-----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, QHT9LpRcQcuNemCTYeJeTXFnPRgBrcrFh27x7co9cTQ70b1dCtSb2fwYXfBWzApu fMzHw0+2Fu9IocAe/YT3mw== 0000912057-00-012760.txt : 20000323 0000912057-00-012760.hdr.sgml : 20000323 ACCESSION NUMBER: 0000912057-00-012760 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000322 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: 575077 BUSINESS ADDRESS: STREET 1: 1500 SW FIRST AVE CITY: PORTLAND STATE: OR ZIP: 97201 BUSINESS PHONE: 5032289161 MAIL ADDRESS: STREET 1: 1500 S W FIRST AVE CITY: PORTLAND STATE: OR ZIP: 97201 10-K 1 FORM 10K 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, 1999 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to _________________. Commission File Number 1-7852 POPE & TALBOT, INC. (Exact name of registrant as specified in its charter) Delaware 94-0777139 (State or other jurisdiction of incorporation (IRS Employer Identification No.) 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 Stock, par value $1.00 New York Stock Exchange, Pacific Stock Exchange Rights to purchase Series A Junior New York Stock Exchange, Participating Cumulative Pacific Stock Exchange Preferred Stock 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 $262,663,771 as of March 13, 2000 ($19.00 per share). 14,553,448 (Number of shares of common stock outstanding as of March 13, 2000) Part I and Part II incorporate specified information by reference from the annual report to shareholders for the year ended December 31, 1999. Part III incorporates specified information by reference from the proxy statement for the annual meeting of shareholders to be held on April 27, 2000. PART I This Annual Report on 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. The statements contained in this report that are not statements of historical fact, including without limitation, statements containing the words "believes," "expects," and words of similar import, constitute forward-looking statements that involve a number of risks and uncertainties. Moreover, from time to time the Company may issue other forward-looking statements. 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. Such risks and uncertainties include those set forth 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, 1999. 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 reports 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. Wood products accounted for 51 percent of the Company's 1999 revenues of $486.9 million and pulp products accounted for 49 percent. 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 high-grade coated and uncoated paper. On November 8, 1999, the Company acquired the remaining minority interest in Harmac Pacific Inc. (Harmac). Through a number of purchases in 1997 and 1998, the Company previously acquired a 60 percent ownership interest in Harmac. The Harmac acquisition was accounted for as a step purchase transaction, and the results of operations of Harmac have been included in the consolidated financial statements from February 2, 1998. Harmac, which was publicly traded on the Toronto, Vancouver and Montreal stock exchanges, operates a pulp mill located on the East Coast of Vancouver Island at Nanaimo, British Columbia, Canada. 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. The tissue business results for 1998 and 1997 were shown as discontinued tissue operations. Revenues from these operations were $8.3 million in 1998, $136.2 million in 1997 and $133.6 million in 1996. For further information regarding the Company's discontinued operations, see Note 11 of "Notes to Consolidated Financial Statements" in the Company's 1999 Annual Report to Shareholders. 1 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 of 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, specifically in British Columbia and the Black Hills region of South Dakota and Wyoming. In 1985, the Company distributed its timber and land development properties in the State of Washington to its shareholders through interests in a newly formed master limited partnership. In 1989, the Company sold its Oregon sawmill, and the Company has since sold its remaining Oregon timberlands. In 1992, the Company acquired a sawmill in Castlegar, British Columbia and related timber cutting rights. At the end of 1995, the Company permanently closed its Port Gamble, Washington sawmill. The Company currently operates five sawmills. In the late 1970s, the Company expanded into the pulp business with the purchase of the Halsey, Oregon pulp mill. The Halsey mill produces bleached kraft pulp which is sold to writing paper, tissue and newsprint manufacturers in the U.S., Europe and Asia. 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 boards and dimension lumber. Wood chips and other similar materials obtained as a by-product of the Company's lumber operations are also sold. During the last three years, revenues from lumber sales were approximately 85 percent or more of total wood products revenues with the balance of revenues from the sale of logs and wood chips. 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. 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 20 to 25 percent of the Company's Canadian log requirements are satisfied through open market log purchases. In the Black Hills, the Company obtains its timber 2 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. The Provincial Government of British Columbia's Commission of Resources and Environment issued the Kootenay Boundary Land Use Plan in 1997. This land use plan set aside several new wilderness areas. Although no assurances can be given, management believes that in the near-term, timber supplies for the Company's Canadian sawmills should be relatively stable. The Company has in place reforestation practices designed to sustain and enhance timber supplies in the long-term to mitigate the adverse effects of forest restrictions. 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 were phased in beginning in 1996, with full implementation completed in 1998. The Code could ultimately have a long-term unfavorable impact on the Company's timber harvest volumes. 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, as amended by Canada and the United States on August 26, 1999, Canadian lumber producers in certain provinces are assigned quotas of lumber volumes which may be shipped to the U.S. tariff-free. Revisions to quotas of lumber volumes and related tariffs since the implementation of the Softwood Lumber Agreement have increased tariff fees paid to the Government of Canada and/or reduced production (by increasing downtime) at the Company's British Columbia sawmills. Because of the Softwood Lumber Agreements, the Company took several shutdowns during 1999, 1998 and 1997. The Company continually evaluates the need for temporary shutdowns in balancing the economics of the Softwood Lumber Agreement, sales prices and production costs. 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 1999, the ten largest of which accounted for approximately 44 percent of total wood products sales. BACKLOG. The Company maintains a minimal finished goods inventory of wood products. At December 31, 1999 orders were approximately $5.4 million compared with approximately $5.1 million at December 31, 1998. This backlog represented an order file for the Company which generally would be shipped within one to two months. 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 other financial information attributable to the wood products business, see Note 13 of "Notes to Consolidated Financial Statements" in the Company's 1999 Annual Report to Shareholders. 3 PULP PRODUCTS BUSINESS The Company owns a pulp mill located in Halsey, Oregon (the Halsey mill) and a pulp mill in Nanaimo, British Columbia (the Harmac mill). The Halsey mill, with a capacity of approximately 180,000 metric tons, produces bleached kraft pulp which is sold in various forms to printing and writing paper, tissue and newsprint manufacturers in the Pacific Northwest and on the open market. In conjunction with the fiber acquisition program for the Halsey pulp mill, the Company brokers wood chips for sale primarily into the export market. The Harmac mill supplies pulp to all sectors of the paper market, for products ranging from newsprint and tissue to high-grade coated and uncoated paper. With a current annual capacity of 390,000 metric tons, the Harmac mill is one of the largest producers of market pulp in Canada. The Harmac mill produced 370,800 metric tons of pulp in 1999, and 354,400 metric tons in 1998, of which 325,100 metric tons were produced in the period subsequent to February 2, 1998. The Harmac mill manufactures a wide range of high-quality kraft pulp made from custom blends of western hemlock, balsam, western red cedar and Douglas fir. The Harmac mill's products are marketed globally through sales offices in Portland, Oregon and Brussels, Belgium and through agency sales offices around the world. The Company has a long-term fiber supply agreement for the Harmac mill with Weyerhaeuser Company Limited (Weyerhaeuser) that provides for 1.7 million cubic meters of fiber per year through 2019. Under this contract, fiber is purchased at market, or at prices determined under a formula intended to reflect fair market value of the fiber and which takes into account the net sales value of pulp sold by Harmac. To run the Harmac mill at full capacity, additional fiber is required to supplement the base supply from Weyerhaeuser. Weyerhaeuser has agreed that it will supply, in addition to the minimum volumes to which it is committed under the Chip and Pulp Log Supply Agreement, the fiber required to fulfill the balance of the Harmac mill's operating requirements, provided that such fiber is available in the market without detriment to Weyerhaeuser's own operations. In addition, the Company has entered into arrangements with other independent fiber suppliers to provide pulp fiber incremental to that provided by Weyerhaeuser. Finally, improved utilization and recovery of available raw materials, through means such as the chip conditioning system completed in 1998, will help to ensure that adequate fiber is available. To a very limited degree, the Harmac mill also acquires wood chips from the Company's Canadian sawmills. The Company has an agreement with Grays Harbor Paper L.P. (Grays Harbor), under which the Halsey mill supplies pulp to the Grays Harbor writing grade paper mill. Grays Harbor purchased approximately 66,000 metric tons, 60,000 metric tons and 89,000 metric tons of pulp from the Company in 1999, 1998 and 1997, respectively. All output from the paper mill is sold to Weyerhaeuser. 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. In 1997, pricing for 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, changed the pulp pricing formula so that pulp prices are based on southern mixed (U.S.) bleached hardwood kraft prices rather than white paper prices. The Company believes that over the longer-term, pulp pricing under the new formula will be comparable to that under the previous pricing formula. The availability of softwood fiber (wood chips and sawdust), particularly in the quantities necessary to support world-scale pulp facilities, fluctuates in the Pacific Northwest. The 4 Company had access to more than adequate supplies of fiber during 1999. 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. To provide an adequate supply of wood fiber for the mill, the Company has expanded its capability of using sawdust 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 30 to 40 percent of the pulp mill's production which remains based on softwood chips. The Company believes that, based on existing wood chip and sawdust availability both within the Willamette Valley region of Oregon and from other sources, fiber resources will be adequate for the Company's requirements at 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 to paper manufacturers worldwide. In 1999, approximately 50 percent of the pulp segment's sales volume was shipped to Europe, 20 percent to North America and 30 percent to Japan and other Pacific Rim countries. Sales in 1999 to Grays Harbor represented 11 percent of pulp revenues and the remaining nine largest pulp customers accounted for an additional 49 percent of pulp revenues. In 1999, approximately 57 percent of pulp products were sold to customers at market prices under long-term or "evergreen" contracts, renewable each year. The balance of the mills' pulp is sold on a spot basis. By establishing and maintaining long-term contractual relationships, the Company is better able to forecast and regulate production than would be the case if it relied entirely on the spot markets. 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, 1999, the Company's backlog of orders believed to be firm for both contractual and non-contractual customers was $77.5 million compared with $37.9 million at December 31, 1998. The increase in the total backlog of orders was due to a 37 percent increase in selling prices and a 49 percent increase in 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, many of which are larger than the Company, but none of which is believed to be dominant. Canada and the Nordic countries produce substantially more market pulp than they consume, with the surplus being sold in Western Europe, the United States and Japan and other Asian countries. Canada, Finland, Norway and Sweden are the principal suppliers of northern bleached softwood kraft pulp to world markets. The United States is a large exporter of hardwood and southern softwood pulp, as well as a significant importer of northern bleached softwood kraft pulp. Latin America also exports both hardwood and softwood pulp. The principal methods of competition in the pulp market are price, quality, volume, reliability of supply and customer service. The Company's competitive advantages include the strength of its northern softwood fiber and the variety and consistent quality of the pulps it produces. In addition, Harmac has the operational flexibility provided by its three separate production lines in combination with the three principal species of fiber available in the region. 5 For further information regarding amounts of revenue, operating profit and loss and other financial information attributable to the pulp products business, see Note 13 of "Notes to Consolidated Financial Statements" in the Company's 1999 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 April 1998, 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." The Company's exposure to these regulations relates to the Company's Halsey pulp mill. The capital costs to comply with these new regulations at the Halsey mill are anticipated to be $35 million, with compliance required by the first quarter of 2001. The required upgrade of the Halsey mill is underway and is expected to be completed by the end of 2000. Approximately $8.2 million of costs related to this project have been incurred through December 31, 1999. Other environmental expenditures anticipated in the year 2000 are not material. Based on its understanding of future environmental compliance standards, the Company's expenditures for such purposes, with the exception of expenditures related to Cluster Rule compliance, are currently estimated to not be significant in 2000. 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. The preservation of old-growth forests and wildlife habitat has affected and may continue to affect the amount and cost of timber obtainable from public agencies in Oregon and Western Washington. The Halsey pulp mill has been affected by the decrease in timber availability since its primary raw materials, wood chips and sawdust, are by-products of the lumber manufacturing process. In British Columbia, the Company's forest resources and related logging activities and reforestation responsibilities have been affected by governmental actions over the past several years. Refer to "Wood Products Business" for the discussion on the impact of the Provincial Government of British Columbia's Commission of Resources and Environment and the Forest Practices Code. The major environmental issues for pulp producers in coastal British Columbia are the management of wastewater, air emissions and solid waste in compliance with the extensive body of applicable environmental protection laws and regulations. Harmac has in place a comprehensive environmental management program, comprising modern pollution abatement and control technologies, detailed operating procedures and practices, early warning systems, scheduled equipment inspections and emergency response planning. Regular independent audits ensure that the environmental program is being implemented effectively and that all regulated requirements are being met. 6 Current legislation requires all pulp mills in British Columbia to eliminate the discharge of chlorinated organic compounds by December 31, 2002. Currently, the cost of available technology to eliminate all chlorinated organic compounds at kraft pulp mills is prohibitive. The British Columbia government, industry and other stakeholders are engaged in discussion to resolve this issue. If the current legislation is not amended, substantially all of the chemical pulp mills in British Columbia would likely be required to be closed, which would have a material adverse affect on the Company. Legislation in British Columbia governing contaminated sites became effective in April 1997. If a triggering event occurs in respect of any property that has been used for industrial or commercial purposes, the regulations require, among other things, a site profile to be prepared in order to determine whether the site in question is potentially contaminated, in which case remediation may be required under government supervision. Pulp mills are subject to these regulations and past and present owners or operators of mill sites may face remediation costs if contaminated areas are found. Triggering events would include the sale of the property or the decommissioning of the mill. The Company cannot assess the magnitude of costs it may be required to incur in order to comply with this legislation if a triggering event should occur. See "Item 3. Legal Proceedings" for a discussion of certain environmental legal proceedings. EMPLOYEES At December 31, 1999, the Company employed 2067 employees of whom 1646 were paid on an hourly basis and a majority of which were members of various labor unions. Approximately 60 percent of the Company's employees were associated with the Company's wood products business, 37 percent were associated with the Company's pulp business and 3 percent were corporate management, marketing and administration personnel. GEOGRAPHIC AREAS For information regarding the Company's revenues and long-lived assets by geographic area, see Note 13 of "Notes to Consolidated Financial Statements" in the Company's 1999 Annual Report to Shareholders. 7 ITEM 2. PROPERTIES The Company leases 38,000 square feet of office space in Portland, Oregon for its corporate administrative and sales functions. WOOD PRODUCTS PROPERTIES The following tabulation briefly states the location, character, capacity and 1999 production of the Company's lumber mills:
- ------------------------------------------------------------------------------------------------------------------- Estimated Annual 1999 Location Capacity (3) Production(3) ---------------------------------------- -------------------------- ------------------------ Spearfish, South Dakota 115,000,000 bd. ft.(1) 113,000,000 bd. ft. Newcastle, Wyoming 35,000,000 bd. ft.(1) 32,000,000 bd. ft. Grand Forks, British Columbia 85,000,000 bd. ft.(2) 72,000,000 bd. ft. Midway, British Columbia 155,000,000 bd. ft.(2) 153,000,000 bd. ft. Castlegar, British Columbia 220,000,000 bd. ft.(2) 208,000,000 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 tariffs under the 1996 Softwood Lumber Agreement. (3) Wood chips are produced as a result of the operation of the Company's lumber mills. It is estimated that the aggregate annual capacity for such production is 300,000 bone-dry units. In 1999, 295,000 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 1999, 181,000 metric tons of pulp were produced, which approximated full capacity for the mill. 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. The Harmac pulp mill is located on a site owned by the Company in Nanaimo on the east coast of Vancouver Island in British Columbia. The Harmac pulp mill has an annual capacity of 390,000 metric tons of NBSK pulp and produced 371,000 metric tons in 1999. 8 ITEM 3. LEGAL PROCEEDINGS The Oregon Department of Environmental Quality (ODEQ), based on detection of possible creosote and hydrocarbon contamination, determined that a vacant industrial site formerly owned by the Company requires further action. Accordingly, the Company and the local governmental owner agreed in a Consent Order with ODEQ to investigate the site and determine an appropriate remedy. The Company is currently participating in the investigation phase of this site with remediation and monitoring to occur over an extended future time period. Based on preliminary findings, the Company has established a reserve in the amount of $6.1 million representing the low end of the range of estimated future remediation and monitoring costs at this site. Factors outside the Company's control could cause the costs to be substantially greater. The Washington Department of Ecology (WDOE) requested that the Company undertake an assessment to determine whether and to what extent the Company's former mill site at Port Gamble, Washington may be contaminated. Further, WDOE requested that the Company perform an investigation of sediments in the adjacent bay to determine the extent of wood waste accumulation. These activities were completed during 1999. Future regulatory developments and investigation findings regarding sediments may indicate remediation will be necessary. Based on preliminary findings, the Company has established a reserve in the amount of $2.6 million representing the low end of the range of estimated future remediation and monitoring costs at this site. Factors outside the Company's control could cause the costs to be substantially greater. The Company has tendered the defense of the above environmental claims to a number of insurance carriers which issued comprehensive general liability policies to the Company from 1959 to 1985. In 1995, the Company filed a declaratory judgment action to obtain a decision that the insurance carriers were obligated to defend the Company and indemnify it for any environmental liabilities incurred as a result of certain operations of the Company during that period. The Company expects that the case will be tried, if necessary in the year 2001. The Company has concluded settlements with several insurance carriers and is engaged in settlement discussions with other insurance carriers. If it is determined that the insurance carriers are obligated to pay the Company's defense and indemnity claims, there are more than sufficient policy limits available to meet the Company's estimated liabilities. The Company believes recovery under these policies is probable and has recorded receivables in amounts it has deemed highly probably of realization. In March 1999, the Company filed a claim under Chapter 11 of the North American Free Trade Agreement (NAFTA) against the Canadian Federal Government. The complaint arises from the Company's assertion that its duty-free export quota under the Canada/U.S. Softwood Lumber Agreement was unfairly allocated and then reduced after the agreement came into effect. The NAFTA contains a special process that permits NAFTA investors who have been harmed by government actions which are inconsistent with the provisions of NAFTA's Investment Chapter to seek compensation before an impartial international arbitration panel. An international arbitration panel has been appointed to hear this claim but there can be no assurance as to when the claim will be resolved. The Internal Revenue Service (IRS) has assessed the Company additional tax of approximately $5.3 million pertaining to transactions between the Company and one of its Canadian subsidiaries during it 1993 tax year. The Company has filed a petition with the Tax Court to challenge the IRS's assessment. The Company has negotiated a tentative settlement with the IRS on this issue for 1993 and certain subsequent tax years and has established a 9 reserve for the amount. While a settlement has been negotiated with the IRS, the settlement has not been finally approved or accepted on behalf of the IRS. The Company is also a party to legal proceedings and environmental matters generally incidental to its business. Although the final outcome of any legal proceeding or environmental matter is subject to many variables and cannot be predicted with any degree of certainty, the Company presently believes that the ultimate outcome resulting from these proceedings and matters would not have a material effect on the Company's current financial position or liquidity; however, in any given future reporting period such proceedings or matters could have a material effect on results of operations. 