-----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, WqMI2+Cxqs1cB34I+mI9vo1eTA3vqaIAfy1h3ahAIPgFpMAY9MzssdhuKv31OT0E tHBt6PBo2v/kOKJ9ABjd8A== 0000891020-97-000424.txt : 19970328 0000891020-97-000424.hdr.sgml : 19970328 ACCESSION NUMBER: 0000891020-97-000424 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: POPE & TALBOT INC /DE/ CENTRAL INDEX KEY: 0000311871 STANDARD INDUSTRIAL CLASSIFICATION: PAPER MILLS [2621] IRS NUMBER: 940777139 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07852 FILM NUMBER: 97565063 BUSINESS ADDRESS: STREET 1: 1500 SW FIRST AVE CITY: PORTLAND STATE: OR ZIP: 97201 BUSINESS PHONE: 5032289161 MAIL ADDRESS: STREET 1: 1500 S W FIRST AVE CITY: PORTLAND STATE: OR ZIP: 97201 10-K 1 FORM 10-K FOR THE FISCAL YEAR ENDED 12/31/96 1 UNITED STATES 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 31, 1996 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 1-7852 POPE & TALBOT, INC. (Exact name of registrant as specified in its charter) Delaware 94-0777139 (State or other jurisdiction (IRS Employer Identification No.) of incorporation or organization) 1500 SW 1st Avenue, Portland, Oregon 97201 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (503) 228-9161 Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange Title of each class on which registered ------------------- --------------------- Common Shares, par value $1.00 New York Stock Exchange Common Shares, par value $1.00 Pacific Stock Exchange 8-3/8% Debentures, Due June 1, 2013 None
Securities registered pursuant to Section 12(g) of the Act: None 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. / / Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / / The aggregate market value of voting stock held by nonaffiliates of the registrant is $192,359,825 as of March 11, 1997 ($15.25 per share). 13,363,779 (Number of shares of common stock outstanding as of March 11, 1997) Part I and Part II incorporate specified information by reference from the annual report to shareholders for the year ended December 31, 1996. Part III incorporates specified information by reference from the proxy statement for the annual meeting of shareholders on April 30, 1997. 2 PART I ITEM 1. BUSINESS INTRODUCTION AND DEVELOPMENTS IN 1996 Pope & Talbot, Inc. (the "Company") is engaged principally in the wood products and pulp and paper products businesses. The Company's wood products business involves the manufacture and sale of standardized and specialty lumber and wood chips. In its pulp and paper business, the Company manufactures and sells private label consumer tissue, bleached kraft pulp for newsprint and writing paper, and brokers wood chips. In December 1995, the Company entered into a definitive agreement to sell its disposable diaper business to Paragon Trade Brands, Inc. ("Paragon"). The sale of this business was completed on February 8, 1996 and the disposable diaper business results for 1995 and 1994 have been reflected as discontinued operations. A gain on the sale of the discontinued diaper business was reported in the first quarter of 1996. During 1996, wood products accounted for approximately 52 percent of the Company's revenues of $447.5 million, consumer tissue accounted for 30 percent and bleached kraft pulp and brokered wood chips combined to account for 18 percent. The Company, a Delaware corporation, was originally incorporated as a California corporation in 1940. It is the successor to a partnership formed in San Francisco, California in 1849 that acquired its first timberlands and opened a lumber mill in the Seattle, Washington area in 1853. Subsequently, the Company developed a lumber business based on timberland and facilities in the U.S. Pacific Northwest, British Columbia, Canada, and the Black Hills region of South Dakota and Wyoming. Since the mid-1980s, the Company has reduced its dependency on timber from the Pacific Northwest, where environmental concerns have sharply restricted the availability and increased the cost of public timber. At the same time, the Company has increased its operations in regions presently having more stable timber supplies, namely in British Columbia and the Black Hills region of South Dakota and Wyoming. In 1985, the Company distributed its timber and land development properties in the State of Washington to its shareholders through interests in a newly formed master limited partnership. In 1989, the Company sold its Oregon sawmill, and the Company has since sold its remaining Oregon timberlands. In 1992, the Company acquired a sawmill in Castlegar, British Columbia and related timber cutting rights. At the end of 1995, the Company permanently closed its Port Gamble, Washington sawmill. The Company currently operates five sawmills with an estimated annual capacity of 549 million board feet, of which approximately 75 percent is located in British Columbia and 25 percent in the Black Hills. In order to expand and broaden its sources of revenue, the Company acquired its pulp, consumer tissue and disposable diaper businesses in the late 1970s and 1980s. The Halsey, Oregon pulp mill produces bleached kraft pulp which is sold to a writing paper manufacturer and newsprint manufacturers in the Pacific Northwest and on the open market. The Company's private label tissue business manufactures towels, napkins, bathroom tissue and facial tissue from recycled paper at two mills in the U.S. The Company sells its tissue products under private labels to supermarkets, drugstores, mass merchandisers, food and drug distribution companies and warehouse club stores. Up to the completion of the previously mentioned diaper business sale in early 1996, the Company produced private label diapers at four mills in the U.S. The businesses in which the Company is engaged are extremely competitive, and a number of the Company's competitors are substantially larger than the Company with correspondingly greater resources. In particular, competition in the tissue products market is extremely strong in terms of price. See "Pulp and Paper Products Business - Paper Products." 2 3 Environmental regulations to which the Company is subject require the Company from time to time to incur significant operating costs and capital expenditures. In addition, as discussed herein, environmental concerns have in the past materially affected the availability and cost of raw materials used in the Company's business. See "Wood Products Business", "Pulp and Paper Products Business" and "Environmental Matters." WOOD PRODUCTS BUSINESS The Company's wood products business involves the manufacture and sale of standardized and specialty lumber and wood chips. The Company's principal wood products categories and the sales generated by each over the past three years are set forth in the following table:
Classes of Wood Products 1996 1995 1994 ------------------------ ---- ---- ---- (In thousands) Lumber $194,930 $194,350 $261,322 Wood chips 20,835 46,514 30,284 Logs and other 15,948 24,712 12,599 -------- -------- -------- Total wood products sales $231,713 $265,576 $304,205 ======== ======== ========
Although 1996 and 1995 lumber revenues were comparable, the 1996 lumber revenues reflected 17 percent higher prices than 1995 which offset 14 percent lower lumber sales volumes. The 1996 volume reduction related mainly to the permanent closure of the Company's Port Gamble, Washington sawmill in 1995, and to a lesser degree, reduced Canadian shipments. Wood chip revenues in 1996 were $25.7 million, or 55 percent, lower than 1995 reflecting residual chip prices which were down nearly 50 percent from 1995 levels combined with lower chip volumes resulting from decreased lumber production. Log sales were down in 1996 due primarily to the 1995 Port Gamble mill closure. In 1995, lumber revenues decreased $67.0 million, or 26 percent, compared with 1994. These reduced lumber revenues were due to a combination of 13 percent lower average lumber prices and 9 percent lower sales volumes. The volume decreases related to reduced Port Gamble sawmill operations and the Grand Forks, British Columbia sawmill operating at one shift, down from the two-shift basis operated prior to 1995. The 1995 wood chip revenues increased $16.2 million, or 54 percent, over 1994 as average chip prices nearly doubled which more than offset lower chip volumes. Log sales were higher in 1995 due mainly to the liquidation of Port Gamble log inventories related to the fourth quarter 1995 sawmill closure. The Company's lumber products consist principally of boards and dimension lumber, some of which are specialty, value-added items, such as stress-rated lumber. Wood chips and other similar materials are obtained as a by-product of the Company's lumber operations. The principal sources of raw material for the Company's wood products operations are timber obtained through long-term cutting licenses on public lands, logs purchased on open log markets, timber offered for sale via competitive bidding by federal agencies, and timber purchased under long-term contracts to cut timber on private lands. During 1995, the Port Gamble sawmill was either shut down or operating on a reduced one-shift basis due to a lack of acceptably priced timber in relation to end-product prices. Prior to the mill's closure, timber harvest levels in the mill's operating region had been significantly reduced as a result of environmental pressures to reduce the amount of timber available for harvest. A strong export log market further reduced domestic log supplies in the region. These reduced log volumes, combined with weakened lumber markets, resulted in operating losses at Port Gamble in 1994 and 1995 and significantly below-capacity production. With no prospect of a resolution to the timber supply situation, the Company permanently closed the Port Gamble sawmill in the fourth quarter of 1995. The assets of the facility were sold in the first quarter of 1996. 3 4 Approximately 75 percent of the Company's current lumber capacity is located in British Columbia, Canada and 25 percent in the Black Hills region of South Dakota and Wyoming. In Canada, timber requirements are obtained primarily from the Provincial Government of British Columbia under long-term timber harvesting licenses which allow the Company to remove timber from defined areas annually on a sustained yield basis. The Provincial Government of British Columbia has the authority to modify prices and harvest volumes at any time. Under the provincial stumpage pricing formula, wood costs are based on a relationship to end- product prices. Approximately 30 percent of the Company's Canadian log requirements are satisfied through open market log purchases. In the Black Hills, the Company obtains its timber from various public and private sources under long-term timber harvesting contracts in addition to buying logs on open markets. Under these Black Hills contracts, prices are subject to periodic adjustment based upon formulas set forth therein. During the early 1990s, the Company's Canadian sawmills benefited from processing additional volumes of pine timber which had been killed by the mountain pine beetle. This beetle kill volume was essentially harvested by the end of 1994. As a result, Canadian timber harvest levels were reduced and resulted in the January 1, 1995 curtailment of the Grand Forks, British Columbia sawmill to a one-shift production basis. This Grand Forks curtailment reduced lumber capacity by 60 million board feet annually, or approximately 8 percent of the Company's then existing lumber capacity. During 1994, the Provincial Government of British Columbia's Commission of Resources and Environment ("CORE") began reviewing the future use of the forest resources in the province, including reserving additional forest resources for park lands. This review was completed in 1996 and British Columbia land use policy groups are now reviewing related recommendations. Although no assurances can be given, management believes that in the near term, timber supplies for the Company's Canadian sawmills should be stable. However, based upon preliminary information, it appears that the amount of timber available to the Company's Canadian sawmills in the longer term could face downward pressure. The British Columbia government has also implemented its Forest Practices Code ("Code"). This Code communicates how companies must perform logging activities. Due to the additional activity required by this Code to protect the environment, the Company's logging costs increased in 1996 and will likely continue at these higher levels. The Code could also ultimately have a long-term impact on the Company's timber harvest volumes. During the first quarter of 1996, U.S. and Canadian trade negotiators reached an agreement establishing volume quotas on Canadian softwood lumber shipments to the U.S. The 5-year agreement took effect April 1, 1996. The quotas specify on a company by company basis the lumber volumes which may be shipped to the U.S. tariff-free and those volumes which may be shipped to the U.S. subject to a $50 per thousand board foot tariff. Shipment volumes in excess of these established quotas are subject to a $100 per thousand board foot tariff. For purposes of determining tariff levels, the quota volumes are evaluated annually during the April 1 through March 31 fiscal year, and are further measured on a quarterly basis within each fiscal year. In late October 1996, the Company was informed of its fiscal year 1996/1997 quota volumes which applied retroactively to April 1. The Company believes its volume allocations were determined consistently with other Canadian lumber companies. The Canadian government may adjust company by company allocations for future fiscal year quota periods. Since the quota agreement was enacted, domestic lumber markets have demonstrated periods of dramatic instability, including some positive and some negative movements. Due to this lumber market uncertainty resulting from this quota, the Company cannot predict with certainty the impact of these quotas on the Company's results of operations. 4 5 Marketing and Distribution. The Company's lumber products are sold primarily to wholesale distributors. Wood chips produced by the Company's sawmills are sold to manufacturers of pulp and paper in the U.S. and Canada. Logs not suitable for consumption in the Company's sawmills are sold to other U.S. and Canadian forest products companies. Marketing of the Company's wood products is centralized in its Portland, Oregon office. Although the Company does not have distribution facilities at the retail level, the Company does utilize several reload facilities around the U.S. to assist in moving the product closer to the customer. The Company sold wood products to numerous customers during 1996, the ten largest of which accounted for approximately 33 percent of total wood products sales. No single wood products customer accounted for more than 10 percent of the Company's revenues in 1996. Backlog. The Company maintains a minimal finished goods inventory of wood products. At December 31, 1996, orders were approximately $9.9 million, compared with approximately $4.7 million at December 31, 1995. This backlog represented an order file for the Company which generally would be shipped in two weeks to one month. The increase from 1995 to 1996 reflects both increased lumber sales prices and higher order volume. The higher order volume is a function of timing and poor year-end 1996 weather conditions which delayed shipments. Competition. The wood products industry is highly competitive, with a large number of companies producing products that are reasonably standardized. There are numerous competitors of the Company that are of comparable size or larger, none of which is believed to be dominant. The principal means of competition in the Company's wood products business are pricing and an ability to satisfy customer demands for various types and grades of lumber. For further information regarding amounts of revenue, operating profit and loss and identifiable assets attributable to the wood products industry segment, see Note 11 of "Notes to Consolidated Financial Statements" in the Company's 1996 Annual Report to Shareholders. PULP AND PAPER PRODUCTS BUSINESS The Company's principal pulp and paper products categories and the sales generated by each over the last three years are set forth in the following table:
Classes of Pulp and Paper Products 1996 1995 1994 ---------------------------------- ---- ---- ---- (In thousands) Tissue products $133,649 $107,013 $104,885 Bleached kraft pulp 72,410 124,361 77,950 Brokered wood chips 9,722 27,459 15,767 -------- -------- -------- Total pulp and paper products sales $215,781 $258,833 $198,602 ======== ======== ========
As discussed previously, at the end of 1995 the Company entered into a definitive agreement to sell its disposable diaper business to Paragon. The disposable diaper business results for 1995 and 1994 were reflected as discontinued operations. Revenues for the discontinued diaper business, which are excluded from the table above, were $144.0 million and $157.1 million in 1995 and 1994, respectively. In 1996, the Company reported a $3.1 million net of tax gain related to the sale of the disposable diaper business. In 1996, pulp and paper revenues decreased $43.1 million, or 17 percent, from 1995 reflecting a dramatic weakening of pulp markets which more than offset higher tissue revenues. The increase in tissue revenues in 1996 from 1995 reflected 11 percent higher prices and 12 percent higher volumes. The 1996 tissue volume improvement related mainly to 5 6 the late 1995 settlement of a seven-month labor strike at the Ransom, Pennsylvania facility. The weak 1996 pulp markets resulted in a pulp price reduction of about 35 percent compared to 1995. Pulp sales volume in 1996 was down 7 percent from 1995 due mainly to a two-week market induced shutdown in the first quarter of 1996 and a brief shutdown in the 1996 third quarter caused by an equipment failure. Lower 1996 brokered wood chip revenues resulted from a significant decrease in wood chip prices combined with lower volume. Pulp and paper revenues increased $60.2 million, or 30 percent, from 1994 to 1995 due mainly to improved pulp sales prices. The Company's pulp sales prices were nearly 70 percent higher on average in 1995 than 1994. In tissue, a 17 percent average price improvement more than offset a 13 percent drop in volume related mainly to the 1995 labor strike at Ransom. Higher brokered wood chip revenues reflected the significant chip price improvement from 1994 to 1995. 1. PAPER PRODUCTS The Company produces a line of private label consumer tissue products including towels, napkins, bathroom tissue and facial tissue. These products are sold under private and controlled labels. The raw material for the Company's tissue mills is wastepaper purchased from wastepaper dealers located in the Midwest, mid-Atlantic and on the East Coast. During 1995, wastepaper pricing was pushed to record levels by a combination of strong pulp markets and shortages of certain wastepaper grades caused primarily by the start-up of new recycled fiber mills in the U.S. As a result of these pressures, the Company's wastepaper prices during 1995 doubled over 1994 pricing. However, by year-end 1995, wastepaper prices were declining consistent with world pulp markets. This late 1995 decline accelerated through the first quarter and into the early second quarter of 1996 when prices leveled. Full year 1996 prices were about half those incurred in 1995 and approximated 1994 prices. The Company believes that there will continue to be an adequate supply of wastepaper in the foreseeable future. Marketing and Distribution. The Company utilizes its own sales force and some retail consumer products brokers to sell its products to supermarkets, drugstores, mass merchandisers, food and drug distribution companies and warehouse club stores. The Company's products enjoy national distribution; however, the majority are sold east of the Rocky Mountains. Sales to the Company's ten largest paper products customers represented 77 percent of tissue products sales in 1996. No single paper products customer accounted for 10 percent or more of total Company revenues in 1996. Backlog. At the end of 1996 the tissue order file was approximately $3.0 million compared to a backlog of approximately $4.2 million at December 31, 1995. The nature of the Company's tissue business is such that the time between order receipt and the related shipment of the order is generally less than two weeks. Due to these short lead times, order files are minimal. The lower order backlog at year-end 1996 as compared to year-end 1995 relates to timing of order receipts. The Company believes it carries an adequate finished goods inventory to meet customer order requirements. Competition. The tissue market is extremely competitive, with approximately 10 major producers. Of these, Kimberly-Clark Corporation, Fort Howard Corporation, James River Corporation and Procter & Gamble Corporation are dominant and account for approximately 65 percent of the market. Within the tissue market, the Company estimates that the private label tissue segment accounts for approximately 12 percent to 30 percent of the total, depending on the product. The principal means of competition in the tissue business are pricing, product quality and customer service. In order to effectively compete against much larger competitors which have lower cost structures, the Company's focus is to differentiate itself in the areas of customer service, consistent product quality and the use of state of the art information systems. 6 7 In the tissue business, the relationship between industry-wide capacity and operating rates significantly influences tissue pricing. Tissue industry capacity increases in the late 1980s and early 1990s resulted in capacity which exceeded demand growth causing tissue prices to decline an average of 14 percent from 1989 through 1993. This condition began to stabilize in 1994, and in 1995 industry-wide tissue operating rates improved to approximately 93 percent of capacity which, combined with high 1995 industry-wide raw material costs, generated tissue price increases for the Company at the end of 1995 of approximately 30 percent over year-end 1994 levels. The 1995 price increases were the first general price increases for the Company's tissue products since 1990. Tissue industry operating rates remained favorable in 1996. Additional industry capacity increases have been announced to come on line through 1999. These capacity increases may affect tissue pricing. 2. PULP PRODUCTS The Company owns a pulp mill at Halsey, Oregon. This mill produces bleached kraft pulp which is sold in various forms to a writing paper manufacturer and newsprint manufacturers in the Pacific Northwest and on the open market. In conjunction with the fiber acquisition program for the pulp mill, the Company brokers pulp chips for sale primarily into the export market. The total annual capacity of the mill is 180,000 air dry metric tons; 162,000 metric tons were produced in 1996, 175,000 metric tons were produced in 1995 and 158,000 metric tons were produced in 1994. In order to provide additional sales flexibility and attempt to improve margins through higher value products, the Company initiated mill modifications totaling $41 million, which were completed in early 1994, to improve pulp quality and expand pulp drying capabilities. These modifications were in addition to a $24 million oxygen delignification project which reduced the use of chlorine in the bleaching process and brought dioxin discharges into compliance with an agreement entered into with the Oregon Department of Environmental Quality on meeting target emission levels. These mill improvements have allowed the Company to expand its pulp product offerings and to dry its total pulp production, thus providing greater access to pulp markets within and outside the Pacific Northwest, which has historically been the Company's primary pulp market region. The Company has an agreement with Grays Harbor Paper L.P. ("Grays Harbor"), under which the Company supplies pulp to the Grays Harbor writing grade paper mill. Grays Harbor purchased approximately 100,000 metric tons, 103,000 metric tons and 89,000 metric tons of pulp from the Company in 1996, 1995 and 1994, respectively. All output from the paper mill is sold to one customer. In the event that the paper mill's sales to its customer are adversely impacted for any reason, sales of the Company's pulp may be adversely impacted. A significant portion of the pulp sold to the paper mill is produced from sawdust, which has historically been less expensive than softwood and hardwood chips. Pricing for this pulp sold to Grays Harbor is computed using a formula based on prices for white paper. Weyerhaeuser Company ("Weyerhaeuser") owns a pulp mill, which it upgraded and expanded, located adjacent to the North Pacific Paper Company ("Norpac") newsprint manufacturing facility in Longview, Washington. Weyerhaeuser is a part owner of Norpac. Norpac purchased 22,000 metric tons and 48,000 metric tons from the Company in 1995 and 1994, respectively. Norpac phased out its purchases from the Company in 1995 as Weyerhaeuser completed its upgrade and expansion project. As a result of the mill's pulp enhancements brought about by the previously mentioned mill modifications, the Company has been able to effectively sell the pulp volume which had previously gone to Norpac. Substantially all of the Company's wood chip and sawdust requirements for the Halsey pulp mill are satisfied through purchases by the Company from third parties. The Company has long-term chip supply contracts with sawmills in the Pacific Northwest. 