Prepared by R.R. Donnelley Financial -- Form 10-K for fiscal year ended December 31, 2001

-----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, OViLnm/tcHCMe450xq+0HKuDoysXfcg8QraAuAiqBAQPnZTSUgtn2O7DpkAP2eht dxAJnsgCQphnyd/osil5xg== 0001032210-02-000381.txt : 20020415 0001032210-02-000381.hdr.sgml : 20020415 ACCESSION NUMBER: 0001032210-02-000381 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020313 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-07852 FILM NUMBER: 02574113 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-K405 1 d10k405.htm FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2001 Prepared by R.R. Donnelley Financial -- Form 10-K for fiscal year ended December 31, 2001

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001

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 or organization)		(IRS Employer Identification No.)

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:

Title of each class		Name of each Exchange on which registered

Common Stock, par value $1.00		New York Stock Exchange, Pacific Stock Exchange
Rights to purchase Series A Junior Participating Cumulative Preferred Stock		New York Stock Exchange, Pacific Stock Exchange

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. þ

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 þ No ¨

The aggregate market value of voting stock held by nonaffiliates of the registrant is $225,678,339 as of March 5, 2002 ($15.15 per share).

15,620,289

(Number of shares of common stock outstanding as of March 5, 2002)

Part I and Part II incorporate specified information by reference from the annual report to shareholders for the year ended December 31, 2001. Part III incorporates specified information by reference from the proxy statement for the annual meeting of shareholders to be held on May 2, 2002.

PART I

Statements in this report and the documents incorporated herein by reference that are not reported financial results or other historical information are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on present information the Company has related to its existing business circumstances and involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from such forward-looking statements. In addition to specific factors that may be described in connection with any particular forward-looking statements, factors that could cause actual results to differ materially include those set forth under “Cautionary Statement Regarding Forward-Looking Information” 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, 2001. Unless required by law, the Company does not assume any obligation to update forward-looking statements based on unanticipated events or changed expectations. 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 pulp and wood products businesses. The Company’s pulp business manufactures and sells bleached kraft pulp for newsprint, tissue and high-grade coated and uncoated paper. In its wood products business, the Company manufactures and sells standardized and specialty lumber and residual wood chips. 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.

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.

Until the sale of the tissue business in 1998, the Company produced a line of private label consumer tissue products including towels, napkins, bathroom tissue and facial tissue. Also, the Company produced disposable diaper products until the 1996 sale of the diaper business. These products were sold under private and controlled labels. The sale of the assets of the Company’s tissue business in 1998 and the tissue business operating results in 1997 were classified as income from discontinued operations as shown in the “Five-Year Summary of Selected Financial Data” in the Company’s 2001 Annual Report to Shareholders.

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 increased its operations in regions having more stable timber supplies, particularly in British Columbia and to a lesser extent 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, Pope Resources. 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 small, 30 million board foot sawmill in Newcastle, Wyoming was closed in 2000 as part of the Company’s effort to rationalize its Black Hills production facilities due to a reduction in public timber availability in that region.

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.

Through a number of purchases in 1997 and 1998, the Company acquired a 60 percent ownership interest in Harmac Pacific Inc. (Harmac). On November 8, 1999, the Company acquired the remaining minority 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 Company’s consolidated financial statements from February 2, 1998. Harmac, which was publicly traded on the Toronto, Vancouver and Montreal stock exchanges, operated a pulp mill located on the east coast of Vancouver Island at Nanaimo, British Columbia, Canada.

During 2001, the Company maintained its strategy of increasing and improving the Company’s position in the pulp business. On June 15, 2001, the Company acquired the Mackenzie pulp mill, located in the northern interior of British Columbia, Canada, from Norske Skog Canada. The mill has a total pulp capacity of 230,000 metric tons per year. The purchase price was $80.4 million U.S. in cash and 1,750,000 shares of Company common stock. With the Mackenzie acquisition, the Company’s pulp production capacity increased to 830,000 metric tons annually. In addition, the Company has the ability to offer customers additional types of products. The results of operations of the Mackenzie pulp mill have been included in the Company’s consolidated financial statements from the acquisition date.

Pulp Business

The Company operates a pulp mill located in Halsey, Oregon (the Halsey mill) and pulp mills in Nanaimo (the Harmac mill) and Mackenzie (the Mackenzie mill), British Columbia. The Halsey mill, with a capacity of approximately 200,000 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 in the open market.

Substantially all of the Company’s wood chip and sawdust requirements for the Halsey pulp mill are satisfied through purchases 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. In conjunction with the fiber acquisition program for the Halsey pulp mill, the Company brokers wood chips for sale primarily into the export market.

With a current annual capacity of approximately 400,000 metric tons, the Harmac mill is one of the largest producers of market pulp in Canada, according to PricewaterhouseCoopers LLP’s “2001 Global Market Pulp Survey of 2000.” 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 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 the Harmac mill.

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. To a limited degree, the Harmac mill also has the ability to acquire wood chips from the Company’s Canadian sawmills. Improved utilization and recovery of available raw materials, through means such as the chip conditioning system completed in 1998, aids in fiber utilization and quality. The chip conditioning system consists of an industry standard set of chip thickness screens that separate oversized and undersized chip fragments and reprocesses the unacceptable wood chips to increase fiber quality and utilization.

In June 2001, the Company purchased the Mackenzie pulp mill from Norske Skog Canada. Located in northern British Columbia, the Mackenzie pulp mill is known for producing a particularly fine grade of northern bleached softwood kraft (NBSK) pulp from chips and sawdust. A synergistic fit with the Company’s existing Harmac and Halsey pulp mills, the Mackenzie facility provides the Company the ability to offer customers additional types of products and has raised the Company’s production capacity by 38 percent, or 230,000 metric tons of NBSK pulp, to a total of 830,000 metric tons. The Mackenzie pulp mill’s capacity consists of 105,000 metric tons per year of sawdust-based pulp and 125,000 metric tons of long fiber pulp.

The Company’s Mackenzie pulp mill purchases approximately 70 percent of its fiber requirements from sawmills also located in Mackenzie, British Columbia and operated by Slocan Forest Products Ltd. (Slocan), primarily under long-term evergreen contracts. The Company has entered into arrangements with other independent fiber suppliers to provide fiber incremental to that provided by Slocan. The Company believes there is an abundance of fiber resources available within an economic radius of the mill that will be adequate for the Mackenzie pulp mill’s requirements.

Marketing and Distribution. The Company’s pulp is marketed globally through sales offices in Portland, Oregon and Brussels, Belgium and through agency sales offices around the world. In 2001, approximately 36 percent of the pulp segment’s revenues were derived from sales to Europe, 35 percent to North America and 27 percent to Asia. The Company sold pulp products to numerous customers during 2001, none of which accounted for more than 10 percent of total revenues.

In 2001, approximately 55 percent of pulp was sold to customers at market prices under long-term or “evergreen” contracts, renewable each year. Approximately 30 percent is sold to other repetitive customers without contract, with the balance sold on a spot basis. By establishing and maintaining long-term contractual relationships, the Company is better able to forecast and regulate production.

Backlog. The Company’s pulp customers either enter into contracts for periods of one to three years or purchase pulp 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, 2001, the Company’s backlog of orders believed to be firm for both contractual and non-contractual customers was $57.1 million compared with $82.9 million at December 31, 2000. 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.

For further information regarding amounts of revenue, operating profit and loss and other financial information attributable to the pulp business, see Note 12 of “Notes to Consolidated Financial Statements” in the Company’s 2001 Annual Report to Shareholders. Such information is incorporated herein by reference.

Wood Products Business

The Company’s wood products business involves the manufacture and sale of dimension and board lumber. Total estimated annual capacity approximates 608 million board feet. Wood chips and other 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 83 percent or more of total wood products revenues with the balance being wood chips, other residuals and logs. 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 in 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 80 percent of the Company’s current lumber capacity is located in British Columbia, Canada and 20 percent in the Black Hills region of South Dakota. For the Company’s Canadian sawmills, approximately 70 percent of the timber requirements are obtained from the Provincial Government of British Columbia under long-term cutting licenses on public lands with the remaining 30 percent purchased in competitive open log markets. In the Black Hills, the Company obtains approximately 40 percent of its timber requirements from public sources under long-term timber harvesting contracts, 40 percent from private sources under long-term harvesting contracts and 20 percent is purchased in competitive open log markets.

Approximately 95 percent of all timberlands in British Columbia are owned by the Province of British Columbia and administered by the Ministry of Forests. The Forest Act empowers the Ministry of Forests to grant timber tenure, including Tree Farm Licenses (TFLs), Forest Licenses (FLs), and Timber Licenses. The annual allocable cut (AAC) for timber tenures is determined by the Ministry of Forests on a sustained yield basis and reflects timber conditions, regional and local economic and social interests, and environmental considerations. The actual cut from a TFL or FL for any given year may vary up to 50 percent above or below the designated AAC for the tenure as long as the annual average cut over a five year prescribed period is within 10 percent of the designated AAC for that period.

A TFL is an area based tenure granted for a term of 25 years that is replaced every five years for a further 25 year term, subject to satisfactory performance by the licensee of its forest management obligations as determined by the Ministry of Forests. Approximately 63 percent of the Company’s AAC is derived from two TFLs (TFL 8 and TFL 23) which are considered the most secure form of timber tenure. The Company’s two TFLs were both replaced effective March 1, 2000 with 25 year terms.

Provincial government timberlands which are not designated as TFLs are organized into timber supply areas (TSAs). FLs are issued within each TSA with the overall harvest for the TSA managed by the Ministry of Forests on a sustained yield basis. FLs are volume based tenures which authorize a specified volume of timber to be cut within a specific TSA. FLs have a term of 15 years and are generally replaceable every five years for a term of 15 years, subject to satisfactory performance by the licensee of its forest management obligations as determined by the Ministry of Forests. The Company has one FL located in the Boundary TSA that provides approximately 37 percent of the Company’s AAC. The Company’s FL was replaced on December 1, 1998 for a 15-year term. The Company is in compliance in all material respects with the terms of its forest tenures.

A stumpage charge is assessed by the Province of British Columbia on all government timber that is harvested. The base stumpage rate charged is determined to meet revenue targets set by the provincial government. The base rate is adjusted quarterly by the Ministry of Forests for various factors including recent lumber prices, timber quality, harvesting costs and species mix.

Provincial legislation requires the Chief Forester for British Columbia to review sustainable timber harvesting levels in each TFL and TSA in the Province every five years. Such determinations involve the Company’s two TFLs and one FL. Overall, there have been no significant increases or decreases to the Company’s AACs as a result of these reviews for the last 10 years. The Company anticipates that the AAC for TFL 8 will increase at the conclusion of the next review (currently underway) as a result of improved timber inventories.

The Company was able to maintain it’s AAC for it’s timber tenures while the provincial government’s target to double the protected provincial land base from 6 percent to 12 percent was met in the year 2000. Certain regions of British Columbia, including the coastal forest area, will have more than 12 percent of lands in protected status. The Provincial government has reviewed all the lands containing the Company’s forest tenures for determination of protected status and no negative impact on timber supplies has occurred.

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 timber supplies for the Company’s Canadian sawmills are relatively stable. The Company has in place reforestation practices designed to sustain and enhance timber supplies in the long-term.

The British Columbia government has also implemented its Forest Practices Code (Code) which became fully effective in mid-1997. The Code governs all facets of a company’ s forest management activities from planning through harvesting and forest renewal and provides a uniform set of rules which are designated to better secure the long-term sustainability of the forest industry. The Company’s harvesting practices are in substantial compliance with the standards set out in the Code.

The Company’s Canadian forest operations are carried out on public forestlands that are subject to the constitutionally protected treaty or common law rights of the First Nations People of Canada. For historical reasons, most of the lands in British Columbia are not covered by treaties and, as a result, the claims of British Columbia’s First Nations People relating to these forest resources are largely unresolved. To address these claims, the governments of Canada and British Columbia instituted a negotiation process under the administration of a treaty commission. Any settlements that may result from the negotiation process may involve a combination of cash and resources and grants of conditional rights to gather food on public lands and some rights of self-government. The effect of any treaties on timber tenure rights, including timber tenures of the Company, cannot be estimated at this time. Such claims may, in the future, result in: a decrease in the lands available for forest operations under British Columbia licenses, including under the Company’s licenses and contracts;

additional restrictions on the sale and harvest of timber on British Columbia timberlands; and an increase in operating costs. Such claims could also affect timber supply and prices. The Company believes that such claims will not have a significant effect on the Company’s timber availability in year 2002, and does not believe there will be significant impacts in the future.

The Company’s Spearfish, South Dakota mill produces primarily dimension pine lumber and premium quality pine boards. In addition, this mill produces quality, specialty products like exterior log cabin siding and interior pine paneling. The Spearfish mill harvests timber from public and private lands in the Black Hills region and incorporates the requirements of the American Forest & Paper Association’s (AF&PA) Sustainable Forestry Initiative (SFI) standard, the standard for sustainable forestry practices on private land in the U.S. It includes a land stewardship ethic that integrates the managing, growing, nurturing, harvesting and reforesting and replanting of trees with the conservation of soil, air and water quality, wildlife and fish habitat and aesthetics. Support for and conformity to the SFI standard is mandatory for AF&PA member companies.

Canada—U.S. Trade Issues. The Canada-U.S. Softwood Lumber Agreement (SLA) of 1996 established 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 were assigned quotas of lumber volumes that could be shipped to the U.S. tariff-free. Incremental volumes were subject to a three-tier tariff. The net impact of these changes were increased tariff fees paid to the Government of Canada and/or reduced production (by increasing down time) at the Company’s British Columbia sawmills. During 2000 and 1999, the Company expensed tariff charges of approximately $.2 million and $7.1 million, respectively, related to shipments from the Company’s British Columbia sawmills into the U.S. Because of the SLA, the Company took several shutdowns during 2000 and 1999.

On April 1, 2001, the SLA expired and on April 2, 2001, petitions for the imposition of antidumping and countervailing duties on softwood lumber from Canada were filed with the U.S. Department of Commerce (DOC) and the U.S. International Trade Commission (ITC), by certain U.S. industry and trade groups. In response to the petitions, the ITC conducted a preliminary injury investigation and on May 16, 2001 determined that there was a reasonable indication that the lumber industry in the United States was threatened with material injury by reason of softwood lumber imports from Canada.

On August 9, 2001, the DOC issued its preliminary determination on the countervailing duty and imposed a preliminary duty rate of 19.31 percent to be posted by cash deposits or bonds on the sales of softwood lumber to the U.S. on or after August 17, 2001. The DOC also made a preliminary determination that certain circumstances existed which may result in duties on sales of softwood lumber applying retroactively to May 19, 2001 (Critical Circumstances). The preliminary duty rate of 19.31 percent was suspended on December 15, 2001, 120 days after the preliminary determination, in accordance with U.S. law. The Company has accrued $13.6 million for the period from May 19, 2001 to December 15, 2001 for countervailing duties at the preliminarily determined rate of 19.31 percent. Duties accrued for the retroactive portion of the countervailing duties for the period from May 19, 2001 to August 16, 2001 totaled $6.7 million.

On October 31, 2001, the DOC issued its preliminary determination on the antidumping duty and imposed a company specific preliminary duty rate on six companies reviewed ranging from 5.94 percent to 19.24 percent. All other companies, including Pope & Talbot’s Canadian subsidiary, received the weighted average rate of the six companies of 12.58 percent. The antidumping duty rate applies to all shipments of softwood lumber made to the U.S. on or after November 6, 2001. The DOC

did not find Critical Circumstances in its preliminary antidumping ruling and therefore did not assess these duties retroactively. The Company has accrued $2.0 million for the period from November 6, 2001 to December 31, 2001 for antidumping duties at the preliminarily determined average rate of 12.58 percent.

The Company has accrued $15.6 million for countervailing and antidumping duties as of December 31, 2001. The final amount and effective date of countervailing and antidumping duties that may be assessed on Canadian softwood lumber exports to the U.S. cannot be determined at this time and will depend on determinations yet to be made by the DOC and ITC and any reviewing courts, NAFTA or WTO panels to which those determinations may be appealed. Any adjustments to the financial statements resulting from a change in the final countervailing and antidumping duty rates or Critical Circumstances determination in the countervailing case will be made prospectively.

Marketing and Distribution. In 2001, approximately 65 percent of the Company’s lumber products were sold to wholesalers, with the remainder sold to remanufacturers and other suppliers of building materials. 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 (approximately six percent of logs acquired in 2001) 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 2001, none of which accounted for more than 10 percent of total revenues.

Backlog. The Company maintains a minimal finished goods inventory of wood products. At December 31, 2001 orders were approximately $5.1 million compared with approximately $3.3 million at December 31, 2000. This backlog represented an order file for the Company which generally would be shipped within approximately one month.

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 12 of “Notes to Consolidated Financial Statements” in the Company’s 2001 Annual Report to Shareholders. Such information is incorporated herein by reference.

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. Compliance with certain portions of the Cluster Rules was required by April 1, 2001 with other portions not required until 2002 and 2006. The upgrade of the Halsey mill, required to comply with the first two portions of the Cluster Rules, was begun in 1998 and completed in November 2000 at a total cost of $37.4 million. The Company spent an additional $.3 million in 2001 to complete compliance with the 2002 portion of the Cluster Rules and currently estimates the cost of compliance with the portion of the Cluster Rules that becomes effective in 2006 at $3 million.

The Mackenzie pulp mill is subject to particulate emission standards determined by the B.C. Ministry of Water, Land and Air Protection. The Company will perform a study in 2002 to determine the appropriate control devices and equipment configuration to reduce particulate emissions from the mill’s power boiler. The Company expects to complete the project by the second quarter of 2004. The estimated costs, including the feasibility study in 2002, are expected to be incurred as follows: 2002—$.3 million; 2003—$5 million and 2004—$1.3 million.

The Company’s estimates of future environmental compliance expenditures are based on its understanding of current standards. 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.

The major environmental issues for pulp producers in 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. The Harmac and Mackenzie mills have in place comprehensive environmental management programs, 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 programs are being implemented effectively and that all regulated requirements are being met.

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 discussions 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.

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 the future in order to comply with this legislation if a triggering event should occur.

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.

See “Item 3. Legal Proceedings” for a discussion of certain environmental legal proceedings.

Employees

At December 31, 2001, the Company employed 2,223 employees of whom 1,740 were paid on an hourly basis and a majority of which were members of various labor unions. Approximately 52 percent of the Company’s employees were associated with the Company’s wood products business, 45 percent were associated with the Company’s pulp business and the balance consisted of corporate management, marketing and administration personnel.

Geographic Areas

For information regarding the Company’s revenues and long-lived assets by geographic area, see Note 12 of “Notes to Consolidated Financial Statements” in the Company’s 2001 Annual Report to Shareholders. Such information is incorporated herein by reference.

Item 2. Properties

The Company leases 38,000 square feet of office space in Portland, Oregon for its corporate administrative and sales functions. This operating lease expires in June 2009. Annual obligations under the lease for rent payments are as follows: 2002—$.7 million; 2003 through 2008—$.8 million and 2009—$.4 million.

Pulp Facilities

The Company has operated a bleached kraft pulp mill near Halsey, Oregon since the late 1970s. The Halsey mill has an estimated production capacity of 200,000 metric tons of pulp and produced 150,500 metric tons of pulp in 2001. The Halsey pulp mill and its new chlorine dioxide facility were sold and leased back in two separate transactions in 1999 and 2001 which are being accounted for as capital leases. The Halsey pulp mill leases expire in 2012. The Company has two purchase options under the leases; one is exercisable in 2007 and the other is exercisable at the end of the lease. Additional information regarding the Halsey mill leases is included in Note 6 of “Notes to Consolidated Financial Statements” in the Company’s 2001 Annual Report to Shareholders.

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 400,000 metric tons of pulp and produced 379,000 metric tons in 2001. The Mackenzie pulp mill is located in the town of Mackenzie in the northern interior of British Columbia on a site owned by the Company. The Mackenzie pulp mill has an annual capacity of 230,000 metric tons of pulp and produced 117,000 metric tons in 2001 since its acquisition in June 2001. The Company believes that all of its pulp facilities are adequate and suitable for current operations.

Wood Products Facilities

The following tabulation briefly states the location, character, capacity and 2001 production of the Company’s lumber mills:

	Estimated Annual Capacity	2001 Production(3)
Location	Estimated Annual Capacity	2001 Production(3)
Spearfish, South Dakota	120,000,000 bd. ft.(1)	101,000,000 bd. ft.
Grand Forks, British Columbia	90,000,000 bd. ft.(2)	78,000,000 bd. ft.
Midway, British Columbia	165,000,000 bd. ft.(1)	141,000,000 bd. ft.
Castlegar, British Columbia	233,000,000 bd. ft.(1)	217,000,000 bd. ft.

⁽¹⁾

Based on operating two shifts, five days per week.

⁽²⁾

Based on operating one shift, five days per week.

⁽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 2001, 257,000 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.

Item 3. Legal Proceedings

In 1998 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. The nature of contamination at the former mill site consists of industrial waste contamination of soil, groundwater and surface water/sediment. In addition, four landfills used by the Company are contaminated with wood debris and industrial wastes. Further, WDOE requested that the Company perform an investigation of sediments in the adjacent bay to determine the extent of wood waste accumulation. The Company is working with the WDOE to complete the sediment characterization and to prepare risk assessments. Based on preliminary findings, the Company has established a reserve in the amount of $6.7 million representing the low end of the range of estimated future remediation costs at this site.

The ultimate costs to the Company for the investigation, remediation and monitoring of these sites cannot be predicted with certainty, due to the often unknown magnitude of the pollution or the necessary cleanup, the varying costs of alternative cleanup methods, the amount of time necessary to accomplish such cleanups and the evolving nature of cleanup technologies and governmental regulations. The Company has recognized liabilities for environmental remediation costs for these sites in amounts that it believes are probable and reasonably estimable. The Company has assumed it will bear the entire cost of remediation at these sites.

The Company has tendered the defense of the above environmental claims to a number of insurance carriers that issued comprehensive general liability policies to the Company from the 1940’s to 1992. 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 has concluded settlements with several insurance carriers and is engaged in settlement discussions with other insurance carriers. The Company has more than sufficient policy limits available to meet the Company’s estimated liabilities. The Company believes recovery under these policies is highly probable and has recorded receivables in amounts it has deemed highly probable of realization. It is possible the Company’s recorded estimate of receivables may change.

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 a great many variables and cannot be predicted with any degree of certainty, the Company presently believes that any ultimate outcome resulting from these proceedings and matters would not have a material effect on the Company’s current financial position, liquidity or results of operations; however, in any given future reporting period, such proceedings or matters could have a material effect on results of operations.

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:

Angel M. Diez, age 56, has been Vice President—General Manager, Pulp Products since February 2001. Prior to becoming Vice President—General Manager, Pulp Products, Mr. Diez was Vice President—Sales and Marketing, Pulp Products, upon joining the Company in 1992. Prior to joining Pope & Talbot, he held positions with Perry H. Koplik & Sons, Inc., Publishers Paper and Boise Cascade.

Abram Friesen, age 59, has been Vice President—General 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 37, 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, former Chairman of the Board of the Company and a director 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 2001 and 2000 was 764 and 823, respectively. Additional information required by Item 5 of Part II is presented in the table entitled “Quarterly Financial Information” on page 35 of the Company’s 2001 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 8 of the Company’s 2001 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 17 of the Company’s 2001 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 13 and 14 of the Company’s 2001 Annual Report to Shareholders. Such information is incorporated herein by reference.

Item 8. Financial Statements and Supplementary Data

The report of independent public accountants and consolidated financial statements are presented on pages 17 through 34 of the Company’s 2001 Annual Report to Shareholders. Such information is incorporated herein by reference. Additionally, the required supplementary quarterly financial information is presented on page 35 of the Company’s 2001 Annual Report to Shareholders and is incorporated herein by reference.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

PART III

Item 10. Directors and Executive Officers

The information required by Item 10 of Part III is presented as a separate item entitled “Executive Officers of the Registrant Who are Not Directors” in Part I, Item 4 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 May 2, 2002. 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 May 2, 2002. 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 percent of Pope & Talbot Common Stock” in the Company’s Definitive Proxy Statement for the Annual Meeting of Shareholders on May 2, 2002. Such information is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

Not applicable.

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)(1) Financial Statements

Annual Report to Shareholders

Report of Independent Public Accountants		17

Consolidated balance sheets at December 31, 2001 and 2000		18

Consolidated statements of operations for each of the three years in the period ended December 31, 2001		19

Consolidated statements of stockholders’ equity for each of the three years in the period ended December 31, 2001		20

Consolidated statements of cash flows for each of the three years in the period ended December 31, 2001		21

Notes to consolidated financial statements		22-34

The consolidated financial statements listed above are included in the Annual Report to Shareholders of Pope & Talbot, Inc. for the year ended December 31, 2001. With the exception of the items referred to in Items 1, 5, 6, 7, 7a and 8, the 2001 Annual Report to Shareholders is not to be deemed filed as part of this report.

(a)(2) Schedules

All schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the related schedule, or because the information required is included in the financial statements and notes thereto.

(a)(3) Exhibits

The following exhibits are filed as part of this annual report.

Exhibit No.


2.1.		Purchase and Sale Agreement dated March 29, 2001 among Norske Skog Canada Limited, Norske Skog Canada Pulp Operations Limited, Pope & Talbot Ltd., Pope & Talbot, Inc., and Norske Skog Canada Mackenzie Pulp Limited (Incorporated herein by reference to Exhibit 2.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001, filed with the SEC on May 8, 2001 (SEC File No. 1-7852)).

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), filed with the SEC on March 31, 1993 (SEC file No. 1-7852)).

3.2.		Bylaws. (Incorporated herein by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999, filed with the SEC on March 24, 2000 (SEC File No. 1-7852)).

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 with the SEC on April 6, 1993 (SEC File No. 33-60640)).


4.2.		Rights Agreement, dated as of April 3, 1998, between the Company and ChaseMellon 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 with the SEC on April 7, 1998 (SEC File No. 1-7852)).

4.3.		Amended and Restated Participation Agreement dated as of December 27, 2001 among the Company, SELCO Service Corporation, the Note Purchasers named therein, Wilmington Trust Company and First Security Bank, National Association.

4.4.		Amended and Restated Facility Lease between the Company and Wilmington Trust Company dated December 27, 2001.

10.1.		Executive Compensation Plans and Arrangements

10.1.1.		Employee Stock Option Plan, as amended April 26, 2001.

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, filed with the SEC on March 31, 1993 (SEC File No. 1-7852)).

10.1.3.		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 filed with the SEC on March 31, 1993 (SEC File No. 1-7852)).

10.1.4.		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 filed with the SEC on March 25, 1991 (SEC File No. 1-7852)).

10.1.5.		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, filed with the SEC on May 14, 1998 (SEC File No. 1-7852)).

10.1.6.		1996 Non-Employee Director Stock Option Plan, as amended April 26, 2001.

10.1.7.		Special Non-Employee Director Stock Retainer Fee Plan. (Incorporated herein by reference to Exhibit 99.5 to the Company’s Form S-8 filed with the SEC on February 22, 1999 (SEC File No. 333-72737)).

10.1.8.		Split Dollar Life Insurance Agreement between the Company and Maria M. Pope, as trustee of the Pope Grandchildren’s Trust, dated December 21, 1999. (Incorporated herein by reference to Exhibit 10.1.11 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999, filed with the SEC on March 24, 2000 (SEC File No. 1-7852)).

10.1.9.		Restricted Stock Award Agreement entered into on April 26, 2001 effective as of September 9, 1999 between the Company and Michael Flannery.

10.2.		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, filed with the SEC on March 25, 1991 (SEC File No. 0-928)).


10.3.		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, filed with the SEC on March 25, 1991 (SEC File No. 0-928)).

10.4.		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, filed with the SEC on November 13, 1996 (SEC File No. 1-7852)).

10.5.		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, filed with the SEC on November 13, 1996 (SEC File No. 1-7852)).

10.6.		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, filed with the SEC on November 13, 1996 (SEC File No. 1-7852)).

10.7.		Credit agreement dated June 15, 2001, between the Company and Toronto Dominion Bank, Bank of Montreal and The Bank of Nova Scotia. (Incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, filed with the SEC on August 8, 2001 (SEC File No. 1-7852)).

13.1.		Portions of the Annual Report to Shareholders for the year ended December 31, 2001 which have been incorporated by reference in this report.

21.1.		List of subsidiaries.

23.1.		Consent of Arthur Andersen 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, 2001.

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 13th day of March, 2002.

POPE & TALBOT, INC.

By:		/s/ Michael Flannery
		Michael Flannery Chairman of the Board

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 13, 2002, by the following persons on behalf of the registrant and in the capacities indicated.

/s/ Michael Flannery		Chairman of the Board, President and Chief Executive Officer

Michael Flannery

/s/ Gordon P. Andrews		Director

Gordon P. Andrews

/s/ David J. Barram		Director

David J. Barram

/s/ Charles Crocker		Director

Charles Crocker

/s/ Lionel G. Dodd		Director

Lionel G. Dodd

/s/ Robert G. Funari		Director

Robert G. Funari

/s/ Kenneth G. Hanna		Director

Kenneth G. Hanna

/s/ Robert Stevens Miller, Jr.		Director

Robert Stevens Miller, Jr.

/s/ Peter T. Pope		Director

Peter T. Pope

/s/ Maria M. Pope		Vice President and Chief Financial Officer

Maria M. Pope

/s/ Gerald L. Brickey		Financial Controller

Gerald L. Brickey

EX-4.3 3 dex43.txt AMENDED AND RESTATED PARTICIPATION AGREEMENT Exhibit 4.3 ================================================================================ AMENDED AND RESTATED PARTICIPATION AGREEMENT dated as of December 27, 2001 among POPE & TALBOT, INC., as Lessee SELCO SERVICE CORPORATION, as Owner Participant NOTE PURCHASERS NAMED HEREIN, as Note Purchasers WILMINGTON TRUST COMPANY, not in its individual capacity, except as expressly provided herein, but solely as Owner Trustee and WELLS FARGO BANK NORTHWEST, NATIONAL ASSOCIATION, (formerly known as First Security Bank, National Association) as Indenture Trustee ================================================================================

