-----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, Nl7h5oUUcpF1bsP75iKWlSEJvCSWdnaWNXMOhYEKYGB0r3l3TB1mK5FZ0jhkUOPy xXHZKsjjyi4D/3W2u2nLqg== 0000106535-98-000004.txt : 19980317 0000106535-98-000004.hdr.sgml : 19980317 ACCESSION NUMBER: 0000106535-98-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971228 FILED AS OF DATE: 19980313 SROS: CSX SROS: NYSE 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: 98565474 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 X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 28, 1997 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ________ Commission File Number 1-4825 WEYERHAEUSER COMPANY A Washington Corporation (IRS Employer Identification No. 91-0470860) Tacoma, Washington 98477 Telephone (253) 924-2345 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Each Class Which Registered - ------------------------------- -------------------------- Common Shares ($1.25 par value) Chicago Stock Exchange New York Stock Exchange Pacific Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No___. 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. [ ]. As of February 27, 1998, 198,568,139 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 $9,915,996,441. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the fiscal year ended December 28, 1997 are incorporated by reference into Parts I, II and IV. Portions of the Notice of 1998 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 12 PART II Item 5. Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters 13 Item 6. Selected Financial Data 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 8. Financial Statements and Supplementary Information 13 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 13 PART III Item 10. Directors and Executive Officers of the Registrant 14 Item 11. Executive Compensation 14 Item 12. Security Ownership of Certain Beneficial Owners and Management 14 Item 13. Certain Relationships and Related Transactions 14 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 15 Signatures 16 Report of Independent Public Accountants on Financial Statement Schedules 17 Schedule II Valuation and Qualifying Accounts 18
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 and 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 30 through 34, Description of the Business of the Company, contained in the company's 1997 Annual Report to Shareholders, is incorporated herein by reference. Financial information with respect to industry segments, included in Note 19 of Notes to Financial Statements contained in the company's 1997 Annual Report to Shareholders, is incorporated herein by reference. Timberlands and Wood Products The company is engaged in the management of 5.2 million acres of company-owned and .2 million acres of leased commercial forestland in the United States (60% in the South and 40% in the Pacific Northwest), most of it highly productive and located extremely well to serve both domestic and international markets. The company has, additionally, long-term license arrangements in Canada covering approximately 23.7 million acres (of which 16.5 million acres are considered to be productive forestland). The combined total timber inventory on these U.S. and Canadian lands is approximately 273 million cunits (a cunit is 100 cubic feet of solid wood), of which approximately 75% is softwood species. 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 28, 1997 --------- ------------------------------------------- Millions Fee Long-term License of Cunits Ownership Leases Arrangements Total --------- --------- --------- ------------ ------- Geographic Area United States West 57 2,048 -- -- 2,048 South 36 3,123 237 -- 3,360 --------- --------- --------- ------------ ------- Total United States 93 5,171 237 -- 5,408 --------- --------- --------- ------------ ------- Canada Alberta 91 -- -- 7,453 7,453 British Columbia 10 38 -- 3,800 3,838 Saskatchewan 79 -- -- 12,462 12,462 --------- --------- --------- ------------ ------- Total Canada 180 38 -- 23,715 23,753 --------- --------- --------- ------------ ------- TOTAL 273 5,209 237 23,715 29,161 ========= ========= ========= ============ =======
Thousands of Acres Thousands of Acres Millions of ----------------------- ------------------ Seedlings Stocking Harvested Planted Planted Control Fertilization --------- ------- ----------- --------- ------------- 1997 Activity West 35.6 32.3 17.2 5.3 73.2 South 55.2 55.4 31.2 -- 200.0 --------- ------- ----------- --------- ------------- Total United States 90.8 87.7 48.4 5.3 273.2 ========= ======= =========== ========= =============
3 Weyerhaeuser Company and Subsidiaries PART I Item 1. Business - Continued - ----------------------------- The company's wood products businesses produce and sell softwood lumber, plywood and veneer; composite panels; oriented strand board; hardwood lumber and plywood; doors; treated products; logs; chips and timber. These products are sold primarily through the company's own sales organizations. Building materials are sold to wholesalers, retailers and industrial users. Sales volumes by major product class are as follows (millions):
1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ Raw materials - cubic ft. 584 577 535 564 547 Softwood lumber - board ft. 4,869 4,745 4,515 4,402 4,230 Softwood plywood and veneer - sq. ft. (3/8") 2,042 2,172 2,324 2,685 2,435 Composite panels - sq. ft. (3/4") 551 604 648 660 626 Oriented strand board - sq. ft. (3/8") 2,462 2,083 1,931 1,803 1,672 Hardboard - sq. ft. (7/16") -- 193 201 167 140 Hardwood lumber - board ft. 362 349 293 254 240 Engineered wood products - lineal ft. 137 116 128 71 47 Hardwood doors (thousands) 730 652 648 617 556
Selected product prices:
1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ Export logs (#2 sawlog-bark on) -$/MBF Cascade - Douglas fir $1,065 $1,330 $1,365 $1,168 $1,224 Coastal - Hemlock 628 611 750 804 831 Coastal - Douglas fir 981 1,246 1,217 1,085 1,104 Lumber (common) - $/MBF 2x4 Douglas fir (kiln dried) 418 422 332 408 418 2x4 Douglas fir (green) 381 386 308 364 383 2x4 Southern yellow pine (kiln dried) 453 422 364 419 397 2x4 Spruce-pine-fir (kiln dried) 354 351 251 343 334 Plywood (1/2" CDX) - $/MSF West 312 307 331 334 321 South 261 256 301 298 282 Oriented strand board (7/16"-24/16) North Central price - $/MSF 142 184 245 265 236
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; Newsprint, which manufactures newsprint at the company's North Pacific Paper Corporation mill and markets it to West Coast and Japanese newspaper publishers; 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, which is 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; Recycling, which operates an extensive wastepaper collection system and markets it to company mills and worldwide customers; and Chemicals, which produces chlorine, caustic and tall oil, which are used principally by the company's pulp, paper and packaging operations. Sales volumes by major product class are as follows (thousands):
1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ Pulp - air-dry metric tons 1,982 1,868 2,060 2,068 1,886 Newsprint - metric tons 684 629 663 638 609 Paper - tons 1,146 1,007 1,006 998 990 Paperboard - tons 243 205 230 201 222 Containerboard - tons 389 346 259 254 290 Packaging - MSF 44,508 42,323 34,342 34,483 31,386 Recycling - tons 2,229 2,011 1,467 985 851
Selected product prices (per ton):
1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ Pulp - NBKP-air-dry metric-U.S. $ 566 $ 579 $ 883 $ 566 $ 445 Newsprint - metric-West Coast U.S. 550 636 662 460 435 Paper - uncoated free sheet-U.S. 740 745 946 617 627 Linerboard - 42 lb.-Eastern U.S. 326 367 505 367 295 Recycling - old corrugated containers 76 53 128 78 27 Recycling - old newsprint 15 18 99 46 16
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. In May 1997, the company's wholly owned subsidiary, Weyerhaeuser Mortgage Company (WMC), was sold. WMC was the principal business within the financial services segment. GNA Corporation, a subsidiary that specialized in the sale of life insurance annuities and mutual funds to the customers of financial institutions, was sold in April 1993. With the sale of WMC, the financial services segment is no longer material to the results of the company. Beginning with the third quarter, the remaining real estate activities in financial services have been combined with real estate into one segment entitled real estate and related assets. Volume information:
1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ Units sold: Single-family units (1) 2,914 2,773 3,114 3,934 3,879 Multi-family units (1) 324 234 117 475 1,141 Lots (1) 1,988 2,522 1,628 2,157 1,372 Commercial space (thousand sq. ft.) 615 569 -- 389 88 Amounts in millions Loan servicing portfolio $ -- $4,354 $10,952 $11,300 $8,400 Single-family loan originations $1,168 $3,436 $ 2,196 $ 2,763 $4,405
(1) Includes one-half of joint venture sales. 6 Weyerhaeuser Company and Subsidiaries PART I Item 2. Properties - ------------------- Timberlands and Wood Products Facilities and annual production are summarized by major product class as follows (millions):
Number Production of Capacity Facilities 1997 1996 1995 1994 1993 ---------- ---------- ----- ----- ----- ----- ----- Logs - cubic ft. -- -- 995 912 914 671 673 Softwood lumber - board ft. 3,790 27 3,992 3,701 3,419 3,249 3,135 Softwood plywood and veneer - sq. ft. (3/8") 1,008 5 1,092 1,243 1,292 1,249 1,188 Composite panels - sq. ft. (3/4") 600 5 478 535 583 594 564 Oriented strand board - sq. ft. (3/8") 2,195 6 2,041 1,687 1,654 1,568 1,443 Hardboard - sq. ft. (7/16") -- -- -- 86 124 122 120 Hardwood lumber - board ft. 413 12 345 333 278 229 221 Hardwood doors (thousands) 850 1 740 646 643 597 522
Principal manufacturing facilities are located as follows: Softwood lumber and plywood Hardwood lumber Alabama, Arkansas, Georgia, Arkansas, Michigan, Oklahoma, Louisiana, Mississippi, Oregon, Pennsylvania, North Carolina, Oklahoma, Oregon, Washington and Wisconsin Washington and Alberta, British Columbia and Hardwood doors Saskatchewan, Canada Wisconsin Composite panels Georgia, North Carolina, Oregon and Wisconsin Oriented strand board Michigan, North Carolina, West Virginia and Alberta, Canada 7 Weyerhaeuser Company and Subsidiaries PART I Item 2. Properties - Continued - ------------------------------- Pulp, Paper and Packaging Facilities and annual production are summarized by major product class as follows (thousands):
Number Production of Capacity Facilities 1997 1996 1995 1994 1993 ---------- ---------- ------ ------ ------ ------ ------ Pulp - air-dry metric tons 2,180 8 2,063 2,004 2,159 2,041 2,096 Newsprint - metric tons 715 1 704 631 687 651 618 Paper - tons 1,126 5 1,128 1,034 1,060 982 1,007 Paperboard - tons 230 1 231 206 229 189 217 Containerboard - tons 2,480 4 2,381 2,331 2,329 2,357 2,269 Packaging - MSF 50,000 46 46,488 44,471 36,041 36,020 32,795 Recycling - tons -- 28 3,655 3,428 2,754 2,042 1,847
Principal manufacturing facilities are located as follows: Pulp Containerboard Georgia, Mississippi, North North Carolina, Oklahoma and Oregon Carolina, Washington and Alberta, British Columbia and Packaging Saskatchewan, Canada Arizona, California, Colorado, Connecticut, Florida, Georgia, Newsprint Hawaii, Illinois, Indiana, Iowa, Washington Kentucky, Maryland, Michigan, Minnesota, Mississippi, Missouri, Paper Nebraska, New Jersey, New York, Mississippi, North Carolina, North Carolina, Ohio, Oregon, Washington, Wisconsin and Tennessee, Texas, Virginia, Saskatchewan, Canada Washington and Wisconsin Paperboard Recycling Washington Arizona, California, Colorado, Georgia, Illinois, Iowa, Kansas, Maryland, Minnesota, Nebraska, North Carolina, Oklahoma, Oregon, Tennessee, Texas, Utah, Virginia, Washington and West Virginia Chemicals Georgia, Mississippi, North Carolina, Oklahoma, Oregon and Washington 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 California 9 Weyerhaeuser Company and Subsidiaries PART I Item 3. Legal Proceedings - -------------------------- Trial began in May 1992 in a federal income tax refund case that the company filed in July 1989 in the United States Claims Court. The complaint contended that the company overpaid federal income taxes in 1977 through 1983. The alleged overpayments resulted from the disallowance of certain timber casualty losses and certain deductions claimed by the company arising from export transactions. The refund sought was approximately $29 million, plus statutory interest from the dates of the alleged overpayments. The company settled the portion of the case relating to export transactions and received a tax refund of approximately $10 million, plus statutory interest. In September 1994, the United States Court of Federal Claims (successor to the United States Claims Court) issued an opinion on the casualty loss issues which resulted in the allowance of additional tax refunds of approximately $2 million, plus statutory interest. Both the company and the government appealed the decision. On August 2, 1996, the Court of Appeals for the Federal Circuit issued its opinion on the remaining timber casualty loss issues, ruling in favor of the company on both the company's appeal and the government's appeal. The United States Supreme Court denied the government's request for certiorari on January 21, 1997. On October 23, 1997, the United States Court of Federal Claims entered a judgment in favor of the company for refund of taxes in the amount of $9 million plus statutory interest. The company has received a partial refund of $7 million in tax plus statutory interest. The government filed an appeal on the remaining $2 million tax refund plus statutory interest, but such appeal was withdrawn in January 1998. The remaining refund is being processed by the government. On March 6, 1992, the company filed a complaint in the Superior Court for King County, Washington, against a number of insurance companies. The complaint sought a declaratory judgment that the insurance companies were obligated to defend the company and to pay, on the company's behalf, certain claims relating to alleged environmental damage from toxic substances to sites owned by third parties and the company. The company subsequently agreed to settlements with all but one of the defendants. The remaining defendant provided first layer excess coverage during a three year period. That defendant's liability on groups of sites is being tried in three phases. Two trials against the remaining defendant, affecting nine sites, began in October 1994 and February 1996, respectively, and resulted in verdicts assigning 100 percent clean-up responsibility to the defendant on three sites, partial responsibility on three others and a finding of no liability as to the remaining three. With respect to the remaining sites, a voluntary dismissal was taken on 6 sites, and on the final 10 sites the defendant's offer of judgment was accepted in June 1997. Final judgment for $7.8 million on the sites covered by the two trials was received on December 19, 1997. 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. At the Cosmopolis, Washington, Columbus, Mississippi, and Flint River, Georgia, facilities, the state regulatory agencies agreed with the company's conclusions regarding the status of each facility. For the Cosmopolis facility, the Washington Department of Ecology agreed the changes made at the facility did not require PSD review. For the Columbus and Flint River facilities, the states concluded the original PSD permits issued to the facilities require updating. The company will update emissions data for the Columbus and Flint River facilities as part of the Title V permitting process. No penalties were assessed for the issues identified at Columbus and Flint River. Agreements resolving the alleged PSD issues have been reached with the states of Washington, Oklahoma and North Carolina, as noted below. No issues were identified at the company's Rothschild, Wisconsin, facility. In April 1995, EPA Region X issued a Notice of Violation (NOV) to the company and to North Pacific Paper Corporation (NORPAC), a joint venture in which the company currently has a 50 percent ownership interest. The NOV addresses alleged PSD violations at NORPAC's Longview, Washington, newsprint manufacturing facility. A settlement resolving alleged PSD issues at the Longview/NORPAC complex was reached with the State of Washington on January 26, 1996. On November 14, 1995, the company entered into a settlement with the State of Oklahoma to resolve alleged PSD violations at the company's Valliant, Oklahoma, containerboard manufacturing facility. The company also entered into Special Orders by Consent with the State of North Carolina to resolve alleged PSD issues at the New Bern, North Carolina, pulp mill and the Plymouth, North Carolina, pulp and paper complex. No decision has been made by the Lane County Oregon Regional Air Pollution Control Authority concerning alleged PSD and permit violations at the company's Springfield, Oregon, containerboard manufacturing facility. 10 Weyerhaeuser Company and Subsidiaries PART I Item 3. Legal Proceedings - Continued - -------------------------------------- The Washington Department of Ecology issued a $10 thousand penalty to the company because of three accidental chlorine releases which occurred at the company's pulp mill in Longview on March 18, 1996, which has been paid. The EPA is also investigating. The Washington Department of Ecology has issued a NOV and a $40 thousand penalty because of an accidental spill of an estimated 8,700 gallons of crude sulfate turpentine on January 27, 1997, at the company's pulp and paper operations in Longview. The penalty was paid. The EPA investigated the January incident. EPA and the company are negotiating a possible settlement of an EPA enforcement action. On June 20, 1996, the Wisconsin Department of Natural Resources (WDNR) issued a NOV for alleged air violations at the Marshfield, Wisconsin, wood products manufacturing facility. No penalty was assessed in the NOV. The NOV was referred to the Wisconsin Department of Justice (WDOJ) for enforcement action on July 2, 1996. The company settled with WDNR in September 1997 and paid a $65 thousand penalty. On October 2, 1996, the WDNR conducted an inspection of a building demolition project at the company's Marshfield, Wisconsin facility. The WDNR noted several potential non-compliance issues in the work performed by the asbestos abatement subcontractor retained for the project. Upon learning of the issues observed by WDNR, the company removed the asbestos abatement subcontractor from the plantsite. The WDNR and EPA Region V are reviewing the work performed to evaluate whether an enforcement action should be brought against the asbestos abatement subcontractor, the general contractor, and/or the company. In November 1996, an action was filed against the company in Superior Court for King County, Washington, on behalf of a purported class of all individuals and entities that own property in the United States on which exterior hardboard siding manufactured by the company has been installed since 1980. The action alleges the company has manufactured and distributed defective hardboard siding and has breached express warranties and consumer protection statutes in its sale of hardboard siding. The action seeks compensatory damages, including prejudgment interest, and seeks damages for the cost of replacing siding that rots subsequent to the entry of any judgment. In January 1997, an action was filed, also in Superior Court for King County, Washington, on behalf of a purported class of all individuals, proprietorships, partnerships, corporations, and other business entities in the United States on whose homes, condominiums, apartment complexes or commercial buildings hardboard siding manufactured by the company has been installed. The action alleges the company has breached express and implied warranties in its sale of hardboard siding and also has violated the Consumer Protection Act of the State of Washington. The action seeks damages, prejudgment interest, costs and reasonable attorney fees. In December 1997, the two cases were consolidated for the purpose of discovery and resolution of the class certification issue. Also, in December 1997, the plaintiffs in the first of the two cases filed a motion to change the trial date and for leave to move for class certification. In January 1998, the court denied this motion. This case was settled for approximately $11 thousand and dismissed in March 1998. The second case is currently set for trial in May 1998 without class certification. The company is a defendant in approximately eighteen other hardboard siding cases, two of which purport to be class actions on behalf of purchasers of single- or multi-family residences that contain the company's hardboard siding, one in Nebraska and one in Iowa. On August 7, 1997, the company entered a plea of guilty to a misdemeanor violation of the Migratory Bird Treaty Act in the U.S. District Court, Western District of Washington, at Tacoma. The misdemeanor violation involved the accidental poisoning of a hawk and an owl in the course of starling pest control at the company's Longview, Washington, pulp mill. The company and the Department of Justice agreed to a disposition of the misdemeanor which involved an undertaking by the company to conduct a starling control research project at its Longview mill. In December 1997, the Oklahoma Department of Environmental Quality issued a NOV for alleged failure to comply with audit requirements for a bark boiler at the company's Valliant, Oklahoma, containerboard manufacturing facility. No penalty was specified. 11 Weyerhaueser Company and Subsidiaries PART I Item 3. Legal Proceedings - Continued - -------------------------------------- The company is also a party to various proceedings relating to the clean-up of hazardous waste sites under the Comprehensive Environmental Response Compensation and Liability Act, commonly known as "Superfund," and similar state laws. The EPA and/or various state agencies have notified the company that it may be a potentially responsible party with respect to other hazardous waste sites as to which no proceedings have been instituted against the company. The company is also a party to other legal proceedings generally incidental to its business. Although the final outcome of any legal proceeding is subject to a great many variables and cannot be predicted with any degree of certainty, the company presently believes that any ultimate outcome resulting from the legal proceedings discussed herein, or all of them combined, would not have a material effect on the company's current financial position, liquidity or results of operations; however, in any given future reporting period, such legal proceedings 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 28, 1997. 12 Weyerhaeuser Company and Subsidiaries PART II Item 5. Market Price of and Dividends on the Registrant's Common - ---------------------------------------------------------------------- Equity and Related Stockholder Matters - -------------------------------------- Information with respect to market information, stockholders and dividends included in Notes 20 and 21 of Notes to Financial Statements in the company's 1997 Annual Report to Shareholders, is incorporated herein by reference. Item 6. Selected Financial Data - -------------------------------- Information with respect to selected financial data included in Note 21 of Notes to Financial Statements in the company's 1997 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 1 and 18-40 contained in the company's 1997 Annual Report to Shareholders, is incorporated herein by reference. Item 8. Financial Statements and Supplementary Information - ----------------------------------------------------------- Financial statements and supplementary information, contained in the company's 1997 Annual Report to Shareholders are incorporated herein by reference:
Page(s) in Annual Report to Shareholders ------------- Report of Independent Public Accountants 40 Consolidated Statement of Earnings 41 Consolidated Balance Sheet 42, 43 Consolidated Statement of Cash Flows 44, 45 Consolidated Statement of Shareholders' Interest 46 Notes to Financial Statements 47-65 Selected Quarterly Financial Information (Unaudited) 63
Item 9. Changes in and Disagreements with Accountants on Accounting and - -------------------------------------------------------------------------- Financial Disclosure - -------------------- Not applicable. 13 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 1 through 4 of the Notice of 1998 Annual Meeting of Shareholders and Proxy Statement dated March 9, 1998 is incorporated herein by reference. The executive officers of the company are as follows:
Name Title Age - --------------------- ------------------------- --- William R. Corbin Executive Vice President 56 Richard C. Gozon Executive Vice President 59 Steven R. Hill Senior Vice President 50 Mack L. Hogans Senior Vice President 49 Norman E. Johnson Senior Vice President 64 Thomas M. Luthy Senior Vice President 60 Steven R. Rogel President 55 William C. Stivers Senior Vice President 59
Item 11. Executive Compensation - -------------------------------- Information with respect to executive compensation included on pages 5 through 16 of the Notice of 1998 Annual Meeting of Shareholders and Proxy Statement dated March 9, 1998 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 5 and 6 of the Notice of 1998 Annual Meeting of Shareholders and Proxy Statement dated March 9, 1998 is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------- Information with respect to certain relationships and related transactions included on pages 20 and 21 of the Notice of 1998 Annual Meeting of Shareholders and Proxy Statement dated March 9, 1998 is incorporated herein by reference. 14 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, contained in the company's 1997 Annual Report to Shareholders, are incorporated in Part II, Item 8 of this Form 10-K by reference.