7 8 Environmental concerns over timber harvests, which caused high log costs and led to the shutdown of the Company's Port Gamble sawmill, have also caused higher chip costs and reduced chip availability from historic sources at the Halsey pulp mill over the past several years. In order to provide an adequate supply of wood fiber for the mill, the Company has expanded its capability of using sawdust and hardwood chips, which historically have been less expensive than softwood chips, as raw materials for a significant portion of the production. Additionally, the Company continues to use an expanded geographic base to maintain an adequate supply of chips for the approximately 40 to 50 percent of the pulp mill's production which remains based on softwood chips. Environmental restrictions on timber harvests coupled with a strong pulp market resulted in a 71 percent increase in chip prices from year-end 1994 levels to mid 1995 levels. However, the weakening pulp market in late 1995 and early 1996 has reduced chip demand and greatly reduced chip prices from their mid 1995 highs. The Company believes there will continue to be an adequate supply of third-party chips and sawdust for the Halsey pulp mill in the foreseeable future. Marketing and Distribution. The Company utilizes its own sales force and pulp brokers to sell its pulp products. A large majority of the Company's pulp products are sold in the Pacific Northwest. In 1996, sales to Grays Harbor represented 64 percent of the Company's pulp revenues and the remaining nine largest customers accounted for an additional 23 percent of pulp revenues. Grays Harbor accounted for 10 percent of total Company revenues in 1996. Backlog. The Company's pulp customers either enter into contracts for periods of one to three years or purchase products without obligation for future purchases. The contractual customers provide the Company with annual estimates of their requirements, followed by periodic orders based on more definitive information. As of December 31, 1996, the Company's backlog of orders believed to be firm for both contractual and non-contractual customers was $17 million compared to $16 million at December 31, 1995. The increase in total order backlog reflects higher order volume which is partially offset by lower sales prices. The increase in backlog volume is due to orders amounting to $5 million from non-contractual customers at December 31, 1996, which the Company believes are firm. At December 31, 1995, there was minimal order volume to non-contractual customers believed to be firm as a consistent relationship with these customers had not been established. The backlog of pulp orders at year-end represents orders which will be filled in the first quarter of the following year. Competition. The pulp industry is highly competitive, with a substantial number of competitors having extensive financial resources, manufacturing expertise and sales and distribution organizations, most of which are larger than the Company, but none of which is believed to be dominant. The principal methods of competition in the pulp market are price, quality, volume, reliability of supply and customer service. For further information regarding amounts of revenue, operating profit and loss and identifiable assets attributable to the pulp and paper products industry segment, see Note 11 of "Notes to Consolidated Financial Statements" in the Company's 1996 Annual Report to Shareholders. ENVIRONMENTAL MATTERS The Company is subject to federal, state, provincial and local air, water and land pollution control, solid and hazardous waste management, disposal and remediation laws and regulations in all areas where it has operations. Compliance with these laws and regulations generally requires operating costs as well as capital expenditures. It is difficult to estimate the costs related solely to environmental matters of many capital projects which have been completed in the past or which may be required in the future. Changes required to comply with 8 9 environmental standards will affect other areas such as facility life and capacity, production costs, changes in raw material requirements and costs and product value. The Environmental Protection Agency ("EPA") has published proposed regulations which would establish standards and limitations for non-combustion sources under the Clean Air Act and revised regulations under the Clean Water Act. These proposals are collectively referred to as the "cluster rules" and have been the subject of extensive discussions between the pulp and paper industry and the EPA. The Company's primary exposure to these proposals relates to the Company's Halsey pulp mill, and to a much lesser degree the Company's two tissue mills. Based on preliminary evaluations of the proposed rules, the costs of required modifications to the Company's mills could range from $15 million to $30 million. The proposed rules could become effective in mid 1997 with compliance required as early as the year 2000. It is estimated that during 1996, capital expenditures for environmental controls amounted to less than $1 million. It is expected that capital expenditures will continue into the future and may increase over time. Based on the understanding of future compliance standards, expenditures for such purposes, with the exception of expenditures related to cluster rule compliance beginning in 1998, are currently estimated to be minimal in 1997 and 1998. However, the ultimate outcome of future compliance is uncertain due to various factors such as the interpretation of environmental laws, potential introduction of new environmental laws and evolving technologies. In response to environmental concerns in Western Oregon and Western Washington, specifically the preservation of old-growth forests and wildlife habitat, substantial amounts of federal timberlands have been set aside as wilderness areas. This has affected and may continue to affect the amount and cost of timber obtainable from public agencies in this region. Currently, the Company's exposure in this region is the Halsey, Oregon pulp mill. The Halsey pulp mill is affected by the decrease in timber availability since its primary raw materials, wood chips and sawdust, are by-products of the lumber manufacturing process. The Company believes that, based on existing wood chip and sawdust availability both within the Willamette Valley region of Oregon and from other sources discussed previously, wood chip and sawdust resources will be adequate for the Company's requirements at the Halsey pulp mill in the foreseeable future. In Canada during 1994, the Provincial Government of British Columbia's Commission of Resources and Environment ("CORE") began reviewing the future use of the forest resources in the province, including reserving additional forest resources for park lands. This review was completed in 1996 and British Columbia land use policy groups are now reviewing related recommendations. Although no assurances can be given, management believes that in the near term, timber supplies for the Company's Canadian sawmills should be stable. However, based upon preliminary information, it appears that the amount of timber available to the Company's Canadian sawmills in the longer term could face downward pressure. The British Columbia government has also implemented its Forest Practices Code ("Code"). This Code communicates how companies must perform logging activities. Due to the additional activity required by this Code to protect the environment, the Company's logging costs increased in 1996 and will likely continue at these higher levels. The Code could also ultimately have a long-term impact on the Company's timber harvest volumes. In 1992, the Company was contacted by the local governmental owner of a vacant industrial site in Oregon on which the Company previously conducted business. The owner informed the Company that the site has been identified as one containing creosote and coal tar, and that it plans to undertake a voluntary cleanup effort of the site. The owner has requested that the Company participate in the cost of the cleanup. The Company is currently participating in the investigation stage of this site with remediation and monitoring to occur over several years, likely beginning in 1998. Based on preliminary findings, the Company has 9 10 estimated the likely total cost to all parties of remediation and monitoring to be in the range of $5 to $12 million and that no amount within this range is more likely an outcome than another. The company has established reserves for environmental remediation and monitoring related to this site in an amount it believes is probable and reasonably estimable. The Company believes it is reasonably possible that the costs associated with the cleanup of this site may exceed cost estimates upon which current accruals are based by amounts which may range from insignificant up to approximately $7 million over several years. The ultimate cost to the Company for the cleanup cannot be predicted with certainty due to the unknown magnitude of the contamination, the varying costs of alternative cleanup methods, the cleanup time frame possibilities, the evolving nature of remediation technologies and governmental regulations and the inability to determine the Company's share of multi-party obligations or the extent to which contributions will be available from other parties. The Company has not assumed it will bear the entire cost of remediation to the exclusion of other known potentially responsible parties, who may be jointly and severally liable, and probable recoveries from insurance carriers. EMPLOYEES At December 31, 1996, the Company employed approximately 2,300 employees of whom 1,900 were paid hourly and a majority of which were members of various labor unions. Approximately 55 percent of the Company's employees were associated with the Company's wood products business, 43 percent were associated with the Company's pulp and paper business and 2 percent were corporate management and administration personnel. FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES The Company's foreign manufacturing operations consist of three lumber mills located in Canada. The Company's wood products business is heavily dependent on foreign operations in that the three Canadian sawmills account for approximately 75 percent of the Company's lumber capacity. See "Wood Products Business" for discussion on a U.S. and Canada agreement establishing volume quotas on Canadian softwood lumber shipments to the U.S. The Company's primary exports are pulp sold to Europe and brokered wood chips sold to Japan. The Company's export sales from the United States were $23.8 million for 1996, $26.3 million for 1995 and $18.2 million for 1994. Of the 1996 export sales, 47 percent were to Japan and 45 percent were to Europe. Financial information regarding the Company's domestic and foreign operations is included in Note 11 of "Notes to Consolidated Financial Statements" on page 29 and 30 of the Company's 1996 Annual Report to Shareholders. 10 11 ITEM 2. PROPERTIES WOOD PRODUCTS PROPERTIES 1. Mills and Plants The following tabulation briefly states the location, character, capacity and 1996 production of the Company's lumber mills:
Estimated Annual 1996 Location Capacity (3) Production(3) - -------- ------------ ------------- Spearfish, South Dakota 110,000,000 bd. ft.(1) 108,000,000 bd. ft. Newcastle, Wyoming 32,000,000 bd. ft.(1) 32,000,000 bd. ft. Grand Forks, British Columbia 60,000,000 bd. ft.(2) 51,000,000 bd. ft. Midway, British Columbia 145,000,000 bd. ft.(2) 143,000,000 bd. ft. Castlegar, British Columbia 211,000,000 bd. ft.(2) 215,000,000 bd. ft.
(1) Based on operating two shifts, five days per week for the Spearfish, South Dakota lumber mill and one shift, five days per week for the Newcastle, Wyoming lumber mill. (2) Based on operating two shifts, five days per week for the Midway and Castlegar, British Columbia mills and one shift, five days per week for the Grand Forks, British Columbia mill. These capacities reflect reduced operations resulting from timber license quota limitations. (3) Wood chips are produced as a result of the operation of the Company's lumber mills. It is estimated that the aggregate annual capacity for such production is 300,000 bone dry units. In 1996, 288,000 bone dry units were produced. The Company believes that its wood products manufacturing facilities are adequate and suitable for current operations. The Company owns all of its wood products manufacturing facilities. PULP AND PAPER PROPERTIES 1. Tissue Mills The following table briefly states the location, character, capacity and 1996 production of the Company's tissue products manufacturing facilities:
Estimated Annual 1996 Location Capacity(1) Production - -------- ----------- ---------- Eau Claire, Wisconsin 55,000 tons 54,000 tons Ransom, Pennsylvania(2) 55,000 tons 49,000 tons
(1) Based on normal industry practice of operating three shifts per day, seven days per week, less scheduled downtime. (2) Ransom's below-capacity production reflects the rebuilding of the customer base that had eroded due to a seven-month labor strike in 1995. The Company believes that its tissue manufacturing facilities are adequate and suitable for current operations. The Company owns all of its tissue production facilities. 11 12 2. Pulp Mill The Company owns a bleached kraft pulp mill near Halsey, Oregon. In 1996, 162,000 air dry metric tons of pulp were produced, compared with an estimated annual capacity of 180,000 metric tons. The Company believes that its pulp facility is adequate and suitable for current operations. ITEM 3. LEGAL PROCEEDINGS In 1985, shareholders of the Company approved a Plan of Distribution pursuant to which all of the Company's timber properties and development properties and related assets and liabilities in the State of Washington were transferred to newly-formed Pope Resources, A Delaware Limited Partnership, with interests in the partnership distributed to the Company's shareholders on a pro rata basis. The Company assigned to the assets transferred a distribution value for federal income tax purposes based upon the public trading price of the partnership interests at the time of distribution. The Internal Revenue Service (IRS) has asserted that the Company owes additional federal income tax in connection with this transaction and the Company has disputed this asserted tax liability. The issue was argued before the U.S. Tax Court (Tax Court) during 1995. In March 1997, the Tax Court rendered a decision which will become final when the Company and the IRS agree to the tax liability to be based upon the Court's decision. Based on the Company's interpretation of the Tax Court's decision, the Company believes the additional tax due in this matter, if any, will not have a material adverse effect on the Company's financial position. The final tax settlement, if any, will be recognized as a reduction in equity with respect to the partnership transaction. Primarily in 1995, the Company incurred costs defending its tax position in this case. In 1995, these defense costs, together with related tax settlements and interest charges totaling $4.9 million, net of tax benefits of $1.4 million, were recognized as a reduction in equity. In December 1996, the IRS proposed certain adjustments pertaining to transactions between the Company and its wholly-owned Canadian subsidiary, resulting in the assertion that additional taxes were due for the tax years 1993 and 1994. The Company believes it has substantial defenses against this claim and plans to vigorously defend its position. The Company believes, based upon consultation with independent tax counsel, that any tax ultimately due in this matter would not have a material adverse effect on the Company's financial position, results of operations or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 12 13 EXECUTIVE OFFICERS OF THE REGISTRANT WHO ARE NOT DIRECTORS In addition to the executive officers who are also directors of the Company, the following executive officers are not directors: CARLOS M. LAMADRID, 61, Senior Vice President, Secretary, and Chief Financial Officer since August 1987. ABRAM FRIESEN, 54, Vice President - Division Manager, Wood Products Division since February 1996. WILLIAM G. FROHNMAYER, 58, Vice President - Division Manager, Fiber Products Division since August 1987. All officers hold office at the pleasure of the Board of Directors. PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS Pope & Talbot, Inc. common stock is traded on the New York and Pacific stock exchanges under the symbol POP. The number of shareholders at year-end 1996 and 1995 were 1,153 and 1,243, respectively. The high and low sales prices for the common stock on the New York Stock Exchange and the dividends paid per common share for each quarter in the last two fiscal years are shown below:
Sales price per share Cash dividends High Low per share ---- --- --------- 1996 1st Quarter $ 15-3/8 $ 13-1/4 $ .19 2nd Quarter 17-5/8 13-1/4 .19 3rd Quarter 16-7/8 14-1/8 .19 4th Quarter 16-1/8 14-7/8 .19 ----- $ .76 1995 1st Quarter $ 16-7/8 $ 15-1/8 $ .19 2nd Quarter 17-7/8 15-3/8 .19 3rd Quarter 17 15-1/4 .19 4th Quarter 15-5/8 12-1/2 .19 ----- $ .76
ITEM 6. SELECTED FINANCIAL DATA Information required by Item 6 of Part II is presented in the table entitled "Five Year Summary of Selected Financial Data" on page 10 of the Company's 1996 Annual Report to Shareholders. Such information is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by Item 7 of Part II is presented on pages 11 through 17 of the Company's 1996 Annual Report to Shareholders. Such information is incorporated herein by reference. 13 14 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by Item 8 of Part II is presented on pages 18 through 31 of the Company's 1996 Annual Report to Shareholders. Such information is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The information required by Item 10 of Part III is presented on page 12 as a separate item entitled "Executive Officers of the Registrant Who are Not Directors" in Part I of this Report on Form 10-K and on pages 2 and 3 (under the item entitled "Certain Information Regarding Directors and Officers") of the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders on April 30, 1997. Such information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 of Part III is presented on page 5 and pages 7 through 14 of the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders on April 30, 1997. Such information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 of Part III is presented on page 4 and page 6 of the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders on April 30, 1997. Such information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) Financial Statements The financial statements listed in the accompanying Index to Financial Statements and Financial Statement Schedules are filed as part of this annual report. (a) (2) Schedules All schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the related schedule, or because the information required is included in the financial statements and notes thereto. (a) (3) Exhibits The following exhibits are filed as part of this annual report. 14 15
Exhibit No. - ----------- 2.1 Asset Purchase Agreement by and among Paragon Trade Brands, Inc., PTB Acquisition Sub, Inc., Pope & Talbot, Inc. and Pope & Talbot, Wis., Inc. dated December 11, 1995. (Incorporated herein by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed February 8, 1996.) 3.1 Certificate of Incorporation, as amended. (Incorporated herein by reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992.) 3.2 Bylaws. 4.1 Indenture, dated June 2, 1993, between the Company and Chemical Trust Company of California as Trustee with respect to the Company's 8-3/8% Debentures due 2013. (Incorporated herein by reference to Exhibit 4.1 to the Company's registration statement on Form S-3 filed April 6, 1993.) 4.2 Revolving Credit Agreement, dated May 6, 1992, among the Company and United States National Bank of Oregon; CIBC, Inc.; ABN AMRO Bank N.V.; Continental Bank N.A.; and Wachovia Bank of Georgia, National Association. (Incorporated herein by reference to Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992.) 4.3 Rights Agreement, dated as of April 13, 1988, between the Company and The Bank of California, as rights agent. (Incorporated herein by reference to Exhibit 4(e) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992.) 4.4 Extension Agreement, dated as of June 30, 1994, to the Revolving Credit Agreement, dated May 6, 1992, among the Company and United States National Bank of Oregon; CIBC, Inc.; ABN AMRO Bank N.V.; Continental Bank N.A.; and Wachovia Bank of Georgia, National Association. (Incorporated herein by reference to Exhibit 4.6 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994.) 4.5 Modification Agreement, dated as of October 31, 1994, to the Revolving Credit Agreement, dated May 6, 1992, among the Company and United States National Bank of Oregon; CIBC, Inc.; ABN AMRO Bank N.V.; Continental Bank N.A.; and Wachovia Bank of Georgia, National Association. (Incorporated herein by reference to Exhibit 4.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994.) 4.6 Modification Agreement, dated as of December 31, 1994, to the Revolving Credit Agreement, dated May 6, 1992, among the Company and United States National Bank of Oregon; CIBC, Inc.; ABN AMRO Bank N.V.; Continental Bank N.A.; and Wachovia Bank of Georgia, National Association. (Incorporated herein by reference to Exhibit 4.8 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994.) 4.7 Extension/Modification Agreement, dated as of June 30, 1995, to the Revolving Credit Agreement, dated May 6, 1992, among the Company and United States National Bank of Oregon; CIBC, Inc.; ABN AMRO Bank N.V.; Bank of America Illinois, fka Continental Bank; and Wachovia Bank of Georgia, National Association. (Incorporated herein by reference to Exhibit 4.7 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995.)
15 16
4.8 Modification Agreement dated as of October 16, 1995, to the Revolving Credit Agreement, dated May 6, 1992, among the Company and United States National Bank of Oregon; CIBC, Inc.; ABN AMRO Bank N.V.; Bank of America Illinois; and Wachovia Bank of Georgia, National Association. (Incorporated herein by reference to Exhibit 4.8 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995.) 4.9 Modification Agreement, dated as of January 22, 1996, to the Revolving Credit Agreement, dated May 6, 1992, among the Company and United States National Bank of Oregon; CIBC, Inc.; ABN AMRO Bank N.V.; Bank of America Illinois; and Wachovia Bank of Georgia, National Association. (Incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed February 8, 1996.) 4.10 Revolving Line of Credit Agreement, dated July 25, 1996, between the Company and United States National Bank of Oregon. 4.11 Modification Agreement, dated as of November 18, 1996, to the Revolving Credit Agreement, dated May 6, 1992, among the Company and United States National Bank of Oregon; CIBC, Inc.; ABN AMRO Bank N.V.; Bank of America Illinois; and Wachovia Bank of Georgia, National Association. 10.1 Executive Compensation Plans and Arrangements --------------------------------------------- 10.1.1 Stock Option and Appreciation Plan. (Incorporated herein by reference to Exhibit 10(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992.) 10.1.2 Executive Incentive Plan. (Incorporated herein by reference to Exhibit 10(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992.) 10.1.3 Restricted Stock Bonus Plan. (Incorporated herein by reference to Exhibit 10(c) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992.) 10.1.4 Deferral Election Plan. (Incorporated herein by reference to Exhibit 10(d) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992.) 10.1.5 Supplemental Executive Retirement Income Plan. (Incorporated herein by reference to Exhibit 10(e) to the Company's Annual Report on Form 10-K for the year ended December 31, 1990.) 10.1.6 Form of Severance Pay Agreement among the Company and certain of its executive officers. (Incorporated herein by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 1990.) 10.1.7 1996 Non-Employee Director Stock Option Plan. (Incorporated herein by reference to Exhibit 10.1.7 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.) 10.2 Lease agreement between the Company and Pope Resources, dated December 20, 1985, for Port Gamble, Washington sawmill site. (Incorporated herein by reference to Exhibit 10(g) to the Company's Annual Report on Form 10-K for the year ended December 31, 1990.)
