly endorsed to the corporation or in blank, or accompanied by proper instruments of transfer, together with written notice of the election to convert setting forth the denominations of common share certificates desired and the names in which such certificates shall be issued. As soon as practicable after such surrender of such certificates and the receipt of such notice, the corporation shall issue and deliver at the office of such transfer agent to the person who surrendered such certificates a certificate or certificates for the number of common shares issuable upon the conversion of such shares, and a check or cash in respect of any fraction of a share. Such conversion shall be deemed to have been effected on the date on which such notice and such certificates shall have been received, and each person in whose name any certificate for common shares shall be issuable upon such conversion shall be deemed to have become on such date the holder of record of the common shares represented thereby. The right to convert shares called for redemption shall terminate at the close of business on the date fixed for such redemption, unless the corporation shall default in making payment of the amount payable upon such redemption. The holders of $2.625 Convertible Exchangeable Preference Shares at the close of business on a dividend payment record date shall be entitled to receive the dividend payable on such shares (except that holders of shares called for redemption on a redemption date between such record date and the dividend payment date shall not be entitled to receive such dividend on such dividend payment date) on the corresponding dividend payment date notwithstanding the conversion thereof or the corporation's default on payment of the dividend due on such dividend payment date. However, $2.625 Convertible Exchangeable Preference Shares surrendered for conversion during the period between the close of business on any record date for the payment of dividends on such 61 $2.625 Convertible Exchangeable Preference Shares and the opening of business on the corresponding dividend payment date (except shares called for redemption on a redemption date during such period) must be accompanied by payment of an amount equal to the dividend payable on such shares on such dividend payment date. A holder of $2.625 Convertible Exchangeable Preference Shares on a dividend payment record date who (or whose transferee) tenders $2.625 Convertible Exchangeable Preference Shares for conversion into common shares on a dividend payment date will receive the dividend payable on such shares by the corporation on such date, and the converting holder need not include payment in the amount of such dividend upon surrender of $2.625 Convertible Exchangeable Preference Shares for conversion. Except as provided above, the corporation shall make no payment or allowance for unpaid dividends whether or not in arrears, on converted shares or for dividends on the common shares issued upon such conversion. (2) (A) The conversion rate for $2.625 Convertible Exchangeable Preference Shares shall be subject to adjustment from time to time only as follows: (i) If the corporation shall (A) pay to holders of common shares a dividend in shares of its capital stock (including common shares), or (B) combine into a smaller number or subdivide its common shares, or issue by reclassification of its common shares any shares of the corporation, the conversion rate for $2.625 Convertible Exchangeable Preference Shares in effect immediately prior thereto shall be adjusted so that the holder of a $2.625 Convertible Exchangeable Preference Share surrendered for conversion after the record date fixing shareholders to be affected by such event shall be entitled to receive the number of shares of the corporation which he would have owned or have been entitled to receive after the happening of any of the events described above, had such share been converted immediately prior to such record date. Such adjustment shall be made whenever any such events shall happen, but shall also be effective retroactively as to any such share converted between such record date and the date of the happening of any such events. (ii) If the corporation shall issue rights or warrants to holders of common shares entitling them to subscribe for or purchase common shares at a price per share less than the current market price per common share (as defined in part (iv) of this subparagraph (2)) as of the record date specified below, the number of common shares into which each $2.625 Convertible Exchangeable Preference Share shall thereafter be convertible shall be determined by multiplying the number of common shares into which such share was theretofore convertible by a fraction, the numerator of which shall be the number of common shares outstanding on the date of issuance of such rights or warrants plus the number of additional common shares offered for subscription or purchase, and the denominator of which shall be the number of common shares outstanding on the date of issuance of such rights or warrants plus the number of common shares which the aggregate offering price of the total number of common shares so offered would purchase at such current market price. Such adjustment shall be made whenever such rights or warrants are issued, but shall also be effective retroactively as to any share converted between the record date for the determination of shareholders entitled to receive such rights or warrants and the date such rights or warrants are issued. (iii) If the corporation shall distribute to holders of common shares evidences of its indebtedness or assets (excluding cash dividends or cash distributions) or rights or warrants to subscribe other than as set forth in part (ii) above, the number of common shares into which each $2.625 Convertible Exchangeable Preference Share shall thereafter be convertible shall be determined by multiplying the number of common shares into which such share was theretofore convertible by a fraction, the numerator of which shall be the current market price per 62 common share (as defined in part (iv) of this subparagraph (2)) as of the date of such distribution, and the denominator of which shall be such current market price per common share less the then fair market value (as determined by the Board of Directors, whose determination shall be conclusive) of the portion of the assets or evidences of indebtedness so distributed or such subscription rights or warrants applicable to one common share. Such adjustment shall be made whenever any such distribution is made, but shall also be effective retroactively as to any share converted between the record date for the determination of shareholders entitled to receive such distribution and the date such distribution is made. (iv) For the purpose of any computation under parts (ii) and (iii) of this subparagraph (2), the current market price per common share as of any date shall be deemed to be the average of the daily closing prices for the thirty consecutive business days commencing on the forty- fifth business day before the date in question. The closing price for each business day shall be the last reported sales price regular way or, if no such sale takes place on such business day, the average of the reported closing bid and asked prices regular way, in either case on the New York Stock Exchange or, if the common shares are not listed or admitted to trading on such exchange, the average of the closing bid and asked prices as furnished by any member of the New York Stock Exchange selected by the Board of Directors for that purpose. (v) The conversion rate for $2.625 Convertible Exchangeable Preference Shares shall always be calculated to the nearest one one-thousandth of a share. No adjustment in the conversion rate for $2.625 Convertible Exchangeable Preference Shares shall be made unless the conversion rate for such shares after such adjustment would differ from the conversion rate prior to such adjustment by one one-hundredth of a common share or more, provided that any adjustments for $2.625 Convertible Exchangeable Preference Shares not made by reason of this part (v) of subparagraph (2) shall be carried forward and taken into account in calculating subsequent adjustments. (vi) Whenever any adjustment in the conversion rate for $2.625 Convertible Exchangeable Preference Shares is made, the corporation shall forthwith (A) file with each transfer agent for such shares a statement describing the adjustment and the method of calculation used, together with an opinion rendered by an independent firm of public accountants of recognized standing, who may be the corporation's regularly engaged auditors, that such adjustment was properly calculated in accordance with the provisions of this subparagraph (2), and (B) cause a copy of such statement to be published in a daily newspaper of general circulation in the Borough of Manhattan, the City of New York, and to be mailed to the holders of record of such shares. (3) If the corporation shall consolidate with or merge into another corporation, or if the corporation shall sell, lease or transfer to any other person or persons all or substantially all of the assets of the corporation, holders of $2.625 Convertible Exchangeable Preference Shares shall have the right after such event to convert each share held into the kind and amount of shares of stock, other securities, cash and property receivable upon such event by a holder of the number of common shares into which such shares might have been converted immediately prior to such event. In any such event, effective provisions shall be made in the certificate or articles of incorporation of the resulting or surviving corporation, in any contract of sale, conveyance, lease or transfer, or otherwise so that the provisions set forth herein for the protection of the conversion rights of $2.625 Convertible Exchangeable Preference Shares shall thereafter continue to be applicable; and any such resulting or surviving corporation shall expressly assume the obligation to deliver, upon conversion, such shares of stock, 63 other securities, cash and property. The provisions of this subparagraph (3) shall similarly apply to successive consolidations, mergers, sales, leases or transfers. (f) The holders of $2.625 Convertible Exchangeable Preference Shares shall not be entitled to vote except as provided by Washington statutes or by this Article III. 14. A series of preference shares shall be designated "Special Voting Shares (A Series of Preference Shares)" (the "Special Voting Shares"). The number of shares and the preferences, limitations and relative rights of the Special Voting Shares shall be as follows: (a) Number of Shares. There shall be one Special ----------------- Voting Share. (b) Dividends or Distributions. Neither the holder --------------------------- nor, if different, the owner of the Special Voting Share shall be entitled to receive Corporation dividends or distributions in its capacity as holder or owner thereof. (c) Voting Rights. Except as provided in -------------- paragraph (d) below, the holder of the Special Voting Share shall have the following voting rights: (1) The holder of the Special Voting Share shall be entitled to vote on each matter on which holders of the Common Stock or stockholders generally are entitled to vote, and the holder of the Special Voting Share shall be entitled to cast on each such matter a number of votes equal to the number of exchangeable shares of Weyerhaeuser Company Limited (the "Exchangeable Shares") then outstanding (A) that are not owned by the Corporation or its affiliates and (B) as to which the holder of the Special Voting Share has timely received, as determined pursuant to the Voting and Exchange Trust Agreement (the "Voting Agreement") to be entered into among Weyerhaeuser Company Limited, the Corporation and CIBC Mellon Trust Company, as trustee, voting instructions from the holders of such Exchangeable Shares in accordance with the Voting Agreement. (2) Except as otherwise provided herein or by applicable law, the holder of the Special Voting Share and the holders of shares of Common Stock shall vote together as one class for the election of directors of the Corporation and on all other matters submitted to a vote of stockholders of the Corporation. (d) Liquidation Rights. ------------------- (1) In the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holder of the Special Voting Share shall be entitled to receive out of the assets of the Corporation available for distribution to the stockholders, an amount equal to $1.00 before any distribution is made on the Common Stock of the Corporation or any other stock ranking junior to the Special Voting Share as to distribution of assets upon voluntary or involuntary liquidation. After payment of the full amount of the liquidation preference of the Special Voting Share, the holder of the Special Voting Share shall not be entitled to any further participation in any distribution of assets of the Corporation. (2) For the purposes of this paragraph (d), neither the sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Corporation nor the consolidation or merger of the Corporation with or into one or more other entities shall be deemed to be a voluntary or involuntary liquidation. 64 (e) No Redemption; No Sinking Fund. ------------------------------- (1) The Special Voting Share shall not be subject to redemption by the Corporation or at the option of its holder, except that at such time as no Exchangeable Shares (other than Exchangeable Shares owned by the Corporation or its affiliates) shall be outstanding, the Special Voting Share shall automatically be redeemed and canceled, with an amount of $1.00 due and payable upon such redemption. (2) The Special Voting Share shall not be subject to or entitled to the operation of a retirement or sinking fund. (f) Ranking. The Special Voting Share shall rank -------- senior to all series of Common Stock of the Corporation and junior to all series of Preferred Shares of the Corporation and to all other series of Preference Shares of the Corporation. (g) Restrictions. During the term of the Voting ------------- Agreement, the Corporation may not, without the consent of the holders of the Exchangeable Shares, issue any shares of its Special Voting Shares in addition to the Special Voting Share and no other term of the Special Voting Share shall be amended, except upon approval of the holder of the Special Voting Share. ARTICLE IV The time of the existence of this corporation shall be perpetual. ARTICLE V 1. The business and affairs of the corporation shall be managed under the direction of a Board of Directors consisting of not fewer than nine (9) nor more than thirteen (13) directors, the exact number to be fixed from time to time by resolution adopted by the affirmative vote of a majority of the entire Board of Directors. Whenever used in these Articles of Incorporation, the phrase "entire Board of Directors" shall mean that number of directors fixed by the most recent resolution adopted pursuant to the preceding sentence prior to the date as of which a determination of the number of directors then constituting the entire Board of Directors shall be relevant for any purpose under these Articles of Incorporation. The directors shall be classified, with respect to the term for which they severally hold office, into three classes, each class to be as nearly equal in number as possible, one class to hold office initially for a term expiring at the annual meeting of shareholders to be held in 1986, another class to hold office initially for a term expiring at the annual meeting of shareholders to be held in 1987, and another class to hold office initially for a term expiring at the annual meeting of shareholders to be held in 1988, with the members of each class to hold office until their successors are elected and qualified. At each annual meeting of shareholders of the corporation, the successors to the class of directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of shareholders held in the third year following the year of their election. 2. Any vacancy occurring in the Board of Directors and any newly created directorship resulting from any increase in the number of directors shall be filled solely by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. 65 3. Any director may be removed from office with cause only by the affirmative vote of the holders of a majority of the voting capital stock and may be removed from office without cause only by the affirmative vote of the holders of 67% of the voting capital stock or, in either case, such other percentage as may be required by applicable law; provided, however, that if applicable law permits to be required a higher percentage of the votes of the holders of the voting capital stock to approve any such removal, then the directors may be removed, with or without cause, as the case may be, only by the affirmative vote of the holders of the lesser of (i) 80% of the voting capital stock and (ii) the maximum percentage of such voting capital stock permitted to be required for such approval. 4. Advance notice of nominations for the election of directors, other than by the Board of Directors or a committee thereof, shall be given within the time and in the manner provided in the bylaws. 5. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of preferred or preference shares or of any other class or series of shares issued by the corporation shall have the right, voting separately by class or series, to elect directors under specified circumstances, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of these Articles of Incorporation applicable thereto, and such directors so elected shall not be classified pursuant to this Article V unless expressly provided by such terms. ARTICLE VI In all elections for directors, every shareholder shall have the right to vote in person or by proxy the number of shares of stock held by him for as many persons as there are directors to be elected. No cumulative voting for directors shall be permitted. ARTICLE VII 1. Bylaws may be adopted, altered, amended or repealed or new bylaws enacted by the affirmative vote of a majority of the entire Board of Directors (if notice thereof is contained in the notice of the meeting at which such vote is taken or if all directors are present) or at any regular meeting of the shareholders (or at any special meeting thereof duly called for that purpose) by the affirmative vote of a majority of the shares represented and entitled to vote at such meeting (if notice thereof is contained in the notice of such meeting). 2. Notwithstanding anything contained in paragraph 1 of this Article VII to the contrary, either (i) the affirmative vote of the holders of at least 80% of the votes entitled to be cast by the holders of all shares of the corporation entitled to vote generally in the election of directors, voting together as a single class, or (ii) the affirmative vote of a majority of the entire Board of Directors with the concurring vote of a majority of the Continuing Directors, voting separately and as a subclass of directors, shall be required to alter, amend or repeal, or adopt any provision inconsistent with, Sections 1 and 2 of Article II, Section 1 of Article III, Article XII and Section 2 of Article XIII of the bylaws. For purposes of this Article VII and Article VIII, the term "Continuing Director" shall mean any member of the Board of Directors who was a member of the Board of Directors on August 13, 1985 or who is elected to the Board of Directors after August 13, 1985 upon the recommendation of a majority of the Continuing Directors, voting separately and as a subclass of directors on such recommendation. 66 ARTICLE VIII Notwithstanding any other provisions of law, these Articles of Incorporation (except as hereinafter provided) or the bylaws of the corporation, the affirmative vote of a majority of the entire Board of Directors and the affirmative vote of the holders of at least 80% of the votes entitled to be cast by the holders of all shares of the corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to alter, amend or repeal, or adopt any provision inconsistent with, Articles V, VI, VIII and IX and paragraph 2 of Article VII of these Articles of Incorporation or any provision of such Articles; provided, however, that the affirmative vote of the holders of 66-2/3% of the votes entitled to be cast by the holders of all shares entitled to vote generally in the election of directors, voting together as a single class, shall be sufficient to approve any alteration, amendment or repeal of, or adoption of any provision inconsistent with, Articles V, VI, VIII and IX and paragraph 2 of Article VII of these Articles of Incorporation that is approved by the affirmative vote of a majority of the entire Board of Directors with the concurring vote of a majority of the Continuing Directors, voting separately and as a subclass of directors. ARTICLE IX Except as otherwise required by law and subject to the rights of the holders of any class of shares having a preference over the common shares as to dividends or upon liquidation, special meetings of shareholders of the corporation may be called only by the Board of Directors pursuant to a resolution adopted by the affirmative vote of a majority of the entire Board of Directors. ARTICLE X 1. (a) From and after the time that the corporation is made aware of the existence of an Interested Shareholder (as hereinafter defined) and so long as there continues to be an Interested Shareholder, in addition to any affirmative vote required by law or these Articles of Incorporation, and except as otherwise expressly provided in paragraph 2 of this Article X: (i) any merger or consolidation of the corporation or any Subsidiary (as hereinafter defined) or any exchange of shares of the corporation or any Subsidiary pursuant to a plan of exchange; (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with the corporation or any Subsidiary of any assets, securities or commitments of any person having an aggregate Fair Market Value (as hereinafter defined) of Fifty Million Dollars ($50,000,000) or more; (iii) any reclassification of securities (including any combination of shares or reverse stock split), or recapitalization or reorganization of the corporation, or any merger or consolidation of the corporation with any of its Subsidiaries; (iv) any sale, lease, exchange, mortgage, pledge, transfer or other disposition of, or any security arrangement, investment, loan, advance, guarantee, agreement to purchase, agreement to pay, extension of credit, joint- venture participation or other arrangement involving, any assets, securities or commitments of the corporation or any Subsidiary, or any issuance, transfer or sale of any securities of the corporation or any Subsidiary, or any combination of the foregoing (whether in one transaction or a series of transactions), having an aggregate Fair Market 67 Value of, and/or involving an aggregate amount of, Fifty Million Dollars ($50,000,000) or more, and/or constituting substantially all, or an integral part of, the assets or business of an industry segment (as that term is commonly used with reference to the business of publicly-owned corporations) of the business of the corporation or any Subsidiary, and/or involving aggregate commitments of Fifty Million Dollars ($50,000,000) or more; (v) the adoption of any plan or proposal for the liquidation or dissolution (or revocation thereof) of the corporation; or (vi) any agreement, contract or other arrangement providing for any one or more of the actions specified in the foregoing clauses (i) to (v); shall require the affirmative vote of the holders of at least 80% of the votes entitled to be cast by the holders of all shares of the corporation entitled to vote generally in the election of directors (the "Voting Stock"), voting together as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law or in any agreement with any national securities exchange or otherwise. (b) The term "Business Transaction" used in this Article X shall mean any transaction which is referred to in any one or more of clauses (i) through (vi) of paragraph 1(a) of this Article X. (c) This paragraph 1 of this Article X shall not apply with respect to purchases and/or sales of goods, services, and products other than timber, made in the ordinary course of the corporation's business, consistent with its past practice. 