During the year, Weyerhaeuser reduced its interest bearing debt by $35 million. Debt payments of $87 million were offset, in part, by the sale of $48 million of industrial revenue bonds. The company's debt to total capital ratio was 39 percent at the end of the year compared with 38 percent at the prior year-end.

The real estate and related assets segment reduced its long-term debt by $331 million during the year while increasing its short-term notes and commercial paper by a similar amount, leaving interest-bearing debt virtually unchanged from the end of 1997.

Cash dividends of $319 million were paid during the year; comparable to the $317 million paid in 1997. Although common share dividends have exceeded the company's target ratio in recent years, the intent, over time, is to pay dividends to common shareholders in the range of 35 to 45 percent of common share earnings. Weyerhaeuser also received intercompany dividends of $190 million and $150 million from Weyerhaeuser Real Estate Company and Weyerhaeuser Financial Services, Inc., in 1998 and 1997, respectively. These dividends are eliminated on a consolidated basis.

During the 1998 first quarter, the company expended $42 million to purchase 925,000 shares of its common stock. This completed the 11 million-share repurchase program that commenced in 1995.

To ensure its ability to meet future commitments, Weyerhaeuser Company and Weyerhaeuser Real Estate company have established unused bank lines of credit in the maximum aggregate sum of $1,050 million. Neither of the entities is a guarantor of the borrowings of the other under any of these credit facilities.

As part of the company's financing activity, derivative securities are sometimes used to achieve the desired mix of fixed versus floating rate debt and to manage the timing of finance opportunities. The company does not hold or issue derivative financial instruments for trading. The company's derivative instruments, which are matched directly against outstanding borrowings, are "pay fixed, receive variable" interest rate swaps with highly rated counterparties in which the interest payments are calculated on a notional amount. The notional amounts do not represent amounts exchanged by the parties and, thus, are not a measure of exposure to the company through its use of derivatives. The company is exposed to credit-related gains or losses in the event of nonperformance by counterparties to these financial instruments; however, the company does not expect any counterparties to fail to meet their obligations. Interest rate swaps are described as follows:

The company is a party to legal proceedings and environmental matters generally incidental to its business. Although the final outcome of any legal proceeding or environmental matter is subject to a great many variables and cannot be predicted with any degree of certainty, the company presently believes that the ultimate outcome resulting from these proceedings and matters would not have a material effect on the company's current financial position, liquidity or results of operations; however, in any given future reporting period, such proceedings or matters could have a material effect on results of operations.(See Note 14 of Notes to Financial Statements.)

Weyerhaeuser, like all other companies using computers and microprocessors, is faced with the task of addressing the Year 2000 problem before the end of 1999. The Year 2000 challenge arises from the nearly universal practice in the computer industry of using two digits rather than four digits to designate the calendar year (e.g., DD/MM/YY). This can lead to incorrect results when computer software performs arithmetic operations, comparisons or data field sorting involving years later than 1999. The company has conducted a comprehensive inventory to identify where this problem may occur in its information technology, manufacturing and facilities systems. >