ii Attachments to Participation Agreement: - --------------------------------------- Schedule 1 - Note Purchaser Information Schedule 3.2(r) - ERISA Matters Schedule 3.2(s) - Environmental Matters Schedule 3.2(w) - Existing Leases Annex I - Definitions Exhibit A - Form of Trust Agreement Exhibit B - Form of Site Lease Exhibit C - Form of Facility Lease Exhibit D - Form of Trust Indenture and Security Agreement Exhibit E - Form of Deed of Trust iii AMENDED AND RESTATED PARTICIPATION AGREEMENT ----------------------- This AMENDED AND RESTATED Participation Agreement (as it may be amended from time to time) dated as of December 27, 2001 (the "Effective Date") is among Pope & Talbot, Inc., a Delaware corporation (herein, together with its successors and assigns, the "Lessee"), SELCO Service Corporation, an ------ Ohio corporation (herein, together with its successors and assigns, the "Owner ----- Participant"), the Note Purchasers named in Schedule 1 hereto (the "Note - ----------- ---- Purchasers"), Wilmington Trust Company, not in its individual capacity except as - ---------- expressly stated herein, but solely as trustee (herein in such capacity, together with its successors and assigns, called the "Owner Trustee") under the ------------- Trust Agreement referred to below, and WELLS FARGO Bank NORTHWEST, National Association (formerly known as First Security Bank, National Association) (herein in such capacity, together with its successors and assigns, called the "Indenture Trustee"). The Owner Participant and the Note Purchasers are herein ----------------- sometimes referred to collectively as the "Participants" and individually as a "Participant". ----------- RECITALS A. The capitalized terms used in this Participation Agreement shall have the respective meanings specified in Annex I attached hereto, unless otherwise herein defined or the context hereof shall otherwise require. B. The parties hereto entered into a certain Participation Agreement as of September 15, 1999 (the "Original Participation Agreement"); -------------------------------- C. The parties hereto desire to amend and restate the Original Participation Agreement, on the terms and conditions set forth herein, it being understood that this Agreement is an amendment and restatement of the Original Participation Agreement, which shall remain in full force and effect, as amended and restated hereby; D. For the avoidance of doubt, each party hereto consents to the entry by each party thereto in each of the Amended and Restated Facility Lease dated as of December 27, 2001 between the Owner Trustee and the Lessee, Amended and Restated Trust Indenture dated as of December 27, 2001 between the Owner Trustee and the Indenture Trustee, and Amendment No.1 to the Site Lease dated as of December 27, 2001 between the Lessee and the Owner Trustee. In addition, each party hereto acknowledges the execution and delivery of certain "Operative Agreements" as defined under this Agreement. E. The Owner Trustee and the Owner Participant have entered into a Trust Agreement dated as of September 15, 1999, substantially in the form attached hereto as Exhibit A, and pursuant to the authorities and directions contained in the Trust Agreement, the Owner Trustee entered into: (1) a Site Lease substantially in the form attached hereto as Exhibit B between the Lessee, as landlord, and the Owner Trustee, as tenant, providing for the grant by the Lessee to the Owner Trustee of a leasehold estate in the Site for the Facility and certain other rights, licenses and easements relating to the Facility, but which shall not, during the Term of the Facility Lease, in any event require the Owner Trustee, as tenant, to pay Rent under the Site Lease which is not fully offset by the obligation of the Lessee to pay Periodic Site Rent on a dollar-for-dollar basis pursuant to the Facility Lease; (2) a Facility Lease substantially in the form attached hereto as Exhibit C between the Owner Trustee, as lessor, and the Lessee, as lessee, for the Facility, providing for the lease of the Facility and the sublease of the Site for the Facility to the Lessee; (3) a Trust Indenture and Security Agreement substantially in the form attached hereto as Exhibit D between the Owner Trustee and the Indenture Trustee, under which the Notes will be issued and secured, and providing for particular description of certain Collateral; (4) a Deed of Trust substantially in the form of Exhibit E between the Owner Trustee, as grantor, the deed of trust trustee thereunder, and the Indenture Trustee, as beneficiary, providing for the grant of a mortgage on the Facility, the Owner Trustee's leasehold interest in the Site and the Owner Trustee's interests under the Site Lease and the Facility Lease; and (5) a Tax Indemnity Agreement between the Lessee and the Owner Participant. NOW THEREFORE, in consideration of the promises and the mutual agreements contained herein, the parties hereto hereby agree that the Original Participation Agreement shall be restated and amended as follows: 2 ARTICLE I. COMMITMENTS OF THE PARTICIPANTS ------------------------------- Section 1.1. Issue and Sale of Series A Notes. -------------------------------- (a) The Series A Notes. In order to finance a portion of the Facility Cost, ------------------ the Trust Agreement authorizes the Owner Trustee to issue and sell its 8.96% Secured Notes, Series A, due January 2, 2008 (the "Series A Notes") in an -------------- aggregate principal amount not to exceed the aggregate amount of the commitments of the Note Purchasers set forth below. The Series A Notes are issued under and secured by the Indenture, will be dated the date of issue and will mature on January 2, 2008. The Series A Notes will bear interest at the rate of 8.96% per annum prior to maturity payable semiannually on each Rent Payment Date, and are to be otherwise substantially in the form attached to the Indenture as Exhibit A. (b) Commitment of Note Purchasers. Subject to the terms and conditions ----------------------------- hereof and on the basis of the representations and warranties hereinafter set forth, the Owner Trustee agrees to issue and sell to each Note Purchaser, and each Note Purchaser agrees to purchase from the Owner Trustee, on the Closing Date, Series A Notes of the Owner Trustee at a price of 100% of the principal amount thereof and in an aggregate principal amount equal to such Note Purchaser's Commitment as set forth in Schedule 1 hereto. The Series A Notes delivered to each Note Purchaser on the Closing Date will, unless otherwise indicated on Schedule 1 hereto, be in the form of a single Series A Note registered in the name of such Note Purchaser. (c) Failure to Deliver. If at the Closing the Owner Trustee fails to tender ------------------ to any Series A Note Purchaser the Notes to be purchased by such Note Purchaser at the Closing or if the conditions to the obligation of such Note Purchaser specified in Section 4 for the Closing have not been fulfilled, each Note Purchaser may thereupon elect to be relieved of all further obligations under this Agreement. Nothing in this Section shall operate to relieve the Owner Trustee, the Owner Participant or the Lessee from their respective obligations hereunder or to waive any of any Note Purchaser's rights against the Owner Trustee, the Owner Participant or the Lessee. Section 1.2. Investments by the Owner Participant. (d) Subject to the terms ------------------------------------ and conditions hereof and on the basis of the representations and warranties hereinafter set forth and set forth in the other Operative Agreements, on the Closing Date the Owner Participant will pay to the Owner Trustee, an amount equal to the Facility Cost for the Facility less the proceeds of the Series A Notes issued on the Closing Date. The 3 aggregate investment required to be made by the Owner Participant pursuant to this Section 1.2(a) shall not exceed $17,398,444.06. (b) In addition, the Owner Participant will make such further payments as may be necessary from time to time to permit the Owner Trustee to satisfy its obligations under Section 2. (c) If at the Closing the conditions to the obligations of the Owner Participant specified in Section 4 for the Closing have not been fulfilled, the Owner Participant may thereupon elect to be relieved of all further obligations under this Agreement. Nothing in this Section shall operate to relieve the Lessee from its obligations hereunder or to waive any of the Owner Participant's rights against the Lessee. Section 1.3. The Closing Date. The closing of the transactions contemplated ---------------- hereby (the "Closing") shall take place after 10:00 a.m., New York City Time, on ------- September 30, 1999 or such other date as the parties hereto shall mutually agree (the "Closing Date"), at the offices of Chapman and Cutler, 111 West Monroe ------------ Street, Chicago, Illinois 60603. On the Closing Date, the payment by the Owner Participant to be made pursuant to Section 1.2(a) and payment for the Series A Notes to be issued on the Closing Date shall be made not later than 11:00 a.m., New York City Time, by transferring or delivering such amounts, in funds immediately available on the Closing Date, to the Owner Trustee. Subject to the applicable conditions set forth in Section 4, the Owner Trustee hereby directs the Indenture Trustee, and the Indenture Trustee hereby agrees, to apply for the account of the Owner Trustee on the Closing Date the proceeds of the sale of the Series A Notes to the account of the Seller, and the Owner Participant will cause to be paid to the Seller for the account of the Owner Trustee, the amounts to be invested and paid by the Owner Participant pursuant to Section 1.2 on the Closing Date. Section 1.4. Expiration of Commitments. The commitment of the Owner ------------------------- Participant under Section 1.2(a) and the several commitments of the Note Purchasers hereunder shall expire on September 30, 1999. Section 1.5. Several Commitments. The obligations hereunder of the ------------------- Participants shall be several and not joint and no Participant shall be liable or responsible for the acts or defaults of any other Participant. 4 ARTICLE II. TRANSACTIONAL EXPENSES ---------------------- Section 2.1. Transactional Expenses to be Borne by Owner Trustee. If the --------------------------------------------------- Owner Participant shall have made its investment provided for in Section 1.2(a) with respect to the Closing and the Facility shall have been purchased, the Owner Trustee will, subject to the final clause of the last sentence of Section 2.2, pay all expenses relating to the transactions contemplated by this Agreement (other than any expenses incurred by the Lessee, including without limitation the fees and expenses of Stoel Rives LLP, its counsel), including but not limited to: (i) the cost of reproducing the Operative Agreements; (ii) the reasonable fees and expenses of Chadbourne & Parke LLP, special counsel for the Owner Participant; (iii) the reasonable fees and expenses of Thompson, Hine & Flory, special Ohio counsel to the Owner Participant; (iv) the reasonable fees and expenses of Chapman and Cutler, special counsel for the Note Purchasers; (v) the reasonable out-of-pocket expenses of the Participants; (vi) the cost of delivering to the main office of each Note Purchaser, insured to the reasonable satisfaction of such Note Purchaser, the Series A Notes purchased by such Note Purchaser on the Closing Date; (vii) the initial fees and expenses of the Owner Trustee under the Trust Agreement (including the reasonable fees and expenses of Morris, James, Hitchens & Williams, its counsel, incurred in connection with the negotiation and delivery of the Operative Agreements); (viii) the initial fees and expenses of the Indenture Trustee under the Indenture (including the reasonable fees and expenses of Ray Quinney & Nebeker, its counsel, incurred in connection with the negotiation and delivery of the Operative Agreements); (ix) the reasonable fees and expenses of Davis Wright Tremaine, local counsel for the Participants; and (x) the fees and expenses of Independent Equipment Company. Section 2.2. Transactional Expenses to be Borne by Lessee. If the -------------------------------------------- transactions contemplated by this Agreement with respect to the Closing are not consummated, the Lessee will pay all expenses relating to the transactions contemplated by this Agreement, including without limitation those referred to in Section 2.1. If the transactions contemplated by this Agreement with respect to the Closing are consummated, the Lessee shall in any event pay: (i) the fees and expenses of counsel for the Lessee; (ii) the cost of delivering to or from the home office of any Note Purchaser from or to the Indenture Trustee, insured to the reasonable satisfaction of such Note Purchaser, any Notes surrendered pursuant to the Indenture and any Note issued in substitution or replacement for the surrendered Notes; (iii) the expenses of the Owner Trustee, the Indenture Trustee and the Participants, including reasonable fees and expenses of their counsel, in connection with any amendments, waivers or consents 5 requested by any party in connection with any of the Operative Agreements, any enforcement action undertaken in connection with the Operative Agreements and all recording and filing fees, stamp taxes and other recording or filing taxes in connection with the recordation or filing of any such amendments, waivers and consents and in connection with any continuation statements or other documents filed to maintain and protect the rights of the parties under the Operative Agreements; (iv) the ongoing fees and expenses of the Owner Trustee under the Trust Agreement, including fees and expenses incurred in connection with the enforcement of the obligations of the Lessee under the Operative Agreements; (v) the ongoing fees and expenses of the Indenture Trustee under the Indenture, including fees and expenses incurred in connection with the enforcement of the obligations of the Lessee under the Operative Agreements; (vi) the premiums for the title insurance and the cost of surveys required by Section 4 and (vii) any costs set forth in Section 2.1 hereof to the extent that the total of all such costs exceeds 0.725% of the Facility Cost. ARTICLE III. WARRANTIES AND REPRESENTATIONS ------------------------------ Section 3.1. Warranties and Representations of the Owner Trustee. (a) --------------------------------------------------- Wilmington Trust Company warrants and represents in its individual capacity notwithstanding the provisions of Section 14.8(b) or any similar provision of any other Operative Agreement, that as of the Closing Date and as of the Effective Date: (i) Wilmington Trust Company (A) is a banking corporation duly organized, validly existing and in good standing under the laws of the State of Delaware; (B) has the corporate power and authority to enter into and perform its obligations under the Trust Agreement and this Agreement; and (C) has full right, power and authority under the Trust Agreement to enter into and perform its obligations, as Owner Trustee, under the Owner Trustee Agreements other than the Trust Agreement. (ii) There are no proceedings pending or, to the knowledge of Wilmington Trust Company, threatened and to the knowledge of Wilmington Trust Company, there is no existing basis for any such proceedings, against or 6 affecting Wilmington Trust Company in any court or before any governmental authority or arbitration board or tribunal which, if adversely determined, might materially and adversely affect the Trust Estate or would call into question the right, power and authority of Wilmington Trust Company to enter into or perform the Owner Trustee Agreements. (iii) The Trust Estate is free and clear of any liens and encumbrances which result from claims against Wilmington Trust Company in its individual capacity; and Wilmington Trust Company has not by affirmative act, in its individual capacity, conveyed any interest in the Trust Estate to any Person or subjected the Trust Estate to any Lien except pursuant to the Operative Agreements. (iv) The Trust Agreement and (insofar as it is entering into this Agreement in its individual capacity) this Agreement have been duly authorized by all necessary corporate action on the part of Wilmington Trust Company in its individual capacity, have been duly executed and delivered by Wilmington Trust Company in its individual capacity, and constitute the valid and binding obligations of Wilmington Trust Company in its individual capacity. (v) Neither the nature of the Trust Estate, nor any relationship between Wilmington Trust Company and any other Person, nor any circumstance in connection with the execution and delivery of the Trust Agreement or this Agreement, is such as to require a consent, approval or authorization of, or filing, registration or qualification with, any governmental authority of the State of Delaware or the federal government of the United States of America governing the banking or trust powers of Wilmington Trust Company on the part of Wilmington Trust Company in connection with the execution and delivery of the Trust Agreement or this Agreement. (vi) The execution and delivery of the Trust Agreement and this Agreement and compliance by Wilmington Trust Company with all of the provisions thereof do not and will not contravene any law regulating the banking or trust activities or business of Wilmington Trust Company, or any order of any court or governmental authority or agency applicable to or binding on Wilmington Trust Company or its certificate of incorporation or its by-laws. (b) The Owner Trustee warrants and represents as Owner Trustee that: (i) The other Owner Trustee Agreements are duly authorized by the Trust Agreement and the Owner Trustee Agreements have been duly 7 executed and delivered by the Owner Trustee, as trustee under the Trust Agreement. (ii) The Owner Trustee is not in violation of any term of any of the Owner Trustee Agreements. (iii) Neither the nature of the Trust Estate, nor any relationship between the Owner Trustee and any other Person, nor any circumstance in connection with the offer, issue, sale or delivery of the Beneficial Interest or the Series A Notes or the execution and delivery of the Owner Trustee Agreements is such as to require a consent, approval or authorization of, or filing, registration or qualification with, any governmental authority of the State of Delaware or the federal government of the United States of America governing the banking or trust powers of Wilmington Trust Company on the part of the Owner Trustee in connection with the execution and delivery of the Owner Trustee Agreements or the offer, issue, sale or delivery of the Beneficial Interest or the Series A Notes. (iv) The Owner Trustee has not by affirmative act conveyed any interest in the Trust Estate to any Person or subjected the Trust Estate to any Lien except pursuant to the Operative Agreements. Section 3.2. Warranties and Representations of the Lessee. The Lessee -------------------------------------------- warrants and represents that as of Closing on the Closing Date: (a) Organization and Authority. The Lessee (i) is a corporation duly -------------------------- organized, validly existing and in good standing under the laws of the State of Delaware; (ii) has all requisite power and authority to own or hold under lease its assets and properties, conduct its business as now conducted and as presently proposed to be conducted and enter into and perform its obligations under this Agreement and each of the other Operative Agreements to which it is or will be a party; and (iii) is duly licensed or qualified and is in good standing as a foreign corporation in each jurisdiction wherein the failure to be so qualified would have a Material Adverse Effect. (b) Due Authorization, Enforceability, etc. The execution, delivery and -------------------------------------- performance of the Lessee Agreements and the compliance by the Lessee with the terms and provisions thereof have been duly authorized by all necessary corporate action of the Lessee. Each of the Lessee Agreements has been duly executed and delivered by the Lessee. Assuming the due authorization, execution and delivery by each other party thereto, each of the Lessee Agreements constitutes the legal, valid and binding obligations of the Lessee, enforceable against the Lessee in accordance with their respective terms, except as the same may be limited by bankruptcy, insolvency, fraudulent conveyance, 8 reorganization, arrangement, moratorium or other laws relating to or affecting the rights of creditors generally and by general principles of equity. (c) No Conflicts. The execution, delivery and performance by the Lessee of ------------ each of the Lessee Agreements, the consummation by the Lessee of the transactions contemplated thereby, and compliance by the Lessee with the terms and provisions thereof, do not and will not (i) conflict with or result in any breach of any agreement to which the Lessee is a party, (ii) conflict with any Applicable Law which could reasonably be expected to result in a Material Adverse Effect, (iii) conflict with the certificate of incorporation or by-laws of the Lessee, or (iv) result in the creation of any Lien (except Permitted Encumbrances) upon any of the property or assets of the Lessee pursuant to the terms of any indenture, mortgage, deed of trust, credit agreement or any other agreement, contact or instrument to which the Lessee is a party or by which its property or assets are bound. (d) Governmental Consent. Neither the nature of the Lessee or any of its -------------------- business or properties, nor any relationship between the Lessee and any other Person, nor any circumstance in connection with the execution and delivery of the Lessee Agreements is such as to require a consent, approval or authorization of, or filing, registration or qualification with, any regulatory body, state, Federal or local, on the part of the Lessee as a condition to the execution and delivery of the Lessee Agreements. (e) Litigation. Except as described in the Lessee's Annual Report on SEC ---------- Form 10-K dated March 24, 1999, there are no proceedings pending, or to the knowledge of the Lessee threatened, against or affecting the Lessee in any court or before any governmental authority or arbitration board or tribunal which if adversely determined would have a Material Adverse Effect, nor are there any other circumstances which, to the knowledge of the Lessee, would lead to or result in any such proceedings. The Lessee is not in default with respect to any order of any court, governmental authority or arbitration board or tribunal. (f) No Defaults. No Lease Default or Lease Event of Default has occurred ----------- and is continuing. The Lessee is not in default in the payment of principal or interest on any indebtedness for borrowed money and no event of default has occurred under any instrument or instruments or agreements to which the Lessee or any Person acting at the instruction of the Lessee with respect to the Lessee's obligations thereunder is a party (i) under and subject to which any indebtedness for borrowed money has been issued or (ii) pursuant to which the Lessee has any obligations the non-performance of which could reasonably be expected to have a Material Adverse Effect; and no event has occurred and is continuing under the provisions of any such instrument or agreement 9 which with the lapse of time or the giving of notice, or both, would constitute such an event of default thereunder. (g) No Materially Adverse Contracts. The Lessee is not a party to, or bound ------------------------------- or affected by, any contract or agreement or subject to any judgment, order, writ, injunction, rule or regulation or decree or other action of any court or other governmental authority or agency, or the award of any arbitrator, or any charter or contractual restriction that materially adversely affects or in the future may (so far as the Lessee can now reasonably foresee based on facts known to the Lessee) materially adversely affect the business, Properties, or financial condition of the Lessee or impair the ability of the Lessee to perform its obligations under the Lessee Agreements. (h) Location of Chief Place of Business and Chief Executive Office. The -------------------------------------------------------------- chief executive office and principal place of business of the Lessee and the office where the Lessee keeps its corporate records concerning the Facility, the Site and the Operative Agreements is located at Suite 200, 1500 SW First Avenue, Portland, Oregon 97201. (i) Title. The Owner Trustee has good and marketable title to the Facility, ----- free and clear of all Liens other than (i) any Liens thereon for taxes, assessments, levies, fees and other governmental and similar charges not due and payable, (ii) any Liens of mechanics, suppliers, materialmen and laborers for work or service performed or materials furnished in connection with the Facility which are not due and payable and are insured over by the Title Policy relating to the Facility issued at Closing, and (iii) those exceptions to title set forth on Schedule B to the Title Policy relating to the Facility issued at Closing. (j) Financial Statements. The audited consolidated balance sheet and -------------------- consolidated statements of income and retained earnings and cash flows of the Lessee for the fiscal years ended December 31, 1998, December 31, 1997, December 31, 1996 and December 31, 1995 fairly present, in conformity with generally accepted accounting principles, the consolidated financial position of the Lessee as of such dates and the results of its operations for the periods then ended. The unaudited consolidated balance sheet and consolidated statements of income and retained earnings and cash flows of the Lessee for the fiscal quarter ended June 30, 1999, fairly present, in conformity with generally accepted accounting principles, the consolidated financial position of the Lessee as of such date and the results of its operations for the period then ended, subject to normal year-end adjustments. Since June 30, 1999, there has been no change in such financial condition or results of operations which could reasonably be expected to have a Material Adverse Effect. 10 (k) Full Disclosure. The Private Placement Memorandum, the financial --------------- statements referred to in clause (j) above, the Lessee Agreements and all other written statements furnished by or on behalf of the Lessee to the Participants in connection with the transactions contemplated by this Agreement, do not, taken as a whole, contain any untrue statement of a material fact or omit a material fact necessary to make the statements contained therein or herein not misleading. There is no fact peculiar to the Lessee which the Lessee has not disclosed to the Participants in writing which has a Material Adverse Effect on nor, so far as the Lessee can now foresee, will have a Material Adverse Effect on the business, Properties or financial condition of the Lessee or impair the ability of the Lessee to perform its obligations under the Lessee Agreements. (l) Use of Proceeds. The net proceeds from the sale of the Series A Notes --------------- will be applied to the payment of a portion of the Facility Cost. None of the transactions contemplated in the Operative Agreements (including, without limitation thereof, the use of the proceeds from the sale of the Series A Notes) or any direct or indirect use or application of the proceeds of the Notes will violate or result in a violation of Section 7 of the Securities Exchange Act of 1934, as amended, or any regulations issued pursuant thereto including, without limitation, Regulation T, U or X of the Board of Governors of the Federal Reserve System, 12 C.F.R., Chapter II. (m) Investment Company Act. The Lessee is not an "investment company" or a ---------------------- company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (n) Holding Company. The Lessee is not subject to regulation as a "holding --------------- company," an "affiliate" of a "holding company," or a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, as amended. (o) Compliance with Law. The Lessee: ------------------- (i) is not, to the knowledge of the Lessee after reasonable inquiry, in violation of any laws, ordinances, governmental rules or regulations to which it is subject, and (ii) has not failed to obtain any license, permit, franchise or other governmental authorization (and in the case of any temporary permits, application for permanent permits have been made and are pending) necessary to the ownership or operation of its property or to the conduct of its business, 11 which violation or failure to obtain would materially adversely affect the business, properties or financial condition of the Lessee or impair the ability of the Lessee to perform its obligations under the Lessee Agreements. (p) Taxes. All tax returns required to be filed by the Lessee in any ----- jurisdiction (other than those for which the failure to file would not have a Material Adverse Effect) have, in fact, been filed, and all taxes, assessments, fees and other governmental charges upon the Lessee or upon any of its properties, income or franchises, which are shown to be due and payable in such returns have been paid. Except as described in the Lessee's Annual Report on SEC Form 10-K dated March 24, 1999, the Lessee does not know of any material proposed additional tax assessment against it for which adequate provision has not been made on its accounts and no controversy in respect of additional income taxes due is pending or to the knowledge of the Lessee threatened which, if adversely determined, could reasonably be expected to have a Material Adverse Effect. The provisions for taxes on the books of the Lessee are adequate for all open years, and for its current fiscal period. (q) Restrictions on Lessee. The Lessee is not a party to or bound by any ---------------------- security, contract, indenture, agreement, instrument, order of any court or governmental agency, law or rule or regulation which restricts the right or ability of the Lessee to enter into leases of the type of the Facility Lease or the Site Lease. (r) Employee Retirement Income Security Act of 1974. ----------------------------------------------- (i) The consummation of the transactions provided for in the Operative Agreements and compliance by the Lessee with the provisions thereof will not involve any prohibited transaction within the meaning of Section 406 of ERISA or Section 4975 of the Code. The representation of the Lessee in the preceding sentence is made in reliance upon and subject to the accuracy of the representation of each Participant in Section 3.5(c) as to the source of funds to be used by such Participant in financing the acquisition of the Facility. (ii) Each Plan is in compliance with the applicable provisions of ERISA, the Code and other federal or state law, except for such non-compliance which would not reasonably be expected to have a Material Adverse Effect. Each Plan intended to qualify under Section 401(a) of the Code has received a favorable determination letter from the IRS and to the Lessee's knowledge, nothing has occurred which would cause the loss of such qualification. 12 (iii) There are no pending, or to the Lessee's knowledge, threatened claims by any Governmental Authority, with respect to any Plan which has resulted or could reasonably be expected to result in a Material Adverse Effect. There has been no prohibited transaction or other violation of the fiduciary responsibility rule with respect to any Plan which could reasonably be expected to result in a Material Adverse Effect. (iv) No ERISA Event has occurred or is reasonably expected to occur with respect to any Pension Plan, other than as specified in Schedule 3.2(r) hereto. (v) No Pension Plan (other than the Multiemployer Plans) has any Unfunded Pension Liability. (vi) Neither the Lessee nor any ERISA Affiliate has incurred, nor does it reasonably expect to incure, any liability under Title IV of ERISA with respect to any Pension Plan (other than premiums due and not delinquent under Section 4007 of ERISA), other than as specified in Schedule 3.2(r) hereto. (vii) Neither the Lessee nor any ERISA Affiliate has transferred any Unfunded Pension Liability to any Person or otherwise engaged in a transaction that could be subject to Section 4069 of ERISA. (viii) A complete list of all the Lessee's affiliates (within the meaning specified in Section V(a)(1) of Prohibited Transaction Exemption 95-60 (issued July 12, 1995)) and each Pension Plan currently in effect is set forth on Schedule 3.2(r). (s) Environmental Matters. To the knowledge of the Lessee after reasonable inquiry: --------------------- (i) neither the Lessee nor the Leased Property is in material violation of any applicable Environmental Law; (ii) the Lessee has obtained all material Governmental Approvals required for the operations of the Facility by any applicable Environmental Law; (iii) there is no and has never been a material Release or threatened material Release or disposal of any Hazardous Material at the Site and the Site is not adversely affected by any material Release or threatened material Release originating or emanating from any other property; 13 (iv) except as disclosed in the reports on Schedule 3.2(s), none of which disclosures, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect, the Site does not contain and has not contained any: (v) underground storage tank, (w) material amounts of asbestos containing building material, (x) any landfills or dumps, (y) hazardous waste treatment, storage or disposal facility as defined pursuant to RCRA or any comparable state law, or (z) site on or nominated for the National Priority List promulgated pursuant to CERCLA or any state priority list promulgated pursuant to any comparable state law; (v) no circumstances exist that could be reasonably expected to (A) form the basis of any Environmental Claims against the Leased Property that individually or in the aggregate could reasonably be expected to have a Material Adverse Effect or (B) cause the Leased Property to be subject to any restrictions on ownership, occupancy, use or transferability under any Environmental Law; (vi) to the Lessee's knowledge, no Hazardous Materials that have been generated at or transported from the Leased Property or any part thereof have been disposed at any location that is listed or proposed for listing on the National Priority List promulgated pursuant to CERCLA or any state priority list promulgated pursuant to any comparable state law, or any location that is or has been the subject of a CERCLA response action, and all Hazardous Materials generated, used, treated, handled or stored at or transported to or from the Leased Property or any part thereof and any property currently or formerly owned or operated by the Lessee have been disposed of in compliance in all material respects with all Environmental Laws and applicable Environmental Permits; (vii) the Lessee has not received any written or other notice, mandate, order, Lien or request which remains pending under an Environmental Law concerning any of the Leased Property or any part thereof or relating to an alleged violation of an Environmental Law concerning the Leased Property or any part thereof or relating to any potential adverse action in any way involving environmental, health or safety matters affecting the Leased Property or any part thereof; (viii) there is no proceeding pending or, to Lessee's knowledge, threatened against the Lessee by any Federal, state, or local court, tribunal, administrative agency, department, commission, board or other authority or instrumentality with respect to the presence or Release of any Hazardous Material from the Leased Property or any part thereof; and 14 (ix) no Hazardous Materials have been Released from or on the Leased Property or any part thereof for which Remedial Action could be required under any Environmental Law or may be necessary to prevent or eliminate an imminent and substantial endangerment to human health or the environment. (t) Security Interests. The Indenture and the Deed of Trust create a valid ------------------ and perfected first priority lien and security interest in the Collateral described therein, subject to Permitted Encumbrances, securing the payment of all Secured Indebtedness, and all filings and other actions necessary or desirable to perfect and protect such lien and security interest have been duly taken at or prior to the Closing. (u) Insurance. The Leased Property (including the Facility) is covered by --------- the insurance required by Section 7 of the Facility Lease covering such Leased Property and all premiums due in respect of such insurance have been paid. (v) Coverage. The amount of the installment of Periodic Rent payable under -------- the Facility Lease on each Rent Payment Date during the Basic Term thereof will equal or exceed the sum of the interest payments and the payments or prepayments of principal due on such Rent Payment Date on the Series A Notes. The amount of Casualty Value and Termination Value under the Facility Lease payable on any date will equal or exceed the sum of the principal amount of the Series A Notes which will remain unpaid on such date plus accrued interest thereon. (w) Leasehold Interest. The Lessee has good and marketable title to the ------------------ Site for the Facility, free and clear of all Liens other than (i) the interest of the Owner Trustee under the Site Lease covering the Site and the interest of the Lessee under the Facility Lease in the Site; (ii) any Liens thereon for taxes, assessments, levies, fees and other governmental and similar charges not due and payable; (iii) any Liens of mechanics, suppliers, materialmen and laborers for work or service performed or materials furnished in connection with the Facility which are not due and payable and are insured over by the Title Policy relating to the Facility issued at Closing; (iv) any exceptions to title set forth on Schedule B to the Title Policy relating to the Site issued at Closing; (v) the leases set forth on Schedule 3.2(w) hereto; and (vi) minor encumbrances, easements or reservations, rights of others for rights-of-way, utilities and other similar purposes, zoning or other restrictions as to the use of real properties, and leases and subleases thereof, in each case, which (A) are necessary or appropriate for the conduct of the activities of the Lessee on the Site or customarily exist on properties of business entities engaged in similar activities and similarly situated and (B) do not in any event materially impair the use or value of the Site. 15 (x) Complete Facility. ----------------- (i) Exhibit B to the Facility Lease contains a complete description of the entire Facility, which is located on the Site. Such items, together with the Site Lease Property for the Facility, constitute an integrated and self-contained pulp mill. The Owner Trustee's title and interest in the Leased Property under the Facility Lease is sufficient to permit during the Term of the Site Lease for the Site of the Facility (i) the locating, occupying, owning, selling, leasing, connecting, operating, maintaining, replacing, renewing, repairing and removing of the Facility, (ii) ingress to and egress from the Leased Property leased under the Facility Lease, (iii) the operating of the Leased Property leased under the Facility Lease in such a manner as to cause the Facility to perform on a daily basis, in commercial operation, the functions for which it was specifically designed at Design Capacity in accordance with the Plans therefor, and (iv) the preservation and enforcement by the Owner Trustee of its rights in and to the Leased Property leased under the Facility Lease and the easements and other rights in respect of the Site Lease Property described or referred to in the Site Lease for the Site of the Facility. (ii) There is presently no default by the Lessee or, to the Lessee's knowledge, by any other party with respect to (1) any easements, rights-of-way, licenses, utilities and other services which would materially and adversely affect the services relating to the Facility or (2) the James River Agreement, the James River Easement, the Railway License or, except with respect to the matters addressed in Section 14.14, the County Road Documents. (iii) All utility services necessary for the operation for its intended purposes of the Facility are installed and operational. (iv) None of the Permitted Encumbrances will interfere in any material respect with the use or possession of the Leased Property or any part thereof or any other asset used in connection therewith or the use of or the exercise by the Owner Trustee of its rights either under any Operative Agreement or to the Leased Property. (v) The Facility is situated wholly within the boundary lines of the Site and does not encroach upon any contiguous or adjoining property; except as disclosed in writing, neither the Site nor any part thereof is considered part of a larger tax lot; the Facility does not violate any rights granted under any easements or rights of way or any covenants or restrictions affecting the Site or any part thereof, and any future violation will not result in a reversion or forfeiture of title, 16 right of re-entry or power of termination; and the easements, rights-of-way, covenants and restrictions affecting the Site or any part thereof do not and will not interfere in any material respect with the use or occupancy of the Leased Property or any part thereof, or any asset owned or used in connection therewith, nor will the exercise of rights or remedies thereunder result in any damage to the Leased Property or any part thereof or diminution of value of the Leased Property or any part thereof. (vi) Except as addressed in Section 14.14, all Permits that are or will become Applicable Permits shall have been obtained, except Applicable Permits customarily obtained or which are permitted by Applicable Law to be obtained after the Closing Date (and the Lessee, having completed all appropriate due diligence in connection therewith, has no reason to believe that such Permits will not be granted in the usual course of business prior to the date that such Permits are required by Applicable Law). All such obtained Permits are in proper form, in full force and effect and are not subject to any further appeal, consent or contest or to any unsatisfied condition that may allow modification or revocation. (y) Casualty Occurrence. No Casualty Occurrence has occurred, and the ------------------- Leased Property may be used for the purposes contemplated by the Lessee in accordance with the Facility Lease and the other Operative Agreements. (z) Recordation and Filing. The Memorandum of Facility Lease and Memorandum ---------------------- of Site Lease have been duly recorded and are in a form sufficient to provide notice of the interests purported to be created by the Facility Lease and Site Lease, respectively. Upon the recordation of the Memorandum of Site Lease in the county in which the Site is located, the Memorandum of Site Lease will have been recorded or filed in such place in which recording or filing is required to provide notice, under Applicable Law, of the interests created by the Site Lease and to protect the validity and effectiveness thereof, and all Taxes, fees and other public charges payable in connection with the filing and recordation of the Memorandum of Site Lease have been paid. Upon the recordation of the Memorandum of Facility Lease in the county where the Facility is located, the Memorandum of Facility Lease will have been recorded or filed in such place in which recording or filing is required to provide notice, under Applicable Law, of the interests created by such Facility Lease and to protect the validity and effectiveness thereof, and all Taxes, fees and other public charges payable in connection with the filing and recordation of the Memorandum of Facility Lease have been paid. 17 (aa) Trade Secrets and Patents. ------------------------- (i) The leasing of the Site by the Owner Trustee, the ownership of the Facility by the Owner Trustee and the leasing and operation of the Facility by the Lessee, do not and will not conflict with, infringe on, or otherwise violate any copyright, trademark, trade name, trade secret or patent rights of any other Person. (ii) The Lessee has all rights to all patents, patent applications, trademarks (whether registered or not), trademark applications, trade names, proprietary computer software, "know-how" and copyrights used or to be used in the ordinary course of the operation of the Facility (the "Intellectual Property Rights") that are necessary for the operation thereof, including the right to assign the Intellectual Property Rights. There is no judicial proceeding pending or, to the knowledge of the Lessee, threatened, involving any claim of any infringement, misuse or misappropriation by the Lessee or any Affiliate thereof of any patent, trademark, trade name, copyright, license or similar intellectual property right owned by any third party related to the Intellectual Property Rights. (bb) Canadian Pension Plans. ---------------------- (i) All Canadian Pension Plans have been registered under the Income Tax Act (Canada) and other applicable Canadian pension legislation. To the Lessee's knowledge, nothing has occurred which would cause the loss of such registration. (ii) All contributions required to make the Canadian Pension Plans fully funded under the Income Tax Act (Canada) and other applicable Canadian pension legislation have been made. (iii) All Canadian Pension Plans are in compliance with the Income Tax Act (Canada) and other applicable Canadian pension legislation, except for such noncompliance which would not reasonably be expected to have a Material Adverse Effect. (iv) The Lessee is not and has not been within the immediately preceding five (5) years a participating employer in any negotiated cost plan or substantially similar plan under applicable Canadian law. The required contributions from any Subsidiary of the Lessee which is a participating employer in any negotiated cost plan, or substantially similar plan, under applicable Canadian law have been remitted. Each Subsidiary of the Lessee which is a 18 participating employer in any negotiated cost plan, or substantially similar plan, under applicable Canadian law has complied with all of its obligations under such a plan, except such noncompliance which would not reasonably be expected to have a Material Adverse Effect. Section 3.3. Warranties and Representations of the Indenture Trustee. The ------------------------------------------------------- Indenture Trustee warrants and represents that as of the Closing Date and as of the Effective Date: (a) The Indenture Trustee is a national association duly organized, validly existing and in good standing under the laws of the United States of America and has the corporate power and authority to enter into and perform its obligations under the Indenture Trustee Agreements. (b) The Indenture Trustee Agreements have been duly authorized, have been executed and delivered by the Indenture Trustee and constitute valid and binding obligations of the Indenture Trustee enforceable against the Indenture Trustee in accordance with the terms hereof and thereof, except as such terms may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting the rights of creditors generally and except as equitable remedies such as specific performance may be in the discretion of the courts. (c) The execution and delivery of the Indenture Trustee Agreements and compliance by the Indenture Trustee with all of the provisions thereof do not and will not contravene any law governing its banking or trust powers, or any order of any court or governmental authority or agency applicable to or binding on the Indenture Trustee or its articles of association or its by-laws. (d) There are no proceedings pending or, to the knowledge of the Indenture Trustee, threatened, and to the knowledge of the Indenture Trustee there is no existing basis for any such proceedings, against or affecting the Indenture Trustee in or before any court or before any governmental authority or arbitration board or tribunal which, if adversely determined, might impair the ability of the Indenture Trustee to perform its obligations under the Indenture Trustee Agreements. (e) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body governing its banking or trust powers is required for the due execution, delivery and performance by the Indenture Trustee of the Indenture Trustee Agreements. 19 Section 3.4. Private Offering. (a) The Owner Trustee warrants and ---------------- represents to the Lessee, the Participants and the Indenture Trustee that neither the Owner Trustee nor any Person authorized or employed by the Owner Trustee as agent, broker, dealer or otherwise in connection with the placement of the Beneficial Interest or any similar Security or the Series A Notes or any similar Security has offered any of the Beneficial Interest or any similar Security or the Series A Notes or any similar Security for sale to, or solicited offers to buy any thereof from, or otherwise approached or negotiated with respect thereto with, any prospective purchaser. (b) The Lessee warrants and represents to the Owner Trustee, the Participants and the Indenture Trustee that: (i) neither the Lessee nor any Person authorized or employed by the Lessee as agent, broker or otherwise in connection with the offering or sale of the Beneficial Interest or any similar Security has offered any of the Beneficial Interest or any similar Security for sale to, or solicited offers to buy any thereof from, or otherwise approached or negotiated with respect thereto with, any prospective purchaser, other than the Owner Participant, which was offered the Beneficial Interest at private sale for investment and which the Lessee or such agent had reasonable grounds to believe, and did believe, and, as to the Owner Participant, after reasonable inquiry does believe, has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of investment in the Beneficial Interest; and (ii) neither the Lessee nor any Person authorized or employed by the Lessee as agent, broker, dealer or otherwise in connection with the offering or sale of the Series A Notes or any similar Security has offered any of the Series A Notes or any similar Security for sale to, or solicited offers to buy any thereof from, or otherwise approached or negotiated with respect thereto with, any prospective purchaser, other than the Note Purchasers and 60 other institutional investors, each of which was offered a portion of the Series A Notes at private sale for investment and each of which the Lessee or such agent had reasonable grounds to believe, and did believe, and, as to the Note Purchasers, after reasonable inquiry does believe, has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of investment in the Series A Notes. (c) The Owner Trustee and the Lessee agree that neither the Owner Trustee nor the Lessee nor anyone acting on the behalf of either or both of the Owner Trustee and the Lessee will offer 20 (i) the Beneficial Interest or any part thereof or any similar Security for issue or sale to, or solicit any offer to acquire any of the Beneficial Interest from anyone so as to bring the issuance and sale of the Beneficial Interest within the provisions of Section 5 of the Securities Act of 1933, as amended, or (ii) the Notes or any part thereof or any similar Security for issue or sale to, or solicit any offer to acquire any of the Notes from, anyone so as to bring the issuance and sale of the Notes within the provisions of Section 5 of the Securities Act of 1933, as amended. Section 3.5. Representations And Covenants Of The Participants. ------------------------------------------------- (a) Representations and Covenants of the Owner Participant. The Owner ------------------------------------------------------ Participant warrants and represents to the Note Purchasers, the Owner Trustee and the Lessee that as of the Closing Date and as of the Effective Date: (i) The Owner Participant is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has the corporate power and authority to carry on its present business and operations, to own or lease its Properties and to enter into and perform its obligations under the Owner Participant Agreements. (ii) The Owner Participant Agreements have been duly authorized, executed and delivered by the Owner Participant and constitute valid and binding obligations of the Owner Participant enforceable against the Owner Participant in accordance with the terms hereof and thereof, except as such terms may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting the rights of creditors generally and except as equitable remedies such as specific performance may be in the discretion of the courts. (iii) The execution and delivery by the Owner Participant of the Owner Participant Agreements and compliance by the Owner Participant with all of the provisions thereof do not and will not contravene any law or any order of any court or governmental authority or agency applicable to or binding on the Owner Participant or contravene the provisions of, or constitute a default under, its articles of association or by-laws or any indenture, mortgage, contract or any agreement or instrument to which the Owner Participant is a party or by which it or any of its property may be bound or affected. (iv) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required 21 for the due execution, delivery or performance by the Owner Participant of the Owner Participant Agreements. (v) The Trust Estate is free of liens and rights of others resulting from claims against the Owner Participant not related to the transactions contemplated by the Operative Agreements. (b) Purchase for Investment. Each Participant represents to each other ----------------------- Participant, the Owner Trustee and the Lessee that such Participant purchased or is purchasing the Interest (as hereinafter defined) acquired or to be acquired by it for the account of such Participant or for the account of one or more pension or trust funds of which it is trustee, in each case for investment and with no present intention of distributing or reselling such Interest or any part thereof, but without prejudice, however, to the right of such Participant at all times to sell or otherwise dispose of all or any part of such Interest under a registration under the Securities Act of 1933, as amended, or under an exemption from such registration available under such Act; provided that the disposition of such Interest shall at all times be within its control, subject, in the case of the Beneficial Interest, to compliance with the provisions of Section 11. If any Participant purchased or is purchasing for the account of one or more pension or trust funds, such Participant represents that it is acting as sole trustee and has sole investment discretion with respect to the acquisition of the Interest acquired or to be acquired by it pursuant to this Agreement. The Beneficial Interest and the Series A Notes are sometimes referred to in this Section 3.5 collectively as the "Interests" and individually as an "Interest". --------- -------- (c) Source of Funds. Each Participant represents that at least one of the following statements is an accurate representation as to the source of funds used or to be used by such Participant to make its investment pursuant to Section 1 (the "Source"): ------ (i) the Source is an "insurance company general account" within the meaning of United States Department of Labor Prohibited Transaction Class Exemption ("PTCE") 95-60 (issued July 12, 1995) and there is no employee ---- benefit plan, treating as a single plan, all plans maintained by the same employer or employee organization, with respect to which the amount of the general account reserves and liabilities for all contracts held by or on behalf of such plan, exceed ten percent (10%) of the total reserves and liabilities of such general account (exclusive of separate account liabilities) plus surplus, as set forth in the NAIC Annual Statement filed with the Source's State of domicile; or 22 (ii) the Source is either (A) an insurance company pooled separate account, within the meaning of PTCE 90-1 (issued January 29, 1990), or (B) a bank collective investment fund, within the meaning of the PTCE 91-38 (issued July 12, 1991) and, (except as disclosed to each other Participant, the Owner Trustee and the Lessee in writing pursuant to this paragraph (ii)), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund; or (iii) the Source constitutes assets of an "investment fund" (within the meaning of Part V of the QPAM Exemption) managed by a "qualified professional asset manager" or "QPAM" (within the meaning of Part V of PTCE 84-14 issued March 13, 1984 (the "QPAM Exemption")), no employee benefit -------------- plan's assets that are included in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Section V(c)(1) of the QPAM Exemption) of such employer or by the same employee organization and managed by such QPAM, exceed 20% of the total client assets managed by such QPAM, the conditions of Part 1(c) and (g) of the QPAM Exemption are satisfied, neither the QPAM nor a Person controlling or controlled by the QPAM (applying the definition of "control" in Section V(e) of the QPAM Exemption) owns a 5% or more interest in such Participant and (A) the identity of such QPAM and (B) the names of all employee benefit plans whose assets are included in such investment fund have been disclosed to each other Participant, the Owner Trustee and the Lessee in writing pursuant to this paragraph (iii); or (iv) the Source is a governmental plan; or (v) the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to each other Participant, the Owner Trustee and the Lessee in writing pursuant to this paragraph (v); or (vi) the Source does not include assets of any employee benefit plan (other than a plan exempt from the coverage of ERISA) and does not include assets of any entity whose underlying assets include "plan assets" as determined under United States Department of Labor Regulation Section 2510.3-101. Section 3.6. Reliance by Holders of the ClO//2// Notes. It is hereby acknowledged and understood that the holders of the ClO//2// Notes are entitled to rely on the representations and warranties in this Section 3. 23 ARTICLE IV. CLOSING CONDITIONS ------------------ Section 4.1. Conditions Precedent to Investment by each Participant. The ------------------------------------------------------ obligations of each Participant to make its investment pursuant hereto on the Closing Date shall be subject to the following conditions: (a) Execution of Operative Agreements. At or before the Closing, the --------------------------------- Operative Agreements shall have been duly executed and delivered by the parties thereto and shall be in full force and effect, and no default shall exist in the performance by any party thereto (other than such Participant) of any of its obligations thereunder. (b) Transfer of Title, Etc. The Seller shall have executed and delivered to ---------------------- the Owner Trustee a warranty deed and bill of sale, in form and substance satisfactory to such Participant, covering the Facility, without representation or warranty (except as to Liens arising by, through or under the Seller) and there shall have been delivered to such Participant's special counsel such instruments as may be necessary or desirable to terminate all interests of the Seller, whether as secured party or otherwise, in the Facility and the Leased Property, other than the interests of the Lessee under the Facility Lease. (c) [Intentionally omitted] --------------------- (d) Survey. Not less than three Business Days prior to the Closing Date, ------ there shall have been delivered to such Participant a survey of the Site and the Facility located on such Site prepared as of a current date by a registered civil engineer or surveyor licensed in the State where such Site is located in accordance with the standard detail requirements for "Class A" land title surveys adopted by the American Land Title Association and the American Congress on Surveying & Mapping, as revised and in effect on the date thereof, showing in reasonable detail the locations and dimensions of such Site and the Facility located on such Site, showing no encroachments upon such Site by adjacent buildings or structures and no encroachments upon adjacent property showing the location of surveyable Schedule B Exceptions to said title policies, and showing no other defects except Permitted Encumbrances. (e) Title Insurance. At the Closing, there shall have been delivered, with --------------- respect to the Facility, to the Owner Trustee an American Land Title Association Leasehold Owners--1992 title insurance policy with extended coverage and to the Indenture Trustee an American Land Title Association Leasehold Loan Policy--1992 of title insurance, both issued by a title insurance company qualified to do business in the 24 State where the Site for the Facility is located designated by the Lessee and not objected to by any Participant, with respect to such Site, satisfactory in substance and form to special counsel to such Participant, insuring the leasehold interest of the Owner Trustee under the Site Lease for such Site for an amount equal to the Facility Cost of the Facility located on such Site and insuring the lien of the Indenture Trustee under the Deed of Trust covering such Site as a holder of a first lien of record on the leasehold interest of the Owner Trustee under the Site Lease for such Site, against loss or damage by reason of the failure of the Deed of Trust covering such Site to create the lien it purports to create upon the leasehold interest of the Owner Trustee in such Site, such lender's policy to be in an amount equal to the original principal amount of the Series A Notes issued on the Closing Date and such policies to have no exceptions to the coverage thereof other than Permitted Encumbrances and such other exceptions as shall be acceptable to such Participant in its sole discretion. Such policies shall contain all endorsements required by the Participants including, without limitation, a comprehensive endorsement and mechanics lien coverage. (f) Opinions of Counsel. At the Closing, such Participant shall have ------------------- received the favorable written opinions of Stoel Rives LLP, counsel for the Lessee, Squadron, Ellenoff, Plesent & Scheinfeld LLP, special New York counsel for the Lessee, Davis Wright Tremaine, local counsel for the Participants, Morris, James, Hitchens & Williams, counsel for the Owner Trustee, Ray Quinney & Nebeker, counsel for the Indenture Trustee, and Chadbourne & Parke LLP, special counsel to the Owner Participant, substantially in the respective forms set forth in Annex II hereto. (g) Insurance Certificate. At or before the Closing, such Participant shall --------------------- have received certificates or other satisfactory evidence of the maintenance of the insurance required pursuant to Section 7 of the Facility Lease covering the Facility in the form contemplated by Section 7(c) of such Facility Lease. (h) [Intentionally omitted] --------------------- (i) Recording of Leases. At or before the Closing, the Site Lease covering ------------------- the Site of the Facility and the Facility Lease covering the Facility (or notices or memoranda thereof) and such other documents as are deemed necessary or appropriate by such Participant shall have each been recorded or filed for record in such public offices as may be necessary or appropriate in order to protect the rights of the Owner Trustee thereunder and (if such Participant is a Note Purchaser) to perfect the right, title and interest of the Indenture Trustee in and to the Collateral. (j) Secretary's Certificates; Good Standing Certificates; Etc. The --------------------------------------------------------- Participants shall have received on or before the Closing Date the following, each dated 25 the Closing Date (unless otherwise specified) and in form and substance satisfactory to the Participants: (i) copies of the resolutions of the board of directors of the Lessee, approving the execution, delivery and performance by the Lessee of the Lessee Agreements and the transactions contemplated thereby, certified as of such Closing Date by the Secretary or an Assistant Secretary of the Lessee; (ii) a certificate of the Secretary or Assistant Secretary of the Lessee certifying the names and true signatures of the officers of the Lessee authorized to execute, deliver and perform, as applicable, the Lessee Agreements on behalf of the Lessee; (iii) the certificate of incorporation of the Lessee as in effect on the Closing Date, certified by the Secretary of State of the state of formation, and the Lessee's by-laws as in effect on the Closing Date, certified by the Secretary or Assistant Secretary of the Lessee as of the Closing Date; and (iv) a good standing certificate for the Lessee from the Secretary of State of its state of incorporation, dated such Closing Date; (k) [Intentionally Omitted] --------------------- (l) Documents Relating to the Site. The Lessee shall deliver, or cause to ------------------------------ be delivered, to the Participants documentation with respect to the condition of the Site, the real estate Taxes applicable to such Site and such other documents and agreements relating to the operation of the Facility or any part thereof as the Participants may reasonably request, in form and substance reasonably acceptable to the Participants. (m) Environmental Matters. A Phase I environmental site assessment of the --------------------- Site by the Environmental Consultant shall have been conducted, at the sole cost and expense of the Lessee, and the Participants shall have received a copy of the Environmental Consultant's report on its Phase I environmental site assessment, which shall be in form and substance satisfactory to the Participants (in their sole discretion). (n) Illegality. No change shall have occurred in Applicable Law which, in ---------- the opinion of the Participants, would make it illegal for such Participant, and no change in circumstances shall have occurred which would otherwise make it illegal or otherwise in contravention of guidance issued by regulatory authorities for such Participant, to participate in the transactions to be contemplated on the Closing Date; and no action or proceeding shall have been instituted nor shall action before any court or Governmental Authority be threatened which in the opinion of counsel for such Participant is not frivolous, nor shall any order have been issued or proposed to be issued by any court or 26 Governmental Authority, as of the Closing Date, to set aside, restrain, enjoin or prevent the consummation of any of the transactions contemplated by this Agreement or any of the other Operative Agreements. (o) Proceedings Satisfactory. All proceedings taken in connection with the ------------------------ transactions contemplated hereby and all documents and papers relating thereto shall be satisfactory to such Participant and its special counsel, and such Participant and such special counsel shall have received copies of such documents and papers as such Participant or such special counsel may reasonably request in connection therewith or as a basis for such special counsel's closing opinion, all in form and substance reasonably satisfactory to such Participant and such special counsel. Section 4.2. Additional Conditions Precedent to Investments by Owner ------------------------------------------------------- Participant. The obligation of the Owner Participant to make its investment - ----------- pursuant hereto on the Closing Date shall be subject to the conditions specified in Section 4.1 and the following additional conditions: (a) Tax Opinion. At or before the Closing, the Owner Participant shall have ----------- received from Chadbourne & Parke LLP, its special counsel, a favorable opinion in form and substance satisfactory to the Owner Participant as to the Federal income tax consequences of the transactions contemplated hereby. (b) Independent Appraisal. At or before the Closing, the Owner Participant --------------------- shall have received the Appraisal. (c) No Change in Law. On the Closing Date, there shall not have occurred a ---------------- change or proposed change in the Code or the treasury regulations thereunder, no administrative pronouncement shall have been issued and no Supreme Court decision shall have been rendered, in each case, which is applicable to the transactions contemplated by the Operative Agreements and which could be adverse to the Owner Participant and for which there has not been an adjustment to Periodic Rent. Section 4.3. Additional Conditions Precedent to Series A Note Purchases. ---------------------------------------------------------- The obligation of each Note Purchaser to purchase and pay for Series A Notes pursuant hereto on the Closing Date shall be subject to the conditions specified in Section 4.1 and the following additional conditions: (a) Recording of Indenture. At or before the Closing, the Indenture (or a ---------------------- notice or memorandum with respect thereto) and the Deed of Trust shall have been 27 recorded or filed in all public offices as may be necessary or appropriate in order to perfect the lien and security interest granted thereby as against creditors of and purchasers from the Owner Trustee. (b) Legal Investment. The Series A Notes to be issued on the Closing Date ---------------- shall on such Closing Date qualify as a legal investment for such Note Purchaser under any laws regulating investments to which it may be subject, and such Note Purchaser shall have received such evidence as it may reasonably request to establish compliance with this condition. (c) Opinion of Counsel. On the Closing Date, such Note Purchaser shall have ------------------ received the favorable written opinion of Chapman and Cutler, special counsel for the Note Purchasers, substantially in the form set forth in Annex II hereto. ARTICLE V. SPECIAL RIGHTS OF NOTE PURCHASERS --------------------------------- Notwithstanding any provision to the contrary in this Agreement, the Indenture or the Notes relating to the manner and place of payment, all amounts payable to each Note Purchaser with respect to any Notes held by such Note Purchaser or a nominee for such Note Purchaser shall be paid to the Indenture Trustee and shall be paid by the Indenture Trustee to such Note Purchaser (without any presentment thereof and without any notation of such payment being made thereon) by check, duly mailed, by first class mail, postage prepaid, or delivered to such Note Purchaser at the address for payments for such Note Purchaser set forth in Schedule 1 hereto or, if wire transfer to a bank account is designated for such Note Purchaser in said Schedule 1 or in a written notice from such Note Purchaser to the Owner Trustee and the Indenture Trustee, by wire transfer of immediately available Federal Reserve funds to the bank so designated for credit to the account and marked for attention as so designated, provided that such bank has facilities for the receipt of a wire transfer, or in such other manner or to such other address in the United States as may be designated by such Note Purchaser in a written notice from such Note Purchaser to the Owner Trustee and the Indenture Trustee. In the case of any wire transfer, the Indenture Trustee will transfer from the office of the Indenture Trustee not later than 9:00 A.M., New York City Time, on each date any payment or prepayment of principal or interest on the Notes or any other payment due to the Note Purchasers is received, provided funds therefor have been received by the Indenture Trustee in cash or in solvent credits acceptable to it. Each Note Purchaser agrees that if such Note Purchaser shall sell or transfer any Note such Note Purchaser will notify the Indenture Trustee of the name and address of the transferee and such Note 28 Purchaser will, prior to the delivery of such Note, make a notation on such Note of the date to which interest has been paid thereon and of the amount of any prepayments made on account of the principal thereof. ARTICLE VI. [INTENTIONALLY OMITTED] --------------------- ARTICLE VII. GENERAL TAX INDEMNITY --------------------- Section 7.1. Tax Indemnitee Defined. For purposes of this Section 7, "Tax ---------------------- --- Indemnitee" means each Participant, the Owner Participant Guarantor, the Owner - ---------- Trustee, Wilmington Trust Company, the Trust Estate, the Indenture Trustee both in its individual capacity and as trustee, each of their respective Affiliates and each of their respective successors or assigns permitted under the terms of the Operative Agreements, including successive holders of the Notes. Section 7.2. Taxes Indemnified. ----------------- (a) Withholding. All payments by the Lessee to any Tax Indemnitee in ----------- connection with the transactions contemplated by the Operative Agreements and the ClO2 Operative Agreements shall be free and clear of, and without deduction for, withholdings of any nature whatsoever (and at the time that the Lessee is required to make any payment upon which any withholding is required the Lessee shall pay an additional amount such that the net amount actually received will, after such withholding and any incremental taxes on such amounts, equal the full amount of the payment then due) and shall be free of expense to each Tax Indemnitee for collection or other charges, provided, however, that no such additional amounts shall be paid by the Lessee and the Lessee assumes no responsibility regarding any withholdings imposed (1) on the Lessor or the Owner Participant by reason of any transfer of the Leased Property or any interest in the Operative Agreements by the Lessor or the Owner Participant other than a transfer pursuant to Section 13 or 19 of the Facility Lease or any transfer which occurs in connection with the occurrence or continuance of a Lease Default or Lease Event of Default or (2) on the Indenture Trustee or any holder by reason of a transfer of the Notes to a holder who is not a U.S. Person, provided that, for the avoidance of doubt, neither the Lessor nor the Owner Participant shall be responsible for any Taxes incurred by reason of an event described in this clause (2) and shall receive any amounts owed to it from the 29 Indenture Trustee without diminution for any such Taxes. If, for any reason, the Lessee is required to make any payment to a taxing authority with respect to, or as a result of, any withholding tax imposed on any Tax Indemnitee in respect of the transactions contemplated by the Operative Agreements and the CLO2 Operative Agreements which withholding tax is not the responsibility of the Lessee under this Section 7 then such Tax Indemnitee shall pay to the Lessee within 30 days of receiving written notice thereof an amount which equals the amount paid by the Lessee with respect to, or as a result of, such withholding tax. (b) In General. Subject to the exclusions stated in Section 7.3, the Lessee ---------- agrees to indemnify and hold harmless each Tax Indemnitee, on an after-tax basis, against all fees (including, without limitation, license fees and registration fees), taxes (including, without limitation, income, gross receipts, franchise, excise, conduct of business, ad valorem, sales, rental, use, value added, property, transfer and stamp taxes), levies, assessments, imports, duties, charges or withholdings of any nature, together with any and all penalties, additions to tax, fines or interest thereon ("Taxes") imposed ----- upon any Tax Indemnitee, the Lessee or all or any part of the Leased Property and the CLO2 Leased Property or the Operative Agreements or the CLO2 Operative Agreements by any federal, state or local government, political subdivision, or taxing authority in the United States or its possessions, by any government or taxing authority of or in a foreign country or by any international authority, upon, with respect to or in connection with: (i) the Leased Property, the ClO2 Leased Property or any part thereof or interest therein; (ii) the acquisition, financing, ownership, leasing, possession, purchase, acceptance, rejection, condition, registration, return, use, storage, operation, return, transfer of title, maintenance, repair, improvement, replacement, substitution, delivery, redelivery, non-delivery, construction, manufacture, insuring, modification, transfer, control, occupancy, servicing, mortgaging, location, refinancing, disposition, subleasing, repossession, abandonment, shut-down, sale or other application or disposition of or with respect to the Leased Property, the ClO2 Leased Property or any part thereof or interest therein; (iii) the rental payments, receipts or earnings arising from the Leased Property and the ClO2 Leased Property or payable pursuant to the Facility Lease or the ClO2 Lease; (iv) the Operative Agreements or the ClO2 Operative Agreements or otherwise in connection with the transactions contemplated thereby; 30 (v) the payment of principal or interest or premium on or other amounts payable with respect to the Notes or as a result of the purchase, holding, refinancing or transfer thereof or otherwise relating to any transaction contemplated hereby; and (vi) without limitation of the foregoing and for the avoidance of doubt, the James River Easement, the James River Agreement, the Railway License and the County Road Documents. Section 7.3. Taxes Excluded. The indemnity provided for in Section 7.2 shall not extend to any of the following: (a) as to any Tax Indemnitee, Taxes imposed by any taxing authority of or in the United States on, based on, or measured by or with respect to the gross or net income or receipts of such Tax Indemnitee or any Affiliate thereof (including any minimum or alternative minimum Taxes and any Taxes on or measured by items of tax preference but excluding any sales, use, license, property, value added (subject to clause (c) below) or rental Taxes); (b) as to any Tax Indemnitee, Taxes imposed by any taxing authority of or in the United States on, based on, measured by or with respect to capital or net worth or similar Taxes to the extent that such Taxes do not exceed the Taxes that would have been imposed had the Tax Indemnitee not entered into the Operative Agreements; (c) as to any Participant, United States Federal value added taxes in the nature of or in lieu of any income tax; (d) as to any Tax Indemnitee, Taxes imposed with respect to the Facility after the earliest of (1) the return of possession of the Facility and the ClO2 Facility to the Owner Participant or the placement of such Facility and the ClO2 Facility in storage at the request of the Owner Participant, in either case pursuant to Section 16 of the Facility Lease covering the Facility and the ClO2 Lease, (2) the termination of the Term under the ClO2 Lease pursuant to Section 19(f) of the Facility Lease with respect to the Facility and the Term under the ClO2 Lease pursuant to Section 14(c) of the ClO2 Participation Agreement, or (3) the discharge in full of the Lessee's obligation to pay the Termination Value or the Casualty Value and all other amounts due, if any, under Section 13 of the Facility Lease and Section 13 of the ClO2 Lease; provided, that the exclusion set forth in this clause (d) shall not apply to Taxes to the extent such Taxes relate to events occurring or matters arising prior to or simultaneously with such time 31 (including, without limitation, Taxes imposed after such time by reason of ownership of the Facility prior to such time); (e) as to any Tax Indemnitee, Taxes to the extent such Taxes arise directly out of or are directly caused by any breach by such Tax Indemnitee of any of its representations, warranties or covenants in any of the Operative Agreements, or the gross negligence or willful misconduct of such Tax Indemnitee; (f) as to any Tax Indemnitee, any Taxes to the extent such Taxes result from the failure of such Tax Indemnitee to file tax returns, reports or statements properly and on a timely basis (unless such failure is related to the failure of the Lessee to perform properly and on a timely basis its obligations under Section 7.8); (g) as to any Tax Indemnitee, Taxes which become payable as a result of a sale, assignment, transfer or other disposition (whether voluntary or involuntary) by such Tax Indemnitee of all or any portion of its interest in the Leased Property or any part thereof, the Trust Estate or any of the Operative Agreements or rights created thereunder, including, without limitation, a revocation of the Trust Agreement, other than a disposition which occurs as the result of the exercise of remedies for a Lease Event of Default, any disposition which occurs in connection with the occurrence and continuance of a Lease Event of Default or a purchase of the Facility pursuant to the Facility Lease; (h) as to any Tax Indemnitee, Taxes, to the extent such Taxes imposed by any jurisdiction would not have been imposed on such Tax Indemnitee but for activities of such Tax Indemnitee in such jurisdiction unrelated to the transactions contemplated by the Operative Agreements and the ClO2 Operative Agreements; (i) as to the Indenture Trustee or the holder of a Note (or any successor indebtedness), any Tax in the nature of an intangible or similar Tax imposed upon or with respect to the value of its interest in the Notes (or any successor indebtedness) by any taxing authority unless such Tax would not have been imposed on the value of any other Notes held by the Indenture Trustee or the holder of a Note; (j) as to the Owner Trustee or the Indenture Trustee, Taxes which are based on or measured by its fees or compensation; 32 (k) as to any Tax Indemnitee, penalties, interest or additions to tax (including those related to estimated tax payments) to the extent imposed as a result of Taxes which are excluded from indemnification hereunder; and (l) as to any Tax Indemnitee, any foreign Taxes imposed with respect to the Facility or any portion or part thereof, or the transactions contemplated by the Operative Agreements or the ClO2 Operative Agreements, unless such Taxes result from the use, registration, or location of the Facility or the ClO2 Facility or any portion or part thereof, or the incorporation, organization or location of a user, lessee or assignee (whether or not in possession) of the Facility or the ClO2 Facility or any portion or part thereof (other than the Lessor, the Owner Participant or any Affiliate or assignee thereof), in, or any payment in respect thereof being made by the Lessee or any Affiliate thereof from, the foreign jurisdiction imposing such Taxes. Section 7.4. All Tax Obligations in this Section, Etc. Notwithstanding any ---------------------------------------- other provision anywhere contained in the Operative Agreements, it is understood that all of the Lessee's obligations with respect to Taxes are set forth in this Section 7 and in the Tax Indemnity Agreement. Section 7.5. Payments to Lessee. (a) If any Tax Indemnitee shall realize a ------------------ Tax benefit (net of any Tax detriment not otherwise paid or indemnified against by the Lessee hereunder) as a result of any Taxes paid or indemnified against by the Lessee under this Section 7 (whether by way of deduction, credit, allocation or apportionment or otherwise), such Tax Indemnitee shall pay to the Lessee an amount equal to the amount of such Tax benefit, increased by the Tax Indemnitee's additional saved Taxes attributable to the payment being made to the Lessee hereunder. (b) Upon receipt by a Tax Indemnitee of a refund or credit of all or part of any Taxes paid or indemnified against by the Lessee, such Tax Indemnitee shall pay to the Lessee an amount equal to the amount of such refund plus any interest received by or credited to such Tax Indemnitee with respect to such refund increased or decreased, as the case may be, by the Tax Indemnitee's net additional or saved taxes attributable to the receipt of such amounts from the taxing authority and the payment being made to the Lessee hereunder. (c) If at the time a payment described in Section 7.5(a) or (b) hereof shall be due to the Lessee a Lease Default or Lease Event of Default shall have occurred and be continuing, such amount shall not be payable until such Lease Default or Lease Event of Default shall have been cured. 33 (d) The aggregate of all amounts paid by a Tax Indemnitee to the Lessee pursuant to this Section 7.5 shall in no case exceed the sum of all amounts paid to such Tax Indemnitee by the Lessee, other than contest costs, plus amounts payable to the Lessee under clause (b) of this Section 7.5. Section 7.6. Procedures. The Lessee will endeavor in good faith to ---------- determine and timely pay to the applicable authority all Taxes which it will be obligated to indemnify under this Section 7 except those that the Lessee intends to contest pursuant to Section 7.7. Any amount payable to a Tax Indemnitee pursuant to Section 7.2 shall be paid within 30 days after receipt of a written demand therefor from such Tax Indemnitee accompanied by a written statement describing in reasonable detail the basis for such indemnity and the computation of the amount so payable, provided that such amount need not be paid prior to the later of (i) the date on which such Taxes are paid or payable (including without limitation by a reduction of a refund with respect to unindemnified Taxes), or (ii) in the case of amounts which are being contested pursuant to Section 7.7 hereof, the time such contest (including all appeals) is finally resolved. Any amount payable to the Lessee pursuant to Section 7.5 shall be paid promptly after a Tax Indemnitee realizes a net tax benefit or receives a refund giving rise to a payment under Section 7.5, and shall be accompanied by a written statement by such Tax Indemnitee setting forth in reasonable detail the basis for computing the amount of such payment. Such statement shall be final, binding and conclusive upon the parties unless within 15 days following the Lessee's receipt of any computation from such Tax Indemnitee, the Lessee requests that an independent nationally recognized accounting firm selected by such Tax Indemnitee and reasonably acceptable to the Lessee determine whether such computations of such Tax Indemnitee are correct. Such accounting firm shall be requested to make the determination contemplated by this Section 7.6 within 30 days of its selection. In the event such accounting firm shall determine that such computations are incorrect, then such firm shall determine what it believes to be the correct computations. The Tax Indemnitee shall cooperate with such accounting firm and supply it with all information necessary to permit it to accomplish such determination (other than income tax returns). The computations of such accounting firm shall be final, binding and conclusive upon the parties, and the Lessee shall have no right to inspect the books, records or tax returns of any Tax Indemnitee to verify such computation or for any other purpose. All fees and expenses of the accounting firm payable under this Section 7.6 shall be borne by the Lessee; provided, however, that such fees and expenses will be paid by the Tax Indemnitee if the verification results in an adjustment in the Lessee's favor of ten percent or more of the indemnity payment or payments computed by the Tax Indemnitee. 34 Section 7.7 Contest. If a written claim is made against a Tax Indemnitee ------- for Taxes with respect to which the Lessee may be liable for indemnity hereunder, the Tax Indemnitee shall give the Lessee prompt notice in writing of such claim (and in any event within 30 days after its receipt) and shall promptly furnish the Lessee with copies of the claim and all other writings received from the taxing authority relating to the claim; provided however, that the failure of such Tax Indemnitee timely to provide such written notice shall not affect the Lessee's obligations under this except to the extent that the same precludes the Lessee from contesting such Taxes. The Tax Indemnitee shall not pay such claim prior to the 30 days after providing the Lessee with such written notice, unless required to do so by law or unless deferral of payment would cause adverse consequences to the Tax Indemnitee. The Tax Indemnitee shall in good faith, with due diligence and at the Lessee's expense, if requested in writing by the Lessee, contest (including pursuing all appeals permitted hereby) in the name of the Tax Indemnitee (or, if requested by the Lessee and permissible as a matter of law, in the name of the Lessee or an Affiliate), or shall permit or, at such Tax Indemnitee's election, require the Lessee to contest in either the name of the Lessee or an Affiliate or with the Tax Indemnitee's consent (not to be unreasonably withheld), in the name of the Tax Indemnitee the validity, applicability or amount of such Taxes by, (a) resisting payment thereof if practical; (b) not paying the same except under protest if protest is necessary and proper; (c) if the payment be made, using reasonable efforts to obtain a refund thereof in appropriate administrative and judicial proceedings; or (d) taking such other reasonable action as is reasonably requested by the Lessee from time to time. provided, however, that if the contest is carried on in the name of the Lessee - ----------------- or an Affiliate, or is being brought by the Lessee in the name of the Tax Indemnitee, such contest shall be undertaken by the Lessee, at the Lessee's expense and at no after-tax cost to the Tax Indemnitee, unless at such time the Tax Indemnitee determines in its reasonable good faith judgment that either (x) such claim is not severable from other Taxes in dispute before the same taxing authority without adversely affecting the Tax Indemnitee with respect to such other Taxes or the resolution of the dispute or (y) based upon the Lessee's conduct of such contest, the Lessee's continued control of such contest is reasonably likely to have a material adverse impact on the Tax Indemnitee in which case the Tax Indemnitee shall conduct such contest. 35 In no event shall any Tax Indemnitee be required or the Lessee be permitted to contest any Taxes for which the Lessee is obligated to indemnify pursuant to this Section 7 unless: (1) such Lessee shall have acknowledged its liability to such Tax Indemnitee for an indemnity payment pursuant to this Section 7 as a result of such claim if and to the extent such Tax Indemnitee or the Lessee, as the case may be, shall not prevail in the contest of such claim provided, however, that such acknowledgment shall be of no force or effect to the extent that such contest is resolved on a basis that clearly demonstrates that, without such acknowledgment pursuant the terms of this Agreement, the Lessee would not otherwise be liable to the Tax Indemnitee for the Tax so contested; (2) such Tax Indemnitee shall have received the opinion of independent tax counsel selected by such Tax Indemnitee and satisfactory to the Lessee furnished at Lessee's sole expense, to the effect that a reasonable basis exists for contesting such claim or, in the event of an appeal, that it is more likely than not that an appellate court will reverse or substantially modify the adverse determination (and provided that no appeal shall be required to the United States Supreme Court); (3) the Lessee shall have agreed to pay such Tax Indemnitee on demand (and at no after-tax costs to such Tax Indemnitee) all reasonable costs and expenses that such Tax Indemnitee actually incurs in connection with contesting such claim (including, without limitation, all costs, expenses, reasonable legal and accounting fees, disbursements, penalties, interest and additions to the Taxes); (4) no Lease Default or Lease Event of Default shall have occurred and shall have been continuing; (5) such Tax Indemnitee shall have determined that the action to be taken will not result in any substantial danger of sale, forfeiture or loss of, or the creation of any Lien (except if such Lessee shall have adequately bonded such Lien or otherwise made provision to protect the interests of such Tax Indemnitee in a manner reasonably satisfactory to such Tax Indemnitee) on the Leased Property or ClO2 Leased Property or any portion thereof or any interest therein; (6) the amount of such claims alone, or, if the subject matter thereof shall be of a continuing or recurring nature, when aggregated with identical potential claims with respect to this transaction shall be at least $25,000; (7) if such contest shall be conducted in a manner requiring the payment of the claim, the Lessee shall have paid the amount required (and at no after-tax costs to the Tax Indemnitee); and (8) such claim or liability does not involve the possibility of criminal sanctions or liability to such Tax Indemnitee. The Lessee shall cooperate with the Tax Indemnitee with respect to any contest controlled and conducted by the Tax Indemnitee and the Tax Indemnitee shall consult with the Lessee regarding the conduct of such contest and in furtherance of the foregoing, the Lessee shall have the right to attend any proceeding to the extent relating to matters for which it is obligated to indemnify hereunder but shall not be permitted to actively participate in any discussion. The Tax Indemnitee shall not discriminate against any proposed adjustment due to its indemnified nature as compared with other proposed adjustments involving potential tax liability of the Tax Indemnitee and shall not, without the written consent of the Lessee, settle such 36 proposed adjustment. The Tax Indemnitee shall cooperate with the Lessee with respect to any contest controlled and conducted by the Lessee and the Lessee shall consult with the Tax Indemnitee regarding the conduct of such contest. The Tax Indemnitee shall have the right to attend any proceeding to the extent relating to matters for which it may be indemnified hereunder but shall not be permitted to actively participate in any discussion. Notwithstanding anything contained in this Section 7.7 to the contrary, no Tax Indemnitee shall be required to contest any claim if the subject matter thereof shall be of a continuing or recurring nature and shall have previously been decided adversely to the Tax Indemnitee pursuant to the contest provisions of this Section 7.7 unless there shall have been a change in the law (including, without limitation, amendments to statutes or regulations, administrative rulings or court decisions) enacted, promulgated or effective after such claim shall have been so previously decided, and such Tax Indemnitee shall have received an opinion of independent tax counsel selected by such Tax Indemnitee and reasonably satisfactory to Lessee, furnished at the Lessee's sole expense, to the effect that such change is favorable to the position which such Tax Indemnitee or the Lessee, as the case may be, had asserted in such previous contest and as a result of such change, there is a reasonable basis to contest such claim. Section 7.8. Reports. In the event any reports with respect to Taxes are ------- required to be made, the Lessee will either prepare and file such reports (and in the case of reports which are required to be filed with respect to the Facility, such reports shall be prepared and filed in such manner as to show as required the interests of each Tax Indemnitee in such Facility) or, if it shall not be permitted to file the same, it will notify each Tax Indemnitee of such reporting requirements, prepare such reports in such manner as shall be satisfactory to each Tax Indemnitee and deliver the same to each Tax Indemnitee within a reasonable period prior to the date the same is to be filed. The Lessee's obligations pursuant to the previous sentence shall be subject to Lessee's knowledge (having made good faith and reasonable efforts to inform itself) of the necessary reports; provided, however that a Tax Indemnitee's failure to file any report as a result of the Lessee's failure to provide such report shall not subject the Tax Indemnitee to the exclusion in Section 7.3 (f) hereof. The Lessee shall provide such information as the Owner Participant or the Owner Trustee may reasonably require from the Lessee to enable the Owner Participant and the Owner Trustee to fulfill their respective tax filing, tax audit, and tax litigation obligations. Section 7.9. Survival. The provisions of this Section 7 shall continue in -------- full force and effect, notwithstanding the expiration or termination of any Operative Agreement, until all obligations hereunder have been met and all liabilities hereunder paid in full. 37 ARTICLE VIII. INDEMNITIES OF THE OWNER TRUSTEE AND THE OWNER PARTICIPANT ---------------------------------------------------------- Each of Wilmington Trust Company and the Owner Participant (referred to in this Section as the "Indemnitors") hereby severally agrees for the benefit of ----------- the other Indemnitor, the Indenture Trustee and the Note Purchasers (referred to in this Section as the "Indemnitees") that at all times the Trust Estate shall ----------- be free of any Lien arising as a result of claims against such Indemnitor not related to the transactions contemplated by the Operative Agreements and to such Indemnitor's interest in the Trust Estate (except Permitted Encumbrances other than Lessor's Liens attributable to such Indemnitor) and that such Indemnitor will at its own cost and expense promptly take such action as may be necessary duly to discharge any such Lien, provided that no such Lien need be discharged so long as it is being contested by Permitted Contest. Each Indemnitor further agrees to indemnify and hold harmless the Indemnitees from and against any costs or expenses (including legal fees and expenses) incurred, in each case, as a result of the imposition or enforcement of any such Lien. Each Indemnitor hereby severally agrees for the benefit of the Lessee that at all times the Leased Property under the Facility Lease shall be free of any Lien which impairs the right, title or interest of the Lessee under the Facility Lease and which arises as a result of claims against such Indemnitor not related to the transactions contemplated by the Operative Agreements and to such Indemnitor's interest in such Leased Property, except Permitted Encumbrances (other than Lessor's Liens attributable to such Indemnitor), and that such Indemnitor will at its own cost and expense promptly take such action as may be necessary duly to discharge any such Lien, provided that no such Lien need be discharged so long as it is being contested by Permitted Contest; and such Indemnitor further agrees to indemnify and hold harmless the Lessee from and against any costs or expenses (including legal fees and expenses) incurred, in each case, as a result of the imposition or enforcement of any such Lien which impairs the right, title or interest of the Lessee under the Facility Lease, except Permitted Encumbrances (other than Lessor's Liens attributable to such Indemnitor). The agreements of Wilmington Trust Company in this Section 8 are made in its individual capacity and not as Owner Trustee, notwithstanding the provisions of Section 14.8(b) or any similar provision of any other Operative Agreement. 38 ARTICLE IX. INDEMNIFICATION --------------- Section 9.1. General Indemnity. The Lessee hereby agrees, whether or not ----------------- any of the transactions contemplated hereby shall be consummated, to assume liability for, and does hereby agree to indemnify, protect, defend, save and keep harmless, on an after tax basis and at no after tax cost to the Indemnified Party, each Indemnified Party from and against any and all liabilities, obligations, losses, damages, Environmental Claims, penalties, claims (including claims by any employee of the Lessee or the ClO2 Lessee or the Seller or any of their respective contractors), actions, suits and related costs, expenses and disbursements, including reasonable legal fees and expenses, of whatsoever kind and nature (for purposes of this Section 9 collectively called "Expenses"), imposed on, asserted against or incurred by any Indemnified Party as a result of claims threatened or asserted against such Indemnified Party in any way relating to or arising out of (i) this Agreement and the other Operative Agreements, including the Notes and the offering or sale thereof and the ClO2 Operative Agreements, (ii) the construction, installation, ownership, delivery, lease, sublease, possession, use, operations or condition of the Leased Property and the ClO2 Leased Property under the Facility Lease and the ClO2 Lease (including, without limitation, latent and other defects, whether or not discoverable by the Indemnified Party or the Lessee, and any claim for patent, trademark or copyright infringement and any claim arising under the strict liability doctrine in tort) the ClO2 Facility or the ClO2 Site, (iii) the sale or other disposition of the Leased Property under the Facility Lease, the ClO2 Leased Property under the ClO2 Lease or any portion thereof pursuant to Section 8, 13, or 15 or 19 of such Facility Lease, Section 8, 13, or 15 of the ClO2 Lease or Section 14 of the ClO2 Participation Agreement, or (iv) without limitation of the foregoing and for the avoidance of doubt, the James River Easement, the James River Agreement, the Railway License and the County Road Documents, except only that the Lessee shall not be required to indemnify any Indemnified Party pursuant to this Section 9 for (A) any Taxes or other impositions, and (B) Expenses resulting from the willful misconduct, gross negligence or willful breach of contract of such Indemnified Party. If any Indemnified Party shall have knowledge of any claim or liability hereby indemnified against it shall give prompt written notice thereof to the Lessee; provided, however, that the failure of such Indemnified Party to give such notice shall not relieve the Lessee of any of its obligations hereunder except to the extent the same causes the Lessee's indemnification obligations to exceed the obligations of the Lessee had the Lessee received such notice. Section 9.2. Payments, Survival and other Provisions. All amounts payable --------------------------------------- by the Lessee pursuant to this Section 9 shall be payable directly to the parties 39 entitled to indemnification. All the indemnities contained in this Section 9 shall continue in full force and effect notwithstanding the expiration or other termination of this Agreement, the Facility Lease or any other Operative Agreement and are expressly made for the benefit of, and shall be enforceable by, each Indemnified Party. The Lessee's obligations under this Section 9 shall be that of primary obligor irrespective of whether the Indemnified Party shall also be indemnified with respect to the same matter under any other agreement by any other Person. Section 9.3. No Guarantee of Residual Value or Notes. The indemnities and --------------------------------------- assumptions of liabilities set forth in this Section 9 do not guarantee a residual value of the Facility or guarantee the payment of the Notes; provided that the foregoing shall not limit the provisions of Section 12(b) of the Facility Lease. ARTICLE X. TRANSACTION ECONOMICS --------------------- The Periodic Rent, Casualty Value, Termination Value and Early Purchase Price for the Facility being purchased on the Closing Date shall be as set forth in the form of Facility Lease attached hereto as Exhibit C. ARTICLE XI. RESTRICTIONS ON TRANSFER OF BENEFICIAL INTEREST ----------------------------------------------- The Owner Participant agrees that it shall not sell, convey, assign, pledge, mortgage encumber or otherwise transfer any of its Beneficial Interest and further agrees that the obligations under the Owner Participant Guaranty shall not be transferred, in each case prior to the expiration or earlier termination of the Term of the Facility Lease, unless: (a) The Person to whom such transfer is to be made (a "Transferee") is not ---------- subject at the time of the transfer to an Insolvency Proceeding and is an "affiliated company" or a "qualified investor" or any other Person agreeable to each Note Purchaser and the Lessee as evidenced by their respective prior written consents delivered to the Owner Participant or Owner Participant Guarantor, as applicable. The term "affiliated company" shall mean any company (the "Parent") owning, directly or indirectly, not less than 80% of the Voting ------ Stock of the Owner Participant or the Owner Participant Guarantor, any company (the "Holding Company") owning, directly or indirectly, not less --------------- 40 than 80% of the Voting Stock of the Parent, and any company not less than 80% of the Voting Stock of which is owned, directly or indirectly, by the Holding Company, the Parent or such Owner Participant or Owner Participant Guarantor or any entity with which such Owner Participant or Owner Participant Guarantor merges or consolidates or which acquires substantially all of its assets. The term "qualified investor" means any Person existing under the laws of the United States of America or any jurisdiction thereof which is an institutional investor, which, so long as no Lease Default under clause (i), (ii), (vi), (vii), (viii) or (ix) of Section 15(a) of the Facility Lease or any Lease Event of Default shall have occurred and be continuing, is not a Disqualified Assignee (as defined below), and which (in the case of any banking institution or insurance company) has capital, surplus and undivided profits (or the equivalent) of at least U.S.$50,000,000 or (in the case of any other transferee) has a net worth of at least U.S.$50,000,000; provided that, such Transferee may have a capital, surplus and undivided profits or net worth, as the case may be, of less than U.S.$50,000,000 if all of the capital stock and other Securities of such Transferee are owned by a Person that would constitute a permitted transferee hereunder and such Person guarantees, or, in the case of a transfer by the Owner Participant where the Owner Participant Guarantor remains the same Person as before such transfer, such Person continues to guaranty the obligations of such transferee of the Owner Participant, under the Operative Agreements by instrument in substantially the form of the Owner Participant Guaranty or otherwise satisfactory to the Owner Trustee, each other Participant and the Lessee. "Disqualified Assignee" means a Person engaged, as a material part of its business, in activities in the forest products industry, excluding a Person engaged in such activities solely as a result of passive investments (including the temporary ownership of manufacturing facilities as a result of the exercise of such Person's remedies in connection with such investments). (b) The Indenture Trustee, the Note Purchasers and the Lessee shall have received 20 days' prior written notice of such transfer specifying the name and address of any proposed transferee and such additional information as shall be necessary to determine whether the proposed transfer satisfies the requirements of this Section 11. (c) Such Transferee enters into an agreement or agreements in form and substance reasonably satisfactory to the Lessee, the Owner Trustee and the Note Purchasers whereby, in the case of a transfer by the Owner Participant, such Transferee confirms that it shall be deemed a party to this Agreement, and each other Owner Participant Agreement, and in the case of a transfer by the Owner Participant Guarantor, such Transferee confirms that it is party to the Owner Participant Guaranty, and agrees to be bound by all the terms of, and to undertake all of the obligations and liabilities of the transferring Owner Participant or Owner Participant Guarantor, as applicable, contained in, the Owner Participant Agreements or the Owner Participant Guaranty, if applicable, to 41 the extent of the interest transferred and in which the Transferee shall make representations and warranties comparable to those of the Owner Participant or Owner Participant Guarantor contained herein and in the other Owner Participant Agreements or, as applicable, in the Owner Participant Guaranty. (d) An opinion of counsel of the Transferee (which counsel shall be reasonably acceptable to the Lessee and the Note Purchasers), confirming (i) the existence, power and authority of, and due authorization, execution and delivery of all relevant documentation by, the Transferee (with appropriate reliance on certificates of corporate officers or public officials as to matters of fact), and (ii) that each agreement referred to in subparagraph (c) above is the legal, valid and binding obligation of the Transferee, enforceable against the Transferee in accordance with the terms thereof (subject to customary qualifications as to bankruptcy and equitable principles), shall be provided, prior to such transfer, to the Lessee, the Note Purchasers and the Indenture Trustee, which opinion shall be in form and substance reasonably satisfactory to each of them. (e) After giving effect to such transfer, there shall not be more than two Owner Participants in the aggregate. (f) All fees, expenses and charges of the parties hereto (including, without limitation, legal fees and expenses of special counsel) incurred in connection with each transfer of such Beneficial Interest shall be paid by the Owner Participant or the Owner Participant Guarantor, as applicable. (g) Such transfer does not involve the use of an amount which constitutes assets of an employee benefit plan (other than a governmental plan exempt from the coverage of under ERISA) or such Transferee makes the representation regarding the source of funds contained in Section 3.5(c) hereof. (h) After giving effect to such transfer, no Indenture Default attributable to any Owner Participant, any Owner Participant Guarantor or the Owner Trustee shall have occurred and be continuing. (i) The Owner Participant or Owner Participant Guarantor, as applicable, shall deliver to the Lessee, the Owner Trustee, the Note Purchasers and the Indenture Trustee, an Officer's Certificate certifying as to compliance with the transfer requirements contained herein. (j) Any such purported transfer of Beneficial Interest under this Agreement shall be deemed to be null and void unless a similar transfer of the same 42 percentage interest to the same transferee is made simultaneously under and as defined in the ClO2 Participation Agreement. Upon any such transfer, (i) except as the context otherwise requires, such Transferee shall be deemed the "Owner Participant" or "Owner Participant Guarantor", as the case may be, for all purposes, and shall enjoy the rights and privileges and perform the obligations of the Owner Participant or Owner Participant Guarantor, as applicable, to the extent of the interest transferred hereunder and under each other Owner Participant Agreement, and, except as the context otherwise requires, each reference in this Agreement and each other Operative Agreement to the "Owner Participant" or "Owner Participant Guarantor", as the case may be, shall thereafter be deemed to include such Transferee for all purposes to the extent of the interest transferred, (ii) the transferor shall be released from all obligations hereunder and under each other Owner Participant Agreement and, if applicable, under the Owner Participant Guaranty, or by which such transferor is bound to the extent such obligations are expressly assumed by a Transferee, and (iii) in the event of a transfer by the Owner Participant to a Transferee that is a qualified investor (whether or not an affiliated company) having capital surplus and undivided profits or net worth, as the case may be, of $50,000,000, any Owner Participant Guarantor prior to such transfer shall be released from all obligations under the Owner Participant Guaranty, and under the other Operative Agreements; and provided, further, that in no event shall any such transfer or assignment waive or release the transferor, or the Owner Participant Guarantor prior to transfer in the case referred to in clause (iii) of this paragraph, from any liability on account of any breach of any of its representations, warranties, covenants or obligations set forth in the Owner Participant Agreements or the Owner Participant Guaranty, if applicable, or for any fraudulent or willful misconduct. Any transfer or assignment of the Beneficial Interest in violation of this Section 11 shall be void and of no effect. No consent of the Lessee otherwise required hereunder shall be required if any Lease Event of Default shall have occurred and be continuing. Notwithstanding any transfer, the transferor Owner Participant or Owner Participant Guarantor, as the case may be, shall be entitled to all benefits accrued and all rights vested prior to such transfer, including, without limitation, rights to indemnification under any Operative Agreements and also shall remain liable to the extent provided in the Operative Agreements, for facts, circumstances, acts or omissions that occurred prior to or contemporaneously with such transfer. Notwithstanding anything to the contrary contained herein, each of the Owner Participant and Owner Participant Guarantor shall not mortgage, pledge, assign or otherwise hypothecate the Beneficial Interest, or any portion thereof, as collateral security. 43 ARTICLE XII. LESSEE ASSUMPTION OF NOTES -------------------------- Section 12.1. Assumption. (a) In the event that the Lessee shall have ---------- elected to assume the rights and obligations of the Owner Trustee under the Indenture and the Notes in connection with the purchase by the Lessee of the Facility and termination of the Facility Lease pursuant to Section 19(f) thereof, the Lessee shall so notify the Indenture Trustee, each holder of a Note and each holder of a ClO2 Note and, so long as no Lease Default or Lease Event of Default shall have occurred and be continuing on the purchase date and date of assumption (the "Assumption Date") specified in such notice, which date shall --------------- be not less than 30 nor more than 60 days after the date of the Indenture Trustee's receipt of such notice, upon delivery to the Indenture Trustee of the documents referred to below (provided, however, that such assumption shall be -------- ------- null and void unless the ClO2 Lessee has simultaneously made the corresponding assumption under the ClO2 Operative Documents), the Lessee shall assume all of the rights and obligations of the Owner Trustee under the Indenture and under the Notes then outstanding and in connection therewith (and as a condition thereto) Lessee shall satisfy, or cause to be satisfied the following conditions precedent: (i) (A) Lessee shall enter into an instrument of assumption (the "Assumption Agreement") pursuant to which the Lessee irrevocably and -------------------- unconditionally assumes and undertakes, with full recourse to the Lessee, the Owner Trustee's obligations (the "Assumed ------- Obligations") with respect to principal, interest and all other amounts ----------- (including, without limitation, the Make-Whole Amount) payable to the holders of the Notes or the Indenture Trustee under the Notes, the Indenture and the Participation Agreement and which incorporates therein events of default substantially similar in scope and effect to those set forth in the Facility Lease (and eliminating those no longer relevant with respect to the Owner Participant) and covenants substantially similar to the covenants of the Lessee under the Facility Lease, and (B) if requested by a Majority in Interest, the Lessee shall also issue, and the Indenture Trustee shall also authenticate, new Notes evidencing such assumption and the full recourse nature of the Lessee's obligations thereunder; (ii) Lessee shall also enter into a deed of trust, given by the Lessee, in form and substance satisfactory to the holders of the Notes and the holders of the ClO2 Notes, covering the Site and the Facility and such other instruments and documents (including, without limitation, Uniform Commercial Code financing statements) as may be necessary (or reasonably requested by a 44 Majority in Interest, the Required Lenders or the Indenture Trustee) for the security interest of the Indenture Trustee in the Facility and in the other rights, property and interests included in the Indenture Estate to continue to be (or in the case of such deed of trust to be) perfected and duly recorded in all places necessary or, in the reasonable opinion of a Majority in Interest or the Required Lenders, advisable; (iii) Lessee shall deliver to each of the holders of the Notes and each of the holders of the ClO2 Notes an insurance report dated the Assumption Date of an independent insurance broker and the certificates of insurance, each in form and substance reasonably satisfactory to the holders of the Notes and the Indenture Trustee as to the due compliance as of the Assumption Date with the terms of Section 7 of the Facility Lease (as incorporated into the Assumption Agreement and as relates to the holders of the Notes, the holders of the ClO2 Notes and the Indenture Trustee); (iv) Lessee shall deliver to each of the holders of the Notes and each of the holders of the ClO2 Notes evidence that as of the Assumption Date the Lessee has good title to the Facility and the Site free and clear of all Liens other than the Lien of, and the security interest created by, the Indenture, the deed of trust referred to in clause (ii) above, the Facility Lease and other Permitted Encumbrances (other than Lessor's Liens); (v) Lessee shall deliver to each of the holders of the Notes and each of the holders of the ClO2 Notes a certificate from the Lessee that no Lease Default or Lease Event of Default shall have occurred and be continuing as of the Assumption Date; (vi) Lessee shall deliver to each of the holders of the Notes and each of the holders of the ClO2 Notes an opinion (or opinions) of counsel to the Lessee reasonably satisfactory to the holders of the Notes, the holders of the ClO2 Notes and the Indenture Trustee in form and substance reasonably satisfactory to the holders of the Notes, the holders of the ClO2 Notes and the Indenture Trustee, addressed to the Note Purchasers, the holders of the ClO2 Notes and the Indenture Trustee and dated the Assumption Date, with customary qualifications, to the effect that (A) the execution, delivery and performance of the Assumption Agreement, the deed of trust referred to in paragraph (ii) of this Section 12.1 and all other instruments and documents executed and delivered by the Lessee in connection with the assumption of the obligations contemplated by this Section 12.1 or otherwise necessary for the continued perfection of the security interests referred to in clause (ii) above have, in each instance, been duly 45 authorized by all necessary action, and duly executed and delivered; (B) the Assumption Agreement, such deed of trust and all such other documents and instruments referred to above are legal, valid and binding obligations of the Lessee enforceable in accordance with their terms (with customary qualifications); (C) execution and delivery by the Lessee of the Assumption Agreement and all such other documents and instruments referred to above do not and will not contravene any provision of the Lessee's certificate of incorporation or by-laws or any law or regulation applicable to the Lessee or any agreement, mortgage or instrument known to such counsel to which the Lessee is a party or by which the Lessee is bound; (D) after giving effect to the transactions contemplated by the Assumption Agreement, the respective Liens of the Indenture and each such deed of trust continue to constitute valid and duly perfected Liens on the Collateral described therein; and (E) to such further effect with respect to such other matters (including, without limitation, any matters included in the opinion delivered on the Closing Date pursuant to Section 4.1(f) of this Agreement, to the extent such matters are relevant at the time of the assumption contemplated by this Section 12.1) as a Majority in Interest or the Required Lenders may reasonably request; (vii) Lessee shall deliver to each holder of the Notes and each holder of the ClO2 Notes such other documentation or evidence reasonably requested by a Majority in Interest or the Required Lenders (in form and substance reasonably satisfactory to the holders of the Notes, the holders of the ClO2 Notes and the Indenture Trustee), including amendments to the Operative Agreements, to give effect to the foregoing and in order to establish the authority of the Lessee, the Owner Trustee, the Indenture Trustee and the Owner Participant to consummate the transactions contemplated by the assumption and the taking of all corporate proceedings in connection therewith. (b) It shall be a condition of any transaction contemplated by Section 12.1(a) that such instruments as the Owner Trustee or the Owner Participant may reasonably request, prepared at the sole cost and expense of the Lessee, evidencing the release and discharge of the Owner Trustee from any liability on or with respect to the Notes or the Indenture or the Deed of Trust (other than liabilities accrued prior to the date of the assumption) and discharging the Lien of the Indenture Trustee upon the purchase price of the Facility being distributed to the Owner Trustee, shall be delivered to the Owner Trustee. Section 12.2. No Other Assumption; Payment of Expenses. Neither the Lessee ---------------------------------------- nor any other Person may assume the Notes except pursuant to and in accordance with the provisions of Section 12.1. Lessee shall pay all reasonable costs and expenses 46 (including counsel's reasonable fees and disbursements) of the Owner Trustee, the Participants, the holders of the ClO2 Notes and the Indenture Trustee in connection with the consummation of the transactions contemplated by Section 12.1. ARTICLE XIII. REFINANCING OF NOTES -------------------- So long as no Lease Default or Lease Event of Default shall be in existence and the ClO2 Lessee shall be simultaneously exercising its right under Section 13 of the ClO2 Participation Agreement corresponding hereto, and so long as Lessee has not given notice of its election to purchase under Section 19 of the Facility Lease, the Lessee shall have the right not more than twice during the Term of the Facility Lease to request the Owner Participant and the Owner Trustee to effect an optional prepayment of all, and not less than all, of the Notes pursuant to Section 2.10(e) of the Indenture as part of a refunding or refinancing operation. As soon as practicable after receipt of such request, the Owner Participant and the Lessee will enter into an agreement, in form and substance reasonably satisfactory to the parties thereto, as to the terms of such refunding or refinancing as follows: (a) the Lessee, the Owner Participant, the Indenture Trustee, the Owner Trustee, and any other appropriate parties will enter into a financing or loan agreement (which may involve an underwriting agreement in connection with a public offering), in form and substance reasonably satisfactory to the parties thereto, providing for (i) the issuance and sale by the Owner Trustee or such other party as may be appropriate on the date specified in such agreement (for the purposes of this Section 13, the "Refunding Date"), such date to be the same date specified as the Refunding -------------- Date under Section 13 of the ClO2 Participation Agreement, of debt Securities in an aggregate principal amount (in the lawful currency of the United States) equal to the principal amount of the Notes outstanding on the Refunding Date plus, at the discretion of the Lessee, but subject to the rights of Owner Participant set forth in the provisions following clause (h) of this Section, the accrued and unpaid interest thereon and underwriting fees, having the same maturity date as said Notes and having a weighted average life to maturity which is not less than or greater than the remaining weighted average life to maturity of said Notes (in each case calculated in accordance with standard financial practice) by more than three months, (ii) the application of the proceeds of the sale of such debt Securities to the prepayment of all such Notes on the Refunding Date, and (iii) payment by Lessee to the Person or Persons entitled thereto of all other amounts, in respect of accrued interest, or 47 any Make-Whole Amount or other premium, if any, payable on such Refunding Date; (b) the Lessee and the Owner Trustee will amend the Facility Lease such that (i) if the Refunding Date is not a Rent Payment Date and the accrued and unpaid interest on the Notes is not otherwise paid pursuant to clause (a) above, the Lessee shall on the Refunding Date prepay that portion of the next succeeding installment of Periodic Rent as shall equal the aggregate interest accrued on the Notes outstanding to the Refunding Date, (ii) Periodic Rent payable in respect of the period from and after the Refunding Date shall be recalculated to preserve the Net Economic Return which the Owner Participant would have realized had such refunding not occurred, provided that the net present value of Periodic Rent shall be minimized to the extent consistent therewith, and (iii) amounts payable in respect of Casualty Value and Termination Value from and after the Refunding Date shall be appropriately recalculated to preserve the Net Economic Return which the Owner Participant would have realized had such refunding not occurred (it being agreed that any recalculations pursuant to subclauses (ii) and (iii) of this clause (b) shall be performed in accordance with the requirements for the adjustment in Periodic Rent contained in Section 4(f) of the Facility Lease); (c) the Owner Trustee will enter into an agreement to provide for the securing thereunder of the debt Securities issued by the Owner Trustee pursuant to clause (a) above in like manner as the Notes and/or will enter into such amendments and supplements to the Indenture and the Deed of Trust as may be necessary to effect such refunding or refinancing, which agreements, amendments and/or supplements shall be reasonably satisfactory in form and substance to the Owner Participant and the Lessee; provided that, notwithstanding the foregoing (but subject to the provisions of clause (a) above), the Lessee reserves the right to set the economic terms and other terms not customarily negotiated between an Owner Participant and a lender of the refunding or refinancing transaction to be so offered; provided, further, that no such amendment or supplement will increase the obligations or have any adverse impact on the rights of the Owner Participant under the Operative Agreements without the consent of the Owner Participant; (d) in the case of a refunding or refinancing involving a public offering of debt Securities, neither the Owner Trustee nor the Owner Participant shall be the "issuer" for Securities law purposes, the offering materials (including any registration statement) for the refunding or refinancing transaction shall be reasonably satisfactory to the Owner Participant and the Lessee shall provide 48 satisfactory indemnity to the Owner Trustee and the Owner Participant with respect thereto; (e) unless otherwise agreed by the Owner Participant, the Lessee shall pay to the Owner Trustee as Supplemental Rent an amount equal to the Make-Whole Amount or other premium, if any, payable in respect of Notes outstanding on the Refunding Date, and all reasonable fees, costs and expenses of such refunding or refinancing; (f) the Lessee shall give the Indenture Trustee not less than 25 days prior written notice of the Refunding Date; (g) the Owner Participant, the Owner Trustee and the Indenture Trustee shall have received (i) such opinions of counsel as they may reasonably request concerning compliance with the Securities Act of 1933, as amended, and any other applicable law relating to the sale of Securities and (ii) such other opinions of counsel and such certificates and other documents, each in form and substance satisfactory to them, as they may reasonably request in connection with compliance with the terms and conditions of this Section 13; and (h) all necessary authorizations, approvals and consents shall have been obtained; provided, however, that the Lessee will, to the extent then known, promptly - -------- ------- provide to the Owner Participant, the Owner Trustee and the Indenture Trustee substantially final terms and conditions of any such refunding or refinancing not less than 30 days prior to the execution and delivery of the documents contemplated hereunder in connection therewith; and provided, further, that (w) no refunding or refinancing of the Notes will be permitted unless simultaneously therewith the ClO2 Notes are refunded or refinanced by the ClO2 Lessee under Section 13 of the ClO2 Participation Agreement, (x) no refunding or refinancing of the Notes will be permitted if within 30 days after receipt by the Owner Participant of a request from the Lessee to effect a refunding or refinancing pursuant to this Section 13 and of information regarding the terms of such refunding or refinancing necessary to render the opinion referred to below, the Owner Participant reasonably determines (which determination may, at the Owner Participant's election but at the Lessee's expense, be supported by a written opinion of independent tax counsel selected by the Owner Participant) that there will be a risk of adverse tax or other consequences (including, without limitation, a non-de minimis risk of materially adverse tax consequences resulting from the application of Section 467 of the Code and the Treasury Regulations thereunder or from the payment by the Lessee of Supplemental Rent referred to in clause (e) above) to the Owner Participant or the Owner Trustee resulting from the 49 refunding or refinancing and gives notice of such determination in reasonable detail to the Lessee; (y) the Lessee shall pay to or reimburse the Participants, the Owner Trustee and the Indenture Trustee for all costs and expenses (including reasonable attorneys' fees) paid or incurred by them in connection with such refunding or refinancing; and (z) no refunding or refinancing of the Notes will be permitted if it shall cause the Owner Participant to account for the transaction contemplated hereby as other than a "leveraged lease" under the Financial Accounting Standards Board ("FASB") Statement No. 13, as amended (including any amendment effected by means of the adoption by FASB of a new statement in lieu of FASB Statement No. 13). The Owner Participant agrees to cooperate in good faith with the Lessee in effecting any such refunding or refinancing; provided that in no event, in connection with or after giving effect to, such refunding or refinancing shall the Owner Participant be exposed to any unindemnified non-de minimis risk (including tax risk) to which it is not exposed prior to such refunding or refinancing. Notwithstanding the foregoing, if the Lessee shall fail to effectuate a refinancing pursuant to the requirements of this Section 13, including, without limitation, the payment of all amounts due and owing pursuant to Section 2.10(e) of the Indenture, or if the ClO2 Lessee fails to effectuate a refinancing of the ClO2 Notes pursuant to the requirements of Section 13 of the ClO2 Participation Agreement, the Facility Lease and the Indenture shall continue in full force and effect. ARTICLE XIV. MISCELLANEOUS ------------- Section 14.1. Amendments. This Agreement may, from time to time and at any ---------- time, be amended or supplemented, by an instrument or instruments in writing executed by the parties hereto; and further provided, that no such amendment or ---------------- supplement shall be effective unless consented to by the Required Lenders; provided, that no such amendment or supplement shall be effective unless the - -------- same amendment or supplement is being executed with respect to the corresponding provision of the ClO2 Participation Agreement or the ClO2 Lease. Section 14.2. Notices. All communications under this Agreement shall be in ------- writing or by facsimile and any such notice shall become effective (i) upon personal delivery thereof, including, without limitation, by overnight mail or courier service, (ii) upon receipt thereof, in the case of notice by United States mail, certified or registered, postage prepaid, return receipt requested, or (iii) upon confirmation of receipt thereof, in the case of notice by facsimile, provided such transmission is promptly further confirmed in writing by either of the methods set forth in clause (i) or (ii) above, in each case 50 addressed to the parties hereto at their addresses set forth beneath their respective signatures below (or in the case of the Note Purchasers on Schedule 1 hereto) or at such other place as any such party may designate by notice given in accordance with this Section 14.2 or in the case of the holders of the ClO2 Notes, as specified in Section 15.2 of the ClO2 Participation Agreement. Section 14.3. Survival. All warranties, representations and covenants made -------- by any party herein or in any certificate or other instrument delivered by any party to any other party under this Agreement shall be considered to have been relied upon by such other party and shall survive the consummation of the transactions contemplated hereby on the Closing Date regardless of any investigation made by such other party or on behalf of such other party. All statements in any such certificate or other instrument by the Owner Participant, the Owner Trustee or the Lessee or on behalf of the Owner Participant, the Owner Trustee or the Lessee under this Agreement shall constitute warranties and representations by the Owner Participant, the Owner Trustee, or, as the case may be, the Lessee hereunder. Section 14.4. Successors and Assigns. This Agreement shall be binding upon ---------------------- and shall inure to the benefit of, and shall be enforceable by, the parties hereto and their respective successors and permitted assigns including each successive holder of the Beneficial Interest and each successive holder of any Note issued and delivered pursuant to this Agreement or the Indenture whether or not an express assignment to any such holder of rights under this Agreement has been made. Section 14.5. Governing Law. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED ------------- IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAW OF THE STATE OF NEW YORK EXCLUDING CHOICE-OF-LAW PRINCIPLES OF THE LAW OF SUCH STATE THAT WOULD REQUIRE THE APPLICATION OF THE LAWS OF A JURISDICTION OTHER THAN SUCH STATE BUT INCLUDING SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW. Section 14.6. Counterparts. This Agreement may be executed in any number of ------------ counterparts, each executed counterpart constituting an original but all together only one Agreement. Section 14.7. Headings and Table of Contents. The headings of the sections ------------------------------ of this Agreement and the Table of Contents are inserted for purposes of convenience only and shall not be construed to affect the meaning or construction of any of the provisions hereof. 51 Section 14.8. Limitations of Liability. ------------------------ (a) Liabilities of the Participants. No Participant shall have any ------------------------------- obligation or duty to the Lessee, to any other Participant or to others with respect to the transactions contemplated hereby except those obligations or duties of such Participant expressly set forth in this Agreement and the other Operative Agreements and no Participant shall be liable for performance by any other party hereto of such other party's obligations or duties hereunder. Without limitation of the generality of the foregoing, under no circumstances whatsoever shall any Participant be liable to the Lessee, nor shall any Participant be liable to any other Participant, for any action or inaction on the part of the Owner Trustee or the Indenture Trustee in connection with the transactions contemplated herein, whether or not such action or inaction is caused by willful misconduct or gross negligence of the Owner Trustee or the Indenture Trustee. (b) No Recourse to Wilmington Trust Company. It is expressly understood and --------------------------------------- agreed by and between the Owner Trustee, Wilmington Trust Company, the Lessee, the Owner Participant, the Indenture Trustee, each Note Purchaser and any holder of the Notes and their respective successors and assigns that, subject to the proviso to this paragraph, this Agreement is executed by Wilmington Trust Company, not individually or personally but solely as trustee under the Trust Agreement in the exercise of the power and authority conferred and vested in it as such trustee, that each and all of the representations, warranties, undertakings and agreements herein made on the part of the Owner Trustee are made and intended not as personal representations, warranties, undertakings and agreements by Wilmington Trust Company or for the purpose or with the intention of binding Wilmington Trust Company personally, but are made and intended for the purpose of binding only the Trust Estate, that this Agreement is executed and delivered by Wilmington Trust Company solely in the exercise of the powers expressly conferred upon Wilmington Trust Company as trustee under the Trust Agreement, that actions to be taken by the Owner Trustee pursuant to its obligations hereunder may, in certain instances, be taken by the Owner Trustee only upon specific authority of the Owner Participant, that, subject to the proviso to this paragraph, nothing herein contained shall be construed as creating any liability of Wilmington Trust Company, individually or personally, or any incorporator or any past, present or future subscriber to the capital stock of, or stockholder, officer or director of Wilmington Trust Company, to perform any covenant either express or implied contained herein, all such liability, if any, being expressly waived by the Lessee, the Indenture Trustee, each Note Purchaser and any holder of the Notes and any person claiming by, through or under such persons, and that so far as Wilmington Trust Company, individually or personally is concerned, subject to the proviso to this paragraph, the Lessee, the Indenture Trustee, each Note Purchaser and any holder of the Notes and any person claiming by, through or 52 under such persons shall look solely to the Trust Estate for the performance of any obligation of Wilmington Trust Company under this Agreement; provided, however, that nothing in this Section 14.8 shall be construed to limit in scope or substance those representations and warranties of Wilmington Trust Company made expressly in its individual capacity set forth in Section 3.1 or the indemnities of Wilmington Trust Company in its individual capacity set forth in Section 8. The term "Owner Trustee" as used in this Participation Agreement shall include any trustee succeeding Wilmington Trust Company as trustee under the Trust Agreement or the Owner Participant if the trust created thereby is revoked. Any obligation of the Owner Trustee hereunder may be performed by the Owner Participant, and any such performance shall not be construed as revocation of the trust created by the Trust Agreement. Nothing contained in this Agreement shall restrict the operation of the provisions of the Trust Agreement with respect to its revocation or the resignation or removal of the Owner Trustee thereunder. (c) No Recourse to Owner Participant. All payments of principal and -------------------------------- interest and premium, if any, to be made under the Notes or the Indenture shall be made only from the income and proceeds from the Indenture Estate and only to the extent that the Indenture Trustee shall have sufficient income or proceeds from the Indenture Estate to make such payments in accordance with the terms of Article III of the Indenture. Each of the parties to this Agreement agrees that neither the Owner Participant nor its permitted successors and assigns is or shall be personally liable for any amount payable by the Owner Participant or the Owner Trustee under any Operative Agreement, or for damages resulting from the breach of its or the Owner Trustee's obligations under any Operative Agreement, except as expressly provided in Section 8. Section 14.9. Purchase of Beneficial Interest by Lessee; Termination of --------------------------------------------------------- Trust by Owner Participant. (a) Anything to the contrary herein or in the other - -------------------------- Operative Agreements notwithstanding, the Lessee shall not purchase or otherwise acquire the Beneficial Interest or any part thereof. (b) Anything to the contrary herein or in the other Operative Agreements notwithstanding, the Owner Participant hereby acknowledges and agrees that the Trust established under the Trust Agreement shall not be subject to revocation or termination by the Owner Participant prior to the payment in full and discharge of the Notes and the ClO2 Notes and all other indebtedness secured by the Indenture and the release of the Indenture and the Deed of Trust and the liens and security interests granted thereby. Section 14.10. Certain Limitations in Reorganization. The holder of any ------------------------------------- Note and the Indenture Trustee agree that, should the Trust Estate or the Trust become a debtor subject to the reorganization provisions of the Bankruptcy Reform Act of 1978 or 53 any successor provision, they shall, upon the request of the Owner Participant, make the election referred to in Section 1111(b)(1)(A)(i) of Title I of such Act or any successor provision. Notwithstanding such election, if (1) the Trust Estate or the Trust becomes a debtor subject to the reorganization provisions of the Bankruptcy Reform Act of 1978 or any successor provision, (2) pursuant to such reorganization provisions the Owner Participant is held to have recourse liability to the debtor or the trustee of the debtor directly or indirectly on account of any amount payable as principal, interest or premium on the Notes, and (3) the holder of any Note or the Indenture Trustee actually receives any Excess Amount (as defined below) which reflects any payment by the Owner Participant on account of (2) above, then such Noteholder or the Indenture Trustee, as the case may be, shall promptly refund to the Owner Participant such Excess Amount. For purposes of this Section 14.10, "Excess Amount" means the amount by which such payment exceeds the amount which would have been received by any Noteholder or the Indenture Trustee if the Owner Participant had not become subject to the recourse liability referred to in (2) above. Nothing contained in this Section 14.10 shall prevent any Noteholder or the Indenture Trustee from enforcing any personal obligation (and retaining the proceeds thereof) of the Owner Participant under this Agreement to the extent herein provided, for which the Owner Participant has agreed by the terms of this Agreement to accept personal responsibility. Section 14.11. Amendment of Indenture, Deed of Trust and Trust Agreement. --------------------------------------------------------- The Lessee hereby consents in all respects to the execution and delivery of the Indenture, of the Deed of Trust and of the Trust Agreement and to all of the terms of each; it being agreed that such consent shall not be construed to require the Lessee's consent to any future supplement to, or amendment, waiver or modification of the terms of the Indenture, the Deed of Trust, the Trust Agreement or any Note. Section 14.12. Submission to Jurisdiction. Each of the Lessee, the Owner -------------------------- Participant, the Owner Trustee, the Note Purchasers and the Indenture Trustee (i) hereby irrevocably submits to the nonexclusive jurisdiction of the Supreme Court of the State of New York, New York County (without prejudice to the right of any party to remove to the United States District Court for the Southern District of New York) and to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York for the purposes of any suit, action or other proceeding arising out of this Agreement, the other Operative Agreements, or the subject matter hereof or thereof or any of the transactions contemplated hereby or thereby brought by any of the parties hereto or their successors or assigns; (ii) hereby irrevocably agrees that all claims in respect of such action or proceeding may be heard and determined in such New York State court, or in such federal court; and (iii) to the extent permitted by Applicable Law, hereby irrevocably waives, and agrees not to assert, by way of motion, as a defense, or 54 otherwise, in any such suit, action or proceeding any claim that is not personally subject to the jurisdiction of the above-named courts, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this Agreement, the other Operative Agreements, or the subject matter hereof or thereof may not be enforced in or by such court. Section 14.13. Waiver of Jury Trial. The parties hereto waive any right to -------------------- have a jury participate in resolving any dispute, whether sounding in contract, tort, or otherwise, between them arising out of, connected with, related to or incidental to the relationship established between them in connection with this Agreement or any other Operative Agreement or any other instrument, document or agreement executed or delivered in connection herewith or therewith or the transactions related hereto or thereto. The parties hereto hereby agree and consent that any such claim, demand, action or cause of action shall be decided by court trial without a jury and that any of them may file an original counterpart or a copy of this Agreement with any court as written evidence of the consent of the parties hereto the waiver of their right to a trial by jury. Section 14.14. Complete Facility. The Lessee covenants and agrees, without ----------------- limiting its obligations under the Facility Lease and the other Operative Agreements, that it shall obtain and maintain, or cause to be obtained and maintained, all Permits, rights and easements, and provide access to such utility services, sufficient to permit during the Term of the Site Lease (i) the locating, occupying, owning, selling, leasing, connecting, operating, maintaining, replacing, renewing, repairing and removing of the Facility, (ii) ingress to and egress from the Leased Property, (iii) intake and discharge of water and other utilities necessary for the operation of the Facility, (iv) the operating of the Leased Property in such a manner as to cause the Facility to perform on a daily basis, in commercial operation, the functions for which it was specifically designed at Design Capacity in accordance with the Plans therefor, and (v) the preservation and enforcement by the Owner Trustee of its rights in and to the Leased Property and the easements and other rights with respect to the Site Lease Property described or referred to in the Site Lease, except such Permits and rights the absence of which would not cause a Material Adverse Effect. The Lessee shall have such access to the Leased Property as shall be reasonably necessary to comply with its obligations under this Section. The Lessee further covenants and agrees: (a) that during the Site Lease Term, the Lessee shall not, without the Owner Trustee's, the Indenture Trustee's and each Participant's prior written consent, terminate the Railway License, the James River Agreement, the James River Easement, the County Road Documents; and 55 (b) that during the Site Lease Term, the Lessee shall send copies of all notices (other than notices relating to pricing or other operations in the ordinary course of business) given or received under the Railway License, the James River Agreement, the James River Easement and the County Road Documents to the Owner Trustee, the Indenture Trustee and each Participant within five (5) Business Days after receipt thereof. [signature pages follow] 56 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their duly authorized officers all as of the day and year first above written. POPE & TALBOT, INC., as Lessee By: s/s Michael Flannery --------------------------------------------------- Name: Michael Flannery Title: President and Chief Executive Officer By: s/s Maria M. Pope --------------------------------------------------- Name: Maria M. Pope Title: Vice President and Chief Financial Officer 1500 SW First Avenue, Suite 200 Portland, Oregon 97201 Attention: Chief Financial Officer Fax: (503) 220-2722 57 WILMINGTON TRUST COMPANY, not individually (except to the extent expressly stated herein) but solely as Owner Trustee By: s/s Anita Dallago ---------------------------------------------- Name: Anita Dallago Title: Financial Services Officer Rodney Square North 1100 North Market Street Wilmington, Delaware 19890-0001 Attention: Corporate Trust Administration Fax: (302) 651-8882 With a copy to Owner Participant 58 SELCO SERVICE CORPORATION, as Owner Participant By: s/s Richard J. Remiker ----------------------------------- Name: Richard J. Remiker Title: Vice President c/o Key Equipment Finance 66 South Pearl Street, 7th Floor Albany, NY 12207 Attention: Leveraged Lease Administrator Fax: (518) 257-8833 59 FLEET CAPITAL CORPORATION, as Note Purchaser By: s/s Edward W. O'Brien ------------------------------------ Name: Edward W. O'Brien Title: Vice President 60 HELLER FINANCIAL LEASING, INC., as Note Purchaser By: s/s Walter Schoultz ------------------------------------ Name: Walter Schoultz Title: VP 61 THE CIT GROUP/EQUIPMENT FINANCING INC., as Note Purchaser By: s/s Neil McDermid ------------------------------------- Name: Neil McDermid Title: VP 62 GENERAL ELECTRIC CAPITAL BUSINESS ASSET FUNDING CORPORATION, as Note Purchaser By: s/s Terry Gray ------------------------------------- Name: Terry Gray Title: VP 63 WELLS FARGO BANK NORTHWEST, NATIONAL ASSOCIATION, (formerly known as First Security Bank, National Association), as Indenture Trustee By: s/s Brett R. King ------------------------------ Name: Brett R. King Title: Vice President 64 Schedule 1 Note Purchaser Information -------------------------- Note Purchaser Commitment -------------- ---------- Fleet Capital Corporation $20,175,205.94 50 Kennedy Plaza, 5th Floor Mail Stop: RI/MO/284 Providence, Rhode Island 02903 Attention: Senior Credit Officer Fax: (401) 751-4230 Payments All payments on or in respect of the Series A Notes to be by bank wire transfer of Federal or other immediately available funds (identifying each payment as "8.96% Senior Notes, Series A, due January 2, 2008, of Wilmington Trust Company, Trustee (Pope & Talbot, Inc., Lessee), principal, premium or interest") to: Fleet Bank RI ABA No. 011500010 For the account of Fleet Capital Leasing Account No. 015-5527767 Re: Pope & Talbot, Inc. Upon receipt contact: Leslie Tordoff Notices All notices and communications, including notices with respect to payments and written confirmation of each such payment, to be addressed as first provided above. Name of Nominee in which Series A Notes are to be issued: None Schedule 1 - Page 1 Note Purchaser Commitment -------------- ---------- Taxpayer I.D. Number: 05-0342167 Schedule 1 - Page 2 Note Purchaser Commitment -------------- ---------- The CIT Group/Equipment Financing Inc. $15,000,000.00 1540 West Fountainhead Parkway Tempe, Arizona 85282 Attention: Lee McDermid Fax: (480) 858 1459 Payments All payments on or in respect of the Series A Notes to be by certified check (identifying each payment as "8.96% Senior Notes, Series A, due January 2, 2008, of Wilmington Trust Company, Trustee (Pope & Talbot, Inc., Lessee), principal, premium or interest") to: The CIT Group/Equipment Financing Inc. P.O. Box 34591 Charlotte, North Carolina 28234-4591 Notices All notices and communications, including notices with respect to payments and written confirmation of each such payment, to be addressed as first provided above. Name of Nominee in which Series A Notes are to be issued: None Taxpayer I.D. Number: 13-054-2408 Schedule 1 - Page 3 Note Purchaser Commitment -------------- ---------- Heller Financial Leasing, Inc. $12,000,000 500 West Monroe Street 29th Floor Chicago, Illinois 60661 Attention: CEF Portfolio Manager Fax: (312) 441-7395 Payments All payments on or in respect of the Series A Notes to be by bank wire transfer of Federal or other immediately available funds (identifying each payment as "8.96% Senior Notes, Series A, due January 2, 2008, of Wilmington Trust Company, Trustee (Pope & Talbot, Inc., Lessee), principal, premium or interest") to: Bank of America 231 South LaSalle Street Chicago, Illinois 60697 ABA No. 071-000-039 Account Number: 8188801273 Reference: Pope & Talbot Acct. #192-0257 Attention: John E. Payne Notices All notices and communications, including notices with respect to payments and written confirmation of each such payment, to be addressed as first provided above. Name of Nominee in which Series A Notes are to be issued: None Taxpayer I.D. Number: 36-3920431 Schedule 1 - Page 4

