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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______.
Commission File Number 1-7852
POPE & TALBOT, INC.
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (503) 228-9161
--------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of each class on which registered
------------------- -----------------------
Common Shares, par value $1.00 New York Stock Exchange
Common Shares, par value $1.00 Pacific Stock Exchange
8-3/8% Debentures, Due June 1, 2013 None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The aggregate market value of voting stock held by nonaffiliates of the
registrant is $191,607,390 as of March 19, 1998 ($15.00 per share).
13,481,441
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(Number of shares of common stock outstanding as of March 19, 1998)
Part I and Part II incorporate specified information by reference from the
annual report to shareholders for the year ended December 31, 1997 and from the
Company's Current Report on Form 8-K dated March 6, 1998. Part III incorporates
specified information by reference from the proxy statement for the annual
meeting of shareholders on April 30, 1998.
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PART I
This Annual Report of Form 10-K and the documents incorporated herein by
reference contain forward-looking statements that have been made pursuant to the
provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based on current expectations, estimates and
projections about the Company's industry, management's beliefs and certain
assumptions made by the Company's management. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," and variations
of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict; therefore, actual results may differ materially from
those expressed or forecasted in any such forward-looking statements. Such risks
and uncertainties include those set forth herein under "Factors That May Affect
Future Results" in the Management's Discussion and Analysis of Results of
Operations and Financial Condition incorporated by reference from the Company's
Annual Report to Shareholders for the year ended December 31, 1997, as well as
those noted in "Environmental Matters" and "Legal Proceedings" below. Unless
required by law, the Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise. However, readers should carefully review the report and
documents the Company files from time to time with the Securities and Exchange
Commission, particularly its Quarterly Reports on Form 10-Q and any current
Reports on Form 8-K.
ITEM 1. BUSINESS
INTRODUCTION
Pope & Talbot, Inc. (the Company) is engaged principally in the wood
products and pulp products businesses. The Company's wood products business
involves the manufacture and sale of standardized and specialty lumber
and wood chips. In its pulp products business, the Company manufactures and
sells bleached kraft pulp for newsprint, tissue and writing paper, and brokers
wood chips. In January 1998, the Company announced it had entered into a
definitive agreement to sell its private label tissue business to PLAINWELL,
INC. (Plainwell). The sale of this business was completed on March 6, 1998, and
the tissue business results for 1997, 1996 and 1995 have been shown as
discontinued tissue operations. In December 1995, the Company entered into a
definitive agreement to sell its disposable diaper business to Paragon Trade
Brands, Inc. (Paragon). The sale of this business was completed on February 8,
1996, and the disposable diaper business results for 1995 have been reflected as
discontinued diaper operations. A gain on the sale of the discontinued diaper
business was reported in the first quarter of 1996. During 1997, wood products
accounted for approximately 75 percent of the Company's revenues from continuing
operations of $329.9 million, and bleached kraft pulp and brokered wood chips
accounted for 25 percent. Discontinued tissue operations revenues were $136.2
million in 1997.
The Company, a Delaware corporation, was originally incorporated as a
California corporation in 1940. It is the successor to a partnership formed in
San Francisco, California in 1849 that acquired its first timberlands and opened
a lumber mill in the Seattle, Washington area in 1853. Subsequently, the Company
developed a lumber business based on timberland and facilities in the U.S.
Pacific Northwest, British Columbia, Canada, and the Black Hills region of South
Dakota and Wyoming.
Since the mid-1980s, the Company has reduced its dependency on timber from
the Pacific Northwest, where environmental concerns have sharply restricted the
availability and increased the cost of public timber. At the same time, the
Company has increased its operations in regions presently having more stable
timber supplies, namely in British Columbia and the Black Hills region of South
Dakota and Wyoming. In 1985, the Company distributed its timber and land
development properties in the State of Washington to its shareholders through
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interests in a newly formed master limited partnership. In 1989, the Company
sold its Oregon sawmill, and the Company has since sold its remaining Oregon
timberlands. In 1992, the Company acquired a sawmill in Castlegar, British
Columbia and related timber cutting rights. At the end of 1995, the Company
permanently closed its Port Gamble, Washington sawmill. The Company currently
operates five sawmills with an estimated annual capacity of 560 million board
feet, of which approximately 75 percent is located in British Columbia and 25
percent in the Black Hills.
In the late 1970s, the Company expanded into the pulp business with the
purchase of its Halsey, Oregon pulp mill. The Halsey mill produces bleached
kraft pulp which is sold to writing paper, tissue and newsprint manufacturers in
the Pacific Northwest and on the open market.
In December 1997, the Company announced its tender offer to acquire a
controlling interest in Harmac Pacific Inc. (Harmac) outstanding common shares
for cash. On February 2, 1998, the Company acquired shares of Harmac common
stock which resulted in the Company holding a 53 percent controlling interest
in Harmac. Harmac, which is publicly traded on the Toronto, Vancouver and
Montreal stock exchanges, operates a pulp mill, located on the east coast of
Vancouver Island in British Columbia, Canada, which has an annual capacity to
produce 370,000 metric tons of pulp.
The businesses in which the Company is engaged are extremely competitive,
and a number of the Company's competitors are substantially larger than the
Company with correspondingly greater resources.
Environmental regulations to which the Company is subject require the
Company from time to time to incur significant operating costs and capital
expenditures. In addition, as discussed herein, environmental concerns have in
the past materially affected the availability and cost of raw materials used in
the Company's business. See "Wood Products Business," "Pulp Products Business"
and "Environmental Matters."
WOOD PRODUCTS BUSINESS
The Company's wood products business involves the manufacture and sale of
standardized and specialty lumber and wood chips. The Company's principal wood
products categories and the sales generated by each over the past three years
are set forth in the following table:
<TABLE>
<CAPTION>
Classes of Wood Products 1997 1996 1995
------------------------ ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Lumber $ 219,698 $ 194,930 $ 194,350
Wood chips 16,010 20,835 46,514
Logs and other 12,612 15,948 24,712
---------- ---------- ----------
Total wood products sales $ 248,320 $ 231,713 $ 265,576
========= ========== ==========
</TABLE>
In 1997, lumber revenues increased $24.8 million, or 13 percent, over
1996, due to 10 percent higher average prices combined with a 2 percent volume
increase. Wood chip revenues in 1997 declined $4.8 million, or 23 percent, from
1996, reflecting 20 percent lower residual chip prices and 6 percent lower chip
volumes. Log sales and other were down in 1997 primarily due to the first
quarter 1996 sale of the Port Gamble sawmill. Although 1996 and 1995 lumber
revenues were comparable, the 1996 lumber revenues reflected 17 percent higher
prices than 1995 which offset 14 percent lower lumber sales volumes. The 1996
volume reduction related mainly to the permanent closure of the Company's Port
Gamble, Washington sawmill in 1995, and to a lesser degree, reduced Canadian
shipments. Wood chip revenues in 1996 were $25.7 million, or 55 percent, lower
than 1995 reflecting residual chip prices which were down nearly 50 percent from
1995 levels combined with lower chip
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volumes resulting from decreased lumber production. Log sales were down in 1996
due primarily to the 1995 Port Gamble mill closure.
The Company's lumber products consist principally of boards and dimension
lumber, some of which are specialty, value-added items, such as stress-rated
lumber. Wood chips and other similar materials are obtained as a by-product of
the Company's lumber operations.
The principal sources of raw material for the Company's wood products
operations are timber obtained through long-term cutting licenses on public
lands, logs purchased on open log markets, timber offered for sale via
competitive bidding by federal agencies, and timber purchased under long-term
contracts to cut timber on private lands.
During 1995, the Port Gamble sawmill was either shut down or operating on
a reduced one-shift basis due to a lack of acceptably priced timber in relation
to end-product prices. Prior to the mill's closure, timber harvest levels in the
mill's operating region had been significantly reduced as a result of
environmental pressures to reduce the amount of timber available for harvest. A
strong export log market further reduced domestic log supplies in the region.
These reduced log volumes, combined with weakened lumber markets, resulted in
operating losses at Port Gamble and significantly below-capacity production.
With no prospect of a resolution to the timber supply situation, the Company
permanently closed the Port Gamble sawmill in the fourth quarter of 1995. The
assets of the facility were sold in the first quarter of 1996.
Approximately 75 percent of the Company's current lumber capacity is
located in British Columbia, Canada and 25 percent in the Black Hills region of
South Dakota and Wyoming. In Canada, timber requirements are obtained primarily
from the Provincial Government of British Columbia under long-term timber
harvesting licenses which allow the Company to remove timber from defined areas
annually on a sustained yield basis. The Provincial Government of British
Columbia has the authority to modify prices and harvest volumes at any time.
Under the provincial stumpage pricing formula, wood costs are based on a
relationship to end-product prices. Approximately 30 percent of the Company's
Canadian log requirements are satisfied through open market log purchases. In
the Black Hills, the Company obtains its timber from various public and private
sources under long-term timber harvesting contracts in addition to buying logs
on open markets. Under these Black Hills contracts, prices are subject to
periodic adjustment based upon formulas set forth therein.
During 1994, the Provincial Government of British Columbia's Commission of
Resources and Environment (CORE) began reviewing the future use of the forest
resources in the province. This review was completed in 1996, and in 1997, the
related Kootenay Boundary Land Use Plan was approved. This land use plan set
aside several areas for new parks. Although no assurances can be given,
management believes that in the near term, timber supplies for the Company's
Canadian sawmills should be stable. The Company is improving its reforestation
practices and developing strategies to sustain and enhance timber supplies in
the long-term in order to mitigate the adverse effects on timber supplies of the
land being set aside.
The British Columbia government has also implemented its Forest Practices
Code (Code). This Code sets strict standards for logging activities and
reforestation responsibilities. Requirements under this Code have been phased in
beginning in 1996, with full implementation to be in place during 1998. Due to
the additional logging and reforestation requirements of this Code, the
Company's logging costs increased in 1996 and 1997, and will likely increase
further during 1998. The Code could also ultimately have a long-term unfavorable
impact on the Company's timber harvest volumes.
During the first quarter of 1996, U.S. and Canadian trade negotiators
reached an agreement establishing volume quotas on Canadian softwood lumber
shipments to the U.S. Based on this agreement, Canadian lumber producers are
assigned volume quotas specifying
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on a company by company basis the lumber volumes which may be shipped to the
U.S. tariff-free and those volumes which may be shipped to the U.S. subject to a
$51 per thousand board foot tariff. Shipment volumes in excess of these
established quotas are subject to a $102 per thousand board foot tariff. March
31, 1997, represented the end of the first fiscal year lumber quota period
related to this agreement and the Company shipped volumes in excess of its
specified quotas during the period. In June 1997, the Company was informed of
its fiscal year 1997/1998 quota volumes which applied retroactively to April 1.
The Company's updated tariff-free volume allocation for the current fiscal year
represents an 11.4 million board foot reduction from the 1996/1997 fiscal year
allocations. Partially offsetting this tariff-free allocation reduction was a
2.6 million board foot increase in the Company's volume allocation subject to
the lower $51 per thousand board foot tariff. The Company believes its volume
allocations were determined consistently with other British Columbia lumber
producers. During 1997, the Company expensed tariff charges of about $1.9
million related to shipments from the Company's Canadian sawmills into the U.S.
Because of weakened lumber markets in the last half of 1997, coupled with the
implications of this tariff agreement, the Company took a two-week shutdown at
its Midway, British Columbia sawmill in October 1997 and also extended holiday
downtime at all of its Canadian sawmills in December 1997. The Company will
continually evaluate the need for temporary shutdowns at its Canadian sawmills
in the future taking into consideration the dynamics of the lumber markets and
the impact of the tariff agreement.
Marketing and Distribution. The Company's lumber products are sold
primarily to wholesale distributors. Wood chips produced by the Company's
sawmills are sold to manufacturers of pulp and paper in the U.S. and Canada.
Logs not suitable for consumption in the Company's sawmills are sold to other
U.S. and Canadian forest products companies.
Marketing of the Company's wood products is centralized in its Portland,
Oregon office. Although the Company does not have distribution facilities at the
retail level, the Company does utilize several reload facilities around the U.S.
to assist in moving the product closer to the customer. The Company sold wood
products to numerous customers during 1997, the ten largest of which accounted
for approximately 42 percent of total wood products sales. Approximately 12
percent of the Company's revenues in 1997 were to a group of lumber wholesalers
affiliated with a single parent, namely Forest City Group.
Backlog. The Company maintains a minimal finished goods inventory of wood
products. At December 31, 1997, orders were approximately $4.6 million, compared
with approximately $9.9 million at December 31, 1996. This backlog represented
an order file for the Company which generally would be shipped within one to two
months. The decrease from 1996 reflects both lower order volume in 1997 due to a
slower market and decreased lumber sales prices. The higher order volume in 1996
was also a function of timing and poor year-end 1996 weather conditions which
delayed shipments.
Competition. The wood products industry is highly competitive, with a
large number of companies producing products that are reasonably standardized.
There are numerous competitors of the Company that are of comparable size or
larger, none of which is believed to be dominant. The principal means of
competition in the Company's wood products business are pricing and the ability
to satisfy customer demands for various types and grades of lumber.
For further information regarding amounts of revenue, operating profit and
loss and identifiable assets attributable to the wood products industry segment,
see Note 11 of "Notes to Consolidated Financial Statements" in the Company's
1997 Annual Report to Shareholders.
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PULP PRODUCTS BUSINESS
The Company's principal pulp products categories and the sales generaed by
each over the last three years are set forth in the following table:
<TABLE>
<CAPTION>
Classes of Pulp Products 1997 1996 1995
------------------------ ---- ---- ----
(In thousands)
<S> <C> <C> <C>
Bleached kraft pulp $ 75,396 $ 72,410 $ 124,361
Brokered wood chips 6,183 9,722 27,459
---------- --------- ----------
Total pulp products sales $ 81,579 $ 82,132 $ 151,820
========== ========= ==========
</TABLE>
In 1997, pulp products revenues decreased $0.6 million from 1996. Bleached
kraft pulp revenues increased $3.0 million, or 4 percent, from 1996 to 1997
reflecting 12 percent higher sales volumes offset by 7 percent lower pulp
pricing. Lower 1997 brokered wood chip revenues resulted from a continuing
decrease in wood chip prices combined with lower volume. Pulp products revenues
decreased $69.7 million, or 46 percent, from 1995 to 1996 reflecting a dramatic
weakening of pulp markets. The Company's pulp sales prices were nearly 35
percent lower on average in 1996 than 1995. Pulp sales volume in 1996 was down 7
percent from 1995 due mainly to a two-week market induced shutdown in the first
quarter of 1996 and a brief shutdown in the 1996 third quarter caused by an
equipment failure. Lower brokered wood chip revenues reflected a significant
decrease in wood chip prices combined with lower volume in 1996 compared to
1995.
The Company owns a pulp mill at Halsey, Oregon. This mill produces
bleached kraft pulp which is sold in various forms to writing paper, tissue and
newsprint manufacturers in the Pacific Northwest and on the open market. In
conjunction with the fiber acquisition program for the pulp mill, the Company
brokers pulp chips for sale primarily into the export market. The total annual
capacity of the mill is 180,000 air dry metric tons; 175,000 metric tons were
produced in 1997, 162,000 metric tons were produced in 1996 and 175,000 metric
tons were produced in 1995.
To provide additional sales flexibility and attempt to improve margins
through higher value products, the Company initiated mill modifications, which
were completed in early 1994, to improve pulp quality and expand pulp drying
capabilities. These mill improvements have allowed the Company to expand its
pulp product offerings and to dry its total pulp production, thus providing
greater access to pulp markets within and outside the Pacific Northwest, which
has historically been the Company's primary pulp market region.
The Company has an agreement with Grays Harbor Paper L.P. (Grays Harbor),
under which the Company supplies pulp to the Grays Harbor writing grade paper
mill. Grays Harbor purchased approximately 89,000 metric tons, 100,000 metric
tons and 103,000 metric tons of pulp from the Company in 1997, 1996 and 1995,
respectively. All output from the paper mill is sold to one customer. In the
event that the paper mill's sales to its customer are adversely impacted for any
reason, sales of the Company's pulp may be adversely impacted. A significant
portion of the pulp sold to the paper mill is produced from sawdust, which has
historically been less expensive than softwood and hardwood chips. Pricing for
this pulp sold to Grays Harbor was computed using a formula based on prices for
white paper. In late 1997, the Company and Grays Harbor modified their pulp
supply contract. The modified contract, which became effective January 1, 1998,
changes the pulp pricing formula so that pulp prices are based on Southern mixed
(U.S.) bleached hardwood kraft prices rather than white paper prices. Given the
current pulp market weakness, the Company expects the new Grays Harbor pricing
formula will result in lower Grays Harbor pulp prices early in 1998, but the
Company believes that over the longer-term, pulp pricing under the new formula
will be comparable to that under the previous pricing formula.
