-----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, TO/NarrlzXUavuGTG8cHm6CcksxPTimTNDiavr1hDEvpgo34Tj4dxh0gsD1ZCLUj ZebJ9Bcf9vKYj4/OUh0INg== 0000891020-98-000471.txt : 19980401 0000891020-98-000471.hdr.sgml : 19980401 ACCESSION NUMBER: 0000891020-98-000471 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 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: SEC FILE NUMBER: 001-07852 FILM NUMBER: 98581388 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 ANNUAL REPORT FOR THE FISCAL YEAR ENDED 12/31/97 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, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______. Commission File Number 1-7852 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 $191,607,390 as of March 19, 1998 ($15.00 per share). 13,481,441 - ------------------------------------------------------------------ (Number of shares of common stock outstanding as of March 19, 1998) Part I and Part II incorporate specified information by reference from the annual report to shareholders for the year ended December 31, 1997 and from the Company's Current Report on Form 8-K dated March 6, 1998. Part III incorporates specified information by reference from the proxy statement for the annual meeting of shareholders on April 30, 1998. 2 PART I This Annual Report of Form 10-K and the documents incorporated herein by reference contain forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on current expectations, estimates and projections about the Company's industry, management's beliefs and certain assumptions made by the Company's management. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Such risks and uncertainties include those set forth herein under "Factors That May Affect Future Results" in the Management's Discussion and Analysis of Results of Operations and Financial Condition incorporated by reference from the Company's Annual Report to Shareholders for the year ended December 31, 1997, as well as those noted in "Environmental Matters" and "Legal Proceedings" below. Unless required by law, the Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. However, readers should carefully review the report and documents the Company files from time to time with the Securities and Exchange Commission, particularly its Quarterly Reports on Form 10-Q and any current Reports on Form 8-K. ITEM 1. BUSINESS INTRODUCTION Pope & Talbot, Inc. (the Company) is engaged principally in the wood products and pulp products businesses. The Company's wood products business involves the manufacture and sale of standardized and specialty lumber and wood chips. In its pulp products business, the Company manufactures and sells bleached kraft pulp for newsprint, tissue and writing paper, and brokers wood chips. In January 1998, the Company announced it had entered into a definitive agreement to sell its private label tissue business to PLAINWELL, INC. (Plainwell). The sale of this business was completed on March 6, 1998, and the tissue business results for 1997, 1996 and 1995 have been shown as discontinued tissue operations. 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 have been reflected as discontinued diaper operations. A gain on the sale of the discontinued diaper business was reported in the first quarter of 1996. During 1997, wood products accounted for approximately 75 percent of the Company's revenues from continuing operations of $329.9 million, and bleached kraft pulp and brokered wood chips accounted for 25 percent. Discontinued tissue operations revenues were $136.2 million in 1997. 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 2 3 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 560 million board feet, of which approximately 75 percent is located in British Columbia and 25 percent in the Black Hills. In the late 1970s, the Company expanded into the pulp business with the purchase of its Halsey, Oregon pulp mill. The Halsey mill produces bleached kraft pulp which is sold to writing paper, tissue and newsprint manufacturers in the Pacific Northwest and on the open market. In December 1997, the Company announced its tender offer to acquire a controlling interest in Harmac Pacific Inc. (Harmac) outstanding common shares for cash. On February 2, 1998, the Company acquired shares of Harmac common stock which resulted in the Company holding a 53 percent controlling interest in Harmac. Harmac, which is publicly traded on the Toronto, Vancouver and Montreal stock exchanges, operates a pulp mill, located on the east coast of Vancouver Island in British Columbia, Canada, which has an annual capacity to produce 370,000 metric tons of pulp. 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. 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 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 1997 1996 1995 ------------------------ ---------- ---------- ---------- (In thousands) Lumber $ 219,698 $ 194,930 $ 194,350 Wood chips 16,010 20,835 46,514 Logs and other 12,612 15,948 24,712 ---------- ---------- ---------- Total wood products sales $ 248,320 $ 231,713 $ 265,576 ========= ========== ==========
In 1997, lumber revenues increased $24.8 million, or 13 percent, over 1996, due to 10 percent higher average prices combined with a 2 percent volume increase. Wood chip revenues in 1997 declined $4.8 million, or 23 percent, from 1996, reflecting 20 percent lower residual chip prices and 6 percent lower chip volumes. Log sales and other were down in 1997 primarily due to the first quarter 1996 sale of the Port Gamble sawmill. 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 3 4 volumes resulting from decreased lumber production. Log sales were down in 1996 due primarily to the 1995 Port Gamble mill 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 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. 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 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. This review was completed in 1996, and in 1997, the related Kootenay Boundary Land Use Plan was approved. This land use plan set aside several areas for new parks. Although no assurances can be given, management believes that in the near term, timber supplies for the Company's Canadian sawmills should be stable. The Company is improving its reforestation practices and developing strategies to sustain and enhance timber supplies in the long-term in order to mitigate the adverse effects on timber supplies of the land being set aside. The British Columbia government has also implemented its Forest Practices Code (Code). This Code sets strict standards for logging activities and reforestation responsibilities. Requirements under this Code have been phased in beginning in 1996, with full implementation to be in place during 1998. Due to the additional logging and reforestation requirements of this Code, the Company's logging costs increased in 1996 and 1997, and will likely increase further during 1998. The Code could also ultimately have a long-term unfavorable 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. Based on this agreement, Canadian lumber producers are assigned volume quotas specifying 4 5 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 $51 per thousand board foot tariff. Shipment volumes in excess of these established quotas are subject to a $102 per thousand board foot tariff. March 31, 1997, represented the end of the first fiscal year lumber quota period related to this agreement and the Company shipped volumes in excess of its specified quotas during the period. In June 1997, the Company was informed of its fiscal year 1997/1998 quota volumes which applied retroactively to April 1. The Company's updated tariff-free volume allocation for the current fiscal year represents an 11.4 million board foot reduction from the 1996/1997 fiscal year allocations. Partially offsetting this tariff-free allocation reduction was a 2.6 million board foot increase in the Company's volume allocation subject to the lower $51 per thousand board foot tariff. The Company believes its volume allocations were determined consistently with other British Columbia lumber producers. During 1997, the Company expensed tariff charges of about $1.9 million related to shipments from the Company's Canadian sawmills into the U.S. Because of weakened lumber markets in the last half of 1997, coupled with the implications of this tariff agreement, the Company took a two-week shutdown at its Midway, British Columbia sawmill in October 1997 and also extended holiday downtime at all of its Canadian sawmills in December 1997. The Company will continually evaluate the need for temporary shutdowns at its Canadian sawmills in the future taking into consideration the dynamics of the lumber markets and the impact of the tariff agreement. 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 1997, the ten largest of which accounted for approximately 42 percent of total wood products sales. Approximately 12 percent of the Company's revenues in 1997 were to a group of lumber wholesalers affiliated with a single parent, namely Forest City Group. Backlog. The Company maintains a minimal finished goods inventory of wood products. At December 31, 1997, orders were approximately $4.6 million, compared with approximately $9.9 million at December 31, 1996. This backlog represented an order file for the Company which generally would be shipped within one to two months. The decrease from 1996 reflects both lower order volume in 1997 due to a slower market and decreased lumber sales prices. The higher order volume in 1996 was also 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 the 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 1997 Annual Report to Shareholders. 5 6 PULP PRODUCTS BUSINESS The Company's principal pulp products categories and the sales generaed by each over the last three years are set forth in the following table:
Classes of Pulp Products 1997 1996 1995 ------------------------ ---- ---- ---- (In thousands) Bleached kraft pulp $ 75,396 $ 72,410 $ 124,361 Brokered wood chips 6,183 9,722 27,459 ---------- --------- ---------- Total pulp products sales $ 81,579 $ 82,132 $ 151,820 ========== ========= ==========
In 1997, pulp products revenues decreased $0.6 million from 1996. Bleached kraft pulp revenues increased $3.0 million, or 4 percent, from 1996 to 1997 reflecting 12 percent higher sales volumes offset by 7 percent lower pulp pricing. Lower 1997 brokered wood chip revenues resulted from a continuing decrease in wood chip prices combined with lower volume. Pulp products revenues decreased $69.7 million, or 46 percent, from 1995 to 1996 reflecting a dramatic weakening of pulp markets. The Company's pulp sales prices were nearly 35 percent lower on average in 1996 than 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 brokered wood chip revenues reflected a significant decrease in wood chip prices combined with lower volume in 1996 compared to 1995. The Company owns a pulp mill at Halsey, Oregon. This mill produces bleached kraft pulp which is sold in various forms to writing paper, tissue 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; 175,000 metric tons were produced in 1997, 162,000 metric tons were produced in 1996 and 175,000 metric tons were produced in 1995. To provide additional sales flexibility and attempt to improve margins through higher value products, the Company initiated mill modifications, which were completed in early 1994, to improve pulp quality and expand pulp drying capabilities. 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 89,000 metric tons, 100,000 metric tons and 103,000 metric tons of pulp from the Company in 1997, 1996 and 1995, 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 was computed using a formula based on prices for white paper. In late 1997, the Company and Grays Harbor modified their pulp supply contract. The modified contract, which became effective January 1, 1998, changes the pulp pricing formula so that pulp prices are based on Southern mixed (U.S.) bleached hardwood kraft prices rather than white paper prices. Given the current pulp market weakness, the Company expects the new Grays Harbor pricing formula will result in lower Grays Harbor pulp prices early in 1998, but the Company believes that over the longer-term, pulp pricing under the new formula will be comparable to that under the previous pricing formula. 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. 6 7 Environmental concerns over timber harvests, which have caused high log costs and led to the shutdown of the Company's Port Gamble sawmill, have also caused 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, which historically has been less expensive than softwood chips, as a raw material 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. At the end of 1995, and continuing in 1996 and 1997, reduced demand for chips resulting from the weakened pulp market caused chip prices to fall significantly 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 1997, sales to Grays Harbor represented 45 percent of the Company's pulp revenues and the remaining nine largest customers accounted for an additional 30 percent of pulp revenues. Grays Harbor accounted for 11 percent of total Company revenues in 1997. 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, 1997, the Company's backlog of orders believed to be firm for both contractual and non-contractual customers was $18 million compared to $17 million at December 31, 1996. The increase in the total backlog of orders reflects both higher sales prices and order volumes. 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. In December 1997, the Company announced its tender offer to acquire a controlling interest in Harmac outstanding common shares for cash. On February 2, 1998, the Company completed the acquisition of the common shares which resulted in the Company holding a 53 percent controlling ownership interest in Harmac. The Harmac pulp mill is located in Nanaimo, British Columbia and is one of Canada's largest pulp producers with an annual capacity of 370,000 metric tons of northern bleached softwood kraft pulp. The Harmac pulp mill produced 340,000 metric tons in 1997, and had revenues of $163 million. For further information regarding amounts of revenue, operating profit and loss and identifiable assets attributable to the pulp products industry segment, see Note 11 of "Notes to Consolidated Financial Statements" in the Company's 1997 Annual Report to Shareholders. DISCONTINUED OPERATIONS As discussed previously, in March 1998, the Company sold its tissue business to Plainwell and, in February 1996, the Company sold its disposable diaper business to Paragon. The tissue business results for 1997, 1996 and 1995 were shown as discontinued tissue operations. The discontinued tissue business revenues were $136.2 million in 1997, $133.6 million in 1996 and $107.0 million in 1995. The disposable diaper business results for 1995 were reflected as discontinued diaper operations. Revenues for the discontinued diaper business were $144.0 million in 1995. 