Page Number(s) Financial Statement Schedules in Form 10-K ------------- Report of Independent Public Accountants on Financial Statement Schedules 17 Schedule II - Valuation and Qualifying Accounts 18
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, contained in the company's 1997 Annual Report to Shareholders and incorporated herein by reference. Exhibits: 3 - (i) Articles of Incorporation (ii) Bylaws 10 - Material Contracts (a) Agreement with N. E. Johnson (incorporated by reference to 1992 Form 10-K filed with the Securities and Exchange Commission on March 12, 1993-Commission File Number 1-4825) (b) Agreement with W. R. Corbin (incorporated by reference to 1992 Form 10-K filed with the Securities and Exchange Commission on March 12, 1993-Commission File Number 1-4825) (c) 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) (d) Agreement with S. R. Rogel 11 - Statement Re: Computation of Per Share Earnings (incorporated by reference to Note 2 of the 1997 Weyerhaeuser Company Annual Report to Shareholders) 13 - Portions of the 1997 Weyerhaeuser Company 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 22, February 24, April 15, May 23, June 19, July 1, July 9, July 11, July 17, September 4, and October 15, 1997 and January 23, 1998, respectively, reporting information under Item 5, Other Events. 15 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 13, 1998. Weyerhaeuser Company /s/ Steven R. Rogel --------------------- Steven R. Rogel President 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 13, 1998. /s/ Steven R. Rogel /s/ P. M. Hawley - ------------------------------ --------------------------- Steven R. Rogel Philip M. Hawley President, Principal Executive Director Officer and Director /s/ Martha R. Ingram --------------------------- /s/ George H. Weyerhaeuser Martha R. Ingram - ------------------------------ Director George H. Weyerhaeuser Chairman of the Board and /s/ John Kieckhefer Director --------------------------- John I. Kieckhefer /s/ William C. Stivers Director - ------------------------------ William C. Stivers /s/Donald F. Mazankowski Principal Financial Officer --------------------------- Donald F. Mazankowski /s/ Kenneth J. Stancato Director - ------------------------------ Kenneth J. Stancato /s/ William D. Ruckelshaus Principal Accounting Officer --------------------------- William D. Ruckelshaus /s/ John W. Creighton, Jr. Director - ------------------------------ John W. Creighton, Jr. /s/ Richard H. Sinkfield Director ---------------------------- Richard H. Sinkfield /s/ W. John Driscoll Director - ------------------------------ W. John Driscoll /s/ James N. Sullivan Director ---------------------------- James N. Sullivan Director 16 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 11, 1998. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed on page 15 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 11, 1998 17 Weyerhaeuser Company and Subsidiaries FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts For the three years ended December 28, 1997 Dollar amounts in millions Deductions Balance at from/ Balance at Beginning Charged Additions (to) End of Description of Period to Income Reserve Period - ----------- ---------- --------- -------------- ---------- Weyerhaeuser Reserve deducted from related asset accounts: Doubtful accounts - Accounts receivable 1997 $ 7 $ 5 $ 6 $ 6 ========== ========== ============= ========== 1996 $ 9 $ 4 $ 6 $ 7 ========== ========== ============= ========== 1995 $ 10 $ 2 $ 3 $ 9 ========== ========== ============= ========== Real Estate and Related Assets Reserves and allowances deducted from related asset accounts: Receivables 1997 $ 9 $ -- $ 3 $ 6 ========== ========== ============= ========== 1996 $ 7 $ 3 $ 1 $ 9 ========== ========== ============= ========== 1995 $ 4 $ 1 $ (2)(1) $ 7 ========== ========== ============= ========== Mortgage-related financial instruments 1997 $ 7 $ 13 $ (7)(2) $ 27 ========== ========== ============= ========== 1996 $ 2 $ -- $ (5)(2) $ 7 ========== ========== ============= ========== 1995 $ 8 $ -- $ 6 $ 2 ========== ========== ============= ========== Investment in and advances to joint ventures and limited partnerships 1997 $ 27 $ -- $ 21 $ 6 ========== ========== ============= ========== 1996 $ 38 $ -- $ 11 $ 27 ========== ========== ============= ========== 1995 $ 49 $ -- $ 11 $ 38 ========== ========== ============= ========== (1) Includes allowances transferred in on partnership notes that were consolidated. (2) Includes allowances transferred in from other liabilities.
18 Weyerhaeuser Company and Subsidiaries Exhibits Index Exhibits: 3 - (i) Articles of Incorporation (ii) Bylaws 10 - Material Contracts (a) Agreement with N. E. Johnson (incorporated by reference to 1992 Form 10-K filed with the Securities and Exchange Commission on March 12, 1993-Commission File Number 1-4825) (b) Agreement with W. R. Corbin (incorporated by reference to 1992 Form 10-K filed with the Securities and Exchange Commission on March 12, 1993-Commission File Number 1-4825) (c) 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) (d) Agreement with S. R. Rogel 11 - Statement Re: Computation of Per Share Earnings (incorporated by reference to Note 2 of the 1997 Weyerhaeuser Company Annual Report to Shareholders) 13 - Portions of the 1997 Weyerhaeuser Company Annual Report to Shareholders specifically incorporated by reference herein 22 - Subsidiaries of the Registrant 23 - Consent of Independent Public Accountants 27 - Financial Data Schedules 19 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 and 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 J.H. Hamlen & Son, Inc. Arkansas 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 90 SCA Weyerhaeuser Packaging Holding Company British Virgin Asia Limited Islands 50 Texas, Oklahoma & Eastern Railroad Company Oklahoma 100 United Structures, Inc. California 100 Westwood Shipping Lines, Inc. Washington 100 Weycomp Claims Management Service, Inc. Texas 100 Weyerhaeuser Company of Nevada Nevada 100 Weyerhaeuser Construction Company Washington 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 Weyerhaeuser Financial Investments, Inc. Nevada 100 Abfall Finance Corp. California 100 Brookview, Inc. Nevada 100 The Giddings Mortgage Investment Company California 100 Gudig Abfall, Inc. California 100 Kachura Finance Corp. California 100 McGNT Finance Corp. California 100 Pass-Through Finance Corp. California 100
1 Weyerhaeuser Company and Subsidiaries Exhibit 22 Subsidiaries of the Registrant - Continued
Percentage State or Ownership of Country of Immediate Name Incorporation Parent ---- ----------------- ------------- 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 Monthill, Inc. California 100 WVC II, Inc. Nevada 100 Weyerhaeuser Venture Company Nevada 100 Las Positas Land Co. California 100 WAMCO, Inc. Nevada 100 Weyerhaeuser Realty Investors, Inc. Washington 100 Weyerhaeuser Forestlands International, Inc. Washington 100 Weyerhaeuser International, Inc. Washington 100 Weyerhaeuser Canada Ltd. Canada 100 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 de Mexico, S.A. de C.V. Mexico 100 Weyerhaeuser Saskatchewan Ltd. Canada 100 Weyerhaeuser China, Ltd. Washington 100 Weyerhaeuser GMBH Germany 100 Weyerhaeuser (Asia) Limited Hong Kong 100 Weyerhaeuser Italia, S.r.l. Italy 100 Weyerhaeuser Japan Ltd. Japan & 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 Canada 100 Weyerhaeuser Raw Materials, Inc. Delaware 100
2 Weyerhaeuser Company and Subsidiaries Exhibit 22 Subsidiaries of the Registrant - Continued
Percentage State or Ownership of Country of Immediate Name Incorporation Parent ---- ----------------- ------------- 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 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 Winchester Homes, Inc. Delaware 100 SC-WHI, Inc. Delaware 100 Weyerhaeuser Sales Company Nevada 100 The Wray Company Arizona 100
3 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 No. 333-36753 on Form S-3 and Nos. 33-60527, 33-60529, 33-60521, 33-60525, 33-25928, 33-24979, 33-47392, 333-10165, 33-41414, 2-88109, 2-27929, 2-58498, 2-81463 and 333-01565 on Form S-8. ARTHUR ANDERSEN LLP Seattle, Washington, March 13, 1998 1 EX-13 2 HIGHLIGHTS
Dollar amounts in millions except per-share figures 1997 1996 - --------------------------------------------------------------------------- Net sales and revenues $11,210 $11,114 - --------------------------------------------------------------------------- Net earnings before special items 351 463 Effect of special items (1) (9) -- - --------------------------------------------------------------------------- Net earnings 342 463 - --------------------------------------------------------------------------- Cash flow from operations, before working capital changes 1,099 1,257 Capital expenditures (excluding acquisitions) 656 879 Total assets 13,075 13,596 Shareholders' interest 4,649 4,604 - ---------------------------------------------------------------------------
1997 1996 - --------------------------------------------------------------------------- Before Effect of Special Special Items Items (1) Net - --------------------------------------------------------------------------- Basic earnings per common share (2): First quarter $ .22 $(0.12) $ .10 $ .72 Second quarter .47 .09 .56 .52 Third quarter .53 .04 .57 .60 Fourth quarter .54 (.05) .49 .50 - --------------------------------------------------------------------------- $1.76 $(0.04) $1.72 $2.34 ===========================================================================
(1) The 1997 special items are the net of gains on the sale of Weyerhaeuser Mortgage Company and Saskatoon Chemicals, Ltd., and interest income from a favorable federal income tax decision offset by the loss on the sale of Shemin Nurseries; the consolidation, closure or disposition of certain recycling facilities; and closure of two plywood facilities, an export lumber mill and a corrugated medium machine. (2) Diluted earnings per common share by quarter for 1997 and 1996 were $0.10, $0.55, $0.57 and $0.49; and $0.71, $0.52, $0.60 and $0.49, respectively.
Market prices - high/low 1997 1996 - --------------------------------------------------------------------------- First quarter $50 5/8 - 44 1/2 $49 1/2 - 39 15/16 Second quarter 55 1/4 - 42 5/8 49 7/8 - 41 3/4 Third quarter 63 15/16 - 51 5/8 48 1/4 - 39 1/2 Fourth quarter 60 3/4 - 46 1/16 48 1/8 - 43 7/8 - --------------------------------------------------------------------------- Year $63 15/16 - 42 5/8 $49 7/8 - 39 1/2 - ---------------------------------------------------------------------------
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. 1 PULP, PAPER AND PACKAGING
STATISTICAL DATA - --------------------------------------------------------------------------- NET SALES 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------- (Millions of dollars) Pulp $ 986 $ 954 $ 1,616 $ 1,012 $ 823 Newsprint 416 451 508 356 322 Paper 842 803 1,001 664 648 Paperboard and containerboard 301 281 325 240 255 Packaging 1,781 1,921 1,863 1,495 1,302 Recycling 189 140 266 121 77 Chemicals 57 63 63 45 32 Miscellaneous products 37 35 40 133 120 - --------------------------------------------------------------------------- $ 4,609 $ 4,648 $ 5,682 $ 4,066 $ 3,579 ===========================================================================
SALES VOLUMES 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------- (Thousands) Pulp - air-dry metric tons 1,982 1,868 2,060 2,068 1,886 Newsprint - metric tons 684 629 663 638 609 Paper - tons 1,146 1,007 1,006 998 990 Paperboard - tons 243 205 230 201 222 Containerboard - tons 389 346 259 254 290 Packaging - MSF 44,508 42,323 34,342 34,483 31,386 Recycling - tons 2,229 2,011 1,467 985 851
ANNUAL PRODUCTION Capacity 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------- (Thousands) Pulp - air-dry metric tons 2,180 2,063 2,004 2,159 2,041 2,096 Newsprint - metric tons 715 704 631 687 651 618 Paper - tons 1,126 1,128 1,034 1,060 982 1,007 Paperboard - tons 230 231 206 229 189 217 Containerboard - tons 2,480 2,381 2,331 2,329 2,357 2,269 Packaging - MSF 50,000 46,488 44,471 36,041 36,020 32,795 Recycling - tons -- 3,655 3,428 2,754 2,042 1,847
PRINCIPAL MANUFACTURING FACILITIES - --------------------------------------------------------------------------- Pulp 8 Containerboard 4 Newsprint 1 Packaging 46 Paper 5 Recycling 28 Paperboard 1 Chemicals 7
18 PULP, PAPER AND PACKAGING Over the past seven years, we've followed a course to improve our operations and apply discipline to our capital spending. This has involved making sure that we focus on what we do best, continually improving the performance of our business, and investing prudently to upgrade the quality of our assets. Through these efforts, we've strengthened the ability of this sector to meet increased global competition and grow shareholder returns. The market conditions we experienced during 1997 demonstrate the importance of continuing to improve our operations. The slow recovery in pulp and paper prices resulted in operating earnings of $192 million compared with $307 million in 1996. Operating earnings for 1997 exclude special items associated with closures and disposition of certain facilities that were offset, in part, by the gain on the sale of the Canadian chemical business. Net sales were $4.6 billion, unchanged from the prior year. While this performance did not meet our expectations, we saw indications that our efforts are producing results. For example, we've reduced our capital spending to depreciation levels. We did this by aligning our capital spending to the levels we need to sustain our current operations and achieve our long-range strategic goals. We also implemented a systematic capital investment process to better foster accountability for major capital projects. As a result, this year we spent $315 million on capital projects, excluding acquisitions, the lowest in 10 years. It also allowed our sector to generate its third consecutive year of positive cash flows despite the general industry downturn. And because we've completed our major modernization projects, we believe we can maintain, or even lower, our levels of capital spending in the future. We've made significant progress in improving the efficiency of our operations by engaging our employees in the design and implementation of better work systems. These improvements have reduced reportable accidents by 65 percent since 1991 and significantly increased production capability at our existing pulp and paper facilities. In 1997 alone, this helped increase our production by 300,000 tons. We're improving operations by continually evaluating our businesses and operating units to ensure they fit our core competencies and serve attractive markets. Through this discipline, we channel our energies and resources on areas capable of producing the returns we seek over the business cycle. During 1997, we: > Negotiated the restructuring of our NORPAC joint venture that produces high-quality newsprint for publishers and printers in the western United States and Japan. Under the new structure that takes effect in 1998, Weyerhaeuser and Nippon Paper Industries Co., Ltd., each will 19 own 50 percent of NORPAC. The new arrangement more closely reflects the operating relationship of this joint venture. > Closed the sale of our Saskatoon chemical facility to a subsidiary of Sterling Chemicals Holdings, Inc. > Realigned our Recycling business to meet the key raw material needs of our mill customers. Through this effort, we improved efficiencies and reduced costs by focusing on those locations most important to our customers. During 1997, our Recycling business collected and processed 7 percent more recycled paper with 30 percent fewer facilities than we had in 1996. During the year, we also improved the quality of our asset base to serve the needs of customers in growth markets. Domestically, our strategy involves expanding through acquisitions rather than building new capacity. For example, in 1997 we acquired Union Camp Corporation's Denver box plant to expand market coverage into the Rocky Mountain Region. To serve the international needs of existing customers, we develop strategic alliances to limit risk, conserve capital and gain access to local market information and distribution channels. In 1996, we formed a joint venture with SCA Packaging Europe BV to meet corrugated packaging needs in the People's Republic of China. During 1997, this venture - SCA Weyerhaeuser Packaging Holding Company Asia Limited - began construction of plants in Shanghai and Wuhan. We expect both to begin operation in 1998. During 1997, we also continued to focus on differentiating our products and services in ways that our customers recognize and value. This includes expanding our entire line of high-quality uncoated free sheet paper to capture higher returns generated by these products. We've already seen the contribution of fine papers to our earnings more than double over the past five years. One reason for such growth - created by the growth in home offices - is the increased use of high-quality business papers. During 1997, we introduced our SOHO (Small Office/ Home Office) retail program. In addition to developing higher quality papers for small and home office needs, we made it easier for customers to select the right paper for their specific requirements by developing easy-to-use product guides. We're also differentiating other parts of our product line. Our Containerboard Packaging business began exploring new packaging solutions for customers, while our Pulp operation is working on new absorbency fibers. Both efforts will help us develop higher value products capable of producing new growth opportunities and higher margins. New absorbency fibers, for example, improve product function and provide manufacturers with greater flexibility and speed in commercializing their product upgrades. We believe this will allow providers to develop a greater range of products and increase demand for our product. As we've upgraded our mills to run more efficiently, we've also seen significant environmental improvements. 20 These improvements include: > Shifting our entire bleached-kraft pulp mill system to the use of elemental chlorine-free (ECF) bleaching processes, a major step to improving the quality of our water discharges. > Recycling 98 percent of pulping chemicals used to manufacture pulp. > Supplying two-thirds of the energy needed at our pulp mills to reduce the use of fossil fuels. > Reducing water consumption by 65 percent. These efforts have not gone unnoticed. During 1997, the Environmental Protection Agency and McGraw-Hill honored our Flint River, Georgia, facility for meeting or exceeding voluntary waste-elimination or pollution- prevention programs in conjunction with the EPA's Project XL. An initiative of the Clinton Administration, Project XL - eXellence and Leadership - seeks to provide regulatory flexibility in exchange for superior environmental performance. And because our mills already substantially meet the water quality standards outlined in the EPA's new Cluster Rules, we've reduced the need for future capital investments in this area. These are some of the actions we've taken to build the foundation for future growth. Looking ahead, we will build on this progress by continuing to reduce costs, narrowing our focus, and differentiating our products in ways customers recognize and value. The improvements we've made and the results they've produced demonstrate we are on the right course. PULP, PAPER AND PACKAGING
PRODUCTS PRINCIPAL LOCATIONS - --------------------------------------------------------------------------- MARKET PULP manufactures wood pulp Georgia, Mississippi, for global markets. North Carolina, Washington, Alberta, British Columbia, Saskatchewan - --------------------------------------------------------------------------- FINE PAPER manufactures a range of both Mississippi, North Carolina, coated and uncoated fine papers and markets Washington, Wisconsin, its products through paper merchants. Saskatchewan - --------------------------------------------------------------------------- NEWSPRINT manufactured at the North Pacific Washington Paper Corporation (NORPAC) mill is marketed to customers in the western United States and Japan. - --------------------------------------------------------------------------- BLEACHED PAPERBOARD produces and markets Washington bleached paperboard to West Coast and Pacific Rim customers for production of liquid containers such as milk and juice cartons. - --------------------------------------------------------------------------- CONTAINERBOARD PACKAGING manufactures Arizona, California, linerboard corrugating medium and produces Colorado, Connecticut, industrial and agricultural packaging (boxes). Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Mississippi, Missouri Nebraska, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Tennessee, Texas, Virginia, Washington, Wisconsin - --------------------------------------------------------------------------- RECYCLING operates an extensive wastepaper Arizona, California, collection system to supply company mills Colorado, Georgia, and national and international customers. Illinois, Iowa, Kansas, Maryland, Minnesota, Nebraska, North Carolina, Oklahoma, Oregon, Tennessee, Texas, Utah, Virginia, Washington, West Virginia - --------------------------------------------------------------------------- CHEMICALS produces chemicals used in pulp Georgia, Mississippi, and paper manufacturing processes and other North Carolina, Oklahoma, products like tall oil and turpentine. Oregon, Washington - --------------------------------------------------------------------------- WESTWOOD SHIPPING provides ocean Washington transportation for Weyerhaeuser and other selected markets. - ---------------------------------------------------------------------------
21 TIMBERLANDS AND WOOD PRODUCTS STATISTICAL DATA - ---------------------------------------------------------------------------
NET SALES 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------- (Millions of dollars) Raw materials (logs, chips and timber) $ 1,008 $ 1,066 $ 1,102 $ 1,091 $ 1,021 Softwood lumber 2,094 1,988 1,648 1,880 1,704 Softwood plywood and veneer 502 519 591 636 567 Oriented strand board, composite and other panel products 594 667 752 750 623 Hardwood lumber 272 235 193 175 154 Engineered wood products 284 233 207 157 100 Miscellaneous products 620 532 438 303 299 - --------------------------------------------------------------------------- $ 5,374 $ 5,240 $ 4,931 $ 4,992 $ 4,468 ===========================================================================
SALES VOLUMES 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------- (Millions) Raw materials - cubic feet 584 577 535 564 547 Softwood lumber - board feet 4,869 4,745 4,515 4,402 4,230 Softwood plywood and veneer - square feet (3/8") 2,042 2,172 2,324 2,685 2,435 Composite panels - square feet (3/4") 551 604 648 660 626 Oriented strand board - square feet (3/8") 2,462 2,083 1,931 1,803 1,672 Hardboard - square feet (7/16") -- 193 201 167 140 Hardwood lumber - board feet 362 349 293 254 240 Engineered wood products - lineal feet 137 116 128 71 47 Hardwood doors (thousands) 730 652 648 617 556
ANNUAL PRODUCTION Capacity 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------- (Millions) Logs - cubic feet -- 995 912 914 671 673 Softwood lumber - board feet 3,790 3,992 3,701 3,419 3,249 3,135 Softwood plywood and veneer - square feet (3/8") 1,008 1,092 1,243 1,292 1,249 1,188 Composite panels - square feet (3/4") 600 478 535 583 594 564 Oriented strand board - square feet (3/8") 2,195 2,041 1,687 1,654 1,568 1,443 Hardboard - square feet (7/16") -- -- 86 124 122 120 Hardwood lumber - board feet 413 345 333 278 229 221 Hardwood doors (thousands) 850 740 646 643 597 522
PRINCIPAL MANUFACTURING FACILITIES - --------------------------------------------------------------------------- Softwood lumber, plywood and veneer 32 Hardwood lumber 12 Composite panels 5 Hardwood doors 1 Oriented strand board 6
22 TIMBERLANDS AND WOOD PRODUCTS For nearly 100 years, we've been a leader in forest management and the production of high-quality wood products. It's a position you'd expect from the world's largest private owner of merchantable softwood timber and North America's largest producer of softwood lumber. Although we're proud of our leadership status, we also know that it takes continual improvement to maintain this position. That's why we've spent the past seven years upgrading our portfolio, improving our production capabilities, and focusing on customer service. As a result, we've positioned our Timberlands and Wood Products sector to perform better, produce higher quality products and operate with greater safety than ever before. During 1997, market conditions tested us. Weak demand for logs and wood products in the last half of the year resulted in operating earnings of $747 million, excluding the effect of charges related to the closure of three manufacturing facilities, compared with $805 million in 1996. Net sales in 1997 were $5.4 billion compared with $5.2 billion the previous year. Despite the effect of market conditions on our results, we fared better than we would have previously under similar circumstances. We also did better than others in our industry. This level of performance under difficult market conditions is a direct result of the maturing of our timber portfolio and our focus the past seven years. For example, by improving work systems and eliminating redundancy and waste, Timberlands has reduced overhead costs. We've also benefited from the Business Improvement Plans we've had in place since 1991. Meanwhile, our Wood Products business is now capable of producing, on a same-facility basis, 21 percent more lumber, 40 percent more plywood and 18 percent more oriented strand board than we did in 1991. To achieve further improvements, we're applying what we've learned from our 1996 acquisition of the highly efficient Cavenham properties in Mississippi and Louisiana to our other lumber businesses. We're also seeking to continually improve our outstanding timber base. In 1997, this resulted in expansion of our portfolio outside North America. We purchased a 51 percent interest in the Nelson Forests Joint Venture, previously owned by a subsidiary of Fletcher Challenge Forests. The Nelson Forests Joint Venture manages more than 193,000 acres of forestland in New Zealand and is one of the world's first forestry operations to achieve ISO 14001 status. Created by the International Standards Organization in Geneva, ISO certification recognizes companies that integrate environmental responsibility into daily operations. During the year, we also began purchasing private agricultural land in Uruguay for establishing fast- growing managed forests. This is the 23 first investment we've made through the World Timberfund - a joint venture with institutional investors represented by UBS Resource Investments International. Uruguay features good tree-growing soils and climate and a history of economic and political stability. We expect the first thinning of these managed forests to occur in 11 years, with final harvests expected in 20 to 25 years. Our investments in New Zealand and Uruguay are part of the company's strategies to better serve international customers. As with all of our timberlands, we'll manage our properties in the Southern Hemisphere in ways that protect the environment and produce sustainable sources of high-quality wood. This includes applying the core competencies we've developed in High Yield Forestry over the past 30 years. In North America, we're about to begin to see the first harvests of trees grown using these practices. Our first harvests will begin within the next five years in the South, with similar harvests in the West occurring in about 10 years. Over the next 15 years, the harvest of high-yield timber will gradually increase by approximately 70 percent from 1995 levels due to High Yield Forestry. In addition to increasing our harvests and cash flow, these forests will produce more knot-free wood for use in appearance- grade lumber and other higher-value products due to our practice of pruning selected trees. To develop products, markets and customers for these future harvests, our Building Materials Distribution businesses have steadily enhanced their lines of appearance-grade products. During 1997, we placed additional emphasis on this growth area by introducing appearance-grade products from a variety of domestic and international sources. Meeting the demand for higher-quality products also has resulted in the use of new technologies. For example, our Marshfield, Wisconsin, door business now uses the industry's most effective enterprise resource planning system - DoorBuilder (TM) - to reduce order cycle time by 50 percent. This new system links all of the business' computerized information processing systems to electronically track ordering, production and billing of the more than 700,000 custom doors we make each year. Not only does this system improve our efficiency, customers benefit from the reliable delivery rate it provides. For the past two years, we've delivered virtually all of our door orders on time and complete. Meanwhile, our Wood Products businesses continue to improve their manufacturing capabilities and provide added value to customers. In 1997, this included announcing plans to close two plywood plants. The closures of plywood plants in Plymouth, North Carolina, and Philadelphia, Mississippi, are part of our effort to strengthen lumber-producing facilities. As a result of modernization and expansion plans, we'll increase our annual lumber-producing capabilities by 15 percent by the end of 1999. These modernization efforts also significantly 24 improve our ability to more effectively use our raw materials while enhancing overall product value. The use of curved sawing techniques, for example, allows us to increase the amount of lumber per log and produce straighter lumber. We've also improved the way we work by involving our employees and incorporating their ideas into our practices. Their ideas help remove production bottlenecks and reduce unscheduled downtime in existing facilities while helping reduce start-up costs at new facilities. Our oriented strand board mill in Sutton, West Virginia, for example, just completed its first year of operation and is ahead of the projected start- up curve due to our capital planning and work systems improvement practices. We also see an improvement in safety as we increase the productivity and efficiency of our facilities. To help deploy these practices throughout our system, we're working closely with our two major unions to identify additional opportunities for improvement. As we look to the future, our Timberlands and Wood Products segment will continue its focus on improving operations through process reliability and a focus on delivering value to the customer. Through these efforts, we believe we will create increased value for our shareholders.