Schedule 1 - Page 5 Schedule 3.2(r) ERISA Matters ------------- 1. Exception to Section 3.2(r)(iv): A Reportable Event within the meaning of ERISA ss. 4043(c)(3) occurred with respect to the Restated Defined Benefit Retirement Income Plan for Certain Employees of Pope & Talbot, Inc. in connection with the sale of the Tissue Business of the Consumer Products Division of Pope & Talbot, Inc. (the Tissue Business) to Plainwell Paper Company (Plainwell) on March 8, 1998. Notice to the PBGC was waived under Department of Labor Regulation ss. 4043.23(c)(2). 2. Exception to Section 3.2(r)(vi): In connection with the sale of the Tissue Business, Plainwell agreed that it would intend to comply with the requirements of ERISA ss. 4204 so that no complete or partial withdrawal would be considered to have occurred by the Lessee or one or more ERISA Affiliates with respect to the Paper Industry Union-Management Pension Fund, a Multiemployer Plan. If there is a partial or complete withdrawal by Plainwell from the Paper Industry Union-Management Pension Fund prior to the end of the period prescribed by ERISA ss. 4204, applicable law may hold the Lessee and one or more ERISA Affiliates secondarily liable for any withdrawal liability the Lessee or one or more ERISA Affiliates would have incurred had the agreement to comply with Section 4204 not been reached. The potential estimated withdrawal liability amounts to $11,133,800. Such figures consider employee and pensioner data used in the valuation of the Paper Industry Union-Management Pension Fund as of January 1, 1997 and the benefit levels in effect as of December 31, 1996. Additionally, the calculations reflect data on terminated employers for the years 1981 through 1996. 3. Lessee's affiliates within the meaning specified in Section V(a)(1) of Prohibited Transaction Exemption 95-60 for purposes of Section 3.2(r)(viii): (a) Penn Timber, Inc. (b) Pope & Talbot, Wis., Inc. (c) Pope & Talbot F.S.C., Inc. (d) Pope & Talbot Relocation Services, Inc. (e) Pope & Talbot International Ltd. Schedule 3.2(r) - Page 1 (f) Pope & Talbot Pulp Ltd. (g) P & T Power Company (h) Pope & Talbot Pulp Sales U.S., Inc. (i) Harmac Pacific Inc. 4. Pension Plans currently in effect under Section 3.2(r)(viii):. (a) Restated Defined Benefit Retirement Income Plan for Certain Employees of Pope & Talbot, Inc. (b) Retirement Plan for Production Employees of the Consumer Products Division of Pope & Talbot, Inc. (c) Retirement Plan for Non-Bargaining Employees of the Wood Products Division of Pope & Talbot, Inc. (d) Pope & Talbot, Wis., Inc. Hourly Employees IWA Local 4-362 Retirement Plan1 - ----------------- (1) This Schedule 3.2(r) does not include any Canadian plans or any other plan for which Title IV of ERISA is made inapplicable pursuant to ERISAss.4021(b)(7). Schedule 3.2(r) - Page 2 Schedule 3.2(s) Environmental Matters --------------------- 1. Matters disclosed in the Phase I Environmental Site Assessment report dated August 23, 1999, for the Halsey Pulp Mill located at 30480 American Drive, Halsey, Oregon, prepared by SECOR International Incorporated; 2. Matters disclosed in the Addendum to the Phase I Site Assessment report dated September 29, 1999; 3. Environmental Permits: (a) NPDES Permit No. 101114. Expiration 7-1-98. Renewal submitted on time, which allows operation under this permit until disposition is made on the application. No disposition expected until 2001; (b) General Storm Water Permit No. 1200Z. Expiration 6-30-2002; (c) Air Oregon Permit No. 22-3501. Expiration 10-1-2000. Renewal application to be submitted by 10-1-99; and 4. Asbestos Survey of the Halsey Pulp Mill dated September 22, 1999. Schedule 3.2(s)

Schedule 3.2(w) - Page 1

Schedule 3.2(w) - Page 2 Annex I - Definitions See Exhibit 4.4 Amended and Restated Facility Lease between Pope & Talbot, Inc. and Wilmington Trust Company, dated December 27, 2001 - Annex I. Annex I Exhibit A - Form of Trust Agreement Between SELCO Service Corporation - Owner Participant and Wilmington Trust Company - Owner Trustee (not included herein). Exhibit A ================================================================================ Exhibit B SITE LEASE Dated September 30, 1999 Between POPE & TALBOT, INC., Landlord And WILMINGTON TRUST COMPANY, not in its individual capacity but solely as Owner Trustee, Tenant ================================================================================ (Pulpmill, Halsey, Oregon) Exhibit B

Exhibit B - i ATTACHMENTS: Exhibit A -- Description of Site (See Exhibit C of Exhibit 4.4 Amended and Restated Facility Lease between Pope and Talbot, Inc. and Wilmington Trust Company dated December 27, 2001). Annex I -- Definitions (See Annex I of Exhibit 4.4 Amended and Restated Facility Lease between Pope and Talbot, Inc. and Wilmington Trust Company dated December 27, 2001). Exhibit B - ii SITE LEASE This SITE LEASE dated September 30, 1999, is between POPE & TALBOT, INC., a Delaware corporation (the "Landlord"), as landlord hereunder, and WILMINGTON TRUST COMPANY, a Delaware banking corporation, not in its individual capacity but solely as Owner Trustee (the "Tenant"), as tenant hereunder. IN CONSIDERATION OF the mutual covenants and agreements hereinafter set forth, and intending to be legally bound, the Tenant and the Landlord hereby agree as follows: SECTION 1. DEFINITIONS. The capitalized terms used in this Site Lease shall have the respective meanings set forth in Annex I attached hereto unless elsewhere defined or the context shall otherwise require. SECTION 2. LEASE OF SITE. Subject to all the terms and conditions of this Site Lease, the Landlord hereby, for the Site Lease Term, leases to the Tenant the Site described in Exhibit A attached hereto, together with any rights of way, licenses, easements, entitlements and appurtenances now or hereafter belonging or pertaining thereto. Subject to the terms and provisions of this Site Lease, the Landlord grants to the Tenant the right to remain in sole and full possession of the Site and the rights hereinafter specified with respect to the other Site Lease Property for the Site Lease Term and warrants that it has full right and authority to grant the interests in the Site Lease Property in the manner and form herein provided, and that it will defend and hold harmless the Tenant and its successors and assigns in their peaceable, quiet, undisputed and exclusive possession and enjoyment of the Site against the claims of all persons, except for Liens described in clause (g) of the definition of "Permitted Encumbrances" and the title exceptions described in Schedule B-I to the Title Policy issued on the Closing Date to the Tenant. Except as set forth in Section 19 hereof, effective from and after the date hereof, Landlord waives and relinquishes any Lien or other right in the nature of a landlord's lien or privilege which it might now or hereafter otherwise have in or with respect to the Site, the Facility or any part thereof. The parties hereto acknowledge that the title to the Facility and, except as set forth in Section 8 of the Facility Lease, all improvements now or hereafter installed on the Site by any party (including, without limitation, Landlord) during the Site Lease Term are and will be owned by the Tenant. It is the intention of the parties hereto that the separation of the title to the Site from the title to the Facility is to remain so separated until the expiration of the Site Lease Term. Exhibit B - 1 SECTION 3. RENT. The Tenant agrees to pay the Landlord rent ("Periodic Site Rent") in consecutive semiannual installments (other than the first rent payment, which shall be in respect of the period from the Closing Date to the first Periodic Site Rent Payment Date), each in an amount equal to the Periodic Site Rent Amount, payable in arrears on each Periodic Site Rent Payment Date before the Post-Facility Lease Date and in advance after the Post-Facility Lease Date; provided that, so long as the Landlord shall be the Lessee under the Facility Lease, the Tenant's obligation to make Periodic Site Rent payments shall be satisfied by its concurrent right to receive Periodic Site Rent under the Facility Lease. SECTION 4. USE, ALTERATIONS, IMPROVEMENTS, ETC. The Tenant may use the Site and the Facility for any legal business purpose, including, without limitation, the same purpose and business as Landlord may use the Site and the Facility for under the Facility Lease. During the Site Lease Term, the Tenant may, in its discretion, from time to time alter or improve, or cause to be altered or improved, the Site or any part thereof, in any manner it deems necessary or desirable, to carry on any activity permitted hereunder, including the construction, addition, alteration, demolition and removal of any buildings, equipment, roads or other structures, items of personal property or fixtures and any grading or landscaping of the Site; provided, however, that so long as the Facility Lease is in effect, the Tenant shall refrain from any action permitted under this Section 4, except to the extent such action is undertaken by Tenant in its capacity as lessor under, and in accordance with, the Facility Lease. SECTION 5. EARLY TERMINATION. The Site Lease Term shall automatically expire upon the earlier to occur of (a) the occurrence of a termination date specified by the Tenant in a written notice delivered to the Landlord at least 30 days prior to such date and (b) the transfer of the Facility to the Lessee pursuant to the exercise by Lessee of any of its rights to purchase the Facility pursuant to any of the Operative Agreements and payment of all amounts due and payable in connection therewith. Notwithstanding anything to the contrary contained in this Site Lease, no event, occurrence or failure to perform by (or on behalf of) Tenant shall constitute a default or an event of default hereunder, and Landlord shall have no right (whether conferred by statute or otherwise) to terminate this Site Lease or to take possession of the Site, so long as any sums remain to be paid at any time by Landlord as Lessee under the Facility Lease or under any other Operative Agreement. Exhibit B - 2 SECTION 6. TAXES, LIENS, MAINTENANCE, ETC. Section 6.1. Taxes and Other Charges. So long as this Site Lease remains in effect, the Landlord shall, at its own cost and expense, pay as and when the same shall become due and payable all general and special taxes levied upon the Site Lease Property or the Tenant's interest hereunder in the Site Lease Property and any fees, assessments or other governmental or quasi-governmental charges of whatsoever kind or character, including interest and penalties, by whomsoever payable, on or relating to the Site Lease Property or the Tenant's interest hereunder in the Site Lease Property other than taxes, fees, assessments, or other governmental or quasi-governmental charges not due and payable or the amount or validity of which is being contested by a Permitted Contest. Section 6.2. Liens. So long as this Site Lease remains in effect: (a) The Landlord shall, at its own cost and expense, keep the Site Lease Property free and clear of any and all Liens, charges and encumbrances of persons claiming by, through or under the Landlord other than Permitted Encumbrances; and (b) The Tenant shall, at its own cost and expense, keep the Site Lease Property free and clear of any and all Liens, charges and encumbrances resulting from acts or omissions of the Tenant or claims against the Tenant unrelated to its interest in the Site Lease Property which impair the right, title and interest of the Landlord in the Site Lease Property, other than Permitted Encumbrances specified in clauses (a) through (d) and (f) of the definition thereof. Section 6.3. Maintenance; Insurance. Before the Post-Facility Lease Date the Landlord and after the Post-Facility Lease Date the Tenant shall, at its own cost and expense: (a) maintain the Site Lease Property in accordance with the provisions of paragraphs (a), (b), (c) and (d) of Section 8 of the Facility Lease, which provisions are by this reference incorporated herein; and (b) maintain with respect to the Site Lease Property the insurance coverage required by Section 7 of the Facility Lease with respect thereto, except that, subject to Section 7 of the Facility Lease, losses under such insurance shall be payable directly to the Landlord and the Tenant as their respective interests may appear. Section 6.4. Casualty or Condemnation. Any payment, including condemnation awards, received at any time by Landlord or Tenant as a result of a Casualty Occurrence or a requisition or taking by a Governmental Authority when the Facility Lease is in effect shall be distributed in accordance with Section 13 of the Facility Lease. Any such payment received by Landlord or Tenant after the Facility Lease has expired or has been terminated shall be applied as follows: so much of such payments as shall be necessary to pay in full all sums owing to Tenant, as lessor under the Facility Lease or under any other Operative Document shall be retained by, or paid over to, Tenant, and the balance (if any) of such payments shall be retained by, or paid over to Landlord. Exhibit B - 3 SECTION 7. MORTGAGE OF THE TENANT'S INTEREST; RIGHTS OF INDENTURE TRUSTEE. (a) The Landlord and the Tenant acknowledge that all the right, title and interest of the Tenant in this Site Lease and the Site Lease Property, simultaneously with the execution hereof, are being mortgaged, pledged and assigned to the Indenture Trustee under the Deed in Trust held by the Indenture Trustee as a part of the Collateral under the Indenture, as security for the indebtedness from time to time issued and outstanding under and secured by the Indenture. The Landlord hereby consents to the Deed of Trust and the Indenture becoming a lien on the right, title and interest of the Tenant in and to this Site Lease and the Site Lease Property. The Landlord acknowledges that the Facility shall be and remain the property of the Tenant until the expiration or earlier termination of the Site Lease Term and, upon the occurrence of an Event of Default under the Indenture, the interest of the Tenant in this Site Lease and the Site Lease Property (or any part thereof) may be sold by the Indenture Trustee, through foreclosure of the Deed of Trust, or otherwise, to repay the Notes and all other sums coming due under the Indenture. If the interest of the Tenant in this Site Lease and in the Site Lease Property shall be sold by the Indenture Trustee as hereinabove and in the Deed in Trust provided, the Landlord shall recognize the purchaser or transferee of such interest as if such party had been the tenant under this Site Lease and such party shall succeed to all of the rights and obligations of the Tenant hereunder. (b) The Landlord shall, upon three (3) Business Days' prior written notice by the Tenant or by the Indenture Trustee, from time to time during the Site Lease Term, execute, acknowledge and deliver to the Tenant and the Indenture Trustee, a statement in writing certifying that this Site Lease is unmodified and in full force and effect (and if there shall have been modifications to this Site Lease, that the same is in full force and effect, except as modified, and stating such modifications) and the dates to which the rent and other payments under this Site Lease have been paid by the Tenant in advance (if any). (c) The Landlord represents that it has full right, power and lawful authority to enter into this Site Lease and to transfer the interests in the Site Lease Property pursuant to this Site Lease. (d) Unless and until the Landlord shall have received written notice from the Indenture Trustee that the Lien of the Deed of Trust and the Indenture has been released (i) no amendment or modification of, or waiver by or consent of the Tenant in respect of, any of the provisions of this Site Lease shall be effective unless the Indenture Trustee shall have joined in such amendment, modification, waiver or consent or shall have given its prior written consent thereto, (ii) except as otherwise provided in the Indenture, the Indenture Trustee shall have the sole right to exercise all rights, privileges and remedies of the Tenant (either in its own name or in the name of the Owner Trustee for the use and benefit of the Indenture Trustee), and (iii) any notice given by the Landlord hereunder shall be concurrently delivered to the Indenture Trustee. Exhibit B - 4 SECTION 8. RETURN. Section 8.1. Surrender of Site. Upon the expiration of the Site Lease Term, the Tenant will peaceably and quietly yield up and surrender possession of the Site Lease Property to the Landlord free of (a) Liens, charges, encumbrances and claims resulting from acts or omissions of the Tenant or claims against the Tenant unrelated to its interest in the Site Lease Property, other than Permitted Encumbrances, (except Lessor Liens) and (b) Liens, charges and encumbrances which the Landlord has assumed or is obligated to discharge under any of the Lessee Agreements. Subject to the Landlord's rights under the Facility Lease, the Tenant shall have the right, but not the obligation, to remove all or any part of the Facility from the Site at any time prior to the expiration of the Site Lease Term and for one year thereafter. In connection with such removal the Tenant may enter upon the Site for such period of time as shall be reasonably required by the Tenant to accomplish such removal, provided that the Tenant shall complete such removal within one year after the expiration of the Site Lease Term. Removal of the Facility by the Tenant in the manner hereinabove provided shall not give rise to any claim for compensation by the Landlord, and no claim of ownership by the Landlord of any portion of the Facility shall prevent such removal. The Tenant shall use reasonable care to avoid unnecessary damage to the Site or other property owned by the Landlord in connection with any removal of the Facility pursuant to this Section. The Landlord shall cooperate fully in any such removal and will render such assistance and make available such suitable facilities as may at the time be available as the Tenant shall reasonably request. Section 8.2. Landlord's Purchase Option. The Tenant shall have the right, upon 30 days written notice prior to its surrender of the Site Lease Property to the Landlord pursuant to Section 8.1, to require the Landlord, at Landlord's sole risk and expense, to dismantle any or all movable parts of the Facility, remove them from the Site Lease Property and cause them to be delivered to a railhead or other suitable common carrier for shipment to a disposal site, all as may be specified by the Tenant. Notwithstanding the foregoing, after (but only after) the Tenant shall have exercised the right set forth in the preceding sentence, the Landlord shall have the option to purchase the Facility at a price equal to the greater of $1.00 or the fair market value of the Facility (dismantled and sold at auction) determined in accordance with the Appraisal Procedure, less the cost the Landlord would have incurred to remove the Facility as provided in the first sentence of this Section 8.2, to remediate the Site and to rezone and prepare the Site for non-industrial use. Payment of the purchase price shall be made on the date of purchase in immediately available funds against delivery of a quitclaim deed and bill of sale transferring and assigning to the Landlord to all right, title and interest of the Tenant in and to the Facility, free and clear of all Liens other than Lessor's Liens attributable to the Tenant. SECTION 9. DETERMINATION OF FAIR MARKET RENTAL VALUE. At such time as such determination shall be relevant, the Tenant and the Landlord shall consult for the purpose of determining the Fair Market Rental Value for the Site, and any such Exhibit B - 5 value agreed upon in writing shall constitute the Periodic Site Rent Amount. If the Tenant and the Landlord fail to agree upon such value within 30 days after notice pursuant to the first sentence of this paragraph, such value shall be determined by the Appraisal Procedure. Such Fair Market Rental Value shall be determined on the basis of, and shall be equal in amount to, the value which would obtain in an arm's-length transaction between an informed and willing tenant (other than a tenant currently in possession) and an informed and willing landlord under no compulsion to lease. Any such determination shall be made on the basis of a lease having terms and conditions (other than the lease term and fixed rental) similar to the terms and conditions of this Site Lease. All costs and expenses of any Appraisal Procedure pursuant to this Section 9 shall be borne by the Landlord. SECTION 10. SUCCESSORS AND ASSIGNS. This Site Lease shall be binding upon and shall inure to the benefit of, and shall be enforceable by, the Landlord and the Tenant and their respective successors and permitted assigns. Without limiting the foregoing, the Landlord shall not assign, sublease or otherwise transfer its rights and interest as landlord hereunder. Tenant may, from time to time, sublease all or any part of the Site and/or the Facility pursuant to the Facility Lease and, to the extent permitted by and subject to the terms and provisions of the other Operative Agreements, assign Tenant's interests hereunder in connection with an assignment of its interests as Lessor under the Facility Lease. After the expiration or termination of the Facility Lease, the Tenant may sublease or assign this Site Lease to any person without the consent of the Landlord. From and after the date of any such assignment or sublease, the Landlord shall look exclusively to the assignee or sublessee for the performance of all obligations of the Tenant hereunder. SECTION 11. HEADINGS AND TABLE OF CONTENTS. The headings preceding the various sections and the Table of Contents are for convenience of reference only and shall not be deemed to affect the meaning or construction hereof. SECTION 12. COUNTERPARTS. This Site Lease may be executed in any number of counterparts, each counterpart constituting an original but all together one Site Lease. SECTION 13. GOVERNING LAW. THIS SITE LEASE SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAW OF THE STATE OF OREGON EXCLUDING CHOICE-OF-LAW PRINCIPLES OF THE LAW OF SUCH STATE THAT WOULD REQUIRE THE APPLICATION OF THE LAWS OF A JURISDICTION OTHER THAN SUCH STATE. Exhibit B - 6 SECTION 14. NOTICES. All communications under this Site Lease shall be in writing or by facsimile and any such notice shall become effective (i) upon personal delivery thereof, including, without limitation, by overnight mail or courier service, (ii) upon receipt thereof, in the case of notice by United States mail, certified or registered, postage prepaid, return receipt requested, or (iii) upon confirmation of receipt thereof, in the case of notice by facsimile, provided such transmission is promptly further confirmed in writing by either of the methods set forth in clause (i) or (ii) above, in each case addressed as set forth below or at such other place as any such party may designate by notice given in accordance with this Section 14. If to the Tenant: WILMINGTON TRUST COMPANY Rodney Square North 1100 North Market Street Wilmington, Delaware 19890-0001 Attention: Corporate Trust Administration Fax: (302) 651-8882 with a copy to the Owner Participant at SELCO SERVICE CORPORATION c/o Key Corp Leasing 54 State Street, 9th Floor Albany, New York 12207 Attention: Leveraged Lease Administrator Fax: If to the Landlord: POPE & TALBOT, INC. 1500 SW First Avenue, Suite 200 P. O. Box 8171 Portland, Oregon 97201 Attention: Chief Financial Officer Fax: (503) 220-2722 Exhibit B - 7 If to the Indenture Trustee: FIRST SECURITY BANK, NATIONAL ASSOCIATION 79 South Main Street Salt Lake City, Utah 84111 Attention: Corporate Trust Services Fax: (802) 246-5053 SECTION 15. BANKRUPTCY. It is expressly understood and agreed that for purposes of Section 365(h) of the Bankruptcy Code, 11 U.S.C. Section 365(h), (a) Tenant shall be deemed to be in possession of the Site by virtue of the possessory interest therein granted to Tenant under this Site Lease whether or not all or any part of the Site has been subleased by Tenant and (b) in the event of any rejection or disaffirmance of this Site Lease in any bankruptcy or similar proceeding relating to Landlord, Tenant may elect to remain in possession of the Site for the balance of the Site Lease Term, including all extensions exercisable hereunder, at the option of Tenant. SECTION 16. THE FACILITY LEASE. So long as the Facility Lease remains in effect or the Landlord, as Lessee under the Facility Lease, is otherwise liable for amounts in respect thereof or under the other Operative Agreements, (i) Landlord shall look solely to the Lessee under the Facility Lease for the performance and discharge of Tenant's obligations and liabilities under this Site Lease (other than with respect to Lessor's Liens and the restrictions on Tenant's rights of assignment and subleasing under Section 10) with the same force and effect as though Tenant had performed the same, (ii) Tenant shall have no liability hereunder (other than with respect to Lessor's Liens and the restrictions on Tenant's rights of assignment and subleasing under Section 10), (iii) other than with respect to any events arising out of any failure to fulfill obligations with respect to Lessor's Liens and the restrictions on Tenant's rights of assignment and subleasing under Section 10, no default or event of default shall arise hereunder and (iv) the rights of Tenant hereunder shall not be affected by any failure of Tenant to perform or discharge such liabilities or obligations notwithstanding (a) any continuation of any such failure after the end of the term of the Facility Lease or (b) that such failure first became known or apparent after the end of the term of the Facility Lease. No such performance or discharge by or on behalf of the Landlord, as Lessee under the Facility Lease, shall be deemed a merger of the Facility Lease with this Site Lease or a merger of the estate of the Owner Trustee under the Facility Lease with the estate of the Lessee thereunder. Exhibit B - 8 SECTION 17. SEVERABILITY. Any provision of this Site Lease that shall be prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. SECTION 18. RECORDING. This Site Lease or a memorandum hereof may be recorded by either party hereto in the appropriate real estate records and Landlord shall pay all costs of recording and all applicable recording or transfer taxes or related charges. SECTION 19. DEFAULT. If during any portion of the Site Lease Term during which Section 16 does not apply Tenant shall fail to pay any installment of rent within ten (10) days after written notice that it is due, or if Tenant shall fail to perform any other obligation under this Site Lease within thirty (30) days after written notice from Landlord, the Landlord shall have the right to any and all remedies available for breach of lease under applicable law, including written termination of Tenant's rights under this Site Lease (provided that in the event Landlord elects to terminate this Site Lease, the Landlord shall provide Tenant a written notice of intent to so terminate ten (10) days prior to such termination), recovery of possession of the Site, collection of all unpaid rent and damages for breach of lease as provided by law. If an obligation cannot reasonably be performed within thirty (30) days, then it shall be a sufficient cure if Tenant commences the cure within the twenty-day period and diligently prosecutes it to completion within a reasonable time. Exhibit B - 9 IN WITNESS WHEREOF, the Tenant and the Landlord have caused this Site Lease to be executed and delivered by their respective duly authorized officers, all as of the date first above written. POPE & TALBOT, INC. By: ----------------------------------------- Its -------------------------------------- WILMINGTON TRUST COMPANY, not in its individual capacity but solely as Owner Trustee By: ----------------------------------------- Its -------------------------------------- Exhibit B - 10 Exhibit C - Form of Facility Lease See Exhibit 4.4 Amended and Restated Facility Lease Between Pope & Talbot, Inc. and Wilmington Trust Company dated December 27, 2001. Exhibit C Exhibit D - Form of Trust Indenture and Security Agreement Between Wilmington Trust Company - Owner Trustee and First Security Bank, National Association - Indenture Trustee (not included herein). Exhibit D Exhibit E - Form of Deed Trust from Wilmington Trust Company, solely as Trustee To Oregon Title Insurance Company For the Benefit of First Security Bank, National Association (not included herein). Exhibit E EX-4.4 4 dex44.txt AMENDED AND RESTATED FACILITY LEASE Exhibit 4.4 Amended and Restated Facility Lease Dated December 27, 2001 Between WILMINGTON TRUST COMPANY not in its individual capacity but solely as Owner Trustee, Lessor and POPE & TALBOT, INC., Lessee ================================================================================ This Facility Lease and the rentals and other sums due and to become due hereunder have been assigned for security to and are subject to a security interest in favor of Wells Fargo Bank Northwest, National Association (formerly known as First Security Bank, National Association), as Indenture Trustee under an Amended and Restated Trust Indenture and Security Agreement dated as of September 15, 1999 between said Indenture Trustee and the Owner Trustee, as Debtor, as amended and restated on the date hereof. Information concerning such security interest may be obtained from the Indenture Trustee at its address set forth in Section 20 of this Facility Lease. ================================================================================ Table of Contents -----------------