7 8 Until the sale of the tissue business in March 1998, the Company produced a line of private label consumer tissue products including towels, napkins, bathroom tissue and facial tissue. Also, until the February 1996 sale of the diaper business, the Company produced disposable diaper products. These products were sold under private and controlled labels. For further information regarding the Company's discontinued operations, see Note 9 of "Notes to Consolidated Financial Statements" in the Company's 1997 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 environmental standards will affect other areas such as facility life and capacity, production costs, changes in raw material requirements and costs and product value. In November 1997, the Environmental Protection Agency (EPA) published regulations establishing standards and limitations for non-combustion sources under the Clean Air Act and revised regulations under the Clean Water Act. These regulations 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 regulations relates to the Company's Halsey pulp mill. Anticipated compliance capital requirements at Halsey are estimated at $30 to $35 million with compliance required by the end of 2000. It is estimated that during 1997, capital expenditures for environmental controls amounted to approximately $1 million. It is expected that capital expenditures will continue into the future and will increase over time, particularly considering the previously discussed cluster rules capital requirements. Based on the understanding of future compliance standards, expenditures for such purposes, with the exception of expenditures related to cluster rule compliance, are currently estimated to not be significant in 1998 and 1999. 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 British Columbia, the Company's wood products business forest resources and related logging activities and reforestation responsibilities have been affected by recent governmental actions. Refer to "Wood Products Business" for a further discussion on the impact of the Provincial Government of British Columbia's Commission of Resources and Environment (CORE) and the Forest Practices Code (Code). 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 8 9 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 late 1999 or 2000. Based on preliminary findings, the Company has estimated the likely total cost of remediation and monitoring of this site 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. EMPLOYEES At December 31, 1997, the Company employed approximately 2,300 employees of whom 1,900 were paid on an hourly basis and a majority of which were members of various labor unions. Included in these numbers were approximately 800 salaried and hourly employees who were employed by the discontinued tissue operations. Approximately 84 percent of the Company's employees from continuing operations were associated with the Company's wood products business, 14 percent were associated with the Company's pulp 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 U.S. were $30.5 million for 1997, $23.2 million for 1996 and $26.3 million for 1995. Of the 1997 export sales, 39 percent were to Japan and 50 percent were to Europe. Export sales for the discontinued tissue operations were $1.0 million in 1997, $0.6 million in 1996 and there were no export sales in 1995. Financial information regarding the Company's domestic and foreign operations is included in Note 11 of "Notes to Consolidated Financial Statements" on page 31 of the Company's 1997 Annual Report to Shareholders. 9 10 ITEM 2. PROPERTIES WOOD PRODUCTS PROPERTIES 1. Mills and Plants The following tabulation briefly states the location, character, capacity and 1997 production of the Company's lumber mills:
Estimated Annual 1997 Location Capacity (3) Production(3) - --------------------- ------------- ------------- Spearfish, South Dakota 112,000,000 bd. ft.(1) 108,000,000 bd. ft. Newcastle, Wyoming 32,000,000 bd. ft.(1) 31,000,000 bd. ft. Grand Forks, British Columbia 60,000,000 bd. ft.(2) 59,000,000 bd. ft. Midway, British Columbia 145,000,000 bd. ft.(2) 134,000,000 bd. ft. Castlegar, British Columbia 211,000,000 bd. ft.(2) 220,000,000 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 293,000 bone dry units. In 1997, 271,000 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 PRODUCTS PROPERTIES The Company owns a bleached kraft pulp mill near Halsey, Oregon. In 1997, 175,000 air dry metric tons of pulp were produced, compared with an estimated annual capacity of 180,000 metric tons. Other than future mill modifications required by the EPA's "cluster rules," as described previously in "Environmental Matters," the Company believes that its Halsey pulp facility is adequate and suitable for current operations. As discussed previously, in December 1997, the Company announced its tender offer to acquire a controlling interest in Harmac outstanding common shares for cash. In February 1998, the Company acquired common shares which resulted in the Company holding a 53 percent controlling ownership interest in Harmac. The Harmac pulp mill is located on the east coast of Vancouver Island in Nanaimo, British Columbia. The Harmac pulp mill has an annual capacity of 370,000 metric tons of northern bleached softwood kraft pulp and produced 340,000 metric tons in 1997. DISCONTINUED TISSUE PROPERTIES As previously discussed, the Company's tissue business was sold to Plainwell in March 1998. During 1997, the Eau Claire, Wisconsin and Ransom, Pennsylvania facilities produced 54,000 tons and 53,000 tons, respectively. 10 11 ITEM 3. LEGAL PROCEEDINGS In 1985, 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), with interests in the Partnership distributed to the Company's shareholders on a pro rata basis. Upon audit, the Internal Revenue Service (IRS) challenged the distribution value of the assets reported by the Company for federal income tax purposes. 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 tried in the Tax Court during the third quarter 1995. The Company incurred costs (primarily in 1995) in connection with the Tax Court litigation. In 1995, these litigation costs, together with related tax payments and interest charges totaling $4.9 million, net of tax benefits of $1.4 million, were recognized as a reduction in additional paid-in capital with respect to the Partnership transaction. In March and October 1997, the Tax Court rendered decisions concerning the Company's tax liability arising from the Partnership transaction. The Company is presently in the process of appealing the decision and filed notice as such with the 9th Circuit Court of Appeals during December 1997. In the second quarter of 1997, based on the Company's best estimate of the ultimate tax liability, taking into consideration the Tax Court's March 1997 decision, the Company recognized a further reduction in additional paid-in capital of $1.8 million. This charge to equity, which represents the minimum in the estimated range of exposure to the Company, reflected tax and interest amounts totaling $2.4 million, net of tax benefits of $0.6 million. Taking into consideration the potential outcomes of the Company's appeal of the Tax Court decision, the Company estimates the potential for additional equity reductions will range from zero (if the Company is wholly successful in its appeal of the Tax Court decision) up to $4 million (if the Tax Court decision becomes final or is sustained on appeal). Any further tax, interest and litigation costs related to the Partnership transaction will be recognized as a reduction in equity with respect to the Partnership transaction. 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 of approximately $7 million 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. Although the final outcome of this matter cannot be predicted, the Company presently believes that the results of this claim would not have a material adverse effect on the Company's financial position or liquidity; however, in any given reporting period, this matter could have a material effect on results of operations. On December 31,1997, the Company filed a claim in the United States District Court for the Western District of Washington in Seattle against the Procter & Gamble Company (P&G) alleging anti-trust violations and seeking a declaration of non-infringement and invalidity of certain P&G disposable baby diaper patents. This claim was filed in response to assertions made by P&G to the Company that certain disposable diaper products produced by the Company's discontinued disposable diaper operations infringed two of P&G's inner-leg gather patents. P&G has indicated it believes the Company is obligated to it with respect to the sale of diapers which allegedly used the patents. The Company has asserted in its legal action that it did not infringe any valid claims of the P&G patents and also that P&G and another diaper supplier have taken actions to prevent fair competition among sellers of disposable diapers. In an infringement action against Paragon based on the same diaper patents, P&G received a favorable judgment in the State of Delaware in December 1997. Early in 1998, Paragon appealed the Court's decision. If P&G proceeds against the Company with legal action related to its patent infringement assertions and is substantially successful in such action, the outcome could have a material adverse effect on the Company's results of operations, liquidity and financial position. The Company intends to vigorously assert its position. 11 12 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 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: ROBERT J. DAY, 54, Senior Vice President and Chief Financial Officer since August 1997. ABRAM FRIESEN, 55, Vice President - Division Manager, Wood Products Division since February 1996. WILLIAM G. FROHNMAYER, 59, 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 1997 and 1996 were 1,005 and 1,153, 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 ---- --- -------------- 1997 1st Quarter $ 16-7/8 $ 13-5/8 $.19 2nd Quarter 16-7/8 13-1/4 .19 3rd Quarter 22-1/8 16-5/16 .19 4th Quarter 21-7/8 13-1/2 .19 ---- $.76 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
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 1997 Annual Report to Shareholders. Such information is incorporated herein by reference. 12 13 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 1997 Annual Report to Shareholders. Such information is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by Item 8 of Part II is incorporated by reference to the Company's Current Report on Form 8-K dated March 6, 1998 and presented on pages 18 through 31 of the Company's 1997 Annual Report to Shareholders. Additionally, the required supplementary quarterly financial information is incorporated herein by reference to page 32 of the Company's 1997 Annual Report to Shareholders. 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, 1998. Such information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 of Part III is presented on pages 5 through 15 of the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders on April 30, 1998. 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, 1998. 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 13 14 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. 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.) 2.2 Offer to Purchase and Circular, dated December 20, 1997. (Incorporated herein by reference to Exhibit 1 to Schedule 14-D-1F filed with the Securities and Exchange Commission on December 22, 1997 by Pope & Talbot Pulp Ltd.) 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. (Incorporated herein by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996.) 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 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.) 4.3 Revolving Credit Agreement, dated December 15, 1997, between the Company and U.S. Bank National Association. (Incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated March 6, 1998.) 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.) 14 15 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.) 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 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.) 10.6 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.) 10.9 Grays Harbor Paper L.P. Second Amended and Restated Pulp Sales Supply Contract, dated December 17, 1997. [Certain information has been omitted therein pursuant to a request for confidential treatment pursuant to Rule 24b-2] 11.1 Statement showing computation of per share earnings. 13.1 Portions of the annual report to shareholders for the year ended December 31, 1997 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. 15 16 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 A Current Report on Form 8-K was filed on December 15, 1997 reporting the tender offer to acquire a controlling interest in Harmac Pacific Inc. A second Current Report on Form 8-K was filed on December 23, 1997 reporting the mailing of a tender offer to purchase to the holders of the outstanding shares of Harmac Pacific Inc. 16 17 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Annual Report to Shareholders ------------ Report of Independent Public Accountants 17 Consolidated balance sheets at December 31, 1997 and 1996 18 Consolidated statements of income for each of the three years in the period ended December 31, 1997 19 Consolidated statements of stockholders' equity for each of the three years in the period ended December 31, 1997 20 Consolidated statements of cash flows for each of the three years in the period ended December 31, 1997 21 Notes to consolidated financial statements 22-31 Supplementary information: Quarterly financial information (unaudited) 32
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, 1997. The financial information listed in the above index has been incorporated by reference to the Company's Current Report on Form 8-K dated March 6, 1998, except for the supplementary quarterly financial information (unaudited) which has been incorporated by reference to the Company's 1997 Annual Report to Shareholders. With the exception of the items referred to in Items 1, 6, 7 and 8, the 1997 Annual Report to Shareholders is not to be deemed filed as part of this report. 17 18 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 No.'s 33-34996, 333-04223 and 33-64764 on Form S-8. ARTHUR ANDERSEN LLP Portland, Oregon March 30, 1998 18 19 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 30th day of March, 1998. 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 30, 1998 - ----------------------------------- -------------------------------- -------------- Peter T. Pope \s\ Gordon P. Andrews Director March 30, 1998 - ----------------------------------- -------------------------------- -------------- Gordon P. Andrews \s\ Hamilton W. Budge Director March 30, 1998 - ----------------------------------- -------------------------------- -------------- Hamilton W. Budge \s\ Charles Crocker Director March 30, 1998 - ----------------------------------- -------------------------------- -------------- Charles Crocker \s\ Michael Flannery President and Director March 30, 1998 - ----------------------------------- -------------------------------- -------------- Michael Flannery \s\ Warren E. McCain Director March 30, 1998 - ----------------------------------- -------------------------------- -------------- Warren E. McCain \s\ Robert Stevens Miller, Jr. Director March 30, 1998 - ----------------------------------- -------------------------------- -------------- Robert Stevens Miller, Jr. \s\ Hugo G. L. Powell Director March 30, 1998 - ----------------------------------- -------------------------------- -------------- Hugo G. L. Powell \s\ Brooks Walker, Jr. Director March 30, 1998 - ----------------------------------- -------------------------------- -------------- Brooks Walker, Jr. Senior Vice President and \s\ Robert J. Day Chief Financial Officer March 30, 1998 - ----------------------------------- -------------------------------- -------------- Robert J. Day \s\ Robert L. Bluhm Financial Controller March 30, 1998 - ----------------------------------- -------------------------------- -------------- Robert L. Bluhm