Substantially all of the Company's wood chip and sawdust requirements for
the Halsey pulp mill are satisfied through purchases by the Company from third
parties. The Company has long-term chip supply contracts with sawmills in the
Pacific Northwest.
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Environmental concerns over timber harvests, which have caused high log
costs and led to the shutdown of the Company's Port Gamble sawmill, have also
caused reduced chip availability from historic sources at the Halsey pulp mill
over the past several years. In order to provide an adequate supply of wood
fiber for the mill, the Company has expanded its capability of using sawdust,
which historically has been less expensive than softwood chips, as a raw
material for a significant portion of the production. Additionally, the Company
continues to use an expanded geographic base to maintain an adequate supply of
chips for the approximately 40 to 50 percent of the pulp mill's production which
remains based on softwood chips. At the end of 1995, and continuing in 1996 and
1997, reduced demand for chips resulting from the weakened pulp market caused
chip prices to fall significantly from their mid-1995 highs. The Company
believes there will continue to be an adequate supply of third-party chips and
sawdust for the Halsey pulp mill in the foreseeable future.
Marketing and Distribution. The Company utilizes its own sales force and
pulp brokers to sell its pulp products. A large majority of the Company's pulp
products are sold in the Pacific Northwest. In 1997, sales to Grays Harbor
represented 45 percent of the Company's pulp revenues and the remaining nine
largest customers accounted for an additional 30 percent of pulp revenues. Grays
Harbor accounted for 11 percent of total Company revenues in 1997.
Backlog. The Company's pulp customers either enter into contracts for
periods of one to three years or purchase products without obligation for future
purchases. The contractual customers provide the Company with annual estimates
of their requirements, followed by periodic orders based on more definitive
information. As of December 31, 1997, the Company's backlog of orders believed
to be firm for both contractual and non-contractual customers was $18 million
compared to $17 million at December 31, 1996. The increase in the total backlog
of orders reflects both higher sales prices and order volumes. The backlog of
pulp orders at year-end represents orders which will be filled in the first
quarter of the following year.
Competition. The pulp industry is highly competitive, with a substantial
number of competitors having extensive financial resources, manufacturing
expertise and sales and distribution organizations, most of which are larger
than the Company, but none of which is believed to be dominant. The principal
methods of competition in the pulp market are price, quality, volume,
reliability of supply and customer service.
In December 1997, the Company announced its tender offer to acquire a
controlling interest in Harmac outstanding common shares for cash. On
February 2, 1998, the Company completed the acquisition of the common shares
which resulted in the Company holding a 53 percent controlling ownership
interest in Harmac. The Harmac pulp mill is located in Nanaimo, British
Columbia and is one of Canada's largest pulp producers with an annual capacity
of 370,000 metric tons of northern bleached softwood kraft pulp. The Harmac
pulp mill produced 340,000 metric tons in 1997, and had revenues of
$163 million.
For further information regarding amounts of revenue, operating profit and
loss and identifiable assets attributable to the pulp products industry segment,
see Note 11 of "Notes to Consolidated Financial Statements" in the Company's
1997 Annual Report to Shareholders.
DISCONTINUED OPERATIONS
As discussed previously, in March 1998, the Company sold its tissue
business to Plainwell and, in February 1996, the Company sold its disposable
diaper business to Paragon. The tissue business results for 1997, 1996 and 1995
were shown as discontinued tissue operations. The discontinued tissue business
revenues were $136.2 million in 1997, $133.6 million in 1996 and $107.0 million
in 1995. The disposable diaper business results for 1995 were reflected as
discontinued diaper operations. Revenues for the discontinued diaper business
were $144.0 million in 1995.
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Until the sale of the tissue business in March 1998, the Company produced
a line of private label consumer tissue products including towels, napkins,
bathroom tissue and facial tissue. Also, until the February 1996 sale of the
diaper business, the Company produced disposable diaper products. These products
were sold under private and controlled labels.
For further information regarding the Company's discontinued operations,
see Note 9 of "Notes to Consolidated Financial Statements" in the Company's 1997
Annual Report to Shareholders.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state, provincial and local air, water
and land pollution control, solid and hazardous waste management, disposal and
remediation laws and regulations in all areas where it has operations.
Compliance with these laws and regulations generally requires operating costs as
well as capital expenditures. It is difficult to estimate the costs related
solely to environmental matters of many capital projects which have been
completed in the past or which may be required in the future. Changes required
to comply with environmental standards will affect other areas such as facility
life and capacity, production costs, changes in raw material requirements and
costs and product value. In November 1997, the Environmental Protection Agency
(EPA) published regulations establishing standards and limitations for
non-combustion sources under the Clean Air Act and revised regulations under the
Clean Water Act. These regulations are collectively referred to as the "cluster
rules" and have been the subject of extensive discussions between the pulp and
paper industry and the EPA. The Company's primary exposure to these regulations
relates to the Company's Halsey pulp mill. Anticipated compliance capital
requirements at Halsey are estimated at $30 to $35 million with compliance
required by the end of 2000. It is estimated that during 1997, capital
expenditures for environmental controls amounted to approximately $1 million. It
is expected that capital expenditures will continue into the future and will
increase over time, particularly considering the previously discussed cluster
rules capital requirements. Based on the understanding of future compliance
standards, expenditures for such purposes, with the exception of expenditures
related to cluster rule compliance, are currently estimated to not be
significant in 1998 and 1999. However, the ultimate outcome of future compliance
is uncertain due to various factors such as the interpretation of environmental
laws, potential introduction of new environmental laws and evolving
technologies.
In response to environmental concerns in Western Oregon and Western
Washington, specifically the preservation of old-growth forests and wildlife
habitat, substantial amounts of federal timberlands have been set aside as
wilderness areas. This has affected and may continue to affect the amount and
cost of timber obtainable from public agencies in this region. Currently, the
Company's exposure in this region is the Halsey, Oregon pulp mill. The Halsey
pulp mill is affected by the decrease in timber availability since its primary
raw materials, wood chips and sawdust, are by-products of the lumber
manufacturing process. The Company believes that, based on existing wood chip
and sawdust availability both within the Willamette Valley region of Oregon and
from other sources discussed previously, wood chip and sawdust resources will be
adequate for the Company's requirements at the Halsey pulp mill in the
foreseeable future.
In British Columbia, the Company's wood products business forest resources
and related logging activities and reforestation responsibilities have been
affected by recent governmental actions. Refer to "Wood Products Business" for a
further discussion on the impact of the Provincial Government of British
Columbia's Commission of Resources and Environment (CORE) and the Forest
Practices Code (Code).
In 1992, the Company was contacted by the local governmental
owner of a vacant industrial site in Oregon on which the Company previously
conducted business. The
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owner informed the Company that the site has been identified as one containing
creosote and coal tar, and that it plans to undertake a voluntary cleanup effort
of the site. The owner has requested that the Company participate in the cost of
the cleanup. The Company is currently participating in the investigation stage
of this site with remediation and monitoring to occur over several years, likely
beginning in late 1999 or 2000. Based on preliminary findings, the Company has
estimated the likely total cost of remediation and monitoring of this site to be
in the range of $5 to $12 million and that no amount within the range is more
likely an outcome than another. The ultimate cost to the Company for site
remediation and monitoring cannot be predicted with certainty due to the unknown
magnitude of the contamination, the varying costs of alternative cleanup
methods, the cleanup time frame possibilities, the evolving nature of
remediation technologies and governmental regulations and the inability to
determine the Company's share of multi-party obligations or the extent to which
contributions will be available from other parties. The Company has established
reserves for environmental remediation and monitoring related to this site in an
amount it believes is probable and reasonably estimable. The Company has not
assumed it will bear the entire cost of remediation to the exclusion of other
known potentially responsible parties (PRPs) who may be jointly and severally
liable. The ability of other PRPs to participate has been taken into account
based generally on the parties' financial condition and probable contribution.
Certain recoveries from insurance carriers have been recorded as their receipt
is deemed probable and amounts are reasonably estimable.
EMPLOYEES
At December 31, 1997, the Company employed approximately 2,300 employees
of whom 1,900 were paid on an hourly basis and a majority of which were members
of various labor unions. Included in these numbers were approximately 800
salaried and hourly employees who were employed by the discontinued tissue
operations. Approximately 84 percent of the Company's employees from continuing
operations were associated with the Company's wood products business, 14 percent
were associated with the Company's pulp business and 2 percent were corporate
management and administration personnel.
FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The Company's foreign manufacturing operations consist of three lumber
mills located in Canada. The Company's wood products business is heavily
dependent on foreign operations in that the three Canadian sawmills account for
approximately 75 percent of the Company's lumber capacity. See "Wood Products
Business" for discussion on a U.S. and Canada agreement establishing volume
quotas on Canadian softwood lumber shipments to the U.S. The Company's primary
exports are pulp sold to Europe and brokered wood chips sold to Japan. The
Company's export sales from the U.S. were $30.5 million for 1997, $23.2 million
for 1996 and $26.3 million for 1995. Of the 1997 export sales, 39 percent were
to Japan and 50 percent were to Europe. Export sales for the discontinued tissue
operations were $1.0 million in 1997, $0.6 million in 1996 and there were no
export sales in 1995.
Financial information regarding the Company's domestic and foreign
operations is included in Note 11 of "Notes to Consolidated Financial
Statements" on page 31 of the Company's 1997 Annual Report to Shareholders.
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ITEM 2. PROPERTIES
WOOD PRODUCTS PROPERTIES
1. Mills and Plants
The following tabulation briefly states the location, character, capacity
and 1997 production of the Company's lumber mills:
<TABLE>
<CAPTION>
Estimated Annual 1997
Location Capacity (3) Production(3)
- --------------------- ------------- -------------
<S> <C> <C>
Spearfish, South Dakota 112,000,000 bd. ft.(1) 108,000,000 bd. ft.
Newcastle, Wyoming 32,000,000 bd. ft.(1) 31,000,000 bd. ft.
Grand Forks, British Columbia 60,000,000 bd. ft.(2) 59,000,000 bd. ft.
Midway, British Columbia 145,000,000 bd. ft.(2) 134,000,000 bd. ft.
Castlegar, British Columbia 211,000,000 bd. ft.(2) 220,000,000 bd. ft.
</TABLE>
(1) Based on operating two shifts, five days per week for the Spearfish, South
Dakota lumber mill and one shift, five days per week for the Newcastle,
Wyoming lumber mill.
(2) Based on operating two shifts, five days per week for the Midway and
Castlegar, British Columbia mills and one shift, five days per week for the
Grand Forks, British Columbia mill. These capacities reflect reduced
operations resulting from timber license quota limitations.
(3) Wood chips are produced as a result of the operation of the Company's
lumber mills. It is estimated that the aggregate annual capacity for such
production is 293,000 bone dry units. In 1997, 271,000 bone dry units were
produced.
The Company believes that its wood products manufacturing facilities are
adequate and suitable for current operations. The Company owns all of its wood
products manufacturing facilities.
PULP PRODUCTS PROPERTIES
The Company owns a bleached kraft pulp mill near Halsey, Oregon. In 1997,
175,000 air dry metric tons of pulp were produced, compared with an estimated
annual capacity of 180,000 metric tons. Other than future mill modifications
required by the EPA's "cluster rules," as described previously in "Environmental
Matters," the Company believes that its Halsey pulp facility is adequate and
suitable for current operations.
As discussed previously, in December 1997, the Company announced its
tender offer to acquire a controlling interest in Harmac outstanding common
shares for cash. In February 1998, the Company acquired common shares which
resulted in the Company holding a 53 percent controlling ownership interest in
Harmac. The Harmac pulp mill is located on the east coast of Vancouver Island in
Nanaimo, British Columbia. The Harmac pulp mill has an annual capacity of
370,000 metric tons of northern bleached softwood kraft pulp and produced
340,000 metric tons in 1997.
DISCONTINUED TISSUE PROPERTIES
As previously discussed, the Company's tissue business was sold to
Plainwell in March 1998. During 1997, the Eau Claire, Wisconsin and Ransom,
Pennsylvania facilities produced 54,000 tons and 53,000 tons, respectively.
10
<PAGE> 11
ITEM 3. LEGAL PROCEEDINGS
In 1985, stockholders of the Company approved a Plan of Distribution
pursuant to which all of the Company's timber properties and development
properties and related assets and liabilities in the State of Washington were
transferred to newly-formed Pope Resources, A Delaware Limited Partnership (the
Partnership), with interests in the Partnership distributed to the Company's
shareholders on a pro rata basis.
Upon audit, the Internal Revenue Service (IRS) challenged the distribution
value of the assets reported by the Company for federal income tax purposes. In
January 1993, the Company petitioned the United States Tax Court (Tax Court) in
order to resolve the disputed value of the distribution. The issue was tried in
the Tax Court during the third quarter 1995. The Company incurred costs
(primarily in 1995) in connection with the Tax Court litigation. In 1995, these
litigation costs, together with related tax payments and interest charges
totaling $4.9 million, net of tax benefits of $1.4 million, were recognized as a
reduction in additional paid-in capital with respect to the Partnership
transaction. In March and October 1997, the Tax Court rendered decisions
concerning the Company's tax liability arising from the Partnership transaction.
The Company is presently in the process of appealing the decision and filed
notice as such with the 9th Circuit Court of Appeals during December 1997. In
the second quarter of 1997, based on the Company's best estimate of the ultimate
tax liability, taking into consideration the Tax Court's March 1997 decision,
the Company recognized a further reduction in additional paid-in capital of $1.8
million. This charge to equity, which represents the minimum in the estimated
range of exposure to the Company, reflected tax and interest amounts totaling
$2.4 million, net of tax benefits of $0.6 million. Taking into consideration the
potential outcomes of the Company's appeal of the Tax Court decision, the
Company estimates the potential for additional equity reductions will range from
zero (if the Company is wholly successful in its appeal of the Tax Court
decision) up to $4 million (if the Tax Court decision becomes final or is
sustained on appeal). Any further tax, interest and litigation costs related to
the Partnership transaction will be recognized as a reduction in equity with
respect to the Partnership transaction.
In December 1996, the IRS proposed certain adjustments pertaining to
transactions between the Company and its wholly-owned Canadian subsidiary,
resulting in the assertion that additional taxes of approximately $7 million
were due for the tax years 1993 and 1994. The Company believes it has
substantial defenses against this claim and plans to vigorously defend its
position. Although the final outcome of this matter cannot be predicted, the
Company presently believes that the results of this claim would not have a
material adverse effect on the Company's financial position or liquidity;
however, in any given reporting period, this matter could have a material effect
on results of operations.
On December 31,1997, the Company filed a claim in the United States
District Court for the Western District of Washington in Seattle against the
Procter & Gamble Company (P&G) alleging anti-trust violations and seeking a
declaration of non-infringement and invalidity of certain P&G disposable baby
diaper patents. This claim was filed in response to assertions made by P&G to
the Company that certain disposable diaper products produced by the Company's
discontinued disposable diaper operations infringed two of P&G's inner-leg
gather patents. P&G has indicated it believes the Company is obligated to it
with respect to the sale of diapers which allegedly used the patents. The
Company has asserted in its legal action that it did not infringe any valid
claims of the P&G patents and also that P&G and another diaper supplier have
taken actions to prevent fair competition among sellers of disposable diapers.
In an infringement action against Paragon based on the same diaper patents, P&G
received a favorable judgment in the State of Delaware in December 1997. Early
in 1998, Paragon appealed the Court's decision. If P&G proceeds against the
Company with legal action related to its patent infringement assertions and is
substantially successful in such action, the outcome could have a material
adverse effect on the Company's results of operations, liquidity and financial
position. The Company intends to vigorously assert its position.
11
<PAGE> 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT WHO ARE NOT DIRECTORS
In addition to the executive officers who are also directors of the
Company, the following executive officers are not directors:
ROBERT J. DAY, 54, Senior Vice President and Chief Financial Officer
since August 1997.
ABRAM FRIESEN, 55, Vice President - Division Manager, Wood Products Division
since February 1996.
WILLIAM G. FROHNMAYER, 59, Vice President - Division Manager, Fiber Products
Division since August 1987.
All officers hold office at the pleasure of the Board of Directors.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Pope & Talbot, Inc. common stock is traded on the New York and Pacific
stock exchanges under the symbol POP. The number of shareholders at year-end
1997 and 1996 were 1,005 and 1,153, respectively. The high and low sales prices
for the common stock on the New York Stock Exchange and the dividends paid per
common share for each quarter in the last two fiscal years are shown below:
<TABLE>
<CAPTION>
Sales price per share
--------------------- Cash dividends
High Low per share
---- --- --------------
<S> <C> <C> <C>
1997
1st Quarter $ 16-7/8 $ 13-5/8 $.19
2nd Quarter 16-7/8 13-1/4 .19
3rd Quarter 22-1/8 16-5/16 .19
4th Quarter 21-7/8 13-1/2 .19
----
$.76
1996
1st Quarter $ 15-3/8 $ 13-1/4 $.19
2nd Quarter 17-5/8 13-1/4 .19
3rd Quarter 16-7/8 14-1/8 .19
4th Quarter 16-1/8 14-7/8 .19
----
$.76
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
Information required by Item 6 of Part II is presented in the table
entitled "Five Year Summary of Selected Financial Data" on page 10 of the
Company's 1997 Annual Report to Shareholders. Such information is incorporated
herein by reference.