TIMBERLANDS AND WOOD PRODUCTS PRINCIPAL LOCATIONS - --------------------------------------------------------------------------- WESTERN TIMBERLANDS: Acres owned 2,048,000 Oregon, Washington - --------------------------------------------------------------------------- SOUTHERN TIMBERLANDS: Acres owned 3,123,000 Alabama, Arkansas, Acres leased 237,000 Georgia, Louisiana, --------- Mississippi, North 3,360,000 Carolina, Oklahoma - --------------------------------------------------------------------------- CANADIAN TIMBERLANDS: Acres licensed 23,715,000 Alberta, British Columbia, Saskatchewan - --------------------------------------------------------------------------- SOFTWOOD LUMBER produces dimension lumber. Western Lumber: Oregon, Washington Southern Lumber: Alabama, Arkansas, Georgia, Louisiana, Mississippi, North Carolina, Oklahoma Canadian Lumber: Alberta, British Columbia, Saskatchewan - --------------------------------------------------------------------------- PLYWOOD manufactures softwood structural and Alabama, Arkansas, "appearance" panels for home remodelers, Oklahoma, builders and industrial users. Washington (veneer) - --------------------------------------------------------------------------- ORIENTED STRAND BOARD produces structural sheathing, Michigan, North sub-flooring, underlayment and other panels for Carolina, West residential and commercial construction. Virginia; Alberta, Canada - --------------------------------------------------------------------------- COMPOSITE PRODUCTS manufactures particleboard and Georgia, North medium density fiberboard used primarily in Carolina, Oregon, furniture, laminating, countertops, millwork and Wisconsin door manufacturing. - --------------------------------------------------------------------------- HARDWOOD LUMBER is the world's leading producer Arkansas, Michigan, of hardwood lumber and components for use in Oklahoma, Oregon, manufacturing cabinets and furniture. Pennsylvania, Washington, Wisconsin - --------------------------------------------------------------------------- ARCHITECTURAL DOORS is the top door manufacturer in Wisconsin the United States and produces architectural doors used mainly in offices, schools and hospitals. - --------------------------------------------------------------------------- BUILDING MATERIALS DISTRIBUTION provides Alabama, Arizona, chain/regional lumber accounts, industrial/home California, improvement warehouse retailers, and millwork and Colorado, Florida, manufactured-housing customers with Georgia, Idaho, marketing, sales and logistics support. Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Michigan, Minnesota, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Tennessee, Texas, Utah, Virginia, Washington, Wisconsin; Alberta, British Columbia, Manitoba, Nova Scotia, Ontario and Quebec, Canada. - ---------------------------------------------------------------------------
25 REAL ESTATE AND RELATED ASSETS Strong real estate markets, an increased focus on the home-building and land development business, and improved operating efficiencies combined to increase earnings for our Real Estate and Related Assets sector in 1997. For the year, the sector reported earnings of $66 million before a gain associated with the sale of Weyerhaeuser Mortgage Company. This compares with $43 million in 1996. The Real Estate and Related Assets sector has continually reviewed its portfolio to ensure it targets markets and businesses capable of producing competitive returns. As a result, the sector has exited a number of smaller markets and secondary businesses. In addition to narrowing its focus, the sector has made significant improvements in operations. Sales revenues were up slightly from 1996, reaching $1.1 billion in 1997. Home sales increased 17 percent and housing inventory turnover has improved. Significantly more homes were presold prior to completion than in prior years. We go into 1998 with the best backlog of home sales since the late 1980s. With home building and land development activities in Southern California, Las Vegas, Houston, Maryland, Virginia and the Puget Sound area, the company continues to be one of the top 20 home builders in the United States. REAL ESTATE & 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 - --------------------------------------------------------------------
EX-13 3 1997 FINANCIAL REPORT
CONTENTS 30 Description of the Business of the Company 35 Financial Review 40 Report of Independent Public Accountants 41 Consolidated Statement of Earnings 42 Consolidated Balance Sheet 44 Consolidated Statement of Cash Flows 46 Consolidated Statement of Shareholders' Interest 47 Notes to Financial Statements 64 Historical Summary
This annual report may contain statements concerning the company's future results and performance that are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The accuracy of such statements is subject to a number of risks, uncertainties and assumptions that may cause actual results to differ materially from those projected, including, but not limited to, the effect of general economic conditions, including the level of interest rates and housing starts; market demand for the company's products; the effect of forestry, land use, environmental and other governmental regulations; and the risk of losses from fires, floods and other natural disasters. The company is also a large exporter and is affected by changes in economic activity in Europe and Asia, particularly Japan, and by changes in currency exchange rates and restrictions on international trade. These and other factors that could cause or contribute to actual results differing materially from such forward looking statements are discussed in greater detail in the company's Securities and Exchange Commission filings. 29 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 35,800 employees, of whom 34,900 are employed in its timber- based businesses, and of this number, approximately 17,400 are covered by collective bargaining agreements, which generally are negotiated on a multi- year basis. Approximately 900 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. In 1997, the company's sales to customers outside the United States totaled $2.2 billion (including exports of $1.5 billion from the United States and $.7 billion of Canadian export and domestic sales), or 20 percent of total consolidated sales and revenues, compared with 22 percent in 1996. The company believes these sales contributed a higher proportion of aggregate operating profits (see Note 3 of Notes to Financial Statements). 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 AND WOOD PRODUCTS The company is engaged in the management of 5.2 million acres of company- owned and .2 million acres of leased commercial forestland in the United States (60 percent in the South and 40 percent in the Pacific Northwest), most of it highly productive and located extremely well to serve both domestic and international markets. The company has, additionally, long-term license arrangements in Canada covering approximately 23.7 million acres (of which 16.5 million acres are considered to be productive forestland). The combined total timber inventory on these U.S. and Canadian lands is approximately 273 million cunits (a cunit is 100 cubic feet of solid wood), of which approximately 75 percent is softwood species. 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's wood products businesses produce and sell softwood lumber, plywood and veneer; composite panels; oriented strand board; hardwood lumber and plywood; doors; treated products; logs; chips and timber. These products are sold primarily through the company's own sales organizations. Building materials are sold to wholesalers, retailers and industrial users. The company, through its wholly owned subsidiary, Weyerhaeuser Forestlands International, is in a joint-venture partnership with institutional investors represented by UBS Resource Investments International, a unit of UBS Asset Management (New York) Inc., which makes investments in timberlands and related assets outside the United States. The primary focus of this partnership is in pine forests in the Southern Hemisphere. The company is a 50 percent owner of the joint venture, the total size of which is expected to be approximately $400 million. The joint venture will be capitalized over time through equal cash contributions by the company and the investor group. During the year, the company purchased a 51 percent interest in an existing New Zealand joint venture located on the northern end of the South Island. The company paid $190 million for timber, land, related assets and net working capital. The forested area of the joint venture consists of 148,000 acres of Crown Forest License cutting rights and approximately 45,000 acres of freehold land. The company will be responsible for the management and marketing activities of the joint venture. RII New Zealand Forests I Inc. continues to hold the remaining 49 percent in the joint venture. 30 The company closed an export lumber mill at Coos Bay, Oregon, and plywood facilities located at Philadelphia, Mississippi, and Plymouth, North Carolina, in 1997. These closures were part of the company's long-term strategy to align its wood products manufacturing facilities with changing future sources of raw materials.
- ----------------------------------------------------------------------- Dollar amounts in millions 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------- Net sales: Raw materials (logs, chips and timber) $ 1,008 $ 1,066 $ 1,102 $ 1,091 $ 1,021 Softwood lumber 2,094 1,988 1,648 1,880 1,704 Softwood plywood and veneer 502 519 591 636 567 Oriented strand board, composite and other panels 594 667 752 750 623 Hardwood lumber 272 235 193 175 154 Engineered wood products 284 233 207 157 100 Miscellaneous products 620 532 438 303 299 - ----------------------------------------------------------------------- $ 5,374 $ 5,240 $ 4,931 $ 4,992 $ 4,468 ======================================================================= Approximate contributions to earnings (1) $ 707 $ 805 $ 808 $ 1,034 $ 891 =======================================================================
(1) After special 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; Newsprint, which manufactures newsprint at the company's North Pacific Paper Corporation mill and markets it to West Coast and Japanese newspaper publishers; 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, which is 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; Recycling, which operates an extensive wastepaper collection system and markets it to company mills and worldwide customers; and Chemicals, which produces chlorine, caustic and tall oil, which are used principally by the company's pulp, paper and packaging operations. During 1997, the company sold its Saskatoon, Saskatchewan, Canada, chemical operation, closed its Longview, Washington, corrugated medium machine, and restructured its recycling business through consolidation, closure or disposition of certain facilities. The SCA Weyerhaeuser Packaging Holding Company Asia Ltd. joint venture, formed in 1996 to pursue opportunities to build or buy containerboard packaging facilities to serve manufacturers of consumer and industrial products in Asia, commenced construction on two facilities in China in 1997.
- ----------------------------------------------------------------------- Dollar amounts in millions 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------- Net sales: Pulp $ 986 $ 954 $ 1,616 $ 1,012 $ 823 Newsprint 416 451 508 356 322 Paper 842 803 1,001 664 648 Paperboard and containerboard 301 281 325 240 255 Packaging 1,781 1,921 1,863 1,495 1,302 Recycling 189 140 266 121 77 Chemicals 57 63 63 45 32 Miscellaneous products 37 35 40 133 120 - ----------------------------------------------------------------------- $ 4,609 $ 4,648 $ 5,682 $ 4,066 $ 3,579 ======================================================================= Approximate contributions to earnings(1) $ 164 $ 307 $ 1,181 $ 211 $ 61 =======================================================================
(1) 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. 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. 31 With the sale of Weyerhaeuser Mortgage Company in the second quarter of 1997, the financial services segment is no longer material to the company. Therefore, the remaining real estate activities of Weyerhaeuser Financial Services, Inc. (WFS), have been combined with WRECO into one segment entitled real estate and related assets.
- ----------------------------------------------------------------------- Dollar amounts in millions 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------- Net sales and revenues: Single-family units $ 688 $ 573 $ 563 $ 686 $ 615 Multi-family units 29 12 -- 26 30 Residential lots 91 76 60 65 43 Commercial lots 57 50 29 7 41 Commercial buildings 68 43 4 35 3 Acreage 41 25 36 20 27 Interest (1) 35 70 76 84 110 Investment income (1) 2 1 3 2 116 Loan origination and servicing fees (1) 35 100 84 88 127 Other 47 59 64 104 118 - ------------------------------------------------------------------------ $ 1,093 $ 1,009 $ 919 $ 1,117 $ 1,230 ======================================================================== Approximate contributions to earnings (2) $ 111 $ 43 $ (277) $ 18 $ 94 ========================================================================
(1) Interest, investment income, and loan origination and servicing fees relate principally to the company's operations in financial services through its subsidiaries Weyerhaeuser Mortgage Company, sold in the second quarter of 1997, and GNA Corporation, sold in 1993. (2) After a $45 million gain on the sale of Weyerhaeuser Mortgage Company in 1997, a special charge of $290 million to dispose of certain real estate assets in 1995, and a $42 million gain on the sale of GNA Corporation in 1993. CORPORATE AND OTHER Corporate and other includes marine transportation and general corporate expense. The company sold its wholly owned wholesale nursery and garden supply products subsidiary, Shemin Nurseries, Inc., in the first quarter of 1997. Revenues and operating earnings of this operation were not material to the company.
- ----------------------------------------------------------------------- Dollar amounts in millions 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------- Net sales $ 134 $ 217 $ 256 $ 223 $ 269 ======================================================================= Approximate contributions to earnings (1) $ (186) $ (183) $ (217) $ (142) $ (46) =======================================================================
(1) 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, and a $70 million gain on disposal of the infant diaper business in 1993. ENVIRONMENTAL MATTERS In 1990 the northern spotted owl was listed as a threatened species under the Endangered Species Act (ESA). In 1992 the marbled murrelet was listed as a threatened species under the ESA, and in 1996 the Umpqua River Cutthroat Trout was listed as a threatened species. Certain Snake River salmon runs have been listed as threatened or endangered under the ESA, and coho salmon have been listed as threatened in California and parts of southwest Oregon. Petitions have been filed to list certain Pacific Northwest salmon runs, steelhead trout, bull trout and other fish populations 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. Requirements to protect habitat for threatened and endangered species on non-federal timberlands has resulted, and may in the future result, in restrictions on timber harvest on some non-federal timberlands in the Pacific Northwest, including some timberlands of the company. 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, statutory requirements with respect to the protection of wetlands 32 may affect future harvest and forest management practices on some of the company's timberlands, particularly in southeastern states. In April 1994, the Clinton administration (the administration) adopted its plan with respect to management of federal timberlands in the Pacific Northwest. This plan has reduced timber sales from certain federal lands in western Washington, western Oregon and northern California by more than 75 percent from harvest levels in the 1980s. Subsequently, the administration has begun similar planning efforts and adopted interim timber sale policies for federal timberlands in the intermountain west and certain other regions. These reductions in federal timber sales have seriously reduced log supplies to many independent sawmills that have been important suppliers of wood chips to the company's pulp and paper mills in Washington and Oregon. Alternative sources of wood chips and recycled fiber have become available, and some companies have reduced manufacturing capacity or production levels in response to reduced federal timber harvests. The company does not anticipate that reductions in federal timber harvests will require significant curtailments of capacity or production at its current manufacturing facilities. The administration also has stated that reduced timber harvest on federal lands will provide the opportunity to clarify the uncertainty surrounding federal policies for protection of northern spotted owls on some private lands. On February 7, 1995, the administration proposed a special rule to clarify federal harvest restrictions on some private lands in Washington and California. The company believes that the regulatory changes might ultimately allow it to harvest fee timber in some areas where it has not been operating because of uncertainties regarding regulations intended to protect the northern spotted owl. Whether those regulatory changes will be implemented is uncertain. If those regulatory changes are not implemented, the company might not harvest some timber that it otherwise might harvest in 1998 and 1999. Because those regulatory changes may not be implemented, and in order to avoid existing uncertainty under the ESA, the company, in February 1995, developed a Habitat Conservation Plan (HCP) and obtained from the U.S. Fish and Wildlife Service an Incidental Take Permit with respect to northern spotted owls on approximately 209,000 acres of its Oregon coastal timberlands. That HCP establishes a protocol for the harvest of timber and the protection of the northern spotted owl on those timberlands and is expected to remain in effect for at least 50 years. In December 1996, the company applied for an Incidental Take Permit covering approximately 400,000 acres of company timberlands in western Oregon. If the related HCP and Implementation Agreement are approved and that permit is issued by the U.S. Fish and Wildlife Service and the National Marine Fisheries Service, the company would be authorized to "take" all species currently listed or proposed for listing under the ESA (including the northern spotted owl), and all or most species that may become listed in the future, in the course of conducting timber harvest and other forest management and land use activities on those lands. Pursuant to both of those HCPs, there are limits on the amount of land covered by the HCPs that can be transferred unless the U.S. Fish and Wildlife Service approves the transfer or the new owner agrees to be bound by the HCP and related documents. In 1996 the company 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 that it acquired from the United States in an exchange with the U.S. Forest Service and certain nearby lands that the company already owned. The company also 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. The company believes the most effective way to manage its timberlands for the growth and harvest of timber and the protection of wildlife and fish habitat is to develop plans for the management of timber and other resources on those lands and obtain approval of those plans from the appropriate federal or state agencies. Accordingly, the company is seeking to develop HCPs or other arrangements with federal and state fish and wildlife agencies for some other parts of its Pacific Northwest timberlands that would address the protection of wildlife and fish habitat for both listed and non-listed species. 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, fish habitat and wildlife, 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 of the states 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, 33 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(R) 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(R) 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. The company does not know whether these effects will continue. 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 1998 or 1999 will have, a significant effect on the company's total harvest of timber, 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 com- pany estimates that capital expenditures for environmental compliance were approximately $41 million (6 percent of total capital expenditures excluding acquisitions) in 1997. Based on its understanding of current regulatory requirements, the company expects that expenditures will range from $75 million to $85 million (10 to 11 percent of total capital expenditures) in 1998 and 1999. The company is involved in the environmental investigation or remediation of numerous sites, including 43 superfund sites where the company has been named as a potentially responsible party. 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, and others are third-party sites involving several parties who have a joint and several obligation to remediate the site. 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 $21 million in 1997 and expects to spend $15 million in 1998 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 $100 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 continue to prepare the permit applications in 1998 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 non-combustion 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 will go into effect in early 1998. The cluster rules will require the company to commit approximately $80 million of additional capital to further reduce air emissions and wastewater discharges over the next several years. 34 FINANCIAL REVIEW RESULTS OF OPERATIONS 1997 COMPARED WITH 1996 During 1997, the company's consolidated net sales and revenues were $11.2 billion compared with $11.1 billion in the prior year. Sales were relatively even from year to year in all the operating segments, with increased volumes in most product lines offsetting unfavorable price variances. While the real estate and related assets segment included only four months of revenues from Weyerhaeuser Mortgage Company due to the sale of this business in May, the lost revenues were more than offset by increased revenues from real estate activity. Net earnings for the year were $342 million, or $1.72 basic earnings per share, compared with $463 million, or $2.34 basic earnings per share, in 1996. The current year's earnings included after-tax special items of $9 million, or 4 cents per common share, related to the charges incurred for closures of operating facilities, offset in part by the gain on sale of businesses. Diluted earnings per share, which is based upon the weighted average number of shares outstanding plus shares the company may be obligated to issue to satisfy stock options, were $1.71 and $2.33 for 1997 and 1996, respectively. 1997 operating earnings in the timberlands and wood products segment were $707 million, net of charges totaling $40 million for the closure of two plywood facilities and an export sawmill. Excluding these charges, the segment earned $747 million compared with $805 million in 1996. The decrease from year to year is the combination of weak export demand for logs and lumber and lower domestic structural panel prices, offset somewhat by a stronger domestic lumber market. The pulp, paper and packaging segment had operating earnings of $164 million in 1997, which includes special items netting to a charge of $28 million. This includes a $49 million charge for the consolidation, closure or disposition of certain recycling facilities, the closure of a corrugated medium machine, and a gain of $21 million from the sale of a chemical facility in Saskatoon, Saskatchewan, Canada. Before these special items, the segment earned $192 million compared with $307 million in the previous year. Volume increases in all product lines were more than offset by weaker average prices when compared with 1996, although pulp, paper and packaging markets improved each quarter in 1997. The paper and packaging markets continued this improvement through the fourth quarter; however, pulp markets began to weaken during the quarter due to a decline in demand in Asia. The real estate and related assets segment earned $111 million for the year, including a $45 million gain on the sale of the company's wholly owned subsidiary, Weyerhaeuser Mortgage Company. The $66 million operating earnings, excluding this gain, when compared with $43 million in 1996, reflects stronger real estate markets, an increased focus on the home building and land development businesses, and improved operating efficiencies. The increase in Weyerhaeuser's costs of products sold, as a percentage of sales, to 78 percent in 1997 compared with last year's 75 percent can be attributed to the price weaknesses described above. The product inventory turnover rate was 12.1 turns for the year compared with 10.3 turns in 1996. Charges of $89 million incurred for the closure of production facilities were a factor in the increase in costs and expenses for 1997 over the prior year. The increase in costs and operating expenses in the real estate and related assets segment is consistent with the increased revenues from the strong real estate markets. Reduced selling, general and administrative expenses, compared with the prior year, are due primarily 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. Individual items significant in relation to net earnings in 1997 were: a gain of $45 million from the sale of the mortgage banking business, 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, 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. There were no significant individual items in 1996. 1996 COMPARED WITH 1995 Consolidated net sales and revenues were $11.1 billion in 1996, a decrease of 6 percent from the record $11.8 billion posted in 1995. This decrease is the net of a $1 billion decrease in the pulp, paper and packaging segment and an increase of $309 million for timberlands and wood products. Pulp, paper, corrugated packaging and recycled products experienced material unfavorable price variances offset, in part, by favorable volume variances in the packaging business related to the acquisition of nine facilities in late 1995. Wood products benefited from favorable price and volume variances in lumber. 35 Net earnings for 1996 were $463 million, or $2.34 per common share, compared with record earnings of $799 million, or $3.93 per common share, in 1995. The 1995 earnings were net of an after-tax special charge of $184 million ($290 million pretax), or 90 cents per common share, in the real estate and related assets segment. Lower prices in the pulp, paper and packaging segment, which were in sharp contrast with the record 1995 levels, accounted for the decline in 1996 earnings. The timberlands and wood products segment operating earnings were $805 million, comparable to 1995 earnings of $808 million, as it benefited from strong demand in the United States and Japan. Tight supplies and disruptions related to countervailing duties on imports from Canada contributed to strong lumber results. The panel markets were negatively impacted by the excess capacity of oriented strand board as new facilities came on line in 1996. The pulp, paper and packaging segment reported operating earnings of $307 million in 1996 compared with a record performance of $1.2 billion in 1995. The downturn in pulp and paper prices, which began in the fourth quarter of 1995 as customers cut back on purchases in order to reduce excess inventories, continued as prices were significantly lower than the prior year. The real estate and related assets segment earned $43 million from operations in 1996 compared with $13 million, before the special charge, in 1995. Real estate benefited from several major commercial project closings and increased residential property sales along with reduced costs as the result of the disposition of certain impaired properties. Improved financial services results reflected the sale of capitalized servicing rights and increased loan originations in the company's mortgage banking business. Weyerhaeuser's cost of products sold, as a percentage of sales, increased to 75 percent in 1996 compared with 69 percent in 1995, reflecting the significant decline in pulp, paper and packaging pricing. Additionally, inventory turnover rates were lower in 1996 compared with the higher rates experienced in the peak price periods of 1995. The real estate and related assets segment costs and operating expenses in 1996 rose 7 percent over the 1995 level, consistent with the 10 percent increase in revenues from year to year. The decline in depreciation and amortization was directly related to the disposition of certain impaired assets and sale of substantially all of the capitalized servicing rights in the mortgage banking business. Selling, general and administrative expenses increased over 1995 primarily due to the opening of additional branch offices in 1996 by the mortgage banking business. Other income (expense) is an aggregation of both recurring and occasional non-operating income and expense items and, as a result, may fluctuate from period to period. No individual income or expense item in 1996 was significant in relation to net earnings. 