19 EX-10.9 2 SECOND AMND. AND RESTD. PULP SALES SUPPLY CONTRACT 1 EXHIBIT 10.9 [Certain information has been omitted herein pursuant to a request for confidential treatment pursuant to Rule 24b-2] SECOND AMENDED AND RESTATED PULP SALES SUPPLY CONTRACT Between GRAYS HARBOR PAPER, L.P., a Washington limited partnership, successor by assignment to Grays Harbor Industrial, Inc., a Washington corporation, "Buyer" and POPE & TALBOT, INC. a Delaware corporation "Seller" Dated: 12/17 , 1997 -------------------------- 2 TABLE OF CONTENTS
Page ---- 1. Incorporation by Reference; Purchase and Sale; Quantity and Quality ................................................... 2 2. Term .......................................................... 3 3. Price ......................................................... 3 4. Payment Terms ................................................. 4 4A. Credit ........................................................ 5 5. Security ...................................................... 5 6. Care of Collateral ............................................ 6 7. Specifications ................................................ 6 8. Warranty and Liability ........................................ 7 9. Relationship of Parties ....................................... 8 10. Costs and Attorney Fees ....................................... 8 10.1 No Suit or Action Filed .................................. 8 10.2 Arbitration or Mediation; Trial and Appeal ............... 8 10.3 Definitions .............................................. 9 11. Assignment .................................................... 9 12. Standards of Performance ...................................... 9 13. Additional Terms and Conditions ............................... 9 14. Entire Agreement .............................................. 9 15. Notice ........................................................ 9 16. Time of Essence ............................................... 10
EXHIBIT A - MARKETING AGREEMENT EXHIBIT B - SPECIFICATIONS EXHIBIT C - ADDITIONAL TERMS AND CONDITIONS 3 SECOND AMENDED AND RESTATED PULP SALES SUPPLY CONTRACT DATE: As of January 1, 1998 PARTIES: GRAYS HARBOR PAPER, L.P., a Washington limited partnership, successor by assignment to Grays Harbor Industrial, Inc., a Washington corporation 3105 Murphy Hoquiam, WA 98550 ("Buyer") Fax No. 206-532-1278 POPE & TALBOT, INC. a Delaware corporation 1500 S.W. First Avenue Portland, OR 97201 ("Seller") Fax No. 503-220-2729 PREAMBLES: A. Pursuant to agreement dated as of June 3, 1993 ("original supply contract") as amended and restated in its entirety by agreement dated as of September 28, 1994 ("amended and restated supply contract"), Seller agreed to sell to Buyer and Buyer agreed to purchase from Seller substantially all of the Pulp requirements for Buyer's uncoated free sheet paper mill in Hoquiam, Washington ("Hoquiam mill"). As used herein, the term "Supply Contract" means this Second Amended and Restated Pulp Sales Supply Contract. B. (Confidential Treatment Requested) C. Circumstances of the parties have changed as have their expectations with respect to the pricing mechanism, volume and mix of Pulp to be sold and purchased under the amended and restated supply contract as well as the duration of the contract itself and the payment and security provisions after the additional bonus price increase notes have been fully satisfied. D. It is the intention and desire of the parties that the amended and restated supply contract be further amended and restated in its entirety all as more particularly set forth herein to reflect the parties' changed expectations. As used herein the term "Supply Contract" means this Second Amended and Restated Pulp Sales Supply Contract. 1 - SECOND AMENDED AND RESTATED PULP SALES SUPPLY CONTRACT 4 AGREEMENTS: 1. Incorporation by Reference; Purchase and Sale; Quantity and Quality. 1.1 By this reference the Preambles are incorporated in and made a part of this Supply Contract. 1.2 For the calendar year 1998, Seller agrees to sell and deliver to Buyer and Buyer agrees to purchase and take from Seller 72,000 air dried metric tons ("ADMT") of Halsey bleached Kraft baled pulp ("Pulp") of which at least 36,000 ADMT shall be sawdust pulp ("Sawdust Pulp") and approximately 36,000 ADMT shall be softwood pulp ("Softwood Pulp"). Seller shall deliver Pulp at approximately 275 ADMT per day. 1.3 Any year after 1998 for which the parties, pursuant to Section 3.5 herein, agree in writing as to (1) an extension of the Supply Contract, and (2) the price, volume and mix of Pulp to be sold and purchased during such year is an "Extension Year." Any year after 1998 which is not an Extension Year is a "Phase Down Year." During a Phase Down Year Seller agrees to sell to Buyer and Buyer agrees to purchase from Seller 50,000 ADMT of Pulp of which at least 25,000 ADMT shall be Sawdust Pulp and approximately 25,000 ADMT shall be Softwood Pulp. Seller shall deliver Pulp at approximately 200 ADMT per day. 1.4 Buyer may adjust tonnage from week to week to accommodate the mill's production changes on a day-to-day basis, provided, however, that the mix of Pulp purchased by Buyer hereunder shall remain substantially 50% Sawdust Pulp and 50% Softwood Pulp. Seller reserves the right to provide Pulp in satisfaction of its obligations under this Supply Contract either through its pulp manufacturing facilities in Halsey, Oregon or from other sources, provided such pulp meets the specification requirements or the functional equivalent thereof of this Supply Contract. 1.5 If Seller's softwood fiber costs escalate disproportionately to the increase in price for Softwood Pulp hereunder, at Seller's written request the parties in good faith will negotiate adjustments to the volume, mix and price of Softwood Pulp to be sold and purchased hereunder in an attempt to ameliorate the adverse economic effect of such disproportionate escalation in softwood fiber costs. 2 - SECOND AMENDED AND RESTATED PULP SALES SUPPLY CONTRACT 5 2. Term. 2.1 Subject to earlier termination as provided herein, this Agreement shall become effective as of January 1, 1998 and shall continue through December 31, 1999 unless extended as herein provided. 2.2 Buyer will promptly notify Seller in writing of any material modification or amendment of the marketing agreement ("Marketing Agreement"), copy of which is attached hereto as Exhibit A between Buyer and Weyerhaeuser Company ("Weyerhaeuser"), and of any election by Weyerhaeuser or by Buyer to cancel or terminate the Marketing Agreement. Notwithstanding any other provisions to the contrary herein, (a) in the event of any material modification or amendment of the Marketing Agreement which Seller in good faith determines will adversely affect Seller, Seller may terminate this Supply Contract upon twelve (12) months written notice of termination to Buyer; and (b) in the event of any cancellation or termination of the Marketing Agreement during the term of this Supply Contract, Seller may terminate this Supply Contract as of the termination of the Marketing Agreement by giving Buyer written notice of termination no later than sixty (60) days after Seller's receipt of written notice from Buyer that Buyer or Weyerhaeuser has elected to terminate the Marketing Agreement. 3. Price. 3.1 The price of the Pulp purchased and sold under this Supply Contract shall be a delivered price for Pulp to the Buyer or Buyer's agent (including common carrier) at Seller's Halsey, Oregon facility. Buyer or Buyer's agent shall have the authority to accept or reject the goods with the right of inspection upon delivery at the Seller's Halsey, Oregon facility. Seller shall arrange for and bear the cost of all freight and insurance in connection with the transportation of the Pulp to Buyer's Hoquiam paper mill. 3.2 The price per ADMT for Sawdust Pulp sold and delivered in any month during the first year of this Supply Contract shall be the price reported in the publication Pulp & Paper Week for Southern mixed (U.S.) bleached hardwood Kraft for such month, less the following adjustments: (Confidential Treatment Requested) 3 - SECOND AMENDED AND RESTATED PULP SALES SUPPLY CONTRACT 6 3.3 The price per ADMT for Softwood Pulp sold and delivered in any month during the first year of this Supply Contract shall be (Confidential Treatment Requested). 3.4 For any Phase Down Year the price per ADMT for Sawdust Pulp and Softwood Pulp shall be the then prevailing market price to be determined by the parties as a result of good faith negotiations. 3.5 Commencing no later than September 1, 1998 and September 1 of any Extension Year, except as otherwise herein provided, the parties shall review the pricing, payment terms, volume, mix and any other provisions of this Supply Contract to determine whether the Supply Contract is meeting the parties' expectations. If the parties reach agreement as to such modifications by October 31, 1998 or by October 31 of any succeeding Extension Year, as the case may be, the modifications will become effective as of January 1, 1999 or January 1 of such succeeding Extension Year. If such agreement is not reached by October 31, 1998 or by October 31 of any succeeding Extension Year, as the case may be, this Supply Contract will terminate as of December 31, 1999 or as of December 31 of any such succeeding Phase Down Year. During any Phase Down Year, the volume, mix, pricing and payment terms shall be as otherwise provided herein for a Phase Down Year. 4. Payment Terms. 4.1 As used herein the term "invoice month" means the calendar month for which Seller has invoiced Buyer for Pulp sold and delivered during such period. Seller will invoice Buyer weekly for Pulp delivered during the week. Weekly invoices of Pulp will be based upon the price reported in the issue of Pulp & Paper Week most recently published before the invoice and will be adjusted at the end of the invoice month to reflect any increase or decrease in the price reported in Pulp & Paper Week for the invoice month in which the Pulp was sold and delivered. Payment will be due within fifty-five (55) days from date of invoice. Any amount not paid within fifty-five (55) days from date of invoice will bear interest at the rate per annum (360-day year) equal to one percentage point above the Prime Rate from time to time published by the Wall Street Journal or if the Wall Street Journal is not then being published, or if a quotation of the Prime Rate is for any reason not available therein, then the Prime Rate as published in another national financial reporting publication, as selected by Seller. Interest will accrue from the fifty-fifth day after the date of invoice until paid, and will be payable upon demand of the Seller. 4 - SECOND AMENDED AND RESTATED PULP SALES SUPPLY CONTRACT 7 4.2 Buyer shall cause Weyerhaeuser to pay directly to Seller fifty percent (50%) of the "Purchase Price" (as defined in the Marketing Agreement) receivable by Buyer from Weyerhaeuser pursuant to the Marketing Agreement. If Seller fails to receive full payment when due under this Supply Contract, Seller shall immediately notify Buyer in writing and Buyer shall have five (5) business days to make payment. If payment is not made by Buyer to Seller within said five (5) day period, then Seller, at its option, may cease delivery of Pulp to Buyer. 4A. Credit. If at any time Buyer's financial responsibility becomes impaired or unsatisfactory to Seller, based on Seller's reasonable judgment, Seller may demand satisfactory proof of Buyer's financial responsibility or satisfactory additional security for performance given by Buyer. Failing this, payment shall be made in cash on delivery, otherwise Seller shall have the right to decline to make further shipments or deliveries. Nothing in this clause shall affect the obligation of the Buyer to pay for the Pulp contracted for. 5. Security. 5.1 Under the original supply contract and the indemnification and security agreement executed concurrently therewith, and under the amended and restated supply contract, Buyer granted to Seller security interests in various assets. Contemporaneously with the execution of the amended and restated supply contract, the parties entered into an "Amended and Restated Security Agreement" which is an amendment and restatement of the indemnification and security agreement. In the Amended and Restated Security Agreement, as the same may be amended, the security interests granted in the original supply contract and in the indemnification and security agreement are continued in full force and effect and a security interest in certain additional collateral was granted by Buyer to Seller as security for payment and performance of Buyer's obligations hereunder as more fully specified therein. At Seller's request, Buyer will execute such UCC financing statements and other instruments as Seller and Seller's counsel consider appropriate to continue Seller's security interest and to implement the provisions of this Section 5. Seller shall have and be entitled to execute all rights and remedies available to a secured party under the laws of the states of Washington and Oregon. 5.2 At Buyer's request, Seller will enter into an intercreditor agreement with Buyer's lender(s) by the terms of which Seller will agree to subordinate to such lender(s) Seller's security interest as to an undivided 50% of Buyer's work in process, finished goods (including the UCFS paper produced from the Pulp), proceeds from the sale thereof and accounts receivable, provided that such lender(s) acknowledge the priority 5 - SECOND AMENDED AND RESTATED PULP SALES SUPPLY CONTRACT 8 of Seller's security interest as to an undivided 50% of such collateral and consent to the direct payment by Weyerhaeuser to Seller of 50% of the Purchase Price receivable by Buyer from Weyerhaeuser as provided in this Section 5. The form and content of the intercreditor agreement must be reasonably acceptable to Seller and Seller's counsel. 6. Care of Collateral. 6.1 At all times subsequent to the delivery of the Pulp to Buyer or Buyer's agent (including a common carrier) at Seller's Halsey, Oregon facility, or elsewhere, title to and risk of loss as to the Pulp will remain in Buyer, and Buyer at all times shall refrain from waste and shall exercise reasonable care as to the stored Pulp. During storage, Buyer will (a) not commingle the stored Pulp with other property of Buyer or others, (b) clearly identify the storage area, (c) limit access to the storage area to only those persons specifically authorized by Buyer and (d) provide adequate on-site security to prevent theft and vandalism of the Pulp. 6.2 While Buyer is not in default under this Supply Contract, Buyer may withdraw Pulp from storage for the exclusive purpose of converting same into UCFS paper under this Supply Contract. Buyer shall not use or dispose of the Pulp for any purpose other than to convert same into UCFS paper in accordance with the terms of this Supply Contract. 6.3 In the event that production is reduced at Seller's Halsey pulp mill due to causes beyond the control of Seller, Seller will allocate that pulp which is produced at its Halsey pulp mill ratably among all Seller's regular contractual pulp customers, including Buyer. Notwithstanding any other provision of this Supply Contract, if Seller completely discontinues the operation of its Halsey pulp facility, Seller will be relieved of any further duty or obligation under this Supply Contract as of one year following Seller's written notice to Buyer of such discontinuance. Seller has no plans to discontinue operations of the Halsey pulp facility. 7. Specifications. 