16 17
10.3 Lease agreement between the Company and Shenandoah Development Group, Ltd., dated March 14, 1988, for Atlanta diaper mill site as amended September 1, 1988 and August 30, 1989. (Incorporated herein by reference to Exhibit 10(h) to the Company's Annual Report on Form 10-K for the year ended December 31, 1990.) 10.4 Lease agreement between the Company and Shenandoah Development Group, Ltd., dated July 31, 1989, for additional facilities at Atlanta diaper mill as amended August 30, 1989 and February 1990. (Incorporated herein by reference to Exhibit 10(i) to the Company's Annual Report on Form 10-K for the year ended December 31, 1990.) 10.5 Grays Harbor Paper L.P. Amended and Restated Pulp Sales Supply Contract, dated September 28, 1994 (with certain confidential information deleted). (Incorporated herein by reference to Exhibit 10(j) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994.) 10.6 Province of British Columbia Tree Farm License No. 8, dated March 1, 1995. (Incorporated herein by reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.) 10.7 Province of British Columbia Tree Farm License No. 23, dated March 1, 1995. (Incorporated herein by reference to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.) 10.8 Province of British Columbia Forest License A18969, dated December 1, 1993. (Incorporated herein by reference to Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.) 11.1 Statement showing computation of per share earnings. 13.1 Portions of the annual report to shareholders for the year ended December 31, 1996 which have been incorporated by reference in this report. 21.1 Listing of parents and subsidiaries. 23.1 Consent of Arthur Andersen LLP. 27.1 Financial Data Schedule.
The undersigned registrant hereby undertakes to file with the Commission a copy of any agreement not filed under exhibit item (4) above on the basis of the exemption set forth in the Commission's rules and regulations. (b) Reports on Form 8-K No reports on Form 8-K were filed during the three months ended December 31, 1996. 17 18 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Annual Report to Shareholders ------------ Report of Independent Public Accountants 17 Consolidated balance sheets at December 31, 1996 and 1995 18 Consolidated statements of income for each of the three years in the period ended December 31, 1996 19 Consolidated statements of stockholders' equity for each of the three years in the period ended December 31, 1996 20 Consolidated statements of cash flows for each of the three years in the period ended December 31, 1996 21 Notes to consolidated financial statements 22-30 Supplementary information: Quarterly financial information (unaudited) 31
All schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes thereto. The consolidated financial statements listed in the above index are included in the Annual Report to Shareholders of Pope & Talbot, Inc. for the year ended December 31, 1996 are hereby incorporated by reference. With the exception of the pages listed in the above index and the items referred to in Items 1, 6, 7 and 8, the 1996 Annual Report to Shareholders is not to be deemed filed as part of this report. 18 19 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report incorporated by reference in this Form 10-K into the Company's previously filed Registration Statement Nos. 33-34996, 333-04223 and 33-64764 on Form S-8. ARTHUR ANDERSEN LLP Portland, Oregon March 27, 1997 19 20 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, in the City of Portland, State of Oregon, on this 27th day of March, 1997. POPE & TALBOT, INC. BY: \s\ Peter T. Pope -------------------------------------- Peter T. Pope, Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Chairman of the Board and \s\ Peter T. Pope Chief Executive Officer March 27, 1997 - ---------------------------------- ------------------------------ -------------- Peter T. Pope \s\ Gordon P. Andrews Director March 27, 1997 - ---------------------------------- ------------------------------ -------------- Gordon P. Andrews \s\ Hamilton W. Budge Director March 27, 1997 - ------------------------------------------ ------------------------------ -------------- Hamilton W. Budge \s\ Charles Crocker Director March 27, 1997 - ------------------------------------------ ------------------------------ -------------- Charles Crocker \s\ Michael Flannery President and Director March 27, 1997 - ------------------------------------------ ------------------------------ -------------- Michael Flannery \s\ Warren E. McCain Director March 27, 1997 - ------------------------------------------ ------------------------------ -------------- Warren E. McCain \s\ Robert Stevens Miller, Jr. Director March 27, 1997 - ------------------------------------------ ------------------------------ -------------- Robert Stevens Miller, Jr. \s\ Hugo G. L. Powell Director March 27, 1997 - ------------------------------------------ ------------------------------ -------------- Hugo G. L. Powell \s\ Brooks Walker, Jr. Director March 27, 1997 - ------------------------------------------ ------------------------------ -------------- Brooks Walker, Jr. Senior Vice President, Secretary and \s\ Carlos M. Lamadrid Chief Financial Officer March 27, 1997 - ------------------------------------------ ------------------------------ -------------- Carlos M. Lamadrid \s\ Robert L. Bluhm Financial Controller March 27, 1997 - ------------------------------------------ ------------------------------ -------------- Robert L. Bluhm
20 EX-3.2 2 BYLAWS OF POPE & TALBOT, INC 1 EXHIBIT 3.2 BYLAWS OF POPE & TALBOT, INC. ARTICLE I Stockholders Section 1.1 Annual Meetings. An annual meeting of stockholders shall be held for the election of directors at such date, time and place either within or without the State of Delaware as may be designated by the Board of Directors from time to time. Any other proper business may be transacted at the annual meeting. Section 1.2. Special Meetings. Special meetings of stockholders may be called at any time by the Board, or by a majority of the members of the Board, or by a committee of the Board which has been duly designated by the Board and whose powers and authority, as provided in a resolution of the Board or in the Bylaws, include the power to call such meetings, but such special meetings may not be called by any other person or persons; provided, however, that if and to the extent that any special meeting of stockholders may be called by any other person or persons specified in any provisions of the Certificate of Incorporation or any amendment thereto or any certificate filed under Section 151(g) of the Delaware General Corporation Law (or any successor thereto), then such special meeting may also be called by the person or persons, in the manner, at the times and for the purposes so specified. A special meeting shall be held at such date, time and place either within or without the State of Delaware as may be stated in the notice of the meeting. Section 1.3. Notice of Meetings. Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by law, the written notice of any meeting shall be given not less than ten nor more than sixty days before the date of the meeting to each stockholder entitled to vote at such meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the Corporation. Section 1.4. Adjournments. Any meetings of stockholders, annual or special, may adjourn from time to time to reconvene at the same or some other place, and notice need not be given of any such adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting 1 2 the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 1.5. Quorum. At each meeting of stockholders, except where otherwise provided by law, the holders of a majority of the outstanding shares of each class of stock entitled to vote at the meeting, present in person or represented by proxy, shall constitute a quorum. For purposes of the foregoing, two or more classes or series of stock shall be considered a single class if the holders thereof are entitled to vote together as a single class at the meeting. In the absence of a quorum the stockholders so present may, by majority vote, adjourn the meeting from time to time in the manner provided by Section 1.4 of these Bylaws until a quorum shall attend. Shares of its own capital stock belonging on the record date for the meeting to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the Corporation, shall neither be entitled to vote nor be counted for quorum purposes; provided, however, that the foregoing shall not limit the right of the Corporation to vote stock, including but not limited to its own stock, held by it in a fiduciary capacity. Section 1.6. Organization. Meetings of stockholders shall be presided over by the Chairman of the board, or in his absence by the President, or in his absence by a Senior Vice President, or in their absence by a Vice President, or in the absence of the foregoing persons by a chairman designated by the Board of Directors, or in the absence of such designation by a chairman chosen at the meeting. The Secretary shall act as secretary of the meeting, but in his absence the chairman of the meeting may appoint any person to act as secretary of the meeting. Section 1.7. Voting; Proxies. Each stockholder entitled to vote at any meeting of stockholders shall be entitled to vote for each share of stock held by him which has voting power upon the matter in question, except to the extent that the Certificate of Incorporation provides for cumulative voting with respect to the election of directors. Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for him by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or another duly executed proxy bearing a later date with the Secretary of the Corporation. Voting at meetings of stockholders need not be by written ballot and need not be conducted by inspectors unless the holders of a majority of the outstanding shares of all classes of stock entitled to vote thereon present in person or by proxy at such meeting shall so determine. 2 3 Section 1.8. Fixing Date for Determination of Stockholders of Record. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect to any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. If no record date is fixed: (1) the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; and (2) the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for the adjourned meeting. Section 1.9. List of Stockholders Entitled to Vote. The Secretary shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for the purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any stockholder who is present. Section 1.10. Notice of Stockholder Business and Nominations. (A) Annual Meetings of Stockholders. (1) Nominations of persons for election to the Board of Directors of the Corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of the stockholders (a) pursuant to the Corporation's notice of meeting, (b) by or at the direction of the Board of Directors or (c) by any stockholder of the Corporation who was a stockholder of record at the time of giving of notice provided for in this Bylaw, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Bylaw. (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of paragraph (A) (1) of this Bylaw, the stockholder must have given timely notice in conformance with the requirements of this Bylaw, thereof in writing to the Secretary of the Corporation and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive 3 4 offices of the Corporation not later than the close of business on the 90th day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the stockholder to be timely must be so delivered not later than the close of business on the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by the Corporation. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the corporation which are beneficially owned by such person, (iv) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the stockholder, and (v) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934 (the "1934 Act") (including without limitation such person's written consent to being named in the proxy statement, if any, as a nominee and to serving as a director if elected); and (b) as to any other business that the stockholder proposes to bring before the meeting (i) a brief description of the business desired to be brought before the meeting, (ii) the reasons for conducting such business at the meeting, (iii) any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made and (iv) any other information which is required to be disclosed in solicitations of proxies on behalf of any such business, and specifically, any such information called for by Items 4 and 5 of Regulation 14A under the 1934 Act regarding such other business, the proponent of such other business and any associates or persons who would be deemed "participants" under Regulation 14A were the proponent soliciting proxies on behalf of such other business. All such notices shall include (i) a representation that the person sending the notice is a shareholder of record and will remain such through the record date for the meeting, (ii) the name and address, as they appear on the corporation's books, of such shareholder, (iii) the class and number of the corporation's shares which are owned beneficially and of record by such shareholder, and (iv) a representation that such shareholder intends to appear in person or by proxy at such meeting to make the nomination or move the consideration of other business set forth in the notice. (3) Notwithstanding anything in the second sentence of paragraph (A)(2) of this Bylaw to the contrary, in the event that the number of directors to the Board of Directors of the Corporation is increased and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board of Directors at least 70 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this Bylaw shall also be considered timely, but only with respect to nominees for any new positions created by 4 5 such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation. (B) Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting (a) by or at the direction of the Board of Directors or (b) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in this Bylaw, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Bylaw. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Corporation's notice of meeting, if the stockholder's notice required by paragraph (A)(2) of this Bylaw shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 90th day prior to such special meeting or the 10th day following the day on which public announcement is first made on the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a stockholder's notice as described above. (C) General. (1) Only such persons who are nominated in accordance with the procedures set forth in this Bylaw shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Bylaw. Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, the chairman of the meeting shall refuse to acknowledge the nomination of any person or the consideration of any business not made in compliance with the foregoing procedures. (2) For purposes of this Bylaw, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this Bylaw, a stockholder shall also comply with all applicable requirements of the 1934 Act and the rules and regulations thereunder with respect to the matters set forth in this Bylaw. Nothing in this Bylaw shall be deemed to affect any rights (i) of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under 5 6 the 1934 Act or (ii) of the holders of any series of Preferred Stock to elect directors under specified circumstances. ARTICLE II Board of Directors Section 2.1. Powers; Number; Qualifications. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors, except as may be otherwise provided by law. The authorized number of directors shall be nine (9), and such number shall not be changed except by a Bylaw amending this section duly adopted by the Board or duly adopted by the Stockholders pursuant to the terms of Article SIXTH of the Certificate of Incorporation. Directors need not be stockholders. Section 2.2. Election; Term of Office; Resignation; Removal; Vacancies. Each director shall hold office until the expiration of his term and until his successor is elected and qualified or until his earlier resignation or notice to the Board of Directors or to the President or the Secretary of the Corporation. Such resignation shall take effect at the time specified therein, and unless otherwise specified therein no acceptance of such resignation shall be necessary to make it effective. Any director or the entire Board of Directors may be removed, with cause, by the holders of a majority of the shares then entitled to vote at an election of directors. Vacancies and newly created directorships resulting from any increase in the authorized number of directors or from any other cause may be filled by a majority of the directors then in office, although less than a quorum, or by the sole remaining director. Section 2.3. Regular Meetings. A regular annual organizational meeting of the Board of Directors shall be held without other notice than this Bylaw at such time as the Board of Directors may specify within twenty-four (24) hours after, and at the same place as, the annual meeting of stockholders, for the purpose of electing officers and conducting any other business which may properly be considered. The Board of Directors may provide for the time and place of other regular meetings from time to time by resolution, and no notice need be given of such regular meetings. Section 2.4. Special Meetings. Special meetings of the Board of Directors may be held at any time or place within or without the State of Delaware whenever called by the Chairman of the Board, by the President or by any two directors. Notice of all special meetings of the Board shall be given to each director by two days' service of the same by telegram, by letter, or personally. Such notice may be waived by any director and any meeting shall be a legal meeting without notice having been given if all the directors shall be present thereat or if those not present shall, either before or after the meeting, sign a written waiver of notice of, or a consent to, such meeting or shall after the meeting sign an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or be made a part of the minutes of the meeting. 6 7 Section 2.5. Telephonic Meetings Permitted. Members of the Board of Directors, or any committee designated by the Board, may participate in a meeting of the Board or of such committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Bylaw shall constitute presence in person at such meeting. Section 2.6. Quorum; Vote Required for Action. At all meetings of the Board of Directors a majority of the entire Board shall constitute a quorum for the transaction of business. The vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board. In case at any meeting of the Board a quorum shall not be present, the members of the Board present may adjourn the meeting from time to time until a quorum shall attend. Section 2.7. Organization. Meetings of the Board of Directors shall be presided over by the Chairman of the Board, or in his absence by the President, or in his absence by the Vice President of Finance, or in his absence by a Senior Vice President, or in their absence by a chairman chosen at the meeting. The Secretary shall act as secretary of the meeting, but in his absence the chairman of the meeting may appoint any person to act as secretary of the meeting. Section 2.8. Action by Directors Without a Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board or of such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors. Section 2.9 Compensation of Directors. The Board of Directors shall have the authority to fix the compensation of directors. ARTICLE III Committees Section 3.1. Committees. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation, 7 8 and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of dissolution, removing or indemnifying directors or amending these Bylaws; and, unless the resolution expressly so provides, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of the stock. Section 3.2. Committee Rules. Unless the Board of Directors otherwise provides, each committee designated by the Board may adopt, amend and repeal rules for the conduct of its business. In the absence of a provision by the Board or a provision in the rules of such committee to the contrary, a majority of the entire authorized number of members of such committee shall constitute a quorum for the transaction of business, the vote of a majority of the members present at a meeting at the time of such vote if a quorum is then present shall be the act of such committee, and in other respects each committee shall conduct its business in the same manner as the Board conducts its business pursuant to Article II of these Bylaws. ARTICLE IV Officers Section 4.1. Number and Term. The officers of the Corporation shall be the Chairman of the Board, the President, a Vice President of Finance, who shall be the chief financial officer of the Corporation and a Secretary, all of which shall be chosen by the Board of Directors. In addition, the Board of Directors may, but is not required to, appoint such other officers as may be deemed expedient for the proper conduct of the business of the Corporation, including but not limited to one or more other Executive Vice Presidents, one or more Senior Vice Presidents, one or more Vice Presidents, a Corporate Controller, a Treasurer, one or more Assistant Secretaries and one or more Assistant Treasurers, each of whom shall have such authority and perform such duties as the Board of Directors or the Chief Executive Officer may from time to time determine. Upon action of the Board of Directors, any Vice President may be named as an Executive Vice President or a Senior Vice President. The following officers of the Corporation shall be elected annually at the regular or organizational meeting of the Board of Directors held after the annual meeting of stockholders and shall serve at the pleasure of the Board of Directors: Chairman of the Board, President, Vice President of Finance, Secretary and such other officers as the Board of Directors may determine. The Chairman of the Board shall be elected from the members of the Board of Directors. If officers are not chosen at such meeting of the Board of Directors, they shall be chosen as soon thereafter as shall be convenient. Each officer shall hold office until his successor shall have been duly chosen or until his removal or resignation. 8 9 Section 4.2. Removal and Resignation. Any officer chosen by the Board of Directors may be removed at any time, with or without cause, by the affirmative vote of a majority of all the members of the Board of Directors. Any officer chosen by the Board of Directors may resign at any time by giving written notice of said resignation to the Corporation. Unless a different time is specified therein, such resignation shall be effective upon its receipt by the Chairman of the Board, the President, the Secretary or the Board of Directors. Section 4.3. Vacancies. A vacancy in any office because of any cause may be filled by the Board of Directors for the unexpired portion of the term. Section 4.4. Chairman of the Board. The Chairman of the Board shall, when present, preside at all meetings of the stockholders and of the Board of Directors and shall be the chief executive officer and general manager of the Corporation. As chief executive officer he shall exercise the general supervision of the property, affairs and business of the Corporation, shall sign or countersign or authorize another officer to sign all certificates, contracts, and other instruments of the Corporation as authorized by the Board of Directors, shall make reports to the Board of Directors and the stockholders, and shall perform all such other duties as are incident to such office or are properly required by the Board of Directors. Section 4.5. President. Subject to the provisions of Section 4.4 above, the President shall be the chief operating officer of the Corporation and perform all such other duties as are incident to such office or are properly required by the Board of Directors. Section 4.6. Absence or Disability of the Chief Executive Officer. In the absence or disability of the Chairman of the Board, the President shall act as the chief executive officer. The Chairman of the Board shall at all times have on file with the Secretary his written designation of the officer from time to time so designated by him to act as the chief executive officer in his absence or disability and in the absence or disability of the President. In the case of absence or inability to act of any other officer of the Corporation and of any person herein authorized to act in his place, the Board of Directors may from time to time delegate the powers or duties of such officer to any other officer, or any director or other person whom it may select. Section 4.7. Vice President of Finance. The Vice President of Finance shall be the chief financial officer of the Corporation. Such officer shall have custody of all moneys and securities of the Corporation and shall keep regular books of account. Such officer shall disburse the funds of the Corporation in payment of the just demands against the Corporation, or as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the Board of Directors from time to time as may be required of such officer, an account of all transactions and of the financial condition of the Corporation. Such officer shall perform all duties incident to such office or which are properly required by the Board of Directors or by the chief executive officer. 