2. The provisions of paragraph 1 of this Article X shall not be applicable to any Business Transaction, and such Business Transaction shall require only such affirmative vote as is required by law or any other provision of these Articles of Incorporation, if the Business Transaction shall have been approved by a majority of the Continuing Directors (as hereinafter defined), voting separately and as a subclass of directors. 3. For the purposes of this Article X: (a) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in effect on July 22, 1985 (the term "registrant" in said Rule 12b-2 meaning, in this case, the corporation). (b) "beneficially owned" shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Exchange Act, as in effect on July 22, 1985. (c) "Continuing Director" means any member of the Board of Directors who was a member of the Board of Directors on August 13, 1985 or who is elected to the Board of Directors after August 13, 1985 upon the recommendation of a majority of the Continuing Directors, voting separately and as a subclass of directors on such recommendation. (d) "Fair Market Value" means: (x) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the Composite Tape for New York Stock Exchange-Listed Stocks, or, if such stock is not quoted on the Composite Tape, on 68 the New York Stock Exchange, or if such stock is not listed on such exchange, on the principal United States securities exchange registered under the Exchange Act on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined in good faith by majority vote of the Continuing Directors; and (y) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined in good faith by majority vote of the Continuing Directors. (e) "Interested Shareholder" at any particular time means any person (other than the corporation or any Subsidiary and other than any pension, profit-sharing, employee stock ownership or other employee benefit plan of the corporation or any Subsidiary or any trustee of or fiduciary with respect to any such plan when acting in such capacity) who or which: (i) is at such time the beneficial owner, directly or indirectly, of shares of the corporation having ten percent (10%) or more of the votes entitled to be cast by the holders of all outstanding shares of Voting Stock; (ii) at any time within the two-year period immediately prior to such time was the beneficial owner, directly or indirectly, of shares of the corporation having ten percent (10%) or more of the votes entitled to be cast by the holders of all outstanding shares of Voting Stock; or (iii) is at such time an assignee of or has otherwise succeeded to the beneficial ownership of any shares of Voting Stock which were at any time within the two- year period immediately prior to such time beneficially owned by any Interested Shareholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933; provided, however, that "Interested Shareholder" shall not mean any person who or which, as of July 22, 1985, met any of the conditions set forth in clauses (i), (ii) or (iii). (f) "person" means an individual, a corporation, a partnership, an association, a joint stock company, a trust, any unincorporated organization, or a government or political subdivision thereof. (g) "Subsidiary" means any corporation of which a majority of any class or series of equity security is owned, directly or indirectly, by the corporation; provided, however, that for the purposes of the definition of Interested Shareholder set forth in paragraph 3(e) of this Article X, the term "Subsidiary" shall mean only a corporation of which a majority of each class or series of equity security is owned, directly or indirectly, by the corporation. (h) A person shall be a "beneficial owner" of any shares of Voting Stock: (i) which are beneficially owned, directly or indirectly, by such person or any of its Affiliates or Associates; (ii) which such person or any of its Affiliates or Associates has (x) the right to acquire (whether or not such right is exercisable immediately) pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or 69 otherwise, or (y) the right to vote pursuant to any agreement, arrangement or understanding; or (iii) which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Voting Stock. (i) For the purposes of determining whether a person is an Interested Shareholder pursuant to paragraph 3 (e) of this Article X, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned by an Interested Shareholder through application of paragraph 3 (h) of this Article X but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement or understanding, or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise. 4. For the purposes of this Article X, the Continuing Directors shall have the power and duty to determine, by majority vote, on the basis of information known to them after reasonable inquiry, whether any transaction specified in paragraphs 1 (a) (ii) and 1 (a) (iv) meets the monetary tests set forth therein. 5. The provisions of this Article X shall not be construed to impose any fiduciary duty, obligation or responsibility on the Board of Directors, or any member thereof, to approve such Business Transaction or recommend its adoption or approval to the shareholders, nor shall any provision of this Article X be construed as limiting, prohibiting or otherwise restricting in any manner the Board of Directors, or any member thereof, with respect to evaluations of or actions and responses taken with respect to such Business Transaction. 6. No action taken by, or omission of, a Continuing Director in the exercise (or non-exercise) of the authority and discharge of the responsibilities conferred or imposed upon Continuing Directors by this Article X shall be deemed to be, or involve, a breach of the fiduciary duty of such Continuing Director to the shareholders of the corporation unless it can be demonstrated by the person asserting such breach that the Continuing Director acted (or failed to act) in bad faith and in a manner inconsistent with the provisions and spirit of this Article X. 7. Notwithstanding any other provisions of law, these Articles of Incorporation (except as hereinafter provided) or the bylaws of the corporation, the affirmative vote of a majority of the entire Board of Directors and the affirmative vote of the holders of at least 80% of the votes entitled to be cast by the holders of all outstanding shares of Voting Stock, voting together as a single class, shall be required to alter, amend or repeal, or to adopt any provision inconsistent with, this Article X or any provision hereof; provided, however, that the affirmative vote of the holders of 66 2/3% of all outstanding shares of Voting Stock, voting together as a single class, shall be sufficient to approve any alteration, amendment or repeal of, or adoption of any provision inconsistent with, this Article X or any provision hereof that is approved by the affirmative vote of a majority of the entire Board of Directors with the concurring vote of a majority of the Continuing Directors, voting separately and as a subclass of directors. The phrase "entire Board of Directors" shall mean that number of directors fixed by the most recent resolution adopted by the Board of Directors prior to the date as of which a determination of the number of directors then constituting the entire Board of Directors shall be relevant for any purpose under this Article X. 8. All reasonable expenses (including, without limitation, attorneys' fees and disbursements) incurred by the Continuing Directors in the exercise of the authority, and discharge of the 70 responsibilities, conferred or imposed upon them by this Article X (or incurred by reason or as a consequence of the exercise of such authority or the discharge of such responsibilities, including, without limitation, all attorneys' fees and disbursements incurred in asserting or defending any claim arising out of such exercise) shall be paid by the corporation. The provisions of this paragraph 8 of this Article X shall be deemed to be a contract between the corporation and the Continuing Directors, and it shall be the duty of the Chief Financial Officer of the corporation to make prompt payment thereof on the written request of a majority of the Continuing Directors, accompanied by appropriate vouchers and invoices. The rights conferred upon the Continuing Directors, and the obligations imposed upon the corporation, by this paragraph 8 of this Article X shall be in addition to the rights of the Continuing Directors, as directors, to indemnification under the bylaws of the corporation; provided, however, that the corporation shall not, by reason of this sentence, be obliged to make duplicate payments of any item of expense incurred by a Continuing Director. ARTICLE XI To the full extent the Washington Business Corporation Act permits the limitation or elimination of liability of directors, a director of this corporation shall not be personally liable to this corporation or its shareholders for monetary damages for conduct as a director, provided that, except as provided in the next succeeding sentence, this provision shall not eliminate or limit liability of the director (i) for acts or omissions that involve intentional misconduct by the director or a knowing violation of law by the director, (ii) for conduct violating Section 23A.08.450 of the Washington Business Corporation Act, or (iii) for any transaction from which the director will personally receive a benefit in money, property or service to which the director is not legally entitled. If the Washington Business Corporation Act is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of this corporation shall be eliminated or limited to the fullest extent permitted by the Washington Business Corporation Act, as so amended. Any repeal or modification of this Article by the shareholders of this corporation shall not adversely affect any right or protection of a director of this corporation, for or with respect to any action or omission of such director occurring prior to such amendment or repeal, existing at the time of such repeal or modification. ARTICLE XII This corporation may indemnify, including the making of advances of expenses and the making of contracts with directors with respect to indemnity, and may purchase and maintain insurance for, its directors, officers, trustees, employees, and other persons and agents, and (without limiting the generality of the foregoing) shall indemnify its directors against all liability, damage and expenses arising from or in connection with service for, employment by, or other affiliation with this corporation or other firms or entities to the maximum extent and under all circumstances permitted by law as then in effect. Dated at Federal Way, Washington, this 22nd day of October, 1999. See attached _______________________________________ Secretary of Weyerhaeuser Company 71 ARTICLES OF RESTATEMENT OF WEYERHAEUSER COMPANY To the Secretary of State State of Washington Pursuant to the provisions of the Washington Business Corporate Act, the corporation hereinafter named (the "corporation") does hereby adopt these Articles of Restatement. 1. The name of the corporation is Weyerhaeuser Company. 2. The text of the Restated Articles of Incorporation is annexed hereto and made a part hereof. Executed on October 22, 1999. /s/ Sandy D. McDade --------------------------------- Name of Officer: Sandy D. McDade Title of Officer: Secretary CERTIFICATE It is hereby certified that: 1. The name of the corporation is Weyerhaeuser Company 2. The restatement herein provided for does not contain an amendment to the Articles of Incorporation requiring shareholder approval. The Board of Directors of the corporation adopted the restatement of the Articles of Incorporation herein provided for on June 20, 1999. Executed on October 22, 1999. /s/ Sandy D. McDade --------------------------------- Name of Officer: Sandy D. McDade Title of Officer: Secretary EX-13 3 1999 FINANCIAL HIGHLIGHTS =========================================================================
Dollar amounts in millions except per-share figures 1999 1998 - ------------------------------------------------------------------------- Net sales and revenues $ 12,262 $ 10,766 -------------------- Earnings before cumulative effect of a change in an accounting principle 616 294 Cumulative effect of a change in an accounting principle(1) (89) - -------------------- Net earnings 527 294 -------------------- Cash flow from operations, before working capital changes 1,396 1,018 Capital expenditures (excluding acquisitions) 566 615 Total assets 18,339 12,834 Shareholder interest 7,173 4,526 --------------------
BASIC EARNINGS PER SHARE(3) - ------------------------------------------------------------------------------ 1999 1998 ------------------------------------------------------ ------- Before cumulative effect Cumulative effect of a change in an of a change in an accounting principle accounting principle Net(2) Net(2) ------------------------------------------------------ ------- First quarter $ .21 $ (.45) $ (.24) $ .43 Second quarter .82 - .82 .34 Third quarter 1.18 - 1.18 .56 Fourth quarter .79 - .79 .15 ------------------------------------------------------ ------- $ 2.99 $ (.43) $ 2.56 $ 1.48 ====================================================== =======
(1) The cumulative effect of a change in an accounting principle in 1999 reflects the after-tax effect of the first- quarter write-off of the unamortized balance of capitalized start-up costs at year-end 1998. (2) Included in 1999 earnings were nonrecurring items principally for MacMillan Bloedel acquisition costs incurred in the fourth quarter and asset impairment charges primarily associated with the decision to sell the company's Composite Products business booked in the first quarter. The sale of this business occurred in the second quarter. Net earnings before these nonrecurring items and the cumulative effect of a change in an accounting principle were $681 million, or $3.31 per share. (3) Diluted earnings per share by quarter for 1999 and 1998 were ($0.24), $0.81, $1.18 and $ 0.78; and $0.43, $0.34, $0.55 and $0.15, respectively.
MARKET PRICES HIGH/LOW 1999 1998 - ------------------------------------------------------------------------------ First quarter $ 62 - 49 9/16 $ 57 15/16 - 44 15/16 Second quarter 73 15/16 - 55 9/16 61 7/16 - 44 9/16 Third quarter 69 3/4 - 54 13/16 47 7/16 - 36 3/4 Fourth quarter 72 15/16 - 54 9/16 51 9/16 - 41 3/4 Year $ 73 15/16 - 49 9/16 $ 61 7/16 - 36 3/4 - ------------------------------------------------------------------------------
The consolidated financial statements include: (1) Weyerhaeuser Company (Weyerhaeuser), 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. 9 PULP, PAPER AND PACKAGING =========================================================================
NET SALES 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------- In millions of dollars Pulp $ 1,060 $ 935 $ 986 $ 954 $ 1,616 Paper 1,010 869 842 803 1,001 Paperboard and containerboard 369 298 301 281 325 Packaging 2,005 1,894 1,781 1,921 1,863 Newsprint - 37 416 451 508 Recycling 239 191 189 140 266 Other products 149 88 94 98 103 -------------------------------------------- $ 4,832 $ 4,312 $ 4,609 $ 4,648 $ 5,682 ============================================
SALES VOLUMES 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------- In thousands Pulp-air-dry metric tons 2,273 2,012 1,982 1,868 2,060 Paper-tons 1,460 1,181 1,146 1,007 1,006 Paperboard-tons 248 236 243 205 230 Containerboard-tons 576 323 389 346 259 Packaging-MSF 46,483 44,299 44,508 42,323 34,342 Newsprint-metric tons - 62 684 629 663 Recycling-tons 2,785 2,546 2,229 2,011 1,467 ---------------------------------------------
ANNUAL PRODUCTION CAPACITY 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------- In thousands Pulp-air-dry metric tons 2,285 2,219 1,971 2,063 2,004 2,159 Paper-tons 1,595 1,511 1,235 1,128 1,034 1,060 Paperboard-tons 230 251 237 231 206 229 Containerboard-tons 3,694 2,622 2,291 2,381 2,331 2,329 Packaging-MSF 66,000 48,758 46,410 46,488 44,471 36,041 Newsprint-metric tons - - 69 704 631 687 Recycling-tons - 4,287 3,833 3,655 3,428 2,754 --------------------------------------------------
PRINCIPAL MANUFACTURING FACILITIES - -------------------------------------------------------------- Pulp 9 Containerboard 7 Paper 6 Packaging 64 Paperboard 1 Recycling 24 - --------------------------------------------------------------
1999 PULP MILL CAPACITIES 1999 total capacity 2.3 million metric tons - -------------------------------------------------------------------------------- Metric tons in thousands (Shown as bar graph in document) ================================================================================ LOCATION Columbus, MS 380 Cosmopolis, WA 140 Dryden, ONT 75 Flint River, GA 330 Grande Prairie, ALB 310 Kamloops, BC 470 New Bern, NC 315 Plymouth, NC 130 Prince Albert, SASK 135 Weyerhaeuser's Pulp business is the world leader in producing softwood market pulp for global markets. We manufacture three major product lines: softwood and hardwood papergrade pulp, absorbent pulp, and dissolving and specialty pulp. Customers from around the world buy this pulp for use in products such as fine writing, office and publication papers; diapers and absorbent personal care products; pharmaceuticals; and a photographic-base paper. We strive to produce these products in a way that reduces unwanted byproducts and captures and reuses all available resources during the pulp process. 24 1999 PAPER MILL CAPACITIES 1999 total capacity 1.6 million tons - -------------------------------------------------------------------------------- Tons in thousands (Shown as bar graph in document) ================================================================================ LOCATION Columbus, MS 220 Dryden, ONT 395 Longview, WA 160 Plymouth, NC 430 Prince Albert, SASK 250 Rothschild, WI 140 Our Fine Paper business manufactures coated and uncoated fine papers for printing, publishing, and business and office use. Some of the most recognizable names are First Choice premium electronic imaging paper and Cougar(R) Opaque and Lynx Opaque(R) printing papers. Our Newsprint business is a joint venture with Nippon Paper Industries of Japan that makes high-quality newsprint for newspaper publishers and commercial printers in the western United States and Japan. The Bleached Paperboard business primarily makes paperboard used to produce containers such as milk and juice cartons and paper cups. 1999 MEDIUM CAPACITIES 1999 total capacity 1.1 million tons - -------------------------------------------------------------------------------- Tons in thousands (Shown as bar graph in document) ================================================================================ LOCATION North Bend, OR 252 Pine Hill, AL 287 (Location acquired from MacMillan Bloedel) Plymouth, NC 176 Sturgeon Falls, ONT 99 (Location acquired from MacMillan Bloedel) Valliant, OK 255 1999 LINERBOARD CAPACITIES 1999 total capacity 2.6 million tons - -------------------------------------------------------------------------------- Tons in thousands (Shown as bar graph in document) ================================================================================ LOCATION Henderson, KY 173 (Location acquired from MacMillan Bloedel) Pine Hill, AL 566 (Location acquired from MacMillan Bloedel) Plymouth, NC 297 Springfield, OR 723 Valliant, OK 866 Weyerhaeuser manufactures package-strength medium and linerboard. The medium is used in forming the fluted (or wavy) portion of corrugated packaging that provides package strength and extra cushioning to the products in the box. The linerboard is the flat, outer sheets of paper used to create the inside and outside facings of a corrugated box. The liners provide extra stacking strength and a smooth graphics surface for the finished box. Containerboard and corrugated packaging are made from renewable and recyclable resources with an average recycled content of 57 percent. - -------------------------------------------------------------------------------- MANUFACTURING FACILITIES ================================================================================ PACKAGING PLANTS Arizona, Arkansas, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, New York, North Carolina, Ohio, Oregon, Tennessee, Texas, Virginia, Washington, Wisconsin; Guanajuato, Mexico PAPER AND CONTAINERBOARD RECYCLING Arizona, California, Colorado, Illinois, Iowa, Kansas, Maryland, Minnesota, Nebraska, North Carolina, Oklahoma, Oregon, Tennessee, Texas, Utah, Virginia, Washington 25 TIMBERLANDS ==========================================================================
NET SALES 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------- In millions of dollars To unaffiliated customers: Raw materials (logs, chips and timber) $ 626 $ 599 $ 760 $ 830 $ 850 Other products 30 37 37 37 32 -------------------------------------------- $ 656 $ 636 $ 797 $ 867 $ 882 ============================================ Intersegment sales $ 537 $ 488 $ 520 $ 513 $ 574 ============================================