1995 COMPARED WITH 1994 The company's consolidated net sales and revenues increased 13 percent to a record $11.8 billion in 1995 compared with $10.4 billion in 1994. The pulp, paper and packaging segment accounted for $5.7 billion of this record performance, 40 percent over its sales of $4.1 billion in 1994, with strong year-to-year improvement in all product lines. These markets weakened in the fourth quarter, and this weakness persisted in 1996 as customers continued to reduce inventories. The timberlands and wood products segment sales of $4.9 billion approximated 1994's. The real estate and related assets segment had combined sales of $919 million, down from the prior year's $1.1 billion, largely attributable to declines in single-family home sales. The company also achieved record earnings of $799 million, or $3.93 per common share, in 1995, which was 36 percent over the $589 million, or $2.86 per common share, recorded in 1994. The 1995 earnings were net of an after- tax charge of $184 million ($290 million pretax), or 90 cents per common share, in the real estate and related assets segment. The 1994 earnings included a net contribution of $.03 per common share for the return of countervailing duty by the U.S. government against Canadian lumber imports and the expected cost of postretirement benefits for Canadian employees. Operating earnings in the timberlands and wood products segment were $808 million, down from the record $1 billion for the previous year. This was attributable to price declines primarily in softwood lumber, caused by a drop in domestic housing starts. The pulp, paper and packaging segment posted record operating earnings of $1.2 billion in 1995 compared with $211 million earned in 1994. Significant price improvement over the prior year and ongoing improvements in operations were the key factors in recovery in this segment. The company's real estate and related assets segment recorded an operating loss of $277 million for the year after reflecting a $290 million charge to operations. The majority of the charge was a direct result of the company's decision to accelerate the disposition of certain real estate assets previously held for development and use. The remainder of the charge resulted from the application of those provisions of Statement of Financial 36 Accounting Standards (SFAS) No. 121 relating to the valuation of assets held for future use where estimated undiscounted future cash flows from those assets did not exceed the carrying value of those assets. Before these actions, the combined segments earned $13 million compared with $18 million in 1994. Weyerhaeuser's cost of products sold as a percentage of net sales decreased to 69 percent in 1995 compared with 73 percent in 1994. The company continued to benefit from its mill modernization program and implementation of its business improvement plans, offset in part by the costs associated with higher sales activity, principally in the pulp, paper and packaging segment. Depreciation expense increased over the prior year as a result of the completion and start-up of several mill modernization projects in late 1994 in the pulp, paper and packaging segment. The expansion of the company's Performance Share Plan to include all employees was the major contributor to the $109 million increase in selling, general and administrative expenses. Contributions made by the company into this plan are invested in company stock on behalf of each employee. The size of the contribution, if any, is decided by the board of directors each year on the basis of that year's profits and the company's performance relative to its competition. Excluding the revaluation charge, the decrease in costs and operating expenses of the real estate and related assets segment are in line with the reduced sales activity. Other income (expense) is an aggregation of both recurring and occasional non-operating income and expense items and, as a result, may fluctuate from period to period. No individual income or expense item in 1995 was significant in relation to net earnings. Weyerhaeuser's interest expense incurred was up $34 million over the prior year as a result of prefunding 1995 debt maturities that were due late in the year as well as an increase in the company's combined long- and short- term debt levels. Capitalized interest was $16 million less than the prior year as mill modernization projects at Longview, Washington, and Plymouth, North Carolina, were completed. SUBSEQUENT EVENT In February 1998, the company and Nippon Paper Industries Co., Ltd. (NPI), completed the restructuring of their North Pacific Paper Corporation (NORPAC) joint venture. Through this restructuring, the ownership of NORPAC changed from 80 percent company ownership and 20 percent NPI ownership to 50 percent for each shareholder. The company, either directly or through a wholly owned subsidiary, will continue to provide marketing, support services, raw materials and staffing to the joint venture. BUSINESS IMPROVEMENT PLANS In 1994 business improvement plans were developed to improve the annual pretax earnings of the company by $600 million by the end of 1997. Given the volatility of prices in many of the company's product lines and changing material and labor costs, the improvement plans were developed, stated and are being tracked in 1994 dollars. The year-to-year impact of these plans will obviously vary as prices and costs change each year. These plans were developed by each unit of the company and did not require major capital investment. They focused on the manageable variables at each operating unit that have the greatest impact on profitability, i.e., production volume, manufacturing cost, product mix and controllable overhead. The company achieved annualized improvements totaling $224 million, $120 million and $276 million, as measured in 1994 dollars, in 1997, 1996 and 1995, respectively, with 1998 as the first full year of benefits. The rate of improvement increased in 1997 compared with 1996. The company exceeded its goal in Pulp, Paper and Packaging. Wood Products and Timberlands fell slightly short of its goal as four facilities were sold and three were closed permanently that were included in the original plan. The annualized improvements realized over the 1995 to 1997 period, in 1994 dollars, are as follows:
- ---------------------------------------------------------------- Dollar amounts in millions 1997 1996 1995 Total - ---------------------------------------------------------------- Pulp, paper and packaging $ 129 $ 49 $ 146 $ 324 Timberlands and wood products 95 71 130 296 - ---------------------------------------------------------------- $ 224 $ 120 $ 276 $ 620 ================================================================
37 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 under lying 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 subsidiaries, given the very different nature of their assets and business activities. The amount of debt and equity associated with the capital structure of each will reflect the basic earnings capacity, real value and unique liquidity characteristics of the assets dedicated to that business. . The combination of maturing short-term debt and the structure of long- term debt will be managed judiciously to minimize liquidity risk. Long-term debt maturities are shown in Note 13 of Notes to Financial Statements. OPERATIONS Weyerhaeuser's net cash provided by operations in 1997 was $1 billion, essentially all from cash flow from operations before changes in net working capital. This was down slightly from the $1.1 billion provided in 1996. These funds were provided by net income of $271 million, down from last year's $434 million; depreciation, amortization and fee stumpage of $616 million comparable to the prior year; and deferred taxes of $88 million compared to $121 million in 1996. In addition, in 1997 funds were provided from $89 million in non-cash charges for the closure or disposition of facilities. Working capital, net of the effects of the sale or acquisition of businesses and facilities, increased by $44 million in 1997, slightly higher than the $41 million increase a year earlier. This net increase in the current year was due primarily to an increase in receivables and a decrease in accounts payable and accrued liabilities. Net cash provided by operations in the real estate and related assets segment was $13 million compared with $155 million in 1996. Cash flow from operations of $23 million before changes in working capital was provided by net income of $71 million, of which $45 million was from the gain on the sale of the mortgage banking business. The segment's working capital increased by $10 million in 1997 compared with a decrease of $82 million in the prior year from decreases in real estate inventories and mortgages held for sale. Cash flow from operations before changes in working capital by business segment was as follows:
- ---------------------------------------------------------- Dollar amounts in millions 1997 1996 1995 - ---------------------------------------------------------- Timberlands and wood products $ 993 $ 1,045 $ 1,026 Pulp, paper and packaging 556 665 1,567 Real estate and related assets 23 73 67 Corporate and other (473) (526) (792) - ---------------------------------------------------------- $ 1,099 $ 1,257 $ 1,868 ==========================================================
INVESTING Capital expenditures, excluding acquisitions, were $656 million in 1997 compared with $879 million in 1996. They are currently expected to approximate $750 million, excluding acquisitions, in 1998; however, these expenditures could be increased or decreased as a consequence of future economic conditions. Recent capital spending, excluding acquisitions, has been in the following areas:
- ---------------------------------------------------------- Dollar amounts in millions 1997 1996 1995 - ---------------------------------------------------------- Timberlands and wood products $ 314 $ 418 $ 446 Pulp, paper and packaging 315 415 501 Corporate and other 27 46 49 - ---------------------------------------------------------- $ 656 $ 879 $ 996 ==========================================================
Acquisitions of plant, property and equipment amounted to $13 million in 1997. Also, during the year, the company expended $190 million to acquire 51 percent of a forestry joint venture in New Zealand. The cash needed to meet these and other company needs was generated from internal cash flow, issuance of debt, sale of businesses and short-term borrowing. Proceeds from the sale of the wholesale nursery business and the Saskatoon chemical facility provided $76 million of cash to Weyerhaeuser in 1997 while the sale of the mortgage banking business provided $192 million of cash in the real estate and related assets segment. 38 FINANCING During the year, Weyerhaeuser reduced its interest-bearing debt by $117 million, bringing the debt to total capital ratio down to 36.3 percent at year-end compared with 37.9 percent at the end of 1996. New borrowings included two $300 million, 6.95 percent debentures, one for 20 years and the other for 30 years. In addition, $38 million of industrial revenue bonds were sold. Long-term debt was reduced by a pay-down of $695 million in commercial paper and $78 million in scheduled debt. The company paid $317 million in cash dividends on common shares in both 1997 and 1996. 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 an intercompany dividend from Weyerhaeuser Financial Services, Inc., which has been eliminated on a consolidated basis. During the year, the company repurchased 496,000 common shares for $22 million as part of the 11 million share repurchase program implemented in 1995. This repurchase program was completed in January 1998. The real estate and related assets segment used $299 million in funds for financing activities in the year. An increase in commercial paper borrowings provided $118 million while funds were used for the $150 million intercompany dividend and $281 million in debt reductions. 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 $825 million. Neither of the entities is a guarantor of the borrowings of the other under any of these credit facilities. MARKET RISK OF FINANCIAL INSTRUMENTS The company has exposure to market risk including changes in interest rates and currency exchange rates. To manage the volatility relating to these exposures, the company has entered into limited derivative transactions to manage well-defined interest rate and foreign exchange risks. The company does not hold or issue derivative financial instruments for trading. The majority of the company's derivative instruments are "pay fixed, receive variable" interest rate swaps with highly rated counterparties in which the interest payments are calculated on a notional amount. The notional amounts do not represent amounts exchanged by the parties and, thus, are not a measure of exposure to the company through its use of derivatives. The company is exposed to credit-related gains or losses in the event of non-performance by counterparties to these financial instruments; however, the company does not expect any counterparties to fail to meet their obligations. Interest rate swaps are described as follows:
- ----------------------------------------------------------------------- Dollar amounts in millions Variable Rate at December 28, 1997 - ----------------------------------------------------------------------- Notional Maturity Fixed Fair Value Amount Date Rate % % Based On of Swap(1) - ----------------------------------------------------------------------- $ 150 1/1/98 9.38 6.00 30 day commercial paper $ --- 40 3/23/98 8.72 6.00 30 day commercial paper (0.2) 150 5/17/98 6.36 5.90 90 day LIBOR (0.4) 50 6/8/98 (2) 5.54 5.90 90 day LIBOR 0.1 27 5/1/99 6.70 8.25 11.95% - Kenny index 0.5 75 12/6/99 (3) 6.85 5.90 30 day LIBOR (2.1) - ----------------------------------------------------------------------- $ 492 $ (2.1) - -----------------------------------------------------------------------
(1) The amount of the obligation under each swap is based on the assumption that such swap had terminated at the end of the fiscal period, and provides for the netting of amounts payable by and to the counterparty. In each case, the amount of such obligation is the net amount so determined. (2) Includes the value of an option, by the counterparty, to extend for one year at maturity date. (3) Includes the value of an option, by the counterparty, to extend for two years at maturity date. 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. 39 YEAR 2000 Weyerhaeuser, like all other companies using computers and microprocessors, is faced with the task of addressing the Year 2000 problem over the next two years. The Year 2000 challenge arises from the nearly universal practice in the computer industry of using two digits rather than four digits to designate the calendar year (e.g., DD/MM/YY). This can lead to incorrect results when computer software performs arithmetic operations, comparisons or data field sorting involving years later than 1999. The company has embarked on a comprehensive approach to identify where this problem may occur in its information technology, manufacturing and facilities systems. The company plans to modify or replace its affected systems in a manner that will minimize any detrimental effects on operations. While it is not possible at present to quantify the overall cost of this work, the company presently believes that the ultimate outcome resulting from this work will 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 costs could have a material effect on results of operations. ACCOUNTING MATTERS PROSPECTIVE PRONOUNCEMENTS During the year, the FASB issued the following pronouncements that will be effective in periods after the close of the company's 1997 fiscal year: . SFAS No. 130, "Reporting Comprehensive Income." . SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." These statements are 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 28, 1997, and December 29, 1996, and the related consolidated statements of earnings, cash flows and shareholders' interest for each of the three years in the period ended December 28, 1997. 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 28, 1997, and December 29, 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 28, 1997, in conformity with generally accepted accounting principles. Seattle, Washington, February 11, 1998 ARTHUR ANDERSEN LLP 40 CONSOLIDATED STATEMENT OF EARNINGS
- ---------------------------------------------------------------------- For the three-year period ended December 28, 1997 Dollar amounts in millions except per-share figures 1997 1996 1995 - ---------------------------------------------------------------------- Net sales and revenues: Weyerhaeuser $ 10,117 $ 10,105 $ 10,869 Real estate and related assets 1,093 1,009 919 - ---------------------------------------------------------------------- Total net sales and revenues 11,210 11,114 11,788 - ---------------------------------------------------------------------- Costs and expenses: Weyerhaeuser: Costs of products sold 7,866 7,610 7,516 Depreciation, amortization and fee stumpage 616 601 580 Selling, general and administrative expenses 647 702 724 Research and development expenses 56 54 51 Taxes other than payroll and income taxes 142 151 155 Charges for closure or disposition of facilities 89 -- -- - ----------------------------------------------------------------------- 9,416 9,118 9,026 - ----------------------------------------------------------------------- Real estate and related assets: Costs and operating expenses 909 726 681 Depreciation and amortization 12 16 41 Selling, general and administrative expenses 96 173 139 Taxes other than payroll and income taxes 8 11 8 Charge for impairment of long-lived assets (Note 1) -- -- 290 - ----------------------------------------------------------------------- 1,025 926 1,159 - ----------------------------------------------------------------------- Total costs and expenses 10,441 10,044 10,185 - ----------------------------------------------------------------------- Operating income 769 1,070 1,603 Interest expense and other: Weyerhaeuser: Interest expense incurred 271 273 271 Less interest capitalized 15 21 20 Other income (expense), net (Note 4) (17) (58) (71) Real estate and related assets: Interest expense incurred 110 132 140 Less interest capitalized 69 65 76 Other income (expense), net (Note 4) 84 27 27 - ----------------------------------------------------------------------- Earnings before income taxes 539 720 1,244 Income taxes (Note 5) 197 257 445 - ----------------------------------------------------------------------- Net earnings $ 342 $ 463 $ 799 ======================================================================= Per common share (Note 2): Basic net earnings $ 1.72 $ 2.34 $ 3.93 ======================================================================= Diluted net earnings $ 1.71 $ 2.33 $ 3.91 ======================================================================= Dividends paid $ 1.60 $ 1.60 $ 1.50 =======================================================================
See notes on pages 47 through 65. 41 CONSOLIDATED BALANCE SHEET
- ---------------------------------------------------------------------- December 28, December 29, Dollar amounts in millions 1997 1996 - ---------------------------------------------------------------------- ASSETS Weyerhaeuser Current assets: Cash and short-term investments (Note 1) $ 100 $ 33 Receivables, less allowances of $6 and $7 913 902 Inventories (Note 8) 983 1,001 Prepaid expenses 298 289 - ---------------------------------------------------------------------- Total current assets 2,294 2,225 Property and equipment (Note 9) 6,974 7,007 Construction in progress 313 417 Timber and timberlands at cost, less fee stumpage charged to disposals 996 1,073 Investments in joint ventures 249 35 Other assets and deferred charges 245 211 - ---------------------------------------------------------------------- 11,071 10,968 - ---------------------------------------------------------------------- Real estate and related assets Cash and short-term investments, including restricted deposits of $16 and $18 22 38 Receivables, less discounts and allowances of $6 and $9 62 99 Mortgage-related financial instruments, less discounts and allowances of $27 and $7 (Notes 1 and 14) 173 621 Real estate in process of development and for sale (Note 10) 593 680 Land being processed for development 845 719 Investments in and advances to joint ventures and limited partnerships, less reserves of $6 and $27 116 115 Other assets 193 356 - ---------------------------------------------------------------------- 2,004 2,628 - ---------------------------------------------------------------------- Total assets $ 13,075 $ 13,596 ======================================================================
See notes on pages 47 through 65. 42
- ------------------------------------------------------------------------- December 28, December 29, Dollar amounts in millions 1997 1996 - ------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' INTEREST Weyerhaeuser Current liabilities: Notes payable $ 25 $ 16 Current maturities of long-term debt 17 80 Accounts payable (Note 1) 694 725 Accrued liabilities (Note 11) 648 662 - ------------------------------------------------------------------------- Total current liabilities 1,384 1,483 Long-term debt (Notes 13 and 14) 3,483 3,546 Deferred income taxes (Note 5) 1,418 1,324 Deferred pension and other liabilities (Notes 6 and 7) 498 493 Minority interest in subsidiaries 121 113 Commitments and contingencies (Note 15) - ------------------------------------------------------------------------- 6,904 6,959 - ------------------------------------------------------------------------- Real estate and related assets Notes payable and commercial paper (Note 12) 228 245 Long-term debt (Notes 13 and 14) 1,032 1,537 Other liabilities 262 251 Commitments and contingencies (Note 15) - ------------------------------------------------------------------------- 1,522 2,033 - ------------------------------------------------------------------------- Total liabilities 8,426 8,992 - ------------------------------------------------------------------------- Shareholders' interest (Note 17): Common shares: authorized 400,000,000 shares, issued 206,072,890 shares, $1.25 par value 258 258 Other capital 407 407 Cumulative translation adjustment (123) (93) Retained earnings 4,397 4,372 Treasury common shares, at cost: 6,586,939 and 7,736,601 (290) (340) - ------------------------------------------------------------------------- Total shareholders' interest 4,649 4,604 - ------------------------------------------------------------------------- Total liabilities and shareholders' interest $ 13,075 $ 13,596 ==========================================================================
43 CONSOLIDATED STATEMENT OF CASH FLOWS
- -------------------------------------------------------------------------- For the three-year period Consolidated ended December 28, 1997 ---------------------------- Dollar amounts in millions 1997 1996 1995 - -------------------------------------------------------------------------- Cash provided by (used for) operations: Net earnings (loss) $ 342 $ 463 $ 799 Non-cash charges to income: Depreciation, amortization and fee stumpage 628 617 621 Deferred income taxes, net 75 181 103 Charges for closure or disposition of facilities 89 -- -- Charge for impairment of long-lived assets -- -- 290 Decrease (increase) in working capital: Accounts receivable (9) 67 (33) Inventories, prepaid expenses, real estate and land (23) 68 (159) Mortgage notes held for sale and mortgage loans receivable (64) 19 (18) Accounts payable and accrued liabilities 42 (113) (102) (Gain) loss on disposition of assets 5 1 43 (Gain) loss on disposition of businesses (58) -- -- Other 18 (5) 12 - -------------------------------------------------------------------------- Net cash provided by operations 1,045 1,298 1,556 - -------------------------------------------------------------------------- Cash provided by (used for) investing activities: Property and equipment (610) (829) (928) Timber and timberlands (46) (50) (68) Investments in joint ventures (189) (12) 38 Property and equipment and timber and timberlands from acquisitions (13) (448) (77) Proceeds from sale of: Property and equipment (Note 16) 85 74 19 Businesses 268 -- -- Mortgage and investment securities 55 106 25 Other (23) (5) 153 - -------------------------------------------------------------------------- Net cash provided by (used for) investing activities (473) (1,164) (838) - -------------------------------------------------------------------------- Cash provided by (used for) financing activities: Issuances of debt 632 142 723 Sale of industrial revenue bonds 38 33 150 Notes and commercial paper borrowings, net (577) 534 (439) Cash dividends (317) (317) (306) Intercompany cash dividends -- -- -- Payments on debt (359) (513) (661) Purchase of treasury common shares (22) (45) (379) Exercise of stock options 61 20 19 Other 23 (1) (4) - -------------------------------------------------------------------------- Net cash provided by (used for) financing activities (521) (147) (897) - -------------------------------------------------------------------------- Net increase (decrease) in cash and short-term investments 51 (13) (179) Cash and short-term investments at beginning of year 71 84 263 - -------------------------------------------------------------------------- Cash and short-term investments at end of year $ 122 $ 71 $ 84 ========================================================================== Cash paid during the year for: Interest, net of amount capitalized $ 287 $ 322 $ 302 ============================ Income taxes $ 21 $ 168 $ 332 ==========================================================================
See notes on pages 47 through 65. 44
- ------------------------------------------------------------ Real Estate and Weyerhaeuser Company Related Assets - ------------------------------------------------------------ 1997 1996 1995 1997 1996 1995 - ------------------------------------------------------------ $ 271 $ 434 $ 981 $ 71 $ 29 $ (182) 616 601 580 12 16 41 88 121 183 (13) 60 (80) 89 -- -- -- -- -- -- -- -- -- -- 290 (17) 75 (60) 8 (8) 27 5 (30) (148) (28) 98 (11) -- -- -- (64) 19 (18) (32) (86) (82) 74 (27) (20) 13 8 43 (8) (7) -- (13) -- -- (45) -- -- 12 20 14 6 (25) (2) - ------------------------------------------------------------ 1,032 1,143 1,511 13 155 45 - ------------------------------------------------------------ (607) (820) (915) (3) (9) (13) (46) (50) (68) -- -- -- (214) (8) (19) 25 (4) 57 (13) (448) (77) -- -- -- 39 61 19 46 13 -- 76 -- -- 192 -- -- -- -- -- 55 106 25 22 (44) (31) (45) 39 184 - ------------------------------------------------------------ (743) (1,309) (1,091) 270 145 253 - ------------------------------------------------------------ 618 12 583 14 130 140 38 33 150 -- -- -- (695) 637 (159) 118 (103) (280) (317) (317) (306) -- -- -- 150 -- -- (150) -- -- (78) (174) (480) (281) (339) (181) (22) (45) (379) -- -- -- 61 20 19 -- -- -- 23 (1) (4) -- -- -- - ------------------------------------------------------------ (222) 165 (576) (299) (312) (321) - ------------------------------------------------------------ 67 (1) (156) (16) (12) (23) 33 34 190 38 50 73 - ------------------------------------------------------------ $ 100 $ 33 $ 34 $ 22 $ 38 $ 50 ============================================================ $ 244 $ 255 $ 236 $ 43 $ 67 $ 66 ============================================================ $ 54 $ 188 $ 346 $ (33) $ (20) $ (14) ============================================================
45 CONSOLIDATED STATEMENT OF SHAREHOLDERS' INTEREST
