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, 1998
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
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(State or other jurisdiction (IRS Employer
of incorporation Identification No.)
or organization)
1500 SW 1st Avenue,
Portland, Oregon 97201
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(Address of principal (Zip Code)
executive offices)
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
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Common Shares, par value $1.00 New York Stock Exchange,
Pacific Stock Exchange
Rights to purchase Series A Junior New York Stock Exchange,
Participating Cumulative Pacific Stock Exchange
Preferred Stock
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 $89,610,745 as of March 19, 1999 ($7.00 per share).
13,481,441
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(Number of shares of common stock outstanding as of March 19, 1999)
Part I and Part II incorporate specified information by reference from the
annual report to shareholders for the year ended December 31, 1998. Part III
incorporates specified information by reference from the proxy statement for the
annual meeting of shareholders to be held on April 29, 1999.
<PAGE>
PART I
This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements that have been made pursuant to the
provisions of the Private Securities Litigation Reform Act of 1995. 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 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, 1998, 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 reports and
documents the Company files from time to time with the Securities and Exchange
Commission, particularly its Quarterly Reports on Form 10-Q and any Current
Reports on Form 8-K.
Item 1. Business
Introduction
Pope & Talbot, Inc. (the Company) is engaged principally in the wood
products and pulp products businesses. The Company's wood products business
involves the manufacture and sale of standardized and specialty lumber and wood
chips. In its pulp products business, the Company manufactures and sells
bleached kraft pulp for newsprint, tissue and high-grade coated and uncoated
paper. Wood products accounted for approximately 52 percent of the Company's
1998 revenues from continuing operations of $420.8 million and bleached kraft
pulp accounted for 48 percent. In February 1998, the Company acquired a 53
percent controlling ownership interest in Harmac Pacific Inc. (Harmac). The
Company's interest in Harmac was subsequently increased to 60 percent in
December 1998 through an open market purchase of Harmac common stock. 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 at Nanaimo,
British Columbia, Canada.
In the first quarter of 1998, the Company sold its private label tissue
business to PLAINWELL, INC. The tissue business results for 1998, 1997 and 1996
have been reported as discontinued tissue operations. The Company sold its
disposable diaper business in February 1996, and recorded a gain on the sale.
Results of operations related to the diaper business were reflected as
discontinued operations in 1995 and prior periods. In the first quarter of 1996,
the Company also sold its sawmill located in Port Gamble, Washington.
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
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and facilities in the U.S. Pacific Northwest, British Columbia, Canada and the
Black Hills region of South Dakota and Wyoming.
Since the mid-1980s, the Company has reduced its dependency on timber from
the Pacific Northwest, where environmental concerns have sharply restricted the
availability of and increased the cost of public timber. At the same time, the
Company has increased its operations in regions presently having more stable
timber supplies, 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
interests in a newly formed master limited partnership. In 1989, the Company
sold its Oregon sawmill, and the Company has since sold its remaining Oregon
timberlands. In 1992, the Company acquired a sawmill in Castlegar, British
Columbia and related timber cutting rights. At the end of 1995, the Company
permanently closed its Port Gamble, Washington sawmill. The Company currently
operates five sawmills.
In the late 1970s, the Company expanded into the pulp business with the
purchase of the Halsey, Oregon pulp mill. The Halsey mill produces bleached
kraft pulp which is sold to writing paper, tissue and newsprint manufacturers in
the U.S., Europe and Asia.
The businesses in which the Company is engaged are extremely competitive,
and a number of the Company's competitors are substantially larger than the
Company with correspondingly greater resources.
Environmental regulations to which the Company is subject require the
Company from time to time to incur significant operating costs and capital
expenditures. In addition, as discussed herein, environmental concerns have in
the past materially affected the availability and cost of raw materials used in
the Company's business. See "Wood Products Business", "Pulp Products Business"
and "Environmental Matters".
Wood Products Business
The Company's wood products business involves the manufacture and sale of
boards and dimension lumber, some of which are specialty items, such as
stress-rated lumber. Wood chips and other similar materials obtained as a
by-product of the Company's lumber operations are also sold. During the last
three years, revenues from lumber sales were approximately 85 percent or more of
total wood products revenues with the balance of revenues from the sale of logs
and wood chips. The principal sources of raw material for the Company's wood
products operations are timber obtained through long-term cutting licenses on
public lands, logs purchased on open log markets, timber offered for sale via
competitive bidding by federal agencies and timber purchased under long-term
contracts to cut timber on private lands.
Approximately 75 percent of the Company's current lumber capacity is
located in British Columbia, Canada and 25 percent in the Black Hills region of
South Dakota and Wyoming. In Canada, timber requirements are obtained primarily
from the Provincial Government of British Columbia under long-term timber
harvesting licenses which allow the Company to remove timber from defined areas
annually on a sustained yield basis. The Provincial Government of British
Columbia has the authority to modify prices and harvest volumes at any time.
Under the provincial stumpage pricing formula, wood costs are based on a
relationship to end-product prices. Approximately 25 percent of the Company's
Canadian log requirements are satisfied through open market log purchases. In
the Black Hills, the Company obtains its timber 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.
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The Provincial Government of British Columbia's Commission of Resources and
Environment issued the Kootenay Boundary Land Use Plan in 1997. This land use
plan set aside several new wilderness areas. Although no assurances can be
given, management believes that in the near-term, timber supplies for the
Company's Canadian sawmills should be relatively stable. The Company has
improved its reforestation practices to sustain and enhance timber supplies in
the long-term to mitigate the adverse effects of forest restrictions.
The British Columbia government has also implemented its Forest Practices
Code (Code). This Code sets strict standards for logging activities and
reforestation responsibilities. Requirements under this Code have been phased in
beginning in 1996, with full implementation in place during 1998. The Code could
ultimately have a long-term unfavorable impact on the Company's timber harvest
volumes.
During 1996, U.S. and Canadian trade negotiators reached an agreement
establishing volume quotas on Canadian softwood lumber shipments to the U.S.
Based on this agreement, Canadian lumber producers are assigned quotas of lumber
volumes which may be shipped to the U.S. tariff-free. Incremental volumes are
subject to a two-tier tariff of $52 per thousand board feet and $104 per
thousand board feet. The first annual period subject to quotas and tariffs ended
March 31, 1997. The Company's tariff-free volume was reduced by 11.4 million
board feet from the 1996/1997 fiscal year to the 1997/1998 fiscal year, and then
by another 11.6 million board feet for the 1998/1999 fiscal year. As a partial
offset, the Company received increases in its allocation at the lower $52 per
thousand board feet tariff from the 1996/1997 fiscal year to the 1998/1999
fiscal year. During 1998 and 1997, the Company expensed tariff charges of
approximately $2.9 million and $1.9 million, respectively, related to shipments
from the Company's Canadian sawmills into the U.S. Because of weakened lumber
markets in 1998 and the last half of 1997, coupled with the implications of this
tariff agreement, the Company was forced to take several shutdowns during those
years. The Company continually evaluates the need for temporary shutdowns in
balancing the economics of sales prices, production costs and tariffs.
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 1998, the ten largest of which accounted
for approximately 39 percent of total wood products sales.
Backlog. The Company maintains a minimal finished goods inventory of wood
products. At December 31, 1998, orders were approximately $5.1 million, compared
with approximately $4.6 million at December 31, 1997. This backlog represented
an order file for the Company which generally would be shipped within one to two
months.
Competition. The wood products industry is highly competitive, with a large
number of companies producing products that are reasonably standardized. There
are numerous competitors of the Company that are of comparable size or larger,
none of which is believed to be dominant. The principal means of competition in
the Company's wood products business are pricing and the ability to satisfy
customer demands for various types and grades of lumber.
For further information regarding amounts of revenue, operating profit and
other financial information attributable to the wood products business, see Note
12 of "Notes to Consolidated Financial Statements" in the Company's 1998 Annual
Report to Shareholders.
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Pulp Products Business
The Company owns a pulp mill located in Halsey, Oregon and a 60% interest
in Harmac which owns a pulp mill in Nanaimo, British Columbia. The Halsey 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 Halsey pulp
mill, the Company brokers wood chips for sale primarily into the export market.
The Harmac mill supplies pulp to all sectors of the paper market, for products
ranging from newsprint and tissue to high-grade coated and uncoated paper.
The Company has an agreement with Grays Harbor Paper L.P. (Grays Harbor),
under which the Halsey mill supplies pulp to the Grays Harbor writing grade
paper mill. Grays Harbor purchased approximately 60,000 metric tons, 89,000
metric tons and 100,000 metric tons of pulp from the Company in 1998, 1997 and
1996, 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. In 1997 and
1996, pricing for pulp sold to Grays Harbor was computed using a formula based
on prices for white paper. In late 1997, the Company and Grays Harbor modified
their pulp supply contract. The modified contract, which became effective
January 1, 1998, changed the pulp pricing formula so that pulp prices are based
on southern mixed (U.S.) bleached hardwood kraft prices rather than white paper
prices. The Company believes that over the longer-term, pulp pricing under the
new formula will be comparable to that under the previous pricing formula.
Softwood fiber (wood chips and sawdust), particularly in the quantities
necessary to support world-scale pulp facilities, is in increasingly short
supply in the Pacific Northwest. Substantially all of the Company's wood chip
and sawdust requirements for the Halsey pulp mill are satisfied through
purchases by the Company from third parties. The Company has long-term chip
supply contracts with sawmills in the Pacific Northwest. To provide an adequate
supply of wood fiber for the mill, the Company has expanded its capability of
using sawdust as a raw material for a significant portion of the production.
Additionally, the Company continues to use an expanded geographic base to
maintain an adequate supply of chips for the approximately 30 to 40 percent of
the pulp mill's production which remains based on softwood chips. The Company
believes that, based on existing wood chip and sawdust availability both within
the Willamette Valley region of Oregon and from other sources, fiber resources
will be adequate for the Company's requirements at the Halsey pulp mill in the
foreseeable future.
With an annual capacity of 380,000 metric tons, the Company's Harmac pulp
mill is one of the largest producers of market pulp in Canada. Harmac produced
354,000 metric tons of pulp in 1998, of which 335,000 metric tons were produced
in the period subsequent to February 2, 1998. Harmac manufactures a wide range
of high-quality kraft pulp made from custom blends of western hemlock, balsam,
western red cedar and Douglas fir. Harmac's products are marketed globally
through sales offices in Portland, Oregon and Brussels, Belgium and through
agency sales offices around the world.
Harmac has a long-term fiber supply agreement with MacMillan Bloedel
Limited (MacMillan Bloedel) that provides for at least 80 percent of its fiber
requirements through 2019. Under this contract, fiber is purchased at market, or
at prices determined under a formula intended to reflect fair market value of
the fiber and which takes into account the net sales value of pulp sold by
Harmac. To run the Harmac mill at full capacity, additional fiber is required to
supplement the base supply from MacMillan Bloedel.
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MacMillan Bloedel has agreed that it will supply, in addition to the
minimum volumes to which it is committed under the Chip and Pulp Log Supply
Agreement, the fiber required to fulfill the balance of Harmac's operating
requirements, provided that such fiber is available in the market without
detriment to MacMillan Bloedel's own operations. In addition, Harmac has entered
into an arrangement with an independent lumber producer in the interior of
British Columbia to provide pulp fiber incremental to that provided by MacMillan
Bloedel. Finally, improved utilization and recovery of available raw materials,
through means such as the recently completed chip conditioning system, will help
to ensure that adequate fiber is available. The Company's management is also
evaluating various other initiatives to secure sources for the balance of
Harmac's fiber requirements over the long term. To a very limited degree, Harmac
acquired wood chips from the Company's Canadian sawmills in 1998.
Marketing and Distribution. The Company utilizes its own sales force and
pulp brokers to sell its pulp products to paper manufacturers worldwide. In
1998, approximately 41 percent of the pulp segment's sales volume was shipped to
Europe, 33 percent to North America, 24 percent to Asia and 2 percent to Latin
America. Sales in 1998 to Grays Harbor represented 13 percent of pulp revenues
and the remaining nine largest customers accounted for an additional 40 percent
of pulp revenues.
In 1998, approximately 59 percent of pulp products were sold to customers
at market prices under long-term or "evergreen" contracts, renewable each year.
The balance of the mills' pulp is sold on a spot basis. By establishing and
maintaining long-term contractual relationships, the Company is better able to
forecast and regulate production than would be the case if it relied entirely on
the spot markets.
Backlog. The Company's pulp customers either enter into contracts for
periods of one to three years or purchase products without obligation for future
purchases. The contractual customers provide the Company with annual estimates
of their requirements, followed by periodic orders based on more definitive
information. As of December 31, 1998, the Company's backlog of orders believed
to be firm for both contractual and non-contractual customers was $37.9 million
compared to $18 million at December 31, 1997. The increase in the total backlog
of orders is primarily due to the inclusion of Harmac's backlog orders of $23.9
million in the 1998 amounts. The backlog of pulp orders at year-end represents
orders which will be filled in the first quarter of the following year.
Competition. The pulp industry is highly competitive, with a substantial
number of competitors having extensive financial resources, manufacturing
expertise and sales and distribution organizations, many of which are larger
than the Company, but none of which is believed to be dominant. Canada and the
Nordic countries produce substantially more market pulp than they consume, with
the surplus being sold in Western Europe, the United States and Japan and other
Asian countries. Canada, Finland, Norway and Sweden are the principal suppliers
of northern bleached softwood kraft pulp to world markets. The United States is
a large exporter of hardwood and southern softwood pulps, as well as a
significant importer of northern bleached softwood kraft pulp. Latin America
also exports both hardwood and softwood pulps.
The principal methods of competition in the pulp market are price, quality,
volume, reliability of supply and customer service. The Company's competitive
advantages include the strength of its northern softwood fiber and the variety
and consistent quality of the pulps it produces. In addition, Harmac has the
operational flexibility provided by its three separate production lines in
combination with the three principal species of fiber available in the region.
For further information regarding amounts of revenue, operating profit and
loss and other financial information attributable to the pulp products business,
see Note 12 of "Notes to Consolidated Financial Statements" in the Company's
1998 Annual Report to Shareholders.
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Discontinued Operations
Until the sale of the tissue business in March 1998, the Company produced a
line of private label consumer tissue products including towels, napkins,
bathroom tissue and facial tissue. Also, until the February 1996 sale of the
diaper business, the Company produced disposable diaper products. These products
were sold under private and controlled labels. The tissue business results for
1998, 1997 and 1996 were shown as discontinued tissue operations. Revenues from
these operations were $8.3 million in 1998, $136.2 million in 1997 and $133.6
million in 1996.
For further information regarding the Company's discontinued operations,
see Note 10 of "Notes to Consolidated Financial Statements" in the Company's
1998 Annual Report to Shareholders.
Environmental Matters
The Company is subject to federal, state, provincial and local air, water
and land pollution control, solid and hazardous waste management, disposal and
remediation laws and regulations in all areas where it has operations.
Compliance with these laws and regulations generally requires operating costs as
well as capital expenditures. It is difficult to estimate the costs related
solely to environmental matters of many capital projects which have been
completed in the past or which may be required in the future. Changes required
to comply with environmental standards will affect other areas such as facility
life and capacity, production costs, changes in raw material requirements and
costs and product value. In April 1998, the Environmental Protection Agency
(EPA) published regulations establishing standards and limitations for
non-combustion sources under the Clean Air Act and revised regulations under the
Clean Water Act. These regulations are collectively referred to as the "Cluster
Rules" and have been the subject of extensive discussions between the pulp and
paper industry and the EPA. The Company's exposure to these regulations relates
to the Company's Halsey pulp mill. The capital costs to comply with these new
regulations at the Halsey mill are anticipated to be $35 million, with
compliance required by the first quarter of 2001. It is estimated that during
1998 and 1997, capital expenditures at Halsey for environmental controls
amounted to approximately $1.5 million and $1 million, respectively.
Based on the understanding of future compliance standards, the Company's
expenditures for such purposes, with the exception of expenditures related to
Cluster Rule compliance, are currently estimated to not be significant in 1999
and 2000. However, the ultimate outcome of future compliance is uncertain due to
various factors such as the interpretation of environmental laws, potential
introduction of new environmental laws and evolving technologies.
The preservation of old-growth forests and wildlife habitat has affected
and may continue to affect the amount and cost of timber obtainable from public
agencies in Oregon and Western Washington. The Halsey pulp mill 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.
In British Columbia, the Company's wood products business forest resources
and related logging activities and reforestation responsibilities have been
affected by governmental actions over the past several years. Refer to "Wood
Products Business" for the discussion on the impact of the Provincial Government
of British Columbia's Commission of Resources and Environment and the Forest
Practices Code.
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The major environmental issue for pulp producers in coastal British
Columbia is the management of wastewater, air emissions and solid waste in
compliance with the extensive body of applicable environmental protection laws
and regulations. Harmac has in place a comprehensive environmental management
program, comprising modern pollution abatement and control technologies,
detailed operating procedures and practices, early warning systems, scheduled
equipment inspections and emergency response planning. Regular independent
audits ensure that the environmental program is being implemented effectively
and that all regulated requirements are being met.
Recent legislation in British Columbia governing contaminated sites became
effective in April 1997. If a triggering event occurs in respect of any property
that has been used for industrial or commercial purposes, the regulations
require, among other things, a site profile to be prepared in order to determine
whether the site in question is potentially contaminated, in which case
remediation may be required under government supervision. Pulp mills are subject
to these regulations and past and present owners or operators of mill sites may
face remediation costs if contaminated areas are found. Triggering events would
include the sale of the property or the decommissioning of the mill. The Company
cannot assess the magnitude of costs it may be required to incur in order to
comply with this legislation if a triggering event should occur.
See "Item 3. Legal Proceedings" for a discussion of certain environmental
legal proceedings.
Employees
At December 31, 1998, the Company, including Harmac, employed 2117
employees of whom 1685 were paid on an hourly basis and a majority of which were
members of various labor unions. Approximately 59 percent of the Company's
employees were associated with the Company's wood products business, 38 percent
were associated with the Company's pulp business and 3 percent were corporate
management, marketing and administration personnel.
Geographic Areas
For information regarding the Company's revenues and long-lived assets by
geographic area, see Note 12 of "Notes to Consolidated Financial Statements" in
the Company's 1998 Annual Report to Shareholders.
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Item 2. Properties
The Company leases 38,000 square feet of office space in Portland, Oregon
for its corporate administrative and sales functions.
Wood Products Properties
The following tabulation briefly states the location, character, capacity
and 1998 production of the Company's lumber mills:
<TABLE>
<CAPTION>
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Estimated Annual 1998
Location Capacity (3) Production(3)
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<S> <C> <C>
Spearfish, South Dakota 113,000,000 bd. ft.(1) 110,000,000 bd. ft.
Newcastle, Wyoming 35,000,000 bd. ft.(1) 34,000,000 bd. ft.
Grand Forks, British Columbia 68,000,000 bd. ft.(2) 65,000,000 bd. ft.
Midway, British Columbia 154,000,000 bd. ft.(2) 146,000,000 bd. ft.
Castlegar, British Columbia 225,000,000 bd. ft.(2) 209,000,000 bd. ft.
- -----------------------------------------------------------------------------------------
(1) Based on operating two shifts, five days per week for the Spearfish, South
Dakota lumber mill and one shift, five days per week for the Newcastle,
Wyoming lumber mill.
(2) Based on operating two shifts, five days per week for the Midway and
Castlegar, British Columbia mills and one shift, five days per week for the
Grand Forks, British Columbia mill. These capacities reflect reduced
operations resulting from timber license quota limitations.
(3) Wood chips are produced as a result of the operation of the Company's
lumber mills. It is estimated that the aggregate annual capacity for such
production is 285,000 bone dry units. In 1998, 270,000 bone dry units were
produced.
</TABLE>
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 1998,
158,000 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.
The Harmac pulp mill is located on a 1,000-acre site owned by Harmac at
Nanaimo on the east coast of Vancouver Island in British Columbia. The Harmac
pulp mill has an annual capacity of 380,000 metric tons of NBSK pulp and
produced 354,000 metric tons in 1998.
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Item 3. Legal Proceedings
In 1985, pursuant to a Plan of Distribution, the Company transferred all of
the Company's timber properties, development properties and related assets and
liabilities in the State of Washington to newly-formed Pope Resources, a
Delaware Limited Partnership (the Partnership). Interests in the Partnership
were distributed to the Company's shareholders on a pro rata basis. Taxes
payable of $10.3 million at the time of distribution were charged to
stockholders' equity. Upon subsequent audit, the Internal Revenue Service (IRS)
challenged the distribution value of the assets reported by the Company for
federal income tax purposes.
In 1993, the Company petitioned the U.S. Tax Court (Tax Court) to resolve
the disputed value of the distribution. In 1997, the Tax Court ruled on the
Company's tax liability with respect to the distribution, and the Company
appealed. In January 1999, the U.S. Court of Appeals for the Ninth Circuit
upheld the U.S. Tax Court ruling as to the distribution value of the assets
contributed by the Company. As a result of the decision by the Ninth Circuit,
the Company recognized in 1998 an additional reduction in stockholders' equity
of $3.2 million, which represented the balance of tax, interest and litigation
costs previously paid and deferred.
In December 1997, the Company filed an action against the Proctor & Gamble
Company (P&G) alleging anti-trust violations and seeking a declaration of
non-infringement and invalidity of certain P&G disposable diaper patents. In
that action, P&G filed a counter claim against the Company alleging infringement
of the same patents. This action 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. Additionally, the companies have had a dispute regarding P&G's
use and attempt to register the trademark "Gentle Touch" for which the Company
has common law and statutory rights. In November 1998, the Company settled with
P&G on all of these matters.
The IRS has assessed the Company additional tax of approximately $5.3
million pertaining to transactions between the Company and its wholly-owned
Canadian subsidiary during its 1993 tax year. The Company, which has filed a
petition with the Tax Court, believes it has substantial defenses against this
claim and plans to vigorously defend its position. The Company has established
reserves for this matter in amounts it believes are probable and reasonably
estimable. 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 effect on results
of operations.
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 is contaminated by
creosote and, to a lesser extent, hydrocarbons, and that the owner planned 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 2001. Based on
preliminary findings, the Company has estimated the likely cost of remediation
and monitoring to be in the range of $15 to $20 million. 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 the other known potentially responsible party (PRP) who may be
jointly and severally liable. The ability of the other PRP to participate has
been taken into account based generally on the PRP's financial condition and
probable contribution. The ultimate cost to the Company for site
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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. Anticipated recoveries from
insurance carriers have been accrued when their receipt is deemed probable and
amounts are reasonably estimable.
In 1998, the Washington Department of Ecology (WDOE) requested the Company
undertake an assessment to determine whether and to what extent its former mill
site at Port Gamble, Washington may be contaminated. The Company is performing
the investigation and expects that it will be completed in 1999. In addition,
WDOE and the EPA have requested the Company to perform an investigation of
sediments in the adjacent bay to determine the extent of wood waste or hazardous
substances present in the near shore zone adjacent to the former mill. This
investigation also should be completed in 1999. Depending on the outcome of
these investigations, the Company may face additional claims or demands for
actions.
The Company has tendered the defense of the above environmental claims to a
number of insurance carriers which issued comprehensive general liability
policies to the Company from 1959-1985. In 1995, the Company filed a declaratory
judgment action in the U.S. District Court for the District of Oregon to obtain
a decision that the insurance carriers were obligated to defend the Company and
indemnify it for any environmental liabilities incurred as a result of certain
operations of the Company during that period.
In March 1999, the Company and the insurance carriers agreed to dismiss the
federal lawsuit and refile in state court, in Multnomah County Circuit Court,
Oregon. The Company expects that the case will be tried, if necessary, in the
year 2001. The Company has concluded settlements with several insurance carriers
and is engaged in settlement discussions with other insurance carriers. If it is
determined that the insurance carriers are obligated to pay the Company's
defense and indemnity obligations, there are more than sufficient policy limits
available to meet the Company's estimated liabilities.
In December 1998, the Company filed a North American Free Trade Agreement
(NAFTA) Notice of Intent that could permit the Company to proceed, if it so
chooses, with a claim against the Canadian Federal Government. The complaint
arises from the Company's assertion that its duty-free export quota under the
Canada/U.S. Softwood Lumber Agreement has been unfairly reduced each year since
the agreement came into effect.
The NAFTA contains a special process that permits NAFTA investors who have
been harmed by government actions which are inconsistent with the provisions of
NAFTA's Investment Chapter to seek compensation before an impartial
international arbitration panel. If the two disputing parties are unable to
resolve this dispute, the Company could be entitled to start an Investor-State
claim against Canada no sooner than ninety-one days after the Notice of Intent
was served. There can be no assurance as to when the claim will be resolved.
11
<PAGE>
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, age 56, has been Senior Vice President, Chief Financial
Officer of the Company since August 1997. From July 1977 to March 1995, Mr. Day
was employed at Simpson Investment Company, a privately-held forest products
company where he served as Corporate Controller, Vice President Planning and
Controller and Vice President Treasurer.
Abram Friesen, age 56, has been Vice President - Division Manager, Wood
Products since February 1996. From 1987 to 1996, Mr. Friesen was President of
Pope & Talbot Ltd., a wholly-owned subsidiary of the Company.
Ralph Leverton, age 51, has been Vice President - Division Manager, Pulp
Products since September 1998. Mr. Leverton was formerly Vice President,
Finance, Chief Financial Officer and Secretary of Harmac Pacific Inc. from May
1994 to April 1998.
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
1998 and 1997 were 952 and 1,005, respectively. Additional information required
by Item 5 of Part II is presented in the table entitled "Quarterly Financial
Information" on page 31 of the Company's 1998 Annual Report to Shareholders.
Such information is incorporated herein by reference.
Item 6. Selected Financial Data
Information required by Item 6 of Part II is presented in the table
entitled "Five Year Summary of Selected Financial Data" on page 30 of the
Company's 1998 Annual Report to Shareholders. Such information is incorporated
herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required by Item 7 of Part II is presented on pages 8
through 13 of the Company's 1998 Annual Report to Shareholders. Such information
is incorporated herein by reference.
12
<PAGE>
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
The information required by Item 7a of Part II is presented on pages 20 and
23 of the Company's 1998 Annual Report to Shareholders. Such information is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The information required by Item 8 of Part II is presented on pages 14
through 29 of the Company's 1998 Annual Report to Shareholders. Such information
is incorporated herein by reference. Additionally, the required supplementary
quarterly financial information is presented on page 31 of the Company's 1998
Annual Report to Shareholders and is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers
The information required by Item 10 of Part III is presented 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, on pages 2 and 3 (under the
item entitled "Certain Information Regarding Directors and Officers") and on
page 17 (under the item entitled "Section 16(a) - Beneficial Ownership
Compliance") of the Company's Definitive Proxy Statement for the Annual Meeting
of Shareholders on April 29, 1999. 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 29, 1999. 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 29, 1999. Such information is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
Not applicable
13
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements
Annual Report
to
Shareholders
------------------------------------------------------------------------
Report of Independent Public Accountants 14
Consolidated balance sheets at December 31,
1998 and 1997 15
Consolidated statements of stockholders' equity
for each of the three years in the period
ended December 31, 1998 16
Consolidated statements of income for each of
the three years in the period ended
December 31, 1998 17
Consolidated statements of cash flows for each
of the three years in the period ended
December 31, 1998 18
Notes to consolidated financial statements 19-29
The consolidated financial statements listed above are included in the
Annual Report to Shareholders of Pope & Talbot, Inc. for the year ended December
31, 1998. With the exception of the items referred to in Items 1, 5, 6, 7, 7a
and 8, the 1998 Annual Report to Shareholders is not to be deemed filed as part
of this report.
The report of PricewaterhouseCoopers LLP on the financial statements of
Harmac as of and for the year ended December 31, 1998, which report has been
relied upon by Arthur Andersen LLP in their report listed above, is filed as
Exhibit 99.1 to this Form 10-K.
(a)(2) Schedules
All schedules are omitted since the required information is not present or
is not present in amounts sufficient to require submission of the related
schedule, or because the information required is included in the financial
statements and notes thereto.
(a)(3) Exhibits
The following exhibits are filed as part of this annual report.
Exhibit No.
- -----------
3.1. Certificate of Incorporation, as amended. (Incorporated herein by
reference to Exhibit 3(a) to the Company's Annual Report on Form
10-K for the year ended December 31, 1992).
3.2. Bylaws. (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).
14
<PAGE>
4.1. Indenture, dated June 2, 1993, between the Company and Chemical
Trust Company of California as Trustee with respect to the
Company's 8-3/8% Debentures due 2013. (Incorporated herein by
reference to Exhibit 4.1 to the Company's registration statement
on Form S-3 filed April 6, 1993).
4.2. Rights Agreement, dated as of April 3, 1998, between the Company
and Chase-Mellon Shareholder Services, L. L. C., as rights agent.
(Incorporated herein by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K filed on April 7, 1998).
4.3. Indenture, dated as of October 5, 1994, between Harmac Pacific
Inc. and Montreal Trust Company of Canada as Trustee with respect
to the Company's 8% convertible unsecured subordinated debentures
due 2004.
10.1. Executive Compensation Plans and Arrangements
10.1.1. Stock Option and Appreciation Plan (as amended). (Incorporated
herein by reference to Exhibits 99.1 and 99.2 to the Company's
Form S-8 filed on February 22, 1999).
10.1.2. Executive Incentive Plan, as amended. (Incorporated herein by
reference to Exhibit 10(b) to the Company's Annual Report on Form
10-K for the year ended December 31, 1992).
10.1.3. Restricted Stock Bonus Plan. (Incorporated herein by reference to
Exhibit 10(c) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992).
10.1.4. Deferral Election Plan. (Incorporated herein by reference to
Exhibit 10(d) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992).
10.1.5. Supplemental Executive Retirement Income Plan. (Incorporated
herein by reference to Exhibit 10(e) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1990).
10.1.6. Form of Severance Pay Agreement among the Company and certain of
its executive officers. (Incorporated herein by reference to
Exhibit 10.1.6 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998).
10.1.7. 1996 Non-Employee Director Stock Option Plan. (Incorporated herein
by reference to Exhibit 10.1.7 to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1996).
10.1.8. Special Non-Employee Director Stock Retainer Fee Plan.
(Incorporated herein by reference to Exhibit 99.5 to the Company's
Form S-8 filed on February 22, 1999).
10.1.9. Employment Agreement with Ralph Leverton, dated November 30, 1998.
10.1.10. Separation Agreement with William G. Frohnmayer, dated May 6,
1998.
15
<PAGE>
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(1) to the
Company's Annual Report on Form 10-K for the year ended December
31, 1990).
10.5. Province of British Columbia Tree Farm License No. 8, dated March
1, 1995. (Incorporated herein by reference to Exhibit 10.6 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996).
10.6. Province of British Columbia Tree Farm License No. 23, dated March
1, 1995. (Incorporated herein by reference to Exhibit 10.7 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996).
10.7. Province of British Columbia Forest License A18969, dated December
1, 1993. (Incorporated herein by reference to Exhibit 10.8 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996).
11.1. Statement showing computation of per share earnings.
13.1. Portions of the Annual Report to Shareholders for the year ended
December 31, 1998 which have been incorporated by reference in
this report.
18.1. Letter regarding change in accounting principle.
21.1. List of subsidiaries.
23.1. Consent of Arthur Andersen LLP.
23.2. Consent of PricewaterhouseCoopers LLP.
27.1. Financial Data Schedule.
99.1. Report of PricewaterhouseCoopers LLP
16
<PAGE>
The undersigned registrant hereby undertakes to file with the Commission a
copy of any agreement not filed under exhibit item (4) above on the basis of the
exemption set forth in the Commission's rules and regulations.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended December
31, 1998.
17
<PAGE>
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 24th day of March, 1999.
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 on March 24, 1999, by the following persons on behalf of
the registrant and in the capacities indicated.
Chairman of the Board and
\s\ PETER T. POPE Chief Executive Officer
- ----------------------------------- -----------------------------------
Peter T. Pope
\s\ GORDON P. ANDREWS Director
- ----------------------------------- -----------------------------------
Gordon P. Andrews
\s\ HAMILTON W. BUDGE Director
- ----------------------------------- -----------------------------------
Hamilton W. Budge
\s\ CHARLES CROCKER Director
- ----------------------------------- -----------------------------------
Charles Crocker
\s\ MICHAEL FLANNERY President and Director
- ----------------------------------- -----------------------------------
Michael Flannery
\s\ KENNETH G. HANNA Director
- ----------------------------------- -----------------------------------
Kenneth G. Hanna
\s\ ROBERT STEVENS MILLER, JR. Director
- ----------------------------------- -----------------------------------
Robert Stevens Miller, Jr.
\s\ HUGO G. L. POWELL Director
- ----------------------------------- -----------------------------------
Hugo G. L. Powell
\s\ BROOKS WALKER, JR. Director
- ----------------------------------- -----------------------------------
Brooks Walker, Jr.