SALES VOLUMES 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------- In millions Raw materials-cubic feet 287 259 235 254 254 ---------------------------------------------
ANNUAL PRODUCTION 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------- In millions Logs-cubic feet 521 495 476 412 420 Fee harvest-cubic feet 634 585 541 496 518 --------------------------------------------
26 U.S. OWNED AND LEASED TIMBERLANDS Total acres owned or leased 5.7 million - -------------------------------------------------------------------------------- Acres in thousands (Shown as bar graph in document) ================================================================================ LOCATION Alabama 625 Arkansas 737 Georgia 334 Louisiana 358 Mississippi 646 North Carolina 575 Oklahoma/Texas 510 Oregon 579 Washington 1,381 In the United States, Weyerhaeuser owns and operates 5.7 million acres of privately managed forests in 10 states for sustainable wood production. We manage our forests to increase the quality and volume of wood produced, as well as to protect important natural resources. Such forest practices include planting 300 to 600 seedlings on each acre, thinning forest stands to give remaining trees more room to grow, pruning selected trees to produce knot-free wood, fertilizing stands to supplement natural nutrient levels, and harvesting at sustainable rates-approximately 2 percent of our forestlands each year in the West and 3 percent in the South where the growing cycle is faster. CANADIAN OWNED AND Total acres owned or licensed LICENSED TIMBERLANDS 33.5 million (13.6 million hectares) - -------------------------------------------------------------------------------- Acres in thousands (Shown as bar graph in document) ================================================================================ LOCATION Alberta 7,515 British Columbia 6,412 New Brunswick 177 Ontario 6,539 Saskatchewan 12,807 Forests in Canada generally are publicly owned and administered by provincial governments. Weyerhaeuser Canada holds renewable, long-term licenses on 32.8 million acres (13.3 million hectares) of productive forestlands in five provinces and owns 663,000 acres (268,000 hectares) in British Columbia. Weyerhaeuser works closely with various stakeholder groups to achieve business improvement opportunities. This includes working with various major universities in the area of forestry research and development; strengthening relationships with Aboriginal peoples; and helping establish sustainable forest management standards. 27 WOOD PRODUCTS ==========================================================================
NET SALES 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------- In millions of dollars Softwood lumber $ 2,318 $ 1,793 $ 2,094 $ 1,988 $ 1,648 Softwood plywood and veneer 539 452 502 519 591 Oriented strand board, composite and other panel products 825 765 594 667 752 Hardwood lumber 280 240 272 235 193 Engineered wood products 409 330 284 233 207 Raw materials (logs, chips & timber) 194 228 232 220 228 Other products 791 667 599 511 430 -------------------------------------------- $ 5,356 $ 4,475 $ 4,577 $ 4,373 $ 4,049 ============================================
SALES VOLUMES 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------- In millions Softwood lumber-board feet 5,734 4,995 4,869 4,745 4,515 Softwood plywood and veneer -square feet (3/8) 1,902 1,842 2,042 2,172 2,324 Composite panels -square feet (3/4) 410 586 551 604 648 Oriented strand board -square feet (3/8) 2,716 2,697 2,462 2,083 1,931 Hardwood lumber-board feet 397 339 362 349 293 Doors (thousands) 720 789 730 652 648 Raw materials-cubic feet 305 315 325 304 260 ---------------------------------------------
ANNUAL PRODUCTION CAPACITY 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------- In millions Softwood lumber-board feet 5,452 4,532 4,025 3,968 3,701 3,419 Softwood plywood and veneer -square feet (3/8) 1,371 1,065 960 1,092 1,243 1,292 Composite panels -square feet (3/4) 228 281 510 478 535 583 Oriented strand board -square feet (3/8) 3,365 2,452 2,179 2,041 1,687 1,654 Hardwood lumber-board feet 386 376 342 345 333 278 Doors (thousands) 850 732 788 740 646 643 Logs-cubic feet - 572 526 519 500 494 --------------------------------------------------
PRINCIPAL MANUFACTURING FACILITIES - ---------------------------------------------------------------------------- Softwood lumber, plywood and veneer 45 Hardwood lumber 12 Composite panels 3 Doors 1 Oriented strand board 9 - ----------------------------------------------------------------------------
BUILDING MATERIALS DISTRIBUTION sells a broad range of building materials from a network of in-market customer service centers, satellites and reload operations located throughout North America. ================================================================================ U.S. LOCATIONS Alabama, Arizona, California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Tennessee, Texas, Utah, Virginia, Washington, Wisconsin CANADIAN LOCATIONS Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec, Saskatchewan 28 SOFTWOOD LUMBER 1999 total capacity 5.5 billion board feet - -------------------------------------------------------------------------------- Board feet in millions (Shown as bar graphs in document) - -------------------------------------------------------------------------------- WESTERN U.S. 1999 total capacity 1.1 billion board feet ================================================================================ LOCATION Aberdeen, WA 200 Cottage Grove, OR 315 Enumclaw, WA 230 Green Mountain, WA 230 Raymond, WA 170 - -------------------------------------------------------------------------------- SOUTHERN U.S. 1999 total capacity 2.1 billion board feet ================================================================================ LOCATION Barnesville, GA 136 Bruce, MS 214 Dierks, AR 195 Greenville, NC 219 Holden, LA 121 McComb, MS 195 Millport, AL 95 Mt. Pine, AR 115 New Bern, NC 94 Philadelphia, MS 211 Pine Hill, AL 103 (acquired from MacMillan Bloedel) Plymouth, NC 174 Wright City, OK 225 Durango, MEXICO 24 (acquired from MacMillan Bloedel) - -------------------------------------------------------------------------------- CANADA 1999 total capacity 2.2 billion board feet ================================================================================ LOCATION Big River, SASK 99 Carrot River, SASK 68 (acquired from MacMillan Bloedel) Chapleau, ONT 130 (acquired from MacMillan Bloedel) Chemainus, BC 101 (acquired from MacMillan Bloedel) Drayton Valley, ALB 134 Dryden, ONT 73 Ear Falls, ONT 134 Grande Cache, ALB 114 Grande Prairie, ALB 207 Kamloops, BC 116 Nanaimo, BC 71 (acquired from MacMillan Bloedel) New Westminster, BC 136 (acquired from MacMillan Bloedel) Okanagan Falls, BC 136 Port Alberni (ADP), BC 177 (acquired from MacMillan Bloedel) Port Alberni (SOMASS), BC 82 (acquired from MacMillan Bloedel) Princeton, BC 135 Vancouver, BC 122 (acquired from MacMillan Bloedel) Vavenby, BC 151 Weyerhaeuser lumber in North America is produced from a variety of species. The lumber business works closely with our Timberlands group and other suppliers to ensure raw materials that meet specifications for log quality, including species, length, bucking and cleanliness. Technological advances, such as curve sawing that follows the natural curve of the tree, help Weyerhaeuser lumber operations minimize waste and obtain the maximum value from each log. 29 OSB MILL CAPACITIES 1999 total capacity 3.4 billion square feet - -------------------------------------------------------------------------------- Square feet 3/8" in millions (Shown as bar graph in document) ================================================================================ LOCATION Drayton Valley, ALB 400 Edson, ALB 400 Elkin, NC 340 Grayling, MI 445 Hudson Bay, SASK 210 (acquired from MacMillan Bloedel) Miramichi, NB 400 (acquired from MacMillan Bloedel) Slave Lake, ALB 220 Sutton, WV 520 Wawa, ONT 430 (acquired from MacMillan Bloedel) Weyerhaeuser is the world's second-largest producer of oriented strand board (OSB). OSB is a construction panel made with layers of precision-manufactured wood "strands" that are aligned, formed into panels and pressed with an exterior grade adhesive resin. The resulting engineered product is a high-quality, cost-effective panel for structural sheathing, subflooring, underlayments, webstock for I-beam floor joists, furniture stock and other building components. We market OSB as Sturdi-Wood(TM) in the western United States, Canada and Asia, and as Structurwood(R) in the eastern and midwestern United States. SOFTWOOD PLYWOOD AND VENEER CAPACITY 1999 total capacity 1.4 billion square feet - -------------------------------------------------------------------------------- Square feet 3/8" in millions (Shown as bar graph in document) ================================================================================ LOCATION Aberdeen, WA (veneer) 150 Dierks, AR 215 Hudson Bay, SASK 86 (acquired from MacMillan Bloedel) Millport, AL 227 Mt. Pine, AR 252 Nipigon, ONT (hardwood) 41 (acquired from MacMillan Bloedel) Pine Hill, AL 153 (acquired from MacMillan Bloedel) Wright City, OK 247 Plywood is a panel made with multiple layers of softwood veneer and is used as a construction material and "appearance" panel by builders and home remodelers both in North America and overseas. It also has industrial applications such as truck-trailer linings and upholstered furniture frame-stock. Weyerhaeuser is a major producer of plywood panels. HARDWOOD LUMBER 1999 total capacity 386 million board feet - -------------------------------------------------------------------------------- Board feet in millions (Shown as bar graph in document) ================================================================================ LOCATION Arlington, WA 60 Centralia, WA 60 Dorchester, WI 24 Eugene, OR 60 Garibaldi, OR 25 Lewiston, MI 7 Little Rock, AR 20 Longview, WA 60 Onalaska, WI 12 Sedro Woolley, WA 25 Titusville, PA 21 Wright City, OK 12 Weyerhaeuser is one of the leading producers of hardwood lumber and components in the world. Major furniture, cabinet and architectural millwork manufacturers domestically and worldwide purchase the lumber and component products produced by our Hardwood Lumber business. Choicewood(TM) boards, mouldings, panels and other specialty items are sold to retailers throughout North America. Other products include hardwood lumber, components, pallet cants, ties and a unique clear dimension lumber product for the Japanese fine furniture industry. 30 TRUS JOIST Trus Joist manufactures a variety of engineered wood products for structural framing and industrial applications. It is the world's largest manufacturer of engineered wood products. Weyerhaeuser acquired Trus Joist in January 2000 following a successful tender offer to shareholders of TJ International, the holding company that owned Trus Joist. ================================================================================ U.S. LOCATIONS Alabama, California, Georgia, Kentucky, Louisiana, Minnesota, Ohio, Oregon, Washington, West Virginia CANADIAN LOCATIONS Alberta, British Columbia
REAL ESTATE AND RELATED ASSETS - -------------------------------------------------------------------------------- OPERATIONS PRINCIPAL LOCATIONS ================================================================================ Land Management Arkansas, Georgia, North Carolina, Washington Pardee Construction Company Nevada, Southern California Quadrant Corporation Washington Trendmaker Homes Texas Winchester Homes Maryland, Virginia Weyerhaeuser Realty Investors California, Washington 31 - ------------------------------------------------------------ DESCRIPTION OF THE BUSINESS OF THE COMPANY - ------------------------------------------------------------ Weyerhaeuser Company (the company) was incorporated in the state of Washington in January 1900 as Weyerhaeuser Timber Company. It is principally engaged in the growing and harvesting of timber and the manufacture, distribution and sale of forest products, real estate development and construction, and other real estate related activities. The company has 44,800 employees, of whom 43,800 are employed in its timber-based businesses, and of this number, approximately 23,000 are covered by collective bargaining agreements, which generally are negotiated on a multi-year basis. Approximately 1,000 of the company's employees are involved in the activities of its real estate and related assets segment. The major markets, both domestic and foreign, in which the company sells its products are highly competitive, with numerous strong sellers competing in each. Many of the company's products also compete with substitutes for wood and wood fiber products. The company's subsidiaries in the real estate and related assets segment operate in highly competitive markets, competing with numerous regional and national firms in real estate development and construction and other real estate related activities. On November 1, 1999, the company completed the acquisition of MacMillan Bloedel Limited (MB). This acquisition included: . 428,000 acres of fee timberlands in the United States and 554,000 acres in Canada and 6 million acres of timberlands under long-term licensing arrangements in Canada. . 11 softwood lumber mills, three oriented strand board mills, three plywood mills, a particleboard mill, an integrated operation in Mexico and 31 Building Materials Distribution centers to the wood products segment. . A 49 percent interest in Trus Joist MacMillan, a joint venture based in Boise, Idaho, with 16 facilities in the United States and Canada that manufacture and market engineered wood products for structural framing and industrial applications. . Three containerboard mills and 19 corrugated packaging facilities to the Containerboard Packaging business in the pulp, paper and packaging segment. In 1999, the company's sales to customers outside the United States totaled $2.3 billion (including exports of $1.2 billion from the United States and $1.1 billion of Canadian export and domestic sales), or 19 percent of total consolidated sales and revenues, compared with 17 percent in 1998. All sales to customers outside the United States are subject to risks related to international trade and to political, economic and other factors that vary from country to country. - ------------------------------------------------------------ BUSINESS SEGMENTS ============================================================ TIMBERLANDS The company is engaged in the management of 5.2 million acres of company-owned and .5 million acres of leased commercial forestland in the United States (3.8 million acres in the South and 1.9 million acres in the Pacific Northwest), most of it highly productive and located extremely well to serve both domestic and international markets. The standing timber inventory on these lands is approximately 96 million cunits (a cunit is 100 cubic feet of solid wood). The relationship between cubic measurement and the quantity of end products that may be produced from timber varies according to the species, size and quality of timber, and will change through time as the mix of these variables changes. To sustain the timber supply from its fee timberlands, the company is engaged in extensive planting, suppression of nonmerchantable species, precommercial and commercial thinning, fertilization and operational pruning, all of which increase the yield from its fee timberland acreage. The company, through its wholly owned subsidiary, Weyerhaeuser New Zealand Inc., is responsible for the management and marketing activities of a New Zealand joint venture located on the northern end of the South Island consisting of 151,000 acres of Crown Forest License cutting rights and approximately 42,000 acres of freehold land. The company, through its wholly owned subsidiary, Weyerhaeuser Forestlands International, is a 50 percent owner in RII Weyerhaeuser World Timberfund, L.P. (WTF), a joint-venture partnership, which makes investments outside the United States. During the second quarter of 1999, WTF paid approximately U.S. $142 million to acquire 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 a sales and distribution business in Australia. Approximately 500 people work in these operations. This joint venture also owns 97 percent of a Uruguayan venture, Colonvade, S.A., which has acquired over 237,000 acres of private grazing land that is currently being converted into plantation forests. 42
Dollar amounts in millions 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------- Sales to unaffiliated customers: Raw materials (logs, chips and timber) $ 626 $ 599 $ 760 $ 830 $ 850 Other products 30 37 37 37 32 - ----------------------------------------------------------------------- $ 656 $ 636 $ 797 $ 867 $ 882 ======================================================================= Intersegment sales $ 537 $ 488 $ 520 $ 513 $ 574 ======================================================================= Approximate contributions to earnings $ 535 $ 487 $ 535 $ 503 $ 560 =======================================================================
WOOD PRODUCTS The company's wood products businesses produce and sell softwood lumber, plywood and veneer; oriented strand board, composite and other panels; hardwood lumber; doors and treated products. These products are sold primarily through the company's own sales organizations. Building materials are sold to wholesalers, retailers and industrial users. The raw materials required to produce these products are purchased from third parties, transferred at market price from the company's timberlands, or obtained from long-term licensing arrangements. During the second quarter of 1999, the company sold its composite products businesses facilities located at Adel, Georgia; Moncure, North Carolina; and Springfield, Oregon, and a ply-veneer plant at Springfield.
Dollar amounts in millions 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------- Sales to unaffiliated customers: Softwood lumber $ 2,318 $ 1,793 $ 2,094 $ 1,988 $ 1,648 Softwood plywood and veneer 539 452 502 519 591 Oriented strand board, composite and other panels 825 765 594 667 752 Hardwood lumber 280 240 272 235 193 Engineered wood products 409 330 284 233 207 Raw materials (logs, chips and timber) 194 228 232 220 228 Other products 791 667 599 511 430 - ------------------------------------------------------------------------- $ 5,356 $ 4,475 $ 4,577 $ 4,373 $ 4,049 ========================================================================= Approximate contributions to earnings(1)(2)(3) $ 470 $ 183 $ 172 $ 302 $ 248 =========================================================================
(1) After nonrecurring charges totaling $99 million for facility closure costs associated with the acquisition of MacMillan Bloedel and the disposition of the company's Composite Products business in 1999. (2) After nonrecurring charges totaling $25 million for changes to the British Columbia lumber operations in 1998. (3) After nonrecurring charges totaling $40 million associated with the closure of a lumber mill and two plywood facilities in 1997. PULP, PAPER AND PACKAGING The company's pulp, paper and packaging businesses include: Pulp, which manufactures chemical wood pulp for world markets; Paper, which manufactures and markets a range of both coated and uncoated fine papers through paper merchants and printers; Containerboard Packaging, which manufactures linerboard and corrugating medium, primarily used in the production of corrugated packaging, and manufactures and markets industrial and agricultural packaging; Paperboard, which manufactures and markets bleached paperboard, used for production of liquid containers, to West Coast and Pacific Rim customers; and Recycling, which operates an extensive wastepaper collection system and markets it to company mills and worldwide customers.
Dollar amounts in millions 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------- Sales to unaffiliated customers: Pulp $ 1,060 $ 935 $ 986 $ 954 $ 1,616 Paper 1,010 869 842 803 1,001 Paperboard and containerboard 369 298 301 281 325 Packaging 2,005 1,894 1,781 1,921 1,863 Newsprint(1) - 37 416 451 508 Recycling 239 191 189 140 266 Other products 149 88 94 98 103 - ----------------------------------------------------------------------------- $ 4,832 $ 4,312 $ 4,609 $ 4,648 $ 5,682 ============================================================================= Approximate contributions to earnings(2)(3) $ 310 $ 150 $ 164 $ 307 $ 1,181 =============================================================================
(1) As of February 1998, the company's ownership in its newsprint subsidiary changed from 80 percent to 50 percent; therefore, 1998 results reflect one month's sales. (2) After nonrecurring charges of $42 million associated with the closure of the Longview, Washington, chlor-alkali facility and streamlining pulp and paper operations in 1998. (3) After the gain of $21 million on the sale of Saskatoon Chemicals, Ltd., and charges totaling $49 million for the closure of a corrugated medium machine and the restructuring of the recycling business in 1997. 43 REAL ESTATE AND RELATED ASSETS The company, through its subsidiary, Weyerhaeuser Real Estate Company (WRECO), is engaged in developing single- family housing and residential lots for sale, including development of master-planned communities. Operations are concentrated mainly in selected metropolitan areas in Southern California, Nevada, Washington, Texas, Maryland and Virginia.
Dollar amounts in millions 1999 1998 1997 1996 1995 - --------------------------------------------------------------------------- Sales to and revenues from unaffiliated customers: Single-family units $ 960 $ 834 $ 688 $ 573 $ 563 Multi-family units 3 36 29 12 - Residential lots 99 103 91 76 60 Commercial lots 58 23 57 50 29 Commercial buildings 48 100 68 43 4 Acreage 33 36 41 25 36 Interest(1) 10 18 35 70 76 Loan origination and servicing fees(1) - - 35 100 84 Other 25 42 49 60 67 - ---------------------------------------------------------------------------- $ 1,236 $ 1,192 $ 1,093 $ 1,009 $ 919 ============================================================================ Approximate contributions to earnings(2) $ 190 $ 124 $ 111 $ 43 $ (277) ============================================================================
(1) Interest and loan origination and servicing fees relate principally to the company's operations in financial services through its subsidiary, Weyerhaeuser Mortgage Company, which was sold in the second quarter of 1997. (2) After a $45 million gain on the sale of Weyerhaeuser Mortgage Company in 1997 and a charge of $290 million to dispose of certain real estate assets in 1995. CORPORATE AND OTHER Corporate and other includes marine transportation and general corporate expense.