7.1 Pulp to be purchased and sold hereunder shall substantially conform with the specifications attached hereto as Exhibit B and by this reference made a part hereof. Any amendment or modification of the specifications shall only become effective when Buyer and Seller agree in writing to such amendment or modification. 7.2 Seller shall furnish Buyer, on a regular basis, with information compiled by Seller at the Halsey pulp mill (including quality reports and tests performed in the ordinary 6 - SECOND AMENDED AND RESTATED PULP SALES SUPPLY CONTRACT 9 course of Seller's production of Pulp) to verify Seller's substantial compliance with the specifications. 7.3 Seller and Buyer shall meet once per calendar quarter (more often if needed) to review quality issues. 8. Warranty and Liability. Seller warrants that Pulp sold hereunder conforms to the specifications contained in this Supply Contract, that the Pulp does not infringe any valid U.S. patent and that title is unencumbered. THERE ARE NO WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. SPECIFICALLY, SELLER MAKES NO WARRANTY THAT PULP SUPPLIED BY SELLER HEREUNDER WHICH MEETS THE SPECIFICATIONS OF THIS SUPPLY CONTRACT WILL BE SUITABLE FOR THE PRODUCTION OF UCFS PAPER AT BUYER'S HOQUIAM PAPER MILL. BUYER ENTERS INTO THIS SUPPLY CONTRACT HAVING CONDUCTED OR HAVING CAUSED TO BE CONDUCTED SUCH TEST RUNS UTILIZING SELLER'S PULP AS BUYER HAS CONSIDERED APPROPRIATE. UNDER NO CIRCUMSTANCE SHALL SELLER HAVE ANY OBLIGATION UNDER THIS SUPPLY CONTRACT OR OTHERWISE EXCEPT TO PROVIDE BUYER WITH PULP WHICH MEETS THE SPECIFICATIONS OF THIS SUPPLY CONTRACT. SELLER SHALL NOT BE LIABLE FOR ANY CONSEQUENTIAL, INCONSEQUENTIAL, INCIDENTAL OR SPECIAL DAMAGES OF ANY KIND WHATSOEVER. BUYER'S SOLE REMEDY AND SELLER'S SOLE LIABILITY FOR DEFECTIVE PULP SHALL BE REPLACEMENT OR CREDIT. IN NO EVENT SHALL SELLER'S LIABILITY EXCEED THE PURCHASE PRICE OF DEFECTIVE PULP. BUYER SHALL HAVE NO REQUIREMENT OR LIABILITY TO TAKE OR PAY FOR ANY CERTAIN QUANTITY OF PULP OTHER THAN AS PROVIDED IN SECTIONS 1.2, 1.3 AND 3.5 HEREIN. IN NO EVENT SHALL BUYER BE LIABLE TO SELLER FOR ANY CONSEQUENTIAL, INCONSEQUENTIAL, INCIDENTAL, SPECIAL, DIRECT OR INDIRECT LOSS, HARM, CLAIMS OR DEMANDS ARISING OUT OF OR RELATED TO BUYER'S FAILURE OR INABILITY TO PURCHASE PULP, INCLUDING WITHOUT LIMITATION ANY CURTAILMENT OR SUSPENSION OF PRODUCTION OF UCFS PAPER, WHETHER OR NOT DUE TO THE FAULT OF BUYER OR OTHERS. HOWEVER, IF DURING ANY 30-DAY PERIOD WHICH BEGINS AFTER THE EARLIER OF (A) THE DATE AS OF WHICH BUYER COMMENCED OPERATION OF TWO PAPER MACHINES AT THE HOQUIAM PAPER MILL, OR (B) MARCH 31, 1994, BUYER (EXCEPT FOR FORCE MAJEURE AS HEREIN DEFINED) SHOULD FAIL TO TAKE OR PAY FOR SEVENTY-FIVE PERCENT (75%) OF THE VOLUMES OF PULP SELLER IS OBLIGATED TO DELIVER UNDER THIS SUPPLY CONTRACT, SELLER SHALL NOTIFY BUYER IN WRITING OF SUCH SHORTFALL. IF WITHIN FIVE (5) BUSINESS DAYS OF ITS RECEIPT OF SUCH NOTICE BUYER HAS NOT RESUMED TAKING PULP AT THE RATE OF AT LEAST SEVENTY-FIVE PERCENT (75%) OF THE MAXIMUM VOLUMES SELLER IS OBLIGATED TO DELIVER UNDER THIS SUPPLY CONTRACT OR HAS NOT MADE OTHER SUITABLE ARRANGEMENTS WITH SELLER FOR THE DISPOSITION OF THE SHORTFALL, SELLER MAY TAKE SUCH ACTION AS SELLER CONSIDERS APPROPRIATE TO DISPOSE OF THE SHORTFALL. BUYER ACKNOWLEDGES THAT 7 - SECOND AMENDED AND RESTATED PULP SALES SUPPLY CONTRACT 10 SUCH ACTION MAY INVOLVE SELLER'S COMMITMENT ("THIRD PARTY COMMITMENT") TO SELL TO THIRD PARTIES A PORTION OF THE VOLUME OF PULP SELLER OTHERWISE WOULD BE OBLIGATED TO SELL TO BUYER UNDER THIS SUPPLY CONTRACT. IF IN CONNECTION WITH THE DISPOSITION OF A SHORTFALL SELLER MAKES THIRD PARTY COMMITMENTS, AT BUYER'S REQUEST SELLER WILL MAKE REASONABLE GOOD FAITH EFFORTS TO RESUME DELIVERIES TO BUYER OF PULP AT PRE-SHORTFALL LEVELS UPON THE EXPIRATION OF SUCH THIRD PARTY COMMITMENT IF BUYER IS THEN PURCHASING THE MAXIMUM TONNAGE SELLER IS THEN OBLIGATED TO SELL UNDER THIS SUPPLY CONTRACT AND IF BUYER IS NOT OTHERWISE IN DEFAULT HEREUNDER. 9. Relationship of Parties. Nothing in this Supply Contract or in any related dealings between Seller and Buyer shall be construed or interpreted to mean that the relationship between the parties is other than the relationship of seller and buyer, or secured party and debtor, as the came may be, as more particularly set forth in this Supply Contract. The parties specifically disclaim any intention that their relationship under this Supply Contract be interpreted or construed as a partnership or joint venture relationship. 10. Costs and Attorney Fees. 10.1 No Suit or Action Filed. If this Supply Contract is placed in the hands of an attorney due to a default in the payment or performance of any of its terms, the defaulting party shall pay, immediately upon demand, the other party's reasonable attorney fees, collection costs, even though no suit or action is filed thereon, and any other fees or expenses incurred by the nondefaulting party. 10.2 Arbitration or Mediation; Trial and Appeal. If any arbitration, mediation, or other proceeding is brought in lieu of litigation, or if suit or action is instituted to enforce or interpret any of the terms of this Supply Contract, or if suit or action is instituted in a Bankruptcy Court for a United States District Court to enforce or interpret any of the terms of this Supply Contract, to seek relief from an automatic stay, to obtain adequate protection, or to otherwise assert the interest of Seller in a bankruptcy proceeding, the party not prevailing shall pay the prevailing party's costs and disbursements, the fees and expenses of expert witnesses in determining reasonable attorney fees, and such sums as the court may determine to be reasonable for the prevailing party's attorney fees connected with the trial and any appeal and by petition for review thereof. 10.3 Definitions. For purposes of this Supply Contract, the term attorney fees includes all charges of the prevailing party's attorneys and their staff (including without limitation legal assistants, paralegals, word processing, and 8 - SECOND AMENDED AND RESTATED PULP SALES SUPPLY CONTRACT 11 other support personnel) and any post-petition fees in a bankruptcy court. For purposes of this Supply Contract, the term fees and expenses includes but is not limited to long distance telephone charges; expenses of facsimile transmission; expenses for postage (including costs of registered or certified mail and return receipts), express mail, or parcel delivery; mileage and all deposition charges, including but not limited to court reporter's charges, appearance fees, and all costs of transcription; costs incurred in searching records; and the cost of title reports or surveyor's reports. 11. Assignment. This Supply Contract shall be binding on and shall inure to the benefit of the respective successors of the parties, but shall not be assigned without the prior written consent of the parties which shall not be unreasonably withheld. 12. Standards of Performance. Both parties agree that their performance pursuant to this Supply Contract shall be judged by standards of good faith and commercial reasonableness. Both parties agree to take or refrain from such action and to execute such documents as are reasonably necessary to implement this Supply Contract and to carry out its intent and purposes and to avoid impairing or interfering with the reasonable expectations of the parties. 13. Additional Terms and Conditions. Exhibit C attached hereto listing Additional Terms and Conditions is incorporated and made a part of this Agreement. 14. Entire Agreement. This Supply Contract together with the attached exhibits constitutes the entire understanding and agreement of the parties hereto, and may only be modified or amended by an agreement in writing signed by the parties. 15. Notice. Any notice required or permitted to be given or made by the terms of this Supply Contract shall be deemed to have been duly given or made (a) if personally delivered to Buyer or Seller, as the case may be, at its address first above written, or (b) as of and when transmitted by facsimile transmission to Buyer or Seller, as the case may be, at its address first above written, or (c) as of and when deposited in the United states mail in a sealed envelope, postage prepaid, by registered or certified mail, return receipt requested, addressed to Buyer or Seller, as the case may be, at its address first above written. Any party may change the address to which notice shall be 9 - SECOND AMENDED AND RESTATED PULP SALES SUPPLY CONTRACT 12 delivered or sent by notice to the other parties transmitted as herein provided. 16. Time of Essence. Time is of the essence hereof. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. GRAYS HARBOR PAPER, L.P., a Washington limited partnership By: Grays Harbor Industrial, Inc., a Washington corporation, its general partner By: /s/ WILLIAM D. QUIGG ------------------------------- Title: President ---------------------------- POPE & TALBOT, INC. By: /s/ WILLIAM G. FROHNMAYER ------------------------------- W.G. Frohnmayer Vice President/General Manager-Fiber Products Division 10 - SECOND AMENDED AND RESTATED PULP SALES SUPPLY CONTRACT 13 EXHIBIT A MARKETING AGREEMENT (13 pages) 14 EXHIBIT A MARKETING AGREEMENT THIS AGREEMENT is entered into the date indicated on the last page of this Agreement by and between GRAYS HARBOR INDUSTRIAL, INC., a Washington corporation, or its permitted assigns as set forth in paragraph 11.5 ("Seller"), and WEYERHAEUSER COMPANY, a Washington corporation ("Buyer"). RECITALS I. The Seller is contemplating the purchase of a paper mill (the "Hoquiam Paper Mill") located in Hoquiam, Washington, from its current owners and operators, Grays Harbor Paper Company and ITT/Rayonier, and if purchased, Seller intends to operate the Hoquiam Paper Mill and produce uncoated free sheet paper ("UCFS"). II. Prior to acquiring and operating the Hoquiam Paper Mill, however, Seller desires to enter into a Marketing Agreement with Buyer whereby Buyer would market and sell the entire output of UCFS paper which Seller will produce from the Hoquiam Paper Mill (the "UCFS Paper"). THEREFORE, Buyer and Seller, in the event Seller is successful in acquiring the Hoquiam Paper Mill and all necessary support facilities, systems and machines and commences operation, and in consideration of the mutual agreements, undertakings and promises contained in this Agreement, do now agree and commit with and to one another as follows: 1. Purchase and Sale; Quantity and Quality. 1.1 Entire Output. For the term of this Agreement, Seller agrees to sell and Buyer agrees to purchase and take from Seller the entire output of UCFS Paper meeting Buyer's specifications and standards from the Hoquiam Paper Mill, estimated to be 15 approximately 135,000 short tons per year when the mill is operating at full capacity. UCFS Paper which does not meet Buyer's specifications and standards will not be sold by Seller (neither to Buyer nor any third party), but will be used by Buyer as waste furnish in the paper making process at the Hoquiam Paper Mill. Notwithstanding the foregoing, during the start-up of the Hoquiam Paper Mill, Buyer may, at its option, purchase start-up tonnage which, while not meeting Buyer's specifications and standards, is deemed by Buyer to be of sufficient quality for Buyer to sell as off-grade paper in the market place. 1.2 UCFS Paper Delivery. The UCFS Paper will be packaged in the manner reasonably required by Buyer, for loading, as specified by Buyer, from Seller's docks by Seller's personnel directly onto trucks or into containers and then onto trucks. Buyer shall identify to Seller the truck carriers with whom Buyer has made arrangements to transport UCFS Paper from the Hoquiam Paper Mill, and Seller shall schedule specific pick-ups with such identified truck carriers. The UCFS Paper and its packaging material will bear Buyer's brand and marks or other brands and marks as specified by Buyer, and Seller will, at Seller's expense, procure all necessary packaging and labelling materials meeting Buyer's specifications. 1.3 Delivery Schedule. Seller and Buyer shall reasonably agree on a schedule for the pickup of UCFS Paper by Buyer from Seller. All risk of loss as to the UCFS Paper passes to Buyer at the moment it is loaded onto the trucks of Buyer's identified truck carrier. Sales of the UCFS Paper to Buyer are FOB the Hoquiam Paper Mill. 1.4 UCFS Paper to Be Manufactured. Buyer shall have the right to direct the Seller as to the quantity, quality, grade, and packaging (including labeling, wrapping, and roll or sheet form) of 2 16 specific UCFS Paper to be manufactured, with reasonable notice, within the existing capabilities of the Hoquiam Paper Mill, and the raw materials on hand or available. 2. Marketing of UCFS Paper. 2.1 Capacity. Seller shall reasonably use its best efforts to manufacture sufficient UCFS Paper to meet Buyer's specific or anticipated needs, and to enable Buyer to fulfill its contractual commitments to its customers, but seller shall not be obliged to expand its operations beyond the facilities currently contemplated for the Hoquiam Paper Mill (which is a capacity of 135,000 short tons per year of UCFS Paper). The parties agree to use their best efforts to coordinate production and delivery to accommodate Buyer's market demands and Seller's production capabilities and efficiencies. 2.2 Marketing. Subject to Section 9.1, Buyer will be responsible for and will reasonably use its best efforts, through Buyer's marketing organization, experience, and market research, to sell and market the entire output of UCFS Paper meeting Buyer's specifications and standards of the Hoquiam Paper Mill. It is understood that Buyer will be marketing the UCFS Paper to the markets traditionally served by Buyer in western North America and the Pacific Rim. 2.3 Trademarks. It is understood that (a) all trademarks, trade names and watermarks heretofore or hereafter used, applied for, registered or licensed by Buyer shall be deemed to be the property of Buyer; and (b) all trademarks, trade names and watermarks heretofore or hereafter used, applied for, registered or licensed by Seller shall belong to Seller. 3 17 2.4 Technical Assistance During the Term of This Agreement. 2.4.1 Buyer, at no charge to Seller, will (i) schedule production of the Hoquiam Paper Mill and arrange transportation from the Mill of product purchased by Buyer (but such scheduling and arranging shall not include detailed machine scheduling or shipping assembly functions), and (ii) subject to mutual agreement of Buyer and Seller on the nature, scope and amount of service, provide market research and technical assistance; and 2.4.2 Subject to mutual agreement of Buyer and Seller on the nature, scope and amount of services and Buyer's charge for services, Buyer will perform product development work with respect to products of the Hoquiam Paper Mill. 3. Term. 3.1 The initial term of this Agreement shall begin on the first day (Monday) of the first week during which Seller makes delivery of UCFS Paper to Buyer at the Hoquiam Paper Mill pursuant to paragraphs 1.2 and 1.3, including delivery of start-up tonnage purchased by Buyer (such first day of such first week being hereinafter referred to as the "Start Date"). The initial term shall end three (3) years from the Start Date. For example, if the first delivery of UCFS Paper to Buyer occurred on Wednesday, October 20, 1993, the Start Date would be Monday, October 18, 1993, and the ending date of the initial term would be October 17, 1996. On each anniversary of the Start Date, the term of this Agreement shall extend one year, unless either party has given written notice to the other party not less than twenty-five (25) months prior to the then current ending date of the term that the Agreement will terminate on such then current ending date. 3.2 Notwithstanding the foregoing, 4 18 3.2.1 In the event Seller has not closed its purchase of the Hoquiam Paper Mill by September 30, 1993, this Agreement shall automatically terminate on September 30, 1993 and be of no further force and effect; and 3.2.2 In the event Seller has not commenced production at the Hoquiam Paper Mill of commercial quantities of UCFS Paper meeting Buyer's specifications by January 4, 1994, Buyer may terminate this Agreement by written notice to Seller given not later than January 31, 1994. 