<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ____________________.
Commission File Number 1-7852
POPE & TALBOT, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-0777139
----------------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1500 SW 1st Avenue, Portland, Oregon 97201
------------------------------------ ---------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (503) 228-9161
--------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of each class on which registered
------------------- -----------------------
Common Shares, par value $1.00 New York Stock Exchange
Common Shares, par value $1.00 Pacific Stock Exchange
8-3/8% Debentures, Due June 1, 2013 None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The aggregate market value of voting stock held by nonaffiliates of the
registrant is $207,267,954 as of March 9, 1995 ($16.375 per share).
13,362,729
------------------------------------------------------------------
(Number of shares of common stock outstanding as of March 9, 1995)
Part I and Part II incorporate specified information by reference from the
annual report to shareholders for the year ended December 31, 1994. Part III
incorporates specified information by reference from the proxy statement for
the annual meeting of shareholders on May 10, 1995.
<PAGE> 2
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The financial statements listed in the accompanying Index to
Financial Statements and Financial Statement Schedules are filed as
part of this annual report.
(a) (2) Schedules
All schedules are omitted since the required information is not
present or is not present in amounts sufficient to require
submission of the related schedule, or because the information
required is included in the financial statements and notes thereto.
(a) (3) Exhibits
The following exhibits are filed as part of this annual report.
Exhibit No.
<TABLE>
<S> <C>
3.1 Certificate of Incorporation, as amended. (Incorporated herein by reference to Exhibit 3(a) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1992.)
3.2 Bylaws. (Incorporated herein by reference to Exhibit 3(b) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992.)
</TABLE>
14
<PAGE> 3
<TABLE>
<S> <C>
4.1 Indenture, dated June 2, 1993, between the Company and Chemical Trust Company of California as Trustee with
respect to the Company's 8-3/8% Debentures due 2013. (Incorporated herein by reference to Exhibit 4.1 to the
Company's registration statement on Form S-3 filed April 6, 1993.)
4.2 Revolving Credit Agreement, dated July 18, 1990, between the Company and United States National Bank of Oregon.
(Incorporated herein by reference to Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1990.)
4.3 Revolving Credit Agreement, dated May 6, 1992, among the Company and United States National Bank of Oregon; CIBC,
Inc.; ABN AMRO Bank N.V.; Continental Bank N.A.; and Wachovia Bank of Georgia, National Association.
(Incorporated herein by reference to Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1992.)
4.4 Rights Agreement, dated as of April 13, 1988, between the Company and The Bank of California, as rights agent.
(Incorporated herein by reference to Exhibit 4(e) to the Company's Annual Report on Form 10-K for the year ended
December 31, 1992.)
4.5 Line of Credit Agreement, dated April 29, 1994, between the Company and Wachovia Bank of Georgia, National
Association. (Incorporated herein by reference to Exhibit 4(a) to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1994.)
4.6 Extension Agreement, dated as of June 30, 1994, to the Revolving Credit Agreement, dated May 6, 1992, among the
Company and United States National Bank of Oregon; CIBC, Inc.; ABN AMRO Bank N.V.; Continental Bank N.A.; and
Wachovia Bank of Georgia, National Association.
4.7 Modification Agreement, dated as of October 31, 1994, to the Revolving Credit Agreement, dated May 6, 1992, among
the Company and United States National Bank of Oregon; CIBC, Inc.; ABN AMRO Bank N.V.; Continental Bank N.A.; and
Wachovia Bank of Georgia, National Association.
4.8 Modification Agreement, dated as of December 31, 1994, to the Revolving Credit Agreement, dated May 6, 1992, among
the Company and United States National Bank of Oregon; CIBC, Inc.; ABN AMRO Bank N.V.; Continental Bank N.A.; and
Wachovia Bank of Georgia, National Association.
10.1 Executive Compensation Plans and Arrangements
---------------------------------------------
10.1.1 Stock Option and Appreciation Plan. (Incorporated herein by reference to Exhibit 10(a) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992.)
10.1.2 Executive Incentive Plan. (Incorporated herein by reference to Exhibit 10(b) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1992.)
10.1.3 Restricted Stock Bonus Plan. (Incorporated herein by reference to Exhibit 10(c) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1992.)
</TABLE>
15
<PAGE> 4
<TABLE>
<S> <C>
10.1.4 Deferral Election Plan. (Incorporated herein by reference to Exhibit 10(d) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1992.)
10.1.5 Supplemental Executive Retirement Income Plan. (Incorporated herein by reference to Exhibit 10(e) to the
Company's Annual Report on Form 10-K for the year ended December 31, 1990.)
10.1.6 Form of Severance Pay Agreement among the Company and certain of its executive officers. (Incorporated herein
by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 1990.)
10.2 Lease agreement between the Company and Pope Resources, dated December 20, 1985, for Port Gamble, Washington
sawmill site. (Incorporated herein by reference to Exhibit 10(g) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1990.)
10.3 Lease agreement between the Company and Shenandoah Development Group, Ltd., dated March 14, 1988, for Atlanta
diaper mill site as amended September 1, 1988 and August 30, 1989. (Incorporated herein by reference to Exhibit
10(h) to the Company's Annual Report on Form 10-K for the year ended December 31, 1990.)
10.4 Lease agreement between the Company and Shenandoah Development Group, Ltd., dated July 31, 1989, for additional
facilities at Atlanta diaper mill as amended August 30, 1989 and February 1990. (Incorporated herein by
reference to Exhibit 10(i) to the Company's Annual Report on Form 10-K for the year ended December 31, 1990.)
10.5 Grays Harbor Paper L.P. Amended and Restated Pulp Sales Supply Contract, dated September 28, 1994 (with certain
confidential information deleted). (Incorporated herein by reference to Exhibit 10(j) to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1994.)
11.1 Statement showing computation of per share earnings.
*13.1 Portions of the annual report to shareholders for the year ended December 31, 1994 which have been incorporated
by reference in this report.
21.1 Listing of parents and subsidiaries. (Incorporated herein by reference to Exhibit 22 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992.)
23.1 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule.
* Refiled herewith.
</TABLE>
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, 1994.
16
<PAGE> 5
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Annual
Report
to
Shareholders
------------
<S> <C>
Report of Independent Public Accountants 19
Consolidated balance sheets at December 31, 1994 and 1993 20
Consolidated statements of income for each of the three years
in the period ended December 31, 1994 21
Consolidated statements of stockholders' equity for each of the
three years in the period ended December 31, 1994 22
Consolidated statements of cash flows for each
of the three years in the period ended December 31, 1994 23
Notes to consolidated financial statements 24-32
Supplementary information:
Quarterly financial information (unaudited) 33
</TABLE>
All schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements and notes thereto.
The consolidated financial statements listed in the above index which
are included in the Annual Report to Shareholders of Pope & Talbot, Inc. for
the year ended December 31, 1994 are hereby incorporated by reference. With
the exception of the pages listed in the above index and the items referred to
in Items 1, 6, 7 and 8, the 1994 Annual Report to Shareholders is not to be
deemed filed as part of this report.
17
<PAGE> 6
POPE & TALBOT, INC.
SIGNATURE
Pursuant to the requirements 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.
POPE & TALBOT, INC.
----------------------
Registrant
Date: March 30, 1995 /s/ C. Lamadrid
-----------------------
C. Lamadrid
Senior Vice President and
Chief Financial Officer
<PAGE> 7
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
----------- ----------- --------
<S> <C> <C>
3.1 Certificate of Incorporation, as amended. (Incorporated herein by reference to Exhibit 3(a) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1992.)
3.2 Bylaws. (Incorporated herein by reference to Exhibit 3(b) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1992.)
4.1 Indenture, dated June 2, 1993, between the Company and Chemical Trust Company of California as Trustee with
respect to the Company's 8-3/8% Debentures due 2013. (Incorporated herein by reference to Exhibit 4.1 to the
Company's registration statement on Form S-3 filed April 6, 1993.)
4.2 Revolving Credit Agreement, dated July 18, 1990, between the Company and United States National Bank of
Oregon. (Incorporated herein by reference to Exhibit 4 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1990.)
4.3 Revolving Credit Agreement, dated May 6, 1992, among the Company and United States National Bank of Oregon;
CIBC, Inc.; ABN AMRO Bank N.V.; Continental Bank N.A.; and Wachovia Bank of Georgia, National Association.
(Incorporated herein by reference to Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1992.)
4.4 Rights Agreement, dated as of April 13, 1988, between the Company and The Bank of California, as rights
agent. (Incorporated herein by reference to Exhibit 4(e) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992.)
4.5 Line of Credit Agreement, dated April 29, 1994, between the Company and Wachovia Bank of Georgia, National
Association. (Incorporated herein by reference to Exhibit 4(a) to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1994.)
4.6 Extension Agreement, dated as of June 30, 1994, to the Revolving Credit Agreement, dated May 6, 1992, among
the Company and United States National Bank of Oregon; CIBC, Inc.; ABN AMRO Bank N.V.; Continental Bank N.A.;
and Wachovia Bank of Georgia, National Association.
</TABLE>
<PAGE> 8
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
----------- ----------- --------
<S> <C> <C>
4.7 Modification Agreement, dated as of October 31, 1994, to the Revolving Credit Agreement, dated May 6, 1992,
among the Company and United States National Bank of Oregon; CIBC, Inc.; ABN AMRO Bank N.V.; Continental Bank
N.A.; and Wachovia Bank of Georgia, National Association.
4.8 Modification Agreement, dated as of December 31, 1994, to the Revolving Credit Agreement, dated May 6, 1992,
among the Company and United States National Bank of Oregon; CIBC, Inc.; ABN AMRO Bank N.V.; Continental Bank
N.A.; and Wachovia Bank of Georgia, National Association.
10.1 Executive Compensation Plans and Arrangements
---------------------------------------------
10.1.1 Stock Option and Appreciation Plan. (Incorporated herein by reference to Exhibit 10(a) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1992.)
10.1.2 Executive Incentive Plan. (Incorporated herein by reference to Exhibit 10(b) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1992.)