Senior Vice President and
\s\ ROBERT J. DAY Chief Financial Officer
- ----------------------------------- -----------------------------------
Robert J. Day
\s\ GERALD L. BRICKEY Financial Controller
- ----------------------------------- -----------------------------------
Gerald L. Brickey
18
DATED AS OF OCTOBER 5, 1994
HARMAC PACIFIC INC.
and
MONTREAL TRUST COMPANY OF CANADA,
AS TRUSTEE
- --------------------------------------------------------------------------------
TRUST INDENTURE
PROVIDING FOR THE ISSUE OF UP TO
$76,500,000 AGGREGATE PRINCIPAL AMOUNT OF
8% CONVERTIBLE UNSECURED SUBORDINATED DEBENTURES DUE
OCTOBER 4, 2004
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Recitals Page
-------- ----
ARTICLE I
INTERPRETATION
1.1 Definitions ........................................................... 1
1.2 Interpretation not Affected by Headings .............................. 4
1.3 Applicable Law......................................................... 5
1.4 Language............................................................... 5
1.5 References............................................................. 5
ARTICLE 2
THE DEBENTURES
2.1 Limitation of Issue.................................................... 5
2.2 Form and Terms of Debentures ......................................... 5
2.3 Execution of Debentures .............................................. 7
2.4 Certification by Trustee ............................................. 7
2.5 Interim Debentures or Certificates ................................... 7
2.6 Registration and Transfer of Debentures .............................. 8
2.7 Payment of Interest .................................................. 9
2.8 Persons Entitled to Payment .......................................... 9
2.9 Debentures to Rank Equally ...........................................10
2.10 Mutilation, Loss, Theft or Destruction of Debentures .................10
2.11 Exchange of Debentures ...............................................10
2.12 Charge for Registration, Transfer and Cancellation ...................10
2.13 Option of Holder as to Place of Payment ..............................11
ARTICLE 3
3.1 Issuance of Debentures ...............................................11
ARTICLE 4
SUBORDINATION OF DEBENTURES TO SENIOR INDEBTEDNESS
4.1 Subordination..........................................................12
4.2 Payment on Dissolution or Winding-Up...................................12
4.3 Senior Indebtedness Default............................................13
4.4 Subrogation to Senior Indebtedness.....................................14
4.5 Rights of Debenture Holders Reserved...................................14
4.6 Exceptions to Subordination............................................15
4.7 Renewal or Extension of Senior Indebtedness............................16
<PAGE>
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4.8 Authorization to Trustee .............................................16
4.9 Relationship of Trustee ..............................................16
4.10 Restrictions on Purchase of Debentures ...............................16
ARTICLE 5
REDEMPTION AND PURCHASE OF DEBENTURES
5.1 Right to Redeem ......................................................17
5.2 Partial Redemption ...................................................17
5.3 Notice of Redemption .................................................17
5.4 Debentures Due on Redemption Dates ...................................18
5.5 Deposit of Redemption Moneys or Common Shares ........................18
5.6 Surrender of Debentures for Cancellation .............................18
5.7 Failure to Surrender Debentures Called for Redemption ................19
5.8 Payment in Common Shares on Redemption of Debentures or Maturity Date .19
5.9 Issue of Common Shares on Redemption of Debentures on Maturity Date ...19
5.10 No Requirement to Issue Fractional Shares ............................20
5.11 Redemption on Liquidation ............................................20
5.12 Unclaimed Moneys or Common Shares ....................................21
5.13 Purchase of Debentures ...............................................21
5.14 Cancellation of Debentures ...........................................21
ARTICLE 6
CONVERSION OF DEBENTURES
6.1 Conversion Privilege and Conversion Price ............................22
6.2 Manner of Exercise of Right to Convert ...............................22
6.3 Revival of Right to Convert ...........................................24
6.4 Adjustment to Conversion Price .......................................24
6.5 No Requirement to Issue Fractional Shares ............................26
6.6 Taxes and Charges on Conversion ......................................26
6.7 Cancellation of Converted Debentures .................................26
6.8 Certificate as to Adjustment .........................................27
6.9 Notice of Special Matters ............................................27
6.10 Protection of Trustee ................................................27
6.11 Availability of Shares ...............................................28
6.12 Governmental Requirements ............................................28
ARTICLE 7
COVENANTS OF THE COMPANY
7.1 Payment of Principal and Interest......................................28
7.2 To Carry on Business ..................................................28
<PAGE>
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7.3 To Pay Trustee's Remuneration..........................................29
7.4 Not to Exceed Time for Payment of Interest.............................29
7.5 Audit..................................................................29
7.6 Trustee May Perform Covenants..........................................29
7.7 Certificates of Compliance.............................................30
7.8 Maintain Listing and Reporting Status..................................31
ARTICLE 8
REMEDIES
8.1 Acceleration of Maturity on Default....................................30
8.2 Notice of Events of Default............................................31
8.3 Waiver of Default......................................................31
8.4 Right of Trustee to Enforce Payment....................................32
8.5 Nature.................................................................33
8.6 Application of Moneys by Trustee.......................................33
8.7 Notice of Payment by Trustee...........................................34
8.8 Trustee May Demand Production of Debentures............................34
8.9 Trustee Appointed Attorney.............................................34
ARTICLE 9
SUITS BY DEBENTURE HOLDERS AND TRUSTEE
9.1 Debenture Holders May Not Sue .........................................34
9.2 General Powers of Trustee To Sue ......................................35
9.3 Trustee May Sue Without Possession of Debentures ......................35
9.4 Staying Actions ......................................................35
ARTICLE 10
10.1 Immunity of Officers, Shareholders and Directors ......................35
ARTICLE 11
SUCCESSOR COMPANY
11.1 Reconstruction, Consolidation, Amalgamation or Merger..................36
11.2 Consent of Trustee ....................................................36
11.3 Debt Obligations ......................................................36
<PAGE>
-4-
ARTICLE 12
SUPPLEMENTAL INDENTURES
12.1 Provision for Supplemental Indentures..................................37
12.2 Correction of Manifest Errors..........................................38
12.3 Prior Stock Exchange Approval..........................................38
ARTICLE 13
CONCERNING THE TRUSTEE
13.1 Duty of Trustee .......................................................38
13.2 Trust Indenture Legislation ...........................................38
13.3 Conditions Precedent to Trustee's Obligation to Act ...................39
13.4 Evidence .............................................................39
13.5 Experts, Advisers and Agents .........................................39
13.6 Investment of Trust Funds ............................................40
13.7 Trustee Not Ordinarily Bound .........................................40
13.8 Trustee Not Required to Give Security ................................41
13.9 Replacement of Trustee ...............................................41
13.10 Acceptance of Trust ..................................................41
13.11 No Conflict of Interest ..............................................41
ARTICLE 14
NOTICES
14.1 Notice to the Company ................................................42
14.2 Notice to the Debenture Holder .......................................42
14.3 Notice to the Trustee .................................................42
14.4 Postal Disruptions ....................................................42
ARTICLE 15
DEBENTURE HOLDERS MEETINGS
15.1 Right to Convene Meeting ..............................................43
15.2 Notice.................................................................43
15.3 Chairman ..............................................................43
15.4 Quorum.................................................................43
15.5 Power to Adjourn .....................................................44
15.6 Show of Hands ........................................................44
15.7 Poll...................................................................44
15.8 Voting ................................................................44
15.9 Regulations............................................................45
15.10 Company and Trustee May be Represented ...............................45
15.11 Powers Exercisable by Extraordinary Resolution ........................45
15.12 Meaning of "Extraordinary Resolution"..................................47
<PAGE>
-5-
15.13 Powers Cumulative......................................................48
15.14 Minutes................................................................48
15.15 Instruments in Writing.................................................48
15.16 Binding Effect of Resolutions .........................................48
15.17 Certain Debentures Deemed Not Outstanding ............................49
ARTICLE 16
SATISFACTION AND DISCHARGE
16.1 Cancellation and Destruction...........................................49
16.2 Non-Presentation of Debentures.........................................49
16.3 Repayment of Unclaimed Moneys to Company...............................50
16.4 Release and Discharge..................................................50
16.5 Non-Production of Debentures...........................................50
ARTICLE 17
17.1 Execution..............................................................50
SCHEDULES
Form of Debenture......................................................52
Form of Trustee's Certificate..........................................56
Conversion Form .......................................................57
<PAGE>
THIS INDENTURE made as of the 5th day of October, 1994.
BETWEEN:
HARMAC PACIFIC INC., a company incorporated under the laws
of the Province of British Columbia, and having its head
office in the City of Vancouver, in the Province of British
Columbia
(the "Company")
AND:
MONTREAL TRUST COMPANY OF CANADA, a trust company
incorporated under the laws of Canada
(the "Trustee")
WITNESSES THAT:
WHEREAS the Company has determined to create and issue the Debentures to be
constituted and issued in the manner hereinafter appearing; and
WHEREAS the Company is duly authorized to create and issue the Debentures;
and
WHEREAS all things necessary have been done to make the Debentures, when
certified by the Trustee and issued as provided in this Indenture, valid,
binding and legal obligations of the Company with the benefits and subject to
the terms of this Indenture and to make this Indenture a valid and binding
Indenture in accordance with its terms; and
WHEREAS the foregoing recitals are made as representations and statements
of fact by the Company and not by the Trustee.
NOW THEREFORE IT IS HEREBY COVENANTED, AGREED AND DECLARED as follows:
ARTICLE 1
INTERPRETATION
DEFINITIONS
SECTION 1.1
In this Indenture and the Schedule annexed hereto and in the Debentures,
unless there is something in the subject matter or context inconsistent
therewith, the following expressions shall have the following meanings:
(1) "Common Shares" means the common voting shares without par value in the
capital of the Company as such shares exist at the close of business on the date
of the execution and delivery of this Indenture; provided that in the event of a
change, subdivision, reclassification or consolidation thereof or successive
such changes, subdivisions, reclassifications or consolidations, then, subject
to such adjustments as may be required
<PAGE>
-2-
by section 6.1(4) and 6.4, "Common Shares" shall thereafter mean the shares
resulting from such change, subdivision, reclassification or consolidation.
(2) "Certified Resolution" means, with respect to the Company, a copy of a
resolution certified by the chairman, the president, a vice president, the
secretary or an assistant secretary of the Company to have been duly passed by
its Directors and to be in full force and effect on the date of such
certification.
(3) "Certificate", "written order" and "written request" mean,
respectively, a certificate, written order and written request signed in the
name of the Company by any two of the chairman, the president, the vice
presidents, the secretary and the treasurer of the Company provided that an
assistant secretary or an assistant treasurer of the Company may sign in the
name of the Company in lieu of the secretary or the treasurer.
(4) "Company" means Harmac Pacific Inc., and includes any successor company
to or of the Company which shall have complied with the provisions of Article
11.
(5) "Company's Auditors" or "Auditors of the Company" means an independent
firm of chartered accountants duly appointed as auditors of the Company.
(6) "Conversion Price" has the meaning attributed thereto in Section 6.1,
unless such price shall have been adjusted in accordance with the provisions of
Article 6 in which case it shall mean the adjusted price.
(7) "Counsel" means any barrister or solicitor or any firm of barristers or
solicitors retained by the Trustee or retained or employed by the Company and
approved by the Trustee.
(8) "Debentures" means the Debentures issued and certified hereunder or to
be issued and certified hereunder and for the time being outstanding whether in
definitive or interim form. Debentures which have been partially redeemed or
converted shall be deemed to be outstanding only to the extent of the unredeemed
or unconverted part of the principal amount thereof.
(9) "Debenture holders" or "holders" means the persons for the time being
entered in the register or registers hereinafter mentioned as holders thereof.
(10) "Designated Representative" means, with respect to any class of Senior
Indebtedness which shall have been issued under an indenture, the trustee or
trustees under such indenture, except that, if any other person shall be
designated in writing to the Trustee by the holders of a majority of the
outstanding principal amount of such class of Senior Indebtedness such other
person shall be the Designated Representative of such class; and, with respect
to any other class of Senior Indebtedness, the person designated in writing to
the Trustee by the holders of a majority of the outstanding principal amount
thereof or, in the absence of such designation, the person designated in writing
to the Trustee by the Company.
(11) "Director" means a director of the Company for the time being and
"Directors" or "Board of Directors" means the board of directors of the Company
or, if duly constituted and whenever duly empowered, the executive or some other
committee, if any, of the board of directors of the Company, for the time being,
and reference to action by the directors means action by the directors of the
Company as a board or action by the executive or other committee as such.
(12) "Dividends paid in the ordinary course" means cash dividends paid on
the Common Shares in any fiscal year of the Company to the extent that the
aggregate amount of such cash dividends does not in such fiscal year exceed the
greatest of:
(i) 200% of the aggregate amount of cash dividends paid by the
Company on the Shares in the period of 12 consecutive months
ended immediately prior to the first day of such fiscal year;
<PAGE>
-3-
(ii) 100% of the aggregate amount of cash dividends paid by the
Company on the Shares in the period of 36 consecutive months
ended immediately prior to the first day of such fiscal year;
and
(iii) 150% of the consolidated net earnings of the Company, before
extraordinary items, for the period of 12 consecutive months
ended immediately prior to the first day of such fiscal year;
provided that where shares in the capital of the Company are distributed to a
holder of Common Shares pursuant to his exercise of an option to receive a
dividend in the form of such shares in lieu of a cash dividend, such dividend
shall be deemed to be a cash dividend.
(13) "encumbrance" means any mortgage, hypothec, pledge, charge, lien or
other encumbrance, whether fixed or floating.
(14) "Event of Default" means any event specified in Section 9.1, continued
for the period of time, if any, therein designated.
(15) "Extraordinary Resolution" means an extraordinary resolution of
Debenture holders as defined in Section 15.12 and includes a written instrument
signed by Debenture holders pursuant to the provisions of Section 15.15.
(16) "Regulation S" means Regulation S promulgated under the U.S.
Securities Act;
(17) "Time of Expiry" has the meaning attributed thereto in subsection (1)
of Section 6.1.
(18) "Senior Indebtedness" means the principal of, and premium, if any, and
accrued and unpaid interest on
(i) all indebtedness of the Company, other than the indebtedness
evidenced by the Debentures, whether outstanding on the date of
this Indenture or thereafter created, incurred for money
borrowed or raised by the Company by whatever means or
indebtedness for money borrowed by others (including, but not
limited to, Subsidiaries) for payment of which the Company is
liable and includes, without limitation, the liability of the
Company for accepted bills of exchange, debt instruments,
finance leases, accepted drafts and bankers acceptances issued
by the Company or a Subsidiary, as the case may be and any
liability evidenced by bonds, debentures, notes or similar
instruments;
(ii) all indebtedness, whether outstanding on the date of this
Indenture or thereafter created, incurred, assumed or
guaranteed by the Company in connection with the acquisition by
the Company or by others (including, but not limited to,
Subsidiaries) of any business, property or other asset or
service;
(iii) any trade debts of the Company, whether outstanding on the date
of this Indenture or thereafter created, incurred, assumed or
guaranteed by the Company; and
(iv) renewals, extensions and refundings of any such indebtedness;
unless, in each case, the instrument creating or evidencing such indebtedness or
under or pursuant to which the same is incurred, assumed, guaranteed or
outstanding provides that such indebtedness is not superior in right of payment
to the Debentures.
(19) "Senior Indebtedness Default" means
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(i) the declaration of any Senior Indebtedness to be due and
payable prior to the stated maturity thereof following the
occurrence of an event which permits the holder or holders of
such Senior Indebtedness, or one or more Designated
Representatives, to make such declaration; or
(ii) the non-payment in full of any principal amount of Senior
Indebtedness upon its stated maturity (other than maturity
pursuant to any sinking fund or installment payment
obligation).
(20) "Subsidiary" means any corporation of which there are owned, directly
or indirectly, by or for the Company, or by or for any corporation in like
relation to the Company, shares which, in the aggregate, entitle the holders
thereof to cast more than 50% of the votes which may be cast by the holders of
all shares of such corporation (other than shares carrying a contingent right to
vote, whether or not such contingency shall have occurred) for the election of
its directors and includes any corporation in like relation to a Subsidiary.
(21) "this Indenture", "this Trust Deed", "this Trust Indenture", "hereto",
"hereby", "hereunder", "hereof' and similar expressions refer to this instrument
and not to any particular Article, Section, subsection, clause, subdivision or
other portion hereof and include any and every instrument supplemental or
ancillary hereto or in implementation hereof.
(22) "Trustee" means Montreal Trust Company of Canada or its successor or
successors for the time being as trustee hereunder.
(23) "United States" means the United States of America, its territories
and possessions, any state of the United States, and the District of Columbia;
(24) "U.S. Person" has the meaning set forth in Regulation S under the U.S.
Securities Act;
(25) "U.S. Securities Act" means the United States Securities Act of 1933,
as amended;
(26) Words importing the singular number shall include the plural and vice
versa; words importing the masculine gender shall include the feminine gender
and vice versa; and words importing persons shall include firms and corporations
and vice versa.
(27) Any reference in this Indenture to any Act or section thereof shall be
deemed to be a reference to such Act or section as amended or re-enacted from
time to time.
(28) All calculations contemplated by subsection (12) of this Section 1.1
shall be made in accordance with generally accepted accounting principles.
INTERPRETATION NOT AFFECTED BY HEADINGS
SECTION 1.2
The division of this Indenture into Articles and Sections, the provisions
of a table of contents hereto and the insertion of headings are for convenience
of reference only and shall not affect the construction or interpretation of
this Indenture.
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APPLICABLE LAW
SECTION 1.3
This Indenture and the Debentures shall be construed in accordance with the
laws of the Province of British Columbia and shall be treated in all respects as
British Columbia contracts.
LANGUAGE
SECTION 1.4
The Company and the Trustee have required that this Indenture and related
documents be drawn up in the English language (la societe et le fiduciaire ont
exige que cette convention do fiducie et les documents s'y rapportent soient
rediges en anglais).
REFERENCES
SECTION 1.5
All references herein to Articles, Sections and other subdivisions refer to
the corresponding Articles, Sections and other subdivisions of this Indenture.
ARTICLE 2
THE DEBENTURES
LIMITATION OF ISSUE
SECTION 2.1
The aggregate principal amount of Debentures authorized for issue hereunder
is limited to $76,500,000 in lawful money of Canada.
FORM AND TERMS OF DEBENTURES
SECTION 2.2
(1) The Debentures shall be designated "8% Convertible Subordinated
Debentures", shall be dated October 5, 1994, shall mature on October 4, 2004 and
shall bear interest subject to Section 2.7, from October 5, 1994 at the rate of
8% per annum (after as well as before maturity and after as well as before
default, with interest on overdue interest at the same rate) calculated
halfyearly and not in advance and payable half-yearly on the first days of June
and December in each year, commencing on the first day of December, 1994, in the
amount of $40 on each $1,000 principal amount of Debentures; provided that
interest on each $1,000 principal amount of Debentures from October 5, 1994,
payable on the first day of December, 1994, shall be in the amount of $12.49.
(2) The principal of and half-yearly interest on the Debentures shall be
payable in lawful money of Canada at any branch in Canada of The Bank of Nova
Scotia.
(3) The Debentures shall be issued only as fully registered Debentures in
denominations of $1,000 and integral multiples of $1,000.
(4) The Debentures and the certificate of the Trustee endorsed thereon,
respectively, shall be substantially in the form set forth in the Schedule
hereto with such insertions, omissions, substitutions and
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variations as may be authorized by the Company and assented to by the Trustee,
and shall be numbered in such manner as may be assented to by the Trustee, the
execution by the Company and the certification by the Trustee of any Debenture
being conclusive evidence of such authorization and assent.
(5) Each certificate representing Debentures issued to U.S. Persons,
persons in the United States or persons who are acting on behalf of a U.S.
Person, shall bear a legend in substantially the following form:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE UNITED STATES SECURITIES ACT OF 1933 (THE "U.S.
SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING SUCH
SECURITIES, AGREES FOR THE BENEFIT OF THE COMPANY THAT SUCH
SECURITIES MAY BE OFFERED, SOLD OR OTHERWISE TRANSFERRED
ONLY (A) TO THE COMPANY, (B) OUTSIDE THE UNITED STATES IN
ACCORDANCE WITH RULE 904 OF REGULATION S UNDER THE U.S.
SECURITIES ACT, IF AVAILABLE, OR (C) INSIDE THE UNITED
STATES (1) PURSUANT TO THE EXEMPTION FROM REGISTRATION UNDER
THE U.S. SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER, IF
APPLICABLE, AND IN COMPLIANCE WITH APPLICABLE STATE
SECURITIES LAWS OR (2) IN A TRANSACTION THAT DOES NOT
REQUIRE REGISTRATION UNDER THE U.S. SECURITIES ACT OR ANY
APPLICABLE UNITED STATES STATE LAWS GOVERNING THE OFFER AND
SALE OF SECURITIES AND THE SELLER HAS FURNISHED TO THE
COMPANY AN OPINION OF COUNSEL OF RECOGNIZED STANDING
REASONABLY SATISFACTORY TO THE COMPANY, TO THAT EFFECT,
DELIVERY OF THIS CERTIFICATE MAY NOT CONSTITUTE "GOOD
DELIVERY" IN SETTLEMENT OF TRANSACTIONS ON STOCK EXCHANGES
IN CANADA. A NEW CERTIFICATE, BEARING NO LEGEND, DELIVERY OF
WHICH WILL CONSTITUTE "GOOD DELIVERY", MAY BE OBTAINED FROM
THE CUSTODIAN UPON DELIVERY OF THIS CERTIFICATE AND A DULY
EXECUTED DECLARATION, IN A FORM SATISFACTORY TO THE
CUSTODIAN AND THE COMPANY, TO THE EFFECT THAT THE SALE OF
THE SECURITIES REPRESENTED HEREBY IS BEING MADE IN
COMPLIANCE WITH RULE 904 OF REGULATION S UNDER THE
SECURITIES ACT.
provided, that if such Debentures are being sold or transferred under clause (B)
above, the legend maybe removed by providing a declaration to the Trustee to the
following effect:
The undersigned (A) acknowledges that the sale of securities
to which this declaration relates is being made in reliance
on Rule 904 of Regulation S under the United States
Securities Act of 1933 (the "U.S. Securities Act") and (B)
certifies that (1) it is not an "affiliate" of the Company
(as defined in Rule 405 under the U.S. Securities Act), (2)
the offer of such securities was not made to a person in the
United States and either (a) at the time the buy order was
originated, the buyer was outside the United States, or the
seller and any person acting on its behalf reasonably
believe that the buyer was outside the United States, or (b)
the transaction was executed on or through the facilities of
the Alberta, Montreal, Toronto or Vancouver stock exchanges
and neither the seller nor any person acting on its behalf
knows that the transaction has been prearranged with a buyer
in the United States and (3) neither the seller nor any
person acting on its behalf engaged in any directed selling
efforts in connection with the offer and sale of such
securities. Terms used herein have the meanings given to
them by Regulation S.
Prior to the initial issuance of the Debentures, the Company shall
notify the Trustee concerning which Debentures are to bear the legend described
in this Section 2.2(5). The Trustee will thereafter maintain a list of all
registered holders from time to time of legended Debentures or, in its capacity
as registrar and
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transfer agent for the Common Shares, of legended Common Share certificates
issued upon conversion, redemption or maturity of the Debentures, as set forth
herein.
EXECUTION OF DEBENTURES
SECTION 2.3
The Debentures shall be under the common seal of the Company or a facsimile
thereof (which shall be deemed to be the common seal of the Company) and shall
be signed by any two of the chairman of the board, the president, a
vice-president, the secretary or the treasurer of the Company provided that an
assistant secretary or an assistant treasurer of the Company may sign in the
name of the Company in lieu of the secretary or the treasurer. The signatures of
any of such officers may be mechanically reproduced in facsimile and Debentures
bearing such facsimile signatures shall be binding upon the Company as if they
had been manually signed by such officers. Notwithstanding that any of the
persons whose manual or facsimile signature appears on any Debenture as one of
such officers may no longer, at the date of this Indenture or at the date of
such Debenture or at the date of certification and delivery thereof, hold the
official capacity in which he signed, any Debenture signed as aforesaid shall be
valid and binding upon the Company when such Debenture has been certified by the
Trustee under Section 2.4.
CERTIFICATION BY TRUSTEE
SECTION 2.4
(1) No Debenture shall be issued or, if issued, shall be obligatory or
entitle the holder to the benefit hereof until it has been certified by the
Trustee substantially in the form of the certificate set out in the Schedule
hereto or in some other form approved by the Trustee and such certification by
the Trustee upon any Debenture shall be conclusive evidence that the Debenture
so certified has been duly issued hereunder, is a valid obligation of the
Company and is entitled to the benefits of this Indenture.
(2) The certificate of the Trustee on Debentures issued hereunder shall not
be construed as a representation or warranty by the Trustee as to the validity
of this Indenture or of the Debentures (except the due certification thereof)
and the Trustee shall in no respect be liable or answerable for the use made of
the Debentures or any of them or of the proceeds thereof. The certificate of the
Trustee signed on the definitive or interim Debentures shall however be a
representation and warranty by the Trustee that said definitive or interim
Debentures have been duly certified by or on behalf of the Trustee pursuant to
the provisions of this Indenture.
INTERIM DEBENTURES OR CERTIFICATES
SECTION 2.5
Pending the delivery of definitive Debentures, the Company may issue and
the Trustee may certify in lieu thereof interim Debentures in such forms and in
such denominations and signed in such manner as provided herein, entitling the
holders thereof to definitive Debentures when the same are ready for delivery;
or the Company may execute and the Trustee certify a temporary Debenture for the
whole principal amount of Debentures authorized to be issued hereunder and
deliver the same to the Trustee and thereupon the Trustee may issue its own
interim certificates in such form and in such amounts, not exceeding in the
aggregate the principal amount of the temporary Debenture so delivered to it, as
the Company and the Trustee may approve entitling the holders thereof to
definitive Debentures when the same are ready for delivery; and, when so issued
and certified, such interim or temporary Debentures or interim certificates
shall, for all purposes, but without duplication, rank in respect of this
Indenture equally with Debentures duly issued hereunder and, pending the
exchange thereof for definitive Debentures, the holders of the said interim or
temporary Debentures or interim certificates shall be deemed without duplication
to be Debenture holders and entitled to the benefits of this Indenture to the
same extent and in the same manner as though the said exchange had actually been
made. Forthwith after the
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Company shall have delivered the definitive Debentures to the Trustee, the
Trustee shall cancel such temporary Debenture, if any, and shall call in for
exchange all interim Debentures or interim certificates that shall have been
issued and forthwith after such exchange shall cancel the same. No charge shall
be made by the Company or the Trustee to the holders of such interim Debentures
or interim certificates for the exchange thereof. All interest paid upon interim
or temporary Debentures or interim certificates shall be noted thereon as a
condition precedent to such payment unless paid by cheque to the registered
holders thereof.
REGISTRATION AND TRANSFER OF DEBENTURES
SECTION 2.6
(1) The Company shall cause to be kept by and at the principal office of
the Trustee in Vancouver, Toronto and Montreal, registers in which shall be
entered the names and addresses of the holders of Debentures and particulars of
Debentures held by them respectively and of all transfers of Debentures. No
transfer of a Debenture shall be valid unless made on one of such registers by
the registered holder or his executors or administrators or other legal
representatives or his or their attorney duly appointed by an instrument in
writing in form and execution satisfactory to the Trustee and upon compliance
with such requirements as the Trustee and/or other registrar may prescribe.
(2) The Company shall have power at any time to close any register upon
which the registration of any Debenture appears, except the registers maintained
at Vancouver and Toronto, and in that event it shall transfer the records
thereof to another existing register or other existing registers, or to a new
register, and thereafter Debentures previously registered on such closed
register shall be deemed to be registered on such other existing or new
register, as the case may be.
(3) The registers referred to in this Section 2.6 shall at all reasonable
times be open for inspection by the Trustee, the Company and any Debenture
holder.
(4) The holder of a Debenture shall be entitled to have such Debenture
transferred at any of the places at which a register is kept pursuant to the
provisions of this Section 2.6, under such reasonable regulations as the Trustee
may prescribe.
(5) The registers of Debentures may be closed on any day upon which
interest on the Debentures is payable and during the 15 preceding business days.
The registers of Debentures may also be closed on the day of any selection by
the Trustee of Debentures to be redeemed and during the 15 preceding business
days.
(6) Neither the Trustee nor any registrar nor the Company shall be charged
with notice of or be bound to see to the execution of any trust, whether
express, implied or constructive, in respect of any Debenture and any of them
may transfer any Debenture on the direction of the registered holder thereof
whether named as trustee or otherwise, as though that person were the beneficial
owner thereof.
(7) The holder of a Debenture may at any time or from time to time have the
registration of such Debenture transferred from the register in which the
registration thereof appears to another register maintained in another place
authorized for that purpose under the provisions of this Indenture upon payment
of a reasonable fee to be fixed by the Trustee.
(8) Every registrar shall, when requested to do so by the Company or the
Trustee, furnish the Company or the Trustee, as the case may be, with a list of
the names and addresses of the holders of Debentures on the registers maintained
by such registrar and showing the principal amount and serial numbers of
Debentures held by each such holder.
(9) A Debenture holder may, upon payment to the Trustee of a reasonable fee
and upon compliance with other conditions prescribed by law, require the Trustee
to furnish a list of the names and addresses of the holders of Debentures as
shown on the registers provided for in this Section 2.6, showing the
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principal amount of Debentures held by each such holder and a statement of the
aggregate principal amount of Debentures outstanding on the day as of which such
list is made up.
(10) Notwithstanding the foregoing, the Trustee shall not register a
transfer of a Debenture bearing the legend set forth in Section 2.2(5), unless
the Company has received a written opinion of counsel or other evidence
satisfactory to it that the transfer of Debentures by such holder is in
compliance with applicable United States federal and state securities laws, and
the Company has provided a direction to the Trustee to proceed with such
transfer or registration, subject to such terms or conditions, including
legending the Debenture certificate, as may be required by law.
PAYMENT OF INTEREST
SECTION 2.7
All Debentures issued hereunder, whether issued originally or in exchange
for other Debentures, shall bear interest from their date or from the last
interest payment date on which interest shall have been paid or made available
for payment on the outstanding Debentures, whichever shall be later.
PERSONS ENTITLED TO PAYMENT
SECTION 2.8
(1) The Company, the Trustee, any registrar and any paying agent may deem
and treat the person in whose name any Debenture is registered as the absolute
owner thereof for all purposes of this Indenture and payment of or on account of
the principal of and interest on such Debenture shall be made only to or to the
order in writing of such holder, and the Company, the Trustee, any registrar and
any paying agent shall not be affected, to the extent permitted by law, by any
notice to the contrary, and such payment shall be a good and sufficient
discharge to the Company, the Trustee, any registrar and any paying agent for
the amounts so paid.
(2) As the interest on the Debentures becomes due, the Company shall
forward or cause to be forwarded by prepaid ordinary mail, to the holder for the
time being or, in the case of joint holders, to one of such joint holders
(failing written instructions to the contrary from all of such joint holders),
at his address appearing on the appropriate register hereinbefore mentioned, a
cheque on the Company's bankers for such interest (less any tax required to be
deducted) payable to or to the order of such holder or holders and negotiable at
par at each of the places at which interest upon the Debentures is payable. The
forwarding of such cheque shall satisfy and discharge the liability for the
interest upon the Debentures to the extent of the sums represented thereby (plus
the amount of any tax deducted as aforesaid) unless such cheque is not paid on
presentation; provided that in the event of the non-receipt of such cheque by
such registered holder or the loss or destruction thereof the Company, upon
being furnished with reasonable evidence of such non-receipt, loss or
destruction and indemnity reasonably satisfactory to it, shall issue or cause to
be issued to such registered holder a replacement cheque for the amount of such
cheque.
(3) The holder for the time being of any Debenture shall be entitled to the
principal moneys and interest evidenced by such Debenture, free from all
equities or rights of set-off or counterclaim between the Company and the
original or any intermediate holder thereof and all persons may act accordingly
and a transferee of a Debenture shall, after the appropriate form of transfer is
lodged with the Trustee or other registrar and upon compliance with all other
conditions in that behalf required by this Indenture or by any conditions
contained in such Debenture or by law, be entitled to be entered on the
appropriate register or on any one of the appropriate registers as the owner of
such Debenture free from all equities or rights of set-off or counterclaim
between the Company and his transferor or any previous holder thereof.
(4) Where a Debenture is registered in more than one name the principal of
and interest from time to time payable in respect thereof shall be paid to or to
the order of the joint holders thereof (failing written
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instructions to the contrary from all such joint holders) and such payment shall
be a valid discharge to the Company, the Trustee, any registrar and any paying
agent.
(5) In the case of the death of one or more joint holders, the principal of
and interest on any Debenture registered in their names may, notwithstanding
subsection (4) of this Section 2.8, be paid to the survivor or survivors of such
holders whose receipt therefor shall constitute a valid discharge to the
Company, the Trustee, any registrar and any paying agent.
DEBENTURES TO RANK EQUALLY
SECTION 2.9
The Debentures may be issued in such amounts, to such persons, on such
terms, not inconsistent with the provisions of this Indenture, and either at par
or at a discount or at a premium as the Directors may determine. The Debentures
as soon as issued or negotiated shall, subject to the terms hereof, rank pari
passu without discrimination, preference or priority and shall be equally and
rateably entitled to the benefits hereof as if all the Debentures had been
issued and negotiated simultaneously.
MUTILATION, LOSS, THEFT OR DESTRUCTION OF DEBENTURES
SECTION 2.10
In case any of the Debentures shall become mutilated or be lost, stolen or
destroyed, the Company, in its discretion, may issue, and thereupon the Trustee
shall certify and deliver, a new Debenture upon surrender and cancellation of
the mutilated Debenture or, in the case of a lost, stolen or destroyed
Debenture, in lieu of and in substitution for the same, and the substituted
Debenture shall be in a form approved by the Trustee and shall be entitled to
the benefits of this. Indenture equally with all other Debentures issued or to
be issued hereunder without preference or priority one over another. In case of
loss, theft or destruction the applicant for a substituted Debenture shall
furnish to the Company and to the Trustee such evidence of such loss, theft or
destruction as shall be satisfactory to the Company and to the Trustee in their
discretion and shall also furnish an indemnity satisfactory to them in their
discretion and shall pay all expenses incidental to the issuance of such
substituted Debenture.
EXCHANGE OF DEBENTURES
SECTION 2.11
(1) Debentures of any denomination may be exchanged for Debentures in any
other authorized denomination or denominations in the same aggregate principal
amount as the Debentures so exchanged. Exchanges of Debentures may be made at
such place or places at which the registers referred to in subsection (1) of
Section 2.6 are kept and at such other place or places, if any, as may from time
to time be designated by the Company for such purpose. Any Debentures tendered
for exchange shall be surrendered. In every case of exchange the Debentures so
surrendered shall be cancelled.
(2) Debentures issued in exchange for Debentures which at the time of such
issue have been selected or called for redemption at a later date shall be
deemed to have been selected or called for redemption in the same manner and
shall have noted thereon a statement to that effect.
CHARGE FOR REGISTRATION, TRANSFER AND CANCELLATION
SECTION 2.12
(1) Except as herein otherwise provided, in every case of exchange of
Debentures of any denomination for other Debentures and for any transfer of
Debentures, the Trustee or other registrar may make
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a sufficient charge to reimburse it for any stamp tax or governmental charge
required to be paid and, in addition, a reasonable charge for its service in
connection with, and a reasonable charge for every Debenture issued upon, such
exchange or transfer, and payment of the said charges shall be made by the party
requesting such exchange or transfer as a condition precedent thereto.
(2) Notwithstanding subsection (1) of this Section 2.12, no charge shall be
made to a Debenture holder (i) for any exchange, transfer or registration of any
Debenture applied for within a period of 30 days from the issue of the
Debentures hereunder; or (ii) for any exchange, after such period, of Debentures
in denominations in excess of $ 1,000 for Debentures in lesser denominations,
provided that the Debentures surrendered for exchange shall not have been issued
as a result of any previous exchange other than an exchange pursuant to clause
(i) of this subsection or pursuant to Section 5.2 or 6.2.
OPTION OF HOLDER AS TO PLACE OF PAYMENT
SECTION 2.13
Except as otherwise herein provided, all sums which may at any time become
payable, whether at maturity or on a declaration or on redemption or otherwise,
on account of any Debenture or any interest thereon, shall be payable, at the
option of the holder, at any of the places at which the principal of and
interest on such Debenture are payable.
ARTICLE 3
ISSUANCE OF DEBENTURES
SECTION 3.1
Debentures in the aggregate principal amount of $76,500,000 in lawful money
of Canada shall forthwith be executed by the Company and delivered to the
Trustee and shall, upon the written request of the Company, be certified by or
on behalf of the Trustee, and delivered to the Company or order without the
Trustee receiving any consideration therefor, but only upon receipt by the
Trustee of:
(a) an opinion of Counsel, dated as of the date of delivery thereof to the
effect that:
(i) this Indenture has been duly and validly authorized, executed
and delivered by and is a valid and legally binding instrument
of the Company and is enforceable;
(ii) the Debentures have been duly and validly authorized, executed
and delivered by the Company and, upon the certification and
delivery thereof by the Trustee, will be valid and legally
binding obligations of the Company entitled to the benefits of
this Indenture in accordance with their terms and are
enforceable; and
(iii) all terms provided for in this Indenture relating to the
authorization, execution, certification and delivery of the
Debentures have been complied with;
provided that such opinion may state as to enforceability that it is
subject to the qualifications that the rights and remedies of the Trustee
and the holders of the Debentures are subject to any applicable bankruptcy
or insolvency laws or other laws affecting creditors rights generally and
to the provisions of this Indenture and that no opinion is given as to the
availability of the remedy of specific performance and other equitable
remedies; and
(b) such other or further certificates, opinions, reports, declarations or
other instruments as may be necessary to comply with the provisions of any
indenture legislation referred to in Section 13.2.