12
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by Item 7 of Part II is presented on pages 11
through 17 of the Company's 1997 Annual Report to Shareholders. Such information
is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 of Part II is incorporated by reference
to the Company's Current Report on Form 8-K dated March 6, 1998 and presented on
pages 18 through 31 of the Company's 1997 Annual Report to Shareholders.
Additionally, the required supplementary quarterly financial information is
incorporated herein by reference to page 32 of the Company's 1997 Annual Report
to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by Item 10 of Part III is presented on page 12 as
a separate item entitled "Executive Officers of the Registrant Who are Not
Directors" in Part I of this Report on Form 10-K and on pages 2 and 3 (under the
item entitled "Certain Information Regarding Directors and Officers") of the
Company's Definitive Proxy Statement for the Annual Meeting of Shareholders on
April 30, 1998. Such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Part III is presented on pages 5
through 15 of the Company's Definitive Proxy Statement for the Annual Meeting of
Shareholders on April 30, 1998. Such information is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 of Part III is presented on page 4 and
page 6 of the Company's Definitive Proxy Statement for the Annual Meeting of
Shareholders on April 30, 1998. Such information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The financial statements listed in the accompanying Index to Financial
Statements and Financial Statement Schedules are filed as part of this
annual report.
(a) (2) Schedules
13
<PAGE> 14
All schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission
of the related schedule, or because the information required is
included in the financial statements and notes thereto.
(a) (3) Exhibits
The following exhibits are filed as part of this annual report.
Exhibit No.
- -----------
2.1 Asset Purchase Agreement by and among Paragon Trade Brands, Inc.,
PTB Acquisition Sub, Inc., Pope & Talbot, Inc. and Pope & Talbot,
Wis., Inc. dated December 11, 1995. (Incorporated herein by
reference to Exhibit 2.1 to the Company's Current Report on Form
8-K filed February 8, 1996.)
2.2 Offer to Purchase and Circular, dated December 20, 1997.
(Incorporated herein by reference to Exhibit 1 to Schedule
14-D-1F filed with the Securities and Exchange Commission on
December 22, 1997 by Pope & Talbot Pulp Ltd.)
3.1 Certificate of Incorporation, as amended. (Incorporated herein by
reference to Exhibit 3(a) to the Company's Annual Report on Form
10-K for the year ended December 31, 1992.)
3.2 Bylaws. (Incorporated herein by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1996.)
4.1 Indenture, dated June 2, 1993, between the Company and Chemical
Trust Company of California as Trustee with respect to the
Company's 8-3/8% Debentures due 2013. (Incorporated herein by
reference to Exhibit 4.1 to the Company's registration statement
on Form S-3 filed April 6, 1993.)
4.2 Rights Agreement, dated as of April 13, 1988, between the Company
and The Bank of California, as rights agent. (Incorporated herein
by reference to Exhibit 4(e) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1992.)
4.3 Revolving Credit Agreement, dated December 15, 1997, between the
Company and U.S. Bank National Association. (Incorporated herein
by reference to Exhibit 4.1 to the Company's Current Report on
Form 8-K dated March 6, 1998.)
10.1 Executive Compensation Plans and Arrangements
10.1.1 Stock Option and Appreciation Plan. (Incorporated herein by
reference to Exhibit 10(a) to the Company's Annual Report on Form
10-K for the year ended December 31, 1992.)
10.1.2 Executive Incentive Plan. (Incorporated herein by reference to
Exhibit 10(b) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992.)
10.1.3 Restricted Stock Bonus Plan. (Incorporated herein by reference to
Exhibit 10(c) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992.)
10.1.4 Deferral Election Plan. (Incorporated herein by reference to
Exhibit 10(d) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992.)
14
<PAGE> 15
10.1.5 Supplemental Executive Retirement Income Plan. (Incorporated
herein by reference to Exhibit 10(e) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1990.)
10.1.6 Form of Severance Pay Agreement among the Company and certain of
its executive officers. (Incorporated herein by reference to
Exhibit 10(f) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1990.)
10.1.7 1996 Non-Employee Director Stock Option Plan. (Incorporated
herein by reference to Exhibit 10.1.7 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996.)
10.2 Lease agreement between the Company and Pope Resources, dated
December 20, 1985, for Port Gamble, Washington sawmill site.
(Incorporated herein by reference to Exhibit 10(g) to the
Company's Annual Report on Form 10-K for the year ended December
31, 1990.)
10.3 Lease agreement between the Company and Shenandoah Development
Group, Ltd., dated March 14, 1988, for Atlanta diaper mill site
as amended September 1, 1988 and August 30, 1989. (Incorporated
herein by reference to Exhibit 10(h) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1990.)
10.4 Lease agreement between the Company and Shenandoah Development
Group, Ltd., dated July 31, 1989, for additional facilities at
Atlanta diaper mill as amended August 30, 1989 and February 1990.
(Incorporated herein by reference to Exhibit 10(i) to the
Company's Annual Report on Form 10-K for the year ended December
31, 1990.)
10.5 Province of British Columbia Tree Farm License No. 8, dated March
1, 1995. (Incorporated herein by reference to Exhibit 10.6 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996.)
10.6 Province of British Columbia Tree Farm License No. 23, dated
March 1, 1995. (Incorporated herein by reference to Exhibit 10.7
to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996.)
10.8 Province of British Columbia Forest License A18969, dated
December 1, 1993. (Incorporated herein by reference to Exhibit
10.8 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996.)
10.9 Grays Harbor Paper L.P. Second Amended and Restated Pulp Sales
Supply Contract, dated December 17, 1997. [Certain information
has been omitted therein pursuant to a request for confidential
treatment pursuant to Rule 24b-2]
11.1 Statement showing computation of per share earnings.
13.1 Portions of the annual report to shareholders for the year ended
December 31, 1997 which have been incorporated by reference in
this report.
21.1 Listing of parents and subsidiaries.
23.1 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule.
15
<PAGE> 16
The undersigned registrant hereby undertakes to file with the Commission a copy
of any agreement not filed under exhibit item (4) above on the basis of the
exemption set forth in the Commission's rules and regulations.
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed on December 15, 1997 reporting the
tender offer to acquire a controlling interest in Harmac Pacific Inc. A
second Current Report on Form 8-K was filed on December 23, 1997 reporting
the mailing of a tender offer to purchase to the holders of the
outstanding shares of Harmac Pacific Inc.
16
<PAGE> 17
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Annual
Report
to
Shareholders
------------
<S> <C>
Report of Independent Public Accountants 17
Consolidated balance sheets at December 31, 1997 and 1996 18
Consolidated statements of income for each of the three years
in the period ended December 31, 1997 19
Consolidated statements of stockholders' equity for each of the
three years in the period ended December 31, 1997 20
Consolidated statements of cash flows for each
of the three years in the period ended December 31, 1997 21
Notes to consolidated financial statements 22-31
Supplementary information:
Quarterly financial information (unaudited) 32
</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 are
included in the Annual Report to Shareholders of Pope & Talbot, Inc. for the
year ended December 31, 1997. The financial information listed in the above
index has been incorporated by reference to the Company's Current Report on Form
8-K dated March 6, 1998, except for the supplementary quarterly financial
information (unaudited) which has been incorporated by reference to the
Company's 1997 Annual Report to Shareholders. With the exception of the items
referred to in Items 1, 6, 7 and 8, the 1997 Annual Report to Shareholders is
not to be deemed filed as part of this report.
17
<PAGE> 18
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report incorporated by reference in this Form 10-K into the Company's previously
filed Registration Statement No.'s 33-34996, 333-04223 and 33-64764 on Form S-8.
ARTHUR ANDERSEN LLP
Portland, Oregon
March 30, 1998
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Portland, State of Oregon, on this 30th day of March, 1998.
POPE & TALBOT, INC.
BY: \s\ Peter T. Pope
-------------------------------------
Peter T. Pope, Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Chairman of the Board and
\s\ Peter T. Pope Chief Executive Officer March 30, 1998
- ----------------------------------- -------------------------------- --------------
Peter T. Pope
\s\ Gordon P. Andrews Director March 30, 1998
- ----------------------------------- -------------------------------- --------------
Gordon P. Andrews
\s\ Hamilton W. Budge Director March 30, 1998
- ----------------------------------- -------------------------------- --------------
Hamilton W. Budge
\s\ Charles Crocker Director March 30, 1998
- ----------------------------------- -------------------------------- --------------
Charles Crocker
\s\ Michael Flannery President and Director March 30, 1998
- ----------------------------------- -------------------------------- --------------
Michael Flannery
\s\ Warren E. McCain Director March 30, 1998
- ----------------------------------- -------------------------------- --------------
Warren E. McCain
\s\ Robert Stevens Miller, Jr. Director March 30, 1998
- ----------------------------------- -------------------------------- --------------
Robert Stevens Miller, Jr.
\s\ Hugo G. L. Powell Director March 30, 1998
- ----------------------------------- -------------------------------- --------------
Hugo G. L. Powell
\s\ Brooks Walker, Jr. Director March 30, 1998
- ----------------------------------- -------------------------------- --------------
Brooks Walker, Jr.
Senior Vice President and
\s\ Robert J. Day Chief Financial Officer March 30, 1998
- ----------------------------------- -------------------------------- --------------
Robert J. Day
\s\ Robert L. Bluhm Financial Controller March 30, 1998
- ----------------------------------- -------------------------------- --------------
Robert L. Bluhm
</TABLE>
19
<PAGE> 1
EXHIBIT 10.9
[Certain information has been omitted herein
pursuant to a request for confidential
treatment pursuant to Rule 24b-2]
SECOND AMENDED AND RESTATED
PULP SALES SUPPLY CONTRACT
Between
GRAYS HARBOR PAPER, L.P.,
a Washington limited partnership,
successor by assignment to
Grays Harbor Industrial, Inc.,
a Washington corporation,
"Buyer"
and
POPE & TALBOT, INC.
a Delaware corporation
"Seller"
Dated: 12/17 , 1997
--------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Incorporation by Reference; Purchase and Sale; Quantity
and Quality ................................................... 2
2. Term .......................................................... 3
3. Price ......................................................... 3
4. Payment Terms ................................................. 4
4A. Credit ........................................................ 5
5. Security ...................................................... 5
6. Care of Collateral ............................................ 6
7. Specifications ................................................ 6
8. Warranty and Liability ........................................ 7
9. Relationship of Parties ....................................... 8
10. Costs and Attorney Fees ....................................... 8
10.1 No Suit or Action Filed .................................. 8
10.2 Arbitration or Mediation; Trial and Appeal ............... 8
10.3 Definitions .............................................. 9
11. Assignment .................................................... 9
12. Standards of Performance ...................................... 9
13. Additional Terms and Conditions ............................... 9
14. Entire Agreement .............................................. 9
15. Notice ........................................................ 9
16. Time of Essence ............................................... 10
</TABLE>
EXHIBIT A - MARKETING AGREEMENT
EXHIBIT B - SPECIFICATIONS
EXHIBIT C - ADDITIONAL TERMS AND CONDITIONS
<PAGE> 3
SECOND AMENDED AND RESTATED
PULP SALES SUPPLY CONTRACT
DATE: As of January 1, 1998
PARTIES: GRAYS HARBOR PAPER, L.P.,
a Washington limited partnership,
successor by assignment to
Grays Harbor Industrial, Inc.,
a Washington corporation
3105 Murphy
Hoquiam, WA 98550 ("Buyer")
Fax No. 206-532-1278
POPE & TALBOT, INC.
a Delaware corporation
1500 S.W. First Avenue
Portland, OR 97201 ("Seller")
Fax No. 503-220-2729
PREAMBLES:
A. Pursuant to agreement dated as of June 3, 1993 ("original supply
contract") as amended and restated in its entirety by agreement dated as of
September 28, 1994 ("amended and restated supply contract"), Seller agreed to
sell to Buyer and Buyer agreed to purchase from Seller substantially all of the
Pulp requirements for Buyer's uncoated free sheet paper mill in Hoquiam,
Washington ("Hoquiam mill"). As used herein, the term "Supply Contract" means
this Second Amended and Restated Pulp Sales Supply Contract.
B. (Confidential Treatment Requested)
C. Circumstances of the parties have changed as have their expectations
with respect to the pricing mechanism, volume and mix of Pulp to be sold and
purchased under the amended and restated supply contract as well as the duration
of the contract itself and the payment and security provisions after the
additional bonus price increase notes have been fully satisfied.
D. It is the intention and desire of the parties that the amended and
restated supply contract be further amended and restated in its entirety all as
more particularly set forth herein to reflect the parties' changed expectations.
As used herein the term "Supply Contract" means this Second Amended and Restated
Pulp Sales Supply Contract.
1 - SECOND AMENDED AND RESTATED PULP SALES SUPPLY CONTRACT
<PAGE> 4
AGREEMENTS:
1. Incorporation by Reference; Purchase and Sale; Quantity and Quality.
1.1 By this reference the Preambles are incorporated in and made
a part of this Supply Contract.
1.2 For the calendar year 1998, Seller agrees to sell and deliver
to Buyer and Buyer agrees to purchase and take from Seller 72,000 air dried
metric tons ("ADMT") of Halsey bleached Kraft baled pulp ("Pulp") of which at
least 36,000 ADMT shall be sawdust pulp ("Sawdust Pulp") and approximately
36,000 ADMT shall be softwood pulp ("Softwood Pulp"). Seller shall deliver Pulp
at approximately 275 ADMT per day.
1.3 Any year after 1998 for which the parties, pursuant to
Section 3.5 herein, agree in writing as to (1) an extension of the Supply
Contract, and (2) the price, volume and mix of Pulp to be sold and purchased
during such year is an "Extension Year." Any year after 1998 which is not an
Extension Year is a "Phase Down Year." During a Phase Down Year Seller agrees to
sell to Buyer and Buyer agrees to purchase from Seller 50,000 ADMT of Pulp of
which at least 25,000 ADMT shall be Sawdust Pulp and approximately 25,000 ADMT
shall be Softwood Pulp. Seller shall deliver Pulp at approximately 200 ADMT per
day.
1.4 Buyer may adjust tonnage from week to week to accommodate the
mill's production changes on a day-to-day basis, provided, however, that the mix
of Pulp purchased by Buyer hereunder shall remain substantially 50% Sawdust Pulp
and 50% Softwood Pulp. Seller reserves the right to provide Pulp in satisfaction
of its obligations under this Supply Contract either through its pulp
manufacturing facilities in Halsey, Oregon or from other sources, provided such
pulp meets the specification requirements or the functional equivalent thereof
of this Supply Contract.
1.5 If Seller's softwood fiber costs escalate disproportionately
to the increase in price for Softwood Pulp hereunder, at Seller's written
request the parties in good faith will negotiate adjustments to the volume, mix
and price of Softwood Pulp to be sold and purchased hereunder in an attempt to
ameliorate the adverse economic effect of such disproportionate escalation in
softwood fiber costs.
2 - SECOND AMENDED AND RESTATED PULP SALES SUPPLY CONTRACT
<PAGE> 5
2. Term.
2.1 Subject to earlier termination as provided herein, this
Agreement shall become effective as of January 1, 1998 and shall continue
through December 31, 1999 unless extended as herein provided.
2.2 Buyer will promptly notify Seller in writing of any material
modification or amendment of the marketing agreement ("Marketing Agreement"),
copy of which is attached hereto as Exhibit A between Buyer and Weyerhaeuser
Company ("Weyerhaeuser"), and of any election by Weyerhaeuser or by Buyer to
cancel or terminate the Marketing Agreement. Notwithstanding any other
provisions to the contrary herein, (a) in the event of any material modification
or amendment of the Marketing Agreement which Seller in good faith determines
will adversely affect Seller, Seller may terminate this Supply Contract upon
twelve (12) months written notice of termination to Buyer; and (b) in the event
of any cancellation or termination of the Marketing Agreement during the term of
this Supply Contract, Seller may terminate this Supply Contract as of the
termination of the Marketing Agreement by giving Buyer written notice of
termination no later than sixty (60) days after Seller's receipt of written
notice from Buyer that Buyer or Weyerhaeuser has elected to terminate the
Marketing Agreement.
3. Price.
3.1 The price of the Pulp purchased and sold under this Supply
Contract shall be a delivered price for Pulp to the Buyer or Buyer's agent
(including common carrier) at Seller's Halsey, Oregon facility. Buyer or Buyer's
agent shall have the authority to accept or reject the goods with the right of
inspection upon delivery at the Seller's Halsey, Oregon facility. Seller shall
arrange for and bear the cost of all freight and insurance in connection with
the transportation of the Pulp to Buyer's Hoquiam paper mill.