10.1.3 Restricted Stock Bonus Plan. (Incorporated herein by reference to Exhibit 10(c) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992.)
10.1.4 Deferral Election Plan. (Incorporated herein by reference to Exhibit 10(d) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1992.)
10.1.5 Supplemental Executive Retirement Income Plan. (Incorporated herein by reference to Exhibit 10(e) to the
Company's Annual Report on Form 10-K for the year ended December 31, 1990.)
10.1.6 Form of Severance Pay Agreement among the Company and certain of its executive officers. (Incorporated
herein by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended December
31, 1990.)
10.2 Lease agreement between the Company and Pope Resources, dated December 20, 1985, for Port Gamble, Washington
sawmill site. (Incorporated herein by reference to Exhibit 10(g) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1990.)
</TABLE>
<PAGE> 9
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
----------- ----------- --------
<S> <C> <C>
10.3 Lease agreement between the Company and Shenandoah Development Group, Ltd., dated March 14, 1988, for Atlanta
diaper mill site as amended September 1, 1988 and August 30, 1989. (Incorporated herein by reference to
Exhibit 10(h) to the Company's Annual Report on Form 10-K for the year ended December 31, 1990.)
10.4 Lease agreement between the Company and Shenandoah Development Group, Ltd., dated July 31, 1989, for
additional facilities at Atlanta diaper mill as amended August 30, 1989 and February 1990. (Incorporated
herein by reference to Exhibit 10(i) to the Company's Annual Report on Form 10-K for the year ended December
31, 1990.)
10.5 Grays Harbor Paper L.P. Amended and Restated Pulp Sales Supply Contract, dated September 28, 1994 (with
certain confidential information deleted). (Incorporated herein by reference to Exhibit 10(j) to the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994.)
11.1 Statement showing computation of per share earnings.
*13.1 Portions of the annual report to shareholders for the year ended December 31, 1994 which have been
incorporated by reference in this report.
21.1 Listing of parents and subsidiaries. (Incorporated herein by reference to Exhibit 22 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992.)
23.1 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule.
* Refiled herewith.
</TABLE>
<PAGE> 1
Exhibit 13.1
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
Pope & Talbot, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years ended December 31
(Dollars in thousands except per share) 1994 1993 1992 1991 1990
--------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OPERATIONS
Revenues $659,873 $628,926 $544,345 $502,275 $562,493
Depreciation and amortization 39,061 29,303 28,564 27,948 26,352
Interest expense, net 9,322 8,714 5,622 3,941 3,925
Income (loss) before accounting changes 15,897 21,575 (2,252) (5,095) 19,829
Cumulative effect of accounting changes - (562) - (6,467) -
-------- -------- -------- -------- --------
Net income (loss) $ 15,897 $ 21,013 $ (2,252) $(11,562) $ 19,829
======== ======== ======== ======== ========
Effective tax rate 40% 41% (9)% (28)% 36%
PER COMMON SHARE
Income (loss) before accounting changes - primary $ 1.21 $ 1.85 $ (.19) $ (.44) $ 1.70
Income (loss) before accounting changes - fully diluted 1.20 1.71 (.19) (.44) 1.61
Effect of accounting changes - primary - (.05) - (.56) -
Effect of accounting changes - fully diluted - (.04) - (.56) -
Cash dividends .76 .76 .76 .76 .72
Stockholders' equity 17.08 15.73 14.85 16.09 17.83
YEAR-END COMMON SHARES OUTSTANDING, NET OF TREASURY STOCK 13,362,729 11,715,798 11,610,664 11,597,560 11,580,440
FINANCIAL POSITION (at December 31)
Current assets $223,050 $169,897 $138,288 $122,393 $131,612
Properties, net 282,827 269,200 222,500 213,964 209,673
Other assets 33,507 16,724 8,893 10,626 12,655
-------- -------- -------- -------- --------
$539,384 $455,821 $369,681 $346,983 $353,940
======== ======== ======== ======== ========
Current liabilities $103,576 $101,162 $ 79,668 $ 64,545 $ 49,389
Long-term obligations 28,777 27,803 24,227 16,934 4,401
Long-term debt 177,471 134,599 89,500 69,000 77,490
Deferred income taxes 1,365 7,936 3,892 9,896 16,132
Stockholders' equity 228,195 184,321 172,394 186,608 206,528
-------- -------- -------- -------- --------
$539,384 $455,821 $369,681 $346,983 $353,940
======== ======== ======== ======== ========
CASH FLOW
Operating activities:
Net income (loss) $ 15,897 $ 21,013 $ (2,252) $(11,562) $ 19,829
Depreciation and amortization 39,061 29,303 28,564 27,948 26,352
Other (gains) losses, net (13,845) - 1,589 1,940 (867)
Cumulative effect of accounting changes - 562 - 6,467 -
Working capital and other (51,686) (13,990) 10,833 2,717 (6,615)
-------- -------- ------ -------- --------
Cash provided by (used for) operating activities (10,573) 36,888 38,734 27,510 38,699
Investing activities:
Capital expenditures (55,582) (82,585) (32,276) (37,268) (41,876)
Acquisition of sawmill - - (19,417) - -
Cash provided by restructuring activities - - 11,480 2,750 19,622
Proceeds from sale of other properties 722 1,156 1,158 1,848 1,101
-------- -------- -------- -------- --------
Cash used for investing activities (54,860) (81,429) (39,055) (32,670) (21,153)
Financing activities:
Net increase in borrowings 91,899 51,017 9,483 8,440 1,935
Increase in restricted bond funds (15,458) - - - -
Cash dividends (9,855) (8,871) (8,821) (8,806) (8,445)
Other 1,926 1,819 229 293 (4,133)
-------- -------- -------- -------- --------
Cash provided by (used for) financing activities 68,512 43,965 891 (73) (10,643)
-------- -------- -------- -------- --------
Increase (decrease) in cash and cash equivalents $ 3,079 $ (576) $ 570 $ (5,233) 6,903
======== ======== ======== ======== ========
</TABLE>
14
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
POPE & TALBOT, INC. AND SUBSIDIARIES
OVERVIEW
Increased losses in tissue and lower diaper earnings more than offset the
results of a strengthening pulp market and another strong year for lumber,
resulting in a 24 percent earnings decline in 1994 from 1993. Pope & Talbot's
earnings for 1994 were $15.9 million, or $1.21 per share ($1.20 on a fully
diluted basis), a decline from 1993's net income of $21.0 million, or $1.80 per
share ($1.67 on a fully diluted basis).
While strong lumber markets continued from 1993 into the first quarter
of 1994, rising interest rates resulted in declining lumber prices for the
remainder of the year. Lumber prices averaged higher in 1994 than 1993, but
higher log costs, particularly in Canada, reduced earnings below 1993 levels.
In mid 1994, the United States Government rescinded a 6.51 percent duty that
had been charged on all Canadian lumber sold in the United States since early
1992. The 1994 earnings reflect an anticipated refund of the $13.8 million
pre-tax paid under this duty during 1992 and 1993. Pulp losses in 1994 were
reduced substantially from 1993 and by year-end pulp was beginning to show
positive earnings. Tissue posted losses for the third consecutive year as
slightly higher average sales prices for tissue were not adequate to offset
increases in operating expenses and wastepaper prices. Diaper profits declined
from 1993's record year as product pricing decreased slightly in response to
the producers of national diaper brands attempting to regain market share,
while operating costs increased.
Revenues increased 5 percent to a record $659.9 million in 1994 from
$628.9 million in 1993. Higher pulp sales volume resulting from operating at
essentially full capacity and higher lumber selling prices generated the higher
sales levels.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of internally generated cash is operating
income before depreciation and the principal external source of cash is debt
financing. The debt-to-total-capitalization ratio increased slightly to 44
percent and total debt increased to $177.5 million at year-end 1994, from 42
percent and $134.6 million at the end of 1993. The current ratio at December
31, 1994 was 2.2 to 1, compared to the 1.7 to 1 ratio at the end of 1993.
Overall, cash used by operations was $10.6 million in 1994. Net
income before non-cash charges for depreciation and amortization generated cash
of $55.0 million. Inventories increased $32.1 million due primarily to higher
tissue, diaper and log inventories. Tissue and diaper inventories were up due
to sluggish product demand in the fourth quarter. Increased log inventories
related mainly to higher prices paid for logs in Canada in 1994 and higher
inventory volumes at Port Gamble. Receivables are higher, reflecting the
remaining $16.1 million Canadian duty refund which is anticipated to be
received in the first half of 1995. Income taxes payable are lower due to
lower 1994 earnings and the timing of recognition and payment of the Canadian
tax liability.
The Company increased its borrowings in 1994 by $74 million on its
short- and long-term unsecured revolving credit agreements. Additionally, an
$18.8 million loan from the City of Eau Claire, Wisconsin under the state's
solid waste disposal revenue bond program was obtained in 1994 to finance the
major portion of a project at the Company's Eau Claire, Wisconsin tissue
facility to improve and upgrade that facility's existing recycled fiber pulping
capabilities. Of the $18.8 million, $15.5 million is being held in an escrow
account and will be drawn on as the project is completed. See Note 4 of Notes
to Consolidated Financial Statements for further long-term debt information and
subsequent years' debt repayment schedules. Cash resources, including debt
financing, were used to finance $55.6 million of capital expenditures, and $9.9
million for the payment of dividends. Scheduled long-term debt repayments were
$901 thousand in 1994 and are projected to be essentially unchanged in 1995.
Capital spending declined from the record spending in 1993 of $82.6 million to
$55.6 million in 1994, the second highest capital spending level in the
Company's history. The most significant projects during 1994 included
completion of a project to expand drying capabilities at the Halsey pulp mill,
the second phase of a project to improve raw material utilization at the
Castlegar, B.C. sawmill, and other cost reduction and product improvement
projects at the Company's other locations. Additionally, as previously
mentioned, a project to improve the quality of the recycled pulp at the Eau
Claire tissue facility was started in 1994 and is scheduled to be completed in
the first half of 1995.