Dollar amounts in millions 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------ Sales to unaffiliated customers $ 182 $ 151 $ 134 $ 217 $ 256 ======================================================================== Approximate contributions to earnings(1)(2)(3) $ (272) $ (225) $ (186) $ (183) $ (217) ========================================================================
(1) After nonrecurring charges of $3 million for costs associated with the acquisition of MacMillan Bloedel in 1999. (2) After nonrecurring charges of $4 million for streamlining corporate operations in 1998. (3) After a $10 million gain, which is the net effect of interest income from a favorable federal income tax decision and the loss incurred in the sale of Shemin Nurseries in 1997. - ------------------------------------------------------------------------ ENVIRONMENTAL MATTERS ======================================================================== Since 1990, a number of fish and wildlife species that occur in streams and timberlands in the Pacific Northwest (Washington, Oregon, Idaho and northern California) have been listed as threatened or endangered in at least some portions of their ranges under the Endangered Species Act (ESA). These include the northern spotted owl, marbled murrelet, Umpqua River cutthroat trout, and a number of salmon species, bull trout and steelhead trout. Petitions have been filed to list other species and additional populations of some of those species as threatened or endangered under the ESA. A consequence of these listings has been, and a consequence of future listings may be, reductions in the sale and harvest of timber on federal timberlands in the Pacific Northwest. Federal and state requirements to protect habitat for threatened and endangered species have resulted in restrictions on timber harvest on some nonfederal timberlands in the Pacific Northwest, including some timberlands of the company. Additional regulatory actions taken by federal or state agencies to protect habitat for these species may, in the future, result in restrictions on timber harvests and other forest management practices in such states, including company timberlands in western Washington and western Oregon, could increase operating costs, and could affect timber supply and prices. The company believes that such restrictions will not have a significant effect on the company's total harvest of timber or production of forest products in the year 2000, although they may have such an effect in the future. The listing of the red-cockaded woodpecker as an endangered species under the ESA had some effect on the harvest of public and private timber in the southeastern United States, but has had little effect on the company's operations. Other ESA-listed species (e.g., American burying beetle and gopher tortoise) occur on or near some of the company's southern timberlands, but have had little effect on the company's operations. Other federal ESA listings, or designations of fish and wildlife species as endangered, threatened or otherwise sensitive under various state laws, could affect future timber harvests on some of the company's timberlands and could affect timber supply and prices in some regions. In addition, regulations protecting wetlands may affect future harvest 44 and forest management practices on some of the company's timberlands, particularly in southeastern states. In February 1995, the company obtained U.S. Fish and Wildlife Service approval of a Habitat Conservation Plan (HCP) and Incidental Take Permit with respect to northern spotted owls on approximately 209,000 acres of its Oregon coastal timberlands, which is expected to remain in effect for at least 50 years. In December 1996, the company applied to the U.S. Fish and Wildlife Service and the National Marine Fisheries Service for a multi-species HCP covering approximately 400,000 acres of company timberlands in western Oregon. If that HCP is approved and the related Incidental Take Permit is issued, the company would be authorized to "take" members of species currently listed or proposed for listing under the ESA and members of all or most species that may become listed in the future, in the course of conducting forest management and other activities on those lands. Under both HCPs, there are limits on the amounts of covered lands that can be sold or exchanged unless the new owner agrees to be bound by the HCP and related documents or the agencies approve the change in ownership. The company also has obtained from the U.S. Fish and Wildlife Service an Incidental Take Permit for the American burying beetle covering approximately 25,000 acres of lands in Oklahoma and has entered into agreements with the U.S. Fish and Wildlife Service to reduce uncertainties under the ESA with respect to red-cockaded woodpeckers on some of its timberlands in North Carolina and northern spotted owls on some of its timberlands in Washington. Forest practice acts in some of the states in which the company has timber increasingly affect present or future harvest and forest management activities. For example, forest practice acts in Washington and Oregon limit the size of clearcuts, require that some timber be left unharvested in riparian areas and sometimes in other areas to protect water quality and fish and wildlife habitat, regulate construction of forest roads and conduct of other forest management activities, require reforestation following timber harvest, and contain procedures for state agencies to review and approve proposed forest practice activities. Other states and some local governments regulate certain forest practices through various permit programs. Each state in which the company owns timberlands has developed "best management practices" (BMPs) to reduce the effects of forest practices on water quality and aquatic habitats. Additional and more stringent regulations and regulatory programs may be adopted by various state and local governments to achieve water quality standards under the Clean Water Act or to preserve aquatic habitats. These current or future forest practice acts, BMPs and other programs may reduce the volumes of timber that can be harvested, increase operating and administrative costs, and make it more difficult to respond to rapid changes in markets, extreme weather or other unexpected circumstances. However, the company does not anticipate that it will be disproportionately affected by these programs as compared with typical owners of comparable timberlands or that these programs will significantly disrupt its planned operations over large areas or for extended periods. In addition, the company participates in the Sustainable Forestry Initiative(SM) sponsored by the American Forest & Paper Association, a code of conduct designed to supplement government regulatory programs with voluntary landowner initiatives to further protect certain public resources and values. Compliance with the Sustainable Forestry Initiative(SM) may require some increases in operating costs. The combination of the forest management and harvest restrictions and effects described in the preceding paragraphs has increased operating costs, resulted in changes in the value of timber and logs from the company's Pacific Northwest timberlands, and contributed to increases in the prices paid for wood products and wood chips during periods of high demand. One additional effect may be the continuation of some reduced usage of, and some substitution of other products for, lumber and plywood. The company does not believe that the restrictions and effects described in the above paragraphs have had, or in 2000 or 2001 will have, a significant effect on the company's total harvest of timber, although they may have such an effect in the future. Weyerhaeuser's Canadian forest operations are primarily carried out on public forestlands under forest licenses. Many of these lands are subject to the constitutionally protected treaty or common law rights of the First Nations people of Canada. For historical reasons, most of the lands in British Columbia (B.C.) are not covered by treaties and, as a result, the claims of B.C.'s First Nations people relating to these forest resources are largely unresolved. Such claims may, in the future, result in some decrease in the lands available for forest operations under B.C. licenses, including under the company's licenses and contracts, could result in additional restrictions on the sale and 45 harvest of timber on B.C. timberlands, could increase operating costs, and could affect timber supply and prices. The company believes that such claims will not have a significant effect on the company's total harvest of timber or production of forest products in year 2000, although they may have such an effect in the future. In addition to the foregoing, the company is subject to federal, state or provincial and local air, water and land pollution control, solid and hazardous waste management, disposal and remediation laws and regulations in all areas in which it has operations, and to market demands with respect to chemical content of some products and use of recycled fiber. Compliance with these laws, regulations and demands usually involves capital expenditures as well as operating costs. The company cannot easily quantify future amounts of capital expenditures required to comply with these laws, regulations and demands, or the effects on operating costs, because in some instances compliance standards have not been developed or have not become final or definitive. In addition, compliance with standards frequently serves other purposes such as extension of facility life, increase in capacity, changes in raw material requirements, or increase in economic value of assets or products. While it is difficult to isolate the environmental component of most manufacturing capital projects, the company estimates that capital expenditures for environmental compliance were approximately $107 million (19 percent of total capital expenditures excluding acquisitions) in 1999. Based on its understanding of current regulatory requirements, the company expects that expenditures will range from $80 million to $100 million (9 to 11 percent of total capital expenditures) in 2000 and 2001. The company is involved in the environmental investigation or remediation of numerous sites. Some of the sites are on property presently or formerly owned by the company where the company has the sole obligation to remediate the site or shares that obligation with one or more parties, others are third-party sites involving several parties who have a joint and several obligation to remediate the site, and some are superfund sites where the company has been named as a potentially responsible party. The company's liability with respect to these sites ranges from insignificant at some sites to substantial at others, depending on the quantity, toxicity and nature of materials deposited by the company at the site and, with respect to some sites, the number and economic viability of the other responsible parties. The company spent approximately $14 million in 1999 and expects to spend $15 million in 2000 on environmental remediation of these sites. It is the company's policy to accrue for environmental remediation costs when it is determined that it is probable that such an obligation exists and the amount of the obligation can be reasonably estimated. Based on currently available information and analysis, the company believes that it is reasonably possible that costs associated with all identified sites may exceed current accruals by amounts that may prove insignificant or that could range, in the aggregate, up to approximately $110 million over several years. This estimate of the upper end of the range of reasonably possible additional costs is much less certain than the estimates upon which accruals are currently based and utilizes assumptions less favorable to the company among the range of reasonably possible outcomes. An Environmental Protection Agency (EPA) regulation under Title 5 of the Clean Air Act requires updated comprehensive operating permits at many of the company's manufacturing operations. The company will update the permit applications on file with the states as needed during 2000 and anticipates that it will be able to obtain the necessary permits. The EPA published proposed regulations on December 17, 1993, known as the "cluster rules," which would establish maximum achievable control technology standards for noncombustion sources under the Clean Air Act, and revised wastewater effluent limitations under the Clean Water Act. The original proposal has been modified on two occasions. The final rule was approved by the administrator of the EPA in November 1997 and went into effect in early 1998. The cluster rules will require the company to commit over the next several years approximately $87 million of additional capital to further reduce air emissions and wastewater discharges. 46 - ------------------------------------------------------------------------ FINANCIAL REVIEW - ------------------------------------------------------------------------ RESULTS OF OPERATIONS ======================================================================== 1999 COMPARED WITH 1998 Consolidated net sales and revenues for 1999 were a record $12.3 billion, an increase of 14 percent when compared with $10.8 billion in 1998. Increased volumes and higher prices over 1998 in essentially all product lines accounted for this increase. 1999 included two months' results from operations acquired in the MacMillan Bloedel business combination. 1999 net earnings were $527 million, or $2.56 basic earnings per share, an increase of 79 percent over 1998 results of $294 million, or $1.48 basic earnings per share. The company's fourth quarter results were negatively impacted by unanticipated effects of the lockout at some British Columbia ports, continued cleanup in North Carolina after Hurricane Floyd and higher than normal maintenance expenses. 1999 results were impacted by the following nonrecurring after-tax charges: . $89 million, or 43 cents per share, incurred in the first quarter for the cumulative effect of a change in an accounting principle that 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. . A charge of $65 million, or 32 cents per share, for closure or disposition of facilities. This included charges in the first quarter associated with the recognition of impairment of long-lived assets to be disposed of in four of the company's composite products facilities, a ply-veneer facility and a chip export dock, and in the fourth quarter for facility closure costs related to the MacMillan Bloedel acquisition. The year's results before these charges were $681 million, or $3.31 per share. The 1998 results reflected an after-tax charge of $45 million, or 23 cents per share, primarily associated with streamlining pulp and paper operations, the closure of a chemical facility and changes in the British Columbia operations. Before these charges, the company earned $339 million, or $1.71 per share, in 1998. During 1999, the company also incurred pretax charges of $32 million for Year 2000 remediation work compared with $42 million in the previous year. Diluted earnings per share, which are based on the inclusion of outstanding stock options and convertible debentures in the weighted average number of shares outstanding, were $2.55 and $1.47 for 1999 and 1998, respectively. The timberlands segment's operating earnings for 1999 were $535 million, a 10 percent increase over $487 million reported in 1998. Net sales for the year were $656 million, slightly higher than the $636 reported in the previous year. This increase was due to improvements in the Japanese economy, increased harvest levels in the U.S. South and overall demand for wood. The year ended with volumes and prices for both domestic and foreign log markets at levels higher than 1998. The wood products segment produced record operating earnings of $569 million in 1999 before nonrecurring charges of $94 million incurred in the disposition of the Composite Products business and $5 million for the acquisition of MacMillan Bloedel facilities. This compares favorably with earnings of $208 million before nonrecurring pretax charges of $25 million in 1998. Sales were $5.4 billion, an increase of 20 percent over the $4.5 billion reported in the prior year. New home construction and remodeling created a very strong demand for lumber and panels in 1999. The demand reached its height in the second and third quarters, achieving record earnings for both periods. The market cooled in the fourth quarter as a result of the traditional seasonal slowdown; however, prices remained above 1998 fourth-quarter levels. The year's operating earnings for the pulp, paper and packaging segment were $310 million compared with $192 million before nonrecurring pretax charges of $42 million in 1998, an increase of 61 percent. 1999 sales were $4.8 billion, up 12 percent over $4.3 billion recorded in 1998. Market conditions for pulp, containerboard and paper began improving during the second quarter due to the recovery of the global market for these products. This trend continued into the third and fourth quarters, which allowed the company to implement several price increases for pulp, containerboard and paper. At year-end, prices for all major product lines in this segment were at their highest levels of the year. The real estate and related assets segment produced record earnings of $190 million for the year compared with $124 million in 1998. Sales and revenues were $1.2 billion, comparable to 1998. The strength of the 47 housing markets in which the company operates - especially California - contributed to this 53 percent increase in earnings over the prior year. As the year ended, the real estate market was weakening; however, the segment's performance was helped by improved margins. Total costs and expenses for the year increased by $1 billion, or 10 percent, over the prior year. When considering the 14 percent increase in sales, operating margin is 9 percent for the year compared with 6 percent in 1998. Nonrecurring charges for the year, which included charges for acquisition and closure or disposition of facilities, impairment of long-lived assets to be disposed of, and Year 2000 remediation costs, were $134 million compared with $113 million in 1998. Selling, general and administrative expenses increased by $142 million over the prior year, primarily from an increase in accruals for employee performance incentives related to higher earnings. Other income (expense) is an aggregation of both recurring and occasional income and expense items and, as a result, can fluctuate from year to year. Significant items in 1999 were interest income of $33 million for Weyerhaeuser and $10 million for real estate and related assets. There were no significant items in 1998. 1998 COMPARED WITH 1997 Consolidated net sales and revenues for 1998 were $10.8 billion, a decrease of 4 percent over the prior year's $11.2 billion. Lower average prices in the major products were the principal factor in this unfavorable variance compared with 1997. In total, revenue changes as a result of volume variances were unchanged from the prior year. 1998 net earnings were $294 million, or $1.48 basic earnings per common share, a 14 percent decrease from $342 million, or $1.72 basic earnings per common share in 1997. The 1998 results reflect an after-tax charge of $45 million, or 23 cents per common share, primarily associated with streamlining pulp and paper operations, the closure of the Longview chlor-alkali facility and changes to the British Columbia lumber operations. During the year, the company also incurred pretax charges of $42 million on Year 2000 remediation work. 1997 earnings included an after-tax net charge of $9 million, or 4 cents per common share, related to the closure of operating facilities, offset in part by the gain on sale of businesses. Diluted earnings per common share, which are based upon the inclusion of outstanding stock options in the weighted average number of shares outstanding, were $1.47 and $1.72 for 1998 and 1997, respectively. The timberlands segment's operating earnings for 1998 were $487 million compared with $535 million in 1997. The 1998 results were hurt by a soft export market early in the year that weakened prices for both domestic and export logs. Net sales for the year were $636 million compared with $797 million in 1997. Export log prices did improve throughout the year and were above 1997 fourth-quarter levels at year- end. Operating earnings for the wood products segment were $208 million before the $25 million nonrecurring pretax charge associated with changes in the British Columbia lumber operations. This compares with the $212 million earned before nonrecurring pretax charges of $40 million for the closure of two plywood facilities and an export sawmill in 1997. This segment posted net sales of $4.5 billion for 1998, comparable to $4.6 billion in the prior year. Oriented strand board enjoyed a strong year with both volumes and prices above 1997 levels. Lower prices for lumber, however, offset the effects of higher volume driven by domestic housing starts. The pulp, paper and packaging segment had operating earnings of $192 million in 1998 before the nonrecurring pretax $42 million charge associated with streamlining pulp and paper operations and the closure of the Longview, Washington, chlor-alkali facility. This is comparable to the $192 million earned in 1997 before a pretax nonrecurring charge of $28 million, which is the net of a $49 million charge for facility closures, offset in part by a $21 million gain on the sale of the Saskatoon, Saskatchewan, Canada, chemical business. Sales for the segment were $4.3 billion for the year compared with $4.6 billion in the prior year. Prices for most grades of pulp and paper were below 1997 levels. The ownership restructuring of the North Pacific Paper Corporation newsprint facility from a fully consolidated subsidiary to a 50 percent owned equity affiliate in February 1998 also unfavorably impacted segment sales for the year. The real estate and related assets segment posted operating earnings of $124 million in 1998, compared with 1997 earnings of $66 million, before the gain of $45 million on the sale of Weyerhaeuser Mortgage Company. Improved operating performance and the strong housing market contributed to stronger earnings. Net sales and revenues were $1.2 billion in 1998 compared with $1.1 billion in 1997. This increase was primarily from the sale of single- family units, offset in part by the elimination of loan origination and service fees generated in previous years by the mortgage banking business. The sale of commercial properties was essentially unchanged from year to year. 48 Weyerhaeuser's costs of products sold were $398 million or 5 percent less in 1998 than 1997. This is consistent with the reduction in Weyerhaeuser net sales and maintains the costs of products sold as a percentage of sales at 78 percent, the same as 1997. Charges of $71 million in 1998 and $89 million in 1997 for the closure or disposition of facilities were included in costs and expenses. The product inventory turnover rate was 11.8 turns for the year, slightly less than the 12.1 turns in 1997. The real estate and related assets segment costs and operating expenses rose in 1998 on par with the increase in sales and revenues. Selling, general and administrative expenses decreased by $43 million for 1998 due principally to the sale of the mortgage banking business. Other income (expense) is an aggregation of both recurring and occasional income and expense items and, as a result, can fluctuate from year to year. There were no significant individual items in 1998. Significant items in 1997 for Weyerhaeuser were interest income of $18 million from a favorable federal income tax decision, a loss of $8 million from the sale of the wholesale nursery business and a gain of $21 million from the sale of the Saskatoon chemical facility. The real estate and related assets segment had a gain of $45 million from the sale of the mortgage banking business in 1997. CHARGES FOR CLOSURE OR DISPOSITION OF FACILITIES In 1999, 1998, and 1997, the company took pretax charges of $102 million, $71 million and $89 million, respectively, for the closure or disposition of facilities. These costs were based on plans that identified each of the facilities that would be closed or disposed of and the number of employees to be involuntarily terminated, their functions and their locations. These charges were related to the following facilities or activities: 1999: . $91 million for the impairment of long-lived assets to be disposed of 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, were located in Springfield, Oregon; Moncure, North Carolina; Adel, Georgia; and Coos Bay, Oregon. The Composite Products business and ply-veneer facility were sold in the second quarter. The chip export facility was closed in the fourth quarter. . $3 million for costs incurred in the disposition of the composite products facilities and ply-veneer facility and closure of the chip export facility. . $4 million for exit activities related to the planned closure of existing Building Materials Distribution centers that will become duplicative in the same geographical area as a result of the acquisition of MacMillan Bloedel. $2 million of this amount is for the termination of 64 employees, and another $2 million is for property-related items, primarily the termination of operating leases. The company is expected to complete these closures during 2000. . $4 million for integration costs related to the MacMillan Bloedel business combination. 1998: . $25 million for changes in the British Columbia lumber operations - Due to increased costs, the market impact of U.S. lumber quotas and the effect of the size and location of the mills on the business' competitiveness, the company consolidated its British Columbia lumber operations. This included permanently closing a sawmill in Lumby, converting the Merritt mill to a planer-only operation, and reconfiguring the company's remaining four sawmills in the province to achieve improved production capacity. Two hundred jobs were affected by these changes. . $22 million for closure of the Longview, Washington, chlor-alkali facility - The company closed this facility in 1999 because of market conditions and the need to invest significant capital to ensure continued safe operation of the plant. This closure completed the company's exit from chemical manufacturing. One hundred jobs were affected by this closure. . $20 million for pulp and paper operations reorganization - - Streamlining efforts in these businesses affected 460 employees. . $4 million for corporate operations streamlining - The company outsourced its employee benefits administration and closed its urban waste recovery business, which affected 80 positions. These costs are categorized in the aggregate as follows:
Dollar amounts in millions 1998 - ------------------------------------------------------------------------ Termination and other employee-related costs $ 39 Dispositions of property and equipment 16 Write-off of inventories 1 Environmental cleanup 8 Other exit activities 7 - ------------------------------------------------------------------------ $ 71 ========================================================================
1997: . $34 million for the closure, consolidation or disposition of recycling facilities - The company made adjustments to its nationwide system to meet the needs of internal and external customers in an increasingly competitive marketplace. Three hundred thirty jobs were affected by these changes. 49 . $15 million for the closure of the corrugated medium machine and administrative reorganization at the Longview, Washington, plant site - The company determined that the machine was not large enough to be a cost-competitive operation and after examining the limited options available decided to permanently close the operation. No employees were affected in 1997 by the machine closure; however, the administrative reorganization affected 29 employees. . $25 million for the closures of the Plymouth, North Carolina, and Philadelphia, Mississippi, plywood facilities - - These closures were a part of the company's long-term strategy to modify its wood products manufacturing facilities to match the changing future sources of raw materials. The company closed the Plymouth facility rather than modernize it in order to expand lumber production and reduce energy costs. This facility lacked an independent energy source, a problem that would have required a substantial investment. Two hundred forty jobs were affected by this closure. The closure of the Philadelphia facility allowed the company to strengthen the production capability of a sawmill that operates on the same site. The closure affected 165 jobs. . $15 million for the closure of the Coos Bay, Oregon, export sawmill and scaling back of related logging operations - Changing customer requirements, including declining demand for post-and-beam style housing and increased customer acceptance of substitute products in the Japanese market, eroded demand for products from this mill. Japanese homebuilders are using more dimension lumber, laminated beams and prefabricated panels, a trend that will further erode demand for post-and-beam lumber. This closure affected 200 positions at the mill. These costs are categorized in the aggregate as follows:
Dollar amounts in millions 1997 - ------------------------------------------------------------------------ Termination and other employee-related costs $ 17 Dispositions of property and equipment 42 Write-off of goodwill 14 Write-off of inventories 4 Environmental cleanup 2 Leasehold termination costs 1 Other exit activities 9 - ------------------------------------------------------------------------ $ 89 ========================================================================
Of the $262 million charges taken during these periods, approximately 64 percent of the total charges will not require cash outflows, while the remaining 36 percent requires cash outflows. The operating results of these facilities prior to our exit activities were not material to the company's results of operations. At year-end 1999, the company had $36 million reserved to complete these exit activities in 2000. Once fully implemented, the company expects these activities to improve annual operating costs by approximately $70 million by: . Lowering our labor costs due to downsizing our work force in the facilities and businesses affected. . Lowering depreciation and amortization costs for the net book value of property and equipment disposed of or closed and goodwill written off. . Productivity in our mill systems through a revised configuration of operating facilities with improved manufacturing logistics and costs. - ------------------------------------------------------------------------ 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 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 assets, 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. Long-term debt maturities are shown in Note 12 of Notes to Financial Statements. OPERATIONS Consolidated net cash provided by operations was $1.5 billion, an increase of 34 percent over $1.1 billion provided in 1998. $1.4 billion of the 1999 amount was provided by cash flow from operations before changes in working capital, while decreases in working capital accounted for $105 million. In 1998, cash flow from operations before working capital provided $1 billion with decreases in working capital providing $104 million. 50 Cash flow from operations before changes in working capital by segment was as follows:
Dollar amounts in millions 1999 1998 1997 - ------------------------------------------------------------------------ Timberlands $ 577 $ 533 $ 606 Wood products 705 373 384 Pulp, paper and packaging 611 528 566 Real estate and related assets 91 22 9 Corporate and other (588) (438) (473) - ------------------------------------------------------------------------ $ 1,396 $ 1,018 $ 1,092 ========================================================================
The increase of $378 million in cash flow from operations before changes in working capital is reflected primarily in increases of $233 million in net earnings and $120 million in noncash nonrecurring charges. In 1999, the company incurred a total of $191 million in nonrecurring charges for the write-off of capitalized start-up costs, impairment of long-lived assets to be disposed of, and closure or disposition of facilities. In 1998, the company had nonrecurring charges of $71 million for closure or disposition of facilities. These sources were partially offset by an increase of $48 million in the credit for noncash pension and other postretirement benefits due to favorable investment returns. Weyerhaeuser's 1999 working capital, net of the effects of the acquisition of MacMillan Bloedel and the disposition of the Composite Products business, decreased by $63 million. An increase in accounts payable and accrued liabilities and a decrease in prepaid expenses offset, in part, by increased receivables and inventories provided cash. The product inventory turnover rate was 12.5 times in 1999 compared with 11.8 times in 1998. In 1998, working capital, net of the effects of the NORPAC equity restructuring from a fully consolidated subsidiary to an equity affiliate and the purchase of the Dryden paper mill and sawmills, decreased by $86 million. This was reflected in decreases of receivables, inventories and prepaid expenses. Net working capital in the real estate and related assets segment provided $42 million in 1999 compared with $18 million in 1998. Increases in accounts payable and current year's income tax accrual were offset, in part, by acquisition of land and residential lots. INVESTING Capital expenditures in 1999, excluding acquisitions, were $566 million, down 8 percent from the $615 million spent in 1998. They are currently expected to approximate $900 million, excluding acquisitions, in 2000; however, these expenditures could be increased or decreased as a consequence of future economic conditions. Capital spending by segment, excluding acquisitions, over the past three years was as follows:
Dollar amounts in millions 1999 1998 1997 - ------------------------------------------------------------------------ Timberlands $ 104 $ 87 $ 75 Wood products 143 169 239 Pulp, paper and packaging 279 325 315 Corporate and other 40 34 27 - ------------------------------------------------------------------------ $ 566 $ 615 $ 656 ========================================================================
Cash in the amount of $247 million was acquired in the MacMillan Bloedel business combination in 1999. Also, in 1999, the company increased its investment in equity affiliates by $52 million, primarily in the RII Weyerhaeuser World Timberfund, L.P., joint venture that acquired timber, sawmills and other facilities in Southeast Australia. In 1998, the company acquired the Dryden, Ontario, Canada, paper mill and sawmills at a cost of $494 million for property and equipment and $49 million for working capital. Acquisitions of property in 1997 amounted to $13 million, with an additional $2 million for working capital. Also in 1997, the company expended $190 million to acquire a 51 percent interest in a forestry joint venture in New Zealand. The cash required to meet 1999 capital and other needs was provided by internal cash flow, the sale of the Composite Products business, cash in the MacMillan Bloedel acquisition, new debt issuances and dividends from subsidiaries, which are eliminated upon consolidation. The real estate and related assets segment met its cash needs through internal cash flow and the sale of mortgage-related financial instruments. The cash needed to meet capital and other Weyerhaeuser needs in 1998 was generated by internal cash flow, proceeds from the NORPAC equity restructuring and dividends from subsidiaries, which are eliminated upon consolidation. In the real estate and related assets segment, proceeds from the sale of mortgage-related financial instruments, reduction of holdings in equity affiliates and sale of property accounted for the cash provided by investing activities. FINANCING Weyerhaeuser increased its interest-bearing debt by $661 million during the year, net of $703 million of debt assumed in the MacMillan Bloedel business combination. New borrowings, including a net increase in commercial paper, were $807 million. Debt payments, including approximately $101 million for the redemption of convertible subordinated debentures assumed in the MacMillan Bloedel business combination, were $383 million. In 1998, the company decreased its interest-bearing debt by 51 $35 million, with payments of $87 million being offset, in part, by the sales of $48 million of industrial revenue bonds. The company's debt to total capital ratio was 36 percent at the end of 1999 compared with 39 percent at the prior year-end. At the end of 1999, the company's cash and short-term investments reflected $1.6 billion in marketable securities. These liquid investments were being held to meet cash requirements in early January to complete the $720 million tender offer for the shares of TJ International and redeem $750 million in notes payable. During the year, the real estate and related assets segment reduced its long-term debt by $224 million, while increasing notes and commercial paper by $111 million. In 1998, issuances of debt and increases in commercial paper offset payments on debt for a nil change in overall debt. In 1999, the company received $97 million from the sale of treasury shares used in the exercise of employee stock options compared with $19 million in 1998. This increased activity reflects the rise in the market price of the company's common stock. Cash dividends of $321 million were paid during the year; comparable to the $319 million paid in 1998. Although common share dividends have exceeded the company's target ratio in recent years, the intent, over time, is to pay dividends to common shareholders in the range of 35 to 45 percent of common share earnings. Weyerhaeuser also received intercompany dividends of $100 million and $190 million from Weyerhaeuser Real Estate Company and Weyerhaeuser Financial Services, Inc., in 1999 and 1998, respectively. These dividends are eliminated on a consolidated basis. During the 1998 first quarter, the company expended $42 million to purchase 925,000 shares of its common stock. This completed the 11 million-share repurchase program that commenced in 1995. To ensure its ability to meet future commitments, Weyerhaeuser Company and Weyerhaeuser Real Estate Company have established unused bank lines of credit in the maximum aggregate sum of $1.66 billion. Neither of the entities is a guarantor of the borrowings of the other under any of these credit facilities. MARKET RISK OF FINANCIAL INSTRUMENTS 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. 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. At December 26, 1999, the net open position of foreign exchange hedges in Canadian dollars, German DMs and Japanese yen was $310 million. . 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. At December 26, 1999, the company had one interest rate swap with a maturity date of November 6, 2001, and a notional amount of $75 million with a fixed interest rate of 6.85 percent. The value rate at December 26, 1999, based on the 30-day LIBOR, was 6.32 percent, with the fair value of the swap being a loss of $100,000. The amount of the obligation under this swap is based on the assumption that it 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. 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. 52 - ------------------------------------------------------------------------ HARDBOARD SIDING CASES ======================================================================== The company is a defendant in hardboard siding cases that can be divided into two types: . Purported class actions. Of the nine class action cases that have been filed against the company since November 1996: - Four have been resolved without a class being certified. In one of those cases, the plaintiffs have filed an appeal of a summary judgment in favor of the company. - Four statewide cases are pending in Iowa, Oregon, South Carolina and Texas. - A class of plaintiffs has been certified in one case in California. . Primarily multi-family and residential development cases. - Two cases have gone to trial. One resulted in a jury verdict in favor of the company, and the other in a judgment for the plaintiffs of approximately $3.5 million, representing a jury verdict that the company was responsible for 20 percent of the plaintiff's losses and 80 percent were caused by construction defects attributable to the general contractor and certain subcontractors. The company has appealed this decision and has established a reserve in the amount of the judgment. - Twenty-five cases of this type are pending. No pattern was developed that would allow the company to establish a reserve beyond what the company has already established for the existing jury verdict. The company also has hardboard siding product claims that have not been, nor are they anticipated to be, significant in relation to the company's results of operations. - ------------------------------------------------------------------------ ENVIRONMENTAL MATTERS ======================================================================== The company has established reserves for remediation costs on all of the approximately 115 active sites across our operations as of the end of 1999 in the aggregate amount of $46 million, up from $32 million at the end of 1998. This increase reflects the acquisition of MacMillan Bloedel, the incorporation of new information on all sites concerning remediation alternatives, updates on prior cost estimates and new sites (none of which were significant) less the costs incurred to remediate these sites during this period. The company has accrued remediation costs into this reserve as follows: $9 million, $28 million and $20 million in 1999, 1998 and 1997, respectively. The company incurred remediation costs as follows: $14 million, $14 million and $18 million in 1999, 1998 and 1997, respectively, and charged these costs against the reserve. - ------------------------------------------------------------------------ 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. (See Note 14 of Notes to Financial Statements.) - ------------------------------------------------------------------------ SUPPORT ALIGNMENT ======================================================================== In October, the company announced a new initiative to streamline and improve delivery of internal support services that is expected to result in $150 million to $200 million in annual savings. The company expects implementation of these plans to begin during the first quarter of 2000, a process that may take up to three years to complete. Because implementation plans are still under review, the specific number of employees affected, exact timing of the implementation and associated costs have not been finalized. 53 - ------------------------------------------------------------------------ YEAR 2000 ======================================================================== Weyerhaeuser, like all other companies using computers and microprocessors, was faced with the task of addressing the Year 2000 problem. The company completed its goal of correcting and testing all affected systems across the company before the end of 1999 and during the transition to the year 2000 experienced only a few minor problems that were quickly fixed and did not significantly affect company operations. Through the end of 1999, the company incurred $92 million of remediation costs, of which $37 million was incurred in 1999. $15 million of the cumulative amount has been capitalized for new hardware and software. - ------------------------------------------------------------------------ ACCOUNTING MATTERS ======================================================================== PROSPECTIVE PRONOUNCEMENTS In 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. The effective date of this pronouncement, originally fiscal years beginning after June 15, 1999, has been delayed to fiscal years beginning after June 15, 2000, with the issuance of SFAS No. 137 in June 1999. This statement is described in "Note 1. Summary of Significant Accounting Policies" of Notes to Financial Statements. ACCOUNTING AND REPORTING STANDARDS COMMITTEE During the year, the Accounting and Reporting Standards Committee, comprised of four outside directors, reviewed with the company's management and with its independent public accountants the scope and results of the company's internal and external audit activities and the adequacy of the company's internal accounting controls. The committee also reviewed current and emerging accounting and reporting requirements and practices affecting the company. - ------------------------------------------------------------------------ REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS - ------------------------------------------------------------------------ To the shareholders of Weyerhaeuser Company: We have audited the accompanying consolidated balance sheets of Weyerhaeuser Company (a Washington corporation) and subsidiaries as of December 26, 1999, and December 27, 1998, and the related consolidated statements of earnings, cash flows and shareholders' interest for each of the three years in the period ended December 26, 1999. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Weyerhaeuser Company and subsidiaries as of December 26, 1999, and December 27, 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 26, 1999, in conformity with generally accepted accounting principles. As explained in Note 1 of Notes to Financial Statements, effective December 28, 1998, the company changed its method of accounting for start-up activities. Seattle, Washington, February 9, 2000 ARTHUR ANDERSEN LLP 54
CONSOLIDATED STATEMENT OF EARNINGS For the three-year period ended December 26, 1999 Dollar amounts in millions except per-share figures ======================================================================== 1999 1998 1997 - ------------------------------------------------------------------------ Net sales and revenues: Weyerhaeuser $ 11,026 $ 9,574 $ 10,117 Real estate and related assets 1,236 1,192 1,093 - ------------------------------------------------------------------------ Total net sales and revenues 12,262 10,766 11,210 - ------------------------------------------------------------------------ Costs and expenses: Weyerhaeuser: Costs of products sold 8,304 7,468 7,866 Depreciation, amortization and fee stumpage 634 611 616 Selling, general and administrative expenses 791 649 646 Research and development expenses 55 57 56 Taxes other than payroll and income taxes 131 130 142 Charges for closure or disposition of facilities (Note 15) 102 71 89 Charge for Year 2000 remediation 32 42 1 - ------------------------------------------------------------------------ 10,049 9,028 9,416 - ------------------------------------------------------------------------ Real estate and related assets: Costs and operating expenses 1,017 1,016 909 Depreciation and amortization 6 5 12 Selling, general and administrative expenses 54 53 96 Taxes other than payroll and income taxes 8 8 8 - ------------------------------------------------------------------------ 1,085 1,082 1,025 - ------------------------------------------------------------------------ Total costs and expenses 11,134 10,110 10,441 - ------------------------------------------------------------------------ Operating income 1,128 656 769 Interest expense and other: Weyerhaeuser: Interest expense incurred 279 264 271 Less interest capitalized 16 7 15 Equity in income (loss) of affiliates (Note 3) 26 28 (7) Other income (expense), net (Note 4) 38 15 (10) Real estate and related assets: Interest expense incurred 72 77 110 Less interest capitalized 58 61 69 Equity in income of joint ventures and limited partnerships (Note 3) 39 30 26 Other income, net (Note 4) 16 7 58 - ------------------------------------------------------------------------ Earnings before income taxes and cumulative effect of a change in an accounting principle 970 463 539 Income taxes (Note 5) 354 169 197 - ------------------------------------------------------------------------ Earnings before cumulative effect of a change in an accounting principle 616 294 342 Cumulative effect of a change in an accounting principle (Note 1) 89 - - - ------------------------------------------------------------------------ Net earnings $ 527 $ 294 $ 342 ========================================================================
- ------------------------------------------------------------------------ 1999 1998 1997 - ------------------------------------------------------------------------ Per share (Note 2): Basic net earnings before cumulative effect of a change in an accounting principle $ 2.99 $ 1.48 $ 1.72 Cumulative effect of a change in an accounting principle (.43) - - - ------------------------------------------------------------------------ $ 2.56 $ 1.48 $ 1.72 ======================================================================== Diluted net earnings before cumulative effect of a change in an accounting principle $ 2.98 $ 1.47 $ 1.72 Cumulative effect of a change in an accounting principle (.43) - - - ------------------------------------------------------------------------ $ 2.55 $ 1.47 $ 1.72 ======================================================================== Dividends paid per share $ 1.60 $ 1.60 $ 1.60 ========================================================================
See notes on pages 61 through 81. 55
CONSOLIDATED BALANCE SHEET Dollar amounts in millions ======================================================================== December 26, December 27, 1999 1998 - ------------------------------------------------------------------------ ASSETS Weyerhaeuser Current assets: Cash and short-term investments (Note 1) $ 1,640 $ 28 Receivables, less allowances of $10 and $5 1,296 886 Inventories (Note 7) 1,329 962 Prepaid expenses 278 294 - ------------------------------------------------------------------------ Total current assets 4,543 2,170 Property and equipment (Note 8) 7,560 6,692 Construction in progress 355 315 Timber and timberlands at cost, less fee stumpage charged to disposals 1,667 1,013 Investments in and advances to equity affiliates (Note 3) 950 482 Goodwill, net of accumulated amortization of $3 792 - Other assets and deferred charges 533 262 - ------------------------------------------------------------------------ 16,400 10,934 - ------------------------------------------------------------------------ Real estate and related assets Cash and short-term investments 3 7 Receivables, less discounts and allowances of $7 and $6 94 81 Mortgage-related financial instruments, less discounts and allowances of $3 and $9 (Notes 1 and 13) 84 119 Real estate in process of development and for sale (Note 9) 556 584 Land being processed for development 956 854 Investments in and advances to joint ventures and limited partnerships, less reserves of $3 and $4 (Note 3) 124 120 Other assets 122 135 - ------------------------------------------------------------------------ 1,939 1,900 - ------------------------------------------------------------------------ Total assets $ 18,339 $ 12,834 ========================================================================
See notes on pages 61 through 81. 56