4. Pricing and Payment. 4.1 The purchase price for UCFS Paper purchased and sold hereunder (the "Purchase Price") shall be the Net Price (as defined below) less 3.5%. 4.2 "Net Price" shall mean the gross sales price as invoiced ("Invoice Amount") by Buyer to Buyer's customer for the UCFS Paper, less freight, discounts, rebates, prompt payment discounts, adjustments from returns and allowances, duties, insurance, and mutually agreed upon warehousing costs. 4.3 For each one week period during the term hereof, Buyer shall pay the Purchase Price for UCFS Paper invoiced by Buyer to Buyer's customers during such one week period, and such payment shall be made not later than three weeks following the end of such one week period. By way of example, if the one week period were March 7, 1994 to March 13, 1994, Buyer would pay the Purchase Price of UCFS Paper invoiced by Buyer to Buyer's customers during that one week period, and such payment would be due not later than April 3, 1994. Buyer's payment shall be accompanied by a statement showing the aggregate of Invoice Amounts for the one week period, the aggregate deductions by type for such aggregate Invoice Amounts to arrive at the aggregate Net Price, and the 3.5% deduction to 5 19 arrive at the aggregate Purchase Price paid. Payment of the Purchase Price is not dependent upon or subject to Buyer's collection of Invoice Amounts from Buyer's customers for the UCFS Paper. Notwithstanding the foregoing, it is contemplated by the parties that Buyer will have received a purchase order or similar order for sale of paper delivered to Buyer prior to delivery of such to Buyer. In the event that this is not the case, Buyer shall advise Seller and Seller's obligation to deliver will be subject to mutual agreement by the parties. Seller agrees to maintain stock inventories of finished UCFS Paper in amounts to be mutually agreed upon by the parties. 4.4 Seller directs and Buyer agrees that the Purchase Price due Seller hereunder shall be paid by Buyer as follows: (i) fifty percent (50%) of the Purchase Price shall be paid by Buyer to Seller and (ii) fifty percent (50%) shall be paid directly by Buyer to Seller's pulp supplier, Pope and Talbot, at such address as Pope and Talbot from time to time shall direct, by check payable solely to Pope and Talbot. Buyer's willingness to split payment of the Purchase Price as directed by Seller shall not give Pope and Talbot any rights under this Agreement; however, Buyer does acknowledge that Seller has granted to Pope and Talbot a security interest in its accounts receivables, including its receivables from Buyer under this Agreement. Except as otherwise provided herein, Pope and Talbot shall have no right to give any instructions, directions or otherwise to Buyer. 5. Costs of Marketing, Delivery, Insurance and Related Expenses; Manufacturing Costs; Audit. 5.1 Buyer agrees to use its reasonable best efforts to keep its costs and charges which are deductions from the Invoice Amount as low as reasonably possible. Seller agrees to use its reasonable best efforts to keep its managerial, manufacturing, 6 20 operating, maintenance, and other costs of the Hoquiam Paper Mill as low as reasonably possible. 5.2 Buyer agrees to use its reasonable best efforts, on Buyer's sale of the UCFS Paper, to obtain the highest price reasonably possible consistent with then current market conditions. 5.3 Subject to Section 9.1, Buyer agrees to not discriminate in its marketing, sale, distribution and pricing policies with respect to similar products from its Longview Mill and the Hoquiam Paper Mill. However, it is understood that it may be necessary in times of market decline for Buyer to accept lower prices for product produced at the Hoquiam Paper Mill in order to keep the mill in operation. 5.4 Seller and Buyer shall reasonably agree on and implement audit and accounting procedures to adequately track, confirm, display and exchange information and data on all costs and revenues associated with sale of UCFS Paper, including Invoice Amounts, Purchase Price and any other relevant invoice and expense figures. Buyer, however, shall not be obligated to provide Seller with data on specific transactions, and any disclosure by Buyer to Seller shall be limited to aggregated data which does not reveal individual sales transactions of Buyer. Any audit by Seller of Buyer's records shall be conducted by an independent accountant at reasonable times and on reasonable notice, shall be limited to Buyer's records relevant to purchases and payments hereunder, and such independent accountant shall not reveal or disclose to Seller information of Buyer on individual sales transactions of Buyer. 6. Limitations to Seller's Obligations. Seller's obligations under this Agreement are subject to and limited by the following: 7 21 6.1 Suspension of Operations. Seller shall have the right to suspend or curtail manufacturing operations at the Hoquiam Paper Mill for UCFS Paper in the event that the Seller is not able to receive from Buyer sufficient revenue to provide a commercially reasonable and consistent financial return to Seller for its sales of UCFS Paper to Buyer. Such suspension or curtailment would only be possible after reasonable notice from Seller to Buyer and in any event notice of not less than 60 days. Seller shall have the right to immediately cancel, suspend or curtail production, with as much notice as possible to Buyer, in the event Seller, through no fault of Seller, is unable to obtain raw material. 7. Sales of Product to Others. Seller shall have the right to manufacture and sell UCFS Paper to persons or entities other than Buyer, but only if: 7.1 Buyer has given notice of its intention to terminate this Agreement and less than twelve months remain in the effective term of this Agreement; provided, however, Seller shall give Buyer not less than six months notice of Seller's intention to reduce sales to Buyer and sell to others during such final twelve month period, such notice shall specify the amount of reduction of sales to Buyer (which reduction shall not be greater than 50% of the output of the Hoquiam Paper Mill), and Buyer's purchase obligations shall be reduced by the amount of the reduction specified by Seller in its notice to Seller; 7.2 Buyer is in material breach of its obligations set forth in this Agreement; 7.3 Buyer has curtailed or suspended its purchases pursuant to Section 9.1 herein. 8 22 In no event will Seller use Buyer's trademarks, trade names or watermarks on or in connection with UCFS Paper sold to other than Buyer without Buyer's consent. 8. Breach. Seller and Buyer shall each have the right, at their option, to immediately terminate or suspend the performance of their obligations under this Agreement if the other party is in material breach or default of its obligations in this Agreement. The parties shall not be in material breach or default pursuant to this Agreement unless, with regard to a monetary default, one party shall not have cured the monetary default within twenty (20) days after notice. As to non-monetary defaults, one party shall not be in default if it cures the default within thirty (30) days after notice, provided that if more than thirty (30) days are reasonably required to cure the default that no right to terminate or suspend shall exist so long as the party is reasonably prosecuting a cure to completion. 9. Limitations to Buyer's Obligations. Buyer's obligations under this Agreement are subject to and limited by the following: 9.1 Suspension of Purchases. Buyer shall have the right to suspend or curtail purchases of UCFS Paper from the Hoquiam Paper Mill in the event Buyer is unable to sell all of the output of the Hoquiam Paper Mill, and Buyer shall have no obligation to suspend or curtail operations at Buyer's Longview or other mills. Such suspension or curtailment will be with as much notice to Seller as possible, and Buyer shall give Seller at least a sixty (60) day written alert of declining market conditions which may necessitate a suspension or curtailment and at least seven (7) days written notice of suspension or curtailment. At the time of executing this Agreement, Buyer does not anticipate any reason why it will not be able to purchase all of the output of UCFS Paper during the term of this Agreement. For approximately the last ten 9 23 years, Buyer has not taken market downtime at its North American UCFS mills, and does not anticipate that it would be necessary to suspend or significantly curtail purchases from Seller; however, Buyer cannot give assurances that curtailment or suspension will not occur. 10. Warranty and Liability. SELLER WARRANTS THAT UCFS PAPER SOLD HEREUNDER WILL CONFORM TO WEYERHAEUSER'S SPECIFICATIONS AND STANDARDS AND WILL NOT INFRINGE ANY VALID U.S. PATENT. BUYER IS SOLELY RESPONSIBLE FOR DETERMINING THE SUITABILITY OF UCFS PAPER PURCHASED HEREUNDER FOR ANY PARTICULAR USE. 10.1 In the event UCFS Paper fails to conform to this warranty, Seller, at Buyer's option, will provide replacement paper conforming to the warranty (delivered, freight prepaid by Seller), or refund the purchase price (plus freight costs incurred by Buyer). Buyer, at Buyer's option, may (i) return nonconforming paper to the Hoquiam Paper Mill at Seller's expense (where such returned paper will be used as waste furnish in the paper making process at the Hoquiam Paper Mill), or (ii) dispose of the non-conforming paper in the field. In the case of such disposal, if Seller has replaced the nonconforming paper or refunded the purchase price, Buyer will pay to Seller the amount received by Buyer on disposal less costs of disposal and less 3.5%. Seller shall further be liable to Buyer for costs incurred and payments made by Buyer in connection with resolving claims, in accordance with Buyer's customary claims procedures, of Buyer's customers relating to non-conforming paper. EXCEPT AS PROVIDED ABOVE, IN NO EVENT SHALL SELLER BE LIABLE TO BUYER FOR ANY CONSEQUENTIAL, INCIDENTAL, SPECIAL, DIRECT OR INDIRECT LOSS, HARM, CLAIMS OR DEMANDS ARISING OUT OF OR RELATED TO SELLER'S FAILURE OR INABILITY TO DELIVER UCFS PAPER, INCLUDING 10 24 WITHOUT LIMITATION ANY CURTAILMENT OR SUSPENSION OF PRODUCTION, WHETHER OR NOT DUE TO THE FAULT OF SELLER OR OTHERS. 11. General Agreement Provisions. All of the respective rights and obligations of the parties to this Agreement are subject to the following provisions: 11.1 Force Majeure. For all purposes of this Agreement, the expression "Force Majeure" includes any Act of God, war, mobilization, strike, lockout, drought, flood, total or partial fire, obstruction of navigation by ice, or loss, damage or detention at sea, acts of governmental agencies, or other contingency or cause beyond the control of the Seller or Buyer. The Buyer or the Seller, as the case may be, may suspend performance under this Agreement pending Force Majeure, neither party being responsible to the other party for any damage resulting from such suspension. The Buyer or the Seller, as the case may be, shall give prompt notice to the other party of any Force Majeure which may affect performance under this Agreement. During any period of Force Majeure, the party whose performance is not excused or suspended pending Force Majeure may sell or buy, as the case may be, UCFS Paper to third parties and not be in breach of this Agreement. If Force Majeure should extend for longer than 90 consecutive days, then the party whose performance hereunder is not excused or suspended by Force Majeure may terminate this Agreement and the parties' respective rights, duties and obligations hereunder by giving written notice to the other party of its election to terminate. 11.2 Choice of Law. The rights and obligations of the parties arising out of or related to this Agreement shall be 11 25 governed by and construed in accordance with the laws of the State of Washington. 11.3 Attorneys' Fees. In any lawsuit arising out of or related to this Agreement where the interests or positions are adverse, the substantially prevailing party shall be entitled to an award of its reasonable attorney's fees and costs. 11.4 Standards of Performance. Both parties agree that their performance pursuant to this Agreement shall be judged by standards of good faith and commercial reasonableness. Both parties agree to take or refrain from such action and to execute such documents as are reasonably necessary to implement this Agreement and to carry out its intent and purposes and to avoid impairing or interfering with the reasonable expectations of the parties. 11.5 Assignment. This Agreement shall be binding on and shall inure to the benefit of the respective successors of the parties, but shall not be assigned without the prior written consent of the parties which shall not be unreasonably withheld; provided that notwithstanding the foregoing, Seller may assign this Agreement to a limited partnership or other entity which may be formed for the purpose of acquiring the Hoquiam Paper Mill, provided William D. Quigg or a company controlled by him acts as its general partner, or in the case of a corporation, acts as its controlling shareholder. 11.6 Notices. Any notices required or permitted to be given hereunder shall be in writing and hand delivered, mailed by first class mail (postage prepaid), or sent by fax (with telephone verification of receipt) as follows: 12 26 to Seller: Grays Harbor Industrial, Inc. Attn: William D. Quigg Grays Harbor Industrial, Inc. 803 - 23rd Street Hoquiam, WA 98550 Fax No.: 1-800-537-5435 Verify No.: 206-532-9600 to Buyer: Weyerhaeuser Company Attn: John Begley P.O. Box 739 Longview, WA 98632 Fax No.: 206-636-6559 Verify No.: 206-636-6500 11.7 Final Agreement. This Agreement is the final agreement between the parties with respect to the subject matter hereof, superseding and merging all prior writings and communications. This Agreement may be modified or amended only in a writing signed by both parties. DATED this 24th day of May, 1993. GRAYS HARBOR INDUSTRIAL, INC. WEYERHAEUSER COMPANY By /s/ William D. Quigg By /s/ Robert F. Meyer -------------------------- ------------------------------ Its President Its VP Fine Paper ---------------------- --------------------------- 13 27 EXHIBIT B SPECIFICATIONS (2 pages) 28 EXHIBIT B SPECIFICATIONS WHITE GOLD SHEETED PULP GRADE 312 BLEACHED SAWDUST SOFTWOOD KRAFT TEMPORARY MAY 1993 SPECIES DOUGLAS FIR This bleached softwood sawdust kraft performs well in applications for printing papers. Its sawdust content produces a much shorter fiber than conventional softwood kraft, making it ideal for use in paper furnishes to improve formation, sheet density, and printing surfaces; refining improves the pulp's tensile strength without much loss in tear strength. White Gold 312 is press dried allowing quick and complete repulping. Future supply will include dried sheeted pulp which will require some additional refining to develop the strength characteristics.