15
<PAGE> 3
The Company has invested substantial funds during the last two years
to improve product quality and marketability, reduce costs, improve customer
service and meet environmental requirements. It is expected that spending on
capital projects will be substantially less in 1995 than either 1994 or 1993.
It is anticipated that $23 million will be required to complete capital
projects in process, the most significant being the completion of the pulp
modernization project at the Eau Claire tissue facility. In addition, the
Company anticipates that additional capital projects will be undertaken during
1995, primarily to sustain existing operations. Projected 1995 capital
spending is expected to be funded with internally generated cash, restricted
bond funds, and supplemented, if necessary, with borrowings on the Company's
lines of credit.
The Company has available $120 million of credit lines under existing
agreements, of which $85 million was outstanding at December 31, 1994.
During the first quarter of 1994, the Company called for redemption of
all the Company's $40 million 6 percent convertible subordinated debentures due
2012. The effect of this transaction was to reduce long-term debt by $40
million and increase stockholders' equity by $38.6 million ($40 million less
fees and expenses) and to increase common shares outstanding by 1.5 million
shares.
The impact of fluctuations in foreign currency exchange rates have not
had, and are not expected to have, a significant effect on the Company's
liquidity or results of operations.
RESULTS OF OPERATIONS
WOOD PRODUCTS
The Company's wood products business, which in 1994 comprised 46
percent of consolidated revenues, generated operating profit of $55.2 million
in 1994. Additionally, income of $13.8 million representing the return by the
United States Government of a duty paid in 1993 and 1992 to the government for
Canadian lumber sold in the United States was recognized in 1994. During 1992
the United States Government imposed a 6.51 percent duty on Canadian lumber
sold in the United States. After numerous studies and appeals, the United
States Government concluded that there was no basis for this duty and during
1994 terminated the duty and announced that all amounts paid under the duty
would be refunded with interest. A portion of the returned duty was received
in 1994, with the remainder expected to be received during the first half of
1995. Excluding the duty refund, wood products earnings of $55.2 million were
the second best earnings in the Company's history behind the 1993 record
earnings of $62.1 million. Earnings in 1992 were $15.3 million. Many of the
same economic factors which impacted the wood products business in 1993
continued into 1994. Significantly curtailed harvest levels for timber from
federal lands in the Pacific Northwest as a result of environmental pressure to
reduce timber harvests continued into 1994. This reduced harvest level has
decreased the amount of timber available from federal lands over the last three
years, and average year-to-year lumber sales prices have increased over the
last three years in response to tighter timber supplies as well as a stronger
housing market. Lumber prices, however, during 1994 declined steadily
throughout the year after peaking in the first quarter of 1994. Housing starts
have remained relatively constant over the past three years with 1.4 million
housing starts in 1994 compared to 1.28 million in 1993 and 1.2 million in
1992. Interest rates, which historically have influenced the level of housing
starts, began to move upward in 1994. Housing starts during the last six
months of 1994 were lower, reflecting the higher interest rate environment.
Approximately 40 percent of the Company's lumber capacity is in the
United States, with half of this capacity in Western Washington where the
environmental concerns have sharply restricted the volume of public timber
available, and increased the cost of remaining timber, and half in the Black
Hills region of South Dakota and Wyoming, where timber supplies are more stable
although timber costs have increased. United States log costs have continued
to escalate in 1993 and 1994 and have essentially offset the benefit of higher
lumber prices. The Company's Canadian sawmills represent 60 percent of the
Company's lumber capacity. During 1994, log costs for the Company's Canadian
sawmills increased approximately 42 percent, well above the approximate 11
percent increase in sales prices. During 1994, the Provincial Government of
British Columbia adjusted upward the price charged for a substantial portion of
the wood used by the Company's three Canadian sawmills effective May 1, 1994.
The new pricing formula is based on a relationship to end- product prices and
increased log
16
<PAGE> 4
costs approximately $7 million in 1994. Based on lumber prices in effect at
the end of 1994, the new pricing structure would increase Canadian timber costs
by approximately $11 million in 1995 over the stumpage rates in effect prior to
the revised formula. The Company values its United States lumber inventories
on the last-in, first-out method. Quantities of certain lumber inventories
valued at LIFO were reduced, generating 1994 pre-tax income of approximately $5
million, primarily in the second half of the year.
Lumber sales volume decreased to 686 million board feet in 1994 or 87
percent of the estimated 785 million board feet of 1994 capacity. Sales
volumes in 1993 and 1992 were 726 million board feet and 669 million board
feet, respectively. The increase in 1993 was due to the mid 1992 acquisition
of the 225 million board feet per year Castlegar sawmill. Lower production at
the Canadian sawmills caused by poor log quality during a portion of 1994 and
periodic shutdowns of the Port Gamble sawmill, as a result of a lack of
acceptably priced timber in relation to end-product prices, resulted in the
lower overall production in 1994. Port Gamble is the only Company sawmill in
the high-priced timber region of the Pacific Northwest and operates only as
acceptably priced timber is available. Effective January 1, 1995, the Company
will reduce its Grand Forks, British Columbia sawmill to a one-shift basis,
reducing the Company's lumber production capacity by approximately 60 million
board feet annually, or approximately 8 percent of the Company's lumber
capacity. The curtailment was caused by reduced timber harvest levels allowed
by the British Columbia Government. In Canada, the provincial government of
British Columbia's Commission of Resources and Environment (CORE) is reviewing
the future use of the forest resources in the province, including reserving
additional forest resources to park lands. This may affect the amount of
timber available in the future and could reduce the amount of timber available
to the Company's Canadian sawmills by 10 percent to 30 percent or more.
Wood products revenues were $304.2 million in 1994 compared to $300
million in 1993 and $214.2 million in 1992. The 1993 revenue increase was a
combination of 9 percent higher sales volumes and 34 percent higher sales
prices. During 1994, lower sales volumes were more than offset by higher sales
prices to produce the slightly higher sales amounts. Based on the anticipated
reduction in Canadian lumber capacity and sales prices in effect at year-end,
it is likely that Wood Products will generate a lower level of earnings in 1995
than 1994.
PULP AND PAPER PRODUCTS
The pulp and paper segment, which produces market pulp, private label
tissue and disposable diapers generated 54 percent of 1994 revenues. The pulp
and paper segment has posted losses for the last three years, after several
years of profitable operations. Pulp and paper operating losses before other
gains and losses were $4.6 million in 1992, $9.8 million in 1993 and increased
to $23.2 million in 1994. Results for 1994 included several unusual items
primarily for litigation, computer systems maintenance and termination costs
which increased expenses by approximately $8 million. Tissue losses have
increased each year since 1992. Pulp losses in 1994 were substantially less
than 1993 after increasing losses in 1991 through 1993. Diapers income
increased annually from 1991 through 1993, when record diaper profits were
posted; however, during 1994 diaper profits declined substantially. Pulp and
paper revenues increased 8 percent in 1994 with sales of $355.7 million,
compared to 1993 sales of $328.9 million and 1992 sales of $330.2 million.
During 1993 market pulp revenues declined on 28 percent lower volumes and 12
percent lower pricing. Revenues improved in 1994 as the pulp mill returned to
essentially full production for the majority of 1994, and pricing improved
throughout the year. Tissue revenues declined in 1993 from 1992 levels and
remained largely unchanged in 1994. Diaper revenues increased in 1993 from
1992 on higher volumes and prices; however, diaper revenues declined in 1994 on
lower volumes and prices.
The most significant factor in the increased pulp and paper segment
loss in 1994 was the substantial decline in diaper earnings. During 1993 diaper
sales volumes increased 21 percent to 1.1 billion diapers and although Procter
& Gamble, a significant producer of branded disposable diapers, reduced selling
prices, the Company was generally able to maintain its diaper selling prices in
1993 at 1992 levels. Sales volumes of diapers overall in the United States
have not increased in the last two years which has led to the competitive
pricing environment which continued into 1994, and under pressure from both
branded producers and other private
17
<PAGE> 5
label diaper producers, sales prices declined an average of 3 percent in 1994.
During the fourth quarter of 1994, Procter & Gamble announced a further price
reduction which is scheduled to become effective in the first quarter of 1995
and it is anticipated that the Company will be required to also reduce its
diaper prices. Sales volumes suffered early in 1994; however, during the last
half of the year, sales volumes had improved to approximately 85 percent of
capacity. Overall diapers operated at approximately 81 percent of capacity
during 1994. The increases in pulp prices which benefited our pulp business
late in 1994 had a detrimental effect on the Company's diaper operations.
Costs for fluff pulp, a primary component of disposable diapers, and corrugated
containers began to increase in the second half of the year, and are expected
to continue to increase in 1995. Additionally, costs for other non-pulp based
raw materials also began to increase in the second half of 1994. In December
1994, the Company instituted several cost reduction efforts, including
reductions in salaried headcounts to reduce the diaper operations cost
structures. Additionally, the Company is also reviewing alternatives to reduce
the cost of producing its diapers, including reducing overall labor costs and
changing the amount and type of raw materials used to manufacture diapers.
The Company's tissue business, which comprised 16 percent of total
Company revenues in 1994, has incurred increasing losses each year since 1992.
Prices for the Company's tissue products, which had declined during the four
years ending in 1993 caused by industry capacity increases which exceeded
demand growth and aggressive pricing by branded tissue, began to stabilize
during 1994. Through 1993, tissue sales prices had declined approximately 13
percent from when they first began to decline in 1989; however, prices
increased approximately 2 percent in 1994. In December 1994, Procter & Gamble,
a significant producer of consumer tissue products, announced a 5 to 7 percent
price increase effective in the first quarter 1995. The Company also announced
a 5 to 7 percent first quarter 1995 price increase. It is unclear at this time
what portion of these price increases will become effective. Tissue shipments
were essentially unchanged in 1994 from 1993 and overall tissue operated at
approximately 97 percent of capacity. Higher prices for wastepaper, the
primary raw material for the Company's tissue products began to increase in the
second half of 1994 in line with the strengthening pulp market. Wastepaper
prices were further pushed to record price levels by shortages in de-ink
grades of pulp caused by the start-up in 1994 of new recycled fiber mills in
the United States. The Company instituted in December 1994 several cost
reduction efforts in the tissue business, including reductions in salaried
headcounts. The current losses in the Company's tissue business and increasing
fiber costs indicate that a return to profitability will be dependent on
improved industry pricing.