3.2 The price per ADMT for Sawdust Pulp sold and delivered in any
month during the first year of this Supply Contract shall be the price reported
in the publication Pulp & Paper Week for Southern mixed (U.S.) bleached hardwood
Kraft for such month, less the following adjustments: (Confidential Treatment
Requested)
3 - SECOND AMENDED AND RESTATED PULP SALES SUPPLY CONTRACT
<PAGE> 6
3.3 The price per ADMT for Softwood Pulp sold and delivered in
any month during the first year of this Supply Contract shall be (Confidential
Treatment Requested).
3.4 For any Phase Down Year the price per ADMT for Sawdust Pulp
and Softwood Pulp shall be the then prevailing market price to be determined by
the parties as a result of good faith negotiations.
3.5 Commencing no later than September 1, 1998 and September 1 of
any Extension Year, except as otherwise herein provided, the parties shall
review the pricing, payment terms, volume, mix and any other provisions of this
Supply Contract to determine whether the Supply Contract is meeting the parties'
expectations. If the parties reach agreement as to such modifications by October
31, 1998 or by October 31 of any succeeding Extension Year, as the case may be,
the modifications will become effective as of January 1, 1999 or January 1 of
such succeeding Extension Year. If such agreement is not reached by October 31,
1998 or by October 31 of any succeeding Extension Year, as the case may be, this
Supply Contract will terminate as of December 31, 1999 or as of December 31 of
any such succeeding Phase Down Year. During any Phase Down Year, the volume,
mix, pricing and payment terms shall be as otherwise provided herein for a Phase
Down Year.
4. Payment Terms.
4.1 As used herein the term "invoice month" means the calendar
month for which Seller has invoiced Buyer for Pulp sold and delivered during
such period. Seller will invoice Buyer weekly for Pulp delivered during the
week. Weekly invoices of Pulp will be based upon the price reported in the issue
of Pulp & Paper Week most recently published before the invoice and will be
adjusted at the end of the invoice month to reflect any increase or decrease in
the price reported in Pulp & Paper Week for the invoice month in which the Pulp
was sold and delivered. Payment will be due within fifty-five (55) days from
date of invoice. Any amount not paid within fifty-five (55) days from date of
invoice will bear interest at the rate per annum (360-day year) equal to one
percentage point above the Prime Rate from time to time published by the Wall
Street Journal or if the Wall Street Journal is not then being published, or if
a quotation of the Prime Rate is for any reason not available therein, then the
Prime Rate as published in another national financial reporting publication, as
selected by Seller. Interest will accrue from the fifty-fifth day after the date
of invoice until paid, and will be payable upon demand of the Seller.
4 - SECOND AMENDED AND RESTATED PULP SALES SUPPLY CONTRACT
<PAGE> 7
4.2 Buyer shall cause Weyerhaeuser to pay directly to Seller
fifty percent (50%) of the "Purchase Price" (as defined in the Marketing
Agreement) receivable by Buyer from Weyerhaeuser pursuant to the Marketing
Agreement. If Seller fails to receive full payment when due under this Supply
Contract, Seller shall immediately notify Buyer in writing and Buyer shall have
five (5) business days to make payment. If payment is not made by Buyer to
Seller within said five (5) day period, then Seller, at its option, may cease
delivery of Pulp to Buyer.
4A. Credit.
If at any time Buyer's financial responsibility becomes impaired
or unsatisfactory to Seller, based on Seller's reasonable judgment, Seller may
demand satisfactory proof of Buyer's financial responsibility or satisfactory
additional security for performance given by Buyer. Failing this, payment shall
be made in cash on delivery, otherwise Seller shall have the right to decline to
make further shipments or deliveries. Nothing in this clause shall affect the
obligation of the Buyer to pay for the Pulp contracted for.
5. Security.
5.1 Under the original supply contract and the indemnification
and security agreement executed concurrently therewith, and under the amended
and restated supply contract, Buyer granted to Seller security interests in
various assets. Contemporaneously with the execution of the amended and restated
supply contract, the parties entered into an "Amended and Restated Security
Agreement" which is an amendment and restatement of the indemnification and
security agreement. In the Amended and Restated Security Agreement, as the same
may be amended, the security interests granted in the original supply contract
and in the indemnification and security agreement are continued in full force
and effect and a security interest in certain additional collateral was granted
by Buyer to Seller as security for payment and performance of Buyer's
obligations hereunder as more fully specified therein. At Seller's request,
Buyer will execute such UCC financing statements and other instruments as Seller
and Seller's counsel consider appropriate to continue Seller's security interest
and to implement the provisions of this Section 5. Seller shall have and be
entitled to execute all rights and remedies available to a secured party under
the laws of the states of Washington and Oregon.
5.2 At Buyer's request, Seller will enter into an intercreditor
agreement with Buyer's lender(s) by the terms of which Seller will agree to
subordinate to such lender(s) Seller's security interest as to an undivided 50%
of Buyer's work in process, finished goods (including the UCFS paper produced
from the Pulp), proceeds from the sale thereof and accounts receivable, provided
that such lender(s) acknowledge the priority
5 - SECOND AMENDED AND RESTATED PULP SALES SUPPLY CONTRACT
<PAGE> 8
of Seller's security interest as to an undivided 50% of such collateral and
consent to the direct payment by Weyerhaeuser to Seller of 50% of the Purchase
Price receivable by Buyer from Weyerhaeuser as provided in this Section 5. The
form and content of the intercreditor agreement must be reasonably acceptable to
Seller and Seller's counsel.
6. Care of Collateral.
6.1 At all times subsequent to the delivery of the Pulp to Buyer
or Buyer's agent (including a common carrier) at Seller's Halsey, Oregon
facility, or elsewhere, title to and risk of loss as to the Pulp will remain in
Buyer, and Buyer at all times shall refrain from waste and shall exercise
reasonable care as to the stored Pulp. During storage, Buyer will (a) not
commingle the stored Pulp with other property of Buyer or others, (b) clearly
identify the storage area, (c) limit access to the storage area to only those
persons specifically authorized by Buyer and (d) provide adequate on-site
security to prevent theft and vandalism of the Pulp.
6.2 While Buyer is not in default under this Supply Contract,
Buyer may withdraw Pulp from storage for the exclusive purpose of converting
same into UCFS paper under this Supply Contract. Buyer shall not use or dispose
of the Pulp for any purpose other than to convert same into UCFS paper in
accordance with the terms of this Supply Contract.
6.3 In the event that production is reduced at Seller's Halsey
pulp mill due to causes beyond the control of Seller, Seller will allocate that
pulp which is produced at its Halsey pulp mill ratably among all Seller's
regular contractual pulp customers, including Buyer. Notwithstanding any other
provision of this Supply Contract, if Seller completely discontinues the
operation of its Halsey pulp facility, Seller will be relieved of any further
duty or obligation under this Supply Contract as of one year following Seller's
written notice to Buyer of such discontinuance. Seller has no plans to
discontinue operations of the Halsey pulp facility.
7. Specifications.
7.1 Pulp to be purchased and sold hereunder shall substantially
conform with the specifications attached hereto as Exhibit B and by this
reference made a part hereof. Any amendment or modification of the
specifications shall only become effective when Buyer and Seller agree in
writing to such amendment or modification.
7.2 Seller shall furnish Buyer, on a regular basis, with
information compiled by Seller at the Halsey pulp mill (including quality
reports and tests performed in the ordinary
6 - SECOND AMENDED AND RESTATED PULP SALES SUPPLY CONTRACT
<PAGE> 9
course of Seller's production of Pulp) to verify Seller's substantial compliance
with the specifications.
7.3 Seller and Buyer shall meet once per calendar quarter (more
often if needed) to review quality issues.
8. Warranty and Liability.
Seller warrants that Pulp sold hereunder conforms to the
specifications contained in this Supply Contract, that the Pulp does not
infringe any valid U.S. patent and that title is unencumbered. THERE ARE NO
WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING ANY IMPLIED WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. SPECIFICALLY, SELLER MAKES
NO WARRANTY THAT PULP SUPPLIED BY SELLER HEREUNDER WHICH MEETS THE
SPECIFICATIONS OF THIS SUPPLY CONTRACT WILL BE SUITABLE FOR THE PRODUCTION OF
UCFS PAPER AT BUYER'S HOQUIAM PAPER MILL. BUYER ENTERS INTO THIS SUPPLY CONTRACT
HAVING CONDUCTED OR HAVING CAUSED TO BE CONDUCTED SUCH TEST RUNS UTILIZING
SELLER'S PULP AS BUYER HAS CONSIDERED APPROPRIATE. UNDER NO CIRCUMSTANCE SHALL
SELLER HAVE ANY OBLIGATION UNDER THIS SUPPLY CONTRACT OR OTHERWISE EXCEPT TO
PROVIDE BUYER WITH PULP WHICH MEETS THE SPECIFICATIONS OF THIS SUPPLY CONTRACT.
SELLER SHALL NOT BE LIABLE FOR ANY CONSEQUENTIAL, INCONSEQUENTIAL, INCIDENTAL OR
SPECIAL DAMAGES OF ANY KIND WHATSOEVER. BUYER'S SOLE REMEDY AND SELLER'S SOLE
LIABILITY FOR DEFECTIVE PULP SHALL BE REPLACEMENT OR CREDIT. IN NO EVENT SHALL
SELLER'S LIABILITY EXCEED THE PURCHASE PRICE OF DEFECTIVE PULP.
BUYER SHALL HAVE NO REQUIREMENT OR LIABILITY TO TAKE OR PAY FOR
ANY CERTAIN QUANTITY OF PULP OTHER THAN AS PROVIDED IN SECTIONS 1.2, 1.3 AND 3.5
HEREIN. IN NO EVENT SHALL BUYER BE LIABLE TO SELLER FOR ANY CONSEQUENTIAL,
INCONSEQUENTIAL, INCIDENTAL, SPECIAL, DIRECT OR INDIRECT LOSS, HARM, CLAIMS OR
DEMANDS ARISING OUT OF OR RELATED TO BUYER'S FAILURE OR INABILITY TO PURCHASE
PULP, INCLUDING WITHOUT LIMITATION ANY CURTAILMENT OR SUSPENSION OF PRODUCTION
OF UCFS PAPER, WHETHER OR NOT DUE TO THE FAULT OF BUYER OR OTHERS.
HOWEVER, IF DURING ANY 30-DAY PERIOD WHICH BEGINS AFTER THE
EARLIER OF (A) THE DATE AS OF WHICH BUYER COMMENCED OPERATION OF TWO PAPER
MACHINES AT THE HOQUIAM PAPER MILL, OR (B) MARCH 31, 1994, BUYER (EXCEPT FOR
FORCE MAJEURE AS HEREIN DEFINED) SHOULD FAIL TO TAKE OR PAY FOR SEVENTY-FIVE
PERCENT (75%) OF THE VOLUMES OF PULP SELLER IS OBLIGATED TO DELIVER UNDER THIS
SUPPLY CONTRACT, SELLER SHALL NOTIFY BUYER IN WRITING OF SUCH SHORTFALL. IF
WITHIN FIVE (5) BUSINESS DAYS OF ITS RECEIPT OF SUCH NOTICE BUYER HAS NOT
RESUMED TAKING PULP AT THE RATE OF AT LEAST SEVENTY-FIVE PERCENT (75%) OF THE
MAXIMUM VOLUMES SELLER IS OBLIGATED TO DELIVER UNDER THIS SUPPLY CONTRACT OR HAS
NOT MADE OTHER SUITABLE ARRANGEMENTS WITH SELLER FOR THE DISPOSITION OF THE
SHORTFALL, SELLER MAY TAKE SUCH ACTION AS SELLER CONSIDERS APPROPRIATE TO
DISPOSE OF THE SHORTFALL. BUYER ACKNOWLEDGES THAT
7 - SECOND AMENDED AND RESTATED PULP SALES SUPPLY CONTRACT
<PAGE> 10
SUCH ACTION MAY INVOLVE SELLER'S COMMITMENT ("THIRD PARTY COMMITMENT") TO SELL
TO THIRD PARTIES A PORTION OF THE VOLUME OF PULP SELLER OTHERWISE WOULD BE
OBLIGATED TO SELL TO BUYER UNDER THIS SUPPLY CONTRACT. IF IN CONNECTION WITH THE
DISPOSITION OF A SHORTFALL SELLER MAKES THIRD PARTY COMMITMENTS, AT BUYER'S
REQUEST SELLER WILL MAKE REASONABLE GOOD FAITH EFFORTS TO RESUME DELIVERIES TO
BUYER OF PULP AT PRE-SHORTFALL LEVELS UPON THE EXPIRATION OF SUCH THIRD PARTY
COMMITMENT IF BUYER IS THEN PURCHASING THE MAXIMUM TONNAGE SELLER IS THEN
OBLIGATED TO SELL UNDER THIS SUPPLY CONTRACT AND IF BUYER IS NOT OTHERWISE IN
DEFAULT HEREUNDER.
9. Relationship of Parties.
Nothing in this Supply Contract or in any related dealings
between Seller and Buyer shall be construed or interpreted to mean that the
relationship between the parties is other than the relationship of seller and
buyer, or secured party and debtor, as the came may be, as more particularly set
forth in this Supply Contract. The parties specifically disclaim any intention
that their relationship under this Supply Contract be interpreted or construed
as a partnership or joint venture relationship.
10. Costs and Attorney Fees.
10.1 No Suit or Action Filed. If this Supply Contract is placed
in the hands of an attorney due to a default in the payment or performance of
any of its terms, the defaulting party shall pay, immediately upon demand, the
other party's reasonable attorney fees, collection costs, even though no suit or
action is filed thereon, and any other fees or expenses incurred by the
nondefaulting party.
10.2 Arbitration or Mediation; Trial and Appeal. If any
arbitration, mediation, or other proceeding is brought in lieu of litigation, or
if suit or action is instituted to enforce or interpret any of the terms of this
Supply Contract, or if suit or action is instituted in a Bankruptcy Court for a
United States District Court to enforce or interpret any of the terms of this
Supply Contract, to seek relief from an automatic stay, to obtain adequate
protection, or to otherwise assert the interest of Seller in a bankruptcy
proceeding, the party not prevailing shall pay the prevailing party's costs and
disbursements, the fees and expenses of expert witnesses in determining
reasonable attorney fees, and such sums as the court may determine to be
reasonable for the prevailing party's attorney fees connected with the trial and
any appeal and by petition for review thereof.
10.3 Definitions. For purposes of this Supply Contract, the term
attorney fees includes all charges of the prevailing party's attorneys and their
staff (including without limitation legal assistants, paralegals, word
processing, and
8 - SECOND AMENDED AND RESTATED PULP SALES SUPPLY CONTRACT
<PAGE> 11
other support personnel) and any post-petition fees in a bankruptcy court. For
purposes of this Supply Contract, the term fees and expenses includes but is not
limited to long distance telephone charges; expenses of facsimile transmission;
expenses for postage (including costs of registered or certified mail and return
receipts), express mail, or parcel delivery; mileage and all deposition charges,
including but not limited to court reporter's charges, appearance fees, and all
costs of transcription; costs incurred in searching records; and the cost of
title reports or surveyor's reports.
11. Assignment.
This Supply Contract shall be binding on and shall inure to the
benefit of the respective successors of the parties, but shall not be assigned
without the prior written consent of the parties which shall not be unreasonably
withheld.
12. Standards of Performance.
Both parties agree that their performance pursuant to this Supply
Contract shall be judged by standards of good faith and commercial
reasonableness. Both parties agree to take or refrain from such action and to
execute such documents as are reasonably necessary to implement this Supply
Contract and to carry out its intent and purposes and to avoid impairing or
interfering with the reasonable expectations of the parties.
13. Additional Terms and Conditions.
Exhibit C attached hereto listing Additional Terms and Conditions
is incorporated and made a part of this Agreement.
14. Entire Agreement.
This Supply Contract together with the attached exhibits
constitutes the entire understanding and agreement of the parties hereto, and
may only be modified or amended by an agreement in writing signed by the
parties.
15. Notice.
Any notice required or permitted to be given or made by the terms
of this Supply Contract shall be deemed to have been duly given or made (a) if
personally delivered to Buyer or Seller, as the case may be, at its address
first above written, or (b) as of and when transmitted by facsimile transmission
to Buyer or Seller, as the case may be, at its address first above written, or
(c) as of and when deposited in the United states mail in a sealed envelope,
postage prepaid, by registered or certified mail, return receipt requested,
addressed to Buyer or Seller, as the case may be, at its address first above
written. Any party may change the address to which notice shall be
9 - SECOND AMENDED AND RESTATED PULP SALES SUPPLY CONTRACT
<PAGE> 12
delivered or sent by notice to the other parties transmitted as herein provided.