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ARTICLE 4
SUBORDINATION OF DEBENTURES TO SENIOR INDEBTEDNESS
SUBORDINATION
SECTION 4.1
The payment of the principal of and interest payable on the Debentures
shall be subordinate and rank junior, to the extent and in the manner set forth
in this Article 4, to the prior payment in full of all Senior Indebtedness,
whether outstanding on the date of this Indenture or thereafter incurred. Upon
the maturity of any Senior Indebtedness by lapse of time, acceleration or
otherwise then, except as otherwise provided in Section 4.6, the principal of
and interest on such matured Senior Indebtedness shall first be paid in full or
payment duly provided for in a manner satisfactory to the Trustee before an
payment is made on account of the principal of and interest on the Debentures.
PAYMENT ON DISSOLUTION OR WINDING-UP
SECTION 4.2
(1) In the event of any payment or distribution of assets of the Company
upon any liquidation, dissolution or winding up (or arrangement or other
reorganization that is similar thereto) of the Company, whether or not pursuant
to any bankruptcy, insolvency or analogous law of Canada or of any province
thereof, subject to Section 4.6:
(a) the holders of all Senior Indebtedness shall first be entitled to
receive payment in full thereof, or such payment shall be duly
provided for in a manner satisfactory to the Trustee, before the
holders of the Debentures shall be entitled to receive any payment
upon the principal of or interest on the Debentures;
(b) the holders of Debentures by their acceptance thereof assign to
the holders of Senior Indebtedness or the Designated Representatives
thereof, for the purposes and to the extent set forth in this clause
(b) of subsection (1) of Section 42, all their right and title and
interest to and in any payment or distribution of assets of the
Company of any kind or character, whether in cash, property or
securities, to which the Debenture holders or the Trustee (for their
benefit) would be entitled but for the provisions of this Section 4.2,
and the Trustee shall take such steps as may be necessary or
appropriate to entitle the holders of Senior Indebtedness or the
Designated Representatives thereof to receive such payment or
distribution directly from the liquidating trustee or agent or other
person making such payment or distribution, whether a trustee in
bankruptcy, a receiver or receiver-manager or other liquidating agent,
rateably according to the aggregate amounts remaining unpaid on the
Senior Indebtedness held or represented by each, all to the extent
necessary to provide for payment of all Senior Indebtedness in full
(after giving effect to any concurrent payment or distribution to the
holders of such Senior Indebtedness or provision therefor), prior to
any payment upon the principal of or interest on the Debentures;
(c) in the event, notwithstanding the provisions of clauses (a) and
(b) of subsection (1) of this Section 4.2, any payment or distribution
of assets of the Company of any kind or character (other than shares
of any class in the capital of the Company into which Debentures are
convertible or cash duly delivered upon the conversion of Debentures
pursuant to Article 7 hereto in respect of the principal of or
interest on the Debentures, whether in cash, property or securities,
shall be received by the Trustee or by any Debenture holder before all
Senior Indebtedness shall have been paid in full or duly provided for,
such payment or distribution
<PAGE>
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shall be held by the recipient in trust (which trust is hereby
declared) for the benefit of, and shall be paid over to, the holders
of Senior Indebtedness or the Designated Representatives thereof,
rateably according to the aggregate amount remaining unpaid on such
Senior Indebtedness represented by each, to the extent necessary to
pay all Senior Indebtedness in full (after giving effect to any
concurrent payment or distribution to the holders of such Senior
Indebtedness or provision therefor); and
(d) when all Senior Indebtedness shall have been paid in full the
holders of the Debentures shall be entitled to receive payment from
any assets then available for such payment.
The reconstruction or reorganization of the Company, the consolidation,
amalgamation or merger of the Company with another corporation or the transfer
of its undertaking and assets as an entirety, or substantially as an entirety,
to another corporation, in each case upon the terms and conditions provided in
Article 11, shall be deemed not to be a liquidation, dissolution or winding up
of the Company for the purposes of this Section 4.2 if such reconstruction,
reorganization, consolidation, amalgamation, merger or transfer may be and is
carried out in compliance with the conditions set forth in Article 11.
(2) For the purposes of ascertaining the persons entitled to participate in
any payment or distribution, the holders of Senior Indebtedness and other
indebtedness, the amount thereof or payable thereon, the amount or amounts
distributed thereon and all other facts pertinent thereto, the Trustee and the
Debenture holders shall be entitled to rely upon a Certificate or a certificate,
in similar form, of a trustee in bankruptcy or other liquidating trustee or
agent or an order or decree of a court of competent jurisdiction.
SENIOR INDEBTEDNESS DEFAULT
SECTION 4.3
In the event that a Senior Indebtedness Default shall have occurred and be
continuing and written notice of such Senior Indebtedness Default, containing
reasonable particulars thereof, shall have been received by the Trustee and the
Company from the holders of the affected Senior Indebtedness or the Designated
Representative thereof, then subject to Section 4.6 and unless and so long as
the Company shall in good faith dispute the existence of such Senior
Indebtedness Default:
(a) the Company shall not purchase any Debentures or make any payment of
the principal of or interest on the Debentures and the Trustee shall not be
entitled to demand, institute proceedings for the collection of, or receive
any payment or benefit (including without limitation, by compensation,
set-off, combination of accounts or realization of security or otherwise);
and
(b) if the Trustee shall receive from the Company or shall hold any amount
for payment of the principal of or interest on the Debentures:
(i) the Trustee shall hold such amount in trust for the benefit of
the holders of Senior Indebtedness or the Designated
Representatives thereof rateably according to, and to the
extent of, the aggregate principal amount of each class of such
Senior Indebtedness remaining unpaid at either the time of
receipt by the Trustee of such amount from the Company or the
time of the occurrence of such Senior Indebtedness Default,
whichever is later; and
(ii) the Trustee shall from time to time pay over to the holders of
each class of Senior Indebtedness or the Designated
Representative thereof, from the amount so held in trust for
the benefit of such class, so much as shall at the time of such
payment by the Trustee have become due and remain unpaid, of
the principal of, and premium, if any, and interest on, such
class or, if the amount so due and unpaid shall be greater
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than the amount so held in trust for the benefit of such class,
then the entire amount so held;
provided, however, that if such Senior Indebtedness Default shall be
cured or waived, or all amounts that shall have become due for
principal of, and premium, if any, and interest on all Senior
Indebtedness shall have been paid or duly provided for (whether by the
Company or by application by the Trustee as aforesaid), and the
Trustee shall have received a Certificate to that effect from the
Company and either shall have received a similar certificate from the
holders of each class of Senior Indebtedness or the Designated
Representative thereof as to the payment in full or due provision for
the payment of all amounts due in respect of such class, or shall not,
within 10 days after written request by the Trustee to each such
holder or the Designated Representative thereof, have received a
statement to the contrary from any such holder or Designated
Representative, then such trusts for the benefit of the holders of
Senior Indebtedness and the Designated Representatives thereof shall
terminate and any amounts still held by the Trustee shall be applied
by it for the purposes for which such amount shall have been received
from the Company as aforesaid. In the event that the Trustee shall
make any payment to any Debenture holder contrary to the provisions of
this clause (b), then such Debenture holder shall repay any amount so
received to the Trustee, to be held and applied by the Trustee in
accordance with the provisions of this clause (b). The Trustee shall
not have any obligation to institute a suit, action or proceeding to
recover such amount unless the holders of any class of Senior
Indebtedness or the Designated Representative thereof shall have made
written request upon the Trustee to institute such suit, action or
proceeding and shall have provided to the Trustee reasonable indemnity
and security against the costs, expenses and liabilities to be
incurred therein or thereby.
SUBROGATION TO SENIOR INDEBTEDNESS
SECTION 4.4
Subject to the payment in full of all Senior Indebtedness or the making of
due provision for such payment, the holders of the Debentures shall be
subrogated to the rights of the holders of the Senior Indebtedness to receive
payments or distributions of assets of the Company applicable to such Senior
Indebtedness, to the extent of the application thereto of moneys or other assets
which would have been received by the holders of Debentures but for the
provisions of this Article 4, until the principal of and interest on the
Debentures shall be paid in full or duly provided for.
RIGHTS OF DEBENTURE HOLDERS RESERVED
SECTION 4.5
The provisions of this Article 4 are and are intended solely for the
purpose of defining the relative rights of the holders of the Debentures and of
Senior Indebtedness. Nothing in this Article 4 or elsewhere in this Indenture or
any indenture supplemental hereto or in the Debentures is intended to or shall
impair the obligation of the Company, subject to the rights of the holders of
the Senior Indebtedness, to pay to the holders of the Debentures the principal
of and interest on the Debentures as and when the same shall become due and
payable in accordance with their terms and the provisions of this Indenture or
affect the relative rights of the holders of the Debentures and creditors of the
Company other than the holders of Senior Indebtedness, nor shall anything herein
or in the Debentures prevent the Trustee or the holder of any Debenture from
exercising all remedies otherwise permitted by this Indenture upon default under
the Debentures or this Indenture or any indenture supplemental hereto, subject
to the rights (if any) under this Article 4 of the holders of Senior
Indebtedness in respect of any payment or distribution of cash, property or
securities of the Company received upon the exercise of any such remedy.
<PAGE>
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EXCEPTIONS TO SUBORDINATION
SECTION 4.6
Notwithstanding any other provision of this Article 4 or any provision of
the Debentures relating to subordination:
(a) if notice of redemption of any Debenture has been given in accordance
with Section 5.3 before receipt by the Company of written notice of a
Senior Indebtedness Default the amount necessary to provide for the
redemption of such Debentures may be paid to the Trustee by the Company;
(b) if an agreement for the purchase of any Debentures has been entered
into by the Company providing for the purchase of such Debentures on or
before a day which is not more than 40 days after the receipt by the
Company of written notice of a Senior Indebtedness Default, the amount
necessary to complete the purchase of such Debentures may be paid by the
Company;
(c) any amounts (other than the amounts referred to in clause (d) of this
Section 4.6) received by the Trustee from the Company in compliance with
the provisions of this Indenture for the purpose of making any payments to
holders of the Debentures shall be held in trust solely for the purpose of
making such payments and the Trustee may pay or make, and any such holder
may receive, any payment or distribution from any such amounts and the
holders of the Senior Indebtedness shall have no right to, or claim in
respect of, such amounts, payments or distributions, either against the
Trustee or such holders, if
(i) in case of a redemption or purchase of Debentures, the Trustee
shall not have received, on or before the fortieth day prior to the
redemption date or the date fixed for the completion of such purchase,
as the case may be, from the Company or from the holders of any class
of Senior Indebtedness or the Designated Representative thereof,
written notice that a Senior Indebtedness Default has occurred and is
continuing;
or
(ii) in case of a deposit for the purposes of any other payment to
holders of Debentures, the Trustee shall not have received, on or
before the tenth day prior to the date on which such payment to such
holders is to be made from the Company or from the holders of any
class of Senior Indebtedness or the Designated Representative thereof,
written notice that a Senior Indebtedness Default has occurred and is
continuing;
(d) this Article 4 shall not be applicable to any funds which are deposited
with the Trustee for the purposes of the redemption or retirement of
Debentures and which constitute the proceeds of the substantially
concurrent issuance of other debentures or notes maturing not earlier than
the Debentures which have subordination provisions and sinking fund
provisions (if any) not less favourable to the holders of Senior
Indebtedness than those contained herein or the substantially concurrent
sale by the Company of shares of its capital, or both; and
(e) this Article 4 shall not be applicable to any cash received by the
Trustee pursuant to Section 7.3 or by the Trustee or the holder of any
Debenture as a holder of Senior Indebtedness.
Notwithstanding this Article 4 or any other provision of this Indenture, the
Trustee shall not be charged with knowledge of the existence of any facts which
would prohibit the making of any payment of moneys to the Trustee, or the
application of such moneys by the Trustee in accordance with the terms hereof,
unless and until the Trustee shall have received written notice thereof as
provided in Section 4.3.
<PAGE>
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RENEWAL OR EXTENSION OF SENIOR INDEBTEDNESS
SECTION 4.7
(1) The holders of any Senior Indebtedness may at any time in their
discretion renew or extend the time of payment of the Senior Indebtedness so
held or exercise any other of their rights under the Senior Indebtedness
including, without limitation, the waiver of default thereunder, all without
notice to or assent from the holders of the Debentures or the Trustee.
(2) No compromise, alteration, amendment, modification, extension, renewal
or other change of, or waiver, consent or other action in respect of, any
liability or obligation under or in respect of any Senior Indebtedness, or of
any of the terms, covenants or conditions of an indenture or other document
under which any class of Senior Indebtedness shall have been issued, shall in
any way alter or affect any of the provisions of this Article 4 or of the
Debentures relating to the subordination thereof.
AUTHORIZATION TO TRUSTEE
SECTION 4.8
Each holder of Debentures by his acceptance thereof irrevocably authorizes
and directs the Trustee on his behalf to take such action as may be necessary or
appropriate to further assure the subordination provided for in this Article 4,
and appoints the Trustee his agent for any and all such purposes. Without
limitation of the foregoing, the Trustee, for and on behalf of the holders from
time to time of all the Debentures, is authorized and directed to execute deeds
of subordination from time to time upon receipt of a written request of the
Company to that effect stating that one or more named persons are the holders of
Senior Indebtedness and specifying the amount and nature thereof. Any deed of
subordination executed pursuant to this Section 4.8 shall be conclusive evidence
that the indebtedness therein specified is Senior Indebtedness. The Trustee
shall keep on file at its principal office in Vancouver, and shall deliver to
the Company, a copy of each deed of subordination executed and delivered by it
pursuant to this Section 4.8. Nothing contained in this Section 4.8 shall impair
the rights of any holders of Senior Indebtedness in whose favour a deed of
subordination has not been so executed and delivered.
RELATIONSHIP OF TRUSTEE
SECTION 4.9
The Trustee shall not have any duty or obligation to the holders of Senior
Indebtedness other than to perform such duties and obligations, and only such
duties and obligations, as are specifically set forth in this Article 4 for the
benefit of the holders of Senior Indebtedness.
RESTRICTIONS ON PURCHASE OF DEBENTURES
SECTION 4.10
Subject to Section 4.6, the Company shall not purchase any Debentures or
make any payment of the principal of or interest on, the Debentures or make any
other payments or distributions to any persons with respect thereto if, after
giving effect to such action, there would exist any Senior Indebtedness Default.
<PAGE>
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ARTICLE 5
REDEMPTION AND PURCHASE OF DEBENTURES
RIGHT TO REDEEM
SECTION 5.1
(1) The Debentures may not be redeemed prior to October 5, 1997. Thereafter
and prior to October 5, 1999 the Debentures may not be redeemed unless the
Company shall have filed with the Trustee a Certificate certifying that the
weighted average price at which the Common Shares traded on The Toronto Stock
Exchange during 20 consecutive trading days ending on the fifth trading day
preceding the date on which notice of redemption is given was not less than 125%
of the Conversion Price in effect on the date of the filing of such Certificate.
The weighted average price shall be determined by dividing the aggregate sale
price of all Common Shares sold on the said exchange during the said 20
consecutive trading days by the total number of Common Shares so sold. Subject
to the foregoing, the Debentures shall be redeemable prior to maturity in whole
at any time or in part from time to time, at the option of the Company, on not
more than 60 and not less than 30 days' prior notice, at a price equal to the
principal amount thereof together with accrued and unpaid interest to the date
fixed for redemption, the whole being hereinafter referred to as the "redemption
price".
PARTIAL REDEMPTION
SECTION 5.2
(1) In the event that less than all the Debentures for the time being
outstanding are at any time to be redeemed, the Company shall in each such case,
at least 21 days before the date upon which the notice of redemption is required
to be given, notify the Trustee in writing of its intention to redeem Debentures
and of the aggregate principal amount of Debentures to be so redeemed and the
Debentures to be so redeemed shall be selected by the Trustee by lot or in such
other manner as the Trustee may deem equitable. For the purpose of redemption
and selection for redemption, each Debenture of a denomination in excess of
$1,000 shall be deemed to consist of the appropriate number of units of $1,000
each and any part of the principal of such Debenture comprising one or more of
such units may, accordingly, be selected and be called for redemption. For this
purpose the Trustee may make regulations with regard to the manner in which
Debentures may be so selected for redemption and regulations so made shall be
valid and binding upon all holders of Debentures. In the event that any
Debenture shall be called for redemption in part only the holder thereof, upon
surrender of such Debenture in accordance with the provisions of Section 5.6,
shall be entitled to receive, without expense to such holder, one or more new
Debentures for the unredeemed part of the principal amount of the Debenture so
surrendered.
(2) Unless the context otherwise requires, the word "Debenture" or
"Debentures" as used in this Article 5 and in Article 6 shall be deemed to
include any part of the principal amount of any Debenture which shall have
become subject to redemption pursuant to the provisions hereof.
NOTICE OF REDEMPTION
SECTION 5.3
Notice of intention to redeem any of the Debentures shall be given by the
Company in the following manner:
(a) notice or intention to redeem Debentures selected for redemption shall
be given to each holder of such Debentures by letter or circular sent by
prepaid registered mail addressed to him at his last address appearing upon
the appropriate register hereinbefore mentioned and mailed not less than 30
days prior to the date fixed for redemption; provided always that neither
the failure to mail such
<PAGE>
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notice, nor any defect in any notice so mailed, to any particular holders
of Debentures shall affect the sufficiency of such notice with respect to
other holders of Debentures;
(b) every notice of intention to redeem shall, unless all of the Debentures
are to be redeemed, specify the serial numbers of the Debentures so called
for redemption and, in case a Debenture is to be redeemed in part only,
that part of the principal amount thereof so to be redeemed and shall
specify the redemption date, the redemption price, whether the redemption
price is to be paid in cash or in Common Shares pursuant to Section 5.8 and
places of payment and shall state that interest on the Debentures so to be
redeemed shall cease from and after the said redemption date; and
(c) every notice of intention to redeem which specifies that the redemption
price will be paid in cash shall contain a brief statement of the
conditions on which the Debentures called for redemption may be converted
into Common Shares pursuant to the provisions of Article 6.
Every notice sent by post as aforesaid shall be conclusively deemed to have been
given on the day it is posted.
DEBENTURES DUE ON REDEMPTION DATES
SECTION 5.4
(1) Notice having been given as aforesaid, all the Debentures so called for
redemption shall thereupon be and become due and payable at the redemption
price, on such redemption date, in the same manner and with the same effect as
if it were the date of maturity specified in such Debentures, anything therein
or herein to the contrary notwithstanding, and from and after such redemption
date, if the moneys, or Common Shares, as applicable, necessary to redeem such
Debentures shall have been deposited as hereinafter provided, such Debentures
shall not be considered as outstanding hereunder and interest upon such
Debentures shall cease.
(2) In case any question shall arise as to whether any notice has been
given as above provided and any such deposit made, such question shall be
decided by the Trustee whose decision shall be final and binding upon all
parties in interest.
DEPOSIT OF REDEMPTION MONEYS OR COMMON SHARES
SECTION 5.5
Upon Debentures having been called for redemption as hereinbefore provided,
the Company shall deposit with the Trustee or any paying agent on the order of
the Trustee, on or before the redemption date fixed in the notice of the
redemption thereof, such sums or that number of Common Shares, as applicable, as
may be sufficient to pay the redemption price of the Debentures so to be
redeemed. From the sums or Common Shares so deposited the Trustee shall pay or
cause to be paid to the holders of such Debentures so called for redemption,
upon surrender of such Debentures, the principal and interest, to which they are
respectively entitled on redemption.
SURRENDER OF DEBENTURES FOR CANCELLATION
SECTION 5.6
If the principal moneys due upon any Debentures shall become payable by
redemption or otherwise before the date of maturity thereof, the person
presenting such Debenture for payment shall surrender the same for cancellation.
All Debentures so surrendered for cancellation shall forthwith be delivered to
the Trustee and shall be cancelled by it and, subject to Section 5.2, no
Debentures shall be issued in substitution therefor.
<PAGE>
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FAILURE TO SURRENDER DEBENTURES
CALLED FOR REDEMPTION
SECTION 5.7
In case the holder of any Debenture called for redemption shall fail on or
before the date specified for redemption to surrender his Debenture, or shall
not within such time accept payment of the redemption moneys or Common Shares
payable in respect thereof or give such receipt therefore, if any, as the
Trustee may require, such redemption moneys or Common Shares may be set aside in
trust at such rate of interest, if applicable, as the depositary may allow,
either in the deposit department of the Trustee or in a chartered bank, and such
setting aside shall for all purposes be deemed a payment to the Debenture holder
of the sum so set aside and, to that extent, the said Debenture shall thereafter
not be considered as outstanding hereunder and the Debenture holder shall have
no other right except to receive payment out of the moneys or Common Shares so
paid and deposited, upon surrender and delivery up of his Debenture, of the
redemption price of such Debenture including accrued and unpaid interest thereon
to the date specified for redemption plus such interest thereon, if any, as the
depositary may allow.
PAYMENT IN COMMON SHARES ON REDEMPTION
OF DEBENTURES OR MATURITY DATE
SECTION 5.8
Subject to section 5.9, applicable law and regulatory approvals, and
notwithstanding any other provision of this Indenture, the Company, at its
option, on at least 30 days and not more than 60 days notice given in accordance
with section 5.3 (which notice, in the case of a redemption, may be given
contemporaneously with notice of such redemption pursuant to section 5.3), may
satisfy its obligation hereunder to pay such aggregate amount payable plus
accrued interest payable to the holders of Debentures on redemption or on the
date of maturity by the issue to such holders of that number of Common Shares
determined by dividing such aggregate principal amount by 95% of the weighted
average price at which the Common Shares traded on The Toronto Stock Exchange
during 20 consecutive trading days ending on the fifth trading day preceding the
date of redemption or maturity. The weighted average price shall be determined
by dividing the aggregate sale price of all Common Shares sold on the said
exchange during the said 20 consecutive trading days by the total number of
Common Shares sold.
The Company may not exercise this right if an Event of Default hereunder
has occurred and is continuing at the date of redemption or on the date of
maturity, as the case may be.
The Company reserves the right to satisfy its obligation hereunder to pay
the aggregate principal amount plus accrued interest payable to the holders of
Debentures on redemption or on the date of maturity, as the case may be, in
cash, instead of in Common Shares as provided above, to holders of Debentures
not residing in Canada, if any.
ISSUE OF COMMON SHARES ON REDEMPTION
OF DEBENTURES OR MATURITY DATE
SECTION 5.9
(1) On the maturity date or the redemption date, as the case may be, and if
otherwise permitted to do so by law, the Company may issue that number of Common
Shares determined under section 5.8 and, in such case, will deliver to the
Trustee the following:
(a) an Officer's Certificate certifying that no Event of Default
hereunder has occurred and is continuing as at the date of redemption
or on the maturity date, as the case may be; and
<PAGE>
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(b) an opinion of counsel that (i) all requirements imposed by this
Indenture or by law in connection with the proposed issue of Common
Shares have been complied with and such Common Shares may be freely
traded, through persons registered as securities dealers if required
under applicable laws, (ii) the Common Shares so issued have been
validly issued and upon receipt by the Company of the consideration
therefor will be outstanding as fully paid and non-assessable shares
and (iii) that the Vancouver Stock Exchange, The Montreal Exchange and
The Toronto Stock Exchange have conditionally approved the listing of
the Common Shares so issued and any conditions stipulated by those
exchanges have been validly and completely fulfilled as at the date
such Common Shares are so issued.
(2) If any registration or filing pursuant to any securities laws of Canada
or any province thereof is required to ensure that any Common Shares issuable on
the maturity date or the redemption date, as the case may be, are issued in
compliance with all such laws or to ensure that any such Common Shares, once
issued, may be freely traded, the Company covenants that it will take all such
action as may be necessary to make or obtain such registration or filing, as the
case may be.
(3) Subject to section 5.2, the issue by the Company of that number of
Common Shares determined under section 5.8 shall fully satisfy and discharge the
obligation of the Company to pay the principal amount of such Debentures and
accrued interest.
(4) Notwithstanding anything herein contained, Common Shares will only be
issued in compliance with the securities laws of any applicable jurisdiction,
and the certificates representing the Common Shares thereby issued may bear such
legend as may, in the opinion of counsel to the Company, acting reasonably, be
necessary in order to avoid a violation of any securities laws of any province
in Canada or of the United States or to comply with the requirements of any
stock exchange on which the Common Shares are listed, provided that if at any
time, in the opinion of counsel to the Company, such legends are no longer
necessary in order to avoid a violation of any such laws, or the holder of any
such legended certificate, at the holder's expense, provides the Company with
evidence satisfactory in form and substance to the Company (which may include an
opinion of counsel satisfactory to the Company) to the effect that such holder
is entitled to sell or otherwise transfer such Common Shares, in a transaction
in which such legends are not required, such legended certificate may thereafter
be surrendered to the Company in exchange for a certificate which does not bear
such legend.
(5) Certificates representing Common Shares to be issued by the Company
pursuant to Section 5.9 upon the redemption (or the maturity date) of Debentures
bearing the U.S. Securities Act legend set forth in Section 2.2(5), shall, when
issued, bear the legend set forth in Section 2.2(5).
NO REQUIREMENT TO ISSUE FRACTIONAL SHARES
SECTION 5.10
The Company shall not be required to issue fractional Common Shares upon
the issue of Common Shares pursuant to section 5.9. If any fractional interest
in a Common Share would, except for the provisions of this section, be
deliverable upon the issue of any shares pursuant to section 5.9, the Company
shall, in lieu of delivering any certificate representing such fractional
interest, satisfy such fractional interest by paying to the registered holder of
such shares an amount in lawful money of Canada equal (computed to the nearest
cent) to an identical fraction of the weighted average price of the Common
Shares on the maturity date or the date fixed for redemption, as the case may
be, calculated pursuant to section 5.8.
REDEMPTION ON LIQUIDATION
SECTION 5.11
In the event of proceedings being instituted for the voluntary liquidation
or winding up of the Company before the maturity of the Debentures for the time
being outstanding (except for the purpose of effecting a
<PAGE>
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reconstruction of the Company or its consolidation, amalgamation or merger with
another corporation or the transfer of its undertaking and assets as an entirety
to any other corporation in the manner provided in Article 11 hereof) all
Debentures shall be redeemed and/or paid by the Company at the price, if any, at
which the Company could redeem or pay the same (at the option of the Company and
not pursuant to any covenant or provision requiring redemption) on the date on
which the resolution was passed for the voluntary liquidation or winding-up of
the Company.
UNCLAIMED MONEYS OR COMMON SHARES
SECTION 5.12
In the event that any money or Common Shares required to be deposited
hereunder with the Trustee or any depositary or paying agent on account of
principal or interest on any Debentures issued hereunder shall remain so
deposited for a period of six years, then such moneys, together with any
accumulated interest thereon, shall at the end of such period be paid over by
the Trustee or such depositary or paying agent to the Company on its demand.
PURCHASE OF DEBENTURES
SECTION 5.13
(1) At any time when the Company is not in default hereunder it may
purchase all or any of the Debentures in the market (which shall include
purchases from or through an investment dealer or a firm holding membership on a
recognized stock exchange) or by tender or by private contract, at the principal
amount therefor, together in each case with accrued and unpaid interest to the
date of purchase and costs of purchase. All Debentures so purchased shall
forthwith be delivered to the Trustee and shall be cancelled by it and no
Debentures shall be issued in substitution therefor.
(2) If, upon an invitation for tenders, more Debentures are tendered at the
same lowest price than the Company is prepared to accept at that price the
Debentures to be purchased by the Company shall be selected by the Trustee by
lot, or in such other manner as the Trustee may deem equitable, from the
Debentures tendered by each tendering holder of Debentures who tendered at such
lowest price. For this purpose the Trustee may make, and from time to time
amend, regulations with respect to the manner in which Debentures may be so
selected and regulations so made shah be valid and binding upon all holders of
Debentures notwithstanding the fact that, as a result thereof, one or more of
such Debentures become subject to purchase in part only.
CANCELLATION OF DEBENTURES
SECTION 5.14
All Debentures redeemed and all Debentures purchased under this Article
shall forthwith be delivered to the Trustee and shall be cancelled by it and no
Debentures shall be issued in substitution therefor.
<PAGE>
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ARTICLE 6
CONVERSION OF DEBENTURES
CONVERSION PRIVILEGE AND CONVERSION PRICE
SECTION 6.1
(1) Upon and subject to the provisions and conditions of this Article, the
holder of each Debenture shall have the right, at his option, at any time on or
before the close of business on October 3, 2004, the date immediately preceding
the date of maturity of the Debenture or, if such Debenture be previously called
for redemption, the business day immediately preceding the date fixed for
redemption of such Debenture (such time and date in this Article being referred
to as the "Time of Expiry") to convert the whole or any part which is $1,000 or
an integral multiple thereof, of the principal amount of such Debenture into
fully paid and non assessable Common Shares by applying such principal amount to
the purchase of such Common Shares at the conversion price (the "Conversion
Price") of $16.50 per Common Share, being a rate of 60.606 Common Shares for
each $1,000 principal amount of Debentures, subject to adjustment from time to
time as provided in Section 6.4.
(2) Such right of conversion shall extend only to the maximum number of
whole Common Shares into which the aggregate principal amount of the Debenture
or Debentures surrendered for conversion at any one time by the holder thereof
may be converted in accordance with the foregoing provisions of this Section.
Fractional interests in Common Shares shall be adjusted for in the manner
provided in Section 6.5.
(3) "Close of business" as used in this Article 7 shall mean the normal
closing hour of the office of the Trustee referred to in subsection (1) of
Section 62 at which such conversion right is being exercised.
(4) If at any time prior to the Time of Expiry any alteration or
reorganization of the capital of the Company or amalgamation of the Company with
another corporation or the transfer or sale of all or substantially all the
assets of the Company to another corporation shall be effected in such a manner
that holders of Common Shares shall be entitled to receive shares or other
securities or property in lieu of or in exchange for Common Shares, each holder
of a Debenture who shall thereafter convert such Debenture under this Article 6
shall be entitled to receive and shall accept, in lieu of the number of Common
Shares to which he was theretofore entitled upon such conversion, the kind and
amount of shares or other securities or property which such Debenture holder
would have been entitled to receive as a result of such alteration,
reorganization, amalgamation, transfer or sale if, on the effective date
thereof, he had been the registered holder of the number of Common Shares to
which he would have been entitled if he had exercised his right of conversion
under this Article 6 immediately prior to such alteration, reorganization,
transfer or sale becoming effective but at the Conversion Price in effect on the
actual date of the exercise of the conversion right. If necessary, appropriate
adjustments shall be made in the application of the provisions set forth in this
Article 6 with respect to the rights and interests thereafter of the holders of
Debentures to the end that the provisions set forth in this Article 6 shall
thereafter correspondingly be made applicable as nearly as may reasonably be in
relation to any shares or other securities or property thereafter deliverable
upon the conversion of any Debenture. Any such adjustments shall be made by and
set forth in a supplemental indenture approved by the Board of Directors and by
the Trustee and shall for all purposes be conclusively deemed to be an
appropriate adjustment. The provisions of this subsection (4) of this Section
6.1 shall not apply to an event giving rise to an adjustment to the Conversion
Price pursuant to Section 6.4.
MANNER OF EXERCISE OF RIGHT TO CONVERT
SECTION 6.2
(1) The holder of a Debenture desiring to convert such Debenture in whole
or in part into Common Shares shall, prior to the Time of Expiry, surrender such
Debenture to the Trustee at its principal office in
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Vancouver, Toronto or Montreal with the conversion form on the back of such
Debenture, or any other written notice in a form satisfactory to the Trustee, in
either case duly executed by the holder or his executors or administrators or
other legal representatives or his or their attorney duly appointed by an
instrument in writing in form and executed in a manner satisfactory to the
Trustee, exercising his right to convert such Debenture in accordance with the
provisions of this Article. Thereupon such Debenture holder or, subject to
payment of all applicable stamp or security transfer taxes or other governmental
charges and compliance with all reasonable requirements of the Trustee, his
nominee or assignee, shall be entitled to be entered in the books of the Company
as at the Date of Conversion (or such later date as is specified in subsection
(2) of this Section 6.2) as the holder of the number of Common Shares into which
such Debenture is convertible in accordance with the provisions of this Article
and, as soon as practicable thereafter, the Company shall deliver to such
Debenture holder or, subject to the aforesaid, his nominee or assignee, a
certificate or certificates for such Common Shares and, if applicable, a cheque
for any amount payable pursuant to Section 6.5.
(2) For the purposes of this Article, a Debenture shall be deemed to be
surrendered for conversion on the date (herein called "Date of Conversion") on
which it is so surrendered in accordance with the provisions of this Article
and, in the case of a Debenture so surrendered by post or other means of
transmission, on the date on which it is received by the Trustee or its agent at
one of the offices specified in subsection (1) of this Section. If a Debenture
is surrendered for conversion on a day on which the register for Common Shares
is closed, the person or persons entitled to receive Common Shares shall become
the holder or holders of record of such Common Shares as at the date on which
such registers are next reopened.
(3) Any part, being $1,000 or an integral multiple thereof, of a Debenture
in a denomination in excess of $1,000 may be converted as provided in this
Article and all references in this Indenture to conversion of Debentures shall
be deemed to include conversion of such parts.
(4) If a Debenture holder exercises his right of conversion with respect to
a part only of a Debenture which has previously been called for redemption in
part, the Debenture holder shall be deemed to exercise such right first with
respect to that part of the Debenture which has been so called and thereafter
with respect to the balance of the Debenture, unless at the time of exercise of
such right the Debenture holder gives to the Trustee instructions in writing to
the contrary.
(5) The holder of any Debenture of which part only is converted shall, upon
the exercise of his right of conversion, surrender the said Debenture to the
Trustee, and the Trustee shall cancel the same and shall without charge
forthwith certify and deliver to the holder a new Debenture or Debentures in an
aggregate principal amount equal to the unconverted part of the principal amount
of the Debenture so surrendered; provided that any such new Debenture or
Debentures issued in exchange for a Debenture which at the time of such issue
has been called for redemption in whole or in part shall be deemed to have been
called for redemption in the same manner and shall have noted thereon a
statement to that effect.
(6) The holder of a Debenture surrendered for conversion in accordance with
this Section shall be entitled to receive accrued and unpaid interest in respect
thereof up to the interest payment date on or next preceding the Date of
Conversion of such Debenture, but there shall be no payment or adjustment by the
Company on account of any interest accrued or accruing on such Debentures from
the date of such interest payment date. The Common Shares issued upon such
conversion shall rank only in respect of dividends declared in favour of
shareholders of record on and after the Date of Conversion or such later date as
such holder shall become the holder of record of such Common Shares pursuant to
subsection (2) of this Section, from which applicable date such Common Shares
shall for all purposes be and be deemed to be issued and outstanding as fully
paid and non-assessable Common Shares.