The Company's market pulp business, which comprised approximately 14
percent of 1994 revenues has seen a substantial improvement in the pulp markets
during 1994, with industry pricing for a standard grade of bleached softwood
pulp selling at the end of 1994 for more than 70 percent above its December
1993 price. Although prices for the Company's pulp have increased during 1994,
they have lagged behind industry levels. Currently, approximately 50 percent
of the mill's capacity is sold to a new customer in 1994, the Grays Harbor
Paper Company, with pricing tied to a formula based on white paper prices.
These paper prices did not increase as rapidly as pulp pricing, and prices for
this pulp are currently below industry pricing. For the majority of 1994, a
significant portion of the Company's pulp not sold to Grays Harbor had been
sold under pricing arrangements which were below industry pricing. Late in the
third quarter of 1994, these non-Grays Harbor pricing provisions expired and
prices for non-Grays Harbor sales have returned to a normal relationship to
market. Overall, pulp prices in 1994 were 25 percent higher than 1993's prices
which had declined 12 percent below 1992's already depressed levels; however,
year-end 1994 pulp prices were 62 percent higher than year-end 1993 prices.
During the first quarter of 1994, the Company completed and
successfully started up a conventional pulp dryer with the capability of drying
the full output of the Halsey pulp mill. Previously, this mill had been
limited in its ability to dry the full output of the mill. Combined with other
mill modifications, the pulp dryer provides the flexibility to sell the full
output in domestic or world pulp markets. Historically, a portion of the pulp
was sold in slush form to an adjacent tissue facility. During mid-1993, the
tissue facility completed its phase-out of the Company's pulp and converted to
recycled fiber pulp. As a result of a lack of adequate drying capacity and
depressed pulp prices, the Company's Halsey pulp mill operated at approximately
60 percent of capacity during 1993. This
18
<PAGE> 6
continued into early 1994; however, during the last six months of 1994, the
mill operated essentially at capacity. Overall, the mill operated at 88
percent of capacity in 1994.
Environmental concerns over timber harvests, which have caused high
log costs for the Company's Port Gamble sawmill, have also caused higher chip
costs and reduced chip availability from historic sources at the Halsey pulp
mill over the last several years. In order to maintain an adequate supply of
wood fiber to the mill and to reduce its fiber costs, the Company has expanded
its geographic base from which it obtains softwood chips and began in 1994 to
use sawdust and hardwood chips as raw materials for a portion of the
production. Sawdust has historically been less expensive than the softwood
chips normally used as the primary raw material for the pulp mill. In order to
maintain an adequate supply of chips for the anticipated 60 percent of the pulp
mill's production which will remain based on these softwood chips, the Company
will continue to use an expanded geographic base to obtain chips, adding to
their cost. Although chip costs have remained at historically high levels,
they have been essentially constant during 1992, 1993 and 1994; however, chip
prices did begin to increase late in the fourth quarter of 1994. Unless
environmental restrictions on timber harvests are relaxed, chip prices likely
will remain high, and sawdust and hardwood chip prices may also increase.
OTHER MATTERS
The Environmental Protection Agency (EPA) has published proposed
regulations which would establish standards and limitations for non-combustion
sources under the Clean Air Act and revised regulations under the Clean Water
Act. These proposals are collectively referred to as the "cluster rules" and
have been the subject of extensive discussions between the pulp and paper
industry and the EPA. The Company's primary exposure to these proposals relate
to the Company's Halsey pulp mill, and to a much lesser degree the Company's
two tissue mills. Based on preliminary evaluation of the proposed rules, the
costs of modifications to the Company's mills could range from $15 million to
$30 million. The proposed rules could be made effective in 1999, although
later enactment is possible.
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, 1994 and
1993, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Pope & Talbot, Inc.
and subsidiaries as of December 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting principles.
As discussed in Notes 1 and 7 to the financial statements, effective
January 1, 1993, the Company changed its method of accounting for income taxes
and supplies inventories.
Arthur Andersen LLP
Portland, Oregon,
January 23, 1995
19
<PAGE> 7
CONSOLIDATED BALANCE SHEETS
Pope & Talbot, Inc. and Subsidiaries
<TABLE>
<CAPTION>
December 31 (Dollars in thousands except per share) 1994 1993
--------------------------------------------------- --------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,847 $ 3,768
Accounts receivable 55,333 56,040
Countervailing duty refund receivable (Note 8) 16,144 -
Inventories (Notes 1 and 2) 127,392 95,256
Deposits on timber purchase contracts 5,997 5,937
Prepaid expenses (Note 7) 11,337 8,896
--------- ---------
Total current assets 223,050 169,897
Properties (Notes 3, 8 and 9):
Plant and equipment 548,430 503,416
Accumulated depreciation (276,465) (245,104)
--------- ---------
271,965 258,312
Land and timber cutting rights 10,862 10,888
--------- ---------
Total properties 282,827 269,200
Other assets:
Restricted bond funds (Note 4) 15,458 -
Deferred charges 13,853 12,362
Goodwill, net of amortization 4,196 4,362
--------- ---------
Total other assets 33,507 16,724
--------- ---------
$ 539,384 $ 455,821
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (Note 4) $ 20,000 $ 11,000
Current portion of long-term debt (Note 4) 928 901
Accounts payable 36,736 36,228
Accrued payroll and related taxes 21,074 18,336
Other accrued liabilities 16,238 16,875
Income taxes (Notes 1 and 7) 8,600 17,822
--------- ---------
Total current liabilities 103,576 101,162
Reforestation (Notes 1 and 9) 15,136 14,999
Postretirement benefits (Note 6) 13,641 12,804
Long-term debt, net of current portion (Note 4) 177,471 134,599
Deferred income taxes (Notes 1 and 7) 1,365 7,936
Commitments and contingencies (Note 10) - -
Stockholders' equity (Notes 1, 4, and 5):
Preferred stock, $10 par value, 1,500,000 shares authorized,
none issued - -
Common stock, $1 par value, 20,000,000 shares authorized,
13,971,605 issued (12,429,352 in 1993) 13,972 12,429
Additional paid-in capital 40,858 3,370
Retained earnings 191,804 185,762
Cumulative translation adjustments (7,315) (4,578)
Common stock held in treasury, at cost (11,124) (12,662)
--------- ---------
Total stockholders' equity 228,195 184,321
--------- ---------
$ 539,384 $ 455,821
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
20
<PAGE> 8
CONSOLIDATED STATEMENTS OF INCOME
Pope & Talbot, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years ended December 31 (Thousands except per share) 1994 1993 1992
---------------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Revenues $659,873 $628,926 $544,345
Costs and expenses:
Cost of sales 604,249 554,172 509,821
Selling, general and administrative 33,485 29,634 29,783
Interest, net (Notes 1 and 4) 9,322 8,714 5,622
-------- -------- --------
647,056 592,520 545,226
Other gains (losses), net (Note 8) 13,845 - (1,589)
-------- -------- --------
Income (loss) before income taxes and
cumulative effect of accounting changes 26,662 36,406 (2,470)
Income tax provision (benefit) (Note 7) 10,765 14,831 (218)
-------- -------- --------
Income (loss) before cumulative effect
of accounting changes 15,897 21,575 (2,252)
Cumulative effect of accounting changes (Note 1) - (562) -
-------- -------- --------
Net income (loss) $ 15,897 $ 21,013 $ (2,252)
======== ======== ========
Net income (loss) per common share (Note 1):
Primary:
Income (loss) before cumulative effect of
accounting changes $ 1.21 $ 1.85 $ (.19)
Cumulative effect of accounting changes - (.05) -
-------- -------- --------
Primary earnings (loss) per share $ 1.21 $ 1.80 $ (.19)
-------- -------- --------
Fully diluted:
Income (loss) before cumulative effect of
accounting changes $ 1.20 $ 1.71 $ (.19)
Cumulative effect of accounting changes - (.04) -
-------- -------- --------
Fully diluted earnings (loss) per share $ 1.20 $ 1.67 $ (.19)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
21
<PAGE> 9
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Pope & Talbot, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Common stock Treasury stock Additional Cumulative
Years ended December 31 -------------------- ------------------- paid-in Retained translation
(Dollars in thousands except per share) Shares Amounts Shares Amounts capital earnings adjustments
--------------------------------------- ------ ------- ------ ------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1991 12,429,352 $12,429 (831,792) $(13,601) $ 2,261 $184,693 $ 826
Net loss - - - - - (2,252) -
Issuance of shares under stock plans - - 13,104 102 127 - -
Cash dividends ($.76 per share) - - - - - (8,821) -
Change in translation adjustment - - - - - - (3,370)
---------- ------- -------- ------- ------ ------- -------
Balance at December 31, 1992 12,429,352 12,429 (818,688) (13,499) 2,388 173,620 (2,544)
---------- ------- -------- ------- ------ ------- -------
Net income - - - - - 21,013 -
Purchase of treasury stock - - (16,703) (353) - - -
Issuance of shares under stock plans - - 121,837 1,190 982 - -
Cash dividends ($.76 per share) - - - - - (8,871) -
Change in translation adjustment - - - - - - (2,034)
---------- ------- -------- ------- ------ ------- -------
Balance at December 31, 1993 12,429,352 12,429 (713,554) (12,662) 3,370 185,762 (4,578)
---------- ------- -------- ------- ------ ------- -------
Net income - - - - - 15,897 -
Convertible debenture conversion 1,542,253 1,543 - - 37,100 - -
Purchase of treasury stock - - (1,946) (63) - - -
Issuance of shares under stock plans - - 106,624 1,601 388 - -
Cash dividends ($.76 per share) - - - - - (9,855) -
Change in translation adjustment - - - - - - (2,737)
---------- ------- -------- ------- ------ ------- -------
Balance at December 31, 1994 13,971,605 $13,972 (608,876) $(11,124) $40,858 $191,804 $(7,315)
========== ======= ======== ======== ======= ========= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
22
<PAGE> 10
CONSOLIDATED STATEMENTS OF CASH FLOWS
Pope & Talbot, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years ended December 31 (Thousands) 1994 1993 1992
----------------------------------- ------- ------- -------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss) $ 15,897 $ 21,013 $ (2,252)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 39,061 29,303 28,564
Other (gains) losses, net (Note 8) (13,845) - 1,589
Cumulative effect of accounting changes (Note 1) - 562 -
Changes in assets and liabilities:
Increase (decrease) in:
Accounts payable 508 5,350 14,482
Accrued payroll and related taxes 2,738 1,254 3,430
Other accrued liabilities (637) (239) (4,090)
Income taxes (9,222) 9,211 5,161
Reforestation 1,010 3,280 3,095
Postretirement benefits 837 848 783
Deferred income taxes (9,140) 150 (5,940)
Decrease (increase) in:
Receivables (1,592) (8,261) (7,934)
Inventories (32,136) (18,648) 4,071
Deposits on timber purchase contracts (2,154) (3,651) (1,649)
Prepaid expenses 106 (120) 990
Deferred charges and other (2,004) (3,164) (1,566)
-------- -------- --------
Net cash provided by (used for) operating activities (10,573) 36,888 38,734
Cash flow from investing activities:
Capital expenditures (55,582) (82,585) (32,276)
Acquisition of sawmill (Note 9) - - (19,417)
Cash provided by sale of timberlands (Note 8) - - 11,480
Proceeds from sale of other properties 722 1,156 1,158
-------- -------- --------
Net cash used for investing activities (54,860) (81,429) (39,055)
Cash flow from financing activities:
Net increase (decrease) in short-term borrowings 9,000 5,517 (11,517)
Proceeds from issuance of long-term debt 83,800 91,000 21,000
Reduction of long-term debt, including current portion (901) (45,500) -
Increase in restricted bond funds (Note 4) (15,458) - -
Proceeds from issuance of treasury stock, net 1,926 1,819 229
Cash dividends (9,855) (8,871) (8,821)
-------- -------- --------
Net cash provided by financing activities 68,512 43,965 891
-------- -------- --------
Increase (decrease) in cash and cash equivalents 3,079 (576) 570
Cash and cash equivalents at beginning of period 3,768 4,344 3,774
-------- -------- --------
Cash and cash equivalents at end of period $ 6,847 $ 3,768 $ 4,344
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
23
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pope & Talbot, Inc. and Subsidiaries
December 31, 1994, 1993 and 1992
1. ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Pope & Talbot, Inc. and Subsidiaries (the Company), after eliminating
intercompany transactions and balances.