- -------------------------------------------------------------------------- For the three-year period ended December 28, 1997 Dollar amounts in millions 1997 1996 1995 - -------------------------------------------------------------------------- Common stock issued: Balance at end of year $ 258 $ 258 $ 258 - -------------------------------------------------------------------------- Other capital: Balance at beginning of year 407 415 416 Stock options exercised (11) (8) (3) Other transactions (net) 11 -- 2 - -------------------------------------------------------------------------- Balance at end of year 407 407 415 - -------------------------------------------------------------------------- Cumulative translation adjustment: Balance at beginning of year (93) (90) (107) Translation adjustment (30) (3) 17 - -------------------------------------------------------------------------- Balance at end of year (123) (93) (90) - -------------------------------------------------------------------------- Retained earnings: Balance at beginning of year 4,372 4,226 3,733 Net earnings 342 463 799 Cash dividends on common shares (317) (317) (306) - -------------------------------------------------------------------------- Balance at end of year 4,397 4,372 4,226 - -------------------------------------------------------------------------- Common stock held in treasury: Balance at beginning of year (340) (323) (10) Purchases of treasury common shares (22) (45) (379) Stock options exercised 72 28 22 Used in acquisition of capital assets -- -- 44 - -------------------------------------------------------------------------- Balance at end of year (290) (340) (323) - -------------------------------------------------------------------------- Total shareholders' interest: Balance at end of year $ 4,649 $ 4,604 $ 4,486 ========================================================================== Shares of common stock (in thousands): Issued at end of year 206,073 206,073 206,073 - -------------------------------------------------------------------------- In treasury: Balance at beginning of year 7,737 7,303 455 Purchases of treasury common shares 496 1,086 8,494 Stock options exercised (1,646) (642) (648) Used in acquisition of capital assets -- (10) (998) - -------------------------------------------------------------------------- Balance at end of year 6,587 7,737 7,303 - -------------------------------------------------------------------------- Outstanding at end of year 199,486 198,336 198,770 ==========================================================================
See notes on pages 47 through 65. 46 NOTES TO FINANCIAL STATEMENTS For the three-year period ended December 28, 1997 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The consolidated financial statements include the accounts of Weyerhaeuser Company and all of its majority-owned domestic and foreign subsidiaries. Significant intercompany transactions and accounts are eliminated. Certain of the consolidated financial statements and notes to financial statements are presented in two groupings: (1) Weyerhaeuser (the company), principally engaged in the growing and harvesting of timber and the manufacture, distribution and sale of forest products, and (2) Real estate and related assets, principally engaged in real estate development and construction and other real estate related activities. NATURE OF OPERATIONS The company's principal business segments, which account for the majority of sales, earnings and the asset base, are: . Timberlands and wood products, which is engaged in the management of 5.2 million acres of company-owned and .2 million acres of leased commercial forestland in the United States (60 percent in the South and 40 percent in the Pacific Northwest) and 23.7 million acres of forestland in Canada under long-term licensing arrangements (of which 16.5 million acres are considered to be productive forestland) and the production of a full line of solid wood products that are sold primarily through the company's own sales organizations to wholesalers, retailers and industrial users in North America, the Pacific Rim and Europe. . Pulp, paper and packaging, which manufactures and sells pulp, newsprint, 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 and 1996 had 52 weeks, and fiscal year 1995 had 53 weeks. ACCOUNTING PRONOUNCEMENTS IMPLEMENTED In 1997, the company implemented the following pronouncements of the Financial Accounting Standards Board (FASB): . Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," that establishes standards for computing and presenting earnings per share (EPS). It simplifies the standards in APB Opinion No. 15 (Earnings per Share) for computing EPS by replacing primary earnings per share with basic earnings per share and by altering the calculation of diluted EPS, which replaces fully diluted EPS. . SFAS No. 129, "Disclosure of Information about Capital Structure," that continues the existing requirements to disclose pertinent rights and privileges of all securities other than common stock, but expands the number of companies subject to portions of its requirements. The company's current capital structure does not require any additional disclosures as a result of this pronouncement. In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," to provide accounting and reporting guidance for transfers and servicing of financial assets and extinguishments of liabilities. The statement uses the "financial-components approach" in which, after a transfer of financial assets, an entity would recognize all financial assets and services it controls and all liabilities it has incurred and remove financial assets and liabilities from the balance sheet when control is surrendered or when they are extinguished, respectively. It is to be applied to transfers and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1996. This statement supersedes several previous statements, including SFAS No. 122, "Accounting for Mortgage Servicing Rights -- an amendment of FASB Statement No. 65," which the company had implemented in 1995. In 1996, the FASB issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125 -- an amendment of FASB Statement No. 125," which deferred for one year the effective date of certain provisions. The adoption of these statements did not have a significant impact on results of operations or financial position. PROSPECTIVE ACCOUNTING PRONOUNCEMENTS In 1997, the FASB issued the following pronouncements that will be effective in periods after the close of the company's 1997 fiscal year: . SFAS No. 130, "Reporting Comprehensive Income," that establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of financial statements. This statement will require that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This statement 47 is effective for fiscal years beginning after December 15, 1997. . SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," that will require companies to determine segments based on how management makes decisions about allocating resources to segments and measuring their performance. Disclosures for each segment are similar to those required under current standards, with the addition of certain quarterly requirements. This statement will also require entity-wide disclosure about products and services, the countries in which the company holds material assets and reports material revenues, and its significant customers. This statement is effective for fiscal years beginning after December 15, 1997; however, no interim reporting is required in the initial year. Management is evaluating the effect of this statement on reported segment information. 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 $119 million and $417 million are in the western geographical region of the United States at December 28, 1997, and December 29, 1996, 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, have gains or losses recognized at settlement date. . 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 $492 million and $807 million at December 28, 1997, and December 29, 1996, respectively. These notional amounts do not represent amounts exchanged by the parties and, thus, are not a measure of exposure to the company through its use of derivatives. The exposure in a derivative contract is the net difference between what each party is required to pay based on the contractual terms against the notional amount of the contract, such as interest rates or exchange rates. The use of derivatives does not have a significant effect on the company's results of operations or its financial position. CASH AND SHORT-TERM INVESTMENTS For purposes of cash flow and fair value reporting, short-term investments with original maturities of 90 days or less are considered as cash equivalents. Short-term investments are stated at cost, which approximates market. INVENTORIES Inventories are stated at the lower of cost or market. Cost includes labor, materials and production overhead. The last-in, first-out (LIFO) method is used to cost approximately half of domestic raw materials, in process and finished goods inventories. LIFO inventories were $250 million and $296 million at December 28, 1997, and December 29, 1996, 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 $234 million and $239 million greater at December 28, 1997, and December 29, 1996, respectively. PROPERTY AND EQUIPMENT The company's property accounts are maintained on an individual asset basis. Betterments and replacements of major units are capitalized. Maintenance, repairs and minor replacements are expensed. Depreciation is provided generally on the straight-line or unit-of-production method at rates based on estimated service lives. Amortization of logging railroads and truck roads is provided 48 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 recoverable. 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. INVESTMENTS IN JOINT VENTURES The company accounts for its investments in joint ventures under the equity method and provides for taxes on undistributed earnings. 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 $164 million at December 28, 1997, and December 29, 1996, 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. RECLASSIFICATIONS Certain reclassifications have been made to conform prior years' data to the current format. REAL ESTATE AND RELATED ASSETS With the sale of the mortgage banking business in the second quarter of 1997, the financial services segment is no longer material to the results of the company. Therefore, the remaining activities in financial services that are principally real estate related have been combined with real estate into one segment entitled real estate and related assets. Real estate held for sale is stated at the lower of cost or fair value. The determination of fair value is based on appraisals and market pricing of comparable assets, when available, or the discounted value of estimated future cash flows from these assets. Real estate held for development is stated at cost to the extent it does not exceed the estimated undiscounted future net cash flows, in which case, it is carried at fair value. Mortgage notes held for sale (see Note 14) that were outstanding at December 29, 1996, were stated at the lower of cost or market, which was computed by the aggregate method (unrealized losses were offset by unrealized gains). As a result of the sale of the company's mortgage banking business during the year, there were no mortgage notes held for sale outstanding at December 28, 1997. Mortgage-backed certificates (see Note 14) 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. In 1995, the company implemented SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires companies to change their method of valuing long-lived assets. The company's decision to accelerate the disposition of certain real estate assets previously held for development and use along with the implementation of this pronouncement resulted in a $290 million charge to operations in the third quarter of 1995. The majority of the charge was a direct result of the company's decision to accelerate the disposition of those assets. The remainder of the charge resulted from the application of 49 those provisions of SFAS No. 121 relating to the valuation of assets held for future use where estimated undiscounted future cash flows from those assets did not exceed the carrying value of those assets. The company's evaluation of each asset first considered the availability of appraisal information, then comparable sales information, and finally discounted estimated cash flows. Because appraisal information was very limited for the assets evaluated, the majority of the assets were valued based upon comparable sales data or discounted estimated cash flows. The discount rate considered applicable market conditions and risks associated with each asset. In those cases where a discount rate was used, it was 20 percent. Subsequent sales have demonstrated that the valuation assumptions used were reasonable. The carrying value of the affected assets at December 28, 1997, and December 29, 1996, was approximately $94 million and $141 million, respectively. NOTE 2. NET EARNINGS PER COMMON SHARE Basic net earnings per common share are based on the weighted average number of common shares outstanding during the respective periods. Diluted net earnings per common share are based on the weighted average number of common shares outstanding and stock options outstanding at the beginning of or granted during the respective periods.
- -------------------------------------------------------------------------- Dollar amounts in millions Net Weighted Average Per-Share except per-share figures Earnings Shares (000) Amount - -------------------------------------------------------------------------- 1997: Basic $ 342 198,967 $ 1.72 ========== Stock options granted -- 902 --------------------------- Diluted $ 342 199,869 $ 1.71 ========================================= 1996: Basic $ 463 198,318 $ 2.34 ========== Stock options granted -- 756 --------------------------- Diluted $ 463 199,074 $ 2.33 ========================================= 1995: Basic $ 799 203,525 $ 3.93 ========== Stock options granted -- 836 --------------------------- Diluted $ 799 204,361 $ 3.91 ==========================================================================
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 - --------------------------------------------------- 1997 150,000 $53.06 1996 1,216,400 $45.94 4,700 $47.13 1,178,400 $48.13 1995 1,180,400 $48.13 - ---------------------------------------------------
50 NOTE 3. FOREIGN OPERATIONS AND EXPORT SALES The following net assets, net sales and earnings before income taxes, related to operations outside the United States, principally Canada, are included in the company's consolidated financial statements:
- -------------------------------------------------------------------------- Dollar amounts in millions December 28, 1997 December 29, 1996 - -------------------------------------------------------------------------- Net assets: Working capital $ 123 $ 160 Timber-cutting rights 3 5 Property and equipment, net 900 930 Other assets 259 35 - -------------------------------------------------------------------------- 1,285 1,130 Other liabilities (434) (262) - -------------------------------------------------------------------------- Net assets $ 851 $ 868 ==========================================================================
- -------------------------------------------------------------------------- Dollar amounts in millions 1997 1996 1995 - -------------------------------------------------------------------------- Net sales $ 1,382 $ 1,354 $ 1,614 - -------------------------------------------------------------------------- Earnings before income taxes: Foreign entities $ 107 $ 106 $ 392 U.S. entities with foreign activity 2 5 18 - --------------------------------------------------------------------------
The company is engaged in the sale of products for export from the United States. These sales consist principally of pulp, newsprint, paperboard, containerboard, logs, lumber and wood chips to Japan; pulp, containerboard, lumber and plywood to Europe; and logs to China and Korea. The following table compares the company's export sales from the United States to customers in Japan and elsewhere with its total net sales and revenues.
- -------------------------------------------------------------------------- Dollar amounts in millions 1997 1996 1995 - -------------------------------------------------------------------------- Export sales from the United States: Customers in Japan $ 893 $ 1,185 $ 1,173 Customers outside Japan 634 573 763 - -------------------------------------------------------------------------- Total export sales 1,527 1,758 1,936 - -------------------------------------------------------------------------- Total net sales and revenues $ 11,210 $ 11,114 $ 11,788 ==========================================================================
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, fluctuates from period to period. Individual income (expense) items significant in 1997 in relation to net earnings 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. There were no significant other income (expense) items in 1996 or 1995. 51 NOTE 5. INCOME TAXES Earnings before income taxes are comprised of the following:
- -------------------------------------------------------------------------- Dollar amounts in millions 1997 1996 1995 - -------------------------------------------------------------------------- Domestic earnings $ 432 $ 614 $ 852 Foreign earnings 107 106 392 - -------------------------------------------------------------------------- $ 539 $ 720 $ 1,244 ==========================================================================
Provisions for income taxes include the following:
- -------------------------------------------------------------------------- Dollar amounts in millions 1997 1996 1995 - -------------------------------------------------------------------------- Federal: Current $ 65 $ 41 $ 177 Deferred 86 166 92 - -------------------------------------------------------------------------- 151 207 269 - -------------------------------------------------------------------------- State: Current 6 2 31 Deferred 3 16 4 - -------------------------------------------------------------------------- 9 18 35 - -------------------------------------------------------------------------- Foreign: Current 45 33 134 Deferred (8) (1) 7 - -------------------------------------------------------------------------- 37 32 141 - -------------------------------------------------------------------------- $ 197 $ 257 $ 445 ==========================================================================
A reconciliation between the federal statutory tax rate and the company's effective tax rate follows:
- -------------------------------------------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------- Statutory tax on income 35.0% 35% 35% State income taxes, net of federal tax benefit 1.3 2 2 All other, net .2 (1) (1) - -------------------------------------------------------------------------- Effective income tax rate 36.5% 36% 36% ==========================================================================
The net deferred income tax (liabilities) assets include the following components:
- -------------------------------------------------------------------------- Dollar amounts in millions December 28, 1997 December 29, 1996 - -------------------------------------------------------------------------- Current (included in prepaid expenses) $ 90 $ 84 Noncurrent (1,418) (1,324) Real estate and related assets (included in other assets) 28 12 - -------------------------------------------------------------------------- Total $ (1,300) $ (1,228) ==========================================================================
The deferred tax (liabilities) assets are comprised of the following:
- -------------------------------------------------------------------------- Dollar amounts in millions December 28, 1997 December 29, 1996 - -------------------------------------------------------------------------- Depreciation $ (1,352) $ (1,303) Depletion (176) (143) Capitalized interest and taxes -- real estate development (71) (68) Other (189) (186) - -------------------------------------------------------------------------- Total deferred tax (liabilities) (1,788) (1,700) - -------------------------------------------------------------------------- Pension and retiree health care 128 125 Charges for impairment of long-lived assets 43 56 Alternative minimum tax credit carryforward 63 46 Other 254 245 - -------------------------------------------------------------------------- Total deferred tax assets 488 472 - -------------------------------------------------------------------------- $ (1,300) $ (1,228) ==========================================================================
52 As of December 28, 1997, the company has available approximately $63 million of alternative minimum tax credit carryforward, which does not expire, and foreign tax credit carryforwards of $4 million, $1 million, $1 million and $1 million expiring in 1999, 2000, 2001 and 2002, respectively. The company intends to reinvest undistributed earnings of certain foreign subsidiaries; therefore, no U.S. taxes have been provided. These earnings totaled approximately $827 million at the end of 1997. While it is not practicable to determine the income tax liability that would result from repatriation, it is estimated that withholding taxes payable upon repatriation would approximate $41 million. NOTE 6. PENSION PLANS Net annual pension cost (income) includes the following components:
- -------------------------------------------------------------------------- Dollar amounts in millions 1997 1996 1995 - -------------------------------------------------------------------------- Service cost-benefits earned during the period $ 54 $ 49 $ 37 Interest cost on projected benefit obligation 122 111 104 Actual return on plan assets (584) (414) (466) Net amortization and deferrals 399 254 323 Pension expense due to sales, closures and other 1 2 -- - -------------------------------------------------------------------------- $ (8) $ 2 $ (2) ==========================================================================
The assumptions used were as follows:
- -------------------------------------------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------- Discount rate 7.75% 7.75% 7.75% Rate of increase in compensation levels 4.5% 4.5% 4.5% Expected long-term rate of return on plan assets 11.5% 11.5% 11.5% - --------------------------------------------------------------------------
The following table sets forth the plans' funded status and amounts recognized in the company's consolidated balance sheet for its U.S. and Canadian pension plans:
- --------------------------------------------------------------------------- December 28, 1997 December 29, 1996 - --------------------------------------------------------------------------- Assets Accumulated Assets Accumulated Exceed Benefits Exceed Benefits Dollar amounts Accumulated Exceed Accumulated Exceed in millions Benefits Assets Total Benefits Assets Total - --------------------------------------------------------------------------- Accumulated benefit obligation: Vested $ 1,307 $ 23 $1,330 $ 1,337 $ 17 $1,354 Non-vested 155 -- 155 29 -- 29 - --------------------------------------------------------------------------- $ 1,462 $ 23 $1,485 $ 1,366 $ 17 $1,383 =========================================================================== Projected benefit obligation $ 1,621 $ 39 $1,660 $ 1,498 $ 30 $1,528 Fair value of plan assets (2,391) (27) (2,418) (1,933) (22) (1,955) Unrecognized prior service cost (84) (9) (93) (58) (10) (68) Unrecognized net gain (loss) 891 (4) 887 539 2 541 Unrecognized net transition asset 22 (1) 21 27 (1) 26 Additional minimum liability -- 2 2 -- -- -- - --------------------------------------------------------------------------- Accrued/(prepaid) pension cost $ 59 $ -- $ 59 $ 73 $ (1) $ 72 ===========================================================================
The assets of the U.S. and Canadian pension plans, as of December 28, 1997, and December 29, 1996, consist of a highly diversified mix of equity, fixed income and real estate securities. Approximately 1,600 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 $7 million in 1997, $5 million in 1996 and $7 million in 1995. 53 NOTE 7. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The company sponsors defined benefit postretirement plans for its U.S. employees that provide medical and life insurance coverage as follows: . Two salaried retiree medical plans that cover substantially all salaried employees who retire under the company's retirement plan and their spouses. Plan I covers those retired or eligible to retire as of January 1, 1990, and provides full health coverage. Plan II includes those salaried employees not eligible for Plan I, under which the company provides a fixed dollar amount per year of service toward the premium, with the retiree paying the remainder. The company reserves the right to revise the fixed dollar amount. . An hourly retiree medical plan that covers approximately 3,500 active hourly employees and their spouses. For some, the coverage stops at age 65, while others have lifetime coverage. In some units the retiree must pay a portion of the premium, while in others the company pays the full cost. There are approximately 1,900 retired hourly employees and their spouses currently covered under these programs. . A salaried retiree life insurance plan that starts at 80 percent of salary at retirement and reduces to six thousand dollars in 20 percent increments. Approximately 4,000 persons who are retired or were eligible to retire as of December 31, 1991, are subject to a different schedule. . An hourly retiree life insurance plan in which approximately 12,400 active hourly employees are eligible and approximately 2,600 hourly retirees have coverage. Most of these are covered by fixed dollar amount coverage that is graded down after retirement. Some units have pay-related insurance on which the company pays the full cost. Weyerhaeuser sponsors various defined contribution plans for U.S. salaried and hourly employees. The basis for determining plan contributions varies by plan. The amounts charged to operations and contributed to the plans for participating employees were $34 million, $32 million and $28 million in 1997, 1996 and 1995, respectively. The company sponsors four defined benefit postretirement plans for its Canadian employees that provide medical and life insurance benefits. Approximately 300 retired employees are covered and 2,300 active employees are eligible for coverage in these four plans as of year-end 1997. The following table sets forth the U.S. and Canadian plans' combined accrued postretirement benefit obligation as of December 28, 1997, and December 29, 1996:
- -------------------------------------------------------------------------- Dollar amounts in millions December 28, 1997 December 29, 1996 - -------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees: Health $ 98 $ 102 Life 24 25 Fully eligible and other active plan participants: Health 76 86 Life 15 14 - -------------------------------------------------------------------------- 213 227 Unrecognized actuarial gain 53 31 - -------------------------------------------------------------------------- Accrued postretirement benefit obligation $ 266 $ 258 ==========================================================================
Net annual postretirement benefit costs included the following components:
- -------------------------------------------------------------------- Dollar amounts in millions 1997 1996 1995 - -------------------------------------------------------------------- Service cost benefits attributed to service during the period: Health $ 4 $ 4 $ 3 Life 1 1 -- Interest cost on accumulated postretirement benefit obligation: Health 13 13 16 Life 3 3 3 Amortization of gain -- health (2) (1) (1) - --------------------------------------------------------------------- Net postretirement benefit cost $ 19 $ 20 $ 21 =====================================================================
54 For measurement purposes, an 8.5, 8.0 and 7.5 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 1995, 1996 and 1997, respectively. Beginning in 1998, the rate is assumed to decrease by 0.5 percent annually to a level of 5.5 percent for the year 2001 and all years thereafter. The effect of a one percent increase in the assumed health care cost trend rates would increase the accumulated post-retirement benefit obligation as of December 28, 1997, by 10.3 percent, and the aggregate of the service and interest cost components of net annual postretirement benefit cost for 1997 by 13 percent. Other assumptions used were as follows:
- -------------------------------------------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------- Discount rate 7.75% 7.75% 7.75% Rate of increase in compensation levels: Salaried 4.5% 4.5% 4.5% Hourly 3.0% 3.0% 3.0% - --------------------------------------------------------------------------
NOTE 8. INVENTORIES
- -------------------------------------------------------------------------- Dollar amounts in millions December 28, 1997 December 29, 1996 - -------------------------------------------------------------------------- Logs and chips $ 103 $ 120 Lumber, plywood and panels 154 148 Pulp, newsprint and paper 185 202 Containerboard, paperboard and packaging 107 108 Other products 152 134 Materials and supplies 282 289 - -------------------------------------------------------------------------- $ 983 $ 1,001 ==========================================================================