ii Attachments to Facility Lease: Schedule 1 - Schedule of Periodic Rent Percentages Schedule 1A - Schedule of Periodic Rent Allocations Schedule 2 - Schedule of Casualty Value Schedule 3 - Schedule of Termination Value Schedule 4 - Schedule of the Early Purchase Date, Early Purchase Price and Installment Amounts and Dates Exhibit A - Description of Major Components of the Facility Exhibit B - Description of the Facility Exhibit C - Description of the Site Exhibit D - Pricing Assumptions Exhibit E - Form of Lease Supplement Annex I - Definitions iii FACILITY LEASE This Amended and Restated Facility Lease, dated December 27, 2001 (this "Lease"), is between Wilmington Trust Company, a Delaware banking corporation, ----- not in its individual capacity but solely as owner trustee (the "Owner Trustee") ------------- under the Trust Agreement, as lessor hereunder, and Pope & Talbot, Inc., a Delaware corporation (the "Lessee"). ------ WHEREAS, the parties hereto entered into that certain Facility Lease dated as of September 30, 1999 (the "Existing Facility Lease"); and WHEREAS, the parties hereto desire to amend and restate the Existing Facility Lease, on the terms and conditions set forth herein, it being understood that this Agreement is an amendment and restatement of the Existing Facility Lease, which shall remain in full force and effect, as amended and restated hereby. NOW, THEREFORE, in consideration of the promises and the mutual agreements contained herein, the Owner Trustee and the Lessee hereby agree that the Existing Facility Lease shall be amended and restated as follows: Section 1. Interpretation of this Lease. (a) Definitions. The capitalized terms used in this Lease shall have the ----------- respective meanings indicated in Annex I hereto unless elsewhere defined herein or the context hereof shall otherwise require. (b) Accounting Principles. Where the character or amount of any asset or --------------------- liability or item of income or expense is required to be determined or any consolidation or other accounting computation is required to be made for the purposes of this Lease, this shall be done in accordance with generally accepted accounting principles at the time in effect, to the extent applicable, except where such principles are inconsistent with the requirements of this Lease. (c) Directly or Indirectly. Where any provision in this Lease refers to ---------------------- action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person. Section 2. ACCEPTANCE OF LEASED PROPERTY. The Owner Trustee does hereby lease and let the Leased Property to the Lessee and the Leased Property is hereby accepted by the Lessee hereunder and declared to be and constitute the property leased hereunder, all for the Rent and the Term hereinafter stipulated and upon the terms and conditions herein set forth. Section 3. TERM OF LEASE. The basic term of this Lease (the "Basic Term") shall commence on the Closing Date and shall expire January 2, 2012, subject to earlier termination pursuant to Sections 13, 15 and 19. Section 4. RENT PAYMENTS. The Lessee agrees to pay the Owner Trustee the following hereunder: (a) Rent for Facility. The Lessee hereby agrees to pay to the Owner Trustee ----------------- Rent for the Facility (the "Periodic Rent") on each semiannual Rent Payment Date during the Facility Lease Term, unless the Facility Lease is earlier terminated in accordance with the express provisions hereof, in an amount equal to the percentage set forth under the column entitled "Total Periodic Rent Percentage" opposite such Rent Payment Date on Schedule 1 multiplied by the Facility Cost. The Periodic Rent payable on each Rent Payment Date pursuant to this Section 4(a) shall be in satisfaction of the Lessee's obligation to pay the Periodic Rent allocated to each full or partial calendar year during the Facility Lease Term as set forth on Schedule 1A. (b) Rent for Site Lease Property. The Lessee agrees to pay the Owner ---------------------------- Trustee Rent for the Site Lease Property (the "Periodic Site Rent") payable for the Term in consecutive semiannual installments (other than the first Site Lease Rent payment, which shall be in respect of the period from the Closing Date to the first Rent Payment Date), each in an amount equal to the Periodic Site Rent Amount, payable in arrears on each Rent Payment Date; provided that, so long as the Lessee shall be the landlord under the Site Lease, the Lessee's obligation to make Periodic Site Rent payments shall be satisfied by its concurrent right to receive Site Rent under the Site Lease. (c) Supplemental Rent. The Lessee agrees to pay to the Owner Trustee, or to ----------------- whosoever shall be entitled thereto, any and all Supplemental Rent promptly as the same shall become due and owing, and in the event of any failure on the part of the Lessee to pay any Supplemental Rent, the Owner Trustee shall have all rights, powers and remedies provided for herein or by law or equity or otherwise in the case of nonpayment of Periodic Rent. Lessee will, in addition to any other Rent due and payable hereunder, also pay, as Supplemental Rent, (i) in the case of the termination of this Lease pursuant to Section 13(d), on the Termination Date, an amount equal to the Make-Whole Amount, if any, with respect to the principal amount of each Note to be prepaid as a result of such termination, (ii) in the case of the purchase of the Facility pursuant to Section 19(f), unless Lessee shall have assumed the Notes as provided in the Participation Agreement, on such date of purchase, an amount equal to the Make-Whole Amount, if any, with respect to the principal amount of each Note to be prepaid as a result of such purchase, and (iii) in the case of any refinancing of the Notes pursuant to Section 13 of the Participation Agreement, on the Refunding Date, an amount equal to the Make-Whole Amount, if any, with respect to the aggregate principal amount of the Notes being prepaid. (d) Place and Manner of Payment. All payments to be made by the Lessee --------------------------- under this Lease shall be made as follows: (i) Each installment of Periodic Rent shall be paid to the Owner Trustee by wire transfer to the principal office of the Owner Trustee at the address thereof provided for payments in Section 20(c); provided that until the Lessee shall have received notice from the Indenture Trustee that all Secured Indebtedness has been fully 2 paid and satisfied, all such payments shall be made by wire transfer to the office of the Indenture Trustee designated in Section 20(c) or as otherwise designated from time to time in writing by the Indenture Trustee; (ii) The entire amount of any payment of Casualty Value or Termination Value pursuant to Section 13, of any payment of the purchase price of the Facility pursuant to Section 19(b), Early Purchase Price pursuant to Section 19(f), and any payment pursuant to Section 15 hereof shall be paid to the Owner Trustee by wire transfer to the principal office of the Owner Trustee at the address thereof provided for payments in Section 20(c); provided that until the Lessee shall have received notice from the Indenture Trustee that all Secured Indebtedness has been fully paid and satisfied, all such payments shall be made by wire transfer to the office of the Indenture Trustee designated in Section 20(c) or as otherwise designated from time to time in writing by the Indenture Trustee; (iii) The amount of any payment owing to the Owner Trustee or the Owner Participant pursuant to Section 7 or 9 of the Participation Agreement (and by incorporation by reference herein, Section 5 hereof) and Section 7 hereof (but, in the case of Section 7 hereof, only with respect to public liability insurance) shall be made directly to the party to receive the same without regard to the assignment of this Lease pursuant to Section 14 hereof; and (iv) All payments other than those above specified shall be made by the Lessee directly to the party entitled to receive the same. The Lessee agrees that it will make payments due hereunder by wire transfer where specified above in immediately available funds consisting of lawful currency of the United States of America no later than 10:00 A.M. Portland, Oregon time on the date due to the party to whom such payment is to be made to such account in any United States bank as such party may from time to time direct in writing, and where not so specified, such payment shall be made by check of the Lessee drawn on a bank located in the continental United States and mailed to the party to receive the same at the address herein provided or at such other address as the Lessee shall have been previously advised in writing. (e) Overdue Payments. The amount of any installment of Periodic Rent or ---------------- Periodic Site Rent or any payment of Supplemental Rent remaining unpaid after the due date thereof shall bear interest at the Late Rate from and after the due date of such installment or payment and such interest shall be paid by the Lessee, on demand as Supplemental Rent. (f) Adjustment of Rent. The Periodic Rent percentage, Casualty Value, ------------------ Termination Value and Early Purchase Date and Early Purchase Price tables attached hereto as Schedules 1, 2, 3 and 4 respectively, have been calculated on the assumptions (the "Pricing Assumptions") set forth in Exhibit D hereto. If for any reason the Closing Date or the Transaction Costs related to the Facility set forth in Exhibit D hereto shall prove to be incorrect, then the Owner Participant acting in 3 good faith shall, prior to the first Rent Payment Date, recompute the factors for Periodic Rent, the Casualty Value and Termination Value tables and the Early Purchase Date and Early Purchase Price in order to provide the Owner Participant with the same Net Economic Return as if such assumptions were accurate; provided, that such adjustments shall comply with the Guidelines and all provisions of the Code and the Treasury Regulations thereunder, in each case as in effect on the date of such adjustment, including, without limitation, Section 467 of the Code and the Treasury Regulations thereunder, in each case as in effect on the date of such adjustment; and provided, further, that in such recomputation (i) each installment of Periodic Rent shall be in an amount sufficient to pay on each installment date the principal of, and interest on, the Notes due on such date without acceleration, (ii) the Casualty Value and Termination Value as of any date shall be sufficient to pay the aggregate unpaid principal amount of, and interest on, the Notes outstanding as of such date and (iii) the Early Purchase Price shall at all times exceed the appraiser's estimated fair market value for the Early Purchase Date. Such recomputation shall be based upon the assumptions and methods of calculation utilized by the Owner Participant in computing the amounts thereof originally set forth in this Lease. On or before the first Rent Payment Date, the Owner Trustee and the Lessee shall execute and deliver a Lease Supplement, substantially in the form of Exhibit E hereto, reflecting any revisions to Schedules 1, 2, 3 and 4 hereto, and the adjustments shall be effective as of said first Rent Payment Date. (g) Verification of Rental Adjustments. Each notice to the Lessee from the ---------------------------------- Owner Participant setting forth the results of any calculation or recalculation pursuant to paragraph (f) above shall be accompanied by a letter from the Owner Participant setting forth the reasons for such calculation or recalculation and stating that such calculation or recalculation was made using the same methods and, except as to the change or changes in circumstance giving rise to such adjustment, the same assumptions as were used in computing the factors for Periodic Rent, Casualty Values and Termination Values and the Early Purchase Date and Early Purchase Price in effect prior to such adjustment. Section 5. INDEMNITIES. The Lessee's indemnity obligations are set forth in Sections 7 and 9 of the Participation Agreement, which Sections are incorporated herein by reference as though fully set forth in this Section 5. The Lessee's indemnity obligations contained in Sections 7 and 9 of the Participation Agreement shall survive the termination of any of this Lease and the other Operative Agreements and shall survive the transfer of any Note or the Beneficial Interest and payment of any or all Notes and the extinguishment of the Beneficial Interest. Section 6. LESSEE'S COVENANTS. Section 6.1 Nature of Business. Neither the Lessee nor any Subsidiary will ------------------ engage in any business if, as a result, the general nature of the business, taken on a consolidated basis, which would then be engaged in by the Lessee and its Subsidiaries would be substantially changed from the growing and harvesting of timber and manufacture and sale of wood products and related businesses engaged in by the Lessee and its Subsidiaries on the date of this Lease and described in the Private Placement Memorandum and other businesses incidental or reasonably related thereto. 4 Section 6.2 Mergers and Consolidations. The Lessee will not consolidate -------------------------- with, or be a party to a merger with, or sell, lease or otherwise dispose of all or substantially all of its assets to, any other Person; provided, however, that the Lessee may consolidate or merge with, or sell all or substantially all of its assets to, any business entity if: (i) the surviving or continuing entity or the entity to which all or substantially all of the Lessee's assets are sold (the "Surviving Entity") shall be either the Lessee or an entity organized under the laws of the United States or any state thereof which conducts at least a majority of its business and has at least a majority of its assets within the United States, and in the case of any such consolidation or merger in which the Lessee is not the Surviving Entity or in the case of any such sale, the Surviving Entity shall (A) expressly assume in writing the due and punctual performance and observance of all of the covenants in the Operative Agreements to be performed or observed by the Lessee, and (B) furnish to the Owner Trustee, the Indenture Trustee and each Participant an opinion of independent counsel to the effect that the instrument of assumption has been duly authorized, executed and delivered and constitutes the legal, valid and binding contract and agreement of the Surviving Entity enforceable in accordance with its terms (subject to customary limitations relating to bankruptcy and the enforcement of equitable remedies), which counsel and opinion shall be reasonably satisfactory to the Owner Trustee and the Indenture Trustee; and (ii) at the time of such consolidation or merger or such sale and after giving effect thereto (A) no Default or Event of Default shall have occurred and be continuing and (B) the Adjusted Net Worth of the Surviving Entity shall not be less than the Adjusted Net Worth of the Lessee immediately prior to such consolidation or merger or such sale. Section 6.3 Lessee Financial Covenants. Lessee covenants and agrees that it shall: -------------------------- (a) maintain a Fixed Charge Coverage Ratio of at least 1.05 to 1, as measured by reference to the amounts reported for Lessee's immediately preceding four fiscal quarters on a rolling basis; provided, however, that if as of the end of any fiscal quarter Lessee does not meet the Fixed Charge Coverage Ratio, then Lessee must maintain, until such time as Lessee regains compliance with such Fixed Charge Coverage Ratio, on a consolidated basis, a minimum balance of $25,000,000 (denominated in United States Dollars), consisting of one or more of the following: (i) United States cash or cash equivalents; (ii) Canadian cash or cash equivalents; or (iii) immediately available and unused loan commitments from one or more lenders. For purposes of denominating in United States Dollars any Canadian cash, cash equivalents or loan commitments and availability, the parties will use the "Exchange Rates" in the "Currency Trading" table appearing from time to time in the Wall Street Journal; (b) maintain a ratio of Total Funded Debt to Total Adjusted Capitalization of no more than (i) 62.5% for the fiscal years ending December 31, 1999, December 31, 2001 and December 31, 2002 and (ii) 55.0% thereafter; and 5 (c) maintain a minimum Adjusted Net Worth as of the end of each fiscal quarter of not less than the sum of (i) U.S.$123,807,000, (ii) 50% of cumulative consolidated positive net income for each fiscal quarter ending after March 31, 1999 and (iii) 100% of the value (net of underwriters' discounts and customary out-of-pocket costs and expenses of issuance) of any Equity Interests issued by Lessee since March 31, 1999. Section 6.4 Pension Plans. ------------- (a) The Lessee will not and will not permit any ERISA Affiliate to withdraw from any Multiemployer Plan if such withdrawal would result in withdrawal liability (as described in Part 1 of Subtitle E of Title IV of ERISA) that could reasonably be expected to have a Material Adverse Effect. The Lessee will not and will not permit any ERISA Affiliate (i) to permit any employee benefit plan maintained by it to be terminated in a manner which could result in the imposition of a Lien on any Property of the Lessee or any Subsidiary pursuant to Section 4068 of ERISA or (ii) to fail to make a required contribution to any Plan pursuant to Section 412(m) of the Code or Section 302(e) of ERISA which could result in a Lien or any Property of the Lessee or any Subsidiary of the Lessee pursuant to Section 412(a) of the Code or Section 302(f) of ERISA. (b) The Lessee agrees that all contributions required to be made to the Canadian Pension Plans to make them fully funded under the Income Tax Act (Canada) and other applicable Canadian pension legislation will continue to be made at the time required under applicable Canadian pension legislation. (c) The Lessee agrees that the required contributions from any Subsidiary of the Lessee which is a participating employer in any negotiated cost plan, or substantially similar plan, under applicable Canadian law will continue to be remitted at the time required under applicable Canadian pension legislation. Section 6.5 Certain Notices. --------------- (a) Liens. Upon the attachment of an aggregate amount of U.S. $250,000 or ----- more of Liens on the Leased Property or any part thereof (in either case excluding any Liens constituting Permitted Encumbrances), the Lessee shall promptly (and in no event later than ten (10) Business Days after it shall have obtained knowledge thereof) notify the Owner Trustee and the Indenture Trustee of the attachment of all such Liens and the full particulars thereof unless the same shall have been removed or discharged by the Lessee. (b) Notices of Noncompliance with Applicable Laws. The Lessee shall furnish --------------------------------------------- to the Owner Trustee, the ClO2 Indenture Trustee, and the Indenture Trustee, within five (5) Business Days after receipt thereof, a copy of any notice or order of any Governmental Authority asserting that the Lessee is not in compliance with, or in violation of, or may be liable for contamination originating from or on the Site or the Facility under, any Applicable Law, if such non-compliance, violation or liability could reasonably be expected to have a Material Adverse Effect. 6 (c) Plans and Specifications; Operating Manuals. The Lessee shall maintain ------------------------------------------- or cause its Affiliates to maintain throughout the Site Lease Term, and keep on file at its office, a complete set of plans and specifications, including "as-built" plans and specifications as and when available, with respect to the Facility (which shall reflect all material Parts incorporated or installed in or attached to the Facility and all material Alterations made pursuant to Section 8 hereof; provided, however, that such plans and specifications shall as of any date not be required to reflect any such Parts so incorporated, installed or attached or any such Alteration made within forty-five (45) days prior to such date). Upon the expiration of the Term, unless the Lessee has exercised its option to purchase the Facility and has paid all amounts due and owing in connection therewith, the Lessee shall deliver to the Owner Trustee and the Indenture Trustee or to the Owner Trustee's designee or the Indenture Trustee's designee, as the case may be, a complete set of such plans and specifications and all work drawings and similar documents with respect to the Leased Property maintained pursuant to the requirements of this Section 6.5(c). (d) Environmental Event. The Lessee shall promptly, but in any case within ------------------- five (5) Business Days, notify each Participant, each holder of the ClO2 Notes, the Owner Trustee and the Indenture Trustee if (i) any event has occurred or any condition is discovered in, on, from or involving the Leased Property or any part thereof involving the presence or Release of Hazardous Materials or the violation, or noncompliance with, any applicable Environmental Law that could reasonably be anticipated to result in penalties, Remedial Action or other liabilities in an aggregate amount in excess of U.S.$1,000,000, or (ii) the Lessee has received notification that it, the Leased Property or any part thereof is the subject of an Environmental Claim or has knowledge of any conditions or occurrences at the Leased Property that could reasonably form the basis of a material Environmental Claim, in either case that could reasonably be expected to result in any ordered Remedial Action or other liability related to an event or condition with respect to the Leased Property or any part thereof the cost of which liability is reasonably expected to exceed U.S.$1,000,000, or (iii) any material and actual or imminent restriction on the ownership, occupancy, use, productivity or transferability of the Leased Property arising in connection with any Release, threatened Release or disposal of a Hazardous Material or any breach or violation of, or noncompliance with, any Environmental Law, or (iv) any other environmental, natural resource, health or safety condition which could reasonably be expected to materially and adversely affect the ability of the Lessee to perform its obligations under the Operative Agreements (each of (i) through (iv) an "Environmental Event"). Following the receipt of a notice pursuant to the immediately preceding paragraph, the Owner Trustee may require the Lessee to conduct, or cause to be conducted, an environmental study by an environmental consultant reasonably satisfactory to the Owner Trustee (the cost and expenses of such environmental consultant to be borne by the Lessee) of the Leased Property or any applicable part thereof on which such Environmental Event or Release shall have occurred, the scope of which study shall be limited to confirming the magnitude and anticipated cost of the liability resulting in the Environmental Event and to provide a copy of the environmental consultant's report on its study to the Owner Trustee. Notwithstanding the foregoing, if a pattern, in the reasonable opinion of the Owner Trustee, of such Environmental Events exists, the Owner Trustee may conduct or require the Lessee to conduct a more comprehensive environmental study (the cost and expense of such study to be borne by the Lessee) of the Leased Property or the applicable part thereof to determine the scope 7 and nature of such pattern. If it is the reasonable opinion of the Owner Trustee that (i) an Environmental Event has occurred or exists and a Permitted Remediation (as defined below) is not available or the Environmental Event cannot be cured through a Permitted Remediation or (ii) the Environmental Event will result in the cessation of operation of the Facility or the applicable part thereof for 30 days or more such Environmental Event shall, at the option of the Owner Trustee, be deemed a Casualty Occurrence with respect to the Leased Property or the applicable part thereof (an "Environmental Trigger"). A "Permitted Remediation" means any remediation of an Environmental Event (a) the cost of which remediation is not anticipated, in the reasonable opinion of the Owner Trustee, to exceed U.S.$5,000,000; provided that such amount shall be increased to $15,000,000 if either (1) the Adjusted Net Worth of the Lessee at the time of determination is not less than the amount set forth in Section 6.3(c)(i), or (2) the Lessee then carries environmental insurance with respect to the Leased Property and shall demonstrate to the reasonable satisfaction of the Owner Trustee and the Indenture Trustee that the insurers thereunder have confirmed coverage of such remediation under such insurance; provided further that if such insurance coverage is less than $15,000,000 (at a time when clause (1) is not applicable), the applicable amount for purposes of determining a Permitted Remediation shall be the greater of $5,000,000 and the amount of such coverage (but in no event greater than $15,000,000), (b) during and after which such Environmental Event it could not be expected to result in any additional environmental liability incurred by the Owner Trustee for which the Owner Trustee has not received additional indemnification in an amount and from a Person satisfactory to the Owner Trustee in its sole discretion and (c) permitted and effected in material compliance with all applicable Environmental Laws. Irrespective of whether an Environmental Trigger has occurred, the Lessee shall promptly initiate, at its sole cost and expense (provided that, without derogating from any of the Lessee's obligations hereunder or under of the other Operative Agreements, nothing herein contained shall be deemed to release or waive any of the Lessee's rights against any other Person liable to the Lessee with respect to any Environmental Event or condition), such actions as may be necessary to comply in all material respects with all applicable Environmental Laws and to alleviate any significant risk to human health or the environment if the same arises from an Environmental Event or a condition on or in respect of the Leased Property or any part thereof, whether existing prior to, on or after the date of this Lease. Once the Lessee commences such actions, the Lessee shall thereafter diligently and expeditiously proceed to comply materially and in a timely manner with all Environmental Laws and to so alleviate any significant risk to human health or the environment. Section 6.6 Facility Operations. The Lessee will cause the Site and the ------------------- Facility to comply with all restrictive covenants and applicable zoning and subdivision ordinances and building codes, except where a failure so to comply could not reasonably be expected to have a Material Adverse Effect. Section 6.7 Compliance with Law. The Lessee covenants and agrees to comply ------------------- with, and to cause the Facility, the Site and the operations of the Lessee at the Facility and the Site to comply with, all Applicable Law and all judgments, injunctions, decrees or awards to which the Lessee, the Facility or the Site may be subject, except where the failure so to comply could not reasonably be expected to have a Material Adverse Effect. 8 Section 7. INSURANCE. (a) Required Insurance Coverages and Limits. The Lessee agrees that it will --------------------------------------- at its own cost and expense at all times during the Term: (i) Keep the Leased Property insured against physical loss including by fire, windstorm, explosion, flood, subsidence, earthquake, earth movement and collapse and with all-risk coverage and against all such other risks as are insured against by the Lessee with respect to property of a similar character owned or leased by the Lessee, in an amount not less than the greater of (A) the replacement value of the Facility and (B) the Casualty Value of the Facility as of the next preceding Rent Payment Date, which insurance shall (v) cover all materials, equipment, tools and supplies stored on the Site and to become part of the Leased Property, (w) cover all portions of the Leased Property while in transit, (x) include boiler and machinery insurance, (y) include coverage against loss caused by explosion and breakdown and (z) waive any condition requiring that the Leased Property be in use or ready for use, (ii) Maintain commercial general liability insurance with respect to the Leased Property including liability coverage for premise-operations, contractual liability, product liability, builder's risk, workmen's compensation, and owned, non-owned and hired car auto liability, which coverage shall be against damage because of bodily injury, including death, or damage to property of others, such insurance to afford protection to the limit of not less than U.S.$1,000,000 combined single limit per occurrence in respect of bodily injury or property damage liability and U.S.$2,000,000 in the aggregate and a U.S.$35,000,000 umbrella liability for liabilities in excess of the single limit amounts, and (iii) Maintain such other insurance covering such risks and in such amounts as is customary by corporations owning, operating or leasing property or engaged in the same or similar business, similarly situated with the Leased Property and/or the Lessee, to the extent available on commercially reasonable terms. The Lessee agrees to maintain all insurance provided for under this Section 7 with good and responsible insurance companies of recognized national reputation reasonably acceptable to the Owner Trustee, the holders of the ClO2 Notes and the Participants. Any policies of insurance carried in accordance with this Section 7 and any policies taken out in substitution or replacement for any of such policies (1) shall name the Insured Parties as additional insureds, (2) shall provide that in respect of the interest of the Insured Parties in such policies the insurance shall not be invalidated by any action or inaction of the Lessee or any other Person and shall insure the Insured Parties' interests as they appear, regardless of any breach or violation of any warranty, declaration or condition contained in such policies by the Lessee or any other Person, (3) shall provide that, if such insurance is cancelled for any reason whatsoever, or any substantial change is made in the coverage which adversely affects the interest of any Insured Party or if such insurance is allowed to lapse for nonpayment of premium, such cancellation, change or lapse shall not be effective as to such Insured Party for 30 days after receipt by such Insured Party of written notice from such insurers of such cancellation, change or 9 lapse, (4) shall provide that no Insured Party shall have any obligation or liability for premiums in connection with such insurance, (5) shall provide that such insurance shall be primary without right of contribution from any other insurance which may be carried by any Insured Party with respect to its interest as such in the Leased Property, (6) shall provide that the insurers shall waive any rights of subrogation against the Insured Parties, except for claims as shall arise from the willful misconduct or gross negligence of any such Insured Party, and (7) shall provide that such insurers shall waive any right of setoff, counterclaim or any other deduction, whether by attachment or otherwise, in respect of any liability of any Insured Party. Each liability policy shall expressly provide that all of the provisions thereof, except the limits of liability, shall operate in the same manner as if there were a separate policy covering each insured. Each policy covering casualty insurance required to be carried by paragraph (a)(i) of this Section 7 shall provide either (y) that any payments for any loss or damage to the Leased Property shall be paid to the Indenture Trustee (or, if the Secured Indebtedness shall have been fully paid and satisfied, to the Owner Trustee), as loss payee, or (z) that (i) any payments for any loss or damage to the Leased Property constituting a total or constructive loss or a Casualty Occurrence shall be paid to the Indenture Trustee (or, if the Secured Indebtedness shall have been fully paid and satisfied, to the Owner Trustee), as loss payee, (ii) any payments for any loss or damage to the Leased Property which do not constitute a total or constructive loss or a Casualty Occurrence and are not in excess of U.S.$2,500,000 shall be paid to the Lessee (unless the insurer shall have received notice of a Default or Event of Default, in which case such payments shall be paid to the Indenture Trustee (or, if the Secured Indebtedness shall have been fully paid and satisfied, to the Owner Trustee), as loss payee, and (iii) any payments for any loss or damage to the Leased Property which do not constitute a total or constructive loss or a Casualty Occurrence and are in excess of U.S.$2,500,000 shall be paid to the Indenture Trustee (or, if the Secured Indebtedness shall have been fully paid and satisfied, to the Owner Trustee), as loss payee), in each case under a standard mortgage loss payable clause (which clause specifies payment solely to the Indenture Trustee or, if the Secured Indebtedness shall have been fully paid and satisfied, solely to the Owner Trustee, and which clause acknowledges that the loss payee shall have no obligation for unpaid premiums) reasonably satisfactory to the Indenture Trustee. Any such insurance may be carried under blanket policies maintained by the Lessee so long as such policies otherwise comply with the provisions of this Section 7(a). If general public liability insurance shall be carried under any blanket policy which is subject to aggregate annual claim limitations, the Lessee shall keep the Owner Trustee advised from time to time of the amount of any such limitations and the amounts of claims which reduce the available policy limits. (b) Adjustment and Payment of Losses. The loss, if any, under any casualty -------------------------------- insurance required to be carried by paragraph (a)(i) of this Section 7 shall be adjusted with the insurance companies by the Lessee, or otherwise collected, including the filing of proceedings deemed advisable by the Lessee, subject to the reasonable approval of the Owner Trustee (and the Indenture Trustee unless the Secured Indebtedness shall have been fully paid and satisfied) if the loss exceeds U.S.$2,500,000. The loss so adjusted shall be paid in accordance with the antepenultimate sentence of Section 7(a). Losses covered by liability insurance shall be adjusted by and paid to the Person suffering such loss. The loss, if any, under such insurance shall be adjusted and paid as provided in this Lease. 10 (c) Evidence of Insurance. The Lessee shall, on or before the Closing Date, --------------------- furnish the Owner Trustee, the ClO2 Indenture Trustee and the Indenture Trustee with certificates or other satisfactory evidence of maintenance of the insurance required hereunder and shall with respect to any renewal policy or policies, furnish certificates evidencing such renewal not less than ten days prior to the expiration date of the original policy or policies. Each such certificate or other evidence of insurance shall identify the insurance carrier, the type of insurance, the coverage limits, annual aggregate limits, if any, and the policy term. Upon the reasonable request of the Owner Trustee, the Indenture Trustee, any holder of the ClO2 Notes or any Participant, the Lessee shall provide, or cause to be provided, a report by AON Risk Services of Oregon, Inc. or another firm of independent insurance brokers (which may be the Lessee's regular insurance agency) chosen by the Lessee and satisfactory to the Owner Trustee and the Indenture Trustee setting forth the insurance obtained by the Lessee pursuant to this Section 7 and then in effect (or to be in effect, in the case of renewals) and stating whether, in the opinion of such firm, such insurance complies with the requirements of this Section 7. The Lessee will cause such firm to advise each Insured Party in writing promptly of any default in the payment of any premium and of any other act or omission on the part of the Lessee of which such firm has knowledge and which might invalidate or render unenforceable, in whole or in part, any insurance on the Leased Property. The Lessee will also cause such firm to advise each Insured Party in writing promptly upon such firm acquiring knowledge that an interruption or reduction of any insurance carried and maintained on the Leased Property pursuant to this Section 7 will occur. (d) Application of Insurance Proceeds. All insurance proceeds from policies --------------------------------- required to be maintained hereunder received by or payable to the Owner Trustee on account of any damage to or destruction of the Leased Property or any part thereof (less the actual costs, fees and expenses incurred in the collection thereof) shall be applied or dealt with as follows: (i) All such proceeds actually received on account of any such damage or destruction other than a Casualty Occurrence shall be paid over to the Lessee or as it may direct from time to time as restoration, replacement and rebuilding of the Leased Property ("Restoration") progresses to pay (or reimburse the Lessee for) the cost of Restoration, if the amount of such proceeds received by the Owner Trustee, together with such additional amounts, if any, theretofore expended by the Lessee out of its own funds for Restoration are sufficient to pay the estimated cost of completing Restoration, but only upon a written application of the Lessee accompanied by an Officer's Certificate of the Lessee stating that no Default or Event of Default has occurred and is continuing under this Lease and showing, in reasonable detail, (A) the nature of Restoration, (B) that such Restoration is intended to restore the Facility to Design Capacity (normal wear and tear excepted), (C) the actual cash expenditures made to date for Restoration, and (D) the estimated cost (which, if requested by the Owner Trustee, shall be verified by an accompanying certificate of an engineer or architect not an employee of the Lessee) to complete Restoration. Upon the written request of the Lessee, accompanied by evidence reasonably satisfactory to the Owner Trustee that Restoration has been completed and the costs thereof paid in full, that the Facility is capable of operating at Design Capacity (normal wear and tear excepted) and that the Leased Property is not subject to mechanics' 11 or similar Liens for labor or materials supplied in connection therewith, the balance, if any, of such proceeds shall be paid over or assigned to the Lessee or as it may direct. (ii) All such proceeds received or payable on account of a Casualty Occurrence shall be paid over or assigned to the Lessee or as it may direct in either case after receipt by the Owner Trustee (or, so long as the Secured Indebtedness shall not have been fully paid and satisfied, the Indenture Trustee) of the Casualty Value of the Facility and payment of all other amounts due hereunder. (iii) Pending application pursuant to subparagraph (i) or (ii) above, all such proceeds held from time to time by the Owner Trustee (or, so long as the Secured Indebtedness shall not have been fully paid and satisfied, the Indenture Trustee) shall be invested and reinvested by the Owner Trustee or the Indenture Trustee, as the case may be, in accordance with the provisions of Section 20(i). (e) Insurance for Own Account. Nothing in this Section 7 shall limit or ------------------------- prohibit the Owner Trustee, any Participant, the Owner Participant Guarantor or the Lessee from obtaining, at its own expense, additional insurance for its own account and any proceeds payable thereunder shall be payable in accordance with the insurance policy relating thereto, provided that no such insurance may be obtained which would limit or otherwise adversely affect the coverage of any insurance required to be maintained pursuant to this Section 7, and provided, further, that nothing in this clause (e) shall impose any obligation on the Owner Trustee, any Participant, the Owner Participant Guarantor or the Lessee to obtain any such additional insurance. (f) Application of Payments During Existence of an Event of Default. Any --------------------------------------------------------------- amount referred to in this Section 7 which is payable to or retainable by the Lessee shall not be paid to or retained by the Lessee if at the time of such payment or retention a Default or Event of Default shall have occurred and be continuing, but shall be held by or paid over to the Owner Trustee (or, so long as the Secured Indebtedness shall not have been fully paid and satisfied, the Indenture Trustee) as security for the obligations of the Lessee under this Lease and, if a Default or Event of Default shall have occurred and be continuing, applied against the Lessee's obligations hereunder as and when due. At such time as there shall not be continuing any such Default or Event of Default, such amount shall be paid to the Lessee in accordance with the foregoing provisions of this Section 7 to the extent not previously applied in accordance with the preceding sentence. Section 8. MAINTENANCE; MAINTENANCE COSTS AND WARRANTIES; REPLACEMENT OF PARTS; ALTERATIONS; MODIFICATIONS AND ADDITIONS. (a) Maintenance. The Lessee at its sole cost and expense shall maintain, ----------- service and repair the Leased Property to keep it (i) in as good operating condition and capable of operating at Design Capacity, (ii) in such condition so as to have the capacity and functional ability to perform, on a daily basis in commercial operation, the functions for which it was designed, in accordance with the Plans, and (iii) in such condition as the Lessee would, in the 12 prudent management of its own properties, maintain, service and repair similar property owned by the Lessee and in any event, to the extent required to maintain the Leased Property in good repair in a manner consistent with prudent industry practice and in compliance in all material respects with all Applicable Laws, rules and regulations, noncompliance with which might result in the imposition of a penalty on any Indemnified Party or materially adversely affect the Leased Property or the operation thereof. The Lessee shall comply with such repair and maintenance standards and schedules as are required to enforce warranty claims against the manufacturers and suppliers of the Leased Property or which are otherwise established by such manufacturers and suppliers as recommended operating procedures and any standards imposed by any insurance policies in effect with respect to the Leased Property. The Lessee shall maintain at the Facility, in accordance with the Lessee's practices existing on the date of this Lease, a maintenance log with respect to the Leased Property, which shall include the details of all material maintenance and repairs performed on the Leased Property. In the event of any damage to or destruction of the Leased Property, or any part thereof, by fire or other casualty, unless this Lease shall be terminated pursuant to Section 13, the Lessee shall, at its own expense, with reasonable promptness, repair, restore or rebuild the same so that upon the completion of such repair, restoration or rebuilding the Leased Property shall be in the condition required by the provisions of this Section 8(a) and so that the current and residual value and utility of the Leased Property shall be at least equal to the current and residual value and utility of the Leased Property immediately prior to the occurrence of such casualty assuming that the Leased Property was then in the condition required to be maintained by the terms of this Lease. (b) Maintenance Costs and Warranties. The Lessee agrees to pay all costs, -------------------------------- expenses, fees and charges incurred in connection with (i) the use and operation of the Leased Property by the Lessee during the Term hereof, including but not limited to repairs, maintenance, storage and servicing as provided in this Section 8 and (ii) the preserving and protecting of the Leased Property, and the repairing, maintaining and servicing of the Leased Property as provided in this Section 8, during the period after a termination of the Lessee's right of possession of the Facility and the Site pursuant to Section 15 and prior to the interest of the Owner Trustee in the Leased Property being leased or sold to a third person (not the Owner Trustee, the Indenture Trustee, or any Participant, or any Affiliate of any thereof, in connection with the exercise of their rights in the Leased Property under the Operative Agreements) by the Owner Trustee (or the Indenture Trustee or any Participant, or any Affiliate thereof, in connection with the exercise of their rights under the Operative Agreements). So long as no Event of Default has occurred and is continuing, the Owner Trustee hereby constitutes the Lessee the agent and attorney-in-fact of the Owner Trustee for the purpose of exercising and enforcing, and with full right, power and authority to exercise and to enforce, all of the right, title and interest of the Owner Trustee in, under and to the warranties and obligations of any supplier of goods or services in respect of the Leased Property and agrees to execute and deliver such further instruments as may be necessary to enable the Lessee to obtain goods or services furnished for the Leased Property by said suppliers. The Owner Trustee shall have no other obligation or duty with respect to any of such matters. Any proceeds obtained by the Lessee from the enforcement of the warranties and obligations of any supplier of goods or services in respect of the Facility shall be held by the Lessee and applied from time to time to the repair and maintenance of the Facility, and any balance thereof remaining at the expiration of the Term shall be paid over to the Owner Trustee or as it may direct, unless the Lessee has exercised its option to purchase the Facility and all 13 amounts due and owing by the Lessee under this Lease or any of the other Operative Agreements have been paid in full, in which case the balance remaining shall be paid to the Lessee. (c) Replacement of Parts and Components. The Lessee at its sole cost and ----------------------------------- expense, will, with reasonable promptness, replace all appliances, parts, instruments, appurtenances, accessories, furnishings and other equipment of whatever nature: (i) which may from time to time constitute a part of the Facility (herein for the purpose of this Section 8 collectively called "Parts"), and (ii) which may from time to time be incorporated or installed in or attached to the Site Lease Property (herein for the purpose of this Section 8 collectively called "Components") and which may from time to time become worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or permanently rendered unfit for use for any reason whatsoever. All replacement Parts and Components shall be free and clear of all Liens and rights of others except Permitted Encumbrances and shall be in as good operating condition as, and shall have a current and residual value, useful life and utility at least equal to, the Parts or Components replaced, assuming that such replaced Parts or Components were in the condition required to be maintained by the terms hereof, and shall be in the condition and repair required to be maintained by the terms hereof. All Parts owned by the Owner Trustee at any time removed from the Facility shall remain the property of the Owner Trustee, no matter where located, until such time as such Parts shall be replaced by Parts which have been incorporated or installed in or attached to the Facility and which meet the requirements for replacement Parts specified above. Immediately upon any such replacement Part becoming incorporated or installed in or attached to the Facility as above provided, without further act, (A) title to the removed Part shall thereupon vest in the Lessee or such person as shall be designated by the Lessee, free and clear of all rights of the Owner Trustee, and shall no longer be deemed a Part hereunder, (B) title to such replacement Part shall thereupon vest in the Owner Trustee, free and clear of all Liens (other than Permitted Encumbrances) and (C) such replacement Part shall become subject to this Lease and be deemed part of the Facility for all purposes to the same extent as the Parts originally incorporated or installed in or attached to such Facility. (d) Required Alterations. The Lessee, at its sole cost and expense, shall, -------------------- with reasonable promptness, make such repairs, alterations, modifications, reconfigurations, improvements and additions (herein for the purpose of this Section 8 collectively called "Alterations") to the Leased Property, and shall obtain and maintain all applicable Permits necessary for the construction and operation of such Alterations, as may be required from time to time to meet the requirements of Applicable Law or of any insurance policies in effect with respect to the Leased Property unless prior to the time at which such Alterations became required pursuant to such Applicable Law or insurance policies the Lessee shall have given the Owner Trustee notice of the termination of this Lease pursuant to Section 13(d). If the Lessee determines in good faith that the cost of any Alteration (required under this Section 8(d)) is 14 greater than $1,000,000 or if it determines in good faith that the cost of any Alteration (required under 8(d) of the ClO2 Lease) is greater than $1,000,000, the Lessee may request a determination of the Fair Market Sales Value of the Facility pursuant to Section 19(a) of this Lease and may, upon not less than 90 days' prior written notice to the Owner Trustee, elect to close the Facility and either purchase the Facility or terminate this Facility Lease pursuant to the next succeeding paragraph. Such written notice shall be accompanied by an Officer's Certificate of the Lessee specifying the required Alteration, the Lessee's good faith determination of the cost of such Alteration and that, as a result of such cost, the Lessee has elected to close the Facility and the ClO2 Facility. Such written notice shall specify either (i) that the Lessee has elected to and shall purchase the Facility pursuant to Section 19(f), provided that the Early Purchase Date for purposes of Section 19(f) shall be the next succeeding Rent Payment Date that is at least 90 days after the date of such written notice and the Early Purchase Price for purposes of Section 19(f) shall be the greater of Fair Market Sales Value of the Facility, as determined in accordance with Section 19(a) hereof and the Termination Value on such Early Purchase Date; provided that Lessee may not elect to purchase the Facility unless Pope & Talbot has elected to purchase the ClO2 Facility pursuant to Section 14(c) of the ClO2 Participation Agreement, or (ii) that the Lessee has elected to and shall terminate this Lease pursuant to Section 13(d) as of the next succeeding Rent Payment Date that is at least 180 days after the date of such written notice; provided that the Lessee may not elect to terminate this Lease pursuant to Section 13(d) unless the ClO2 Lessee has elected to terminate the ClO2 Lease under Section 13(d) of the ClO2 Lease. (e) Optional Alterations. -------------------- (i) The Lessee, at its sole cost and expense, may from time to time make such Alterations to the Facility as the Lessee may deem desirable in the proper conduct of its business and which are not inconsistent with, and would not impair, the continuing operation of the Facility in accordance with its original functional purpose; provided, that any such Alteration made by the Lessee pursuant to this paragraph shall not diminish the value, utility, condition or remaining economic useful life and estimated residual value of the Facility to the Owner Trustee below the value, utility, condition, remaining economic useful life and estimated residual value thereof to the Owner Trustee immediately prior to such Alteration assuming that the Facility was then in the condition required to be maintained by the terms of this Lease. Unless the Lessee has exercised its option to purchase the Facility pursuant to Section 19 of this Lease and has paid all amounts due and owing under this Lease or any of the other Operative Agreements, at the Owner Trustee's request, the Lessee will remove any readily removable Alterations under this paragraph prior to the end of the Term at the Lessee's sole cost and expense. (ii) The Lessee, at its own expense, shall have the right to erect, alter or abandon structures, improvements, personal property, ramps, ditches, roadways, drainage and sanitary systems, supply lines for materials and utilities on the Site Lease Property, to grant licenses, rights, and easements respecting the same and otherwise to affect the Site Lease Property in any manner which the Lessee shall deem necessary or advisable for the operation of the Facility or the Site Lease Property as originally erected 15 or from time to time altered by the Lessee; provided that there shall be no material interference with or impairment of the operation of the Leased Property and no adverse effect on the current or residual value, useful life or utility of the Leased Property resulting therefrom, and that all such licenses, rights and easements granted pursuant to this sentence shall be subject and subordinate to this Lease and the Site Lease. Provided that the foregoing conditions have been met and subject to all other provisions of this Lease, including, without limitation, maintenance requirements, the Owner Trustee agrees to accept such structures, improvements, personal property, ramps, ditches, roadways, drainage and sanitary systems, supply lines for materials and utilities thereon, in an "as-is" condition at the time the Lessee's rights under this Lease of possession and use of the Facility and the Site shall cease. (f) Title to Parts. (i) Title to all Parts and Alterations incorporated or installed in or attached to the Facility shall without further act vest in the Owner Trustee free and clear of all Liens (other than Permitted Encumbrances) and shall be deemed to constitute a part of the Facility and be subject to this Lease in the following cases: (A) such Part or Alteration is in replacement of or in substitution for, and not in addition to, any Part constituting a part of the Facility at the time of the acceptance thereof hereunder or any such original part; (B) such Part or Alteration is required to be incorporated or installed in or attached to the Facility pursuant to the terms of paragraphs (a), (c) or (d) of this Section 8; or (C) such Part or Alteration cannot be readily removed from the Facility without (1) impairing the continuing operation of the Facility in accordance with its original functional purpose, (2) materially damaging the Facility, or (3) materially diminishing the value of the Facility or diminishing the utility, condition, remaining economic useful life or estimated residual value, below the value, utility, condition, remaining economic useful life and estimated residual value thereof immediately prior to such removal, assuming that the Facility was then in the condition required to be maintained by the terms of this Lease and (except in the case of a Part or Alteration referred to in clause (A) or (B) above) such Part had not been added, or such Alteration made, to the Facility. (ii) Title to any other Parts and Alterations shall remain with the Lessee and such Parts and Alterations shall not be deemed to constitute part of the Facility in determining either the Fair Market Sales Value or the Fair Market Rental Value of the Facility; provided, however, that any such part which is not removed by the Lessee prior to the termination of this Lease shall become the property of the Owner Trustee. 16 (g) Option to Purchase Additional Parts and Optional Alterations. Unless ------------------------------------------------------------ the Lessee shall have purchased the Facility pursuant to the exercise of its option to purchase, the Owner Trustee shall have the option upon the expiry or earlier termination of the Term hereunder to purchase any right, title or interest of the Lessee (to the extent that such right, title or interest is transferable) in and to any Part that remains the property of the Lessee pursuant to Section 8(f)(ii) for the Fair Market Sales Value thereof as of such date. The Owner Trustee shall give the Lessee written notice at least 60 days prior to the expiry or earlier termination of the Term as to its election to exercise the purchase option provided for in the preceding sentence; provided however, that if this Lease is terminated due to the occurrence of an Event of Default hereunder, only 15 days prior written notice prior to the return of the Leased Property shall be required. (h) Other Parties Not Obligated to Maintain or Repair. The Owner Trustee, ------------------------------------------------- the Indenture Trustee and each Participant shall not under any circumstances be required to make any repairs, replacements, Alterations or renewals of any nature or description to the Leased Property, make any expenditure whatsoever in connection with this Lease or maintain the Leased Property in any way. The Lessee waives any right to (i) require the Owner Trustee, the Indenture Trustee or any Participant to maintain or repair all or any part of the Facility or (ii) make repairs at the expense of the Owner Trustee, the Indenture Trustee or any Participant pursuant to any Applicable Law, contract, agreement, or covenant, condition or restriction in effect at any time during the Term. Section 9. LOCATION AND USE; NO ASSIGNMENT BY LESSEE. (a) Location and Use. ---------------- (i) The Lessee agrees that the Facility will be used solely in the conduct of its business and solely by qualified personnel and will at all times be and remain in the exclusive possession and control of the Lessee at the Site, provided that the Lessee may deliver possession of any part or portion of the Facility to any manufacturer, contractor, supplier or mechanic designated by the Lessee for purposes of realizing the benefits of any warranty or in order to comply with the obligations and rights of the Lessee under Section 8, but the rights of any such party in possession of such part or portion of the Facility shall be subject and subordinate to the terms of this Lease, including without limitation, the right of the Owner Trustee to take possession of the Facility pursuant to Section 15. In the event that pursuant to the foregoing sentence hereof any part or portion of the Facility having a value in excess of 1% of the then Casualty Value is removed from Linn County, Oregon, the Lessee shall give the Owner Trustee, the ClO2 Indenture Trustee and the Indenture Trustee not less than 30 days' prior written notice of such removal and shall deliver to the Owner Trustee, the ClO2 Indenture Trustee and the Indenture Trustee promptly after such removal, and in any event within 10 days thereafter, the opinion of the Lessee's counsel that such removal shall not impair or adversely affect the ownership of such part or portion of the Facility by the Owner Trustee, that all necessary recordings and filings under Applicable Law have been duly made in the public offices wherein such recordings or filings are necessary to protect the validity and effectiveness of this Lease and the Indenture (including the maintenance of 17 the perfection of security interest thereof in the removed part or portion) and that all fees, taxes and charges payable in connection therewith have been paid in full by the Lessee. The Lessee shall not change the use of the Leased Property as a pulp mill without the Owner Trustee's prior written consent. The Lessee will not do or permit any act or thing that may impair the value of the Leased Property or any part thereof (provided that actions by the Lessee expressly required by Section 8 of this Lease shall not be deemed to impair the value of the Leased Property) or that materially increases the dangers, or poses an unreasonable risk of harm, to third parties (on or off the Leased Property) arising from activities thereon, or that constitutes a public or private nuisance or waste to the Leased Property or any part thereof. The Lessee agrees that it will not use the Leased Property if it has failed to procure or maintain insurance to the extent required by Section 7 herein. (ii) The Lessee agrees that the Leased Property will at all times be maintained, used and operated under and in compliance in all material respects with all Applicable Laws; provided, however, that the Lessee may contest the application of any such rule, regulation or order in good faith and by appropriate proceedings, but only so long as such proceedings do not involve any danger of criminal liability or a material danger of civil liability of the Owner Trustee, the Indenture Trustee, any holder of the ClO2 Notes, or any Participant, or a material danger of the sale, forfeiture or loss of the Leased Property, any portion thereof or any interest of the Owner Trustee, the Indenture Trustee, any holder of the ClO2 Notes, or any Participant therein. The Lessee and the Leased Property shall comply in all material respects with all applicable Environmental Laws and the Lessee shall obtain and maintain in good standing all Governmental Approvals required for the operations of the Facility by any applicable Environmental Law. The Lessee shall not (A) own or operate on the Site (1) except in compliance in all material respects with Environmental Laws, any underground storage tank, (2) except in compliance in all material respects with Environmental Laws, material amounts of asbestos containing building material, or (3) landfill or dump, (B) use, generate, treat, store or dispose of Hazardous Materials at or on the Site in quantities materially greater than that which is customary for operations similar to those of the Lessee at the Site, or (C) conduct any activity on the Site or use the Leased Property in any manner (1) which would cause the Leased Property to become a hazardous waste treatment, storage or disposal facility within the meaning of RCRA or any similar state law or local ordinance, (2) so as to cause a material Release or threat of Release of any Hazardous Material from or at the Site, to cause the Site to become a site on or nominated for the National Priority List promulgated pursuant to CERCLA or any state priority list promulgated pursuant to any similar state law, or (3) so as to cause a discharge of pollutants or effluents into any water source or system, or the discharge into the air of any emissions, which would require a permit under the Federal Water Pollution Control Act, 33 U.S.C. ss.ss.1251 et seq., or the Clean Air Act, 42 U.S.C. ss.ss.741, et seq., or any similar state law or local ordinance, unless such a permit shall be in full force and effect and such discharge shall be in full compliance therewith. At its sole expense (but without thereby waiving any claims it may have against third parties), the Lessee will conduct any investigation, study, sampling and testing, and undertake any Remedial Action or other response action necessary to remove, clean up or abate any Hazardous Material which is Released or disposed of at or on the Site in accordance with any applicable Environmental Law and 18 any order or directive from a Governmental Authority having jurisdiction, except to the extent the Lessee is diligently contesting any applicable Environmental Law or any order or directive from a Governmental Authority, so long as such contest is in good faith and by appropriate proceedings, but only so long as reserves deemed by the Lessee to be adequate are maintained and such proceedings do not involve any danger of criminal liability or a material danger of civil liability of the Owner Trustee, the Indenture Trustee, any holder of the ClO2 Notes or any Participant, or a material danger of the sale, forfeiture or loss of the Leased Property, any portion thereof or any interest of the Owner Trustee, the Indenture Trustee or any Participant therein. (b) No Assignment by Lessee; Permitted Subleases. The Lessee agrees that, -------------------------------------------- without the prior written consent of the Owner Trustee and the Indenture Trustee, the Lessee will not assign, transfer (except a transfer in accordance with Section 6.2) or sublease its right in respect of the Leased Property under this Lease, or permit its rights or interest hereunder to be subject to any Lien other than Permitted Encumbrances except with respect to subleases as provided in this Section 9(b); provided that no such assignment, transfer or sublease shall be in effect unless an assignment, transfer or sublease relating to the ClO2 Lease in favor of the same parties and otherwise identical in all respects to such assignment, transfer or sublease hereunder is in effect; further provided that the Lessee may, without the consent of the Owner Trustee or the Indenture Trustee, enter into (i) year-to-year subleases of a portion or portions of the Site for agricultural purposes on terms consistent with the Lessee's practice with respect to such subleases as of the Closing Date and not interfering with the use and operation of the Facility, and (ii) any other sublease of the Leased Property subject to the following conditions: (A) the sublessee shall agree in writing to comply with all of the terms and provisions of this Facility Lease during the period of said sublease, (B) the rights of any person who receives possession of the Leased Property shall be subject and subordinate to all the terms of this Lease, (C) such sublease shall expressly state that it is subject and subordinate to the terms of this Facility Lease and all rights of the Owner Trustee hereunder, including, without limitation, the right of the Owner Trustee to repossess the Leased Property pursuant to Section 15 hereof and to avoid such sublease upon termination of this Facility Lease notwithstanding the fact that no default may have occurred and be continuing under such sublease, (D) no such sublease shall extend beyond the remaining Term of this Lease, (E) such sublease shall expressly prohibit by its terms any sub-sublease by the sublessee thereunder and shall not contain any option for the sublessee to purchase the Leased Property or any part thereof except that Lessee may grant to any such sublessee an option to purchase the Leased Property, or assign to a sublessee its option to purchase the Leased Property under Sections 19(b) or (f), provided that (i) the sublessee's purchase price payable to the Lessee with respect to its options shall exceed the price payable under the Lessee's corresponding options under Sections 19(b) or (f), and (ii) the sublessee's purchase option is exercisable only on the same dates and subject to the same notices as the Lessee's options under Sections 19(b) or(f), as the case may be, and (iii) only if the same such option is granted to the same sublessee under Section 14 of the ClO2 Participation Agreement and only if the options under this Lease and the ClO2 Participation Agreement are exercisable simultaneously, (F) the sublessee shall not at the date of execution of such sublease be subject of any bankruptcy, liquidation or similar proceeding or have a negative net worth (as set forth in such sublessee's most recent available financial statements), and (G) such sublease shall be assigned to the Owner Trustee as security for the Lessee's obligations hereunder and under the 19 other Operative Agreements and further assigned by the Owner Trustee to the Indenture Trustee as additional collateral under the Indenture, in each case pursuant to agreements in form and substance reasonably satisfactory to the Owner Trustee and the Indenture Trustee, and the Lessee shall cause such agreements (or financing statements or other notices with respect thereto) to be filed in all public offices necessary to perfect the rights of the Owner Trustee and the Indenture Trustee in such sublease; provided that no such sublease shall be in effect unless the same or substantially identical sublease is in effect with regard to the ClO2 Lease in favor of the same parties and under the same terms and conditions. No assignment or sublease of any of the rights of the Lessee hereunder shall relieve the Lessee of any of its obligations, liabilities or duties hereunder which shall be and remain those of a principal and not a guarantor. Section 10. LIENS. The Lessee agrees that it will keep the Leased Property free and clear of any and all Liens other than Permitted Encumbrances. Lessee shall promptly, at its own expense, take such action as may be necessary to duly discharge any such Lien if the same shall arise at any time. Section 11. OWNERSHIP AND MARKING. (a) Ownership. The Lessee acknowledges and agrees that it does not and will --------- not have or obtain any title to the Facility, nor any property right or interest, legal or equitable, therein except its right and interest as lessee hereunder and subject to all the terms hereof. The Lessee understands and acknowledges that the Facility is owned by the Owner Trustee, and mortgaged to the Indenture Trustee pursuant to the Indenture. (b) Facility Personal Property. It is the intent of the parties hereto that -------------------------- the Facility shall be and remain personal property notwithstanding the manner in which the Facility may be attached or affixed to realty. Further, the Lessee and the Owner Trustee agree that the Facility shall for purposes of the laws of the State of Oregon be personal property and not real property. In the event that, notwithstanding the foregoing, a court of competent jurisdiction shall make a final determination that some part or portion of the Facility constitutes real property under Applicable Law, then this Lease shall be deemed to be and shall be construed as a divisible and severable contract between the Owner Trustee and the Lessee for the leasing of, respectively, (i) the part or portion of the Facility so determined to constitute real property under Applicable Law and (ii) the remainder of the Facility, all to the same extent and with the same force and effect as though a separate lease had been entered into by the Owner Trustee and the Lessee in respect of the part or portion of the Facility so determined to constitute real property and the remainder of the Facility, and the amount of each installment of Rent payable in respect of the part or portion of the Facility so determined to constitute real property shall bear the same relationship to the aggregate amount of such installment of Rent as the cost to the Owner Trustee of such part or portion of the Facility so determined to constitute real property shall bear to the Facility Cost. 20 There shall be no merger of this Facility Lease nor of the leasehold estate created hereby with any other estate in the Facility or the Site, or any part thereof, by reason of the fact that the same Person may acquire or own such estates, directly or indirectly. (c) Marking. The Lessee shall promptly cause each component of the Facility ------- identified in Exhibit A hereto to be plainly, permanently and conspicuously marked by stenciling or by a metal tag or plate affixed thereto, setting forth the following legend: THIS FACILITY IS OWNED BY WILMINGTON TRUST COMPANY AS OWNER TRUSTEE, IS LEASED BY SAID OWNER TRUSTEE TO POPE & TALBOT, INC. AND IS SUBJECT TO A SECURITY INTEREST GRANTED TO WELLS FARGO BANK NORTHWEST , NATIONAL ASSOCIATION (FORMERLY KNOWN AS FIRST SECURITY BANK, NATIONAL ASSOCIATION), AS INDENTURE TRUSTEE. The Lessee covenants and agrees to replace any stenciling, tag or plate and sign or marker which may be removed or destroyed or become illegible and to indemnify each Indemnified Party against any liability, loss or expense incurred by any of them as a result of the failure to maintain such markings. Section 12. DISCLAIMER OF WARRANTIES; NET LEASE. (a) Disclaimer of Warranties. Without waiving any claim the Lessee or the Owner Trustee may have against any seller, supplier or manufacturer, the Lessee acknowledges and agrees that (i) the Leased Property is of a design, capacity and manufacture selected by the Lessee, (ii) the Lessee is satisfied that the Leased Property is suitable for its purposes, (iii) the Owner Trustee is not a manufacturer nor a dealer in property of such kind, (iv) the Leased Property is leased hereunder subject to the rights of any parties in possession of the Site and the state of the title to the Site and the rights of ownership in the Site at the time the Leased Property becomes subject to this Lease and to all applicable zoning regulations, restrictions, laws and ordinances, building restrictions, and other laws and governmental regulations now in effect or hereafter adopted and in the state and condition of every part thereof when the same first becomes subject to this Lease, without representation or warranty of any kind by the Owner Trustee, and (v) THE OWNER TRUSTEE LEASES THE LEASED PROPERTY AS-IS WITHOUT WARRANTY OR REPRESENTATION EITHER EXPRESS OR IMPLIED AS TO (A) THE FITNESS FOR ANY PARTICULAR PURPOSE OR MERCHANTABILITY OR DESIGN OR QUALITY OF THE LEASED PROPERTY, (B) THE ABSENCE OF ANY INFRINGEMENT OF ANY PATENT, TRADEMARK OR COPYRIGHT, (C) THE OWNER TRUSTEE'S TITLE THERETO OR INTEREST THEREIN, (D) THE LESSEE'S RIGHT TO THE QUIET ENJOYMENT THEREOF, OR (E) ANY OTHER MATTER WHATSOEVER. It is agreed that, as between the Indemnified Parties and the Lessee, all risks incident to the matters discussed in the preceding sentence are to be borne by the Lessee. The provisions of this Section 12 have been negotiated by the Owner Trustee and the Lessee and are intended to be a complete exclusion and negation of any representations or warranties of the Indemnified Parties, 21 express or implied, with respect to the Leased Property that may arise pursuant to any law now or hereafter in effect, or otherwise. (b) Net Lease; Non-Terminability. ---------------------------- (i) This Lease is a net lease, and it is intended that the Lessee shall pay all costs and expenses of every character, whether seen or unforeseen, ordinary or extraordinary or structural or non-structural, in connection with the use, operation, maintenance, repair and reconstruction of the Leased Property by the Lessee, including the costs and expenses particularly set forth in this Lease. The Rent which the Lessee is obligated to pay shall be paid without notice or demand and without set-off (other than with respect to Periodic Site Rent as expressly provided in Section 4(b)), counterclaim, abatement, suspension, deduction or defense. (ii) Except as otherwise expressly provided, this Lease shall neither terminate nor shall the Lessee have any right to terminate this Lease or be entitled to abatement, suspension, deferment or reduction of any Rent which the Lessee is obligated to pay hereunder, nor shall the obligations hereunder of the Lessee be affected, by reason of (A) any defect in the condition, merchantability, design, construction, operation, durability, quality or fitness for use of the Leased Property or any portion thereof or the failure of the Leased Property to comply with all Applicable Laws, including any inability to use the Leased Property by reason of such non-compliance; (B) any defect in title or rights to the Leased Property, or the existence of any Liens with respect to the Leased Property or any part thereof; (C) any damage to, removal, abandonment, salvage, loss, theft, contamination of, scrapping or destruction of the Leased Property or any portion thereof; (D) the taking of the Leased Property or any portion thereof by condemnation, confiscation, requisition, eminent domain or otherwise; (E) any prohibition, limitation, restriction, prevention, interruption, cessation or curtailment of or interference with any use or possession of the Leased Property or any portion thereof, or any eviction by paramount title or otherwise; (F) the termination or loss of the Owner Trustee's interest under the Site Lease or any other lease, sublease, right-of-way, easement or other interest in personal or real property upon or to which any portion of the Leased Property is located, attached or appurtenant or in connection with which any portion of the Leased Property is used or which otherwise affects or may affect the Owner Trustee's ownership of or right to use the Leased Property or any portion thereof; (G) the inadequacy or incorrectness of the description of any portion of the Leased Property or the failure of this Lease to demise to the Lessee the Leased Property or any portion thereof; (H) the Lessee's acquisition or ownership of all or any part of the Leased Property otherwise than pursuant to an express provision of this Lease; (I) any change, waiver, extension, indulgence or other action or omission or breach in respect of any obligation or liability of or by the Owner Trustee, the Indenture Trustee or any Participant; (J) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceedings relating to the Lessee, the Owner Trustee, the Indenture Trustee, any Participant or any other Person, or any action taken with respect to this Lease by any trustee or receiver of the Lessee, the Owner Trustee, the Indenture Trustee, any Participant or any other Person, or by any court in any such 22 proceeding; (K) any setoff, counterclaim, recoupment, defense or other right or claim that the Lessee has or might have against any Person, including without limitation the Owner Trustee, the Indenture Trustee, any Participant or any vendor, manufacturer, contractor of or for the Leased Property for any reason whatsoever; (L) any failure on the part of the Owner Trustee or any other Person to perform or comply with any of the terms of this Lease, of any other Operative Agreement or of any other agreement or any breach of any representation or warranty of, or any act or omission of the Lessee, the Owner Trustee, the Indenture Trustee or any Participant under this Lease or any of the other Operative Agreements, or any claims, rights or remedies occurring or arising as a result of any other business dealings between or among the Lessee and any of the Owner Trustee, the Indenture Trustee and any Participant; (M) any invalidity or unenforceability or illegality or disaffirmance of this Lease against or by the Lessee or any provision hereof or any of the other Operative Agreements or any provision of any thereof or any lack of right, power or authority of the Lessee, the Owner Trustee, the Indenture Trustee or any Participant to enter into any Operative Agreement or any of the transactions contemplated thereby; (N) the impossibility or illegality of performance by the Lessee, the Owner Trustee, the Indenture Trustee, any Participant or any of them; (O) any action by any court, administrative agency or other Governmental Authority; or (P) any other cause or circumstances whether similar or dissimilar to the foregoing and whether or not the Lessee shall have notice or knowledge of any of the foregoing, it being the intention of the parties hereto that the obligations of the Lessee shall be absolute and unconditional and shall be separate and independent covenants and agreements and shall continue unaffected unless and until the covenants have been terminated pursuant to an express provision of this Lease. Each Rent payment made pursuant to this Lease by Lessee shall be final and the Lessee will not seek to recover all or any part of such payment from the Owner Trustee, the Indenture Trustee, any holder of the ClO2 Notes or any Participant for any reason whatsoever. If for any reason whatsoever this Lease shall be terminated in whole or in part by operation of law or otherwise except as specifically provided herein or as otherwise agreed, the Lessee nonetheless agrees to pay to the Owner Trustee or to whomsoever shall be entitled thereto, an amount equal to each Rent payment at the time such payment would have become due and payable in accordance with the terms hereof had this Lease not been terminated in whole or in part. The obligation of the Lessee in the immediately preceding sentence shall survive the expiration or termination of this Lease other than in accordance with its terms. Nothing contained in this Section 12(b) shall be construed to otherwise limit the right of the Lessee to make any claim it might have against the Owner Trustee or any other Person or to pursue such claim in such manner as the Lessee shall deem appropriate. The Lessee covenants that it will remain obligated under this Lease in accordance with its terms and will take no action to terminate, rescind or avoid this Lease, notwithstanding the bankruptcy, insolvency, reorganization, composition, readjustment, liquidation, dissolution, winding-up or other proceeding affecting the Owner Trustee or the Owner Participant or any assignee of the Owner Trustee or the Owner Participant or any other action with respect to this Lease which may be taken in any such proceeding by any trustee or receiver of the Owner Trustee or of any assignee of the Owner Trustee or by any court or any of the foregoing actions 23 which may be taken by or against any of the Owner Trustee's predecessors in interest in the Facility. Except as expressly provided herein, the Lessee waives all rights now or hereafter conferred by law (y) to quit, terminate, rescind or surrender this Lease or the Leased Property or any part thereof, or (z) to any abatement, suspension, deferment, return or reduction of the Rent. Section 13. CASUALTY OCCURRENCES; CONDEMNATION; EARLY TERMINATION; ETC. (a) Casualty Occurrence. In the event of a Casualty Occurrence, the Lessee ------------------- shall promptly and fully inform the Owner Trustee, the ClO2 Indenture Trustee and the Indenture Trustee in writing in regard thereto and shall, on the Casualty Termination Date, pay to the Owner Trustee (or, so long as the Secured Indebtedness shall not have been fully paid and satisfied, the Indenture Trustee) an amount equal to the sum of (i) the Casualty Value of the Facility determined as of the Casualty Termination Date, (ii) if the Casualty Termination Date is a Rent Payment Date, any Periodic Rent (other than Periodic Rent payable "in advance" on such date) and the Periodic Site Rent due on the Casualty Termination Date, and (iii) all other Supplemental Rent then due. Notwithstanding such Casualty Occurrence, the Lessee's obligation to pay Rent hereunder due and payable as to the Facility on or prior to the payment date of such Casualty Value shall continue. Upon receipt by the Owner Trustee (or, so long as the Secured Indebtedness shall not have been fully paid and satisfied, the Indenture Trustee) of such payments and all other sums then due and payable by the Lessee under this Lease and the other Operative Agreements and release of the Lien of the Indenture pursuant to Section 9.01 thereof, this Lease shall terminate, and the Owner Trustee will transfer to the Lessee all the Owner Trustee's right, title and interest, if any, in and to the Leased Property on an "as-is", "where-is" basis, without recourse or warranty, express or implied, except for a warranty against Lessor's Liens attributable to the Owner Trustee or Wilmington Trust Company. (b) Certain Government Requisitions. In the event that during the Term the ------------------------------- use of the Leased Property is