All assets and liabilities of the Company's Canadian subsidiary are
translated into United States dollars at the period-end exchange rate.
Revenues and expenses are translated at the average exchange rate for the year.
Translation gains and losses are reflected in Stockholders' equity as
Cumulative translation adjustments. Net gains and losses on foreign currency
transactions, which are not significant, are reflected in Net income (loss).
INVENTORIES
Inventories are stated at the lower of cost or market. For portions of lumber
and raw material inventories, cost has been determined on the last-in, first-
out method. For remaining inventories, cost has been determined using the
first-in, first-out and average-cost methods. Inventory costs include the
cost of materials, labor and plant overhead.
PLANT AND EQUIPMENT
Plant and equipment is carried at cost and includes expenditures for new
facilities and those expenditures which substantially increase the useful
lives of existing plant and equipment. Costs of maintenance and repairs are
charged to expense as incurred. Upon sale or retirement, the related cost and
accumulated depreciation are removed from the accounts, with the resultant gain
or loss included in income.
Depreciation is computed using the straight-line method over the
useful lives of respective assets. The estimated useful lives of the principal
items of plant and equipment range from 3 to 20 years.
The Company capitalizes interest on borrowed funds during the
construction period of major capital projects. Interest capitalized is
determined by applying the Company's effective interest rate to the accumulated
capital costs during the construction period of a project. Total net interest
costs incurred were $10,257,000, $10,449,000 and $5,956,000 for 1994, 1993 and
1992, respectively. Interest capitalized was $935,000 in 1994, $1,735,000 in
1993 and $334,000 in 1992. Capitalized interest is amortized over the
depreciable life of related assets.
INTEREST
Interest in the Consolidated Statements of Income is shown net of interest
income and, as mentioned previously, capitalized interest. Interest income
was $1,760,000 in 1994 and was not significant in 1993 and 1992.
TIMBER RESOURCES
In the United States, the Company obtains its timber from various public and
private sources under timber harvesting contracts. Additionally, logs are
purchased on open log markets. Liabilities for timber removed under
harvesting contracts are not recorded until the timber is cut, as the Company
generally does not incur a direct liability for, or ownership of, this timber
until it has been harvested.
The total volume committed under contract, the 1995 planned contract
harvest at contract prices and the estimated market values based on current log
markets are as follows:
<TABLE>
<CAPTION>
Thousand Per thousand
board feet Amount board feet
---------- ------ --------------
<S> <C> <C> <C>
Total under contract:
At contract prices 313,000 $ 77,907,000 $249
At current log market values 313,000 116,324,000 372
1995 planned harvest:
At contract prices 75,000 19,371,000 258
At current log market values 75,000 28,030,000 374
</TABLE>
In Canada, the Company primarily obtains its timber from the
Provincial Government of British Columbia under timber harvesting licenses.
The cost assigned to these timber licenses is amortized over 50 years on a
straight-line basis. The Company also purchases logs in Canada on open log
markets.
The Canadian timber harvesting licenses allow, but do not require, the
Company to remove timber from defined areas annually on a sustained yield
basis. Future allowable harvests may be adjusted if the Company does not
remove timber over a five year period in accordance with the grants. As in the
United States, liabilities for the cost of timber removed are not recorded
until the timber is cut as the Company does not incur a direct liability for,
or ownership of, this timber until it has been harvested.
24
<PAGE> 12
GOODWILL
The goodwill contained in the Consolidated Balance Sheets relates to the 1980
purchase of the Company's Eau Claire, Wisconsin facilities. This amount is
being amortized on a straight-line basis over 40 years.
REFORESTATION
Under the Canadian timber harvesting licenses mentioned previously, the
Company is responsible for the reforestation of the land from which timber
is harvested. A substantial portion of the costs incurred to reforest do not
occur until 10 to 15 years after the timber is harvested. The Company accrues
for the total projected cost of reforestation as the timber is removed. Actual
expenditures for reforestation are applied against this accrual when they are
made.
INCOME TAXES
Effective January 1, 1993, the Company implemented the provisions of Statement
of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes." SFAS No. 109 utilizes the liability method and deferred taxes are
determined based on the estimated future tax effects of differences between
the financial statement and tax bases of assets and liabilities given the
provisions of the enacted tax laws. The principal temporary differences are
related to depreciation, reforestation and postretirement benefits. Prior to
the implementation of SFAS No. 109, the Company accounted for income taxes in
accordance with Accounting Principles Board Opinion No. 11.
Undistributed earnings of the Company's Canadian subsidiary totaled
$107,411,000 on December 31, 1994, which, under existing law, will not be
subject to United States tax until distributed as dividends. Since the
earnings have been, and are intended to be, reinvested in Canadian operations,
no provision has been made for any United States taxes that may be applicable
thereto. Furthermore, any taxes paid to the Canadian Government on those
earnings may be used in whole or in part, as credits against the United States
tax on any dividends distributed from such earnings. It is not practicable to
estimate the amount of unrecognized deferred United States taxes on these
undistributed earnings.
STATEMENTS OF CASH FLOWS
The Company classifies as Cash and cash equivalents, unrestricted cash on
deposit in banks plus unrestricted cash invested temporarily in various
investment instruments that are part of the Company's cash management program.
The Company's cash and cash equivalents have original maturities of 90 days or
less and the related carrying amounts approximate fair values. The effect of
exchange rate changes on cash balances held in foreign currencies is not
significant. Non-cash transactions have been excluded from the accompanying
Consolidated Statements of Cash Flows. Total cash expenditures for interest,
net of capitalized interest, were $11,465,000, $8,821,000 and $5,402,000 for
1994, 1993 and 1992, respectively. Total cash expenditures for income taxes
were $26,484,000 for 1994, $9,589,000 for 1993 and $1,166,000 for 1992.
PER SHARE INFORMATION
Per share information is based on the weighted average number of common shares
outstanding during each year.
The computation for fully diluted net income (loss) per common share
assumed conversion of $40 million of 6 percent convertible debentures issued in
March 1987 until the debentures were converted to equity in the first quarter
of 1994. The computation also includes the assumed issuance of common shares
under the stock option and appreciation plan, net of an assumed buyback of
treasury shares at the average market price.
The average number of shares used to calculate primary net income
(loss) per common share was 13,110,000 in 1994, 11,685,000 in 1993 and
11,609,000 in 1992. The average number of shares used to calculate fully
diluted net income (loss) per common share was 13,468,000 in 1994, 13,492,000
in 1993 and 13,165,000 in 1992.
ACCOUNTING CHANGES
In 1993, the Company changed its accounting for supplies inventories and
income taxes. The income (expense) related to the cumulative effect of
these accounting changes was as follows:
<TABLE>
<CAPTION>
(Thousands except per share) Amount Per Share
------- ---------
<S> <C> <C>
Supplies inventories (net
of $1,168 tax provision) $ 1,764 $ .15
Income taxes (2,326) (.20)
------- -----
$ (562) $(.05)
======= =====
</TABLE>
25
<PAGE> 13
Supplies inventories
Effective January 1, 1993, the Company changed its method of accounting for
supplies inventories. Prior to 1993, supplies items were expensed when
purchased. As of January 1, 1993, such supplies items were valued using the
average-cost method and were recorded as supplies inventories. Since many
supplies items are kept on hand for an extended period of time, the Company
believes that reflecting these items as inventory results in a better matching
of the cost of supplies with the timing of their use.