(7) Certificates representing Common Shares to be issued by the Company
pursuant to this Section 6.2 upon conversion of Debentures bearing the U.S.
Securities Act legend set forth in Section 2.2(5) shall, when issued, bear the
legend set forth in Section 2.2(5).
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REVIVAL OF RIGHT TO CONVERT
SECTION 6.3
If payment of the redemption price of any Debenture which has been called
for redemption is not made upon due surrender of such Debenture on the date
fixed for such redemption, the right to convert such Debenture shall revive and
continue as if such Debenture had not been called for redemption.
ADJUSTMENT TO CONVERSION PRICE
SECTION 6.4
The Conversion Price in effect at any date shall be subject to adjustment
from time to time as follows:
(1) If and whenever at any time after October 4, 1994 and prior to the Time
of Expiry, the Company shall (i) subdivide the outstanding Common Shares into a
greater number of Common Shares, (ii) consolidate the outstanding Common Shares
into a lesser number of Common Shares, or (iii) issue Common Shares or
securities convertible into or exchangeable for Common Shares, to the holders of
all or substantially all of the outstanding Common Shares by way of a stock
dividend (other than the issue of Common Shares to holders of Common Shares,
pursuant to their exercise of options to receive dividends in the form of shares
in lieu of cash Dividends paid in the ordinary course on the outstanding Common
Shares), the Conversion Price shall, on the effective date of such subdivision
or consolidation or on the record date of such stock dividend, as the case may
be, be adjusted to that amount which is in the same proportion to the Conversion
Price in effect immediately prior to such subdivision, consolidation or stock
dividend as the number of outstanding Common Shares before giving effect to such
subdivision, consolidation or stock dividend bears to the number of outstanding
Common Shares after giving effect to such subdivision, consolidation or stock
dividend. Such adjustment shall be made successively whenever any event referred
to in this subsection (1) shall occur; and any such issue of Common Shares by
way of a stock dividend shall be deemed to have been made on the record date for
the stock dividend for the purpose of calculating the number of outstanding
Common Shares under subsections (2) and (3) of this Section 6.4.
(2) If and whenever at any time after October 4, 1994 and prior to the Time
of Expiry, the Company shall fix a record date for the issuance of rights,
options or warrants to all or substantially all the holders of the outstanding
Common Shares entitling them, for a period expiring not more than 45 days after
such record date, to subscribe for or purchase Common Shares (or securities
convertible into Common Shares) at a price per share (or having a conversion or
exchange price per share) less than 95% of the Current Market Price (as defined
in subsection (5) of this Section 6.4) of a Common Share on such record date,
the Conversion Price shall be adjusted immediately after such record date so
that it shall equal the price determined by multiplying the Conversion Price in
effect on such record date by a fraction of which the numerator shall be the
total number of Common Shares outstanding on such record date plus a number of
Common Shares equal to the number arrived at by dividing the aggregate price of
the total number of additional Common Shares offered for subscription or
purchase (or the aggregate conversion or exchange price of the convertible
securities so offered) by such Current Market Price, and of which the
denominator shall be the total number of Common Shares outstanding on such
record date plus the total number of additional Common Shares offered for
subscription or purchase (or into which the convertible securities so offered
are convertible); and Common Shares owned by or held for the account of the
Company or any Subsidiary shall be deemed not to be outstanding for the purpose
of any such computation. Such adjustment shall be made successively whenever
such a record date is fixed. To the extent that any rights, options or warrants
are not so issued or any such rights, options or warrants are not exercised
prior to the expiration thereof, the Conversion Price shall then be readjusted
to the Conversion Price which would then be in effect if such record date had
not been fixed or to the Conversion Price which would then be in effect based
upon the number of Common Shares (or securities convertible into Common Shares)
actually issued upon the exercise of such rights or warrants.
<PAGE>
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(3) If and whenever at any time after October 4, 1994 and prior to the Time
of Expiry, the Company shall fix a record date for the making of a distribution
to all or substantially all the holders of its outstanding Common Shares of (i)
shares of any class other than Common Shares, whether of the Company or any
other corporation (other than shares distributed to holders of Common Shares
pursuant to their exercise of options to receive dividends in the form of such
shares in lieu of cash Dividends paid in the ordinary course on the Common
Shares), or (ii) rights, options or warrants (excluding those referred to in
subsection (2) of this Section 6.4) or (iii) evidences of its indebtedness, or
(iv) assets (excluding Dividends paid in the ordinary course) then, in each such
case, the Conversion Price shall be adjusted immediately after such record date
so that it shall equal the price determined by multiplying the Conversion Price
in effect on such record date by a fraction, of which the numerator shall be (a)
the total number of Common Shares outstanding on such record date multiplied by
the Current Market Price of a Common Share on such record date, less (b) the
aggregate fair market value (as determined by the Board of Directors with the
approval of the Trustee and subject to the prior approval of The Toronto Stock
Exchange, which determination shall be conclusive) of such shares or rights,
options or warrants or evidences of indebtedness or assets so distributed, and
of which the denominator shall be the amount determined in (a) of this
subsection (3); and any Common Shares owned by or held for the account of the
Company or any Subsidiary shall be deemed not to be outstanding for the purpose
of any such computation. Such adjustment shall be made successively whenever
such a record date is fixed. To the extent that such distribution not so made,
the Conversion Price shall then be readjusted to the Conversion Price which
would then be in effect if such record date had not been fixed or to the
Conversion Price which would then be in effect based upon such shares or rights,
options or warrants or evidences of indebtedness or assets actually distributed,
as the case may be.
(4) No adjustment to the Conversion Price shall be made in respect of any
event described in subsections (2) or (3) of this Section 6.4 if the holders of
the Debentures are allowed to participate as though they had converted their
Debentures prior to the applicable record date or effective date, such
participation being subject to the prior written consent of The Toronto Stock
Exchange.
(5) For the purpose of any computation under subsections (2) or (3) of this
Section 6.4, the "Current Market Price" of a Common Share at any date shall be
the weighted average price per share for Common Shares, as the case may be, for
any 30 consecutive trading days (selected by the Company) commencing not more
than 45 trading days and ending not less than five trading days before such date
on The Toronto Stock Exchange or, if the shares in respect of which a
determination of Current Market Price is being made are not listed thereon, on
such stock exchange on which such shares are listed as may be selected for such
purpose by the Directors and approved by the Trustee or, if such shares are not
listed on any stock exchange, then on the over-the-counter market. The weighted
average price shall be determined by dividing the aggregate sale price of all
such shares sold on the said exchange or market, as the case may be, during the
said 30 consecutive trading days by the total number of such shares so sold.
(6) In any case in which this Section 6.4 shall require that an adjustment
shall become effective, immediately after a record date for an event referred to
herein, the Company may defer, until the occurrence of such event, issuing to
the holder of any Debenture converted after such record date and before the
occurrence of such event the additional Common Shares, if any, issuable upon
such conversion by reason of such adjustment; provided, however, that the
Company shall deliver to such holder an appropriate instrument evidencing such
holder's right to receive such additional Common Shares upon the occurrence of
such event and the right to receive any distributions made on such additional
Common Shares declared in favour of holders of record of Common Shares on and
after the Date of Conversion or such later date as such holder would, but for
the provisions of this subsection (6), have become the holder of record of such
additional Common Shares pursuant to Section 6.2.
(7) The adjustments provided for in this Section 6.4 are cumulative, shall,
in the case of adjustments to the Conversion Price, be computed to the nearest
one-tenth of one cent and shall apply (without duplication) to successive
subdivisions, consolidations, distributions, issuances or other events resulting
in any adjustment under the provisions of this Section, provided that,
notwithstanding any other provision of this Section, no adjustment of the
Conversion Price shall be required unless such adjustment
<PAGE>
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would require an increase or decrease of at least 1% in the Conversion Price
then in effect; provided, however, that any adjustments which by reason of this
subsection (7) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment.
(7) In the event of any question arising with respect to the adjustments
provided in this Section 6.4, such question shall be conclusively determined by
a firm of chartered accountants appointed by the Company and acceptable to the
Trustee (who may be the Auditors of the Company); and such accountants shall
have access to all necessary records of the Company; and such determination
shall be binding upon the Company, the Trustee and the Debenture holders.
NO REQUIREMENT TO ISSUE FRACTIONAL SHARES
SECTION 6.5
The Company shall not be required to issue fractional Common Shares upon
the conversion of Debentures pursuant to this Article. If more than one
Debenture shall be surrendered for conversion at one time which are registered
in the name of the same holder, the number of whole Common Shares issuable upon
conversion thereof shall be computed on the basis of the aggregate principal
amount of such Debentures to be converted. If any fractional interest in a
Common Share would, except for the provisions of this Section, be delivered upon
the conversion of any principal amount of Debentures, the Company shall, in lieu
of delivering a certificate for such fractional interest, satisfy such
fractional interest by paying to the holder of such surrendered Debenture an
amount in lawful money of Canada equal (computed to the nearest cent) to the
same fraction of the price on The Toronto Stock Exchange for the last board lot
trade of Common Shares on the business day next preceding the Date of Conversion
as the fraction of a Common Share in lieu of which such cash payment is being
made; provided however, that if there is no board lot trade of Common Shares on
such preceding business day, the price to be used in computing such fractional
interest shall be the average of the bid and ask prices on The Toronto Stock
Exchange for a board lot of Common Shares on such preceding business day. If at
any time the Common Shares are not listed on The Toronto Stock Exchange, then
the price to be used at such time in computing such fractional interest shall be
the applicable price on such exchange on which the Common Shares are listed as
may be selected for such purpose by the Directors and approved by the Trustee
or, if the Common Shares are not listed on any stock exchange, then such
applicable price in the over-the-counter market.
TAXES AND CHARGES ON CONVERSION
SECTION 6.6
The Company will from time to time promptly pay or make provision
satisfactory to the Trustee for the payment of any and all taxes and charges
which may be imposed by the laws of Canada or any province thereof (except
income tax or security transfer tax, if any) which shall be payable with respect
to the issuance and/or delivery to the holders of Debentures, upon the exercise
of their right of conversion, of Common Shares pursuant to the terms of the
Debentures and of this Indenture.
CANCELLATION OF CONVERTED DEBENTURES
SECTION 6.7
All Debentures converted in whole or in part under the provisions of this
Article shall be forthwith delivered to and cancelled by the Trustee and,
subject to the provisions of subsection (5) of Section 6.2, no Debenture shall
be issued in substitution therefor.
<PAGE>
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CERTIFICATE AS TO ADJUSTMENT
SECTION 6.8
The Company shall from time to time immediately after the occurrence of any
event which requires an adjustment or readjustment as provided in Section 6.4,
deliver a Certificate to the Trustee specifying the nature of the event
requiring the same and the amount of the adjustment necessitated thereby and
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based, which Certificate and the amount of the
adjustment specified therein shall be accompanied by an unqualified opinion of a
firm of chartered accountants appointed by the Company and acceptable to the
Trustee (who may be the Auditors of the Company) to the effect that such
Certificate presents fairly all matters described therein, and that the
calculation of the amount of the adjustment specified therein is accurate, in
accordance with the requirements of this Indenture, and such Certificate, when
approved by the Trustee, shall be conclusive and binding on all parties in
interest. The Company shall, except in respect of any subdivision or
consolidation of Common Shares, forthwith give notice to the Debenture holders
in the manner provided in Article 14 specifying the event requiring such
adjustment or readjustment and the results thereof, including the resulting
Conversion Price; provided that if the Company has given notice under Section
6.9 covering all the relevant facts in respect of such event and if the Trustee
approves, no such notice need be given under this Section 6.8.
NOTICE OF SPECIAL MATTERS
SECTION 6.9
The Company covenants with the Trustee that at any time prior to the Time
of Expiry and so long as any Debenture remains outstanding, it will give notice
to the Trustee, and to the Debenture holders in the manner provided in Article
14, of its intention to fix an effective date for any event referred to in
subsection (4) of Section 6.1 or a record date for any event referred to in
subsections (1), (2) or (3) of Section 6.4 (other than the subdivision or
consolidation of the Common Shares) which may give rise to an adjustment in the
Conversion Price and, in each case, such notice shall specify the particulars of
such event and the effective date or both the record date and the effective
date, as the case may be, for such event; provided that the Company shall only
be required to specify in such notice such particulars of such event as shall
have been fixed and determined on the date on which such notice is given. Such
notice shall be given in each case not less than 14 days prior to such
applicable effective date or record date.
PROTECTION OF TRUSTEE
SECTION 6.10
Subject to Section 13.1, the Trustee (i) shall not at any time be under any
duty or responsibility to any Debenture holder to determine whether any facts
exist which may require any adjustment in the Conversion Price, or with respect
to the nature or extent of any such adjustment when made, or with respect to the
method employed in making the same; (ii) shall not be accountable with respect
to the validity or value (or the kind or amount) of any Common Shares or of any
shares or other securities or property which may at any time be issued or
delivered upon the conversion of any Debenture; and (iii) shall not be
responsible for any failure of the Company to make any cash payment or to issue,
transfer or deliver Common Shares or share certificates upon the surrender of
any Debenture for the purpose of conversion, or to comply with any of the
covenants contained in this Article.
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AVAILABILITY OF SHARES
SECTION 6.11
The Company shall at all times on or before the Time of Expiry (so long as
any of the Debentures remain outstanding) set aside and reserve out of its
authorized but unissued Common Shares, for the purpose of effecting the
conversion of the Debentures, such number of Common Shares as shall from time to
time be sufficient to effect the conversion of all outstanding Debentures. The
Company covenants that all Common Shares which shall be issued on conversion of
Debentures shall be duly and validly issued as fully paid and non-assessable
shares. As a condition precedent to the taking of any action which would result
in an adjustment to the Conversion Price, the Company shall take any corporate
action which may, in the opinion of Counsel, be necessary in order that the
shares to which the Debenture holders are entitled on the full exercise of their
conversion rights in accordance with the provisions hereof shall be available
for such purpose and that such shares may be validly and legally issued as fully
paid and non-assessable shares.
GOVERNMENTAL REQUIREMENTS
SECTION 6.12
If any Common Shares of the Company to be issued upon the conversion of the
Debentures hereunder require any filing with or registration with or approval of
any governmental authority in Canada or the United States or compliance with any
other requirement under any law of Canada or a province thereof or the United
States before such shares may be validly issued upon such conversion or traded
by the person to whom they are issued pursuant to such conversion, the Company
will take such action as may be necessary to secure such filing, registration,
approval or compliance as the case may be; provided that, in the event that such
filing, registration, approval or compliance is required only by reason of the
particular circumstances of or actions taken by any such person, the Company
will not be required to take such action.
ARTICLE 7
COVENANTS OF THE COMPANY
The Company covenants and agrees that so long as any of the Debentures are
outstanding:
PAYMENT OF PRINCIPAL AND INTEREST
SECTION 7.1
The Company shall duly and punctually pay or cause to be paid the principal
of and interest on each of the Debentures at the places, at the respective times
and in the manner provided herein and in the Debentures.
TO CARRY ON BUSINESS
SECTION 7.2
The Company shall carry on its business in a proper and efficient manner
and, subject to the express provisions hereof, will do or cause to be done all
things necessary to preserve and keep in full force and effect its corporate
existence, and will not consolidate, amalgamate or merge with any other
corporation or transfer its undertaking and assets as an entirety or
substantially as an entirety to any other corporation except on compliance with
the provisions of Article 11.
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TO PAY TRUSTEE'S REMUNERATION
SECTION 7.3
(1) The Company shall pay to the Trustee such reasonable remuneration for
its services as trustee as may be agreed upon between the Trustee and the
Company and shall also pay all costs, charges and expenses properly incurred by
the Trustee in connection with the trusts hereof and also (in addition to any
right of indemnity by law given to the Trustee) shall at all times keep
indemnified the Trustee against all actions, proceedings, costs, claims and
demands in respect of any matter or thing done or omitted by the Trustee (other
than through a failure by the Trustee to comply with the standard of care
required by Section 13.1) in any way relating to this Indenture.
(2) All costs, charges and expenses incurred and all payments made by the
Trustee in the lawful exercise of the powers hereby conferred upon it and all
remuneration payable to the Trustee shall be payable by the Company on demand
and shall carry interest from 60 days after the date the Trustee demands payment
thereof from the Company at a rate of interest equal to the prime rate of
interest per annum charged to the Company by the Company's banker from time to
time and all such costs, charges and expenses and payments and all interest
thereon and all remuneration payable to the Trustee hereunder shall be payable
out of any funds coming into the possession of the Trustee, except funds held in
trust for the payment of particular Debentures or interest thereon in priority
to any payment on or in respect of be Debentures. The said remuneration shall
continue to be payable until the trusts hereof shall be finally wound up whether
or not a liquidator, receiver or receiver and manager shall have been appointed
or the trusts of this Indenture shall be in due course of administration or
under the direction of a court of competent jurisdiction.
NOT TO EXTEND TIME FOR PAYMENT OF INTEREST
SECTION 7.4
(1) In order to prevent any accumulation after maturity of unpaid interest
or of unpaid Debentures the Company shall not directly or indirectly extend or
assent to the extension of time for payment of any interest upon any Debentures
and shall not directly or indirectly be or become a party to or approve any such
arrangement by funding any interest on the Debentures or in any other manner.
(2) In case the time for the payment of any such interest shall be so
extended, whether or not such extension be by or with the consent of the
Company, notwithstanding anything herein or in the Debentures contained, such
interest shall not be entitled in case of default hereunder to the benefit of
this Indenture except subject to the prior payment in full of the principal of
all the Debentures issued hereunder and then outstanding and all interest on
such Debentures the payment of which has not been so extended, and of all other
moneys payable hereunder.
AUDIT
SECTION 7.5
The Company will furnish to the Trustee, within 180 days after the end of
each fiscal year, a copy of the financial statements and the report of the
Company's Auditors thereon which is furnished to the shareholders of the
Company.
TRUSTEE MAY PERFORM COVENANTS
SECTION 7.6
If the Company shall fail to perform any covenant on its part herein
contained, the Trustee may in its discretion, but (subject to Section 8.2) need
not, notify the Debenture holders of such of such failure and/or itself may
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perform any of said covenants capable of being performed by it and, if any such
covenant requires the payment or expenditure of money, it may make such payment
or expenditure with it own funds, or with money borrowed by or advanced to it
for such purpose, but shall be under no obligation so to do.
CERTIFICATES OF COMPLIANCE
SECTION 7.7
At least once in every 12 month period commencing on the date hereof and at
any other time upon the demand of the Trustee, the Company will deliver to the
Trustee a Certificate stating that the Company has complied with all covenants,
conditions or other requirements contained in this Indenture that, if not
complied with, would, with the giving of notice, lapse of time or otherwise,
constitute an Event of Default or, if there has been a failure to so comply,
giving particulars thereof.
MAINTAIN LISTING AND REPORTING STATUS
SECTION 7.8
The Company will take all reasonable steps to maintain a listing for the
Common Shares on The Toronto Stock Exchange or another recognized stock exchange
in Canada and to maintain the status of the Company as a reporting issuer under
all applicable securities laws, regulations and policies in British Columbia,
Ontario and Quebec and to ensure that it is not in default of any requirements
thereof in respect of such status.
ARTICLE 8
REMEDIES
ACCELERATION OF MATURITY ON DEFAULT
SECTION 8.1
Upon the happening of any one or more of the following Events of Default,
namely:
(a) if the Company makes default in payment of the principal on any
Debenture when the same becomes due under any provision hereof or of
the Debentures; or if the Company makes default in payment of any
interest due on any Debenture when the same becomes due under any
provision hereof or of the Debentures and any such default continues
for a period of 30 days;
(b) if a receiving order is made against the Company or any Subsidiary
which is material to the Company on a consolidated basis (in this
Section 8.1 called a "Substantial Subsidiary") or the Company or any
such Substantial Subsidiary is ordered to be wound up by any court of
competent jurisdiction, or if a liquidator or a receiver or a receiver
and manager or a trustee in bankruptcy is appointed to the Company or
any such Substantial Subsidiary, and such event continues or such
order remains in effect for a period of 60 days and, in the case of
any of such events in respect of any such Substantial Subsidiary,
written notice thereof is given to the Company by the Trustee or to
the Company and to the Trustee by the holders of not less than ten
percent in principal amount of the Debentures;
(c) if a resolution be passed for the winding up or liquidation of the
Company, except in the course of carrying out, or pursuant to a
transaction carried out in compliance with, the conditions of Article
11, or if the Company or a Substantial Subsidiary becomes insolvent or
bankrupt or makes a proposal under the Bankruptcy Act (Canada) or
consents to the
<PAGE>
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appointment of a receiver or a receiver and manager of, or of any
substantial part of the property of, the Company or a Substantial
Subsidiary, or makes a general assignment for the benefit of
creditors, or admits in writing its inability to pay its debts
generally as they become due, or takes corporate action in furtherance
of any of the aforesaid purposes;
(d) if the holder of any encumbrance shall take possession of the
property of the Company or a Substantial Subsidiary or any part
thereof which is a substantial part thereof, or if a distress or
execution or any similar process be levied or enforced thereagainst
and remain unsatisfied for such period as would permit such property
or such part thereof to be sold thereunder;
(e) if the Company shall neglect to observe or perform any other
covenant or condition herein contained on its part to be observed or
performed and, after notice in writing has been given by the Trustee
to the Company specifying such default and requiring the Company to
put an end to the same, (which said notice may be given by the
Trustee, in its discretion, and shall be given by the Trustee upon
receipt of a request in writing signed by the holders of not less than
25% in principal amount of the Debentures then outstanding) the
Company shall fail to make good such default within a period of 30
days, unless the Trustee (having regard to the subject matter of the
default) shall have agreed to a longer period, and in such event,
within the period agreed to by the Trustee;
then in each and every such event, if such event is continuing, the Trustee,
subject to Section 8.3, may in its discretion and shall, upon the request in
writing of the holders of not less than 25% in principal amount of the
Debentures then outstanding, declare the principal of, and interest on, all
Debentures then outstanding and all other moneys outstanding hereunder to be due
and payable, and the same shall forthwith become immediately due and payable to
the Trustee, anything therein or herein to the contrary notwithstanding and the
Company shall forthwith pay to the Trustee the amount of the principal of, and
interest then accrued on, all of the Debentures then outstanding and all other
moneys outstanding hereunder, together with interest thereon, at the rate of
interest borne by the Debentures from the date of the said declaration until
payment is received by the Trustee and such payment when made shall be deemed to
have been made on such Debentures and shall be applied as provided in Section
8.6.
NOTICE OF EVENTS OF DEFAULT
SECTION 8.2
If an Event of Default shall occur and be continuing the Trustee shall,
within 30 days after it becomes aware of the occurrence of such Event of
Default, give notice of such Event of Default to the Debenture holders in the
manner provided in Article 14, provided that, notwithstanding the foregoing,
unless the Trustee shall have been requested to do so by the holders of at least
25% of the principal amount of the Debentures then outstanding, the Trustee
shall not be required to give such notice if the Trustee reasonably believes
that it is in the best interests of the Debenture holders to withhold such
notice and shall have so informed the Company in writing.
WAIVER OF DEFAULT
SECTION 8.3
Upon the happening of any Event of Default, except default in payment of
principal moneys at maturity and in addition to the powers exercisable by the
Debenture holders by Extraordinary Resolution, the holders of not less than
662/3% in principal amount of all the Debentures which shall then be outstanding
shall have power, by an instrument or instruments in writing or by affirmative
votes of such holders at a meeting duly convened and held as hereinafter
provided, to cancel any declaration made by the Trustee pursuant to Section 8.1
or to require the Trustee to waive the default, or both, and such declaration
shall thereupon be cancelled or
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the Trustee shall thereupon waive the default, in either case, upon such terms
and conditions as such holders shall prescribe. So long as it has not become
bound as provided in this Article 8 to declare the principal of and interest on
all the Debentures then outstanding to be due and payable, or to obtain and
enforce payment of the same, the Trustee shall have power to waive any default
arising hereunder, if in the opinion of the Trustee the same shall have been
cured, or adequate satisfaction made therefor, upon such terms and conditions as
the Trustee may deem advisable. Provided always that no act or omission either
of the Trustee or of the Debenture holders in the premises shall extend to or be
taken in any manner whatsoever to affect any subsequent default or the rights
resulting therefrom.
RIGHT OF TRUSTEE TO ENFORCE PAYMENT
SECTION 8.4
(1) Subject to the provisions of Section 8.3, in case the Company shall
fail to pay to the Trustee, on demand, the principal of and interest on all
Debentures then outstanding which shall have been declared by the Trustee to be
due and payable pursuant to Section 8.1, together with any other amounts due
hereunder, the Trustee may in its discretion and shall upon the request in
writing of the holders of not less than 25% in principal amount of the
Debentures then outstanding and upon being indemnified to its reasonable
satisfaction against all costs, expenses and liabilities to be incurred, proceed
in its name as Trustee hereunder to obtain or enforce payment of the said
principal of and interest on all the Debentures then outstanding together with
any other amounts due hereunder, by any remedy provided by law either by legal
proceedings or otherwise.
(2) The Trustee shall be entitled and empowered, either in its own name or
as trustee of an express trust, or as attorney-in-fact for the holders of the
Debentures, or in any one or more of such capacities, to file such proof of
debt, amendment of proof of debt, claim, petition or other document as may be
necessary or advisable in order to have the claims of the Trustee and of the
holders of the Debentures allowed in any insolvency, bankruptcy, liquidation or
judicial proceedings relative to the Company or its creditors or relative to or
affecting its property. The Trustee is hereby irrevocably appointed (and the
successive respective holders of the Debentures by taking and holding the same
shall be conclusively deemed to have so appointed the Trustee) the true and
lawful attorney-in-fact of the respective holders of the Debentures with
authority to make and file in the respective names of the holders of the
Debentures or on behalf of the holders of the Debentures as a class,' subject to
deduction from any such claims of the amounts of any claims filed by any of the
holders of the Debentures themselves, any proof of debt, amendment of proof of
debt, claim, petition or other document in any such proceedings and to receive
payment of any sums becoming distributable on account thereof, and to execute
any such other papers and documents and to do and perform any and all such acts
and things for and on behalf of such holders of the Debentures, as may be
necessary or advisable in the opinion of the Trustee, in order to have the
respective claims of the Trustee and of the holders of the Debentures against
the Company or its property allowed in any such proceeding, and to receive
payment of or on account of such claims; provided, however, that nothing
contained in this Indenture shall be deemed to give to the Trustee, unless so
authorized by Extraordinary Resolution, any right to accept or consent to any
plan of reorganization or otherwise by action of any character in such
proceeding to waive or change in any way any right of any Debenture holder.
(3) Any such suit or proceeding instituted by the Trustee shall be brought
in the name of the Trustee as trustee of an express trust, and any recovery of
judgment shall be for the rateable benefit of the holders of the Debentures
subject to the provisions of this Indenture. In any proceeding brought by the
Trustee (and also any proceeding in which a declaratory judgment of a court may
be sought as to the interpretation or construction of any provision of this
Indenture, to which the Trustee shall be a party) the Trustee shall be held to
represent all the holders of the Debentures, and it shall not be necessary to
make any holders of the Debentures parties to any such proceeding.
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NATURE
SECTION 8.5
No such remedy for the enforcement of the rights of the Trustee or of the
Debenture holders shall be exclusive of or dependent on any other such remedy
but any one or more of such remedies may from time to time be exercised
independently or in combination.
APPLICATION OF MONEYS BY TRUSTEE
SECTION 8.6
(1) Except as hereinafter otherwise expressly provided, any moneys received
by the Trustee from the Company pursuant to the foregoing Sections of this
Article 8, or as a result of legal or other proceedings or from any trustee in
bankruptcy or liquidator of the Company, shall be applied, together with any
other moneys in the hands of the Trustee available for such purposes, as
follows:
FIRST: to the payment or reimbursement to the Trustee of its
compensation, costs, charges, expenses, borrowings, advances, or
other moneys furnished or provided by or at the instance of the
Trustee in or about the execution of its trust or otherwise in
relation to this Indenture, with interest thereon, as herein
provided;
SECOND: subject to Article IV and Section 7.4 and as hereinafter in this
Section 8.6 provided, in payment rateably and proportionately of
the principal of and accrued and unpaid interest and interest on
amounts in default on the Debentures which shall then be
outstanding in the priority of principal first and then accrued
and unpaid interest and interest on amounts in default unless
otherwise directed by Extraordinary Resolution and, in that case,
in such order of priority as between principal and interest as
may be directed by such resolution; and
THIRD: the surplus (if any) of such moneys shall be paid to the Company
or its assigns;
provided, however, that no payment shall be made pursuant to SECOND above in
respect of the principal of or interest on any Debenture held, directly or
indirectly, by or for the benefit of the Company or any Subsidiary (other than
any Debenture pledged for value and in good faith to a person other than the
Company or any Subsidiary but only to the extent of such person's interest
therein) except subject to the prior payment in full of the principal of and
interest on all Debentures which are not so held.
(2) Provided always that the Trustee shall not be bound to apply or make
any partial or interim payment of any moneys coming into its hands pursuant to
the foregoing Sections of this Article 8 if the amount so received by it is
insufficient to make a distribution of at least 2% of the principal amount of
the outstanding Debentures but it may retain the money so received by it and
deposit the same in its deposit department or in a chartered bank in Canada to
its credit at such rate of interest as is then current on similar deposits or
invest the same as provided in Section 13.6 until the moneys or the investments
representing the same, with the income derived therefrom together with any other
moneys for the time being under its control shall be sufficient for the said
purpose or until it shall consider it advisable to apply the same in the manner
above set forth. The provisions of this Section 8.6 shall not apply, however, to
a final payment in distribution hereunder.
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NOTICE OF PAYMENT BY TRUSTEE
SECTION 8.7
Not less than 21 days' notice shall be given by the Trustee to the
Debenture holders of any payment to be made under this Article 8 to the
Debenture holders. Such notice shall state the time when and the place where
such payment is to be made, the liability under this Indenture upon which it is
to be applied and the amount of the payment and the application thereof as
between principal and interest. After the day so fixed, unless payment Shall
have been duly demanded and have been refused, the Debenture holders will be
entitled to interest only on the balance (if any) of the principal moneys and
interest due to them, respectively, on the Debentures, after deduction of the
respective amounts payable in respect thereof on the day so fixed.
TRUSTEE MAY DEMAND PRODUCTION OF DEBENTURES
SECTION 8.8
The Trustee shall have the right to demand production of the Debentures in
respect of which any payment of principal or interest required by the Article 8
is made and may cause to be endorsed on the same a memorandum of the amount so
paid and the date of payment, but the Trustee may, in its discretion, dispense
with such production and endorsement in any special case, upon such indemnity
being given to it and to the Company as the Trustee shall deem sufficient.
TRUSTEE APPOINTED ATTORNEY
SECTION 8.9
The Company hereby irrevocably appoints the Trustee to be the attorney of
the Company for and in the name and on behalf of the Company to execute any
instruments and do any acts and things which the Company ought to sign, execute
and do hereunder and generally to use the name of the Company in the exercise of
all or any of the powers hereby conferred on the Trustee, with full powers of
substitution and revocation.
ARTICLE 9
SUITS BY DEBENTURE HOLDERS AND TRUSTEE
DEBENTURE HOLDERS MAY NOT SUE
SECTION 9.1
No holder of any Debenture shall have any right to institute any action,
suit or proceeding at law or in equity for the purpose of enforcing payment of
the principal of or interest on any Debenture or for the execution of any trust
or power hereunder or for the appointment of a liquidator or receiver or for a
receiving order under the Bankruptcy Act or to have the Company wound up or to
file or prove a claim in any liquidation or bankruptcy proceedings or for any
other remedy hereunder, unless (a) such holder shall previously have given to
the Trustee written notice of the happening of an Event of Default hereunder
which has continued for at least 90 days; and (b) the Debenture holders by
Extraordinary Resolution, or by written instrument signed by the holders of at
least 25% in principal amount of the Debentures then outstanding, shall have
made a request to the Trustee, and the Trustee shall have been afforded
reasonable opportunity, either in itself to proceed to exercise the powers
herein granted or to institute an action, suit or proceeding in its name for
such purpose; and (c) the Debenture holders or any of them shall have furnished
to the Trustee, when so requested by the Trustee, the request and indemnity
referred to in Section 13.3; and (d) the Trustee shall have failed to act within
a reasonable time thereafter; and in such case but not otherwise, any Debenture
holder acting on behalf of himself and all other Debenture holders shall be
entitled to take proceedings in any court of competent jurisdiction such
<PAGE>
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as the Trustee might have taken hereunder; it being understood and intended that
no (me or mom holders of Debentures shall have any right in any manner
whatsoever to affect, disturb or prejudice the rights hereby created by his or
their action or to enforce any right hereunder or under any Debenture, except
subject to the conditions and in the manner herein provided, and that all powers
and trusts hereunder shall be exacted and all proceedings at law shall be
instituted, had and maintained by the Trustee, except only as herein provided,
and in any event for the equal benefit of all holders of all outstanding
Debentures.
GENERAL POWER OF TRUSTEE TO SUE
SECTION 9.2
The Trustee shall have the power to institute and maintain all and any such
actions, suits and proceedings as it may be advised shall be necessary or
expedient to preserve and to protect its interests and the interests of the
holders of Debentures.
TRUSTEE MAY SUE WITHOUT POSSESSION OF DEBENTURES
SECTION 9.3
All rights of action under this Indenture may be enforced by the Trustee
without the possession of any of the Debentures or the production thereof at any
trial or other proceedings relative thereto.
STAYING ACTIONS
SECTION 9.4
In case any action or other proceeding shall have been brought by the
Trustee or by any Debenture holder after failure of the Trustee to act, the
Debenture holders may, by Extraordinary Resolution, direct the Trustee or the
Debenture holder bringing any such action or other proceeding to waive the
default in respect of which any such action or other proceeding shall have been
brought upon payment of the costs, charges and expenses incurred by the Trustee
or the Debenture holder, as the case may be in connection therewith, and to stay
or discontinue or otherwise deal with any such action or other proceeding and
such directions shall be binding upon and shall be complied with by the Trustee
and such Debenture holder.
ARTICLE 10
IMMUNITY OF OFFICERS, SHAREHOLDERS AND DIRECTORS
SECTION 10.1
No recourse under or upon any obligation, covenant or agreement contained
in this Indenture or in any Debenture issued hereunder or because of the
creation of any indebtedness hereunder shall be had against any shareholder,
officer or director, past, present or future, of the Company or of the
Subsidiaries or of any successor corporation either directly or through the
Company or the Subsidiaries or otherwise, by the enforcement of any assessment
or by any legal or equitable proceeding by virtue of any statute or otherwise,
it being expressly understood that this Indenture and the Debentures issued
hereunder are solely corporate obligations and that no personal liability
whatever shall attach to or be incurred by the shareholders, officers or
directors of the Company, or of the Subsidiaries, or of any successor
corporation, or any of them, because of the creation of the indebtedness hereby
authorized, or under or by reason of the obligations, covenants or agreements
contained in this Indenture or in any of the Debentures issued hereunder or
implied therefrom; and that any and all personal liability of every name and
nature either at common law or in equity or by statute and any and all rights
and claims against every such shareholder, officer or director are hereby
expressly waived as a condition of and as consideration for the execution of
this Indenture and the issue of such Debentures.