10 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: Abram Friesen, age 57, has been Vice President - Division Manager, Wood Products since February 1996. From 1987 to 1996, Mr. Friesen was President of Pope & Talbot Ltd., a wholly-owned subsidiary of the Company. Maria M. Pope, age 35, has been Vice President, Chief Financial Officer and Secretary since May 1999. From April 1998 to May 1999, Ms. Pope was the Company's Treasurer and Secretary. Prior to becoming Secretary and Treasurer, Ms. Pope was Planning and Budgeting Manager for the Company upon joining the Company in 1995. Ms. Pope previously worked for Levi Strauss & Co. and Morgan Stanley & Co., Inc. Ms. Pope is the daughter of Peter T. Pope, Chairman of the Board of the Company. 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 registered shareholders at year-end 1999 and 1998 were 1,049 and 952, respectively. Additional information required by Item 5 of Part II is presented in the table entitled "Quarterly Financial Information" on page 30 of the Company's 1999 Annual Report to Shareholders. Such information is incorporated herein by reference. 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 29 of the Company's 1999 Annual Report to Shareholders. Such information is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by Item 7 of Part II is presented on pages 9 through 15 of the Company's 1999 Annual Report to Shareholders. Such information is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by Item 7a of Part II is presented on pages 21 and 23 of the Company's 1999 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 presented on pages 15 through 28 of the Company's 1999 Annual Report to Shareholders. Such information is incorporated herein by reference. Additionally, the required supplementary quarterly financial information is presented on page 30 of the Company's 1999 Annual Report to Shareholders and is incorporated herein by reference. 11 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 11 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 under the items entitled "Certain Information Regarding Directors and Officers" and "Section 16(a) - Beneficial Ownership Reporting Compliance" in the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders on April 27, 2000. Such information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 of Part III is presented under the items entitled "Director Remuneration" and "Executive Compensation and Other Information" in the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders on April 27, 2000. 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 under the items entitled "Security Ownership of Management" and "Beneficial Ownership of Over 5% of Pope & Talbot Common Stock" in the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders on April 27, 2000. Such information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable 12 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) FINANCIAL STATEMENTS
Annual Report to Shareholders ---------------------------------------------------------------------- ---------------------- Report of Independent Public Accountants 15 Consolidated balance sheets at December 31, 1999 16 and 1998 Consolidated statements of income for each of the three years in the 17 period ended December 31, 1999 Consolidated statements of stockholders' equity for 18 each of the three years in the period ended December 31, 1999 Consolidated statements of cash flows for each of the three years in 19 the period ended December 31, 1999 Notes to consolidated financial statements 20-28
The consolidated financial statements listed above are included in the Annual Report to Shareholders of Pope & Talbot, Inc. for the year ended December 31, 1999. With the exception of the items referred to in Items 1, 5, 6, 7, 7a and 8, the 1999 Annual Report to Shareholders is not to be deemed filed as part of this report. The report of PricewaterhouseCoopers LLP on the financial statements of Harmac as of and for the year ended December 31, 1998, which report has been relied upon by Arthur Andersen LLP in their report listed above, is filed as Exhibit 99.1 to this Form 10-K. (a)(2) SCHEDULES All schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the related schedule, or because the information required is included in the financial statements and notes thereto. (a)(3) EXHIBITS The following exhibits are filed as part of this annual report. EXHIBIT NO. 3.1. Certificate of Incorporation, as amended. (Incorporated herein by reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992). 3.2. Bylaws. 4.1. Indenture, dated June 2, 1993, between the Company and Chemical Trust Company of California as Trustee with respect to the Company's 8-3/8% Debentures due 2013. (Incorporated herein by reference to Exhibit 4.1 to the Company's registration statement on Form S-3 filed April 6, 1993). 4.2. Rights Agreement, dated as of April 3, 1998, between the Company and Chase-Mellon Shareholder Services, L. L. C., as rights agent. (Incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on April 7, 1998). 13 4.3. Participation Agreement dated as of September 15, 1999 among the Company, SELCO Service Corporation, the Note Purchasers named therein, Wilmington Trust Company and First Security Bank, National Association. (Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999). 4.4. Facility Lease between the Company and Wilmington Trust Company dated September 30, 1999. (Incorporated herein by reference to Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999). 10.1. EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS 10.1.1. Stock Option and Appreciation Plan (as amended). (Incorporated herein by reference to Exhibits 99.1 and 99.2 to the Company's Form S-8 filed on February 22, 1999). 10.1.2. Executive Incentive Plan, as amended. (Incorporated herein by reference to Exhibit 10(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992). 10.1.3. Restricted Stock Bonus Plan. (Incorporated herein by reference to Exhibit 10(c) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992). 10.1.4. Deferral Election Plan. (Incorporated herein by reference to Exhibit 10(d) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992). 10.1.5. Supplemental Executive Retirement Income Plan. (Incorporated herein by reference to Exhibit 10(e) to the Company's Annual Report on Form 10-K for the year ended December 31, 1990). 10.1.6. Form of Severance Pay Agreement among the Company and certain of its executive officers. (Incorporated herein by reference to Exhibit 10.1.6 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). 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). 10.1.8. Special Non-Employee Director Stock Retainer Fee Plan. (Incorporated herein by reference to Exhibit 99.5 to the Company's Form S-8 filed on February 22, 1999). 10.1.9. Employment Agreement with Ralph Leverton, dated November 30, 1998. (Incorporated herein by reference to Exhibit 10.1.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998). 10.1.10.Separation Agreement with Ralph Leverton dated August 31, 1999. 10.1.11 Split Dollar Life Insurance Agreement between the Company and Maria M. Pope, as trustee of the Pope Grandchildren's Trust, dated December 21, 1999. 14 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, 1998, 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(1) 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). 10.7. Province of British Columbia Forest License A18969, dated December 1, 1993. (Incorporated herein by reference to Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). 11.1. Statement showing computation of per share earnings. 13.1. Portions of the Annual Report to Shareholders for the year ended December 31, 1999 which have been incorporated by reference in this report. 21.1. List of subsidiaries. 23.1. Consent of Arthur Andersen LLP. 23.2. Consent of PricewaterhouseCoopers LLP. 27.1. Financial Data Schedule. 99.1. Report of PricewaterhouseCoopers LLP. The undersigned registrant hereby undertakes to file with the Commission a copy of any agreement not filed under exhibit item (4) above on the basis of the exemption set forth in the Commission's rules and regulations. (b) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the three months ended December 31, 1999. 15 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 20th day of March, 2000. POPE & TALBOT, INC. By: \s\Peter T. Pope ------------------------------------ Peter T. Pope, Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 20, 2000, by the following persons on behalf of the registrant and in the capacities indicated. \s\Peter T. Pope Chairman of the Board - --------------------------------------------- ------------------------------------------- Peter T. Pope President, Director and \s\Michael Flannery Chief Executive Officer - --------------------------------------------- ------------------------------------------- Michael Flannery \s\Gordon P. Andrews Director - --------------------------------------------- ------------------------------------------- Gordon P. Andrews \s\Hamilton W. Budge Director - --------------------------------------------- ------------------------------------------- Hamilton W. Budge \s\Charles Crocker Director - --------------------------------------------- ------------------------------------------- Charles Crocker \s\Lionel G. Dodd Director - --------------------------------------------- ------------------------------------------- Lionel G. Dodd \s\Kenneth G. Hanna Director - --------------------------------------------- ------------------------------------------- Kenneth G. Hanna \s\Robert Stevens Miller, Jr. Director - --------------------------------------------- ------------------------------------------- Robert Stevens Miller, Jr. \s\Brooks Walker, Jr. Director - --------------------------------------------- ------------------------------------------- Brooks Walker, Jr. Vice President and \s\Maria M. Pope Chief Financial Officer - --------------------------------------------- ------------------------------------------- Maria M. Pope \s\Gerald L. Brickey Financial Controller - --------------------------------------------- ------------------------------------------- Gerald L. Brickey
16 EX-3.2 2 EXHIBIT 3.2 Exhibit 3.2 BYLAWS OF POPE & TALBOT, INC. ARTICLE I STOCKHOLDERS Section 1.1 ANNUAL MEETINGS. An annual meeting of stockholders shall be held for the election of directors at such date, time and place either within or without the State of Delaware as may be designated by the Board of Directors from time to time. Any other proper business may be transacted at the annual meeting. Section 1.2. SPECIAL MEETINGS. Special meetings of stockholders may be called at any time by the Board, or by a majority of the members of the Board, or by a committee of the Board which has been duly designated by the Board and whose powers and authority, as provided in a resolution of the Board or in the Bylaws, include the power to call such meetings, but such special meetings may not be called by any other person or persons; provided, however, that if and to the extent that any special meeting of stockholders may be called by any other person or persons specified in any provisions of the Certificate of Incorporation or any amendment thereto or any certificate filed under Section 151(g) of the Delaware General Corporation Law (or any successor thereto), then such special meeting may also be called by the person or persons, in the manner, at the times and for the purposes so specified. A special meeting shall be held at such date, time and place either within or without the State of Delaware as may be stated in the notice of the meeting. Section 1.3. NOTICE OF MEETINGS. Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by law, the written notice of any meeting shall be given not less than ten nor more than sixty days before the date of the meeting to each stockholder entitled to vote at such meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the Corporation. Section 1.4. ADJOURNMENTS. Any meetings of stockholders, annual or special, may adjourn from time to time to reconvene at the same or some other place, and notice need not be given of any such adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting 1 the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 1.5. QUORUM. At each meeting of stockholders, except where otherwise provided by law, the holders of a majority of the outstanding shares of each class of stock entitled to vote at the meeting, present in person or represented by proxy, shall constitute a quorum. For purposes of the foregoing, two or more classes or series of stock shall be considered a single class if the holders thereof are entitled to vote together as a single class at the meeting. In the absence of a quorum the stockholders so present may, by majority vote, adjourn the meeting from time to time in the manner provided by Section 1.4 of these Bylaws until a quorum shall attend. Shares of its own capital stock belonging on the record date for the meeting to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the Corporation, shall neither be entitled to vote nor be counted for quorum purposes; provided, however, that the foregoing shall not limit the right of the Corporation to vote stock, including but not limited to its own stock, held by it in a fiduciary capacity. Section 1.6. ORGANIZATION. Meetings of stockholders shall be presided over by the Chairman of the board, or in his absence by the President, or in his absence by a Senior Vice President, or in their absence by a Vice President, or in the absence of the foregoing persons by a chairman designated by the Board of Directors, or in the absence of such designation by a chairman chosen at the meeting. The Secretary shall act as secretary of the meeting, but in his absence the chairman of the meeting may appoint any person to act as secretary of the meeting. Section 1.7. VOTING; PROXIES. Each stockholder entitled to vote at any meeting of stockholders shall be entitled to vote for each share of stock held by him which has voting power upon the matter in question, except to the extent that the Certificate of Incorporation provides for cumulative voting with respect to the election of directors. Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for him by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or another duly executed proxy bearing a later date with the Secretary of the Corporation. Voting at meetings of stockholders need not be by written ballot and need not be conducted by inspectors unless the holders of a majority of the outstanding shares of all classes of stock entitled to vote thereon present in person or by proxy at such meeting shall so determine. 2 Section 1.8. FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect to any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. If no record date is fixed: (1) the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; and (2) the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for the adjourned meeting. Section 1.9. LIST OF STOCKHOLDERS ENTITLED TO VOTE. The Secretary shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for the purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any stockholder who is present. Section 1.10. NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS. (A) ANNUAL MEETINGS OF STOCKHOLDERS. (1) Nominations of persons for election to the Board of Directors of the Corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of the stockholders (a) pursuant to the Corporation's notice of meeting, (b) by or at the direction of the Board of Directors or (c) by any stockholder of the Corporation who was a stockholder of record at the time of giving of notice provided for in this Bylaw, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Bylaw. (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of paragraph (A) (1) of this Bylaw, the stockholder must have given timely notice in conformance with the requirements of this Bylaw, thereof in writing to the Secretary of the Corporation and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive 3 offices of the Corporation not later than the close of business on the 90th day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the stockholder to be timely must be so delivered not later than the close of business on the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by the Corporation. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the corporation which are beneficially owned by such person, (iv) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the stockholder, and (v) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934 (the "1934 Act") (including without limitation such person's written consent to being named in the proxy statement, if any, as a nominee and to serving as a director if elected); and (b) as to any other business that the stockholder proposes to bring before the meeting (i) a brief description of the business desired to be brought before the meeting, (ii) the reasons for conducting such business at the meeting, (iii) any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made and (iv) any other information which is required to be disclosed in solicitations of proxies on behalf of any such business, and specifically, any such information called for by Items 4 and 5 of Regulation 14A under the 1934 Act regarding such other business, the proponent of such other business and any associates or persons who would be deemed "participants" under Regulation 14A were the proponent soliciting proxies on behalf of such other business. All such notices shall include (i) a representation that the person sending the notice is a shareholder of record and will remain such through the record date for the meeting, (ii) the name and address, as they appear on the corporation's books, of such shareholder, (iii) the class and number of the corporation's shares which are owned beneficially and of record by such shareholder, and (iv) a representation that such shareholder intends to appear in person or by proxy at such meeting to make the nomination or move the consideration of other business set forth in the notice. (3) Notwithstanding anything in the second sentence of paragraph (A)(2) of this Bylaw to the contrary, in the event that the number of directors to the Board of Directors of the Corporation is increased and there is no public announce-ment by the Corporation naming all of the nominees for director or specifying the size of the increased Board of Directors at least 70 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this Bylaw shall also be considered timely, but only with respect to nominees for any new positions created by 4 such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation. (B) SPECIAL MEETINGS OF STOCKHOLDERS. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting (a) by or at the direction of the Board of Directors or (b) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in this Bylaw, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Bylaw. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Corporation's notice of meeting, if the stockholder's notice required by paragraph (A)(2) of this Bylaw shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 90th day prior to such special meeting or the 10th day following the day on which public announcement is first made on the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a stockholder's notice as described above. (C) GENERAL. (1) Only such persons who are nominated in accordance with the procedures set forth in this Bylaw shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Bylaw. Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, the chairman of the meeting shall refuse to acknowledge the nomination of any person or the consideration of any business not made in compliance with the foregoing procedures. (2) For purposes of this Bylaw, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this Bylaw, a stockholder shall also comply with all applicable requirements of the 1934 Act and the rules and regulations thereunder with respect to the matters set forth in this Bylaw. Nothing in this Bylaw shall be deemed to affect any rights (i) of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under 5 the 1934 Act or (ii) of the holders of any series of Preferred Stock to elect directors under specified circumstances. ARTICLE II BOARD OF DIRECTORS Section 2.1. POWERS; NUMBER; QUALIFICATIONS. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors, except as may be otherwise provided by law. The authorized number of directors shall be nine (9), and such number shall not be changed except by a Bylaw amending this section duly adopted by the Board or duly adopted by the Stockholders pursuant to the terms of Article SIXTH of the Certificate of Incorporation. Directors need not be stockholders. Section 2.2. ELECTION; TERM OF OFFICE; RESIGNATION; REMOVAL; VACANCIES. Each director shall hold office until the expiration of his term and until his successor is elected and qualified or until his earlier resignation or notice to the Board of Directors or to the President or the Secretary of the Corporation. Such resignation shall take effect at the time specified therein, and unless otherwise specified therein no acceptance of such resignation shall be necessary to make it effective. Any director or the entire Board of Directors may be removed, with cause, by the holders of a majority of the shares then entitled to vote at an election of directors. Vacancies and newly created directorships resulting from any increase in the authorized number of directors or from any other cause may be filled by a majority of the directors then in office, although less than a quorum, or by the sole remaining director. Section 2.3. REGULAR MEETINGS. A regular annual organizational meeting of the Board of Directors shall be held without other notice than this Bylaw at such time as the Board of Directors may specify within twenty-four (24) hours after, and at the same place as, the annual meeting of stockholders, for the purpose of electing officers and conducting any other business which may properly be considered. The Board of Directors may provide for the time and place of other regular meetings from time to time by resolution, and no notice need be given of such regular meetings. Section 2.4. SPECIAL MEETINGS. Special meetings of the Board of Directors may be held at any time or place within or without the State of Delaware whenever called by the Chairman of the Board, by the President or by any two directors. Notice of all special meetings of the Board shall be given to each director by two days' service of the same by telegram, by letter, or personally. Such notice may be waived by any director and any meeting shall be a legal meeting without notice having been given if all the directors shall be present thereat or if those not present shall, either before or after the meeting, sign a written waiver of notice of, or a consent to, such meeting or shall after the meeting sign an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or be made a part of the minutes of the meeting. 