PRODUCT CHARACTERISTICS TYPICAL MINIMUM MAXIMUM -------- -------- ------- Bale Weight, Pounds 3,400 3,300 3,450 Bale Size 80x38x40 N/A N/A Air Dry, Percent 50 N/A N/A ISO Brightness 88 84.5 N/A TAPPI Total Dirt and Shive Count, PPM 5 0 10
TYPICAL PULP PHYSICAL PROPERTIES Freeness CSF 640 550 400 TAPPI Burst Factor gf/cm2 / g/m2 25 33 38 TAPPI Tear Factor 100gf.m2/g 80 75 70 Breaking Length km 4.0 5.0 6.0 Tensile gf/ln 6,000 8,000 9,500
Exhibit B 1 of 2 29 WHITE GOLD GRADE 112 BLEACHED SOFTWOOD KRAFT MAY 1993 SPECIES DOUGLAS FIR This Douglas Fir kraft pulp has excellent initial tear strength and develops good tensile strength with refining. White Gold 112 is press dried, allowing quick and complete repulping. Future supply will include dried sheeted pulp which will require some additional refining to develop peak strength characteristics.
PRODUCT CHARACTERISTICS TYPICAL MINIMUM MAXIMUM ---------- ------- ------- Bale Weight, Pounds 3,400 3,300 3,450 Bale Size 80x37.5x38 N/A N/A Air Dry, Percent 50 N/A N/A ISO Brightness 86 84.5 N/A TAPPI Total Dirt and Shive Count, PPM 3 0 5
TYPICAL PULP PHYSICAL PROPERTIES Freeness CSF 740 550 400 TAPPI Burst Factor gf/cm2 / g/m2 27 55 60 TAPPI Tear Factor 100gf.m2/g 200 120 100 Breaking Length km 3.5 7.0 8.0 Tensile gf/ln 5,500 11,000 12,000
Pope and Talbot - Halsey, Oregon U.S.A. Exhibit B 2 of 2 30 EXHIBIT C ADDITIONAL TERMS AND CONDITIONS (2 pages) 31 EXHIBIT C ADDITIONAL TERMS AND CONDITIONS 1. TESTS: Buyer shall not dispute the quality of any Pulp delivered to Buyer hereunder, unless the results (when averaged) of tests performed by Buyer with respect to a representative sampling of the bales of Pulp shipped in the truckload which included such delivered Pulp show that the Pulp tested does not meet the specifications received in this Supply Contract. 2. CLAIMS: All claims of every nature, including but not limited to the quality, quantity, or condition of the Pulp and the time, place or manner of delivery, must be made in writing or by telegram to Seller within thirty (30) days from the date of delivery at Buyer's mill. The Buyer shall make payment when due, subject to final adjustment according to the results of retesting or arbitration. In no event shall any claim exceed the price for the quantity of Pulp which is established to be inferior in quality or to be improperly delivered. Neither party shall be liable for any indirect, special, or consequential damages resulting from any breach hereof. 3. TAX: The amount of any federal, state, or municipal sales or excise tax imposed and payable or accruing on or by reason of this Supply Contract shall be added to the price and paid in full without discount by the Buyer. 4. FORCE MAJEURE: For all purposes of this Supply Contract the expression "Force Majeure" includes any Act of God, war, mobilization, strike, lockout, drought, flood, total or partial fire, obstruction of navigation by ice, or loss, damage or detention at sea, acts of governmental agencies, or other contingency or cause beyond the control of the Seller which prevents the manufacture and/or shipment of Pulp, or beyond the control of the Buyer which prevents the manufacture or delivery of Pulp or paper. The Buyer or the Seller, as the case may be, may suspend performance under this Supply Contract pending Force Majeure, neither party being responsible to the other party for any damage resulting from such suspension. Pulp lost or damaged in transit need not be replaced by Seller nor accepted by Buyer. The Buyer or the Seller, as the case may be, shall give prompt notice to the other party of any Force Majeure which may, according to previous section of this clause, affect the performance under this contract, and also which such Force Majeure ceases, and as soon as practicable, notify to what extent it will necessitate a suspension. Shipments in transit from Seller's mill must be accepted by the Buyer. 1- Exhibit C 32 In case Seller's stock of Pulp is totally or partially destroyed, and/or damaged by fire, the Seller is entitled to cancel such quantity which as a consequence cannot be delivered. During any period of Force Majeure, the party whose performance is not excused or suspended pending Force Majeure may sell or buy, an the case may be, Pulp to third parties and not be in breach of this Supply Contract. If Force Majeure should extend for longer than 90 consecutive days, then the party whose performance hereunder is not excused or suspended by Force Majeure may terminate this Supply Contract and the parties' respective rights, duties and obligations hereunder by giving written notice to the other party of its election to terminate this Supply Contract. 5. UNEXCUSED FAILURE TO PERFORM: If Buyer refuses to accept delivery of Pulp under this Supply Contract, except for reasons excused by this Supply Contract, the Pulp cannot afterwards be claimed by the Buyer but may be sold by the Seller for the Buyer's account. That is, Buyer shall remain obligated to Seller for any deficiency in the price realized by Seller from sales of pulp to third parties below the price which would have been payable by Buyer for the Pulp hereunder. If Seller refuses to make delivery of Pulp under this Supply Contract, except for reasons excused by this Supply Contract, Buyer, after fifteen (15) days' written notice to the Seller during which time Seller may remedy such refusal, may purchase equivalent Pulp from other sources for the Seller's account. That is, Seller shall be obligated to Buyer for any increase in price paid by Buyer for Pulp purchased from third parties over the price which would have been payable to Seller for the pulp hereunder. 6. WAIVER: No right of any party shall be deemed waived by any failure to exercise a right in any prior instance. All valid waivers must be in writing. 7. TERMINATION. Termination of this Supply Contract as provided herein, other than for Force Majeure as permitted above, shall not release Buyer from the obligation to accept and pay for all Pulp delivered hereunder prior to the effective date of termination nor release the Seller from the obligation to deliver Pulp to Buyer which had previously been ordered and to which Buyer is entitled under this Agreement. 8. APPLICABLE LAW. This Agreement shall be governed in all respects by the law of the State of Washington. 9. USE: Buyer is responsible for determining the suitability of Pulp purchased hereunder for any particular use. 2- Exhibit C EX-11.1 3 STATEMENT SHOWING COMPUTATION OF PER SHARE EARNING 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, 1997, 1996 and 1995
1997 1996 1995 ------------ ------------ ------------ Weighted average number of common shares outstanding 13,419,000 13,363,779 13,363,520 Application of the "treasury stock" method to the stock option plan 42,257 13,924 3,903 ------------ ------------ ------------ Total common and common equivalent shares, assuming full dilution 13,461,452 13,377,703 13,367,423 ============ ============ ============ Net income (loss) $ 10,020,000 $ 3,909,000 $(24,838,000) Add: interest on convertible debentures, net of applicable income taxes -- -- -- ------------ ------------ ------------ Net income (loss), assuming full dilution $ 10,020,000 $ 3,909,000 $(24,838,000) ============ ============ ============ Net income (loss) per common share, assuming dilution $ .75 $ .29 $ (1.86) ============ ============ ============
The computation of basic 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 4 PORTIONS OF 1997 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) 1997 1996 1995 1994 1993 ------------ ------------ ------------ ------------ ------------ OPERATIONS Revenues $ 329,899 $ 313,845 $ 417,396 $ 397,923 $ 353,759 Depreciation and amortization 30,056 31,440 45,066 39,061 29,303 Interest expense, net 5,995 6,035 9,480 7,167 6,356 Income (loss) from continuing operations 4,432 (1,329) 4,955 26,589 17,940 Income (loss) from discontinued tissue operations 5,588 2,128 (18,751) (10,637) (7,170) Income (loss) from discontinued diaper operations -- 3,110 (11,042) (55) 10,805 Cumulative effect of accounting changes -- -- -- -- (562) ------------ ------------ ------------ ------------ ------------ Net income (loss) $ 10,020 $ 3,909 $ (24,838) $ 15,897 $ 21,013 ============ ============ ============ ============ ============ Effective tax rate 44% 52% (32)% 40% 41% PER COMMON SHARE Income (loss) from continuing operations - basic $ .33 $ (.10) $ .37 $ 2.03 $ 1.54 Income (loss) from continuing operations - diluted .33 (.10) .37 1.99 1.42 Income (loss) from discontinued operations - basic .42 .39 (2.23) (.82) .31 Income (loss) from discontinued operations - diluted .42 .39 (2.23) (.79) .30 Effect of accounting changes - basic -- -- -- -- (.05) Effect of accounting changes - diluted -- -- -- -- (.04) Cash dividends .76 .76 .76 .76 .76 Stockholders' equity 13.31 13.71 14.19 17.08 15.73 YEAR-END COMMON SHARES OUTSTANDING, NET OF TREASURY STOCK 13,481,441 13,363,779 13,363,779 13,362,729 11,715,798 FINANCIAL POSITION (at December 31) Current assets $ 210,950 $ 164,502 $ 207,252 $ 223,050 $ 169,897 Properties, net 108,165 201,666 225,760 282,827 269,200 Deferred income tax assets, net 24,843 21,871 16,531 -- -- Other assets 31,809 19,890 22,684 33,507 16,724 ------------ ------------ ------------ ------------ ------------ $ 375,767 $ 407,929 $ 472,227 $ 539,384 $ 455,821 ============ ============ ============ ============ ============ Current liabilities $ 84,835 $ 87,067 $ 113,495 $ 103,576 $ 101,162 Long-term obligations 22,765 29,608 30,526 28,777 27,803 Long-term debt 88,705 108,026 138,514 177,471 134,599 Deferred income tax liabilities, net -- -- -- 1,365 7,936 Stockholders' equity 179,462 183,228 189,692 228,195 184,321 ------------ ------------ ------------ ------------ ------------ $ 375,767 $ 407,929 $ 472,227 $ 539,384 $ 455,821 ============ ============ ============ ============ ============ CASH FLOW Operating activities: Net income (loss) $ 10,020 $ 3,909 $ (24,838) $ 15,897 $ 21,013 Depreciation and amortization 30,056 31,440 45,066 39,061 29,303 Other (gains) losses, net -- (1,852) -- (13,845) -- Gain on disposal of discontinued diaper operations -- (5,604) -- -- -- Cumulative effect of accounting changes -- -- -- -- 562 Working capital and other (15,108) (16,479) 29,519 (51,686) (13,990) ------------ ------------ ------------ ------------ ------------ Cash provided by (used for) operating activities 24,968 11,414 49,747 (10,573) 36,888 Investing activities: Capital expenditures (13,084) (7,180) (27,777) (55,582) (82,585) Purchase of equity securities (13,760) -- -- -- -- Proceeds from disposal of discontinued diaper operations -- 50,500 -- -- -- Proceeds from sale of Paragon common stock -- 14,902 -- -- -- Proceeds from sale of other properties 378 2,359 1,004 722 1,156 ------------ ------------ ------------ ------------ ------------ Cash provided by (used for) investing activities (26,466) 60,581 (26,773) (54,860) (81,429) Financing activities: Net increase (decrease) in borrowings 11,312 (43,457) (16,428) 91,899 51,017 Partnership transaction tax settlement costs (1,846) -- (4,884) -- -- Change in restricted bond funds -- -- 15,458 (15,458) -- Cash dividends (10,197) (10,156) (10,156) (9,855) (8,871) Other 1,932 -- 15 1,926 1,819 ------------ ------------ ------------ ------------ ------------ Cash provided by (used for) financing activities 1,201 (53,613) (15,995) 68,512 43,965 ------------ ------------ ------------ ------------ ------------ Increase (decrease) in cash and cash equivalents $ (297) $ 18,382 $ 6,979 $ 3,079 $ (576) ============ ============ ============ ============ ============
-10- 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION POPE & TALBOT, INC. AND SUBSIDIARIES OVERVIEW Favorable lumber markets produced strong wood products earnings which combined with solid tissue operating profits to offset a loss in the Company's pulp business resulting in a significant earnings improvement in 1997 from 1996. Total 1997 net income was $10.0 million, or $.75 per share, compared to the 1996 net income of $3.9 million, or $.29 per share, and 1995's net loss of $24.8 million, or $1.86 per share. In January 1998, the Company announced it had reached a definitive agreement to sell its tissue business to PLAINWELL, INC. (Plainwell). The Company's tissue business has been reflected as a discontinued operation in the 1997 financial statements. 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 reported as a gain on disposal of discontinued operations in 1996. Pope & Talbot's income from continuing operations was $4.4 million, or $.33 per share, in 1997 compared to the 1996 loss of $1.3 million, or $.10 per share, and 1995's income of $5.0 million, or $.37 per share. The Company's discontinued tissue operations reflected income of $5.6 million, or $.42 per share, in 1997 and $2.1 million, or $.16 per share, in 1996 after incurring a loss of $18.8 million, or $1.40 per share, in 1995. In 1995, the discontinued diaper operations incurred a loss of $11.0 million, or $.83 per share. As was true in 1996, during 1997 a 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 average lumber prices by 10 percent in 1997 following a 17 percent increase in 1996 from 1995. This strong lumber market more than offset the continued impact of poor residual chip prices. Residual chip prices fell dramatically during 1996 and the ongoing weakness in the pulp markets during 1997 resulted in further chip price reductions. The Company's pulp business incurred a loss in 1997 due to the continued weakness in world pulp markets which began at the end of 1995. The 1997 loss in the pulp business was not as large as 1996 due mainly to higher volumes and lower residual chip and sawdust costs. The Company's profits in its discontinued tissue business in 1997 reflected higher shipments and improved operating efficiencies which more than offset sales price reductions. Revenues in 1997 increased to $329.9 million from $313.8 million (after restatement for discontinued tissue operations) in 1996. Higher lumber prices and volumes, combined with greater pulp shipments, more than offset lower pulp and wood chip sales prices resulting in the increased 1997 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. In 1997, the Company generated $40.1 million from operating income before depreciation and amortization. During the year, total long-term debt declined $19.3 million while short-term debt increased $11.8 million. The reduction in long-term debt related mainly to the assumption by Plainwell upon closing of the tissue business sale of the $18.8 million City of