9 10 Section 4.8. Executive Vice Presidents. The Executive Vice Presidents shall perform such duties and have such other powers as may from time to time be assigned and conferred upon them by the Board of Directors or by the chief executive officer. Section 4.9. Senior Vice Presidents and Vice Presidents. The Senior Vice Presidents and the Vice Presidents shall respectively perform such duties and have such powers as may from time to time be assigned and conferred upon them by the Board of Directors or by the chief executive officer, and shall perform such other duties and have such other powers as may be reasonably incident to their respective offices. Section 4.10. Secretary. The Secretary shall see that notices for all meetings are given in accordance with the provisions of these Bylaws and as required by law, shall keep minutes of all meetings, shall have charge of the seal and the corporate books, and shall make such reports and perform such other duties as are incident to such office or which are properly required by the Board of Directors or by the chief executive officer. The Assistant Secretary or the Assistant Secretaries, in the order of their seniority, shall, in the absence or disability of the Secretary, or in the event of such officer's refusal to act, perform the duties and exercise the powers and discharge such duties as may be assigned from time to time by the Board of Directors or by the chief executive officer. Section 4.11. Treasurer. The Treasurer shall, in the absence or disability of the Vice President of Finance, or in the event of such officer's refusal to act, perform the duties and exercise the powers of the Vice President of Finance, and shall have such powers and discharge such duties as may be assigned from time to time by the Board of Directors or by the chief executive officer. Section 4.12. Corporate Controller. The Corporate Controller shall perform such duties and have such powers as may be from time to time assigned and conferred upon him by the Board of Directors or by the chief executive officer, and shall perform such other duties and have such other powers as may be reasonably incident to such office. Section 4.13. Subordinate Officers. The Board of Directors may from time to time elect such subordinate officers as it may deem desirable. Each such officer shall hold office for such period, and shall have such authority and perform such duties, as the Board of Directors or the chief executive officer may from time to time prescribe. The Board of Directors may authorize any officer to appoint subordinate officers and to prescribe the powers and duties thereof. Section 4.14. Compensation. The Board of Directors shall have power to fix the compensation of all officers and employees of the Corporation. It may appoint one or more committees with authority to fix the compensation of officers and employees, it 10 11 may authorize the chief executive officer or any officer upon whom the power of appointing subordinate officers may have been conferred to fix the compensation of subordinate officers, and it may authorize an individual to fix the salaries and wages of non-officer employees. No officer shall be prevented from receiving a salary or other compensation from the Corporation by reason of the fact that such officer is also a director of the Corporation. ARTICLE V Stock Section 5.1. Certificates. Every holder of stock in the Corporation shall be entitled to have a certificate signed by or in the name of the Corporation by the Chairman of the Board of Directors, or the President or a Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, of the Corporation, certifying the number of shares owned by him in the Corporation. If such certificate is manually signed by one officer or manually countersigned by a transfer agent or by a registrar, any other signature on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. Section 5.2. Lost, Stolen or Destroyed Stock Certificates; Issuance of New Certificates. The Corporation may issue a new certificate of stock in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. ARTICLE VI Miscellaneous Section 6.1. Fiscal Year. The fiscal year of the Corporation shall be determined by the Board of Directors. Section 6.2. Seal. The Corporation may have a corporate seal which shall have the name of the Corporation inscribed thereon and shall be in such form as may be approved from time to time by the Board of Directors. The corporate seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. 11 12 Section 6.3. Waiver of Notice of Meetings of Stockholders, Directors and Committees. Whenever notice is required to be given by law or under any provision or the Certificate of Incorporation or these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors, or members of a committee of directors need be specified in any written waiver of notice. Section 6.4. Indemnification of Directors, Officers and Employees. (a) The 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 (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise or as a member of any committee or similar body, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, that he had reasonable cause to believe that his conduct was unlawful. (b) The 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 or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or as a member of any committee or similar body, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the Corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the Corporation unless and only to the extent that the Court of Chancery or the court in which 12 13 such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. (c) Any indemnification under Section 6.4(a) or Section 6.4(b) of the Bylaws (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Sections 6.4(a) and 6.4(b) of the Bylaws. Such determination shall be made (i) by the Board by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (ii) if such a quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (iii) by the stockholders. (d) Notwithstanding the other provisions of this Section, to the extent that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 6.4(a) or Section 6.4(b) of the Bylaws, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. (e) Expenses incurred in defending a civil or criminal action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board in the specific case upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the Corporation as authorized in this Section. (f) The indemnification provided by this Section shall not be deemed exclusive and is declared expressly to be nonexclusive of any other rights to which those seeking indemnification may be entitled under any Bylaws, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (g) Upon resolution passed by the Board, the Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise or as a member of any committee or similar body against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, 13 14 whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Section. (h) For the purposes of this Section, references to "the Corporation" include in addition to the resulting corporation any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise or as a member of any committee or similar body shall stand in the same position under the provisions of this Section with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (i) To assure indemnification under this Section of all such persons who are determined by the Corporation or otherwise to be or to have been "fiduciaries" of any employee benefit plan of the corporation which may exist from time to time, references to "other enterprises" shall be deemed to include such an employee benefit plan, including, without limitation, any plan of the Corporation which is governed by the Act of Congress entitled "Employee Retirement Income Security Act of 1974," as amended from time to time; the corporation shall be deemed to have requested a person to serve an employee benefit plan where the performance by such person of his duties to the Corporation also imposes duties on, or otherwise involves services by, such person to the plan or participants or beneficiaries of the plan; excise taxes assessed on a person with respect to an employee benefit plan pursuant to such Act of Congress shall be deemed "fines"; and action taken or omitted by a person with respect to an employee benefit plan in the performance of such person's duties for a purpose reasonably believed by such person to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the Corporation. Section 6.5. Interested Directors; Quorum. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association or other organization in which one or more of its directors or officers are directors or officers, or have financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if: (1) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (2) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically 14 15 approved in good faith by vote of the stockholders; or (3) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board, a committee thereof or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board or of a committee which authorizes the contract or transaction. Section 6.6. Representation of Shares in Other Corporations. Shares of other corporations standing in the name of this Corporation may be voted or represented and all incidents thereto may be exercised on behalf of the Corporation by the Chairman of the Board, the President, the Executive Vice President(s) or any Vice President and the Treasurer or the Secretary or an Assistant Secretary. Section 6.7. Authorized Signatures. All written instruments shall be binding upon the Corporation if signed on its behalf by any two of the following officers of the Corporation: the Chairman of the Board, the Vice Chairman, the President, the Executive Vice President(s), the Senior Vice President(s) and the Vice Presidents. Section 6.8. Form of Records. Any records maintained by the Corporation in the regular course of its business, including its stock ledger, books of account and minute books, may be kept on, or be in the form of, punch cards, magnetic tape, photographs, microphotographs or any other information storage device, provided that the records so kept can be converted into clearly legible form within a reasonable time. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect the same. Section 6.9. Amendment of Bylaws. These Bylaws may be amended or repealed, and new Bylaws adopted, by the Board of Directors, but the stockholders entitled to vote may adopt additional Bylaws and may amend or repeal any Bylaw whether or not adopted by them, provided that such stockholder action is approved by the affirmative vote of the holders of not less than two-thirds of the total voting power of all outstanding shares of stock of the Corporation entitled to vote in the election of directors, considered for purposes of this Section as one class. 15 EX-4.10 3 REVOLVING LINE OF CREDIT 1 EXHIBIT 4.10 PROMISSORY NOTE $10,000,000.00 Portland, Oregon Dated as of: July 25, 1996 POPE & TALBOT, INC. ("BORROWER") UNITED STATES NATIONAL BANK OF OREGON ("LENDER") 1. PROMISE TO PAY. For value received Borrower promises to pay to Lender or order at its Oregon Commercial Loan Servicing Center the unpaid principal balance of this note, with interest thereon at the rate specified in this Note. 2. TYPE OF CREDIT. This note is given to evidence Borrower's obligation to repay all sums which Lender may from time to time advance to Borrower ("Advances") under a revolving line of credit. No advances shall be made which create a maximum principal amount outstanding at any one time under this note which exceeds $10,000,000 ("Maximum Amount"). However, Advances hereunder may be borrowed, repaid and reborrowed, and the aggregate Advances loaned hereunder from time to time may exceed such maximum amount. 3. OPTIONAL ADVANCES. Each new Advance and extension of the Maturity Date for any existing Advance shall be made by Lender in its sole discretion and at its sole option. Lender is under no obligation and has not committed to make any Advance hereunder. Lender may, at any time for any reason, (i) decline to make any requested Advance or to extend the Maturity Date for an existing Advance, or (ii) permanently terminate the availability of Advances on this note. 4. INTEREST RATE. (a) Subject to Section 7, each Advance hereunder shall bear interest at the Borrowing Rate agreed upon between Lender and Borrower. The Borrowing Rate for any Interest Period is the fixed rate per annum (computed on the basis of a 360-day year and the actual number of days elapsed) quoted by Lender to Borrower for an Advance for such Interest Period, based on such factors as Lender in its sole discretion determines to be relevant, and is not necessarily the lowest rate of interest which Lender collects from any borrower or class of borrowers. "Interest Period" means, as to any Advance, a period of up to 30 days as selected by Borrower, commencing on the date the Borrowing Rate becomes applicable thereto; provided however, that (i) the first and last day of each Interest Period shall be business days; and (ii) no Interest Period shall be selected which would extend beyond 364 days from date of note. The maturity date ("Maturity Date") for each Advance shall be the last day of the applicable Interest Period. (b) Whenever Borrower wishes to request a new Advance or a new Maturity Date for an outstanding Advance, Borrower shall submit a request to Lender for a Borrowing Rate quote. Each such request shall be given by the person(s) authorized in Section 10 of this note and shall specify the proposed effective date, amount, Interest Period and Maturity Date of the Advance, and whether Borrower is requesting a new Advance or a new Maturity Date for an outstanding Advance. If Lender is willing to make the Advance, Lender shall promptly quote to Borrower the applicable Borrowing Rate. Within 60 minutes of receiving a Borrowing Rate quotation, Borrower may request an Advance at the Borrowing Rate in the amount and for the Interest Period specified in its request for a Borrowing Rate quote, which request shall be irrevocable. (c) Upon payment of all or any portion of any Advance on a date other than the Maturity Date, including without limitation acceleration under Section 7, Borrower shall pay to Lender on demand such amount as Lender reasonably determines is equivalent to all direct or indirect losses, expenses, liabilities, or reductions in yield to Lender resulting therefrom, whether incurred in connection with liquidation or reemployment of funds or otherwise. 5. COMPUTATION OF INTEREST. All interest on this note will be computed at the applicable rate based on a 360-day year and applies to the actual number of days elapsed. Page 1 2 6. PAYMENT SCHEDULE. (a) PRINCIPAL. The principal balance of each Advance shall be paid (i) on the Maturity Date for such Advance, unless Lender in its sole discretion agrees to establish a new Borrowing Rate and Maturity Date for such Advance and (ii) on demand ("Final Maturity Date"). (b) INTEREST. All accrued interest on each Advance shall be paid on the last day of each Interest Period and on the Final Maturity Date. 7. DEFAULT. (a) Without prejudice to Lender's right to decline to make any requested Advance, each of the following shall be an event of default: (i) Borrower fails to make any payment when due; (ii) Borrower fails to perform or comply with any term, covenant or obligation in this note or in any other agreement or loan Borrower has with Lender; (iii) Borrower defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to repay this note or perform Borrower's obligations under this note or any related documents; (iv) any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect; (v) Borrower becomes insolvent, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against borrower under any bankruptcy or insolvency laws; (vi) any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender; (vii) any material adverse change in Borrower's financial condition or management or Lender in good faith deems itself insecure. (b) Upon the occurrence of an event of default, Lender may declare the entire unpaid principal balance on this note and all accrued unpaid interest immediately due and payable, without notice. Upon default, including failure to pay upon the Final Maturity Date, Lender, at its option, may also, if permitted under applicable law, increase the interest rate on this note to a rate equal to the Lender's prime rate plus 2%. Lender's prime rate is the rate of interest which Lender from time to time establishes as its prime rate and is not, for example, the lowest rate of interest which Lender collects from any borrower or class of borrowers. When Lender's prime rate is applicable, the interest rate hereunder shall be adjusted without notice effective on the day Lender's prime rate changes, but in no event shall the rate of interest be higher than allowed by law. 8. LATE CHARGE. If any payment of principal or interest is 5 or more days past due, Borrower will be charged a late charge of 5% of the delinquent payment. 9. EVIDENCE OF PRINCIPAL BALANCE; PAYMENT ON DEMAND. Holder's records shall, at any time, be conclusive evidence of the unpaid principal balance and interest owing on this note. Not withstanding any other provisions of this note, in the event holder makes Advances hereunder which result in an unpaid principal balance on this note which at any time exceeds the Maximum Amount, Borrower agrees that all such Advances, with interest, shall be payable on demand. Page 2 3 10. REQUESTS FOR ADVANCES. (a) Any Advance may be made upon the request (either in writing or orally and promptly confirmed in writing) of any one of the following person(s) and any person or persons otherwise authorized to execute and deliver promissory notes to Lender on behalf of Borrower. Norene DeLance Dennis Bunday Carlos Lamadrid (b) All advances shall be disbursed by deposit directly to Borrower's account number 179-0012-296 at the SW 2nd & Columbia Branch of Lender. (c) Borrower agrees that Lender shall have no obligation to verify the identity of any person making any request pursuant to this Section 10, and Borrower assumes all risks of the validity and authorization of such requests. In consideration of Lender agreeing, at its sole discretion, to make Advances upon such requests, Borrower promises to pay holder, in accordance with the provisions of this note, the principal balance together with interest thereon and other sums due hereunder, although any Advances may have been requested by a person or persons not authorized to do so. 11. NOTICES. Any notice hereunder may be given by ordinary mail, postage paid and addressed to Borrower at the last known address of Borrower as shown on holder's records. If Borrower consists of more than one person, notification of any of said persons shall be complete notification of all. Notice may be given either before or reasonably soon after the effective date of the change. 12. ATTORNEY FEES. Whether or not litigation or arbitration is commenced, Borrower promises to pay all costs of collecting overdue amounts. Without limiting the foregoing, in the event that holder consults an attorney regarding the enforcement of any of its rights under this note or any document securing the same, or if this note is placed in the hands of an attorney for collection or if suit or litigation is brought to enforce this note or any document securing the same, Borrower promises to pay all costs thereof including such additional sums as the court or arbitrator(s) may adjudge reasonable as attorney fees, including without limitation, costs and attorney fees incurred in any appellate court, in any proceeding under the bankruptcy code, or in any receivership and post-judgment attorney fees incurred in enforcing any judgment. 13. WAIVERS; CONSENT. Each party hereto, whether maker, co-maker, guarantor or otherwise, waives diligence, demand, presentment for payment, notice of non-payment, protest and notice of protest and waives all defenses based on suretyship or impairment of collateral. Without notice to Borrower and without diminishing or affecting Lender's rights or Borrower's obligations hereunder, Lender may deal in any manner with any person who at any time is liable for, or provides any real or personal property collateral for, any indebtedness of Borrower to Lender, including the indebtedness evidenced by this note. Without limiting the foregoing, Lender may, in its sole discretion: (a) make secured or unsecured loans to Borrower and agree to any number of waivers, modifications, extensions and renewals of any length of such loans, including the loan evidenced by this note; (b) impair, release (with or without substitution of new collateral), fail to perfect a security interest in, fail to preserve the value of, fail to dispose of in accordance with applicable law, any collateral provided by any person; (c) sue, fail to sue, agree not to sue, release, and settle or compromise with, any person. 14. ARBITRATION. (a) Either lender or Borrower may require that all disputes, claims, counterclaims and defenses, including those based on or arising from any alleged tort ("Claims") relating in any way to this note or any transaction of which this note is a part (the "Loan"), be settled by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association and Title 9 of the U.S. Code. All Claims will be subject to the statutes of limitation applicable if they were litigated. This provision is void if the Loan, at the time of the proposed submission to arbitration, is secured by real property located outside of Oregon or Washington, or if the effect of the Page 3 4 arbitration procedure (as opposed to any Claims of Borrower) would be to materially impair Lender's ability to realize on any collateral securing the Loan. (b) If arbitration occurs and each party's Claim is less than $100,000, one neutral arbitrator will decide all issues; if any party's Claim is $100,000 or more, three neutral arbitrators will decide all issues. All arbitrators will be active Oregon State Bar members in good standing. All arbitration hearings will be held in Portland, Oregon. In addition to all other powers, the arbitrator(s) shall have the exclusive right to determine all issues of arbitrability. Judgment on any arbitration award may be entered in any court with jurisdiction. (c) If either party institutes any judicial proceeding relating to the Loan, such action shall not be a waiver of the right to submit any Claim to arbitration. In addition, each has the right before, during and after any arbitration to exercise any number of the following remedies, in any order or concurrently: (i) setoff; (ii) self-help repossession; (iii) judicial or non-judicial foreclosure against real or personal property collateral; and (iv) provisional remedies, including injunction, appointment of receiver, attachment, claim and delivery and replevin. 