The cumulative effect of this change in accounting for supplies
inventories for years prior to 1993, which is reflected in the Consolidated
Statements of Income for 1993, resulted in a benefit of $1,764,000, after
related income taxes of $1,168,000, or $.15 per common share. The effect of
the change on 1993's net income before cumulative effect of accounting changes
was not significant. The Company was not able to determine the impact of this
change on 1992 as supplies inventory records were not available prior to 1993.
Income taxes
During the first quarter of 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." The new standard
was adopted prospectively and a $2,326,000, or $.20 per share, charge related
to the cumulative effect of this change in accounting for income taxes was
recognized.
2. INVENTORIES
<TABLE>
<CAPTION>
(Thousands) 1994 1993
----------- -------- --------
<S> <C> <C>
Lumber $ 16,349 $13,144
Tissue, tissue products and diapers 26,842 15,218
Logs 52,028 34,095
Pulp and paper raw material 20,553 21,187
Chemicals and supplies 8,575 7,193
Other 3,045 4,419
-------- -------
$127,392 $95,256
======== =======
</TABLE>
The portion of lumber and raw materials inventories determined using the
last-in, first-out (LIFO) method aggregated $9,607,000 and $8,406,000 at
December 31, 1994 and 1993, respectively. The cost of these LIFO inventories
valued at the lower of average cost or market, which approximates current cost,
at December 31, 1994 and 1993, was $11,931,000 and $16,596,000, respectively.
During 1994, certain inventory quantities were reduced, resulting in
liquidations of LIFO inventory quantities carried at lower costs prevailing in
prior years. The effect of these inventory quantity reductions was to increase
1994 pre-tax income by approximately $5 million.
3. PROPERTIES
<TABLE>
<CAPTION>
(Thousands) 1994 1993
----------- -------- --------
<S> <C> <C>
Plant and equipment:
Mills, plants and improvements $ 94,206 $ 88,490
Equipment 412,277 351,852
Mobile equipment 20,510 19,559
Construction in progress 21,437 43,515
-------- --------
$548,430 $503,416
======== ========
Land and timber cutting rights:
Land $ 6,247 $ 5,906
Canadian timber cutting rights 4,615 4,982
-------- --------
$ 10,862 $ 10,888
======== ========
</TABLE>
4. DEBT
<TABLE>
<CAPTION>
(Thousands) 1994 1993
----------- -------- --------
<S> <C> <C>
8.375% debentures, due 2013 $ 75,000 $ 75,000
SELP note payable, secured by related properties,
6.55%, payable monthly from 1994 through 2013 15,599 16,000
Industrial revenue bond, secured by related
properties, variable interest rate
(4.7% at December 31, 1994), payable
annually through 2002 4,000 4,500
City of Eau Claire note payable, variable interest rate
(5.7% at December 31, 1994), due 2014 18,800 -
Unsecured revolving-credit agreement, variable
interest rate (6.3% at December 31, 1994) 65,000 -
6% convertible subordinated debentures,
converted 1994 - 40,000
-------- --------
178,399 135,500
Less current portion 928 901
-------- --------
$177,471 $134,599
======== ========
</TABLE>
During the fourth quarter of 1994, the City of Eau Claire, Wisconsin
issued tax-exempt adjustable rate solid waste disposal revenue bonds. The
bonds were issued to finance a wastepaper pulping improvement project at the
Company's Eau Claire, Wisconsin tissue facility. Upon sale of the bonds, the
City of
26
<PAGE> 14
Eau Claire loaned $18.8 million to the Company. Proceeds from the loan are
maintained in a trust account restricted as to use for the construction of the
above stated project. The unexpended portion of such funds have been
classified as Restricted bond funds in the accompanying Consolidated Balance
Sheets. Trust assets are invested in short-term interest bearing marketable
securities for which current market approximates cost.
During 1993, the Company issued $75 million of 8 3/8 percent debentures
due June 1, 2013. The net proceeds of approximately $73.8 million were
partially used to retire $45 million of indebtedness that was outstanding under
the Company's $75 million unsecured revolving-credit agreement. The remainder
of the proceeds were used to finance the Company's capital improvement
projects.
In June of 1993, the State of Oregon issued tax-exempt bonds under the
State's Small Scale Energy Loan Program (SELP). Upon completion of the
Company's Halsey pulp mill oxygen delignification project in the fourth quarter
of 1993, the State of Oregon loaned a portion of the bond proceeds ($16
million) to the Company for 20 years at 6.55 percent interest. The note is
secured by substantially all of the assets at the Company's Halsey pulp mill.
The Company has an unsecured revolving-credit agreement with a group of
five banks. The agreement provides $75 million of revolving credit until 1997.
On or before April 30 of any calendar year which precedes by two years the June
1997 expiration date, the Company may request a one year extension, which may
be granted upon the affirmative vote of all involved banks. The interest rate
associated with this agreement is based, at the option of the Company, on the
Interbank (LIBOR) rate plus a variable margin ranging from 7/16 percent to 5/8
percent or the greater of the bank's prime rate during the revolving period or
the Federal Funds rate plus 1/2 percent. Without extension, the full
outstanding balance on the revolving-credit agreement will be due in 1997.
Early in the second quarter of 1994, the Company negotiated a $25
million short-term line of credit. This line of credit, added to the previous
short-term line, gives the Company $45 million of unsecured, short-term
line-of-credit agreements with domestic banks, with interest based on
negotiated rates. As of December 31, 1994, there was $20,000,000 outstanding
on these lines. The interest rate on the short-term lines was 6.1 percent and
4.3 percent at December 31, 1994 and 1993, respectively. There are no
commitment fees or compensating balance requirements associated with these
agreements.
In 1987, the Company issued $40 million of 6 percent convertible
subordinated debentures due March 1, 2012. On February 17, 1994, the Company
initiated an underwritten call for the redemption, on March 4, 1994, of the $40
million outstanding aggregate principal balance of these convertible
subordinated debentures. As a result of this underwritten call, the Company
issued 1,542,253 shares of previously unissued common stock to satisfy the $40
million debt obligation. This issuance of common shares resulted in an
increase in Stockholders' equity of $38,643,000 ($40 million less transaction
fees and unamortized debt issuance costs). This non-cash transaction has been
excluded from the accompanying Consolidated Statements of Cash Flows.
The various loan agreements contain, among other things, certain
requirements as to maintenance of working capital, sale of assets, incurrence
of debt and restrictions as to the payment of cash dividends. At December 31,
1994, the payment of dividends from retained earnings under all of these
agreements was limited to $25.6 million.
Excluding repayments of the unsecured revolving-credit agreement, the
annual maturities of long-term debt for the four years subsequent to December
31, 1995 are: 1996 - $957,000; 1997 - $988,000; 1998 - $1,021,000 and 1999 -
$1,056,000.
The fair value of the 8 3/8 percent debentures at December 31, 1994 was
estimated to be $70,000,000 based upon rates currently available for debt with
similar terms. The Company's carrying value of other long-term debt
approximates its fair value.
5. STOCK OPTION AND BONUS PLANS
The Company has a stock option and appreciation plan and a restricted stock
bonus plan for officers and key employees. Both plans are administered by the
Human Resources Committee of the Board of Directors. The Committee is
composed of outside Directors who are not eligible for awards. At December 31,
1994, 538,886 shares were available for future grants under these plans.
27
<PAGE> 15
STOCK OPTION AND APPRECIATION PLAN
The stock option and appreciation plan provides for granting both
incentive stock options and non-qualified stock options to purchase shares of
the Company's common stock at prices not less than 85 percent of fair market
value on the date of grant. Options are exercisable as stated in each
individual grant; however, no option may extend beyond ten years from the date
of grant. The grant may provide that all or part of the option, to the extent
exercisable, may be surrendered to the Company for an appreciation distribution
of the difference between the option price and the fair market value on the
surrender date (stock appreciation rights (SAR) grants). The appreciation
distribution must be made up of at least 70 percent common stock. No stock
option grants made subsequent to 1987 have SARs attached. At December 31,
1994, no outstanding options have SARs attached.
At the date of grant, compensation expense is accrued and is measured
as the excess, if any, of the current market value over the option price of the
stock. Adjustments to compensation expense are made periodically for market
price fluctuations when options are outstanding which have an appreciation
right attached. Stock option compensation expense was not significant in 1994,
1993 or 1992. The Company has followed the practice of using treasury stock to
fulfill its obligations under the stock option plan. When stock is issued
pursuant to the stock option plan, the difference between the cost of treasury
stock issued and the exercise price of the option is credited to Additional
paid-in capital.
At December 31, 1994, 223,302 options were exercisable. The following
table summarizes stock option transactions under this plan for the three years
ended December 31, 1994:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Option price range $14.00 - $30.38 $14.00 - $24.63 $14.00 - $24.63
Option shares granted 99,100 296,100 167,600
Exercised and surrendered (106,624) (122,650) (11,689)
Canceled (37,978) (10,450) (62,060)
Option shares at year-end 703,862 749,364 586,364
</TABLE>
RESTRICTED STOCK BONUS PLAN
The restricted stock bonus plan provides for issuance of restricted
shares to officers and key employees. The issued shares are covered by
restrictions as to transfer for periods of up to ten years. Compensation
expense is recognized in the year the grant is made based on the market price
of the Company's stock at the date of grant. Restricted stock bonus plan
compensation expense was not significant in 1994, 1993 or 1992. At December
31, 1994, 4,500 shares were still under restriction.
6. PENSION AND OTHER POSTRETIREMENT PLANS
PENSION PLANS
Substantially all of the Company's employees participate in
noncontributory defined-benefit pension plans. These include plans which are
administered by the Company and multi-employer plans administered by various
unions.
Certain union employees are covered under multi-employer union pension
plans. Contributions to these plans are based upon negotiated hourly rates.