<PAGE>
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ARTICLE 11
SUCCESSOR COMPANY
RECONSTRUCTION, CONSOLIDATION, AMALGAMATION OR MERGER
SECTION 11.1
Notwithstanding anything contained in this Indenture or in the Debentures,
a resolution or order for winding up the Company, or any other proceedings taken
with a view to its reconstruction, or its consolidation, amalgamation or merger
with another company or the transfer of its undertaking and assets as an
entirety or substantially as an entirety to any other company, shall not
constitute an Event of Default and shall be deemed not to be prevented or
restricted by anything contained herein or in the Debentures, if such other
company or the company resulting from such consolidation, amalgamation, or
merger (either of which companies is herein called the "successor company")
shall, within 90 days from the passing of the resolution or the date of the
order, and at or before the transfer or vesting of the undertaking and assets of
the Company to or in the successor company, enter into a covenant with the
Trustee or otherwise become liable in law to pay the principal moneys, interest
and other moneys due or which may become due under this Indenture and the
Debentures and to perform and observe all the obligations of the Company under
this Indenture, and shall sign and execute all such deeds and documents as the
Trustee may be advised by Counsel are necessary or advisable in the premises.
Provided, however, and the foregoing provisions of this Section 11.1 are
upon the condition that such reconstruction, consolidation, amalgamation, merger
or transfer shall, in the opinion of the Trustee, be upon such terms as
substantially to preserve and not to impair any of the rights or powers of the
Trustee or of the Debenture holders hereunder and upon such terms as are in no
way prejudicial to the interests of the Debenture holders.
CONSENT OF TRUSTEE
SECTION 11.2
The Trustee, upon obtaining an opinion of Counsel that the reconstruction,
consolidation, amalgamation, merger or transfer described in Section 11.1 is on
such terms as substantially to preserve and not to impair the lien hereof and
the rights and powers of the Trustee and the Debenture holders hereunder and
that all the provisions of this Article have been complied with, and upon being
satisfied that such terms are in no way prejudicial to the interests of the
Debenture holders, shall consent thereto and join in such documents and do such
acts as, in its discretion, may be thought advisable, and upon such consent
being given, such reconstruction, consolidation, amalgamation, merger or
transfer may be carried out and thereupon the Company may be released and
discharged from liability under this Indenture and the Trustee may execute any
document or documents which it may be advised is or are necessary or advisable
for effecting or evidencing such release and discharge and the opinion of
Counsel as aforesaid shall be full warrant and authority to the Trustee for so
doing.
DEBT OBLIGATIONS
SECTION 11.3
Such successor company may thereupon cause to be signed and may issue,
either in its own name or in the name of the Company, any or all Debentures, the
issue of which is from time to time authorized hereunder, not theretofore signed
by the Company and delivered to the Trustee and the Trustee, upon the order of
such successor company, in lieu of the Company, and subject to all the terms,
conditions and restrictions herein prescribed, shall certify any and all such
Debentures previously signed by the officers of
<PAGE>
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the Company and delivered to the Trustee for certification, and any of such
Debentures which such successor company shall thereafter cause to be signed and
delivered to the Trustee for that purpose. All Debentures so issued shall have
the same legal rank as the Debentures theretofore or thereafter issued in
accordance with the terms of this Indenture as though all such Debentures had
actually been issued by the Company as of the date of the execution hereof.
Every such successor company shall possess and may exercise each and every power
of the Company hereunder.
ARTICLE 12
SUPPLEMENTAL INDENTURES
PROVISION FOR SUPPLEMENTAL INDENTURES
SECTION 12.1
From time to time the Trustee and, when authorized by a resolution of the
Directors, the Company may, and they shall, when required by this Indenture,
execute, acknowledge and deliver by their proper officers deeds or indentures
supplemental hereto, which thereafter shall form part hereof for any one of more
of the following purposes:
(a) evidencing the succession of successor companies to the Company and the
covenants of and obligations assumed by such successor companies in
accordance with the provisions of Article 11;
(b) giving effect to any Extraordinary Resolution passed as provided in
Article 15;
(c) giving effect to any modification of the covenants or other provisions
of this Indenture or any indenture supplemental hereto for the exclusive
benefit of the holders of the Debentures including the covenants contained
in Article 7;
(d) making such provisions not inconsistent with this Indenture as may be
necessary or desirable with respect to matters or questions arising
hereunder or for the purpose of obtaining a listing or quotation of the
Debentures on any stock exchange or providing additional means of
transferring Debentures, provided that such provisions are not, in the
opinion of the Trustee, prejudicial to the interests of the Debenture
holders;
(e) adding to or altering the provisions hereof in respect of the
registration and transfer of Debentures, including provisions for the issue
of Debentures of denominations other than those herein provided for, and
the exchange of Debentures of different denominations and making any
modification in the form of the Debentures which does not affect the
substance thereof and which, in the opinion of the Trustee, is not
prejudicial to the interests of the Debenture holders;
(f) making any addition to, deletion from or alteration of the provisions
of this indenture which the Company may deem necessary or advisable in
order to facilitate the sale of any of the Debentures and which, in the
opinion of the Trustee, does not materially and adversely affect the
interest of the holders of the Debentures including, without limiting the
generality of the foregoing, such additions, deletions and alterations,
including provision for the appointment of an additional trustee or a
co-trustee in the United States of America, as would be required to obtain
qualifications of this Indenture under the provisions of the Trust
Indenture Act of 1939 of the United States of America or any Act which may
hereafter be substituted therefor;
(g) adding to the limitations or restrictions herein specified further
limitations or restrictions, thereafter to be observed, upon the amount,
dates of maturity, issuance or the purposes of the issue of Debentures
hereunder; provided that the Trustee shall be of opinion that such further
limitations or restrictions shall not be prejudicial to the interests of
the Debentures holders;
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(h) adding to the covenants of the Company herein contained for the
protection of the holders of the Debentures and/or providing for events of
default in addition to those herein specified; and
(i) for any other purpose required by or not inconsistent with the terms of
this Indenture, provided that in the opinion of the Trustee the rights of
the Trustee or of the Debenture holders are in no way prejudiced thereby.
CORRECTION OF MANIFEST ERRORS
SECTION 12.2
The Company and the Trustee may, without the consent or concurrence of the
Debenture holders, by supplemental indenture or otherwise, make any changes or
corrections in this Indenture which the Trustee shall have been advised by
Counsel are required for certain purposes, including (a) making additions to,
deletions from or alterations of any of the provisions of the Indenture which
the Company may deem necessary or advisable and which, in the opinion of the
Trustee, do not adversely affect in any substantial respect the interests of the
holders of Debentures; (b) making any additions to, deletions from or
alterations of the provisions of the Indenture which in the opinion of the
Trustee may from time to time be necessary or advisable to conform the Indenture
to applicable legislation of Canada or a province; or (c) for any other purpose
not inconsistent with the terms of the Indenture, including the correction or
rectification of any ambiguities, defective provision, errors or omissions,
provided that in the opinion of the Trustee the rights of the Trustee or of the
holders of the Debentures, are not materially prejudiced thereby.
PRIOR STOCK EXCHANGE APPROVAL
SECTION 12.3
All indentures supplemental to this Indenture and all amendments to this
Indenture are subject to the prior written consent of The Toronto Stock
Exchange.
ARTICLE 13
CONCERNING THE TRUSTEE
DUTY OF TRUSTEE
SECTION 13.1
In the exercise of the rights, duties and obligations prescribed or
conferred by the terms of this Indenture, the Trustee shall act honestly and in
good faith with a view to the best interests of the Debenture holders and shall
exercise the care, diligence and skill of a reasonably prudent trustee.
TRUST INDENTURE LEGISLATION
SECTION 13.2
(1) The expression "indenture legislation" herein means the provisions, if
any, of the Company Act (British Columbia), The Business Corporations Act
(Ontario) as amended or reenacted and any other statute of Canada or any
province thereof, and of any regulations under such statutes, relating to trust
indentures and to the rights, duties and obligations of trustees under trust
indentures and of corporations issuing debt obligations under trust indentures,
to the extent that such provisions are at the time in force and applicable to
this Indenture or the Company.
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(2) The Company and the Trustee agree that each will at all times in
relation to this Indenture and any action to be taken hereunder, observe and
comply with and be entitled to the benefits of indenture legislation.
(3) If and to the extent that any provision of this Indenture limits,
qualifies or conflicts with any mandatory requirement of indenture legislation,
such mandatory requirement shall prevail.
CONDITIONS PRECEDENT TO TRUSTEE'S OBLIGATION TO ACT
SECTION 13.3
(1) The obligation of the Trustee to commence or continue any act, action
or proceeding for the purpose of enforcing any rights of the Trustee or the
Debenture holders hereunder shall be conditional upon the Debenture holders
furnishing, when required by notice in writing by the Trustee, sufficient funds
to commence or continue such act, action or proceeding and indemnity reasonably
satisfactory to the Trustee to protect and hold harmless the Trustee against the
costs, charges and expenses and liabilities to be incurred thereby and any loss
or damage it may suffer by reason thereof.
(2) None of the provisions contained in this Indenture shall require the
Trustee to expend or risk its own funds or otherwise incur financial liability
in the performance of any of its duties or obligations or in the exercise of any
of its rights or powers unless indemnified as aforesaid.
(3) The Trustee may, before commencing or at any time during the
continuance of any such act, action or proceeding, require the Debenture holders
at whose instance it is acting to deposit with the Trustee the Debentures held
by them, for which Debentures the Trustee shall issue receipts.
EVIDENCE
SECTION 13.4
(1) In addition to the reports, certificates, opinions and other evidence
required by this Indenture, the Company shall furnish to the Trustee such
additional evidence of compliance with any provision hereof, and in such form
(including by way of one or more statutory declarations of the Company), as may
be prescribed by indenture legislation or as the Trustee may reasonably require
by written notice to the Company.
(2) Proof of the execution of an instrument in writing by any Debenture
holder may be made by the certificate of a notary public or other officer with
similar powers, that the person signing such instrument acknowledged to him the
execution thereof, or by an affidavit of a witness to such execution or in any
other manner which the Trustee may consider adequate.
(3) If indenture legislation so permits or requires, any Certificate or
certificate required by this Indenture may be expressed as the opinion of the
signer or signers of such certificate.
EXPERTS, ADVISERS AND AGENTS
SECTION 13.5
The Trustee may:
(a) in relation to these presents act on the opinion or advice of or
information obtained from any solicitor, auditor, valuer, engineer,
surveyor, or other expert, whether obtained by the Trustee or by the
Company, or otherwise, and may employ such assistants as may be necessary
for the proper discharge of its duties and may pay proper and reasonable
compensation for all such legal and other advice or assistants as
aforesaid; and
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(b) employ such agents and other assistants as it may reasonably
require for the proper discharge of its duties hereunder, and may pay
reasonable remuneration for all services performed for it (and shall be
entitled to receive reasonable remuneration for all services performed
by it) in the discharge of the trusts hereof and compensation for all
disbursements, costs and expenses made or incurred by it in the
discharge of its duties hereunder and in the management of the trusts
hereof.
INVESTMENT OF TRUST FUNDS
SECTION 13.6
Unless otherwise provided in this Indenture:
(a) any moneys held by the Trustee which under the trusts of this Indenture
may or ought to be invested or which may be on deposit with the Trustee or
which may be in the hands of the Trustee may be invested and reinvested in
the name or under the control of the Trustee in securities in which, under
the laws of the Province of British Columbia, trustees are authorized to
invest trust moneys and, unless and until the Trustee shall have declared
the principal of and interest on the Debentures to be due and payable
pursuant to Section 8.1, the Trustee shall so invest such moneys at the
request of the Company,
(b) pending the investment of any moneys as hereinbefore provided, such
moneys may be deposited in the name of the Trustee in any chartered bank of
Canada or in the deposit department of the Trustee or any other loan or
trust company authorized to accept deposits under the laws of Canada or any
Province thereof at the rate of interest, if any, then current on similar
deposits; and
(c) unless and until the Trustee shall levi declared the principal of and
interest on the Debentures to be due and payable pursuant to Section 8.1,
the Trustee shall pay over to the Company all interest received by the
Trustee in respect of any investments or deposits made pursuant to the
provisions of this Section and, if the Trustee shall have declared the
principal of and interest on the Debentures to be due and payable pursuant
to Section 8.1, the Trustee shall apply such interest in accordance with
Section 8.6.
Subject to Section 13.1, in the event the Trustee incurs any loss on the
investment of moneys in accordance with the provisions of this Section 13.6, the
Company shall reimburse the Trustee for any such loss.
TRUSTEE NOT ORDINARILY BOUND
SECTION 13.7
Except as provided in Section 8.2 and as otherwise specifically provided
herein, the Trustee shall not be bound to give notice to any person of the
execution hereof, nor to do, observe or perform or see to the observance or
performance by the Company of any of the obligations herein imposed upon the
Company or of the covenants on the part of the Company herein contained, nor to
enforce any rights it may have hereunder, unless the Trustee shall have been
required to do so in writing by the holders of not less than 25% of the
aggregate principal amount of the Debentures or by any Extraordinary Resolution
of the Debenture holders passed in accordance with the provisions contained in
Article 15, and then only after it shall have been indemnified to its
satisfaction against all actions, proceedings, claims and demands to which it
may render itself liable and all costs, charges, damages and expenses which it
may incur by so doing.
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TRUSTEE NOT REQUIRED TO GIVE SECURITY
SECTION 13.8
The Trustee shall not be required to give any bond or security in respect
of the execution of the trusts and powers of this Indenture or otherwise in
respect of the premises.
REPLACEMENT OF TRUSTEE
SECTION 13.9
(1) The Trustee may resign its trust and be discharged from all fu and
liabilities hereunder by giving to the Company three months' notice in writing
or such shorter notice as the Company may accept as sufficient. The Debenture
holders by Extraordinary Resolution shall have power at any time to remove the
Trustee and to appoint a new Trustee.
(2) Notwithstanding the foregoing if at any time a material conflict of
interest exists in the Trustee's role as a fiduciary hereunder the Trustee
shall, within 90 days after ascertaining that such a material conflict of
interest exists, either eliminate such material conflict of interest or resign
its trust by giving notice in writing to the Company at least 21 days before
such resignation shall become effective and, upon any such resignation becoming
effective, the Trustee shall be discharged from all further duties and
liabilities hereunder.
(3) Any company into which the Trustee may be merged or with which it may
be consolidated or amalgamated, or any company resulting from any merger,
consolidation or amalgamation to which the Trustee shall be a party, shall be
the successor Trustee under this Indenture without the execution of any
instrument or further act.
(4) In the event of the Trustee resigning or being removed or being
dissolved, becoming bankrupt, going into liquidation or otherwise becoming
incapable of acting hereunder, the Company shall forthwith appoint a new Trustee
unless a new Trustee has already been appointed by the Debenture holders.
Failing such appointment by the Company the retiring Trustee or any Debenture
holder may apply to a Judge of the Supreme Court of British Columbia, on such
notice to the Company and the retiring Trustee as such Judge may direct and
without notice to the Debenture holders, for the appointment of a new Trustee
but any new Trustee so appointed by the Company or by the Court shall be subject
to removal as aforesaid by the Debenture holders. Any new Trustee appointed
under any provisions of this Section shall be a corporation authorized to carry
on the business of a trust company in the Provinces of British Columbia and
Ontario and shall certify that it will not have any material conflict of
interest upon becoming Trustee hereunder. On any new appointment the new Trustee
shall be vested with the same powers, rights, duties and responsibilities as if
it had been originally named herein as Trustee, without any further assurance,
conveyance, act or deed; but there shall be immediately executed, at the expense
of the Company, all such conveyances or other instruments as may, in the opinion
of Counsel, be necessary or advisable for the purpose of assuring the same to
the new Trustee.
ACCEPTANCE OF TRUST
SECTION 13.10
The Trustee hereby accepts the trusts in this Indenture declared and
provided for and agrees to perform the same upon the terms and conditions herein
set forth and in trust for the various persons who shall from time to time be
Debenture holders, subject to all the terms and conditions herein set forth.
NO CONFLICT OF INTEREST
SECTION 13.11
The trustee represents to the Company that at the date of the execution and
delivery of this Indenture there exists no material conflict of interest in the
role of the Trustee as a fiduciary hereunder.
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ARTICLE 14
NOTICES
NOTICE TO THE COMPANY
SECTION 14.1
Any notice to the Company under the provisions of this Indenture shall be
valid and effective if delivered personally or if given by registered letter,
postage prepaid, addressed to the Company at 2650 - 666 Burrard Street,
Vancouver, British Columbia, V6C 2X8, attention Secretary, and shall be deemed
to have been effectively given on the third business day after mailing. The
Company may from time to time notify the Trustee in writing of a change of
address for service in the manner set forth herein which thereafter, until
changed by like notice, shall be the address of the Company for all purposes of
this Indenture.
NOTICE TO THE DEBENTURE HOLDER
SECTION 14.2
Unless herein otherwise expressly provided, any notice to be given
hereunder to Debenture holders shall be deemed to be validly given if such
notice is sent by first class surface or air mail, prepaid, addressed to such
holders at their respective addresses appearing on any of the registers
above-mentioned; but if in the case of joint holders of any Debentures, more
than one address appears in the register in respect of such joint holding, such
notice shall be addressed only to the first address so appearing. Any notice so
given by mail shall be deemed to have been given on the third business day after
mailing.
NOTICE TO THE TRUSTEE
SECTION 14.3
Any notice to the Trustee under the provisions of this Indenture shall be
valid and effective if given by registered letter, postage prepaid, addressed to
the Trustee at 4th Floor, 510 Burrard Street, Vancouver, British Columbia, V6C
3A8, attention Corporate Trust Department, and shall be deemed to have been
effectively given when so mailed. The Trustee may from time to time notify the
Company in writing of a change of address for service in the manner set forth
herein which thereafter, until changed by like notice, shall be the address of
the Trustee for all purposes of this Indenture.
POSTAL DISRUPTIONS
SECTION 14.4
(1) Notwithstanding the foregoing provisions of this Article 14 and of
Section 5.3, no notice under the provisions of this Indenture sent by mail shall
be valid or effective if sent at a time when any actual or threatened postal
disruption exists
(a) in the case of a notice to the Company or to the Trustee (i) in
the City of Vancouver or such other municipality as in which the
address of the Company hereunder may from time to time be, or (ii) in
the municipality in which the notice is mailed; or
(b) in the case of a notice to Debenture holders, if the actual or
threatened postal disruption generally affects the postal system in
any Province of Canada or exists in the municipality in which the
notice is mailed.
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(2) In the event of an actual or threatened postal disruption referred to
in subsection (1), notwithstanding Section 14.2 and Section 5.3, any notice
required or permitted to be given to Debenture holders under the provisions of
this Indenture shall be deemed to be validly and effectively given if such
notice is published once in a daily English language newspaper of general
circulation in each of Vancouver, Calgary, Regina, Winnipeg, Toronto, Montreal
and Halifax. Any notice so given by publication shall be deemed to have been
given on the day on which publication is completed in all of the aforementioned
cities, publication having been effected contemporaneously or not more than one
week previously in all other of such cities.
ARTICLE 15
DEBENTURE HOLDERS MEETINGS
RIGHT TO CONVENE MEETING
SECTION 15.1
The Trustee may at any time and from time to time and shall, on receipt of
a written request of the Company or an instrument in writing signed in one or
more counterparts by the holder or holders of not less than ten percent in
principal amount of the Debentures (in this Article 15 called a "Debenture
holders' Request") and upon being indemnified to its reasonable satisfaction by
the Company or by the Debenture holders signing such Debenture holders' Request
against the costs which may be incurred in connection with the calling and
holding of such meeting, convene a meeting of the Debenture holders. In the
event of the Trustee failing within 30 days after receipt of such written
request of the Company or Debenture holders' Request and such indemnity to give
notice convening such meeting, the Company or such Debenture holders, as the
case may be, may convene such meeting. Every such meeting shall be held in the
city of Vancouver or at such other place as may be approved or determined by the
Trustee.
NOTICE
SECTION 15.2
At least 21 days' notice of any meeting shall be given to the Debenture
holders in the manner provided in Article 14 and a copy thereof shall be sent by
prepaid registered post to the Trustee unless the meeting has been called by it
and to the Company unless the meeting has been called by it. Such notice shall
state the time when and the place where the meeting is to be held and shall
state briefly the general nature of the business to be transacted thereat and it
shall not be necessary for any such notice to set out the terms of any
resolution to be proposed or any of the provisions of this Article 15.
CHAIRMAN
SECTION 15.3
Some person nominated in writing by the Trustee shall be chairman of the
meeting and if no person is so nominated, or if the person so nominated is not
present within fifteen minutes from the time fixed for the holding of the
meeting, the Debenture holders present in person or by proxy shall choose some
person present to be chairman. The chairman need not be a Debenture holder.
QUORUM
SECTION 15.4
Subject to the provisions of Section 15.12, at any meeting of the Debenture
holders a quorum shall consist of Debenture holders present in person or by
proxy and representing at least 50% in principal amount
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of the outstanding Debentures. If a quorum of the Debenture holders shall not be
present within half-an-hour from the time fixed for holding any meeting, the
meeting, if convened by the Debenture holders or on a Debenture holders'
Request, shall be dissolved; but if otherwise convened the meeting shall stand
adjourned without notice to the same day in the next week (unless such day is a
non-business day in which case it shall stand adjourned to the next following
business day thereafter) at the same time and place. At the adjourned meeting
the Debenture holders present in person or by proxy shall form a quorum and may
transact the business for which the meeting was originally convened
notwithstanding that they may not represent 50% in principal amount of the
outstanding Debentures.
POWER TO ADJOURN
SECTION 15.5
The chairman of any meeting at which a quorum of the Debenture holders is
present may with the consent of the holders of a majority in principal amount of
the Debentures represented thereat adjourn any such meeting and no notice of
such adjournment need be given except such notice, if any, as the meeting may
prescribe.
SHOW OF HANDS
SECTION 15.6
Every question submitted to a meeting shall be decided in the first place
by a majority of the votes given on a show of hands except that votes on
Extraordinary Resolutions shall be given in the manner hereinafter provided. At
any such meeting, unless a poll is duly demanded as herein provided, a
declaration by the chairman that a resolution has been carried unanimously or by
a particular majority or lost or not carried by a particular majority shall be
conclusive evidence of the fact.
POLL
SECTION 15.7
On every Extraordinary Resolution, and on any other question submitted to a
meeting when directed by the chairman or when demanded after a vote by show of
hands by one or more Debenture holders, acting in person or by proxy and holding
at least $10,000 of the principal amount of the Debentures for the time being
outstanding, a poll shall be taken in such manner as the chairman shall direct.
Questions other than Extraordinary Resolutions shall, if a poll be taken, be
decided by the votes of the holders of a majority in principal amount of the
Debentures represented at the meeting and voted on the poll. If at any meeting a
poll is so demanded as aforesaid on the election of a chairman or on a question
of adjournment, it shall be taken forthwith. If at any meeting a poll is so
demanded on any other question, or an Extraordinary Resolution is to be voted
upon, a poll shall be taken in such manner and either at once or after an
adjournment as the chairman directs. The result of a poll shall be deemed to be
the decision of the meeting at which the poll was taken and shall be binding on
all Debenture holders.
VOTING
SECTION 15.8
On a show of hands every person who is present and entitled to vote,
whether as a Debenture holder or as proxy for one or more absent Debenture
holders or both, shall have one vote. On a poll each Debenture holder present in
person or represented by a proxy duly appointed by instrument in writing shall
be entitled to one vote in respect of each $1,000 principal amount of Debentures
of which he shall then be the holder. A proxy need not be a Debenture holder. In
the case of joint registered holders of a Debenture, any one of them present in
person or by proxy at the meeting may vote in the absence of the other or
others; but in case more than one
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of them be present in person or by proxy, they shall vote together in respect of
the Debentures of which they are joint registered holders.
REGULATIONS
SECTION 15.9
The Trustee or the Company with the approval of the Trustee may from time
to time make and from time to time vary such regulations as it shall from time
to time think fit:
(a) for the deposit of instruments appointing proxies at such place as the
Trustee, the Company or the Debenture holders convening the meeting, as the
case may be, may in the notice convening the meeting direct, and as to the
time, if any, before the holding of the meeting or any adjournment thereof
by which the same shall be deposited; and
(b) for the deposit of instruments appointing proxies at some approved
place or places other than the place at which the meeting is to be held and
enabling particulars of such instruments appointing proxies to be mailed or
telecopied before the meeting to the Company or to the Trustee at the place
where the same is to be held and for the voting of proxies so deposited as
though the instruments themselves were produced at the meeting.
Any regulations so made shall be binding and effective and the votes given in
accordance therewith shall be valid and shall be counted. Save as such
regulations may provide, the only persons who shall be recognized at any meeting
as the holders of any Debentures, or as entitled to vote or be present at the
meeting in respect thereof, shall be the persons registered as the holders of
Debentures and persons whom such holders have by instrument in writing duly
appointed as their proxies.
COMPANY AND TRUSTEE MAY BE REPRESENTED
SECTION 15.10
The Company and the Trustee, by their respective officers and directors,
and the legal advisers of the Company and the Trustee, may attend any meeting of
the Debenture holders, but shall have no vote as such.
POWERS EXERCISABLE BY EXTRAORDINARY RESOLUTION
SECTION 15.11
In addition to all other powers conferred upon them by any other provisions
of this Indenture or by law, a meeting of the Debenture holders shall have the
following powers exercisable from time to time by Extraordinary Resolution:
(a) power to agree to and sanction any change whatsoever of any provision
of the Debentures or of this Indenture and any modification, abrogation,
alteration, compromise or arrangement of the rights of Debenture holders
and/or the Trustee against the Company whether such rights arise under this
Indenture, the Debentures or otherwise;
(b) power to assent to any modification of or change in or omission from
the provisions contained in this Indenture or any Debentures or in any
indenture or instrument supplemental or ancillary hereto or thereto as may
be agreed to by the Company and to authorize the Trustee to concur in and
execute any indenture or instrument supplemental or ancillary hereto or
thereto embodying such modification, change or omission;
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(c) power to sanction the exchange of Debentures for or the conversion of
Debentures into shares, bonds, debentures, notes or any other securities or
obligations of the Company or any other company;
(d) power to direct or authorize the Trustee to exercise any power, right,
remedy or authority given to it by this Indenture of the Debentures in any
manner specified in such Extraordinary Resolution or to refrain from
exercising any such power, right, remedy or authority;
(e) power to waive and direct the Trustee to waive any default on the part
of the Company in complying with any provision of this Indenture or the
Debentures and/or cancel any declaration made by the Trustee pursuant to
Section 9.1 either unconditionally or upon any conditions specified in such
Extraordinary Resolution;
(f) power to restrain any Debenture holder from taking or instituting (as
such holder) any suit, action or proceeding for the purpose of enforcing
payment of the principal interest on any Debenture, or for the execution of
any trust or power hereunder or in connection herewith, or for the
appointment of a liquidator or a receiver or a trustee in bankruptcy or to
have the Company wound up, or for any other remedy hereunder or in
connection herewith;
(g) power to direct any Debenture holder who, as such, has brought any
suit, action or proceeding to stay or discontinue or otherwise deal with
the same upon payment, if the taking of such suit, action or proceeding
shall be permitted by Section 9.1, of the costs, charges and expenses
reasonably and properly incurred by such Debenture holder in connection
therewith;
(h) power to sanction any scheme for the reconstruction or reorganization
of the Company or for the consolidation, amalgamation or merger of the
Company with any other corporation or for the selling or leasing of the
undertaking, property and assets of the Company or any part thereof,
provided that no such sanction shall be necessary for a reconstruction,
consolidation, amalgamation or merger or transfer under the provisions of
Article 11 hereof;
(i) power to sanction the distribution of any shares or securities or the
use or disposal of the whole or any part of such shares or securities or
any cash in such manner and for such purposes as may be deemed advisable;
(j) power to appoint and remove a committee (herein sometimes called a
"Debenture holders' committee") to consult with the Trustee and to delegate
to such Debenture holders' committee (subject to such limitations, if any,
as may be prescribed in such Extraordinary Resolution) all or any of the
powers which the Debenture holders could exercise by Extraordinary
Resolution under paragraphs (d), (e), (f), (g), (h), (i), (k), 0), (p), (q)
and (r) of this Section 15.11. The Extraordinary Resolution making such
appointment may provide for payment of the expenses and disbursements of
and compensation to such Debenture holders' committee. Such Debenture
holders' committee shall consist of such number of persons as shall be
prescribed in the Extraordinary Resolution appointing it, and the members
need not be themselves Debenture holders. Subject to the Extraordinary
Resolution appointing it, every such Debenture holders' committee may elect
its chairman and may make regulations respecting its quorum, the calling of
its meetings, the filling of vacancies occurring in its number, the manner
in which it may act and its procedure generally; and such regulations may
provide that the Debenture holders' committee may act at a meeting at which
a quorum is present or may act by minutes signed by a majority of the
members thereof or the number of members thereof necessary to constitute a
quorum, whichever is the greater. All acts of any such Debenture holders'
committee within the authority delegated to it shall be binding upon all
Debenture holders;
(k) power to assent to any compromise or arrangement by the Company with
any creditor, creditors or class or classes of creditors or with the
holders of any shares or securities of the Company;
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(l) power to authorize the Trustee, in the event of the Company making an
authorized assignment or a custodian or trustee being appointed under the
Bankruptcy Act (Canada) or a liquidator being appointed under the
Winding-Up Act (Canada), for and on behalf of the Debenture holders and in
addition to any claim or debt proved or made for its own account as Trustee
hereunder, to file and prove a claim or debt against the Company and its
property for an amount equivalent to the aggregate amount which may be
payable in respect of the Debentures, value security, and vote such claim
or debt at meetings of creditors and generally act for and on behalf of the
Debenture holders in such proceedings as such Extraordinary Resolution may
provide;
(m) power to require the Trustee to make a declaration under the provisions
of Section 8.1 but subject always to the provisions of Section 8.3;
(n) power to amend, alter or repeal any Extraordinary Resolution previously
passed or sanctioned by the Debenture holders or by any committee appointed
pursuant to clause (j) of this subsection.
(o) power to require the Trustee to exercise or refrain from exercising any
of the powers conferred upon it by this Indenture or to waive any default
on the part of the Company;
(p) power to authorize the Trustee or any other corporation, firm or person
lid at any sale of the Company properties or assets or any part thereof and
to borrow the moneys required to make any deposit at said sale or pay the
balance of the purchase price and to give security for the repayment of the
moneys so borrowed and interest thereon, or to advance moneys for such
purpose, in which event the person advancing the same shall have a lien
upon the property or assets so purchased for the amount so advanced and
interest thereon:
(q) power to remove the Trustee from office and to appoint a new Trustee;
and
(r) power, notwithstanding Section 7.4, to authorize the Company and the
Trustee to grant extensions of time for payment of interest on any of the
Debentures, whether or not the interest, the payment in respect of which is
extended. is at the time due or overdue.
MEANING OF "EXTRAORDINARY RESOLUTION"
SECTION 15.12
(1) The expression "Extraordinary Resolution" when used in this Trust
Indenture means, subject as hereinafter in this Article 15 provided, a
resolution proposed to be passed as an Extraordinary Resolution at a meeting of
Debenture holders duly convened for the purpose and held in accordance with the
provisions of this Article 15 at which the holders of at least 51% in principal
amount of the Debentures then outstanding are present in person or by proxy and
passed by the favourable votes of the holders of not less than 662/3% of the
principal amount of Debentures represented at the meeting and voted on a poll
upon such resolution.
(2) If at any such meeting the holders of 51% in principal amount of the
Debentures outstanding are not present in person or by proxy within half-an-hour
after the time appointed for the meeting, then the meeting, if convened by
Debenture holders or on a Debenture holders' Request, shall be dissolved; but if
otherwise convened the meeting shall stand adjourned to such date, being not
less than 21 nor more than 60 days later, and to such place and time as may be
appointed by the chairman. Not less than 10 days notice shall be given of the
time and place of such adjourned meeting in the manner provided in Article 14.
Such notice shall state that at the adjourned meeting the Debenture holders
present in person or by proxy shall form a quorum but it shall not be necessary
to set forth the purposes for which the meeting was originally called or any
other particulars. At the adjourned meeting the Debenture holders present in
person or by proxy shall form a quorum and may transact the business for which
the meeting was originally convened and a resolution proposed at such adjourned
meeting and passed by the requisite vote as provided in subsection (1) of this
Section 15.12 shall be an Extraordinary Resolution within the meaning of this
Indenture, notwithstanding that the holders of 51% in
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principal amount of the Debentures then outstanding are not present in person or
by proxy at such adjourned meeting.
(3) Votes on an Extraordinary Resolution shall always be given on a poll
and no demand for a poll on an Extraordinary Resolution shall be necessary.
POWERS CUMULATIVE
SECTION 15.13
It is hereby declared and agreed that any one or more of the powers and/or
combination of the powers in this Indenture stated to be exercisable by the
Debenture holders by Extraordinary Resolution or otherwise may be exercised from
time to time and the exercise of any one or more of such powers or any
combination of powers from time to time shall not be deemed to exhaust the right
of the Debenture holders to exercise the same or any other such power or powers
or combination of power thereafter from time to time.
MINUTES
SECTION 15.14
Minutes of all resolutions and proceedings at every such meeting of
Debenture holders or of a Debenture holders' committee as aforesaid shall be
made and duly entered in books to be from time to time provided for that purpose
by the Trustee at the expense of the Company, and any such minutes as aforesaid,
if signed by the chairman of the meeting at which such resolutions were passed
or proceedings had, or by the chairman of the next succeeding meeting of the
Debenture holders or of the Debenture holders' committee, shall be prima facie
evidence of the matters therein stated and, until the contrary is proved, every
such meeting, in respect of the proceedings of which minutes shall have been
made, shall be deemed to have been duly held and convened, and all resolutions
passed thereat or proceedings had, to have been duly passed and had.
INSTRUMENTS IN WRITING
SECTION 15.15
All actions which may be taken and all powers which may be exercised by the
Debenture holders at a meeting held as hereinbefore in this Article 15 provided
may also be taken and exercised by the holders of 662/3% of the principal amount
of all the outstanding Debentures by an instrument in writing signed in one or
more counterparts and the expression "Extraordinary Resolution" when used in
this Indenture shall include an instrument so signed.
BINDING EFFECT OF RESOLUTIONS
SECTION 15.16
Every resolution and every Extraordinary Resolution passed in accordance
with the provisions of this Article 15 at a meeting of Debenture holders shall
be binding upon all the Debenture holders, whether present or absent at such
meeting, and every instrument in writing signed by Debenture holders in
accordance with Section 15.15 shall be binding upon all the Debenture holders,
whether signatories thereto or not, and each and every Debenture holder and the
Trustee (subject to the provisions for its indemnity herein contained) shall be
bound to give effect accordingly to every such resolution, Extraordinary
Resolution and instrument in writing.