15. GOVERNING LAW. This note shall be governed by and construed and enforced in accordance with the laws of the State of Oregon without regard to conflicts of law principles; provided, however, that to the extent that Lender has greater rights or remedies under Federal law, this provision shall not be deemed to deprive Lender of such rights and remedies as may be available under Federal law. 16. DISCLOSURE. UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY LENDERS AFTER OCTOBER 3, 1989 CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE NOT FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY THE BORROWER'S RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION AND BE SIGNED BY THE LENDER TO BE ENFORCEABLE. Borrower hereby acknowledges receipt of a completed copy of this document. POPE & TALBOT, INC. By: /s/ Dennis Bunday ---------------------------------- Title: Treasurer Date: July 25, 1996 For valuable consideration, Lender agrees to the terms of the arbitration provision set forth in this note. UNITED STATES NATIONAL BANK OF OREGON By: /s/ Janice T. Thede ------------------------------------------- Title: Vice President Date: July 25, 1996 Page 4 EX-4.11 4 RELOVING CREDIT 1 EXHIBIT 4.11 MODIFICATION AGREEMENT This modification agreement is dated as of November 18, 1996, and is among POPE & TALBOT, INC., a Delaware corporation (the "Borrower"), UNITED STATES NATIONAL BANK OF OREGON ("U.S. Bank"), CIBC INC. ("CIBC"), ABN AMRO BANK N.V. ("ABN"), BANK OF AMERICA ILLINOIS ("BofA"), and WACHOVIA BANK OF GEORGIA, N.A. ("Wachovia"). Recitals A. U.S. Bank, CIBC, ABN, BofA, and Wachovia (individually a "Bank" and collectively the "Banks") and the Borrower are parties to a credit agreement dated as of May 6, 1992, as modified (the "Credit Agreement"). All of the capitalized terms used in this modification agreement (this "Agreement") are defined by the Credit Agreement. B. The Borrower and the Banks desire to enter into this Agreement to consent to the reorganization of the business structure of the Borrower's Canadian subsidiaries. NOW, THEREFORE, for value, the Borrower and the Banks agree that: 1. Consent to Formation of New Subsidiary. The Banks consent to the formation and organization by the Borrower of a new Canadian subsidiary of the Borrower to be named Pope & Talbot International, Ltd. ("International"), on the condition that the Borrower acquires and holds at all times all of the issued and outstanding securities (including stock, warrants, debentures, similar financial assets, and all related entitlements) of International. 2. Creation and Perfection of New Security Interest. The Borrower promises and agrees to promptly pledge 66% (or the maximum number of shares that may be pledged without the pledge being deemed to be dividend income to the Borrower under Section 956 of the Internal Revenue Code) of the International securities that the Borrower now owns or hereafter acquires to the Banks as collateral for payment and performance of the Borrower's obligations under the Credit Agreement. No inference should be drawn from this consent that the Banks consent to (a) the formation and/or organization of any other subsidiaries or (b) any transfer by International of the securities of Pope & Talbot, Ltd. ("Ltd."), to any third party. The Borrower promises that it will cause International to promise to U.S. Bank, in its capacity as administrative agent for Banks (the "Agent"), in writing that International will not pledge or otherwise transfer the securities or assets of Ltd. to any third party. 3. Consent to Transfer of Securities. The Banks consent to the transfer by the Borrower to International of all of the issued and outstanding securities of Ltd. when and if International becomes the Borrower's wholly-owned direct subsidiary. 4. Percentage Required to Release Collateral. It is agreed that the consent of 100% of the Banks (rather than merely the majority) is required to terminate the Bank's security interest in collateral or to release or otherwise transfer any material or essential part of or interest in the collateral heretofore or hereafter provided by the Borrower or any of its -1- 2 subsidiaries as security for payment and performance of the Borrower's obligations to the Banks under the Credit Agreement. 5. Release of Old Security Interest. The Banks instruct the Agent to release the existing pledge of the Ltd. securities to the Banks as collateral for payment and performance of the Borrower's obligations under the Credit Agreement when the transfer has been completed and when the Borrower has pledged the International securities to the Banks as provided for in section 2 above. 6. Miscellaneous. The parties agree to issue any additional documents and instruments reasonably necessary to effectuate the objectives of this Agreement. The Loan Documents will continue in full force and effect as modified by this Agreement. This Agreement may be signed in one or more counterparts but all such counterparts will constitute but one agreement. The Borrower will reimburse the Agent for the reasonable out-of-pocket costs and expenses incurred by the Agent in preparing this Agreement. 7. Effective Date. This Agreement will become effective only when the Agent has received by facsimile the signature page signed by the Borrower and the signature page(s) signed by all of the Banks. If the Borrower or a Bank delivers a facsimile of its signature, such delivery will constitute the promise of such person to deliver sufficient copies of the manually signed signature page for distribution to each other party to the Credit Agreement. POPE & TALBOT, INC. UNITED STATES NATIONAL BANK OR OREGON, Agent By /s/ C. Lamadrid By /s/ Janice T. Thede ------------------------ -------------------------- Carlos M. Lamadrid Janice T. Thede Chief Financial Officer Vice President -2- 3 UNITED STATES NATIONAL BANK OF OREGON By /s/ Janice T. Thede -------------------------- Janice T. Thede Vice President CIBC INC. ABN AMRO BANK N.V. By /s/ R.A. Mendoza By ABN AMRO NORTH AMERICA, INC., -------------------------- its agent Ray Mendoza Vice President By /s/ David McGinnis ----------------------------- David McGinnis Vice President and Director BANK OF AMERICA ILLINOIS WACHOVIA BANK OF GEORGIA, NATIONAL ASSOCIATION By /s/ Michael J. Balok By /s/ William F. Hamlet --------------------------- ----------------------------- Michael J. Balok William F. Hamlet Managing Director Senior Vice President -3- EX-11.1 5 CALCULATION OF PER SHARE EARNINGS 1 EXHIBIT 11.1 POPE & TALBOT, INC. AND SUBSIDIARIES Statement Showing Calculation of Average Common Shares Outstanding and Earnings Per Average Common Share Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994(1) ---- ---- ---- Weighted average number of common shares outstanding 13,363,779 13,363,520 13,109,640 Weighted average of common stock equivalent shares attributable to convertible debentures -- -- 249,258 Application of the "treasury stock" method to the stock option plan 13,924 3,903 108,755 ----------- ------------ ----------- Total common and common equivalent shares, assuming full dilution 13,377,703 13,367,423 13,467,653 =========== ============ =========== Net income (loss) $ 3,909,000 $(24,838,000) $15,897,000 Add: interest on convertible debentures, net of applicable income taxes -- -- 244,000 ----------- ------------ ----------- Net income (loss), assuming full dilution $ 3,909,000 $(24,838,000) $16,141,000 =========== ============ =========== Net income (loss) per common share, assuming full dilution $ .29 $ (1.86) $ 1.20 =========== ============ ===========
(1) The 1994 calculation reflects the February 1994 month-end conversion of convertible debentures to 1.5 million shares of common stock. Net income per common share, assuming full dilution in 1994 has not been reported in the Consolidated Statements of Income as threshold of 3 percent dilution has not been met. The computation of primary net income per common share is not included because the computation can be clearly determined from the material contained in this report. EX-13.1 6 PORTIONS OF ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13.1 FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
Pope & Talbot, Inc. and Subsidiaries Years ended December 31 (Dollars in thousands except per share) 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATIONS Revenues $ 447,494 $ 524,409 $ 502,807 $ 458,799 $ 404,830 Depreciation and amortization 31,440 45,066 39,061 29,303 28,564 Interest expense, net 8,792 13,784 9,322 8,714 5,622 Income (loss) from continuing operations 799 (13,796) 15,952 10,770 (7,507) Income (loss) from discontinued operations 3,110 (11,042) (55) 10,805 5,255 Cumulative effect of accounting changes -- -- -- (562) -- --------------------------------------------------------------------- Net income (loss) $ 3,909 $ (24,838) $ 15,897 $ 21,013 $ (2,252) ===================================================================== Effective tax rate 52% (32)% 40% 41% (9)% PER COMMON SHARE Income (loss) from continuing operations - primary $ .06 $ (1.03) $ 1.21 $ .92 $ (.63) Income (loss) from continuing operations - fully diluted .06 (1.03) 1.20 .85 (.63) Income (loss) from discontinued operations - primary .23 (.83) -- .93 .44 Income (loss) from discontinued operations - fully diluted .23 (.83) -- .86 .44 Effect of accounting changes - primary -- -- -- (.05) -- Effect of accounting changes - fully diluted -- -- -- (.04) -- Cash dividends .76 .76 .76 .76 .76 Stockholders' equity 13.71 14.19 17.08 15.73 14.85 YEAR-END COMMON SHARES OUTSTANDING, NET OF TREASURY STOCK 13,363,779 13,363,779 13,362,729 11,715,798 11,610,664 FINANCIAL POSITION (at December 31) Current assets $ 164,502 $ 207,252 $ 223,050 $ 169,897 $ 138,288 Properties, net 201,666 225,760 282,827 269,200 222,500 Deferred income tax assets, net 21,871 16,531 -- -- -- Other assets 19,890 22,684 33,507 16,724 8,893 --------------------------------------------------------------------- $ 407,929 $ 472,227 $ 539,384 $ 455,821 $ 369,681 ===================================================================== Current liabilities $ 87,067 $ 113,495 $ 103,576 $ 101,162 $ 79,668 Long-term obligations 29,608 30,526 28,777 27,803 24,227 Long-term debt 108,026 138,514 177,471 134,599 89,500 Deferred income tax liabilities, net -- -- 1,365 7,936 3,892 Stockholders' equity 183,228 189,692 228,195 184,321 172,394 --------------------------------------------------------------------- $ 407,929 $ 472,227 $ 539,384 $ 455,821 $ 369,681 ===================================================================== CASH FLOW Operating activities: Net income (loss) $ 3,909 $ (24,838) $ 15,897 $ 21,013 $ (2,252) Depreciation and amortization 31,440 45,066 39,061 29,303 28,564 Other (gains) losses, net (1,852) -- (13,845) -- 1,589 Gain on disposal of discontinued operations (5,604) -- -- -- -- Cumulative effect of accounting changes -- -- -- 562 -- Working capital and other (16,479) 29,519 (51,686) (13,990) 10,833 --------------------------------------------------------------------- Cash provided by (used for) operating activities 11,414 49,747 (10,573) 36,888 38,734 Investing activities: Capital expenditures (7,180) (27,777) (55,582) (82,585) (32,276) Acquisition of sawmill -- -- -- -- (19,417) Proceeds from disposal of discontinued operations 50,500 -- -- -- -- Proceeds from sale of Paragon common stock 14,902 -- -- -- -- Proceeds from sale of other properties 2,359 1,004 722 1,156 1,158 Cash provided by restructuring activities -- -- -- -- 11,480 --------------------------------------------------------------------- Cash provided by (used for) investing activities 60,581 (26,773) (54,860) (81,429) (39,055) Financing activities: Net increase (decrease) in borrowings (43,457) (16,428) 91,899 51,017 9,483 Change in restricted bond funds -- 15,458 (15,458) -- -- Partnership transaction tax settlement costs -- (4,884) -- -- -- Cash dividends (10,156) (10,156) (9,855) (8,871) (8,821) Other -- 15 1,926 1,819 229 --------------------------------------------------------------------- Cash provided by (used for) financing activities (53,613) (15,995) 68,512 43,965 891 --------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents $ 18,382 $ 6,979 $ 3,079 $ (576) $ 570 =====================================================================
10 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION POPE & TALBOT, INC. AND SUBSIDIARIES OVERVIEW Solid operating profits in the wood products segment more than offset a loss in the pulp and paper segment resulting in a return to profitability in 1996 after incurring the largest loss in the Company's history in 1995. Total 1996 net income was $3.9 million, or $.29 per share, compared to a 1995 net loss of $24.8 million, or $1.86 per share, and 1994 net income of $15.9 million, or $1.21 per share. In the first quarter of 1996, the Company completed the sale of its disposable diaper business to Paragon Trade Brands, Inc. (Paragon) and reported an after tax gain on this sale of $3.1 million, or $.23 per share. This transaction was reflected as a gain on disposal of discontinued operations in the Consolidated Statements of Income. Pope & Talbot's income from continuing operations was $0.8 million, or $.06 per share, in 1996 compared to the corresponding 1995 loss of $13.8 million, or $1.03 per share, and 1994's income of $15.9 million, or $1.21 per share. The Company's discontinued diaper business incurred a loss of $11.0 million, or $.83 per share, in 1995 after essentially breaking even in 1994. In 1996, a relatively strong housing market, and to a lesser extent, lumber market uncertainties surrounding an implemented lumber quota arrangement between the United States and Canada combined to increase the Company's lumber prices by 17 percent. This strong lumber market more than offset the impact of lower lumber shipments and poor residual chip prices. Lumber shipments declined due mainly to the permanent closure of the Company's Port Gamble, Washington sawmill in late 1995. Declining pulp prices resulted in the lower chip prices during 1996. The Company's tissue business returned to profitability in 1996, following four years of losses, reflecting higher sales prices and shipments. In addition, lower labor costs and improved operating efficiencies resulting from the late-1995 labor strike settlement at the Company's Ransom, Pennsylvania tissue mill helped tissue profitability. After generating strong earnings in 1995, the Company's pulp business incurred a loss in 1996 as the dramatic weakening of world pulp markets, which began at the end of 1995, continued throughout 1996. Lower chip prices in 1996 benefited the Company's pulp business; however, the Company produces more residual chips in its lumber business than it consumes in the pulp business, so on balance, declining chip prices were detrimental to the Company's operating results. Revenues in 1996 decreased to $447.5 million from the 1995 record sales of $524.4 million. Higher tissue and lumber prices and increased tissue shipments were more than offset by lower pulp and wood chip sales prices and reduced lumber volumes resulting in the lower 1996 revenues. LIQUIDITY AND CAPITAL RESOURCES The Company's primary source of internally generated cash is operating income before depreciation and the principal external source of cash is debt financing. Cash was also generated in 1996 from the sale of the Company's disposable diaper business. In 1996, the Company generated $35.3 million from operating income before depreciation and amortization and $65.4 million from the diaper business sale, including the associated sales of Paragon common stock. During the year, total long-term and short-term debt declined $43.5 million. This debt reduction resulted in a year-end 1996 long-term debt to total capitalization ratio of 37 percent compared to 42 percent at the end of 1995. The current ratio at December 31, 1996 was 1.9 to 1, essentially unchanged from the end of year 1995 ratio of 1.8 to 1. At the end of 1995, the Company reached an agreement to sell its diaper business to Paragon. The sale was completed on February 8, 1996. The sale included essentially all of the Company's diaper assets, except receivables. Total consideration for the sale was $63.5 million comprised of $50.5 million cash and Paragon common stock for the remainder. During the first quarter of 1996, Paragon exercised an option to repurchase 227,719 shares from the Company resulting in proceeds of $4.8 million. The remaining shares were held by the Company until the fourth quarter of 1996 at which time the remaining stock was sold to Paragon for $10.1 million. The proceeds received were used primarily to pay down bank debt. See Note 9 of Notes to Consolidated Financial Statements for further discussion of the sale of the diaper business. Cash generated from operations was $11.4 million in 1996. Operating income before non-cash charges for depreciation and amortization generated cash of $35.3 million in 1996. Reductions of accounts payable used cash 11 3 of $11.8 million due mainly to the payment of discontinued diaper business liabilities combined with payment timing changes. Income taxes payable were $2.7 million lower due mainly to the timing of recognition and payment of Canadian taxes. Collections of accounts receivables related primarily to the discontinued diaper operations generated cash of $13.6 million. Inventories increased $12.1 million due mainly to a buildup of log inventories resulting from log purchase opportunities in Canada combined with higher lumber inventories caused by poor year-end weather conditions which delayed shipments. Net deferred income tax assets increased $4.8 million resulting in a reconciling item in cash generated from operations as the income tax benefit recognized was not realized as cash. Cash provided by operations, combined with the proceeds related to the disposable diaper sale, was used to pay dividends of $10.2 million, reduce total short- and long-term debt by $43.5 million and finance capital expenditures of $7.2 million. Scheduled long-term debt repayments were $0.5 million in 1996 and are anticipated to remain at $0.5 million in 1997. Capital spending was reduced to $7.2 million in 1996 from $27.8 million in 1995 and $55.6 million in 1994. During 1993 and 1994, the Company spent record amounts upgrading and modernizing its facilities and completing necessary pollution control projects. With the projects completed in 1993 and 1994, the only significant project during 1995 was the completion of a project to improve the quality of the recycled pulp at the Eau Claire, Wisconsin tissue facility. This project was started in 1994 and was financed almost entirely from the $18.8 million Eau Claire solid waste disposal revenue bond proceeds. All other 1995 capital expenditures and all of 1996 capital expenditures were undertaken to sustain existing operations. There were no significant capital projects in process at year-end and to complete existing projects in 1997 will require about $2 million. The Company's facilities are suitable for existing operations and 1997 capital projects will be primarily to sustain existing operations with a limited number of relatively small, high-return projects. Capital spending in 1997, which is currently projected to approximate $15 million, will be funded with internally generated cash and supplemented, if necessary, with borrowings on the Company's lines of credit. Concurrent with the diaper business sale in February 1996, the Company's amount available under its revolving-credit agreement was reduced from $100 million to $75 million. Of this $75 million available revolving credit, $30 million was outstanding at December 31, 1996, leaving an unused balance of $45 million. The Company's $30 million year-end 1996 outstanding balance was borrowed in July 1996 and then paid to Pope & Talbot, Ltd., a wholly-owned Canadian subsidiary, to satisfy a portion of its intercompany account. Pope & Talbot, Ltd. has invested this $30 million in short-term cash equivalents which effectively cannot be used for current operations or debt reduction as doing so could result in substantial adverse tax consequences. After considering this additional $30 million third quarter 1996 borrowing and the related cash equivalent balance, the Company has effectively paid down $73.5 million of debt in 1996. At December 31, 1996, the Company also had a $10 million uncommitted credit line which is used primarily to facilitate cash management activities. This uncommitted credit line had no balance outstanding at year-end 1996. The impact of fluctuations in foreign currency exchange rates has not had, and is not expected to have, a significant effect on the Company's liquidity or results of operations. RESULTS OF OPERATIONS WOOD PRODUCTS The Company's wood products business, which comprised 52 percent of 1996 consolidated revenues, generated an operating profit of $22.9 million in 1996. These 1996 profits compare to 1995 and 1994 earnings of $2.7 million and $55.2 million, respectively. The 1994 lumber results represented the second most profitable year in the history of the Company's lumber business. In addition to the $55.2 million of 1994 earnings, income of $13.8 million was recognized representing the return by the U.S. government of a duty paid in 1993 and 1992 to the government for Canadian lumber sold in the U.S. Wood Products 1996 revenues of $231.7 million compared to sales of $265.6 million and $304.2 million in 1995 and 1994, respectively. The revenue reduction in 1996 relative to 1995 reflected lower lumber and residual wood chip volumes and significantly reduced wood chip prices which more than offset higher lumber prices. The 1995 decrease in sales from 1994 related to lower sales prices and volumes. 