It is not possible to determine the amount of accumulated benefits or net
assets available for benefits that apply solely to Company employees covered by
these plans.
Substantially all other Company employees are covered by noncontributory
defined-benefit pension plans administered by the Company. The pension benefit
for salaried employees is based on years of service and the five highest out of
the last ten years of compensation. Pension benefits for employees covered
under hourly plans are generally based on each employee's years of service.
The Company's funding policy regarding all of its Company administered
plans is to make contributions to the plans that are between the minimum
amounts required by the Employee Retirement Income Security Act (ERISA) and the
maximum amounts deductible under current income tax regulations.
Net periodic pension cost for 1994, 1993 and 1992 was composed of the
following:
<TABLE>
<CAPTION>
(Thousands) 1994 1993 1992
----------- ---- ---- ----
<S> <C> <C> <C>
Company administered plans:
Service cost - benefits earned
by employees during the period $ 2,362 $ 1,933 $ 2,164
Interest cost on projected benefit obligation 3,287 3,116 2,927
Actual earnings from plan assets (2,062) (5,072) (4,576)
Deferral of earnings (loss) from plan assets (1,827) 1,520 1,431
Net amortization and deferral (8) (43) (27)
------ ------ ------
Net periodic pension cost for
Company administered plans 1,752 1,454 1,919
Contributions to multi-employer plans 4,288 4,351 3,562
------ ------ ------
Total net periodic pension cost $ 6,040 $ 5,805 $ 5,481
======= ======= =======
</TABLE>
28
<PAGE> 16
The following table sets forth the funded status of the Company
administered plans and the amounts recognized as an asset or liability in the
accompanying Consolidated Balance Sheets at December 31, 1994 and 1993:
<TABLE>
<CAPTION>
(Thousands) 1994 1993
----------- ---------------------------- ----------------------------
Plans having Plans having Plans having Plans having
assets in accumulated assets in accumulated
excess of benefits in excess of benefits in
accumulated excess of accumulated excess of
benefits assets benefits assets
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Accumulated benefit obligation:
Vested portion $(23,782) $(14,102) $(24,402) $(15,610)
Nonvested portion (588) (955) (836) (1,159)
-------- -------- -------- --------
(24,370) (15,057) (25,238) (16,769)
Effect of projected future
compensation levels (6,095) (419) (6,068) (209)
-------- -------- -------- --------
Projected benefit obligation (30,465) (15,476) (31,306) (16,978)
Plan assets at fair market value 31,582 13,401 30,980 13,416
-------- -------- -------- --------
Plan assets in excess of (less than)
projected benefit obligation 1,117 (2,075) (326) (3,562)
Unrecognized net (gain) loss (451) (12) 688 1,521
Unrecognized prior service (1,485) 1,462 (340) 1,626
Balance of unrecorded transition
asset from initial application of
Statement of Financial Accounting
Standards No. 87 (776) (89) (922) (96)
-------- -------- -------- --------
Accrued pension liability $ (1,595) $ (714) $ (900) $ (511)
======== ======== ======== ========
</TABLE>
Substantially all of the pension plans' assets are invested in common
stock, fixed-income securities, cash and cash equivalents. The discount rate
and rate of increase in future compensation levels used in determining the
actuarial present value of the projected benefit obligation were 8 percent and
5.5 percent, respectively, for 1994, and 7 percent and 5 percent, respectively,
for 1993. The expected long-term rate of return on plan assets was 9 percent
for 1994 and 1993.
The Company has granted some former employees pension benefits which
supplement the normal Company plan. These benefits are unfunded, general
obligations of the Company. The cost associated with these grants was $234,000
in 1994, $242,000 in 1993 and $138,000 in 1992.
OTHER POSTRETIREMENT PLANS
The Company sponsors postretirement medical and life insurance plans for
certain salaried and nonsalaried employees and eligible spouses and dependents
of the employees. The medical plans pay a stated percentage of covered medical
expenses incurred after deducting co-payments made once a stated deductible has
been met. The life insurance plans pay a defined benefit. The Company's
funding policy for these plans is to not make contributions to the plans prior
to the actual incurrence of costs under the plans.
Net periodic cost in 1994, 1993 and 1992 for these plans was composed of
the following:
<TABLE>
<CAPTION>
(Thousands) 1994 1993 1992
----------- ------ ------ ------
<S> <C> <C> <C>
Service cost - benefits attributed
to service during the period $ 493 $ 406 $ 387
Interest cost on accumulated
benefit obligation 851 892 853
------ ------ ------
Net periodic cost of postretirement
medical and life insurance plans $1,344 $1,298 $1,240
====== ====== ======
</TABLE>
The following table reconciles the plans' funded status to the accrued
postretirement medical and life insurance cost liability in the accompanying
Consolidated Balance Sheets at December 31, 1994 and 1993:
<TABLE>
<CAPTION>
(Thousands) 1994 1993
------------ ------- -------
<S> <C> <C>
Accumulated benefit obligation:
Retirees $ 2,299 $ 1,908
Other fully eligible participants 2,866 3,853
Other active participants 6,343 7,938
------- -------
11,508 13,699
Unrecognized actuarial gain (loss) 1,790 (895)
Unrecognized prior service 343 -
------- -------
Accrued postretirement medical and
life insurance cost liability $13,641 $12,804
======= =======
</TABLE>
For measurement purposes, 10 percent and 10.5 percent rates of increase
were assumed for health care costs in 1994 and 1993, respectively. The rate is
assumed to decline in 1/2 percent decrements every year until it reaches 5
percent in 2004 where it will remain level thereafter. A 1 percent increase in
the assumed health care cost trend rates would increase the accumulated
postretirement benefit obligation by $1,300,000 at December 31, 1994. The
effect of this 1 percent increase on the service and interest cost components
of the net periodic cost of postretirement medical and life insurance plans
would be an increase of $170,000 in 1994. The discount rate used in
determining the accumulated benefit obligation was 8 percent in 1994 and 7
percent in 1993.
29
<PAGE> 17
7. INCOME TAXES
The income tax provision (benefit) consists of the following components:
<TABLE>
<CAPTION>
(Thousands) Current Deferred Total
------------ -------- -------- -------
<S> <C> <C> <C>
1994
Federal $(2,357) $(6,826) $(9,183)
State - (1,076) (1,076)
Canada 22,334 (1,310) 21,024
------- -------- -------
$19,977 $(9,212) $10,765
======= ======= =======
1993
Federal $(4,195) $ 914 $(3,281)
State (17) 181 164
Canada 18,993 (1,045) 17,948
------- ------- -------
$14,781 $ 50 $14,831
======= ======== =======
1992
Federal $ (897) $(1,835) $(2,732)
State - - -
Canada 3,775 (1,261) 2,514
------- ------- -------
$ 2,878 $(3,096) $ (218)
======= ======== =======
</TABLE>
The third quarter 1993 increase in the United States top statutory
federal rate from 34 percent to 35 percent did not have a significant effect on
the Company's 1993 provision for income taxes. Effective January 1, 1993, the
Company changed its method of accounting for supplies inventories. The tax
effect of this accounting change of $1,168,000 was deferred. The tax rate used
in providing for the cumulative effect of accounting changes differed from the
United States statutory federal income tax rate by an amount representing state
income taxes.
The income tax provision was different from the amount computed by
applying the United States statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
(Thousands) 1994 1993 1992
----------- -------- ------- -------
<S> <C> <C> <C>
Income (loss) before income taxes
and cumulative effect of
accounting changes:
United States $(26,978) $(9,530) $(8,137)
Canada 53,640 45,936 5,667
-------- ------- -------
$ 26,662 $36,406 $(2,470)
======== ======= =======
United States:
U.S. statutory federal income tax $ (9,442) $(3,335) $(2,767)
State income and franchise taxes,
net of federal income tax benefit (699) 107 -
Other items, net (118) 111 35
-------- ------- -------
(10,259) (3,117) (2,732)
Canada:
U.S. statutory federal income tax 18,774 16,078 1,927
Effect of Canadian tax rate different
from U.S. 1,792 1,878 331
Non-deductible interest 373 - 186
Other items, net 85 (8) 70
-------- ------- -------
21,024 17,948 2,514
-------- ------- -------
$ 10,765 $14,831 $ (218)
======== ======= =======
</TABLE>
In prior years the Company was required to compute its current federal
income tax liability under the Alternative Minimum Tax (AMT) methodology as it
resulted in a greater tax payable when compared to that computed using the
standard tax system. Additional amounts paid under the AMT system can be
carried forward indefinitely as credits to be applied against regular tax. AMT
carryforwards at December 31, 1994 are $738,000. As of December 31, 1994, the
Company has available $27,589,000 of net operating loss carryforwards for U.S.
federal tax purposes, expiring in 2009.
Following the provisions of SFAS No. 109, "Accounting for Income
Taxes," adopted January 1, 1993, 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 (liability) asset is comprised of the following:
<TABLE>
<CAPTION>
December 31, December 31, January 1,
(Thousands) 1994 1993 1993
----------- ---- ---- ----
<S> <C> <C> <C>
Current deferred taxes:
Gross assets $ 7,932 $ 5,385 $ 5,262
Gross liabilities - - -
------- -------- --------
Total current deferred taxes 7,932 5,385 5,262
Noncurrent deferred taxes:
Gross assets 27,250 19,018 15,276
Gross liabilities (28,615) (26,954) (21,871)
-------- -------- --------
Total noncurrent deferred taxes (1,365) (7,936) (6,595)
-------- -------- --------
Net deferred tax (liability) asset $ 6,567 $ (2,551) $ (1,333)
======== ======== ========
</TABLE>
The Company's valuation allowance against deferred tax assets was not
significant at December 31, 1994, 1993 or January 1, 1993.