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CERTAIN DEBENTURES DEEMED NOT OUTSTANDING
SECTION 15.17
Debentures held by or for the Company or any Subsidiary shall be deemed not
to be outstanding Debentures for any purpose of this Article 15, provided
however, that Debentures pledged or charged by the Company or any Subsidiary as
security for loans or other indebtedness shall, for all such purposes, be deemed
to be outstanding Debentures and the pledgees thereof or holders of any lien or
charge thereon (other than the Company or any Subsidiary) shall be qualified and
entitled to sign any requisition or notice, attend all meetings of Debenture
holders and vote thereat in respect of the Debentures so pledged or charged by
the Company or any Subsidiary unless such pledgees or holders are expressly
precluded under the terms of the pledge or charge from freely exercising in
their discretion, uncontroiled by the Company or any Subsidiary, the right to
vote such Debentures, in which case the terms of the pledge or charge shall
govern.
ARTICLE 16
SATISFACTION AND DISCHARGE
CANCELLATION AND DESTRUCTION
SECTION 16.1
All Debentures cancelled or required to be cancelled under any provision of
this Indenture shall be destroyed by or under the direction of the Trustee by
cremation or otherwise (in the presence of a representative of the Company if
the Company shall so require) and the Trustee shall retain a certificate of such
destruction and deliver a duplicate thereof to the Company.
NON-PRESENTATION OF DEBENTURES
SECTION 16.2
In case the holder of any Debenture shall fail to present the same for
payment on the date on which the principal, the premium and/or the interest
thereon or represented thereby becomes payable either at maturity, on redemption
or otherwise or if such holder shall not accept payment on account thereof and
give such receipt therefor, if any, as the Trustee may require.
(a) the Company shall be entitled to pay to the Trustee and direct it to
set aside; or
(b) in respect of moneys in the hands of the Trustee which may or should be
applied to the payment of the Debentures, the Company shall be entitled to
direct the Trustee to set aside; or
(c) if the redemption was pursuant to notice given by the Trustee, the
Trustee may itself set aside;
the principal moneys and/or the interest, as the case may be, in trust to be
paid to the holder of such Debentures upon due presentation for surrender
thereof in accordance with the provisions of this Indenture; and thereupon the
principal moneys, or interest payable on or represented by each Debenture in
respect whereof such moneys have been set aside shall be deemed to have been
paid and the holder thereof shall thereafter have no right in respect thereof
except that of receiving payment of the moneys so set aside by the Trustee upon
due presentation and surrender thereof, subject always to the provisions of
Section 16.3.
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REPAYMENT OF UNCLAIMED MONEYS TO COMPANY
SECTION 16.3
Any moneys set aside under Section 16.2 and not claimed by and paid to
holders of Debentures as provided in Section 16.2 within six years after the
date of such setting aside shall be repaid to the Company by the Trustee on
demand and thereupon the Trustee shall be released from all further liability
with respect to such moneys and thereafter the holders of the Debentures in
respect of which such moneys were so paid to the Company shall have no right in
respect thereof except to obtain payment of the moneys due thereon from the
Company.
RELEASE AND DISCHARGE
SECTION 16.4
Upon proof being given to the reasonable satisfaction of the Trustee that
all Debentures and interest (including without duplication interest on amounts
overdue) thereon have been paid or satisfied, or that all the Debentures have
matured or have been duly called for redemption or the Trustee has been given
irrevocable instructions by the Company to give within 90 days notice of
redemption of all the Debentures, and such payment and/or redemption has been
duly and effectually provided for by payment to the Trustee or otherwise, and
upon payment of all costs, charges and expenses properly incurred by the Trustee
in relation to this Indenture and all interest thereon and the reasonable
remuneration of the Trustee, or upon provision satisfactory to the Trustee being
made therefor, the Trustee shall at the request and at the expense of the
Company, execute and deliver to the Company such deeds or other instruments as
shall be requisite to release the Company from the trusts and provisions herein
contained and to release the Company from is covenants herein contained except
those relating to the indemnification of the Trustee and to the obligations of
the Company with respect to the moneys repaid to it under Section 16.3 hereof.
NON-PRODUCTION OF DEBENTURES
SECTION 16.5
Subject to the provisions of Article 5 hereof, in the event of a holder not
producing any Debenture upon the redemption, maturity or other date of payment
thereof, a certificate of the Trustee hereunder of the deposit with it for
payment of the principal amount of such Debenture and of such interest as may be
due thereon shall avail as a cancellation of such Debenture for the purposes
hereof, and as a sufficient authorization to the Company to cancel the entries
relating to such Debenture.
ARTICLE 17
EXECUTION
SECTION 17.1
This Indenture may be executed in several counterparts, each of which when
so executed shall be deemed to be an original and such counterparts together
shall constitute the one and the same instrument and notwithstanding their date
of execution shall be deemed to bear date as of the 5th day of October, 1994.
SECTION 17.2
The parties hereto confirm that it is their wish that this Trust Indenture
as well as all documents relating thereto, including the Debentures and notices,
be drawn up in English only. Les parties a la
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presente convention confirment leur volonte que cette convention, de m'eme que
tous les documents s'y rattachant, y compris les debentures et tout avis, soient
rediges en anglais seulement.
IN WITNESS WHEREOF the parties hereto have executed this Indenture.
HARMAC PACIFIC INC.
By: /s/ RALPH LEVERTON
By: /s/ ERIC LAURITZEN
MONTREAL TRUST COMPANY OF CANADA
By: /s/ N. H. CLEMENT
By: /s/ J.W. HUFF
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SCHEDULE
to the annexed Indenture dated as of the 5th day of October, 1994 between Harmac
Pacific Inc. and Montreal Trust Company of Canada, as Trustee.
[Legend for U.S. Persons] THE SECURITIES REPRESENTED HEREBY HAVE NOT
BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS
AMENDED (THE "U.S. SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING
SUCH SECURITIES, AGREES FOR THE BENEFIT OF THE COMPANY THAT SUCH
SECURITIES MAY BE OFFERED, SOLD OR OTHERWISE TRANSFERRED ONLY (A) TO
THE COMPANY, (B) OUTSIDE THE UNITED STATES IN ACCORDANCE WITH RULE 904
OF REGULATION S UNDER THE U.S. SECURITIES ACT, IF AVAILABLE, OR (C)
INSIDE THE UNITED STATES (1) PURSUANT TO THE EXEMPTION FROM
REGISTRATION UNDER THE U.S. SECURITIES ACT PROVIDED BY RULE 144
THEREUNDER, IF APPLICABLE, AND IN COMPLIANCE WITH APPLICABLE STATE
SECURITIES LAWS OR (2) IN A TRANSACTION THAT DOES NOT REQUIRE
REGISTRATION UNDER THE U.S. SECURITIES ACT OR ANY APPLICABLE UNITED
STATES STATE LAWS GOVERNING THE OFFER AND SALE OF SECURITIES AND THE
SELLER HAS FURNISHED TO THE COMPANY AN OPINION OF COUNSEL OF
RECOGNIZED STANDING REASONABLY SATISFACTORY TO THE COMPANY, TO THAT
EFFECT. DELIVERY OF THIS CERTIFICATE MAY NOT CONSTITUTE "GOOD
DELIVERY" IN SETTLEMENT OF TRANSACTIONS ON STOCK EXCHANGES IN CANADA.
A NEW CERTIFICATE, BARING NO LEGEND, DELIVERY OF WHICH WILL CONSTITUTE
"GOOD DELIVERY", MAY BE OBTAINED FROM THE CUSTODIAN UPON DELIVERY OF
THIS CERTIFICATE AND A DULY EXECUTED DECLARATION, IN A FORM
SATISFACTORY TO THE CUSTODIAN AND THE COMPANY, TO THE EFFECT THAT THE
SALE OF THE SECURITIES REPRESENTED HEREBY IS BEING MADE IN COMPLIANCE
WITH RULE 904 OF REGULATION S UNDER THE SECURITIES ACT.
FORM OF DEBENTURE
The following is the form of fully registered 8% Convertible Subordinated
Debenture referred to in subsection (4) of Section 2.2 of the annexed Indenture.
No............. $.................
HARMAC PACIFIC INC.
(Incorporated in the Province of British Columbia)
8% CONVERTIBLE UNSECURED SUBORDINATED DEBENTURE
Due October 4, 2004
HARMAC PACIFIC INC. (hereinafter called the "Company") for value received
hereby promises to pay to ______________________________________________________
________________________________________________________________________________
________________________________________________________________________________
<PAGE>
-53-
on October 4, 2004 or on such earlier date as the principal amount hereof may
become due in accordance with the provisions of the Trust Indenture hereinafter
mentioned, on presentation and surrender of this Debenture,
the principal sum of ___________________________________________________________
dollars ($____________) in lawful money of Canada at any branch in Canada of
Bank of Nova Scotia at the holder's option, and to pay interest on the principal
sum hereof at the rate of 8% per annum from October 5, 1994 or from the last
interest payment date to which interest has been paid or made available for
payment on the outstanding Debentures, whichever is later, at any of the said
places, at the holder's option, in like money half-yearly on June 1 and December
1 in each year; and should the Company at any time make default in the payment
of any principal or interest, to pay interest on the amount in default at the
same rate, in like money at any one of the said places, at the holder's option,
and half-yearly on the same dates. As interest on this Debenture becomes due,
the Company (except in case of payment at maturity or on redemption at which
time payment of interest will be made upon surrender of this Debenture) shall
forward or cause to be forwarded, either directly or through the Trustee, by
prepaid ordinary post to the registered address of the registered holder of this
Debenture for the time being, or in the case of joint holders to the registered
address of one of such joint holders, a cheque on the Company's bankers for such
interest, less any tax required by law to be deducted, payable to the order of
such holder or holders and negotiable at par at any one of the places at which
interest upon this Debenture 0 payable at the holder's option. The forwarding of
such cheque shall satisfy and discharge the liability for interest upon this
Debenture to the extent of the sum represented thereby (plus the amount of any
tax deducted as aforesaid) unless such cheque be not paid on presentation.
This Debenture is one of the Debentures designated 8% Convertible
Subordinated Debentures (herein referred to as the "Debentures") issued and to
be issued under and entitled to the benefits of an Indenture (herein called the
"Trust Indenture") dated as of October 5, 1994 made between the Company and
Montreal Trust Company of Canada, as Trustee. Reference is hereby made to the
Trust Indenture and all instruments supplemental thereto for a description of
all the rights of the holders of Debentures issued or issuable thereunder, of
the Company and of the Trustee and of the terms and conditions upon which such
Debentures are issued or may be issued and held all to the same effect as if the
provisions of the Trust Indenture and all instruments supplemental thereto were
herein set forth, to all of which provisions the holder of this Debenture, by
acceptance hereof, assents.
The aggregate principal amount of Debentures which may be issued under the
Trust Indenture is limited to $76,500,000 of lawful money of Canada, and
Debentures to this aggregate principal amount have been authorized for immediate
issue under the Trust Indenture, of which this is one.
The Debentures are issuable as fully registered Debentures only in
denominations of $1,000 and integral multiples thereof.
This Debenture is a direct obligation of the Company ranking for payment
pari passu with all other Debentures, but is not secured by any mortgage,
pledge, or other charge. The Trust Indenture does not restrict the Company from
incurring additional indebtedness or from mortgaging, pledging or charging its
properties to secure any indebtedness.
This Debenture and all other Debentures now or hereafter issued under the
Trust Indenture shall, subject to the terms of the Trust Indenture, be equally
and rateably entitled to the benefit of the Trust Indenture as if all the
Debentures had been issued simultaneously. The payment of the principal of and
interest on this Debenture is expressly subordinated as provided in the Trust
Indenture to the prior payment in full of all present or future Senior
Indebtedness (as defined in the Trust Indenture) of the Company and by
acceptance of this Debenture the holder hereof agrees, expressly for the benefit
of the present and future holders of such Senior Indebtedness, to be bound by
the provisions of the Trust Indenture.
<PAGE>
-54-
All or any part (being $1,000 or an integral multiple thereof) of this
Debenture is convertible, at the option of the holder hereof, upon surrender of
this-Debenture at the principal office of the Trustee in Vancouver, Calgary,
Regina, Winnipeg, Toronto, Montreal or Halifax at any time after their issuance
and on or before the close of business on the date of maturity of this
Debenture, or, if this Debenture is previously called for redemption, the
business day immediately preceding the date specified for redemption, into fully
paid and non-assessable common shares (herein referred to as "Common Shares") in
the capital of the Company (without adjustment for interest accrued hereon or
for dividends on Common Shares issuable upon conversion) at a Conversion Price
(as defined in the Trust Indenture) of $16.50 per Common Share, being at a rate
of approximately 60.606 Common Shares for each $1,000 principal amount of
Debentures, all subject to the terms and conditions set forth in the Trust
Indenture. The Trust Indenture makes provision for the adjustment of the
Conversion Price in certain events therein specified and for the giving of
notice to Debenture holders of such events.
Although the Debentures may be converted at any time after their issuance,
there may not be an active trading market for the Common Shares so acquired
until after November 27, 1994. Therefore, it may be difficult or impossible to
resell prior to that date any Common Shares issued on conversion of Debentures.
The Debentures may not be redeemed prior to October 5, 1997. Thereafter and
prior to October 5, 1999, the Debentures may not be redeemed unless the Company
shall have filed with the Trustee a certificate certifying that the weighted
average price (as defined in the Trust Indenture) at which the Common Shares
traded on The Toronto Stock Exchange during the period of 20 consecutive trading
days ending on a date not earlier than the fifth trading day preceding the date
on which notice of redemption is given was not less than 125% of the Conversion
Price in effect on the date of the filing of such certificate. Subject to the
foregoing, the Debentures may be redeemed prior to maturity, in whole at any
time or in part from time to time at the option of the Company on not more than
60 and not less than 30 days' prior notice at redemption prices equal to the
principal amount thereof plus accrued and unpaid interest to the date specified
for redemption.
This Debenture, if for a principal amount in excess of $1,000, is subject
to redemption in part (being $1,000 or an integral multiple thereof) and, in the
event of such partial redemption, the holder hereof shall be entitled to
receive, without expense to such holder, a new Debenture for the unredeemed part
of the principal amount of the Debenture.
In case of partial redemption, the Debentures to be redeemed shall be
selected as provided in the Trust Indenture. If this Debenture is called for
redemption and payment hereof duly provided for, interest shall cease to accrue
hereon from the date fixed for redemption as provided in the Trust Indenture.
The right is also reserved to the Company to purchase Debentures at any
time in the market or by tender or by private contract at prices equal to the
principal amount thereof, plus accrued and unpaid interest and costs of
purchase.
The principal hereof may also become or be declared due before stated
maturity on the conditions, in the manner, with the effect and at the times set
forth in the Trust Indenture.
Upon presentation at the principal office of the Trustee in Vancouver,
Calgary, Regina, Winnipeg, Toronto, Montreal or Halifax, subject to the
provisions of the Trust Indenture and upon compliance with the reasonable
requirements of the Trustee: (1) Debentures of any denomination may be exchanged
for Debentures of any other authorized denomination of the same aggregate
principal amount; and (2) a Debenture may be transferred by the registered
holder thereof or his executors, administrators or other legal representatives
or his or their attorney duly appointed in writing.
The Company and the Trustee may deem and treat the person in whose name
this Debenture is registered as the absolute owner of this Debenture for the
purpose of receiving payment of or on account of the principal hereof and
premium, if any, and interest due hereon and for all purposes whatsoever.
<PAGE>
-55-
The Trust Indenture contains provisions making binding upon all holders of
Debentures outstanding thereunder resolutions passed at meetings of such holders
held in accordance with such provisions and instruments in writing signed by the
holders of a specified percentage of the principal amount of the Debentures
outstanding.
This Debenture shall not become obligatory for any purpose until it shall
have been certified by or on behalf of the Trustee for the time being under the
Trust Indenture.
IN WITNESS WHEREOF HARMAC PACIFIC INC. has caused its common seal to be
hereunto affixed and this Debenture to be signed by facsimile signature by its
Chairman of the Board and an Executive Vice President as of October 5, 1994.
HARMAC PACIFIC INC.
By:
-------------------------------------
President
By:
-------------------------------------
Vice President Finance and
Chief Financial Officer
MONTREAL TRUST COMPANY OF CANADA
Trustee
By:
-------------------------------------
Authorized Officer
<PAGE>
-56-
(Form of Trustee's Certificate)
TRUSTEE'S CERTIFICATE
This Debenture is one of the 8% Convertible Subordinated Debentures
referred to in the Trust Indenture within mentioned.
Dated: __________________________________
<PAGE>
-57-
CONVERSION FORM
To: HARMAC PACIFIC INC.
The undersigned registered holder of the within Debenture hereby
irrevocably elects to convert said Debenture (or $ principal amount
thereof*) into common shares of Harmac Pacific Inc. in accordance with the
terms of the Indenture referred to in said Debenture and directs that the
common shares issuable and deliverable upon the conversion be issued and
delivered to the person indicated below. (If common shares are to be issued
in the name of a person other than the holder, all requisite transfer taxes
must be tendered by the undersigned.)
Dated.........................
.........................................
(Signature of Registered Holder)
*If less than the full principal amount of the within Debenture is to be
converted, indicate in the space provided the principal amount (which must be $
1,000 or an integral multiple thereof) to be converted.
NOTE: If shares are to be issued in the name of a person other than the holder,
the signature must be guaranteed by a chartered bank, by a trust company,
or by a member firm of The Toronto Stock Exchange, the Vancouver Stock
Exchange or the Montreal Exchange.
Print Name in which common shares on conversion are to be issued, delivered
and registered.
Name.........................
................................................................................
(Address) (City, Province and Postal Code)
Name of guarantor:..............................................................
Authorized signature:...........................................................
November 30, 1998
Mr. Ralph Leverton
[Address]
Dear Ralph:
This letter is to confirm our agreement in connection with the settlement of
your rights arising from your employment agreement (the "Agreement") made as of
December 1, 1994 with Harmac Pacific Inc. (the "Company") as a result of the
acquisition of control of the Company by Pope & Talbot, Inc. ("P&T") on February
2, 1998.
Under the Agreement, on the change in control, you were entitled to terminate
your employment on notice to the Company and to receive from the Company an
amount equal to three times the sum of your base salary for 1998 and the average
bonus paid to you in respect of 1995, 1996 and 1997.
You have since accepted employment with P&T as its Vice President Pulp Division,
which role includes acting as the President and Chief Operating Officer of the
Company.
I confirm that you and we have agreed to terminate the Agreement in its
entirety, without further liability of either party, effective August 31, 1998
in consideration of the following:
1. The payment to you by the Company of the sum of $557,500, the receipt of
which you hereby acknowledge; and
2. Our agreement that if on or before July 31, 1999 you resign on not less
than 30 days' notice or are dismissed from your employment by P&T:
a. the Company will pay you the further sum of $278,750;
b. unless you are then receiving long-term disability payments under the
Company's long-term disability plan, on the specified date of
termination you will be entitled to receive from the Company's pension
plans for its salaried employees and executive officers the benefits
payable in accordance with the terms of those plans;
c. until the earlier of the first anniversary of the date of the
termination of your employment and the end of the month in which you
commence employment with another employer that provides reasonably
comparable benefits and perquisites to its senior executives as those
provided by the Corporation:
<PAGE>
Mr. Ralph Leverton
November 30, 1998
Page 2
i. subject to your insurability, you will continue to be eligible
for all employee life, medical and dental insurance and other
benefits, other than pension and long-term disability benefits
under benefit plans and programs then in effect for executive and
key management employees of P&T and P&T shall provide same or, at
its option, shall purchase substantially comparable benefits
outside its existing plans and programs; provided, however, that
nothing herein shall be construed as limiting P&T's right to
terminate any such plan or program at any time or from time to
time; and
ii. P&T shall continue to provide the perquisites and benefits which
were provided to you at the time of the termination of your
employment, other than pension and long-term disability benefits,
and other than participation in any share option plan, or any
bonus or incentive plan or arrangement established for executive
officers of P&T; and
d. the Company shall reimburse you for employment relocation and
financial counselling and tax planning services actually incurred to
an aggregate maximum of $10,000, provided that the relevant consultant
has been approved in writing by the Company prior to the incurring of
such fees or expenses.
Please sign below to confirm your agreement with the foregoing terms and return
a signed copy to me, whereupon this will become a binding agreement.
Yours truly,
Michael Flannery
Chairman of the Board &
Chief Executive Officer
/s/ RALPH LEVERTON
- ---------------------------------- ----------------------------------
Ralph Leverton Date
SEPARATION AGREEMENT
Pope & Talbot, Inc. and William G. Frohnmayer, have reached an agreement as
follows:
1. Your early retirement date will be June 30, 1998, at which time you
will resign from the company. Your current salary and benefits will
continue thru the above retirement date.
2. Pope & Talbot, Inc. will pay to you, for your lifetime, the difference
between the pension to which you would have been entitled had you
continued employment with the company until age 62, at an increasing
salary of 3% and the pension you will actually receive from the
Salaried Plan and the SERP. The amount of this benefit is $1,138.54
per month.
3. After you retire, Pope & Talbot, Inc. will provide 25% of your life
insurance until you reach age 65. In addition, Pope & Talbot will
continue your medical coverage until you reach age 65 (03-31-03) and
for your spouse until you reach age 70 (03-31-08).
4. Pope & Talbot, Inc. will provide that your stock options, which are
vested as of June 30, 1998, remain exercisable for three years, July
1, 1998 through June 30, 2001.
5. Pope & Talbot, Inc. will also provide you a bonus in the amount of
$150,000.00 at the time of retirement. This is in lieu of any payment
that you may be entitled to from the Executive Incentive Plan.
$75,000.00 payable on June 30, 1998 and $75,000.00 payable January 4,
1999.
6. Pope & Talbot, Inc. will also guarantee you a consulting agreement for
the period of September 1, 1998 through August 30, 1999. This
agreement is to engage your services for 140 days at $ 1,000.00 per
day.
7. Pope & Talbot, Inc. will also give you the 1997 Suburban, lap top
computer, fax, and cell phone that are currently in your possession.
This sum is above and beyond all wages and benefits earned by William G.
Frohnmayer prior to the date of separation.
8. In consideration for this payment:
a. William G. Frohnmayer acknowledges separation from his employment
with the company effective June 30, 1998;
<PAGE>
b. William G. Frohnmayer forever releases Pope & Talbot, Inc. and
all persons now or formerly employed or connected with Pope &
Talbot, Inc. from any and all claims, actions and suits which he
has or might have against Pope & Talbot, Inc. arising out of his
employment and separation from employment with Pope & Talbot,
Inc. including but not limited to damages, attorney fees, back
pay, compensation, general damages, punitive damages, interest
and reinstatement based on any claim of any nature including but
not limited to a claim under any state or federal statute, the
AGE DISCRIMINATION IN EMPLOYMENT ACT, and all other state and
federal statutes, or any contract claim (either express or
implied)or any other claim of any nature which exists on the date
that he signs this separation agreement;
c. William G. Frohnmayer agrees to not disclose to any other
employer, person or employee representative, any trade secret or
proprietary or confidential information pertaining to the Company
and its employees, including but not limited to production,
personnel, cost, customer, wage, or benefit information. In
accordance with normal ethical and professional standards,
William G. Frohnmayer will refrain from taking actions or making
statements, written or oral which disparage or defame the
goodwill or reputation of the Company, its directors, officers,
executives, and employees. From the time of this agreement, if
William G. Frohnmayer engages in any of the foregoing conduct, he
will immediately forfeit any remaining payments and all benefits
continuation will cease. In addition, the company may demand
return of all payments already made, and upon such demand,
William G. Frohnmayer agrees to return such payments and Pope &
Talbot may pursue any and all legal and equitable remedies;
d. "The parties hereto agree to submit any claim or dispute arising
out of the terms of this agreement to private and confidential
arbitration by a single neutral arbitrator. Subject to the terms
of this paragraph, the arbitration proceeding shall be governed
by the arbitration rules of the Arbitration Service of Portland.
The arbitrator shall be appointed by agreement of the parties
hereto or, if no agreement can be reached, by the Arbitration
Service of Portland pursuant to its rules. The decision of the
arbitrator shall be final and binding on the parties to the
arbitration, and judgment thereon may be entered in any court
having jurisdiction. All costs of any such arbitration
proceeding, including attorney fees and witness expenses shall be
paid by the party against whom the arbitration rules. This
arbitration procedure is intended to be the exclusive method of
resolving any claim relating to the obligations set forth in this
agreement."
2
<PAGE>
9. If William G. Frohnmayer files for unemployment compensation, Pope &
Talbot will not oppose his eligibility to receive such compensation.
10. William G. Frohnmayer acknowledges that he has been paid in full all
sums due and owing by virtue of his employment with Pope & Talbot,
Inc.
11. In accordance with state and federal law, William G. Frohnmayer is
aware of the following with respect to release of any claims under the
AGE DISCRIMINATION IN EMPLOYMENT ACT (ADEA):
a. He has the right to consult with an attorney before signing this
agreement and has been advised by Pope & Talbot, Inc. to do so;
b. He has up to 21 days to consider this separation agreement and
the releases contained herein;
c. He has seven days after signing this separation agreement to
revoke this agreement and the agreement and release will not be
effective as to any ADEA claim until the eighth day following the
signing of this agreement;
d. No compensation or benefits provided pursuant to this agreement
will be paid until eight days after signing this agreement.
12. The provisions set out above represent the sole and entire agreement
between William G. Frohnmayer and Pope & Talbot, Inc. This agreement
cannot be amended or modified in any way except by writing signed by a
duly authorized representative of Pope & Talbot and William G.
Frohnmayer, and stating the intent of both parties to amend this
agreement.
POPE & TALBOT, INC. I am signing this Agreement voluntarily
and understand the above.
By: /s/ /s/ WILLIAM G. FROHNMAYER
Date: May 6, 1998 Date: May 6, 1998
3
<TABLE>
<CAPTION>
POPE & TALBOT, INC. AND SUBSIDIARIES
Statement Showing Calculation of Average
Common Shares Outstanding and Earnings
Per Average Common Share
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Weighted average number of
common shares outstanding 13,481,441 13,419,195 13,363,779
Application of the "treasury stock"
method to the stock option plan 807 42,257 13,924
------------ ------------ ------------
Total common and common
equivalent shares,
assuming dilution 13,482,248 13,461,452 13,377,703
============ ============ ============
Net income (loss) $ 342,000 $ 10,020,000 $ 3,909,000
============ ============ ============
Net income (loss) per common share,
assuming dilution $ .03 $ .75 $ .29
============ ============ ============
</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.
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Pope & Talbot, Inc. and Subsidiaries
Overview
Poor commodity prices in pulp and lumber markets and increased leverage in pulp
combined to depress earnings for Pope & Talbot in 1998. The Company's continuing
operations lost $23.5 million, or $1.74 per share. This compares with income
from continuing operations of $4.4 million, or $.33 per share, in 1997 and a
loss from continuing operations of $1.3 million, or $.10 per share, in 1996.
Lumber prices have declined steadily since April of 1997 and the Random Length
Composite Index for lumber settled at a low level of approximately $280 per
thousand board feet for most of 1998. Meanwhile, the world pulp markets
dramatically weakened at the end of 1995 and prices have remained depressed
during 1998 at levels ranging from $460 to $575 per metric ton for northern
bleached softwood kraft (NBSK) pulp. The Company purchased a majority ownership
interest in Harmac Pacific Inc. (Harmac) in February 1998. Harmac's mill in
Nanaimo, BC, produces high quality NBSK pulp and is a market leader in the
production of pulp for specialty applications. Pope & Talbot's 1998 earnings
include its share of Harmac's results from the date of acquisition.
Total 1998 net income was $.3 million, or $.03 per share, compared with
$10.0 million, or $.75 per share in 1997 and $3.9 million, or $.29 per share, in
1996. The results for each of these years included the impact of discontinued
operations, and in 1998, net income also included the impact of an accounting
change. These transactions are discussed below.
In the first quarter of 1998, the Company sold its tissue business for a
gain of $26.8 million, net of tax. In the accompanying financial statements, the
earnings from the tissue business were reported as discontinued operations, net
of tax, in each of the last three years. The Company sold its disposable diaper
business in 1996, and reported a $3.1 million gain on sale, net of tax.
Settlement of diaper business legal issues outstanding and recognition of costs
associated with former diaper business facilities were recorded in the fourth
quarter of 1998 for a loss of $4.0 million, net of tax. Earnings per share
related to discontinued operations were $1.71, $.42 and $.39 in 1998, 1997 and
1996, respectively.
Revenues in 1998 grew to $420.8 million (including Harmac's revenues of $140.3
million) from $329.9 million in 1997 and $313.8 million in 1996. Excluding the
impact of Harmac, 1998 revenues would have been lower than 1997 and 1996, due
primarily to the low commodity prices in lumber and pulp. Lumber volume sold has
increased year over year since 1996. In addition to lower prices, U.S. pulp
operations experienced a 12 percent decrease in volume sold in 1998 compared
with 1997 as the result of market-related downtime.
Cost of sales were $429.1 million, $300.3 million and $295.5 million in
1998, 1997 and 1996, respectively. Included in 1998 was $140.4 million of Harmac
pulp operations costs. For additional details regarding cost of sales, see the
Wood Products and Pulp Products sections following this overview.
Selling, general and administrative expenses were $24.1 million in 1998,
compared with $14.8 million in 1997 and $15.1 million in 1996. Costs in 1998
increased $9.3 million over 1997 primarily due to the inclusion of Harmac in
1998 results without any corresponding amounts in 1997.
Results of Operations
Wood Products
The Company's Wood Products business comprised 52 percent of 1998 consolidated
revenues and generated an operating profit before corporate expenses, interest
and income taxes of $1.3 million. Results for 1998 compared to 1997 and 1996
operating profits of $24.9 million and $22.9 million, respectively.
Wood Products revenues were $216.9 million in 1998 compared with $248.3
million and $231.7 million in 1997 and 1996, respectively. The $31.4 million
decrease in 1998 was due primarily to a 21 percent decline in average lumber
prices. The 1997 revenue increase relative to 1996 reflected higher lumber
volumes and prices.
U.S. lumber consumption was at record levels in 1998 with low interest
rates, record housing starts of 1.62 million (the highest in 11 years) and a
strong U.S. economy. Lumber shipments of 573 million board feet in 1998 were up
5 percent from 1997 and 7 percent from 1996 in response to strong North American
demand. The Asian financial crisis, especially the collapse of the Japanese
economy, decreased
<PAGE>
9
- --------------------------------------------------------------------------------
exports of U.S. lumber and logs and increased imports from other countries of
these products. As a result, the price of lumber dropped significantly. The
Random Lengths Composite Price Index for lumber was down 16 percent in 1998, the
lowest level since 1995. During 1997, average lumber prices improved 10 percent
over 1996 levels, reflecting continued strength in the lumber markets. U.S.
housing starts in 1997 were 1.48 million compared with 1.47 million in 1996.
Lumber prices during 1997 peaked in the second quarter, and prices realized in
December 1997 were nearly 20 percent below that second quarter peak.
Wood products cost of sales for 1998 totaled $211.8 million, compared with
$219.1 million in 1997 and $204.8 million in 1996. The $7.3 million decrease in
cost of sales in 1998 was primarily due to reductions in the cost of logs.
Average 1998 log costs dropped 11 percent in the Canadian sawmills and 5 percent
in the U.S. sawmills. British Columbia stumpage fees, which are indexed (with a
three-month lag) to lumber prices, were reduced in the third quarter of 1998 in
response to declining lumber prices. Lumber production per man-hour and lumber
recovery from logs increased in 1998 as the result of several well-targeted
capital expenditures.
Approximately 75 percent of the Company's current lumber capacity is
located in British Columbia, Canada. Most of the timber supply for the Canadian
mills is under long-term harvesting licenses with the Provincial Government and
the balance is purchased. 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 quotas of lumber volumes which may be shipped to the U.S. tariff-free.
Incremental volumes are subject to a two-tier tariff of $52 per thousand board
feet and $104 per thousand board feet. The first annual period subject to quotas
and tariffs ended March 31, 1997. The Company's tariff-free volume was reduced
by 11.4 million board feet from the 1996/1997 fiscal year to the 1997/1998
fiscal year, and then by another 11.6 million board feet for the 1998/1999
fiscal year. As a partial offset, the Company received increases in its
allocation of the lower $52 per thousand board foot tariff from the 1996/1997
fiscal year to the 1998/1999 fiscal year. During 1998 and 1997, the Company
expensed tariff charges of approximately $2.9 million and $1.9 million,
respectively, related to shipments from the Company's Canadian sawmills into the
U.S. Because of declining lumber prices in 1998 and the last half of 1997,
coupled with the implications of this tariff agreement, the Company was forced
to take several shutdowns during 1998 and 1997. The Company continually
evaluates the need for temporary shutdowns in balancing the economics of sales
prices, production costs and tariffs.
The Provincial Government of British Columbia's Commission of Resources and
Environment issued the Kootenay Boundary Land Use Plan in 1997. This land use
plan set aside several new wilderness areas. Although no assurances can be
given, management believes that in the near term, timber supplies for the
Company's Canadian sawmills should be relatively stable. The Company has
improved its reforestation practices to sustain and enhance timber supplies in
the long term to mitigate the adverse effects of forest restrictions.
Pulp Products
In line with the Company's strategy of narrowing its business focus to pulp and
lumber, the Company increased its presence in the NBSK pulp market with the
acquisition of a controlling interest in Harmac in February 1998. The Company's
proportion of revenues in 1998 from pulp products increased to 48 percent of
total revenues from 25 percent in 1997. The Company is now the world's ninth
largest producer of NBSK pulp with approximately 460,000 metric tons of
capacity. The Company also has 100,000 metric tons of short-fiber (sawdust) pulp
producing capacity. In 1998, revenues from the Company's two pulp mills totaled
$203.8 million, compared with $81.6 million in 1997 and $82.1 million in 1996.
Largely as the result of depressed prices and demand, the Company's pulp
operations incurred operating losses before corporate expenses, interest and
income taxes of $21.2 million in 1998, compared with operating losses of $2.7
million in 1997 and $10.8 million in 1996.
Pulp pricing has reflected weak pulp markets since the end of 1995. The
European benchmark price for NBSK pulp averaged $462 per metric ton in the
fourth quarter of 1998 compared with $598 per metric ton in the fourth quarter
of 1997, a decline of 23 percent. The benchmark price of NBSK pulp per metric
ton averaged $589 in 1996, $565 in 1997 and $516 in 1998.
Pulp revenues for the Company's Halsey, Oregon mill in 1998 were $63.5
million compared with $81.6 million in 1997 and $82.1 million in 1996. Average
1998 prices realized at Halsey decreased 8 percent from 1997 prices. In
addition, sales volume in 1998 decreased 12 percent from 1997 volumes.
<PAGE>
10
- --------------------------------------------------------------------------------
During 1998, all of Halsey's pulp sales were priced on the basis of market
prices for various grades of pulp, including the 40 percent sold to Grays Harbor
Paper Company (Grays Harbor). During 1997 and 1996, about 50 percent and 60
percent, respectively, of Halsey's pulp was sold to Grays Harbor with pricing
indexed to the price of white paper. In 1998, the contract was modified to
provide for pricing based on southern mixed(U.S.) bleached hardwood kraft
prices.