16. Time of Essence.
Time is of the essence hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date first above written.
GRAYS HARBOR PAPER, L.P.,
a Washington limited partnership
By: Grays Harbor Industrial, Inc.,
a Washington corporation, its
general partner
By: /s/ WILLIAM D. QUIGG
-------------------------------
Title: President
----------------------------
POPE & TALBOT, INC.
By: /s/ WILLIAM G. FROHNMAYER
-------------------------------
W.G. Frohnmayer
Vice President/General
Manager-Fiber Products
Division
10 - SECOND AMENDED AND RESTATED PULP SALES SUPPLY CONTRACT
<PAGE> 13
EXHIBIT A
MARKETING AGREEMENT
(13 pages)
<PAGE> 14
EXHIBIT A
MARKETING AGREEMENT
THIS AGREEMENT is entered into the date indicated on the last page of
this Agreement by and between GRAYS HARBOR INDUSTRIAL, INC., a Washington
corporation, or its permitted assigns as set forth in paragraph 11.5 ("Seller"),
and WEYERHAEUSER COMPANY, a Washington corporation ("Buyer").
RECITALS
I. The Seller is contemplating the purchase of a paper mill (the
"Hoquiam Paper Mill") located in Hoquiam, Washington, from its current owners
and operators, Grays Harbor Paper Company and ITT/Rayonier, and if purchased,
Seller intends to operate the Hoquiam Paper Mill and produce uncoated free sheet
paper ("UCFS").
II. Prior to acquiring and operating the Hoquiam Paper Mill, however,
Seller desires to enter into a Marketing Agreement with Buyer whereby Buyer
would market and sell the entire output of UCFS paper which Seller will produce
from the Hoquiam Paper Mill (the "UCFS Paper").
THEREFORE, Buyer and Seller, in the event Seller is successful in
acquiring the Hoquiam Paper Mill and all necessary support facilities, systems
and machines and commences operation, and in consideration of the mutual
agreements, undertakings and promises contained in this Agreement, do now agree
and commit with and to one another as follows:
1. Purchase and Sale; Quantity and Quality.
1.1 Entire Output. For the term of this Agreement, Seller agrees
to sell and Buyer agrees to purchase and take from Seller the entire output of
UCFS Paper meeting Buyer's specifications and standards from the Hoquiam Paper
Mill, estimated to be
<PAGE> 15
approximately 135,000 short tons per year when the mill is operating at full
capacity. UCFS Paper which does not meet Buyer's specifications and standards
will not be sold by Seller (neither to Buyer nor any third party), but will be
used by Buyer as waste furnish in the paper making process at the Hoquiam Paper
Mill. Notwithstanding the foregoing, during the start-up of the Hoquiam Paper
Mill, Buyer may, at its option, purchase start-up tonnage which, while not
meeting Buyer's specifications and standards, is deemed by Buyer to be of
sufficient quality for Buyer to sell as off-grade paper in the market place.
1.2 UCFS Paper Delivery. The UCFS Paper will be packaged in the
manner reasonably required by Buyer, for loading, as specified by Buyer, from
Seller's docks by Seller's personnel directly onto trucks or into containers and
then onto trucks. Buyer shall identify to Seller the truck carriers with whom
Buyer has made arrangements to transport UCFS Paper from the Hoquiam Paper Mill,
and Seller shall schedule specific pick-ups with such identified truck carriers.
The UCFS Paper and its packaging material will bear Buyer's brand and marks or
other brands and marks as specified by Buyer, and Seller will, at Seller's
expense, procure all necessary packaging and labelling materials meeting Buyer's
specifications.
1.3 Delivery Schedule. Seller and Buyer shall reasonably agree on
a schedule for the pickup of UCFS Paper by Buyer from Seller. All risk of loss
as to the UCFS Paper passes to Buyer at the moment it is loaded onto the trucks
of Buyer's identified truck carrier. Sales of the UCFS Paper to Buyer are FOB
the Hoquiam Paper Mill.
1.4 UCFS Paper to Be Manufactured. Buyer shall have the right to
direct the Seller as to the quantity, quality, grade, and packaging (including
labeling, wrapping, and roll or sheet form) of
2
<PAGE> 16
specific UCFS Paper to be manufactured, with reasonable notice, within the
existing capabilities of the Hoquiam Paper Mill, and the raw materials on hand
or available.
2. Marketing of UCFS Paper.
2.1 Capacity. Seller shall reasonably use its best efforts to
manufacture sufficient UCFS Paper to meet Buyer's specific or anticipated needs,
and to enable Buyer to fulfill its contractual commitments to its customers, but
seller shall not be obliged to expand its operations beyond the facilities
currently contemplated for the Hoquiam Paper Mill (which is a capacity of
135,000 short tons per year of UCFS Paper). The parties agree to use their best
efforts to coordinate production and delivery to accommodate Buyer's market
demands and Seller's production capabilities and efficiencies.
2.2 Marketing. Subject to Section 9.1, Buyer will be responsible
for and will reasonably use its best efforts, through Buyer's marketing
organization, experience, and market research, to sell and market the entire
output of UCFS Paper meeting Buyer's specifications and standards of the Hoquiam
Paper Mill. It is understood that Buyer will be marketing the UCFS Paper to the
markets traditionally served by Buyer in western North America and the Pacific
Rim.
2.3 Trademarks. It is understood that (a) all trademarks, trade
names and watermarks heretofore or hereafter used, applied for, registered or
licensed by Buyer shall be deemed to be the property of Buyer; and (b) all
trademarks, trade names and watermarks heretofore or hereafter used, applied
for, registered or licensed by Seller shall belong to Seller.
3
<PAGE> 17
2.4 Technical Assistance During the Term of This Agreement.
2.4.1 Buyer, at no charge to Seller, will (i) schedule
production of the Hoquiam Paper Mill and arrange transportation from the Mill of
product purchased by Buyer (but such scheduling and arranging shall not include
detailed machine scheduling or shipping assembly functions), and (ii) subject to
mutual agreement of Buyer and Seller on the nature, scope and amount of service,
provide market research and technical assistance; and
2.4.2 Subject to mutual agreement of Buyer and Seller on
the nature, scope and amount of services and Buyer's charge for services, Buyer
will perform product development work with respect to products of the Hoquiam
Paper Mill.
3. Term.
3.1 The initial term of this Agreement shall begin on the first
day (Monday) of the first week during which Seller makes delivery of UCFS Paper
to Buyer at the Hoquiam Paper Mill pursuant to paragraphs 1.2 and 1.3, including
delivery of start-up tonnage purchased by Buyer (such first day of such first
week being hereinafter referred to as the "Start Date"). The initial term shall
end three (3) years from the Start Date. For example, if the first delivery of
UCFS Paper to Buyer occurred on Wednesday, October 20, 1993, the Start Date
would be Monday, October 18, 1993, and the ending date of the initial term would
be October 17, 1996. On each anniversary of the Start Date, the term of this
Agreement shall extend one year, unless either party has given written notice to
the other party not less than twenty-five (25) months prior to the then current
ending date of the term that the Agreement will terminate on such then current
ending date.
3.2 Notwithstanding the foregoing,
4
<PAGE> 18
3.2.1 In the event Seller has not closed its purchase of
the Hoquiam Paper Mill by September 30, 1993, this Agreement shall automatically
terminate on September 30, 1993 and be of no further force and effect; and
3.2.2 In the event Seller has not commenced production at
the Hoquiam Paper Mill of commercial quantities of UCFS Paper meeting Buyer's
specifications by January 4, 1994, Buyer may terminate this Agreement by written
notice to Seller given not later than January 31, 1994.
4. Pricing and Payment.
4.1 The purchase price for UCFS Paper purchased and sold
hereunder (the "Purchase Price") shall be the Net Price (as defined below) less
3.5%.
4.2 "Net Price" shall mean the gross sales price as invoiced
("Invoice Amount") by Buyer to Buyer's customer for the UCFS Paper, less
freight, discounts, rebates, prompt payment discounts, adjustments from returns
and allowances, duties, insurance, and mutually agreed upon warehousing costs.
4.3 For each one week period during the term hereof, Buyer shall
pay the Purchase Price for UCFS Paper invoiced by Buyer to Buyer's customers
during such one week period, and such payment shall be made not later than three
weeks following the end of such one week period. By way of example, if the one
week period were March 7, 1994 to March 13, 1994, Buyer would pay the Purchase
Price of UCFS Paper invoiced by Buyer to Buyer's customers during that one week
period, and such payment would be due not later than April 3, 1994. Buyer's
payment shall be accompanied by a statement showing the aggregate of Invoice
Amounts for the one week period, the aggregate deductions by type for such
aggregate Invoice Amounts to arrive at the aggregate Net Price, and the 3.5%
deduction to
5
<PAGE> 19
arrive at the aggregate Purchase Price paid. Payment of the Purchase Price is
not dependent upon or subject to Buyer's collection of Invoice Amounts from
Buyer's customers for the UCFS Paper. Notwithstanding the foregoing, it is
contemplated by the parties that Buyer will have received a purchase order or
similar order for sale of paper delivered to Buyer prior to delivery of such to
Buyer. In the event that this is not the case, Buyer shall advise Seller and
Seller's obligation to deliver will be subject to mutual agreement by the
parties. Seller agrees to maintain stock inventories of finished UCFS Paper in
amounts to be mutually agreed upon by the parties.
4.4 Seller directs and Buyer agrees that the Purchase Price due
Seller hereunder shall be paid by Buyer as follows: (i) fifty percent (50%) of
the Purchase Price shall be paid by Buyer to Seller and (ii) fifty percent (50%)
shall be paid directly by Buyer to Seller's pulp supplier, Pope and Talbot, at
such address as Pope and Talbot from time to time shall direct, by check payable
solely to Pope and Talbot. Buyer's willingness to split payment of the Purchase
Price as directed by Seller shall not give Pope and Talbot any rights under this
Agreement; however, Buyer does acknowledge that Seller has granted to Pope and
Talbot a security interest in its accounts receivables, including its
receivables from Buyer under this Agreement. Except as otherwise provided
herein, Pope and Talbot shall have no right to give any instructions, directions
or otherwise to Buyer.
5. Costs of Marketing, Delivery, Insurance and Related Expenses;
Manufacturing Costs; Audit.
5.1 Buyer agrees to use its reasonable best efforts to keep its
costs and charges which are deductions from the Invoice Amount as low as
reasonably possible. Seller agrees to use its reasonable best efforts to keep
its managerial, manufacturing,
6
<PAGE> 20
operating, maintenance, and other costs of the Hoquiam Paper Mill as low as
reasonably possible.
5.2 Buyer agrees to use its reasonable best efforts, on Buyer's
sale of the UCFS Paper, to obtain the highest price reasonably possible
consistent with then current market conditions.
5.3 Subject to Section 9.1, Buyer agrees to not discriminate in
its marketing, sale, distribution and pricing policies with respect to similar
products from its Longview Mill and the Hoquiam Paper Mill. However, it is
understood that it may be necessary in times of market decline for Buyer to
accept lower prices for product produced at the Hoquiam Paper Mill in order to
keep the mill in operation.
5.4 Seller and Buyer shall reasonably agree on and implement
audit and accounting procedures to adequately track, confirm, display and
exchange information and data on all costs and revenues associated with sale of
UCFS Paper, including Invoice Amounts, Purchase Price and any other relevant
invoice and expense figures. Buyer, however, shall not be obligated to provide
Seller with data on specific transactions, and any disclosure by Buyer to Seller
shall be limited to aggregated data which does not reveal individual sales
transactions of Buyer. Any audit by Seller of Buyer's records shall be conducted
by an independent accountant at reasonable times and on reasonable notice, shall
be limited to Buyer's records relevant to purchases and payments hereunder, and
such independent accountant shall not reveal or disclose to Seller information
of Buyer on individual sales transactions of Buyer.
6. Limitations to Seller's Obligations. Seller's obligations under this
Agreement are subject to and limited by the following:
7
<PAGE> 21
6.1 Suspension of Operations. Seller shall have the right to
suspend or curtail manufacturing operations at the Hoquiam Paper Mill for UCFS
Paper in the event that the Seller is not able to receive from Buyer sufficient
revenue to provide a commercially reasonable and consistent financial return to
Seller for its sales of UCFS Paper to Buyer. Such suspension or curtailment
would only be possible after reasonable notice from Seller to Buyer and in any
event notice of not less than 60 days. Seller shall have the right to
immediately cancel, suspend or curtail production, with as much notice as
possible to Buyer, in the event Seller, through no fault of Seller, is unable to
obtain raw material.
7. Sales of Product to Others. Seller shall have the right to
manufacture and sell UCFS Paper to persons or entities other than Buyer, but
only if:
7.1 Buyer has given notice of its intention to terminate this
Agreement and less than twelve months remain in the effective term of this
Agreement; provided, however, Seller shall give Buyer not less than six months
notice of Seller's intention to reduce sales to Buyer and sell to others during
such final twelve month period, such notice shall specify the amount of
reduction of sales to Buyer (which reduction shall not be greater than 50% of
the output of the Hoquiam Paper Mill), and Buyer's purchase obligations shall be
reduced by the amount of the reduction specified by Seller in its notice to
Seller;
7.2 Buyer is in material breach of its obligations set forth in
this Agreement;
7.3 Buyer has curtailed or suspended its purchases pursuant to
Section 9.1 herein.
8
<PAGE> 22
In no event will Seller use Buyer's trademarks, trade names or
watermarks on or in connection with UCFS Paper sold to other than Buyer without
Buyer's consent.
8. Breach. Seller and Buyer shall each have the right, at their option,
to immediately terminate or suspend the performance of their obligations under
this Agreement if the other party is in material breach or default of its
obligations in this Agreement. The parties shall not be in material breach or
default pursuant to this Agreement unless, with regard to a monetary default,
one party shall not have cured the monetary default within twenty (20) days
after notice. As to non-monetary defaults, one party shall not be in default if
it cures the default within thirty (30) days after notice, provided that if more
than thirty (30) days are reasonably required to cure the default that no right
to terminate or suspend shall exist so long as the party is reasonably
prosecuting a cure to completion.
9. Limitations to Buyer's Obligations. Buyer's obligations under this
Agreement are subject to and limited by the following:
9.1 Suspension of Purchases. Buyer shall have the right to
suspend or curtail purchases of UCFS Paper from the Hoquiam Paper Mill in the
event Buyer is unable to sell all of the output of the Hoquiam Paper Mill, and
Buyer shall have no obligation to suspend or curtail operations at Buyer's
Longview or other mills. Such suspension or curtailment will be with as much
notice to Seller as possible, and Buyer shall give Seller at least a sixty (60)
day written alert of declining market conditions which may necessitate a
suspension or curtailment and at least seven (7) days written notice of
suspension or curtailment. At the time of executing this Agreement, Buyer does
not anticipate any reason why it will not be able to purchase all of the output
of UCFS Paper during the term of this Agreement. For approximately the last ten
9
<PAGE> 23
years, Buyer has not taken market downtime at its North American UCFS mills, and
does not anticipate that it would be necessary to suspend or significantly
curtail purchases from Seller; however, Buyer cannot give assurances that
curtailment or suspension will not occur.
10. Warranty and Liability. SELLER WARRANTS THAT UCFS PAPER SOLD
HEREUNDER WILL CONFORM TO WEYERHAEUSER'S SPECIFICATIONS AND STANDARDS AND WILL
NOT INFRINGE ANY VALID U.S. PATENT. BUYER IS SOLELY RESPONSIBLE FOR DETERMINING
THE SUITABILITY OF UCFS PAPER PURCHASED HEREUNDER FOR ANY PARTICULAR USE.
10.1 In the event UCFS Paper fails to conform to this warranty,
Seller, at Buyer's option, will provide replacement paper conforming to the
warranty (delivered, freight prepaid by Seller), or refund the purchase price
(plus freight costs incurred by Buyer). Buyer, at Buyer's option, may (i) return
nonconforming paper to the Hoquiam Paper Mill at Seller's expense (where such
returned paper will be used as waste furnish in the paper making process at the
Hoquiam Paper Mill), or (ii) dispose of the non-conforming paper in the field.
In the case of such disposal, if Seller has replaced the nonconforming paper or
refunded the purchase price, Buyer will pay to Seller the amount received by
Buyer on disposal less costs of disposal and less 3.5%. Seller shall further be
liable to Buyer for costs incurred and payments made by Buyer in connection with
resolving claims, in accordance with Buyer's customary claims procedures, of
Buyer's customers relating to non-conforming paper.
EXCEPT AS PROVIDED ABOVE, IN NO EVENT SHALL SELLER BE LIABLE TO BUYER
FOR ANY CONSEQUENTIAL, INCIDENTAL, SPECIAL, DIRECT OR INDIRECT LOSS, HARM,
CLAIMS OR DEMANDS ARISING OUT OF OR RELATED TO SELLER'S FAILURE OR INABILITY TO
DELIVER UCFS PAPER, INCLUDING
10
<PAGE> 24
WITHOUT LIMITATION ANY CURTAILMENT OR SUSPENSION OF PRODUCTION, WHETHER OR NOT
DUE TO THE FAULT OF SELLER OR OTHERS.