The tax effect of significant temporary differences representing
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31, December 31, January 1,
(Thousands) 1994 1993 1993
----------- -------- -------- --------
<S> <C> <C> <C>
Postretirement benefits $ 4,998 $ 4,671 $ 4,231
Reforestation 4,599 4,458 3,597
Vacation pay 2,247 2,028 1,942
Depreciation (26,722) (24,589) (21,871)
AMT and other tax credits 3,803 6,009 6,146
Net operating loss carryforwards 10,700 663 485
Other, net 6,942 4,209 4,137
-------- -------- --------
Net deferred tax (liability) asset $ 6,567 $ (2,551) $ (1,333)
======== ======== ========
</TABLE>
In 1985, the stockholders of the Company approved a Plan of Distribution
pursuant to which all of the Company's timber properties and development
properties and related assets and
30
<PAGE> 18
liabilities in the State of Washington were transferred to newly-formed Pope
Resources, A Delaware Limited Partnership. The transfer resulted in
$10,266,000 of taxes currently payable in 1985, which was charged to
Stockholders' equity.
The distribution value for federal income tax purposes that was assigned
to the assets transferred to the Partnership has been challenged by the
Internal Revenue Service (IRS). In January 1993, the Company petitioned the
United States Tax Court in order to resolve the disputed value of the
distribution. It is management's opinion, based upon consultation with
independent tax counsel, that the Company can successfully defend itself
against this claim and that any additional tax due would not have a material
adverse effect on the financial position of the Company. The final tax
settlement, if any, will be recognized as a reduction in equity with respect to
the partnership transaction.
8. OTHER GAINS AND LOSSES
COUNTERVAILING DUTY REFUND
During 1992, the United States Government imposed a 6.51 percent duty
on Canadian lumber sold in the United States. After numerous studies and
appeals, the United States Government concluded there was no basis for this
duty and during 1994 terminated the duty and announced all amounts paid under
the duty would be refunded with interest. The Company has classified the
anticipated refund of duty amounts paid in 1992 and 1993 as Other gains
(losses) in the Consolidated Statements of Income.
SALE OF TIMBERLANDS
During 1992, the Company sold the last of the parcels of its Oregon
timberlands which were no longer necessary as a result of selling its Oakridge,
Oregon sawmill in 1989.
COST REDUCTION AND EFFICIENCY IMPROVEMENTS
In 1992, the Company announced a program to reduce costs and improve
operating efficiencies, principally in the pulp and paper business. Costs
under this program primarily included severance and early retirement packages,
asset write-downs resulting from the permanent closure of the Ladysmith,
Wisconsin tissue plant and the Maryville, Missouri diaper plant, and costs to
transfer equipment from the closed plants to other Company facilities.
The components of Other gains (losses) in the Consolidated Statements
of Income are as follows:
<TABLE>
<CAPTION>
(Thousands) 1994 1992
----------- ------- --------
<S> <C> <C>
Countervailing duty refund $13,845 $ -
Sale of timberlands - 10,348
Cost reduction and efficiency
improvements - (11,937)
------- --------
Other gains (losses), before tax $13,845 $ (1,589)
======= ========
</TABLE>
9. ACQUISITION OF SAWMILL
On April 15, 1992, the Company purchased a sawmill in Castlegar,
British Columbia from Westar Ltd. The sawmill has an annual capacity of
approximately 225 million board feet. The purchase price of $19,417,000 was
paid in cash and financed under the Company's revolving-credit agreement.
Assets acquired and liabilities assumed included inventory, $8,730,000; prepaid
expenses, $1,085,000; properties, $11,466,000; land and timber cutting rights,
$3,392,000; accrued liabilities, $962,000; and reforestation liability,
$4,294,000. The acquisition of the sawmill was accounted for as a purchase,
and the consolidated financial statements include results of operating the
sawmill since the date of acquisition.
10. LITIGATION AND LEGAL MATTERS
The Company is a party to legal proceedings and environmental matters
generally incidental to its business. Although the final outcome of any legal
proceeding or environmental matter is subject to a great many variables and
cannot be predicted with any degree of certainty, the Company presently
believes that the ultimate outcome resulting from these proceedings and matters
would not have a material effect on the Company's current financial position,
liquidity or results of operations; however, in any given future reporting
period such proceedings or matters could have a material effect on results of
operations.
31
<PAGE> 19
11. INFORMATION ABOUT THE COMPANY'S OPERATIONS IN DIFFERENT INDUSTRIES AND
GEOGRAPHIC AREAS
By Industry
<TABLE>
<CAPTION>
(Thousands) 1994 1993 1992
----------- -------- -------- --------
<S> <C> <C> <C>
REVENUES:
Wood products $304,205 $300,035 $214,167
Pulp and paper products 355,668 328,891 330,178
-------- -------- --------
$659,873 $628,926 $544,345
======== ======== ========
OPERATING PROFIT (LOSS):
Before other gains (losses), net:
Wood products $ 55,224 $ 62,084 $ 15,297
Pulp and paper products (23,153) (9,784) (4,632)
-------- -------- --------
32,071 52,300 10,665
Other gains (losses), net:
Wood products 13,845 - 9,953
Pulp and paper products - - (11,542)
-------- -------- --------
13,845 - (1,589)
Operating profit (loss):
Wood products 69,069 62,084 25,250
Pulp and paper products (23,153) (9,784) (16,174)
-------- -------- --------
45,916 52,300 9,076
Interest expense, net (9,322) (8,714) (5,622)
General corporate expense (9,932) (7,180) (5,924)
-------- -------- --------
Income (loss) before income taxes
and accounting changes $ 26,662 $ 36,406 $ (2,470)
======== ======== ========
IDENTIFIABLE ASSETS:
Wood products $173,458 $130,905 $111,319
Pulp and paper products 327,454 302,503 242,572
Corporate 38,472 22,413 15,790
-------- -------- --------
$539,384 $455,821 $369,681
======== ======== ========
CAPITAL EXPENDITURES:
Wood products $ 14,141 $ 12,984 $ 22,873
Pulp and paper products 41,441 69,601 24,261
-------- -------- --------
$ 55,582 $ 82,585 $ 47,134
======== ======== ========
DEPRECIATION AND AMORTIZATION:
Wood products $ 7,822 $ 7,334 $ 6,847
Pulp and paper products 30,200 21,270 21,057
Corporate 1,039 699 660
-------- -------- --------
$ 39,061 $ 29,303 $ 28,564
======== ======== ========
</TABLE>
By Geographic Area
<TABLE>
<CAPTION>
(Thousands) 1994 1993 1992
----------- -------- -------- --------
<S> <C> <C> <C>
REVENUES:
United States $457,417 $450,142 $449,401
Canada 202,456 178,784 94,944
-------- -------- --------
$659,873 $628,926 $544,345
======== ======== ========
OPERATING PROFIT (LOSS):
Before other gains (losses), net:
United States $(19,492) $ (2,259) $ (608)
Canada 51,563 54,559 11,273
-------- -------- --------
32,071 52,300 10,665
Other gains (losses), net:
United States - - (1,589)
Canada 13,845 - -
-------- -------- --------
13,845 - (1,589)
Operating profit (loss):
United States (19,492) (2,259) (2,197)
Canada 65,408 54,559 11,273
-------- -------- --------
45,916 52,300 9,076
Interest expense, net (9,322) (8,714) (5,622)
General corporate expense (9,932) (7,180) (5,924)
-------- -------- --------
Income (loss) before income taxes
and accounting changes $ 26,662 $ 36,406 $ (2,470)
======== ======== ========
IDENTIFIABLE ASSETS:
United States $410,990 $354,365 $284,746
Canada 89,922 79,043 69,145
Corporate 38,472 22,413 15,790
-------- -------- --------
$539,384 $455,821 $369,681
======== ======== ========
</TABLE>
NOTES:
A. The Company operates principally in two industries:
1) Wood products: Manufacture and sale of lumber and wood chips.
2) Pulp and paper products: Manufacture and sale of bleached kraft pulp,
tissue products and disposable diapers.
B. Operating profit (loss) is total revenue less directly identifiable costs
and expenses. In computing operating profit (loss), none of the following
items have been included: General corporate expenses, net interest
expense and income taxes.
C. Identifiable assets are those assets of the Company that are identified
with the operations in each industry or geographic area.
32
<PAGE> 20
QUARTERLY FINANCIAL INFORMATION
The following quarterly information is unaudited, but includes all adjustments
which management considers necessary for a fair presentation of such
information. For interim quarterly statements, the income tax provision is
estimated using the best available information for projected results for the
entire year. During the fourth quarter of 1994, the Company recognized Other
gains (losses) of $13,845,000 relating to the announced refund of
countervailing duties originally paid in 1992 and 1993 (see Note 8).
<TABLE>
<CAPTION>
Quarter
----------------------------------------
(Thousands except per share) First Second Third Fourth Year
---------------------------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
1994
Revenues $168,741 $157,920 $171,254 $161,958 $659,873
Gross profit 23,817 14,209 13,270 4,328 55,624
Other gains (losses) - - - 13,845 13,845
Net income 8,588 2,801 921 3,587 15,897
Net income per common share:
Primary .70 .21 .07 .27 1.21
Fully diluted .65 .21 .07 .27 1.20
1993
Revenues $167,613 $151,216 $150,910 $159,187 $628,926
Gross profit 26,386 16,791 12,562 19,015 74,754
Income before accounting
changes 11,034 4,672 1,313 4,556 21,575
Cumulative effect of
accounting changes (562) - - - (562)
-------- -------- -------- -------- --------
Net income $ 10,472 $ 4,672 $ 1,313 $ 4,556 $ 21,013
======== ======== ======== ======== ========
Net income per common share:
Primary income before
accounting changes $ .95 $ .40 $ .11 $ .39 $1.85
Cumulative effect of
accounting changes (.05) - - - (.05)
------ ------- ------- ------- -----
Primary net income $ .90 $ .40 $ .11 $ .39 $1.80
====== ======= ======= ======= =====
Fully diluted income before
accounting changes $ .85 $ .38 $ .11 $ .36 $1.71
Cumulative effect of
accounting changes (.04) - - - (.04)
------ ------- ------- ------- -----
Fully diluted net income $ .81 $ .38 $ .11 $ .36 $1.67
====== ======= ======= ======= =====
</TABLE>
33