6 Section 2.5. TELEPHONIC MEETINGS PERMITTED. Members of the Board of Directors, or any committee designated by the Board, may participate in a meeting of the Board or of such committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Bylaw shall constitute presence in person at such meeting. Section 2.6. QUORUM; VOTE REQUIRED FOR ACTION. At all meetings of the Board of Directors a majority of the entire Board shall constitute a quorum for the transaction of business. The vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board. In case at any meeting of the Board a quorum shall not be present, the members of the Board present may adjourn the meeting from time to time until a quorum shall attend. Section 2.7. ORGANIZATION. Meetings of the Board of Directors shall be presided over by the Chairman of the Board, or in his absence by the President, or in his absence by the Vice President of Finance, or in his absence by a Senior Vice President, or in their absence by a chairman chosen at the meeting. The Secretary shall act as secretary of the meeting, but in his absence the chairman of the meeting may appoint any person to act as secretary of the meeting. Section 2.8. ACTION BY DIRECTORS WITHOUT A MEETING. Any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board or of such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors. Section 2.9 COMPENSATION OF DIRECTORS. The Board of Directors shall have the authority to fix the compensation of directors. ARTICLE III COMMITTEES Section 3.1. COMMITTEES. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation, 7 and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of dissolution, removing or indemnifying directors or amending these Bylaws; and, unless the resolution expressly so provides, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of the stock. Section 3.2. COMMITTEE RULES. Unless the Board of Directors otherwise provides, each committee designated by the Board may adopt, amend and repeal rules for the conduct of its business. In the absence of a provision by the Board or a provision in the rules of such committee to the contrary, a majority of the entire authorized number of members of such committee shall constitute a quorum for the transaction of business, the vote of a majority of the members present at a meeting at the time of such vote if a quorum is then present shall be the act of such committee, and in other respects each committee shall conduct its business in the same manner as the Board conducts its business pursuant to Article II of these Bylaws. ARTICLE IV OFFICERS Section 4.1. NUMBER AND TERM. The officers of the Corporation shall be the Chairman of the Board, the President, a Vice President of Finance, who shall be the chief financial officer of the Corporation and a Secretary, all of which shall be chosen by the Board of Directors. In addition, the Board of Directors may, but is not required to, appoint such other officers as may be deemed expedient for the proper conduct of the business of the Corporation, including but not limited to one or more other Executive Vice Presidents, one or more Senior Vice Presidents, one or more Vice Presidents, a Corporate Controller, a Treasurer, one or more Assistant Secretaries and one or more Assistant Treasurers, each of whom shall have such authority and perform such duties as the Board of Directors or the Chief Executive Officer may from time to time determine. Upon action of the Board of Directors, any Vice President may be named as an Executive Vice President or a Senior Vice President. The following officers of the Corporation shall be elected annually at the regular or organizational meeting of the Board of Directors held after the annual meeting of stockholders and shall serve at the pleasure of the Board of Directors: Chairman of the Board, President, Vice President of Finance, Secretary and such other officers as the Board of Directors may determine. The Chairman of the Board shall be elected from the members of the Board of Directors. If officers are not chosen at such meeting of the Board of Directors, they shall be chosen as soon thereafter as shall be convenient. Each officer shall hold office until his successor shall have been duly chosen or until his removal or resignation. 8 Section 4.2. REMOVAL AND RESIGNATION. Any officer chosen by the Board of Directors may be removed at any time, with or without cause, by the affirmative vote of a majority of all the members of the Board of Directors. Any officer chosen by the Board of Directors may resign at any time by giving written notice of said resignation to the Corporation. Unless a different time is specified therein, such resignation shall be effective upon its receipt by the Chairman of the Board, the President, the Secretary or the Board of Directors. Section 4.3. VACANCIES. A vacancy in any office because of any cause may be filled by the Board of Directors for the unexpired portion of the term. Section 4.4. CHAIRMAN OF THE BOARD. The Chairman of the Board shall, when present, preside at all meetings of the stockholders and of the Board of Directors. Section 4.5. PRESIDENT. The President shall be the Chief Executive Officer of the Corporation. As Chief Executive Officer, he shall exercise the general supervision of the property, affairs and business of the Corporation, shall sign or countersign or authorize another officer to sign all certificates, contracts, and other instruments of the Corporation as authorized by the Board of Directors, shall make reports to the Board of Directors and the stockholders, and shall perform all such other duties as are incident to such officer or are properly required by the Board of Directors. Section 4.6. ABSENCE OR DISABILITY OF THE CHIEF EXECUTIVE OFFICER. In the absence or disability of the President, the Board of Directors shall designate one of the other officers or directors of the Corporation or other individual to act as Chief Executive Officer. Section 4.7. VICE PRESIDENT OF FINANCE. The Vice President of Finance shall be the chief financial officer of the Corporation. Such officer shall have custody of all moneys and securities of the Corporation and shall keep regular books of account. Such officer shall disburse the funds of the Corporation in payment of the just demands against the Corporation, or as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the Board of Directors from time to time as may be required of such officer, an account of all transactions and of the financial condition of the Corporation. Such officer shall perform all duties incident to such office or which are properly required by the Board of Directors or by the chief executive officer. Section 4.8. EXECUTIVE VICE PRESIDENTS. The Executive Vice Presidents shall perform such duties and have such other powers as may from time to time be assigned and conferred upon them by the Board of Directors or by the chief executive officer. Section 4.9. SENIOR VICE PRESIDENTS AND VICE PRESIDENTS. The Senior Vice Presidents and the Vice Presidents shall respectively perform such duties and have such powers as may from time to time be assigned and conferred upon them by the Board of 9 Directors or by the chief executive officer, and shall perform such other duties and have such other powers as may be reasonably incident to their respective offices. Section 4.10. SECRETARY. The Secretary shall see that notices for all meetings are given in accordance with the provisions of these Bylaws and as required by law, shall keep minutes of all meetings, shall have charge of the seal and the corporate books, and shall make such reports and perform such other duties as are incident to such office or which are properly required by the Board of Directors or by the chief executive officer. The Assistant Secretary or the Assistant Secretaries, in the order of their seniority, shall, in the absence or disability of the Secretary, or in the event of such officer's refusal to act, perform the duties and exercise the powers and discharge such duties as may be assigned from time to time by the Board of Directors or by the chief executive officer. Section 4.11. TREASURER. The Treasurer shall, in the absence or disability of the Vice President of Finance, or in the event of such officer's refusal to act, perform the duties and exercise the powers of the Vice President of Finance, and shall have such powers and discharge such duties as may be assigned from time to time by the Board of Directors or by the chief executive officer. Section 4.12. CORPORATE CONTROLLER. The Corporate Controller shall perform such duties and have such powers as may be from time to time assigned and conferred upon him by the Board of Directors or by the chief executive officer, and shall perform such other duties and have such other powers as may be reasonably incident to such office. Section 4.13. SUBORDINATE OFFICERS. The Board of Directors may from time to time elect such subordinate officers as it may deem desirable. Each such officer shall hold office for such period, and shall have such authority and perform such duties, as the Board of Directors or the chief executive officer may from time to time prescribe. The Board of Directors may authorize any officer to appoint subordinate officers and to prescribe the powers and duties thereof. Section 4.14. COMPENSATION. The Board of Directors shall have power to fix the compensation of all officers and employees of the Corporation. It may appoint one or more committees with authority to fix the compensation of officers and employees, it may authorize the chief executive officer or any officer upon whom the power of appointing subordinate officers may have been conferred to fix the compensation of subordinate officers, and it may authorize an individual to fix the salaries and wages of non-officer employees. No officer shall be prevented from receiving a salary or other compensation from the Corporation by reason of the fact that such officer is also a director of the Corporation. ARTICLE V 10 STOCK Section 5.1. CERTIFICATES. Every holder of stock in the Corporation shall be entitled to have a certificate signed by or in the name of the Corporation by the Chairman of the Board of Directors, or the President or a Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, of the Corporation, certifying the number of shares owned by him in the Corporation. If such certificate is manually signed by one officer or manually countersigned by a transfer agent or by a registrar, any other signature on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. Section 5.2. LOST, STOLEN OR DESTROYED STOCK CERTIFICATES; ISSUANCE OF NEW CERTIFICATES. The Corporation may issue a new certificate of stock in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. ARTICLE VI MISCELLANEOUS Section 6.1. FISCAL YEAR. The fiscal year of the Corporation shall be determined by the Board of Directors. Section 6.2. SEAL. The Corporation may have a corporate seal which shall have the name of the Corporation inscribed thereon and shall be in such form as may be approved from time to time by the Board of Directors. The corporate seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. Section 6.3. WAIVER OF NOTICE OF MEETINGS OF STOCKHOLDERS, DIRECTORS AND COMMITTEES. Whenever notice is required to be given by law or under any provision or the Certificate of Incorporation or these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors, or members of a committee of directors need be specified in any written waiver of notice. 11 Section 6.4. INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES. (a) The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise or as a member of any committee or similar body, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, that he had reasonable cause to believe that his conduct was unlawful. (b) The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or as a member of any committee or similar body, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the Corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. (c) Any indemnification under Section 6.4(a) or Section 6.4(b) of the Bylaws (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Sections 6.4(a) and 6.4(b) of the Bylaws. Such 12 determination shall be made (i) by the Board by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (ii) if such a quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (iii) by the stockholders. (d) Notwithstanding the other provisions of this Section, to the extent that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 6.4(a) or Section 6.4(b) of the Bylaws, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. (e) Expenses incurred in defending a civil or criminal action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board in the specific case upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the Corporation as authorized in this Section. (f) The indemnification provided by this Section shall not be deemed exclusive and is declared expressly to be nonexclusive of any other rights to which those seeking indemnification may be entitled under any Bylaws, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (g) Upon resolution passed by the Board, the Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise or as a member of any committee or similar body against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Section. (h) For the purposes of this Section, references to "the Corporation" include in addition to the resulting corporation any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise or as a member of any 13 committee or similar body shall stand in the same position under the provisions of this Section with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (i) To assure indemnification under this Section of all such persons who are determined by the Corporation or otherwise to be or to have been "fiduciaries" of any employee benefit plan of the corporation which may exist from time to time, references to "other enterprises" shall be deemed to include such an employee benefit plan, including, without limitation, any plan of the Corporation which is governed by the Act of Congress entitled "Employee Retirement Income Security Act of 1974," as amended from time to time; the corporation shall be deemed to have requested a person to serve an employee benefit plan where the performance by such person of his duties to the Corporation also imposes duties on, or otherwise involves services by, such person to the plan or participants or beneficiaries of the plan; excise taxes assessed on a person with respect to an employee benefit plan pursuant to such Act of Congress shall be deemed "fines"; and action taken or omitted by a person with respect to an employee benefit plan in the performance of such person's duties for a purpose reasonably believed by such person to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the Corporation. Section 6.5. INTERESTED DIRECTORS; QUORUM. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association or other organization in which one or more of its directors or officers are directors or officers, or have financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if: (1) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (2) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (3) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board, a committee thereof or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board or of a committee which authorizes the contract or transaction. Section 6.6. REPRESENTATION OF SHARES IN OTHER CORPORATIONS. Shares of other corporations standing in the name of this Corporation may be voted or represented and all incidents thereto may be exercised on behalf of the Corporation by the Chairman 14 of the Board, the President, the Executive Vice President(s) or any Vice President and the Treasurer or the Secretary or an Assistant Secretary. Section 6.7. AUTHORIZED SIGNATURES. All written instruments shall be binding upon the Corporation if signed on its behalf by any two of the following officers of the Corporation: the Chairman of the Board, the Vice Chairman, the President, the Executive Vice President(s), the Senior Vice President(s) and the Vice Presidents. Section 6.8. FORM OF RECORDS. Any records maintained by the Corporation in the regular course of its business, including its stock ledger, books of account and minute books, may be kept on, or be in the form of, punch cards, magnetic tape, photographs, microphotographs or any other information storage device, provided that the records so kept can be converted into clearly legible form within a reasonable time. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect the same. Section 6.9. AMENDMENT OF BYLAWS. These Bylaws may be amended or repealed, and new Bylaws adopted, by the Board of Directors, but the stockholders entitled to vote may adopt additional Bylaws and may amend or repeal any Bylaw whether or not adopted by them, provided that such stockholder action is approved by the affirmative vote of the holders of not less than two-thirds of the total voting power of all outstanding shares of stock of the Corporation entitled to vote in the election of directors, considered for purposes of this Section as one class. 15 EX-10 3 EXHIBIT 10.10 Exhibit 10.1.10 SPLIT-DOLLAR LIFE INSURANCE AGREEMENT DECEMBER 21, 1999 POPE & TALBOT, INC. A DELAWARE CORPORATION 1500 S.W. FIRST AVENUE, SUITE 200 PORTLAND, OREGON 97201 COMPANY MARIA M. POPE TRUSTEE OF THE POPE GRANDCHILDREN'S TRUST 1500 S.W. FIRST AVENUE, SUITE 200 PORTLAND, OREGON 97201 TRUSTEE The Company and the Trustee enter into this Agreement to govern an arrangement whereby the Company and the Trustee will join in the purchase of Policy No. 020043774, on a policy form entitled Variable Estate Protection Policy 1999, (Policy), issued by John Hancock Mutual Life Insurance Company (Insurer), insuring the lives of Peter T. Pope (Pope) and his wife, Josephine D. Pope. This Agreement is entered into in connection with the employment by the Company of Pope as the Company's Chairman and Chief Executive Officer and is intended to be a split-dollar life insurance agreement described in Rev. Rul. 64-328. ARTICLE 1 LIFE INSURANCE POLICY AND COLLATERAL ASSIGNMENT 1.01 POLICY 1.01-1 In connection with this Agreement, the Trustee will apply for and purchase the Policy. 1.01-2 The Trustee will be owner of the Policy. The Trustee may freely exercise all rights and incidents of ownership, subject to the rights of the Company under this Agreement and the collateral assignment of the Policy to secure the Company's rights as described below. 1 1.01-3 The Trustee may pledge or assign the Policy to secure a loan, including a policy loan from the Insurer, but only to the extent that the Policy death benefit and net cash surrender value will not thereby be reduced below the amount the Company would then be entitled to receive under 2.01 in the event of a death benefit being payable under the Policy or under 3.01 in the event of surrender of the Policy. The Trustee is responsible for payment of interest on any such loan. 1.01-4 The Trustee will promptly provide copies of all Policy documents, including the Policy, the Policy application, the Collateral Assignment, any loan documents and any other documents relating to the Policy, to the Company. 1.02 PREMIUM PAYMENTS The Company will pay the entire premium under the policy. 1.03 COLLATERAL ASSIGNMENT 1.03-1 To secure the Company's rights under this Agreement, the Trustee will collaterally assign the Policy to the Company using a collateral assignment form attached as Attachment A (Collateral Assignment). The Collateral Assignment will merely secure the Company's rights under this Agreement and will not transfer any incidents of ownership of the Policy to the Company. 1.03-2 The Trustee shall own and retain all rights under the Policy, subject to the Company's rights under the Collateral Assignment, including the right to designate beneficiaries, the right to settlement and dividend options, the right to make a policy loan on the cash value as security, the right to surrender or partially surrender the Policy and receive the cash value and any other incidents of ownership. 1.03-3 The Trustee and the Company will take any additional actions necessary to cause the Collateral Assignment to conform to this Agreement. 2 ARTICLE 2 DEATH BENEFIT UNDER POLICY 2.01 PAYMENT TO COMPANY If a death benefit becomes payable under the Policy, a sum equal to the accumulated premiums paid by the Company under 1.02, less any amount previously reimbursed, shall be paid to the Company. 2.02 BALANCE OF PROCEEDS Any balance of the proceeds over the amount payable under 2.01 shall be paid to the Trustee or other beneficiaries designated by the Trustee in the manner and in the amounts provided in the Policy's provisions for designation of beneficiary. ARTICLE 3 SURRENDER OF POLICY 3.01 PAYMENT TO COMPANY ON SURRENDER If the Trustee surrenders or partially surrenders the Policy, the Company shall have the unqualified right to receive the lesser of (a) the net proceeds from the complete or partial surrender of the policy or (b) the accumulated premiums paid by the Company under 1.02, less any amount previously reimbursed. 3.02 BALANCE OF NET CASH SURRENDER VALUE Any balance of the Policy's net cash surrender value over the amount payable to the Company under 3.01 shall be payable to the Trustee. 3 ARTICLE 4 TERMINATION OF AGREEMENT 4.01 TERMINATION OF AGREEMENT This Agreement shall terminate on the earlier of (a) such date as the Company and the Trustee may agree in writing or (b) the last day of the sixteenth Policy year. 4.02 RELEASE OF COLLATERAL ASSIGNMENT 4.02-1 For sixty days after the date of termination of the Agreement under 4.01, the Trustee shall have the option of obtaining the release of the Collateral Assignment as follows. 4.02-2 The Trustee may exercise this option by paying to the Company the amount of the net cash surrender value of the Policy that the Company would then be entitled to receive under 3.01 if the Policy were then surrendered. 4.02-3 Upon receipt of payment under 4.02-2 the Company will release the Collateral Assignment by executing and delivering to the Trustee and the Insurer an appropriate instrument of release. 4.03 COMPANY'S RIGHTS If the Trustee does not exercise the option under 4.02, the Company may enforce its rights to claim and receive payment from the net cash surrender value of the Policy of the amount under 3.01. The Trustee will, at the Company's request, execute any documents required by the Insurer to make payment to the Company, including surrender or partial surrender of the Policy if required under the terms of the Policy. 4 ARTICLE 5 MISCELLANEOUS 5.01 BINDING AGREEMENT This Agreement is binding on and enforceable by and against the parties, their successors, legal representatives and assigns. 5.02 AMENDMENTS This Agreement may be amended only in a written document signed by both parties. 