NOTE 9. PROPERTY AND EQUIPMENT
- -------------------------------------------------------------------------- Dollar amounts in millions December 28, 1997 December 29, 1996 - -------------------------------------------------------------------------- Property and equipment, at cost: Land $ 158 $ 158 Buildings and improvements 1,721 1,686 Machinery and equipment 9,954 9,713 Rail and truck roads and other 599 596 - -------------------------------------------------------------------------- 12,432 12,153 Less allowance for depreciation and amortization 5,458 5,146 - -------------------------------------------------------------------------- $ 6,974 $ 7,007 ==========================================================================
55 NOTE 10. REAL ESTATE IN PROCESS OF DEVELOPMENT AND FOR SALE Properties held by the company's real estate and related assets segment include:
- -------------------------------------------------------------------------- Dollar amounts in millions December 28, 1997 December 29, 1996 - -------------------------------------------------------------------------- Dwelling units $ 207 $ 198 Residential lots 223 264 Commercial lots 79 135 Commercial projects 56 31 Acreage 27 49 Other inventories 1 3 - -------------------------------------------------------------------------- $ 593 $ 680 ==========================================================================
NOTE 11. ACCRUED LIABILITIES
- -------------------------------------------------------------------------- Dollar amounts in millions December 28, 1997 December 29, 1996 - -------------------------------------------------------------------------- Payroll -- wages and salaries, incentive awards, retirement and vacation pay $ 268 $ 279 Taxes -- Social Security and real and personal property 53 57 Interest 91 79 Income taxes 42 51 Other 194 196 - -------------------------------------------------------------------------- $ 648 $ 662 ==========================================================================
NOTE 12. SHORT-TERM DEBT BORROWINGS Real estate and related assets segment short-term borrowings were $228 million with a weighted average interest rate of 5.7 percent at December 28, 1997, and $245 million with a weighted average interest rate of 4.7 percent at December 29, 1996. LINES OF CREDIT The company has short-term bank credit lines that provide for borrowings of up to the total amount of $425 million, all of which could be availed of by the company and Weyerhaeuser Real Estate Company (WRECO) at December 28, 1997, and borrowings of up to the total amount of $375 million, all of which could be availed of by the company, WRECO and Weyerhaeuser Mortgage Company (WMC) at December 29, 1996. No portions of these lines have been availed of by the company or WRECO at December 28, 1997, and none were availed of by the company, WRECO or WMC at December 29, 1996. None of the entities referred to herein is a guarantor of the borrowings of the others. At December 29, 1996, WMC had $54 million outstanding against short-term special credit lines that provided for borrowings of up to $230 million. With the sale of WMC in 1997, this credit line has been repaid and cancelled. 56 NOTE 13. LONG-TERM DEBT DEBT Weyerhaeuser long-term debt, including the current portion, is as follows:
- -------------------------------------------------------------------------- December 28, December 29, Dollar amounts in millions 1997 1996 - -------------------------------------------------------------------------- 8 3/8% debentures due 2007 $ 150 $ 150 7.50% debentures due 2013 250 250 7.25% debentures due 2013 250 250 7 1/8% debentures due 2023 250 250 9.05% notes due 2003 200 200 8 1/2% debentures due 2025 300 300 7.95% debentures due 2025 250 250 6.95% debentures due 2017 300 -- 6.95% debentures due 2027 300 -- Industrial revenue bonds, rates from 2.5% (variable) to 9.85% (fixed), due 1998-2028 784 746 Medium-term notes, rates from 6.43% to 8.91%, due 1999-2005 246 313 Commercial paper/credit agreements 194 889 Other 26 28 - -------------------------------------------------------------------------- $ 3,500 $ 3,626 ==========================================================================
- -------------------------------------------------------------------------- Portion due within one year $ 17 $ 80 ==========================================================================
Long-term debt maturities during the next five years are (millions): - -------------------------------------------------------------------------- 1998 $ 17 1999 86 2000 295 2001 78 2002 7 - --------------------------------------------------------------------------
Real estate and related assets segment long-term debt, including the current portion, is as follows:
- -------------------------------------------------------------------------- December 28, December 29, Dollar amounts in millions 1997 1996 - -------------------------------------------------------------------------- Notes payable, unsecured; weighted average interest rates are approximately 7.0% and 6.4% $ 652 $ 735 Bank and other borrowings, unsecured; weighted average interest rates are approximately 5.9% and 5.5% 250 380 Notes payable, secured; weighted average interest rates are approximately 8.2% and 8.5% 30 41 Collateralized mortgage obligation bonds 100 133 Commercial paper/credit agreements -- 248 - -------------------------------------------------------------------------- $ 1,032 $ 1,537 ==========================================================================
- -------------------------------------------------------------------------- Portion due within one year $ 350 $ 723 ==========================================================================
Long-term debt maturities during the next five years are (millions): - -------------------------------------------------------------------------- 1998 $ 350 1999 116 2000 199 2001 162 2002 81 - --------------------------------------------------------------------------
57 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. At December 29, 1996, WMC had $25 million outstanding against a one-year evergreen credit commitment. With the sale of WMC in 1997, this credit commitment has been repaid and cancelled. Weyerhaeuser Financial Services, Inc. (WFS), a wholly owned subsidiary, has a revolving/term credit agreement that provides for: (1) borrowings of up to $75 million at December 28, 1997, and $450 million at December 29, 1996, at LIBOR or other such rates as may be agreed upon by WFS and the banks, and (2) a commitment fee on the unused portion of the credit. $75 million and $355 million were outstanding under this facility at December 28, 1997, and December 29, 1996, respectively. 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 28, 1997, and none was availed of by the company, WRECO, WMC or WFS at December 29, 1996, except as noted above. The company's compensating balance agreements were not significant. NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS
- -------------------------------------------------------------------------- December 28, 1997 December 29, 1996 ----------------- ---------------- Carrying Fair Carrying Fair Dollar amounts in millions Value Value Value Value - -------------------------------------------------------------------------- Weyerhaeuser: Financial liabilities: Long-term debt (including current maturities) $3,500 $3,859 $3,626 $3,809 - -------------------------------------------------------------------------- Real estate and related assets: Financial assets: Mortgage notes held for sale -- -- 334 335 Mortgage loans receivable 64 74 133 126 Mortgage-backed certificates and other pledged financial instruments 109 117 154 165 ----------------------------------- Total financial assets 173 191 621 626 ----------------------------------- Financial liabilities: Long-term debt (including current maturities) 1,032 1,044 1,537 1,553 - --------------------------------------------------------------------------
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 notes held for sale were estimated using the quoted market prices for securities backed by similar loans adjusted for differences in loan characteristics. The estimated fair value was net of related hedge instruments, which were estimated based upon quoted market prices for securities. . 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. 58 NOTE 15. LEGAL PROCEEDINGS, COMMITMENTS AND CONTINGENCIES LEGAL PROCEEDINGS In November 1996, an action was filed against the company in Superior Court for King County, Washington, on behalf of a purported class of all individuals and entities that own property in the United States on which exterior hardboard siding manufactured by the company has been installed since 1980. The action alleges the company has manufactured and distributed defective hardboard siding and has breached express warranties and consumer protection statutes in its sale of hardboard siding. The action seeks compensatory damages, including prejudgment interest, and seeks damages for the cost of replacing siding that rots subsequent to the entry of any judgment. In January 1997, an action was filed, also in Superior Court for King County, Washington, on behalf of a purported class of all individuals, proprietorships, partnerships, corporations and other business entities in the United States on whose homes, condominiums, apartment complexes or commercial buildings hardboard siding manufactured by the company has been installed. The action alleges the company has breached express and implied warranties in its sale of hardboard siding and also has violated the Consumer Protection Act of the state of Washington. The action seeks damages, prejudgment interest, costs and reasonable attorney fees. In December 1997, the two cases were consolidated for the purpose of discovery and resolution of the class certification issue. Also, in December 1997, the plaintiffs in the first of the two cases filed a motion to change the trial date and for leave to move for class certification. In January 1998, the court denied this motion. The two cases are currently set for trial in March 1998 and May 1998, respectively, without class certification. The company is a defendant in approximately eighteen other hardboard siding cases, two of which purport to be class actions on behalf of purchasers of single- or multi-family residences that contain the company's hardboard siding, one in Nebraska and one in Iowa. 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 $100 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 1997 capital expenditures, excluding acquisitions, were $656 million and are expected to approximate $750 million in 1998; however, the 1998 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 $42 million of partnership borrowings and limited recourse obligations associated with $162 million of sold mortgage loans. The fair value of the recourse on these loans is estimated to be $3 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. 59 NOTE 16. PROCEEDS FROM SALE OF PROPERTY AND EQUIPMENT In 1996, the company sold its Klamath Falls, Oregon, hardboard, particleboard and plywood manufacturing operations; 600,000 acres of predominantly pine timberlands; and its nursery and seed orchard facilities. Proceeds from the sale of the property and equipment in this transaction amounted to $33 million. The resulting gain on this transaction was not material to the company's pretax income. The timberlands portion of this transaction involved a like-kind exchange for other timberlands, primarily private commercial timberlands in southeastern Louisiana and southern Mississippi previously owned by Cavenham Forest Industries. NOTE 17. 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 28, 1997, and December 29, 1996; and . 40,000,000 preference shares having a par value of $1.00 per share, of which none were issued and outstanding at December 28, 1997, and December 29, 1996. 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. NOTE 18. 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:
- ------------------------------------------------------- 1997 1996 - ------------------------------------------------------- Net income (in millions): As reported $ 342 $ 463 Pro forma 332 454 Basic earnings per share: As reported $ 1.72 $ 2.34 Pro forma 1.67 2.29 Diluted earnings per share: As reported $ 1.71 $ 2.33 Pro forma 1.66 2.28 - -------------------------------------------------------
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:
- --------------------------------------------------------- 1997 1996 - --------------------------------------------------------- Risk-free interest rate 6.42% 5.81% Expected life 4.9 years 6.4 years Expected volatility 26.21% 25.61% Expected dividend yield 3.44% 3.48% - ----------------------------------------------------------
60 Changes in the number of shares subject to option are summarized as follows:
- ----------------------------------------------------------------- 1997 1996 1995 - ----------------------------------------------------------------- Shares (in thousands): Outstanding, beginning of year 6,243 5,972 5,687 Granted 1,563 1,222 1,155 Exercised 1,864 925 859 Forfeited 91 26 11 Expired 3 -- -- - ----------------------------------------------------------------- Outstanding, end of year 5,848 6,243 5,972 - ----------------------------------------------------------------- Exercisable, end of year 4,309 5,022 4,817 - ----------------------------------------------------------------- Weighted average exercise price: Outstanding, beginning of year $40.56 $38.17 $36.27 Granted 46.54 45.94 39.47 Exercised 36.70 32.11 27.34 Forfeited 44.68 43.46 40.10 Expired 37.75 -- -- Outstanding, end of year 43.32 40.56 38.17 Weighted average grant date fair value of options 11.26 11.40 10.41 - ------------------------------------------------------------------
334 of the 5,848 options outstanding at December 28, 1997, have exercise prices between $20 and $35, with a weighted average exercise price of $25.29 and a weighted average remaining contractual life of 2.59 years. All of these options are exercisable. The remaining 5,514 options have exercise prices between $36 and $54, with a weighted average exercise price of $44.41 and a weighted average remaining contractual life of 7.35 years. 3,975 of these options are exercisable with a weighted average exercise price of $43.59. NOTE 19. 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 and wood products (including softwood lumber, plywood and veneer; composite panels; oriented strand board; logs; chips; timber; doors; hardwood lumber and plywood; and treated products); pulp, paper and packaging (including pulp, newsprint, paper, containerboard, paperboard, packaging, recycling and chemicals); 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, newsprint, paper, containerboard and paperboard primary manufacturing and secondary conversion facilities, including extensive transfers of raw materials, semi-finished materials and end products between and among these groups. Accounting for segment profitability involves allocations of joint raw materials and conversion costs and the use of transfer prices that attempt to approximate current market values. 61 The following table sets forth an analysis of the company's operations by business segments:
- -------------------------------------------------------------------------- Dollar amounts in millions 1997 1996 1995 - -------------------------------------------------------------------------- Sales to and revenues from unaffiliated customers: Timberlands and wood products $ 5,374 $ 5,240 $ 4,931 Pulp, paper and packaging 4,609 4,648 5,682 Real estate and related assets 1,093 1,009 919 Corporate and other 134 217 256 - -------------------------------------------------------------------------- 11,210 11,114 11,788 ------------------------------- Intersegment sales and revenues: Timberlands and wood products 248 322 558 Pulp, paper and packaging 95 88 168 Corporate and other 35 35 33 - -------------------------------------------------------------------------- 378 445 759 ------------------------------- Total sales and revenues 11,588 11,559 12,547 Eliminations (378) (445) (759) - -------------------------------------------------------------------------- $ 11,210 $ 11,114 $ 11,788 ========================================================================== Approximate contribution (charge) to earnings (1)(2)(3): Timberlands and wood products $ 707 $ 805 $ 808 Pulp, paper and packaging 164 307 1,181 Real estate and related assets 111 43 (277) Corporate and other (186) (183) (217) - -------------------------------------------------------------------------- 796 972 1,495 Interest expense (3) (341) (338) (347) Less capitalized interest 84 86 96 - -------------------------------------------------------------------------- Earnings before income taxes 539 720 1,244 Income taxes (197) (257) (445) - -------------------------------------------------------------------------- $ 342 $ 463 $ 799 ========================================================================== Depreciation, amortization and fee stumpage: Timberlands and wood products $ 243 $ 227 $ 211 Pulp, paper and packaging 353 355 350 Real estate and related assets 12 16 41 Corporate and other 20 19 19 - -------------------------------------------------------------------------- $ 628 $ 617 $ 621 ========================================================================== Capital expenditures (including acquisitions): Timberlands and wood products $ 315 $ 866 $ 508 Pulp, paper and packaging 327 415 562 Real estate and related assets 3 9 13 Corporate and other 24 37 36 - -------------------------------------------------------------------------- $ 669 $ 1,327 $ 1,119 ========================================================================== Assets: Timberlands and wood products $ 3,804 $ 3,658 $ 2,940 Pulp, paper and packaging 6,589 6,721 6,797 Real estate and related assets 2,004 2,628 2,905 Corporate and other 1,160 1,184 1,151 - -------------------------------------------------------------------------- 13,557 14,191 13,793 Eliminations (482) (595) (540) - -------------------------------------------------------------------------- $ 13,075 $ 13,596 $ 13,253 ==========================================================================
(1) 1997 results reflect special items of $14 million, which are the net of charges incurred for closures of operating facilities, offset in part by gains on sales of businesses. (2) 1995 "approximate contribution to earnings" includes special charges of $290 million for real estate and related assets to dispose of certain real estate assets. (3) Interest expense of $40 million, $67 million and $64 million in 1997, 1996 and 1995, respectively, is included in the determination of "approximate contribution to earnings" and excluded from "interest expense" for financial services businesses. 62 NOTE 20. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- -------------------------------------------------------------------------- Dollar amounts in millions First Second Third Fourth except per-share figures Quarter Quarter Quarter Quarter Year - -------------------------------------------------------------------------- Net sales: 1997 $ 2,608 $ 2,909 $ 2,823 $ 2,870 $11,210 1996 2,605 2,886 2,852 2,771 $11,114 Operating income: 1997 104 212 233 220 769 1996 287 265 286 232 1,070 Earnings before income taxes: 1997 33 172 180 154 539 1996 222 161 187 150 720 Net earnings: 1997 21 109 114 98 342 1996 142 103 120 98 463 Net earnings per common share: Basic 1997 .10 .56 .57 .49 1.72 1996 .72 .52 .60 .50 2.34 Diluted 1997 .10 .55 .57 .49 1.71 1996 .71 .52 .60 .49 2.33 Dividends per common share: 1997 .40 .40 .40 .40 1.60 1996 .40 .40 .40 .40 1.60 Market prices -- high/low: 1997 50 5/8 - 44 1/2 55 1/4 - 42 5/8 63 15/16 - 51 5/8 60 3/4 - 46 1/16 63 15/16 - 42 5/8 1996 49 1/2 - 39 15/16 49 7/8 - 41 3/4 48 1/4 - 39 1/2 48 1/8 - 43 7/8 49 7/8 - 39 1/2 - --------------------------------------------------------------------------
63 NOTE 21. HISTORICAL SUMMARY
- -------------------------------------------------------------------------- Dollar amounts in millions except per-share figures 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------- PER COMMON SHARE: Basic net earnings (loss) from continuing operations, before extraordinary item and effect of accounting changes $ 1.72 2.34 3.93 2.86 2.58 Extraordinary item(3) $ -- -- -- -- .25 Effect of accounting changes $ -- -- -- -- -- --------------------------------------- Basic net earnings (loss) $ 1.72 2.34 3.93 2.86 2.83 ======================================= Diluted net earnings (loss) from continuing operations, before extraordinary item and effect of accounting changes $ 1.71 2.33 3.91 2.85 2.56 Extraordinary item(3) $ -- -- -- -- .25 Effect of accounting changes $ -- -- -- -- -- --------------------------------------- Diluted net earnings (loss) $ 1.71 2.33 3.91 2.85 2.81 ======================================= Dividends paid $ 1.60 1.60 1.50 1.20 1.20 Shareholders' interest (end of year) $ 23.30 23.21 22.57 20.86 19.34 FINANCIAL POSITION: Total assets: Weyerhaeuser $11,071 10,968 10,359 9,750 9,087 Real estate and related assets $ 2,004 2,628 2,894 3,408 3,670 --------------------------------------- $13,075 13,596 13,253 13,158 12,757 ======================================= Long-term debt (net of current portion): Weyerhaeuser: Long-term debt $ 3,483 3,546 2,983 2,713 2,998 Capital lease obligations $ 2 2 2 -- -- Convertible subordinated debentures $ -- -- -- -- -- Limited recourse income debenture $ -- -- -- -- -- --------------------------------------- $ 3,485 3,548 2,985 2,713 2,998 ======================================= Real estate and related assets: Long-term debt $ 682 814 1,608 1,873 2,086 ======================================= Shareholders' interest $ 4,649 4,604 4,486 4,290 3,966 Percent earned on shareholders' interest 7.4% 10.2% 18.2% 14.3% 15.2% OPERATING RESULTS: Net sales and revenues: Weyerhaeuser $10,117 10,105 10,869 9,281 8,315 Real estate and related assets $ 1,093 1,009 919 1,117 1,230 --------------------------------------- $11,210 11,114 11,788 10,398 9,545 ======================================= Net earnings (loss) from continuing operations before extraordinary item and effect of accounting changes: Weyerhaeuser $ 271 434 981 576 459 Real estate and related assets $ 71 29 (182)(2) 13 68 --------------------------------------- $ 342(1) 463 799 589 527 Extraordinary item(3) $ -- -- -- -- 52 Effect of accounting changes $ -- -- -- -- -- --------------------------------------- Net earnings (loss) $ 342 463 799 589 579 ======================================= STATISTICS (UNAUDITED): Number of employees 35,778 39,020 39,558 36,665 36,748 Salaries and wages $ 1,706 1,781 1,779 1,610 1,585 Employee benefits $ 355 370 408 357 347 Total taxes $ 478 557 736 618 577 Timberlands (thousands of acres): U.S. fee ownership 5,171 5,326 5,302 5,587 5,512 Long-term license arrangements 23,715 22,863 22,866 17,849 17,845 Number of shareholder accounts at year-end: Common 20,981 22,528 23,446 24,131 25,282 Preferred -- -- -- -- -- Preference -- -- -- -- -- Average common and common equivalent shares outstanding (thousands) 198,967 198,318 203,525 205,543 204,866 - --------------------------------------------------------------------------
64
- -------------------------------------------------------------------------- 1992 1991 1990 1989 1988 1987 - -------------------------------------------------------------------------- 1.83 (.50) 1.87 1.56 2.68 2.12 -- -- -- -- -- -- -- (.30) -- -- -- -- - --------------------------------------------------------- 1.83 (.80) 1.87 1.56 2.68 2.12 ========================================================= 1.82 (.50) 1.87 1.56 2.68 2.10 -- -- -- -- -- -- -- (.30) -- -- -- -- - --------------------------------------------------------- 1.82 (.80) 1.87 1.56 2.68 2.10 ========================================================= 1.20 1.20 1.20 1.20 1.15 .90 17.85 17.25 19.21 18.55 18.14 16.54 8,566 7,551 7,556 7,371 6,983 6,418 9,720 9,435 8,800 8,605 8,401 6,499 - --------------------------------------------------------- 18,286 16,986 16,356 15,976 15,384 12,917 ========================================================= 2,659 2,195 2,168 1,502 1,644 1,540 -- -- 7 23 37 51 193 193 193 -- -- -- 188 204 204 204 198 181 - --------------------------------------------------------- 3,040 2,592 2,572 1,729 1,879 1,772 ========================================================= 2,411 2,421 2,637 2,006 2,318 2,130 ========================================================= 3,646 3,489 3,864 4,148 4,044 3,714 10.4% (4.4)% 9.8% 8.3% 14.6% 12.8% 7,744 7,167 7,447 8,355 7,861 6,988 1,522 1,606 1,619 1,826 1,467 1,397 - --------------------------------------------------------- 9,266 8,773 9,066 10,181 9,328 8,385 ========================================================= 332 (25) 340 377 516 379 40 (76) 54 (36) 50 68 - --------------------------------------------------------- 372 (101)(4) 394 341(5) 566 447 -- -- -- -- -- -- -- (61) -- -- -- -- - --------------------------------------------------------- 372 (162) 394 341 566 447 ========================================================= 39,022 38,669 40,621 45,214 46,976 45,123 1,580 1,476 1,531 1,563 1,423 1,277 323 321 318 325 292 250 443 173 446 403 511 467 5,592 5,488 5,592 5,664 5,775 5,813 18,828 13,491 13,491 13,324 13,324 12,064 26,334 26,937 28,187 29,847 30,379 32,535 -- -- -- 12 25 26 -- -- -- 443 351 106 203,373 201,578 203,673 204,331 207,785 202,544 - --------------------------------------------------------------------------
(1) 1997 results reflect net special items charges of $14 million less related tax effect of $5 million, or $9 million. (2) 1995 results reflect a special charge for disposal of certain real estate assets of $290 million less related tax effect of $106 million, or $184 million. (3) 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. (4) 1991 results reflect restructuring and other charges of $445 million less related tax effect of $162 million, or $283 million. (5) 1989 results reflect net special items charges of $401 million less related tax effect of $141 million, or $260 million. 65 EX-27 4
5 1,000,000 YEAR DEC-28-1997 DEC-28-1997 122 0 987 12 983 2,294 12,432 5,458 13,075 1,384 4,515 258 0 0 4,391 13,075 11,210 11,210 8,775 8,775 867 6 297 539 197 342 0 0 0 342 1.72 1.71