requisitioned or taken by any Governmental Authority under the power of eminent domain or otherwise under circumstances which do not constitute a Casualty Occurrence in respect thereof, the Lessee's duty to pay Periodic Rent, Periodic Site Rent and Supplemental Rent shall continue for the duration of such requisition or taking. Unless a Default or Event of Default shall have occurred and be continuing, the Lessee shall be entitled to receive and retain for its own account all sums payable for any such period by such Governmental Authority as compensation for requisition or taking of possession. If a Default or Event of Default shall have occurred and be continuing, the Lessee shall be deemed to the extent of any such compensation so received to be the agent of the Owner Trustee in collecting and receiving the same and shall segregate and hold in trust and promptly remit any such compensation so received to the Owner Trustee for crediting against any sums then due and owing hereunder to the Owner Trustee, its successors and assigns. (c) Application of Payments with Respect to a Casualty Occurrence. The ------------------------------------------------------------- Owner Trustee shall receive the entire amount payable by any Governmental Authority or instrumentality or agency thereof or other Person with respect to a Casualty Occurrence (other 24 than proceeds of insurance maintained by the Lessee, the application of which shall be governed by Section 7 hereof). Such amount, after deducting all expenses, including attorneys' fees, incurred by the Owner Trustee in or as a result of such condemnation proceedings shall be applied promptly as follows: so much of such payments as shall not exceed the Casualty Value required to be paid by the Lessee pursuant to Section 13 shall be applied in reduction of the Lessee's obligation to pay such Casualty Value, if not already paid by the Lessee, or, if already paid by the Lessee and no Default or Event of Default exists, shall be applied to reimburse the Lessee for its payment of such Casualty Value. The balance, if any, of such payments shall be retained by the Owner Trustee, unless, prior to the Casualty Occurrence, the Lessee shall have irrevocably exercised (subject to Section 19(e)) its option to purchase the Facility, the Casualty Value for the Facility shall have been determined pursuant to Section 19(e) and the Lessee shall have paid in full all sums due and owing by the Lessee under this Lease or any of the other Operative Agreements, in which event the balance shall be paid to the Lessee. (d) Early Termination. So long as no Default or Event of Default shall have ----------------- occurred and be continuing, the Lessee may, upon not less than 180 days' prior written notice to the Owner Trustee (which notice shall not be revocable without the consent of the Owner Participant), terminate this Lease on or after September 30, 2006 (or, if earlier, the date referred to in clause (ii) of the second paragraph of Section 8(d)) or as of any succeeding Rent Payment Date if the Facility, in the good faith judgment of the Lessee as determined by the Board of Directors, shall have become uneconomic, obsolete or surplus to the needs of the Lessee so as to be no longer useful in the conduct of Lessee's business; provided that such notice shall be deemed to be invalid unless similar notice has been given under the corresponding provision of the ClO2 Lease Such written notice shall designate the date on which termination is to become effective, which shall be a date set forth on Schedule 3 hereto (the "Termination Date") and shall be accompanied by a certified copy of the resolutions of the Board of Directors making such determination and by an Officer's Certificate of the Lessee setting forth the determination that the Facility has become uneconomic, obsolete or surplus to the needs of Lessee and a statement in reasonable detail of the basis for such determination. For the purposes of this Section 13(d), interest rates payable by the Lessee on its indebtedness for borrowed money or finance charges payable by the Lessee in connection with the acquisition of its equipment under conditional sale contracts, leases or other arrangements for deferred payment shall be disregarded in the determination of any right of termination provided herein. Following the giving of such notice, the Lessee, as agent for the Owner Trustee, shall dispose of the Facility and transfer all of the Owner Trustee's right, title and interest in and to the Site Lease on the Termination Date for the best price obtainable unless the Owner Participant shall notify the Lessee that it elects to retain ownership of the Facility in accordance with and to the extent permitted by the last paragraph of this Section 13(d), provided that no such disposition shall be to the Lessee or any Affiliate of the Lessee; provided further that such disposition shall not be permitted unless a disposition of the ClO2 Facility in accordance with the corresponding provisions of the ClO2 Lease shall be made simultaneously under the same terms and conditions to the same parties The Lessee shall certify to the Owner Trustee in writing the amount of each bid so received and the name and address of the party submitting such bid promptly upon receipt thereof. The Owner Trustee may obtain bids, but shall be under no duty to solicit bids, inquire into the efforts of the Lessee to obtain bids or otherwise take any action in connection with arranging such dispositions. Prior to such 25 disposition and after such termination, the Facility shall not be used by the Lessee or any Affiliate of the Lessee. Any disposition pursuant to this Section 13(d) shall be on an "as-is", "where-is" basis, without recourse, representation or warranty, express or implied, except for a warranty against Lessor's Liens attributable to the Owner Trustee or Wilmington Trust Company. At such time as the Secured Indebtedness shall have been fully paid and satisfied, the Indenture Trustee shall release the Lien of the Indenture pursuant to Section 9.01 thereof. In disposing of the Facility, the Lessee shall take such action as the Owner Trustee shall reasonably request to terminate any contingent liability which the Owner Trustee or the Owner Participant might have arising out of such disposition. The Lessee shall remain liable under all provisions of this Lease (other than its obligation to pay Periodic Rent and Periodic Site Rent for the period after the Termination Date as of which Termination Value is determined) as if this Lease were in full force and effect, until such time as the Facility shall have been disposed of in accordance with the provisions of this Section 13(d). If, on the Termination Date, (w) the ClO2 Facility shall not have been sold pursuant to and in accordance with the provisions of Section 13(d) of the ClO2 Lease, (x) the Owner Participant shall not have elected to retain the Facility, (y) the Facility shall have not been sold pursuant to and in accordance with the provisions of this Section 13(d) or (z) the Lessee does not make all payments required pursuant to and in accordance with the provisions of this Section 13(d), Lessee's notice of termination shall be deemed to be withdrawn as of such date and this Lease shall continue in full force and effect with respect to the Facility and the Lessee shall pay the reasonable costs, expenses and liabilities incurred by the Owner Trustee, the Indenture Trustee and the Participants as a result of Lessee's having given such notice of termination. Any proceeds from the disposition of the Facility pursuant to this Section 13(d) shall be paid to and retained by the Owner Trustee (or, so long as the Secured Indebtedness shall not have been fully paid and satisfied, the Indenture Trustee). In the case of a disposition of the Facility pursuant to this Section 13(d), on the Termination Date, the Lessee shall pay to the Owner Trustee (or, so long as the Secured Indebtedness shall not have been fully paid and satisfied, the Indenture Trustee) (i) all payments of any Periodic Rent (other than Periodic Rent payable "in advance" on the Termination Date) and Periodic Site Rent through and including the Termination Date, (ii) the excess, if any, of (A) the Termination Value of the Facility as of the Termination Date, over (B) the net cash proceeds from the disposition of the Facility pursuant to this Section 13(d) (after the deduction of all costs and expenses of the Lessee, the Owner Trustee, the Indenture Trustee and the Participants that have not been previously paid by the Lessee in connection with such disposition) received by the Owner Trustee (or, so long as the Secured Indebtedness shall not have been fully paid and satisfied, the Indenture Trustee) and the Persons entitled thereto, (iii) an amount equal to the Make-Whole Amount, if any, in respect of the principal amount of the Notes to be prepaid in accordance with Section 2.10(b) of the Indenture and (iv) all other sums then due and payable by the Lessee under this Lease and the other Operative Agreements. Any amount of such net proceeds in excess of such payments by the Lessee shall be retained by the Owner Trustee or the Indenture Trustee, as the case may be. The Owner Trustee may, at any time prior to 15 days prior to the Termination Date, give written notice to Lessee and the Indenture Trustee that the Owner Trustee elects 26 irrevocably to terminate this Lease with respect to the Facility on the Termination Date. On the Termination Date the Owner Participant shall pay to the Indenture Trustee sufficient funds to enable the Owner Trustee to pay in full the aggregate unpaid principal amount of all Notes then outstanding, together with accrued interest thereon to such Termination Date, plus the Make-Whole Amount, if any, thereon and all other Secured Indebtedness due and payable on such Termination Date to the holders of the Notes under the Operative Agreements (but without relieving the Lessee of its obligations to make all payments of Supplemental Rent owed by the Lessee in connection therewith under the last sentence of Section 4(c)). Effective on full payment to the Indenture Trustee of all the foregoing amounts and on the Lessee's full payment of the installment of Periodic Rent (other than Periodic Rent payable "in advance" on the Termination Date) and Periodic Site Rent due on such Termination Date plus all other amounts of Rent due on or prior to such Termination Date including, without limitation, Supplemental Rent in the amount of the Make-Whole Amount, if any, due to the Indenture Trustee under the preceding sentence, this Lease shall terminate; provided that this Lease, notwithstanding anything else to the contrary contained herein, shall continue in full force and effect unless such amounts are paid in full. If, after giving an irrevocable notice, the Owner Participant fails to make the required payment on the Termination Date, the Owner Trustee shall have no further rights to make the election provided for under this paragraph. Section 14. ASSIGNMENT BY OWNER TRUSTEE. (a) Right to Assign. This Lease and all Rent and all other sums ---------------- due or to become due hereunder may be assigned as collateral security for the Secured Indebtedness in whole or in part by the Owner Trustee without the consent of the Lessee, but the Lessee shall be under no obligation to any assignee of the Owner Trustee (other than the Indenture Trustee) except upon written notice of such assignment from the Owner Trustee. Upon notice to the Lessee of any such assignment, the Rent and other sums payable by the Lessee which are the subject matter of the assignment shall be paid to or upon the written order of the assignee. Such notice is hereby given of the assignment of this Lease and all the Rent and other sums due and to become due under this Lease (other than Excepted Property) to the Indenture Trustee under and pursuant to the Indenture, and the Lessee agrees to make all payments of Rent hereunder (including, without limitation, Rent constituting Excepted Property) in accordance with the provisions of Section 4. (b) Obligation and Right of Assignee. Any assignee pursuant to --------------------------------- this Section 14 shall not be obligated to perform any duty, covenant or condition required to be performed by the Owner Trustee under any of the terms hereof, but on the contrary, the Lessee and the Owner Trustee by their respective executions hereof each acknowledge and agree that notwithstanding any such assignment each and all of such duties, covenants or conditions required to be performed by the Owner Trustee shall survive any such assignment and shall be and remain the sole liability of the Owner Trustee. Without limiting the foregoing, the Lessee acknowledges and agrees that the rights of such assignee in and to the Rent shall not be subject to any abatement whatsoever, and shall not be subject to any defense, setoff, counterclaim or recoupment or reduction of any kind for any reason whatsoever whether by reason of failure of or defect in the Owner Trustee's title or any interruption from whatsoever cause in the use, operation or possession of the Leased Property or any part thereof or any damage to or loss or 27 destruction of the Leased Property or any part thereof or by reason of any other indebtedness or liability, howsoever and whenever arising, of the Owner Trustee or of any other Person to the Lessee or to any other Person, or for any cause whatsoever, it being the intent hereof that the Lessee shall be unconditionally and absolutely obligated to pay such assignee all of the Rent, subject only to the provisions of the Indenture relating to Excepted Property. (c) Amendments; Exercise of Remedies. Unless and until the Lessee --------------------------------- shall have received written notice from the Indenture Trustee that the Lien of the Indenture has been released (i) no amendment or modification of, or waiver by or consent or approval of the Owner Trustee in respect of, any of the provisions of this Lease shall be effective unless the Indenture Trustee shall have joined in such amendment, modification, waiver or consent or shall have given its prior written consent thereto, and (ii) except as otherwise provided in the Indenture, the Indenture Trustee shall have the sole right to exercise all rights, privileges and remedies and to make elections, demands or the like and to take any other discretionary action (either in its own name or in the name of the Owner Trustee for the use and benefit of the Indenture Trustee) which by the terms of this Lease or by Applicable Law are permitted or provided to be exercised by the Owner Trustee. Section 15. DEFAULTS. (a) Events of Default. The following events shall constitute ------------------ Events of Default (whether any such event shall be voluntary or involuntary or come about or be effected by operation of law or pursuant to or in compliance with any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (i) The Lessee shall default in the payment when due of any installment of Periodic Rent or of Periodic Site Rent or of any Casualty Value or Termination Value payable pursuant to Section 13 or Early Purchase Price payable pursuant to Section 19 and such default shall continue for a period of five Business Days; or (ii) The Lessee shall default in the payment of any Supplemental Rent (other than Casualty Value, Termination Value or Early Purchase Price) and such default shall continue for a period of five Business Days after written notice thereof shall have been received by the Lessee; or (iii) The Lessee shall default in the observance or performance of any covenant required to be observed or performed by the Lessee under Section 6.2, Section 6.3 or Section 10 (which in the case of a default under Section 10 shall have been continuing for a period of five Business Days) or shall default in the maintenance of the insurance coverage required by Section 7 or shall make or permit any unauthorized assignment or transfer of this Lease, or of the Lessee's interest in the Leased Property, or any portion thereof; or (iv) The Lessee shall default in the observance or performance of any other covenant required to be observed or performed by the Lessee hereunder or under 28 any other Lessee Agreement and such default shall continue for more than 30 days after the earlier of (A) the day on which a Responsible Officer of the Lessee first obtains knowledge of such default, or (B) the day on which written notice thereof shall have been received by the Lessee, or such longer period, not to exceed 90 days, as may be necessary to cure any such default that can be cured within such period, so long as the Lessee is diligently proceeding to cure such default and such default does not involve any material danger of the sale, forfeiture or loss of any part of the Leased Property; or (v) Any representation or warranty made by the Lessee herein or in any other Lessee Agreement (except the Tax Indemnity Agreement) or in any statement or certificate furnished by the Lessee to the Owner Trustee or the Indenture Trustee or any Participant in connection with the transactions contemplated by the Operative Agreements or furnished by the Lessee pursuant hereto proves untrue in any material respect as of the date of issuance or making thereof; or (vi) A custodian, liquidator, trustee, receiver or similar official is appointed for the Lessee or any Subsidiary or for the major part of the Property of either and is not discharged within 60 days after such appointment; or (vii) The Lessee or any Material Subsidiary becomes insolvent or bankrupt, is generally not paying its debts as they become due or makes an assignment for the benefit of creditors, or the Lessee or any Subsidiary applies for or consents to the appointment of a custodian, liquidator, trustee, receiver or similar official for the Lessee, such Subsidiary or for the major part of the Property of any of them; or (viii) Bankruptcy, reorganization, arrangement or insolvency proceedings, or other proceedings for relief under any bankruptcy or similar law or laws for the relief of debtors, are instituted by or against the Lessee or any Subsidiary and, if instituted against the Lessee or any Subsidiary, are consented to or are not dismissed within 60 days after such institution; or (ix) The Lessee, or any Person on behalf of the Lessee, shall contest or deny the validity or enforceability of this Lease or the other Lessee Agreements or its obligations hereunder or thereunder; or (x) An order or decree requiring a split-up or divestiture of the Lessee is outstanding against the Lessee and such order or decree remains unstayed and in effect for more than 30 consecutive days. (xi) An Event of Default, as defined under the terms and conditions of the ClO2 Lease, has occurred and is continuing; (b) Remedies. Upon the occurrence of any Event of Default and at any time thereafter so long as the same shall be continuing, the Owner Trustee (or, so long as the Secured Indebtedness shall not have been fully paid and satisfied, the Indenture Trustee) may, at its option, declare this Lease to be in default by a written notice to the Lessee (provided that no such written notice shall be required with respect to any Event of Default under Section 15(a)(vi), (vii) 29 or (viii) or if the ClO2 Lease has been declared or deemed declared to be in default) and at any time thereafter, so long as the Lessee shall not have remedied all outstanding Events of Default, the Owner Trustee (or, so long as the Secured Indebtedness shall not have been fully paid and satisfied, the Indenture Trustee) may do one or more of the following as the Owner Trustee or the Indenture Trustee, as the case may be, in its sole discretion shall elect, to the extent permitted by, and subject to compliance with any mandatory requirements of, Applicable Law then in effect: (i) the Owner Trustee or the Indenture Trustee, as the case may be, may proceed by appropriate court action or actions, either at law or in equity, to enforce performance by the Lessee of the applicable covenants and terms of this Lease or to recover damages for the breach thereof; (ii) the Owner Trustee or the Indenture Trustee, as the case may be, may, upon 10 days prior written notice to the Lessee, (provided that no such written notice shall be required with respect to any Event of Default under Section 15(a)(vi), (vii) or (viii)) terminate this Lease, and, whether or not this Lease has been so terminated, enter upon the Site and take immediate possession of the Facility and the Site and remove all or any part of the Facility by summary proceedings or otherwise, all without liability to the Lessee for or by reason of such entry or taking of possession, whether for the restoration of damage to property caused by such taking or otherwise; (iii) the Owner Trustee or the Indenture Trustee, as the case may be, may sell the Facility and its interest in the Site Lease Property or any part thereof at public or private sale, as the Owner Trustee or the Indenture Trustee, as the case may be, may determine, free and clear of any rights of the Lessee and without any duty to account to the Lessee with respect to such sale or for the proceeds thereof (except to the extent required by paragraph (vi) below if the Owner Trustee or the Indenture Trustee, as the case may be, elects to exercise its rights under said paragraph), in which event the Lessee's obligation to pay Periodic Rent and Periodic Site Rent hereunder for the period commencing on the date of such sale shall terminate (except to the extent that Periodic Rent or Periodic Site Rent, as the case may be, is to be included in computations under paragraph (v) or paragraph (vi) below if the Owner Trustee or the Indenture Trustee, as the case may be, elects to exercise its rights under either of said paragraphs); (iv) the Owner Trustee or the Indenture Trustee, as the case may be, may hold, keep idle or lease to others the Leased Property or any part thereof, as the Owner Trustee or the Indenture Trustee, as the case may be, in its sole discretion may determine, free and clear of any rights of the Lessee and without any duty to account to the Lessee with respect to such action or inaction or for any proceeds with respect thereto, except that the Lessee's obligation to pay Periodic Rent and Periodic Site Rent for the period commencing when the Lessee shall have been deprived of possession pursuant to this Section 15 shall be reduced by the net proceeds, if any, received by the Owner Trustee or the Indenture Trustee, as the case may be, from leasing the Leased Property or such part to any person other than the Lessee for any period during the Term; 30 (v) whether or not the Owner Trustee or the Indenture Trustee, as the case may be, shall have exercised, or shall thereafter at any time exercise, any of its rights under paragraph (i), (ii), (iii) or (iv) above, the Owner Trustee or the Indenture Trustee, as the case may be, by written notice to the Lessee specifying a payment date which shall be not earlier than 10 days after the date of such notice, may demand that the Lessee pay to the Owner Trustee or the Indenture Trustee, as the case may be, and the Lessee shall pay to the Owner Trustee or the Indenture Trustee, as the case may be, on the payment date specified in such notice, as liquidated damages for loss of a bargain and not as a penalty (in lieu of the Periodic Rent and Periodic Site Rent due after the Rent Payment Date coinciding with or immediately preceding the payment date specified in such notice), any unpaid Periodic Rent and Periodic Site Rent due for all periods up to and including the Rent Payment Date next succeeding the date of such notice and any and all unpaid Supplemental Rent due hereunder before or during the exercise of remedies hereunder, including, without limitation, all legal fees and other costs and expenses incurred by the Owner Trustee or the Indenture Trustee, as the case may be, the Indenture Trustee or any Participant by reason of the occurrence of any Event of Default or the exercise of remedies with respect thereto, plus whichever of the following amounts the Owner Trustee or the Indenture Trustee, as the case may be, in its sole discretion, shall specify in such notice (together with interest on such amount at the Late Rate from the payment date specified in such notice to the date of actual payment): (A) an amount equal to the excess, if any, of the Casualty Value (plus interest at the Late Rate on such Casualty Value from the Rent Payment Date as of which such Casualty Value was calculated to the payment date specified in such notice) computed as of the Rent Payment Date coinciding with or immediately preceding the payment date specified in such notice, over the fair market rental value (computed as hereafter in this Section 15(b) provided) of the Facility for the remainder of the then current Term after discounting such fair market rental value to present worth as of the payment date specified in such notice at a discount rate equal to the Specified Rate in effect on the date of such notice, compounded semiannually on the Rent Payment Dates; or (B) an amount equal to the excess, if any, of the Casualty Value (plus interest at the Late Rate on such Casualty Value from the Rent Payment Date as of which such Casualty Value was calculated) computed as of the payment date specified in such notice over the fair market sales value of the Facility (computed as hereafter in this Section 15(b) provided) as of the payment date specified in such notice; (vi) if the Owner Trustee or the Indenture Trustee, as the case may be, shall have sold the Facility and its interest in the Site Lease Property pursuant to paragraph (iii) above, the Owner Trustee or the Indenture Trustee, as the case may be, in lieu of exercising its rights under paragraph (v) above, may, if it shall so elect, demand that the Lessee pay to the Owner Trustee or the Indenture Trustee, as the case may be, and the Lessee shall pay to the Owner Trustee or the Indenture Trustee, as the case may be, as liquidated damages for loss of a bargain and not as a penalty, any unpaid Periodic Rent and Periodic Site Rent due for periods up to and including the Rent Payment Date next following the date of such sale and any and all unpaid Supplemental Rent due hereunder before or during the exercise of remedies hereunder, including, without limitation, all legal fees and other costs and expenses incurred by the Owner Trustee, the 31 Indenture Trustee or any Participant by reason of the occurrence of any Event of Default or the exercise of remedies with respect thereto, plus the amount of any deficiency between the net after tax cash out-of-pocket proceeds of such sale and the Casualty Value of the Facility, computed as of the Rent Payment Date next following the date of such sale, together with interest at the Late Rate on the amount of such deficiency from the Rent Payment Date as of which such Casualty Value is computed until the date of actual payment; (vii) in lieu of exercising its rights under paragraph (v) above, the Owner Trustee or the Indenture Trustee, as the case may be, may by notice to the Lessee require the Lessee to pay on demand to the Owner Trustee or the Indenture Trustee, as the case may be, and the Lessee hereby agrees that it will so pay to the Owner Trustee or the Indenture Trustee, as the case may be, as liquidated damages for loss of a bargain and not as a penalty (in lieu of the Periodic Rent and Periodic Site Rent due after the Rent Payment Date next succeeding the date of such notice) any unpaid Periodic Rent and Periodic Site Rent due for all periods up to and including the Rent Payment Date next succeeding the date of such notice and any and all unpaid Supplemental Rent due hereunder before or during the exercise of remedies hereunder, including, without limitation, all legal fees and other costs and expenses incurred by the Owner Trustee, the Indenture Trustee or any Participant by reason of the occurrence of any Event of Default or the exercise of remedies with respect thereto, plus an amount equal to Casualty Value computed as of the Rent Payment Date next succeeding the date of such notice (or if such date is a Rent Payment Date, then computed as of such Rent Payment Date), together with interest, to the extent permitted by law, at the Late Rate on such amount of Casualty Value from the date as of which such Casualty Value was computed to the date of actual payment; and upon such payment of liquidated damages and the payment of all other Rent then due hereunder, the Owner Trustee or the Indenture Trustee, as the case may be, shall assign and transfer the Facility and its interest in the Site Lease Property to Lessee, as-is, where-is, without recourse or warranty, express or implied, except for a warranty against Lessor's Liens attributable to the Owner Trustee or Wilmington Trust Company, and the Owner Trustee or the Indenture Trustee, as the case may be, shall execute and deliver such documents evidencing such assignment and transfer as the Lessee, at its sole cost and expense, shall reasonably request. In addition, promptly after the Lessee makes the payment of Casualty Value as aforesaid, the fair market sales value of the Facility as of the date of which Casualty Value was determined will be determined. If the fair market sales value of the Facility as of such date is determined to exceed the Casualty Value paid pursuant to the first sentence of this paragraph (vii), the Lessee shall, within 30 days after such determination, pay the amount of such excess to the Owner Trustee or the Indenture Trustee, as the case may be; and (viii) the Owner Trustee may exercise any other right or remedy which may be available to it under Applicable Law. In addition, the Lessee shall be liable, except as otherwise provided above, for any and all unpaid Rent due hereunder before or during the exercise of any of the foregoing remedies and for all legal fees and other costs and expenses incurred by the Owner Trustee, the Indenture 32 Trustee or any Participant by reason of the occurrence of any Event of Default or the exercise of the remedies with respect thereto, including all costs and expenses incurred in connection with the surrender of the Leased Property or redelivery of the Facility in accordance with Section 16 hereof or in placing the Leased Property in the condition required by said Section 16 and any premium payable on the Notes. For the purpose of paragraphs (v) and (vii) above, the "fair market rental value" or the "fair market sales value" of the Leased Property shall mean such value as determined by the Owner Trustee or the Indenture Trustee, as the case may be. Such fair market sales value and such fair market rental value shall be determined on the basis specified in Section 19, except that the assumptions set forth in clause (i) of Section 19(a) shall not be made (unless the Facility is still located at the Site, in which case the then remaining Site Lease Term shall be considered), but such determination shall instead be made on an "as-is, where-is" basis, taking into account the actual condition and location of the Facility. At any sale pursuant to this Section 15, any Participant may bid for and purchase the Facility and the Owner Trustee's interest in the Site Lease Property. To the extent permitted by Applicable Law, the Lessee hereby waives any rights now or hereafter conferred by statute or otherwise which may require the Owner Trustee or the Indenture Trustee, as the case may be, to sell, lease or otherwise use the Leased Property in mitigation of the Lessee's damages as set forth in this Section 15 or which may otherwise limit or modify any of the Owner Trustee's or the Indenture Trustee's, as the case may be, rights and remedies in this Section 15. (c) Simultaneous Exercise of Remedies. Pursuant to the terms of --------------------------------- the Intercreditor Agreement, Owner Trustee or the Indenture Trustee, as the case may be, shall not exercise any of its rights or remedies as provided in Section 15(b) unless the same rights and remedies are simultaneously being exercised under the ClO2 Lease. If such rights or remedies under the ClO2 Lease are not being exercised, any such exercise under this Agreement shall be deemed to be of no force or effect. Section 16. RETURN OF FACILITY TO OWNER TRUSTEE. (a) Surrender at Site. In the event that the Facility has neither ----------------- been sold to a third party pursuant to Section 13 nor purchased by the Lessee pursuant to Section 19, the Lessee will at its own expense surrender possession of the Leased Property to the Owner Trustee or (if the Secured Indebtedness has not been fully paid and satisfied) the Indenture Trustee, at the Site at the end of the Term hereof, including, for the avoidance of doubt, a return of the Facility on account of the exercise of remedies pursuant to Section 15(b) hereof. At the time of such surrender, (i) the Lessee shall also surrender to the Owner Trustee one copy of the Plans and all other logs, catalogs, software, documents, instruments, plans, maps, surveys, blueprints, diagrams, schematics, property casualty inspection reports, fire and boiler inspection reports, as built diagrams, specifications, manuals, technical drawings and other materials relating to the Leased Property and the Technology; (ii) all equipment which is leased under this Facility Lease shall be in such condition that it is capable of performing the task for which it was originally 33 intended at its design rating or capacity; furthermore, it shall be capable of immediately being used by a second user without the need for major overhaul, refurbishment or replacement for a period of not less than ten (10) years from the expiration of the Basic Term, normal routine maintenance procedures and associated expenses excepted; (iii) all equipment which is part of the Facility shall be properly lubricated and all surfaces and components shall be properly coated with a protective coating from the elements; (iv) the Leased Property shall be free from all Liens except those for which the Owner Trustee or the Owner Participant is responsible under Section 8 of the Participation Agreement, Liens described in clauses (f), (g) and (h) of the definition of "Permitted Encumbrances" and the exceptions to title described in Schedule B to the Title Policy issued on the Closing Date to the Owner Trustee; (v) the Facility shall be immediately capable of being operated at the Site by an operator other than the Lessee or any Affiliate of the Lessee without the need for any Alterations; (vi) the Facility shall be in compliance in all material respects with all then existing Applicable Laws governing its use, operation and sale; (vii) any Hazardous Materials, other than those used in the normal operation of the Facility and used and stored in compliance with Environmental Laws, shall have been removed from the Leased Property by a licensed waste disposal firm, provided that upon the written request of the Owner Trustee, the Lessee shall also remove Hazardous Materials used in the normal operation of the Facility which have been used and stored in compliance with Environmental Laws to the extent that such Hazardous Materials are not useable in the normal operation of the Facility or salable; and (viii) the Leased Property shall be in at least the operating condition required by the terms hereof, including, without limitation, the provisions of Section 8(a). (b)Engineer's Report. Unless the Lessee has exercised its option ----------------- to purchase the Facility and has paid all amounts due and owing in connection therewith, not less than 90 days and not more than 180 days prior to the last day of the Term (or the date on which the Facility is otherwise returned to the Owner Trustee or the Indenture Trustee in the event that the Secured Indebtedness has not been fully paid and satisfied), the Lessee shall provide to the Owner Trustee, the Owner Participant, the ClO//2// Indenture Trustee and the Indenture Trustee (in the event that the Secured Indebtedness has not been fully paid and satisfied) an inspection report prepared by a qualified independent engineer selected by the Lessee and reasonably satisfactory to the Owner Trustee, the Owner Participant, and the Indenture Trustee (in the event that the Secured Indebtedness has not been fully paid and satisfied) certifying whether or not the Facility is (i) in good working order, (ii) capable of performing substantially at the original manufacturer's performance specifications at the time the Facility was originally designed and (iii) capable of performing at its Design Capacity. In the event that such report or the report to 34 be given pursuant 16(b) of the ClO//2// Lease indicates that the Facility or the ClO//2// Facility, as the case may be, does not satisfy the requirements of clause (i), (ii) or (iii) of the preceding sentence or the corresponding clauses in Section 16(b) of the ClO//2// Lease, the Owner Trustee or the Indenture Trustee (in the event that the Secured Indebtedness has not been fully paid and satisfied) may elect either (A) to deem that the Leased Property is not returned until the earlier of (1) the date on which the Facility is properly repaired to satisfy such requirements and (2) one year after the last day of the Term, in which case the Lessee shall continue to be obligated under all the terms and conditions of this Lease (including without limitation the provisions relating to insurance, indemnification and risk of loss), except that the Lessee shall not be required to pay Periodic Rent and Periodic Site Rent after the expiration of the Basic Term or any Renewal Term, as the case may be, but the Lessee shall pay to the Owner Trustee or the Indenture Trustee, as the case may be, as liquidated damages, and not as a penalty, for the failure of the Lessee to return the Leased Property to the Owner Trustee or the Indenture Trustee, as the case may be, at the expiration of the Term as required by the provisions of this Section 16, an amount equal to 120% of the daily equivalent of (y) the arithmetic average of the Periodic Rent during the Basic Term, or (z) if the failure to return occurs after a Renewal Term, the arithmetic average of the Periodic Rent during such Renewal Term, or (B) to terminate this Lease, in which case the Lessee shall pay to the Owner Trustee or the Indenture Trustee, as the case may be, the Termination Value; provided that any such election by the Owner Trustee or Indenture Trustee, as applicable, under this Section shall be deemed to be null and void unless the same election is made the ClO//2// Owner Trustee or ClO//2// Indenture Trustee, as applicable, under Section 16(b) of the ClO//2// Lease. If the Owner Trustee or the Indenture Trustee, as the case may be, elects the option specified in clause (A) above and the Facility or ClO//2// Facility under the ClO//2// Lease, if applicable, has not been properly repaired one year after the last day of the Term, the Lessee shall pay to the Owner Trustee or the Indenture Trustee, as the case may be, the Termination Value for the Facility and title to the Facility shall vest in the Lessee upon such payment. (c) Environmental Report. Unless the Lessee has exercised its option - --------------------- to purchase the Facility and has paid all amounts due and owing in connection therewith, not less than 90 days and not more than 180 days prior to the last day of the Term (or the date on which the Facility is otherwise returned to the Owner Trustee or the Indenture Trustee, as the case may be), the Lessee shall provide to the Owner Trustee, the Owner Participant, the ClO//2// Indenture Trustee and the Indenture Trustee (in the event that the Secured Indebtedness has not been fully paid and satisfied) an inspection report prepared by a reputable environmental consulting firm selected by the Owner Trustee and reasonably satisfactory to the Owner Participant or the Indenture Trustee, as the case may be, certifying whether or not the Site and the Facility are in compliance with CERCLA, RCRA and in all material respects with all other then existing Environmental Laws. In the event that such report or the report to be given under Section 16(c) of the ClO//2// Lease indicates that either the Site, the Facility, the ClO//2// Site or the ClO//2// Facility, as the case may be, is not in compliance with all then existing Environmental Laws or that Remedial Action could be required at the Leased Property, the Owner Trustee or the Indenture Trustee, as the case may be, may elect either (A) to deem that the Leased Property is not returned until the earlier of (1) the date on which the Site and the Facility are in compliance with all then existing Environmental Laws and (2) one year after the last day of the Term, in which case the Lessee shall continue to be obligated under all the terms and conditions of this Lease (including without limitation the provisions relating to insurance, indemnification and risk of loss), except (c) 35 that the Lessee shall not be required to pay Periodic Rent and Periodic Site Rent after the expiration of the Basic Term or any Renewal Term, as the case may be, but the Lessee shall pay to the Owner Trustee or the Indenture Trustee, as the case may be, as liquidated damages, and not as a penalty, for the failure of the Lessee to return the Leased Property to the Owner Trustee or the Indenture Trustee, as the case may be, at the expiration of the Term as required by the provisions of this Section 16, an amount equal to 120% of the daily equivalent of (y) the arithmetic average of the Periodic Rent during the Basic Term, or (z) if the failure to return occurs after a Renewal Term, the arithmetic average of the Periodic Rent during such Renewal Term, or (B) to terminate this Lease, in which case the Lessee shall pay to the Owner Trustee or the Indenture Trustee, as the case may be, the Termination Value for the Facility and title to this Facility shall vest in the Lessee upon such payment; provided that any such election by the Owner Trustee or Indenture Trustee, as applicable, under this Section shall be deemed to be null and void unless the same election is made by ClO//2// Owner Trustee or ClO//2// Indenture Trustee, as applicable under Section 16(c) of the ClO//2// Lease. If the Owner Trustee or the Indenture Trustee, as the case may be, elects the option specified in clause (A) above and the Facility or the ClO//2// Facility under the ClO//2// Lease, if applicable, has not been properly repaired one year after the last day of the Term, the Lessee shall pay to the Owner Trustee or the Indenture Trustee, as the case may be, the Termination Value for the Facility. (d) Storage. Following the surrender of the Facility as -------- provided in Section 16(a) above, upon the written request of the Owner Trustee or the Indenture Trustee, as the case may be, the Lessee agrees to store the Facility at the Site in the condition requested by the Owner Trustee or the Indenture Trustee, as the case may be, at the expense of the Lessee for a period of one year. The Owner Trustee or the Indenture Trustee, as the case may be, may during the storage period obtain bids for purchase of the Facility on an "as-is", "where is" basis, and at its sole option, may elect to accept or reject any such bids for the Facility. The Lessee shall continue to be obligated under all the terms and conditions of this Lease (including without limitation the provisions relating to insurance (to the extent such insurance is commercially reasonably available to the Lessee), indemnification and risk of loss (to the extent the insurance is commercially reasonably available to the Lessee)) during the storage period set forth above, except that, the Lessee shall not be required to pay Periodic Rent and Periodic Site Rent after the expiration of the Basic Term or any Renewal Term, as the case may be. Neither the Lessee nor any Affiliate shall be entitled to operate on a commercial basis the Facility during such period. The Lessee shall have such access to the Leased Property as shall be reasonably necessary to enable the Lessee to comply with its obligations under this Section 16(d). Section 17. [INTENTIONALLY LEFT BLANK] Section 18. FINANCIAL STATEMENTS AND REPORTS; INSPECTION AND CERTIFICATES. (a) Reports and Rights of Inspection. The Lessee will keep, --------------------------------- and will cause each Subsidiary to keep, proper books of record and account in which full and correct entries will be made of all dealings or transactions of or in relation to the business and affairs of the Lessee or such Subsidiary, in accordance with generally accepted accounting principles applicable to the Lessee or such Subsidiary, as the case may be, in any such case consistently 36 applied (except for changes disclosed in the financial statements furnished to the Owner Trustee, the Indenture Trustee, each holder of the ClO//2// Notes and each Participant pursuant to this Section 18(a) and concurred in by the independent public accountants referred to in Section 18(a)(ii) hereof), and will furnish to the Owner Trustee, the Indenture Trustee, each holder of the ClO//2// Notes and each Participant (in duplicate if so specified below or otherwise requested): (i) Quarterly Statements. As soon as available and in any event --------------------- within 60 days after the end of each quarterly fiscal period(except the last) of each fiscal year, duplicate copies of: (A) consolidated balance sheets of the Lessee as of the close of such quarter setting forth in comparative form the amount as of the close of the corresponding period of the preceding fiscal year and the amount as of the close of said preceding fiscal year, and (B) consolidated statements of income and cash flows of the Lessee for such quarterly period and the year to date period setting forth in comparative form the amount for the corresponding periods of the preceding fiscal year, all in reasonable detail and certified as complete and correct, by an authorized financial officer of the Lessee; (ii) Annual Statements. As soon as available and in any event within ------------------ 120 days after the close of each fiscal year of the Lessee,duplicate copies of: (A) consolidated balance sheets of the Lessee as of the close of such fiscal year, and (B) consolidated statements of income and cash flows of the Lessee for such fiscal year, in each case setting forth in comparative form the consolidated figures for the preceding fiscal year, all in reasonable detail and accompanied by an opinion thereon of a firm of independent public accountants of recognized national standing selected by the Lessee to the effect that the consolidated financial statements have been prepared in accordance with GAAP consistently applied (except for changes in application in which such accountants concur) and present fairly the financial condition and results of operations of the Lessee and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards and accordingly, includes such tests of the accounting records and such other auditing procedures as were considered necessary in connection therewith; (iii) SEC and Other Reports. Promptly upon their becoming available, ---------------------- one copy of each financial statement, report, notice or proxy statement sent by the Lessee to all holders of Equity Interests in the Lessee generally and of each regular or periodic 37 report, and any registration statement or prospectus filed by the Lessee or any Subsidiary with any securities exchange or the Securities and Exchange Commission or any successor agency, and copies of any orders in any proceedings to which the Lessee or any of its Subsidiaries is a party, issued by any Governmental Authority, Federal or state, having jurisdiction over the Lessee or any of its Subsidiaries, other than reports or licenses granted by any such Governmental Authority with respect to the timber; (iv) Notice of Default or Claimed Default. Immediately upon a Responsible ------------------------------------- Officer of the Lessee becoming aware of the existence of a Default or an Event of Default or that the Owner Trustee has given notice or taken any other action with respect to an Event of Default or a claimed default under this Lease, or a default in the payment of the principal, premium, if any, sinking fund or interest with respect to indebtedness for borrowed money, or an event of default with respect to any indebtedness for borrowed money or in the instrument under which such indebtedness is outstanding permitting the holders thereof to accelerate the maturity thereof, a written notice specifying the nature of the Default, Event of Default, default or claimed default and any such notice given or action taken by the Owner Trustee and what action the Lessee is taking or proposes to take with respect thereto; (v) ERISA Reporting. Prompt written notice, and in any event within ten ---------------- days after a Responsible Officer of the Lessee learns of its occurrence, of the following and the action the Lessee has taken, is taking or proposes to take with respect thereto and, when known, any action taken or threatened by the Internal Revenue Service, Department of Labor or the PBGC with respect thereto: (A) a Reportable Event with respect to any employee benefit plan; (B) the institution of any steps by the Lessee, any ERISA Affiliate, the PBGC or any other Person to terminate any employee benefit plan pursuant to Sections 4041(c) or 4042 of ERISA; (C) the institution of any steps by the Lessee or any ERISA Affiliate to withdraw from any Multiemployer Plan, within the meaning of ERISA which would result in a material adverse effect on the business, profits or financial condition of the Lessee and its Subsidiaries taken as a whole; (D) a "prohibited transaction" within the meaning of Section 406 of ERISA in connection with any employee benefit plan which would result in a material adverse effect on the business or financial condition of the Lessee; or (E) any increase in the liability of the Lessee with respect to any post-retirement welfare benefits which would result in a material adverse effect on the business or financial condition of the Lessee; and (vi) Notice of Litigation. Prompt written notice, and in any event within --------------------- five Business Days after a Responsible Officer of the Lessee first obtains knowledge thereof, with respect to the institution of any suit or proceeding or Environmental Claim against the Lessee or any Subsidiary thereof which if determined adversely could, individually or in the aggregate with other suits and proceedings, reasonably be expected to have a material adverse effect on the business, profits, Properties or financial condition of the Lessee. (vii) Information in Respect of Damages and Taxes. Such information and ------------------------------------------- data as the Owner Trustee, the Indenture Trustee, any holder of the ClO//2// Notes or 38 any Participant may from time to time reasonably request as to location and the existence and status of any claims for damages (whether against the Leased Property or against the Owner Trustee or the Lessee) arising out of the use, operation or condition of the Leased Property, the taxes of the nature provided to be paid by the Lessee under Section 7 of the Participation Agreement which have been assessed and the amount of such taxes paid, and such other data pertinent to the Leased Property and the condition, use, repair and operation thereof as any such party from time to time may reasonably request. Without limiting the foregoing, the Lessee agrees that, without any such request, it will furnish the Owner Trustee, the Indenture Trustee, each holder of the ClO//2// Notes and each Participant with prompt written notice of (A) any claim for damages arising out of the use, operation or condition of the Leased Property if the amount of such claim exceeds U.S.$1,000,000 and (B) any damage, loss, theft or destruction, partial or complete, of any of the Leased Property, if the amount thereof exceeds U.S.$2,500,000; (viii) Eau Claire Facility. The Lessee shall promptly, but in -------------------- any case within five (5) Business Days, after a Responsible Officer of the Lessee receives written notice of any failure of Plainwell Paper Company to fulfill its obligation to make ongoing contributions with respect to its obligations for the Eau Claire Facility under the Paper Industry Union-Management Pension Fund resulting from the sale of the Tissue Business to Plainwell Paper Company (which failure has not been corrected within the applicable grace period), notify the Owner Trustee and the Indenture Trustee in writing of the receipt of any such notice; and (ix) Requested Information. With reasonable promptness, such ---------------------- other data and information as the Owner Trustee, the Indenture Trustee, any holder of the ClO//2// Notes or any Participant may reasonably request including, without limitation, any information required to be provided to such Note Purchaser or a prospective purchaser of the Notes by Rule 144A(d)(4) under the Securities Act. (b) Officer's Certificates. Within the periods provided ----------------------- in Sections 18(a) (i) and 18(a)(ii), the Lessee shall deliver to the Owner Trustee, the Indenture Trustee and each Participant a certificate signed by the chief financial officer of the Lessee stating that such officer has reviewed the provisions of this Lease and the other Operative Agreements and setting forth: (i) the information and computations (in sufficient detail) required in order to establish whether the Lessee was in compliance with the requirements of Section 6.3, at the end of the period covered by the financial statements then being furnished and (ii) whether there existed as of the date of such financial statements and whether, to the best of his knowledge, there exists on the date of the certificate or existed at any time during the period covered by such financial statements any Default or Event of Default and, if any such condition or event exists on the date of the certificate, specifying the nature and period of existence thereof and the action the Lessee is taking and proposes to take with respect thereto. (c) [Intentionally Omitted]. --------------------- (d) Property Report. Each set of financial statements --------------- of the Lessee delivered pursuant to Section 18(a)(ii) will be accompanied by a report of an officer of the Lessee familiar 39 with the status and condition of the Leased Property which describes the status, condition and location of the Leased Property, describing any Alteration or repair to the Facility having a cost exceeding U.S.$1,000,000, any warranty claim in an amount exceeding U.S.$1,000,000 against any supplier of goods or services in connection with the Leased Property, any period of 45 or more consecutive days during which the Facility was not in operation and any violation of governmental rules or regulations involving the Facility or the operation thereof which could reasonably be expected to have a Material Adverse Effect, in each case during the period since the previous report (or, in the case of the first such report, since the date of this Lease), and describing the circumstances thereof, and stating whether any Leased Property is then in the condition required by this Lease and, if not, what the Lessee is doing or intends to do in connection therewith. (e) Inspection. Without limiting the foregoing, the Lessee will permit the ----------- Owner Trustee, the Indenture Trustee, any holder of the ClO//2// Notes and each Participant (or such Persons as the Owner Trustee, the Indenture Trustee, such holder or such Participant may designate) to visit and inspect the Leased Property, to examine all their books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers, employees, and independent public accountants (and by this provision the Lessee authorizes said accountants to discuss with the Owner Trustee, the Indenture Trustee, such holder such Participant or such Person so designated the finances and affairs of the Lessee and its Subsidiaries with or without an officer or employee of the Lessee or any of its Subsidiaries being present) all at such reasonable times and as often as may be reasonably requested; provided that unless a Default or Event of Default shall have occurred and shall be continuing, the Owner Trustee, the Indenture Trustee, such holder and such Participant shall give the Lessee at least 10 days' prior written notice of any such visit, examination or proposed discussion. The Lessee shall not be required to pay or reimburse the Owner Trustee, the Indenture Trustee, such holder or such Participant for expenses which it may incur in connection with any such visitation or inspection except in the case of any such visitation or inspection which shall occur while a Default or Event of Default shall have occurred and shall be continuing. Section 19. OPTIONS TO RENEW AND PURCHASE. (a) Determination of Fair Market Sales Value and Fair Market Rental Value. ---------------------------------------------------------------------- Not more than 24 months nor less than 14 months prior to the expiration of the Basic Term and any Renewal Term, the Lessee may notify the Owner Trustee in writing that the Lessee desires a determination of the Fair Market Sales Value of the Facility as of the end of such Term and/or the Fair Market Rental Value of the Facility for a permitted Renewal Term, as specified in Section 19(c), commencing upon the expiration of the then current Term and the Fair Market Sales Value of the Facility as of the end of such Renewal Term. Thereafter, the Owner Trustee and the Lessee shall consult for the purpose of determining such Fair Market Sales Value and Fair Market Rental Value, and any values agreed upon in writing shall constitute such Fair Market Sales Values and Fair Market Rental Value. If the Owner Trustee and the Lessee fail to agree upon such values within 45 days after the Lessee's notice pursuant to the first sentence of this paragraph, the Lessee may request that such values be determined by the Appraisal Procedure. The Lessee's request for a determination of Fair Market Value shall not obligate the 40 Lessee to exercise any of the options provided in this Section 19. All costs and expenses of any Appraisal Procedure pursuant to this Section 19 shall be borne by the Lessee. (b) End of Term Options to Purchase. So long as no Default -------------------------------- under clause (vi), (vii) or (viii) of Section 15(a) or Event of Default and no Default under clause (vii), (viii) or (ix) of Section 15(a) of the ClO//2// Lease or Event of Default as defined under the ClO//2// Lease has occurred and is continuing, the Lessee shall have the right on the date of the expiration of the Basic Term to purchase the Facility at a price equal to the Fair Market Sales Value determined as of the end of such Basic Term pursuant to Section 19(a); provided that that such right may not be exercised unless the corresponding right is being exercised simultaneously by it under Section 14(b) of the ClO//2// Participation Agreement. The Lessee shall give to the Owner Trustee irrevocable written notice not more than two years and at least one year prior to the end of the Basic Term of its election to exercise the purchase option provided for in the preceding sentence. Payment of the purchase price shall be made on the date of purchase at the place of payment specified in Section 4(d) hereof in immediately available funds to the Owner Trustee (or, so long as the Secured Indebtedness shall not have been fully paid and satisfied, the Indenture Trustee), against delivery of a quitclaim deed and bill of sale transferring and assigning to the Lessee all right, title and interest of the Owner Trustee in and to the Facility on an "as-is" "where-is" basis without recourse or warranty, express or implied, except for a warranty against Lessor's Liens attributable to the Owner Trustee or Wilmington Trust Company. Such purchase shall be deemed to be null and void unless the purchase by it of the ClO//2// Facility has simultaneously occurred under Section 14(b) of the ClO//2// Participation Agreement. The Owner Trustee shall not otherwise be required to make any representation or warranty as to the condition of the Leased Property or any other matters. At such time as the Secured Indebtedness shall have been fully paid and satisfied, the Indenture Trustee shall release the Lien of the Indenture pursuant to Section 9.01 thereof. Upon expiration of each Renewal Term, so long as no Default under clause (vi), (vii) or (viii) of Section 15(a) or Event of Default and no Default under clause (vii), (viii) or (ix) of Section 15(a) of the ClO//2// Lease or Event of Default under the ClO//2// Lease has occurred and is continuing, the Lessee shall have the right to purchase the Facility at a price equal to the Fair Market Sales Value thereof determined as of the end of such Renewal Term pursuant to Section 19(a); provided, however, that such right may not be exercised unless the corresponding right is being exercised simultaneously by it under Scetion 14(b) of the ClO//2// Participation Agreement. The Lessee shall give the Owner Trustee irrevocable written notice at least one year prior to the end of such Renewal Term of its election to exercise the purchase option provided for in the preceding sentence. Following such notice, the Lessee shall purchase the Facility on the terms and conditions set forth in this Section 19(b). In the event of any purchase of the Facility by the Lessee pursuant to this Section 19(b) and payment of all Rent and other sums due and owing by the Lessee pursuant to this Lease or any of the other Operative Agreements (with payment and application of the amount thereof necessary to fully pay and satisfy the Secured Indebtedness and discharge of the Lien of the Indenture to be made pursuant to Section 9.01 thereof), the Owner Trustee shall, concurrently with such purchase, transfer its right, title and interest in and to the Site Lease to the Lessee on an "as-is" "where-is" basis without recourse or warranty, express or implied, except for a warranty against Lessor's Liens attributable to the Owner Trustee or Wilmington Trust Company. Such purchase shall be deemed to be null and 41 void unless the purchase by it of the ClO//2// Facility has simultaneously occurred under Section 14(b) of the ClO//2// Participation Agreement. At such time as the Secured Indebtedness shall have been fully paid and satisfied, the Indenture Trustee shall release the Lien of the Indenture pursuant to Section 9.01 thereof. (c) End of Term Options to Renew. So long as no Default or Event ----------------------------- of Default shall have occurred and be continuing, and no Default or Event of Default as defined under the ClO//2// Lease shall have occurred and is continuing, and assuming that this Lease and the ClO//2// Lease have not been earlier terminated, the Lessee shall have the right to renew this Lease for no more than two Renewal Terms of one year each, commencing at the expiration of the Basic Term or the preceding Renewal Term, as the case may be; provided however that such right may not be exercised unless the corresponding right is being simultaneously exercised by the ClO//2// Lessee under 19(b) of the ClO//2// Lease. All of the provisions of this Lease shall be applicable during each Renewal Term except that the Casualty Values shall be determined in accordance with Section 19(d) and Periodic Rent shall be the product of (x) the Fair Market Rental Value of the Facility for such Renewal Term, determined in accordance with Section 19(a) and (y) 105%; provided that if prior to the time such renewal option is exercisable the IRS has clarified that fair market renewal term options are not includible in the "lease term" as defined by Section 467 of the Code and the Treasury Regulations thereunder, the number in clause (y) shall be 100%. The Lessee shall give to the Owner Trustee irrevocable written notice at least one year prior to the end of the Basic Term or the current Renewal Term, as the case may be, of its election to exercise the renewal option provided for in this Section 19 for a Renewal Term or an additional Renewal Term commencing upon the expiration of such Term. A Renewal Term shall not be in effect unless a Renewal Term is in effect under the terms of the ClO//2// Lease. (d) Casualty Value During Renewal Term. The Casualty Value as of ----------------------------------- the commencement of each Renewal Term shall be the Fair Market Sales Value of the Facility as of the end of the Basic Term or the preceding Renewal Term, as the case may be (determined in accordance with Section 19(a)), and on each Casualty Termination Date during such Renewal Term shall decline on a straight-line basis to a value for the final Casualty Termination Date for such Renewal Term equal to the Fair Market Sales Value of the Facility as of the end of such Renewal Term (determined in accordance with Section 19(a)). (e) Casualty Occurrence. Notwithstanding any request by the Lessee -------------------- for a determination of Fair Market Sales Value pursuant to this Section 19, the provisions of Section 13 shall continue in full force and effect until the date of purchase and the passage of ownership of the Facility unless the Lessee shall have exercised the option by irrevocable written notice to purchase pursuant to Section 19(b) or 19(f), in which event the amount of "Casualty Value" shall equal the greater of (i) the option purchase price or Early Purchase Price , as applicable, (plus any other amounts payable in connection therewith) and (ii) the Casualty Value which would have applied but for the exercise of such purchase option. If the Lessee has exercised any of its options to purchase or renew under this Section 19 and a Casualty Occurrence occurs before the closing of such purchase or commencement of the Renewal Term, as applicable, the Lessee may, by written notice to the Owner Trustee (and, so long as the Secured Indebtedness has not been fully paid and satisfied, the Indenture Trustee and the ClO//2// 42 Indenture Trustee) given promptly upon such Casualty Occurrence, elect to rescind the exercise of such option. (f) Early Purchase Option. So long as no Default under clause (vi), (vii) --------------------- or (viii) of Section 15(a) or Event of Default shall have occurred and be continuing and no Default under clause (vii), (viii) or (ix) of Section 15(a) of the ClO//2// Lease or Event of Default as defined under the ClO//2// Lease shall have occurred and is continuing, the Lessee may, upon not less than 90 days' prior written notice to the Owner Trustee (and so long as the Secured Indebtedness has not been fully paid and satisfied, to the ClO//2// Indenture Trustee and the Indenture Trustee) elect to purchase the Facility on the Early Purchase Date at a price equal to the Early Purchase Price; provided that such right may not be exercised unless the corresponding right is being exercised by it under Section 14(c) of the ClO//2// Participation Agreement. Such written notice shall be irrevocable. On the Early Purchase Date, the Lessee shall pay to the Owner Trustee (or, so long as the Secured Indebtedness shall not have been fully paid and satisfied, the Indenture Trustee) at the place of payment specified in Section 4(d) hereof in immediately available funds (i) all payments of Periodic Rent (other than Periodic Rent payable "in advance" on the Early Purchase Date) and Periodic Site Rent through and including such Early Purchase Date whether or not due and payable at the time, (ii) the Early Purchase Price, (iii) an amount equal to the Make-Whole Amount, if any, in respect of the principal amount of the Notes to be prepaid in accordance with Section 2.10(d) of the Indenture and (iv) all other Rent and sums then due and payable by the Lessee under this Facility Lease and the other Lessee Agreements. Upon application of all such sums to the payment in full and satisfaction of the Secured Indebtedness pursuant to the Indenture and release of the Lien thereof pursuant to Section 9.01 of the Indenture or the assumption of the Notes in accordance with Section 12 of the Participation Agreement, as the case may be, the Owner Trustee shall then and thereupon deliver a quitclaim deed and bill of sale transferring and assigning to the Lessee all right, title and interest of the Owner Trustee in and to the Facility on an "as-is" "where-is" basis without recourse or warranty, express or implied, except for a warranty against Lessor's Liens attributable to the Owner Trustee or Wilmington Trust Company. Such purchase shall be deemed to be null and void unless the purchase by it of the ClO//2// Facility has occurred under Section 14(c) of the ClO//2// Participation Agreement. The Owner Trustee shall not otherwise be required to make any representation or warranty as to the condition of the Leased Property or any other matters. In the event of any such purchase and receipt by the Owner Trustee (or, so long as the Secured Indebtedness has not been fully paid and satisfied, the Indenture Trustee) of all of the amounts provided in this Section 19(f) the obligation of the Lessee to pay Periodic Rent and Periodic Site Rent hereunder shall cease and the Term shall end. In the event the Lessee exercises its option to assume the Notes in accordance with Section 12 of the Participation Agreement, the principal amount of such Notes so assumed shall be deducted from the Early Purchase Price and no Make-Whole Amount shall be payable under this Section 19(f). If, on the Early Purchase Date, the Lessee shall fail to pay all amounts required to be paid pursuant to this Section 19(f) and Section 14(c) of the ClO//2// Participation Agreement, Lessee's notice of early purchase shall be deemed to be withdrawn as of such date, this Lease shall continue in full force and effect with respect to the Facility and the Lessee shall pay the reasonable costs, expenses and liabilities incurred by the Owner Trustee, the Indenture Trustee and the Participants as a result of the Lessee's having given such notice. The Lessee may elect to pay the Early Purchase Price in installments in the amounts (subject to reduction in the case of the first installment if the Lessee elects to assume the Notes in 43 accordance with Section 12 of the Participation Agreement) and on the dates set forth in Schedule 4; provided however, if the Lessee does not elect to assume the Notes in accordance with Section 12 of the Participation Agreement, after giving effect to the payment and application of the first installment of the Early Purchase Price the Notes shall have been paid in full; provided finally, that if the Lessee so elects to pay the Early Purchase Price in installments, the Lessee (a) shall grant the Owner Trustee a Lien and security interest in the Leased Property pursuant to agreements reasonably satisfactory in scope, form and substance to the Owner Participant, securing the unpaid amount of the Early Purchase Price (provided that Lessee may not elect this option (a) if Lessee shall have assumed the Notes in accordance with Section of the Participation Agreement), (b) shall provide a letter of credit in the amount of the unpaid Early Purchase Price, in scope, form and substance reasonably satisfactory to the Owner Participant, issued by a bank or trust company organized under the laws of the United States or any State thereof, the long term debt of which bank or trust company is rated A2, by Standard & Poor's Ratings Group, a division of McGraw Hill, Inc., and A by Moody's Investors Service, Inc., or (c) shall grant the Owner Trustee a Lien and security interest in Property (other than the Leased Property) of the Lessee reasonably acceptable to Owner Participant pursuant to agreements reasonably satisfactory in scope, form and substance to the Owner Participant, securing the unpaid amount of the Early Purchase Price. (g) Site Reduction. If Lessee shall not have exercised any of its options to purchase the Leased Property pursuant to this Section 19, as of the date which is one year prior to the expiration of the Term of this Facility Lease, the Lessee and the Lessor agree to effect a subdivision of the Site so that for any period of time after the end of the Basic Term hereof, the "Site" shall consist solely of the area sufficient and appropriate to operate the Facility and the ClO//2// Facility and all easements necessary for the operation thereof. Section 20. MISCELLANEOUS. (a) No Waiver. No delay or omission to exercise any right, power or --------- remedy accruing to the Owner Trustee upon any breach or default by the Lessee under this Lease shall impair any such right, power or remedy of the Owner Trustee, nor shall any such delay or omission be construed as a waiver of any breach or default, or of any similar breach or default hereafter occurring; nor shall any waiver of a single breach or default be deemed a waiver of any subsequent breach or default. All waivers under this Lease must be in writing, but any breach or default, once waived in writing, shall not be deemed to be continuing for any purpose of the Operative Agreements. All remedies either under this Lease or by law afforded to the Owner Trustee shall be cumulative and not alternative. Any provision of this Lease prohibited by any law now or hereafter in effect shall be ineffective to the extent of such provision without invalidating the remaining provisions hereof. (b) Right of Owner Trustee to Perform. If the Lessee shall fail to comply --------------------------------- with the covenants herein contained, the Owner Trustee may, but shall not be obligated to, (i) make advances to perform the same, and (ii) enter upon the Leased Property to perform any and all acts required by the Lessee's covenants herein contained and to take all such action thereon as in the Owner Trustee's opinion may be necessary or appropriate therefor. All payments so made by the Owner Trustee and all costs and expenses (including without limitation, reasonable attorneys' 44 fees and expenses) incurred in connection therewith shall be payable by the Lessee upon demand as additional rent hereunder, with interest at the Late Rate. No entry shall be deemed an eviction of the Lessee or a repossession of the Leased Property, and no such advance, performance or other act shall be deemed to relieve the Lessee from any default hereunder. (c) Notices. All communications under this Lease shall be in writing or by ------- facsimile and any such notice shall become effective (i) upon personal delivery thereof, including, without limitation, by overnight mail or courier service, (ii) upon receipt thereof, in the case of notice by United States mail, certified or registered, postage prepaid, return receipt requested, or (iii) upon confirmation of receipt thereof, in the case of notice by facsimile, provided such transmission is promptly further confirmed in writing by either of the methods set forth in clause (i) or (ii) above, in each case addressed to the parties hereto at the following addresses as follows: If to the Owner Trustee: Wilmington Trust Company, Rodney Square North 1100 North Market Street Wilmington, Delaware 19890-0001 Fax: (302) 651-8882 Attention: Corporate Trust Administration with a copy to the Owner Participant If to the Lessee: Pope & Talbot, Inc. 1500 SW First Avenue Suite 200 P.O. Box 8171 Portland, Oregon 97201 Attention: Chief Financial Officer Fax: (503) 220-2722 If to the Owner Participant: SELCO Service Corporation c/o Key Equipment Finance 66 South Pearl Street, 7th Floor Albany, NY 12207 Attn: Leveraged Lease Administrator Ph. 518-257-8358 Fax 518-257-8833 Tax ID #: 34-1614731 with a copy to Guarantor 45 with a copy to OP Guarantor If to the Noteholders: At their respective addresses for notices set forth in the Register referred to in the Indenture If to the Indenture Trustee: Wells Fargo Bank Northwest, National Association 79 South Main Street Salt Lake City, Utah 84111 Attention: Corporate Trust Services Fax: (801) 246-5053 or at such other place as any such party may designate by notice given in accordance with this Section. (d) Further Assurances. The Lessee will at its own expense, do, execute, ------------------ acknowledge and deliver all and every such further acts, deeds, conveyances, transfers and assurances as the Owner Trustee or the Indenture Trustee may reasonably request in order to protect the right, title and interest of the Owner Trustee hereunder or under the Site Lease or the perfection or protection of the Lien granted by the Indenture and the Deed of Trust. Without limiting theforegoing, the Lessee agrees at its own expense to cause this Lease and all supplements and amendments hereto, the Site Lease and all supplements and amendments thereto, the Indenture and all supplements and amendments thereto, the Deed of Trust and all supplements and amendments thereto and all financing and continuation statements and similar notices required by Applicable Law at all times to be kept recorded and filed in such manner and in such places as theOwner Trustee or the Indenture Trustee may reasonably request in order to protect the right, title and interest of the Owner Trustee hereunder or under the Site Lease or to protect the rights of the Indenture Trustee under the Indenture and the Deed of Trust. No such recording or filing shall constitute an acknowledgment or implication by the Lessee that this Lease constitutes a chattel mortgage or security agreement or creates a lien or security interest under Applicable Law. (e) Opinions of Counsel. The Lessee agrees at its own expense to furnish to the ------------------- Owner Trustee, the ClO//2// Indenture Trustee and the Indenture Trustee promptlyafter the execution and delivery of any supplement and amendment here to,promptly after the execution and delivery of any supplement and amendment to the Site Lease and promptly after the execution and delivery of any supplement andamendment to the Indenture or the Deed of Trust, an opinion of counsel reasonably satisfactory to the Owner Trustee and the Indenture Trustee (who may be independent counsel to the Lessee) stating that in the opinion of such counsel, such supplement or amendment to this Lease or such supplement or amendment to the Site Lease or such supplement or amendment to the Indenture or the Deed of Trust (or a financing statement, continuation statement or similar notice thereof if and to the extent required by Applicable Law) has been properly recorded or filed for record in all public offices in which such recording or filing is necessary to protect the right, title and interest of the Owner Trustee hereunder or under 46 the Site Lease or, as the case may be, to perfect (or continue the perfection of) the Liens provided by the Indenture and the Deed of Trust as a valid Lien and security interest in the Collateral. (f) Successors and Assigns. This Lease shall be binding upon and shall ---------------------- inure to the benefit of, and shall be enforceable by, the Owner Trustee and the Lessee and their respective successors and permitted assigns. (g) Counterparts; Uniform Commercial Code. This Lease may be executed in ------------------------------------- any number of counterparts, each counterpart constituting an original but all together one Lease; provided, however, that to the extent that this Lease constitutes chattel paper (as such term is defined in the Uniform Commercial Code) no security interest in this Lease may be created through the transfer or possession of any counterpart hereof other than the counterpart bearing the receipt therefor executed by the Indenture Trustee on the signature page hereof, which counterpart shall constitute the only "original" hereof for purposes of the Uniform Commercial Code. (h) Governing Law. THIS LEASE SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE ------------- WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAW OF THE STATE OF NEW YORK EXCLUDING CHOICE-OF-LAW PRINCIPLES OF THE LAW OF SUCH STATE THAT WOULD REQUIRE THE APPLICATION OF THE LAWS OF A JURISDICTION OTHER THAN SUCH STATE BUT INCLUDING SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW. (i) Investment of Funds. The Owner Trustee (or if the Secured Indebtedness ------------------- has not been fully satisfied and discharged, the Indenture Trustee) shall, upon the written direction of the Lessee, invest and reinvest any funds from time to time held by the Owner Trustee or the Indenture Trustee, as the case may be, which constitute proceeds of insurance held by the Owner Trustee or the Indenture Trustee, as the case may be, pursuant to Section 7 (referred to in this paragraph as "Funds") in such direct obligations of the United States of America or obligations for which the full faith and credit of the United States is pledged to provide for the payment of principal and interest, maturing not more than 90 days from the date of such investment, as may be specified in any such direction. Upon any sale or payment of any such investment, the proceeds thereof, plus any interest received by the Owner Trustee or the Indenture Trustee, as the case may be, thereon shall be held by the Owner Trustee (or if the Secured Indebtedness has not been fully satisfied and discharged, the (Indenture Trustee) as part of the Fund from which such investment was made or application as a part of such Fund. If such proceeds (plus such interest and earned discount) shall be less than the cost of such investment, the Owner Trustee or the Indenture Trustee, as the case may be, will not more than three Business Days thereafter notify the Lessee of the amount of such deficiency and the Lessee will promptly pay to the Owner Trustee an amount equal to such deficiency. Any payment in respect of such deficiency shall be held and applied by the Owner Trustee or the Indenture Trustee, as the case may be, as part of the Fund from which such investment was made. The Lessee will pay all expenses incurred by the Owner Trustee or the Indenture Trustee, as the case may be, in connection with the purchase and sale of such investments [signature page follows] 47 IN WITNESS WHEREOF, the Owner Trustee and the Lessee have caused this Lease to be executed and delivered by their respective duly authorized officers, all as of the date first above written. WILMINGTON TRUST COMPANY, not in its individual capacity but solely as Owner Trustee By: s/s Anita Dallago ----------------------------------------- Name: Anita Dallago Title: Financial Services Officer POPE & TALBOT, INC., as Lessee By: s/s Michael Flannery -------------------------------------------------- Name: Michael Flannery Title: President and Chief Executive Officer By: s/s Maria M. Pope -------------------------------------------------- Name: Maria M. Pope Title: Vice President and Chief Financial Officer This Facility Lease and the rentals and other sums due and to become due hereunder have been assigned for security to and are subject to a security interest in favor of Wells Fargo Bank Northwest, National Association, as Indenture Trustee under a Trust Indenture and Security Agreement dated as of December 27, 2001 between said Indenture Trustee and the Owner Trustee hereunder, as debtor. Information concerning such security interest may be obtained from the Indenture Trustee at its address set forth in Section 20 of this Facility Lease. Receipt of this original counterpart of the foregoing Lease is hereby acknowledged this 27th day of December, 2001. WELLS FARGO BANK NORTHWEST, NATIONAL ASSOCIATION, as Indenture Trustee By: s/s Brett R. King ------------------------------ Name: Brett R King Title: Vice President Schedule of Periodic Rent Percentages