CONSOLIDATED BALANCE SHEET Dollar amounts in millions (continued) ======================================================================== December 26, December 27, 1999 1998 - ------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' INTEREST Weyerhaeuser Current liabilities: Notes payable (Note 11) $ 25 $ 5 Current maturities of long-term debt (Note 12) 855 88 Accounts payable (Note 1) 961 699 Accrued liabilities (Note 10) 1,093 707 - ------------------------------------------------------------------------ Total current liabilities 2,934 1,499 Long-term debt (Notes 12 and 13) 3,974 3,397 Deferred income taxes (Note 5) 1,985 1,404 Deferred pension, other postretirement benefits and other liabilities (Note 6) 773 488 Commitments and contingencies (Note 14) - ------------------------------------------------------------------------ 9,666 6,788 - ------------------------------------------------------------------------ Real estate and related assets Notes payable and commercial paper (Note 11) 676 564 Long-term debt (Notes 12 and 13) 479 701 Other liabilities 345 255 Commitments and contingencies (Note 14) - ------------------------------------------------------------------------ 1,500 1,520 - ------------------------------------------------------------------------ Total liabilities 11,166 8,308 - ------------------------------------------------------------------------ Shareholders' interest (Note 16): Common shares: authorized 400,000,000 shares, issued 230,797,536 and 206,072,890 shares, $1.25 par value 288 258 Exchangeable shares: no par value; unlimited shares authorized; 8,809,994 issued and held by nonaffiliates 598 - Other capital 2,086 416 Retained earnings 4,578 4,372 Cumulative other comprehensive (expense) (167) (208) Treasury common shares, at cost: 4,758,348 and 7,063,917 (210) (312) - ------------------------------------------------------------------------ Total shareholders' interest 7,173 4,526 - ------------------------------------------------------------------------ Total liabilities and shareholders' interest $ 18,339 $ 12,834 ========================================================================
57
CONSOLIDATED STATEMENT OF CASH FLOWS For the three-year period ended December 26, 1999 Dollar amounts in millions ======================================================================== Consolidated - ------------------------------------------------------------------------ 1999 1998 1997 - ------------------------------------------------------------------------ Cash provided by (used for) operations: Net earnings $ 527 $ 294 $ 342 Noncash charges (credits) to income: Depreciation, amortization and fee stumpage 640 616 628 Deferred income taxes, net 185 160 81 Pension and other postretirement benefits (85) (37) 23 Equity in (income) loss of affiliates, joint ventures and limited partnerships (65) (58) (19) Effect of a change in accounting principle - net of taxes (Note 1) 89 - - Charges for closure or disposition of facilities (Note 15) 102 71 89 Decrease (increase) in working capital: Receivables (113) 1 (9) Inventories, real estate and land (68) 56 (13) Prepaid expenses 65 16 (10) Mortgage-related financial instruments 21 28 (64) Accounts payable and accrued liabilities 200 3 42 (Gain) loss on disposition of a business - - (58) Other 3 (28) 6 - ------------------------------------------------------------------------ Cash provided by (used for) operations 1,501 1,122 1,038 - ------------------------------------------------------------------------ Cash provided by (used for) investing activities: Property and equipment (487) (562) (610) Timber and timberlands (79) (53) (46) Cash and short-term investments acquired in a business combination (Note 18) 247 - - Property and equipment and timber and timberlands from acquisitions - (494) (13) Working capital from acquisitions - (49) (2) Investments in and advances to equity affiliates (20) 6 (182) Proceeds from sale of: Property and equipment 16 66 85 Businesses 81 - 268 Mortgage-related financial instruments 18 66 55 Restructuring the ownership of a subsidiary - 218 - Intercompany advances - - - Other 18 (15) (21) - ------------------------------------------------------------------------ Cash provided by (used for) investing activities (206) (817) (466) - ------------------------------------------------------------------------ Cash provided by (used for) financing activities: Issuances of debt 809 165 632 Sale of industrial revenue bonds - 48 38 Notes and commercial paper borrowings, net 348 328 (577) Cash dividends (321) (319) (317) Intercompany cash dividends - - - Payments on debt (607) (577) (359) Purchase of treasury common shares - (42) (22) Exercise of stock options 97 19 61 Other (13) (14) 23 - ------------------------------------------------------------------------ Cash provided by (used for) financing activities 313 (392) (521) - ------------------------------------------------------------------------ Net increase (decrease) in cash and short-term investments 1,608 (87) 51 Cash and short-term investments at beginning of year 35 122 71 - ------------------------------------------------------------------------ Cash and short-term investments at end of year $ 1,643 $ 35 $ 122 ======================================================================== Cash paid (received) during the year for: Interest, net of amount capitalized $ 264 $ 282 $ 287 ======================================================================== Income taxes $ 81 $ 66 $ 21 ========================================================================
See notes on pages 61 through 81. 58
CONSOLIDATED STATEMENT OF CASH FLOWS (continued) ======================================================================== Real Estate and Weyerhaeuser Company Related Assets - ------------------------------------------------------------------------ 1999 1998 1997 1999 1998 1997 - ------------------------------------------------------------------------ $ 406 $ 214 $ 271 $ 121 $ 80 $ 71 634 611 616 6 5 12 175 149 94 10 11 (13) (84) (37) 22 (1) - 1 (26) (28) 7 (39) (30) (26) 89 - - - - - 102 71 89 - - - (101) 30 (17) (12) (29) 8 (20) 40 15 (48) 16 (28) 65 16 (10) - - - - - - 21 28 (64) 119 - (32) 81 3 74 - - (13) - - (45) 9 16 (3) (6) (44) 9 - ------------------------------------------------------------------------ 1,368 1,082 1,039 133 40 (1) - ------------------------------------------------------------------------ (476) (560) (607) (11) (2) (3) (79) (53) (46) - - - 247 - - - - - - (494) (13) - - - - (49) (2) - - - (52) (41) (221) 32 47 39 15 42 39 1 24 46 81 - 76 - - 192 - - - 18 66 55 - 218 - - - - (33) (3) 42 33 3 (42) 17 (13) (18) 1 (2) (3) - ------------------------------------------------------------------------ (280) (953) (750) 74 136 284 - ------------------------------------------------------------------------ 807 6 618 2 159 14 - 48 38 - - - 237 (2) (695) 111 330 118 (321) (319) (317) - - - 100 190 150 (100) (190) (150) (383) (87) (78) (224) (490) (281) - (42) (22) - - - 97 19 61 - - - (13) (14) 23 - - - - ------------------------------------------------------------------------ 524 (201) (222) (211) (191) (299) - ------------------------------------------------------------------------ 1,612 (72) 67 (4) (15) (16) 28 100 33 7 22 38 - ------------------------------------------------------------------------ $ 1,640 $ 28 $ 100 $ 3 $ 7 $ 22 ======================================================================== $ 246 $ 261 $ 244 $ 18 $ 21 $ 43 ======================================================================== $ 77 $ (4) $ 54 $ 4 $ 70 $ (33) ========================================================================
59
CONSOLIDATED STATEMENT OF SHAREHOLDERS' INTEREST For the three-year period ended December 26, 1999 Dollar amounts in millions ======================================================================== 1999 1998 1997 - ------------------------------------------------------------------------ Common stock: Balance at beginning of year $ 258 $ 258 $ 258 New issuance 25 - - Issued in retraction of exchangeable shares 5 - - - ------------------------------------------------------------------------ Balance at end of year $ 288 $ 258 $ 258 - ------------------------------------------------------------------------ Exchangeable shares: New issuance $ 909 $ - $ - Retraction (311) - - - ------------------------------------------------------------------------ Balance at end of year $ 598 $ - $ - - ------------------------------------------------------------------------ Other capital - common and exchangeable: Balance at beginning of year $ 416 $ 407 $ 407 Stock options exercised (3) (1) (11) New issuance 1,343 - - Retraction of exchangeable shares 306 - - Other transactions, net 24 10 11 - ------------------------------------------------------------------------ Balance at end of year $ 2,086 $ 416 $ 407 - ------------------------------------------------------------------------ Retained earnings: Balance at beginning of year $ 4,372 $ 4,397 $ 4,372 Net earnings 527 294 342 Cash dividends on common shares (321) (319) (317) - ------------------------------------------------------------------------ Balance at end of year $ 4,578 $ 4,372 $ 4,397 - ------------------------------------------------------------------------ Cumulative other comprehensive (expense): Balance at beginning of year $ (208) $ (123) $ (93) Current year's changes - net of tax: Foreign currency translation adjustments 41 (77) (30) Additional minimum pension liability adjustments - (8) - - ------------------------------------------------------------------------ Balance at end of year $ (167) $ (208) $ (123) - ------------------------------------------------------------------------ Common stock held in treasury: Balance at beginning of year $ (312) $ (290) $ (340) Purchase of treasury common shares - (42) (22) Stock options exercised 102 20 72 - ------------------------------------------------------------------------ Balance at end of year $ (210) $ (312) $ (290) - ------------------------------------------------------------------------ Total shareholders' interest: Balance at end of year $ 7,173 $ 4,526 $ 4,649 ======================================================================== Comprehensive income: Net income $ 527 $ 294 $ 342 Foreign currency translation adjustments 60 (90) (44) Income tax (expense) benefit on foreign currency translation adjustments (19) 13 14 Additional minimum pension liability adjustments - (13) - Income tax benefits on minimum pension liability adjustments - 5 - - ------------------------------------------------------------------------ $ 568 $ 209 $ 312 ========================================================================
See notes on pages 61 through 81. 60 - ------------------------------------------------------------------------ NOTES TO FINANCIAL STATEMENTS For the three-year period ended December 26, 1999 - ------------------------------------------------------------------------ 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. Significant intercompany transactions and accounts are eliminated. Investments in and advances to equity affiliates that are not majority owned or controlled are accounted for using the equity method. 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 5.2 million acres of company-owned and .5 million acres of leased commercial forestland in the United States (3.8 million acres in the South and 1.9 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 forestland in Canada under long-term licensing arrangements. . 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. FISCAL YEAR-END The company's fiscal year ends on the last Sunday of the year. Fiscal years 1997 through 1999 each had 52 weeks. ACCOUNTING PRONOUNCEMENTS IMPLEMENTED In the 1999 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 provided 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 required 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 $89 million, or 43 cents per share, in the first 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. PROSPECTIVE ACCOUNTING PRONOUNCEMENTS In 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) 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. The effective date of this pronouncement, originally fiscal years beginning after June 15, 1999, has been delayed to fiscal years beginning after June 15, 2000, with the issuance of SFAS No. 137 in June 1999. This will be effective for the company's fiscal year 2001. 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. 61 USE OF 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. FINANCIAL INSTRUMENTS The company has, where appropriate, estimated the fair value of financial instruments. These fair value amounts may be significantly affected by the assumptions used, including the discount rate and estimates of cash flow. Accordingly, the estimates presented are not necessarily indicative of the amounts that could be realized in a current market exchange. Where these estimates approximate carrying value, no separate disclosure of fair value is shown. Financial instruments that potentially subject the company to concentrations of credit risk consist of real estate and related assets receivables and mortgage-related financial instruments, of which $46 million and $68 million are in the western geographical region of the United States at December 26, 1999, and December 27, 1998, respectively. 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 any counterparties to fail to meet their obligations. The company deals only with highly rated counterparties. The notional amounts of these derivative financial instruments are $385 million and $102 million at December 26, 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 company's 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. At the end of 1999, the company's cash and short-term investments reflected $1.6 billion in marketable securities. These liquid investments were being held to meet cash requirements in early January to complete the $720 million tender offer for the shares of TJ International and redeem $750 million in notes payable. INVENTORIES Inventories are stated at the lower of cost or market. Cost includes labor, materials and production overhead. The last- in, first-out (LIFO) method is used to cost approximately half of domestic raw materials, in process and finished goods inventories. LIFO inventories were $358 million and $253 million at December 26, 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 December 26, 1999, and December 27, 1998, respectively. PROPERTY AND EQUIPMENT The company's property accounts are maintained on an individual asset basis. Betterments and replacements of major units are capitalized. Maintenance, repairs and minor replacements are expensed. Depreciation is provided generally on the straight-line or unit-of-production method at rates based on estimated service lives. Amortization of 62 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 cost of products sold as these inventories are disposed of. GOODWILL Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over 40 years, which is the expected period to be benefited. 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 $185 million and $139 million at December 26, 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 10 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. REVENUE RECOGNITION The company's forest products-based operations recognize revenue from product sales upon shipment to their customers or when the customer assumes risk of ownership. The company's real estate operations recognize income from the sales of single-family housing units when construction has been completed, required down payments have been received and title has passed to the customer. Income from multi-family and commercial properties, developed lots and undeveloped land is recognized when required down payments are received and other income recognition criteria has been satisfied. IMPAIRMENT OF LONG-LIVED ASSETS TO BE DISPOSED OF The company accounts for long-lived assets in accordance with SFAS No. 121, Accounting for the Impairment of Long- Lived Assets and Long-Lived Assets to Be Disposed Of. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Assets to be disposed of are reported at the lower of the carrying value or fair value less cost to sell. COMPREHENSIVE INCOME Comprehensive income consists of net income, foreign currency translation adjustments and additional minimum pension liability adjustments. It is presented in the Consolidated Statement of Shareholders' Interest. RECLASSIFICATIONS Certain reclassifications have been made to conform prior years' data to the current format. 63 REAL ESTATE AND RELATED ASSETS With the sale of the mortgage banking business in 1997, the financial services segment was no longer material to the results of the company. Therefore, the remaining activities in financial services that are principally real estate related were combined with real estate into one segment entitled real estate and related assets in 1997. 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. Mortgage-backed certificates (see Note 13) are carried at par value, adjusted for any unamortized discount or premium. These certificates and other financial instruments are pledged as collateral for the collateralized mortgage obligation (CMO) bonds and are held by banks as trustees. Principal and interest collections are used to meet the interest payments and reduce the outstanding principal balance of the bonds. Related CMO bonds are the obligation of the issuer, and neither the company nor any affiliated company has guaranteed or is otherwise obligated with respect to the bonds. - ------------------------------------------------------------------------ NOTE 2. NET EARNINGS PER SHARE ======================================================================== Basic net earnings per share are based on the weighted average number of common and exchangeable shares outstanding during the respective periods. Diluted net earnings per share are based on the weighted average number of common and exchangeable shares, convertible debentures and stock options outstanding at the beginning of or granted during the respective periods.
Weighted Dollar amounts in millions Net Average Earnings except per-share figures Earnings Shares (000) Per Share - ------------------------------------------------------------------------ 1999: Basic $ 527 205,599 $ 2.56 ========== Convertible debentures - 141 Stock options granted - 886 ------------------------- Diluted $ 527 206,626 $ 2.55 ======================================= 1998: Basic $ 294 198,914 $ 1.48 ========== Stock options granted - 336 ------------------------- Diluted $ 294 199,250 $ 1.47 ======================================= 1997: Basic $ 342 198,967 $ 1.72 ========== Stock options granted - 573 ------------------------- Diluted $ 342 199,540 $ 1.72 =======================================
Options for which the exercise price was greater than the average market price of common shares for the period were not included in the computation of diluted earnings per share. These options to purchase shares were as follows:
Year Options to Purchase Exercise Price - ------------------------------------------------------------------------ 1999 2,500 $ 68.41 212,150 $ 65.56 - ------------------------------------------------------------------------ 1998 1,332,080 $ 51.09 586,539 $ 56.78 150,000 $ 53.06 - ------------------------------------------------------------------------ 1997 150,000 $ 53.06 - ------------------------------------------------------------------------
- ------------------------------------------------------------------------ NOTE 3. EQUITY AFFILIATES ======================================================================== WEYERHAEUSER The company's investments in affiliated companies that are not majority owned or controlled are accounted for using the equity method. The company's significant equity affiliates 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 64 Asia. Two facilities are in operation 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. During the 1999 second quarter, this joint venture paid approximately $142 million to acquire 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 a sales and distribution business in Australia. Approximately 500 people currently work in these operations. Weyerhaeuser Company, through a subsidiary, has the responsibility for all management and marketing activities of this acquisition. . 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. . Wapawekka Lumber LP - A 51 percent owned limited partnership in Saskatchewan, Canada, that commenced the operation of a sawmill during the year. Substantive participating rights by the minority partner preclude the consolidation of this partnership by the company. . Trus Joist MacMillan (TJM) - A 49 percent owned joint venture based in Boise, Idaho, with 16 manufacturing facilities in the United States and Canada. TJM is a manufacturer and marketer of engineered lumber products for structural framing and industrial applications. This 49 percent interest was acquired as a part of the MacMillan Bloedel business combination (see Note 18). In January 2000, the company acquired TJ International, the 51 percent owner and managing partner of TJM (see Note 19). Unconsolidated financial information for affiliated companies that are accounted for by the equity method is as follows:
Dollar amounts in millions December 26, 1999 December 27, 1998 - ------------------------------------------------------------------------ Current assets $ 525 $ 166 Noncurrent assets 1,885 1,334 Current liabilities 275 80 Noncurrent liabilities 816 703 -------------------------------------
1999 1998 1997 - ------------------------------------------------------------------------ Net sales and revenues $ 898 $ 696 $ 214 Operating income 109 110 14 Net income (loss) 47 52 (14) ------------------------------------------------
The company provides goods and services to these affiliates, which vary by entity, in the form of raw materials, management and marketing services, 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. These investments include minor holdings in non-real estate partnerships that have significant assets and income. Unconsolidated financial information for joint ventures and limited partnerships that are accounted for by the equity method is as follows:
Dollar amounts in millions December 26, 1999 December 27, 1998 - ------------------------------------------------------------------------ Current assets $ 11,457 $ 1,755 Noncurrent assets 159 230 Current liabilities 10,577 1,241 Noncurrent liabilities 115 136 -------------------------------------
1999 1998 1997 - ------------------------------------------------------------------------ Net sales and revenues $ 663 $ 244 $ 242 Operating income 313 133 136 Net income 253 103 108 ------------------------------------------------
65 The company may charge management and/or development fees to the joint ventures or limited partnerships. The aggregate total of these transactions is not material to the results of operations of the company. - ------------------------------------------------------------------------ NOTE 4. OTHER INCOME (EXPENSE), NET ======================================================================== Other income (expense) is an aggregation of both recurring and occasional income and expense items and, as a result, can fluctuate from year to year. Significant items in 1999 were interest income of $33 million for Weyerhaeuser and $10 million for real estate and related assets. There were no significant individual items in 1998. Individual income (expense) items significant in 1997 were: Weyerhaeuser: . The interest income of $18 million from the favorable federal income tax decision related to timber casualty losses incurred in the eruption of Mount St. Helens in 1980. . The loss of $8 million from the sale of the wholesale nursery business. . The gain of $21 million from the sale of the Saskatoon chemical facility. Real estate and related assets: . The gain of $45 million from the sale of the mortgage banking business. - ------------------------------------------------------------------------ NOTE 5. INCOME TAXES ======================================================================== Earnings before income taxes and cumulative effect of a change in an accounting principle are comprised of the following:
Dollar amounts in millions 1999 1998 1997 - ------------------------------------------------------------------------- Domestic earnings $ 778 $ 413 $ 432 Foreign earnings 192 50 107 -------------------------------- $ 970 $ 463 $ 539 ================================
Provisions for income taxes include the following:
Dollar amounts in millions 1999 1998 1997 - ------------------------------------------------------------------------ Federal: Current $ 103 $ (7) $ 65 Deferred 150 138 86 -------------------------------- 253 131 151 -------------------------------- State: Current 13 8 6 Deferred 7 10 3 -------------------------------- 20 18 9 -------------------------------- Foreign: Current 53 8 45 Deferred 28 12 (8) -------------------------------- 81 20 37 -------------------------------- Income taxes before cumulative effect of a change in an accounting principle 354 169 197 Deferred taxes applicable to cumulative effect of a change in an accounting principle (52) - - -------------------------------- $ 302 $ 169 $ 197 ================================
A reconciliation between the federal statutory tax rate and the company's effective tax rate before cumulative effect of a change in an accounting principle is as follows:
1999 1998 1997 - ------------------------------------------------------------------------ Statutory tax on income 35.0% 35.0% 35.0% State income taxes, net of federal tax benefit 1.7 2.8 1.3 All other, net (.2) (1.3) .2 ----------------------- Effective income tax rate 36.5% 36.5% 36.5% =======================
The net deferred income tax (liabilities) assets include the following components:
December 26, December 27, Dollar amounts in millions 1999 1998 - ------------------------------------------------------------------------ Current (included in prepaid expenses) $ 138 $ 98 Noncurrent (1,985) (1,404) Real estate and related assets (included in other assets) 7 16 --------------------------- Total $ (1,840) $ (1,290) ===========================
66 The deferred tax (liabilities) assets are comprised of the following:
December 26, December 27, Dollar amounts in millions 1999 1998 - ------------------------------------------------------------------------ Depreciation $ (1,557) $ (1,260) Depletion (406) (207) Other (520) (308) --------------------------- Total deferred tax (liabilities) (2,483) (1,775) --------------------------- Postretirement benefits 130 91 Net operating loss carryforwards 67 - Alternative minimum tax credit carryforward 18 69 Other 428 325 --------------------------- Total deferred tax assets 643 485 --------------------------- $ (1,840) $ (1,290) ===========================