12 4 During 1994, relatively good housing markets and constrained lumber supplies resulting from environmental restrictions on Pacific Northwest timber harvests led to generally strong lumber prices. Although 1995 housing starts of 1.35 million were only slightly lower than 1994, a strong pulp market pushed residual wood chip prices to record levels which increased lumber production resulting in downward pressure on lumber pricing. Lumber prices in 1995 were 13 percent below 1994 levels. After difficult winter weather conditions across the U.S. limited upward movement of lumber sales prices early in 1996, a fairly strong housing market helped lumber prices climb steadily over the balance of the year resulting in 17 percent higher lumber prices in 1996 than those realized in 1995. Although lumber prices improved in 1996, the market for the sawmill residual wood chips in the Pacific Northwest and British Columbia has fallen dramatically since the end of 1995 reflecting weak pulp markets. The residual chip market moved up steadily during 1995 to peak levels in the last half of 1995; however, with the falling pulp markets, chip prices have fallen sharply from their peaks. The Company's 1996 chip prices were down nearly 50 percent from those obtained in 1995. Lumber shipments of 535 million board feet in 1996 were 14 percent below the 1995 lumber sales volume of 624 million board feet and compared to 1994 lumber shipments of 686 million board feet. These year-to-year volume reductions relate mainly to the permanent closure of the Company's Port Gamble sawmill in 1995, and to a lesser degree, reduced Canadian shipments. The Company's 1996 lumber production was essentially at capacity. During 1995, the Port Gamble sawmill was either shut down or operating on a reduced one-shift basis due to a lack of acceptably priced logs in relation to end-product prices. Environmental pressures have restricted timber harvest levels in the Port Gamble operating region in recent years. A strong log export market further reduced domestic log supplies in this region. These reduced log supplies resulted in significantly curtailed operations during 1994 and 1995 which, combined with weakened lumber markets, produced losses at Port Gamble. In the fourth quarter of 1995, with no prospect of resolution to the timber supply situation, the Company permanently closed the Port Gamble sawmill. The mill, which had an annual capacity of 150 million board feet, produced 87 million board feet in 1994 and 53 million board feet in 1995. The sawmill equipment was dismantled and sold in the first quarter of 1996 resulting in a pre-tax gain of $2.1 million. Following several years of accelerated timber harvest levels at the Company's Canadian operations to remove mountain pine beetle damaged trees, timber harvest levels under the Canadian timber harvesting licenses declined in early 1995 to more normal levels. With the return to more normal wood supply levels in Canada, the Company reduced its Grand Forks, British Columbia sawmill to a one-shift basis in January 1995, effectively reducing lumber capacity by 60 million board feet. During the first quarter of 1996, U.S. and Canadian trade negotiators reached an agreement establishing volume quotas on Canadian softwood lumber shipments to the U.S. The 5-year agreement took effect April 1, 1996. The quotas specify on a company by company basis the lumber volumes which may be shipped to the U.S. tariff-free and those volumes which may be shipped to the U.S. subject to a $50 per thousand board foot tariff. Shipment volumes in excess of these established quotas are subject to a $100 per thousand board foot tariff. For purposes of determining tariff levels, the quota volumes are evaluated annually during the April 1 through March 31 fiscal year, and are further measured on a quarterly basis within each fiscal year. In late October 1996, the Company was informed of its fiscal year 1996/1997 quota volumes which applied retroactively to April 1. The Company believes its volume allocations were determined consistently with other Canadian lumber companies. The Canadian government may adjust company by company allocations for future fiscal year quota periods. Since the quota agreement was enacted, domestic lumber markets have demonstrated periods of dramatic instability, including some positive and some negative movements. Due to this lumber market uncertainty resulting from this quota, the Company cannot predict with certainty the impact of these quotas on the Company's results of operations. Approximately 75 percent of the Company's current lumber capacity is located in British Columbia, Canada. During 1994, the provincial government of British Columbia's Commission of Resources and Environment (CORE) began reviewing the future use of the forest resources in the province, including reserving additional forest resources for park lands. This review was completed 13 5 in 1996 and British Columbia land use policy groups are now reviewing related recommendations. Although no assurances can be given, management believes that in the near term, timber supplies for the Company's Canadian sawmills should be stable. However, based upon preliminary information, it appears that the amount of timber available to the Company's Canadian sawmills in the longer term could face downward pressure. The British Columbia government has also implemented its Forest Practices Code (Code). This Code communicates how companies must perform logging activities. Due to the additional logging activity requirements of this Code, the Company's logging costs increased in 1996 and will likely continue at these higher levels. The Code could also ultimately have a long-term impact on the Company's timber harvest volumes. PULP AND PAPER PRODUCTS The pulp and paper segment, which produces market pulp and private label tissue, generated 48 percent of 1996 revenues. The pulp and paper segment has incurred five consecutive years of losses, although the losses in 1996 and 1995 were significantly lower than the losses in the preceding three years. Pulp and paper operating losses were $4.6 million in 1996, $1.5 million in 1995 and $23.1 million in 1994. Following four years of losses, pulp operations returned to profitability in 1995 on sharply improved pulp prices; however, the pulp market fell dramatically in late 1995 and early 1996 resulting in a loss for the operations in 1996. The Company's tissue operations were profitable in 1996 after reporting progressively larger losses during the 1992 through 1995 period. Pulp and paper revenues in 1996 of $215.8 million compared to sales of $258.8 million in 1995 and 1994 sales of $198.6 million. The 17 percent sales reduction from 1995 to 1996 reflected significantly lower pulp revenues which offset higher tissue revenues. Substantially lower pulp prices and decreased brokered wood chip sales, caused by lower chip prices and volumes, more than offset increased tissue prices and volumes resulting in the reduced revenues. Increased pulp revenues in 1995 compared to 1994 resulted from higher pulp selling prices. Tissue revenues in 1995 remained essentially unchanged from 1994 as volume lost resulting from a labor strike at Ransom was offset by higher selling prices. The Company's market pulp business comprised 18 percent of total Company revenues in 1996. Pulp pricing in 1996 was weak reflecting rapid price reductions which began in the fourth quarter of 1995 and continued in 1996. The late 1995, early 1996 price declines followed a period of improving prices which began in 1994 and continued until the 1995 fourth quarter. The Company currently sells approximately 40 to 50 percent of its pulp production into domestic and foreign markets at pricing based on market prices for various grades of pulp. The remaining pulp production is sold to the Grays Harbor Paper Company (Grays Harbor), with pricing tied to a formula based on white paper prices. During 1994, white paper prices did not increase as rapidly as market pulp pricing; however, during 1995 these paper prices increased so that by the end of 1995 the pricing obtained for the pulp sold under this pricing arrangement was higher than comparable market pulp prices. In 1996, pulp pricing under the Grays Harbor contract fell, but not as rapidly as the declines in market pulp. However, by the end of 1996, Grays Harbor and market pulp pricing had become more comparable. The Company's pulp prices were 25 percent higher in 1994 than 1993 and 1995 prices averaged 70 percent higher than those realized in 1994. Pulp prices realized in 1996 were about 35 percent lower than 1995 prices. In 1994, due to a lack of adequate drying capacity and depressed pulp prices, the Company's pulp mill operated at about 88 percent of capacity which compared to essentially full capacity in 1995 except for a one-week shutdown at the end of the year to align production with demand. During 1996, the pulp mill operated at 90 percent of capacity due to a two-week market induced shutdown in the first quarter and a brief shutdown in the third quarter caused by an equipment failure. Over several years leading up to 1996, environmental restrictions on timber harvests in the Pacific Northwest have resulted in reduced chip availability. During 1995, this supply restriction, combined with the strong pulp market, resulted in record-high residual chip prices. At the end of 1995 and continuing in 1996, reduced demand for chips resulting from the weakened pulp market caused chip prices to fall significantly. Overall, chip costs were about 35 percent lower in 1996 than 1995, while 1995 chip costs were 42 percent higher than 1994. In order to maintain an 14 6 adequate supply of wood fiber to the mill, the Company began in 1994 to use sawdust as a raw material for a portion of its pulp production. During 1996, 47 percent of pulp production came from sawdust. Sawdust has historically been in greater supply and less expensive than the wood chips normally used as the primary raw material for the pulp mill. The Company's tissue business, which comprised 30 percent of total 1996 revenues, was profitable during each quarter of 1996 after incurring increasing losses in each of the past four years. Tissue losses in 1992 through 1994 related mainly to poor industry pricing caused by late 1980's and early 1990's capacity increases. The 1995 loss was primarily the result of a seven-month labor strike at the Company's Ransom tissue mill, and to a lesser extent, high wastepaper costs. As the industry over-capacity condition stabilized in 1995 and combined with high 1995 industry-wide raw material costs, tissue pricing began to improve. As a result, 1995 reflected the first general price increase for the Company's tissue products since 1990. Company tissue prices in 1995 were 17 percent higher than 1994 prices. Overall, 1996 prices were 11 percent better than 1995 prices; however, during 1996 prices declined from beginning of year averages reflecting the Company's response to the early second quarter 6 to 8 percent average tissue price reductions implemented by Procter & Gamble and Kimberly-Clark. Tissue pricing has been fairly stable since these mid-1996 price reductions were implemented. The primary raw material component for the Company's tissue is wastepaper. Wastepaper prices generally follow the pricing trends of world pulp markets. With the combination of strong pulp markets in 1995 and shortages of certain wastepaper grades caused primarily by the start-up of new recycled fiber mills in the U.S., wastepaper pricing was pushed to record levels in 1995. As a result of these pressures, 1995 wastepaper prices doubled over 1994 levels, although by year-end 1995 wastepaper prices began to decline consistent with world pulp markets. This late 1995 decline accelerated through the first quarter and into the early second quarter of 1996 when prices leveled. Full year 1996 prices were about half those incurred in 1995 and approximated 1994 prices. The historical losses in tissue resulted not only from the poor tissue pricing, but also due to a high cost structure at the Company's Ransom tissue mill. To reduce these losses, in 1995 the Company implemented a labor contract having a revised, lower cost structure for Ransom. The union employees rejected this contract and were on strike for seven months in 1995 over this contract implementation. In December 1995, the union employees accepted a revised, lower cost contract proposal by the Company. The losses caused by the strike, which were a significant reason for the 1995 tissue loss, included costs for operating the mill with temporary workers and salaried employees and higher shipping and packaging costs, all of which were necessary to supply some of the Company's East Coast customers. During the time since the strike settlement, the Company has rebuilt business that was lost as a result of the strike. Due to implemented labor contract modifications related mainly to employee benefit reductions and work rule changes, Ransom labor costs and operating efficiencies improved in 1996 relative to 1995. After operating at only 53 percent of capacity during 1995 because of the strike, the Ransom facility increased production to approximately 88 percent of capacity for all of 1996 and production approached 95 percent of capacity in the 1996 fourth quarter. Ransom's tissue mill represents approximately 50 percent of the Company's tissue capacity. The Company's other tissue mill at Eau Claire, Wisconsin operated at capacity during 1995 and 1996. Due to the effect of the 1995 Ransom labor strike, tissue sales volumes fell 13 percent from 1994 to 1995, but rebounded 12 percent in 1996 compared to 1995. DISCONTINUED DIAPER OPERATIONS In December 1995, the Company entered into a definitive agreement to sell its disposable diaper business to Paragon. The sale was completed on February 8, 1996. Results of the disposable diaper operations for 1995 and 1994 are reflected in the Consolidated Statements of Income as losses from discontinued operations. In 1996, the Company reported an after-tax gain on the disposal of the discontinued disposable diaper business of $3.1 million, or $.23 per share. See Note 9 of Notes to Consolidated Financial Statements for further discussion of the sale of the diaper business. 15 7 OTHER MATTERS ENVIRONMENTAL Pope & Talbot, consistent with its competitors, is subject to extensive regulation by various federal, state, provincial and local agencies concerning compliance with environmental control statutes and regulations. These regulations impose limitations on the discharge of materials into the environment, as well as require the Company to obtain and operate in compliance with the conditions of permits and other governmental authorizations. The Environmental Protection Agency (EPA) has published proposed regulations which would establish standards and limitations for non-combustion sources under the Clean Air Act and revised regulations under the Clean Water Act. These proposals are collectively referred to as the "cluster rules" and have been the subject of extensive discussions between the pulp and paper industry and the EPA. The Company's primary exposure to these proposals relate to the Company's Halsey, Oregon pulp mill, and to a much lesser degree the Company's two tissue mills. Based on preliminary evaluations of the proposed rules, the costs of modifications to the Company's mills could range from $15 million to $30 million. The proposed rules could become effective in mid 1997 with compliance required as early as the year 2000. In 1992, the Company was contacted by the local governmental owner of a vacant industrial site in Oregon on which the Company previously conducted business. The owner informed the Company that the site has been identified as one containing creosote and coal tar, and that it plans to undertake a voluntary cleanup effort of the site. The owner has requested that the Company participate in the cost of the cleanup. The Company is currently participating in the investigation stage of this site with remediation and monitoring to occur over several years, likely beginning in 1998. Based on preliminary findings, the Company has estimated the likely total cost of remediation and monitoring to be in the range of $5 to $12 million. The ultimate cost to the Company for the cleanup cannot be predicted with certainty due to the unknown magnitude of the contamination, the varying costs of alternative cleanup methods, the cleanup time frame possibilities, the evolving nature of remediation technologies and governmental regulations and the inability to determine the Company's share of multi-party obligations or the extent to which contributions will be available from other parties. The Company has established reserves for environmental remediation and monitoring related to this site in an amount it believes is probable and reasonably estimable. The Company has not assumed it will bear the entire cost of remediation to the exclusion of other known potentially responsible parties (PRPs) who may be jointly and severally liable. The ability of other PRPs to participate has been taken into account based generally on the parties' financial condition and probable contribution. Anticipated recoveries from insurance carriers have been recorded to the extent their receipt is deemed probable and amounts are reasonably estimable. NET DEFERRED INCOME TAX ASSETS The net deferred income tax assets at December 31, 1996 totaled $27.3 million. The temporary differences that give rise to deferred income taxes are shown in Note 7 to the Consolidated Financial Statements. The primary deferred tax asset relates to net operating loss carryforwards for U.S. federal tax purposes. At December 31, 1996, the Company had available $85.5 million of such U.S. federal tax loss carryforwards related to U.S. federal tax losses in 1994, 1995 and 1996. Of these U.S. federal tax carryforwards, $30.2 million expire in 2009, $48.9 million expire in 2010 and $6.4 million expire in 2011. In order to utilize the U.S. net operating loss carryforwards, the Company will have to generate $85.5 million of U.S. taxable income from 1997 through 2011, or an average of about $5.7 million per year. As of December 31, 1996, the Company also has Alternative Minimum Tax (AMT) credit carryforwards of $1.1 million to be applied against regular tax. The AMT credits can be carried forward indefinitely. Management believes that the Company will have sufficient future U.S. taxable income to make it more likely than not that the U.S. net operating loss deferred tax asset will be realized. In making this assessment, management considered the net U.S. tax losses generated in 1994, 1995 and 1996 as aberrations. The negative results in 1994 and 1995 included significant losses from both the Port Gamble sawmill, which was permanently closed in 1995, and the discontinued disposable diaper business. Also, in the Company's tissue business, poor industry pricing, record high wastepaper costs and a seven-month labor strike at the Company's Ransom tissue mill combined to result in 16 8 large tissue losses during the 1994 and 1995 periods. Throughout 1995 industry tissue pricing improved and remained relatively strong during 1996. At the end of 1995 and early 1996, wastepaper costs returned to lower historical levels. Additionally, the labor strike at Ransom was settled at the end of 1995 resulting in a more competitive labor contract. As a result of these tissue business improvements, the Company's tissue operations were profitable in 1996. The 1996 U.S. taxable loss incurred related to the losses suffered in the Company's pulp operations caused by a worldwide pulp market slump. The worldwide pulp market has historically been highly cyclical. Also, there are certain tax planning strategies that could be employed to utilize a net operating loss carryforward that would otherwise expire if income generated by ordinary and recurring operations were not sufficient. Some of the strategies that would be most feasible are sale and leaseback of facilities and change in the method of tax depreciation. FACTORS THAT MAY AFFECT FUTURE RESULTS Statements in this report or in other Company communications, such as press releases, may relate to future events or the Company's future performance and such statements are forward-looking statements. Such forward-looking statements are based on present information the Company has related to its existing business circumstances. Investors are cautioned that such forward-looking statements are subject to an inherent risk that actual results may differ materially from such forward-looking statements. Factors that may result in such variances include, but are not limited to, changes in commodity prices and other economic conditions, actions by competitors, changing weather conditions and natural phenomena, actions by government authorities, uncertainties associated with legal proceedings and future decisions by management in response to changing conditions. Such factors are discussed in this Company Annual Report included in its Form 10-K as well as in Company Reports filed on Form 10-Q. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Pope & Talbot, Inc.: We have audited the accompanying consolidated balance sheets of Pope & Talbot, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. 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 Pope & Talbot, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Arthur Andersen LLP Portland, Oregon, January 17, 1997 17 9 CONSOLIDATED BALANCE SHEETS
Pope & Talbot, Inc. and Subsidiaries December 31 (Dollars in thousands except per share) 1996 1995 - ------------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 32,208 $ 13,826 Accounts receivable (Note 4) 39,170 52,931 Inventories (Notes 1, 2, 4 and 9) 81,036 68,710 Prepaid expenses (Note 7) 12,088 15,616 Discontinued operations assets held for sale (Note 9) - 56,169 ------------ ------------ Total current assets 164,502 207,252 Properties (Notes 1, 3 and 9): Plant and equipment 458,281 447,577 Accumulated depreciation (266,862) (232,199) ------------ ------------ 191,419 215,378 Land and timber cutting rights 10,247 10,382 ------------ ------------ Total properties 201,666 225,760 Other assets: Deferred income tax assets, net (Notes 1 and 7) 21,871 16,531 Goodwill, net of amortization 3,863 4,029 Other 16,027 18,655 ------------ ------------ Total other assets 41,761 39,215 ------------ ------------ $ 407,929 $ 472,227 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable (Note 4) $ 30,000 $ 43,000 Current portion of long-term debt (Note 4) 488 457 Accounts payable 16,379 26,860 Accrued payroll and related taxes 17,510 19,459 Other accrued liabilities 21,326 19,688 Income taxes (Notes 1 and 7) 1,364 4,031 ------------ ------------ Total current liabilities 87,067 113,495 Reforestation (Note 1) 16,721 16,617 Postretirement benefits (Note 6) 12,887 13,909 Long-term debt, net of current portion (Note 4) 108,026 138,514 Commitments and contingencies (Note 10) - - Stockholders' equity (Notes 1, 4, 5 and 7): Preferred stock, $10 par value, 1,500,000 shares authorized, none issued - - Common stock, $1 par value, 20,000,000 shares authorized, 13,971,605 issued 13,972 13,972 Additional paid-in capital 35,976 35,976 Retained earnings 150,563 156,810 Cumulative translation adjustments (6,172) (5,955) Common stock held in treasury, at cost (11,111) (11,111) ------------ ------------ Total stockholders' equity 183,228 189,692 ------------ ------------ $ 407,929 $ 472,227 ============ ============
The accompanying notes are an integral part of these consolidated balance sheets. 18 10 CONSOLIDATED STATEMENTS OF INCOME
Pope & Talbot, Inc. and Subsidiaries Years ended December 31 (Thousands except per share) 1996 1995 1994 - ---------------------------------------------------------------------------------------------- Revenues (Note 9) $447,494 $ 524,409 $ 502,807 Costs and expenses (Note 9): Cost of sales 419,585 510,663 457,737 Selling, general and administrative 18,475 21,309 22,842 Interest, net (Notes 1 and 4) 8,792 13,784 9,322 --------------------------------------- 446,852 545,756 489,901 Other gains (losses) (Notes 8 and 9) 1,852 -- 13,845 --------------------------------------- Income (loss) before income taxes and discontinued operations 2,494 (21,347) 26,751 Income tax provision (benefit) (Note 7) 1,695 (7,551) 10,799 --------------------------------------- Income (loss) from continuing operations 799 (13,796) 15,952 Discontinued operations (Note 9): Loss from discontinued operations (net of tax benefit of $3,949 and $34 for 1995 and 1994, respectively) -- (11,042) (55) Gain on disposal of discontinued operations (net of applicable income taxes of $2,494) 3,110 -- -- --------------------------------------- Net income (loss) $ 3,909 $ (24,838) $ 15,897 ======================================= Income (loss) per common share (Note 1): Income (loss) from continuing operations $ .06 $ (1.03) $ 1.21 Income (loss) from discontinued operations .23 (.83) -- --------------------------------------- Net income (loss) $ .29 $ (1.86) $ 1.21 =======================================
The accompanying notes are an integral part of these consolidated statements. 19 11 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Pope & Talbot, Inc. and Subsidiaries Additional Cumulative Years ended December 31 Common stock Treasury stock paid-in Retained translation (Dollars in thousands except per share) Shares Amounts Shares Amounts capital earnings adjustments - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1993 12,429,352 $12,429 (713,554) $(12,662) $ 3,370 $185,762 $(4,578) Net income -- -- -- -- -- 15,897 -- Convertible debenture conversion 1,542,253 1,543 -- -- 37,100 -- -- Purchase of treasury stock -- -- (1,946) (63) -- -- -- Issuance of shares under stock plans -- -- 106,624 1,601 388 -- -- Cash dividends ($.76 per share) -- -- -- -- -- (9,855) -- Change in translation adjustment -- -- -- -- -- -- (2,737) ------------------------------------------------------------------------------------ Balance at December 31, 1994 13,971,605 13,972 (608,876) (11,124) 40,858 191,804 (7,315) ------------------------------------------------------------------------------------ Net loss -- -- -- -- -- (24,838) -- Issuance of shares under stock plans -- -- 1,050 13 2 -- -- Cash dividends ($.76 per share) -- -- -- -- -- (10,156) -- Change in translation adjustment -- -- -- -- -- -- 1,360 Partnership transaction tax settlement costs (Note 7) -- -- -- -- (4,884) -- -- ------------------------------------------------------------------------------------ Balance at December 31, 1995 13,971,605 13,972 (607,826) (11,111) 35,976 156,810 (5,955) ------------------------------------------------------------------------------------ Net income -- -- -- -- -- 3,909 -- Cash dividends ($.76 per share) -- -- -- -- -- (10,156) -- Change in translation adjustment -- -- -- -- -- -- (217) ------------------------------------------------------------------------------------ Balance at December 31, 1996 13,971,605 $13,972 (607,826) $(11,111) $35,976 $150,563 $(6,172) ====================================================================================