5.03 GOVERNING LAW This Agreement is governed by and construed according to the laws of the state of Oregon with the exception of its rules with respect to choice of laws. 5.04 SEVERABILITY No part of this Agreement will be affected if any other part of it is held invalid or unenforceable. 5.05 NOTICES All notices required or permitted to be given under this Agreement must be given in writing and will be deemed given when personally delivered or, if earlier, when received after mailing by registered or certified mail, postage prepaid, with return receipt requested. 5.06 ADAYS@ Any reference in this Agreement to Adays@ means all calendar days, whether or not legal holidays. 5.07 WAIVERS A party's failure to insist on compliance or enforcement of any provision of this Agreement shall neither affect the validity of the provision or its enforceability, nor constitute a waiver of future enforcement of that or any other provision. 5 5.08 DUPLICATE ORIGINALS This Agreement may be executed in duplicate originals, any of which shall have the same significance. TRUSTEE: TRUSTEE OF THE POPE GRANDCHILDREN'S TRUST By: /s/ Maria M. Pope ------------------ COMPANY: POPE & TALBOT, INC. By: /s/ Michael Flannery --------------------- 6 EX-10.1 4 EXHIBIT 10.1.11 Exhibit 10.1.11 August 31, 1999 Mr. Ralph Leverton 9137 N.W. McKenna Drive Portland, OR 97229 RE: SEPARATION AGREEMENT Dear Ralph: This letter, when signed by you, will constitute our Agreement regarding your separation from employment with "Pope & Talbot, Inc." (or the "Company"). Because of the subject of this letter, its tone necessarily is formal. However, on behalf of the Company, I want to express our appreciation for the contributions you have made during your employment. I also want to convey to you our best wishes for your future. We have mutually agreed upon your resignation as Vice President Pulp Division from the Company effective July 31, 1999. Your separation will be recorded in your personnel file and communicated by management within the Company as a resignation. The Company has agreed to provide you with the following: o Three months of salary continuation starting on August 1, 1999 and ending on October 31, 1999. This salary continuation is for the purpose of you providing transition services as requested by me. o Medical and dental benefits to continue through October 31, 1999 with Pope & Talbot or until your reside in Canada and are covered under the Harmac agreement, whichever occurs first. o Club dues will continue through October 31, 1999 or until you reside in Canada and are covered under the Harmac agreement, whichever occurs first. o Continued use of the vehicle through October 31, 1999 or until you reside in Canada and are covered under the Harmac agreement, whichever occurs first. o We will notify immigration on October 31, 1999 that you are no longer with the company. 1 Mr. Ralph Leverton Separation Agreement August 31, 1999 Page 2 o We will pay $2,500.00 towards the cost for Arthur Andersen to prepare your 1999 Canadian and U.S. tax returns. o We will relocate you back to Vancouver, B.C. according to Pope & Talbot's Relocation Policy with modifications, of which you have a copy. You acknowledge that the Company has no legal obligation to provide you with these separation/transition benefits except as part of this Agreement. These benefits are unique to you and your circumstances. In consideration for these benefits, you release the Company, its officers, directors, employees, agents, and insurers, from any claims you might have, whether known or unknown to you at this time, in connection with your employment or your resignation. This release includes any claims you might have under applicable state, federal or local law dealing with employment, contract, wage and hour, tort, or civil rights matters, including, but not limited to applicable state civil rights or wage payment laws, Title VII of the Civil Rights Act of 1964, the Post-Civil War Rights Acts (42 USC (delta)(delta) 1981-1988), the Civil Rights Act of 1991, the Age Discrimination in Employment Act, the Older Workers Benefit Protection Act, the Rehabilitation Act of 1973, the Americans with Disabilities Act, the Equal Pay Act, the Family and Medical Leave Act, the Uniformed Services Employment and Reemployment Rights Act, the Vietnam Era Veterans Readjustment Assistance Act, the Worker Adjustment and Retraining Notification Act, Executive Order 11246, and any regulations under such laws. This release, however, does not affect any rights you might have for benefits under any applicable medical insurance, disability, workers compensation, unemployment compensation or retirement program, or the two attached letters (one from Harmac Pacific dated November 30, 1998 and one from Pope & Talbot, Inc. dated December 2, 1998). You agree to hold confidential the terms of this separation Agreement, except to the extent that disclosure of its terms to your spouse, accountant, attorney and taxing authorities may be necessary for your financial or legal affairs or as may be required by law. You acknowledge that this Separation Agreement contains the entire agreement between you and the Company regarding the terms of your separation from employment. You further acknowledge that you have been given at least 21 days to consider this agreement and discuss it with financial or legal counsel of your choice; and that you voluntarily sign it and agree to be bound by its terms. You understand that this Separation Agreement must be signed within 21 days after you receive it in order for you to be entitled to the benefits given under it. However, you may revoke the Separation Agreement by sending me a written statement to that effect within 7 days after you have signed it. Unless you revoke it, the Separation Agreement will be 2 Mr. Ralph Leverton Separation Agreement August 31, 1999 Page 3 effective as of 7 days after you have signed it and the Company will then provide you with the benefits stated in the Separation Agreement. If you wish to enter into this Separation Agreement, please sign the enclosed copy where indicated and return the copy to me. Again, I thank you for all you have done for us during your employment and wish you every success in the future. Sincerely, Michael Flannery Chairman & Chief Executive Officer BH:kmt fl'rl899 Enclosure I voluntarily agree to and accept the terms of this Separation Agreement. - ---------------------------------------- ----------------------------------- Ralph Leverton Date Signed 3 EX-11. 5 EXHIBIT 11 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, 1999, 1998 and 1997
1999 1998 1997 ---- ---- ---- Weighted average number of common shares outstanding 13,666,705 13,481,441 13,419,195 Application of the "treasury stock" method to the stock option plan 82,654 807 42,257 ---------------- --------------- --------------- Total common and common equivalent shares, assuming full dilution 13,749,359 13,482,248 13,461,452 ================ =============== =============== Net income $ 14,421,000 $ 342,000 $ 10,020,000 ================ =============== =============== Net income per common share, assuming dilution $ 1.05 $ .03 $ .75 ================ =============== ===============
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 6 EXHIBIT 13.1 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Pope & Talbot, Inc. and Subsidiaries OVERVIEW Improving pulp and lumber markets, combined with pulp mill and sawmill efficiency gains, led to dramatically improved financial results in 1999. Net income for 1999 was $14.4 million, or $1.05 per diluted share, compared with a loss from continuing operations of $23.5 million, or $1.74 per diluted share, in 1998. Income from continuing operations was $4.4 million, or $.33 per diluted share, in 1997. On November 8, 1999, the Company acquired the remaining minority interest in Harmac Pacific Inc. (Harmac). The Company became the controlling shareholder of Harmac with a 53 percent ownership interest on February 2, 1998 and increased its ownership of Harmac to 60 percent on December 2, 1998. The Company's consolidated results of operations include Harmac's results from February 2, 1998. The Company made significant progress during 1999 on several strategic objectives. In the fourth quarter of 1999, with the acquisition of the remaining Harmac minority interest, the Company completed the last step of the process begun in 1997 to reposition the Company to exclusively wood products and pulp business lines. On a per share basis, Pope & Talbot is highly leveraged to pulp and lumber price changes. Production of North American softwood lumber reached a new record high in 1999, the highest level in twelve years. Lumber prices reached a cyclical high in the third quarter of 1999 and at year-end 1999 remained above 1998 price levels. In January 2000, the list price of northern bleached softwood kraft (NBSK) pulp delivered into Europe increased to $630 per metric ton, a level not experienced since the first quarter of 1996. Total revenues in 1999 increased to $486.9 million from $420.8 million in 1998 and $329.9 million in 1997. Lumber sales volumes in 1999 were flat compared with 1998, but the Company's average lumber sales prices increased 16 percent. Pulp sales volumes in 1999 increased 10 percent over 1998 volumes, and average pulp sales prices ton increased 4 percent. Comparing 1998 revenues with 1997, excluding Harmac revenues of $140.3 million in 1998, total revenues would have been less than 1997 primarily due to low commodity prices in both lumber and pulp. In addition, U.S. pulp operations in 1998 experienced a 12 percent decrease in volume sold compared with 1997 as the result of market-related downtime. The Company's focus on cost reductions at the mills and on controlling selling, general and administrative expenses was also a strategic objective. Cost of sales were $430.7 million, $429.1 million and $300.3 million in 1999, 1998 and 1997, respectively. The increase in cost of sales in 1998 compared with 1997 primarily reflects the acquisition of Harmac in 1998. Included in the 1998 amount was $140.4 million of Harmac pulp operations costs. For additional details regarding costs of sales, see the Wood Products and Pulp Products sections following this overview. Selling, general and administrative expenses were $23.9 million in 1999, compared with $24.1 million in 1998 and $14.8 million in 1997. Costs in 1998 increased $9.3 million over 1997 primarily due to the inclusion of Harmac in the 1998 results without any corresponding amounts in 1997. In 1999, the Company's progress in reduction of costs through integration of Harmac's corporate and sales functions with Pope & Talbot's was largely offset by higher legal and other corporate costs. The Company is also focused on maximizing return on invested capital. Capital expenditures for 1999, excluding environmental compliance costs, have been aimed at small, high-return investments to increase efficiencies and capacity. The open market purchases by the Company of approximately 430,000 shares of its common stock in the fourth quarter of 1999 was consistent with the goal of maximizing returns on invested capital. RESULTS OF OPERATIONS WOOD PRODUCTS The Company's Wood Products business comprised 51 percent of 1999 consolidated revenues and generated an operating profit before corporate expenses, interest and income taxes of $42.6 million. Results for 1999 compared to 1998 and 1997 operating profits of $1.3 million and $24.9 million, respectively. Wood Products revenues were $248.7 million in 1999 compared with $216.9 million and $248.3 million in 1998 and 1997, respectively. The $31.8 million increase in 1999 was due primarily to a 16 percent increase in average lumber prices. The 1998 revenue decrease relative to 1997 was due to lumber prices averaging 21 percent lower in 1998. U.S. lumber consumption reached record levels in 1999, with housing starts of almost 1.7 million and softwood lumber consumption in the U.S. approximating 54 billion board feet. Improving economies in Japan and other Pacific Rim countries also had a favorable impact on lumber demand in 1999. The Company shipped 577.9 million board feet in 1999, compared with 573.0 million board feet in 1998 and 546.4 million board feet in 1997. The average price per thousand board feet of western spruce/pine/fir (SPF) lumber has fluctuated significantly during the last three years. The Random Lengths Composite Price Index for SPF averaged $354 per thousand board feet in 1997, $288 in 1998 and rose to $342 in 1999. Despite record domestic demand in 1998, the collapse of the Japanese and other Asian economies caused the price of lumber to drop dramatically in 1998. Wood Products cost of sales for 1999 totaled $199.3 million, compared with $211.8 million in 1998 and $219.1 million in 1997. The $12.5 million decrease in cost of sales in 1999 was primarily due to reductions in the cost of saw logs as well as to lower manufacturing costs. Wood Products cost of sales in 1998 declined $7.3 million from 1997, primarily due to log cost decreases. Average log costs dropped 17 percent in the Canadian sawmills and 3 percent in the U.S sawmills in 1999, after 10 decreasing 11 percent and 5 percent, respectively, in 1998 relative to 1997. British Columbia stumpage fees, which are indexed (with a three-month lag) to lumber prices, increased in the third quarter of 1999 in response to rising lumber prices. Lumber production per man-hour and lumber recovery from logs increased in 1999 and 1998 relative to 1997 as the result of several well-targeted capital expenditures. In the fourth quarter of 1999, the Company completed the installation of a new curve sawing gang-edger at the Spearfish, South Dakota mill. The new energy system in place at our largest Canadian sawmill, Castlegar, led to further cost savings in 1999. Approximately 75 percent of the Company's current lumber capacity is located in British Columbia, Canada. Most of the timber supply for the Canadian mills is under long-term harvesting licenses with the Provincial Government and the balance is purchased in the open market. Lumber sales into the U.S. from certain provinces in Canada (including British Columbia) are subject to tariffs under the 1996 Softwood Lumber Agreement. Based on this agreement, as amended by Canada and the United States on August 26, 1999, Canadian lumber producers in certain provinces are assigned quotas of lumber volumes which may be shipped to the U.S. tariff-free. Incremental volumes are subject to a three-tier tariff of $53 per thousand board feet, $106 per thousand board feet and $146 per thousand board feet. The first annual period subject to quotas and tariffs ended March 31, 1997. The Company's tariff-free volume was reduced by 11.4 million board feet from 1996/1997 fiscal year to the 1997/1998 fiscal year, and then by another 11.6 million board feet for the 1998/1999 fiscal year. The tariff-free volume was essentially unchanged from 1998/1999 to 1999/2000. Although the Company's volume at the $53 tariff was reduced by 4.1 million board feet for 1999/2000, the volume at the $106 tariff was limited (previously it was unlimited) and the additional tier at $146 per thousand board feet was added. The net impact of these changes has been to increase tariff fees paid to the Government of Canada and/or reduce production (by increasing downtime) at the Company's British Columbia sawmills. During 1999, 1998, and 1997, the Company expensed tariff charges of approximately $7.1 million, $2.9 million and $1.9 million, respectively, related to shipments from the Company's British Columbia sawmills into the U.S. Because of the Softwood Lumber Agreement, the Company took several shutdowns during 1999, 1998 and 1997. The Company continually evaluates the need for temporary shutdowns in balancing the economics of the Softwood Lumber Agreement, sales prices and production costs. The Provincial Government of British Columbia's Commission of Resources and Environment issued the Kootenay Boundary Land Use Plan in 1997. This land use plan set aside several new wilderness areas. Although no assurances can be given, management believes that in the near term, timber supplies for the Company's Canadian sawmills will be relatively stable. The Company has in place reforestation practices designed to sustain and enhance timber supplies in the long-term to mitigate the adverse effects of forest restrictions. PULP PRODUCTS In the fourth quarter of 1999, the Company completed the acquisition of the remaining 40 percent Harmac minority interest. As a result of acquiring the minority interest in Harmac's annual capacity, the Company increased its annual pulp capacity by 152,000 tons. In addition, integration of Harmac's administrative, sales and other mill support functions was substantially completed by the end of 1999. The Company's proportion of revenues in 1999 from pulp products was 49 percent of total revenues compared with 48 percent in 1998 and 25 percent in 1997. The Company is currently the world's ninth largest producer of high grade NBSK pulp with approximately 445,000 metric tons of capacity. The Company also has 125,000 metric tons of short-fiber (sawdust) pulp producing capacity. In 1999, revenues from the Company's pulp operations totaled $238.2 million, compared with $203.8 million in 1998 and $81.6 million in 1997. Due to steadily increasing pulp prices combined with sales volume increases, operating losses from the Company's pulp operations in 1999 decreased to $1.9 million from $21.2 million in 1998. Operating losses related to the Company's Halsey mill in 1997 totaled $2.7 million. Pulp pricing, reflecting weak pulp markets since the end of 1996, strengthened significantly in the second half of 1999. The European benchmark price for NBSK pulp averaged $587 per metric ton in the fourth quarter of 1999 compared with $462 per metric ton in the fourth quarter of 1998, an increase of 27 percent. The benchmark price of NBSK pulp per metric ton averaged $520 in 1999, $516 in 1998 and $566 in 1997. Pulp revenues in 1999 for the Company's Harmac mill, in Nanaimo, British Columbia, were $162.9 million on shipments of 375,000 metric tons. This compares with sales of $140.3 million on 335,000 metric tons in the eleven-month period of 1998. Approximately 50 percent of sales were to Europe, 30 percent to Japan and other Pacific Rim countries and 20 percent to North America. Harmac produced 370,800 tons in 1999, the highest volume of pulp produced by the mill since 1969. Harmac produced 325,100 metric tons of pulp in the eleven-month period of 1998. During 1999, total costs decreased $6 per metric ton of pulp. This reduction was primarily the result of lower fiber costs due to species mix changes and to lower labor costs. Mill staff reductions related to the 1998 restructuring initiative have reduced labor costs and improved the mill's man-hour per ton of production efficiency ratio to 3.1 from 3.6 for the year 1998. Harmac has a long-term fiber supply agreement with Weyerhaeuser Company Limited that provides 1.7 million cubic meters of fiber per year through 2019. Fiber is purchased at market or at prices determined under a formula intended to reflect fair market value of the fiber and which takes into account the net sales value of pulp sold by Harmac. Surplus residual fiber in coastal British Columbia and the mix of pulp products produced mitigated the impact of the more expensive whole log chips and the cost of fiber indexed to the sales price of pulp. To reduce break-even levels, the Company has focused on reducing operating costs at the Harmac mill. During 1998, the Company initiated a comprehensive restructuring plan by closing 11 Harmac's on-site log chipping mill and the Vancouver, BC corporate administrative and pulp sales office. The plan also included reductions of hourly and salaried staff at the mill. The pulp sales and administrative functions of Harmac and Pope & Talbot were combined during the fourth quarter of 1998 in the Company's corporate office in Portland, Oregon. The combined pulp sales function sells a broad range of pulp and is able to pursue larger pulp customers and negotiate better transportation prices. A new labor contract ratified in January 1999 provided for improved work practice flexibility, leading to further reductions in labor costs at the mill. Also in 1998, Harmac completed its three-year project to modernize its fiber handling system. As a result of these initiatives and other actions, Harmac lowered its manufacturing costs by $30 per metric ton from 1997 to 1999. Certain restructuring costs recorded by Harmac totaling $6.5 million (costs totaling $5.6 million associated with employee terminations and $900,000 of fixed asset write-offs) were included in liabilities in the computation of the fair value of assets and liabilities assumed at the acquisition date. Costs charged to the restructure liability in 1998 totaled $3.2 million and related primarily to severance and other employee benefits and fixed asset write-offs. Costs charged to the restructure liability in 1999, primarily cash payments for severance and other employee benefits, totaled $1.3 million. As of December 31, 1999, total restructuring costs incurred and anticipated for the restructuring plan totaled $5.0 million. Therefore, $1.5 million of restructuring costs included in the original acquisition cost allocation was reversed at December 31, 1999 as an adjustment to the fair value of assets and liabilities acquired. The remaining liability for restructuring costs at December 31, 1999 was $.5 million, representing employee benefits payable to terminated employees. Pulp revenues for the Company's Halsey, Oregon mill in 1999 were $75.3 million compared with $63.5 million in 1998 and $81.6 million in 1997. Average 1999 prices realized at Halsey increased 6 percent from 1998 prices. In addition, sales volume in 1999 increased 17 percent from 1998 volumes. For 1999 and 1998, all of Halsey's pulp sales were priced on the basis of market prices for the various grades of pulp, including the 35 to 40 percent sold to Grays Harbor Paper Company (Grays Harbor). During 1997, 50 percent of Halsey's pulp was sold to Grays Harbor with pricing contractually indexed to the price of white paper. In 1998, the contract was modified to provide for pricing based on southern mixed (U.S.) bleached hardwood kraft prices. Halsey shipped 185,000 metric tons of pulp in 1999, compared with 158,000 metric tons in 1998 and 180,000 metric tons in 1997. In 1999, the Halsey mill achieved an all-time production record of 181,000 metric tons. Production was reduced in 1998 to balance inventory levels and reduce fiber costs. The Halsey mill produces pulp from two fiber sources- wood chips and sawdust. Sawdust has historically been in greater supply and less expensive than wood chips, which are normally used as the primary raw material for pulp mills. As a result of rising wood chip prices in 1998, Halsey further shifted its mix of production in favor of the lower cost fiber source. Halsey's 1999 sales mix was 69 percent sawdust pulp compared with 62 percent and 59 percent in 1998 and 1997, respectively. Sawdust prices averaged 9 percent higher in 1999 compared with 1998, and rose 16 percent in 1998 from 1997 levels. In contrast, the price of wood chips fell 17 percent in 1999 from 1998 average prices. Wood chip prices in 1998 increased 49 percent from average prices in 1997. The Company expects to complete its $35 million chlorine dioxide capital project at the Halsey mill by the end of 2000. These expenditures will improve the environmental performance of the mill and make it fully compliant with the Environmental Protection Agency's (EPA) "Cluster Rules." In addition, pulp quality will be improved. The Company changed the method of depreciating its U.S. pulp production assets from straight-line to units-of-production in 1998. The Company believed this method, common within the industry, most appropriately matches production costs with pulp sales revenues and brought the accounting methods of the Company's pulp mills into conformity. The impact to the consolidated loss from continuing operations in 1998 was a reduction of depreciation expense before tax of $.8 million. The cumulative effect of this accounting change on years prior to 1998 was income of $.7 million, net of tax, or $.06 per share. 