The Halsey mill produces pulp from two fiber sources, wood chips and
sawdust. Wood chip prices fell sharply from a peak in early 1996 as pulp markets
fell. While still at relatively low prices compared with historical levels,
average wood chip prices at Halsey increased 49 percent per metric ton in 1998
compared with 1997, and average sawdust prices increased 22 percent per metric
ton. Sawdust has historically been in greater supply and less expensive than
wood chips, which are normally used as the primary raw material for pulp mills.
As a result of rising wood chip prices in 1998, Halsey shifted its mix of
production in favor of the lower cost fiber source. Halsey's 1998 sales mix was
62 percent sawdust pulp and 38 percent wood chip pulp compared with 59 percent
sawdust and 41 percent wood chip pulp in 1997.
Halsey shipped 158,000 metric tons of pulp in 1998, compared with 180,000
metric tons in 1997 and 161,000 metric tons in 1996. Production was reduced in
1998 to balance inventory levels. Production levels in 1996 were below 1997
levels due to soft markets and equipment failure.
Harmac revenues included in the Company's 1998 results totaled $140.3
million on shipments of 335,000 metric tons. Approximately 50 percent of sales
were to Europe, 29 percent to Japan and other Pacific Rim countries and 19
percent to North America.
Harmac has a long-term fiber supply agreement with MacMillan Bloedel
Limited that provides for at least 80 percent of its fiber requirements through
2019. Fiber is purchased at market or at prices determined under a formula
intended to reflect fair market value of the fiber and which takes into account
the net sales value of pulp sold by Harmac.
To lower break-even levels, Harmac has focused on reducing operating costs.
At the end of the first quarter of 1998, Harmac initiated the first phase of a
comprehensive restructuring plan by announcing the closures of its on-site log
chipping mill and the Vancouver, BC corporate administrative and marketing
office. In the fourth quarter of 1998, Harmac announced a second phase of hourly
and salaried staff reductions at the mill. A new labor contract ratified in
January 1999 provides for future improved work practice flexibility, which is
expected to reduce labor costs at the mill. Also in 1998, Harmac completed its
three-year project to modernize the fiber handling system. As a result of these
initiatives and other actions, Harmac lowered its manufacturing cost by $26 per
metric ton from 1997 to 1998.
The selling and administrative functions of Harmac and Pope & Talbot were
combined during the fourth quarter of 1998 in the Company's corporate office in
Portland, Oregon, with significant cost reductions expected to be achieved. The
combined marketing function now sells a broad range of pulp and is able to
pursue larger pulp customers and negotiate better transportation prices.
To bring the accounting methods of the Company's pulp mills into
conformity, the Company changed the method of depreciating its U.S. pulp
production assets from straight-line to units-of-production in 1998. The Company
believes this method, common within the industry, more appropriately matches
production costs with pulp sales revenues. The impact to the 1998 loss from
continuing operations was a reduction of depreciation expense before tax of $.8
million. The cumulative effect of this accounting change on years prior to 1998
was income of $.7 million, net of tax, or $.06 per share.
Discontinued Operations
In January 1998, the Company sold the assets of its tissue business for cash
consideration of $120.5 million and the assumption by the purchaser of certain
liabilities. The liabilities assumed include the $18.8 million City of Eau
Claire note payable and the business's $7.1 million post-retirement benefit
obligation. The sale closed on March 6, 1998 and the Company recognized a gain
of $26.8 million, net of tax. Income per share from the discontinued operations
and sale of the tissue business in 1998 was $2.01. The Company's tissue business
operating results for the periods prior to the sale are reflected in the
Consolidated Statements of Income as income from discontinued tissue operations.
The Company sold its disposable diaper business in February 1996 and
reported an after-tax gain on the sale of $3.1 million, or $.23 per share. In
1998, the Company settled legal issues related to the diaper business and
recognized certain costs related to facilities formerly used in diaper
production. These costs were $4.0 million, net of tax, or $.30 per share.
<PAGE>
11
- --------------------------------------------------------------------------------
See Note 10 of Notes to Consolidated Financial Statements for further discussion
of the discontinued tissue and disposable diaper businesses.
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 1998, operations used cash of $6.1 million. Operating activities provided
cash of $25.0 million in 1997 and $11.4 million in 1996. Income from continuing
operations, adjusted to add back noncash charges for depreciation and
amortization, for 1998 was $6.5 million, compared with $34.5 million in 1997 and
$30.1 million in 1996. Changes in current and deferred income taxes in 1998 of
$6.2 million were due primarily to the utilization of deferred tax assets
related to net operating loss carryforwards in connection with the gain on sale
of the tissue business. Cash flows from reductions of inventories in 1998 of
$16.9 million related primarily to active management of Wood Products log and
lumber inventories.
During the first quarter of 1998, the Company completed the acquisition of
a 53 percent interest in Harmac for cash. The first quarter 1998 investment in
Harmac was $35.8 million, net of cash acquired of $19.6 million, and included
common stock purchases and acquisition costs. The payment for Harmac shares in
the first quarter of 1998 was made from existing cash and cash equivalent
balances and borrowings of approximately $20 million under the Company's
revolving credit agreement. From the sale of the tissue business, the Company
received $120.5 million in cash and the purchaser assumed certain tissue
business liabilities. The Company used the cash received primarily to pay off
short-term debt obligations related to the Harmac acquisition and to purchase
short-term investments. In December 1998, the Company acquired an additional 1.2
million shares of Harmac stock for $2.5 million, increasing its majority
ownership to 60.2 percent.
The Company has historically paid dividends based on a percentage of
equity. Dividends paid totaled $10.2 million for the years 1998, 1997 and 1996,
and reflected a dividend rate of $.76 per share on an annual basis. The Board of
Directors declared a regular quarterly dividend of $.19 per share payable on
February 19, 1999. However, at the February 4, 1999 meeting, the Board of
Directors determined that the dividend payable on May 14, 1999 will be paid at
the rate of $.11 per share. The reduction was made to preserve the Company's net
worth and to conserve cash balances.
The current ratio at December 31, 1998 was 2.2 to 1 and the Company's
long-term debt to total capitalization ratio was 41.1 percent. 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 was 37.5 percent. The current ratio
at December 31, 1997 was 2.5 to 1. 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.
Capital spending in 1998 was $27.6 million compared with $13.1 million in
1997 and $7.2 million in 1996. Harmac's 1998 capital expenditures totaled $8.1
million, of which $6.6 million related to installation of a barge unloading
facility, the final phase of a three-year, $32 million project to modernize the
fiber handling system. The Wood Products division spent approximately $9 million
in 1998 for a waste wood burning energy system at the Castlegar sawmill.
As discussed further in the Environmental Matters section of this
Management's Discussion and Analysis below, the Company estimates it will have
to spend approximately $35 million on capital projects at its Halsey pulp mill
by the end of the first quarter of 2001 to comply with the Cluster Rules.
Approximately $1.5 million of costs related to these rules have been incurred
through December 31, 1998. Other anticipated capital projects in 1999 will be
primarily to sustain existing operations with a limited number of relatively
small, high-return projects. Projected 1999 capital spending, which will likely
be significantly lower than 1998, will be funded with internally generated cash
and supplemented, if necessary, with borrowings on the Company's lines of
credit.
At December 31, 1998, the Company had available $75 million under a
revolving credit agreement scheduled to expire in April 1999. In the first
quarter of 1999, this agreement was replaced with a $25 million revolving credit
agreement with a domestic bank and a $25 million revolving credit agreement with
a Canadian bank. At December 31, 1998, Harmac had $35 million Canadian
(approximately $22.7 million U.S.) of borrowing capacity under a $40 million
Canadian (approximately $26 million U.S.) 364-day revolving credit and term loan
facility.
<PAGE>
12
- --------------------------------------------------------------------------------
Other Matters
Environmental
The Company, as well as its competitors, is subject to 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. Compliance with all operating and
environmental permits is a priority for the Company.
In April 1998, the Environmental Protection Agency (EPA) published
regulations establishing standards and limitations for noncombustion 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. To meet the requirements, it is estimated that $35 million in capital
expenditures will be required by the first quarter of 2001 to bring the
Company's Halsey, Oregon pulp mill into compliance.
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 is contaminated by
creosote and, to a lesser extent, hydrocarbons, and that the owner planned to
undertake a voluntary cleanup of the site. The owner has requested that the
Company participate in the cost of the clean-up. The Company is currently
participating in the investigation stage of this site with remediation and
monitoring to occur over several years, likely beginning in 2001. Based on
preliminary findings, the Company has estimated the likely cost of remediation
and monitoring to be in the range of $15 million to $20 million. 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 the other known potentially responsible party (PRP) who may be
jointly and severally liable. The ability of the other PRP to participate has
been taken into account based generally on the PRP's financial condition and
probable contribution.
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 clean-up methods, the clean-up 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 the
other PRP. Anticipated recoveries from insurance carriers have been recorded at
such time as their receipt is deemed probable and amounts are reasonably
estimated.
In 1998, the Washington Department of Ecology (WDOE) requested the Company
undertake an assessment to determine whether and to what extent its former mill
site at Port Gamble, Washington may be contaminated. The Company is performing
the investigation and expects that it will be completed in 1999. In addition,
WDOE and the EPA have requested the Company to perform an investigation of
sediments in the adjacent bay to determine the extent of wood waste or hazardous
substances present in the near shore zone adjacent to the former mill. This
investigation also should be completed in 1999. Depending on the outcome of
these investigations, the Company may face additional claims or demands for
further action.
Net Deferred Tax Asset
The net deferred tax asset at December 31, 1998 was $21.2 million. The temporary
differences that gave rise to deferred taxes are shown in Note 9 of Notes to
Consolidated Financial Statements. The primary deferred tax asset related to net
operating loss carryforwards. At December 31, 1998, the Company had available
$48.6 million of U.S. federal tax loss carryforwards expiring as follows: 2010 -
$41.0 million; 2011 - $1.1 million; and 2012 - $6.5 million. The Company had
available $30.5 million of Canadian tax loss carryforwards related to Harmac,
expiring as follows: 2000 - $2.1 million; 2002 - $19.9 million; 2003 - $5.7
million; 2004 - $1.1 million; and 2005 - $1.7 million. As of December 31, 1998,
the Company also had Alternative Minimum Tax carry-forwards of $1.4 million that
may be carried forward indefinitely. Management believes that the Company will
have sufficientfuture U.S. and Canadian taxable income to make it more likely
than not that the net operating loss deferred tax asset will be realized. In
making this assessment, management has considered the cyclical nature of the
business, the
<PAGE>
13
- --------------------------------------------------------------------------------
relatively long expiration period of net operating losses and the ability to
utilize certain tax planning strategies if a net operating loss were to
otherwise expire. Some of the strategies that would be most feasible are the
sale and leaseback of facilities and changing the method of tax depreciation. In
addition, for Canadian net operating losses, deferral in utilization of capital
cost allowance deductions may be employed in order to utilize net operating
losses.
Other Contingencies
The Internal Revenue Service has assessed the Company additional tax of
approximately $5.3 million pertaining to transactions between the Company and
its wholly-owned Canadian subsidiary during its 1993 tax year. The Company,
which has filed a petition with the U.S. Tax Court, 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 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 effect on results of
operations.
Year 2000 Compliance
Pope & Talbot, like all other companies using computers and microprocessors, is
faced with the task of addressing the Year 2000 problem. 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
and manufacturing systems, and to evaluate the Year 2000 readiness of certain
third parties, such as suppliers and customers. The direct costs of projects
solely intended to correct the Company's Year 2000 problems are currently
estimated at $3.4 million, of which $2 million has been spent as of December 31,
1998. Most of these expenditures relate to replacement of systems and
applications and will be capitalized.
The Company completed an inventory of its core financial reporting
processes and other information technology systems in 1997 and expects to have
the necessary revisions to these systems and processes completed by mid-1999.
The Company has also completed an inventory of the process control systems and
embedded microprocessors used in its manufacturing operations and determined
that only a small percentage of such systems and microprocessors could be
subject to Year 2000 problems. The Company expects to have these affected
manufacturing systems replaced or corrected and complete testing and
verification of such systems during 1999. The Company presently believes that,
with conversions to new computer and financial systems and modifications to
existing software, the Year 2000 issues will not pose significant operational
problems for the Company. Due to the general uncertainty inherent in the Year
2000 problem, however, there can be no assurance that all Year 2000 problems
will be foreseen and corrected, or if foreseen, corrected on a timely basis, or
that no material disruption to the Company's business or operations will occur.
Further, the Company's expectations are based on the assumption that there will
be no general failure of external local, national or international systems (such
as power, communications or transportation systems) necessary for the ordinary
conduct of business. There can be no assurance that successful contingency plans
can, in fact, be developed or implemented to deal with such failures.
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. Such
statements are forward-looking statements and 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,
failure by the Company to realize expected cost savings from capital
expenditures, 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 the Company's Annual
Report included in its Form 10-K as well as in Company reports filed on Form
10-Q.
<PAGE>
14
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Pope & Talbot, Inc.
We have audited the accompanying consolidated balance sheets of Pope & Talbot,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1998 and 1997
and the related consolidated statements of stockholders' equity, income and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Harmac Pacific Inc.,
which statements reflect total assets and total revenues of 33 percent and 43
percent in 1998, respectively, of the related consolidated totals. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for the other
entity, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Pope & Talbot, Inc. and subsidiaries as of December
31, 1998 and 1997, and the results of its operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
As explained in Note 1 to the consolidated financial statements, effective
January 1, 1998, the Company changed its method of accounting for depreciation
of pulp production assets from the straight-line method to the
units-of-production method.
ARTHUR ANDERSEN LLP
Portland, OR
JANUARY 27, 1999
<PAGE>
15
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<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
Pope & Talbot, Inc. and Subsidiaries
As of December 31, 1998 and 1997
(in thousands of dollars except per share amounts) 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 27,473 $ 31,911
Short-term investments 9,857 -
Accounts receivable 62,356 34,134
Inventories 77,757 65,987
Prepaid expenses 10,651 11,057
Discontinued tissue operations net assets held for sale - 67,861
------------------------------
Total current assets 188,094 210,950
Properties:
Plant and equipment 424,519 279,298
Accumulated depreciation (199,417) (178,459)
------------------------------
225,102 100,839
Land and timber cutting rights 9,290 7,326
------------------------------
Total properties 234,392 108,165
Other assets:
Investment in equity securities - 13,760
Deferred income tax assets, net 16,218 24,843
Other 10,885 18,049
------------------------------
Total other assets 27,103 56,652
------------------------------
$ 449,589 $ 375,767
==============================
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 10,259 $ 41,800
Current portion of long-term debt 556 521
Accounts payable 21,532 12,649
Accrued payroll and related taxes 18,471 12,789
Other accrued liabilities 25,449 15,050
Income taxes 8,775 2,026
------------------------------
Total current liabilities 85,042 84,835
Reforestation 15,441 16,427
Postretirement benefits 13,286 6,338
Long-term debt, net of current portion 138,004 88,705
Minority interest 39,759 -
Stockholders' equity:
Preferred stock, $10 par value, 1,500,000 shares authorized,
none issued - -
Common stock, $1 par value, 20,000,000 shares authorized,
13,971,605 issued 13,972 13,972
Additional paid-in capital 31,160 34,395
Retained earnings 140,482 150,386
Cumulative translation adjustments (18,113) (9,847)
Common stock held in treasury, at cost (9,444) (9,444)
------------------------------
Total stockholders' equity 158,057 179,462
------------------------------
$ 449,589 $ 375,767
==============================
The accompanying notes to consolidated financial statements are an integral part
of this statement.
</TABLE>
<PAGE>
16
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<TABLE>
<CAPTION>
Pope & Talbot, Inc. and Subsidiaries
For the years ended December 31, 1998, 1997 and 1996
(in thousands of dollars except per share amounts)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'EQUITY
Common stock Treasury stock Additional Cumulative
---------------------------------------------- paid-in Retained translation
Shares Amount Shares Amount capital earnings adjustments Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 13,971,605 $ 13,972 (607,826) $ (11,111) $ 35,976 $ 156,810 $ (5,955) $ 189,692
Cash dividends ($.76 per share) - - - - - (10,156) - (10,156)
Comprehensive income (loss):
Net income - - - - - 3,909 - 3,909
Change in translation
adjustment - - - - - - (217) (217)
----------
Total comprehensive income 3,692
------------------------------------------------------------------------------------------------
Balance at December 31, 1996 13,971,605 13,972 (607,826) (11,111) 35,976 150,563 (6,172) 183,228
------------------------------------------------------------------------------------------------
Issuance of shares under stock
plans - - 117,662 1,667 265 - - 1,932
Cash dividends ($.76 per share) - - - - - (10,197) - (10,197)
Partnership transaction tax
settlement costs - - - - (1,846) - - (1,846)
Comprehensive income (loss):
Net income - - - - - 10,020 - 10,020
Change in translation
Adjustment - - - - - - (3,675) (3,675)
----------
Total comprehensive income 6,345
------------------------------------------------------------------------------------------------
Balance at December 31, 1997 13,971,605 13,972 (490,164) (9,444) 34,395 150,386 (9,847) 179,462
------------------------------------------------------------------------------------------------
Cash dividends ($.76 per share) - - - - - (10,246) - (10,246)
Partnership transaction tax
settlement costs - - - - (3,235) - - (3,235)
Comprehensive income (loss):
Net income - - - - - 342 - 342
Change in translation
Adjustment - - - - - - (8,266) (8,266)
----------
Total comprehensive loss (7,924)
------------------------------------------------------------------------------------------------
Balance at December 31, 1998 13,971,605 $ 13,972 (490,164) $ (9,444) $ 31,160 $ 140,482 $ (18,113) $ 158,057
================================================================================================
The accompanying notes to consolidated financial statements are an integral part
of this statement.
</TABLE>
<PAGE>
17
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Pope & Talbot, Inc. and Subsidiaries
For the years ended December 31, 1998, 1997 and 1996
(in thousands of dollars except per share amounts) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 420,785 $ 329,899 $ 313,845
Costs and expenses:
Cost of sales 429,071 300,320 295,533
Selling, general and administrative 24,100 14,814 15,124
Interest, net 7,973 5,995 6,035
---------------------------------------------
461,144 321,129 316,692
Other gains - - 1,852
---------------------------------------------
Income (loss) before income taxes, minority interest, discontinued
operations and cumulative effect of accounting change (40,359) 8,770 (995)
Income tax provision (benefit) (13,352) 4,338 334
---------------------------------------------
Income (loss) before minority interest, discontinued operations
and cumulative effect of accounting change (27,007) 4,432 (1,329)
Minority interest in subsidiary loss, net of income tax benefit (3,547) - -
---------------------------------------------
Income (loss) from continuing operations (23,460) 4,432 (1,329)
Discontinued operations:
Income from discontinued tissue operations
(net of income tax provision of $164, $3,573 and $1,361
for 1998, 1997 and 1996, respectively) 256 5,588 2,128
Gain on sale of discontinued tissue operations
(net of income tax provision of $24,630) 26,818 - -
Gain (loss) on sale of discontinued diaper operations
(net of income tax benefit of $1,985 for 1998 and
income tax provision of $2,494 for 1996) (4,015) - 3,110
---------------------------------------------
Income from discontinued operations 23,059 5,588 5,238
---------------------------------------------
Income (loss) before cumulative effect of accounting change (401) 10,020 3,909
Cumulative effect of accounting change 743 - -
---------------------------------------------
Net income $ 342 $ 10,020 $ 3,909
=============================================
Basic and diluted income (loss) per common share:
Income (loss) from continuing operations $ (1.74) $ .33 $ (.10)
Income from discontinued operations 1.71 .42 .39
Cumulative effect of accounting change .06 - -
---------------------------------------------
Net income $ .03 $ .75 $ .29
=============================================
The accompanying notes to consolidated financial statements are an integral part
of this statement.
</TABLE>
<PAGE>
18
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Pope & Talbot, Inc. and Subsidiaries
For the years ended December 31, 1998, 1997 and 1996
(in thousands of dollars) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income $ 342 $ 10,020 $ 3,909
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 29,919 30,056 31,440
Other gains - - (1,852)
Gain on disposal of discontinued operations (51,448) - (5,604)
Minority interest in subsidiary loss (3,547) - -
Cumulative effect of accounting change (743) - -
Changes in assets and liabilities:
Accounts receivable (161) (5,640) 13,611
Inventories 16,906 (2,620) (12,080)
Prepaid expenses and other assets 2,207 (4,590) 2,023
Accounts payable and accrued liabilities (7,497) (988) (13,192)
Current and deferred income taxes 6,168 (2,219) (7,479)
Other liabilities 1,710 949 638
---------------------------------------------
Net cash provided by (used for) operating activities (6,144) 24,968 11,414
Cash flow from investing activities:
Purchases of short-term investments (43,935) - -
Proceeds from maturities of short-term investments 29,311 - -
Proceeds from sales of short-term investments 4,869 - -
Purchases of noncurrent investments held for sale (2,206) (13,760) -
Proceeds from sale of equity securities - - 14,902
Capital expenditures (27,574) (13,084) (7,180)
Investment in subsidiary, net of cash acquired (38,337) - -
Minority interest in subsidiary treasury stock issuance 174 - -
Proceeds from disposal of discontinued operations 120,451 - 50,500
Proceeds from sale of other properties 1,261 378 2,359
---------------------------------------------
Net cash provided by (used for) investing activities 44,014 (26,466) 60,581
Cash flow from financing activities:
Net increase (decrease) in short-term borrowings (31,541) 11,800 (13,000)
Reduction of long-term debt, including current portion (521) (488) (30,457)
Partnership transaction tax settlement costs - (1,846) -
Proceeds from issuance of treasury stock, net - 1,932 -
Cash dividends (10,246) (10,197) (10,156)
---------------------------------------------
Net cash provided by (used for) financing activities (42,308) 1,201 (53,613)
---------------------------------------------
Increase (decrease) in cash and cash equivalents (4,438) (297) 18,382
Cash and cash equivalents at beginning of period 31,911 32,208 13,826
---------------------------------------------
Cash and cash equivalents at end of period $ 27,473 $ 31,911 $ 32,208
=============================================
The accompanying notes to consolidated financial statements are an integral part
of this statement.
</TABLE>
<PAGE>
19
- --------------------------------------------------------------------------------
Pope & Talbot, Inc. and Subsidiaries
For the years ended December 31, 1998, 1997 and 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Pope
& Talbot, Inc. and Subsidiaries (the Company), after eliminating significant
intercompany transactions and balances.
All assets and liabilities of the Company's foreign subsidiaries are
translated into U.S. dollars at the period-end exchange rates. Revenues and
expenses are translated at an average exchange rate for the year. Translation
gains and losses are reflected in stockholders' equity as cumulative translation
adjustments. Net gains and losses on foreign currency transactions, which are
not significant, are reflected in selling, general and administrative expenses.
Inventories
Inventories are stated at the lower of cost or market. For portions of lumber
and raw material inventories, cost has been determined on the last-in, first-out
method. For remaining inventories, cost has been determined using the first-in,
first-out and average-cost methods.
Plant and Equipment
Plant and equipment is carried at cost and includes expenditures for new
facilities and those expenditures which substantially increase the useful lives
of existing plant and equipment. Costs of maintenance and repairs are charged to
expense as incurred. Upon sale or retirement, the related cost and accumulated
depreciation are removed from the accounts, with the resultant gain or loss
included in income. The estimated useful lives of the principal items of plant
and equipment range from 3 to 40 years.
Depreciation of assets other than pulp production assets is computed using
the straight-line method over the useful lives of respective assets. In 1998,
depreciation of the Company's pulp production assets has been computed using the
units-of-production method. Prior to 1998, the U.S. pulp production assets were
depreciated using the straight-line method. The new method was adopted to
conform depreciation methods between the Company's U.S. and Canadian pulp
operations. The Company believes the units-of-production method, common in the
industry, more appropriately matches production costs and pulp sales revenues
over the lives of the pulp mill assets. The effect of the change in 1998 was to
decrease the loss from continuing operations by approximately $.5 million. The
cumulative effect of applying the new method for years prior to 1998 is reported
net of tax as a cumulative effect of accounting change in the 1998 Consolidated
Statement of Income.
The Company capitalizes interest on borrowed funds during the construction
period of major capital projects. Interest capitalized is determined by applying
the Company's effective interest rate to the accumulated capital costs during
the construction period of a project. Interest capitalized in 1998 was $.4
million. There were no significant interest costs capitalized in 1997 or 1996.
Capitalized interest is amortized over the depreciable life of related assets.
The Company evaluates recoverability of long-lived assets using projections
of related future cash flows. Realization of these assets is dependent on
generating sufficient future cash flows to recover the asset's carrying value.
Although realization is not assured, management believes current long-lived
asset carrying values will be recovered. These assets may become impaired in the
future, however, if estimates of future cash flows are reduced.
Interest
Interest in the Consolidated Statements of Income is shown net of interest
income and, as mentioned previously, capitalized interest. Interest income was
$3.4 million in 1998, $1.9 million in 1997 and $1.4 million in 1996.
Timber Resources
In the U.S., the Company obtains its timber from various public and private
sources under timber harvesting contracts. Additionally, logs are purchased on
open log markets. Liabilities for timber removed under harvesting contracts are
not recorded until the timber is cut, as the Company generally does not incur a
direct liability for, or ownership
<PAGE>
20
- --------------------------------------------------------------------------------
of, this timber until it has been harvested. The total volume committed under
contract at December 31, 1998, and the 1999 planned contract harvest was 238
million board feet and 67 million board feet, respectively. The Company's best
estimate of its total commitment at current contract rates under these contracts
was approximately $42 million. The Company evaluates the realizability of
harvesting contracts based on the estimated total cost applied to such harvests
and the projected values to be realized from sales of the converted product.
In Canada, the Company primarily obtains its timber from the Provincial
Government of British Columbia under timber harvesting licenses. The cost
assigned to these timber licenses is amortized over 50 years on a straight-line
basis. The Company also purchases logs in Canada on open log markets.
The Canadian timber harvesting licenses allow, but do not require, the
Company to remove timber from defined areas annually on a sustained yield basis.
Future allowable harvests may be adjusted if the Company does not remove timber
over a five-year period in accordance with the grants. As in the U.S.,
liabilities for the cost of timber removed are not recorded until the timber is
cut as the Company does not incur a direct liability for, or ownership of, this
timber until it has been harvested.
Reforestation
Under the Canadian timber harvesting licenses mentioned above, the Company is
responsible for the reforestation of the land from which timber is harvested. A
substantial portion of the costs incurred to reforest do not occur until 10 to
15 years after the timber is harvested. The Company accrues for the total
projected cost of reforestation as the timber is removed. Actual expenditures
for reforestation are applied against this accrual when they are made.
Income Taxes
The Company accounts for income taxes using the liability method, and deferred
taxes are determined based on the estimated future tax effects of differences
between the financial statement and tax bases of assets and liabilities given
the provisions of the enacted tax laws. The principal temporary differences are
related to depreciation, net operating loss carryforwards, various tax credits,
reforestation and postretirement benefits.
Undistributed earnings of the Company's wholly-owned Canadian subsidiary
totaled $154.8 million on December 31, 1998, which, under existing law, will not
be subject to U.S. tax until distributed as dividends. Since the earnings have
been, and are intended to be, reinvested in Canadian operations, no provision
has been made for any U.S. taxes that may be applicable thereto. Furthermore,
any taxes paid to the Canadian government on those earnings may be used, in
whole or in part, as credits against the U.S. tax on any dividends distributed
from such earnings. It is not practicable to estimate the amount of unrecognized
deferred U.S. taxes on these undistributed earnings.
Derivative Financial Instruments
The Company's subsidiary, Harmac Pacific Inc. (Harmac), enters into Canadian
dollar forward exchange contracts with maturities of one to five months to fix
the conversion of a portion of pulp sales receivables denominated in U.S.
dollars. At December 31, 1998, the Company had contracts to purchase $23 million
Canadian with the exchange rate to be used at settlement approximating the spot
rate at the date the contract was acquired. At December 31, 1998, the Company
had not entered into any derivatives to hedge its Canadian currency exposure.
Statements of Cash Flows
The Company classifies as cash and cash equivalents unrestricted cash on deposit
in banks plus all investments having original maturities of 90 days or less.
Carrying amounts of any such investments approximate fair values. The effect of
exchange rate changes on cash balances held in foreign currencies was not
significant. Total cash expenditures for interest were $11.8 million, $10.1
million and $10.9 million for 1998, 1997 and 1996, respectively. Total cash
expenditures for income taxes were $1.9 million for 1998, $9.2 million for 1997
and $11.9 million for 1996.
Per Share Information
Per share information is based on the weighted average number of common shares
outstanding during each year. The weighted average number of shares used to
calculate net income (loss) per common share was 13,481,000 in 1998, 13,419,000
in 1997 and 13,364,000 in 1996.
Certain Company stock options were not included in the computation of
diluted earnings per share because the options' exercise prices were greater
than the average market prices of the common shares. Such stock options totaled
827,000 shares, 475,000 shares and 839,000 shares at year-end 1998, 1997 and
1996, respectively, at average
<PAGE>
21
- --------------------------------------------------------------------------------
exercise prices of $18 in 1998, $21 in 1997 and $19 in 1996. The Company's
outstanding stock options did not affect the calculation of diluted earnings per
share for 1998, 1997 or 1996.
Environmental Matters
The Company recognizes a liability for environmental remediation costs when it
believes it is probable a liability has been incurred and the amount can be
reasonably estimated. The liabilities are based on currently available
information and reflect the participation of other potentially responsible
parties depending on the parties' financial condition and probable contribution.
The accruals are recorded at undiscounted amounts and are reflected as other
accrued liabilities in the accompanying Consolidated Balance Sheets. Recoveries
of environmental remediation costs from insurance carriers are recorded at such
time as their receipt is deemed probable and the amounts can be reasonably
estimated.
New Accounting Standards
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income" and SFAS
No.131, "Disclosures about Segments of an Enterprise and Related Information,"
in June 1997, and SFAS No.132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits,"in February 1998. The Company adopted the Statements in
1998; prior year disclosures have been restated to conform with the current year
presentation. Application of the new standards did not have a material impact on
the Company's results of operation, financial position or cash flows.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Reclassifications
Certain reclassifications have been made to prior years' data to conform to the
1998 presentation.
2. ACQUISITION
On February 2, 1998, the Company acquired 6.8 million shares of Harmac common
stock for $77.8 million Canadian (approximately $53.4 million U.S.). Combined
with the Company's previous Harmac stock purchases, this resulted in the Company
holding a 53 percent controlling ownership interest in Harmac. In December 1998,
the Company acquired an additional 1.2 million shares of Harmac stock for $2.5
million, increasing its ownership share to 60.2 percent.
The acquisition was accounted for as a purchase, and the results of
operations of Harmac have been included in the consolidated financial statements
from February 2, 1998. The fair value of assets acquired and liabilities assumed
were as follows:
(thousands)
- --------------------------------------------------------------------------------
Current assets, other than cash $ 58,781
Property, plant and equipment 137,855
Other assets 728
Current liabilities (31,837)
Convertible subordinated debentures (52,556)
Other liabilities (14,534)
Minority interest (45,646)
---------
Purchase price, net of $19,637 cash received $ 52,791
=========
In conjunction with the Company's acquisition of a majority interest in
Harmac, a comprehensive plan to reduce operating costs at the mill and
administrative and marketing costs was announced. The plan consisted of closing
Harmac's on-site log chipping mill, closing the Vancouver, BC corporate
administrative and marketing office and combining those functions with the
Company's corporate offices, and additional reductions in hourly and salaried
staff at the mill. Certain restructuring costs recorded by Harmac totaling $6.5
million (primarily costs associated with employee terminations) were included in
current liabilities in the computation of the fair value of assets and
liabilities assumed at acquisition date. Costs charged to the restructure
liability in 1998 totaled $3.2 million and related primarily to severance and
other employee benefits. Substantially all of the staff reductions will be
completed by mid-1999.
The following unaudited pro forma information for 1998 below gives effect
to the transaction as if it had occurred at the beginning of the period after
giving effect to certain adjustments, including material differences between
Canadian and U.S. generally accepted accounting principles.
<PAGE>
22
- --------------------------------------------------------------------------------
The unaudited pro forma information does not necessarily reflect the results of
operations that actually would have been achieved had the acquisition been
consummated at that time.
(thousands except per share) (unaudited) 1998
- --------------------------------------------------------------------------------
Revenues $ 429,849
Loss from continuing operations (24,422)
Income from discontinued operations 23,059
Cumulative effect of accounting change 743
Net loss (620)
Basic and diluted income (loss) per common share:
Loss from continuing operations (1.82)
Income from discontinued operations 1.71
Cumulative effect of accounting change .06
Net loss (.05)
3. INVESTMENT SECURITIES
At December 31, 1998, the Company's short-term investments consisted primarily
of corporate debt securities. Included in other assets are debt securities with
maturities beyond one year totaling $2.2 million. The investment securities were
classified as available-for-sale and the amortized cost approximated the fair
value.
At December 31, 1997, the Company's investment in equity securities,
classified as available-for-sale, consisted of its investment in Harmac. The
Company's December 31, 1997 investment in Harmac was carried at cost of $13.8
million, which compared with a market value of $10.5 million. The excess of
investment cost over market value was not reflected as a reduction in
stockholders' equity at year-end 1997 due to the Company's acquisition of a
controlling interest in Harmac in February 1998 (see Note 2).
4. INVENTORIES
(thousands) 1998 1997
- --------------------------------------------------------------------------------
Lumber $ 7,978 $ 13,976
Pulp 14,517 3,962
Logs 28,958 38,461
Pulp raw material 12,376 881
Chemicals and supplies 12,431 7,362
Other 1,497 1,345
---------------------------------
$ 77,757 $ 65,987
=================================
The portion of lumber and raw materials inventories determined using the
last-in, first-out (LIFO) method aggregated $3.5 million and $4.0 million at
December31, 1998 and 1997, respectively. The cost of LIFO inventories valued at
the lower of average cost or market, which approximated current cost, at
December 31, 1998 and 1997, was $5.7 million and $6.1 million, respectively.