* Prepaid rents accrue interest at the December, 2001 110% Long-term AFR (5.49% semi-annual) Schedule 1 to Facility Lease

* Stated as a percentage of Equipment Cost Schedule 1A to Facility Lease Schedule of Casualty Value

Schedule of Casualty Value

*Stated as a percentage of C1O2 Facility Cost Schedule 2 (to Facility Lease) 2 of 4 Schedule of Casualty Value Determination Basic Casualty Prepaid Rent Amount of Date Value* Rebate* Casualty Value* - ------------- -------------- ------------ --------------- 4/2/2007 63.408434% 51.236118% 48.172316% 5/2/2007 62.811475% 14.412250% 48.399225% 6/2/2007 62.215414% 13.588383% 48.627031% 7/2/2007 61.631282% 12.764516% 48.866766% 8/2/2007 60.980438% 29.706766% 31.273672% 9/2/2007 60.330616% 28.941296% 31.389320% 10/2/2007 59.692852% 28.175826% 31.517026% 11/2/2007 59.056230% 27.410357% 31.645873% 12/2/2007 58.420760% 26.644887% 31.775873% 1/2/2008 57.797478% 25.879418% 31.918061% 2/2/2008 57.030557% 26.363755% 30.666802% 3/2/2008 56.264920% 25.463268% 30.801652% 4/2/2008 55.500581% 24.562781% 30.937800% 5/2/2008 54.751646% 23.662294% 31.089352% 6/2/2008 54.004161% 22.761808% 31.242353% 7/2/2008 53.272233% 21.861321% 31.410912% 8/2/2008 52.509548% 21.713968% 30.795580% 9/2/2008 51.748379% 20.792305% 30.956073% 10/2/2008 51.002836% 19.870643% 31.132194% 11/2/2008 50.258967% 18.948980% 31.309987% 12/2/2008 49.516786% 18.027318% 31.489468% 1/2/2009 48.790404% 17.105655% 31.684749% 2/2/2009 48.033261% 16.968800% 31.096381% 3/2/2009 47.277880% 15.993795% 31.284085% 4/2/2009 46.524279% 15.050711% 31.473568% 5/2/2009 45.787020% 14.107626% 31.679394% 6/2/2009 45.051705% 13.164542% 31.887164% 7/2/2009 44.332901% 12.221457% 32.111444% 8/2/2009 43.516562% 18.757944% 24.758619% 9/2/2009 42.701372% 17.823153% 24.878219% 10/2/2009 41.901888% 16.888361% 25.013527% 11/2/2009 41.103706% 15.953570% 25.150136% 12/2/2009 40.306837% 15.018779% 25.288058% 1/2/2010 39.525841% 14.083988% 25.441853% 2/2/2010 38.641677% 21.160136% 17.481542% 3/2/2010 37.757944% 20.236284% 17.521660% 4/2/2010 36.874644% 19.312432% 17.562213% 5/2/2010 36.006293% 18.388580% 17.617714% 6/2/2010 35.138516% 17.464727% 17.673789% 7/2/2010 34.285829% 16.540875% 17.744954% 8/2/2010 33.408500% 15.591664% 17.816836% 9/2/2010 32.531893% 14.642452% 17.889441% 10/2/2010 31.670527% 13.693240% 17.977287% 11/2/2010 30.810030% 12.744028% 18.066002% 12/2/2010 29.950409% 11.794816% 18.155593% *Stated as a percentage of C102 Facility Cost Schedule 2 (to Facility Lease) 3 of 4 Schedule of Casualty Value Determination Basic Casualty Prepaid Rent Amount of Date Value* Rebate* Casualty Value* - ------------- -------------- ------------ --------------- 1/2/2011 29.106184% 10.845604% 18.260580% 2/2/2011 28.328176% 9.954041% 18.374135% 3/2/2011 27.551202% 9.062477% 18.488725% 4/2/2011 26.775272% 8.170913% 18.604358% 5/2/2011 26.014589% 7.279350% 18.735239% 6/2/2011 25.255099% 6.387786% 18.867312% 7/2/2011 24.511005% 5.496222% 19.014783% 8/2/2011 23.743782% 4.580185% 19.163597% 9/2/2011 22.977915% 3.664148% 19.313766% 10/2/2011 22.227609% 2.748111% 19.479498% 11/2/2011 21.478813% 1.832074% 19.646739% 12/2/2011 20.731541% 0.916037% 19.815504% 1/2/2012 20.000000% 0.000000% 20.000000% *Stated as percentage of ClO2 Facility Cost Schedule 2 (to Facility Lease) 4 of 4 Schedule of Termination Value Termination Basic Termination Prepaid Rent Amount of Date Value* Rebate* Termination Value* - ----------- ----------------- ------------ ------------------ 10/2/1999 100.380263% 0.000000% 100.380263% 11/2/1999 101.193411% 0.000000% 101.193411% 12/2/1999 101.973541% 0.000000% 101.973541% 1/2/2000 102.756140% 0.000000% 102.756140% 2/2/2000 98.482403% 0.000000% 98.482403% 3/2/2000 99.245914% 0.000000% 99.245914% 4/2/2000 99.982995% 0.000000% 99.982995% 5/2/2000 100.722779% 0.000000% 100.722779% 6/2/2000 101.435919% 0.000000% 101.435919% 7/2/2000 102.151545% 0.000000% 102.151545% 8/2/2000 97.821081% 0.000000% 97.821081% 9/2/2000 98.498110% 0.000000% 98.498110% 10/2/2000 99.177429% 0.000000% 99.177429% 11/2/2000 99.859058% 0.000000% 99.859058% 12/2/2000 100.513647% 0.000000% 100.513647% 1/2/2001 101.170323% 0.000000% 101.170323% 2/2/2001 96.779866% 0.000000% 96.779866% 3/2/2001 97.425866% 0.000000% 97.425866% 4/2/2001 98.054259% 0.000000% 98.054259% 5/2/2001 98.684636% 0.000000% 98.684636% 6/2/2001 99.297265% 0.000000% 99.297265% 7/2/2001 99.911737% 0.000000% 99.911737% 8/2/2001 95.478161% 0.000000% 95.478161% 9/2/2001 96.061042% 0.000000% 96.061042% 10/2/2001 96.645639% 0.000000% 96.645639% 11/2/2001 97.231965% 0.000000% 97.231965% 12/2/2001 97.800286% 0.000000% 97.800286% - ------------------------------------------------------------------ 1/2/2002 97.688015% 0.000000% 97.688015% 2/2/2002 93.123368% 0.000000% 93.123368% 3/2/2002 93.594640% 0.000000% 93.594640% 4/2/2002 94.067512% 0.000000% 94.067512% 5/2/2002 94.526963% 0.000000% 94.526963% 6/2/2002 94.987907% 0.000000% 94.987907% 7/2/2002 95.435320% 0.000000% 95.435320% 8/2/2002 90.832783% 0.000000% 90.832783% 9/2/2002 91.265975% 0.000000% 91.265975% 10/2/2002 91.685538% 0.000000% 91.685538% 11/2/2002 92.106386% 0.000000% 92.106386% 12/2/2002 92.528530% 0.000000% 92.528530% 1/2/2003 92.936945% 0.000000% 92.936945% 2/2/2003 88.182444% 0.000000% 88.182444% 3/2/2003 88.463469% 0.000000% 88.463469% 4/2/2003 88.745700% 0.000000% 88.745700% 5/2/2003 89.016327% 0.000000% 89.016327% 6/2/2003 89.288064% 0.000000% 89.288064% *Stated as a percentage of C1O2 Facility Cost Schedule 3 (to Facility Lease) 1 of 4 Schedule of Termination Value Termination Basic Termination Prepaid Rent Amount of Date Value* Rebate* Termination Value* - ----------- ----------------- ------------ ------------------ 7/2/2003 89.548102% 0.000000% 89.548102% 8/2/2003 84.756263% 0.000000% 84.756263% 9/2/2003 84.999779% 0.000000% 84.999779% 10/2/2003 85.231509% 0.000000% 85.231509% 11/2/2003 85.464163% 0.000000% 85.464163% 12/2/2003 85.697751% 0.000000% 85.697751% 1/2/2004 85.919461% 0.000000% 85.919461% 2/2/2004 81.191140% 0.000000% 81.191140% 3/2/2004 81.497993% 0.000000% 81.497993% 4/2/2004 81.805695% 0.000000% 81.805695% 5/2/2004 82.104866% 0.000000% 82.104866% 6/2/2004 82.404816% 0.000000% 82.404816% 7/2/2004 82.696165% 0.000000% 82.696165% 8/2/2004 77.933630% 0.000000% 77.933630% 9/2/2004 78.206143% 0.000000% 78.206143% 10/2/2004 78.469988% 0.000000% 78.469988% 11/2/2004 78.734475% 0.000000% 78.734475% 12/2/2004 78.999609% 0.000000% 78.999609% 1/2/2005 79.256010% 0.000000% 79.256010% 2/2/2005 74.482631% 0.000000% 74.482631% 3/2/2005 74.883631% 0.000000% 74.883631% 4/2/2005 75.285216% 0.000000% 75.285216% 5/2/2005 75.683605% 0.000000% 75.683605% 6/2/2005 76.082555% 0.000000% 76.082555% 7/2/2005 76.478285% 0.000000% 76.478285% 8/2/2005 71.677550% 0.000000% 71.677550% 9/2/2005 72.051156% 0.000000% 72.051156% 10/2/2005 72.421523% 0.000000% 72.421523% 11/2/2005 72.792407% 0.000000% 72.792407% 12/2/2005 73.163812% 0.000000% 73.163812% 1/2/2006 73.531959% 0.000000% 73.531959% 2/2/2006 67.719629% 0.000000% 67.719629% 3/2/2006 68.057246% 0.000000% 68.057246% 4/2/2006 68.395369% 0.000000% 68.395369% 5/2/2006 68.739662% 0.000000% 68.739662% 6/2/2006 69.084522% 0.000000% 69.084522% 7/2/2006 69.435613% 0.000000% 69.435613% 8/2/2006 63.604948% 0.000000% 63.604948% 9/2/2006 63.924363% 0.000000% 63.924363% 10/2/2006 64.250078% 0.000000% 64.250078% 11/2/2006 64.576490% 0.000000% 64.576490% 12/2/2006 64.903605% 0.000000% 64.903605% 1/2/2007 60.423188% 0.000000% 60.423188% 2/2/2007 64.626761% 16.883852% 47.742909% 3/2/2007 64.017207% 16.059985% 47.957222% *Stated as a percentage of C1O2 Facility Cost Schedule 3 (to Facility Lease) 2 of 4 Schedule of Termination Value Termination Basic Termination Prepaid Rent Amount of Date Value* Rebate* Termination Value* - ---------- ----------------- ------------ ------------------ 4/2/2007 63.408434% 15.236118% 48.172316% 5/2/2007 62.811475% 14.412250% 48.399225% 6/2/2007 62.215414% 13.588383% 48.627031% 7/2/2007 61.631282% 12.764516% 48.866766% 8/2/2007 60.980438% 29.706766% 31.273672% 9/2/2007 60.330616% 28.941296% 31.389320% 10/2/2007 59.692852% 28.175826% 31.517026% 11/2/2007 59.056230% 27.410357% 31.645873% 12/2/2007 58.420760% 26.644887% 31.775873% 1/2/2008 57.797478% 25.879418% 31.918061% 2/2/2008 57.030557% 26.363755% 30.666802% 3/2/2008 56.264920% 25.463268% 30.801652% 4/2/2008 55.500581% 24.562781% 30.937800% 5/2/2008 54.751646% 23.662294% 31.089352% 6/2/2008 54.004161% 22.761808% 31.242353% 7/2/2008 53.272233% 21.861321% 31.410912% 8/2/2008 52.509548% 21.713968% 30.795580% 9/2/2008 51.748379% 20.792305% 30.956073% 10/2/2008 51.002836% 19.870643% 31.132194% 11/2/2008 50.258967% 18.948980% 31.309987% 12/2/2008 49.516786% 18.027318% 31.489468% 1/2/2009 48.790404% 17.105655% 31.684749% 2/2/2009 48.033261% 16.936880% 31.096381% 3/2/2009 47.277880% 15.993795% 31.284085% 4/2/2009 46.524279% 15.050711% 31.473568% 5/2/2009 45.787020% 14.107626% 31.679394% 6/2/2009 45.051705% 13.164542% 31.887164% 7/2/2009 44.332901% 12.221457% 32.111444% 8/2/2009 43.516562% 18.757944% 24.758619% 9/2/2009 42.701372% 17.823153% 24.878219% 10/2/2009 41.901888% 16.888361% 25.013527% 11/2/2009 41.103706% 15.953570% 25.150136% 12/2/2009 40.306837% 15.018779% 25.288058% 1/2/2010 39.525841% 14.083988% 25.441853% 2/2/2010 38.641677% 21.160136% 17.481542% 3/2/2010 37.757944% 20.236284% 17.521660% 4/2/2010 36.874644% 19.312432% 17.562213% 5/2/2010 36.006293% 18.388580% 17.617714% 6/2/2010 35.138516% 17.464727% 17.673789% 7/2/2010 34.285829% 16.540875% 17.744954% 8/2/2010 33.408500% 15.591664% 17.816836% 9/2/2010 32.531893% 14.642452% 17.889441% 10/2/2010 31.670527% 13.693240% 17.977287% 11/2/2010 30.810030% 12.744028% 18.066002% 12/2/2010 29.950409% 11.794816% 18.155593% *Stated as a percentage of C102 Facility Cost Schedule 3 (to Facility Lease) 3 of 4 Schedule of Termination Value Termination Basic Termination Prepaid Rent Amount of Date Value* Rebate* Termination Value* - ---------- ----------------- ------------ ------------------ 1/2/2011 29.106184% 10.845604% 18.260580% 2/2/2011 28.328176% 9.954041% 18.374135% 3/2/2011 27.551202% 9.062477% 18.488725% 4/2/2011 26.775272% 8.170913% 18.604358% 5/2/2011 26.014589% 7.279350% 18.735239% 6/2/2011 25.255099% 6.387786% 18.867312% 7/2/2011 24.511005% 5.496222% 19.014783% 8/2/2011 23.743782% 4.580185% 19.163597% 9/2/2011 22.977915% 3.664148% 19.313766% 10/2/2011 22.227609% 2.748111% 19.479498% 11/2/2011 21.478813% 1.832074% 19.646739% 12/2/2011 20.731541% 0.916037% 19.815504% 1/2/2012 20.000000% 0.000000% 20.000000% *Stated as a percentage of C102 Facility Cost Schedule 3 (to Facility Lease) 4 of 4 Schedule of Early Purchase Date, Early Purchase Price and Installment Amounts and Dates Early Purchase Date 1/2/2007 Early Purchase Amount $38,959,002.49 Early Installment Purchase Price Dates Installments ----------- -------------- 1/2/2007 $25,077,548.41 4/15/2007 $ 3,470,363.52 6/15/2007 $ 3,470,363.52 9/15/2007 $ 3,470,363.52 12/15/2007 $ 3,470,363.52 Schedule 4 (to Facility Lease) Description of Major Components of the Facility -------------------------------- o PULP DRYER: The Flakt pulp dryer machine was originally built in 1970, purchased in 1993, and rebuilt and installed in Halsey in 1994. The pulp dryer has the capability of drying 650 air-dried metric tons per day of bleached kraft market pulp. o RECOVERY BOILER: Babcock & Wilcox PR-125, 400 ton per day recovery boiler was installed in 1968. It was designed for 223,000 pounds per hour steam output. Design pressure of the boiler is 400 psi; design pressure for the economizer is 425 psi; steam condition at the outlet of 350 psi; solids throughput per day of 1,230,000 pounds. Currently operating at 1,900,000 pounds of dry solid per day. o LIME KILN: Allis-Chalmers 9 feet diameter by 250 feet long rotary kiln, SN 96441, installed in 1968. o EVAPORATORS: Six-Effect Evaporator system capable of processing 2,400,000 pounds of solids per day. Ahlstrom three body concentrator with liquor heat treatment system allowing 75% solids liquor to be delivered to the recovery boiler for burning. o DIGESTERS: Complete pulp digesting system including structure consisting of three M&D continuous wood digesters capable of producing 600 tons per day of unbleached wood pulp. o OXYGEN DELIGNIFICATION SYSTEM: Complete oxygen delignification system capable of processing 600 tons per day of unbleached kraft pulp. Consisting of a medium consistency oxygen reactor and two post oxygen wash presses. o BLEACH PLANT: Complete pulp bleaching system, including structure, four pulp washers, tankage, and pumps, capable of producing 500 tons per day of bleach kraft pulp. o AIR COMPRESSORS: Complete compressed air center consisting of three Joy rotary air compressors, and all appropriate equipment, capable of producing approximately 4,500 CFM of compressed air at 90 psi operating pressure. o SERVICE BUILDING: Complete three story reinforced concrete service building, approximately 49,000 square feet of working area, housing administrative offices and complete maintenance shop facilities with machine shop, electrical shop, instrument shop, auto shop and parts storage. Exhibit A (to Facility Lease) Description of the Facility --------------------------- The pulp mill in Halsey, Oregon, including the Major Components described on Exhibit A to this Facility Lease and all other equipment and improvements, if any, constructed or installed or to be constructed or installed on the Site for use as or in connection with such pulp mill, and any and all appliances, parts, instruments, appurtenances, accessories and other equipment and improvements of whatever nature from time to time incorporated in or installed as part of such pulp mill which are the property of the Owner Trustee pursuant to the terms of this Facility Lease, but excluding, however, (i) spare parts and (ii) any Alterations to the Facility as to which title remains with the Lessee pursuant to and within the limitations of Section 8(f)(ii) of this Facility Lease and (iii) for the avoidance of doubt, all tax benefits and tax attributes of any Alterations on which work is started after December 27, 2001. Exhibit B (to Facility Lease) Legal Description PARCEL I: TRACT I: A parcel of land located in Sections 2 and 3 of Township 14 South, Range 4 West, and in Sections 34 and 35 of Township 13 South, Range 4 West of the Willamette Meridian, in the County of Linn, State of Oregon, more particularly described as follows: Beginning at the East Quarter Corner of Section 2 in Township 14 South, Range 4 West of the Willamette Meridian in Linn County, Oregon; thence run North 00 degrees 20'58" East, along the East line of said Section 2, a distance of 988.19 feet to a point marked by a 1-1/2 inch iron pipe; thence leaving said section line and run West, parallel with the South line of the Northeast Quarter of said Section 2, a distance of 2637.67 feet to a point in the center of Muddy Creek; thence run downstream, along the centerline of said Muddy Creek, to a point that is 19.50 chains South of the North line of said Section 2, (said point bears North 43 degrees 40'44" West 698.38 feet from the last mentioned point in the center of Muddy Creek), said point being referenced by a 5/8 inch iron rod which bears North 88 degrees 25'57" West 161.90 feet; from said point in the center of Muddy Creek run North 88 degrees 35'57" West, parallel with and 19.50 chains Southerly of (when measured at right angles) the North line of said Section 2, a distance of 1087.0 feet to a point that is 1131.90 feet South 88 degrees 35'57" East of a point on the West line of said Section 2 that is 19.50 chains South of the Northwest corner of said Section 2; thence run North 00 degrees 36'36" West, parallel with the West line of said Section 2, a distance of 1670.42 feet to a point on the South bank of Muddy Creek; thence run Westerly, along the South bank of said Muddy Creek, to a point on the East line of Caleb Gray Donation Land Claim No. 53; thence run North 00 degrees 25'07" West, along said claim line, 982.45 feet to the Northeast corner of said Caleb Gray Donation Land Claim No. 53; thence North 89 degrees 58'28" West, along the North line of said Caleb Gray Donation Land Claim No. 53, a distance of 3795.63 feet to the Northwest corner of said Claim No. 53; thence continuing North 89 degrees 58'28" West 190.24 feet; thence South 00 degrees 22'09" East 40.0 feet to a point marked by a railroad spike marking the Southerly right of way of Market Road No. 3 and the center of an asphalt roadway to the American Can Company plant; from said railroad spike run South 00 degrees 22' 09" east, along the center of an asphalt roadway to the American Can Company plant; from said railroad spike run South 00 degrees 22'09" East, along the center of said asphalt roadway, a distance of 3155.50 feet to a point referenced by a railroad spike; thence along the arc of an 897.25 foot radius curve right, (the long chord of which bears South 14 degrees 36' 21" West 463.70 feet), a distance of 469.02 feet; thence continuing along said roadway center, South 29 degrees 34'52" West 42.04 feet; thence along the arc of a 554.81 foot radius curve left, (the long chord of which bears South 14 degrees 56'03" West 280.58 feet), a distance of 283.66 feet to a point referenced by a railroad spike; thence South 00 degrees 17'15" West 175.39 feet to a point referenced by a railroad spike; thence along the arc of a 177.99 foot (Continued) Exhibit C-1 Legal Description radius curve left, (the long chord of which bears South 45 degrees 02'03" East 253.13 feet), a distance of 281.58 feet to a point referenced by a railroad spike, (said point bears South 57 degrees 29'04" West 267.90 feet from the Southwest corner of the Caleb Gray Donation Land Claim No. 50); thence run North 89 degrees 38'39" East 1157.19 feet to a point referenced by a 5/8 inch iron rod; thence South 00 degrees 25'33" East 294.29 feet to a point; thence North 89 degrees 39'48" East 600.0 feet to a point marked by a 5/8 inch iron rod; thence South 45 degrees 20'12" East 565.69 feet to a point marked by a 5/8 inch iron rod; thence South 00 degrees 20'12" East 185.75 feet to a point marked by a 5/8 inch iron rod; thence North 89 degrees 39'48" West 585.75 feet to a point referenced by a 5/8 inch iron rod; thence North 89 degrees 39'48" East 4345.91 feet to a point on the East line of Section 2 that is 377.33 feet South 00 degrees 03'26" East of the East Quarter Corner of said Section 2; thence run North 00 degrees 03'26" West 377.33 feet to the point of beginning, in Linn County, Oregon. EXCEPTING THEREFROM, those portions lying within Powerline Road and Market Road No. 3. TRACT II: A parcel of land located in Section 3, Township 14 South, Range 4 West of the Willamette Meridian, in the County of Linn, State of Oregon, more particularly described as follows: Commencing at the East Quarter Corner of Section 2 in Township 14 South, Range 4 West of the Willamette Meridian; thence South 00 degrees 03'26" East, along the East line of said Section 2, a distance of 377.33 feet to a point; thence South 89 degrees 39'48" West 4345.91 feet to a point referenced by a 5/8 inch iron rod; thence South 00 degrees 20'12" East 585.75 feet to a point referenced by a 5/8 inch iron rod; thence South 89 degrees 39'48" West 2187.85 feet to a point marked by a 5/8 inch iron rod, being the true point of beginning of the herein described tract; thence North 00 degrees 20'12" West 185.75 feet to a point marked by a 5/8 inch iron rod; thence North 45 degrees 20'12" West 565.69 feet to a point; thence South 89 degrees 39'48" West 435.00 feet; thence South 00 degrees 25'38" East 585.76 feet; thence North 89 degrees 39'48" East 834.09 feet to the true point of beginning. PARCEL II: TRACT I: A parcel of land located Section 33, Township 13 South, Range 4 West Willamette Meridian, Linn County, Oregon described as follows: Commencingat a stone marking the Northeast corner of the Charles Crosby Donation LandClaim No. 37 in Section 34, Township 13 South, Range 4 West of the Willamette Meridian, Linn County, Oregon; thence North 89 degrees 53'30" West along the North line of said Claim No. 37 a distance of 282.66 feet to its intersection with the Westerly right (Continued) Exhibit C-2 Legal Description of way line of the Oregon Electric Railroad property; thence North 1 degree 22' East along the Westerly right of way line of said Oregon Electric Railroad property 1698.37 feet to a point on the South right of way line of County Road No. 217, said point being 30.0 feet distant Southerly from the South line of the John P. Smith Donation Land Claim No. 55 in said Township and Range, said point being marked by a 5/8 inch iron rod; thence run North 89 degrees 46'22" West along the South line of County Road 217 a distance of 2034.46 feet to a point on the South right of way line of County Road No. 217, said point being 30.00 feet distant Southerly from the Northwest corner of the D.W. Allingham Donation Land Claim No. 54 in said Township and Range; thence North 89 degrees 32'55" West 364.96 feet to the point of beginning of the herein described tract; thence North 89 degrees 32' 55" West 428.00 feet; thence North 00 degrees 06'42" East along the West line of said County Road No. 217, a distance of 753.40 feet; thence Northwesterly along the arc of a 161.00 foot radius curve to the left (the chord of which bears North 44 degrees 53'42" West 227.65 feet) to the end of said curve; thence North 89 degrees 54'04" West along the South line of said County Road No. 217 a distance of 1843.50 feet to a point on the South right of way line of County Road No. 217, said point being 30.00 feet distant Southerly from the Northeast corner of the William L. Armstrong Donation Land Claim No. 40 in said Township and Range; thence North 89 degrees 54'48" West along the South of said County Road No. 217 a distance of 151.08 feet; thence leaving the South line of said County Road No. 217; thence continuing South 806.50 feet to a point on the Easterly right of way of the relocated portion of Market Road No. 3 (an 80.00 foot right of way), said point being referenced by a 5/8 inch iron rod; thence Southerly along the Easterly right of way of said relocated Market Road No. 3 along the arc of a 1185.92 foot radius curve to the right (the chord of which bears South 7 degrees 28'59" East 310.76 feet) to the end of said curve; thence continuing along the Easterly right of way line of said relocated Market Road No. 3 South 00 degrees 02'44" West 1455.56 feet to the beginning of a 1105.92 foot radius curve to the left; thence Southeasterly along the arc of a 1105.92 foot radius curve to the left (the chord of which bears South 44 degrees 57'31" East 1564.02 feet) to the end of said curve; thence South 89 degrees 57'26" East along the Northerly right of way of said relocated Market Road No. 3 a distance of 1432.04 feet to a point; thence North 00 degrees 06'42" East 2756.52 feet to the point of beginning. (Continued) Exhibit C - 3 Legal Description TRACT II: Beginning at the Southeast corner of the Charles Crosby Donation Land Claim No. 40 in Township 14 South, Range 4 West of the Willamette Meridian and Claim No. 37 in Township 13 South, Range 4 West of the willamette Meridian thence run north 89 degrees 51'47" West 4717.0 feet to the Northeast corner of the Henry Parks Donation Land Claim No. 41; thence continue North 89 degrees 51'47" West along the South line of said Charles Crosby Donation Land Claim No. 40 a distance of 522.76 feet; thence run North 00 degrees 23'07" East 1366.02 feet to a point marked by a 3/4 inch pipe marking the true point of beginning of the herein described tract; thence North 00 degrees 23'07" East 1077.72 feet to a point on the Southerly right of way of the relocated portion of Market Road No. 3 (an 80 foot right of way); thence run Southeasterly along said right of way line of an 1185.92 foot radius curve left (the chord of which bears South 52 degrees 21'28" East 1447.12 feet to a point marking the end of curve; thence South 89 degrees 57'26" East along said right of way line 3659.40 feet to a point marked by an iron rod, said iron rod being 160 feet West of (when measured at right angles) the centerline of the Oregon Electric Railroad; thence run South 1 degree 22' West parallel with said Oregon Electric Railroad centerline 202.69 feet to a point marked by a 5/8 inch iron rod, said point being 1366.0 feet North of the South line of the said Charles Crosby Donation Land Claim No. 40; thence run North 89degree 51' 47" West 4807.75 feet to the true point of beginning in Linn County, Oregon. PARCEL III: Beginning at the Northwest corner of the William Shepherd Donation Land Claim No. 39; Notification No. 2562 in Township 13 South, Range 4 West of the Willamette Meridian, Linn county, Oregon; run thence South 89 degrees 38'53" East along the North line of said William Shepherd Claim 561.0 feet to a point marked by a 5/8 inch iron rod, said point being 334.62 feet North 89 degrees 38'53" West of a stone found on the North line of said William Shepherd Claim which is marking the Southwest corner of the John McNiel Donation Land Claim No. 41 in said township and range; thence South 100.0 feet to a 5/8 inch iron rod; thence South 89 degrees 38'53" East parallel to the north line of said Claim No. 39, a distance of 435.60 feet to a point marked by a 5/8 inch iron rod; thence North 100.0 feet to a point on the North line of said Claim No. 39, said point being 100.98 feet South 89 degrees 38'53" East of the forementioned stone marking the Southwest corner of the John McNiel Claim No. 41; thence South 89 degrees 38'53" East along the north line of said Claim No. 39, a distance of 1676.40 feet to a point that is 2673.0 feet South 89 degrees 38'53" East of the forementioned Northwest corner of the William Shepherd Claim; thence South 00 degrees 19'29" West parallel to the East line of said William Shepherd Donation Land Claim 1856.58 feet to a point marked by 5/8 inch iron rod; thence North 89 degrees 38'53" West parallel to the North line of said William (Continued) Exhibit C - 4 Legal Description Shepherd Claim a distance of 186.72 feet to a point marked by a 5/8 inch iron rod; thence South 00 degree 20'21" West along a line fence 2098.38 feet to a point marked by a 5/8 inch iron rod; said iron rod being 242.63 feet North 00 degree 20'21" East of a stone found marking the South line of the forementioned William Shepherd Donation Land Claim; thence South 89 degrees 51'02" East 1406.38 feet to a 1 1/2 inch iron pipe found marking Southerly Southwest corner of that certain tract of land conveyed to Donald Lee Bayne and Mildred Frances Bayne in Deed Recorded November 5, 1958 in Book 262, page 450, Linn County, Oregon deed Records; continuing South 89 degrees 51'02" East along the South boundary of said Bayne property 2111.55 feet to a point on the West line of the Charles Crosby Donation Land Claim No. 37 in said township and range, said point being 1292.28 feet South 00 degrees 16'41" West of the Northwest corner of said Charles Crosby Donation Land Claim; run thence South 00 degrees 16'41" West along the West line of said claim 100.0 feet, said point being marked by 5/8 inch iron rod; thence North 89 degrees 51'02" West 3518.02 feet to a point marked by 5/8 inch iron rod, said iron rod being 142.63 feet North 00 degrees 20'21" East of the aforementioned Stone marking the South line of the William Shepherd Donation Land Claim; thence South 00 degrees 28'21" West 142.63 feet to the said stone; thence run South 89 degrees 53'16" West along the South line of said Donation Land Claim No. 39, a distance of 1233.53 feet to the Southwest corner thereof; thence following the meanders of the Willamette River downstream on the following courses and distances; North 5 degrees 30' West 1018.38 feet, North 21 degrees West 495.0 feet, North 30 degrees 45'West 844.80 feet, North 67 degrees West 462.0 feet, North 44 degree 30' West 184.80 feet to a point that bears South from the point of beginning; thence run North along the West line of said Claim No. 39 a distance of 1687.62 feet to the point of beginning in Linn county, Oregon. (continued) Exhibit C - 5 Legal Description PARCEL IV: An easement, created by Easement dated November 16, 1968, recorded January 14, 1969 in Book 336, page 74, Linn County Deed Records, for a right-of-way, 100 feet in width; for pipelines, communication lines, and all appurtenances thereto, upon, under, over and across the following described real property: Beginning at a point on the South boundary of and 5239.76 feet North 89 degrees 51'47" West of the Southeast corner of the Charles J.B. Crosby Donation Land Claim No. 40 In Township 14 South, Range 4 West of the Willamette Meridian, in Linn county, Oregon; thence North 00 degrees 23'07" East 1366.02 feet to a point marked by an 3/4 inch iron pipe, said iron pipe being 1329.57 feet South 00 degrees 23'07" West of a point on the North line of said Charles J.B. Crosby Donation Land Claim, thence continuing North 00 degrees 23'07" East from said 3/4 inch iron pipe a distance of 10.0 feet to the True point of beginning, run thence North 00 degree 23'07" East 100.0 feet, thence South 89 degrees 17'49" West 5135.18 feet to a point on the West line of said Charles J.B. Crosby Donation Land Claim that is 1292.28 feet South 00 degrees 16'41" West of the Northwest corner of said Charles Crosby Donation Land Claim, run thence South 00 degrees 16'41" West along the West line of said Donation Land Claim 100.0 feet, thence leaving the West line of said Donation Land Claim and run North 89 degrees 17' 49" East 5134.99 feet to the true point of beginning, in Linn county, Oregon. PARCEL V: Beginning at a point on the West line of Market Road No. 2 being South 4 degrees 08' West 535.38 feet from a 3/4 inch rod on the North line of the William McIlree Donation Land Claim No. 46 in Township 12 South, Range 4 West of the Willamette Meridian in Linn County, Oregon and running thence South 4 degree 08' West, along the West line of said road, 12.03 feet; thence West 210.13 feet; thence South 16 degrees 56' West 24.04 feet; thence West 62.70 feet to the bank of the Willamette River; thence Northerly, along the East bank of said river, to a point due West of the place of beginning; thence East 276.66 feet to the place of beginning. PARCEL VI: Those easements set forth in agreement of Easements and Covenants dated August 22, 1991, amended June 14, 1993, recorded June 29, 1993 in MF Vol. 646, page 627, records of Linn County, Oregon, as appurtenant to the land set forth in Schedule B of said agreement. Exhibit C - 6 Pricing Assumptions Facility Cost 64,573,650.00 Lender's Commitment 47,175,205.94 Investor's Commitment 17,398,444.06 Transaction Expenses 468,158.96 Debt Rate 8.96% Lease Closing Date 09/30/1999 Lease Termination Date 01/02/2012 Early Purchase Date 01/02/2007 Exhibit D (to Facility Lease) Lease Supplement No. 1 ---------------------- THIS LEASE SUPPLEMENT NO. 1, dated as of December 27, 2001, between WILMINGTON TRUST COMPANY, a Delaware banking corporation, not individually but solely as owner trustee (the "Owner Trustee") under the Trust Agreement (the "Owner Trustee"), and POPE & TALBOT, INC., a Delaware corporation (the "Lessee"); Witnesseth: The Owner Trustee and the Lessee have heretofore entered into that certain Amended and Restated Facility Lease dated December 27, 2001 (the "Facility Lease"). The terms used herein are used with the meanings specified in the Facility Lease. The Facility Lease provides for the execution and delivery of a Lease Supplement substantially in the form hereof for, among other things, the purpose of confirming any change in Periodic Rent, Casualty Value and Termination Value. NOW, THEREFORE, in consideration of the premises and other good and sufficient consideration, the Owner Trustee and the Lessee hereby agree that: [Schedules 1, 2, 3 and 4 to the Facility Lease, showing Periodic Rent percentages, Casualty Values, Termination Values and Early Purchase Price,] are hereby amended to read in full as attached hereto. Any and all notices, requests, certificates and other instruments executed and delivered after the execution and delivery of this Lease Supplement may refer to the "Facility Lease dated September 15, 1999" or the "Lease dated September 15, 1999" without making specific reference to this Lease Supplement, but nevertheless all such references shall be deemed to include this Lease Supplement unless the context shall otherwise require. This Lease Supplement shall be construed in connection with and as part of the Facility Lease, and all terms, conditions and covenants contained in the Facility Lease, except as herein modified, shall be and remain in full force and effect. This Lease Supplement may be executed in any number of counterparts, each executed counterpart constituting an original but all together one and the same instrument. THE OWNER TRUSTEE AND THE LESSEE AGREE THAT THE FACILITY SHALL FOR PURPOSES OF THE LAW OF THE STATE OF OREGON BE PERSONAL PROPERTY. Exhibit E-1 IN WITNESS WHEREOF, the Owner Trustee and the Lessee have caused this Lease Supplement to be duly executed as of the day and year first above written and to be delivered as of the date first above written. WILMINGTON TRUST COMPANY, not in its individual capacity but solely as Owner Trustee By: ----------------------------------------- Name: Title: POPE & TALBOT, INC. By: ----------------------------------------- Name: Title: Consented to as of the date first above written. WELLS FARGO BANK NORTHWEST, NATIONAL ASSOCIATION (formerly known as First Security Bank, National Association), as Indenture Trustee By: ------------------------------------------ Name: Title: Exhibit E-2 ANNEX I - DEFINITIONS GENERAL PROVISIONS The following terms shall have the following meanings for all purposes of the Operative Agreements referred to below, unless otherwise defined therein or the context thereof shall otherwise require and such meanings shall be equally applicable to both the singular and the plural forms of the terms herein defined. In the case of any conflict between the provisions of this Definition Annex and the provisions of the main body of the applicable Operative Agreement, the provisions of the main body of such Agreement shall control the construction of such Agreement. References to agreements shall, unless the context otherwise requires, be deemed to mean and include such agreements as the same may be amended and supplemented from time to time; and references to parties shall be deemed to include the permitted successors and assigns of such parties. DEFINED TERMS "Adjusted Net Worth" shall mean consolidated shareholders' equity plus (i) any negative cumulative translation adjustment at fiscal quarter end less (ii) any positive cumulative translation adjustment at fiscal quarter end. "Affiliate" shall mean any Person (a) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, the Lessee, (b) which beneficially owns or holds 5% or more of the Voting Stock of the Lessee or (c) 5% or more of the Voting Stock of which is beneficially owned or held by the Lessee or a Subsidiary. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of Voting Stock, by contract or otherwise; provided, however, that under no circumstance shall Wilmington Trust Company be considered to be an Affiliate of either the Owner Trustee or the Owner Participant nor shall either the Owner Trustee or the Owner Participant be considered to be an Affiliate of Wilmington Trust Company. "Alterations" shall have the meaning specified in Section 8(d) of the Facility Lease. "Applicable Law" means all applicable laws, treaties, judgments, decrees, injunctions, writs and orders of any court, governmental agency or authority and rules, regulations, orders, directives, licenses and permits of any governmental body, instrumentality, agency or authority. "Applicable Permits" shall mean any Permit that is necessary to develop, build, improve, own, operate or use all or any part of the Leased Property or any part thereof in accordance with the Facility Lease and the other Operative Agreements. "Appraisal" shall mean the appraisal issued to the Owner Participant by the Appraiser, in form and substance satisfactory to it, on the Closing Date. "Appraisal Procedure" shall mean the following procedure for determining the fair market sales value or the fair market rental value, as the case may be, of any property or the termination amount under Section 15 of the Facility Lease: If either party to the Facility Lease shall have given written notice to the other party requesting determination of such value by the Appraisal Procedure, the parties shall consult for the purpose of appointing a qualified independent appraiser by mutual agreement. If no such appraiser is so appointed within 15 days after such notice is given, each party shall appoint a qualified independent appraiser certified by the American Society of Appraisers within 20 days after such notice is given. If one party appoints an appraiser pursuant to the preceding sentence, the appraisal shall be made by such appraiser if the other party fails to appoint a second appraiser within the applicable time limit. If both parties appoint appraisers, the two appraisers so appointed shall within 30 days after such notice is given, appoint a third independent appraiser. If no such third appraiser is appointed within 30 days after such notice is given, either party may apply to the American Arbitration Association to make such appointment, such appointment shall be made within 30 days after such application, and the appraiser so appointed shall be certified by the American Society of Appraisers, and both parties shall be bound by any such appointment. Any appraiser or appraisers appointed pursuant to the foregoing procedure shall be instructed to determine one or more of the fair market sales value or the fair market rental value of such property or the termination amount within 60 days after such appointment. If the parties shall have appointed a single appraiser, such appraiser's determination of values shall be final. If three appraisers shall be appointed, the values determined by the three appraisers shall be averaged, but if any determinations differ by more than 10% from such average, the determination which is most different from such average shall be excluded, the remaining two determinations shall be averaged and such average shall be final. "Appraiser" shall mean Independent Equipment Company. "Assigned Agreements" shall mean the Facility Lease, the Site Lease and all the other agreements referred to in clause (C) of paragraph (I) of the Granting Clause in the Indenture. "Bankruptcy Code" shall mean the United States Bankruptcy Code, as amended from time to time, 11 U.S.C. ss. 101 et seq. "Bankruptcy Proceeding" shall meaning any case or other proceeding under the Bankruptcy Code or any successor or similar statute. "Basic Term" is defined in Section 3 of the Facility Lease. Annex I - 2 "Beneficial Interest" shall mean the interest of the Owner Participant under the Trust Agreement. "Board of Directors" shall mean the Board of Directors of the Lesssee. "Business Day" shall mean any day other than a Saturday, Sunday or a day on which banks in the States of New York, Delaware, Oregon or Utah (or in the event the Indenture Trustee receives and disburses funds in a location other than Utah, such other location) are authorized or permitted to be closed. "Canadian Pension Plan" shall mean each pension plan subject to the Income Tax Act (Canada) which the Lessee or any Subsidiary sponsors, maintains, or to which it makes, is making, or is obligated to make contributions at any time during the immediately preceding five (5) years other than any negotiated cost plan, or substantially similar plan, under applicable Canadian law, and that provides, or within the immediately preceding five (5) years has provided, retirement benefits primarily for the benefit of individuals substantially all of whom are or were "nonresident aliens," as defined in Section 7701(b) of the Code. "Casualty Occurrence" shall mean any of the following events: (a) the destruction of all or substantially all of the Facility; (b) damage to the Facility to such an extent that, in the good faith determination of the Board of Directors of the Lessee (which determination shall be made as soon as practicable after the occurrence of such damage, but in no event later than 90 days after such occurrence), the repair of the Facility is impractical or uneconomic; (c) the condemnation, confiscation or seizure of, or requisition of title to or use of, the Facility by an act of the United States government or any state or local authority or any instrumentality or agency of any thereof for a definite term which extends beyond the end of the Basic Term or for an indefinite term if such requisition in fact continues beyond the end of the Basic Term (in the event of such requisition for an indefinite term, the Casualty Occurrence shall be deemed to have taken place on the penultimate day of the Basic Term); or (d) a Casualty Occurrence as defined in the ClO//2// Lease. "Casualty Termination Date" shall mean the date which is the earliest to occur of (i) the first Determination Date set forth on Schedule 2 to the Facility Lease which is at least 10 days after the payment of insurance proceeds by the insurer in respect of a Casualty Occurrence, (ii) the first Determination Date set forth on Schedule 2 to the Facility Lease which is at least 90 days after a Casualty Occurrence, and (iii) the last day of the then Basic Term or Renewal Term, as the case may be. "Casualty Value" shall mean, as of any Casualty Termination Date during the Basic Term of the Facility Lease, the amount determined by multiplying the percentage set forth under the column entitled "Amount of Casualty Value" for such Casualty Termination Date on Schedule 2 to the Facility Lease by the Facility Cost, and as of any Casualty Termination Date during any Renewal Term, the amount determined in accordance with Section 19 of the Facility Lease. Annex I - 3 "CERCLA" shall mean the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C.ss.ss. 9601 et seq., and any future amendments. "ClO//2// Facility" shall mean the Facility as defined under the ClO//2// Lease. "ClO//2// Indenture" shall mean the Trust Indenture and Security Agreement dated as of December 27, 2001 between the ClO//2// Owner Trustee, as debtor, and the ClO//2// Indenture Trustee, as secured party. "ClO//2// Indenture Trustee" shall mean Wells Fargo Bank Northwest, National Association, and its successors in trust as indenture trustee under the ClO//2// Indenture. "ClO//2// Lease" shall mean the Facility Lease between Wilmington Trust Company, not in its individual capacity but solely as Owner Trustee, and Halsey ClO//2// Limited Partnership, as Lessee, dated December 27, 2001, in connection with a certain pulp bleaching facility in Halsey, Oregon, and any amendment thereto. "ClO//2// Lease Property" shall mean the Leased Property under the ClO//2// Lease. "ClO//2// Lessee" shall mean the Lessee under the ClO//2// Lease. "ClO//2// Note Purchasers" shall mean the Note Purchasers named in Schedule I to the ClO//2// Participation Agreement as the same may be amended from time to time and their respective successors and permitted assigns, including successive holders of the Series A Notes under the ClO//2// Trust Indenture. "ClO//2// Notes" shall mean the Series A Notes issued under the ClO//2// Indenture. "ClO//2// Operative Agreements" shall mean the Operative Agreements as defined pursuant to the ClO//2// Lease. "ClO//2// Owner Participant" means SELCO Service Corporation, an Ohio corporation. "ClO//2// Owner Trustee" shall mean Wilmington Trust Company in its capacity as trustee under the ClO//2// Trust Agreement and its successors in trust thereunder. "ClO//2// Participation Agreement" shall mean the Participation Agreement dated as of December 27, 2001 among Halsey ClO//2// Limited Partnership as Lessee, Wilmington Trust Company, not in its individual capacity but solely as Owner Trustee, the participant parties thereto, Pope & Talbot, Inc. and Wells Fargo Bank Northwest, National Association, as Indenture Trustee, and any amendment thereto. "ClO//2// Site" shall mean the ClO//2// Site as defined in the ClO//2// Lease. Annex I - 4 "ClO//2// Site Lease" shall mean the Site Lease as defined in the ClO//2// Lease. "ClO//2// Trust Agreement" shall mean the Trust Agreement dated as of December 27, 2001 between the ClO//2// Owner Participant and Wilmington Trust Company. "Closing" is defined in Section 1.3 of the Participation Agreement. "Closing Date" shall have the meaning specified in Section 1 of the Participation Agreement. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Collateral" shall mean the property from time to time securing the Secured Indebtedness. "Commitment" shall mean, with respect to each Note Purchaser, such Note Purchaser's commitment for the purchase of the Series A Notes as specified in Schedule I to the Participation Agreement. "Components " shall have the meaning set forth in Section 8(c) of the Facility Lease. "County Road Documents" means the Petition in the County Court of the State of Oregon for Linn County entitled "In the Matter of the Application of American Can Company, a corporation for the right, privilege and franchise to cross under Market Roads No. 2 and 3 with a 30 inch water pipe line and a 42 inch effluent pipe line, and to lay, maintain and operate the same in certain portions of Linn County, Oregon as hereinafter set forth outside the corporate limits of the City of Halsey" filed May 26, 1968 and the subsequent Acceptance of Order Granting Franchise dated May 24, 1968 and the Order Granting Franchise filed July 9, 1968. "Deed of Trust" shall mean the Deed of Trust dated as of the Closing Date, between the Owner Trustee, as grantor, the deed of trust trustee named therein and the Indenture Trustee, as beneficiary, pursuant to the Participation Agreement, securing the Secured Indebtedness. "Default" under the Facility Lease shall mean any event which would constitute an Event of Default under the Facility Lease if any requirement in connection therewith for the giving of notice or the lapse of time, or the happening of any further condition, event or act, had been satisfied. "Design Capacity" shall mean the capacity of the Facility to produce, in commercial operation, 500 air dry metric tons of pulp per day. Annex I - 5 "Determination Date" shall mean any date specified as such on Schedule 2 to the Facility Lease. "Early Purchase Date" shall mean (a) the date specified on Schedule 4 to the Facility Lease and (b) the date, if any, specified by the Lessee as an Early Purchase Date pursuant to Section 8(d) of the Facility Lease. "Early Purchase Price" with respect to an Early Purchase Date shall mean (a) the amount set forth in Schedule 4 to the Facility Lease with respect to such Early Purchase Date or (b) if such Early Purchase Date has been specified pursuant to Section 8(d), the price determined in accordance with the terms and provisions of said Section 8(d) for such Early Purchase Date. "EBITDA" shall mean consolidated net income plus (a) the sum of amounts for such period included in determining such consolidated net income of (i) consolidated interest expense, (ii) consolidated income tax expense, (iii) amortization or write-off of deferred financing costs, (iv) consolidated depreciation expense, (v) consolidated amortization expense, (vi) extraordinary non-cash losses and charges and other non-recurring non-cash losses and charges; less (b) gains on sales of assets (excluding sales in the ordinary course of business) and other extraordinary gains and non-recurring non-cash gains on a consolidated basis in accordance with GAAP. "Employee benefit plan" shall have the meaning specified in Section 3(3) of ERISA. "Environmental Consultant" shall mean Secor International, Inc. "Environmental Claim" shall mean any administrative, regulatory or judicial action, judgment, order, consent decree, consent agreement, suit, demand, demand letter, claim, Lien, notice of non-compliance or violation, notice of liability or potential liability, investigation or other proceeding arising (a) pursuant to any Environmental Law or Governmental Approval issued under any such Environmental Law, (b) from the presence, use, generation, storage, treatment, Release, threatened Release, disposal, remediation or other existence of any Hazardous Material, (c) from any Remedial Action or damages pursuant to an Environmental Law or the order or action of a Governmental Authority, (d) from any third party seeking damages, contribution, indemnification, cost recovery, compensation, injunctive or other relief in connection with a Hazardous Material or arising from alleged injury or threat of injury to health, safety, property, natural resources or the environment, or (e) from any Lien against the Leased Property in favor of a Governmental Authority in connection with a Release, threatened Release or disposal of a Hazardous Material. "Environmental Event" shall have the meaning set forth in Section 6.5(d) of the Facility Lease. Annex I - 6 "Environmental Law" shall mean any statute, law, regulation, rule, ordinance, order, consent decree, consent agreement, judgment, Permit, Governmental Approval, code, common law, treaty, convention or other requirement of a Governmental Authority, pertaining to protection of the environment, health or safety of persons, natural resources, forestry, conservation, wildlife, waste management, Hazardous Materials, and pollution (including, without limitation, Releases and disposals to air, land, water, groundwater and substrate), now or hereafter enacted, and includes, without limitation, Endangered Species Act of 1973, 16 U.S.C.ss.ss. 1531 et seq., CERCLA, RCRA, Federal Water Pollution Control Act, as amended by the Clean Water Act of 1977, .33 U.S.C. ss.ss. 1251 et seq., Clean Air Act of 1966, as amended, 42 U.S.C.ss.ss. 740l et seq., Toxic Substances Control Act of 1976, 15 U.S.C.ss.ss. 2601 et seq., Occupational Safety and Health Act of 1970, as amended, 29 U.S.C.ss.ss. 651 et seq., Oil Pollution Act of 1990, 33 U.S.C. ss.ss. 270l et seq., Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C.ss.ss. 1 1001 et seq., National Environmental Policy Act of 1975, 42 U.S.C.ss.ss. 432l et seq., Safe Drinking Water Act of 1974, as amended, 42 U.S.C.ss.ss. 300(t) et seq., and all similar or implementing laws, rules, regulations, approvals, guidance documents and amendments promulgated thereunder. "Environmental Permits" shall mean all Permits required under Environmental Laws. "Environmental Trigger" shall have the meaning set forth in Section 6.5(d) of the Facility Lease. "Equity Interests" shall mean in the case of a corporation, stock of any class, and in the case of a partnership or a limited partnership, a General Partnership Interest or Limited Partnership Interest. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, and any successor statute of similar import, together with the regulations thereunder, in each case as in effect from time to time. References to sections of ERISA shall be construed to also refer to any successor sections. "ERISA Affiliate" shall mean any corporation, trade or business that is, along with the Lessee, a member of a controlled group of corporations or a controlled group of trades or businesses, as described in Section 414(b) and 414(c), respectively, of the Code or Section 4001(b) of ERISA. "ERISA Event" shall mean (a) a Reportable Event with respect to a Pension Plan; (b) a withdrawal by the Lessee or any ERISA Affiliate from a Pension Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation of operations which is treated as such a withdrawal under Section 4062(e) of ERISA; (c) the filing of a notice of intent to terminate or the treatment of a plan amendment as a termination under Section 4041 or 404lA of ERISA or the commencement of proceedings by the PBGC to terminate a Pension Plan subject to Title IV of ERISA; (d) a failure by the Lessee or any ERISA Affiliate to make required Annex I - 7 contributions to a Pension Plan or other Plan defined in Section 3(2) of ERISA, including contributions required pursuant to Section 412(m) of the Code or Section 302(e) of ERISA; (e) an event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan; (f) the imposition of any liability under Title IV of ERISA, other than PBGC premiums due but not delinquent under Section 4007 of ERISA, upon the Lessee; or (g) an application for a funding waiver or an extension of any amortization period pursuant to Section 412 of the Code with respect to any Pension Plan or other Plan defined in Section 3(2) of ERISA. "Event of Default" under the Facility Lease shall have the meaning specified in Section 15(a) thereof "Excepted Property" shall mean (a)all indemnity payments (including, without limitation, payments pursuant to Sections 7 and 9 of the Participation Agreement and payments under the Tax Indemnity Agreement) to which the Owner Participant, the Owner Trustee, Wilmington Trust Company or any of their respective successors, permitted assigns, directors, officers, employees, servants and agents is entitled pursuant to the Operative Agreements, (b) any insurance proceeds payable under insurance maintained by the Owner Trustee, Wilmington Trust Company or the Owner Participant pursuant to Section 7(e) of the Facility Lease, (c) any insurance proceeds payable to or on behalf of the Owner Trustee, Wilmington Trust Company or to the Owner Participant under any public liability insurance maintained by Lessee pursuant to Section 7 of the Facility Lease, (d) Transaction Costs paid or payable to, or for the benefit of Owner Trustee, Wilmington Trust Company or Owner Participant pursuant to the Participation Agreement, (e) any rights of the Owner Participant, Wilmington Trust Company or the Owner Trustee to demand, collect, sue for, or otherwise receive and enforce payment of the foregoing amounts; provided such rights shall not include the exercise of any remedies under the Facility Lease other than the right to proceed by appropriate court action or actions, either at law or in equity, to enforce performance by the Lessee of the applicable covenants of the Facility Lease or to recover damages for the breach thereof, (f) any amount payable by any Transferee as the purchase price of the Owner Participant's interest in the Trust Estate in compliance with the terms of the Participation Agreement and the Trust Agreement and (g) proceeds of and interest on the foregoing. "Facility" shall mean the pulp mill in Halsey, Oregon leased under the Facility Lease, as the same shall be more fully described in Exhibit B to the Facility Lease, including all other equipment and improvements, if any, constructed or installed or to be constructed or installed on the ClO2 Site (including, without limitation, the Pond Improvements) for use as or in connection with such pulp mill, and any and all appliances, parts, instruments, appurtenances, accessories and other equipment and improvements of whatever nature from time to time incorporated in or installed as part of such pulp mill which are the property of the Owner Trustee pursuant to the terms of the Facility Lease, but excluding, however, (i) spare parts, (ii) any Alterations to the Facility as to which title remains with the Lessee pursuant to and within the limitations of Section 8(f)(ii) of the Facility Lease, and (iii) for the avoidance Annex I - 8 of doubt, all tax benefits and tax attributes of any Alterations on which work will start following December 27, 2001. "Facility Cost" shall mean U.S$64,573,650. "Facility Lease" shall mean the Facility Lease dated the Closing Date, between the Owner Trustee, as lessor, and the Lessee, as lessee, pursuant to the Participation Agreement, dated the Closing Date. "Fair Market Rental Value" shall mean the Fair Market Value calculated for a lease. "Fair Market Sales Value" shall mean the Fair Market Value calculated for a sale of the Facility. "Fair Market Value" shall mean the value which would obtain in an arm's-length transaction between an informed and willing buyer-user or lessee (other than a lessee currently in possession) and an informed and willing seller or lessor under no compulsion to sell, buy or lease. Any such determination shall be made (i) on the assumption that the Facility has been installed at the site of the purchaser or lessee with no expense being borne by such purchaser or lessee for costs of removal, storage, transportation or reinstallation of the Facility at such site, and that the Facility is in the condition and state of repair required by the Facility Lease, and, in the case of Fair Market Sales Value, shall give effect to the then remaining Site Lease Term, (ii) as respects Fair Market Rental Value, on the basis of a lease having terms and conditions (other than Rent) similar to the terms and conditions of the Facility Lease, and (iii) giving effect to the removal of any Parts and Alterations which remain the property of the Lessee under the provisions of Section 8 of the Facility Lease. "Fixed Charge Coverage Ratio" shall mean the ratio of EBITDA to the sum of (i) consolidated interest expense, (ii) current maturities of long term debt, (iii) income taxes paid in cash and (iv) the Maintenance Capital Expense Constant. "GAAP" shall mean generally accepted accounting principles at the time in the United States. "General Partnership Interest" shall mean the interest of a general partner in a general partnership and the interest of a general partner in a limited partnership. "Governmental Approval" shall mean any written Permit, variance, no-action letter, clearance, exemption or other approval granted by a Governmental Authority. "Governmental Authority" shall mean any international, foreign, federal, state, regional, county, local or other body, instrumentality, agency, department, court, commission, board or authority of a governmental entity. Annex I - 9 "Guidelines" shall mean the guidelines set forth in Revenue Procedure 2001-28, 2001-19 IRB 1156, as further set forth in Revenue Procedure 2001-29, 2001-19 IRB 1160, that are applied by the Internal Revenue Service in determining, for advance ruling purposes, whether leveraged lease transactions are leases for Federal income tax purposes. "Hazardous Material" shall mean any hazardous or toxic chemical, waste, byproduct, pollutant, contaminant, compound, product or substance, including, without limitation, asbestos, polychlorinated biphenyls, petroleum (including crude oil or any fraction thereof), and any material the exposure to, or manufacture, possession, presence, use, generation, storage, transportation, treatment, release, disposal, abatement, cleanup, removal, remediation or handling of which, is prohibited, controlled or regulated by any Environmental Law. "Indemnified Parties" shall mean the Participants, each holder of the ClO2 Notes, the Owner Participant Guarantor, the Owner Trustee, Wilmington Trust Company, the Trust Estate and the Indenture Trustee, and successors, permitted assigns, agents, servants, officers and employees of each of the foregoing. "Indenture" shall mean the Trust Indenture and Security Agreement dated as of September 15, 1999 between the Owner Trustee, as debtor, and the Indenture Trustee, as secured party. "Indenture Default" shall mean any event which would constitute an Indenture Event of Default if any requirement in connection therewith for the giving of notice, or the lapse of time, or the happening of any further condition, event or act, had been satisfied. "Indenture Estate" is defined in the Granting Clause of the Indenture. "Indenture Event of Default" is defined in Section 4.01 of the Indenture. "Indenture Investments" shall mean (i) direct obligations of the United States of America, and (ii) obligations fully guaranteed by the United States of America; provided that, any such obligations shall not have a maturity in excess of 90 days; provided further, that any such obligations may be made through a repurchase agreement in commercially reasonable form with a bank or other financial institution (which may be the Indenture Trustee) having capital, surplus and undivided profits of at least U.S.$250,000,000 so long as title to the underlying obligations shall pass to the Indenture Trustee and that such underlying obligations shall be segregated in a custodial or trust account of or for the benefit of the Indenture Trustee. "Indenture Trustee" shall mean Wells Fargo Bank Northwest, National Association (formerly known as First Security Bank, National Association), and its successors in trust as indenture trustee under the Indenture. Annex I - 10 "Indenture Trustee Agreements" shall mean the Operative Agreements to which the Indenture Trustee is a party. "Insolvency Proceeding" shall mean a Bankruptcy Proceeding, and an assignment for the benefit of the creditors, a general receivership or any other proceeding for the adjustment of debts, liquidation of assets or winding-up of the affairs of the Person. "Insured Parties" shall mean the Owner Trustee, ClO//2// Owner Trustee, Wilmington Trust Company, the Owner Participant, the Owner Participant Guarantor, each Indenture Trustee and each holder of the ClO//2// Notes and each holder of the Notes. "Intercreditor Agreement" shall mean the Intercreditor Agreement dated as of December 27, 2001 between the several ClO//2// Note Purchasers, the Note Purchasers, the Owner Participant, the ClO//2// Indenture Trustee, the Indenture Trustee, the Owner Trustee, the ClO//2// Owner Trustee, the Lessee, the ClO//2// Lessee and Pope & Talbot. "IRS" shall mean the Internal Revenue Service of the United States or any successor agency thereto. "James River Agreement" means the Settlement and Operating Agreement dated as of August 9, 1991 by and among Pope & Talbot, Inc., James River Paper Company, Inc. and James River Corporation of Virginia as amended by an Amendment dated February 7, 1996. "James River Easement" means the Easement Agreement dated August 22, 1991 between James River Paper Company, Inc. and Pope & Talbot, Inc., as amended by the Amendment dated June 14, 1993, and as further amended by a Second Amendment dated September 29, 1999. "Late Rate" shall mean interest at the annual rate equal to the lesser of (a) the highest rate permitted by applicable law and (b) the Specified Rate plus 2%. "Lease Default" shall mean a Default under the Facility Lease. "Lease Event of Default" shall mean an Event of Default under the Facility Lease. "Lease Supplement" shall mean a Lease Supplement, substantially in the form of Exhibit E to the Facility Lease, entered into pursuant to Section 4(f) of the Facility Lease. "Leased Property" shall mean the Facility and the Site Lease Property. "Lessee" shall mean Pope & Talbot, Inc., a Delaware corporation, and any corporation which succeeds thereto by merger or consolidation or which acquires all or substantially all of the assets thereof Annex I - 11 "Lessee Agreements" shall mean the Operative Agreements to which the Lessee is a party. "Lessor's Liens" means any Liens arising as a result of (a) claims against or affecting the Owner Trustee, Wilmington Trust Company or the Owner Participant not related to the transactions contemplated by the Operative Agreements, or (b) acts or omissions of the Owner Trustee, Wilmington Trust Company or the Owner Participant not related to the transactions contemplated by the Operative Agreements or not contemplated by the Operative Agreements, or (c) taxes imposed against the Owner Trustee, Wilmington Trust Company or the Owner Participant which the Lessee has not agreed to indemnify against pursuant to the Participation Agreement, the Facility Lease or the Tax Indemnity Agreement, or (d) claims against the Owner Trustee, Wilmington Trust Company or the Owner Participant arising out of the voluntary transfer (which transfer shall be made without the consent, whether or not required, of Lessee and, if the Indenture has not been discharged, the Indenture Trustee) of all or any part of its interest in the Leased Property, other than a transfer pursuant to Section 13, 15 or 19 of the Facility Lease, provided, however, that no Lien which is being contested pursuant to a Permitted Contest shall constitute a Lessor's Lien. "Lien" shall mean any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or contract, and including but not limited to the security interest lien arising from a mortgage, encumbrance, pledge, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances (including, with respect to stock, stockholder agreements, voting trust agreements, buy-back agreements and all similar arrangements) affecting Property. For the purposes of the Operative Agreements, the Lessee shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement, capitalized lease or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes, and such retention or vesting shall constitute a Lien. "Limited Partnership Interest" shall mean the interest of a limited partner in a limited partnership. "Maintenance Capital Expense Constant" shall mean U.S.$7,500,000.00. "Majority in Interest" as of a particular date of determination shall mean with respect to any action or decision of the holders of the Notes. The holders of more than 50% in aggregate unpaid principal amount of the Notes then outstanding, excluding any Notes held by the Owner Participant or the Lessee or an Affiliate of the Owner Participant or the Lessee unless all Notes are so held. "Make-Whole Amount" shall mean in connection with any prepayment of any series of Notes the excess, if any, of (i) the aggregate present value as of the date of such Annex I - 12 prepayment of each dollar of principal being prepaid of such Notes and the amount of interest (exclusive of interest accrued to the date of prepayment) that would have been payable in respect of such dollar if such prepayment had not been made, determined by discounting on a semiannually compounded basis such amounts at the Reinvestment Rate from the respective dates on which they would have been payable, over (ii) 100% of the principal amount of the outstanding Notes of such series being prepaid. The Make-Whole Amount shall not be less than zero. For purposes of any determination of the Make-Whole Amount: "Reinvestment Rate" shall mean (a) the sum of 0.50%, plus the yield reported at 10:00 A.M. (New York time) on the date of determination of the Make-Whole Amount by the Dow Jones Markets, a Division of Dow Jones & Company (formerly known as Telerate Access Service) on the display designated "Page 5" for United States government Securities having a maturity (rounded to the nearest month) corresponding to the remaining Weighted Average Life to Maturity of the principal of such series being prepaid, or (b) in the event that such Dow Jones Markets is no longer available or such yield is not reported as of such time, "Reinvestment Rate" shall mean the sum of 0.50%, plus the arithmetic mean of the two yields under the heading "Week Ending" published in the Statistical Release under the caption "Treasury Constant Maturities" for the maturity (rounded to the nearest month) corresponding to the Weighted Average Life to Maturity of the principal of such series being prepaid. If no maturity exactly corresponds to such Weighted Average Life to Maturity, yields for the maturity next longer than the Weighted Average Life to Maturity and for the maturity next shorter than the Weighted Average Life to Maturity shall be calculated and the Reinvestment Rate shall be interpolated from such yields on a straight-line basis, rounding in each of such relevant periods to the nearest month. For the purposes of calculating the Reinvestment Rate pursuant to clause (b), the most recent Statistical Release published prior to the date of determination of the Make-Whole Amount shall be used. "Statistical Release" shall mean the statistical release designated "H.15(519)" or any successor publication which is published weekly by the Federal Reserve System and which establishes yields on actively traded United States government Securities adjusted to constant maturities or, if such statistical release is not published at the time of any determination hereunder, then such other reasonably comparable index which shall be designated by the holders of a majority in aggregate principal amount of the applicable series of Notes then outstanding. "Weighted Average Life to Maturity" of the principal amount of the series of Notes being prepaid or accelerated shall mean, as of the time of any determination thereof the number of years obtained by dividing the then Remaining Dollar-Years of such principal by the aggregate amount of such principal. The term "Remaining Dollar-Years" of such principal shall mean the amount obtained by (i) multiplying (x) the remainder of (1) the amount of principal of such series that would have become due on each scheduled payment date if such prepayment had not been made, less (2) Annex I - 13 the amount of principal on such Notes being prepaid scheduled to become due on such date after giving effect to such prepayment or acceleration, by (y) the number of years (calculated to the nearest one-twelfth) which will elapse between the date of determination and such scheduled payment date, and (ii) totaling the products obtained in (i). "Material Adverse Effect" shall mean (a) a material adverse change in, or a material adverse effect upon, the operations, business, properties, condition (financial or otherwise) or prospects of the Lessee; (b) a material impairment of the ability of the Lessee to perform under any Lessee Agreement and to avoid any Event of Default; (c) a material adverse effect upon the legality, validity, binding effect or enforceability against the Lessee of any Lessee Agreement; or (d) a material adverse effect on the continued economic operation of the Leased Property. "Material Subsidiary" means any Subsidiary of the Lessee having either (a) 5% or more of the revenue of the Lessee and each of its Subsidiaries on a consolidated basis or (b) 5% or more of the assets of the Lessee and each of its Subsidiaries on a consolidated basis. "Memorandum of Facility Lease" shall mean, with respect to the Facility, a Memorandum of Facility Lease dated the Closing Date. "Memorandum of Site Lease" shall mean, with respect to the Facility, a Memorandum of Site Lease dated the Closing Date. "Multiemployer Plan" shall have the meaning as in Section 400 l(a)(3) of ERISA, but shall not include a plan for which Title IV of ERISA is made inapplicable pursuant to Section 402 l(b)(7) of ERISA. "Net Economic Return" means the Owner Participant's (i) net after-tax yield (computed using the multiple investment sinking fund method), and (ii) aggregate aftertax cash flow; each of clauses (i) and (ii) being calculated both for the period from the Closing Date to the Early Purchase Date and for the period from the Closing Date to the end of the Basic Term, and each as computed on the basis of the same economic and tax assumptions originally utilized by the Owner Participant in calculating the Periodic Rent, Early Purchase Price, Casualty Values and Termination Values. "Non-U.S. Person" shall mean any individual who is not a citizen of the United States, or any partnership, corporation, joint venture, trust, unincorporated association or other entity that is not either a citizen of the United States or organized under the laws of the United States or any State thereof. "Note Purchasers" shall mean the Note Purchasers named in Schedule 1 to the Participation Agreement and their respective successors and permitted assigns, including successive holders of the Series A Notes. Annex I - 14 "Notes" shall mean the Series A Notes. "Officers' Certificate" shall, with respect to any Person, mean a certificate signed by a Responsible Officer of such Person. "Operative Agreements" shall mean and include the Trust Agreement, the Participation Agreement, the Site Lease, the Memorandum of Site Lease, the Facility Lease, the Memorandum of Facility Lease, the Notes outstanding at the time of reference, the Indenture, the Deed of Trust, the Intercreditor Agreement and the Tax Indemnity Agreement. "Ordinary Wear Part" shall mean any mechanical or structural component of equipment subject to wear due to use or utilization. "Owner Participant" means SELCO Service Corporation, an Ohio corporation, and its successors and permitted assigns of its Beneficial Interest. "Owner Participant Agreements" shall mean the Operative Agreements to which the Owner Participant is a party. "Owner Participant Guarantor" shall mean KeyBank, National Association or any other Person guarantying the obligations of the Owner Participant. "Owner Participant Guaranty" shall mean that certain Owner Participant Guaranty dated as of September 15, 1999 entered into by the Owner Participant Guarantor. "Owner Trustee" shall mean Wilmington Trust Company in its capacity as trustee under the Trust Agreement and its successors in trust thereunder. "Owner Trustee Agreements" shall mean the Operative Agreements to which Wilmington Trust Company, either in its individual or trustee capacity, is a party. "Participants" shall mean the Note Purchasers and the Owner Participant. "Participation Agreement" shall mean the Participation Agreement dated as of September 15, 1999, among the Lessee, the Owner Trustee, the Participants and the Indenture Trustee. "Parts" shall have the meaning specified in Section 8(c) of the Facility Lease. "PBGC" shall mean the Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor thereto. "Pension Plan" shall mean a pension plan (as defined in Section 3(2) of ERISA) subject to Title IV of ERISA which the Lessee or any ERISA Affiliate sponsors, maintains, or to which it makes, is making, or is obligated to make contributions, or in the Annex I - 15 case of a multiple employer plan (as described in Section 4064(a) of ERISA) has made contributions at any time during the immediately preceding five (5) plan years. "Periodic Rent" shall mean all rent payable pursuant to Section 4(a) of the Facility Lease for the Basic Term and all rent payable pursuant to Section 19 of the Facility Lease for any Renewal Term. "Periodic Site Rent" is defined in Section 4(b) of the Facility Lease. "Periodic Site Rent Amount" shall mean (i) with respect to each Periodic Site Rent Payment Date on or prior to the later of (a) the expiration or earlier termination of the Basic Term of the Facility Lease in accordance with its terms or otherwise and (b) the full payment and discharge of the Secured Indebtedness, U.S.$l00 and (ii) for any Periodic Site Rent Payment Date occurring after the later of the periods described in subclauses (a) and (b) of clause (i) of this definition (the "Post-Facility Lease Date "), the Fair Market Rental Value for the Site, provided that notwithstanding the foregoing, if an Event of Default under the Facility Lease shall have occurred and the Owner Trustee or the Indenture Trustee, as the case may be, shall be exercising or shall have exercised remedies pursuant to Section 15 of the Facility Lease (including, without limitation, the re-letting or sale of the Facility), Periodic Site Rent Amount shall then and thereafter mean U.S.$l00 with respect to each Periodic Site Rent Payment Date. "Periodic Site Rent Payment Date" shall mean each January 2 and July 2 after the Closing Date during the Site Lease Term. "Permit" shall mean any order, authorization, consent, approval, license, ruling, permit, certification, exemption, waiver, filing or registration by or with any Governmental Authority. "Permitted Contest" shall mean a good faith contest in a manner which each Indemnified Party and, in the case of the Lessor's Liens, the Lessee, determines will be conducted in a manner so as to prevent the imposition of any criminal penalty on, or adverse effect on the title, property or right of, such Indemnified Party or the Lessee, as the case may be, of the legality or validity of any taxes, assessments, levies, fees or other governmental charges, or other claims, Liens or impositions which under the terms of the Facility Lease or the Site Lease, are required to be paid or discharged by the Lessee, the Owner Trustee, Wilmington Trust Company, or the Owner Participant, as the case may be, but for such contest. "Permitted Encumbrances" with respect to the Leased Property shall mean (a) the interests of the Lessee and the Owner Trustee, respectively, under the Facility Lease and under the Site Lease; (b) any Liens thereon for taxes, assessments, levies, fees and other governmental and similar charges either not yet due and payable or the amount or validity of which is being contested by a Permitted Contest (and for the payment of which adequate reserves have been provided); (c) any Liens of mechanics, suppliers, materialmen and Annex I - 16 laborers for work or services performed or materials furnished in connection with the Leased Property arising in the ordinary course of business and for amounts which are either not yet due and payable or the amount or validity of which is being contested by a Permitted Contest (and for the payment of which adequate reserves have been provided); (d) the Lien and security interest Liens granted to the Indenture Trustee under and pursuant to the Indenture; (e) Lessor's Liens; (f) Liens described in Schedule B to the Title Policy issued to the Owner Trustee on the Closing Date; (g) minor encumbrances, easements, covenants or reservations, rights of others for rights-of-way, utilities and other similar purposes, zoning or other restrictions, as to the use of real properties, and leases and subleases thereof, in each case, which (i) are necessary or appropriate for the conduct of the activities of the Lessee on the Leased Property or customarily exist on properties of business entities engaged in similar activities and similarly situated and (ii) do not in any event impair the use or value of the Leased Property; and (h) leases described in Schedule 3.2(w) to the Participation Agreement and subleases that do not impair the operation of the Facility and which are permitted in accordance with the terms and provisions of Section 9(b) of the Facility Lease. "Person" shall mean an individual, partnership, corporation, trust or limited liability company or other unincorporated organization, and a government or agency or political subdivision thereof. "Plan" shall mean an employee benefit plan (as defined in Section 3(3) of ERISA) which the Lessee or any ERISA Affiliate sponsors or maintains or to which the Lessee makes, is making, or is obligated to make contributions and includes any Pension Plan. "Plans" shall mean the engineering drawings for the Facility. "Pond Improvements" shall mean the condensate piping to the effluent pond and six aerators. "Post-Facility Lease Date" is defined in the definition of Periodic Site Rent Amount set forth in this Annex I. "Private Placement Memorandum" shall mean the Debt Participation Memorandum, dated July 1999, prepared by Key Global Finance and received by the Lessee. "Property" shall mean any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Railway License" means the Permit from Oregon Electric Railway Company to American Can Company dated August 27, 1968. "RCRA" shall mean the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976 and Hazardous and Solid Waste Amendments of 1984, 42 U.S.C. ss.ss. 690l et seq., and any future amendments. Annex I - 17 "Refunding Date" is defined in Section 13(a) of the Participation Agreement. "Register" shall mean the register kept at the principal office of the Indenture Trustee for the purpose of recording the registration and transfer of the Notes. "Release" shall mean any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, or disposing into the environment, including, without limitation, the abandonment or discarding of barrels, drums, containers, tanks and other receptacles containing or previously containing any Hazardous Material, whether occurring before or after the date of the Lease. "Remedial Action" shall mean actions required to (i) clean up, remove, remediate, treat, take corrective action, or in any other way address Hazardous Materials in the environment, (ii) prevent the Release or further Release or minimize the further Release of Hazardous Materials, or (iii) investigate and determine if a remedial response is needed, to design such a response and postremedial investigation, monitoring, operation, maintenance and care. "Renewal Term" shall mean any term in respect of which the Lessee shall have exercised its option to renew the Facility Lease pursuant to Section 19 thereof. "Rent" shall mean all Periodic Rent, Periodic Site Rent and Supplemental Rent. "Rent Payment Dates" shall mean the Closing Date and the second day of each January and July thereafter during the Term of the Facility Lease. "Reportable Event" shall mean a "reportable event" as described in Section 4043 of ERISA for which the notice requirement to the PBGC has not been waived, provided that the loss of qualification of a pension plan (as such term is defined in ERISA and which is covered by Title IV of ERISA), other than a Multiemployer Plan, established or maintained by the Lessee or any ERISA Affiliate or as to which the Lessee or any ERISA Affiliate contributed or is a member or otherwise may have any liability, and the failure to meet the minimum funding standard of Section 412 of the Internal Revenue Code of 1986, as amended, or Section 302 of ERISA shall be a Reportable Event regardless of the issuance of any waiver of the reporting requirement by the PBGC. "Required Lenders" shall have the meaning set forth in the Intercreditor Agreement. "Responsible Officer" shall, with respect to the Owner Participant, mean the President, any Vice President, the Secretary, any Assistant Secretary, the Treasurer or any Assistant Treasurer; shall, with respect to the Lessee, mean the President, the Vice President-Finance, chief financial officer, the manager of the Facility or persons fulfilling substantially the same responsibilities or functions as the aforesaid persons or which have direct responsibility for the administration of the Facility Lease and the other Lessee Agreements; Annex I - 18 and shall, with respect to the Owner Trustee or the Indenture Trustee, mean any officer in the Corporate Trust Administration department thereof. "Secured Indebtedness" shall mean the outstanding Notes and all principal thereof (and premium, if any) and interest thereon and all additional amounts and other sums at any time due and owing from or required to be paid by the Owner Trustee under the terms of the outstanding Notes or the Indenture or by the Lessee to the holders of the Notes under the Operative Agreements. "Securities Act" shall mean the Securities Act of 1933, as amended from time t o time. "Security" shall have the same meaning as in Section 2(a)(l) of the Securities Act of 1933, as amended. "Seller" shall mean Pope & Talbot, Inc. "Separate Account" shall have the meaning specified in Section 3(17) of ERISA. "Series A Notes" shall mean the 8.96% Secured Notes, Series A, Due January 2, 2008 of the Owner Trustee substantially in the form attached as Exhibit A to the Indenture. "Site" shall mean the property described in Exhibit A to the Site Lease; provided that no part of the Facility shall be part of the "Site"; and provided further that upon subdivision or other reduction pursuant to Section 19(h) of the Facility Lease, "Site" shall refer to the Site following such subdivision or other reduction. "Site Lease" shall mean the Site Lease dated the Closing Date between the Lessee, as landlord, and the Owner Trustee, as tenant. "Site Lease Property" shall mean the Site and the easements and rights granted to the Owner Trustee under the Site Lease. "Site Lease Term" shall mean the period beginning on the Closing Date and ending ninety-nine (99) years less one day from such date. "Specified Investment" shall mean (a) direct obligations of the United States of America and agencies thereof for which the full faith and credit of the United States is pledged, (b) obligations fully guaranteed by the United States of America, (c) certificates of deposit issued by, or bankers' acceptances of, or time deposits with, any bank, trust company or national banking association incorporated or doing business under the laws of the United States of America or one of the States thereof having combined capital and surplus and retained earnings of at least U.S.$500,000,000 (including the Indenture Trustee or Owner Trustee if such conditions are met), (d) repurchase agreements with any financial institution Annex I - 19 having a combined capital and surplus of at least U.S.$500,000,000 fully collateralized by obligations of the type described in clauses (a) and (c) above and (e) any money market fund investing solely in investments of the type described in clause (a), (b) or (c) above (which shall not include any hedge, future or other contract relating thereto); provided that if all of the above investments are unavailable, the entire amount to be invested may be used to purchase Federal funds from an entity described in (c) above; and provided further that no investment shall be eligible as a "Specified Investment" unless the final maturity or date of return of such investment is 91 days or less from the date of purchase thereof. "Specified Rate" shall mean 8.96% (computed on the basis of a 360 day year of 12 30-day months). "Subsidiary" shall mean, as to any particular parent business entity, any business entity of which such parent business entity and/or one or more business entities which are themselves subsidiaries of such parent business entity, (a) in the case of any corporation, own more than 50% of the Voting Stock, or (b) in the case of any partnership, own 50% or more of the Limited Partnership Interests or General Partnership Interests, as that case may be. Unless the context otherwise clearly requires, any reference to a "Subsidiary" is a reference to a subsidiary of the Lessee. "Supplemental Rent" shall mean all amounts, liabilities and obligations (other than Periodic Rent) which the Lessee is obligated to pay under the Facility Lease to the Owner Trustee or others, including, without limitation, Termination Value and Casualty Value payments. "Tax Indemnity Agreement" shall mean the Tax Indemnity Agreement dated as of September 15, 1999 between the Lessee and the Owner Participant. "Taxes" is defined in Section 7 of the Participation Agreement. "Technology" shall mean, with respect to the Facility and the Site Lease Property and the operation, maintenance, repair, replacement, inspection and removal thereof, (a) all patents, know-how, computer programs and other industrial property rights, and all licenses and rights to use the same, and (b) all information and data with respect thereto, in each case at any time owned or held by or available to the Lessee and necessary to operate the Facility at Design Capacity. "Term" shall mean the full term of the Facility Lease, including the Basic Term and any Renewal Term, unless the Facility Lease shall be terminated earlier pursuant to the terms thereof. "Termination Date" shall have the meaning set forth in Section 13(d) of the Facility Lease. Annex I - 20 "Termination Value" of the Facility as of any Termination Date during the Basic Term shall mean the amount determined by multiplying the percentage set forth under the column entitled "Net Termination Value" for such Determination Date on Schedule 3 of the Facility Lease by the Facility Cost. "Title Policy" shall mean the title policy issued with respect to the Site Lease. "Total Adjusted Capitalization" shall mean Adjusted Net Worth plus Total Funded Debt. "Total Funded Debt" shall mean all indebtedness for borrowed money of the Lessee, excluding (a) contingent obligations with respect to undrawn letters of credit, (b) liabilities in respect of hedging agreements, and (c) customary trade credit. "Transaction Costs" shall mean all amounts paid or payable by the Owner Trustee pursuant to Section 2 of the Participation Agreement. "Transferee" is defined in clause (a) of Section 11 of the Participation Agreement. "Trust" shall mean the trust established under the Trust Agreement. "Trust Agreement" shall mean the Trust Agreement dated as of September 15, 1999 between the Owner Participant and Wilmington Trust Company. "Trust Estate" shall mean all the estate, right, title and' interest of the Owner Trustee in, to and under the Leased Property and the Operative Agreements including, without limitation, all out-of-pocket funds advanced to the Owner Trustee by the Owner Participant, all proceeds from the sale of the Notes, all installments and other payments of rent, insurance proceeds, Casualty Values, condemnation awards, Termination Values, purchase price and sale proceeds, and all other proceeds of any kind for or with respect to the Leased Property and the Operative Agreements. "Unfunded Pension Liability" shall mean the excess of a Pension Plan's benefit liabilities under Section 400l(a)(16) of ERISA, over the current value of that Pension Plan's assets, determined in accordance with the assumptions used for funding the Pension Plan pursuant to Section 412 of the Code for the applicable plan year. "Uniform Commercial Code" shall mean the Uniform Commercial Code as in effect from time to time in any applicable jurisdiction. "U.S. Person" shall have the meaning given such term in Section 7701(a)(30) of the Code. Annex I - 21 "Voting Stock" of any Person shall mean Securities of any class or classes, the holders of which are entitled at such time to elect a majority of the corporate directors of such Person (or Persons performing similar functions). Annex I - 22 EX-10.1.1 5 dex1011.txt EMPOLYEE STOCK OPTION PLAN, AS AMENDED Exhibit 10.1.1 POPE & TALBOT, INC. EMPLOYEE STOCK OPTION PLAN (As Amended as of April 26, 2001) I. PURPOSE OF THE PLAN This Employee Stock Option Plan (the "Plan") is intended to promote the interests of Pope & Talbot, Inc. (the "Corporation") and its subsidiaries by providing a method whereby employees of the Corporation and its subsidiaries who are primarily responsible for the management, growth and success of the business may be offered incentives and rewards which will encourage them to continue in the employ of the Corporation or its subsidiaries. II. ADMINISTRATION OF THE PLAN (a) The Plan shall be administered by the Human Resources and Nominating Committee ("Committee") appointed from time to time by the Corporation's Board of Directors (the "Board"). The Committee shall consist of two (2) or more Board members who shall serve for such term as the Board may determine and shall be subject to removal by the Board at any time. (b) The Committee shall have full authority to administer the Plan, including authority to interpret and construe any provision of the Plan and to adopt such rules and regulations for administering the Plan as it may deem necessary. Decisions of the Committee shall be final and binding on all persons who have an interest in the Plan. III. STOCK SUBJECT TO THE PLAN (a) The stock which is to be made the subject of the options or stock awards granted under the Plan shall be the Corporation's authorized but unissued or reacquired common stock ("Common Stock"). In connection with the issuance of shares under the Plan, the Corporation may repurchase shares of Common Stock on the open market or otherwise. The total number of shares issuable in the aggregate under the Plan and the Corporation's 1996 Non-Employee Director Stock Option Plan (the "Director Plan," and together with the Plan, the "Plans") shall not exceed 2,500,000 shares. (b) The number of shares of Common Stock available for issuance under the Plans shall be subject to adjustment in accordance with the following guidelines: (1) If any outstanding option granted under the Plans expires or is terminated or cancelled for any reason prior to exercise in full, then the unissued shares of Common Stock subject to the unexercised portion of such option may become the subject of subsequent stock option grants or stock awards under the Plans. If shares awarded pursuant to Section VII are forfeited to or repurchased by the Corporation, the number of shares of Common Stock forfeited or repurchased may become the subject of subsequent stock option grants or stock awards under the Plans. (2) Should the exercise price of an outstanding option under the Plans be paid with shares of Common Stock or should shares of Common Stock otherwise issuable under the Plans be withheld by the Corporation in satisfaction of the withholding taxes incurred in connection with the exercise of an outstanding option under the Plans, then the number of shares of Common Stock 1 available for issuance under the Plans shall be reduced by the gross number of shares for which the option is exercised, and not by the net number of shares of Common Stock actually issued to the option holder. (3) Should shares of Common Stock issued under the Plan be withheld by the Corporation in satisfaction of the withholding taxes incurred in connection with a stock award under Section VII, then the number of shares of Common Stock available for issuance under the Plans shall nevertheless be reduced by the gross number of shares issued under the stock award, and not by the net number of shares of Common Stock retained by the award recipient. (c) In no event shall any one participant in the Plan receive stock options for more than 200,000 shares of Common Stock in the aggregate per calendar year. (d) In the event that any change is made to the Common Stock issuable under the Plan or subject to any outstanding stock option granted under the Plan (whether by reason of (I) any merger, consolidation or other reorganization or (II) any stock dividend, stock split, recapitalization, combination of shares, exchange of shares or other change in corporate structure effected without the Corporation's receipt of consideration), appropriate adjustments shall be made to (i) the maximum number and/or class of securities issuable under the Plans, (ii) the maximum number and/or class of securities for which stock options may be granted under the Plan to any one participant per calendar year, and (iii) the number and/or class of securities and price per share in effect under each outstanding stock option. IV. SELECTION OF AWARD RECIPIENTS The persons who shall be eligible to receive options or stock awards under the Plan shall be such key employees of the Corporation and its subsidiaries (including officers, whether or not they are directors) as the Committee shall from time to time select. Non-employee members of the Board shall not be eligible to participate in this Plan. V. TERMS AND CONDITIONS OF STOCK OPTIONS The Committee shall have the sole and exclusive authority to grant to the selected key employees one or more stock options under the Plan. The Committee shall have full authority to determine whether each such granted option is to be an incentive stock option ("Incentive Option") satisfying the requirements of Section 422 of the Internal Revenue Code or a non-qualified option not intended to meet such requirements. Each option granted under the Plan shall be evidenced by an instrument in such form as the Committee may from time to time approve. Such instrument, however, shall conform to the terms and conditions specified below. Each instrument evidencing an Incentive Option shall, in addition, be subject to the applicable provisions of Section VI. (a) Option Price. The option price per share shall be fixed by the Committee, but in no event shall the option price be less than eighty-five percent (85%) of the fair market value per share of Common Stock on the date the option is granted. For purposes of the preceding sentence (and for all other valuation purposes under the Plan), the fair market value per share of Common Stock shall be its closing price, as officially quoted on the New York Stock Exchange Composite-Tape (or any similar successor quotation system), on the day immediately prior to the date in question. If there is no quotation 2 available for such day, then the closing price on the next preceding day for which there does exist such a quotation shall be determinative of fair market value. (b) Number of Shares, Term and Exercise. (1) Each option granted under the Plan shall be exercisable on such date or dates, during such period or periods and for such number of shares as shall be determined by the Committee and set forth in the instrument evidencing such option. No option granted under the Plan, however, shall become exercisable during the first six months of the option term, except to the extent the instrument evidencing such option provides for exercisability upon the optionee's death or disability; nor shall any option have an expiration date which is more than 10 years after the grant date. (2) Any option granted under the Plan may be exercised upon written notice to the Corporation at any time prior to the expiration or sooner termination of the option term. The option price for the number of shares of Common Stock for which the option is exercised shall become immediately due and payable, and no certificates for the shares shall be issued until payment has been made in accordance with subparagraph (3) below. (3) The option price shall be payable in one or more of the following alternative forms specified in the instrument evidencing the option: (i) full payment in cash or cash equivalents; (ii) full payment in shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation's earnings and valued at fair market value on the Exercise Date (as such term is defined below); (iii) full payment through a combination of shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation's earnings and valued at fair market value on the Exercise Date and cash or cash equivalents; or (iv) full payment effected through a broker-dealer sale and remittance procedure pursuant to which the optionee (A) shall provide irrevocable written instructions to the designated brokerage firm to effect the immediate sale of the purchased shares and to remit to the Corporation, out of the sale proceeds available on the settlement date, an amount equal to the aggregate option price payable for the purchased shares plus all applicable Federal and State income and employment taxes required to be withheld by the Corporation in connection with such purchase and sale, and (B) shall provide written directives to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale transaction. For purposes of this subparagraph (3), the Exercise Date shall be the date on which written notice of the option exercise is delivered to the Corporation. Except to the extent the sale and remittance procedure is utilized in connection with the option exercise, payment of the option price for the purchased shares must accompany the exercise notice. (c) Termination of Employment. (1) Should an optionee cease to be an Employee of the Corporation other than by reason of death or termination for gross and willful misconduct, then each outstanding option 3 held by such optionee under the Plan shall not remain exercisable for more than a twelve (12) month period (or such shorter period as may be specified in the instrument evidencing such option) following the date of such cessation of Employee status, except to the extent the Committee may specifically provide otherwise pursuant to its authority under Section XI below. Under no circumstances, however, shall any such option be exercisable after the specified expiration date of the option term. Each such option shall, during such period of limited exercisability, be exercisable only to the extent of the number of shares (if any) for which such option is exercisable on the date of the optionee's cessation of Employee status. (2) If the optionee's status as an Employee is terminated for gross and willful misconduct, including (without limitation) the wrongful appropriation of employer funds or the commission of a felony, then any outstanding options granted such optionee under the Plan may be terminated by the Committee as of the date of such misconduct. (3) For purposes of the Plan, an individual shall be considered to be an Employee of the Corporation for so long as such individual continues in employment with the Corporation or one or more subsidiaries of the Corporation. A subsidiary of the Corporation shall be any company (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each of the companies in such unbroken chain (other than the last company) owns, at the time of determination, stock possessing 50% or more of the total combined voting power of all classes of stock in one other company in such chain. (d) Death of Optionee. Any option under the Plan held by the optionee on the date of his death may be exercised, to the extent of the number of shares (if any) for which such option was exercisable on the date the optionee ceased Employee status (less any option shares subsequently purchased by the optionee prior to death), by the personal representative of the optionee's estate or by the person or persons to whom the option is transferred pursuant to the optionee's will or in accordance with the laws of descent and distribution. Such option may be exercised at any time prior to the earlier of (A) the specified expiration date of the option term or (B) the first anniversary of the optionee's death. Upon the occurrence of the earlier event, the option shall terminate and cease to be exercisable. (e) Acceleration Upon Cessation of Employee Status. The Committee shall have complete discretion, exercisable either at the time of the option grant or at any time while the option remains outstanding, to provide with respect to one or more options granted under the Plan that during the limited period of exercisability following the optionee's cessation of Employee status (as provided in Section V(c)(1) or Section V(d) above), the option may be exercised not only with respect to the number of shares for which it is exercisable at the time of such cessation of Employee status but also with respect to one or more installments of purchasable shares for which the option otherwise would have become exercisable had such cessation of Employee status not occurred. (f) Assignability. No option granted under the Plan shall be assignable or transferable by the optionee other than by will or by the laws of descent and distribution following the optionee's death, and during the optionee's lifetime, the option shall be exercisable only by the optionee. (g) Immediate Exercise of Option. In the event that the Corporation or its shareholders enter into an agreement to dispose of all or substantially all of the assets or outstanding capital stock of the Corporation by means of a sale, merger, reorganization or liquidation ("Corporate Transaction"), then each option to acquire Common Stock at the time outstanding under the Plan shall 4 become exercisable, immediately prior to the consummation of such Corporate Transaction, with respect to the full number of shares of Common Stock at the time subject to such option; provided, however, that the exercisability as an incentive stock option under the Federal tax laws of any accelerated option shall be subject to the applicable dollar limitation of Section VI(b). However, an outstanding option shall not be so accelerated if the terms of the agreement require as a prerequisite for the consummation of the Corporate Transaction that such option is either to be assumed by the successor corporation or parent thereof or to be replaced with a comparable option to purchase shares of capital stock of the successor corporation or parent thereof. The determination of such comparability shall be made by the Board, and its determination shall be conclusive and binding on all persons who have an interest in the Plan. Immediately after the consummation of the Corporate Transaction, all outstanding options (whether or not accelerated) shall expire and be of no further force or effect whatsoever, unless assumed by the successor corporation or parent thereof. (h) Stockholder Rights. No person shall have any rights as a stockholder with respect to the shares of Common Stock purchasable under any option granted under the Plan until he shall have exercised such option and paid the exercise price for the purchased shares. VI. INCENTIVE OPTIONS Incentive Options granted under the Plan shall be subject to the additional terms and conditions specified below. Options which are specifically designated as "non-qualified options" or "non-statutory options" at the time of grant shall not be subject to any of the terms and conditions specified below and accordingly shall not be Incentive Options. (a) Option Price. The option price per share of the Common Stock subject to an Incentive Option shall in no event be less than one hundred percent (100%) of the fair market value of a share of Common Stock on the date of grant. (b) Dollar Limitation. The aggregate fair market value (determined as of the respective date or dates of grant) of the Common Stock for which one or more options granted to any Employee under this Plan (or any other option plan of the Corporation or its parent or subsidiary corporations) may for the first time become exercisable as incentive stock options under the Federal tax laws during any one calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000) or such greater amount as may be permitted under subsequent amendments to Section 422 of the Internal Revenue Code. To the extent the Employee holds two or more options which become exercisable for the first time in the same calendar year, the foregoing limitations or the exercisability thereof as incentive stock options under the Federal tax laws shall be applied on the basis of the order in which such options are granted. Should the number of shares of Common Stock for which any Incentive Option first becomes exercisable in any calendar year exceed the applicable One Hundred Thousand Dollar ($100,000) limitation, then the option may nevertheless be exercised in that calendar year for the excess number of shares as a non-qualified option under the Federal tax laws. (c) 10% Shareholder. If any individual to whom an Incentive Option is to be granted pursuant to the provisions of the Plan is on the date of grant the owner of stock (as determined under Section 424(d) of the Internal Revenue Code) possessing more than 10% of the total combined voting power of all classes of stock of the Corporation or any one of its subsidiaries, then the following special provisions shall be applicable to the option granted to such individual: 5 (1) The option price per share of the Common Stock subject to such Incentive Option shall not be less than one hundred and ten percent (110%) of the fair market value of one share of Common Stock on the date of grant; and (2) The option shall not have a term in excess of five (5) years from the date of grant. (d) Limitation on Time of Grant. No Incentive Option shall be granted on or after the tenth anniversary of the last action by the Board approving an increase in the number of shares available for issuance under the Plan, which action was subsequently approved within 12 months by the shareholders. Except as modified by the preceding provisions of this paragraph VI, all the provisions of the Plan shall be applicable to the Incentive Options granted hereunder. VII. STOCK AWARDS (a) Stock Bonuses. The Committee may award shares under the Plan as stock bonuses. Shares awarded as a bonus shall be subject to the terms, conditions and restrictions determined by the Committee. The restrictions may include restrictions concerning transferability and forfeiture of the shares awarded, together with any other restrictions determined by the Committee. The Committee may require the recipient to sign an agreement as a condition of the award, but may not require the recipient to pay any monetary consideration other than amounts necessary to satisfy tax withholding requirements. The agreement may contain any terms, conditions, restrictions, representations and warranties required by the Committee. The certificates representing the shares awarded shall bear any legends required by the Committee. (b) Restricted Stock. The Committee may issue shares under the Plan for any consideration (including promissory notes and services) determined by the Committee. Shares issued under the Plan shall be subject to the terms, conditions and restrictions determined by the Committee. The restrictions may include restrictions concerning transferability, repurchase by the Corporation and forfeiture of the shares issued, together with any other restrictions determined by the Committee. All Common Stock issued pursuant to this section VII(b) shall be subject to a purchase agreement, which shall be executed by the Corporation and the prospective purchaser of the shares before the delivery of certificates representing the shares to the purchaser. The purchase agreement may contain any terms, conditions, restrictions, representations and warranties required by the Committee. The certificates representing the shares shall bear any legends required by the committee. VIII. EFFECTIVE DATE AND TERM OF PLAN (a) The Plan initially became effective on the date it was adopted by the Board, but before any options granted under the Plan could become exercisable, the Plan had to be approved by the holders of at least a majority of the Corporation's outstanding voting stock represented and voting at a duly-held meeting at which a quorum was present, provided the shares voting for approval also constituted at least a majority of the required quorum. If such stockholder approval had not been obtained, then any options previously granted under the Plan would have terminated and no further options would have been granted. Subject to such limitation, the Committee was authorized to grant options under the Plan at any time after the adoption of the Plan by the Board. 6 (b) Unless sooner terminated in accordance with Section IX, the Plan shall terminate on the date upon which all the shares of Common Stock available for issuance under the Plans shall have been issued hereunder or under the Director Plan. IX. AMENDMENT OR DISCONTINUANCE BY BOARD ACTION (a) The Board may amend, suspend or discontinue the Plan in whole or in part at any time; provided, however, that such action shall not adversely affect rights and obligations with respect to options at the time outstanding under the Plan. In addition, no modification of the Plan by the Board shall without the approval of the Corporation's stockholders materially increase the number of shares of Common Stock which may be issued under the Plans (unless necessary to effect the adjustments required under Section III(d)). (b) Notwithstanding the provisions of Section IX(a), the Board hereby reserves the right to amend or modify the terms and provisions of the Plan and of any outstanding options under the Plan to the extent necessary to qualify any or all options under the Plan for such favorable Federal income tax treatment as may be afforded employee stock options under Section 422 of the Internal Revenue Code and regulations subsequently promulgated thereunder. X. CANCELLATION AND REGRANT The Committee shall have the exclusive authority to effect, at any time and from time to time, with the consent of the affected holders, the cancellation of any or all outstanding options under the Plan and to grant in substitution therefor new options under the Plan covering the same or different numbers of shares of Common Stock but having an option price per share not less than eighty-five percent (85%) of fair market value on the new grant date. XI. SPECIAL POWERS In addition to the power and authority provided the Committee pursuant to the foregoing provisions of the Plan, the Committee shall have the full power and authority, exercisable from time to time in its sole discretion, to extend, either at the time the option is granted or at any time during which the option remains outstanding, the period for which the option is to remain exercisable following the holder's termination of Employee status from the twelve (12) month or shorter period set forth in the agreement evidencing such option to such greater period of time as the Committee shall deem appropriate; provided, however, that in no event shall such option be exercisable after the specified expiration date of the term thereof. 7 EX-10.1.6 6 dex1016.txt 1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN Exhibit 10.1.6 POPE & TALBOT, INC. 1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN (As Amended as of April 26, 2001) I. PURPOSE OF THE PLAN This 1996 Non-Employee Director Stock Option Plan (the "Plan") is intended to promote the interests of Pope & Talbot, Inc., a Delaware corporation (the "Corporation"), by providing the non-employee members of the Corporation's Board of Directors with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to remain in the service of the Corporation. II. DEFINITIONS For purposes of the Plan, the following definitions shall be in effect: BOARD: the Corporation's Board of Directors. CODE: the Internal Revenue Code of 1986, as amended. COMMON STOCK: shares of the Corporation's common stock. CORPORATE TRANSACTION: any of the following stockholder-approved transactions to which the Corporation is a party: (a) a merger or consolidation in which the Corporation is not the surviving entity, except for a transaction the principal purpose of which is to change the State in which the Corporation is incorporated, (b) the sale, transfer or other disposition of all or substantially all of the Corporation's assets in complete liquidation or dissolution of the Corporation, or (c) any reverse merger in which the Corporation is the surviving entity but in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to person or persons different from the persons holding those securities immediately prior to such merger. DOMESTIC RELATIONS ORDER: any judgment, decree or order (including approval of a property settlement agreement) which provides or otherwise conveys, pursuant to applicable State domestic relations laws (including community property laws), marital property rights to any spouse or former spouse of an Optionee. EMPLOYEE PLAN: the Corporation's Employee Stock Option Plan, as amended and restated from time to time. EFFECTIVE DATE: the date of the 1996 Annual Stockholders Meeting, provided the Plan is approved by the affirmative vote of a majority of the outstanding shares of the Corporation's common stock present or represented and entitled to vote at that Annual Meeting. 1 ELIGIBLE DIRECTORS: those individuals who are serving as non-employee Board members on the Effective Date and those individuals who first become non-employee Board members after such Effective Date, whether through appointment by the Board or election by the Corporation's stockholders. FAIR MARKET VALUE: the Fair Market Value per share of Common Stock determined in accordance with the following provisions: (a) If the Common Stock is at the time listed or admitted to trading on the New York Stock Exchange or on any other national securities exchange, then the Fair Market Value shall be the closing selling price per share on the date immediately prior to the date in question on the exchange serving as the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no reported sale of Common Stock on such exchange on the date immediately prior to the date in question, then the Fair Market Value shall be the closing selling price on the exchange on the last preceding date for which such quotation exists. (b) If the Common Stock is not at the time listed or admitted to trading on any national securities exchange but is traded on the NASDAQ National Market, the Fair Market Value shall be the closing selling price per share on the date immediately prior to the date in question, as such price is reported by the National Association of Securities Dealers on the NASDAQ National Market or any successor system. If there is no reported closing selling price for the Common Stock on the date immediately prior to the date in question, then the closing selling price on the last preceding date for which such quotation exists shall be determinative of Fair Market Value. 1934 ACT: the Securities Exchange Act of 1934, as amended. OPTIONEE: any person to whom an option is granted under the Plan. QUALIFIED DOMESTIC RELATIONS ORDER: a Domestic Relations Order which substantially complies with the requirements of Code Section 414(p). III. ADMINISTRATION OF THE PLAN The terms and conditions of each automatic option grant (including the timing and pricing of the option grant) shall be determined by the express terms and conditions of the Plan, and neither the Board nor any committee of the Board shall exercise any discretionary functions with respect to option grants made pursuant to the Plan. IV. STOCK SUBJECT TO THE PLAN (a) Shares of the Corporation's Common Stock shall be available for issuance under the Plan and shall be drawn from either the Corporation's authorized but unissued shares of Common Stock or from reacquired shares of Common Stock, including shares repurchased by the Corporation on the open market. The maximum number of shares of Common Stock issuable in the aggregate under this Plan and the Employee Plan shall not exceed the number of shares set forth in Section III(a) of the Employee Plan, as may be amended from time to time. (b) Should one or more outstanding options under this Plan or the Employee Plan expire or terminate for any reason prior to exercise in full, then the shares subject to the portion of each 2 option not so exercised shall be available for subsequent option grants under this Plan or the Employee Plan. However, should the exercise price of an outstanding option under the Plan be paid with shares of Common Stock, then the number of shares of Common Stock available for issuance under this Plan and the Employee Plan shall be reduced by the gross number of shares for which the option is exercised, and not by the net number of shares of Common Stock actually issued to the holder of such option. (c) Should any change be made to the Common Stock issuable under the Plan and the Employee Plan by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, then the Board shall make appropriate adjustments to (i) the maximum number and/or class of securities issuable in the aggregate under this Plan and the Employee Plan, (ii) the number and/or class of securities for which automatic option grants are to be subsequently made per each newly-elected or continuing non-employee Board member under the Plan, and (iii) the number and/or class of securities and price per share in effect for each option outstanding under the Plan. Such adjustments to the outstanding options are to be effected in a manner which shall preclude the enlargement or dilution of rights and benefits under such options. The adjustments determined by the Board shall be final, binding and conclusive. V. TERMS AND CONDITIONS OF AUTOMATIC OPTION GRANTS (a) Grant Date. Option grants shall be made on the dates specified below: (1) Each individual who is serving as an Eligible Director on the Effective Date shall automatically be granted on that date a non-statutory option to purchase 2,000 shares of Common Stock, provided such individual has not previously been in the employ of the Corporation (or any subsidiary). (2) Each individual who first becomes an Eligible Director after the Effective Date, whether through election by the Corporation's stockholders or appointment by the Board, shall automatically be granted, at the time of such initial election or appointment, a non-statutory option to purchase 3,000 shares of Common Stock, provided such individual has not previously been in the employ of the Corporation (or any subsidiary corporation). (3) At every Annual Stockholders Meeting, beginning with the 2001 Annual Meeting, each individual who is to continue to serve as a non-employee Board member, whether or not such individual is standing for re-election as a Board member at that Annual Meeting, shall automatically be granted a non-statutory option to purchase 3,000 shares of Common Stock, provided such individual has served as a director for at least six (6) months. There shall be no limit on the number of such 3,000 share option grants any one non-employee Board member may receive over his or her period of Board service, and non-employee Board members who have previously been in the employ of the Corporation (or any subsidiary) shall be eligible to receive such annual option grants. (b) Exercise Price. The exercise price per share of Common Stock subject to each automatic option grant shall be equal to one hundred percent (100%) of the Fair Market Value per share of Common Stock on the automatic grant date. (c) Payment. The exercise price shall become immediately due upon exercise of the option and shall be payable in one or more of the forms specified below: 3 (1) cash or check made payable to the Corporation's order; (2) shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date (as such term is defined below); or (3) payment through a broker-dealer sale and remittance procedure pursuant to which the non-employee Board member (I) shall provide irrevocable written instructions to a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares and (II) shall concurrently provide written directives to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale transaction. For purposes of this Section V(c), the Exercise Date shall be the date on which written notice of the option exercise is delivered to the Corporation. Except to the extent the sale and remittance procedure specified above is utilized in connection with the exercise of the option, payment of the option exercise price for the purchased shares must accompany the exercise notice. (d) Option Term. Each automatic grant under the Plan shall have a maximum term of ten (10) years measured from the automatic grant date. (e) Exercisability. Each automatic grant shall be immediately exercisable for any or all of the option shares as fully vested shares. (f) Limited Transferability of Options. During Optionee's lifetime, the option may be exercised only by the Optionee and shall not be assignable or transferable other than by will or by the laws of descent and distribution following the Optionee's death. However, an option may be assigned in whole or in part pursuant to the terms of a Qualified Domestic Relations Order. The assigned portion may only be exercised by the person or persons who acquire a proprietary interest in the option pursuant to such order. The terms applicable to the assigned portion shall be the same as those in effect for the option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Corporation may deem appropriate. (g) Effect of Termination of Board Service. (1) Should the Optionee cease for any reason to serve as a Board member while holding one or more automatic option grants under the Plan, then such individual shall have a twelve (12)-month period following the date of such cessation of Board service in which to exercise each such option for any or all of the option shares at the time subject to that option. (2) Should the Optionee die while in Board service or within twelve (12) months after cessation of Board service, then any automatic option grant held by the Optionee at the time of death may subsequently be exercised, for any or all of the option shares at the time subject to that option, by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution. The right to exercise each such option shall lapse upon the expiration of the twelve (12)-month period measured from the date of the Optionee's cessation of Board service. 4 (3) In no event shall any automatic grant remain exercisable after the expiration date of the ten (10)-year option term. Upon the expiration of the applicable post-service exercise period under subparagraphs 1 or 2 above or (if earlier) upon the expiration of the ten (10)-year option term, the automatic grant shall terminate and cease to be outstanding with respect to all remaining option shares. (h) Stockholder Rights. The holder of an automatic option grant shall have no stockholder rights with respect to any shares subject to such option until such individual shall have exercised the option and paid the exercise price for the purchased shares. (i) Stock Option Agreement. Each automatic option grant shall be evidenced by a Stock Option Agreement in a form consistent with the terms of the Plan. VI. CORPORATE TRANSACTION (a) Immediately following the consummation of any Corporate Transaction, each automatic option grant under the Plan shall terminate and cease to be outstanding, except to the extent such grant is assumed by the successor entity or its parent corporation. (b) Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in the consummation of such Corporate Transaction, had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to (i) the number and class of securities available for issuance under the Plan following the consummation of such Corporate Transaction and (ii) the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain the same. (c) The automatic option grants outstanding under the Plan shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. VII. AMENDMENT OF THE PLAN AND AWARDS The Board has complete and exclusive power and authority to amend or modify the Plan in any or all respects whatsoever. However, no such amendment or modification shall adversely affect rights and obligations with respect to options at the time outstanding under the Plan, unless the affected Optionees consent to such amendment. In addition, the Board may not, without the approval of the Corporation's stockholders, amend the Plan to materially increase the maximum number of shares issuable in the aggregate under this Plan and the Employee Plan. VIII. EFFECTIVE DATE AND TERM OF PLAN (a) The Plan shall be effective on the date of the 1996 Annual Stockholders Meeting, provided the Plan is approved by the affirmative vote of a majority of the outstanding shares of the Corporation's common stock present or represented and entitled to vote at such Annual Meeting, and 5 the initial automatic option grants under the Plan shall be made on such date. If such stockholder approval is not obtained, then the Plan shall terminate and no options shall be granted under the Plan. (b) The Plan shall remain in effect until the date on which all shares available for issuance under this Plan and the Employee Plan shall have been issued pursuant to the exercise of outstanding options. IX. USE OF PROCEEDS Any cash proceeds received by the Corporation from the sale of shares pursuant to option grants or share issuances under the Plan shall be used for general corporate purposes. X. REGULATORY APPROVALS (a) The implementation of the Plan, the granting of any option under the Plan and the issuance of Common Stock upon the exercise of the option grants made hereunder shall be subject to the Corporation's procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the options granted under it, and the Common Stock issued pursuant to it. (b) No shares of Common Stock or other assets shall be issued or delivered under this Plan unless and until there shall have been compliance with all applicable requirements of Federal and state securities laws, including the filing and effectiveness of the Form S-8 registration statement for the shares of Common Stock issuable under the Plan, and all applicable listing requirements of any securities exchange on which the Common Stock is then listed for trading. XI. NO IMPAIRMENT OF RIGHTS Neither the action of the Corporation in establishing the Plan nor any provision of the Plan shall be construed or interpreted so as to affect adversely or otherwise impair the right of the Corporation or the stockholders to remove any individual from the Board at any time in accordance with the provisions of applicable law. XII. MISCELLANEOUS PROVISIONS (a) The right to acquire Common Stock or other assets under the Plan may not be assigned, encumbered or otherwise transferred by any Optionee. (b) The provisions of the Plan relating to the exercise of the outstanding options shall be governed by the laws of the State of Oregon, as such laws are applied to contracts entered into and performed in such State. (c) The provisions of the Plan shall inure to the benefit of, and be binding upon, the Corporation and its successors or assigns, and the Optionees, the legal representatives of their respective estates, their respective heirs or legatees and their permitted assignees. 6 EX-10.1.9 7 dex1019.txt RESTRICTED STOCK AWARD AGREEMENT- MICHAEL FLANNERY Exhibit 10.1.9 RESTRICTED STOCK AWARD AGREEMENT This Agreement is entered into on April 26, 2001 effective as of September 9, 1999 between Pope & Talbot, Inc., a Delaware corporation (the "Company"), and Michael Flannery ("Recipient"). On September 9, 1999, the Human Resources and Nominating Committee (the "Committee") of the Company's Board of Directors (the "Board") recommended, and the Board approved, a contingent restricted stock award to Recipient. On February 15, 2001, the Committee recommended, and the Board approved, certain amendments to the terms of the award. The Company and Recipient now desire to formalize the terms of the award in this Agreement. NOW, THEREFORE, the parties agree as follows: 1. Award. Subject to the terms and conditions of this Agreement, the ----- Company shall issue to the Recipient the number of shares of Common Stock of the Company ("Restricted Shares") determined under this Agreement based on the achievement of certain target price levels by the Company's Common Stock. The Restricted Shares shall be issued by the Company from its available treasury stock. The "Stock Price Targets" for purposes of this Agreement are $14.55 (120% of $12.125, which was the closing market price of the Company's Common Stock on September 9, 1999), $17.46 (120% of $14.55) and $20.95 (120% of $17.46). If, at any time after September 9, 1999 and during the term of Recipient's employment with the Company, the Company's Common Stock closes at or above a Stock Price Target for 20 consecutive days, Recipient shall be issued a number of Restricted Shares determined by dividing $260,000 by the closing price of the Common Stock on the 20th trading day on which the Stock Price Target is met (the "Issue Date"). Accordingly, Recipient may receive under this Agreement $260,000 in value of Restricted Shares for each of the three Stock Price Targets, or a total of $780,000 in value of Restricted Shares if the Company's Common Stock closes at or above the highest Stock Price Target for 20 consecutive days. 2. Forfeiture Restriction; Vesting. If the Recipient ceases to be employed -------------------------------- by the Company for any reason or for no reason, with or without cause, any unvested Restricted Shares (excluding unvested shares that vest upon such termination of employment as described below) shall be forfeited to the Company. Ten percent of each issuance of Restricted Shares shall initially be vested, and the remaining ninety percent of each issuance of Restricted Shares shall initially be unvested. Ten percent of each issuance of Restricted Shares shall vest on each anniversary of the Issue Date for that issuance so that all of each issuance of Restricted Shares shall be vested by the ninth anniversary of the applicable Issue Date. All of the Restricted Shares shall immediately vest if (a) the Recipient ceases to be employed by the Company as a result of an Involuntary Termination (as defined below) within 18 months after a Change in Control (as defined below), (b) the Recipient ceases to be employed by the Company as a result of death or permanent and total disability (within the meaning of Section 22(e)(3) of the Internal Revenue Code of 1986), or (c) the Recipient is employed by the Company on his 65th birthday. Nothing contained in this Agreement shall confer upon Recipient any right to be employed by the Company or to continue to provide services to the Company or to interfere in any way with the right of the Company to terminate Recipient's services at any time for any reason, with or without cause. 2.1 Involuntary Termination. For purposes of this Agreement, "Involuntary ----------------------- Termination" means the termination of Recipient's employment with the Company: (a) involuntarily upon Recipient's discharge or dismissal (other than by reason of Recipient having engaged in fraud or in any other intentional misconduct adversely affecting the business reputation of the Company in a material manner), or (b) voluntarily upon Recipient's resignation following (i) a change in Recipient's position with the Company which materially reduces Recipient's duties or level of responsibility or which otherwise changes the level of management to which Recipient reports, (ii) a 20% or more reduction in Recipient's level of compensation (including base salary, fringe benefits and target bonus under any incentive performance plan), or (iii) a change in Recipient's place of employment which is more than fifty (50) miles from Recipient's place of employment prior to the Change in Control, provided and only if such change or reduction is effected without Recipient's written concurrence. 2.2 Change in Control. For purposes of this Agreement, "Change in Control" means: ----------------- (a) the successful acquisition by a person or a group of related persons, other than the Company or a person controlling, controlled by or under common control with the Company, of beneficial ownership (as determined pursuant to the provisions of Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of securities possessing more than twenty-five percent (25%) of the total combined voting power of the Company's outstanding securities pursuant to a transaction or series of related transactions which the Board does not at any time recommend the Company's shareholders to accept or approve, (b) a change in the composition of the Board over a period of thirty-six (36) consecutive months or less such that a majority of the Board ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (i) have been members of the Board continuously since the beginning of such period or (ii) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (i) who were still in office at the time such election or nomination was approved by the Board, (c) the sale, transfer or other disposition of all or substantially all of the assets of the Company in complete liquidation or dissolution of the Company, or (d) any merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction. 2 3. Restriction on Transfer. The Recipient shall not sell, assign, pledge, ----------------------- or in any manner transfer unvested Restricted Shares, or any right or interest in unvested Restricted Shares, whether voluntarily or by operation of law, or by gift, bequest or otherwise. Any sale or transfer, or purported sale or transfer, of unvested Restricted Shares, or any right or interest in unvested Restricted Shares, in violation of this Section 3 shall be null and void. 4. Tax Withholding. Recipient acknowledges that, at the time any portion of --------------- the Restricted Shares vests (including the Issue Date for the first 10 percent of each issuance of Restricted Shares), the Value (as defined below) on that date of that portion of the Restricted Shares will be treated as ordinary compensation income for federal and state income and FICA tax purposes, and that the Company will be required to withhold taxes on these income amounts. For purposes of this Agreement, the "Value" of a Restricted Share on any date shall be equal to the closing market price for Company Common Stock on that date. Promptly following vesting, the Company will notify Recipient of the required withholding amount. Within 10 days of such notice, Recipient shall pay to the Company the required withholding amount in cash or, at the election of the Recipient, by surrendering to the Company for cancellation Restricted Shares or other shares of Company Common Stock with a Value (as of the later of the vesting date or the date of Recipient's election to surrender such shares) equal to the required withholding amount. 5. Stock Certificate. Upon the Issue Date of any Restricted Shares, the ------------------ award of those Restricted Shares shall be completed and the Recipient shall be the owner of those Restricted Shares with all voting and other rights of a shareholder, except as limited by this Agreement. To secure the rights of the Company under Sections 2 and 4, the Company will retain the certificate or certificates representing the Restricted Shares. Upon any forfeiture of the Restricted Shares covered by this Agreement, the Company shall have the right to cancel the Restricted Shares in accordance with this Agreement without any further action by the Recipient. Upon any failure of the Recipient to pay required withholding under Section 4, the Company shall have the right to cancel vested Restricted Shares with a Value (as of the date the Company exercises this right) equal to the required withholding amount without any further action by the Recipient. After Restricted Shares have vested and all required withholding has been paid to the Company in connection with such vesting, the Company shall deliver a certificate for the vested Restricted Shares to the Recipient. 6. Additional the Company Shares. If, prior to vesting of Restricted -------------------------------- Shares, the outstanding the Company Common Stock is increased as a result of a stock dividend or stock split, the restrictions and other provisions of this Agreement shall apply to any such additional shares of the Company Common Stock which are issued in respect of the Restricted Shares to the same extent as such restrictions and other provisions apply to the Restricted Shares. 7. Miscellaneous. ------------- 7.1 Entire Agreement; Amendment. This Agreement constitutes the entire --------------------------- agreement of the parties with regard to the subjects hereof and may be amended only by written agreement between the Company and Recipient. 3 7.2 Notices. Any notice required or permitted under this Agreement ------- shall be in writing and shall be deemed sufficient when delivered personally to the party to whom it is addressed or when deposited into the United States Mail as registered or certified mail, return receipt requested, postage prepaid, addressed to the Company, Attention: Corporate Secretary, at its principal executive offices or to Recipient at the address of Recipient in the Company's records, or at such other address as such party may designate by ten (10) days' advance written notice to the other party. 7.3 Assignment; Rights and Benefits. Recipient shall not assign this ---------- Agreement or any rights hereunder to any other party or parties without the prior written consent of the Company. The rights and benefits of this Agreement shall inure to the benefit of and be enforceable by the Company's successors and assigns and, subject to the foregoing restriction on assignment, be binding upon Recipient's heirs, executors, administrators, successors and assigns. 7.4 Further Action. The parties agree to execute such further --------------- instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement. 7.5 Applicable Law; Attorneys' Fees. The terms and conditions of this -------------------------------- Agreement shall be governed by the laws of the State of Oregon. In the event either party institutes litigation hereunder, the prevailing party shall be entitled to reasonable attorneys' fees to be set by the trial court and, upon any appeal, the appellate court. 7.6 Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. POPE & TALBOT, INC. By /s/ Peter T. Pope ----------------------------------- Title Director ----------------------------------- RECIPIENT /s/ Michael Flannery ----------------------------------------- Michael Flannery 4 EX-13.1 8 dex131.htm PORTIONS OF ANNUAL REPORT FOR YEAR ENDED 12/31/01 Prepared by R.R. Donnelley Financial -- Portions of Annual Report for year ended 12/31/01