The accompanying notes are an integral part of these consolidated statements. 20 12 CONSOLIDATED STATEMENTS OF CASH FLOWS
Pope & Talbot, Inc. and Subsidiaries Years ended December 31 (Thousands) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------- Cash flow from operating activities: Net income (loss) $ 3,909 $(24,838) $ 15,897 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization 31,440 45,066 39,061 Other (gains) losses (Notes 8 and 9) (1,852) -- (13,845) Gain on disposal of discontinued operations (Note 9) (5,604) -- -- Changes in assets and liabilities: Increase (decrease) in: Accounts payable (11,820) (9,876) 508 Accrued payroll and related taxes (1,893) (1,615) 2,738 Other accrued liabilities 521 3,450 (637) Income taxes (2,667) (4,569) (9,222) Reforestation 176 1,042 1,010 Postretirement benefits 462 268 837 Deferred income taxes (4,812) (15,912) (9,140) Decrease (increase) in: Receivables 13,611 18,546 (1,592) Inventories (12,080) 40,872 (32,136) Deposits on timber purchase contracts 1,092 (15) (2,154) Prepaid expenses 208 (1,169) 106 Other assets 723 (1,503) (2,004) -------------------------------------- Net cash provided by (used for) operating activities 11,414 49,747 (10,573) Cash flow from investing activities: Capital expenditures (7,180) (27,777) (55,582) Proceeds from disposal of discontinued operations (Note 9) 50,500 -- -- Proceeds from sale of Paragon Trade Brands, Inc. common stock (Note 9) 14,902 -- -- Proceeds from sale of other properties 2,359 1,004 722 -------------------------------------- Net cash provided by (used for) investing activities 60,581 (26,773) (54,860) Cash flow from financing activities: Net increase (decrease) in short-term borrowings (13,000) 23,000 9,000 Proceeds from issuance of long-term debt -- -- 83,800 Reduction of long-term debt, including current portion (30,457) (39,428) (901) Change in restricted bond funds (Note 4) -- 15,458 (15,458) Partnership transaction tax settlement costs (Note 7) -- (4,884) -- Proceeds from issuance of treasury stock, net -- 15 1,926 Cash dividends (10,156) (10,156) (9,855) -------------------------------------- Net cash provided by (used for) financing activities (53,613) (15,995) 68,512 -------------------------------------- Increase in cash and cash equivalents 18,382 6,979 3,079 Cash and cash equivalents at beginning of period 13,826 6,847 3,768 -------------------------------------- Cash and cash equivalents at end of period $ 32,208 $ 13,826 $ 6,847 ======================================
The accompanying notes are an integral part of these consolidated statements. 21 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Pope & Talbot, Inc. and Subsidiaries December 31, 1996, 1995 and 1994 1. ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Pope & Talbot, Inc. and Subsidiaries (the Company), after eliminating intercompany transactions and balances. All assets and liabilities of the Company's Canadian subsidiary are translated into United States dollars at the period-end exchange rate. Revenues and expenses are translated at the average exchange rate for the year. Translation gains and losses are reflected in stockholders' equity as cumulative translation adjustments. Net gains and losses on foreign currency transactions, which are not significant, are reflected in net income (loss). INVENTORIES Inventories are stated at the lower of cost or market. For portions of lumber and raw material inventories, cost has been determined on the last-in, first-out method. For remaining inventories, cost has been determined using the first-in, first-out and average- cost methods. Inventory costs include the cost of materials, labor and plant overhead. PLANT AND EQUIPMENT Plant and equipment is carried at cost and includes expenditures for new facilities and those expenditures which substantially increase the useful lives of existing plant and equipment. Costs of maintenance and repairs are charged to expense as incurred. Upon sale or retirement, the related cost and accumulated depreciation are removed from the accounts, with the resultant gain or loss included in income. Depreciation is computed using the straight-line method over the useful lives of respective assets. The estimated useful lives of the principal items of plant and equipment range from 3 to 20 years. The Company capitalizes interest on borrowed funds during the construction period of major capital projects. Interest capitalized is determined by applying the Company's effective interest rate to the accumulated capital costs during the construction period of a project. Total net interest costs incurred were $8,792,000, $14,040,000 and $10,257,000 for 1996, 1995 and 1994, respectively. There was no interest capitalized in 1996. Interest capitalized was $256,000 in 1995 and $935,000 in 1994. Capitalized interest is amortized over the depreciable life of related assets. The Company evaluates recoverability of long-lived assets, including goodwill, using projections of related future cash flows. Realization of these assets is dependent on generating sufficient future cash flows to recover the asset's carrying value. Although realization is not assured, management believes current long-lived asset carrying values will be recovered. These assets may become impaired in the future, however, if estimates of future cash flows are reduced. INTEREST Interest in the Consolidated Statements of Income is shown net of interest income and, as mentioned previously, capitalized interest. Interest income was $1,367,000 in 1996, $1,740,000 in 1995 and $1,760,000 in 1994. TIMBER RESOURCES In the United States, the Company obtains its timber from various public and private sources under timber harvesting contracts. Additionally, logs are purchased on open log markets. Liabilities for timber removed under harvesting contracts are not recorded until the timber is cut, as the Company generally does not incur a direct liability for, or ownership of, this timber until it has been harvested. The total volume committed under contract at December 31, 1996, and the 1997 planned contract harvest are 269,966 thousand board feet and 68,622 thousand board feet, respectively. The Company's best estimate of its total commitment at current contract rates under these contracts is approximately $66,706,000. The Company evaluates the realizability of harvesting contracts based on the estimated total cost applied to such harvests and the projected values to be realized from sales of the converted product. In Canada, the Company primarily obtains its timber from the Provincial Government of British Columbia under timber harvesting licenses. The cost assigned to these timber licenses is amortized over 50 years on a straight-line basis. The Company also purchases logs in Canada on open log markets. The Canadian timber harvesting licenses allow, but do not require, the Company to remove timber from defined areas annually on a sustained yield basis. Future allowable harvests may be adjusted if the Company does not remove timber over a five year period in accordance with the grants. As in the United States, liabilities for the cost of 22 14 timber removed are not recorded until the timber is cut as the Company does not incur a direct liability for, or ownership of, this timber until it has been harvested. GOODWILL The goodwill contained in the Consolidated Balance Sheets relates to the 1980 purchase of the Company's Eau Claire, Wisconsin facilities. This amount is being amortized on a straight-line basis over 40 years. REFORESTATION Under the Canadian timber harvesting licenses mentioned previously, the Company is responsible for the reforestation of the land from which timber is harvested. A substantial portion of the costs incurred to reforest do not occur until 10 to 15 years after the timber is harvested. The Company accrues for the total projected cost of reforestation as the timber is removed. Actual expenditures for reforestation are applied against this accrual when they are made. INCOME TAXES The Company accounts for income taxes using the liability method and deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of the enacted tax laws. The principal temporary differences are related to depreciation, net operating loss carryforwards, various tax credits, reforestation and postretirement benefits. Undistributed earnings of the Company's Canadian subsidiary totaled $131,619,000 on December 31, 1996, which, under existing law, will not be subject to United States tax until distributed as dividends. Since the earnings have been, and are intended to be, reinvested in Canadian operations, no provision has been made for any United States taxes that may be applicable thereto. Furthermore, any taxes paid to the Canadian Government on those earnings may be used in whole or in part, as credits against the United States tax on any dividends distributed from such earnings. It is not practicable to estimate the amount of unrecognized deferred United States taxes on these undistributed earnings. STATEMENTS OF CASH FLOWS The Company classifies as cash and cash equivalents, unrestricted cash on deposit in banks plus all investments having original maturities of 90 days or less. Carrying amounts of any such investments approximate fair values. The effect of exchange rate changes on cash balances held in foreign currencies is not significant. Non-cash transactions have been excluded from the accompanying Consolidated Statements of Cash Flows. Total cash expenditures for interest, net of capitalized interest, were $10,921,000, $14,898,000 and $11,465,000 for 1996, 1995 and 1994, respectively. Total cash expenditures for income taxes were $11,881,000 for 1996, $5,925,000 for 1995 and $26,484,000 for 1994. PER SHARE INFORMATION Per share information is based on the weighted average number of common shares outstanding during each year. The weighted average number of shares used to calculate net income (loss) per common share was 13,364,000 in both 1996 and 1995 and 13,110,000 in 1994. ENVIRONMENTAL MATTERS The Company recognizes a liability for environmental remediation costs when it believes it is probable a liability has been incurred and the amount can be reasonably estimated. The liabilities are based on currently available information and reflect the participation of other potentially responsible parties depending on the parties' financial condition and probable contribution. The accruals are recorded at undiscounted amounts and are reflected as other accrued liabilities in the accompanying Consolidated Balance Sheets. Recoveries of environmental remediation costs from insurance carriers are recorded as assets at such time as their receipt is deemed probable and the amounts are reasonably estimable. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. 2. INVENTORIES
(Thousands) 1996 1995 - --------------------------------------------------------------- Lumber $13,546 $ 8,720 Tissue and tissue products 10,140 13,407 Pulp 5,897 5,272 Logs 33,218 23,195 Pulp and paper raw material 6,140 8,023 Chemicals and supplies 9,996 9,341 Other 2,099 752 ------- -------- $81,036 $68,710 ======= =======
The portion of lumber and raw materials inventories determined using the last-in, first-out (LIFO) method aggregated $4,633,000 and $6,120,000 at December 31, 1996 and 1995, respectively. The cost of these LIFO 23 15 inventories valued at the lower of average cost or market, which approximates current cost, at December 31, 1996 and 1995, was $6,716,000 and $10,437,000, respectively. 3. PROPERTIES
(Thousands) 1996 1995 - ------------------------------------------------------------------------- Plant and equipment: Mills, plants and improvements $ 85,245 $ 83,679 Equipment 350,550 342,928 Mobile equipment 18,553 18,629 Construction in progress 3,933 2,341 -------- -------- $458,281 $447,577 ======== ======== Land and timber cutting rights: Land $ 5,810 $ 5,787 Canadian timber cutting rights 4,437 4,595 -------- ------- $ 10,247 $ 10,382 ======== ========
4. DEBT
(Thousands) 1996 1995 - ------------------------------------------------------------------------------------- 8.375% debentures, due 2013 $ 75,000 $ 75,000 State of Oregon Small Scale Energy Loan Program (SELP) note payable, secured by related properties, 6.55%, payable monthly through 2013 14,714 15,171 City of Eau Claire note payable, variable interest rate (4.3% at December 31, 1996), due 2014 18,800 18,800 Revolving-credit agreement, variable interest rate (6.4% at December 31, 1996) 30,000 73,000 -------- -------- Total debt 138,514 181,971 Less current debt 30,488 43,457 -------- -------- Long-term debt $108,026 $138,514 ======== ========
The Company has a revolving-credit agreement with a group of five banks, secured by inventories and accounts receivable. The agreement provides $75,000,000 of revolving credit until 1998. The interest rate associated with this agreement is based, at the option of the Company, on the Interbank (LIBOR) rate plus a variable margin ranging from 7/16 percent to 3/4 percent or the greater of the banks' prime rate during the revolving period or the Federal Funds rate plus 1/2 percent. A commitment fee of 1/4 percent per year on the total loan commitment plus 1/10 percent per year of the unused portion is paid quarterly. The Company plans to renegotiate its revolving-credit agreement during 1997; however, no assurances can be given regarding the likely outcome of such negotiations. Without successful renegotiation, the full outstanding balance on the revolving-credit agreement will be due in 1998. The Company also has an unsecured $10,000,000 short-term line of credit agreement with a domestic bank, with interest based on a negotiated rate. This line of credit is used primarily to facilitate the Company's cash management activities. As of December 31, 1996, there was no balance outstanding under this agreement. There are no commitment fees or compensating balance requirements associated with this line of credit. The various loan agreements contain, among other things, certain requirements as to maintenance of working capital and interest coverage, sale of assets, incurrence of debt and restrictions as to the payment of cash dividends. The revolving-credit agreement also limits the Company's annual capital expenditures and investments. The payment of dividends from retained earnings under all agreements was limited to $9,000,000 at December 31, 1996. Excluding repayments of the revolving-credit agreement, the annual maturities of long-term debt for the five years subsequent to December 31, 1996 are: 1997 - $488,000; 1998 - $521,000; 1999 - $556,000; 2000 - $594,000 and 2001 - - $634,000. The fair value of the 8 3/8 percent debentures at December 31, 1996 was estimated to be $71,000,000 based upon rates currently available for debt with similar terms. The Company's carrying value of other long-term debt approximates its fair value. During the fourth quarter of 1994, the City of Eau Claire, Wisconsin issued tax-exempt, adjustable rate, solid waste disposal revenue bonds. The bonds were issued to finance a wastepaper pulping improvement project at the Company's Eau Claire, Wisconsin tissue facility. Upon sale of the bonds, the City of Eau Claire loaned $18,800,000 to the Company. At December 31, 1994, the unexpended proceeds from the loan were maintained in a trust account restricted as to use for construction of the project. In 1995, the project was completed and all restricted trust funds were expended. During the first quarter of 1994, the Company initiated an underwritten call for the redemption of all of the Company's $40,000,000, 6 percent convertible subordinated debentures. As a result of this underwritten call, the Company issued 1,542,253 shares of previously unissued common stock to satisfy the $40,000,000 debt obligation. This issuance of common shares resulted in an increase in stockholders' equity of $38,643,000 ($40,000,000 less transaction fees and unamortized debt issuance costs). This non-cash transaction has been excluded from the accompanying Consolidated Statements of Cash Flows. 5. STOCK OPTION AND BONUS PLANS The Company has a stock option and appreciation plan (Option Plan) for officers and key employees. This plan is administered by the Human Resources Committee of the Board of Directors. The Committee is composed of outside Directors who are not eligible for awards. Additionally, in 1996 the Company implemented a non-employee director 24 16 stock option plan (Director Plan). At December 31, 1996, 325,302 shares were available for future grants under these plans. The Option Plan provides for granting both incentive stock options and non-qualified stock options to purchase shares of the Company's common stock at prices not less than 85 percent of fair market value on the date of grant. Options are exercisable as stated in each individual grant; however, no option may extend beyond ten years from the date of grant. The Director Plan provides for automatic option grants at designated intervals to non-employee directors over their period of continued service on the Board of Directors. Such options are granted at 100 percent of fair market value on the date of grant. Options are immediately exercisable and have a ten-year term. The Company accounts for these plans following the guidance of APB Opinion No. 25, under which no compensation cost has been recognized. SFAS No. 123, "Accounting for Stock-Based Compensation", was issued in 1995 and became effective in 1996 and, if fully adopted, changes the methods for recognition of costs on plans similar to those of the Company. Adoption of SFAS No. 123 is optional for stock option cost recognition; however, proforma disclosures are required as if the Company had adopted the cost recognition requirements under SFAS No. 123. Accordingly, the following disclosures are provided in accordance with SFAS No. 123. A summary of the status of the Company's Option Plan and Director Plan at December 31, 1996, 1995 and 1994 and changes during the years then ended in the number of shares (Shares) and the weighted average exercise price (Price) is presented below:
1996 1995 1994 ----------------- ------------------ ------------------- (Shares in thousands) Shares Price Shares Price Shares Price - --------------------- ------ ----- ------ ----- ------ ----- Outstanding at beginning of year 864 $19 704 $20 750 $19 Granted 190 15 193 16 99 30 Exercised - - (1) 15 (107) 19 Canceled (138) 19 (32) 20 (38) 20 ---- --- ---- Outstanding at end of year 916 18 864 19 704 20 ==== === ==== Exercisable at year-end 458 356 223 ==== === === Weighted average fair value of options granted during year $4.58 $5.51 ===== =====
The fair value of options granted in 1996 and 1995 is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 1996 and 1995, respectively: risk-free interest rates of 5.5 and 7.6 percent; dividend yields of 4.0 and 3.6 percent; expected volatility of 38 percent for 1996 and 1995 and expected lives of 6 years for 1996 and 1995. The following table summarizes information about stock options outstanding at December 31, 1996:
Range of exercise prices --------------------------------------- (Shares in thousands) $15 to $23 $23 to $30 Total - --------------------- ---------- ---------- ----- Options outstanding: Number outstanding 793 123 916 Remaining contractual life in years 6.5 5.5 6.4 Weighted average exercise price $17 $28 $18 Options exercisable: Number exercisable 380 78 458 Weighted average exercise price $18 $27 $19
Had compensation cost for the Company's 1996 and 1995 grants for stock-based compensation plans been determined consistent with SFAS No. 123, the Company's net income (loss) and net income (loss) per share would have approximated the following proforma amounts:
(Thousands, except per share) 1996 1995 - ----------------------------- ---- ---- Net income (loss): As reported $3,909 $(24,838) Proforma 3,387 (25,476) Net income (loss) per share: As reported $ .29 $ (1.86) Proforma .25 (1.91)
The effects of applying SFAS No. 123 in this proforma disclosure are not necessarily indicative of what can be expected in future years. SFAS No. 123 does not apply to awards prior to 1995. The Company has followed the practice of using treasury stock to fulfill its obligations under its stock option plans. When stock is issued pursuant to a stock option plan, the difference between the cost of treasury stock issued and the exercise price of the option is credited to additional paid-in capital. 6. PENSION AND OTHER POSTRETIREMENT PLANS PENSION PLANS Substantially all of the Company's employees participate in noncontributory defined-benefit pension plans. These include plans which are administered by the Company and multi-employer plans administered by various unions. Certain union employees are covered under multi-employer union pension plans. Contributions to these plans are based upon negotiated hourly rates. It is not possible to determine the amount of accumulated benefits or net assets available for benefits that apply solely to Company employees covered by these plans. All other Company participating employees are covered by noncontributory defined-benefit pension plans administered by the Company. The pension benefit for salaried employees is based on years of service and the five highest out of the last ten years of compensation. Pension benefits for employees covered under hourly plans are generally based on each employee's years of service. 25 17 The Company's funding policy regarding all of its Company administered plans is to make contributions to the plans that are between the minimum amounts required by the Employee Retirement Income Security Act (ERISA) and the maximum amounts deductible under current income tax regulations. Net periodic pension cost for 1996, 1995 and 1994 was composed of the following:
(Thousands) 1996 1995 1994 - ------------------------------------------------------------------------------------------- Company administered plans: Service cost - benefits earned by employees during the period $ 1,761 $ 2,079 $ 2,362 Interest cost on projected benefit obligation 3,778 3,602 3,287 Actual earnings from plan assets (8,253) (7,273) (2,062) Deferral of earnings (loss) from plan assets 3,679 3,277 (1,827) Net amortization and deferral (76) (28) (8) Curtailment gains (489) (691) -- ----------------------------------- Net periodic pension cost for Company administered plans 400 966 1,752 Contributions to multi-employer plans 3,714 3,984 4,288 ----------------------------------- Total net periodic pension cost $ 4,114 $ 4,950 $ 6,040 ===================================
The following table sets forth the funded status of the Company administered plans and the amounts recognized as an asset or liability in the accompanying Consolidated Balance Sheets at December 31, 1996 and 1995:
(Thousands) 1996 1995 - ---------------------------------------------------------------------------------------------------------- Plans having Plans having Plans having Plans having assets in accumulated assets in accumulated excess of benefits in excess of benefits in accumulated excess of accumulated excess of benefits assets benefits assets - ---------------------------------------------------------------------------------------------------------- Accumulated benefit obligation: Vested portion $ (30,153) $ (16,603) $ (26,707) $ (17,188) Nonvested portion (889) (957) (635) (1,088) --------------------------------------------------------------- (31,042) (17,560) (27,342) (18,276) Effect of projected future compensation levels (5,281) (332) (5,303) (352) --------------------------------------------------------------- Projected benefit obligation (36,323) (17,892) (32,645) (18,628) Plan assets at fair market value 42,629 15,602 36,231 15,428 --------------------------------------------------------------- Plan assets in excess of (less than) projected benefit obligation 6,306 (2,290) 3,586 (3,200) Unrecognized net (gain) loss (6,022) 202 (3,584) 1,121 Unrecognized prior service (40) 1,103 (164) 1,300 Balance of unrecorded transition asset from initial application of SFAS No. 87 (573) (11) (639) (84) --------------------------------------------------------------- Accrued pension liability $ (329) $ (996) $ (801) $ (863) ===============================================================