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. The Company had a strong recovery in earnings before income taxes, depreciation and amortization (EBITDA), starting in the second quarter of 1999. EBITDA for the year 1999 was $65.1 million compared with a negative EBITDA of $3.1 million in 1998 and EBITDA of $33.5 million for 1997. EBITDA for all years excludes the impact of minority interest and discontinued operations. The $14.4 million increase in accounts receivable in 1999 was primarily the result of higher pulp sales volumes at higher prices in 1999. Inventories increased at year-end 1999 as logging activities increased during the winter months, and higher levels of wood chips for pulp operations were acquired at favorable prices in late 1999. Cash flow from reductions in inventories in 1998 of $16.9 million related primarily to active management of Wood Products log and lumber inventories. Changes in current and deferred income taxes in 1999 and 1998 relate primarily to the utilization of deferred tax assets related to net operating loss carryforwards. The increase in other liabilities in 1998 related primarily to restructuring cost liabilities. On September 30, 1999, the Company completed the sale and leaseback of its Halsey, Oregon pulp mill. The Company received $64.6 million in cash and treated the transaction as a financing for financial reporting purposes. A portion of the proceeds was used to fund the Company's $35 million capital project to bring the Halsey mill into compliance with the EPA's "Cluster Rules." On November 8, 1999, the Company acquired the 40 percent of the outstanding Harmac stock it did not already own. Under terms of the agreement, Harmac shareholders received 12 approximately $20 million U.S. in cash and approximately 1.5 million shares of Company common stock. In conjunction with the transaction, Harmac redeemed its 8% convertible subordinated debentures with an outstanding principal balance of $76.5 million Canadian (approximately $52 million U.S.) at par plus accrued interest. The cash requirements for these transactions were financed with a portion of the proceeds from the Halsey mill sale/leaseback and existing cash balances. On February 2, 1998, the Company increased its ownership of Harmac stock from 10 percent to 53 percent through completion of a cash tender offer. The total cost of the 53 percent interest in Harmac was $50.3 million, net of cash acquired of $19.6 million, and included common stock purchases and other acquisition costs. The payment for Harmac shares was made from existing cash and cash equivalent balances and borrowings of approximately $20 million under the Company's revolving credit agreement. The sale of the tissue business, also in the first quarter of 1998, generated $120.5 million in cash and the purchaser assumed certain tissue business liabilities. The Company used the cash received primarily to pay down short-term debt obligations related to the Harmac acquisition and to purchase short-term investments. In December 1998, the Company acquired an additional 1.2 million shares of Harmac stock for $2.5 million, increasing its ownership to 60 percent. In April 1999, the Company's Board of Directors authorized the repurchase of up to 2 million shares of its common stock through open market and privately negotiated transactions. During the fourth quarter of 1999, the Company acquired approximately 430,000 shares of its common stock for $5.2 million through open market purchases. The Company acquires its stock when the Company believes its shares are undervalued in the market. The Company has historically paid dividends based on a percentage of equity. Dividends paid totaled $7.0 million in 1999, and $10.2 million in 1998 and 1997. In the first quarter of 1999, the Board of Directors reduced the quarterly dividend rate to $.11 per share from $.19 per share to conserve the Company's net worth and cash balances. At December 31, 1999 and 1998, the current ratio was 2.1 to 1 and 2.5 to 1, respectively, and the Company's long-term debt to total capitalization ratio was 44 percent and 41 percent, respectively. At December 31, 1999, the Company had available approximately $67 million of borrowing capacity under revolving credit lines totaling $78 million. Total capital spending in 1999 was $24.8 million. Capital spending in 1999, excluding Halsey's environmental compliance spending, was $18.1 million compared with $27.6 million in 1998 and $13.1 million in 1997. The 1998 capital expenditures included Harmac's expenditures totaling $8.1 million, of which $6.6 million related to the installation of a barge unloading facility to modernize its fiber handling system. The Wood Products division spent approximately $9 million in 1998 for a waste wood burning energy system at the Castlegar sawmill. The Company estimates it will spend approximately $35 million on capital projects at its Halsey pulp mill by the end of 2000 to comply with the EPA "Cluster Rules." Approximately $8.2 million of costs related to this project have been incurred through December 31, 1999. Other anticipated capital projects in the Wood and Pulp Divisions for 2000 will be primarily to sustain existing operations with a limited number of relatively small, high-return projects. Projected 2000 capital spending will be funded with internally generated cash and supplemented, if necessary, with borrowings on the Company's lines of credit. DISCONTINUED OPERATIONS In January 1998, the Company sold the assets of its tissue business for cash consideration of $120.5 million and the assumption by the purchaser of certain liabilities. The liabilities assumed included the $18.8 million City of Eau Claire note payable and the business's $7.1 million post-retirement benefit obligation. The sale closed on March 6, 1998 and the Company recognized a gain of $26.8 million, net of tax. The Company's tissue business operating results are reflected in the Consolidated Statements of Income as income from discontinued operations, net of tax. The Company sold its disposable diaper business in February 1996. In 1998, the Company settled legal issues related to the diaper business and recognized certain costs related to facilities formerly used in diaper production. These costs were $4.0 million, net of tax, or $.30 per share. See Note 11 of Notes to Consolidated Financial Statements for additional discussion of the discontinued tissue and disposable diaper businesses. YEAR 2000 COMPLIANCE Pope & Talbot, like all other companies using computers and microprocessors, was faced with the task of addressing the Year 2000 problem. The Year 2000 issue existed because many computer systems and applications use two-digit fields to designate a year. This could have led to incorrect results when computer software performs arithmetic operations, comparisons or data field sorting involving years later than 1999. As a result of the Company's efforts towards systems replacement or corrections, no significant systems problems occurred at the turn of the millennium. Beginning in 1998, the Company embarked on a comprehensive approach to identify where this problem was likely to occur in its information technology and manufacturing systems, and to evaluate the Year 2000 readiness of certain third parties, such as suppliers and customers. The direct costs of projects solely intended to correct the Company's Year 2000 problems approximated $3.3 million. Most of these expenditures, related to replacement of systems and applications, have been capitalized. No significant additional Year 2000 expenditures are anticipated. FACTORS THAT MAY AFFECT FUTURE RESULTS The statements contained in this report that are not statements of historical fact, including without limitation, statements containing the words "believes," "expects," and words of similar import, constitute forward-looking statements that involve a number of risks and uncertainties. Moreover, from time to time the Company may issue other forward-looking statements. Investors are cautioned that such forward-looking statements 13 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 the following: CYCLICAL OPERATING RESULTS AND PRODUCT PRICING The Company's financial performance is principally dependent on the prices it receives for its products. Prices for the Company's products are highly cyclical and have fluctuated significantly in the past and may fluctuate significantly in the future. Prices for both of the Company's principal products, lumber and pulp, fell during 1998 and then improved in 1999. No assurance can be given as to the sustainability of the recent price improvements. The Company's financial performance is also dependent on the rate at which it utilizes its production capacity. When capacity utilization is reduced in response to weak demand for the Company's products, its cost per unit of production increases and its profitability decreases. The markets for the Company's products are highly cyclical and are characterized by periods of excess product supply due to many factors, including: o additions to industry capacity; o increased industry production; o periods of insufficient demand due to weak general economic activity or other causes; and o inventory destocking by customers. The Company's primary products are commodities, resulting in extreme price competition. Both the wood products and pulp industries have had over-capacity for several years. The Company's industries are capital-intensive, which leads to high fixed costs and generally results in continued production as long as prices are sufficient to cover marginal costs. This has caused substantial price competition and volatility and caused the Company to generate net losses from continuing operations as recently as 1996 and 1998. These losses were primarily due to losses in its pulp operations, which continued to be unprofitable in 1999. In the event of a recession, demand and prices are likely to drop substantially. RISKS OF INTERNATIONAL BUSINESS In general, the Company's sales are subject to the risks of international business, including: o fluctuations in foreign currencies; o changes in the economic strength of the countries in which it does business; o trade disputes; o changes in regulatory requirements; o tariffs and other barriers; and o quotas, duties, taxes and other charges or restrictions upon exportation and importation. The economic crisis in Asia softened demand for wood and pulp products in that region and, consequently, lowered prices in 1998. As a result, producers for the Asian markets redirected their products to other regions, thereby lowering prices elsewhere. In addition, Asian producers may be able to further lower prices and increase exports as a result of their depreciated currencies. Weakness in Asian markets has eroded worldwide pricing for the Company's products, indirectly adversely affecting its financial results. Asian markets strengthened in 1999, but if these markets worsened, it could have a material adverse effect on the Company's financial condition and results of operations. AVAILABILITY AND PRICING OF RAW MATERIALS Logs, wood chips and sawdust, the principal raw materials used in the manufacture of the Company's products, are purchased in highly competitive, price-sensitive markets. These raw materials have historically exhibited price and demand cyclicality. Supply and price of these raw materials are dependent upon a variety of factors over which the Company has no control, including environmental and conservation regulations, and natural disasters, such as forest fires, hurricanes and other extreme weather conditions. A decrease in the supply of logs, wood chips and sawdust can cause higher raw material costs. 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 markets, timber offered for sale through competitive bidding by U.S. federal agencies and timber purchased under long-term contracts to cut timber on private lands. The Company's lumber capacity comes from British Columbia (75%) and the Black Hills region of South Dakota and Wyoming (25%). In Canada, the Company's 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. Under these licenses, the Provincial Government has the authority to modify prices and harvest volumes at any time. British Columbia's Commission on Resources and Environment issued the Kootenay Boundary Land Use Plan of 1997. This land use plan set aside several new wilderness areas. The British Columbia government has also implemented a Forest Practices Code, which sets strict standards for logging activities and reforestation responsibilities. No assurance can be given that in the near or long-term the Company's timber supplies will be stable or that these forest restrictions will not have a material adverse effect on the Company's operations. Softwood fiber (wood chips and sawdust), particularly in the quantities necessary to support world-scale pulp production facilities, is in increasingly short supply in the Pacific Northwest. In the last decade Pacific Northwest log availability has been reduced and lumber and plywood mills have shut down. The volume of lower cost residual chips has dropped correspondingly. Pulp mills that require wood chips as the primary source of raw material now rely on additional higher cost supply sources which produce chips directly from pulpwood and/or deliver from greater distances. Consequently, the market price of chips to all buyers has increased. To provide an adequate supply of wood fiber for its Halsey, Oregon mill, the Company has expanded its capability of using sawdust as a raw material for a significant portion of the production and diversified its suppliers of fiber. There can be no assurance that the Company will be able to obtain an adequate supply of softwood fiber for its operations. 14 DEPENDENCE ON A SINGLE SUPPLIER FOR THE HARMAC PULP MILL Harmac has a long-term fiber supply agreement with Weyerhaeuser Company Limited that provides for at least 75% of Harmac's fiber requirements through 2019. Fiber is purchased at market or at prices determined under a formula intended to reflect fair market value of the fiber and which takes into account the net sales value of pulp sold by Harmac. The failure by Weyerhaeuser to deliver the required fiber pursuant to this contract could have a material adverse effect on the Company as a whole. DEPENDENCE ON A SINGLE CUSTOMER FOR THE HALSEY PULP MILL Approximately 35-40% of the pulp produced by the Halsey, Oregon pulp mill is sold to Grays Harbor Paper Company pursuant to a long-term contract. Loss of this key customer would have a material adverse impact on the Company if a replacement buyer could not be secured on a timely basis. QUOTAS AND EXPORT FEES ON LUMBER EXPORTS TO THE UNITED STATES Softwood lumber exports to the U.S. by Canadian producers have been a contentious trade issue between Canada and the U.S. for a number of years. Effective April 1996, the governments of Canada and the U.S. entered into the Softwood Lumber Agreement for the export of softwood lumber to the U.S. Pursuant to the agreement, in each fiscal year ended March 31, Canadian softwood lumber producers are assigned quotas of lumber volumes which may be shipped to the U.S. tariff-free. Incremental volumes were subject to a two-tier tariff of $53 per thousand board feet and $106 per thousand board feet. On August 26, 1999 Canada and the United States amended the Softwood Lumber Agreement to add a third-tier tariff at a rate of $146 per thousand board feet and to reduce the amount of timber volume subject to the first tier by 25%. The Company has been allocated a specific quota within each tier. The Company's tariff-free volume was reduced by 11.4 million board feet from the 1996/1997 fiscal year to the 1997/1998 fiscal year, and then by another 11.6 million board feet for the 1998/1999 fiscal year. As a partial offset, the Company received increases in allocation at the lower tariff from the 1996/1997 fiscal year to the 1998/1999 fiscal year. For the 1999/2000 fiscal year, the Company's tariff-free volume was essentially unchanged, while its volume at the $53 tariff level was decreased by 4.1 million board feet. In March 1999, the Company filed under the North American Free Trade Agreement a claim against the Canadian Federal Government. In its claim, the Company asserts that its duty-free export quota has been unfairly reduced. There can be no assurance as to when the claim will be resolved. The Canadian Softwood Lumber Agreement expires in 2001 and the Company cannot predict whether the agreement will be renewed or what the terms of any renewed agreement might be. GLOBAL COMPETITION The markets for the Company's products are highly competitive on a global basis, with a number of major companies competing in each market and with no company holding a dominant position. In particular, the wood products industry is highly competitive, with a large number of companies producing products that are reasonably standardized. Many of the Company's competitors have substantially greater financial resources than it does. Some of its competitors may have the advantage of not being affected by fluctuations in the value of the Canadian dollar. While the principal basis for competition is price, the Company also competes to a lesser extent on the basis of quality and customer service. EXCHANGE RATE FLUCTUATIONS Although the Company's sales are made primarily in U.S. dollars, a substantial portion of its operating costs and expenses are incurred in Canadian dollars. Significant variations in relative currency values, particularly a significant increase in the value of the Canadian dollar relative to the U.S. dollar, could have a material adverse effect on its business, financial condition, results of operations and cash flows. ENVIRONMENTAL REGULATION The Company is subject to extensive federal, state, provincial and local environmental laws and regulations. These laws and regulations impose stringent standards on the Company regarding, among other things: o air emissions; o water discharges; o use and handling of hazardous materials; o use, handling and disposal of waste; and o remediation of environmental contamination. The Company may incur substantial costs to comply with current requirements or new environmental laws that might be adopted. In addition, the Company may discover currently unknown environmental problems or conditions which may or may not require remediation. Any such event could have a material adverse effect on its business, financial condition, results of operations and cash flows. The Company has spent significant amounts of money in the past to comply with environmental regulations and expects that it will have to spend money in the future. The Company has taken reserves based on current information to address environmental liabilities. Additional significant expenditures could be required if the law changes or new information is discovered, and those expenditures could have a material adverse effect on its financial condition. In addition, the Company has been required to make significant environmental capital expenditures every year. In April 1998, the U.S. Environmental Protection Agency published regulations known as the "Cluster Rules" establishing standards and limitations for air and water emissions by pulp mills. The capital costs to comply with these new regulations at the Halsey pulp mill are anticipated to total approximately $35 million, with compliance required by the first quarter of 2001. 15 The Company has spent $8.2 million of these capital costs through the end of 1999 and expects the mill upgrade to be complete by the end of 2000. Current legislation requires all pulp mills in British Columbia to eliminate the discharge of chlorinated organic compounds by December 31, 2002. Currently, the cost of available technology to eliminate all chlorinated organic compounds at kraft pulp mills is prohibitive. The British Columbia government, industry participants and other stakeholders are engaged in discussion to resolve this issue. If the current legislation is not amended, substantially all of the chemical pulp mills in British Columbia would likely be required to be closed, which would have a material adverse effect on the Company's business. The Company is currently participating in the investigation of environmental contamination at two sites on which it previously conducted business. See Note 12 of Notes to Consolidated Financial Statements. The ultimate cost to the Company for site remediation and monitoring on these sites cannot be predicted with certainty due to the unknown magnitude of the contamination, the varying costs of alternative clean-up methods, the clean-up time frame possibilities, the evolving nature of remediation technologies and governmental regulations and the inability to determine its share of multi-party obligations or the extent to which contributions will be available from other parties, including insurance carriers. COST REDUCTIONS EXPECTED FROM CAPITAL EXPENDITURES The Company has made and will continue to make capital expenditures in both its lumber and pulp operations from which it expects to generate cost savings. Although the Company's management is experienced in achieving cost reductions and operating efficiencies, there can be no assurance that any specified level of cost savings will be fully achieved or will be achieved within the time periods contemplated. In addition, cost savings from capital projects may be offset by cost increases in other areas so that total costs may not actually decrease. FINANCIAL LEVERAGE As a result of increased borrowings, the Company's long-term debt as a percentage of total capitalization at December 31, 1999 of 44 percent is higher than in recent years. While the Company's leverage level is not unusual for the forest products and pulp industries, such leverage increases its financial risk by (i) potentially increasing the cost of additional financing for working capital, capital expenditures and other purposes, and (ii) increasing the amount of cash flow dedicated to the payment of interest and principal. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Pope & Talbot, Inc. We have audited the accompanying consolidated balance sheets of Pope & Talbot, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1999 and 1998 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Harmac Pacific Inc., which statements reflect total assets and total revenues of 43 percent and 33 percent in 1998, respectively, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for the other entity, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Pope & Talbot, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of its operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. As explained in Note 1 to the consolidated financial statements, effective January 1, 1998, the Company changed its method of accounting for depreciation of pulp production assets from the straight-line method to the units-of-production method. ARTHUR ANDERSEN LLP Portland, Oregon JANUARY 20, 2000 16 CONSOLIDATED BALANCE SHEETS Pope & Talbot, Inc. and Subsidiaries As of December 31 (in thousands of dollars except per share amounts)