As of December 26, 1999, the company and its subsidiaries have $23 million of Canadian net operating loss carryforwards, which expire from 2002 through 2006; $161 million of U.S. net operating loss carryforwards, which expire from 2011 through 2018; $27 million of Canadian investment tax credits, which expire from 2000 through 2007; and $8 million of U.S. foreign tax credits, which expire from 2001 through 2004. In addition, the subsidiaries of the company have $18 million of alternative minimum tax credit carryforwards which do not expire. The company intends to reinvest undistributed earnings of certain foreign subsidiaries; therefore, no U.S. taxes have been provided. These earnings totaled approximately $993 million at the end of 1999. Determination of the income tax liability that would result from repatriation is not practicable. - ------------------------------------------------------------------------ NOTE 6. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS ======================================================================== The company sponsors several qualified and nonqualified pension and other postretirement benefit plans for its employees. The following table provides a reconciliation of the changes in the plans' benefit obligations and fair value of plan assets over the two-year period ending December 26, 1999:
Other Postretirement Pension Benefits - ------------------------------------------------------------------------ Dollar amounts in millions 1999 1998 1999 1998 - ------------------------------------------------------------------------ Reconciliation of benefit obligation: Benefit obligation as of prior year-end $ 2,022 $ 1,736 $ 277 $ 213 Service cost 61 54 7 4 Interest cost 149 134 21 19 Plan participants' contributions 2 - 3 3 Actuarial (gain)/loss (123) 97 (22) 53 Foreign currency exchange rate changes 10 (15) 1 (1) Benefits paid (184) (143) (27) (15) Plan curtailments, settlements and special termination benefits - 3 - - Plan amendments 12 62 5 (2) Acquisitions 495 - 96 - Business combinations and divestitures - 94 - 3 ----------------------------------- Benefit obligation at end of year $ 2,444 $ 2,022 $ 361 $ 277 =================================== Reconciliation of fair value of plan assets: Fair value of plan assets at beginning of year (actual) $ 2,893 $ 2,420 $ 2 $ 2 Actual return on plan assets 831 481 - - Foreign currency exchange rate changes 10 (13) - - Employer contributions 6 7 1 - Plan participants' contributions 1 - - - Benefits paid (178) (138) (1) - Acquisitions 525 - - - Business combinations and divestitures - 92 - - ----------------------------------- Fair value of plan assets at end of year (estimated) $ 4,088 $ 2,849 $ 2 $ 2 ===================================
67 The company funds its qualified pension plans and accrues for nonqualified pension benefits and health and life postretirement benefits. The funded status of these plans at December 26, 1999, and December 27, 1998, is as follows:
Other Postretirement Pension Benefits - ------------------------------------------------------------------------ December December December December 26, 27, 26, 27, Dollar amounts in millions 1999 1998 1999 1998 - ------------------------------------------------------------------------ Funded status $ 1,645 $ 827 $ (360) $ (260) Unrecognized prior service cost 140 142 5 (2) Unrecognized net (gain)/loss (1,666) (991) (22) (2) Unrecognized net transition (asset)/obligation (10) (14) - - ----------------------------------- Prepaid/(accrued) benefit cost $ 109 $ (36) $ (377) $ (264) =================================== Amounts recognized in balance sheet consist of: Prepaid benefit cost $ 22 $ 21 Accrued benefit liability (76) (75) Intangible asset 4 10 Cumulative other comprehensive expense - 8 ------------------ Net amount recognized $ (50) $ (36) ==================
The assets of the U.S. and Canadian pension plans, as of December 26, 1999, and December 27, 1998, consist of a highly diversified mix of equity, fixed income and real estate securities. Approximately 6,300 employees are covered by union- administered multi-employer pension plans to which the company makes negotiated contributions based generally on fixed amounts per hour per employee. Contributions to these plans were $10 million in 1999, $5 million in 1998 and $7 million in 1997. The company sponsors multiple defined benefit postretirement plans for its U.S. employees. Medical plans have various levels of coverage and plan participant contributions. Life insurance plans are noncontributory. Canadian employees are covered under multiple defined benefit postretirement plans that provide medical and life insurance benefits. Weyerhaeuser sponsors various defined contribution plans for U.S. salaried and hourly employees. The basis for determining plan contribution varies by plan. The amounts charged to operations and contributed to the plans for participating employees were $36 million, $37 million and $34 million in 1999, 1998 and 1997, respectively. The assumptions used in the measurement of the company's benefit obligations are as follows:
Other Postretirement Pension Benefits - -------------------------------------------------------------------------- 1999 1998 1997 1999 1998 1997 - -------------------------------------------------------------------------- Discount rate 7.75% 7.25% 7.75% 7.75% 7.25% 7.75% Expected return on plan assets 11.50% 11.50% 11.50% 5.75% 5.75% 5.75% Rate of compensation increase: Salaried 3.50% 4.50% 4.50% 3.50% 4.50% 4.50% Hourly 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% -----------------------------------------
For measurement purposes, a 7.0 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 1999. Beginning in 2000, the rate is assumed to decrease by .5 percent annually to a level of 4.5 percent for the year 2004 and all years thereafter. The components of net periodic benefit costs are:
Other Postretirement Pension Benefits - ------------------------------------------------------------------------- Dollars amounts in millions 1999 1998 1997 1999 1998 1997 - ------------------------------------------------------------------------- Service cost $ 61 $ 54 $ 56 $ 7 $ 4 $ 5 Interest cost 149 134 128 21 18 15 Expected return on plan assets (297) (236) (194) - - - Amortization of (gain)/loss (22) (23) 8 (1) (1) (2) Amortization of prior service cost 12 14 10 - - - Amortization of unrecognized transition (asset)/obligation (5) (4) (4) - - - (Gain)/loss due to closure, sale and other - 1 1 - - - ----------------------------------------- $(102) $ (60) $ 5 $ 27 $ 21 $ 18 =========================================
68 The accrued (prepaid) pension costs for the projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plan(s) with accumulated benefit obligations in excess of plan assets were $87 million, $82 million and $8 million, respectively, as of December 26, 1999, and $203 million, $178 million and $102 million, respectively, as of December 27, 1998. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one percent change in assumed health care cost trend rates would have the following effects:
As of December 26, 1999 Dollar amounts in millions 1% Increase 1% Decrease - ---------------------------------------------------------------------- Effect on total of service and interest cost components $ 2 $ (2) Effect on accumulated postretirement benefit obligation 30 (26) -------------------------
- ------------------------------------------------------------------------ NOTE 7. INVENTORIES ========================================================================
December 26, December 27, Dollar amounts in millions 1999 1998 - ------------------------------------------------------------------------ Logs and chips $ 197 $ 108 Lumber, plywood and panels 297 143 Pulp and paper 161 190 Containerboard, paperboard and packaging 160 96 Other products 207 150 Materials and supplies 307 275 --------------------------- $ 1,329 $ 962 ===========================
- ------------------------------------------------------------------------ NOTE 8. PROPERTY AND EQUIPMENT ========================================================================
December 26, December 27, Dollar amounts in millions 1999 1998 - ------------------------------------------------------------------------ Property and equipment, at cost: Land $ 219 $ 157 Buildings and improvements 1,933 1,667 Machinery and equipment 10,499 9,732 Rail and truck roads 577 555 Other 149 111 ---------------------------- 13,377 12,222 Less allowance for depreciation and amortization 5,817 5,530 ---------------------------- $ 7,560 $ 6,692 ============================
- ------------------------------------------------------------------------ NOTE 9. REAL ESTATE IN PROCESS OF DEVELOPMENT AND FOR SALE ======================================================================== Properties held by the company's real estate and related assets segment include:
December 26, December 27, Dollar amounts in millions 1999 1998 - ------------------------------------------------------------------------ Dwelling units $ 198 $ 180 Residential lots 232 237 Commercial lots 84 120 Commercial projects 15 27 Acreage 25 19 Other inventories 2 1 --------------------------- $ 556 $ 584 ===========================
- ------------------------------------------------------------------------ NOTE 10. ACCRUED LIABILITIES ========================================================================
December 26, December 27, Dollar amounts in millions 1999 1998 - ------------------------------------------------------------------------ Payroll - wages and salaries, incentive awards, retirement and vacation pay $ 413 $ 305 Taxes - Social Security and real and personal property 48 46 Product warranties 83 - Interest 105 87 Income taxes 58 16 Other 386 253 --------------------------- $ 1,093 $ 707 ===========================
69 - ------------------------------------------------------------------------ NOTE 11. SHORT-TERM DEBT ======================================================================== BORROWINGS The company had short-term borrowings of $18 million with a weighted average interest rate of 1.27 percent at December 26, 1999. These borrowings are denominated in Japanese yen. The real estate and related assets segment short-term borrowings were $676 million with a weighted average interest rate of 6.2 percent at December 26, 1999, and $564 million with a weighted average interest rate of 5.5 percent at December 27, 1998. LINES OF CREDIT The company has short-term bank credit lines that provide for the borrowings of up to the total amount of $745 million as of December 26, 1999. In addition, the company has other short-term bank credit lines of $515 million and $650 million, all of which could be availed by the company and Weyerhaeuser Real Estate Company (WRECO) at December 26, 1999, and December 27, 1998, respectively. No portions of these lines have been availed by the company or WRECO at December 26, 1999, or December 27, 1998. None of the entities referred to herein is a guarantor of the borrowings of the other. - ------------------------------------------------------------------------ NOTE 12. LONG-TERM DEBT ======================================================================== DEBT Weyerhaeuser long-term debt, including the current portion, is as follows:
December 26, December 27, Dollar amounts in millions 1999 1998 - ------------------------------------------------------------------------ 9.05% notes due 2003 $ 200 $ 200 8.50% debentures due 2004 55 - Floating rate senior notes due 2004 750 - 6.75% notes due 2006 150 - 8.375% debentures due 2007 150 150 7.50% debentures due 2013 250 250 7.25% debentures due 2013 250 250 6.95% debentures due 2017 300 300 7.125% debentures due 2023 250 250 8.50% debentures due 2025 300 300 7.95% debentures due 2025 250 250 7.70% debentures due 2026 150 - 6.95% debentures due 2027 300 300 Industrial revenue bonds, rates from 2.5% (variable) to 9.85% (fixed), due 2000-2028 838 779 Medium-term notes, rates from 6.43% to 8.91%, due 2000-2005 184 246 Commercial paper/credit agreements 429 192 Other 23 18 --------------------------- $ 4,829 $ 3,485 =========================== Portion due within one year $ 855 $ 88 ===========================
Long-term debt maturities are (millions): 2000 $ 855 2001 85 2002 21 2003 625 2004 69 Thereafter 3,174
In December 1999, the company redeemed approximately $101 million in outstanding adjustable rate convertible subordinated debentures due May 1, 2007, originally issued by MacMillan Bloedel. Holders received the principal amount plus unpaid interest up to December 5. 70 Real estate and related assets segment long-term debt, including the current portion, is as follows:
December 26, December 27, Dollar amounts in millions 1999 1998 - ------------------------------------------------------------------------ Notes payable, unsecured; weighted average interest rates are approximately 6.5% and 6.9% $ 430 $ 531 Bank and other borrowings, unsecured; weighted average interest rates are approximately 5.5% - 100 Notes payable, secured; weighted average interest rates are approximately 8.0% and 8.4% 10 13 Collateralized mortgage obligation bonds 39 57 --------------------------- $ 479 $ 701 =========================== Portion due within one year $ 122 $ 121 ===========================
Long-term debt maturities are (millions): 2000 $ 122 2001 159 2002 79 2003 78 2004 4 Thereafter 37
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, had a set of term credit facility agreements with a group of banks that provided for borrowings of up to $175 million as of December 27, 1998. $100 million was outstanding under these agreements at December 27, 1998. During the third quarter of 1999, the last of these agreements was repaid and subsequently canceled. 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. Amounts so classified are shown in the tables in this note. No portion of these lines has been availed of by the company, WRECO or WFS at December 26, 1999, or December 27, 1998, except as noted above. The company's compensating balance agreements were not significant. - ------------------------------------------------------------------------ NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS ========================================================================
December 26, December 27, 1999 1998 --------------- --------------- Carrying Fair Carrying Fair Dollar amounts in millions Value Value Value Value - ------------------------------------------------------------------------- Weyerhaeuser: Financial liabilities: Long-term debt (including current maturities) $ 4,829 $ 4,845 $ 3,485 $ 3,820 ----------------------------------- Real estate and related assets: Financial assets: Mortgage loans receivable 37 33 53 58 Mortgage-backed certificates and other pledged financial instruments 47 48 66 69 ----------------------------------- Total financial assets 84 81 119 127 ----------------------------------- Financial liabilities: Long-term debt (including current maturities) 479 477 701 718 -----------------------------------
71 The methods and assumptions used to estimate fair value of each class of financial instruments for which it is practicable to estimate that value are as follows: . Long-term debt, including the real estate and related assets segment, is estimated based on quoted market prices for the same issues or on the discounted value of the future cash flows expected to be paid using incremental rates of borrowing for similar liabilities. . Mortgage loans receivable are estimated based on the discounted value of estimated future cash flows using current rates for loans with similar terms and risks. . Mortgage-backed certificates and other pledged financial instruments (pledged to secure collateralized mortgage obligations) are estimated using the quoted market prices for securities backed by similar loans and restricted deposits held at cost. - ------------------------------------------------------------------------ NOTE 14. LEGAL PROCEEDINGS, COMMITMENTS AND CONTINGENCIES ======================================================================== LEGAL PROCEEDINGS 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 been unable thus far to obtain a reversal of the certification. 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. In July 1999, the company's motion for summary judgment was granted in this case. The plaintiffs filed a petition for reconsideration, which was denied in January 2000. The plaintiffs have appealed this decision. A lawsuit was filed against the company in District Court, Johnson County, Texas, in June 1999. The case purports to be a class action on behalf of persons who own manufactured homes in the state of Texas with exterior hardboard siding manufactured by the company. The complaint alleges defective design, misrepresentation, negligence, breach of express warranty and fraudulent concealment. The complaint seeks unspecified compensatory damages. In July 1999, a lawsuit was filed against the company in the Court of Common Pleas, Beaufort County, South Carolina. The suit purports to be filed on behalf of all owners of residential structures or other buildings with hardboard siding manufactured by the company. The complaint alleges breach of express and implied warranties, defective design and manufacture, fraud and violation of South Carolina's unfair trade practices act. The plaintiffs seek compensatory damages, treble damages and attorneys' fees. The company is a defendant in two other cases, one in Iowa and the other in Oregon, that purport to be statewide class actions with similar allegations. The company is a defendant in approximately 25 other hardboard siding cases primarily involving multi-family structures and residential developments. In May 1999, two civil antitrust lawsuits were filed against the company in U.S. District Court, Eastern District of Pennsylvania. Both suits name as defendants several other major containerboard and packaging producers. The complaint in the first case alleges the defendants conspired to fix the price of linerboard and that the alleged conspiracy had the effect of increasing the price of corrugated containers. The suit purports to be a class action on behalf of purchasers of corrugated containers during the period October 1993 through November 1995. The complaint in the second case alleges that the company conspired to manipulate the price of linerboard and thereby the price of corrugated sheets. The suit purports to be a class action on behalf of purchasers of corrugated sheets during the period October 1993 through November 1995. Both suits seek damages, including treble damages, under the antitrust laws. In May 1999, the Equity Committee ("the Committee") in the Paragon 72 Trade Brands, Inc., bankruptcy proceeding filed a motion in U.S. Bankruptcy Court for the Northern District of Georgia for authority to prosecute claims against the company in the name of the debtor's estate. Specifically, the Equity Committee seeks to assert that the company breached certain warranties in agreements entered into between Paragon and the company in connection with Paragon's public offering of common stock in January 1993. The Committee seeks to recover damages sustained by Paragon as a result of two patent infringement cases, one brought by Procter & Gamble and the other by Kimberly-Clark. In September 1999, the court authorized the Committee to commence an adversary proceeding against the company. The Committee commenced this proceeding in October 1999, seeking damages in excess of $420 million against the company. Subsidiaries of the company, formerly known as MacMillan Bloedel Limited and MacMillan Bloedel (USA) Inc., have agreed to settle a class action suit involving claims in the United States (excluding Colorado) alleging the failure of cement fiber roofing products previously manufactured by American Cemwood Corporation, a company owned by MacMillan Bloedel (USA) Inc. The proposed settlement would create a fund of $105 million, consisting of $65 million in cash and $40 million guaranteed recovery by the class from certain insurance carriers. The settlement is subject to court approval in May 2000. The company has established reserves for liabilities and legal defense costs it believes are probable and reasonably estimable with respect to the proposed settlement and pending suits and claims. ENVIRONMENTAL It is the company's policy to accrue for environmental remediation costs when it is determined that it is probable that such an obligation exists and the amount of the obligation can be reasonably estimated. Based on currently available information and analysis, the company believes that it is reasonably possible that costs associated with all identified sites may exceed current accruals by amounts that may prove insignificant or that could range, in the aggregate, up to approximately $110 million over several years. This estimate of the upper end of the range of reasonably possible additional costs is much less certain than the estimates upon which accruals are currently based, and utilizes assumptions less favorable to the company among the range of reasonably possible outcomes. In estimating both its current accruals for environmental remediation and the possible range of additional future costs, the company has assumed that it will not bear the entire cost of remediation of every site to the exclusion of other known potentially responsible parties who may be jointly and severally liable. The ability of other potentially responsible parties to participate has been taken into account, based generally on each party's financial condition and probable contribution on a per-site basis. No amounts have been recorded for potential recoveries from insurance carriers. 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, including those described in this note, 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. OTHER ITEMS The company's 1999 capital expenditures, excluding acquisitions, were $566 million and are expected to approxi- mate $900 million in 2000; however, the 2000 expenditure level could be increased or decreased as a consequence of future economic conditions. During the normal course of business, the company's subsidiaries included in its real estate and related assets segment have entered into certain financial commitments comprised primarily of guarantees made on $37 million of partnership borrowings and limited recourse obligations associated with $93 million of sold mortgage loans. The fair value of the recourse on these loans is estimated to be $16 million, which is based upon market spreads for sales of similar loans without recourse or estimates of the credit risk of the associated recourse obligation. - ------------------------------------------------------------------------ NOTE 15. CHARGES FOR CLOSURE OR DISPOSITION OF FACILITIES ======================================================================== During the 1999 first quarter, the company recorded a pretax charge of $91 million for the impairment of long-lived assets to be disposed of. This charge was 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; 73 and Coos Bay, Oregon. The composite products business and ply-veneer facility were sold in the second quarter. The export chip facility was closed in the fourth quarter. Also in the 1999 first quarter, the company incurred $3 million related to the disposition of impaired assets. In the fourth quarter, the company incurred $8 million for integration costs and the planned closure of Building Materials Distribution facilities related to the MacMillan Bloedel acquisition. In 1998, the company took a pretax charge of $71 million for streamlining pulp and paper operations, the closure of the Longview chlor-alkali facility and changes to the British Columbia Lumber operations. In 1997, the company took a pretax charge of $89 million for the closure, consolidation or disposition of recycling facilities, the closure of a corrugated medium machine and administrative reorganization at Longview, Washington, and the closure of two plywood facilities and an export sawmill. (See "Charge for Closure or Disposition of Facilities" in the company's Financial Review, page 49.) - ------------------------------------------------------------------------ NOTE 16. SHAREHOLDERS' INTEREST ======================================================================== PREFERRED AND PREFERENCE SHARES The company is authorized to issue: . 7,000,000 preferred shares having a par value of $1.00 per share, of which none were issued and outstanding at December 26, 1999, and December 27, 1998; and . 40,000,000 preference shares having a par value of $1.00 per share, of which none were issued and outstanding at December 26, 1999, and December 27, 1998. The preferred and preference shares may be issued in one or more series with varying rights and preferences including dividend rates, redemption rights, conversion terms, sinking fund provisions, values in liquidation and voting rights. When issued, the outstanding preferred and preference shares rank senior to outstanding common shares as to dividends and assets available on liquidation. COMMON SHARES On November 1, 1999, the company issued 20,156,809 common shares to common shareholders of MacMillan Bloedel as part of the purchase price of that company. During the months of November and December, the company issued an additional 4,567,837 common shares to the holders of Exchangeable Shares (described in the next paragraph) who exercised their right to exchange the shares. A reconciliation of common share activity for the three years ended December 26, 1999, is as follows:
In thousands 1999 1998 1997 - ---------------------------------------------------------------------- Balance at beginning of year 206,073 206,073 206,073 New issuance 20,157 - - Retraction of exchangeable shares 4,568 - - --------------------------------- Balance at end of year 230,798 206,073 206,073 ================================= In treasury: Balance at beginning of year 7,064 6,587 7,737 Purchase of treasury common shares - 925 496 Stock options exercised (2,306) (448) (1,646) --------------------------------- Balance at end of year 4,758 7,064 6,587 =================================