EX-10 5 November 12, 1997 Mr. Steven R. Rogel 2600 SW Georgian Place Portland, Oregon 97201 Dear Steve: This summarizes and confirms our agreement concerning your employment as President and Chief Executive Officer of Weyerhaeuser Company (the "Company"). You will also be elected to the Company's Board of Directors. As President and Chief Executive Officer, your duties and responsibilities shall be those normally and traditionally associated with such a position and you shall not be required to perform other duties or engage in other activities without your consent. Your office shall be located at the Company's headquarters and you shall be provided with the usual and customary administrative support and assistance. Your employment with the Company will commence on a mutually agreeable date no later than January 5, 1998 at an annual base salary of $925,000, payable no less frequently than monthly in equal installments. Salary reviews are currently done on a 12-month cycle and the Compensation Committee of the Board will review your salary in February of 1999 (based on a 16-month review). You will be a participant in the incentive compensation plan for Company senior executives. In this plan your target bonus will be 60% of your base salary. Actual bonus amounts for the Chief Executive Officer are determined by the Board of Directors and can range from 0 to 3 times target in total. The Board will base your incentive compensation on three components, each to be given equal weight in the total calculation and each of which can range from 0 - 1 times your target bonus: (1) a short-term incentive calculated as shown on Attachment A, based on the Company's annual return on net assets compared to industry competitors; (2) an intermediate-term incentive, calculated as shown on Attachment A, based on total shareholder return compared to industry competitors and the S&P 500; and (3) the Board's evaluation of your performance as Chief Executive Officer based on quantifiable and measurable annual goals or targets agreed to in advance with the Compensation Committee. You will, however, receive a bonus for 1998 at no less than target (60% of base salary) which will be payable in 1999. Mr. Steven Rogel November 12, 1997 Page 2 On your date of hire you will be entitled to a non-forfeitable payment of up to $1,400,000 to compensate you for your losses due to any forfeiture of the following items under your current employment: . Deferred compensation . Stock options (i.e., unvested options that cannot be exercised after your current employment ends) . Restricted stock (i.e., unvested shares of restricted stock that cannot be sold by you after your current employment ends) Your loss for deferred compensation will be determined based on the actual amount forfeited in your deferred compensation account on the date your current employment ends. The value of forfeited stock options and restricted stock will be calculated using $33 as your current employer's share price. The amount of the payment for your losses for the three items shown above will be determined by Milliman & Robertson or other mutually agreeable independent actuary or financial consultant within 30 days after your employment begins, will not be reduced to account for income taxes, and will not exceed $1,400,000. You agree to defer this payment into a "Share Equivalents" account under the Company's deferred compensation plan and to elect payment at a date or event that is at least five years from your date of hire. The Weyerhaeuser share price used for this Share Equivalents deferral will be the closing price for the Company's shares as reported in the Wall Street Journal on your first day of employment with the Company and the payment, when made, shall reflect the increase, if any, in the value of the Share Equivalents due to reinvested dividends and/or share price increase occurring during the period of deferral as provided in the deferred compensation plan. You will be a participant in the Company's long-term incentive compensation plan. The Board of Directors will approve a 150,000 share initial option grant to you under the plan. This stock option will be granted to you on your first day of employment with the Company. You will receive a stock option grant in 1998 which will be determined by our regular granting process. You will be eligible for stock option grants in subsequent years, also determined by the regular process. The current stock option target for the CEO position is 75,000 shares each year with a range of 0 to 112,500 shares. Mr. Steven Rogel November 12, 1997 Page 3 You will be eligible for the regular salaried benefits outlined in the employee handbook provided to you under separate cover. You will also be a member of Weyerhaeuser's key group and eligible for the benefits accorded this group. The enclosed Attachment B summarizes the current program. The Board of Directors reserves the right to terminate your employment at any time with or without cause. In the event that your employment is terminated, you will be entitled to a special severance benefit which will decrease based on the number of months you are employed by the Company. This benefit will be equal to 36 months base pay during your first 24 months of employment with the Company. The amount of this benefit will then decrease by one month for each additional month you are employed (e.g., after 29 months, your severance would be 31 months of base pay) until it reaches 24 months after 36 months of employment. Thereafter, your severance benefit would be 24 months of base pay. The severance benefit described above will not be paid if you resign, retire, die or are terminated for gross or willful misconduct, deliberate refusal or failure to perform your duties, conviction of a felony or for gross negligence in job performance. The severance benefit will commence after 30 days notification of termination and will be paid on a monthly basis. This benefit will be in lieu of any other notice policy or severance plan offered by the Company. You will be entitled to a Supplemental Retirement Benefit described in the enclosed Attachment C, the "Supplemental Retirement Agreement for Steven R. Rogel." The Company will reimburse your relocation expenses in accordance with its standard "Weyerhaeuser Relocation Program," and the "Optional Relocation Programs," copies of which are enclosed as Attachment D. You will also be reimbursed for your attorney fees incurred in connection with this agreement. This agreement shall bind any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, in the same manner and to the same extent that the Company would be obligated under this agreement if no succession had taken place. The level of benefits, plans, programs and compensation described or referred to in this agreement, and as they exist on this date, shall not, as applied to you, be reduced during your employment by the Company without your prior written consent. Mr. Steven Rogel November 12, 1997 Page 4 If the foregoing reflects your understanding of our agreement, please indicate by signing and returning the enclosed copy of this letter. Sincerely, WEYERHAEUSER COMPANY /s/ John W. Creighton, Jr. John W. Creighton, Jr. President Agreed to and accepted this 20th day of ---- November, 1997. /s/ Steven R. Rogel - ------------------- Steven R. Rogel Attachment A Short-term incentive Funding for this portion of the CEO's annual bonus is based on company performance relative to 13 competitors (see next page), measured by one-year EBIT-RONA:
- ----------------------------------------------------------- Relative ranking Funding multiple - ----------------------------------------------------------- 1 1.00x target bonus 2 0.90 3 0.80 4 0.70 5 0.60 6 0.50 7 0.40 8 0.30 9 0.20 10 0.10 11 through 14 0.00 - -----------------------------------------------------------
Example: If Weyerhaeuser's EBIT-RONA ranking is No. 3 in the industry, the short-term component would be 0.80x target bonus. Note: Weyerhaeuser's EBIT-RONA must be at least 8 percent for funding to occur under the short-term incentive component. Intermediate-term This second portion of the annual bonus is based on company performance relative to 13 competitors (see next page) and to the S&P 500, measured by Total Shareholder Return (TSR) over a three-year period:
- --------------------------------------------------------------------- Industry Comparison - S&P Comparison - 70% Weighting 30% Weighting - --------------------------------- ---------------------------------- Peer-group Funding S&P 500 Funding ranking multiple percentile multiple - ---------------------------------------------------------------------- #1-2 1.00x target bonus 75 1.00xtarget bonus 3 0.83 70 0.83 4 0.66 65 0.66 5 0.49 60 0.49 6 0.33 55 0.33 7 0.16 50 0.16 8-14 0.00 <50 0.00 - ---------------------------------------------------------------------
Example: If Weyerhaeuser's three-year TSR is No. 6 in the industry peer group, and in the 60th percentile compared to the S&P 500, then the funding for this component would be (0.33 x 70%) + (0.49 x 30%) = 0.23 + 0.14 = 0.37x target bonus. Note: If Weyerhaeuser's three-year TSR is a negative number, then the above funding levels for the intermediate-term component will be reduced by 50 percent. Attachment A Page 2 Determination of Performance Factors: The EBIT-RONA, TSR and Company rankings established each year for the short-term and intermediate-term incentives will be the same as those established for the management incentive plan that applies to other senior managers of the Company. The 13 competitor companies: . Boise Cascade . Bowater . Champion . Georgia-Pacific . International Paper . Louisiana Pacific . MacMillian Bloedel . Potlatch . Stone . Temple-Inland . Union Camp . Westvaco . Willamette Attachment B Summary of Supplemental Benefits and Stock Ownership Expectations for the Top Management Team Supplemental Benefits - --------------------- In addition to the benefit package described in the Weyerhaeuser Handbook for Salaried Employees, the following additional benefits are provided to you as a member of the Top Management Team. 1. Weyerhaeuser "Stock Equivalents" - effective 1995 Under the executive compensation salary and bonus deferral plan, you are eligible for an additional bonus deferral option which allows you to invest in Weyerhaeuser "stock equivalents." Under this option, the company will increase the value of the deferral by 15 percent. A minimum five-year deferral period applies to the stock equivalents account. If you leave the company in less than five years (for reasons other than retirement, disability or death), the added 15 percent is forfeited. If you retire, you must hold the account for at least five years before receiving payment. Account growth is based on the appreciation (or depreciation) of Weyerhaeuser stock. Dividends are reinvested in additional share equivalents. 2. Supplemental Life Insurance - effective July 1, 1989 In addition to your company-provided basic life insurance of one times salary, you will receive supplemental life insurance in an amount 2-1/2 times your basic life insurance amount. The maximum coverage is $500,000 when combined with your basic life amount. All costs for this coverage will be paid by the company. The beneficiary you designate under your basic life insurance is automatically assigned as beneficiary under this program. Your human resources manager will help you make a change at any time. Tax Implications - ---------------- The value of company-provided life insurance in excess of $50,000 is considered taxable income to you. The Internal Revenue Service provides tax tables which consider the premium, the amount of coverage, and your age in order to arrive at the taxable value ("imputed income") of the insurance to you. Your annual W-2 statement will reflect this calculation of your imputed income. Because of these potential tax implications, if you decide that the value of your insurance to you is less than its imputed income, you have the right to decline participation in these programs. Attachment B Page 2 When You Leave the Company - -------------------------- The insurance section of your benefits handbook will explain what happens to your coverage when you retire or leave the company. 3. Vacations You are immediately eligible for five weeks vacation per year without regard to length of service. There is no provision for banking or saving vacation from year to year. 4. Financial Counseling To assist you in managing your financial affairs, the company contracts with several firms that provide comprehensive financial planning and investment advisory services. One of these firms will contact you directly to begin their services. The company pays the cost of your first year in this program. After the initial year, the company pay approximately one half of the cost and you will be responsible for the remaining charges if you elect to continue. Stock Ownership Requirements - ---------------------------- In order to strengthen the commitment and alignment of top leaders with company interests, members of the Top Management Team are expected to hold the following multiples of base pay in Weyerhaeuser stock:
Salary Level Multiple of Salary ------------ ----------------- CEO 3.0x 56, 57 2.0x 53-55 1.5x < 52 1.0x -
Transition Period Current members have until December 31, 2000 to meet the requirement. New TMT members must meet the requirement by the later of: December 31, 2000 or four years from their date of hire. Tracking and Reporting You will be asked periodically to report your level of stock ownership to the Corporate Compensation Department. Summary information will be prepared for review by the CEO and board of directors. (Individual levels of ownership will be kept confidential.) Attachment B Page 3 Ways to Fulfill the Expectation Your ownership level includes stock acquired through: . Company stock account in the Investment Growth Plan (401(k)). Both the company match and your allocation of salary deferrals will apply. . Performance Share Plan. . "Stock equivalents" bonus deferral. . Stock received through exercising stock options (unexercised stock options will not apply). . Direct purchases of Weyerhaeuser stock through a broker. Attachment C SUPPLEMENTAL RETIREMENT AGREEMENT For Steven R. Rogel In consideration of your employment with Weyerhaeuser Company (the "Company"), the Company will provide you with the Supplemental Retirement Benefit ("SRB") described below. TARGET BENEFIT PAYABLE AT AGE 65 The SRB, when combined with the vested accrued benefits payable at age 65 from each of the following plans: the Weyerhaeuser Company Retirement Plan for Salaried Employees; the Weyerhaeuser Supplemental Retirement Plan; the Willamette Industries Retirement Plan and Supplemental Retirement Plan (the "Current Employer Plans"), is approximately equal to the retirement benefit you would have earned if you had been employed by Weyerhaeuser since June , 1972 (your "Original Hire Date"). - ----- Consistent with this approach, your SRB will be equal to your: . Weyerhaeuser Target Benefit less ---- . Current Employer Retirement Benefit less ---- . Weyerhaeuser Salaried Retirement Benefit less ---- . Weyerhaeuser Supplemental Retirement Benefit For purposes of this Agreement, the above benefits are described as follows: . Weyerhaeuser Target Benefit- The single annuity retirement benefit payable at age 65 under the Weyerhaeuser Company Retirement plan for Salaried Employees and the Weyerhaeuser Supplemental Retirement Plan (the "Weyerhaeuser Plans"), assuming that your service for both benefit and eligibility purposes of this Agreement began on your Original Hire Date and ends on the date of termination of employment from the Company. The terms of the Weyerhaeuser Plans in effect at the time of your termination from the Company will apply in the calculation of this target benefit, with the exception that the "Rule of 85" provisions will not apply. . Current Employer Retirement Benefit - Your vested single annuity payable at age 65 retirement benefit from your Current Employer Plans earned to your date of termination from Willamette Industries. . Weyerhaeuser Salaried Retirement Benefit - Your vested single annuity payable at age 65 retirement benefit from your Weyerhaeuser Company Retirement Plan for Salaried Employees (if any). . Weyerhaeuser Supplemental Retirement Benefit - Your vested single annuity payable at age 65 retirement benefit from your Weyerhaeuser Company Supplemental Retirement Plan (if any). Attachment C Page 2 PAYMENT PRIOR TO AGE 65 . If payment of the SRB begins prior to age 65, the benefit amount otherwise payable at age 65 will be reduced using the early retirement reduction factors in the Weyerhaeuser Company Plan for Salaried Plans at the time of your termination from Weyerhaeuser. For purposes of determining eligibility for the reduction, your service with your current employer will be considered. While the SRB will first be calculated as a single annuity, you can elect to have your SRB paid in any form of payment available from the Weyerhaeuser Company Retirement Plan for Salaried Employees at the time of your termination from employment with Weyerhaeuser Company. Your SRB is an unfunded commitment by the Company to pay you these amounts out of the general assets of the Company. This Agreement does not in any way guarantee that you will qualify for a benefit under the Weyerhaeuser Company Retirement Plan for Salaried Employees or the Weyerhaeuser Company Supplemental Retirement Plan. You must independently meet the benefit eligibility requirements outlined in that plan on the date you actually terminate from the Company. For eligibility and benefit purposes, your service with your current employer will be considered for the Salaried Retiree Health Plan in effect at the time your employment terminates. This plan will likely include cost sharing by you and the Company. If the Company's portion of the cost share is based on service, then the service used for this calculation will be the same as the service used in calculating the Weyerhaeuser Target Benefit in this Agreement. The above terms and conditions are agreed to this 20th day of November, 1997. - ---- -------- /s/ Steven R. Rogel - ------------------- by Steven R. Rogel /s/ Steven R. Hill - ------------------ Steven R. Hill, Senior Vice President, Human Resources & Information Technology Weyerhaeuser Company Attachment D Weyerhaeuser Relocation Program Attachment D Page 2 Sometime in your career, you may have the opportunity to take a job in a different city, county or state. The prospect may be exciting, but what about the move? Weyerhaeuser's Relocation Program can help. Through this program, Employee Relocation Services (ERS) offers professional assistance with your move, helping you understand the company's relocation policy, matching your moving needs with available resources, helping you solve any problems you may encounter to get the most out of your relocation program. After your supervisor approves your move, ERS will give you a call to explain your relocation package options and discuss your individual needs. We'll then send you a relocation package and help you throughout the move. The program's core package, outlined below, is offered to full-time, salaried employees newly hired or already working with the company. Depending on the situation, your hiring supervisor may add optional programs to meet your unique moving needs. Since your new supervisor decides if your new job requires a change in residence, you must get his or her approval before incurring move-related expenses. The Core Package Destination Services/House Hunting An important step in relocating is an orientation to the new community and finding a place to live. ERS can help you make the best possible choice by referring you to a good home-finding service. This service connects you to a real estate or rental agency in your new town that will give you individual attention and expert advice about the new location. Reasonable meal, lodging and transportation expenses will be covered for you and your spouse. En Route Weyerhaeuser will cover the cost of transporting your family by your own car or by air, rail or bus, and will reimburse you for you and your family's meals and lodging en route. Temporary Living Weyerhaeuser understands how difficult and frustrating it is to be separated from your family or to wait for your new home. The company will reimburse meal and lodging expenses for up to 30 days before your family arrives; trips back to visit your family must be approved in advance by your new supervisor. If you need more than 30 days of temporary living, ERS helps you develop a plan to meet your needs while considering cost containment. If your new residence isn't vacant or ready after your family arrives, Weyerhaeuser will reimburse you for lodging and meals for an additional 10 days. Household Goods Transportation ERS will choose a van line when your move is authorized, and you can discuss your special needs with the van line representative. Weyerhaeuser will handle all arrangements to pack, transport and unpack your household goods, and will pay the van line directly for all aspects of the move. All shipments are insured to a maximum of $100,000 by Weyerhaeuser Company. If needed, 30 days' storage is available at your destination. Relocation Allowance If you've moved before, you're probably familiar with the expenses involved in a transfer. In order to help, Weyerhaeuser has established a Relocation Allowance. You'll be paid an amount equivalent to one month's salary at your new job - up to $4,000 (less taxes) - to meet special needs as you relocate. Income Tax Protection Under current law, the money you receive from Weyerhaeuser to assist you in your move must be reported as income. You may, however, be able to claim a tax deduction for some of it (check with the IRS to find out what you can deduct). Weyerhaeuser will also add a payment to offset the extra taxes you'll incur from nondeductible reimbursements that are considered income by the IRS. Attachment D Page 3 Optional Relocation Programs Depending on the situation, your new supervisor will determine your eligibility for optional programs. Home Marketing Assistance Weyerhaeuser encourages you to market your home - which must be your primary residence - through a Realtor. The company offers marketing assistance to improve your chances of getting the best price for your home. This program provides expert direction in Realtor selection and management, and in marketing strategy development. Weyerhaeuser will refer you to a relocation company whose counselors have years of experience in real estate, relocation and home financing. Home Sale Closing Costs Through this program, Weyerhaeuser covers many of the expenses involved in the sale of your home, including real estate commission, documentary stamps, attorney's fees related to the title transfer, transfer taxes related to the sale, and settlement fees. Home Buy-Out Program If you or your Realtor's home-marketing efforts are unsuccessful, Weyerhaeuser offers the Home Buy-Out Program through an outside relocation company. In addition to relieving you of the burden of selling your home, the program releases your equity, allowing you to close promptly on your new home. Attachment D Page 4 This program is offered to salaried employees who own single-family homes or condominiums that are their primary residence. To qualify, a home must not be difficult to market, have a value greater than $400,000, or be on more than five acres. New Home Purchase Closing Costs This program covers many of the costs associated with the transfer of ownership and financing of your new home and can direct you to mortgage companies that offer special financing packages for transferees with direct billing to Weyerhaeuser. Weyerhaeuser will reimburse you for closing costs such as mortgage origination and/or discount points, title transfer and insurance charges, appraisal and credit report. Renters Assistance As a renter, you are bound by your lease. Weyerhaeuser will reimburse you for penalties associated with breaking your lease. At your new location, the company will pay finder's fees to locate housing for you and your family. Mobile and Manufactured Home Sale Closing Costs Weyerhaeuser will reimburse you for typical selling and closing costs for your unit and the land on which it's located, provided the two are sold together. ERS can help you in selecting an agent or broker experienced in mobile home sales. All benefits outlined above have limitations; please make no decisions until you speak with ERS. EX-3 6 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 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: 1 (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 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 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) 3 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 Incorporation 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 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 4 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 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. 5 (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:
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 6 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 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: 7 (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. (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 recieve 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 8 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. (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 9 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 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 theron 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. 10 (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 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 11 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 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 determiend 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 12 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 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. 13 (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. (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 14 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 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. 15 (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 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 16 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. (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 17 engaged auditors, that such adjustment was properly calculated in accordance with the provisions of this subpara graph (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 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: 18
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 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 19 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 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 20 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 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. 21 (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 22 the corporation the "preferential amount" which 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 23 December 15, 1989 - December 14, 1990 1.00 December 15, 1990 and thereafter None
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 24 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 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 25 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. (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 26 (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 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 subparapraph (d) of this parapraph 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". 27 (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 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 28 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 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. 29 (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, 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). 30 (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 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." 31 (19) "Subsequent Dividend Period" and "Subsequent Dividend Periods" shall have the respective meanings specified in subparagraph (a)(2)(i) of this paragraph 10(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 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. 32 (4) "Auction" shall mean the periodic operation of the procedures set forth in this paragraph 10(B). (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). 33 (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 (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 34 (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: (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 35 (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 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; 36 (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; 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 37 (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. (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: 38 (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. (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 39 (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. (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 40 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 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 41 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 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". 42 (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). (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 43 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 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. 44 (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 (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). 45 (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. (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." 46 (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 commerical 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 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. 47 (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 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). 48 (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: (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 49 (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. (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 50 (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%. (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; 51 (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 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 52 (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 "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 53 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 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; 54 (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 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 55 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 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 subdivison 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 56 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. (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 57 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 securites, 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 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 58 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