Eau Claire note payable (this note payable balance was reflected in the discontinued tissue operations net assets held for sale line in the year-end 1997 Consolidated Balance Sheet). Including the $18.8 million City of Eau Claire note payable, the Company's year-end 1997 total long-term debt to total capitalization ratio of 37 percent was unchanged from the end of 1996. The current ratio at December 31, 1997 was 2.5 to 1 compared to 1.9 to 1 at the end of 1996. Included in the Company's current assets at December 31, 1997, were the discontinued tissue operations net assets held for sale totaling $67.9 million. Excluding this balance, the Company's current ratio at year-end 1997 was 1.7 to 1. As previously discussed, in January 1998, the Company reached an agreement to sell its tissue business to Plainwell and this transaction closed in early March of 1998. The transaction included essentially all of the assets and liabilities of the tissue business, including the assumption by Plainwell of the $18.8 million City of Eau Claire note payable and the business's $7.1 million postretirement benefit obligation. Total cash consideration for the sale was $121 million, subject to post-closing adjustments, if any. The Company will use the cash received, less expenses, to pursue strategic acquisitions and pay down bank debt. See Note 9 of Notes to Consolidated Financial Statements for further discussion of the sale of the tissue business. Cash generated from operating activities was $25.0 million in 1997. Operating income before non-cash charges for depreciation and amortization generated cash of $40.1 million in 1997. Accounts receivables increased $5.6 million due primarily to higher pulp prices and volumes in the fourth quarter of 1997 as compared to the same period in 1996 combined with extended credit terms to a major domestic pulp customer and export pulp customers. Inventories increased $2.6 million due mainly to log inventory buildup resulting from log purchase - 11 - 3 opportunities in Canada. Net deferred income tax assets increased $2.9 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 additional short-term borrowings on the Company's revolving-credit agreement, was used to pay dividends of $10.2 million, finance capital expenditures of $13.1 million and invest in $13.8 million of Harmac Pacific Inc. (Harmac) common stock. Scheduled long-term debt repayments were $0.5 million in 1997 and are anticipated to remain at $0.5 million in 1998. Additionally, as a result of the tissue business sale, the Company's $18.8 million City of Eau Claire note payable was assumed by Plainwell upon closing. In December 1997, the Company announced its tender offer to acquire a controlling interest in Harmac's outstanding common shares for cash. Harmac common shares are publicly traded on the Toronto, Vancouver and Montreal stock exchanges. On February 2, 1998, the Company acquired 6.8 million shares of Harmac common stock for $77.8 million Canadian dollars (approximately $53.4 million U.S. dollars). This February 1998 acquisition, combined with the Company's previous Harmac purchases, resulted in the Company holding an approximately 53 percent controlling ownership interest in Harmac. The payment for the Harmac shares in February 1998 was made from existing cash and cash equivalent balances, supplemented with borrowings of approximately $20 million under the Company's revolving-credit agreement. Capital spending increased to $13.1 million in 1997 from the low 1996 capital spending level of $7.2 million and compared to 1995 spending of $27.8 million. During 1993 and 1994, the Company spent record amounts ($82.6 million and $55.6 million, respectively) 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 tissue facility. This project was started in 1994 and financed almost entirely from the $18.8 million Eau Claire solid waste disposal revenue bond proceeds. At the end of 1994, $15.5 million remained available under this bond and was held in escrow for the completion of the project in 1995. All other 1995 capital expenditures, and all of the 1996 and 1997 capital expenditures, were undertaken for relatively small business sustaining and profit improving projects. The Company anticipates that approximately $4 million will be required during 1998 to complete projects approved by year-end 1997 with respect to the Company's continuing operations. Additionally, in early 1998, the Company approved a $9 million waste wood burning energy system project at the Castlegar sawmill. Spending on this Castlegar project is scheduled to be completed during 1998. Also, as discussed further in the Environmental Matters section of this Management's Discussion and Analysis, in November 1997, the Environmental Protection Agency (EPA) approved certain regulations known as the "cluster rules." As a result of these "cluster rules," the Company estimates it will have to spend approximately $30 to $35 million on capital projects at its Halsey pulp mill between now and the end of 2000 to comply. Other than the 1998 Castlegar project spending and the required spending over the next three years necessary to comply with the "cluster rules," the Company's facilities are suitable for existing operations. Additional anticipated capital projects during 1998 will be primarily to sustain existing operations with a limited number of relatively small, high-return projects. Projected 1998 capital spending, which will likely be higher than 1997 capital spending, but lower than 1995 spending, will be funded with internally generated cash, amounts received from the sale of the discontinued tissue business and supplemented, if necessary, with borrowings on the Company's line of credit. At December 31, 1997, the Company had available $75 million under its existing revolving-credit agreement, of which $41.8 million was outstanding at year-end. In the third quarter of 1996, the Company borrowed $30.0 million on its revolving-credit agreement which it then paid to Pope & Talbot, Ltd. (LTD), a wholly-owned Canadian subsidiary, to satisfy a portion of its intercompany account. Since that payment to LTD, the Company has made additional payments to satisfy intercompany account obligations. Substantially all amounts included in the December 31, 1997, cash and cash equivalents balance were held by LTD. Additionally, the investment in Harmac at year-end 1997 was held by LTD. As discussed previously, these LTD cash and cash equivalent balances were used in February 1998 for the acquisition of a controlling interest in Harmac common stock. 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 comprised 75 percent of 1997 consolidated revenues and generated an operating profit of $24.9 million. These 1997 earnings compare to 1996 and 1995 profits of $22.9 million and $2.7 million, respectively. Wood Products revenues were $248.3 million in 1997 compared to $231.7 million and $265.6 million in 1996 and 1995, respectively. The 1997 revenue increase relative to - 12 - 4 1996 reflected higher lumber volumes and prices which more than offset lower residual wood chip prices. Decreased sales in 1996 compared to 1995 resulted from lower lumber and chip volumes, combined with significantly lower chip prices to more than offset improved lumber prices. During 1995, although housing starts of 1.35 million were relatively good, a strong pulp market pushed residual wood chip prices to record levels resulting in increased lumber production which caused downward pressure on lumber pricing. While difficult winter weather conditions across the United States limited upward movement of lumber sales prices early in 1996, a strong housing market helped lumber prices climb steadily over the balance of the year. Housing starts in 1996 were 1.47 million. Average lumber prices were 17 percent higher in 1996 than those realized in 1995. During 1997, average lumber prices improved 10 percent over 1996 levels reflecting continued strength in the lumber markets (1997 housing starts were 1.48 million). Lumber prices during 1997 peaked in the second quarter and prices realized in December 1997 were nearly 20 percent below the second quarter peak. Early 1998 lumber prices have remained at these lower levels. In both 1996 and 1997, lumber prices were also favorably influenced by uncertainties surrounding the lumber quota agreement implemented between the United States and Canada during 1996 (described below). While lumber prices improved the past two years, sawmill residual wood chip markets in the Pacific Northwest and British Columbia fell dramatically after 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, as pulp markets fell, chip prices dropped sharply from their peaks during early 1996. The Company's 1996 average chip prices were down nearly 50 percent from those obtained in 1995, and 1997 average chip prices were 20 percent lower than 1996. Lumber shipments of 546 million board feet in 1997 were up slightly from 1996 shipments of 535 million board feet and compared to 1995 lumber sales volumes of 624 million board feet. The 14 percent volume reduction from 1995 to 1996 related mainly to the permanent closure of the Company's Port Gamble sawmill in 1995. The Company's 1997 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 timber in relation to end-product prices. Environmental pressures restricted timber harvest levels in the Port Gamble operating region. A strong log export market further reduced domestic log supplies in this region. These reduced log supplies, combined with relatively weak lumber markets, produced losses at Port Gamble in 1995. 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 53 million board feet in 1995. The sawmill equipment was dismantled and sold in the first quarter of 1996 resulting in a pretax gain of $2.1 million. Approximately 75 percent of the Company's current lumber capacity is located in British Columbia, Canada. During 1996, U.S. and Canadian trade negotiators reached an agreement establishing volume quotas on Canadian softwood lumber shipments to the U.S. Based on this agreement, Canadian lumber producers are assigned volume quotas specifying on a company by company basis the lumber volumes which may be shipped to the U.S. tariff-free and those volumes subject to a $51 per thousand board foot tariff. Shipments in excess of these specified volume quotas are subject to a $102 per thousand board foot tariff. March 31, 1997, represented the end of the first fiscal year lumber quota period related to this agreement and the Company shipped volumes in excess of its specified quotas during the period. In June 1997, the Company was informed of its fiscal year 1997/1998 quota volumes which applied retroactively to April 1. The Company's updated tariff-free volume allocation for the current fiscal year represents an 11.4 million board foot reduction from the 1996/1997 fiscal year allocations. Partially offsetting this tariff-free allocation reduction was a 2.6 million board foot increase in the Company's volume allocation subject to the lower $51 per thousand board foot tariff. The Company believes its volume allocations were determined consistently with other British Columbia lumber producers. During 1997, the Company expensed tariff charges of about $1.9 million related to shipments from the Company's Canadian sawmills into the U.S. Because of weakened lumber markets in the last half of 1997, coupled with the implications of this tariff agreement, the Company took a two-week shutdown at its Midway, British Columbia sawmill in October 1997 and also extended holiday downtime at all of its Canadian sawmills in December 1997. The Company will continually evaluate the need for temporary shutdowns at its Canadian sawmills in the future taking into consideration the dynamics of the lumber markets and the impact of the tariff agreement. 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. This review was completed in 1996, and in 1997, the related Kootenay Boundary Land Use Plan was approved. This land use plan set aside several areas for new parks. Although no assurances can be given, management believes that in the near term, timber supplies for the Company's Canadian sawmills should be stable. The Company is improving its reforestation practices and developing strategies to sustain and enhance timber supplies in the long-term in order to mitigate the adverse effects on timber supplies of the land being set aside. - 13 - 5 The British Columbia government has also implemented its Forest Practices Code (Code). This Code sets strict standards for logging activities and reforestation responsibilities. Requirements under this Code have been phased in beginning in 1996 with full implementation to be in place during 1998. Due to the additional logging and reforestation requirements of this Code, the Company's logging costs increased in 1996 and 1997 and will likely increase further during 1998. The Code could also ultimately have a long-term unfavorable impact on the Company's timber harvest volumes. PULP PRODUCTS The Company's market pulp business represented 25 percent of 1997 revenues. During 1997, the business incurred a loss of $2.6 million, an improvement of $8.2 million over the $10.8 million loss incurred in 1996. During 1995, following four years of operating losses, the pulp business generated an operating profit of $24.2 million. Pulp revenues of $81.6 million in 1997 compared to sales of $82.1 million in 1996 and 1995 sales of $151.8 million. The flat pulp revenues from 1996 to 1997 reflected higher sales volumes which offset lower pulp pricing. The dramatic 46 percent sales reduction from 1995 to 1996 resulted from significantly lower pulp prices and decreased brokered wood chip sales caused by lower chip prices. Pulp pricing reflected weak pulp markets in 1996 and 1997. Following several years of poor pulp markets, pulp pricing improved in 1994 and continued moving upward until it peaked in the 1995 fourth quarter. In late 1995 and early 1996, pulp pricing rapidly declined and prices have remained relatively poor throughout the second half of 1996 and all of 1997. Prices in 1996 averaged 35 percent lower than those realized in 1995 and prices averaged 7 percent lower in 1997 than 1996 prices. During 1997, the Company sold approximately 50 percent of its pulp production into domestic and foreign markets at pricing based on market prices for various grades of pulp. The remaining 50 percent was sold to the Grays Harbor Paper Company (Grays Harbor), with pricing tied to a formula based on white paper prices. During 1995 and 1996, about 60 percent of the Company's pulp was sold