EXCHANGEABLE SHARES On November 1, 1999, Weyerhaeuser Company Ltd., a wholly owned Canadian subsidiary of the company, issued 13,372,580 Exchangeable Shares to common shareholders of MacMillan Bloedel as part of the purchase price of that company. These Exchangeable Shares are, as nearly as practicable, the economic equivalent of the company's common shares, i.e., they have the following rights: . The right to exchange such shares for Weyerhaeuser common shares on a one-to-one basis. . The right to receive dividends, on a per-share basis, in amounts that are the same as, and are payable at the same time as, dividends declared on Weyerhaeuser common shares. 74 . The right to vote at all shareholder meetings at which Weyerhaeuser shareholders are entitled to vote on the basis of one vote per Exchangeable Share. . The right to participate upon a Weyerhaeuser liquidation event on a pro-rata basis with the holders of Weyerhaeuser common shares in the distribution of assets of Weyerhaeuser. A reconciliation of Exchangeable Share activity for the year ended December 26, 1999, is as follows:
In thousands 1999 - ------------------------------------------------------ New issuance 13,373 Debentures converted to exchangeable shares 5 Retraction (4,568) ------- Balance at end of year 8,810 =======
CUMULATIVE OTHER COMPREHENSIVE (EXPENSE) The company's cumulative other comprehensive (expense) includes:
December 26, December 27, Dollar amounts in millions 1999 1998 - ------------------------------------------------------------------------ Foreign currency translation adjustments $ (159) $ (200) Additional minimum pension liability adjustments (8) (8) --------------------------- $ (167) $ (208) ===========================
- ------------------------------------------------------------------------ NOTE 17. STOCK-BASED COMPENSATION PLAN ======================================================================== The company's Long-Term Incentive Compensation Plan (the "Plan") was approved at the 1992 Annual Meeting of Shareholders. The Plan provides for the purchase of the company's common stock at its market price on the date of grant by certain key officers and other employees of the company and its subsidiaries who are selected from time to time by the Compensation Committee of the Board of Directors. No more than 10 million shares may be issued under the Plan. The term of options granted under the Plan may not exceed 10 years from the grant date. Grantees are 25 percent vested after one year, 50 percent after two years, 75 percent after three years, and 100 percent after four years. The company accounts for all options under APB Opinion No. 25 and related interpretations, under which no compensation has been recognized. Had compensation costs for the Plan been determined consistent with SFAS No. 123, Accounting for Stock-Based Compensation, net income and earnings per share would have been reduced to the following pro forma amounts:
1999 1998 1997 - ----------------------------------------------------------------------- Net income (in millions): As reported $ 527 $ 294 $ 342 Pro forma 511 279 332 Basic earnings per share: As reported $ 2.56 $ 1.48 $ 1.72 Pro forma 2.48 1.40 1.67 Diluted earnings per share: As reported $ 2.55 $ 1.47 $ 1.72 Pro forma 2.47 1.40 1.66 ----------------------------------
Because the SFAS No. 123 method of accounting has not been applied to options granted prior to fiscal year 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants:
1999 1998 1997 - ----------------------------------------------------------------------- Risk-free interest rate 5.00% 5.60% 6.42% Expected life 4.5 years 4.3 years 4.9 years Expected volatility 28.19% 27.08% 26.21% Expected dividend yield 2.90% 3.03% 3.44% ---------------------------------
Changes in the number of shares subject to option are summarized as follows:
1999 1998 1997 - ---------------------------------------------------------------------- Shares (in thousands): Outstanding, beginning of year 7,230 5,848 6,243 Granted 1,787 1,981 1,563 Exercised 2,620 512 1,864 Forfeited 104 87 91 Expired - - 3 Acquired 972 - - --------------------------------- Outstanding, end of year 7,265 7,230 5,848 --------------------------------- Exercisable, end of year 5,509 5,312 4,309 --------------------------------- Weighted average exercise price: Outstanding, beginning of year $ 46.15 $ 43.32 $ 40.56 Granted 55.13 52.85 46.54 Exercised 41.96 38.98 36.70 Forfeited 50.20 50.85 44.68 Expired - 50.85 37.75 Outstanding, end of year 49.56 46.15 43.32 Weighted average grant date fair value of options 13.13 12.34 11.26 ---------------------------------
75 The following table summarizes information about stock options outstanding at December 26, 1999:
Weighted Weighted Average Average Options Options Exercise Remaining Price Range Outstanding Exercisable Price Contractual Life - ----------------------------------------------------------------------- $20-$35 20 20 $ 26.75 1.42 years $36-$49 3,576 3,564 $ 45.17 5.85 years $50-$69 3,669 1,925 $ 53.98 8.66 years ------------------------ 7,265 5,509 ========================
- ------------------------------------------------------------------------ NOTE 18. ACQUISITION OF MACMILLAN BLOEDEL LIMITED ======================================================================== On November 1, 1999, the company completed its acquisition of MacMillan Bloedel Limited (MB) following the approval of the transaction by the shareholders of MB and securing all regulatory approvals in the United States, Canada and other jurisdictions. The total purchase price, including assumed debt of $703 million, totaled $3,006 million. The company issued 20 million common shares, and its wholly owned Canadian subsidiary, Weyerhaeuser Company Ltd., issued 13 million Exchangeable Shares to fund the transaction. At the option of the holder, the Exchangeable Shares may be exchanged for Weyerhaeuser common shares on a one-for-one basis. In addition, the company issued replacement options in exchange for outstanding MB options with the number of shares and the exercise price appropriately adjusted by the exchange ratio. With the exception of $247 million of cash and short-term investments acquired, this transaction was a noncash investing activity in which the company acquired assets and assumed liabilities in exchange for common and exchangeable shares as described above. The company accounted for the transaction using the purchase method of accounting. Accordingly, the assets and liabilities of the acquired company were included in the Consolidated Balance Sheet at December 26, 1999. In addition, the operating results of MB for the period November 1, 1999, through December 26, 1999, were included in the company's Consolidated Statement of Earnings for the period ended December 26, 1999. The purchase price to MB shareholders of $2,303 million was calculated as follows: Total MB Common Shares and MB Warrants exchanged 119,753,415 Multiplied by the Exchange Ratio .28 ------------- Equivalent Weyerhaeuser Common Shares 33,530,956 Less fractional shares (1,567) ------------- 33,529,389 Multiplied by the average market price (U.S.) $ 67.953 ------------- Value of common and exchangeable shares issued $ 2,278 Value of replacement options issued for MB stock options 25 ------------- Total purchase price $ 2,303 =============
The purchase price to MB shareholders, plus estimated direct transaction costs and expenses, additional accrued liabilities and the deferred tax effect of applying purchase accounting at June 30, 1999, over the historical net assets of MB, was calculated as follows:
Dollar amounts in millions - ------------------------------------------------------------------------ Purchase price to MB shareholders $ 2,303 Direct transaction costs and expenses 18 Additional accrued liabilities 70 Deferred tax effect of applying purchase accounting 386 Less: historical net assets (952) ------------- $ 1,825 =============
The above calculation of excess purchase price is preliminary. The company will finalize this allocation by November 1, 2000. As of December 26, 1999, the excess purchase price was allocated as follows:
Dollar amounts in millions - ------------------------------------------------------------------------ Plant, property and equipment, timber and timberlands, and investment in equity affiliates $ 1,030 Goodwill 795 ------------- $ 1,825 =============
76 Property, plant and equipment are being depreciated over an average of 20 years, and timber and timberlands are being amortized over 25 to 40 years. Goodwill is being amortized on a straight-line basis over 40 years. Additional depreciation on the increase to fair market value of property, plant and equipment, timber and timberlands, and investment in equity affiliates; the amortization of goodwill; and the amortization of the deferred tax benefit relating to these charges totaled $9 million through December 26, 1999. The following summarized unaudited pro forma information, assuming this acquisition occurred at the beginning of the respective fiscal years, is as follows:
Pro Forma Information (unaudited) Dollar amounts in millions 1999 1998 - ------------------------------------------------------------------------ Net sales and revenues $ 14,616 $ 13,456 Net earnings before the cumulative effect of a change in an accounting principle and extraordinary items 691 271 Net earnings 599 254 Earnings per share: Basic 2.56 1.09 Diluted 2.55 1.08 ----------------------------
- ------------------------------------------------------------------------ NOTE 19. SUBSEQUENT EVENTS ======================================================================== . On January 6, 2000, the company acquired a controlling interest in TJ International, a 51 percent owner and managing partner of Trus Joist MacMillan (TJM), through a successful tender offer that represented more than 90 percent of the total number of outstanding shares. On January 21, 2000, the company completed the acquisition through the filing of a short-term merger document. This acquisition was completed under the terms of an offer by the company to purchase all outstanding shares of TJ International for $42 per share, or $720 million, in cash. The company had acquired a 49 percent interest in TJM through its acquisition of MacMillan Bloedel, completed in November 1999. . On February 7, 2000, the company announced that it had signed a letter of intent to sell its door business in Marshfield, Wisconsin, to Saunders, Karp and Megrue (SKM), a private merchant-banking firm based in Stamford, Connecticut. The transaction, which will have a positive effect on earnings in the quarter in which it is completed, is expected to close within 60 days. In 1999, the business manufactured and sold 720,000 customized architectural doors and 54 million square feet of particleboard door core to third parties. The business employs approximately 870 people. SKM stated that the facility's current management and work force would remain in place following the sale and will continue operating the business as currently managed. This is the latest in a series of moves that the company has made since 1990 to divest non-core businesses. In 1999, the company closed its chlor-alkali facility and sold its Composite Products business and a ply-veneer facility. - ------------------------------------------------------------------------ NOTE 20. BUSINESS SEGMENTS ======================================================================== The company is principally engaged in the growing and harvesting of timber and the manufacture, distribution and sale of forest products. The business segments are timberlands (including logs, chips and timber); wood products (including softwood lumber, plywood and veneer; oriented strand board; hardwood lumber; treated products; doors; raw materials; and building materials distribution); pulp, paper and packaging (including pulp, paper, container board, 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. 77 An analysis and reconciliation of the company's business segment information to the respective information in the consolidated financial statements is as follows:
For the three-year period ended December 26, 1999 Dollar amounts in millions 1999 1998 1997 - ----------------------------------------------------------------------- Sales to and revenues from unaffiliated customers: Timberlands $ 656 $ 636 $ 797 Wood products 5,356 4,475 4,577 Pulp, paper and packaging 4,832 4,312 4,609 Real estate and related assets 1,236 1,192 1,093 Corporate and other 182 151 134 ------------------------------- $ 12,262 $ 10,766 $ 11,210 =============================== Intersegment sales: Timberlands $ 537 $ 488 $ 520 Wood products 231 184 190 Pulp, paper and packaging 119 74 95 Corporate and other 11 13 35 ------------------------------- 898 759 840 ------------------------------- Total sales and revenues 13,160 11,525 12,050 Intersegment eliminations (898) (759) (840) ------------------------------- $ 12,262 $ 10,766 $ 11,210 =============================== Approximate contribution (charge) to earnings:(1) Timberlands $ 535 $ 487 $ 535 Wood products 470 183 172 Pulp, paper and packaging 310 150 164 Real estate and related assets 190 124 111 Corporate and other (272) (225) (186) ------------------------------- 1,233 719 796 Interest expense(1) (337) (324) (341) Less capitalized interest 74 68 84 ------------------------------- Earnings before income taxes and the cumulative effect of a change in an accounting principle 970 463 539 Income taxes (354) (169) (197) ------------------------------- Earnings before the cumulative effect of a change in an accounting principle 616 294 342 Cumulative effect of a change in an accounting principle (89) - - ------------------------------- $ 527 $ 294 $ 342 =============================== Depreciation, amortization and fee stumpage: Timberlands $ 51 $ 55 $ 72 Wood products 181 188 171 Pulp, paper and packaging 373 348 353 Real estate and related assets 6 5 12 Corporate and other 29 20 20 ------------------------------- $ 640 $ 616 $ 628 =============================== Noncash charges for closure or disposition of facilities: Wood products $ 99 $ 25 $ 40 Pulp, paper and packaging - 42 49 Corporate and other 3 4 - ------------------------------- $ 102 $ 71 $ 89 =============================== Equity in income/(loss) from equity affiliates, joint ventures and limited partnerships: Timberlands $ 3 $ 1 $ 3 Wood products 4 - - Pulp, paper and packaging 19 27 (10) Real estate and related assets 39 30 26 ------------------------------- $ 65 $ 58 $ 19 =============================== Capital expenditures (including acquisitions): Timberlands $ 104 $ 87 $ 75 Wood products 143 212 240 Pulp, paper and packaging 279 776 327 Real estate and related assets 11 2 3 Corporate and other 29 32 24 ------------------------------- $ 566 $ 1,109 $ 669 =============================== Investments in and advances to equity affiliates, joint ventures and limited partnerships: Timberlands $ 270 $ 218 $ 216 Wood products 406 - - Pulp, paper and packaging 274 264 33 Real estate and related assets (less reserves) 124 120 116 ------------------------------- $ 1,074 $ 602 $ 365 =============================== Assets: Timberlands $ 2,212 $ 1,675 $ 1,676 Wood products 3,788 2,129 2,128 Pulp, paper and packaging 7,198 6,346 6,589 Real estate and related assets 1,939 1,900 2,004 Corporate and other 3,641 1,164 1,160 ------------------------------- 18,778 13,214 13,557 Less: Intersegment eliminations (439) (380) (482) ------------------------------- $ 18,339 $ 12,834 $ 13,075 ===============================
Certain reclassifications have been made to conform prior years' data to the current format. (1) Interest expense of $14 million, $17 million and $40 million in 1999, 1998 and 1997, respectively, is included in the determination of "approximate contribution to earnings" and excluded from "interest expense" for financial services businesses. 78 - ------------------------------------------------------------------------ NOTE 21. GEOGRAPHICAL AREAS ======================================================================== The company attributes sales to and revenues from unaffiliated customers in different geographical areas on the basis of the location of the customer. Export sales from the United States consist principally of pulp, paperboard, logs, lumber and wood chips to Japan; containerboard, pulp, lumber and recycling material to other Pacific Rim countries; and pulp and hardwood lumber to Europe. Long-lived assets consist of timber and timberlands and property and equipment used in the generation of revenues in the different geographical areas. Selected information related to the company's operations by geographical area is as follows:
For the three-year period ended December 26, 1999 Dollar amounts in millions 1999 1998 1997 - ------------------------------------------------------------------------ Sales to and revenues from unaffiliated customers: United States $ 10,004 $ 8,999 $ 8,985 Japan(1) 652 610 1,032 Canada 802 514 510 Europe 380 338 354 Other foreign countries 424 305 329 ------------------------------- $ 12,262 $ 10,766 $ 11,210 =============================== Export sales from the United States: Japan(1) $ 521 $ 507 $ 893 Other 667 582 634 ------------------------------- $ 1,188 $ 1,089 $ 1,527 =============================== Earnings before income taxes and cumulative effect of a change in an accounting principle: United States $ 778 $ 413 $ 432 Foreign entities 192 50 107 ------------------------------- $ 970 $ 463 $ 539 =============================== Long-lived assets: United States $ 7,070 $ 6,649 $ 7,426 Canada 2,447 1,345 903 Other foreign countries 65 26 12 ------------------------------- $ 9,582 $ 8,020 $ 8,341 ===============================
(1) 1998 export sales to Japan include only one month's sales of newsprint due to the company's change in ownership of its newsprint subsidiary from 80 percent to 50 percent in February. - ------------------------------------------------------------------------ NOTE 22. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED) ========================================================================
Dollar amounts in millions First Second Third Fourth except per-share figures Quarter Quarter Quarter Quarter Year - ------------------------------------------------------------------------ Net sales: 1999 $ 2,665 $ 3,044 $ 3,120 $ 3,433 $12,262 1998 2,603 2,676 2,736 2,751 10,766 Operating income: 1999 117 308 410 293 1,128 1998 181 161 225 89 656 Earnings before income taxes and cumulative effect of a change in an accounting principle: 1999 65 258 373 274 970 1998 135 109 175 44 463 Net earnings: 1999 (48) 164 237 174 527 1998 85 69 110 30 294 Net earnings per share: Basic 1999 (.24) .82 1.18 .79 2.56 1998 .43 .34 .56 .15 1.48 Diluted 1999 (.24) .81 1.18 .78 2.55 1998 .43 .34 .55 .15 1.47 Dividends per share: 1999 .40 .40 .40 .40 1.60 1998 .40 .40 .40 .40 1.60 Market prices - high/low: 1999 62-49 9/16 73 15/16-55 9/16 69 3/4-54 13/16 72 15/16-54 9/16 73 15/16-49 9/16 1998 57 15/16-44 15/16 61 7/16-44 9/16 47 7/16-36 3/4 51 9/16-41 3/4 61 7/16-36 3/4 ----------------------------------------------------
- ------------------------------------------------------------------------ NOTE 23. HISTORICAL SUMMARY ========================================================================
Dollar amounts in millions except per-share figures 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------ PER SHARE: Basic net earnings (loss) from continuing operations, before extraordinary item and effect of accounting changes $ 2.99 1.48 1.72 2.34 3.93 Extraordinary item(5) $ - - - - - Effect of accounting changes(1) $ (.43) - - - - ---------------------------------------------------- Basic net earnings (loss) $ 2.56 1.48 1.72 2.34 3.93 ==================================================== Diluted net earnings (loss) from continuing operations, before extraordinary item and effect of accounting changes $ 2.98 1.47 1.72 2.33 3.92 Extraordinary item(5) $ - - - - - Effect of accounting changes(1) $ (.43) - - - - ---------------------------------------------------- Diluted net earnings (loss) $ 2.55 1.47 1.72 2.33 3.92 ==================================================== Dividends paid $ 1.60 1.60 1.60 1.60 1.50 Shareholders' interest (end of year) $ 30.54 22.74 23.30 23.21 22.57 FINANCIAL POSITION: Total assets: Weyerhaeuser $ 16,400 10,934 11,071 10,968 10,359 Real estate and related assets $ 1,939 1,900 2,004 2,628 2,894 ---------------------------------------------------- $ 18,339 12,834 13,075 13,596 13,253 ==================================================== Long-term debt (net of current portion): Weyerhaeuser: Long-term debt $ 3,974 3,397 3,483 3,546 2,983 Capital lease obligations $ 1 2 2 2 2 Convertible subordinated debentures $ - - - - - Limited recourse income debenture $ - - - - - ---------------------------------------------------- $ 3,975 3,399 3,485 3,548 2,985 ==================================================== Real estate and related assets: Long-term debt $ 357 580 682 814 1,608 ==================================================== Shareholders' interest $ 7,173 4,526 4,649 4,604 4,486 Percent earned on shareholders' interest 9.0% 6.4% 7.4% 10.2% 18.2% OPERATING RESULTS: Net sales and revenues: Weyerhaeuser $ 11,026 9,574 10,117 10,105 10,869 Real estate and related assets $ 1,236 1,192 1,093 1,009 919 ---------------------------------------------------- $ 12,262 10,766 11,210 11,114 11,788 ==================================================== Net earnings (loss) from continuing operations before extraordinary item and effect of accounting changes: Weyerhaeuser $ 495 214 271 434 981 Real estate and related assets $ 121 80 71 29 (182)(4) ---------------------------------------------------- $ 616 294(2) 342 463 799 Extraordinary item(5) $ - - - - - Effect of accounting changes(1) $ (89) - - - - ---------------------------------------------------- Net earnings (loss) $ 527 294 342(3) 463 799 ==================================================== STATISTICS (UNAUDITED): Number of employees 44,770 36,309 35,778 39,020 39,558 Salaries and wages $ 1,895 1,695 1,706 1,781 1,779 Employee benefits $ 392 351 355 370 408 Total taxes $ 579 437 478 557 736 Timberlands (thousands of acres): U.S. and Canadian fee ownership 5,914 5,099 5,171 5,326 5,302 Long-term license arrangements 32,786 27,002 23,715 22,863 22,866 Number of shareholder accounts at year-end: Common 18,732 19,559 20,981 22,528 23,446 Exchangeable 1,590 - - - - Preferred - - - - - Preference - - - - - Weighted average shares outstanding (thousands) 205,599 198,914 198,967 198,318 203,525 ----------------------------------------------------
80
1994 1993 1992 1991 1990 1989 - ------------------------------------------------------------------ 2.86 2.58 1.83 (.50) 1.87 1.56 - .25 - - - - - - - (.30) - - - ------------------------------------------------------------------ 2.86 2.83 1.83 (.80) 1.87 1.56 ================================================================== 2.86 2.56 1.82 (.50) 1.87 1.56 - .25 - - - - - - - (.30) - - - ------------------------------------------------------------------ 2.86 2.81 1.82 (.80) 1.87 1.56 ================================================================== 1.20 1.20 1.20 1.20 1.20 1.20 20.86 19.34 17.85 17.25 19.21 18.55 9,750 9,087 8,566 7,551 7,556 7,371 3,408 3,670 9,720 9,435 8,800 8,605 - ------------------------------------------------------------------ 13,158 12,757 18,286 16,986 16,356 15,976 ================================================================== 2,713 2,998 2,659 2,195 2,168 1,502 - - - - 7 23 - - 193 193 193 - - - 188 204 204 204 - ------------------------------------------------------------------ 2,713 2,998 3,040 2,592 2,572 1,729 ================================================================== 1,873 2,086 2,411 2,421 2,637 2,006 ================================================================== 4,290 3,966 3,646 3,489 3,864 4,148 14.3% 15.2% 10.4% (4.4)% 9.8% 8.3% 9,281 8,315 7,744 7,167 7,447 8,355 1,117 1,230 1,522 1,606 1,619 1,826 - ------------------------------------------------------------------ 10,398 9,545 9,266 8,773 9,066 10,181 ================================================================== 576 459 332 (25) 340 377 13 68 40 (76) 54 (36) - ------------------------------------------------------------------ 589 527 372 (101)(6) 394 341(7) - 52 - - - - - - - (61) - - - ------------------------------------------------------------------ 589 579 372 (162) 394 341 ================================================================== 36,665 36,748 39,022 38,669 40,621 45,214 1,610 1,585 1,580 1,476 1,531 1,563 357 347 323 321 318 325 618 577 443 173 446 403 5,587 5,512 5,592 5,488 5,592 5,664 17,849 17,845 18,828 13,491 13,491 13,324 24,131 25,282 26,334 26,937 28,187 29,847 - - - - - - - - - - - 12 - - - - - 443 205,543 204,866 203,373 201,578 203,673 204,331 - ------------------------------------------------------------------
(1) 1999 results reflect charges of $244 million less related tax effect of $90 million, or $154 million, for the cumulative effect of a change in an accounting principle, impairment of long-lived assets to be disposed of and closure costs related to the MB acquisition. (2) 1998 results reflect nonrecurring charges of $71 million less related tax effect of $26 million, or $45 million. (3) 1997 results reflect net nonrecurring charges of $13 million less related tax effect of $4 million, or $9 million. (4) 1995 results reflect a charge for disposal of certain real estate assets of $290 million less related tax effect of $106 million, or $184 million. (5) 1993 results reflect an extraordinary net gain as a result of extinguishing certain debt obligations of $86 million less related tax effect of $34 million, or $52 million. (6) 1991 results reflect restructuring and other charges of $445 million less related tax effect of $162 million, or $283 million. (7) 1989 results reflect net nonrecurring items of $401 million less related tax effect of $141 million, or $260 million. EX-27 4
5 1,000,000 12-MOS DEC-26-1999 DEC-26-1999 39 1,604 1,407 17 1,329 4,543 13,377 5,817 18,339 2,934 4,453 0 0 288 6,885 18,339 12,262 12,262 9,321 9,321 881 9 277 970 354 616 0 0 89 527 2.56 2.55
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