Exhibit 13.1

Five-Year Summary of Selected Financial Data

Pope & Talbot, Inc. and Subsidiaries Years ended December 31 (thousands except per share)		2001			2000			1999			1998			1997


Financial Results
Revenues	$	499,227		$	580,052		$	536,183		$	468,452		$	357,581
Depreciation and amortization		30,840			31,912			32,773			29,919			30,056
Interest, net		12,563			8,444			9,063			7,973			5,995
Income (loss) from continuing operations		(24,905	)		32,566			14,421			(23,460	)		4,432
Income from discontinued operations⁽¹⁾		-			-			-			23,059			5,588
Cumulative effect of accounting change		-			-			-			743			-

Net income (loss)	$	(24,905	)	$	32,566		$	14,421		$	342		$	10,020


EBITDA⁽²⁾	$	459		$	96,040		$	65,092		$	(2,467	)	$	44,821
Adjusted EBITDA⁽³⁾		16,026			96,040			65,092			(2,467	)		44,821
Cash provided by (used for) operations		24,258			60,525			41,181			(6,144	)		24,968

Per Common Share
Diluted earnings per share:
Income (loss) from continuing operations	$	(1.68	)	$	2.24		$	1.05		$	(1.74	)	$	.33
Income from discontinued operations⁽¹⁾		-			-			-			1.71			.42
Cumulative effect of accounting change		-			-			-			.06			-

Net income (loss)	$	(1.68	)	$	2.24		$	1.05		$	.03		$	.75

Cash dividends	$	.60		$	.52		$	.52		$	.76		$	.76
Stockholders’ equity		11.02			14.12			12.81			11.72			13.31
Year-end stock price		14.25			16.81			16.00			8.38			15.06

Shares outstanding at year-end (000’s)		15,617			13,857			14,531			13,481			13,481

Financial Position
Current assets	$	196,941		$	182,498		$	202,799		$	185,414		$	208,270
Properties, net		318,061			247,860			234,167			234,392			108,165
Other assets		19,928			27,829			36,341			29,783			59,332

Total assets	$	534,930		$	458,187		$	473,307		$	449,589		$	375,767


Current liabilities	$	102,841		$	74,158		$	98,317		$	73,587		$	81,636
Long-term liabilities		39,947			44,667			41,851			40,182			25,964
Long-term debt, net of current portion		220,029			143,756			147,038			138,004			88,705
Minority interest		-			-			-			39,759			-
Stockholders’ equity		172,113			195,606			186,101			158,057			179,462

Total liabilities and stockholders’ equity	$	534,930		$	458,187		$	473,307		$	449,589		$	375,767


Financial Ratios
Return on equity		(14	)%		17	%		8	%		-	%		6	%
Long-term debt to total capitalization		56	%		42	%		44	%		41	%		37	%⁽⁴⁾
Net debt to total capitalization		56	%		41	%		41	%		39	%		30	%⁽⁴⁾

Sales Volumes
Lumber (thousand board feet)		529,600			562,500			574,400			575,600			548,300
Pulp (metric tons)⁽⁵⁾		642,800			543,300			560,200			493,100			180,200

Number of Employees		2,223			1,985			2,067			2,117			2,255

(1)

Income from discontinued operations represents the sale of the assets of the Company’s tissue business in 1998 and tissue business operating results in 1997.

(2)

Earnings before minority interest, discontinued operations, accounting change, interest, income taxes, depreciation and amortization.

(3)

Earnings before minority interest, discontinued operations, accounting change, interest, income taxes, depreciation and amortization and non-cash lumber import duties of $15,567 in 2001.

(4)

Includes $18,800 note payable assumed by the purchaser of the discontinued tissue business in 1998.

(5)

Includes sales volumes since Mackenzie acquisition on June 15, 2001 and Harmac acquisition on February 2, 1998.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations—2001 Compared with 2000

Overview

Lower commodity prices in pulp and lumber and duties assessed on softwood lumber imported into the U.S. from Canada led to a loss of $24.9 million, or $1.68 per share in 2001. This compared with earnings of $32.6 million, or $2.24 per diluted share, in 2000. The $15.6 million non-cash accrual for lumber import duties on lumber from Canada (as preliminarily determined by the U.S. Department of Commerce) represented 38 percent of the Company’s after tax loss in 2001, or $.65 per share. Excluding these duties, Pope & Talbot lost $1.03 per share in 2001. Total revenues in 2001 were $499.2 million, compared with $580.1 million in 2000.

Earnings before interest, taxes, depreciation and amortization (EBITDA) excluding lumber import duties were $16.0 million for 2001. Giving effect to the non-cash accrual for lumber duties of $15.6 million, EBITDA was $.4 million in 2001 compared with $96.0 million for 2000.

During 2001, the Company continued its focus on reducing costs of production, logistics and overhead, as well as increasing and improving its position in the pulp business. The Company acquired the Mackenzie pulp mill in 2001, increasing the Company’s market pulp capacity by 38 percent to 830,000 metric tons. The purchase from Norske Skog Canada was completed on June 15, 2001 for approximately $80.4 million U.S. in cash and 1,750,000 shares of Company common stock. The results of Mackenzie are included in the consolidated financial statements from the date of acquisition. The Company also strengthened its liquidity position by increasing its lines of credit and completing the second phase of its sale/leaseback of the Halsey pulp mill facility. The Company ended 2001 with a ratio of long-term debt to total capitalization of 56 percent, compared with 42 percent at December 31, 2000.

Results for 2001 were driven primarily by weak markets for both pulp and lumber. The average benchmark price of northern bleached softwood kraft (NBSK) pulp delivered into Northern Europe decreased 22 percent in 2001 compared with 2000. In Wood Products, operating profits fell significantly in 2001 due to preliminary trade sanctions imposed in August and October by the U.S. Department of Commerce (DOC) on lumber imported from Canada into the U.S. Excluding the effect of the $15.6 million of lumber import duties, Wood Products operating results improved in 2001 over 2000 as a result of improving lumber markets in the first half of 2001. However, lumber markets weakened dramatically in the second half of 2001 due to recessionary fears.

Selling, general and administrative costs were lower by $2.3 million in 2001 compared with 2000, due primarily to lower legal fees and lower costs related to employee incentive plans linked to the Company’s financial performance. These expense decreases were partially offset by the inclusion of selling, general and administrative costs of the Mackenzie pulp mill from its June 2001 acquisition date and an increase in the bad debt reserve for certain pulp customers. Net interest expense in 2001 was

$12.6 million compared with $8.4 million in 2000. The increase in net interest expense was primarily due to the higher level of debt in 2001 used to finance the Mackenzie pulp mill purchase.

The Company’s effective tax rate was 42 percent for 2001 and 2000. Included in the 2001 provision was the recognition of state pollution control tax credits that became realizable as the result of the sale/leaseback of the Halsey mill chlorine dioxide facility in December 2001. In addition, the Company recognized in 2001 the benefit of the reduction in the British Columbia corporate income tax rate from 38.6 percent to 35.6 percent.

Pulp Products

Revenues from the Company’s Pulp Products business totaled $291.1 million in 2001 compared with $348.2 million in 2000. EBITDA from the Company’s pulp operations totaled $4.4 million in 2001 compared with $88.5 million in 2000. Pulp Products generated an operating loss before corporate expenses, interest and income taxes of $18.4 million compared with an operating profit of $64.3 million in 2000. These decreases were primarily due to lower pulp prices. Revenues for Mackenzie pulp sales totaled $43.8 million in 2001. The average benchmark list price of NBSK pulp delivered into Northern Europe was $531 per metric ton in 2001 compared with $680 per metric ton in 2000. The Company’s pulp prices for its mix of chip and sawdust pulp were $452 per metric ton in 2001 compared with $641 per metric ton in 2000, down 29 percent. In the fourth quarter of 2001, the Company’s average sales price of pulp was $409 per metric ton compared with $653 per metric ton in the fourth quarter of 2000. Inventories of NORSCAN (United States, Canada, Finland, Norway, Sweden and Spain) producers increased in the fourth quarter of 2001 to approximately 29 days of supply, or 1.7 million metric tons. With world-wide pulp consumption at relatively low levels, pulp prices are expected to further weaken in the first quarter of 2002. Pulp inventory valuation allowances totaled $2.1 million at December 31, 2001, as a result of inventory write-downs

to reflect the difference between production costs and anticipated sales prices on year-end inventories. The Company’s inventory levels at December 31, 2001 were under 30 days of shipments.

Total metric tons sold increased to 642,800 in 2001 from 543,300 in 2000. Sales from the Mackenzie pulp mill totaled 109,700 metric tons in 2001. Sales from the Company’s other pulp mills were lower in 2001 primarily due to two month’s of down time at the Halsey pulp mill, which reduced production approximately 32,000 metric tons. Production at the Halsey pulp mill was curtailed during July and August 2001 as the result of declining pulp prices and weak demand for market pulp. In connection with the curtailment, the Company entered into an agreement with its energy supplier, PacifiCorp, under which PacifiCorp paid the Company to reduce electricity demand. The payments from PacifiCorp, recorded as reductions in cost of sales, offset a significant portion of the costs incurred during the shutdown period.

The Company currently has capacity to produce 585,000 metric tons of high-grade NBSK pulp and 245,000 metric tons of short-fiber (sawdust) pulp annually. Pulp production totaled 647,000 metric tons in 2001 and 563,600 metric tons in 2000. The Mackenzie pulp mill production totaled 117,000 metric tons from the June 15, 2001 date of acquisition through year end. Costs of production in 2001 were negatively affected by higher energy costs. These cost increases were partially offset by lower raw material costs. Additional cost savings at the pulp mills in 2002 are expected to be realized as the Company obtains lower freight rates, chemical costs and supplies due to the Company being a larger entity.

Wood Products

Revenues from the Company’s Wood Products business totaled $208.1 million compared with $231.9 million in 2000. EBITDA from Wood Products before the accrual for lumber import duties was $21.7 million for 2001, compared with $18.1 million in 2000. After subtracting the non-cash accruals, EBITDA was $6.1 million in 2001. The increase in EBITDA for Wood Products, before the accrual for lumber import duties in 2001 over 2000 was primarily due to lower legal fees related to the Company’s NAFTA claim against the Canadian government and the strong lumber markets in the first half of 2001. Wood Products generated an operating loss of $1.0 million in 2001, compared with an operating profit of $11.1 million in 2000, before corporate expenses, interest and income taxes. Mill net lumber prices in the U.S., as measured by the Random Lengths Composite Price Index for western spruce/pine/fir 2x4 lumber, averaged under $221 per thousand board feet for the fourth quarter of 2001 and $250 for the year compared with $257 for the year 2000. The Company’s lumber sales price averaged $315 and $329 per thousand board feet for the fourth quarter and full year 2001, respectively, compared with $341 per thousand board feet for the year 2000. Lumber sales volume decreased to 529.6 million board feet in 2001 from 562.5 million board feet in 2000.

Approximately 80 percent of the Company’s current lumber capacity is located in British Columbia, Canada. Between April 1996 and April 2001, exporters of softwood lumber imported into the U.S. from Canada were subject to tariffs on lumber volumes in excess of defined tariff-free volumes under the Canada-U.S. Softwood Lumber Agreement (SLA). That agreement expired on April 1, 2001.

On April 2, 2001, petitions for the imposition of antidumping and countervailing duties on softwood lumber from Canada were filed with the DOC and the U.S. International Trade Commission (ITC) by certain U.S. industry and trade groups. In response to the petitions, the ITC conducted a preliminary injury investigation and on May 16, 2001, they determined that there was a reasonable indication that the lumber industry in the United States was threatened with material injury by reason of softwood lumber imports from Canada.

On October 31, 2001, the DOC issued its preliminary determination on the antidumping duty and imposed a company-specific preliminary duty rate on six companies reviewed ranging from 5.94 percent to 19.24 percent. All other companies, including Pope & Talbot’s Canadian subsidiary, received the weighted average rate of the six companies of 12.58 percent. The antidumping duty rate applies to all shipments of softwood lumber made to the U.S. on or after November 6, 2001. The DOC did not find Critical Circumstances in its preliminary antidumping ruling and, therefore, did not assess these duties retroactively. The Company has accrued $2.0 million for the period from November 6, 2001 to December 31, 2001 for antidumping duties at the preliminarily determined average rate of 12.58 percent.

tions yet to be made by the DOC and ITC and any reviewing courts, NAFTA or WTO panels to which those determinations may be appealed. Any adjustments to the financial statements resulting from a change in the final countervailing and antidumping duty rates or Critical Circumstances determination in the countervailing case will be made prospectively. The countervailing and antidumping duties accrued up to the date of the final order, currently expected in May 2002, will not be payable until the completion of the first administrative review, which is currently expected to occur in the last half of 2004. Duty assessments subsequent to the finalization of the preliminary duty rates will be payable in cash as lumber is imported into the U.S.

Wood Products cost of sales totaled $202.0 million in 2001 compared with $214.0 million in 2000. The lower cost of sales in 2001 was primarily due to lower sales volumes due to down time taken in the first quarter of 2001, partially offset by the impact of lumber import duties accrued of $15.6 million. In 2001, the Company took an average five weeks down time at its three Canadian sawmills as a result of poor lumber markets and to avoid paying the tariff associated with the SLA. Production was also curtailed for four weeks in the first quarter of 2001 at the Company’s Spearfish operation in the U.S. as a result of poor lumber markets. The average cost of production per unit in 2001 was approximately equal to per unit costs in 2000, despite 20 fewer production days and higher energy costs.

Results of Operations—2000 Compared with 1999

Overview

Net income for 2000 was $32.6 million, or $2.24 per diluted share, compared with $14.4 million, or $1.05 per diluted share, in 1999. The Company experienced a stronger pulp market in 2000 as compared with 1999. The average benchmark price of northern bleached softwood kraft (NBSK) pulp delivered into Northern Europe increased 31 percent in 2000 over the average NBSK list price for 1999. In the Wood Products business, operating profits fell significantly in 2000 as lumber markets weakened due to an oversupply of lumber in the North American market.

During 2000, the Company undertook several strategic initiatives aimed at improving shareholder returns. The Company used its available cash balances and cash provided from operations to reduce debt, increase the common dividend and repurchase common stock. The Company ended the year with a ratio of total debt to total capital of 42 percent, compared with 44 percent at year-end 1999. Cash was also used to bring the Halsey, Oregon pulp mill into compliance with current environmental regulations, as well as for other small, high return capital projects.

Selling, general and administrative costs were higher in 2000 compared with 1999, due primarily to higher costs related to employee incentive plans linked to the Company’s financial performance and legal fees related to the Company’s NAFTA claim against the Canadian government. Net interest expense in 2000 was $8.4 million compared with $9.1 million in 1999. The decrease was primarily due to an increase in capitalized interest, due to the significant amount of capital expenditures in 2000.

pre-tax operating earnings of approximately $2.9 million, or $.12 per diluted share after tax.

Pulp Products

Revenues from the Company’s Pulp Products business totaled $348.2 million compared with $266.2 million in 1999. Pulp Products generated an operating profit before corporate expenses, interest and income taxes of $64.3 million compared with an operating loss of $1.9 million in 1999. The increase was primarily due to higher pulp prices. The average benchmark list price of NBSK pulp delivered into Northern Europe was $680 per metric ton in 2000 compared with $520 per metric ton in 1999. Total metric tons sold decreased to 543,300 in 2000 from 560,200 in 1999.

The Company had capacity to produce 453,500 metric tons of high-grade NBSK pulp and 146,500 metric tons of short-fiber (sawdust) pulp. Pulp production totaled 563,600 metric tons in 2000 and 551,800 metric tons in 1999. The average cost of production per ton was negatively affected by rising raw material and energy costs. Average raw material costs increased approximately 9 percent in 2000 over average 1999 costs. Energy costs at the pulp mills were $2.0 million higher in the fourth quarter of 2000 than the fourth quarter of 1999.

In the fourth quarter of 2000, the chlorine dioxide capital project at the Halsey mill was completed. At a total cost of $37.4 million, these expenditures improved the environmental performance of the mill and have made it compliant with current requirements of the Environmental Protection Agency’s “Cluster Rules.”

Wood Products

Revenues from the Company’s Wood Products business totaled $231.9 million compared with $269.9 million in 1999. Operating profit in 2000 before corporate expenses, interest and income taxes was $11.1 million compared with $42.6 million in 1999. Lumber prices in the fourth quarter of 2000 approximated the lowest prices in the previous 10 years despite housing starts in

2000 approximating 1.6 million. Mill net lumber prices in the U.S., as measured by the Random Lengths Composite Price Index for western spruce/pine/fir 2x4 lumber, averaged under $200 per thousand board feet for the fourth quarter of 2000 and $257 for the year compared with $342 for the year 1999. Lumber sales volume decreased to 562.5 million board feet in 2000 from 577.1 million board feet in 1999.

Wood Products cost of sales totaled $214.0 million in 2000 compared with $220.5 million in 1999. The lower cost of sales in 2000 was primarily due to lower sales volumes and a lower level of tariffs incurred under the 1996 Canada-U.S. Softwood Lumber Agreement (SLA). To avoid paying tariffs under the SLA, the Company took several shutdowns at its Canadian sawmills in 2000. The SLA expired April 1, 2001. The Company expensed tariffs of $.2 million in 2000 compared with $7.1 million in 1999. Average log costs in 2000 increased three percent over average 1999 costs, in part because the Canadian log inventory values as of the beginning of 2000 reflected a higher stumpage rate that was indexed to lumber prices in the second half of 1999. Due to improved operating efficiency at the mills, average costs of production were approximately equal in 2000 and 1999, despite the fewer number of operating days in 2000.

Early in the third quarter of 2000, the Company closed its small, 30 million board foot sawmill in Newcastle, Wyoming. Production capacity enhancements at the Company’s Spearfish, South Dakota sawmill offset the majority of the production capacity of the Wyoming facility.

Liquidity and Capital Resources

The Company’s primary source of internally generated cash is operating income before depreciation and amortization and the principal external source of liquidity has been debt financing. The current ratio at December 31, 2001 and 2000 was 1.9 to 1 and 2.5 to 1, respectively. Excluding the lumber import duty accrual, the current ratio at December 31, 2001 was 2.3 to 1. Total long-term debt to total capitalization was 56 percent at December 31, 2001 compared with 42 percent at December 31, 2000. The increase in the debt ratio was primarily due to the higher level of debt incurred related to the purchase of the Mackenzie pulp mill. The long-term debt to total capitalization ratio was also affected by the Company’s net loss for the year and the $9.9 million negative foreign currency translation adjustment which also reduced stockholders’ equity.

Operating Activities

Net cash provided by operating activities decreased to $24.3 million in 2001 compared to $60.5 million in 2000 and $41.2 million in 1999. Cash flows from operations before working capital changes were $5.9 million in 2001, $64.5 million in 2000 and $44.6 million in 1999. Adjusted to exclude the non-cash lumber import duties accrued, cash flows from operations before working capital changes were $21.5 million in 2001. Changing levels of profitability was the primary reason for the changes in the years presented, due primarily to fluctuations in pulp and lumber commodity prices.

Changes in working capital for 2001 have been adjusted to exclude the effect of the acquisition of the Mackenzie pulp mill. Significant changes in working capital in 2001 included decreases in accounts receivable of $11.5 million and inventories of $13.8 million. The decrease in accounts receivable primarily reflected the impact of lower pulp

prices, while the decrease in inventories primarily reflected the Company’s focus on reducing inventory levels. Raw materials at the pulp mills and sawmills were down significantly from a year ago. The increase in accounts payable and accrued liabilities of $16.0 million related primarily to the accrual of lumber import duties totaling $15.6 million. Decreases in current and deferred income taxes were primarily the result of the current year’s net loss.

Significant changes in working capital for 2000 included a $12.0 million decrease in accounts receivable, offset by a $14.3 million increase in inventories. Inventory increases were primarily due to softening markets for pulp and lumber, approximately $9.4 million of pulp inventory shipped in 2000 and recorded as a sale in the first quarter of 2001 and higher log inventories.

Working capital changes in 1999 reflected an increase in accounts receivable due to higher pulp sales volumes and prices and higher inventories, primarily logs. Accounts payable and accrued liabilities increased in 1999 due to the accrual of Canadian stumpage payments and capital costs related to the Halsey mill chlorine dioxide project.

Investing Activities

Capital expenditures totaled $18.9 million in 2001, $50.6 million in 2000 and $24.8 million in 1999. The Company anticipates that capital expenditures will approximate $16 million to $19 million in 2002, all of which are expected to be financed through internally generated funds and existing cash balances. These expenditures will be primarily to sustain existing operations, focused on projects that are expected to result in cost reductions with relatively short pay-back periods.

On June 15, 2001, the Company acquired the Mackenzie pulp mill from Norske Skog Canada for approximately $80.4 million in cash and 1,750,000 shares of Company common stock. The cash investment in Mackenzie, including direct acquisition costs, totaled $82.6 million.

Included in capital expenditures in 2000 was $27.5 million for the completion of Halsey’s chlorine dioxide project to make the mill compliant with the current requirements of the EPA’s “Cluster Rules.” Total expenditures for this project were approximately $37.4 million.

In the Wood Products business, capital expenditures focused primarily on production cost reduction and recovery improvement projects. During 2000, the Company completed installation of a second optimizing trimmer and an optimized grader assist system at Castlegar, our largest Canadian sawmill, at a cost of $4.0 million. Expenditures in 1999 included $3.1 million on curve sawing technology at the Spearfish, South Dakota mill.

In November 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 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 percent convertible subordinated debentures with an outstanding principal balance of $76.5 million Canadian (approximately $52 million U.S.) at par plus accrued interest.

Financing Activities

Net cash provided by financing activities in 2001 totaled $82.2 million compared with net cash used for financing activities of $33.7 million in 2000 and $.5 million in 1999. At December 31, 2001, the Company had available approximately $35 million of borrowing capacity under its revolving credit lines and $18.6 million of cash, cash equivalents and short-term investments. The Company’s weighted average cost of debt was 6.58 percent at December 31, 2001.

In June 2001, the Company renewed its $25 million revolving credit agreement with a domestic bank and expanded its revolving bank line of credit with three Canadian banks from approximately $47 million U.S. to $69 million U.S. and obtained a two-year term loan of approximately $22 million U.S from a Canadian bank. The Company financed the cash investment of Mackenzie with approximately $75 million from these credit facilities and the remainder from existing cash balances.

In December 2001, the Company completed a $36 million transaction involving the sale/leaseback of the Halsey pulp mill chlorine dioxide (CIO₂) facility and the allocation of associated state pollution control tax credits to a financial investor. The transaction was accounted for as a financing for financial reporting purposes and the proceeds were used to reduce existing debt. The $25.4 million lease financing portion of this transaction has a rent payment schedule that is coterminus with the Halsey mill sale/leaseback transaction completed in September 1999. The Company is also obligated to allocate $10.6 million of pollution control tax credits and other tax attributes over a twelve-year period ending in 2012. If the anticipated tax credits and other tax attributes are not available to the investor, the Company will be required to satisfy the obligation with cash payments. At December 31, 2001, the Company maintained a $9.8 million letter of credit to support this obligation.