Substantially all of the pension plans' assets are invested in common stock, fixed-income securities, cash and cash equivalents. The discount rate, rate of increase in future compensation levels and expected long-term rate of return on plan assets used in determining the actuarial present value of the projected benefit obligation were 7.5 percent, 5 percent and 9 percent, respectively, for both 1996 and 1995. The Company has granted some former employees pension benefits which supplement the normal Company plan. These benefits are unfunded, general obligations of the Company. The cost associated with these grants was $75,000 in 1996, $78,000 in 1995 and $234,000 in 1994. OTHER POSTRETIREMENT PLANS The Company sponsors postretirement medical and life insurance plans for certain salaried and nonsalaried employees and eligible spouses and dependents of the employees. The medical plans pay a stated percentage of covered medical expenses incurred after deducting co-payments made once a stated deductible has been met. The life insurance plans pay a defined benefit. The Company's funding policy for these plans is to not make contributions to the plans prior to the actual incurrence of costs under the plans. Net periodic cost in 1996, 1995 and 1994 for these plans was composed of the following:
(Thousands) 1996 1995 1994 - ----------------------------------------------------------------------------------- Service cost - benefits attributed to service during the period $ 414 $ 417 $ 493 Interest cost on accumulated benefit obligation 938 899 851 Net amortization and deferral (55) (113) -- Curtailment gains (1,484) (385) -- -------------------------------- Net periodic cost (benefit) of postretirement medical and life insurance plans $ (187) $ 818 $1,344 ================================
The following table reconciles the plans' funded status to the accrued postretirement medical and life insurance cost liability in the accompanying Consolidated Balance Sheets at December 31, 1996 and 1995:
(Thousands) 1996 1995 - ----------------------------------------------------------------------- Accumulated benefit obligation: Retirees $ 4,089 $ 2,015 Other fully eligible participants 2,614 2,936 Other active participants 6,745 7,608 ------------------------- 13,448 12,559 Unrecognized actuarial gain (loss) (732) 1,065 Unrecognized prior service 171 285 ------------------------- Accrued postretirement medical and life insurance cost liability $12,887 $13,909 =========================
For measurement purposes, 9 percent and 9.5 percent rates of increase were assumed for health care costs in 1996 and 1995, respectively. The rate is assumed to decline in 1/2 percent decrements every year until it reaches 5 percent in 2004 where it will remain thereafter. A 1 percent increase in the assumed health care cost trend rates would increase the accumulated postretirement benefit obligation by $1,551,000 at December 31, 1996. The effect of this 1 percent increase on the service and interest cost components of the net periodic cost of postretirement medical and life insurance plans would be 26 18 an increase of $188,000 in 1996. The discount rate used in determining the accumulated benefit obligation was 7.5 percent in 1996 and 1995. CURTAILMENT GAINS The pension and other postretirement plans included curtailment gains in 1996 related to the disposition of the Company's disposable diaper business (see Note 9). The 1995 curtailment gains related to cost reduction efforts including the permanent closure of the Company's Port Gamble sawmill. 7. INCOME TAXES The income tax provision (benefit) consists of the following components:
(Thousands) Current Deferred Total - ------------------------------------------------------------------------- 1996 Federal $(1,146) $ (6,889) $(8,035) State 106 130 236 Canada 10,044 (550) 9,494 -------------------------------------------- $ 9,004 $ (7,309) $ 1,695 ============================================ 1995 Federal $ - $ (9,479) $(9,479) State - (1,011) (1,011) Canada 2,986 (47) 2,939 -------------------------------------------- $ 2,986 $(10,537) $(7,551) ============================================= 1994 Federal $(2,357) $ (6,792) $(9,149) State - (1,076) (1,076) Canada 22,334 (1,310) 21,024 -------------------------------------------- $19,977 $ (9,178) $10,799 ============================================
The income tax provision (benefit) was different from the amount computed by applying the United States statutory federal income tax rate as follows:
(Thousands) 1996 1995 1994 - ------------------------------------------------------------------------------------ Income (loss) before income taxes and discontinued operations: United States $(14,608) $(28,176) $(26,889) Canada 17,102 6,829 53,640 ------------------------------ $ 2,494 $(21,347) $ 26,751 ============================== United States: U.S. statutory federal income tax $ (5,113) $ (9,862) $ (9,411) State income and franchise taxes, net of federal income tax benefit 153 (208) (699) Jurisdictional settlements (2,614) - - Other items, net (225) (420) (115) ------------------------------ (7,799) (10,490) (10,225) Canada: U.S. statutory federal income tax 5,986 2,390 18,774 Effect of Canadian tax rate different from U.S. 636 264 1,792 Non-deductible interest - 299 373 Jurisdictional settlements 2,818 - - Other items, net 54 (14) 85 ------------------------------ 9,494 2,939 21,024 ------------------------------ $ 1,695 $ (7,551) $ 10,799 ==============================
In prior years the Company was required to compute its current federal income tax liability under the Alternative Minimum Tax (AMT) methodology as it resulted in a greater tax payable when compared to that computed using the standard tax system. Additional amounts paid under the AMT system can be carried forward indefinitely as credits to be applied against regular tax. AMT carryforwards at December 31, 1996 were $1,059,000. At December 31, 1996, the Company had available $85,547,000 of net operating loss carryforwards for U.S. federal tax purposes, expiring beginning in 2009. The tax effect of these credits and net operating loss carryforwards are reflected as deferred tax assets. Realization of these assets is dependent on generating sufficient U.S. taxable income prior to expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that these deferred tax assets will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the future if estimates of future taxable income during the carryforward period are reduced. Deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of the enacted tax laws. The net deferred tax asset is comprised of the following:
(Thousands) 1996 1995 1994 - -------------------------------------------------------------------------------------------------- Current deferred taxes: Gross assets $ 5,447 $ 5,959 $ 7,932 Gross liabilities - - - ------------------------------------------- Total current deferred taxes 5,447 5,959 7,932 Noncurrent deferred taxes: Gross assets 49,477 46,560 27,250 Gross liabilities (27,606) (30,029) (28,615) ------------------------------------------ Total noncurrent deferred taxes 21,871 16,531 (1,365) ------------------------------------------ Net deferred tax asset $ 27,318 $ 22,490 $ 6,567 ===========================================
The Company's valuation allowance against deferred tax assets at December 31, 1996 and 1995 was $6,372,000 and $5,183,000, respectively, an increase of $1,189,000. These amounts relate to certain state net operating loss carryforwards and tax credits the Company believes will not be realized in the future. The valuation allowance was not significant at December 31, 1994. The tax effect of significant temporary differences representing deferred tax assets and liabilities are as follows:
(Thousands) 1996 1995 1994 - ---------------------------------------------------------------------------------------- Postretirement benefits $ 4,653 $ 5,089 $ 4,998 Reforestation 5,017 4,970 4,599 Vacation pay 1,890 2,034 2,247 Depreciation (24,644) (27,107) (26,722) AMT and other tax credits 6,501 4,991 3,803 Net operating loss carryforwards 32,260 29,200 10,700 Other, net (including valuation allowance) 1,641 3,313 6,942 ------------------------------------ Net deferred tax asset $ 27,318 $ 22,490 $ 6,567 ====================================
27 19 In 1985, the stockholders of the Company approved a Plan of Distribution pursuant to which all of the Company's timber properties and development properties and related assets and liabilities in the State of Washington were transferred to newly-formed Pope Resources, A Delaware Limited Partnership (the Partnership). The transfer resulted in $10,266,000 of taxes currently payable in 1985, which was charged to stockholders' equity. The distribution value for federal income tax purposes that was assigned to the assets transferred to the Partnership has been challenged by the Internal Revenue Service (IRS). In January 1993, the Company petitioned the United States Tax Court (Tax Court) in order to resolve the disputed value of the distribution. The issue was argued before the Tax Court during the third quarter 1995 and follow-up legal briefs were then filed into December 1995. The Tax Court has not yet rendered a final decision in the case. Primarily in 1995, the Company incurred costs defending its tax position in this case. In 1995, these defense costs, together with related tax settlements and interest charges totaling $4,884,000, net of tax benefits of $1,374,000, were recognized as a reduction in additional paid-in capital with respect to the Partnership transaction. The Company believes, based upon consultation with independent tax counsel, that the additional tax due in this matter, if any, will not have a material adverse effect on the Company's financial position or liquidity. In December 1996, the IRS proposed certain adjustments pertaining to transactions between the Company and its wholly-owned Canadian subsidiary, resulting in the assertion that additional taxes were due for the tax years 1993 and 1994. The Company believes it has substantial defenses against this claim and plans to vigorously defend its position. The Company believes, based upon consultation with independent tax counsel, that any tax ultimately due in this matter would not have a material adverse effect on the Company's financial position, results of operations or liquidity. 8. OTHER GAINS AND LOSSES PARAGON COMMON STOCK SALE A pre-tax gain of $1,852,000 was recognized on the fourth quarter 1996 sale of Paragon Trade Brands, Inc. (Paragon) common stock. This transaction is discussed more fully in Note 9. COUNTERVAILING DUTY REFUND During 1992, the United States Government imposed a 6.51 percent duty on Canadian lumber sold in the United States. After numerous studies and appeals, the United States Government concluded there was no basis for this duty and during 1994 terminated the duty and announced that all amounts paid under the duty would be refunded with interest. In 1994, the Company recorded the $13,845,000 of anticipated refunds of duty amounts paid in 1992 and 1993 as other gains (losses) in the Consolidated Statements of Income. 9. DISCONTINUED OPERATIONS On December 11, 1995, the Company entered into a definitive agreement to sell its disposable diaper business (Business) to Paragon. The sale was completed on February 8, 1996. The Company sold substantially all the operating assets of the Business, primarily properties and inventory, to Paragon for $50,500,000 in cash and shares of unregistered Paragon common stock having a value at the time the transaction was closed of approximately $13,050,000. In the first quarter of 1996, pursuant to a stockholders' agreement between the Company and Paragon, Paragon exercised an option to repurchase 227,719 shares from the Company resulting in proceeds to the Company of $4,819,000. The remaining shares were sold to Paragon in the fourth quarter of 1996 resulting in proceeds of $10,083,000 to the Company. A pre-tax gain of $1,852,000 on the sale of this Paragon common stock is included in other gains (losses) in the Consolidated Statements of Income. The pre-tax gain on disposition of the Business of $5,604,000 has been accounted for as discontinued operations and includes closing costs associated with the transaction and a provision of $372,000 for operating losses during the phase-out period. Operating results of the Business for 1995 until the December 11, 1995 sale agreement date are shown separately in the Consolidated Statements of Income as loss from discontinued operations, net of tax. The Consolidated Statements of Income have also been restated for 1994 to reflect disposable diaper operating results as discontinued operations. Disposable diaper sales of $144,000,000 in 1995 and $157,066,000 in 1994 were excluded from revenues in the Consolidated Statements of Income. The net book value of the Company's disposable diaper assets at December 31, 1995 have been shown as discontinued operations assets held for sale in the Consolidated Balance Sheets and include inventories of $17,810,000 and plant and equipment of $38,359,000 (net of $47,640,000 accumulated depreciation). 28 20 10. LEGAL MATTERS AND 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 or liquidity; however, in any given future reporting period such proceedings or matters could have a material effect on results of operations. In 1992, the Company was contacted by the local governmental owner of a vacant industrial site in Oregon on which the Company previously conducted business. The owner informed the Company that the site has been identified as one containing creosote and coal tar, and that it plans to undertake a voluntary cleanup effort of the site. The owner has requested that the Company participate in the cost of the cleanup. The Company is currently participating in the investigation stage of this site with remediation and monitoring to occur over several years, likely beginning in 1998. Based on preliminary findings, the Company has estimated the likely cost of remediation and monitoring to be in the range of $5 to $12 million and that no amount within the range is more likely an outcome than another. The ultimate cost to the Company for site remediation and monitoring cannot be predicted with certainty due to the unknown magnitude of the contamination, the varying costs of alternative cleanup methods, the cleanup time frame possibilities, the evolving nature of remediation technologies and governmental regulations and the inability to determine the company's share of multi-party obligations or the extent to which contributions will be available from other parties. The Company has established reserves for environmental remediation and monitoring related to this site in an amount it believes is probable and reasonably estimable. The Company has not assumed it will bear the entire cost of remediation to the exclusion of other known potentially responsible parties (PRPs) who may be jointly and severally liable. The ability of other PRPs to participate has been taken into account based generally on the parties' financial condition and probable contribution. Certain recoveries from insurance carriers have been recorded as their receipt is deemed probable and amounts are reasonably estimable. 11. INFORMATION ABOUT THE COMPANY'S OPERATIONS IN DIFFERENT INDUSTRIES AND GEOGRAPHIC AREAS
By Industry (Thousands) 1996 1995 1994 - ------------------------------------------------------------------------------------------- REVENUES: Wood products $231,713 $265,576 $304,205 Pulp and paper products 215,781 258,833 198,602 --------------------------------- $447,494 $524,409 $502,807 ================================= OPERATING PROFIT (LOSS): Before other gains (losses): Wood products $ 22,943 $ 2,681 $ 55,224 Pulp and paper products (4,569) (1,508) (23,064) --------------------------------- 18,374 1,173 32,160 Other gains (losses): Wood products - - 13,845 Operating profit (loss): Wood products 22,943 2,681 69,069 Pulp and paper products (4,569) (1,508) (23,064) ---------------------------------- 18,374 1,173 46,005 Other gains (losses) 1,852 - - Interest expense, net (8,792) (13,784) (9,322) General corporate expense (8,940) (8,736) (9,932) ---------------------------------- Income (loss) from continuing operations, before taxes $ 2,494 $(21,347) $ 26,751 ================================= IDENTIFIABLE ASSETS: Wood products $123,145 $111,879 $173,458 Pulp and paper products 215,131 316,600 327,454 Corporate 69,653 43,748 38,472 --------------------------------- $407,929 $472,227 $539,384 ================================= CAPITAL EXPENDITURES: Wood products $ 3,550 $ 3,419 $ 14,141 Pulp and paper products 3,630 24,358 41,441 --------------------------------- $ 7,180 $ 27,777 $ 55,582 ================================= DEPRECIATION AND AMORTIZATION: Wood products $ 8,451 $ 8,775 $ 7,822 Pulp and paper products 22,236 35,291 30,200 Corporate 753 1,000 1,039 --------------------------------- $ 31,440 $ 45,066 $ 39,061 =================================
29 21
By Geographic Area (Thousands) 1996 1995 1994 - ------------------------------------------------------------------------------------------- REVENUES: United States $278,647 $352,035 $300,351 Canada 168,847 172,374 202,456 --------------------------------- $447,494 $524,409 $502,807 ================================= OPERATING PROFIT (LOSS): Before other gains (losses): United States $ (3,566) $(11,806) $(19,403) Canada 21,940 12,979 51,563 --------------------------------- 18,374 1,173 32,160 Other gains (losses): Canada - - 13,845 Operating profit (loss): United States (3,566) (11,806) (19,403) Canada 21,940 12,979 65,408 --------------------------------- 18,374 1,173 46,005 Other gains (losses) 1,852 - - Interest expense, net (8,792) (13,784) (9,322) General corporate expense (8,940) (8,736) (9,932) ---------------------------------- Income (loss) from continuing operations, before taxes $ 2,494 $(21,347) $ 26,751 ================================= IDENTIFIABLE ASSETS: United States operations $252,808 $354,389 $410,990 Canada operations 85,468 74,090 89,922 Corporate 69,653 43,748 38,472 --------------------------------- $407,929 $472,227 $539,384 =================================
NOTES: A. The Company operates principally in two industries: 1) Wood Products: manufactures standardized and specialty lumber and wood chips in the United States and Canada. Lumber products are sold mainly to wholesalers and wood chips are sold to manufacturers of pulp and paper primarily in the United States and Canada. 2) Pulp and paper products: manufactures bleached kraft pulp and a full line of private label consumer tissue products in the United States. Pulp is sold in the United States Pacific Northwest to writing paper and newsprint manufacturers and is exported to European and Asian paper producers. One pulp customer represented 64 percent of 1996 pulp revenues and 10 percent of total Company revenues. Tissue products are sold to supermarkets, drug stores, mass merchandisers, food and drug distribution companies and warehouse club stores nationally, although most sales are east of the Rocky Mountains. The Company also brokers wood chips for sale domestically and internationally. B. Operating profit (loss) is total revenue less directly identifiable costs and expenses. In computing operating profit (loss), none of the following items have been included: general corporate expenses, non-operating other gains (losses), net interest expense, income taxes and discontinued operations. C. Identifiable assets are those assets of the Company that are identified with the operations in each industry or geographic area. D. Identifiable assets, capital expenditures and depreciation and amortization includes assets, expenditures and expenses related to assets from discontinued operations in both the information provided by industry segment and geographic area for 1995 and 1994. 30 22 QUARTERLY FINANCIAL INFORMATION The following quarterly information is unaudited, but includes all adjustments which management considers necessary for a fair presentation of such information. For interim quarterly statements, the income tax provision (benefit) is estimated using the best available information for projected results for the entire year. The 1995 fourth quarter results include year-end adjustments to certain accruals and valuation reserves approximating $3,200,000, net of tax.
Quarter ------------------------------------------------------------------------ (Thousands except per share) First Second Third Fourth Year - --------------------------------------------------------------------------------------------------------------- 1996 Revenues $ 110,682 $ 110,567 $ 112,366 $ 113,879 $ 447,494 Gross profit 2,746 6,963 9,099 9,101 27,909 Income (loss) from continuing operations (2,765) 662 1,137 1,765 799 Gain on disposal of discontinued operations 3,110 -- -- -- 3,110 ------------------------------------------------------------------------- Net income $ 345 $ 662 $ 1,137 $ 1,765 $ 3,909 ========================================================================= Income (loss) per common share: Income (loss) from continuing operations $ (.20) $ .05 $ .08 $ .13 $ .06 Gain on disposal of discontinued operations .23 -- -- -- .23 ------------------------------------------------------------------------- Net income $ .03 $ .05 $ .08 $ .13 $ .29 ========================================================================= 1995 Revenues $ 133,837 $ 124,491 $ 131,773 $ 134,308 $ 524,409 Gross profit (loss) 7,146 (2,108) 3,598 5,110 13,746 Loss from continuing operations (1,043) (6,323) (3,380) (3,050) (13,796) Loss from discontinued operations (191) (2,688) (3,265) (4,898) (11,042) ------------------------------------------------------------------------- Net loss $ (1,234) $ (9,011) $ (6,645) $ (7,948) $ (24,838) ========================================================================= Loss per common share: Loss from continuing operations $ (.08) $ (.48) $ (.25) $ (.22) $ (1.03) Loss from discontinued operations (.01) (.20) (.24) (.38) (.83) ------------------------------------------------------------------------- Net loss $ (.09) $ (.68) $ (.49) $ (.60) $ (1.86) =========================================================================
31 EX-21.1 7 SUBSIDIARIES OF POPE & TALBOT, INC. 1 EXHIBIT 21.1 Subsidiaries of Pope & Talbot, Inc. (the registrant)
State or Other Jurisdiction of Name of Corporation Incorporation - ------------------- ------------- (1) Pope & Talbot International Ltd. British Columbia (2) Pope & Talbot Ltd., a subsidiary of Pope & Talbot International Ltd. British Columbia (3) Pope & Talbot FSC, Inc. Oregon (4) Pope & Talbot Wis., Inc. Delaware (5) Penn Timber, Inc. Oregon (6) Pope & Talbot Relocation Services, Inc. Oregon
All subsidiaries of the registrant do business under the name of the corporation. EX-23.1 8 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report incorporated by reference in this Form 10-K into the Company's previously filed Registration Statement Nos. 33-34996, 333-04223 and 33-64764 on Form S-8. ARTHUR ANDERSEN LLP Portland, Oregon March 27, 1997 EX-27.1 9 FINANCAIL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE POPE & TALBOT, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1996 DEC-31-1996 32,208 0 39,170 0 81,036 164,502 468,528 266,862 407,929 87,067 108,026 0 0 13,972 169,256 407,929 447,494 447,494 419,585 419,585 0 0 8,792 2,494 1,695 799 3,110 0 0 3,909 .29 .29
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