to Grays Harbor. At the beginning of 1995, the Company's Grays Harbor pulp pricing was below that of market pulp as white paper prices did not increase as rapidly as market pulp during the 1994/1995 period. These white paper prices increased during 1995 so that by the fourth quarter of 1995 the pricing obtained for 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. Market and Grays Harbor pulp pricing was fairly comparable during 1997. In late 1997, the Company and Grays Harbor modified their pulp sales supply contract. The modified contract, which became effective January 1, 1998, changes the pulp pricing formula so that pulp prices are based on Southern mixed (U.S.) bleached hardwood kraft prices rather than white paper prices. Given the current pulp market weakness, the Company expects the new Grays Harbor pricing formula will result in lower Grays Harbor pulp sales prices in early 1998, but the Company expects that over the longer-term, pulp pricing under the new formula will be comparable to that under the previous pricing formula. The Company's pulp shipments of 180,000 metric tons in 1997 were 12 percent higher than 1996 shipments of 161,000 metric tons and compared to 1995 shipments of 174,000 metric tons. In 1995, the Halsey pulp mill operated at essentially full capacity 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. The Halsey mill operated at near capacity levels throughout 1997. Over the past several years, 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 and 1997, reduced demand for chips resulting from the weakened pulp market caused chip prices to fall significantly. Overall, chip costs were about 40 percent lower in 1997 than 1996 following a 35 percent reduction in chip costs from 1995 to 1996. In order to maintain an 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 1997, 59 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. Sawdust costs were 35 percent lower in 1997 than 1996 and costs in 1996 were down 5 percent from 1995. DISCONTINUED OPERATIONS On January 22, 1998, the Company entered into a definitive agreement to sell the assets of its tissue business to Plainwell for cash consideration of $121 million and the assumption by Plainwell of tissue business liabilities. The liabilities assumed by Plainwell include the $18.8 million City of Eau Claire note payable and the business's $1.7 million post-retirement benefit obligation. This sale closed on March 6, 1998. The amount of cash received is subject to post-closing adjustments, if any. The Company anticipates recognizing a gain of approximately $2 per share on the sale of these discontinued tissue operations. After incurring a record loss in 1995, the Company's tissue business generated profits the past two years. The large loss in 1995 was primarily the result of a seven-month - 14 - 6 labor strike at the Company's Ransom tissue mill, and to a lesser extent, high wastepaper costs. As industry over capacity conditions created in the late 1980's and early 1990's stabilized in 1995, combined with the impact of high 1995 industry-wide raw material costs, tissue pricing began to improve. Tissue pricing peaked at the end of 1995 and has slowly fallen since. Average tissue prices in 1996 were 11 percent better than 1995; however, 1997 average prices were 5 percent lower than 1996. Tissue shipments of 97,000 tons in 1997 compared to 90,000 tons in 1996 and 1995 shipments of 81,000. The volume increases over the past two years were due mainly to the impact of the 1995 Ransom labor strike. The primary raw material component for the Company's tissue is wastepaper, for which pricing generally follows world pulp market trends. With the combination of strong 1995 pulp markets and shortages of certain wastepaper grades, wastepaper pricing was pushed to record levels in 1995. By the end of 1995, wastepaper prices began to decline consistent with world pulp markets. This late 1995 price decline accelerated through the first half of 1996 when prices then leveled. The Company's 1996 wastepaper costs were about half those incurred in 1995, and 1997 average prices were essentially unchanged from 1996, although prices in the second half of 1997 were higher than the first half. The 1995 Ransom labor strike also had a significant impact on operating efficiencies. During the strike year, costs were very high due to inefficiencies caused by production disruption. During 1996, particularly early in the year, efficiencies improved, but were not fully implemented due to operational start-up challenges. During 1997, the mill reflected the benefit of full production, as well as labor efficiencies, resulting from the employee benefit reductions and work rule changes negotiated into the new Ransom labor contract. In mid 1997, the Company successfully completed labor negotiations at the Eau Claire tissue facilities which also resulted in improved operating efficiencies during the last half of 1997. The Company's tissue business operating results for 1997, 1996 and 1995 are reflected in the Consolidated Statements of Income as income (loss) from discontinued tissue 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 are reflected in the Consolidated Statements of Income as loss from discontinued diaper 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 discontinued tissue and disposable diaper businesses. OTHER MATTERS ENVIRONMENTAL Pope & Talbot, as well as 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. In November 1997, the Environmental Protection Agency (EPA) published regulations establishing standards and limitations for non-combustion sources under the Clean Air Act and revised regulations under the Clean Water Act. These regulations 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 regulations relates to the Company's Halsey pulp mill and, to a lesser degree, the Company's two tissue mills. Anticipated compliance capital requirements at Halsey are estimated at $30 to $35 million with compliance required by the end of 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 late 1999 or 2000. 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. 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 estimated. 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 -15- 7 on the parties' financial condition and probable contribution. Anticipated recoveries from insurance carriers have been recorded at such time as their receipt is deemed probable and amounts are reasonably estimated. NET DEFERRED TAX ASSET The net deferred tax asset at December 31, 1997, totaled $30.1 million. The temporary differences that give rise to deferred income taxes are shown in Note 8 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, 1997, the Company had available $86.8 million of such U.S. federal tax loss carryforwards related to U.S. federal tax losses in 1994, 1995, 1996 and 1997. Of these U.S. federal tax carryforwards, $30.2 million expire in 2009, $48.9 million expire in 2010, $1.1 million expire in 2011 and $6.6 million expire in 2012. In order to utilize the U.S. net operating loss carryforwards, the Company will have to generate $86.8 million of U.S. taxable income from 1998 through 2012, or an average of about $5.8 million per year. As of December 31, 1997, the Company also has Alternative Minimum Tax (AMT) 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 and 1995 as aberrations. The negative results in 1994 and 1995 included significant losses at the Port Gamble sawmill, which was permanently closed in 1995, and the discontinued disposable diaper business which incurred a large loss in 1995. Also, in the Company's discontinued tissue business, poor industry pricing through 1994, record high wastepaper costs during 1995 and a seven-month labor strike at the Company's Ransom tissue mill combined to result in large tissue losses during the 1994 and 1995 periods. During 1996 and 1997, the U.S. taxable losses incurred related to the losses suffered in the Company's pulp operations caused by a world-wide pulp market slump. Additionally, the Company will recognize a significant U.S. taxable gain resulting from the sale of the discontinued tissue business in the first quarter of 1998. There are also 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. YEAR 2000 COMPLIANCE Pope & Talbot, like all other companies using computers and microprocessors, is faced with the task of addressing the Year 2000 problem over the next two years. The Year 2000 issue exists because many computer systems and applications currently use two-digit fields to designate a year. This can lead to incorrect results when computer software performs arithmetic operations, comparisons or data field sorting involving years later than 1999. The Company has embarked on a comprehensive approach to identify where this problem may occur in its information technology, manufacturing and facilities systems. The Company plans to modify or replace its affected systems in a manner that will minimize any detrimental effects on operations. While it is not currently possible to quantify the overall cost of this required work, the Company presently believes that the ultimate costs resulting from these efforts will not have a material effect on the Company's financial condition, liquidity or results of operations. OTHER CONTINGENCIES On December 31, 1997, the Company filed a claim in the United States District Court for the Western District of Washington in Seattle against the Procter & Gamble Company (P&G) alleging anti-trust violations and seeking a declaration of non-infringement and invalidity of certain P&G disposable baby diaper patents. This claim was filed in response to assertions made by P&G to the Company that certain disposable diaper products produced by the Company's discontinued disposable diaper operations infringed two of P&G's inner-leg gather patents. P&G has indicated it believes the Company is obligated to it with respect to the sale of diapers which allegedly used the patents. The Company has asserted in its legal action that it did not infringe any valid claims of the P&G patents and also that P&G and another diaper supplier have taken actions to prevent fair competition among sellers of disposable diapers. In an infringement action against Paragon based on the same diaper patents, P&G received a favorable judgement in the State of Delaware in December 1997. Early in 1998, Paragon appealed the Court's decision. If P&G proceeds against the Company with legal action related to its patent infringement assertions and is substantially successful in such action, the outcome could have a material adverse effect on the Company's results of operations, liquidity and financial position. The Company intends to vigorously assert its position. In December 1996, the Internal Revenue Service (IRS) proposed certain adjustments pertaining to transactions between the Company and its wholly-owned Canadian subsidiary, resulting in the assertion that additional taxes of approximately $7 million were due for the tax years 1993 and 1994. The Company believes it has substantial defenses against this claim and plans to vigorously defend -16- 8 its position. Although the final outcome of this matter cannot be predicted, the Company presently believes that the results of this claim will not have a material effect on the Company's financial position or liquidity; however, in any given reporting period, this matter could have a material adverse effect on results of operations. 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, interest rates and other economic conditions, actions by competitors, changing weather conditions and natural phenomena, actions by government authorities, uncertainties associated with legal proceedings, technological developments, future decisions by management in response to changing conditions and misjudgments in the course of preparing forward-looking statements. 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. -17- 9 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.
Quarter ------------------------------------------- (Thousands except per share) First Second Third Fourth Year --------- --------- --------- --------- --------- 1997 Revenues $ 84,092 $ 88,337 $ 80,683 $ 76,787 $ 329,899 Gross profit 6,079 10,128 8,025 5,347 29,579 Income from continuing operations 243 2,342 1,425 422 4,432 Income from discontinued tissue operations 1,135 1,639 1,935 879 5,588 --------- --------- --------- --------- --------- Net income $ 1,378 $ 3,981 $ 3,360 $ 1,301 $ 10,020 ========= ========= ========= ========= ========= Basic and diluted income per common share: Income from continuing operations $ .02 $ .18 $ .11 $ .03 $ .33 Income from discontinued tissue operations .08 .12 .14 .07 .42 --------- --------- --------- --------- --------- Net income $ .10 $ .30 $ .25 $ .10 $ .75 ========= ========= ========= ========= ========= 1996 Revenues $ 78,642 $ 76,986 $ 77,290 $ 80,927 $ 313,845 Gross profit 1,598 4,825 6,895 4,994 18,312 Income (loss) from continuing operations (2,432) 187 730 186 (1,329) Income (loss) from discontinued tissue operations (333) 475 407 1,579 2,128 Gain on disposal of discontinued diaper operations 3,110 -- -- -- 3,110 --------- --------- --------- --------- --------- Net income $ 345 $ 662 $ 1,137 $ 1,765 $ 3,909 ========= ========= ========= ========= ========= Basic and diluted income (loss) per common share: Income (loss) from continuing operations $ (.18) $ .01 $ .05 $ .01 $ (.10) Income from discontinued operations .21 .04 .03 .12 .39 --------- --------- --------- --------- --------- Net income $ .03 $ .05 $ .08 $ .13 $ .29 ========= ========= ========= ========= =========
-32- EX-21.1 5 LISTING OF PARENTS AND SUBSIDIARIES 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 Pulp Ltd., a subsidiary of Pope & Talbot Ltd. British Columbia (4) Pope & Talbot FSC, Inc. Oregon (5) Pope & Talbot Wis., Inc. Delaware (6) Penn Timber, Inc. Oregon (7) Pope & Talbot Relocation Services, Inc. Oregon
All subsidiaries of the registrant do business under the name of the corporation. EX-23.1 6 CONSENT OF ARTHUR ANDERSEN LLP. 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 No.'s 33-34996, 333-04223 and 33-64764 on Form S-8. ARTHUR ANDERSEN LLP Portland, Oregon March 30, 1998 EX-27.1 7 FINANCIAL 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, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1997 DEC-31-1997 31,911 0 34,134 0 65,987 210,950 286,624 178,459 375,767 84,835 88,705 0 0 13,972 165,490 375,767 329,899 329,899 300,320 300,320 0 0 5,995 8,770 4,338 4,432 5,588 0 0 10,020 0.75 0.75
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