At December 31, 2001, the Company was in compliance with its debt covenants, including maximum leverage ratios, net worth tests and EBITDA or similar ratios related to interest coverage. At December 31, 2001, the Company was required, under the sale/leaseback transaction covenants, to have excess cash of $25 million or to reserve an equal amount of borrowing capacity under its revolving lines of credit. The Company did not have any financial or other commitments related to its 8.375 percent debentures

or corporate debt ratings by Moody’s Investor Service, Standard & Poor’s or any other debt rating service.

In January 2002, the Company elected to repay the remaining $11.9 million balance of its State of Oregon Small Scale Energy Loan (SELP). The Company maintained a $12.4 million letter of credit at December 31, 2001 associated with the SELP note payable. The letter of credit was discontinued on payment of the debt in January 2002.

In 2000, the Company paid down debt and expended $13.0 million for common share repurchases. In April 1999, the Company’s Board of Directors (Board) authorized the repurchase of up to two million shares of its common stock through open market and privately negotiated transactions. The Board authorized the repurchase of an additional one million common shares, for a total authorization of three million shares, in July 2000. The Company acquires its stock when excess cash is available and when the Company believes its shares are undervalued in the market. The Company purchased 824,900 shares in 2000 and 429,600 in 1999.

In July 2000, the Board increased the quarterly dividend to 15 cents per common share from 11 cents per share. In the first quarter of 1999, the Board reduced the quarterly dividend rate to 11 cents from 19 cents to conserve the Company’s cash balances and net worth.

On September 30, 1999, the Company completed the sale/leaseback of its Halsey, Oregon pulp mill. The Company received $64.6 million in cash and recorded the transaction as a financing for financial reporting purposes. The proceeds were used to fund the Company’s chlorine dioxide capital project at the Halsey mill and other corporate purposes.

Financial Market Risk

The Company’s exposure to market risk for interest rates relates primarily to investments in short-term marketable securities and short- and long-term debt. The Company’s investment in marketable securities at December 31, 2001 and 2000 was not significant. The Company’s debt is primarily fixed rate with only 25 percent of total debt at variable rates and, therefore, net income is not materially affected when market interest rates change.

The Company has exposure to foreign currency rate risk due to its significant operations in Canada. For the Company, a weakening of the Canadian dollar relative to the U.S. dollar has a positive effect on the cost of

operating in Canada but has a negative foreign currency translation effect. The Company’s net investment in foreign subsidiaries with a functional currency other than the U.S. dollar is not hedged. The net assets in foreign subsidiaries translated into U.S. dollars using the period-end exchange rates were approximately $213.1 million. The potential loss in fair value resulting from a hypothetical 10 percent adverse change in foreign exchange rates would be approximately $21.3 million at December 31, 2001. Any loss in fair value would be reflected as a cumulative translation adjustment and would not reduce reported net income of the Company.

The Company is exposed to foreign currency transaction gains and losses in the translation of U.S. dollar denominated intercompany borrowings, cash and accounts receivable of its Canadian subsidiary and Canadian dollar denominated intercompany loans made by the parent company. The Company periodically uses foreign exchange contracts to manage its exposure to foreign currency transaction gains and losses. The Company had no foreign exchange contracts outstanding at December 31, 2001. Transaction gains and losses were not material to the results of operations for the Company’s 2001, 2000 or 1999 periods.

The Company utilizes well-defined financial contracts in the normal course of its operations as means to manage commodity price risks. For those limited number of contracts that are considered derivative instruments, the Company has formally designated each as a hedge of specific well-defined risks. The Company has entered into commodity swap agreements designed to hedge against the variability of future cash flows arising from changes in natural gas spot rates. These agreements generate gains or losses that are recognized at the contracts’ respective settlement dates. As of December 31, 2001, the Company had open positions in connection with eight natural gas swap agreements, extending through October 2002. The notional amount of these contracts was $5.7 million, with a fair value representing an unrealized loss of $2.5 million that is recorded in cumulative other comprehensive income (loss) at December 31, 2001. The Company estimates that the unrealized loss will be reclassified into earnings within 12 months.

A hypothetical 10 percent change in natural gas prices would change the fair value of the Company’s natural gas hedges by approximately $.3 million.

Critical Accounting Policies

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 periods.

The Company’s management routinely makes judgments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the probable future resolution of the uncertainties increase, these judgments become even more subjective and complex. The Company has identified certain accounting policies, described below, that are the most important to the portrayal of the Company’s current financial condition and results of operations. The Company’s

significant accounting policies are disclosed in Note 1 to the Company’s Consolidated Financial Statements.

Lumber Import Duties

As discussed previously in Results of Operations—2001 Compared with 2000, Wood Products, the Company has accrued countervailing and anti-dumping duties on softwood lumber imported into the U.S. from the Company’s Canadian sawmills. The duties accrued were based on preliminary rates and assessment periods as determined by the DOC and ITC. The final amount and effective date of these duties that may be assessed on the Company cannot be determined at this time. Total lumber duties ultimately payable by the Company on lumber imports for the period ending December 31, 2001 could be less, but not more, than has been accrued.

Environmental Matters

The Company is required to make estimates of the costs of remediation for certain contaminated formerly operated industrial sites and landfills. The ultimate costs to the Company for remediation and monitoring of these sites cannot be predicted with certainty, due to the often unknown magnitude of the pollution or the necessary cleanup, the varying costs of alternative cleanup methods, the amount of time necessary to accomplish such cleanups and the evolving nature of cleanup technologies and governmental regulations. The Company uses the low end of the range to record liabilities for those sites for which no amount within the estimated range of cleanup costs has been determined more likely an outcome than another. Based on currently available information and analysis, the Company believes that it is reasonably possible that estimated costs associated with all identified sites may exceed current accruals by amounts that may prove insignificant or that could, in any given future period, have a significant effect on the Company’s results of operations.

The Company has tendered the defense of the above environmental claims to a number of insurance carriers that issued comprehensive general liability policies to the Company. 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 certain environmental liabilities incurred.

The Company has concluded settlements with several insurance carriers and is engaged in settlement discussions with other insurance carriers. The Company has recorded receivables from insurance carriers related to recoveries of environmental remediation costs when the Company believes recovery under its policies is highly probable and in amounts it has deemed highly probable of realization. It is possible that estimated recoveries from insurance carriers may vary from current accruals by amounts that may prove insignificant or that could, in any given future period, have a significant effect on the Company’s results of operations.

Reforestation

Approximately 80 percent of the Company’s current lumber capacity is located in the Canadian province of British Columbia. The Company primarily obtains its timber from the Provincial Government of British Columbia under timber harvesting licenses. Under these licenses, the Company is responsible for all reforestation costs (such as site preparation, planting, fertilizing, thinning and herbicide application) until the harvested land requires no further reforestation activity prior to the next harvest.

The Company estimates reforestation costs based on its substantial experience in reforestation in British Columbia under the Province’s Forest Practice Code. A significant portion of the reforestation costs occur during the first five years after harvest. The remaining costs are incurred until the harvested land is “free to grow,” generally seven to twelve years after initial planting. Whereas it is possible to reasonably estimate the costs of labor and materials required for reforestation activities, it is not possible to predict the impact of natural disasters, such as windstorms and forest fires, or the possibility of changes in the Province’s regulations. Any such event or change could result in an adjustment to the accrual that could, in any given future period, have a significant effect on the Company’s results of operations.

Impairment of Long-lived Assets

The Company periodically evaluates long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review of recoverability, the Company estimates future cash flows expected to result from the use of the asset and its eventual disposition. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management’s subjective judgments. The time periods for estimating future cash flows is often lengthy, which increases the sensitivity to assumptions made. Depending on the assumptions and estimates used, the estimated future cash flows projected in the evaluation of long-lived assets can vary within a wide range of outcomes. The Company considers the likelihood of possible outcomes in determining the best estimate of future cash flows.

Cautionary Statement Regarding Forward-Looking Information

Statements in this report that are not reported financial results or other historical information are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on present information the Company has related to its existing business circumstances and involve a number of business risks and uncertainties, any of which could cause actual results to differ

materially from such forward-looking statements. Further, investors are cautioned that the Company does not assume any obligation to update forward-looking statements based on unanticipated events or changed expectations. In addition to specific factors that may be described in connection with any particular forward-looking statement, factors that could cause actual results to differ materially include (but are not limited to):

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. Industry cyclicality resulting from increases or decreases in production capacity, increases or decreases in operating rates and changes in customer consumption patterns will affect changes in product prices, which affect the Company’s profitability and cash flows.

The amount of down time that the Company’s mills take may fluctuate based on changes in current pricing and demand for its products.

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 with no company holding a dominant position. For both lumber and pulp, a large number of companies produce products that are reasonably standardized and the principal basis for competition is price.

The Company’s products are sold primarily in the United States, Europe, Canada and Asia. The economic climate of each region has a significant impact on the demand for pulp and lumber. Changes in regional economies can cause fluctuations in prices and sales volumes and, as a result, directly affect the Company’s profitability and cash flows.

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 adversely affect the Company’s results of operations and cash flows.

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, many of which are beyond the Company’s control. These factors include changing environmental and conservation regulations and natural disasters, such as forest fires, wind storms or other extreme weather conditions. A decrease in the supply of logs, wood chips and sawdust can cause higher raw material costs and, as a result, material fluctuations in the Company’s results of operations.

The Company’s Harmac pulp mill has a long-term fiber supply agreement with Weyerhaeuser Company Limited (Weyerhaeuser) that provides for 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 market value of the fiber and which takes into account the net sales value of pulp sold by the Harmac mill. The Company’s Mackenzie pulp mill purchases approximately 70 percent of its fiber requirements from sawmills also located in Mackenzie, British Columbia and operated by Slocan Forest Products Ltd. (Slocan). The failure by Weyerhaeuser or Slocan to produce the required fiber pursuant to these contracts could have a material adverse effect on the Company as a whole. The Company has entered into arrangements with other independent fiber suppliers to provide fiber incremental to that provided by Weyerhaeuser and Slocan. There can be no assurance that the Company will be able to obtain an adequate supply of softwood fiber for its pulp operations.

Environmental Regulation

The Company’s pulp and lumber operations are subject to a variety of national and local laws and regulations, many of which deal with the environment. These laws and regulations impose stringent standards on the Company’s operations regarding, among other things, air emissions, water discharges, use and handling of hazardous materials, use, handling and disposal of waste and remediation of environmental contamination. Changes in these laws or regulations have in the past, and could in the future, require the Company to make substantial expenditures in order to comply.

Current legislation requires all pulp mills in British Columbia to eliminate the discharge of chlorinated organic compounds by December 31, 2002. With currently available technology, it is not technically feasible to eliminate all chlorinated organic compounds at kraft pulp mills in a cost-effective manner. The British Columbia government, industry participants and other stakeholders are engaged in discussions 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 shut down, which would have a material adverse effect on the Company’s business.

The Company is currently participating in the investigation of environmental contamination at three sites on which it previously conducted business. The ultimate cost to the Company for site remediation and monitoring of these sites cannot be

predicted with certainty due to the difficulties in measuring the magnitude of the contamination, the varying costs of alternative cleanup methods, the cleanup time frame possibilities, the evolving nature of remediation technologies and governmental regulations and determining the extent to which contributions will be available from the other parties, including insurance carriers. See Note 11 of Notes to Consolidated Financial Statements.

Kootenay Boundary Land Use Plan

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. No assurance can be given that such restrictions will not adversely affect the Company’s supply of timber. Any decrease in the supply of timber could have an adverse effect on the Company’s business.

British Columbia’s First Nations People’s Claims to British Columbia Land

First Nations groups in British Columbia have made claims of ownership or interests in substantial portions of land in the Province and are seeking compensation from the government with respect to these claims. To address these claims, the governments of Canada and British Columbia instituted a negotiation process under the administration of a treaty commission. Any settlements that may result from the negotiation process may involve a combination of cash and resources and grants of conditional rights to gather food on public lands and some rights of self-government. The effect of any treaties on timber tenure rights, including timber tenures of the Company, cannot be estimated at this time.

In December 1997, the Supreme Court of Canada held that the First Nations groups have a spectrum of aboriginal rights in lands that have been traditionally used or occupied by their ancestors. The Court’s decision did not apply to any particular lands and was stated in general terms. The Court held that aboriginal rights and title are not absolute and may be infringed upon by government in furtherance of a legislative objective, including forestry, subject to meeting a justification test and being consistent with the fiduciary relationship between government and First Nations groups. It is not possible to determine how

the general principles enunciated by the Court will be applied until subsequent decisions provide clarification. In addition, the effect on any particular lands will not be determinable until the exact nature of historical use, occupancy and rights in any particular piece of property have been determined.

Fees on Lumber Imports into the United States

On April 2, 2001, petitions for the imposition of antidumping and countervailing duties on softwood lumber from Canada were filed with the U.S. Department of Commerce (DOC) and the U.S. International Trade Commission (ITC) by certain U.S. industry and trade groups. In August 2001, the DOC imposed countervailing duties at a preliminarily determined rate of 19.31 percent on Canadian lumber imports retroactive to May 19, 2001. The preliminary duty rate of 19.31 percent was suspended on December 15, 2001, 120 days after the preliminary determination, in accordance with U.S. law.

On October 31, 2001, the DOC imposed a company specific preliminary duty rate on six companies it reviewed ranging from 5.94 percent to 19.24 percent. All other companies, including Pope & Talbot’s Canadian subsidiary, received the weighted average rate of the six companies of 12.58 percent. The antidumping duty rate applies to all shipments of softwood lumber made to the U.S. on or after November 6, 2001.

Net Operating Loss Tax Asset

Management believes that the Company will have sufficient future U.S. taxable income to use its net operating loss deferred tax asset. 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 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.

Financial Leverage

The Company’s long-term debt as a percentage of total capitalization at December 31, 2001 was 56 percent. While the Company’s leverage level is not unusual for the forest products and pulp industries, this leverage increases its financial risk by potentially increasing the cost of additional financing for working capital, capital expenditures and other purposes, and 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, 2001 and 2000, and the

related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates, made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pope & Talbot, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.

As explained in Note 1 to the consolidated financial statements, effective January 1, 2000, the Company changed its method for valuation of fiber in wood chip, log and pulp inventories of the Harmac pulp operations from the first-in, first-out method to the last-in, first-out method.

ARTHUR ANDERSEN LLP

Portland, Oregon

January 22, 2002

Consolidated Balance Sheets

Pope & Talbot, Inc. and Subsidiaries As of December 31 (thousands except per share)		2001			2000

Assets
Current assets:
Cash and cash equivalents	$	18,463		$	1,391
Short-term investments		110			10,604
Accounts receivable		64,812			62,085
Inventories		98,256			98,737
Prepaid expenses		4,573			5,650
Deferred income taxes		10,727			4,031

Total current assets		196,941			182,498
Properties:
Plant and equipment		578,809			485,819
Accumulated depreciation		(268,283	)		(246,165	)

		310,526			239,654
Land and timber cutting rights		7,535			8,206

Total properties		318,061			247,860
Other assets:
Deferred income tax assets, net		4,828			6,300
Other		15,100			21,529

Total other assets		19,928			27,829

	$	534,930		$	458,187

Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt	$	17,786		$	3,247
Accounts payable		33,021			29,770
Accrued payroll and related taxes		14,021			20,411
Income taxes payable		937			7,753
Accrued lumber import duties		15,567			-
Other accrued liabilities		21,509			12,977

Total current liabilities		102,841			74,158
Long-term liabilities:
Long-term debt, net of current portion		220,029			143,756
Other long-term liabilities		39,947			44,667

Total long-term liabilities		259,976			188,423
Stockholders’ equity:
Preferred stock, $10 par value: 1,500,000 shares authorized; none issued		-			-
Common stock, $1 par value: 20,000,000 shares authorized; 17,207,095 and 15,457,095 shares issued		17,207			15,457
Additional paid-in capital		68,353			48,292
Retained earnings		139,228			172,977
Accumulated other comprehensive income (loss)		(27,533	)		(15,796	)
Common stock held in treasury, at cost, 1,590,406 and 1,600,366		(25,142	)		(25,324	)

Total stockholders’ equity		172,113			195,606

	$	534,930		$	458,187

The accompanying notes to consolidated financial statements are an integral part of these statements.

Consolidated Statements of Operations

Pope & Talbot, Inc. and Subsidiaries Years ended December 31 (thousands except per share)	2001			2000		1999

Revenues	$	499,227		$	580,052	$	536,183
Costs and expenses:
Cost of sales		503,263			487,247		478,686
Selling, general and administrative		26,345			28,677		25,178
Interest, net		12,563			8,444		9,063

		542,171			524,368		512,927
Income (loss) before income taxes and minority interest		(42,944	)		55,684		23,256
Income tax provision (benefit)		(18,039	)		23,118		11,422

Income (loss) before minority interest		(24,905	)		32,566		11,834
Minority interest in subsidiary loss, net of income tax benefit		-			-		(2,587	)

Net income (loss)	$	(24,905	)	$	32,566	$	14,421

Basic net income (loss) per share	$	(1.68	)	$	2.28	$	1.06
Diluted net income (loss) per share	$	(1.68	)	$	2.24	$	1.05

The accompanying notes to consolidated financial statements are an integral part of these statements.

Consolidated Statements of Stockholders’ Equity

Pope & Talbot, Inc. and Subsidiaries For the years ended December 31, 2001, 2000 and 1999 (thousands)	Common stock			Treasury Stock					Additional paid-in capital			Retained earnings			Accumulated other comprehensive income (loss)			Total
	Shares	Amount		Shares		Amount			Additional paid-in capital			Retained earnings			Accumulated other comprehensive income (loss)			Total

Balance, December 31, 1998	13,972	$	13,972	(490	)	$	(9,444	)	$	31,160		$	140,482		$	(18,113	)	$	158,057
Cash dividends ($.52 per share)	-		-	-			-			-			(7,010	)		-			(7,010	)
Issuance of shares in acquisition	1,479		1,479	-			-			16,812			-			-			18,291
Options exchanged in acquisition	-		-	-			-			624			-			-			624
Repurchased shares	-		-	(430	)		(5,246	)		-			-			-			(5,246	)
Comprehensive income:
Net income	-		-	-			-			-			14,421			-			14,421
Foreign currency translation	-		-	-			-			-			-			6,964			6,964

Total comprehensive income	-		-	-			-			-			-			-			21,385

Balance, December 31, 1999	15,451		15,451	(920	)		(14,690	)		48,596			147,893			(11,149	)		186,101
Cash dividends ($.52 per share)	-		-	-			-			-			(7,482	)		-			(7,482	)
Issuance of shares in acquisition	6		6	-			-			(6	)		-			-			-
Issuance of shares under stock plans	-		-	145			2,365			(298	)		-			-			2,067
Repurchased shares	-		-	(825	)		(12,999	)		-			-			-			(12,999	)
Comprehensive income (loss):
Net income	-		-	-			-			-			32,566			-			32,566
Foreign currency translation	-		-	-			-			-			-			(4,647	)		(4,647	)

Total comprehensive income	-		-	-			-			-			-			-			27,919

Balance, December 31, 2000	15,457		15,457	(1,600	)		(25,324	)		48,292			172,977			(15,796	)		195,606
Cash dividends ($.60 per share)	-		-	-			-			-			(8,844	)		-			(8,844	)
Issuance of shares in acquisition	1,750		1,750	-			-			20,038			-			-			21,788
Issuance of shares under stock plans	-		-	10			182			23			-			-			205
Comprehensive loss:
Net loss	-		-	-			-			-			(24,905	)		-			(24,905	)
Foreign currency translation	-		-	-			-			-			-			(9,909	)		(9,909	)
Unrealized loss on cash flow
hedging derivatives (net of tax benefit of $973)	-		-	-			-			-			-			(1,549	)		(1,549	)
Minimum pension liability adjustment
(net of tax benefit of $159)	-		-	-			-			-			-			(279	)		(279	)

Total comprehensive loss	-		-	-			-			-			-			-			(36,642	)

Balance, December 31, 2001	17,207	$	17,207	(1,590	)	$	(25,142	)	$	68,353		$	139,228		$	(27,533	)	$	172,113

The accompanying notes to consolidated financial statements are an integral part of these statements.

Consolidated Statements of Cash Flows

Pope & Talbot, Inc. and Subsidiaries Years ended December 31 (thousands)		2001			2000			1999

Cash flow from operating activities:
Net income (loss)	$	(24,905	)	$	32,566		$	14,421
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Depreciation and amortization		30,840			31,912			32,773
Minority interest in subsidiary loss, net of income tax		-			-			(2,587	)
Changes in assets and liabilities:
Accounts receivable		11,454			12,014			(14,423	)
Inventories		13,832			(14,271	)		(6,709	)
Prepaid expenses and other assets		587			(4,848	)		561
Accounts payable and accrued liabilities		16,033			(4,593	)		11,986
Current and deferred income taxes		(15,373	)		4,656			4,843
Other liabilities		(8,210	)		3,089			316

Net cash provided by operating activities		24,258			60,525			41,181
Cash flow from investing activities:
Purchases of short-term investments		(2,745	)		(27,369	)		(19,488	)
Proceeds from maturities of short-term investments		13,239			27,414			18,696
Capital expenditures		(18,852	)		(50,591	)		(24,827	)
Investment in subsidiary, net of cash acquired		(82,592	)		-			(20,389	)
Minority interest in subsidiary treasury stock issuance		-			-			207
Proceeds from sale of other properties		1,591			2,377			335

Net cash used for investing activities		(89,359	)		(48,169	)		(45,466	)
Cash flow from financing activities:
Short-term borrowings		-			(11,059	)		800
Proceeds from long-term debt		95,300			-			64,574
Repayments of long-term debt		(4,488	)		(4,059	)		(53,587	)
Shares repurchased		-			(12,999	)		(5,246	)
Proceeds from issuance of treasury stock, net		205			1,915			-
Cash dividends		(8,844	)		(7,482	)		(7,010	)

Net cash provided by (used for) financing activities		82,173			(33,684	)		(469	)

Increase (decrease) in cash and cash equivalents		17,072			(21,328	)		(4,754	)
Cash and cash equivalents at beginning of period		1,391			22,719			27,473

Cash and cash equivalents at end of period	$	18,463		$	1,391		$	22,719

The accompanying notes to consolidated financial statements are an integral part of these statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Pope & Talbot, Inc. and Subsidiaries

Years ended December 31, 2001, 2000 and 1999

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 balances and transactions.

Foreign Currency Translation

The assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars using year-end exchange rates. Revenues and expenses are translated into U.S. dollars at average exchange rates for each period. Resulting translation adjustments are recorded as a component of accumulated other comprehensive income or loss within stockholders’ equity.

Inventories

Inventories are stated at the lower of cost or market. For lumber inventories at the sawmill in the United States and wood chip, sawdust and wood fiber in pulp inventories at the Company’s three pulp mills, cost has been determined using the last-in, first-out (LIFO) method. For remaining inventories, cost has been determined using the average cost method which approximates the first-in, first-out (FIFO) basis.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost. Expenditures for new facilities and those expenditures that substantially increase the useful lives of existing property, plant and equipment are capitalized as well as interest costs associated with 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 and is amortized over the depreciable life of related assets. Capitalized interest was $0.1 million in 2001, $1.2 million in 2000 and $0.4 million in 1999. Upon sale or retirement of capitalized assets, the related cost and accumulated depreciation are removed from the accounts, with the resultant gain or loss included in the Consolidated Statements of Operations. Costs of maintenance and repairs are charged to expense as incurred.

Depreciation of assets other than pulp production assets is computed using the straight-line method over the useful lives of respective assets. Depreciation of the Company’s pulp production assets is computed using the units-of-production method. The estimated useful lives of the principal items of property, plant and equipment range from 3 to 40 years.

Impairment of Long-Lived Assets

The Company periodically evaluates long-lived assets for impairment. Recoverability of assets is measured by comparison of the carrying amount of an asset to the undiscounted net future cash flows expected to be generated by an asset. If estimated future cash flows indicate the carrying value of an asset may not be recoverable, impairment exists, and the asset’s book value is written down to its estimated realizable value.

Timber Resources

In Canada, the Company primarily obtains its timber from the Provincial Government of British Columbia under timber harvesting licenses. 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. The Company also purchases logs in Canada in the open market. The Company does not incur liabilities for the cost of timber until it has been harvested.

In the U.S., the Company obtains its timber from various public and private sources under timber harvesting contracts. The Company does not incur a direct liability for, or ownership of, this timber until it has been harvested. Additionally, logs are purchased in the open market. The total volume committed under contract at December 31, 2001, and the 2002 planned contract harvest was 148 million board feet and 58 million board feet, respectively. At December 31, 2001, the Company’s best estimate of its total commitment at current contract rates under these contracts was approximately $25.4 million. The Company evaluates the loss contract reserves for its public and private timber harvesting contracts based on the estimated total cost applied to such harvests and the projected values to be realized from conversion of timber to logs.

Amounts capitalized as Canadian timber cutting rights (tree farm licenses and timber licenses) in conjunction with sawmill acquisitions accounted for as a purchase are amortized over 50 years on a straight-line basis due to the long-term, renewable nature of the contracts with the Province of British Columbia.

Reforestation

Under the Canadian timber harvesting licenses mentioned above, the Company is contractually responsible for all

reforestation costs until the harvested land is “free to grow.” This is a forestry term meaning that no further reforestation activity is anticipated prior to the next harvest. A substantial portion of the reforestation responsibilities, such as site preparation, planting and fertilization, occurs during the first five years after harvest. The remaining costs, such as thinning and herbicide application, are incurred until the harvested land is free to grow, generally seven to twelve years after initial planting. 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.

Environmental Expenditures

Environmental expenditures related to current operations that substantially increase the economic value or extend the useful life of an asset are capitalized while all other costs 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 such costs are probable and reasonably estimable. Such 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 receipt is deemed highly probable and can be reasonably estimated.

Revenue Recognition

The Company recognizes revenue from product sales when the sales price is fixed or determinable, title transfers and risk of loss has passed to the customer, which is generally at the time of shipment. Sales are reported net of discounts and allowances. Amounts charged to customers for shipping and handling are recognized as revenue. Shipping and handling costs incurred by the Company are reported as cost of goods sold.

Interest

Interest expense in the Consolidated Statements of Operations is shown net of interest income and capitalized interest. Interest income was $5.1 million in 2001, $2.4 million in 2000 and $3.7 million in 1999.

Earnings Per Share

The computation of basic earnings per share is based on net income or loss and the weighted average number of common shares outstanding during each year. Diluted earnings per share reflect the assumed issuance of common stock equivalents related to dilutive stock options and restricted stock awards. The computation of diluted earnings per share does not assume conversion or exercise of securities that would have an antidilutive effect on earnings per share. For 2001, the computation of diluted net loss per share was antidilutive; therefore, the amounts reported for basic and diluted were the same.

The following table summarizes the computation of diluted net income per share:

(thousands, except per share)	2001			2000		1999

Weighted average shares outstanding		14,818			14,278		13,667
Effect of stock plans		-			233		82

Diluted average shares outstanding		14,818			14,511		13,749


Net income (loss)	$	(24,905	)	$	32,566	$	14,421


Diluted net income (loss) per share	$	(1.68	)	$	2.24	$	1.05

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 price of the common shares, or the impact of their inclusion would be antidilutive. Such stock options totaled 1,370,000 shares, 280,000 shares and 777,000 shares at December 31, 2001, 2000 and 1999, respectively, at prices ranging from $5.25 to $30.38 in 2001, $18.13 to $30.38 in 2000, and $11.06 to $30.38 in 1999.

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. The effect of exchange rate changes on cash balances held in foreign currencies was not significant. Total cash expenditures for interest were $18.1 million, $11.0 million and $12.0 million for 2001, 2000 and 1999, respectively. Total cash expenditures for income taxes were $1.8 million for 2001, $17.3 million for 2000 and $10.6 million for 1999.

Financial Instruments and Derivatives

The carrying amounts reported in the balance sheet for cash and cash equivalents, short-term investments, accounts receivable, short-term borrowings and accounts payable and accrued liabilities approximate fair values due to the short maturity of those instruments.

The Company utilizes well-defined financial contracts in the normal course of its operations as means to manage its foreign currency exchange and commodity price risks. The vast majority of these contracts are fixed-price contracts for future purchases and sales of various commodities that meet the definition of “normal purchases or normal sales” and therefore, are not considered derivative instruments under Statement of Financial Accounting Standards (SFAS) No. 133, as amended. Likewise, several of the Company’s financial and commodity contracts do not provide for net settlement, and therefore, are not considered derivative instruments under SFAS No. 133, as amended. The Company does not hold financial instruments for trading purposes. The Company is exposed to credit-related gains or losses in the event of nonperformance by counterparties to financial instruments but does not expect any counterparties to fail to meet their obligations. The Company’s current accounting treatment for the limited number of contracts considered derivative instruments is described below.

For derivatives designated as fair value hedges, changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, the effective portions of changes in the fair value of the derivatives are recorded in other comprehensive income and are recognized in earnings when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings. Changes in the fair value of all other derivative instruments not designated as hedges are also recognized in earnings in the period in which the changes occurred.

The Company designates commodity swap agreements as cash flow hedges. These agreements are designed to hedge against the variability of future cash flows arising from changes in natural gas spot rates. Gains or losses recorded in other comprehensive income are reclassified into earnings at the contracts’ respective settlement dates.

The notional amount of the natural gas commodity swap agreements was $5.7 million at December 31, 2001. This notional amount does not represent amounts exchanged by the parties and, thus, is not a measure of exposure to the Company through its use of derivatives. The exposure in a derivative contract is the net difference between what each party is required to pay based on contractual terms. The net earnings impact in 2001 resulting from the Company’s use of commodity swap agreements was immaterial. The Company estimates that all unrealized net losses on cash flow hedging derivatives recorded in cumulative other comprehensive income (loss) at December 31, 2001, will be reclassified into earnings within the next 12 months.

The Company uses foreign exchange contracts to manage its exposure to foreign currency transaction gains and losses in the translation of U.S. dollar cash and accounts receivable of its Canadian subsidiary and Canadian dollar denominated intercompany loans made by the parent company. These Canadian dollar forward exchange contracts are not designated as hedges. No such contracts were entered into in 2001 and the impact of these activities in 2001, 2000 and 1999 was immaterial to the Company’s financial results.

Accounting Changes

Effective January 1, 2000, the Company changed the method for valuation of fiber in wood chip, log and pulp inventories of the Harmac pulp operations from the FIFO method to the LIFO method. The change was made to conform the method of valuing fiber inventories between the Company’s U.S. and Canadian operations. The impact of this change was an increase in cost of sales and corresponding decrease in pre-tax operating earnings of approximately $2.9 million, or $.12 per diluted share after tax. The cumulative effect of this change to the LIFO method on operating results as of the beginning of 2000 has not been presented, as the effect is not readily determinable.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.

Prospective Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that all business combinations initiated

after June 30, 2001 be accounted for using the purchase method, thus eliminating the use of pooling-of-interests accounting for business combinations. SFAS No. 142 changes the accounting for goodwill, eliminating the periodic charge to earnings for goodwill amortization for fiscal years beginning after December 15, 2001. Instead, the statement will require an annual assessment of goodwill for impairment, or more frequent assessments if circumstances indicate a possible impairment. Additionally, SFAS No. 142 prescribes the accounting for identifiable intangible assets acquired in a business combination. Whereas, SFAS No. 141 is effective for all business combinations initiated after June 30, 2001, SFAS No. 142 required companies to continue to amortize goodwill existing at June 30, 2001 through the end of the current fiscal year, with periodic amortization ceasing effective January 1, 2002. The effect of the adoption of SFAS No. 142 will not have a material impact on the Company’s financial statements.

In June 2001, the Financial Accounting Standards Board issued SFAS No. 143, “Accounting for Obligations Associated with the Retirement of Long-Lived Assets.” SFAS No. 143 requires the accrual, at fair value, of the estimated retirement obligation for tangible long-lived assets if the Company is legally obligated to perform retirement activities at the end of the related asset’s life and is effective for fiscal years beginning after June 15, 2002. The Company is evaluating the impact of adopting SFAS No. 143 on its consolidated financial position, but does not believe SFAS No. 143 will have a material impact on the Company’s financial statements.

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” that replaces FASB Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” SFAS No. 144 created one accounting model for long-lived assets to be disposed of by sale that applies to all long-lived assets, including discontinued operations, and replaces the provisions of APB Opinion No. 30, “Reporting Results of Operations—Reporting the Effects of Disposal of a Segment of a Business” for the disposal of segments of a business. SFAS No. 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reporting in continuing operations or in discontinued operations. Discontinued operations will no longer include amounts for operating losses that have not yet occurred. SFAS No. 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, are to be applied prospectively.

2. INVESTMENT SECURITIES

The Company’s short-term investments consisted of guaranteed investment certificates at December 31, 2001 and primarily corporate debt securities at December 31, 2000. The investment securities were classified as available-for-sale and the carrying value approximated the fair value.

3. INVENTORIES

(thousands)	2001			2000

Lumber	$	14,681		$	13,803
Pulp		24,711			23,425
Saw logs		28,307			34,377
Pulp logs, chips and sawdust		12,542			18,680
Chemicals and supplies		19,313			13,791
LIFO reserve		(1,298	)		(5,339	)

	$	98,256		$	98,737

The portion of inventories accounted for using the last-in, first-out (LIFO) method aggregated $19.9 million and $26.5 million using the average cost method, which approximates the FIFO basis, at December 31, 2001 and 2000, respectively.

4. PROPERTIES

(thousands)	2001		2000

Plant and equipment:
Mills, plants and improvements	$	87,404	$	65,045
Equipment		466,616		398,074
Mobile equipment		19,345		19,562
Construction in progress		5,444		3,138

	$	578,809	$	485,819

Land and timber cutting rights:
Land	$	4,107	$	4,235
Canadian timber cutting rights		3,428		3,971

	$	7,535	$	8,206

Included in plant and equipment at December 31, 2001, were assets at cost of $195.3 million ($156.8 million at December 31, 2000) and a net book value of $74.9 million ($46.0 million at December 31, 2000) for which the Company does not hold title. See Note 6 and the discussion of the Halsey mill sale/leaseback transactions.

5. INCOME TAXES

Earnings before income taxes and minority interest were comprised of the following:

(thousands)	2001			2000			1999

Domestic income (loss)	$	(31,999	)	$	(9,900	)	$	(10,112	)
Foreign income (loss)		(10,945	)		65,584			33,368

	$	(42,944	)	$	55,684		$	23,256

The income tax provision (benefit) consisted of the following components:

(thousands)	Current			Deferred			Total

2001
Federal	$	-		$	(11,912	)	$	(11,912	)
State		-			(892	)		(892	)
Foreign		(4,717	)		(518	)		(5,235	)

	$	(4,717	)	$	(13,322	)	$	(18,039	)

2000
Federal	$	409		$	(2,172	)	$	(1,763	)
State		-			(407	)		(407	)
Foreign		9,238			16,050			25,288

	$	9,647		$	13,471		$	23,118

1999
Federal	$	1,659		$	(3,289	)	$	(1,630	)
State		54			(460	)		(406	)
Foreign		15,559			(2,101	)		13,458

	$	17,272		$	(5,850	)	$	11,422

The income tax provision (benefit) was different from the amount computed by applying the U.S. statutory federal income tax rate as follows:

(thousands)	2001			2000			1999

Tax at U.S. statutory rate	$	(15,031	)	$	19,489		$	8,140
State tax net of federal benefit		(580	)		(263	)		(264	)
Impact of foreign tax rates different than U.S. statutory rate		299			3,824			1,659
Reduction in foreign tax rate		(1,734	)		-			-
State pollution control tax credits		(1,149	)		-			-
Adjustment to prior years taxes		-			-			1,459
Other items, net		156			68			428

	$	(18,039	)	$	23,118		$	11,422

During the third quarter of 2001, a reduction in the British Columbia provincial corporate income tax rate was enacted. This change in tax law reduced foreign deferred income taxes by $1.7 million due to the effect of the lower tax rate on accumulated temporary differences of the Company’s Canadian subsidiaries. The Company is recognizing state pollution control tax credits and other tax attributes utilized to satisfy the $10.6 million long-term obligation discussed in Note 6 over the 12 tax years ending in 2012.

The temporary differences that give rise to deferred taxes are shown in the following table. The most significant deferred tax asset relates to net operating loss carryforwards. At December 31, 2001, the Company had available $53.2 million of U.S. federal tax loss carryforwards expiring as follows: 2010—$13.8 million; 2011—$4.3 million; 2012—$6.8 million; 2020—$3.2 million and 2021—$25.1 million. As of December 31, 2001, the Company also had Alternative Minimum Tax carryforwards of $.5 million that may be carried forward indefinitely.

Management believes that the Company will have sufficient future U.S. taxable income to make it more likely than not that the 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 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)	2001			2000

Current deferred taxes:
Gross assets	$	10,727		$	4,031
Noncurrent deferred taxes:
Gross assets		56,526			52,159
Gross liabilities		(51,698	)		(45,859	)

Total noncurrent deferred taxes		4,828			6,300

Net deferred tax asset	$	15,555		$	10,331

The Company’s valuation allowance against deferred tax assets was $5.2 million and $6.3 million at December 31, 2001 and 2000, respectively. The change in the valuation allowance related primarily to expiration of state tax credits. The remaining valuation allowance relates to certain state net operating loss carryforwards and 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)	2001			2000

Postretirement benefits	$	8,136		$	7,254
Reforestation		3,107			4,321
Depreciation		(24,760	)		(16,532	)
Lumber import duties		5,542			-
AMT and other tax credits		2,197			2,970
Net operating loss carryforwards		20,312			11,029
Other, net (including valuation allowance)		1,021			1,289

Net deferred tax asset	$	15,555		$	10,331

Undistributed earnings of the Company’s Canadian subsidiaries totaled $159.4 million at December 31, 2001, 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.

6. DEBT

(thousands)	2001		2000

Long-term debt:
State of Oregon Small Scale Energy Loan Program note payable, secured by irrevocable letter of credit, 6.55%	$	11,893	$	12,522
Revolving credit and term loan facility, variable interest
rate 3.35%		37,732		-
Term loan due June 2003, variable interest rate 3.73%		21,568		-
Lease financing obligations, weighted average
interest rate 7.08%		82,134		59,481
Long-term obligation, due 2002-2012, interest at 7.54%		9,488		-
8.375% debentures, due 2013		75,000		75,000

		237,815		147,003
Less current portion		17,786		3,247

Long-term debt	$	220,029	$	143,756

Revolving Credit and Term Loan Facilities

In 2001, the Company renewed its $25 million revolving credit agreement with a domestic bank and expanded its revolving bank line of credit from $75 million Canadian (approximately $47 million U.S.) to $110 million Canadian (approximately $69 million U.S.) with three Canadian banks. Both the U.S. and Canadian lines are 364-day revolving credit and two-year term loan facilities secured by certain inventory and accounts receivable. A commitment fee on the unused portion of the domestic credit facility is payable quarterly and is based on specific debt ratios as outlined in the credit agreement ranging from .4 percent to .75 percent per year. The interest rate associated with the domestic revolving credit agreement is based, at the option of the Company, on specified market rates plus a margin based on the Company’s debt ratio. There were no borrowings under the domestic facility at December 31, 2001, although $22.2 million of availability was utilized at December 31, 2001 by letters of credit described elsewhere in this Note 6.

The interest rate associated with the $110 million Canadian agreement is based, at the option of the Company, on specified market rates plus a margin predetermined by the credit agreement. A commitment fee of .25 percent per year on the unused portion is payable quarterly. At December 31, 2001 the Company had $37.7 million U.S. outstanding under its Canadian revolving credit agreement and had available approximately $35 million U.S. of borrowing capacity under its domestic and Canadian revolving credit agreements.

In addition, the Company obtained a $35 million Canadian (approximately $22 million U.S.) two-year term loan, secured by real property, to fund a portion of the Mackenzie acquisition costs. At December 31, 2001, the Company had $21.6 million U.S. outstanding under the two-year term agreement. The interest rate associated with the term loan is based, at the option of the Company, on specified market rates plus a margin predetermined by the credit agreement.

The revolving credit agreements and term loan agreement contain certain restrictive covenants, including maximum leverage ratios and EBITDA to interest coverage. As of December 31, 2001, the Company was in compliance with these requirements.

Lease Financing Obligations

In the third quarter of 1999, the Company entered into a sale/leaseback of its Halsey pulp mill. The facility was sold for $64.6 million cash, and 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. The lease term ends in 2012, with an early purchase option in 2007. In 2001, the lessor in the 1999 Halsey pulp mill sale/leaseback agreed to credit the Company $2.2 million as an offset against the early purchase option price, if the Company exercises that option. The adjustment to the lease financing obligation has been accounted for as a prospective reduction in the effective interest rate of the debt from December 27, 2001.

On December 27, 2001, the Company entered into a $36 million sale/leaseback of the Halsey pulp mill chlorine dioxide facility (the CIO₂ lease financing). The lessor is the same financial institution with which the Company sold and leased back the Halsey pulp mill in 1999 and the lessee is a limited partnership of which the Company is the general partner and another financial institution is the limited partner. The limited partner invested $10.6 million in the lessee, which was utilized to fund an advance rent payment to the lessor of the facility. The Company has recorded the $36 million CIO₂ transaction as a $25.4 million lease financing obligation and a $10.6 million long-term obligation. The CIO₂ lease financing has a term, rent payment schedule and early purchase option that are coterminus with the Halsey mill sale/leaseback. The Halsey leases require annual rent payments, payable semi-annually, as follows: for the years 2002 through 2004—$4.8 million; 2005—$4.9 million and 2006—$5.8 million. Beginning in January of 2007 (if the leases have not been

terminated by exercise of the early purchase options), two semi-annual payments of $16.6 million and other payments totaling $22.5 million through the end of the lease term in 2012 are required. There are two purchase options under each of the Halsey leases. The aggregate price under the early purchase options in 2007 is fixed at $59.1 million, payable in five installments during 2007. The purchase options at the end of the leases will be at fair market value as determined at the time of the exercise. The leases contain certain restrictive covenants, including a maximum leverage ratio, a minimum net worth requirement and a fixed charge coverage ratio or cash requirement. At December 31, 2001, the Company was in compliance with all of these covenants.

The Company is retiring the $10.6 million long-term obligation through the allocation by the lessee partnership of state pollution control tax credits and other tax attributes to the limited partner over the 12 tax years ending in 2012. The Company is obligated to otherwise repay the long-term obligation if the state pollution control tax credits and other tax attributes are not available to the limited partner as contemplated in the agreement. The stated interest rate represents the calculated implicit interest rate on the $10.6 million cash investment of the limited partner based upon the after-tax cash flows of the pollution control tax credits and other tax attributes allocated to the limited partner over the 12 year life of the limited partnership. At December 31, 2001, the Company maintained a $9.8 million letter of credit to support the long-term obligation.

The annual maturities of long-term debt, excluding the lease financing obligations and related long-term obligation, for the years subsequent to December 31, 2001 are: 2002—$11.9 million; 2003—$21.6 million and 2004—$37.7 million.

In January 2002, the Company elected to repay the remaining balance of the State of Oregon Small Scale Energy Loan (SELP). Accordingly, the Company included this debt in the current portion of long-term debt at December 31, 2001. The Company maintained a $12.4 million letter of credit at December 31, 2001 associated with the SELP note payable. The letter of credit was discontinued upon payment of the debt in January 2002.

7. OTHER LONG-TERM LIABILITIES

Other long-term liabilities consist of the following:

(thousands)	2001		2000

Reforestation	$	11,209	$	14,596
Postretirement benefits		17,418		15,571
Environmental liabilities		7,171		11,845
Other		4,149		2,655

	$	39,947	$	44,667

At December 31, 2001, the Company classified $4.2 million of environmental liabilities as current liabilities in other accrued liabilities. No environmental liabilities were classified as short-term liabilities at December 31, 2000.

8. 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 at a fixed benefit rate.

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.

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 Company sponsors a defined contribution plan to provide substantially all U.S. salaried employees an opportunity to accumulate personal funds for their retirement. Contributions may be made on a before-tax basis. The Company matches a portion of the employee’s contributions in cash to be invested among several investment options at the employee’s discretion. The amounts contributed to the plan for participating employees were $.9 million for the years 2001, 2000 and 1999, respectively.

The following table sets forth selected financial information regarding the pension and postretirement benefit plans:

	Pension Benefits						Postretirement Benefits

(thousands)	2001			2000			2001			2000

Change in benefit obligation:
Benefit obligation at beginning of year	$	68,511		$	70,271		$	15,351		$	13,997
Service cost		2,314			2,365			493			478
Interest cost		5,026			4,987			1,171			1,080
Settlement		-			(5,129	)		-			-
Actuarial (gain) loss		(405	)		258			(88	)		494
Acquisition		430			-			1,099			-
Benefits paid		(3,664	)		(2,987	)		(505	)		(457	)
Foreign currency rate changes		(1,910	)		(1,254	)		(373	)		(241	)

Benefit obligation at end of year	$	70,302		$	68,511		$	17,148		$	15,351


Change in plan assets:
Fair value of plan assets at beginning of year	$	86,719		$	84,385		$	-		$	-
Actual return on plan assets		(12,522	)		10,909			-			-
Acquisition		430			-			-			-
Employer contributions		584			851			505			450
Settlement		-			(5,129	)		-			-
Benefits paid		(3,664	)		(3,175	)		(505	)		(450	)
Foreign currency rate changes		(1,935	)		(1,122	)		-			-

Fair value of plan assets at end of year	$	69,612		$	86,719		$	-		$	-


Funded status	$	(690	)	$	18,208		$	(17,148	)	$	(15,351	)
Employer contribution after measurement date		273			100			-			-
Unrecognized net actuarial loss (gain)		3,474			(16,928	)		(270	)		(220	)
Unrecognized prior service cost		1,230			1,500			-			-
Unrecognized net asset at transition		(44	)		(76	)		-			-

Prepaid (accrued) benefit cost	$	4,243		$	2,804		$	(17,418	)	$	(15,571	)


Plans having assets in excess of accumulated benefits
Benefit obligation	$	37,027		$	65,442
Fair value of plan assets		43,370			86,719

Plans having accumulated benefits in excess of assets
Benefit obligation	$	33,274		$	3,068
Fair value of plan assets		26,242			-

Weighted-average assumptions as of December 31
Discount rate		7.38	%		7.50	%		7.38	%		7.50	%
Rate of compensation increase		4.50	%		5.00	%		4.50	%		5.00	%
Expected return on plan assets		8.54	%		8.50	%

For measurement purposes of U.S. postretirement plans, 6.5 percent and 7.0 percent rates of increase were assumed for health care costs in 2001 and 2000, respectively. The rate was assumed to decline in .5 percent decrements every year until it reached 5 percent in 2004 where it remained thereafter. For the Company’s Canadian plans, 7.0 percent and 8.0 percent annual rates of increase were assumed for health care costs in 2001 and 2000, respectively. The rate was assumed to decline over a graded period until it reached 4.2 percent in 2008 where it remained thereafter.

Net periodic pension cost for 2001, 2000 and 1999 was composed of the following:

	Pension Benefits
(thousands)	2001			2000			1999

Components of net periodic benefit cost:
Service cost	$	2,314		$	2,365		$	2,468
Interest cost		5,026			4,987			4,809
Expected return on plan assets		(7,225	)		(6,968	)		(6,384	)
Amortization of prior service cost		8			76			76
Amortization of transition amounts		150			23			(51	)
Recognized net actuarial gain		(747	)		(663	)		(293	)
Settlement gains		-			(1,129	)		(440	)

Net periodic benefit cost for Company administered plans		(474	)		(1,309	)		185
Contributions to multi-employer plans		4,872			4,686			4,666

Net periodic benefit cost	$	4,398		$	3,377		$	4,851

At December 31, 2001, the Company recorded an additional minimum liability of $439,000 for plans with unfunded accumulated benefit obligations in excess of the unfunded accrued pension cost. A loss of $279,000, net of tax, was recorded in other comprehensive income (loss).

Net periodic cost for the Company’s postretirement medical and life insurance plans for 2001, 2000 and 1999 was composed of the following:

	Postretirement Benefits

(thousands)	2001			2000		1999

Components of net periodic benefit cost:
Service cost	$	493		$	478	$	507
Interest cost		1,171			1,080		950
Recognized net actuarial (gain) loss		(6	)		15		(31	)

Net periodic benefit cost	$	1,658		$	1,573	$	1,426

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	$	343	$	(259	)
Effect on postretirement benefit obligation		2,895		(2,328	)

9. STOCK OPTION PLANS

The Company maintains three stock option plans and accounts for all options under APB Opinion No. 25 and related interpretations, under which no compensation expense has been recognized. The Company has a stock option 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. The Company also has a non-employee director stock option plan (Director Plan). At December 31, 2001, shares available for future grants under these plans totaled 568,360. Additionally, the Company has a non-employee director stock retainer fee plan (Retainer Plan). At December 31, 2001, shares available for future grants under this plan totaled 196,828. 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. Each Harmac stock option was exchanged for .4732 of a Company stock option at an average exercise price of $10.23 per share.

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 non-employee directors over their period of continued service on the Board of Directors. Such options are granted at 100 percent of fair market value on the date of grant. Options are immediately exercisable and have a ten-year term.

The Retainer Plan permits non-employee 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.

A summary of the stock options outstanding at December 31, 2001, 2000 and 1999 and changes during the years then ended in the number of shares (Shares) and the weighted average exercise price (Price) is presented below (options received by former Harmac option holders are denoted as “Exchanged”):

	2001					2000					1999

(shares in thousands)	Shares			Price		Shares			Price		Shares			Price

Outstanding at beginning of year		1,176		$	15		1,054		$	15		837		$	18
Granted		296			15		278			16		277			9
Exchanged		-			-		-			-		95			10
Exercised		(1	)		15		(114	)		15		-			-
Canceled		(101	)		17		(42	)		23		(155	)		16

Outstanding at end of year		1,370			15		1,176			15		1,054			15

Exercisable at year-end		742			16		399			16		642			18

Weighted average fair value of options granted during year	$	5.07				$	5.21				$	1.93

The fair value of options granted in 2001, 2000 and 1999 was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 2001, 2000 and 1999,

respectively: risk-free interest rates of 5.1, 6.6 and 5.1 percent; dividend yields of 5.0, 5.5 and 5.4 percent; and expected volatility of 55, 50 and 35 percent. Expected option lives of six years were assumed. The following table summarizes information about stock options outstanding at December 31, 2001:

	Range of exercise prices

(shares in thousands)	$5-$11		$12-$20		$21-$30		Total

Options outstanding:
Number outstanding		256		1,058		56		1,370
Remaining contractual life in years		7.0		6.1		3.7		6.2
Weighted average exercise price	$	8	$	16	$	29	$	15

Options exercisable:
Number exercisable		118		576		48		742
Weighted average exercise price	$	8	$	17	$	30	$	16

In 2000, restricted shares were awarded to an officer of the Company at no cost based on stock price targets established under the award. Ten percent of the shares vested on the date of issuance and 10 percent will vest on each anniversary thereof. At December 31, 2001, unvested restricted shares totaled 24,224.

Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” if fully adopted, changes the methods for recognition of costs of 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. The effects of applying SFAS No. 123 in this pro forma disclosure are not necessarily indicative of what can be expected in future years.

(thousands except per share)	2001			2000		1999

Net income (loss):
As reported	$	(24,905	)	$	32,566	$	14,421
Pro forma		(25,784	)		31,718		14,093

Diluted net income (loss) per share:
As reported	$	(1.68	)	$	2.24	$	1.05
Pro forma		(1.74	)		2.19		1.03

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 exercise price and the cost of treasury shares is recorded as an increase or decrease to additional paid-in capital.

10. ACQUISITIONS

Mackenzie

On June 15, 2001, the Company completed the acquisition of the Mackenzie pulp mill from Norske Skog Canada. The Company acquired Mackenzie, in a transaction accounted for as a purchase, for approximately $80.4 million U.S. in cash, 1,750,000 shares of Company common stock and the assumption of approximately $21.5 million of liabilities. The Company’s common shares were assigned a value of $12.45, based on the average closing price of Company common stock over a reasonable period

of time around the announcement date (March 29, 2001) of the transaction. Mackenzie is a single-line pulp mill with an annual capacity of 230,000 metric tons of northern bleached kraft chip and sawdust pulp. The results of Mackenzie are included in the consolidated financial statements from the date of acquisition.

The purchase price of Mackenzie was calculated as follows:

(thousands)

Company common shares issued		1,750
Multiplied by the average market price	$	12.45

Value of common shares issued	$	21,788
Cash		80,444

Total		102,232
Direct acquisition costs		2,148

Total purchase price	$	104,380

The purchase price, including estimated direct acquisition costs, was allocated to the assets and liabilities of Mackenzie based upon preliminary estimates of their fair value as indicated below. The actual allocation may differ from those assumptions after valuations and other procedures are completed.

(thousands)

Current assets, other than cash	$	28,217
Property, plant and equipment		97,623
Other assets		8
Current liabilities		(9,246	)
Other liabilities		(12,222	)

Total purchase price	$	104,380

The following unaudited pro forma information for the periods set forth below gives effect to the transaction as if the Mackenzie purchase had occurred as of the beginning of each respective year after giving effect to certain adjustments. The pro forma information is not necessarily indicative of what the actual operating results would have been had the transaction occurred on the dates indicated and does not purport to indicate future results of operations. In addition, the pro forma information does

not reflect any cost savings or other synergies resulting from the transaction.

(thousands except per share, unaudited)	2001			2000

Revenues	$	549,824		$	707,259
Net income (loss)		(28,227	)		40,627
Basic net income (loss) per share		(1.70	)		2.53
Diluted net income (loss) per share		(1.70	)		2.50

Harmac

On November 8, 1999, the Company completed the acquisition of the 40 percent of Harmac Pacific Inc. (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. The shares were valued based on the average market price of the Company’s stock over a reasonable period of time around the announcement date of the transaction. Also included in the purchase price were acquisition costs of $.7 million and the value assigned to Company options that were exchanged for Harmac options of $.6 million. The Company had previously acquired a 53 percent ownership interest in Harmac, through a number of purchases from April 1997 through February 1998, for $69.9 million, including cash acquired of $19.6 million. In December 1998, the Company acquired an additional seven percent of Harmac’s shares for $2.5 million. The cost to acquire 100 percent of Harmac’s shares outstanding totaled $112.4 million, including cash acquired of $19.6 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 allocation of the purchase price to the fair value of assets acquired and liabilities assumed for each acquisition of Harmac shares was as follows:

(thousands)	February 1998			December 1998			November 1999

Current assets	$	58,814		$	-		$	-
Property, plant and equipment		147,164			(9,612	)		(4,569	)
Other assets		2,902			-			-
Current liabilities		(29,297	)		-			-
Convertible subordinated debentures		(52,556	)		-			-
Other liabilities		(23,049	)		3,845			1,828
Minority interest		(53,678	)		8,258			42,720

Purchase price, net of cash acquired	$	50,300		$	2,491		$	39,979

The following unaudited pro forma information gives effect as if 100 percent of the Harmac shares had been acquired at the beginning of 1999 after giving effect to certain adjustments. 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

Revenues	$	536,183
Net income		11,898
Basic net income per share		.87
Diluted net income per share		.87

11. 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.

Environmental Matters

The Oregon Department of Environmental Quality (ODEQ), based on detection of 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. Based on preliminary findings, the Company has established a reserve in the amount of $3.5 million, representing the low end of the range of estimated future remediation and monitoring costs at this site. The reserve for this site was $4.7 million and $6.1 million at December 31, 2000 and 1999, respectively. The reduction in the reserve was due to revisions in the Company’s estimates of the costs of remediation and extent of contamination. The reserve is for the estimated costs of soil and groundwater excavation and treatment, the capping and monitoring of surface water/sediment, and post remediation monitoring costs. The Company currently expects the majority of the remediation costs to be incurred in 2006, with post remediation monitoring costs to begin in 2007 and to continue for 15 to 20 years.

In 1998 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. The nature of contamination at the former mill site consists of industrial waste contamination of soil, groundwater and surface water/sediment. In addition, four landfills used by the Company are contaminated with wood debris and industrial wastes. Further, WDOE requested that the Company perform an investigation of sediments in the adjacent bay to determine the extent of wood waste accumulation. The Company is working with the WDOE to complete the sediment characterization and to prepare risk assessments. Based on preliminary findings, the Company has established a reserve in the amount of $6.7 million, representing the low end of the range of estimated future remediation costs at this site. The reserve for this site was $6.8 million and $2.6 million at December 31, 2000 and 1999, respectively. The increase in 2000 in the reserve was primarily due to changes in the zoning of a portion of the site, which imposed higher remediation standards, an increase in the estimated volume of sediments that may require excavation and disposal and changes in WDOE regulations. The reserve is for the estimated costs of soil and surface water/sediment excavation and treatment, landfill capping and landfill gas collection and habitat restoration. The Company began remediation of the landfill sites in late 2001 and currently expects the majority of the remediation costs to be incurred in 2002 and the balance incurred in 2003.

The Company has recorded liabilities totaling $1.2 million for the closure of three wood waste and sludge disposal areas and one landfill. The Company expects these costs to be incurred over the next one to eight years.

The Company has tendered the defense of the above environmental claims to a number of insurance carriers that issued comprehensive general liability policies to the Company from the 1940’s to 1992. 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 has concluded settlements with several insurance carriers and is engaged in settlement discussions with other insurance carriers. The Company believes it has more than sufficient policy limits available to meet the Company’s estimated liabilities. The Company believes recovery under these policies is highly probable and has recorded receivables in amounts it has deemed highly probable of realization. It is possible the Company’s recorded estimate of receivables may change.

Import Duties

Approximately 80 percent of the Company’s current lumber capacity is located in British Columbia, Canada. Between April 1996 and April 2001, exporters of softwood lumber from Canada to the U.S. were subject to tariffs on lumber volumes in excess of defined tariff-free volumes under the Canada-U.S. Softwood Lumber Agreement (SLA). That agreement expired on April 1, 2001.

On April 2, 2001, petitions for the imposition of antidumping and countervailing duties on softwood lumber from Canada were filed with the U.S. Department of Commerce (DOC) and the U.S. International Trade Commission (ITC), by certain U.S. industry and trade groups. In response to the petitions, the ITC conducted a preliminary injury investigation and on May 16, 2001, determined that there was a reasonable indication that the lumber industry in the United States was threatened with material injury by reason of softwood lumber imports from Canada.

On August 9, 2001, the DOC issued its preliminary determination on the countervailing duty and imposed a preliminary duty rate of 19.31 percent to be posted by cash deposits or bonds on sales of softwood lumber to the U.S. on or after August 17, 2001. The DOC also made a preliminary determination that certain circumstances existed which may result in duties on sales of softwood lumber applying retroactively to May 19, 2001 (Critical Circumstances). The preliminary duty rate of 19.31 percent was suspended on December 15, 2001, 120 days after the preliminary determination, in accordance with U.S. law. The Company has accrued $13.6 million for the period from May 19, 2001 to

December 15, 2001 for countervailing duties at the preliminarily determined rate of 19.31 percent. Duties accrued for the retroactive portion of the countervailing duties for the period from May 19, 2001 to August 16, 2001 totaled $6.7 million.

other companies, including Pope & Talbot’s Canadian subsidiary, received the weighted average rate of the six companies of 12.58 percent. The antidumping duty rate applies to all shipments of softwood lumber made to the U.S. on or after November 6, 2001. The DOC did not find Critical Circumstances in its preliminary antidumping ruling and therefore, did not assess these duties retroactively. The Company has accrued $2.0 million for the period from November 6, 2001 to December 31, 2001 for antidumping duties at the preliminarily determined average rate of 12.58 percent.

The final amount and effective date of countervailing and antidumping duties that may be assessed on Canadian softwood lumber exports to the U.S. cannot be determined at this time and will depend on determinations yet to be made by the DOC and ITC and any reviewing courts, NAFTA or WTO panels to which those determinations may be appealed. Any adjustments to the financial statements resulting from a change in the final countervailing and antidumping duty rates or Critical Circumstances determination in the countervailing case will be made prospectively. The Company anticipates that any liability associated with the periods prior to a permanent order will remain suspended through an administrative review period or 2004 at the earliest. Future assessments will be made with cash.

12. 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 U.S., Europe, Canada and Asia.

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)	2001			2000			1999

Revenues
Wood products	$	208,122		$	231,896		$	269,945
Pulp products		291,105			348,156			266,238

Total operating segments	$	499,227		$	580,052		$	536,183

EBITDA
Wood products	$	6,137		$	18,104		$	50,617
Pulp products		4,417			88,463			21,880

Total operating segments		10,554			106,567			72,497
Corporate		(10,095	)		(10,527	)		(7,405	)

	$	459		$	96,040		$	65,092

Depreciation and amortization expense
Wood products	$	7,122		$	7,014		$	8,028
Pulp products		22,767			24,180			23,819

Total operating segments		29,889			31,194			31,847
Corporate		951			718			926

	$	30,840		$	31,912		$	32,773

Operating profit (loss)
Wood products	$	(985	)	$	11,090		$	42,589
Pulp products		(18,350	)		64,283			(1,939	)

Total operating segments		(19,335	)		75,373			40,650
Corporate		(11,046	)		(11,245	)		(8,331	)
Interest, net		(12,563	)		(8,444	)		(9,063	)

Income before income taxes	$	(42,944	)	$	55,684		$	23,256

Total assets at year-end
Wood products	$	95,700		$	96,795		$	119,588
Pulp products		396,944			291,997			276,571

Total operating segments		492,644			388,792			396,159
Corporate		42,286			69,395			77,148

	$	534,930		$	458,187		$	473,307

Capital expenditures
Wood products	$	5,036		$	8,796		$	8,780
Pulp products		12,194			40,843			14,930

Total operating segments		17,230			49,639			23,710
Corporate		1,622			952			1,117

	$	18,852		$	50,591		$	24,827

Revenues by geographic region⁽¹⁾
United States	$	257,872		$	274,765		$	309,906
Europe		105,990			154,683			113,128
Other		135,365			150,604			113,149

	$	499,227		$	580,052		$	536,183

Properties by geographic region
United States	$	89,674		$	99,479		$	75,730
Canada		228,387			148,381			158,437

	$	318,061		$	247,860		$	234,167

(1) Revenues are reported by the location of the customer.

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

(thousands except per share)	First			Second			Third			Fourth			Year

2001
Revenues	$	116,117		$	108,241		$	142,332		$	132,537		$	499,227
Gross profit (loss)		3,591			1,397			(4,604	)		(4,420	)		(4,036	)
Net loss		(2,960	)		(4,858	)		(9,147	)		(7,940	)		(24,905	)
Per Common Share
Basic net loss		(.21	)		(.34	)		(.59	)		(.51	)		(1.68	)
Dividends		.15			.15			.15			.15			.60
Stock Price
High		16.44			15.82			14.71			14.25			16.44
Low		11.96			11.78			11.17			12.30			11.17
2000
Revenues	$	153,878		$	157,021		$	143,094		$	126,059		$	580,052
Gross profit		25,776			26,232			25,508			15,289			92,805
Net income		9,393			9,823			9,274			4,076			32,566
Per Common Share
Basic net income		.65			.67			.66			.29			2.28
Diluted net income		.64			.66			.64			.29			2.24
Dividends		.11			.11			.15			.15			.52
Stock Price
High		19.94			23.50			21.19			17.88			23.50
Low		14.88			15.63			14.13			13.25			13.25

EX-21.1 9 dex211.txt LIST OF SUBSIDIARIES EXHIBIT 21.1 Subsidiaries of Pope & Talbot, Inc. (the registrant) State or Other Name of Corporation Jurisdiction of Incorporation -------------------------------------------------------------------- 1) Pope & Talbot International Ltd. British Columbia 2) Pope & Talbot Ltd. British Columbia 3) Mackenzie Pulp Land Ltd. British Columbia 4) Pope & Talbot Mackenzie Pulp Alberta Operations Ltd. 5) Pope & Talbot FSC, Inc. U.S. Virgin Islands 6) Pope & Talbot Wis., Inc. Delaware 7) Penn Timber, Inc. Oregon 8) Pope & Talbot Relocation Services, Oregon Inc. 9) P&T Power Company Oregon 10) Pope & Talbot Pulp Sales USA, Inc. Delaware 11) Pope & Talbot Pulp Sales Europe Belgium SPRL 12) Pope & Talbot Lumber Sales, Inc. Delaware 13) Halsey Cl0/2/ Limited Partnership Oregon 14) P&T Community Trust British Columbia 15) P&T Funding Ltd. British Columbia 16) P&T Funding Limited Partnership British Columbia All subsidiaries of the registrant do business under the name of the corporation. EX-23.1 10 dex231.txt CONSENT OF ARTHUR ANDERSEN LLP 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, 33-64764 and 333-60586. ARTHUR ANDERSEN LLP Portland, Oregon March 13, 2002 -----END PRIVACY-ENHANCED MESSAGE-----