1999 1998 - ------------------------------------------------------------------------------------------------------------ ASSETS Current assets: Cash and cash equivalents $ 22,719 $ 27,473 Short-term investments 10,649 9,857 Accounts receivable 74,099 59,676 Inventories 84,466 77,757 Prepaid expenses 10,866 10,651 ------------- ------------- Total current assets 202,799 185,414 Properties: Plant and equipment 457,537 424,519 Accumulated depreciation (232,129) (199,417) ------------- ------------- 225,408 225,102 Land and timber cutting rights 8,759 9,290 ------------- ------------- Total properties 234,167 234,392 Other assets: Deferred income tax assets, net 19,448 16,218 Other 13,792 13,565 ------------- ------------- Total other assets 33,240 29,783 ------------- ------------- $ 470,206 $ 449,589 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 11,059 $ 10,259 Current portion of long-term debt 4,024 556 Accounts payable 29,305 21,532 Accrued payroll and related taxes 18,727 18,471 Income taxes 17,784 8,775 Other accrued liabilities 14,317 13,994 ------------- ------------- Total current liabilities 95,216 73,587 Long-term liabilities: Long-term debt, net of current portion 147,038 138,004 Other long-term liabilities 41,851 40,182 ------------- ------------- Total long-term liabilities 188,889 178,186 Minority interest - 39,759 Stockholders' equity: Preferred stock, $10 par value, 1,500,000 shares authorized, none issued - - Common stock, $1 par value, 20,000,000 shares authorized, 15,450,646 issued 15,451 13,972 Additional paid-in capital 48,596 31,160 Retained earnings 147,893 140,482 Cumulative translation adjustments (11,149) (18,113) Common stock held in treasury, at cost (14,690) (9,444) ------------- ------------- Total stockholders' equity 186,101 158,057 ------------- ------------- $ 470,206 $ 449,589 ============= =============
The accompanying notes to consolidated financial statements are an integral part of this statement. 17 CONSOLIDATED STATEMENTS OF INCOME Pope & Talbot, Inc. and Subsidiaries Years ended December 31 (in thousands of dollars except per share amounts)
1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------- Revenues $ 486,948 $ 420,785 $ 329,899 Cost and expenses: Cost of sales 430,719 429,071 300,320 Selling, general and administrative 23,910 24,100 14,814 Interest, net 9,063 7,973 5,995 ------------- ------------- ------------- 463,692 461,144 321,129 Income (loss) before income taxes, minority interest, discontinued operations and cumulative effect of accounting change 23,256 (40,359) 8,770 Income tax provision (benefit) 11,422 (13,352) 4,338 ------------- ------------- ------------- Income (loss) before minority interest, discontinued operations and cumulative effect of accounting change 11,834 (27,007) 4,432 Minority interest in subsidiary loss, net of income tax benefit (2,587) (3,547) - ------------- ------------- ------------- Income (loss) from continuing operations 14,421 (23,460) 4,432 Discontinued operations: Income from discontinued tissue operations (net of income tax provision of $164 and $3,573 for 1998 and 1997, respectively) - 256 5,588 Gain on sale of discontinued tissue operations (net of income tax provision of $24,630) - 26,818 - Loss on sale of discontinued diaper operations (net of income tax benefit of $1,985) - (4,015) - ------------- ------------- ------------- Income from discontinued operations - 23,059 5,588 ------------- ------------- ------------- Income (loss) before cumulative effect of accounting change 14,421 (401) 10,020 Cumulative effect of accounting change - 743 - ------------- ------------- ------------- Net income $ 14,421 $ 342 $ 10,020 ============= ============= ============= Basic income (loss) per common share: Income (loss) from continuing operations $ 1.06 $ (1.74) $ .33 Income from discontinued operations - 1.71 .42 Cumulative effect of accounting change - .06 - ------------- ------------- ------------- Net income $ 1.06 $ .03 $ .75 ============= ============= ============= Diluted income (loss) per common share: Income (loss) from continuing operations $ 1.05 $ (1.74) $ .33 Income from discontinued operations - 1.71 .42 Cumulative effect of accounting change - .06 - ------------- ------------- ------------- Net income $ 1.05 $ .03 $ .75 ============= ============= =============
The accompanying notes to consolidated financial statements are an integral part of this statement. 18 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Pope & Talbot, Inc. and Subsidiaries For the years ended December 31, 1999, 1998 and 1997 (in thousands of dollars except per share amounts)
Common stock Treasury Stock Additional Cumulative ----------------- ------------------ paid-in Retained translation Shares Amount Shares Amount capital earnings adjustments Total - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 13,971,605 $ 13,972 (607,826) $ (11,111) $ 35,976 $ 150,563 $ (6,172) $183,228 Issuance of shares under stock plans - - 117,662 1,667 265 - - 1,932 Cash dividends ($.76 per share) - - - - - (10,197) - (10,197) Partnership transaction tax settlement costs - - - - (1,846) - - (1,846) Comprehensive income (loss): Net income - - - - - 10,020 - 10,020 Change in translation adjustment - - - - - - (3,675) (3,675) Total comprehensive income - - - - - - - 6,345 ---------- -------- -------- -------- -------- --------- -------- -------- Balance at December 31, 1997 13,971,605 13,972 (490,164) (9,444) 34,395 150,386 (9,847) 179,462 ---------- -------- -------- -------- -------- --------- -------- --------- Cash dividends ($.76 per share) - - - - - (10,246) - (10,246) Partnership transaction tax settlement costs - - - - (3,235) - - (3,235) Comprehensive income (loss): Net income - - - - - 342 - 342 Change in translation adjustment - - - - - - (8,266) (8,266) Total comprehensive loss - - - - - - - (7,924) ---------- -------- -------- -------- -------- --------- -------- --------- Balance at December 31, 1998 13,971,605 13,972 (490,164) (9,444) 31,160 140,482 (18,113) 158,057 ---------- -------- -------- -------- -------- --------- -------- --------- Cash dividends ($.52 per share) - - - - - (7,010) - (7,010) Issuance of shares in acquisition of Harmac minority interest 1,479,041 1,479 - - 16,812 - - 18,291 Value of options exchanged for Harmac options included as additional - - - - 624 - - 624 purchase price Repurchased shares - - (429,600) (5,246) - - - (5,246) Comprehensive income (loss): Net income - - - - - 14,421 - 14,421 Change in translation adjustment - - - - - - 6,964 6,964 Total comprehensive income - - - - - - - 21,385 ---------- -------- -------- -------- -------- --------- -------- --------- Balance at December 31, 1999 15,450,646 $ 15,451 (919,764) $ (14,690) $ 48,596 $ 147,893 $(11,149) $186,101 ========== ======== ======== ======== ======== ========= ======== =========
The accompanying notes to consolidated financial statements are an integral part of this statement. 19 CONSOLIDATED STATEMENTS OF CASH FLOWS Pope & Talbot, Inc. and Subsidiaries Years ended December 31 (in thousands of dollars)
1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------- Cash flow from operating activities: Net income $ 14,421 $ 342 $ 10,020 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization 32,773 29,919 30,056 Gain on disposal of discontinued operations - (51,448) - Minority interest in subsidiary loss, net of income tax (2,587) (3,547) - Cumulative effect of accounting change - (743) - Changes in assets and liabilities: Accounts receivable (14,423) (161) (5,410) Inventories (6,709) 16,906 (2,620) Prepaid expenses and other assets 561 2,207 (4,820) Accounts payable and accrued liabilities 11,986 (8,928) (1,737) Current and deferred income taxes 4,843 6,168 (2,219) Other liabilities 316 3,141 1,698 ------------ ------------ ------------ Net cash provided by (used for) operating activities 41,181 (6,144) 24,968 Cash flow from investing activities: Purchases of short-term investments (19,488) (43,935) - Proceeds from maturities of short-term investments 18,696 29,311 - Proceeds from sales of short-term investments - 4,869 - Purchases of noncurrent investments held for sale - (2,206) (13,760) Capital expenditures (24,827) (27,574) (13,084) Investment in subsidiary, net of cash acquired (20,389) (38,337) - Minority interest in subsidiary treasury stock issuance 207 174 - Proceeds from sale of discontinued operations - 120,451 - Proceeds from sale of other properties 335 1,261 378 ------------ ------------ ------------ Net cash provided by (used for) investing activities (45,466) 44,014 (26,466) Cash flow from financing activities: Net increase (decrease) in short-term borrowings 800 (31,541) 11,800 Increase (decrease) in long-term debt, including current portion 10,987 (521) (488) Shares repurchased (5,246) - - Partnership transaction tax settlement costs - - (1,846) Proceeds from issuance of treasury stock, net - - 1,932 Cash dividends (7,010) (10,246) (10,197) ------------ ------------ ------------ Net cash provided by (used for) financing activities (469) (42,308) 1,201 ------------ ------------ ------------ Decrease in cash and cash equivalents (4,754) (4,438) (297) Cash and cash equivalents at beginning of period 27,473 31,911 32,208 ------------ ------------ ------------ Cash and cash equivalents at end of period $ 22,719 $ 27,473 $ 31,911 ============ ============ ============
The accompanying notes to consolidated financial statements are an integral part of this statement. 20 NOTES TO FINANCIAL STATEMENTS POPE & TALBOT, INC. AND SUBSIDIARIES FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 1. ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Pope & Talbot, Inc. and Subsidiaries (the Company), after eliminating significant intercompany transactions and balances. All assets and liabilities of the Company's foreign subsidiaries are translated into U.S. dollars at the period-end exchange rates. Revenues and expenses are translated at an average exchange rate for the year. Translation gains and losses are reflected in stockholders' equity as cumulative translation adjustments. Net gains and losses on foreign currency transactions, which were not significant, are reflected in net income. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. RECLASSIFICATIONS Certain reclassifications have been made to prior years' data to conform to the current year's presentation. INVENTORIES Inventories are stated at the lower of cost or market. For portions of lumber and raw material inventories, cost has been determined on the last-in, first-out method. For remaining inventories, cost has been determined using the first-in, first-out and average-cost methods. PLANT AND EQUIPMENT Plant and equipment is carried at cost and includes expenditures for new facilities and those expenditures which substantially increase the useful lives of existing plant and equipment. Costs of maintenance and repairs are charged to expense as incurred. Upon sale or retirement, the related cost and accumulated depreciation are removed from the accounts, with the resultant gain or loss included in income. The estimated useful lives of the principal items of plant and equipment range from 3 to 40 years. Depreciation of assets other than pulp production assets is computed using the straight-line method over the useful lives of respective assets. In 1998, depreciation of the Company's U.S. pulp production assets was changed to the units-of-production method from the straight-line method. The change was adopted to conform depreciation methods between the Company's U.S. and Canadian pulp operations. The Company believes the units-of-production method, common in the industry, more appropriately matches production costs and pulp sales revenues over the lives of the pulp mill assets. The effect of the change in 1998 was to decrease the loss from continuing operations by approximately $.5 million. The cumulative effect of applying the new method for years prior to 1998 was reported net of tax as a cumulative effect of accounting change in the 1998 period. The Company capitalizes interest on borrowed funds during the construction period of major capital projects. Interest capitalized is determined by applying the Company's effective interest rate to the accumulated capital costs during the construction period of a project. Interest capitalized in 1999 and 1998 was $.4 million per year. There were no significant interest costs capitalized in 1997. Capitalized interest is amortized over the depreciable life of related assets. The Company evaluates recoverability of long-lived assets using projections of related future cash flows. Realization of these assets is dependent on generating sufficient future cash flows to recover the asset's carrying value. Although realization is not assured, management believes current long-lived asset carrying values will be recovered. These assets may become impaired in the future, however, if estimates of future cash flows are significantly reduced. TIMBER RESOURCES In the U.S., the Company obtains its timber from various public and private sources under timber harvesting contracts. Additionally, logs are purchased on open log markets. Liabilities for timber removed under harvesting contracts are not recorded until the timber is cut, as the Company generally does not incur a direct liability for, or ownership of, this timber until it has been harvested. The total volume committed under contract at December 31, 1999, and the 2000 planned contract harvest was 218 million board feet and 70 million board feet, respectively. The Company's best estimate of its total commitment at current contract rates under these contracts was approximately $43 million. The Company evaluates the realizability of harvesting contracts based on the estimated total cost applied to such harvests and the projected values to be realized from sales of the converted product. In Canada, the Company primarily obtains its timber from the Provincial Government of British Columbia under timber harvesting licenses. The cost assigned to these timber licenses is amortized over 50 years on a straight-line basis. The Company also purchases logs in Canada on open log markets. The Canadian timber harvesting licenses allow, but do not require, the Company to remove timber from defined areas annually on a sustained yield basis. Future allowable harvests may be adjusted if the Company does not remove timber over a five-year period in accordance with the grants. As in the U.S., liabilities for the cost of timber removed are not recorded until the timber is cut as the Company does not incur a direct liability for, or ownership of, this timber until it has been harvested. REFORESTATION Under the Canadian timber harvesting licenses mentioned above, the Company is responsible for the reforestation of the land from which timber is harvested. A substantial portion of the costs incurred to reforest do not occur until 10 to 15 years 21 after the timber is harvested. The Company accrues for the total projected cost of reforestation as the timber is removed. Actual expenditures for reforestation are applied against this accrual when they are made. INCOME TAXES The Company accounts for income taxes using the liability method, and deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of the enacted tax laws. The principal temporary differences are related to depreciation, net operating loss carryforwards, various tax credits, reforestation and postretirement benefits. Undistributed earnings of the Company's Canadian subsidiaries totaled $163.3 million on December 31, 1999, which, under existing law, will not be subject to U.S. tax until distributed as dividends. Since the earnings have been, and are intended to be reinvested in Canadian operations, no provision has been made for any U.S. taxes that may be applicable thereto. Furthermore, any taxes paid to the Canadian government on those earnings may be used, in whole or in part, as credits against the U.S. tax on any dividends distributed from such earnings. It is not practicable to estimate the amount of unrecognized deferred U.S. taxes on these undistributed earnings. ENVIRONMENTAL EXPENDITURES Environmental expenditures related to current operations that qualify as property, plant and equipment or which substantially increase the economic value or extend the useful life of an asset are capitalized, and all other expenditures are expensed as incurred. Expenditures that relate to an existing condition caused by past operations are expensed as incurred. The Company recognizes a liability for environmental remediation costs when it believes it is probable a liability has been incurred and the amount can be reasonably estimated. The liabilities are based on currently available information and reflect the participation of other potentially responsible parties depending on the parties' financial condition and probable contribution. The accruals are recorded at undiscounted amounts. Recoveries of environmental remediation costs from insurance carriers are recorded at such time as their receipt is deemed highly probable and the amounts can be reasonably estimated. REVENUE RECOGNITION The Company recognizes revenue from product sales upon shipment to its customers or when customers assume risk of ownership. INTEREST Interest in the Consolidated Statements of Income is shown net of interest income and capitalized interest. Interest income was $3.7 million in 1999, $3.4 million in 1998 and $1.9 million in 1997. DERIVATIVE FINANCIAL INSTRUMENTS The Company's subsidiary, Harmac Pacific Inc. (Harmac), from time to time entered into Canadian dollar forward exchange contracts with maturities of one to five months to fix the conversion of a portion of pulp sales receivables denominated in U.S. dollars. At December 31, 1999, Harmac had no open derivative contracts to hedge its U.S. currency exposure. At December 31, 1998, Harmac had contracts to purchase $23 million Canadian with the exchange rate used at settlement approximating the spot rate at the date the contract was acquired. PER SHARE INFORMATION Per share information is based on the weighted average number of common shares outstanding during each year. The weighted average number of shares used to calculate basic net income (loss) per common share was 13,667,000 in 1999, 13,481,000 in 1998 and 13,419,000 in 1997. Certain Company stock options were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market prices of the common shares. Such stock options totaled 777,000 shares, 827,000 shares and 475,000 shares at year-end 1999, 1998 and 1997, respectively, at average exercise prices of $16 in 1999, $18 in 1998 and $21 in 1997. The Company's outstanding stock options affected the calculation of diluted earnings per share for 1999, but did not affect the calculation for 1998 or 1997. STATEMENTS OF CASH FLOWS The Company classifies as cash and cash equivalents unrestricted cash on deposit in banks plus all investments having original maturities of 90 days or less. Carrying amounts of any such investments approximate fair values. The effect of exchange rate changes on cash balances held in foreign currencies was not significant. Total cash expenditures for interest were $12.0 million, $11.8 million and $10.1 million for 1999, 1998 and 1997, respectively. Total cash expenditures for income taxes were $10.6 million for 1999, $1.9 million for 1998 and $9.2 million for 1997. NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and hedging activities. The adoption of this statement is not expected to have a material impact on the Company. The FASB subsequently issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of Effective Date of SFAS No. 133," which postpones initial application until fiscal years beginning after June 15, 2000. The Company expects to adopt SFAS No. 133 in 2001. 2. ACQUISITION On November 8, 1999, the Company completed the acquisition of the 40 percent of Harmac shares it did not already own. Harmac shareholders received $30 million Canadian (approximately $20.4 million U.S.) and approximately 1.5 million shares of Company stock at an amount assigned to the issuable shares of $18.3 million. Also included in the purchase price were 22 acquisition costs of $0.7 million and value assigned to Company options that were exchanged for Harmac options of $0.6 million. Through a number of purchases in 1997 and 1998, the Company had acquired a 60 percent ownership interest in Harmac for $72.4 million. The total purchase price of Harmac, net of cash acquired, was $92.8 million. The acquisition was accounted for as a step purchase transaction, and the results of operations of Harmac have been included in the consolidated financial statements from February 2, 1998. The fair value of assets acquired and liabilities assumed for the purchase of the 53 percent of Harmac shares as of February 1998 were as follows:
(THOUSANDS) - ------------------------------------------------------------------------------------------------------------------------------------ Current assets, other than cash $ 58,814 Property, plant and equipment 147,164 Other assets 2,902 Current liabilities (29,297) Convertible subordinated debentures (52,556) Other liabilities (23,049) Minority interest (53,678) ------------- Purchase price, net of $19,637 cash received $ 50,300 =============
The subsequent purchases, in December 1998 and November 1999, resulted in acquired net assets in excess of cost. The excess over cost was allocated to reduce proportionately the values assigned to noncurrent assets in determining their fair value. This resulted in a reduction in the carrying value of property of $14.2 million and an increase to deferred tax assets of $5.7 million to reflect the tax effect of the property adjustment. In conjunction with the Company's acquisition of a majority interest in Harmac in 1998, a comprehensive plan to reduce operating costs at the mill and administrative and selling costs was announced. The plan consisted of closing Harmac's on-site log chipping mill, closing the Vancouver, BC corporate administrative and pulp sales office and combining those functions with the Company's corporate offices, and additional reductions in hourly and salaried staff at the mill. Certain restructuring costs recorded by Harmac totaling $6.5 million (costs totaling $5.6 million associated with employee terminations and $0.9 million of fixed asset write-offs) were included in current liabilities in the computation of the fair value of assets and liabilities assumed at the acquisition date. Costs charged to the restructure liability in 1998 totaled $3.2 million and related primarily to severance and other employee benefits and fixed asset write-offs. Costs charged to the restructure liability in 1999, primarily cash payments for severance and other employee benefits, totaled $1.3 million. At December 31, 1999, total restructuring costs incurred and anticipated for the restructuring plan totaled $5.0 million. Therefore, $1.5 million of restructuring costs included in the original acquisition cost allocation was reversed as an adjustment of the purchase price of Harmac. The remaining liability for restructuring costs at December 31, 1999 was $.5 million, representing employee benefits payable to terminated employees. The following unaudited pro forma information below gives effect as if the Harmac purchase transactions had occurred at the beginning of each of the respective years after giving effect to certain adjustments, including material differences between Canadian and U.S. generally accepted accounting principles. For 1997, the assumed purchase is 60 percent of Harmac shares, the amount owned by the end of 1998. For 1998 and 1999, the assumed purchase is 100 percent of Harmac shares. The unaudited pro forma information does not necessarily reflect the results of operations that actually would have been achieved had the acquisition been consummated at that time.