5. PROPERTIES
(thousands) 1998 1997
- --------------------------------------------------------------------------------
Plant and equipment:
Mills, plants and improvements $ 56,863 $ 53,072
Equipment 341,698 206,463
Mobile equipment 19,145 16,773
Construction in progress 6,813 2,990
---------------------------------
$ 424,519 $ 279,298
=================================
Land and timber cutting rights:
Land $ 4,904 $ 3,207
Canadian timber cutting rights 4,386 4,119
---------------------------------
$ 9,290 $ 7,326
=================================
<TABLE>
<CAPTION>
6. DEBT
(thousands) 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
8.375% debentures, due 2013 $ 75,000 $ 75,000
Harmac 8% convertible subordinated debentures,
interest payable semiannually, due 2004 49,855 -
State of Oregon Small Scale Energy Loan Program
(SELP) note payable, secured by related
properties, 6.55%, payable monthly through
2013 13,705 14,226
Demand operating line of credit, variable interest
rate (6.4% at December 31, 1998) 7,000 -
Harmac revolving credit and term loan facility,
variable interest rate (5.1% at December 31,
1998) 3,259 -
Domestic revolving credit agreement _ 41,800
City of Eau Claire note payable - 18,800
-------------------------------
Total debt 148,819 149,826
Less current debt 10,815 42,321
Less debt assumed by purchaser of discontinued
tissue operations - 18,800
-------------------------------
Long-term debt $ 138,004 $ 88,705
===============================
</TABLE>
At December 31, 1998 the Company had a revolving credit agreement with a
domestic bank, secured by inventory and accounts receivable. The agreement
provided $75 million of revolving credit until April 1999. The interest rate
associated with this agreement was based, at the option of the Company, on the
London Interbank Offer Rate (LIBOR)
<PAGE>
23
- --------------------------------------------------------------------------------
rate plus a variable margin ranging from 7/16 percent to 5/8 percent or the
greater of the bank's prime rate during the revolving period or the Federal
Funds rate plus 1/2 percent. A variable commitment fee of up to 1/5 percent per
year on the total loan commitment and up to 17/200 percent per year on the
unused portion was paid quarterly. In the first quarter of 1999, the $75 million
revolving credit agreement was replaced by a $25 million revolving credit
agreement with the same domestic bank and a $25 million revolving credit
agreement with a Canadian bank. The new credit facilities are 364-day revolving
credit and two-year term loan agreements secured by inventory and accounts
receivable.
Harmac has a 364-day revolving credit and two-year term loan facility
secured by inventory and accounts receivable. The facility provides $40 million
Canadian (approximately $26 million U.S.) of revolving term credit capacity
until September 30, 2001. Outstanding borrowings on the facility bear interest,
at the option of the Company, at the bank's prime lending rate, the greater of
the Base Rate Canada and the Federal Funds Rate plus 1/2 percent, LIBOR plus 1
percent, the Bank's Corporate Bankers' Acceptance Rate plus 3/8 percent or a
fixed rate determinedby the bank. A commitment fee of 1/4 percent per year on
the unused portion is payable quarterly.
The 8 percent subordinated debentures, issued by Harmac on October 5, 1994,
are convertible at the option of the holders into Harmac common shares at any
time prior to maturity at a conversion price of $16.50 Canadian (approximately
$10.75 U.S.) per common share. The debentures are redeemable at the option of
Harmac from October 5, 1997 up to and including October 4, 1999 at par plus
accrued and unpaid interest, provided that the specified weighted average
closing price of the common shares is not less than 125 percent of the
conversion price. From October 5, 1999 to maturity (October 4, 2004), the
debentures are redeemable at the option of Harmac at par plus accrued and unpaid
interest. Harmac may satisfy its obligation to repay the principal amount of the
convertible debentures on redemption or maturity by the issuance of common
shares at approximately 95 percent of the market value of the shares at the date
of maturity or redemption.
The fair value of the 8 3/8 percent debentures, 8 percent convertible
subordinated debentures and 6.55 percent Oregon SELP note at December 31, 1998
were estimated to be $80 million, $57 million and $14 million, respectively,
based upon rates currently available for debt with similar terms. A hypothetical
10 percent change in interest rates would change the fair value of the Company's
fixed-rate long-term debt obligations by $7 million.
The annual maturities of long-term debt for the five years subsequent to
December 31, 1998 are: 1999 - $.6 million; 2000 - $.6 million; 2001- $.6
million; 2002 - $.7 million and 2003 - $.7 million.
7. STOCK OPTION AND BONUS PLANS
The Company has a stock option and appreciation plan (Option Plan) for officers
and key employees. This plan is administered by the Human Resources and
Nominating Committee of the Board of Directors. The Committee is composed of
outside Directors who are not eligible for awards. Additionally, the Company has
a nonemployee director stock option plan (Director Plan). At December 31, 1998,
522,734 shares were available for future grants under these plans. A nonemployee
director stock retainer fee plan was approved by the Company's Board of
Directors in December 1998. Subject to the ratification of the Company's
stockholders at the 1999 Annual Meeting, the plan provides for an additional
reserve of 300,000 shares to be available for grants under the plan.
The Option Plan provides for granting both incentive stock options and
nonqualified stock options to purchase shares of the Company's common stock at
prices not less than 85 percent of fair market value on the date of grant.
Options are exercisable as stated in each individual grant; however, no option
may extend beyond ten years from the date of grant.
The Director Plan provides for automatic option grants at designated
intervals to nonemployee directors over their period of continued service on the
Board of Directors. Such options are granted at 100 percent of fair market value
on the date of grant. Options are immediately exercisable and have a ten-year
term.
The Company accounts for these plans following the guidance of APB Opinion
No. 25, under which no compensation cost has been recognized. SFAS No. 123,
"Accounting for Stock-Based Compensation," if fully adopted, changes
<PAGE>
24
- --------------------------------------------------------------------------------
the methods for recognition of costs on plans similar to those of the Company.
Adoption of SFAS No. 123 is optional for stock option cost recognition; however,
pro forma disclosures are required, and shown below, as if the Company had
adopted the cost recognition requirements under SFAS No. 123.
A summary of the status of the Company's Option Plan and Director Plan at
December 31, 1998, 1997 and 1996 and changes during the years then ended in the
number of shares (Shares) and the weighted average exercise price (Price) is
presented below:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------
(shares in thousands) Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 901 $ 19 916 $ 18 864 $ 19
Granted 76 14 109 16 190 15
Exercised - - (117) 16 - -
Canceled (140) 19 (7) 23 (138) 19
------ ------ ------
Outstanding at end of year 837 18 901 18 916 18
====== ====== ======
Exercisable at year-end 540 19 475 19 458 19
====== ====== ======
Weighted average fair value
of options granted during year $ 3.57 $ 4.69 $ 4.58
====== ====== ======
</TABLE>
The fair value of options granted in 1998, 1997 and 1996 was estimated on
the date of grant using the Black-Scholes option-pricing model with the
following assumptions used for grants in 1998, 1997 and 1996, respectively:
risk-free interest rates of 5.5, 6.6 and 5.5 percent; dividend yields of 4.2,
4.2 and 4.0 percent; and expected volatility of 31, 34 and 38 percent. Expected
option lives of six years were assumed. The following table summarizes
information about stock options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Range of exercise prices
- ----------------------------------------------------------------------------------------
(shares in thousands) $14 to $21 $24 to $30 Total
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding:
Number outstanding 737 100 837
Remaining contractual life in years 5.5 3.5 5.3
Weighted average exercise price $ 17 $ 28 $ 18
Options exercisable:
Number exercisable 453 87 540
Weighted average exercise price $ 17 $ 28 $ 19
</TABLE>
If the Company had accounted for these stock options issued in accordance
with SFAS No. 123, the Company's net income and net income per share would have
approximated the following pro forma amounts:
<TABLE>
<CAPTION>
(thousands except per share) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $ 342 $10,020 $ 3,909
Pro forma 179 9,734 3,387
Net income per share:
As reported $ .03 $ .75 $ .29
Pro forma .01 .73 .25
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
necessarily indicative of what can be expected in future years.
The Company has followed the practice of using treasury stock to fulfill
its obligations under its stock option plans. When stock is issued pursuant to a
stock option plan, the difference between the cost of treasury stock issued and
the exercise price of the option is credited to additional paid-in capital.
In addition to the benefit plans described above, Harmac has a Director and
Employee Share Option Plan (Harmac Option Plan) for directors and key employees
of Harmac and any of its affiliates. The Harmac Option Plan provides for
granting options to purchase Harmac common shares at market prices at the date
of grant. Options under this plan are exercisable as stated in each grant;
however, no option may extend beyond ten years from the date of grant.
8. PENSION AND OTHER POSTRETIREMENT PLANS
The Company's retirement plans consist principally of non-contributory
defined-benefit pension plans and postretire-ment medical and life insurance
plans. The pension plans include plans administered by the Company and
multi-employer plans administered by various unions.
Certain union employees are covered under multi-employer pension plans.
Contributions to these plans are based upon negotiated hourly rates. It is not
possible to determine the amount of accumulated benefits or net assets available
for benefits that apply solely to Company employees covered by these plans. All
other Company participating employees are covered by noncontributory
defined-benefit pension plans administered by the Company. The pension benefit
for salaried employees is based on years of service and the five highest out of
the last ten years of compensation. Pension benefits for employees covered under
hourly plans are generally based on each employee's years of service.
The Company's funding policy regarding all of its Company-administered
pension plans is to make contributions
<PAGE>
25
- --------------------------------------------------------------------------------
to the plans that are between the minimum amounts required by the Employee
Retirement Income Security Act (ERISA) and the maximum amounts deductible under
current tax regulations.
The Company sponsors postretirement medical and life insurance plans for
certain salaried and nonsalaried employees and eligible spouses and dependents
of the employees. The medical plans pay a stated percentage of covered medical
expenses incurred after deducting co-payments made once a stated deductible has
been met. The life insurance plans pay a defined benefit. The Company's funding
policy for these plans is to not make contributions to the plans prior to the
actual incurrence of costs under the plans.
Substantially all of the pension plans' assets are invested in common
stock, fixed-income securities, cash and cash equivalents. Amounts due to
curtailments and settlements are related to discontinued operations (see Note
10). Curtailment gains are a component of the gain on sale of discontinued
operations.
The following table sets forth selected financial information regarding the
pension and postretirement benefit plans:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
------------------------ ------------------------
(thousands) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $ 57,044 $ 54,533 $ 14,024 $ 13,448
Service cost 2,382 1,823 475 435
Interest cost 4,408 3,998 880 977
Settlement (14,766) - - -
Curtailment (1,727) - (6,437) -
Actuarial (gain) loss 3,982 (450) (1,195) -
Acquisition 22,344 - 6,717 -
Benefits paid (2,349) (2,552) (315) (836)
Foreign currency rate changes (1,869) (308) (341) -
----------------------------------------------------
Benefit obligation at end of year $ 69,449 $ 57,044 $ 13,808 $ 14,024
====================================================
Change in plan assets
Fair value of plan assets at beginning of year $ 70,883 $ 58,231 $ - $ -
Actual return on plan assets 3,503 15,439 - -
Acquisition 19,623 - - -
Employer contribution 847 246 315 836
Settlement (16,392) - - -
Benefits paid (2,349) (2,552) (315) (836)
Foreign currency rate changes (1,785) (481) - -
----------------------------------------------------
Fair value of plan assets at end of year $ 74,330 $ 70,883 $ - $ -
====================================================
Funded status $ 4,881 $ 13,839 $ (13,808) $ (14,024)
Unrecognized net actuarial (gain) loss (6,108) (16,270) 522 730
Unrecognized prior service cost 1,261 1,051 - (128)
Unrecognized net asset at transition (243) (437) - -
Less accrued benefit cost associated with discontinued
tissue operations - - - 7,084
----------------------------------------------------
Accrued benefit cost $ (209) $ (1,817) $ (13,286) $ (6,338)
====================================================
Plans having assets in excess of accumulated benefits
Benefit obligation $ 34,405 $ 55,046
Fair value of plan assets 44,856 70,883
Plans having accumulated benefits in excess of assets
Benefit obligation $ 35,044 $ 1,998
Fair value of plan assets 29,474 -
Weighted-average assumptions as of December 31
Discount rate 6.75% 7.5% 6.75% 7.5%
Rate of compensation increase 5.0% 5.0% 5.0% 5.0%
Expected return on plan assets 8.75% 9.0%
</TABLE>
<PAGE>
26
- --------------------------------------------------------------------------------
For measurement purposes, for all plans except the newly acquired Harmac plan, 8
percent and 8.5 percent rates of increase were assumed for health care costs in
1998 and 1997, respectively. The rate was assumed to decline in 1/2 percent
decrements every year until it reached 5 percent in 2004 where it remained
thereafter. The Harmac plan assumed a 10 percent annual rate of increase for
health care costs in 1998. The rate was assumed to decline in 1 percent
decrements every year until it reached 5 percent in 2003 where it remained
thereafter.
Net periodic pension cost for 1998, 1997 and 1996 was composed of the
following:
<TABLE>
<CAPTION>
Pension Benefits
----------------------------------------
(thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Components of net periodic benefit cost
Service cost $ 2,382 $ 1,823 $ 1,761
Interest cost 4,408 3,998 3,778
Expected return on plan assets (6,200) (5,128) (4,574)
Amortization of prior service cost 177 392 125
Amortization of net transition obligation (asset) 24 (140) (141)
Recognized net actuarial gain (735) (243) (60)
Curtailment gains (3,537) - (489)
----------------------------------------
Net periodic benefit cost for Company
administered plans (3,481) 702 400
Contributions to multi-employer plans 4,558 3,575 3,714
----------------------------------------
Net periodic benefit cost $ 1,077 $ 4,277 $ 4,114
========================================
</TABLE>
Net periodic pension costs for the Company's discontinued tissue operations
were $1.1 million and $1.4 million for 1997 and 1996, respectively, and are
included in the preceding table.
The Company has granted some former employees pension benefits which
supplement the normal Company plans. These benefits are unfunded, general
obligations of the Company. The cost associated with these benefits was $386,000
in 1998, $342,000 in 1997 and $75,000 in 1996.
Net periodic cost for the Company's postretirement medical and life
insurance plans for 1998, 1997 and 1996 was composed of the following:
<TABLE>
<CAPTION>
Postretirement Benefits
----------------------------------------
(thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Components of net periodic benefit cost
Service cost $ 475 $ 435 $ 414
Interest cost 880 977 938
Amortization of prior service cost - (43) (43)
Recognized net actuarial (gain) loss (17) 2 (12)
Curtailment gains (6,437) - (1,484)
----------------------------------------
Net periodic benefit cost $ (5,099) $ 1,371 $ (187)
========================================
</TABLE>
Net periodic costs of postretirement medical and life insurance plans for the
Company's discontinued tissue operations were $660,000 and $612,000 for 1997 and
1996, respectively, and are reflected in the preceding table.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the postretirement medical plans. A one-percentage-point
change in assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
One Percentage Point
------------------------
(thousands) Increase Decrease
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Effect on total service and interest cost components $ 262 $ (218)
Effect on postretirement benefit obligation 2,206 (1,880)
</TABLE>
9. INCOME TAXES
The income tax provision (benefit) consists of the following components:
<TABLE>
<CAPTION>
(thousands) Current Deferred Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1998
Federal $ 915 $ (10,924) $ (10,009)
State - (529) (529)
Canada 2,767 (5,581) (2,814)
--------------------------------------------
$ 3,682 $ (17,034) $ (13,352)
============================================
1997
Federal $ - $ (3,004) $ (3,004)
State - (311) (311)
Canada 9,024 (1,371) 7,653
--------------------------------------------
$ 9,024 $ (4,686) $ 4,338
============================================
1996
Federal $ (1,146) $ (8,030) $ (9,176)
State - 16 16
Canada 10,044 (550) 9,494
--------------------------------------------
$ 8,898 $ (8,564) $ 334
============================================
</TABLE>
The income tax provision (benefit) was different from the amount computed
by applying the U.S. statutory federal income tax rate as follows:
<PAGE>
27
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) from continuing operations
before income taxes and
minority interest:
United States $ (31,147) $ (10,947) $ (18,097)
Canada (9,212) 19,717 17,102
----------------------------------------
$ (40,359) $ 8,770 $ (995)
========================================
United States:
U.S. statutory federal income tax $ (10,901) $ (3,831) $ (6,334)
State income franchise taxes, net
of federal income tax benefit (344) (122) (369)
Jurisdictional settlements - - (2,614)
Other items, net 707 638 157
----------------------------------------
(10,538) (3,315) (9,160)
Canada:
U.S. statutory federal income tax (3,224) 6,901 5,986
Effect of Canadian tax rate
different from U.S. (303) 719 636
Jurisdictional settlements - - 2,818
Large corporate tax 370 - -
Other items, net 343 33 54
----------------------------------------
(2,814) 7,653 9,494
----------------------------------------
$ (13,352) $ 4,338 $ 334
========================================
</TABLE>
The net deferred tax asset at December 31, 1998 was $21.2 million. The
temporary differences that give rise to deferred taxes are shown below. The
primary deferred tax asset relates to net operating loss carryforwards. At
December 31, 1998, the Company had available $48.6 million of U.S. federal tax
loss carryforwards expiring as follows: 2010 - $41.0 million; 2011 - $1.1
million; and 2012 - $6.5 million. The Company had available $30.5 million of
Canadian tax loss carryforwards related to Harmac expiring as follows: 2000 -
$2.1 million; 2002 - $19.9 million; 2003 - $5.7 million; 2004 - $1.1 million;
and 2005 - $1.7 million. As of December 31, 1998, the Company also had
Alternative Minimum Tax carryforwards of $1.4 million that may be carried
forward indefinitely.
Management believes that the Company will have sufficient future U.S. and
Canadian taxable income to make it more likely than not that the net operating
loss deferred tax asset will be realized. The realization of the asset is not
assured and could be reduced in the future if estimates of future taxable income
during the carryforward period are reduced.
Deferred taxes are determined based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and
liabilities given the provisions of the enacted tax laws. The net deferred tax
asset is comprised of the following:
<TABLE>
<CAPTION>
(thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Current deferred taxes:
Gross assets $ 4,991 $ 5,217
Noncurrent deferred taxes:
Gross assets 54,730 49,891
Gross liabilities (38,512) (25,048)
-----------------------
Total noncurrent deferred taxes 16,218 24,843
-----------------------
Net deferred tax asset $ 21,209 $ 30,060
=======================
</TABLE>
The Company's valuation allowance against deferred tax assets at December
31, 1998, 1997 and 1996 was $7.3 million, $7.3 million and $6.4 million,
respectively. These amounts relate to certain state net operating loss
carryforwards and tax credits that the Company believes will not be realized in
the future.
The tax effect of significant temporary differences representing deferred
tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
(thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Postretirement benefits $ 6,121 $ 4,872
Reforestation 4,677 4,963
Vacation pay 798 1,939
Depreciation (29,475) (22,214)
AMT and other tax credits 4,866 5,370
Net operating loss carryforwards 28,939 32,420
Other, net (including valuation allowance) 5,283 2,710
-----------------------
Net deferred tax asset $ 21,209 $ 30,060
=======================
</TABLE>
In January 1999, a decision was rendered by the U.S. Court of Appeals for
the Ninth Circuit upholding the U.S. Tax Court opinion of the distribution value
of the assets contributed to Pope Resources, a Delaware limited partnership (the
Partnership) by the Company. The 1985 distribution, made pursuant to a Plan of
Distribution, transferred all of the Company's timber properties, development
properties and related assets and liabilities to the Partnership. Taxes payable
of $10.3 million at the time of distribution were charged to stockholders'
equity. As a result of the decision by the Ninth Circuit, the Company recognized
in 1998 an additional reduction in equity of $3.2 million which represented the
balance of tax, interest and litigation costs previously paid and deferred.
The Internal Revenue Service has assessed the Company additional tax of
approximately $5.3 million pertaining to transactions between the Company and
its wholly-owned Canadian subsidiary during its 1993 tax year. The Company,
which has filed a petition with the Tax Court, believes it has substantial
defenses against this claim and
<PAGE>
28
- --------------------------------------------------------------------------------
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 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 effect on results of operations.
10. DISCONTINUED OPERATIONS
Tissue Business
In March 1998, the Company sold the assets of its tissue business to PLAINWELL,
INC. (Plainwell) for a total cash consideration of $120.5 million and the
assumption by Plainwell of certain liabilities. The net book value of the assets
purchased and liabilities assumed by Plainwell at December 31, 1997 was shown as
discontinued tissue operations net assets held for sale in the Consolidated
Balance Sheets and included the following:
(thousands) 1997
- -------------------------------------------------------------------------------
Accounts receivable $ 10,676
Inventories 17,669
Other current assets 262
--------
Total current assets 28,607
Properties (net of accumulated depreciation of $107,856) 74,969
Goodwill and other 3,908
--------
Total assets 107,484
Current liabilities (13,739)
Postretirement benefits (7,084)
Long-term debt (18,800)
--------
Total liabilities (39,623)
--------
Discontinued tissue operations net assets held for sale $ 67,861
========
Operating results of the tissue business for 1998, 1997 and 1996 are shown
separately in the Consolidated Statements of Income as income from discontinued
tissue operations, net of tax. The discontinued tissue operating results include
an allocation of consolidated net interest expense based upon net assets. The
net interest expense allocated was $.1 million, $2.3 million and $2.8 million in
1998, 1997 and 1996, respectively. Tissue sales of $8.3 million in 1998, $136.2
million in 1997 and $133.6 million in 1996 were excluded from revenues in the
Consolidated Statements of Income.
Disposable Diaper Business
In February 1996, the Company sold all the operating assets of the disposable
diaper business, primarily properties and inventory, to Paragon Trade Brands,
Inc. (Paragon) for $50.5 million in cash and shares of unregistered Paragon
common stock having a value at the time the transaction was closed of
approximately $13.1 million. The Company sold the stock to Paragon in 1996 for a
pre-tax gain of $1.9 million. The gain on the sale of this stock is included in
other gains in the Consolidated Statements of Income.
During the fourth quarter of 1998, the Company settled certain diaper
business legal issues outstanding and recognized costs associated with former
diaper business facilities. The charges totaled $6 million pre-tax ($4 million
after tax).
11. LEGAL MATTERS AND CONTINGENCIES
The Company is a party to legal proceedings and environmental matters generally
incidental to its business. Although the final outcome of any legal proceeding
or environmental matter is subject to many variables and cannot be predicted
with any degree of certainty, the Company presently believes that the ultimate
outcome resulting from these proceedings and matters would not have a material
effect on the Company's current financial position or liquidity; however, in any
given future reporting period such proceedings or matters could have a material
effect on results of operations.
The Company has been 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 is contaminated by creosote and, to
a lesser extent, hydrocarbons, and that the owner planned to undertake a
voluntary cleanup 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 2001. Based on preliminary findings, the
Company has estimated the likely cost of remediation and monitoring to be in the
range of $15 million to $20 million. 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 the other known
potentially responsible party (PRP) who may be jointly and severally liable. The
ability of the other PRP to participate has been taken into account based
generally on the PRP's financial condition and probable contribution.
<PAGE>
29
- --------------------------------------------------------------------------------
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 clean-up methods, the clean-up 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 the
other PRP. Anticipated recoveries from insurance carriers have been recorded at
such time as their receipt is deemed probable and amounts are reasonably
estimated.
12. SEGMENT INFORMATION
The Company is a manufacturer of pulp and lumber, with operations in the U.S.
and in Western Canada. The Company classifies its business into two operating
segments: wood products and pulp products. The two operating segments were
identified as distinct segments based upon the difference in products and the
manner in which the operations are managed. Wood products manufactures
standardized and specialty lumber and sells residual wood chips. Lumber products
are sold mainly to wholesalers, and wood chips are sold to manufacturers of pulp
and paper.
Pulp products manufactures a broad range of pulp utilizing both wood chips
and sawdust as fiber sources. Pulp products are sold primarily to end users in
North America, Europe and Pacific Rim countries. One pulp customer represented
13 percent of 1998 total pulp operations revenues. The accounting policies of
the operating segments are the same as those described in Accounting Policies,
Note 1. The Company evaluates performance based on profit or loss before income
taxes. A reconciliation of the totals reported for the operating segments to the
applicable line items in the consolidated financial statements is as follows:
<TABLE>
<CAPTION>
(thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Wood products $ 216,940 $ 248,320 $ 231,713
Pulp products 203,845 81,579 82,132
---------------------------------------------
Total operating segments $ 420,785 $ 329,899 $ 313,845
=============================================
Operating profit (loss)
from continuing operations
Wood products $ 1,294 $ 24,924 $ 22,943
Pulp products (21,169) (2,650) (10,815)
---------------------------------------------
Total operating segments (19,875) 22,274 12,128
Corporate (12,511) (7,509) (8,940)
Interest, net (7,973) (5,995) (6,035)
Gain on sale of equity securities - - 1,852
---------------------------------------------
$ (40,359) $ 8,770 $ (995)
=============================================
Depreciation and
amortization expense
Wood products $ 7,629 $ 7,902 $ 8,451
Pulp products 20,965 10,313 10,439
---------------------------------------------
Total operating segments 28,594 18,215 18,890
Corporate 674 543 753
Discontinued tissue operations 651 11,298 11,797
---------------------------------------------
$ 29,919 $ 30,056 $ 31,440
=============================================
Total assets
Wood products $ 116,328 $ 123,913 $ 123,145
Pulp products 272,586 93,283 97,781
---------------------------------------------
Total operating segments 388,914 217,196 220,926
Corporate 60,675 90,710 69,653
Discontinued tissue operations (1) - 67,861 117,350
---------------------------------------------
$ 449,589 $ 375,767 $ 407,929
=============================================
Capital expenditures
Wood products $ 13,445 $ 6,159 $ 3,422
Pulp products 12,238 2,742 1,708
---------------------------------------------
Total operating segments 25,683 8,901 5,130
Corporate 1,271 497 128
Discontinued tissue operations 620 3,686 1,922
---------------------------------------------
$ 27,574 $ 13,084 $ 7,180
=============================================
Revenues by
geographic region (2)
United States $ 242,437 $ 261,582 $ 254,882
Europe 78,782 15,274 10,898
Other 99,566 53,043 48,065
---------------------------------------------
$ 420,785 $ 329,899 $ 313,845
=============================================
Properties by
geographic region
United States $ 71,889 $ 75,932 $ 166,437
Canada 162,503 32,233 35,229
---------------------------------------------
$ 234,392 $ 108,165 $ 201,666
=============================================
(1) Discontinued tissue operations for 1997 reflects tissue operations net
assets held for sale.
(2) Revenues are reported by the location of the customer.
</TABLE>
<PAGE>
30
- --------------------------------------------------------------------------------
Pope & Talbot, Inc. and Subsidiaries
For the years ended December 31, 1998, 1997, 1996, 1995 and 1994
(in thousands of dollars except per share amounts)
FIVE-YEAR SUMMARY OF
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operations
Revenues $ 420,785 $ 329,899 $ 313,845 $ 417,396 $ 397,923
Depreciation and amortization 29,919 30,056 31,440 45,066 39,061
Interest expense, net 7,973 5,995 6,035 9,480 7,167
Income (loss) from continuing operations (23,460) 4,432 (1,329) 4,955 26,589
Income (loss) from discontinued operations 23,059 5,588 5,238 (29,793) (10,692)
Cumulative effect of accounting change 743 - - - -
--------------------------------------------------------------
Net income (loss) $ 342 $ 10,020 $ 3,909 $ (24,838) $ 15,897
==============================================================
Per Common Share
Income (loss) from continuing operations - basic $ (1.74) $ .33 $ (.10) $ .37 $ 2.03
Income (loss) from continuing operations - diluted (1.74) .33 (.10) .37 1.99
Income (loss) from discontinued operations - basic 1.71 .42 .39 (2.23) (.82)
Income (loss) from discontinued operations - diluted 1.71 .42 .39 (2.23) (.79)
Cumulative effect of accounting change -
basic and diluted .06 - - - -
Cash dividends .76 .76 .76 .76 .76
Stockholders' equity 11.72 13.31 13.71 14.19 17.08
Year-End Common Shares Outstanding, Net of Treasury Stock 13,481 13,481 13,364 13,364 13,363
(in thousands)
Financial Position (at December 31)
Current assets $ 188,094 $ 210,950 $ 164,502 $ 207,252 $ 223,050
Properties, net 234,392 108,165 201,666 225,760 282,827
Deferred income tax assets, net 16,218 24,843 21,871 16,531 -
Other assets 10,885 31,809 19,890 22,684 33,507
--------------------------------------------------------------
$ 449,589 $ 375,767 $ 407,929 $ 472,227 $ 539,384
==============================================================
Current liabilities $ 85,042 $ 84,835 $ 87,067 $ 113,495 $ 103,576
Long-term liabilities 28,727 22,765 29,608 30,526 28,777
Long-term debt 138,004 88,705 108,026 138,514 177,471
Deferred income tax liabilities, net - _ - - 1,365
Minority interest 39,759 _ - - -
Stockholders' equity 158,057 179,462 183,228 189,692 228,195
--------------------------------------------------------------
$ 449,589 $ 375,767 $ 407,929 $ 472,227 $ 539,384
==============================================================
</TABLE>
<PAGE>
31
- --------------------------------------------------------------------------------
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
----------------------------------------------------
(in thousands of dollars except per share amounts) First Second Third Fourth Year
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
Revenues $ 103,493 $ 106,502 $ 104,315 $ 106,475 $ 420,785
Gross profit (loss) (2,681) (2,940) (5,130) 2,465 (8,286)
Loss from continuing operations (6,593) (7,126) (6,753) (2,988) (23,460)
Income (loss) from discontinued operations 27,074 - - (4,015) 23,059
Cumulative effect of accounting change - - - 743 743
------------------------------------------------------------------
Net income (loss) $ 20,481 $ (7,126) $ (6,753) $ (6,260) $ 342
==================================================================
Per Common Share
Basic and diluted income (loss):
Loss from continuing operations $ (.49) $ (.53) $ (.50) $ (.22) $ (1.74)
Income (loss) from discontinued operations 2.01 - - (.30) 1.71
Cumulative effect of accounting change - - - .06 .06
------------------------------------------------------------------
Net income (loss) $ 1.52 $ (.53) $ (.50) $ (.46) $ .03
==================================================================
Dividends $ .19 $ .19 $ .19 $ .19 $ .76
Stock price - high 16 1/16 16 7/8 12 5/8 10 5/16 16 7/8
- low 13 3/16 11 1/16 8 3/4 7 5/8 7 5/8
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 operations 1,135 1,639 1,935 879 5,588
------------------------------------------------------------------
Net income $ 1,378 $ 3,981 $ 3,360 $ 1,301 $ 10,020
==================================================================
Per Common Share
Basic and diluted income:
Income from continuing operations $ .02 $ .18 $ .11 $ .03 $ .33
Income from discontinued operations .08 .12 .14 .07 .42
------------------------------------------------------------------
Net income $ .10 $ .30 $ .25 $ .10 $ .75
==================================================================
Dividends $ .19 $ .19 $ .19 $ .19 $ .76
Stock price - high 16 7/8 16 7/8 22 1/8 21 7/8 22 1/8
- low 13 5/8 13 1/4 16 5/16 13 1/2 13 1/4
</TABLE>
March 10, 1999
Pope & Talbot, Inc.
1500 S.W. First Avenue
Portland, Oregon 97201
RE: Form 10-K Report for the Year Ended December 31, 1998
Gentlemen:
This letter is written to meet the requirements of Regulation S-K calling for a
letter from a registrant's independent accountants whenever there has been a
change in accounting principle or practice.
As of January 1, 1998, the Company changed from straight-line method of
accounting for pulp production assets to the units-of-production method.
According to the management of the Company, this change was made to conform
depreciation methods between the Company's U.S. and Canadian pulp operations.
The Company believes the units-of-production method, common in the industry,
more appropriately matches production costs and pulp sales revenues over the
lives of the pulp mill assets.
A complete coordinated set of financial and reporting standards for determining
the preferability of accounting principles among acceptable alternative
principles has not been established by the accounting profession. Thus, we
cannot make an objective determination of whether the change in accounting
described in the preceding paragraph is to a preferable method. However, we have
reviewed the pertinent factors, including those related to financial reporting,
in this particular case on a subjective basis, and our opinion stated below is
based on our determination made in this manner.
We are of the opinion that the Company's change in method of accounting is to an
acceptable alternative method of accounting, which, based upon the reasons
stated for the change and our discussions with you, is also preferable under the
circumstances in this particular case. In arriving at this opinion, we have
relied on the business judgment and business planning of your management.
Very truly yours,
Arthur Anderson LLP
Subsidiaries of Pope & Talbot, Inc. (the registrant)
State or Other
Name of Corporation Jurisdiction of
Incorporation
---------------------------------------------------------------------------
1) Pope & Talbot International Ltd. British Columbia
2) Pope & Talbot Ltd., a subsidiary of Pope & British Columbia
Talbot International Ltd.
3) Pope & Talbot Pulp Ltd., a subsidiary of British Columbia
Pope & Talbot Ltd.
4) Harmac Pacific Inc., owned 10.4 percent by British Columbia
Pope & Talbot Ltd. and 49.8 percent by Pope &
Talbot Pulp Ltd.
5) Harmac Europe, Inc., a subsidiary of Harmac Belgium
Pacific Inc.
6) Harmac Sales, Inc., a subsidiary of Harmac Wisconsin
Pacific Inc.
7) Pope & Talbot FSC, Inc. Oregon
8) Pope & Talbot Wis., Inc. Delaware
9) Penn Timber, Inc. Oregon
10) Pope & Talbot Relocation Services, Inc. Oregon
11) Pope & Talbot Pulp Sales USA, Inc. Oregon
12) Pope & Talbot Pulp Sales Europe, owned 89 Belgium
percent by Pope & Talbot Pulp Sales USA, Inc.
and 11 percent by Pope & Talbot, Inc.
All subsidiaries of the registrant do business under the name of the
corporation.
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 registrant's
previously filed Registration Statement File Nos. 33-34996, 333-04223, 333-72737
and 33-64764.
ARTHUR ANDERSEN LLP
Portland, Oregon
March 19, 1999
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report to the Shareholders of Harmac Pacific Inc., dated January 26, 1999,
incorporated by reference in this Form 10-K into the Company's previously filed
Registration Statement No.'s 33-34996, 333-04223, 333-72737 and 33-64764 on Form
S-8.
PRICEWATERHOUSECOOPERS LLP
Vancouver, BC
March 24, 1999
<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, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 27,473
<SECURITIES> 9,857
<RECEIVABLES> 62,356
<ALLOWANCES> 0
<INVENTORY> 77,757
<CURRENT-ASSETS> 188,094
<PP&E> 433,809
<DEPRECIATION> 199,417
<TOTAL-ASSETS> 449,589
<CURRENT-LIABILITIES> 85,042
<BONDS> 138,004
0
0
<COMMON> 13,972
<OTHER-SE> 144,085
<TOTAL-LIABILITY-AND-EQUITY> 449,589
<SALES> 420,785
<TOTAL-REVENUES> 420,785
<CGS> 429,071
<TOTAL-COSTS> 429,071
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,973
<INCOME-PRETAX> (40,359)
<INCOME-TAX> (13,352)
<INCOME-CONTINUING> (27,007)
<DISCONTINUED> 23,059
<EXTRAORDINARY> 0
<CHANGES> 743
<NET-INCOME> 342
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
AUDITORS' REPORT
To the Shareholders of HARMAC PACIFIC INC.
We have audited the consolidated statements of financial position of Harmac
Pacific Inc. as at December 31, 1998 and 1997 and the consolidated statements of
operations and deficit and changes in financial position for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December 31,
1998 and 1997 and the results of its operations and the changes in its financial
position for the years then ended in accordance with generally accepted
accounting principles. As required by the British Columbia Company Act, we
report that, in our opinion, these principles have been consistently applied.
Vancouver, Canada PRICEWATERHOUSECOOPERS LLP
January 26, 1999 Chartered Accountants