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 59 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 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 60 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) 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 61 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 $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 62 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 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 63 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 64 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 $2.625 Convertible Exchangeable Preference Shares shall not be entitled to vote except as provided by Washington statutes or by this Article III. 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. 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. 65 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. 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 66 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 transction or a series of transactions), having an aggregate Fair Market 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 67 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 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 68 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 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, 69 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 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 70 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 29th day of April, 1988. /s/ Alan P. Vandevert --------------------------------------- Secretary of Weyerhaeuser Company 71 ALAN P. VANDEVERT, being first duly sworn, on oath deposes and says: 1. That he is the Secretary, and in such capacity an officer, of Weyerhaeuser Company, a Washington corporation. 2. That he has been authorized by a resolution of the Board of Directors of said corporation, dated April 21, 1988 to execute Restated Articles of Incorporation under the provisions of RCW 23A.16.075. 3. That the Restated Articles of Incorporation as hereinabove set forth do correctly set forth without change the text of the Articles of Incorporation of said corporation as amended through the date of said Restated Articles of Incorporation. 4. That the said Restated Articles of Incorporation supersede the original Articles of Incorporation of said corporation and all amendments thereto. /s/ Alan P. Vandevert -------------------------- STATE OF WASHINGTON ) ) ss. COUNTY OF KING ) I, Vicki A. Merrick, a notary public, do hereby certify that on this 29th day of April, 1988, personally appeared before me Alan P. Vandevert, who, being by me first duly sworn, declared that he is the Secretary of Weyerhaeuser Company, that he signed the foregoing document as an officer of the corporation, and that the statements therein contained are true. /s/ Vicki A. Merrick ------------------------------------ Notary Public in and for the State of Washington, residing at Puyallup. My commission expires: June 16,1998 ------------ EX-3 7 BYLAWS OF WEYERHAEUSER COMPANY (as amended through August 15, 1995) ARTICLE I PRINCIPAL OFFICE ---------------- The principal office of this corporation, and its registered office in the State of Washington, is the Weyerhaeuser Headquarters Building, 33663 Weyerhaeuser Way South, Federal Way, Washington. The registered agent of the corporation is the Secretary of the corporation. ARTICLE II SHAREHOLDERS' MEETINGS ---------------------- 1. (a) The annual meeting of shareholders at which the Directors are elected shall be held at 9:00 a.m. on the third Tuesday in April at the registered office of the corporation, or at such other time or place within or without the State of Washington as may be designated by the Board of Directors, for the purpose of electing directors, and for the transaction only of such other business as is properly brought before the meeting, in accordance with these bylaws." (b) To be properly brought before the meeting, business must be of a nature that is appropriate for consideration at an annual meeting and must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (iii) otherwise properly brought before the meeting by a shareholder. In addition to any other applicable requirements, for business to be properly brought before the annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, each such notice must be given, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the corporation, not less than 50 days nor more than 75 days prior to the meeting; provided, however, that in the event that less than 60 days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made, whichever first occurs. Each such notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (w) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (x) the name and address of record of the 1 shareholder proposing such business, (y) the class or series and number of shares of the corporation which are owned by the shareholder, and (z) any material interest of the shareholder in such business. (c) Notwithstanding anything in these bylaws to the contrary, no business shall be transacted at the annual meeting except in accordance with the procedures set forth in this Section; provided, however, that nothing in this Section shall be deemed to preclude discussion by any shareholder of any business properly brought before the annual meeting, in accordance with these bylaws. 2. Special meetings of shareholders shall be held at such time and place as shall be stated in the notice of special meeting solely for such purpose or purposes as may be stated in the notice of said meeting. Except as otherwise specifically required by law and subject to the rights of the holders of any class or series of stock having a preference over the common shares as to dividends or upon liquidation, special meetings of shareholders 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 (as defined in Section 1 of Article III). 3. The record date for the determination of shareholders entitled to notice of and to vote at each annual or special meeting of shareholders shall be the close of business on the eighth Friday preceding each such meeting, provided, however, that the Board of Directors may by resolution fix a different record date for any particular meeting of shareholders. 4. Every shareholder shall furnish in writing to the principal transfer agent, his post office address at which notice of shareholders' meetings and any other notices or communications pertaining to the corporation's affairs or business may be served upon or mailed to him; and every shareholder shall forthwith advise the principal transfer agent in writing of any change of address. ARTICLE III DIRECTORS --------- 1. The business and affairs of this 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 determined from time to time by resolution adopted by the affirmative vote of a majority of the entire Board of Directors, each director to hold office until his successor shall have been elected and qualified. Whenever used in these bylaws, 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 bylaws. Subject to the rights of holders of any class or series of stock having a preference over the common shares as to dividends or upon liquidation, nominations for the election of directors may be made by the Board of Directors or a committee appointed by the Board of Directors or by any shareholder entitled to vote generally in the election of directors. However, any shareholder entitled to vote generally in the election of directors may nominate one or more persons for election as directors at a meeting only if written notice of such shareholder's intent to make such nomination or nominations has been given, either by personal delivery or by United 2 States mail, postage prepaid, to the Secretary of the corporation not less than 50 days nor more than 75 days prior to the meeting; provided, however, that in the event that less than 60 days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of meeting was mailed or such public disclosure was made, whichever first occurs. Each such notice to the Secretary shall set forth: (i) the name and address of record of the shareholder who intends to make the nomination; (ii) a representation that the shareholder is a holder of record of shares of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iii) the name, age, business and residence addresses, and principal occupation or employment of each nominee; (iv) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (v) such other information regarding each nominee proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission; and (vi) the consent of each nominee to serve as a director of the corporation if so elected. The corporation may require any proposed nominee to furnish such other information as may reasonably be required by the corporation to determine the eligibility of such proposed nominee to serve as a director of the corporation. The presiding officer of the meeting may, if the facts warrant, determine that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. 2. Meetings of the Board of Directors, regular or special, may be held at any place within or without the State of Washington. The times and places for holding meetings of the Board of Directors may be fixed from time to time by resolution of the Board of Directors or (unless contrary to a resolution of the Board of Directors) in the notice of the meeting. 3. The annual meeting of the Board of Directors may be held immediately following the adjournment of the annual meeting of shareholders at the place at which the annual meeting of shareholders is held or at such other time or place fixed by resolution of the Board of Directors. 4. Special meetings of the Board of Directors shall be held whenever called by the Chairman of the Board, the President or the Secretary or by any two or more directors. Notice of each special meeting of the Board shall, if mailed, be addressed to each director at the address designated by him for that purpose or, if none is designated, at his last known address and be mailed on or before the third day before the date on which the meeting is to be held; or such notice shall be sent to each director at such address by telegraph, cable, wireless, telex or other electronic means of transmission, or be delivered to him personally, not later than the day before the date on which such meeting is to be held. Every such notice shall state the time and place of the meeting but need not state the purposes of the meeting, except to the extent required by law. If mailed, each notice shall be deemed given when deposited, with postage thereon prepaid, in a post office or official depository under the exclusive care and custody of the United States Postal Service. Such mailing shall be by first class mail. 3 ARTICLE IV EXECUTIVE AND OTHER COMMITTEES ------------------------------ 1. (a) The Board of Directors may, by resolution passed by a majority of the whole Board, designate three or more of their number to constitute an Executive Committee, and shall include therein the Chairman of the Board. The Executive Committee, except to the extent limited in the aforesaid resolution or by law, shall have and exercise, in the interval between meetings of the Board of Directors, the authority and powers of the Board of Directors in the management of the business of the corporation. (b) Meetings of the Executive Committee may be held at any time and at any place upon call of the Chairman of the Board or the Secretary or any two members of the Committee. Notice, which need not state the purpose of the meeting, shall be given orally, in writing or by telegraph not less than twenty-four hours prior to the time of the holding of said meeting, except that if a meeting is held at a time and place fixed in a resolution of the Executive Committee or the Board of Directors, no notice shall be required. (c) Three of the members of the Executive Committee shall constitute a quorum for the transaction of business and the act of three of the members of the Executive Committee present at a meeting shall be the act of the Executive Committee. All action taken by the Executive Committee shall be reported to the next meeting of the Board of Directors, unless before such meeting a copy of said minutes shall have been given to each Director. 2. (a) The Board of Directors may, by resolution passed by a majority of the whole Board, define the powers, authority, and functions of, designate the number of members and name the Chairmen and other members of such other committees of the Board of Directors as the Board shall from time to time determine. (b) Meetings of such a committee may be had at any time and at any place upon call of the Chairman of the committee, the Chairman of the Board or any other two members of the committee. Notice, which need not state the purpose of the meeting, shall be given orally, in writing or by telegraph not less than twenty-four hours prior to the time of the holding of said meeting, except that if a meeting is held at a time and place fixed in a resolution of the Committee, or the Board of Directors, no notice shall be required. (c) Two of the members of such a committee shall constitute a quorum of the committee for the transaction of its business and the act of two of the members of the committee present at a meeting shall be the act of the committee. All action taken by such a committee shall be reported to the next meeting of the Board of Directors, unless before such meeting a copy of the minutes of the committee meeting shall have been given to each Director. 4 ARTICLE V OFFICERS -------- 1. The officers of this corporation shall include those elected by the Board of Directors and those appointed by the chief executive officer. The officers of this corporation to be elected by the Board of Directors shall be: a Chairman of the Board of Directors; a President; one or more Executive Vice Presidents; one or more Senior Vice Presidents; a Secretary; a Treasurer; a General Counsel; a Controller; and a Director of Taxes. The officers of this corporation which may from time to time be appointed by the chief executive officer shall be the Vice Presidents and such additional officers and assistant officers of this corporation as he may determine. 2. At its annual meeting the Board of Directors shall elect such of the officers of this corporation as are to be elected by it and each such officer shall hold office until the next such annual meeting or until a successor shall have been duly elected and qualified or until his death, resignation, retirement or removal by the Board of Directors. A vacancy in any such office may be filled for the unexpired portion of the term at any meeting of the Board of Directors. Such of the officers of this corporation as are appointed by the chief executive officer shall serve for such periods of time as he may determine or until a successor shall have been appointed or until his death, resignation, retirement or removal from office. 3. Any Director or officer may resign his office at any time. Such resignation shall be made in writing and delivered to and filed with the Secretary, except that a resignation of the Secretary shall be delivered to and filed with the chief executive officer. A resignation so made shall be effective upon its delivery unless some other time be fixed in the resignation, and then from the date so fixed. 4. The Board of Directors may appoint and remove at will such agents and committees as the business of the corporation shall require, each of whom shall exercise such powers and perform such duties as may from time to time be prescribed or assigned by the chief executive officer, the Board of Directors or by other provisions of these bylaws. ARTICLE VI POWERS AND DUTIES OF OFFICERS ----------------------------- 1. The Chairman of the Board of Directors shall, when present, preside at all meetings of the Board of Directors, the Executive Committee, and the shareholders. The Chairman shall advise with and assist the President in any possible way, and shall perform such duties as may be assigned to him by the Board or the President. 2. The President shall be the chief executive officer of the corporation and shall be vested with general authority and control of its affairs, and over the officers, agents and employees of the corporation, subject to the Board of Directors. He shall, in the absence of the Chairman of the Board, preside at all meetings of the Board of Directors, the Executive Committee and the shareholders, and shall perform all the duties devolving upon him by law as 5 the chief executive officer of the corporation. He shall from time to time report to the Board of Directors any information and recommendations concerning the business or affairs of the corporation which may be proper or needed, and shall see that all orders and resolutions of the Board of Directors are carried into effect, and shall perform such other duties and services, not inconsistent with law or these bylaws, as pertain to his office, or as are required by the Board of Directors. 3. (a) The Executive Vice Presidents, the Senior Vice Presidents and the Vice Presidents shall have and exercise such powers and discharge such duties as may from time to time be conferred upon and delegated to them respectively, by the chief executive officer, or by these bylaws, or by the Board of Directors. (b) In the absence of the chief executive officer or in the case of his inability to act, the President, or in the absence of the President or in the case of his inability to act, the most senior Executive Vice President present, or in the absence or inability to act of any Executive Vice President, the most senior Senior Vice President present, shall be vested with all the powers and shall perform all the duties of said chief executive officer during his absence or inability to act, or until his successor shall have been elected. 4. (a) The Treasurer shall attend to the collection, receipt and disbursement of all moneys belonging to the corporation. He shall have authority to endorse, on behalf of the corporation, all checks, notes, drafts, warrants and orders, and he shall have custody over all securities of the corporation. He shall have such additional powers and such other duties as he may from time to time be assigned or directed to perform by these bylaws or by the Board of Directors or by the chief executive officer. (b) The Assistant Treasurers, in the order of their seniority, shall have all of the powers and shall perform the duties of the Treasurer in case of the absence of the Treasurer or his inability to act, and shall have such other powers and duties as they may from time to time be assigned or directed to perform. 5. (a) The Secretary shall have the care and custody of the corporate and stock books and the corporate seal of the corporation. He shall attend all meetings of the shareholders, and, when possible, all meetings of the Board of Directors and of the Executive Committee, and shall record all votes and the minutes of all proceedings in books kept for that purpose. He shall sign such instruments in behalf of the corporation as he may be authorized by the Board of Directors or by law to do, and shall countersign, attest and affix the corporate seal to all certificates and instruments where such countersigning or such sealing and attestation are necessary to the true and proper execution thereof. He shall see that proper notice is given of all meetings of the shareholders of which notice is required to be given, and shall have such powers and duties as he may from time to time be assigned or directed to perform by these bylaws, by the Board of Directors or the chief executive officer. (b) The Assistant Secretaries, in the order of their seniority, shall have all of the powers and shall perform the duties of the Secretary in case of the absence of the Secretary or his inability to act, and shall have such other powers and duties as they may from time to time be assigned or directed to perform. 6 6. The General Counsel shall attend all meetings of the shareholders and, upon request, meetings of the Board of Directors and the Executive Committee of the corporation, and act as advisor thereof, and shall have general supervision of all legal matters of the corporation, and at all times be subject to the direction of the chief executive officer and the Board of Directors of the corporation. 7. (a) The Controller shall be the chief accounting officer of the corporation with authority over and custody of the financial and property books and records of the corporation. He shall maintain adequate records of all assets, liabilities and transactions of the corporation; and shall have such additional powers and duties as he may from time to time be assigned or directed to perform by these bylaws or by the Board of Directors or by the chief executive officer. (b) The Assistant Controllers, in the order of their seniority, shall have all of the powers and shall perform the duties of the Controller in case of the absence of the Controller or his inability to act, and shall have such other powers and duties as they may from time to time be assigned or directed to perform. ARTICLE VII CERTIFICATES OF STOCK 1. All certificates of stock shall be in such form as shall be approved by the Board of Directors, shall be numbered in the order of their issue, shall be dated, shall be signed by the Chairman of the Board, the President, an Executive Vice President, a Senior Vice President, or a Vice President, and by the Secretary or an Assistant Secretary, provided, that where any such certificate is manually countersigned by a Registrar, other than the corporation or its employee, the signatures of the Chairman of the Board, President, Executive Vice President, Senior Vice President, Vice President, Secretary, or Assistant Secretary, and the Transfer Agent upon such certificates may be facsimiles. In case any officer or officers who shall have signed or whose facsimile signature or signatures shall have been used on any such certificate or certificates shall cease to be such officer or officers of the corporation, whether because of death, resignation, or otherwise, before such certificate or certificates shall have been delivered by the corporation, such certificate or certificates may nevertheless be issued and delivered by the corporation as though the person or persons who signed such certificate or certificates or whose facsimile signature or signatures were used thereon had not ceased to be such officer or officers of the corporation. 2. The corporation shall, if and whenever the Board of Directors so determines, maintain one or more transfer offices each in charge of a Transfer Agent designated by the Board of Directors where the shares of the corporation shall be directly transferable; and likewise, one or more registration offices each in charge of a Registrar designated by the Board of Directors where such certificates shall be registered. One person or corporation may be designated as both Transfer Agent and Registrar. When any such transfer and registration office or offices are maintained and the Transfer Agent or Agents and Registrar or Registrars shall have been designated for such office or offices, no certificate for shares of the corporation shall be valid unless countersigned by a Transfer Agent so designated and by a Registrar so designated. 7 3. Except as otherwise provided in the articles of incorporation or a resolution of the Board of Directors of this corporation, transfer of fractional shares shall not be made upon the records or books of the corporation, nor shall certificates for fractional shares be issued by the corporation. 4. The corporation may issue a new certificate in place of any certificate theretofore issued by it alleged to have been lost or destroyed. The Board of Directors shall require the owner of the lost, destroyed or mutilated certificate, or his legal representative, to give the corporation a bond in such sum and with such surety or sureties as it may direct, to indemnify the corporation against any claim that shall be made against it on account of the alleged loss or destruction of such certificate. 5. The Board of Directors may make such additional rules and regulations, not contrary to law or these bylaws, as it may deem expedient concerning the issue, transfer and registration of certificates for shares of the corporation. ARTICLE VIII CONTRACTS --------- The Board of Directors may authorize any officer or officers, agent or agents, to enter into any contract or to execute and deliver any instrument in the name and on behalf of the corporation, and such authority may be general or confined to specific instances; and unless so authorized by the Board of Directors or by these bylaws, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or undertaking, or to pledge its credit or to render it liable for any purpose or on any account. ARTICLE IX FISCAL YEAR ----------- The fiscal year of this corporation shall be the period beginning with the opening of business on the first Monday following the last Sunday of the preceding fiscal year, and ending with the close of business for the last Sunday of the following December. 8 ARTICLE X CORPORATE SEAL -------------- The corporate seal shall be the one of which an impression is affixed in the left hand margin hereof, bearing the words: "WEYERHAEUSER COMPANY CORPORATE SEAL STATE OF WASHINGTON" ARTICLE XI NOTICES AND WAIVERS ------------------- 1. Whenever notice is required under these bylaws or by statute, and such notice is given by mail, the time of giving such notice shall be deemed to be the time when the same is placed in the United States mail, postage prepaid, and addressed to the party to be notified, at his last known address. 2. Any shareholder, officer, director or member of the Executive Committee may waive at any time any notice required to be given under these bylaws, either by separate writing or directly upon the face of the records. ARTICLE XII INDEMNIFICATION --------------- 1. This corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that the person is or was a director, officer or employee, or who is or was serving at the request of the corporation as a director, officer, partner, trustee, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust, other enterprise, or employee benefit plan against judgments, penalties, fines, settlements and reasonable expenses actually incurred by the person in connection with such action, suit or proceeding to the fullest extent and in the manner set forth in and permitted by the Business Corporation Act of the State of Washington, and any other applicable law, as from time to time in effect. Such right of indemnification shall not be deemed exclusive of any other rights to which the person may be entitled apart from the foregoing provisions. For purposes of this Article "director, officer or employee" shall include persons who hold such positions in this corporation or in a wholly owned subsidiary, or hold, at the written request of an officer of this corporation, an equivalent position in another enterprise. The rights granted by this Article shall apply whether or not the person continues to be a director, officer or employee at the time liability or expense is incurred. 9 2. This corporation shall have power to the fullest extent permitted by the Business Corporation Act of the State of Washington to purchase and maintain insurance on behalf of any person who is, or was, a director, officer, employee or agent of this corporation or is or was serving at the request of this corporation as on officer, director, employee or agent of another corporation, partnership, joint venture, trust, other enterprise, or employee benefit plan against any liability asserted against him or incurred by him in any such capacity or arising out of his status as such, whether or not this corporation would have the power to indemnify the person against such liability under the provisions of Section 1 of this Article XII or under the Business Corporation Act of the State of Washington or any other provision of law. ARTICLE XIII 1. These bylaws may be altered, amended or repealed or new bylaws enacted by the affirmative vote of a majority of the entire Board of Directors (if notice of the proposed alteration or amendment 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 of the proposed alteration or amendment is contained in the notice of such meeting). 2. Notwithstanding anything contained in Section 1 of this Article XIII 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 this Section 2 of this Article XIII. For purposes of this Article XIII, 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. -----END PRIVACY-ENHANCED MESSAGE-----