11. General Agreement Provisions. All of the respective rights and
obligations of the parties to this Agreement are subject to the following
provisions:
11.1 Force Majeure. For all purposes of this Agreement, the
expression "Force Majeure" includes any Act of God, war, mobilization, strike,
lockout, drought, flood, total or partial fire, obstruction of navigation by
ice, or loss, damage or detention at sea, acts of governmental agencies, or
other contingency or cause beyond the control of the Seller or Buyer. The Buyer
or the Seller, as the case may be, may suspend performance under this Agreement
pending Force Majeure, neither party being responsible to the other party for
any damage resulting from such suspension. The Buyer or the Seller, as the case
may be, shall give prompt notice to the other party of any Force Majeure which
may affect performance under this Agreement.
During any period of Force Majeure, the party whose performance
is not excused or suspended pending Force Majeure may sell or buy, as the case
may be, UCFS Paper to third parties and not be in breach of this Agreement.
If Force Majeure should extend for longer than 90 consecutive
days, then the party whose performance hereunder is not excused or suspended by
Force Majeure may terminate this Agreement and the parties' respective rights,
duties and obligations hereunder by giving written notice to the other party of
its election to terminate.
11.2 Choice of Law. The rights and obligations of the parties
arising out of or related to this Agreement shall be
11
<PAGE> 25
governed by and construed in accordance with the laws of the State of
Washington.
11.3 Attorneys' Fees. In any lawsuit arising out of or related to
this Agreement where the interests or positions are adverse, the substantially
prevailing party shall be entitled to an award of its reasonable attorney's fees
and costs.
11.4 Standards of Performance. Both parties agree that their
performance pursuant to this Agreement shall be judged by standards of good
faith and commercial reasonableness. Both parties agree to take or refrain from
such action and to execute such documents as are reasonably necessary to
implement this Agreement and to carry out its intent and purposes and to avoid
impairing or interfering with the reasonable expectations of the parties.
11.5 Assignment. This Agreement shall be binding on and shall
inure to the benefit of the respective successors of the parties, but shall not
be assigned without the prior written consent of the parties which shall not be
unreasonably withheld; provided that notwithstanding the foregoing, Seller may
assign this Agreement to a limited partnership or other entity which may be
formed for the purpose of acquiring the Hoquiam Paper Mill, provided William D.
Quigg or a company controlled by him acts as its general partner, or in the case
of a corporation, acts as its controlling shareholder.
11.6 Notices. Any notices required or permitted to be given
hereunder shall be in writing and hand delivered, mailed by first class mail
(postage prepaid), or sent by fax (with telephone verification of receipt) as
follows:
12
<PAGE> 26
to Seller: Grays Harbor Industrial, Inc.
Attn: William D. Quigg
Grays Harbor Industrial, Inc.
803 - 23rd Street
Hoquiam, WA 98550
Fax No.: 1-800-537-5435
Verify No.: 206-532-9600
to Buyer: Weyerhaeuser Company
Attn: John Begley
P.O. Box 739
Longview, WA 98632
Fax No.: 206-636-6559
Verify No.: 206-636-6500
11.7 Final Agreement. This Agreement is the final agreement
between the parties with respect to the subject matter hereof, superseding and
merging all prior writings and communications. This Agreement may be modified or
amended only in a writing signed by both parties.
DATED this 24th day of May, 1993.
GRAYS HARBOR INDUSTRIAL, INC. WEYERHAEUSER COMPANY
By /s/ William D. Quigg By /s/ Robert F. Meyer
-------------------------- ------------------------------
Its President Its VP Fine Paper
---------------------- ---------------------------
13
<PAGE> 27
EXHIBIT B
SPECIFICATIONS
(2 pages)
<PAGE> 28
EXHIBIT B
SPECIFICATIONS
WHITE GOLD SHEETED PULP GRADE 312
BLEACHED SAWDUST SOFTWOOD KRAFT
TEMPORARY
MAY 1993
SPECIES DOUGLAS FIR
This bleached softwood sawdust kraft performs well in applications for
printing papers. Its sawdust content produces a much shorter fiber than
conventional softwood kraft, making it ideal for use in paper furnishes to
improve formation, sheet density, and printing surfaces; refining improves the
pulp's tensile strength without much loss in tear strength.
White Gold 312 is press dried allowing quick and complete repulping.
Future supply will include dried sheeted pulp which will require some additional
refining to develop the strength characteristics.
<TABLE>
<CAPTION>
PRODUCT CHARACTERISTICS
TYPICAL MINIMUM MAXIMUM
-------- -------- -------
<S> <C> <C> <C>
Bale Weight, Pounds 3,400 3,300 3,450
Bale Size 80x38x40 N/A N/A
Air Dry, Percent 50 N/A N/A
ISO Brightness 88 84.5 N/A
TAPPI Total Dirt and
Shive Count, PPM 5 0 10
</TABLE>
<TABLE>
<CAPTION>
TYPICAL PULP PHYSICAL PROPERTIES
<S> <C> <C> <C>
Freeness CSF 640 550 400
TAPPI Burst Factor
gf/cm2 / g/m2 25 33 38
TAPPI Tear Factor
100gf.m2/g 80 75 70
Breaking Length km 4.0 5.0 6.0
Tensile gf/ln 6,000 8,000 9,500
</TABLE>
Exhibit B
1 of 2
<PAGE> 29
WHITE GOLD GRADE 112
BLEACHED SOFTWOOD KRAFT
MAY 1993
SPECIES DOUGLAS FIR
This Douglas Fir kraft pulp has excellent initial tear strength and
develops good tensile strength with refining.
White Gold 112 is press dried, allowing quick and complete repulping.
Future supply will include dried sheeted pulp which will require some additional
refining to develop peak strength characteristics.
<TABLE>
<CAPTION>
PRODUCT CHARACTERISTICS
TYPICAL MINIMUM MAXIMUM
---------- ------- -------
<S> <C> <C> <C>
Bale Weight, Pounds 3,400 3,300 3,450
Bale Size 80x37.5x38 N/A N/A
Air Dry, Percent 50 N/A N/A
ISO Brightness 86 84.5 N/A
TAPPI Total Dirt and
Shive Count, PPM 3 0 5
</TABLE>
<TABLE>
<CAPTION>
TYPICAL PULP PHYSICAL PROPERTIES
<S> <C> <C> <C>
Freeness CSF 740 550 400
TAPPI Burst Factor
gf/cm2 / g/m2 27 55 60
TAPPI Tear Factor
100gf.m2/g 200 120 100
Breaking Length km 3.5 7.0 8.0
Tensile gf/ln 5,500 11,000 12,000
</TABLE>
Pope and Talbot - Halsey, Oregon U.S.A.
Exhibit B
2 of 2
<PAGE> 30
EXHIBIT C
ADDITIONAL TERMS AND CONDITIONS
(2 pages)
<PAGE> 31
EXHIBIT C
ADDITIONAL TERMS AND CONDITIONS
1. TESTS: Buyer shall not dispute the quality of any Pulp delivered to
Buyer hereunder, unless the results (when averaged) of tests performed
by Buyer with respect to a representative sampling of the bales of Pulp
shipped in the truckload which included such delivered Pulp show that
the Pulp tested does not meet the specifications received in this Supply
Contract.
2. CLAIMS: All claims of every nature, including but not limited to the
quality, quantity, or condition of the Pulp and the time, place or
manner of delivery, must be made in writing or by telegram to Seller
within thirty (30) days from the date of delivery at Buyer's mill. The
Buyer shall make payment when due, subject to final adjustment according
to the results of retesting or arbitration.
In no event shall any claim exceed the price for the quantity of Pulp
which is established to be inferior in quality or to be improperly
delivered. Neither party shall be liable for any indirect, special, or
consequential damages resulting from any breach hereof.
3. TAX: The amount of any federal, state, or municipal sales or excise tax
imposed and payable or accruing on or by reason of this Supply Contract
shall be added to the price and paid in full without discount by the
Buyer.
4. FORCE MAJEURE: For all purposes of this Supply Contract the expression
"Force Majeure" includes any Act of God, war, mobilization, strike,
lockout, drought, flood, total or partial fire, obstruction of
navigation by ice, or loss, damage or detention at sea, acts of
governmental agencies, or other contingency or cause beyond the control
of the Seller which prevents the manufacture and/or shipment of Pulp, or
beyond the control of the Buyer which prevents the manufacture or
delivery of Pulp or paper. The Buyer or the Seller, as the case may be,
may suspend performance under this Supply Contract pending Force
Majeure, neither party being responsible to the other party for any
damage resulting from such suspension. Pulp lost or damaged in transit
need not be replaced by Seller nor accepted by Buyer.
The Buyer or the Seller, as the case may be, shall give prompt notice to
the other party of any Force Majeure which may, according to previous
section of this clause, affect the performance under this contract, and
also which such Force Majeure ceases, and as soon as practicable, notify
to what extent it will necessitate a suspension. Shipments in transit
from Seller's mill must be accepted by the Buyer.
1- Exhibit C
<PAGE> 32
In case Seller's stock of Pulp is totally or partially destroyed, and/or
damaged by fire, the Seller is entitled to cancel such quantity which as
a consequence cannot be delivered.
During any period of Force Majeure, the party whose performance is not
excused or suspended pending Force Majeure may sell or buy, an the case
may be, Pulp to third parties and not be in breach of this Supply
Contract. If Force Majeure should extend for longer than 90 consecutive
days, then the party whose performance hereunder is not excused or
suspended by Force Majeure may terminate this Supply Contract and the
parties' respective rights, duties and obligations hereunder by giving
written notice to the other party of its election to terminate this
Supply Contract.
5. UNEXCUSED FAILURE TO PERFORM: If Buyer refuses to accept delivery of
Pulp under this Supply Contract, except for reasons excused by this
Supply Contract, the Pulp cannot afterwards be claimed by the Buyer but
may be sold by the Seller for the Buyer's account. That is, Buyer shall
remain obligated to Seller for any deficiency in the price realized by
Seller from sales of pulp to third parties below the price which would
have been payable by Buyer for the Pulp hereunder. If Seller refuses to
make delivery of Pulp under this Supply Contract, except for reasons
excused by this Supply Contract, Buyer, after fifteen (15) days' written
notice to the Seller during which time Seller may remedy such refusal,
may purchase equivalent Pulp from other sources for the Seller's
account. That is, Seller shall be obligated to Buyer for any increase in
price paid by Buyer for Pulp purchased from third parties over the price
which would have been payable to Seller for the pulp hereunder.
6. WAIVER: No right of any party shall be deemed waived by any failure to
exercise a right in any prior instance. All valid waivers must be in
writing.
7. TERMINATION. Termination of this Supply Contract as provided herein,
other than for Force Majeure as permitted above, shall not release Buyer
from the obligation to accept and pay for all Pulp delivered hereunder
prior to the effective date of termination nor release the Seller from
the obligation to deliver Pulp to Buyer which had previously been
ordered and to which Buyer is entitled under this Agreement.
8. APPLICABLE LAW. This Agreement shall be governed in all respects by the
law of the State of Washington.
9. USE: Buyer is responsible for determining the suitability of Pulp
purchased hereunder for any particular use.
2- Exhibit C
<PAGE> 1
EXHIBIT 11.1
POPE & TALBOT, INC. AND SUBSIDIARIES
Statement Showing Calculation of Average
Common Shares Outstanding and Earnings
Per Average Common Share
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Weighted average number of
common shares outstanding 13,419,000 13,363,779 13,363,520
Application of the "treasury stock"
method to the stock option plan 42,257 13,924 3,903
------------ ------------ ------------
Total common and common
equivalent shares,
assuming full dilution 13,461,452 13,377,703 13,367,423
============ ============ ============
Net income (loss) $ 10,020,000 $ 3,909,000 $(24,838,000)
Add: interest on convertible
debentures, net of
applicable income taxes -- -- --
------------ ------------ ------------
Net income (loss), assuming
full dilution $ 10,020,000 $ 3,909,000 $(24,838,000)
============ ============ ============
Net income (loss) per common share,
assuming dilution $ .75 $ .29 $ (1.86)
============ ============ ============
</TABLE>
The computation of basic net income per common share is not included because the
computation can be clearly determined from the material contained in this
report.
<PAGE> 1
EXHIBIT 13.1
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Pope & Talbot, Inc. and Subsidiaries
Years ended December 31
(Dollars in thousands except per share) 1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATIONS
Revenues $ 329,899 $ 313,845 $ 417,396 $ 397,923 $ 353,759
Depreciation and amortization 30,056 31,440 45,066 39,061 29,303
Interest expense, net 5,995 6,035 9,480 7,167 6,356
Income (loss) from continuing operations 4,432 (1,329) 4,955 26,589 17,940
Income (loss) from discontinued tissue operations 5,588 2,128 (18,751) (10,637) (7,170)
Income (loss) from discontinued diaper operations -- 3,110 (11,042) (55) 10,805
Cumulative effect of accounting changes -- -- -- -- (562)
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 10,020 $ 3,909 $ (24,838) $ 15,897 $ 21,013
============ ============ ============ ============ ============
Effective tax rate 44% 52% (32)% 40% 41%
PER COMMON SHARE
Income (loss) from continuing operations - basic $ .33 $ (.10) $ .37 $ 2.03 $ 1.54
Income (loss) from continuing operations - diluted .33 (.10) .37 1.99 1.42
Income (loss) from discontinued operations - basic .42 .39 (2.23) (.82) .31
Income (loss) from discontinued operations - diluted .42 .39 (2.23) (.79) .30
Effect of accounting changes - basic -- -- -- -- (.05)
Effect of accounting changes - diluted -- -- -- -- (.04)
Cash dividends .76 .76 .76 .76 .76
Stockholders' equity 13.31 13.71 14.19 17.08 15.73
YEAR-END COMMON SHARES OUTSTANDING,
NET OF TREASURY STOCK 13,481,441 13,363,779 13,363,779 13,362,729 11,715,798
FINANCIAL POSITION (at December 31)
Current assets $ 210,950 $ 164,502 $ 207,252 $ 223,050 $ 169,897
Properties, net 108,165 201,666 225,760 282,827 269,200
Deferred income tax assets, net 24,843 21,871 16,531 -- --
Other assets 31,809 19,890 22,684 33,507 16,724
------------ ------------ ------------ ------------ ------------
$ 375,767 $ 407,929 $ 472,227 $ 539,384 $ 455,821
============ ============ ============ ============ ============
Current liabilities $ 84,835 $ 87,067 $ 113,495 $ 103,576 $ 101,162
Long-term obligations 22,765 29,608 30,526 28,777 27,803
Long-term debt 88,705 108,026 138,514 177,471 134,599
Deferred income tax liabilities, net -- -- -- 1,365 7,936
Stockholders' equity 179,462 183,228 189,692 228,195 184,321
------------ ------------ ------------ ------------ ------------
$ 375,767 $ 407,929 $ 472,227 $ 539,384 $ 455,821
============ ============ ============ ============ ============
CASH FLOW
Operating activities:
Net income (loss) $ 10,020 $ 3,909 $ (24,838) $ 15,897 $ 21,013
Depreciation and amortization 30,056 31,440 45,066 39,061 29,303
Other (gains) losses, net -- (1,852) -- (13,845) --
Gain on disposal of discontinued
diaper operations -- (5,604) -- -- --
Cumulative effect of accounting changes -- -- -- -- 562
Working capital and other (15,108) (16,479) 29,519 (51,686) (13,990)
------------ ------------ ------------ ------------ ------------
Cash provided by (used for)
operating activities 24,968 11,414 49,747 (10,573) 36,888
Investing activities:
Capital expenditures (13,084) (7,180) (27,777) (55,582) (82,585)
Purchase of equity securities (13,760) -- -- -- --
Proceeds from disposal of
discontinued diaper operations -- 50,500 -- -- --
Proceeds from sale of Paragon common stock -- 14,902 -- -- --
Proceeds from sale of other properties 378 2,359 1,004 722 1,156
------------ ------------ ------------ ------------ ------------
Cash provided by (used for)
investing activities (26,466) 60,581 (26,773) (54,860) (81,429)
Financing activities:
Net increase (decrease) in borrowings 11,312 (43,457) (16,428) 91,899 51,017
Partnership transaction tax settlement costs (1,846) -- (4,884) -- --
Change in restricted bond funds -- -- 15,458 (15,458) --
Cash dividends (10,197) (10,156) (10,156) (9,855) (8,871)
Other 1,932 -- 15 1,926 1,819
------------ ------------ ------------ ------------ ------------
Cash provided by (used for)
financing activities 1,201 (53,613) (15,995) 68,512 43,965
------------ ------------ ------------ ------------ ------------
Increase (decrease) in cash and cash equivalents $ (297) $ 18,382 $ 6,979 $ 3,079 $ (576)
============ ============ ============ ============ ============
</TABLE>
-10-
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
POPE & TALBOT, INC. AND SUBSIDIARIES
OVERVIEW
Favorable lumber markets produced strong wood products earnings which
combined with solid tissue operating profits to offset a loss in the Company's
pulp business resulting in a significant earnings improvement in 1997 from 1996.