(THOUSANDS EXCEPT PER SHARE, UNAUDITED) 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------- Revenues $486,948 $429,849 $493,428 Income (loss) from continuing operations 11,898 (27,756) (1,192) Income from discontinued operations - 23,059 5,588 Cumulative effect of accounting change - 743 - ----------------------------------------------------- Net income (loss) $ 11,898 $ (3,954) $ 4,396 ===================================================== Basic and diluted income (loss) per common share: Income (loss) from continuing operations $ 0.87 $ (2.06) $ (0.09) Income from discontinued operations - 1.71 0.42 Cumulative effect of accounting change - 0.06 - ----------------------------------------------------- Net income (loss) $ 0.87 $ (0.29) $ 0.33 =====================================================
3. INVESTMENT SECURITIES At December 31, 1999, the Company's short-term investments consisted primarily of corporate debt securities. Included in other assets at December 31, 1998, were debt securities with maturities beyond one year totaling $2.2 million. The investment securities were classified as available-for-sale and the amortized cost approximated the fair value. 4. INVENTORIES
(THOUSANDS) 1999 1998 - -------------------------------------------------------------------------------------------------------------------- Lumber $ 9,454 $ 7,978 Pulp 13,513 14,517 Logs 32,742 28,958 Wood chips and sawdust 15,676 12,376 Chemicals and supplies 12,460 12,431 Other 621 1,497 ------------------------------------- $ 84,466 $ 77,757 =====================================
The portion of lumber and raw materials inventories determined using the last-in, first-out (LIFO) method aggregated $4.1 million and $3.5 million at December 31, 1999 and 1998, respectively. The cost of LIFO inventories valued at the lower of average cost or market, which approximated current cost, at December 31, 1999 and 1998, was $6.4 million and $5.7 million, respectively. 5. PROPERTIES
(THOUSANDS) 1999 1998 - -------------------------------------------------------------------------------------------------------------------- Plant and equipment: Mills, plants and improvements $ 58,907 $ 56,863 Equipment 361,528 341,698 Mobile equipment 20,390 19,145 Construction in progress 16,712 6,813 ---------------------------------- $457,537 $424,519 ================================== Land and timber cutting rights: Land $ 4,313 $ 4,904 Canadian timber cutting rights 4,446 4,386 ---------------------------------- $ 8,759 $ 9,290 ==================================
23 Included in plant and equipment above at December 31, 1999, were assets at cost of $157.9 million and a net book value of $49.0 million for which the Company does not hold title. See the following Note 6 and discussion of the Halsey mill sale/leaseback. 6. DEBT
(THOUSANDS) 1999 1998 - ------------------------------------------------------------------------------------------------------------------- SHORT-TERM DEBT- Revolving credit and term loan facility, variable interest rate (6.25% at December 31, 1999) $ 11,059 $ 3,259 Demand operating line of credit - 7,000 ------------------------------------- Short-term debt $ 11,059 $ 10,259 ===================================== LONG-TERM DEBT- 8.375% debentures, due 2013 $ 75,000 $ 75,000 State of Oregon Small Scale Energy Loan Program (SELP) note payable, secured by irrevocable letter of credit, 6.55%, payable monthly through 2013 13,150 13,705 Lease financing obligation, interest at 6.6% 62,912 - Harmac 8% convertible subordinated debentures - 49,855 ------------------------------------- Total long-term debt 151,062 138,560 Less current portion of long-term obligations 4,024 556 ------------------------------------- Long-term debt, net of current obligations $ 147,038 $ 138,004 =====================================
The Company has revolving credit agreements with three banks which, when combined, provides approximately $78 million of available borrowings. Each agreement contains certain financial covenants, all of which had been met as of December 31, 1999. The Company has a revolving credit and term loan facility with a Canadian bank, secured by certain inventory and accounts receivable. The agreement provides $40 million Canadian (approximately $28 million U.S.) of revolving credit until September 2000, unless extended. The interest rate associated with this agreement is based, at the option of the Company, at the bank's prime lending rate, LIBOR rate plus 1%, the bank's Corporate Bankers' Acceptance Rate plus 3/8 percent, or a fixed rate determined by the bank. A commitment fee of 1/4 percent per year on the unused portion is payable quarterly. The Company had outstanding $16 million Canadian (approximately $11 million U.S.) of borrowings under this agreement at December 31, 1999. The Company has an additional revolving credit and term loan facility with another Canadian bank, secured by certain Canadian inventory, accounts receivable and property, plant and equipment. The agreement provides $25 million U.S. of revolving credit until March 2000, unless extended. The interest rate associated with this agreement is based, at the option of the Company, at the bank's prime lending rate plus 1/4 percent (or 1 1/4 percent for borrowings in excess of $10 million), the U.S. base rate plus 1/4 percent (or 1 1/4 percent for borrowings in excess of $10 million), LIBOR plus 1 percent (or 2 percent for borrowings in excess of $10 million), or the bank's corporate bankers' acceptance rate plus 1 percent (or 2 percent for borrowings in excess of $10 million). A commitment fee of 3/10 percent per year on the unused portion of available borrowings up to $10 million and 1/2 percent of the unused portion over $10 million is payable quarterly. The Company also has a revolving credit agreement with a domestic bank, secured by certain inventory and accounts receivable. The agreement provides $25 million U.S. of revolving credit until June 2000, unless extended. The interest rate associated with this agreement is based, at the option of the Company, at the bank's prime lending rate or LIBOR plus 1 percent. A commitment fee of 3/10 percent per year on the unused portion is payable quarterly. In the third quarter of 1999, the Company entered into a sale/leaseback arrangement of its Halsey pulp mill. The facility was sold for $64.6 million cash. The transaction was accounted for as a financing, wherein the property remained on the books and continues to be depreciated. A lease-financing obligation equal to the proceeds received was recorded, and subsequently reduced by a payment made by the Company at the closing of the lease agreement. The lease has a term of approximately twelve years, with an early purchase option in the seventh year. The lease requires semiannual rent payments as follows: for the years 2000 through 2005 - $3.3 million; $4.0 million in 2006; and beginning in January of 2007 (if the lease has not been previously terminated by exercise of the Company's purchase options), three semiannual payments of $11.4 million are required. The Company has three purchase options under the lease. The purchase option in the seventh year is fixed at $41.1 million, payable in five installments during 2007. The other two options are at the facility's fair market value or a fixed termination value. The facility lease contains several financial covenants, which the Company is required to meet throughout the term of the lease. The Harmac 8 percent convertible subordinated debentures were redeemed in November 1999 at par plus accrued interest. The fair value of the 8 3/8 percent debentures and 6.55 percent Oregon SELP note at December 31, 1999 were estimated to be $71 million and $13 million, respectively, based upon rates currently available for debt with similar terms. A hypothetical 10 percent change in interest rates would change the fair value of the Company's fixed-rate long-term debt obligations by $6 million. The annual maturities of long-term obligations for the five years subsequent to December 31, 1999 are: 2000 - $4.0 million; 2001- $3.2 million; 2002 - $3.5 million; 2003 - - $3.7 million and 2004 - $3.9 million. 7. INCOME TAXES The income tax provision (benefit) consists of the following components:
(THOUSANDS) Current Deferred Total - -------------------------------------------------------------------------------------------------------------- 1999 Federal $ 1,659 $ (3,289) $ (1,630) State 54 (460) (406) Canada 15,559 (2,101) 13,458 ------------------------------------------------------ $17,272 $ (5,850) $ 11,422 ====================================================== 1998 Federal $ 915 $ (10,924) $ (10,009) State - (529) (529) Canada 2,767 (5,581) (2,814) ------------------------------------------------------ $ 3,682 $ (17,034) $ (13,352) ====================================================== 1997 Federal $ - $ (3,004) $ (3,004) State - (311) (311) Canada 9,024 (1,371) 7,653 ------------------------------------------------------ $ 9,024 $ (4,686) $ 4,338 ======================================================
24 The income tax provision (benefit) was different from the amount computed by applying the U.S. statutory federal income tax rate as follows:
(THOUSANDS) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes and minority interest: United States $ (10,112) $ (31,147) $ (10,947) Canada 33,368 (9,212) 19,717 ------------------------------------------------------ $ 23,256 $ (40,359) $ 8,770 ====================================================== United States: U.S. statutory federal income tax $ (3,539) $ (10,901) $ (3,831) State income franchise taxes, net of federal income tax benefit (264) (344) (122) Adjustment to prior years taxes 1,459 - - Other items, net 308 707 638 ------------------------------------------------------ (2,036) (10,538) (3,315) ------------------------------------------------------ Canada: U.S. statutory federal income tax 11,679 (3,224) 6,901 Effect of Canadian tax rate different from U.S. 1,270 (303) 719 Large corporate tax 389 370 - Other items, net 120 343 33 ------------------------------------------------------ 13,458 (2,814) 7,653 ------------------------------------------------------ $ 11,422 $ (13,352) $ 4,338 ======================================================
The net deferred tax asset at December 31, 1999 was $24.8 million. The temporary differences that give rise to deferred taxes are shown in the following table. The primary deferred tax asset relates to net operating loss carryforwards. At December 31, 1999, the Company had available $22.6 million of U.S. federal tax loss carryforwards expiring as follows: 2010 - $15.0 million; 2011 - $1.1 million; and 2012 - $6.5 million. The Company had available $40.5 million of Canadian tax loss carryforwards related to Harmac expiring as follows: 2002 - $21.1 million; 2003 - $6.1 million; 2004 - $1.1 million; 2005 - $3.3 million; and 2006 - $8.9 million. As of December 31, 1999, the Company also had Alternative Minimum Tax carryforwards of $1.4 million that may be carried forward indefinitely. Management believes that the Company will have sufficient future U.S. and Canadian taxable income to make it more likely than not that the net operating loss deferred tax asset will be realized. In making this assessment, management has considered the cyclical nature of its businesses, the relatively long expiration period of net operating losses and the ability to utilize certain tax planning strategies if a net operating loss were to otherwise expire. The strategy that would be most feasible for U.S. federal tax loss carryforwards is changing the method of tax depreciation. Similarly, for Canadian net operating losses, deferral in utilization of capital cost allowance deductions may be employed in order to utilize net operating losses. The realization of the asset is not assured and could be reduced in the future if estimates of future taxable income during the carryforward period are reduced. Deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of the enacted tax laws. The net deferred tax asset is comprised of the following:
(THOUSANDS) 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Current deferred taxes: Gross assets $ 5,317 $ 4,991 Noncurrent deferred taxes: Gross assets 68,738 54,730 Gross liabilities (49,290) (38,512) ------------------------------------- Total noncurrent deferred taxes 19,448 16,218 ------------------------------------- Net deferred tax asset $ 24,765 $ 21,209 =====================================
The Company's valuation allowance against deferred tax assets at December 31, 1999, 1998 and 1997 was $7.3 million. These amounts relate to certain state net operating loss carryforwards and pollution control and energy tax credits that the Company believes will not be realized in the future. The tax effect of significant temporary differences representing deferred tax assets and liabilities are as follows:
(THOUSANDS) 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Postretirement benefits $ 6,742 $ 6,121 Reforestation 4,552 4,677 Vacation pay 866 798 Depreciation (20,734) (29,475) AMT and other tax credits 4,444 4,866 Net operating loss carryforwards 23,400 28,939 Other, net (including valuation allowance) 5,495 5,283 -------------------------------- Net deferred tax asset $ 24,765 $ 21,209 ================================
In January 1999, a decision was rendered by the U.S. Court of Appeals for the Ninth Circuit upholding the U.S. Tax Court opinion of the distribution value of the assets contributed to Pope Resources, a Delaware limited partnership (the Partnership) by the Company. The 1985 distribution, made pursuant to a Plan of Distribution, transferred all of the Company's timber properties, development properties and related assets and liabilities to the Partnership. Taxes payable of $10.3 million at the time of distribution were charged to stockholders' equity. As a result of the decision by the Ninth Circuit, the Company recognized in 1998 an additional reduction in equity of $3.2 million which represented the balance of tax, interest and litigation costs previously paid and deferred. The Internal Revenue Service (IRS) has assessed the Company additional tax of approximately $5.3 million pertaining to transactions between the Company and one of its Canadian subsidiaries during its 1993 tax year. The Company has filed a petition with the Tax Court to challenge the IRS's assessment. The Company has negotiated a tentative settlement with the IRS on this issue for 1993 and certain subsequent tax years and has established a reserve for the amount. While a settlement has been negotiated with the IRS, the settlement has not been finally approved or accepted on behalf of the IRS. 8. OTHER LONG-TERM LIABILITIES Other long-term liabilities consist of the following:
(THOUSANDS) 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Reforestation $ 15,320 $ 15,441 Postretirement benefits 14,712 13,286 Other 11,819 11,455 ------------------------------- $ 41,851 $ 40,182 ===============================
25 9. PENSION AND OTHER POSTRETIREMENT PLANS The Company's retirement plans consist principally of noncontributory defined-benefit pension plans and postretirement medical and life insurance plans. The pension plans include plans administered by the Company and multi-employer plans administered by various unions. Certain union employees are covered under multi-employer pension plans. Contributions to these plans are based upon negotiated hourly rates. It is not possible to determine the amount of accumulated benefits or net assets available for benefits that apply solely to Company employees covered by these plans. All other Company participating employees are covered by noncontributory defined-benefit pension plans administered by the Company. The pension benefit for salaried employees is based on years of service and the five highest out of the last ten years of compensation. Pension benefits for employees covered under hourly plans are generally based on each employee's years of service. The Company's funding policy regarding all of its Company-administered pension plans is to make contributions to the plans that are between the minimum amounts required by the Employee Retirement Income Security Act (ERISA) and the maximum amounts deductible under current tax regulations. Substantially all of the pension plans' assets are invested in common stock, fixed-income securities, cash and cash equivalents. For 1998, amounts due to curtailments and settlements are related to discontinued operations (see Note 11). Curtailment gains were included as a component of the gain on sale of discontinued operations. The Company sponsors postretirement medical and life insurance plans for certain salaried and nonsalaried employees and eligible spouses and dependents of the employees. The medical plans pay a stated percentage of covered medical expenses incurred after deducting co-payments made once a stated deductible has been met. The life insurance plans pay a defined benefit. The Company's funding policy for these plans is to not make contributions to the plans prior to the actual incurrence of costs under the plans. The following table sets forth selected financial information regarding the pension and postretirement benefit plans:
Pension Benefits Postretirement Benefits ----------------------- ----------------------------- (THOUSANDS) 1999 1998 1999 1998 - -------------------------------------------------------------------------------------------------------------------- Change in benefit obligation Benefit obligation at beginning of year $ 69,449 $57,044 $13,808 $ 14,024 Service cost 2,468 2,382 507 475 Interest cost 4,809 4,408 950 880 Amendment 515 - - - Settlement (926) (14,766) - - Curtailment - (1,727) - (6,437) Actuarial (gain) loss (5,249) 3,982 (1,295) (1,195) Acquisition - 22,344 - 6,717 Benefits paid (2,831) (2,349) (374) (315) Foreign currency rate changes 2,036 (1,869) 401 (341) -------------------------------------------------- Benefit obligation at end of year $ 70,271 $69,449 $ 13,997 $ 13,808 ================================================== Change in plan assets Fair value of plan assets at beginning of year $ 74,330 $70,883 $ - $ - Actual return on plan assets 10,590 3,503 - - Acquisition - 19,623 - - Employer contribution 604 847 374 315 Settlement - (16,392) - - Benefits paid (2,831) (2,349) (374) (315) Foreign currency rate changes 1,692 (1,785) - - -------------------------------------------------- Fair value of plan assets at end of year $ 84,385 $74,330 $ - $ - ================================================== Funded status $ 14,114 $ 4,881 $(13,997) $(13,808) Unrecognized net actuarial (gain) loss (15,575) (6,108) (715) 522 Unrecognized prior service cost 1,719 1,261 - - Unrecognized net asset at transition (143) (243) - - -------------------------------------------------- Prepaid (accrued) benefit cost $ 115 $ (209) $(14,712) $(13,286) ================================================== Plans having assets in excess of accumulated benefits Benefit obligation $ 56,282 $34,405 Fair value of plan assets 74,205 44,856 Plans having accumulated benefits in excess of assets Benefit obligation $ 13,989 $35,044 Fair value of plan assets 10,180 29,474 Weighted-average assumptions as of December 31 Discount rate 7.25% 6.75% 7.25% 6.75% Rate of compensation increase 5.00% 5.00% 5.00% 5.00% Expected return on plan assets 8.50% 8.75%
26 For measurement purposes, for all plans except the Harmac plan, 7.5 percent and 8 percent rates of increase were assumed for health care costs in 1999 and 1998, respectively. The rate was assumed to decline in 1/2 percent decrements every year until it reached 5 percent in 2004 where it remained thereafter. The Harmac plan assumed 9 percent and 10 percent annual rates of increase for health care costs in 1999 and 1998, respectively. The rate was assumed to decline in 1 percent decrements every year until it reached 5 percent in 2003 where it remained thereafter. Net periodic pension cost for 1999, 1998 and 1997 was composed of the following:
Pension Benefits ------------------------------------------------- (THOUSANDS) 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------- Components of net periodic benefit cost: Service cost $ 2,468 $ 2,382 $ 1,823 Interest cost 4,809 4,408 3,998 Expected return on plan assets (6,384) (6,200) (5,128) Amortization of prior service cost (33) 177 392 Amortization of net transition obligation (asset) 58 24 (140) Recognized net actuarial gain (293) (735) (243) Settlement gains (440) - - Curtailment gains - (3,537) - -------------------------------------------------- Net periodic benefit cost for Company administered plans 185 (3,481) 702 Contributions to multi-employer plans 4,666 4,558 3,575 -------------------------------------------------- Net periodic benefit cost $ 4,851 $ 1,077 $ 4,277 ==================================================
Net periodic pension costs for the Company's discontinued tissue operations were $1.1 million for 1997 and are included in the preceding table. The Company has granted some former employees pension benefits which supplement the normal Company plans. These benefits are unfunded, general obligations of the Company. The cost associated with these benefits was $117,000 in 1999, $386,000 in 1998 and $342,000 in 1997. Net periodic cost for the Company's postretirement medical and life insurance plans for 1999, 1998 and 1997 was composed of the following:
Postretirement Benefits -------------------------------------------------- (THOUSANDS) 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------- Components of net periodic benefit cost: Service cost $ 507 $ 475 $ 435 Interest cost 950 880 977 Amortization of prior service cost - - (43) Recognized net actuarial (gain) loss (31) (17) 2 Curtailment gains - (6,437) - -------------------------------------------------- Net periodic benefit cost $1,426 $ (5,099) $1,371 ==================================================
Net periodic costs of postretirement medical and life insurance plans for the Company's discontinued tissue operations were $660,000 for 1997 and are reflected in the preceding table. Assumed health care cost trend rates have a significant effect on the amounts reported for the postretirement medical plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
One Percentage Point -------------------------------------- (THOUSANDS) Increase Decrease - -------------------------------------------------------------------------------------------------------------------- Effect on total service and interest cost components $ 281 $ (235) Effect on postretirement benefit obligation 2,244 (1,911)
10. STOCK OPTION PLANS The Company has a stock option and appreciation plan (Option Plan) for officers and key employees. This plan is administered by the Human Resources and Nominating Committee of the Board of Directors. The Committee is composed of outside Directors who are not eligible for awards. Additionally, the Company has a nonemployee director stock option plan (Director Plan). At December 31, 1999, 403,485 shares were available for future grants under these plans. A nonemployee director stock retainer fee plan (Retainer Plan) was approved by the Company's Board of Directors and ratified by the Company's stockholders at the 1999 Annual Meeting. At December 31, 1999, 245,878 shares were available for future grants under this plan. In connection with the acquisition by the Company of the Harmac minority interest in 1999, holders of Harmac options received options to purchase a total of 95,411 shares of Company common stock in exchange for their Harmac options at an appropriately adjusted exercise price. The Option Plan provides for granting both incentive stock options and nonqualified stock options to purchase shares of the Company's common stock at prices not less than 85 percent of fair market value on the date of grant. Options are exercisable as stated in each individual grant; however, no option may extend beyond ten years from the date of grant. The Director Plan provides for automatic option grants at designated intervals to nonemployee directors over their period of continued service on the Board of Directors. Such options are granted at 100 percent of fair market value on the date of grant. Options are immediately exercisable and have a ten-year term. The Retainer Plan permits nonemployee directors to apply all or a portion of their annual retainer fees to the acquisition of options to purchase shares of the Company's common stock. The number of shares covered by such options is determined by dividing the amount of retainer fees to be applied by the Black-Scholes formula value for the option. Such options are granted at 100 percent of fair market value on the date of grant. Options are immediately exercisable and have a ten-year term. The Company accounts for these plans following the guidance of APB Opinion No. 25, under which no compensation cost has been recognized. SFAS No. 123, "Accounting for Stock-Based Compensation," if fully adopted, changes the methods for recognition of costs on plans similar to those of the Company. Adoption of SFAS No. 123 is optional for stock option cost recognition; however, pro forma disclosures are required, and shown below, as if the Company had adopted the cost recognition requirements under SFAS No. 123. A summary of the stock options outstanding at December 31, 1999, 1998 and 1997 and changes during the years then ended in the number of shares (Shares) and the weighted 27 average exercise price (Price) is presented below (options received by former Harmac option holders are denoted as "Exchanged"):
1999 1998 1997 ----------------------- ------------------------- ------------------------- (SHARES IN THOUSANDS) Shares Price Shares Price Shares Price - -------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 837 $ 18 901 $ 19 916 $ 18 Granted 277 9 76 14 109 16 Exchanged 95 10 - - - - Exercised - - - - (117) 16 Canceled (155) 16 (140) 19 (7) 23 ------- ------ ----- Outstanding at end of year 1,054 15 837 18 901 19 ======= ====== ===== Exercisable at year-end 642 18 540 19 475 19 ======= ====== ===== Weighted average fair value of options granted during year $1.93 $3.57 $4.69 ======= ====== =====
The fair value of options granted in 1999, 1998 and 1997 was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 1999, 1998 and 1997, respectively: risk-free interest rates of 5.1, 5.5 and 6.6 percent; dividend yields of 5.4, 4.2 and 4.2 percent; and expected volatility of 35, 31 and 34 percent. Expected option lives of six years were assumed. The following table summarizes information about stock options outstanding at December 31, 1999:
Range of exercise prices ---------------------------------------- (SHARES IN THOUSANDS) $5 - $11 $12 - $20 $24 - $30 Total - -------------------------------------------------------------------------------------------------------------------- Options outstanding: Number outstanding 279 684 91 1,054 Remaining contractual life in years 9.0 5.0 2.4 5.8 Weighted average exercise price $8 $16 $28 $15 Options exercisable: Number exercisable 43 508 91 642 Weighted average exercise price $8 $17 $28 $18
If the Company had accounted for these stock options issued in accordance with SFAS No. 123, the Company's net income and net income per share would have approximated the following pro forma amounts:
(THOUSANDS EXCEPT PER SHARE) 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------- Net income: As reported $ 14,421 $ 342 $ 10,020 Pro forma 14,093 179 9,734 Diluted net income per share: As reported $ 1.05 $ .03 $ .75 Pro forma 1.03 .01 .73
The effects of applying SFAS No. 123 in this pro forma disclosure are not necessarily indicative of what can be expected in future years. The Company has followed the practice of using treasury stock to fulfill its obligations under its stock option plans. When stock is issued pursuant to a stock option plan, the difference between the cost of treasury stock issued and the exercise price of the option is credited to additional paid-in capital. 11. DISCONTINUED OPERATIONS TISSUE BUSINESS In March 1998, the Company sold the assets of its tissue business to PLAINWELL, INC. (Plainwell) for a total cash consideration of $120.5 million and the assumption by Plainwell of certain liabilities. Operating results of the tissue business for 1998 and 1997 are shown separately in the Consolidated Statements of Income as income from discontinued tissue operations, net of tax. The discontinued tissue operating results include an allocation of consolidated net interest expense based upon net assets. The net interest expense allocated was $.1 million and $2.3 million in 1998 and 1997, respectively. Tissue sales of $8.3 million in 1998 and $136.2 million in 1997 were excluded from revenues in the Consolidated Statements of Income. DISPOSABLE DIAPER BUSINESS In February 1996, the Company sold all the operating assets of the disposable diaper business, primarily properties and inventory, to Paragon Trade Brands, Inc. (Paragon). During the fourth quarter of 1998, the Company settled certain diaper business legal issues outstanding and recognized costs associated with former diaper business facilities. The charges totaled $6.0 million pre-tax ($4.0 million after tax). 12. LEGAL MATTERS AND CONTINGENCIES The Company is a party to legal proceedings and environmental matters generally incidental to its business. Although the final outcome of any legal proceeding or environmental matter is subject to many variables and cannot be predicted with any degree of certainty, the Company presently believes that the ultimate outcome resulting from these proceedings and matters would not have a material effect on the Company's current financial position or liquidity; however, in any given future reporting period such proceedings or matters could have a material effect on results of operations. The Oregon Department of Environmental Quality (ODEQ), based on detection of possible creosote and hydrocarbon contamination, determined that a vacant industrial site formerly owned by the Company requires further action. Accordingly, the Company and the local governmental owner agreed in a Consent Order with ODEQ to investigate the site and determine an appropriate remedy. The Company is currently participating in the investigation phase of this site with remediation and monitoring to occur over an extended future time period. Based on preliminary findings, the Company has established a reserve in the amount of $6.1 million representing the low end of the range of estimated future remediation and monitoring costs at this site. Factors outside the Company's control could cause the costs to be substantially greater. The Washington Department of Ecology (WDOE) requested that the Company undertake an assessment to determine whether and to what extent the Company's former mill site at Port Gamble, Washington may be contaminated. Further, WDOE 28 requested that the Company perform an investigation of sediments in the adjacent bay to determine the extent of wood waste accumulation. These activities were completed during 1999. Future regulatory developments and investigation findings regarding sediments may indicate remediation will be necessary. Based on preliminary findings, the Company has established a reserve in the amount of $2.6 million representing the low end of the range of estimated future remediation and monitoring costs at this site. Factors outside the Company's control could cause the costs to be substantially greater. The Company has tendered the defense of the above environmental claims to a number of insurance carriers which issued comprehensive general liability policies to the Company from 1959 to 1985. In 1995, the Company filed a declaratory judgment action to obtain a decision that the insurance carriers were obligated to defend the Company and indemnify it for any environmental liabilities incurred as a result of certain operations of the Company during that period. The Company expects that the case will be tried, if necessary, in the year 2001. The Company has concluded settlements with several insurance carriers and is engaged in settlement discussions with other insurance carriers. If it is determined that the insurance carriers are obligated to pay the Company's defense and indemnity claims, there are more than sufficient policy limits available to meet the Company's estimated liabilities. The Company believes recovery under these policies is probable and has recorded receivables in amounts it has deemed highly probable of realization. In March 1999, the Company filed a claim under Chapter 11 of the North American Free Trade Agreement (NAFTA) against the Canadian Federal Government. The complaint arises from the Company's assertion that its duty-free export quota under the Canada/U.S. Softwood Lumber Agreement has been unfairly allocated and then reduced each year since the agreement came into effect. The NAFTA contains a special process that permits NAFTA investors who have been harmed by government actions which are inconsistent with the provisions of NAFTA's Investment Chapter to seek compensation before an impartial international arbitration panel. An international arbitration panel has been appointed to hear this claim but there can be no assurance as to when the claim will be resolved. 13. SEGMENT INFORMATION The Company is a manufacturer of pulp and lumber, with operations in the U.S. and in Western Canada. The Company classifies its business into two operating segments: wood products and pulp products. The two operating segments were identified as distinct segments based upon the difference in products and the manner in which the operations are managed. Wood products manufactures standardized and specialty lumber and sells residual wood chips. Lumber products are sold mainly to wholesalers, and wood chips are sold to manufacturers of pulp and paper. Pulp products manufactures a broad range of pulp utilizing both wood chips and sawdust as fiber sources. Pulp is sold primarily to end users in North America, Europe and Pacific Rim countries. The accounting policies of the operating segments are the same as those described in Accounting Policies, Note 1. The Company evaluates performance based on profit or loss before income taxes. A reconciliation of the totals reported for the operating segments to the applicable line items in the consolidated financial statements is as follows:
(THOUSANDS) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------- REVENUES Wood products $248,704 $216,940 $248,320 Pulp products 238,244 203,845 81,579 ------------------------------------------------- Total operating segments $486,948 $420,785 $329,899 ================================================= OPERATING PROFIT (LOSS) FROM CONTINUING OPERATIONS Wood products $ 42,589 $ 1,294 $ 24,924 Pulp products (1,939) (21,169) (2,650) ------------------------------------------------- Total operating segments 40,650 (19,875) 22,274 Corporate (8,331) (12,511) (7,509) Interest, net (9,063) (7,973) (5,995) ------------------------------------------------- $ 23,256 $(40,359) $ 8,770 ================================================= DEPRECIATION AND AMORTIZATION EXPENSE Wood products $ 8,028 $ 7,629 $ 7,902 Pulp products 23,819 20,965 10,313 ------------------------------------------------- Total operating segments 31,847 28,594 18,215 Corporate 926 674 543 Discontinued operations - 651 11,298 ------------------------------------------------- $ 32,773 $ 29,919 $ 30,056 ================================================= TOTAL ASSETS AT YEAR-END Wood products $119,588 $116,328 $123,913 Pulp products 276,571 272,586 93,283 ------------------------------------------------- Total operating segments 396,159 388,914 217,196 Corporate 74,047 60,675 90,710 Discontinued operations (1) - - 67,861 ------------------------------------------------- $470,206 $449,589 $375,767 ================================================= CAPITAL EXPENDITURES Wood products $ 8,780 $ 13,445 $ 6,159 Pulp products 14,930 12,238 2,742 ------------------------------------------------- Total operating segments 23,710 25,683 8,901 Corporate 1,117 1,271 497 Discontinued operations - 620 3,686 ------------------------------------------------- $ 24,827 $ 27,574 $ 13,084 ================================================= REVENUES BY GEOGRAPHIC REGION (2) United States $281,449 $242,437 $261,582 Europe 102,740 78,782 15,274 Other 102,759 99,566 53,043 ------------------------------------------------- $486,948 $420,785 $329,899 ================================================= PROPERTIES BY GEOGRAPHIC REGION United States $ 75,730 $ 71,889 $ 75,932 Canada 158,437 162,503 32,233 ------------------------------------------------- $234,167 $234,392 $108,165 =================================================
(1) DISCONTINUED OPERATIONS FOR 1997 REFLECTS TISSUE OPERATIONS ASSETS HELD FOR SALE. (2) REVENUES ARE REPORTED BY THE LOCATION OF THE CUSTOMER. 29 FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA Pope & Talbot, Inc. and Subsidiaries Years ended December 31 (in thousands of dollars except per share amounts)
1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------ OPERATIONS Revenues $ 486,948 $ 420,785 $ 329,899 $ 313,845 $ 417,396 Depreciation and amortization 32,773 29,919 30,056 31,440 45,066 Interest expense, net 9,063 7,973 5,995 6,035 9,480 Income (loss) from continuing operations 14,421 (23,460) 4,432 (1,329) 4,955 Income (loss) from discontinued tissue operations - 23,059 5,588 5,238 (29,793) Cumulative effect of accounting change - 743 - - - ------------ ------------ ------------ ------------ ----------- Net income (loss) $ 14,421 $ 342 $ 10,020 $ 3,909 $ (24,838) ============ ============ ============ ============ =========== PER COMMON SHARE Income (loss) from continuing operations - basic $ 1.06 $ (1.74) $ .33 $ (.10) $ .37 Income (loss) from continuing operations - diluted 1.05 (1.74) .33 (.10) .37 Income (loss) from discontinued operations - basic and diluted - 1.71 .42 .39 (2.23) Cumulative effect of accounting change - basic and diluted - .06 - - - Cash dividends .52 .76 .76 .76 .76 Stockholders' equity 12.81 11.72 13.31 13.71 14.19 YEAR-END COMMON SHARES OUTSTANDING, NET OF TREASURY STOCK (000's) 14,531 13,481 13,481 13,364 13,364 FINANCIAL POSITION (AT DECEMBER 31) Current assets $ 202,799 $ 185,414 $ 208,270 $ 162,052 $ 207,252 Properties, net 234,167 234,392 108,165 201,666 225,760 Deferred income tax assets, net 19,448 16,218 24,843 21,871 16,531 Other assets 13,792 13,565 34,489 22,340 22,684 ------------ ------------ ------------ ------------ ----------- $ 470,206 $ 449,589 $ 375,767 $ 407,929 $ 472,227 ============ ============ ============ ============ =========== Current liabilities $ 95,216 $ 73,587 $ 81,636 $ 84,617 $ 113,495 Long-term liabilities 41,851 40,182 25,964 32,058 30,526 Long-term debt 147,038 138,004 88,705 108,026 138,514 Minority interest - 39,759 - - - Stockholders' equity 186,101 158,057 179,462 183,228 189,692 ------------ ------------ ------------ ------------ ----------- $ 470,206 $ 449,589 $ 375,767 $ 407,929 $ 472,227 ============ ============ ============ ============ ===========
30 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, income taxes were estimated using the best available information for projected results for the entire year.
Quarter --------------------------------------------- (in thousands of dollars except per share amounts) First Second Third Fourth Year - ------------------------------------------------------------------------------------------------------------------- 1999 Revenues $ 109,205 $ 120,255 $ 127,745 $ 129,743 $ 486,948 Gross profit 2,774 12,066 23,258 18,131 56,229 Net income (loss) (2,276) 2,921 7,160 6,616 14,421 PER COMMON SHARE Basic net income (loss) (0.17) 0.22 0.53 0.47 1.06 Diluted net income (loss) (0.17) 0.22 0.53 0.46 1.05 Dividends .19 .11 .11 .11 .52 Stock Price High 9 5/16 13 3/8 14 3/8 16 1/4 16 1/4 Low 6 1/16 6 1/8 10 5/8 10 7/8 6 1/16 1998 Revenues $ 103,493 $ 106,502 $ 104,315 $ 106,475 $ 420,785 Gross profit (loss) (2,681) (2,940) (5,130) 2,465 (8,286) Income (loss) from continuing operations (6,593) (7,126) (6,753) (2,988) (23,460) Income (loss) from discontinued operations 27,074 - - (4,015) 23,059 Cumulative effect of accounting change - - - 743 743 Net income (loss) 20,481 (7,126) (6,753) (6,260) 342 PER COMMON SHARE Basic and diluted net income (loss): Income (loss) from continuing operations (.49) (.53) (.50) (.22) (1.74) Income (loss) from discontinued operations 2.01 - - (.30) 1.71 Cumulative effect of accounting change - - - .06 .06 Net income (loss) 1.52 (.53) (.50) (.46) .03 Dividends .19 .19 .19 .19 .76 Stock Price High 16 1/16 16 7/8 12 5/8 10 5/16 16 7/8 Low 13 3/16 11 1/16 8 3/4 7 5/8 7 5/8
EX-21.1 7 EXHIBIT 21.1 EXHIBIT 21.1 Subsidiaries of Pope & Talbot, Inc. (the registrant)
NAME OF CORPORATION STATE OR OTHER JURISDICTION OF INCORPORATION ------------------------------------------------------------------------------------------ 1) Pope & Talbot International Ltd. British Columbia 2) Pope & Talbot Ltd., a subsidiary of Pope & British Columbia Talbot International Ltd. 3) Harmac Pacific Inc. 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 8) Pope & Talbot Pulp Sales USA, Inc. Oregon 9) Pope & Talbot Pulp Sales Europe SPRL, owned Belgium 89 percent by Pope & Talbot Pulp Sales USA, Inc. and 11 percent by Pope & Talbot, Inc.
All subsidiaries of the registrant do business under the name of the corporation. EX-23.1 8 EXHIBIT 23.1 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 Statements on Form S-8, File No.'s 333-92255, 33-34996, 333-04223, 333-72737 and 33-64764. ARTHUR ANDERSEN LLP Portland, Oregon March 17, 2000 EX-23.2 9 EXHIBIT 23.2 EXHIBIT 23.2 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 Statements on Form S-8, File No.'s 333-92255, 33-34996, 333-04223, 333-72737 and 33-64764. PricewaterhouseCoopers LLP Portland, Oregon March 17, 2000 EX-27 10 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE POPE & TALBOT, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1999 DEC-31-1999 22,719 10,649 74,099 0 84,466 202,799 457,537 232,129 470,206 95,216 147,038 0 0 15,451 170,650 470,206 486,948 486,948 430,719 430,719 0 0 9,063 23,256 11,422 11,834 0 0 0 14,421 1.06 1.05
EX-99.1 11 EXHIBIT 99.1 EXHIBIT 99.1 AUDITORS' REPORT To the Shareholders of Harmac Pacific Inc. We have audited the consolidated statements of financial position of Harmac Pacific Inc. as at December 31, 1998 and 1997 and the consolidated statements of operations and deficit and changes in financial position for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 1998 and 1997 and the results of its operations and the changes in its financial position for the years then ended in accordance with generally accepted accounting principles. As required by the British Columbia Company Act, we report that, in our opinion, these principles have been consistently applied. Vancouver, Canada PRICEWATERHOUSECOOPERS LLP January 26, 1999 Chartered Accountants -----END PRIVACY-ENHANCED MESSAGE-----