Total 1997 net income was $10.0 million, or $.75 per share, compared to the 1996
net income of $3.9 million, or $.29 per share, and 1995's net loss of $24.8
million, or $1.86 per share. In January 1998, the Company announced it had
reached a definitive agreement to sell its tissue business to PLAINWELL, INC.
(Plainwell). The Company's tissue business has been reflected as a discontinued
operation in the 1997 financial statements. In the first quarter of 1996, the
Company completed the sale of its disposable diaper business to Paragon Trade
Brands, Inc. (Paragon) and reported an after tax gain on this sale of $3.1
million, or $.23 per share. This transaction was reported as a gain on disposal
of discontinued operations in 1996. Pope & Talbot's income from continuing
operations was $4.4 million, or $.33 per share, in 1997 compared to the 1996
loss of $1.3 million, or $.10 per share, and 1995's income of $5.0 million, or
$.37 per share. The Company's discontinued tissue operations reflected income of
$5.6 million, or $.42 per share, in 1997 and $2.1 million, or $.16 per share, in
1996 after incurring a loss of $18.8 million, or $1.40 per share, in 1995. In
1995, the discontinued diaper operations incurred a loss of $11.0 million, or
$.83 per share.
As was true in 1996, during 1997 a strong housing market, and to a
lesser extent, lumber market uncertainties surrounding an implemented lumber
quota arrangement between the United States and Canada combined to increase the
Company's average lumber prices by 10 percent in 1997 following a 17 percent
increase in 1996 from 1995. This strong lumber market more than offset the
continued impact of poor residual chip prices. Residual chip prices fell
dramatically during 1996 and the ongoing weakness in the pulp markets during
1997 resulted in further chip price reductions. The Company's pulp business
incurred a loss in 1997 due to the continued weakness in world pulp markets
which began at the end of 1995. The 1997 loss in the pulp business was not as
large as 1996 due mainly to higher volumes and lower residual chip and sawdust
costs. The Company's profits in its discontinued tissue business in 1997
reflected higher shipments and improved operating efficiencies which more than
offset sales price reductions.
Revenues in 1997 increased to $329.9 million from $313.8 million (after
restatement for discontinued tissue operations) in 1996. Higher lumber prices
and volumes, combined with greater pulp shipments, more than offset lower pulp
and wood chip sales prices resulting in the increased 1997 revenues.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of internally generated cash is operating
income before depreciation and the principal external source of cash is debt
financing. In 1997, the Company generated $40.1 million from operating income
before depreciation and amortization. During the year, total long-term debt
declined $19.3 million while short-term debt increased $11.8 million. The
reduction in long-term debt related mainly to the assumption by Plainwell upon
closing of the tissue business sale of the $18.8 million City of Eau Claire note
payable (this note payable balance was reflected in the discontinued tissue
operations net assets held for sale line in the year-end 1997 Consolidated
Balance Sheet). Including the $18.8 million City of Eau Claire note payable, the
Company's year-end 1997 total long-term debt to total capitalization ratio of 37
percent was unchanged from the end of 1996. The current ratio at December 31,
1997 was 2.5 to 1 compared to 1.9 to 1 at the end of 1996. Included in the
Company's current assets at December 31, 1997, were the discontinued tissue
operations net assets held for sale totaling $67.9 million. Excluding this
balance, the Company's current ratio at year-end 1997 was 1.7 to 1.
As previously discussed, in January 1998, the Company reached an
agreement to sell its tissue business to Plainwell and this transaction closed
in early March of 1998. The transaction included essentially all of the assets
and liabilities of the tissue business, including the assumption by Plainwell of
the $18.8 million City of Eau Claire note payable and the business's $7.1
million postretirement benefit obligation. Total cash consideration for the sale
was $121 million, subject to post-closing adjustments, if any. The Company will
use the cash received, less expenses, to pursue strategic acquisitions and pay
down bank debt. See Note 9 of Notes to Consolidated Financial Statements for
further discussion of the sale of the tissue business.
Cash generated from operating activities was $25.0 million in 1997.
Operating income before non-cash charges for depreciation and amortization
generated cash of $40.1 million in 1997. Accounts receivables increased $5.6
million due primarily to higher pulp prices and volumes in the fourth quarter of
1997 as compared to the same period in 1996 combined with extended credit terms
to a major domestic pulp customer and export pulp customers. Inventories
increased $2.6 million due mainly to log inventory buildup resulting from log
purchase
- 11 -
<PAGE> 3
opportunities in Canada. Net deferred income tax assets increased $2.9 million
resulting in a reconciling item in cash generated from operations as the income
tax benefit recognized was not realized as cash.
Cash provided by operations, combined with additional short-term
borrowings on the Company's revolving-credit agreement, was used to pay
dividends of $10.2 million, finance capital expenditures of $13.1 million and
invest in $13.8 million of Harmac Pacific Inc. (Harmac) common stock. Scheduled
long-term debt repayments were $0.5 million in 1997 and are anticipated to
remain at $0.5 million in 1998. Additionally, as a result of the tissue business
sale, the Company's $18.8 million City of Eau Claire note payable was assumed by
Plainwell upon closing.
In December 1997, the Company announced its tender offer to acquire a
controlling interest in Harmac's outstanding common shares for cash. Harmac
common shares are publicly traded on the Toronto, Vancouver and Montreal stock
exchanges. On February 2, 1998, the Company acquired 6.8 million shares of
Harmac common stock for $77.8 million Canadian dollars (approximately $53.4
million U.S. dollars). This February 1998 acquisition, combined with the
Company's previous Harmac purchases, resulted in the Company holding an
approximately 53 percent controlling ownership interest in Harmac. The payment
for the Harmac shares in February 1998 was made from existing cash and cash
equivalent balances, supplemented with borrowings of approximately $20 million
under the Company's revolving-credit agreement.
Capital spending increased to $13.1 million in 1997 from the low 1996
capital spending level of $7.2 million and compared to 1995 spending of $27.8
million. During 1993 and 1994, the Company spent record amounts ($82.6 million
and $55.6 million, respectively) upgrading and modernizing its facilities and
completing necessary pollution control projects. With the projects completed in
1993 and 1994, the only significant project during 1995 was the completion of a
project to improve the quality of the recycled pulp at the Eau Claire tissue
facility. This project was started in 1994 and financed almost entirely from the
$18.8 million Eau Claire solid waste disposal revenue bond proceeds. At the end
of 1994, $15.5 million remained available under this bond and was held in escrow
for the completion of the project in 1995. All other 1995 capital expenditures,
and all of the 1996 and 1997 capital expenditures, were undertaken for
relatively small business sustaining and profit improving projects. The Company
anticipates that approximately $4 million will be required during 1998 to
complete projects approved by year-end 1997 with respect to the Company's
continuing operations. Additionally, in early 1998, the Company approved a $9
million waste wood burning energy system project at the Castlegar sawmill.
Spending on this Castlegar project is scheduled to be completed during 1998.
Also, as discussed further in the Environmental Matters section of this
Management's Discussion and Analysis, in November 1997, the Environmental
Protection Agency (EPA) approved certain regulations known as the "cluster
rules." As a result of these "cluster rules," the Company estimates it will have
to spend approximately $30 to $35 million on capital projects at its Halsey pulp
mill between now and the end of 2000 to comply. Other than the 1998 Castlegar
project spending and the required spending over the next three years necessary
to comply with the "cluster rules," the Company's facilities are suitable for
existing operations. Additional anticipated capital projects during 1998 will be
primarily to sustain existing operations with a limited number of relatively
small, high-return projects. Projected 1998 capital spending, which will likely
be higher than 1997 capital spending, but lower than 1995 spending, will be
funded with internally generated cash, amounts received from the sale of the
discontinued tissue business and supplemented, if necessary, with borrowings on
the Company's line of credit.
At December 31, 1997, the Company had available $75 million under its
existing revolving-credit agreement, of which $41.8 million was outstanding at
year-end. In the third quarter of 1996, the Company borrowed $30.0 million on
its revolving-credit agreement which it then paid to Pope & Talbot, Ltd. (LTD),
a wholly-owned Canadian subsidiary, to satisfy a portion of its intercompany
account. Since that payment to LTD, the Company has made additional payments to
satisfy intercompany account obligations. Substantially all amounts included in
the December 31, 1997, cash and cash equivalents balance were held by LTD.
Additionally, the investment in Harmac at year-end 1997 was held by LTD. As
discussed previously, these LTD cash and cash equivalent balances were used in
February 1998 for the acquisition of a controlling interest in Harmac common
stock.
The impact of fluctuations in foreign currency exchange rates has not
had, and is not expected to have, a significant effect on the Company's
liquidity or results of operations.
RESULTS OF OPERATIONS
WOOD PRODUCTS
The Company's wood products business comprised 75 percent of 1997
consolidated revenues and generated an operating profit of $24.9 million. These
1997 earnings compare to 1996 and 1995 profits of $22.9 million and $2.7
million, respectively.
Wood Products revenues were $248.3 million in 1997 compared to $231.7
million and $265.6 million in 1996 and 1995, respectively. The 1997 revenue
increase relative to
- 12 -
<PAGE> 4
1996 reflected higher lumber volumes and prices which more than offset lower
residual wood chip prices. Decreased sales in 1996 compared to 1995 resulted
from lower lumber and chip volumes, combined with significantly lower chip
prices to more than offset improved lumber prices.
During 1995, although housing starts of 1.35 million were relatively
good, a strong pulp market pushed residual wood chip prices to record levels
resulting in increased lumber production which caused downward pressure on
lumber pricing. While difficult winter weather conditions across the United
States limited upward movement of lumber sales prices early in 1996, a strong
housing market helped lumber prices climb steadily over the balance of the year.
Housing starts in 1996 were 1.47 million. Average lumber prices were 17 percent
higher in 1996 than those realized in 1995. During 1997, average lumber prices
improved 10 percent over 1996 levels reflecting continued strength in the lumber
markets (1997 housing starts were 1.48 million). Lumber prices during 1997
peaked in the second quarter and prices realized in December 1997 were nearly 20
percent below the second quarter peak. Early 1998 lumber prices have remained at
these lower levels. In both 1996 and 1997, lumber prices were also favorably
influenced by uncertainties surrounding the lumber quota agreement implemented
between the United States and Canada during 1996 (described below). While lumber
prices improved the past two years, sawmill residual wood chip markets in the
Pacific Northwest and British Columbia fell dramatically after the end of 1995
reflecting weak pulp markets. The residual chip market moved up steadily during
1995 to peak levels in the last half of 1995; however, as pulp markets fell,
chip prices dropped sharply from their peaks during early 1996. The Company's
1996 average chip prices were down nearly 50 percent from those obtained in
1995, and 1997 average chip prices were 20 percent lower than 1996.
Lumber shipments of 546 million board feet in 1997 were up slightly from
1996 shipments of 535 million board feet and compared to 1995 lumber sales
volumes of 624 million board feet. The 14 percent volume reduction from 1995 to
1996 related mainly to the permanent closure of the Company's Port Gamble
sawmill in 1995. The Company's 1997 lumber production was essentially at
capacity.
During 1995, the Port Gamble sawmill was either shut down or operating
on a reduced one-shift basis due to a lack of acceptably priced timber in
relation to end-product prices. Environmental pressures restricted timber
harvest levels in the Port Gamble operating region. A strong log export market
further reduced domestic log supplies in this region. These reduced log
supplies, combined with relatively weak lumber markets, produced losses at Port
Gamble in 1995. In the fourth quarter of 1995, with no prospect of resolution to
the timber supply situation, the Company permanently closed the Port Gamble
sawmill. The mill, which had an annual capacity of 150 million board feet,
produced 53 million board feet in 1995. The sawmill equipment was dismantled and
sold in the first quarter of 1996 resulting in a pretax gain of $2.1 million.
Approximately 75 percent of the Company's current lumber capacity is
located in British Columbia, Canada. During 1996, U.S. and Canadian trade
negotiators reached an agreement establishing volume quotas on Canadian softwood
lumber shipments to the U.S. Based on this agreement, Canadian lumber producers
are assigned volume quotas specifying on a company by company basis the lumber
volumes which may be shipped to the U.S. tariff-free and those volumes subject
to a $51 per thousand board foot tariff. Shipments in excess of these specified
volume quotas are subject to a $102 per thousand board foot tariff. March 31,
1997, represented the end of the first fiscal year lumber quota period related
to this agreement and the Company shipped volumes in excess of its specified
quotas during the period. In June 1997, the Company was informed of its fiscal
year 1997/1998 quota volumes which applied retroactively to April 1. The
Company's updated tariff-free volume allocation for the current fiscal year
represents an 11.4 million board foot reduction from the 1996/1997 fiscal year
allocations. Partially offsetting this tariff-free allocation reduction was a
2.6 million board foot increase in the Company's volume allocation subject to
the lower $51 per thousand board foot tariff. The Company believes its volume
allocations were determined consistently with other British Columbia lumber
producers. During 1997, the Company expensed tariff charges of about $1.9
million related to shipments from the Company's Canadian sawmills into the U.S.
Because of weakened lumber markets in the last half of 1997, coupled with the
implications of this tariff agreement, the Company took a two-week shutdown at
its Midway, British Columbia sawmill in October 1997 and also extended holiday
downtime at all of its Canadian sawmills in December 1997. The Company will
continually evaluate the need for temporary shutdowns at its Canadian sawmills
in the future taking into consideration the dynamics of the lumber markets and
the impact of the tariff agreement.
During 1994, the provincial government of British Columbia's Commission
of Resources and Environment (CORE) began reviewing the future use of the forest
resources in the province. This review was completed in 1996, and in 1997, the
related Kootenay Boundary Land Use Plan was approved. This land use plan set
aside several areas for new parks. Although no assurances can be given,
management believes that in the near term, timber supplies for the Company's
Canadian sawmills should be stable. The Company is improving its reforestation
practices and developing strategies to sustain and enhance timber supplies in
the long-term in order to mitigate the adverse effects on timber supplies of the
land being set aside.
- 13 -
<PAGE> 5
The British Columbia government has also implemented its Forest
Practices Code (Code). This Code sets strict standards for logging activities
and reforestation responsibilities. Requirements under this Code have been
phased in beginning in 1996 with full implementation to be in place during 1998.
Due to the additional logging and reforestation requirements of this Code, the
Company's logging costs increased in 1996 and 1997 and will likely increase
further during 1998. The Code could also ultimately have a long-term unfavorable
impact on the Company's timber harvest volumes.
PULP PRODUCTS
The Company's market pulp business represented 25 percent of 1997
revenues. During 1997, the business incurred a loss of $2.6 million, an
improvement of $8.2 million over the $10.8 million loss incurred in 1996. During
1995, following four years of operating losses, the pulp business generated an
operating profit of $24.2 million.
Pulp revenues of $81.6 million in 1997 compared to sales of $82.1
million in 1996 and 1995 sales of $151.8 million. The flat pulp revenues from
1996 to 1997 reflected higher sales volumes which offset lower pulp pricing. The
dramatic 46 percent sales reduction from 1995 to 1996 resulted from
significantly lower pulp prices and decreased brokered wood chip sales caused by
lower chip prices.
Pulp pricing reflected weak pulp markets in 1996 and 1997. Following
several years of poor pulp markets, pulp pricing improved in 1994 and continued
moving upward until it peaked in the 1995 fourth quarter. In late 1995 and early
1996, pulp pricing rapidly declined and prices have remained relatively poor
throughout the second half of 1996 and all of 1997. Prices in 1996 averaged 35
percent lower than those realized in 1995 and prices averaged 7 percent lower in
1997 than 1996 prices. During 1997, the Company sold approximately 50 percent of
its pulp production into domestic and foreign markets at pricing based on market
prices for various grades of pulp. The remaining 50 percent was sold to the
Grays Harbor Paper Company (Grays Harbor), with pricing tied to a formula based
on white paper prices. During 1995 and 1996, about 60 percent of the Company's
pulp was sold to Grays Harbor. At the beginning of 1995, the Company's Grays
Harbor pulp pricing was below that of market pulp as white paper prices did not
increase as rapidly as market pulp during the 1994/1995 period. These white
paper prices increased during 1995 so that by the fourth quarter of 1995 the
pricing obtained for pulp sold under this pricing arrangement was higher than
comparable market pulp prices. In 1996, pulp pricing under the Grays Harbor
contract fell, but not as rapidly as the declines in market pulp. Market and
Grays Harbor pulp pricing was fairly comparable during 1997. In late 1997, the
Company and Grays Harbor modified their pulp sales supply contract. The modified
contract, which became effective January 1, 1998, changes the pulp pricing
formula so that pulp prices are based on Southern mixed (U.S.) bleached hardwood
kraft prices rather than white paper prices. Given the current pulp market
weakness, the Company expects the new Grays Harbor pricing formula will result
in lower Grays Harbor pulp sales prices in early 1998, but the Company expects
that over the longer-term, pulp pricing under the new formula will be comparable
to that under the previous pricing formula.
The Company's pulp shipments of 180,000 metric tons in 1997 were 12
percent higher than 1996 shipments of 161,000 metric tons and compared to 1995
shipments of 174,000 metric tons. In 1995, the Halsey pulp mill operated at
essentially full capacity except for a one-week shutdown at the end of the year
to align production with demand. During 1996, the pulp mill operated at 90
percent of capacity due to a two-week market induced shutdown in the first
quarter and a brief shutdown in the third quarter caused by an equipment
failure. The Halsey mill operated at near capacity levels throughout 1997.
Over the past several years, environmental restrictions on timber
harvests in the Pacific Northwest have resulted in reduced chip availability.
During 1995, this supply restriction, combined with the strong pulp market,
resulted in record-high residual chip prices. At the end of 1995, and continuing
in 1996 and 1997, reduced demand for chips resulting from the weakened pulp
market caused chip prices to fall significantly. Overall, chip costs were about
40 percent lower in 1997 than 1996 following a 35 percent reduction in chip
costs from 1995 to 1996. In order to maintain an adequate supply of wood fiber
to the mill, the Company began in 1994 to use sawdust as a raw material for a
portion of its pulp production. During 1997, 59 percent of pulp production came
from sawdust. Sawdust has historically been in greater supply and less expensive
than the wood chips normally used as the primary raw material for the pulp mill.
Sawdust costs were 35 percent lower in 1997 than 1996 and costs in 1996 were
down 5 percent from 1995.
DISCONTINUED OPERATIONS
On January 22, 1998, the Company entered into a definitive agreement to
sell the assets of its tissue business to Plainwell for cash consideration of
$121 million and the assumption by Plainwell of tissue business liabilities. The
liabilities assumed by Plainwell include the $18.8 million City of Eau Claire
note payable and the business's $1.7 million post-retirement benefit obligation.
This sale closed on March 6, 1998. The amount of cash received is subject to
post-closing adjustments, if any. The Company anticipates recognizing a gain of
approximately $2 per share on the sale of these discontinued tissue operations.
After incurring a record loss in 1995, the Company's tissue business
generated profits the past two years. The large loss in 1995 was primarily the
result of a seven-month
- 14 -
<PAGE> 6
labor strike at the Company's Ransom tissue mill, and to a lesser extent, high
wastepaper costs. As industry over capacity conditions created in the late
1980's and early 1990's stabilized in 1995, combined with the impact of high
1995 industry-wide raw material costs, tissue pricing began to improve. Tissue
pricing peaked at the end of 1995 and has slowly fallen since. Average tissue
prices in 1996 were 11 percent better than 1995; however, 1997 average prices
were 5 percent lower than 1996. Tissue shipments of 97,000 tons in 1997 compared
to 90,000 tons in 1996 and 1995 shipments of 81,000. The volume increases over
the past two years were due mainly to the impact of the 1995 Ransom labor
strike. The primary raw material component for the Company's tissue is
wastepaper, for which pricing generally follows world pulp market trends. With
the combination of strong 1995 pulp markets and shortages of certain wastepaper
grades, wastepaper pricing was pushed to record levels in 1995. By the end of
1995, wastepaper prices began to decline consistent with world pulp markets.
This late 1995 price decline accelerated through the first half of 1996 when
prices then leveled. The Company's 1996 wastepaper costs were about half those
incurred in 1995, and 1997 average prices were essentially unchanged from 1996,
although prices in the second half of 1997 were higher than the first half. The
1995 Ransom labor strike also had a significant impact on operating
efficiencies. During the strike year, costs were very high due to inefficiencies
caused by production disruption. During 1996, particularly early in the year,
efficiencies improved, but were not fully implemented due to operational
start-up challenges. During 1997, the mill reflected the benefit of full
production, as well as labor efficiencies, resulting from the employee benefit
reductions and work rule changes negotiated into the new Ransom labor contract.
In mid 1997, the Company successfully completed labor negotiations at the Eau
Claire tissue facilities which also resulted in improved operating efficiencies
during the last half of 1997. The Company's tissue business operating results
for 1997, 1996 and 1995 are reflected in the Consolidated Statements of Income
as income (loss) from discontinued tissue operations.
In December 1995, the Company entered into a definitive agreement to
sell its disposable diaper business to Paragon. The sale was completed on
February 8, 1996. Results of the disposable diaper operations for 1995 are
reflected in the Consolidated Statements of Income as loss from discontinued
diaper operations. In 1996, the Company reported an after-tax gain on the
disposal of the discontinued disposable diaper business of $3.1 million, or $.23
per share.
See Note 9 of Notes to Consolidated Financial Statements for further
discussion of the discontinued tissue and disposable diaper businesses.
OTHER MATTERS
ENVIRONMENTAL
Pope & Talbot, as well as its competitors, is subject to extensive
regulation by various federal, state, provincial and local agencies concerning
compliance with environmental control statutes and regulations. These
regulations impose limitations on the discharge of materials into the
environment, as well as require the Company to obtain and operate in compliance
with the conditions of permits and other governmental authorizations.
In November 1997, the Environmental Protection Agency (EPA) published
regulations establishing standards and limitations for non-combustion sources
under the Clean Air Act and revised regulations under the Clean Water Act. These
regulations are collectively referred to as the "cluster rules" and have been
the subject of extensive discussions between the pulp and paper industry and the
EPA. The Company's primary exposure to these regulations relates to the
Company's Halsey pulp mill and, to a lesser degree, the Company's two tissue
mills. Anticipated compliance capital requirements at Halsey are estimated at
$30 to $35 million with compliance required by the end of 2000.
In 1992, the Company was contacted by the local governmental owner of a
vacant industrial site in Oregon on which the Company previously conducted
business. The owner informed the Company that the site has been identified as
one containing creosote and coal tar, and that it plans to undertake a voluntary
cleanup effort of the site. The owner has requested that the Company participate
in the cost of the cleanup. The Company is currently participating in the
investigation stage of this site with remediation and monitoring to occur over
several years, likely beginning in late 1999 or 2000. Based on preliminary
findings, the Company has estimated the likely cost of remediation and
monitoring to be in the range of $5 to $12 million. The ultimate cost to the
Company for site remediation and monitoring cannot be predicted with certainty
due to the unknown magnitude of the contamination, the varying costs of
alternative cleanup methods, the cleanup time frame possibilities, the evolving
nature of remediation technologies and governmental regulations and the
inability to determine the Company's share of multi-party obligations or the
extent to which contributions will be available from other parties. The Company
has established reserves for environmental remediation and monitoring related to
this site in an amount it believes is probable and reasonably estimated. The
Company has not assumed it will bear the entire cost of remediation to the
exclusion of other known potentially responsible parties (PRPs) who may be
jointly and severally liable. The ability of other PRPs to participate has been
taken into account based generally
-15-
<PAGE> 7
on the parties' financial condition and probable contribution. Anticipated
recoveries from insurance carriers have been recorded at such time as their
receipt is deemed probable and amounts are reasonably estimated.
NET DEFERRED TAX ASSET
The net deferred tax asset at December 31, 1997, totaled $30.1 million.
The temporary differences that give rise to deferred income taxes are shown in
Note 8 to the Consolidated Financial Statements. The primary deferred tax asset
relates to net operating loss carryforwards for U.S. federal tax purposes. At
December 31, 1997, the Company had available $86.8 million of such U.S. federal
tax loss carryforwards related to U.S. federal tax losses in 1994, 1995, 1996
and 1997. Of these U.S. federal tax carryforwards, $30.2 million expire in 2009,
$48.9 million expire in 2010, $1.1 million expire in 2011 and $6.6 million
expire in 2012. In order to utilize the U.S. net operating loss carryforwards,
the Company will have to generate $86.8 million of U.S. taxable income from 1998
through 2012, or an average of about $5.8 million per year. As of December 31,
1997, the Company also has Alternative Minimum Tax (AMT) carryforwards of $1.1
million to be applied against regular tax. The AMT credits can be carried
forward indefinitely.
Management believes that the Company will have sufficient future U.S.
taxable income to make it more likely than not that the U.S. net operating loss
deferred tax asset will be realized. In making this assessment, management
considered the net U.S. tax losses generated in 1994 and 1995 as aberrations.
The negative results in 1994 and 1995 included significant losses at the Port
Gamble sawmill, which was permanently closed in 1995, and the discontinued
disposable diaper business which incurred a large loss in 1995. Also, in the
Company's discontinued tissue business, poor industry pricing through 1994,
record high wastepaper costs during 1995 and a seven-month labor strike at the
Company's Ransom tissue mill combined to result in large tissue losses during
the 1994 and 1995 periods. During 1996 and 1997, the U.S. taxable losses
incurred related to the losses suffered in the Company's pulp operations caused
by a world-wide pulp market slump.
Additionally, the Company will recognize a significant U.S. taxable gain
resulting from the sale of the discontinued tissue business in the first quarter
of 1998. There are also certain tax planning strategies that could be employed
to utilize a net operating loss carryforward that would otherwise expire if
income generated by ordinary and recurring operations were not sufficient. Some
of the strategies that would be most feasible are sale and leaseback of
facilities and change in the method of tax depreciation.
YEAR 2000 COMPLIANCE
Pope & Talbot, like all other companies using computers and
microprocessors, is faced with the task of addressing the Year 2000 problem over
the next two years. The Year 2000 issue exists because many computer systems and
applications currently use two-digit fields to designate a year. This can lead
to incorrect results when computer software performs arithmetic operations,
comparisons or data field sorting involving years later than 1999. The Company
has embarked on a comprehensive approach to identify where this problem may
occur in its information technology, manufacturing and facilities systems. The
Company plans to modify or replace its affected systems in a manner that will
minimize any detrimental effects on operations. While it is not currently
possible to quantify the overall cost of this required work, the Company
presently believes that the ultimate costs resulting from these efforts will not
have a material effect on the Company's financial condition, liquidity or
results of operations.
OTHER CONTINGENCIES
On December 31, 1997, the Company filed a claim in the United States
District Court for the Western District of Washington in Seattle against the
Procter & Gamble Company (P&G) alleging anti-trust violations and seeking a
declaration of non-infringement and invalidity of certain P&G disposable baby
diaper patents. This claim was filed in response to assertions made by P&G to
the Company that certain disposable diaper products produced by the Company's
discontinued disposable diaper operations infringed two of P&G's inner-leg
gather patents. P&G has indicated it believes the Company is obligated to it
with respect to the sale of diapers which allegedly used the patents. The
Company has asserted in its legal action that it did not infringe any valid
claims of the P&G patents and also that P&G and another diaper supplier have
taken actions to prevent fair competition among sellers of disposable diapers.
In an infringement action against Paragon based on the same diaper patents, P&G
received a favorable judgement in the State of Delaware in December 1997. Early
in 1998, Paragon appealed the Court's decision. If P&G proceeds against the
Company with legal action related to its patent infringement assertions and is
substantially successful in such action, the outcome could have a material
adverse effect on the Company's results of operations, liquidity and financial
position. The Company intends to vigorously assert its position.
In December 1996, the Internal Revenue Service (IRS) proposed certain
adjustments pertaining to transactions between the Company and its wholly-owned
Canadian subsidiary, resulting in the assertion that additional taxes of
approximately $7 million were due for the tax years 1993 and 1994. The Company
believes it has substantial defenses against this claim and plans to vigorously
defend
-16-
<PAGE> 8
its position. Although the final outcome of this matter cannot be predicted, the
Company presently believes that the results of this claim will not have a
material effect on the Company's financial position or liquidity; however, in
any given reporting period, this matter could have a material adverse effect on
results of operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Statements in this report or in other Company communications, such as
press releases, may relate to future events or the Company's future performance
and such statements are forward-looking statements. Such forward-looking
statements are based on present information the Company has related to its
existing business circumstances. Investors are cautioned that such
forward-looking statements are subject to an inherent risk that actual results
may differ materially from such forward-looking statements. Factors that may
result in such variances include, but are not limited to, changes in commodity
prices, interest rates and other economic conditions, actions by competitors,
changing weather conditions and natural phenomena, actions by government
authorities, uncertainties associated with legal proceedings, technological
developments, future decisions by management in response to changing conditions
and misjudgments in the course of preparing forward-looking statements. Such
factors are discussed in this Company Annual Report included in its Form 10-K as
well as in Company Reports filed on Form 10-Q.
-17-
<PAGE> 9
QUARTERLY FINANCIAL INFORMATION
The following quarterly information is unaudited, but includes all adjustments
which management considers necessary for a fair presentation of such
information. For interim quarterly statements, the income tax provision
(benefit) is estimated using the best available information for projected
results for the entire year.
<TABLE>
<CAPTION>
Quarter
-------------------------------------------
(Thousands except per share) First Second Third Fourth Year
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
1997
Revenues $ 84,092 $ 88,337 $ 80,683 $ 76,787 $ 329,899
Gross profit 6,079 10,128 8,025 5,347 29,579
Income from continuing
operations 243 2,342 1,425 422 4,432
Income from discontinued
tissue operations 1,135 1,639 1,935 879 5,588
--------- --------- --------- --------- ---------
Net income $ 1,378 $ 3,981 $ 3,360 $ 1,301 $ 10,020
========= ========= ========= ========= =========
Basic and diluted income per common share:
Income from continuing
operations $ .02 $ .18 $ .11 $ .03 $ .33
Income from discontinued
tissue operations .08 .12 .14 .07 .42
--------- --------- --------- --------- ---------
Net income $ .10 $ .30 $ .25 $ .10 $ .75
========= ========= ========= ========= =========
1996
Revenues $ 78,642 $ 76,986 $ 77,290 $ 80,927 $ 313,845
Gross profit 1,598 4,825 6,895 4,994 18,312
Income (loss) from continuing
operations (2,432) 187 730 186 (1,329)
Income (loss) from discontinued
tissue operations (333) 475 407 1,579 2,128
Gain on disposal of discontinued
diaper operations 3,110 -- -- -- 3,110
--------- --------- --------- --------- ---------
Net income $ 345 $ 662 $ 1,137 $ 1,765 $ 3,909
========= ========= ========= ========= =========
Basic and diluted income (loss) per common share:
Income (loss) from
continuing operations $ (.18) $ .01 $ .05 $ .01 $ (.10)
Income from discontinued
operations .21 .04 .03 .12 .39
--------- --------- --------- --------- ---------
Net income $ .03 $ .05 $ .08 $ .13 $ .29
========= ========= ========= ========= =========
</TABLE>
-32-
<PAGE> 1
EXHIBIT 21.1
Subsidiaries of Pope & Talbot, Inc. (the registrant)
<TABLE>
<CAPTION>
State or Other
Jurisdiction of
Name of Corporation Incorporation
- ------------------- -------------
<S> <C>
(1) Pope & Talbot International Ltd. British Columbia
(2) Pope & Talbot Ltd., a subsidiary of
Pope & Talbot International Ltd. British Columbia
(3) Pope & Talbot Pulp Ltd., a subsidiary of
Pope & Talbot Ltd. British Columbia
(4) Pope & Talbot FSC, Inc. Oregon
(5) Pope & Talbot Wis., Inc. Delaware
(6) Penn Timber, Inc. Oregon
(7) Pope & Talbot Relocation Services, Inc. Oregon
</TABLE>
All subsidiaries of the registrant do business under the name of the
corporation.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report incorporated by reference in this Form 10-K into the Company's previously
filed Registration Statement No.'s 33-34996, 333-04223 and 33-64764 on Form S-8.
ARTHUR ANDERSEN LLP
Portland, Oregon
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE POPE &
TALBOT, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR
ENDED DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 31,911
<SECURITIES> 0
<RECEIVABLES> 34,134
<ALLOWANCES> 0
<INVENTORY> 65,987
<CURRENT-ASSETS> 210,950
<PP&E> 286,624
<DEPRECIATION> 178,459
<TOTAL-ASSETS> 375,767
<CURRENT-LIABILITIES> 84,835
<BONDS> 88,705
0
0
<COMMON> 13,972
<OTHER-SE> 165,490
<TOTAL-LIABILITY-AND-EQUITY> 375,767
<SALES> 329,899
<TOTAL-REVENUES> 329,899
<CGS> 300,320
<TOTAL-COSTS> 300,320
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,995
<INCOME-PRETAX> 8,770
<INCOME-TAX> 4,338
<INCOME-CONTINUING> 4,432
<DISCONTINUED> 5,588
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,020
<EPS-PRIMARY> 0.75
<EPS-DILUTED> 0.75
</TABLE>
